By James B. Kelleher
LOUISVILLE, Kentucky, Nov 28 (Reuters) - The U.S. recreational vehicle industry faces a steep uphill, but top manufacturers and dealers, gathering this week for their annual convention, are banking on favorable demographics to restore RV sales.
Retail sales of motor homes have fallen for 19 consecutive months as higher interest rates and gas prices and a slowdown in housing have weighed on consumer confidence.
Further deterioration is seen for 2007, when shipments of motor homes and campers are expected to drop more than 11 percent, according to the latest forecast from the Recreation Vehicle Industry Association (RVIA).
Yet on the eve of the convention, which will feature the latest products from 96 RV and chassis manufacturers and draw 13,000 attendees, Richard Coon, the RVIA president, insisted he was optimistic.
The reason? Gas prices have moderated. More importantly, the baby boomer generation continues to age. His favorite piece of data: Every day, over 12,000 Americans turn 50. "The 50 and older crowd is our prime market," Coon says. Over the next decade, that market is expected to double to 80 million from 40 million.
Mike Molino, the president of the Recreational Vehicle Dealer Association (RVDA), agrees. "It's hard to fail in this business," he says. "We could do a bunch of things wrong because the demographics are so strong."
NEW PRODUCTS KEY
But relying on an aging America to deliver customers to showrooms wasn't much of a strategy in 2006 -- and it's unlikely to do much good in 2007, analysts said.
Within the motor home category, sales of gas powered, "Class A" coaches -- the biggest and most profitable the industry makes -- have fallen 20 percent year to date, while Class A diesel sales are down 12 percent.
Sales of towable travel trailers and folding campers are down a more moderate 1 percent. But take out sales to U.S. relief agencies and others after the back-to-back hurricanes that pummeled the U.S. Gulf Coast in 2005 and "the declines are even worse," says Bob Simonson, an analyst at William Blair.
As a result, stocks of some of the biggest publicly traded manufacturers have suffered.
Shares of Fleetwood Enterprises Inc. and Monaco Coach Corp. , the No. 1 and No. 2 manufacturers in the Class A category, have fallen 37.5 percent and 13.3 percent, respectively, as demand for the fuel-swilling bus-like behemoths has dried up.
But not everyone's hurting. Thor Industries Inc. and Winnebago Industries Inc. are up about 25 percent and 6 percent, respectively. Both are big players in the hard-hit Class A space but have aggressively brought new products to market, helping them avoid the fate of their slower-moving peers.
Thor, the No. 1 maker of towables, has had success with the vehicle, also known as the "toybox," a trailer with extra cargo room and a drop-down rear wall popular with all-terrain vehicle enthusiasts and motorcyclists.
Winnebago has scored big with its new diesel-powered Class C motor homes -- smaller and more fuel efficient than the Class As but bigger than the Class B van campers.
"Where companies are innovating, we see growth," says Craig Kennison, an analyst at R.W. Baird. "Where companies are not innovating, they're subject to interest rates and other macroeconomic variables and finding it difficult to grow."
Even those markets are showing cracks. On Monday, Thor reported fiscal first-quarter earnings below some analysts' estimates as it lowered prices to help dealers move inventory.
Analysts said the industry still faces very strong economic headwinds, including borrowing costs. While they are low by historic standards, rates are still higher than a few years ago. That's discouraging RV owners from trading up, a critical part of the market.
"We don't expect a turnaround to occur in the motor home industry until we see lower interest rates," says analyst Kennison.
The other big headwind is the real estate market. Because many first-time buyers use home equity to finance such a discretionary purchase, falling home prices kill new sales.
"I'm quite concerned about next year, particularly at the high end," says Simonson at William Blair. "This is a very discretionary item. It's one that can be easily postponed."