Explaining a steep sales drop-off – August 14, 2006

The two Minnesota-based snowmobile manufacturers reported dramatic quarterly losses in July, with most of the blame laying in the snowmobile divisions.
Polaris Industries Inc., based in Medina, reported a 90 percent decrease in snowmobile sales in its second quarter, dropping to $5.3 million from $51.9 million in the same quarter last year.
Arctic Cat Inc., of Thief River Falls, reported a 60 percent decline in snowmobile sales for its first quarter. Sales went down to $20.9 million from $52 million from the first quarter in 2005.
The companies both ended their quarters on June 30.
Both companies had a similar rationale for the large decrease: inventory and shipping schedules.
Polaris’ Big Dip
Polaris’ second-quarter report listed several factors that contributed to the large snowmobile sales decrease: lower dealer orders, weak 2006 dealer sales, poor snowfall and warranty issues. Year-to-date, 2006 snowmobile sales totaled $7.8 million compared to $59.1 million in sales for the same period in 2005 — an 87 percent decrease. First-quarter snowmobile sales were down 65 percent year over year.
At Polaris, excess non-current snowmobile inventory at dealerships and a smaller 2007 product line were the reasons the company held off on its early summer shipping schedule, said Bennett Morgan, Polaris’ president and chief operating officer. The only snowmobiles shipped were those that required significant shipping time, he said.
“We went through a pretty tough snowmobile season last year with the snowfall, and we made the decision to cut our production build,” Morgan said. “The timing issues are real in the that we have a lot less to ship. For the dealers’ benefit [with remaining inventory] we thought that we shouldn’t ship early.”
Morgan also blamed Hurricane Katrina and its recovery for excess ATV inventory at dealerships. “We’ve been very conscious of restricting ATV shipments as well,” he added. “This all led to what I call a muted second quarter.”
He anticipates the third quarter will look better than the first two, but it still won’t be rosy. “We’re still going through and restricting supply to some degree,” he said. “I expect to see modest declines from last year, and expect upturn in fourth quarter.”
ATVs Stabilize cat’s snow losses
While Arctic Cat’s first-quarter snowmobile sales decreased by 60 percent, ATV sales increased by 45 percent. Overall for the first quarter, the company was down 11 percent in net sales, from $107.9 million in 2005 to $96.4 million in 2006. The company also has invested heavily in an engine-building facility in St. Cloud, Minn., which will cost the company an expected $8 million.
The loss was less than predicted, said Arctic Cat chairman and CEO Chris Twomey in an earnings conference call.
Arctic Cat also changed it shipping schedule, but for different reasons than Polaris.
Arctic Cat delayed its production and shipment due to the product line. “About 80 percent of the 2007 snowmobile lineup is new and we wanted some extra time before our production began,” Twomey said. The time will be used by engineers and testers to perfect the product, he said.
Dealer inventories are at the same levels as this time last year, Twomey said, though the company has announced programs to the dealers to reduce non-current inventory levels.
“We continue to expect a good retail sales season this year,” Twomey said of snowmobiles. “New models are extremely important to drive sales.”
Another thing that Arctic Cat is watching are margins. Snowmobiles have the highest margin for the company as far as unit sales, followed by ATVs. As ATVs continue to make up an increasing amount of Arctic Cat’s product mix, the decrease in margins could have some impact, Twomey said. The increased cost of raw materials also are affecting the per-unit profit margin.
Year-End Optimism
“Second quarter, for all intents and purposes, was not what we’d call a stellar quarter,” Morgan said. “It pretty much happened as we and Wall Street expected, though. In that regard, there were no bad surprises.”
He said the company’s outlook toward year-end includes an overall 3- to 5-percent decrease in earnings and the earnings-per-share remaining flat.
“From a financial standpoint, there’s no one that excited about it,” Morgan said. “But we are focused on the right thing long-term and getting supply and demand right.”
Morgan said the company has made some “brave decisions” in light of the market and the company shareholder interest.
“Any time that you deal as a publically traded company and you make decisions to choose not to grow, from the lens of dealing with the financial community, it’s brave,” Morgan said. “We’ve continued to acknowledge that we’re not done assisting dealer and getting inventory levels down. We’ve gone through the tough stuff, and we think better days are ahead. ”
For Arctic Cat, the company anticipates record-breaking sales for its fiscal year end in March 2007, Twomey said, including increased sales for its second quarter.
Second-quarter projections range between $290 million and $300 million, up from $276.3 million for the same period last year.
The company anticipates its year to end with a 3 to 6 percent net sales increase, to the $754 million to $776 million range.
Twomey wouldn’t talk about the company’s long-term strategy, but noted his optimism with the snowmobile group.
“We have a great opportunity with the snowmobile industry,” he said. “We have the product lineup that can really drive sales.” psb