Monday, December 27, 2010

In 2010, Winnebago (WGO) Benefited From an Inventory Restocking Bounce

The blue line is the ratio of "Retail Registrations" of Winnebago product (actual purchases by end users) to "Wholesale Deliveries" of product (shipments to dealers). I am calling this the Retail/Wholesale Delivery (RSD) ratio.

A high RSD is bullish for sales because it indicates that the dealers are selling product faster than they are receiving shipments. That means that the dealers' inventories are being drawn down. If they are to maintain their usual inventory levels, they will have to order more in the future to compensate - this is "pent up demand".

As you can see, at the beginning of the recovery dealers had pent up demand for Winnebago inventory. That resulted in the backlog increasing to almost 1600 units.

Now, the dealers have fully restocked. The RSD is around 1, which means that Winnebago will no longer be benefiting from pent up demand. The result is that the order backlog has plummeted.

Investors should be aware that Winnebago was only marginally profitable when it was shipping tons of product to restock dealers' drawn-down inventories.

Most investors are only proficient at linear extrapolation. They probably expect that not only will the inventory restocking pace continue, but that the implied growth in sales during the change from inventory drawdown to inventory restock will continue. They are making a crazy bet on a second derivative.

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