April 30, 2008 / 5:39 PM / 12 years ago

Downturn drives motorhome makers into a ditch

CHICAGO (Reuters) - Rising gasoline prices, falling home values and tightening consumer credit are driving U.S. recreational vehicle sales off the road as the business enters the normally busy spring and summer selling season.

The industry is scrambling to adjust by laying off workers, selling real-estate assets to raise money and bringing back cheaper, more fuel-efficient vehicles whose popularity peaked during the last oil crisis in the 1970s.

Analysts are skeptical the turnaround will be quick. They say it’s going to take time for consumer confidence to rebound and predict 2008 will wind up being another down year for retail sales — the fourth in a row.

“This is not something that’s going to cure itself quickly,” said Bob Simonson, an analyst at William Blair & Co. “These are very big-ticket, discretionary purchases. ... What pulls it out is a bottoming in the economy, a topping out in unemployment, which is at least six to 12 months away.”

Meantime, however, the news is mostly grim. On Tuesday, Fleetwood Enterprises Inc FLE.N, which makes bus-sized motorhomes and towable camping trailers, said it had sold its Riverside, California, headquarters and will defer dividend payments on some convertible debt to boost finances.

The news from Fleetwood, the latest in a series of worrisome announcements from major industry players, came a day after news that RV industry wholesale shipments fell 17 percent in March, pulled down by a 27 percent decline in motorhomes and a 36 percent drop in shipments of the very biggest vehicles.

Sales have been hammered as the U.S. economic downturn eroded consumer confidence. Year to date, motorhome shipments are down 24 percent and towables are down 14 percent.

“SLASHING ORDERS”

“Dealers are slashing orders amid deteriorating retail sales and a fairly negative outlook for 2008,” says Craig Kennison, an industry analyst at Robert W. Baird & Co, who says he expects continued deterioration.

Not so long ago, the motorhome industry was a symbol of America’s outsized appetite for pricey toys purchased with money pulled out of fast-appreciating homes.

During the height of the U.S. property bubble, companies like Winnebago Industries (WGO.N), the No. 1 motorhome maker, couldn’t make enough so-called Class A motorhomes, bus-like vehicles that often cost more than $100,000 and consumed a gallon of gas every 6 miles.

Many buyers financed their purchases using home equity. Others turned to a U.S. lending industry that would finance anyone — as long as it could turn around, bundle its loans and sell them off to investors.

But the collapse of the credit markets and the related slump in the U.S. housing market have changed all that. Call it the “wealth effect” slammed into reverse gear, and it has hit the RV industry particularly hard.

Soaring gasoline prices — which hit a record of nearly $3.61 per gallon on Tuesday, according to travel club AAA — — are now giving the industry yet another headache by giving consumers another reason to stay out of RV showrooms.

RV makers are trying to shift gears. Winnebago has resumed building “Class B” motor homes — essentially low-end van conversions that get double the mileage of the Class A vehicles — to try to drive traffic into empty dealer showrooms.

Five years ago, the company exited the business altogether in order to free up assembly lines for its Class A buses.

PERMANENT CHANGE

Winnebago chief executive Bruce Hertzke said last month the move back into van conversions marked a permanent change in the RV market. He compared the current unpopularity of bus-like motorhomes to falling demand for big sport utility vehicles.

“Part of our market is going to move to smaller products,” Hertzke told Reuters in an interview. “I don’t think the bigger products are going away over the next couple of years. But ... there will be a certain amount of the population that will downsize for better fuel economy.”

Winnebago recently shed 300 jobs, or 9 percent of its work force, to deal with the slump, which has driven at least one RV manufacturer — Perris, California-based National RV — to file for bankruptcy late last year.

In the interview, Hertzke predicted the downturn would force additional players out of the business.

“You’re going to continue to see a shakeout of people who do not have a strong balance sheet and cash position,” he said.

Analyst Simonson said, however, that once the downturn ends, the pent-up demand for RVs will be “much more vigorous” than anyone is willing to predict.

“Just as the length and depth of this downturn has been much greater than investors and managements anticipated, I think the rebound will be the reverse of that,” he said.

Editing by Brian Moss and Peter Bohan

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