Champion Homes, Inc. (SKY) Earnings

Management highlights

### Core Business Performance & Market Position - Full year fiscal 2026 delivered a record number of homes sold (26,622) since the company's 2018 IPO, outperforming the broader industry that saw 9% year-over-year HUD shipment declines in the fourth quarter. - Champion's offsite-built homes offer a strong value proposition: priced at a fraction of the $500,000 average U.S. site-built home price, making it a compelling solution to the national affordable housing crisis that grows more attractive in high-uncertainty macro environments. - The company earned two industry awards in the quarter: a Best in American Living Gold Award from the National Association of Home Builders, and a 12th consecutive Excellence Award from the Manufactured Housing Institute, recognizing product innovation and operational excellence. ### Strategic M&A & Capital Actions - The ECN transaction closed last month, and Champion received $189.1 million Canadian dollars in proceeds from selling its 19% ownership stake in ECN. The company continues its successful joint venture with Triad under new ECN ownership. - Champion announced the acquisition of Homes Direct, a manufactured housing retailer with 11 locations across high-growth Western U.S. states (Arizona, California, Colorado, New Mexico, Oregon). The acquisition will increase Champion's total company-owned U.S. retail locations to 95, with Homes Direct generating $70 million in annualized revenue. The transaction is expected to close in fiscal 2027 Q2, and expands Champion's captive retail footprint per its long-term strategic goals. - The company repurchased $50 million of common stock in Q4 fiscal 2026, $200 million for the full fiscal year. The board refreshed the share repurchase authorization back to $150 million as part of a disciplined capital allocation strategy focused on shareholder value. - Full year fiscal 2026 operating cash flow increased 26.2% to $303.9 million, reflecting strong operating earnings and disciplined working capital management, with $638.3 million in cash and cash equivalents as of quarter end. ### Operational Updates - Q4 manufacturing capacity utilization was 59% (flat sequentially with Q3, slightly down from 60% year-ago). Manufacturing orders increased 7% year-over-year, ending the quarter with a backlog of $316 million, up 19% sequentially, with an 8-week average lead time that is consistent with prior periods. - Legislative and regulatory progress: The 21st Century Road to Housing Act passed the U.S. House of Representatives with bipartisan support, and is now heading to the Senate for final approval before White House signature. The bill supports manufactured housing as a solution to the affordable housing crisis, and Champion continues to monitor HUD code updates, chassis rulemaking, and state/local zoning reform that could expand its addressable market.

Guidance

- For the first quarter of fiscal 2027, management expects consolidated revenue to be approximately flat year-over-year, as the company navigates ongoing consumer affordability challenges amid persistent macro uncertainty. The guidance does not include any revenue contribution from the Homes Direct acquisition, which is expected to close in Q2. - Management expects Q1 2027 adjusted gross margin to land in the 24.5% to 25.5% range. The margin forecast reflects accelerating input cost inflation across key categories that began in Q4 2026 and continued into Q1 2027, partially offset by efficiency and pricing initiatives that lag the impact of cost increases, plus modest headwinds from channel and product mix. Management expects margin stability over the long term as inflation moderates and offsetting initiatives are fully implemented. - Adjusted SG&A as a percentage of sales is expected to land in the 16% to 17% range for Q1 2027, consistent with the current run rate following the Eisman acquisition. - The expiration of ENERGY STAR tax credits on July 1 is expected to increase the fiscal 2027 effective tax rate by approximately 3 to 4% compared to fiscal 2026. - Management expects continued strong operating cash flow generation in fiscal 2027, providing sufficient capital flexibility to balance strategic growth investments (including the Homes Direct acquisition) and ongoing shareholder returns via share repurchases.

Segment performance

Champion Homes reports consolidated fourth quarter fiscal 2026 net sales of $621.3 million, up 4.6% year-over-year, beating low single-digit growth expectations. Full year fiscal 2026 saw a record 26,622 homes sold, with 25,718 homes sold in the U.S. and 243 in Canada. By channel segment: 1. **Independent Retailers**: Sales increased year-over-year, after working through inventory over the first three quarters of the fiscal year, returning to normal ordering levels in Q4. This channel benefited from investments in the new dealer portal. 2. **Captive Retail (company-owned stores)**: Delivered year-over-year growth, with continued strong integration of the prior Eisman acquisition. Captive retail represented 37% of consolidated Q4 sales, up from 35% in the year-ago quarter. 3. **Community Channel**: Q4 sales were down year-over-year (partially due to extreme weather in northern markets), but full year sales grew year-over-year. The channel saw an uptick in order activity entering fiscal 2027 Q1. 4. **Builder-Developer Channel**: Sales grew year-over-year, continuing positive momentum for this strategically important channel. 5. **Canada Segment**: Homes sold increased to 243 from 230 year-over-year, with revenue growing due to higher volume and favorable foreign exchange rates. Overall profitability: Adjusted gross profit increased 4.6% to $159.4 million, with adjusted gross margin flat at 25.7% year-over-year. Adjusted net income attributable to Champion Homes increased 1% to $37.7 million ($0.68 per diluted share), while adjusted EBITDA increased 6.3% to $55.9 million, with adjusted EBITDA margin rising slightly to 9% from 8.9% year-over-year.

Risks & headwinds

- Persistent macroeconomic uncertainty and elevated inflation have put downward pressure on consumer purchasing power, disproportionately impacting entry-level home buyers, the core customer segment for manufactured housing. - Broad-based input cost inflation across key raw material categories (lumber, OSB, steel, petroleum-derived products) accelerated in Q4 2026 and continued into Q1 2027, creating near-term headwinds for gross margins that offsetting actions (pricing, efficiency) will not immediately counteract. - Legislative and regulatory reforms that could expand Champion's addressable market require completion of the legislative process, followed by federal agency rulemaking, which will take an unknown amount of time to implement and deliver market benefits. - Extreme weather conditions created short-term headwinds for production and sales in Q4 2026, particularly in northern U.S. markets for the community channel.

Analyst Q&A

• Q: Analysts asked management to break down the drivers of the flat year-over-year Q1 2027 revenue guide, explain why revenue is not growing despite positive order trends and prior price increases, and clarify if the Homes Direct acquisition is included in the guidance. /

  A: Management confirmed Homes Direct is not included in the Q1 guide, as closing is not expected until Q2. The flat guide stems from two key factors: first, Champion lapped large prior price increases taken in captive retail in the year-ago period, so year-over-year price growth will be much lower in Q1 2027. Second, the year-ago Q1 benefited from extra production carried over from Q4 of the prior year, while this year Champion is matching production strictly to current order levels, eliminating that extra carryover benefit. Overall, the guidance reflects a deliberate, balanced approach to managing production in the current uncertain demand environment.

• Q: What are the primary sources of Q1 2027 gross margin pressure, beyond input cost inflation, and what is the nature of the noted mix headwind? /

  A: Management confirmed the vast majority of the gross margin headwind comes from broad-based input cost inflation across key categories, with offsetting pricing and efficiency actions only lagging the rate of cost increases. The secondary mix headwind comes from two factors: first, a projected increase in community channel sales (which carry slightly lower margins) in Q1, and second, a consumer shift toward lower price point products amid affordability pressures, which changes the product mix toward lower margin offerings. There are no unexpected new competitive pressures driving the margin forecast, and average selling prices are expected to be relatively flat sequentially.

• Q: What are the long-term benefits of the recently passed 21st Century Road to Housing Act, and how long will it take for these benefits to materialize? /

  A: Management noted broad bipartisan support for the bill, which addresses key barriers to manufactured housing adoption, and it is encouraging that similar zoning and parity reforms are also advancing at the state level (including Kentucky, Texas, and Montana). However, full implementation will take time, as the bill still needs Senate approval, presidential signature, and subsequent HUD rulemaking to formalize new regulations. Champion is proactively preparing by expanding its builder-developer channel and building local government proof points of offsite-built housing's ability to solve affordability challenges, to capitalize on tailwinds once reforms are implemented.

• Q: What is the incremental opportunity from the Homes Direct acquisition, what makes the business unique, and will its margin profile be accretive? /

  A: Homes Direct currently generates $70 million in annualized revenue across 11 Western locations, with Champion already supplying a portion of the homes it sells. A meaningful share of the current volume comes from competing brands, so there is significant upside as Champion migrates those to its own products over time, similar to what the company did with the prior Eisman acquisition. Homes Direct has a strong reputation for end-to-end customer service and post-sale support, and its best practices can be shared across Champion's broader retail network to improve performance company-wide. The acquisition will be margin accretive: it adds retail margin on top of manufacturing margin for homes sold, and increasing Champion's plant utilization from incremental sales further improves overall profitability. The primary opportunity is organic growth in the Western U.S. market, rather than large cost synergies. (1987 characters)