Winnebago Earnings Call Nuggets: Gross Margins, Retail Demand

On Thursday, Winnebago Industries (NYSE:WGO) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Gross Margins

Kathryn Thompson – TRG Thompson Research Group: First question is on gross margins and I appreciate the clarity you gave in the prepared comments. Of the roughly 130 basis points that you cited for the consecutive quarter basis improvement, how much was driven by the bump up in inventory? I know you’ve talked about you saw higher inventory levels, and to what extent was driven by overall lower discounting or lower – or any other material changes in raw materials?

Sarah N. Nielsen – VP and CFO: Kathryn, this is Sarah. In regards to the sequential comparison, notably what’s been a positive impact in our fourth fiscal quarter is the fixed overhead absorption is significant, we produced a similar level incrementally more that we sold, and in addition we have a dynamic where we are selling primarily model year 2013 pricing or priced products not the prior year — model year product, and so there is an element there that’s improved margins somewhat across the board and from an inflationary standpoint when we compare where we’ve been tracking and we really evaluate that monthly, but reset standards twice a year that was – it actually kind of was a huge contributing factor to our LIFO adjustments because we’re seeing deflation and when we compare our parts, and pieces cost from August of ‘11 to August of ’12 and when we compare where we were in the second and third quarter’s and where we are in the fourth quarter, and notably it’s not just in our materials, it’s in our labor as well because we have hired so notably inside our fourth quarter, just a slightly under 200 people, that’s also introducing a lower – our average hourly wage and that’s also been a health in regards to our cost structure.

Kathryn Thompson – TRG Thompson Research Group: Also, obviously this is a second big quarter upsized backlogs, but if I better – are you seeing channel fill or is this driven by retail. We actually do our own survey work and are seeing definite improvement, but this is definitely seems to be above and beyond a feedback from retail demand.

Sarah N. Nielsen – VP and CFO: I’ll quickly comment, and maybe Randy would like to add to that. We definitely don’t see enough inventory yet at our dealer level, at our dealerships. Our dealer inventory went down in the quarter and it’s down year-over-year. We have the low 1,900 units on hand at the end of August. On the retail, notably, inside the fourth quarter, retail registrations of Winnebago product increased almost 11.5%. So it was definitely a (part) for us inside the fiscal fourth quarter and part of it I think is the excitement that Randy touched upon with some of the new product introductions that we’ve had, however, a lot of that wouldn’t have had that opportunity to retail throughout the entire quarter as we started shipping some of that products in June, but we think our dealer inventories could definitely – it would be helpful for that to move up quite a bit and then that’s also reflected by our demand, just continuing to build. I think our dealers are interested in having more on their lots.

Randy J. Potts – Chairman, CEO and President: Kathryn, I’ve been to a few shows and several dealer visits throughout the fall in late summer and there’s a lot of excitement building around their product. We’re hitting price points in market segments very successfully that we just – we haven’t hit in a while and as I’ve said all along, our goal is to outperform the market and that remains our goal.

Kathryn Thompson – TRG Thompson Research Group: Then finally, what exactly are the towable production issues? Is this – maybe a little bit more clarification on that?

Randy J. Potts – Chairman, CEO and President: We’ve accomplished some things very well. We got a lot of appealing product out there. We’re generating the revenues as you can tell which is very important to get cash flowing through the business. We need to go back and clean up some of the supporting activities around that, notably bills of materials better capturing the cost of the goods sold. I think that’s fair to say where our biggest challenges are and it’s all mechanical, it’s doable. Our challenge now is to go back and fix some of those things that we didn’t do a very good job up-to-date.

Retail Demand

Alvin Concepcion – Citi: This is actually Alvin Concepcion in for Greg. We’ve seen some pretty strong retail sales growth lately and wondering if you’ve seen a change in retail demand since then? Historically in election years we see consumers hold off on purchases until there’s some certainty, are you seeing that at all or would you expect to see that?

Randy J. Potts – Chairman, CEO and President: I think it’s fair to say that it remains quite robust.

Alvin Concepcion – Citi: It’s great to hear and also I was wondering about, you know, commentary on the retail credit environment over the past couple of months, have you seen changes there?

Sarah N. Nielsen – VP and CFO: I think there’s access for those that are quite credit worthy. I don’t think that there’s been any change. It’s still a dynamic of that someone’s willing to borrow the purchase of discretionary items such as this, but I don’t think there’s any availability issues in the marketplace.

Alvin Concepcion – Citi: And then with regards to the competitive landscape, are you seeing any changes in the promotional or discounting environment? Has it gotten better since the end of the quarter given the strong demand?

Randy J. Potts – Chairman, CEO and President: It was really pretty reasonable at the end of the quarter actually, and I don’t think it’s changed much.