Winnebago's (WGO -2.45%) business has been on a fantastic upswing over the last few quarters. Demand is soaring for its recreational vehicle products, which is helping to push prices -- and profitability -- toward record highs.
Yet the stock has still declined sharply in 2022, falling over 30% to trail the wider market. Investors are worried about several challenges, including supply chain problems. But the biggest concern is that Winnebago will be caught with too much inventory in the event of a recession or slowdown in the RV industry.
With that in mind, let's take a closer look at the earnings update coming from the company on June 22.
Sales trends
Sales trends are always critical, but that metric is even more important to follow today. RV demand could slow in the second half of 2022, rival Thor Industries (THO -1.53%) recently noted, as consumers react to inflation and ease up after spending heavily in this consumer discretionary category for more than a year.
Winnebago likely saw solid growth in this quarter, just as Thor did. Dealership inventories were low heading into Q2, and backlog was high. That setup means Winnebago likely sold every RV and boat it could produce.
Yet its sales trends might have been pressured by supply chain issues and reduced enthusiasm from RV shoppers. Investors should follow market share trends, which have been steadily rising, to judge whether Winnebago is still gaining more than its fair share of the industry's growth.
Profitability update
Winnebago is under the same cost pressure that every company is facing today. Labor and transportation expenses are soaring, and so are costs for key manufacturing inputs.
The good news is that these pressures have been more than offset by rising demand, especially for high-end RV products. Winnebago's gross profit margin held steady last quarter, and operating profit margin is near an all-time high at 12% of sales.
WGO Operating Margin (TTM) data by YCharts
Most investors are bracing for that profitability metric to decline over the next few quarters as demand and supply conditions stabilize. But the big question is whether Winnebago's margins settle at a higher rate than the pre-pandemic days when operating income was around 6% of sales. It has pushed into several higher-end niches since then, including luxury RVs and boats. Ideally that move will help it earn more profits as a percentage of sales.
Looking ahead
Investors will be focused on what CEO Michael Happe and his team have to say about the next few quarters. RV demand appears to be slowing although sales are still likely to set another record.
That scenario raises the risk that Winnebago will be stuck with too much inventory as it works to covert its huge backlog into sales. Producing too many RVs just before a slowdown or recession would lead to collapsing profitability that would reverse many of the gains that shareholders have seen since 2019.
That's why investors will want to watch management's growth outlook and production plans as Winnebago aims to balance meeting high demand against the risk of being stuck with excess inventory during the next cyclical downturn.
