July 27, 2012

Arctic Cat Warms To ATV Sales, Reversing A Loss And Cheering Investors




By Julie Forster

jforster@pioneerpress.com

Pioneer Press (St. Paul, MN)

Credit global warming.

Arctic Cat, best known for its snowmobiles, is becoming less arctic and more temperate—and reversing a first-quarter loss in the process.

Sales of all-terrain vehicles helped the company turn last year's loss into a profit, surprising investors who sent the stock up 20 percent during the trading day.

The company swung to a profit of $2 million in its fiscal first quarter compared with a loss of $2.3 million in the same period last year. Analysts were expecting a loss. Investors cheered further as the company upped its guidance for fiscal 2013 earnings and revenue.

Driven by sales of its Wildcat side-by-sides, a hot-rod type of all-terrain vehicle, plus more traditional "core" ATV sales, revenue rose 49 percent to $111.3 million from $75 million. Sales of all-terrain vehicles, Arctic Cat's largest business, grew 93 percent to $73 million. Snowmobiles were up 4 percent. Sales of parts, branded garments and accessories were up 3 percent.

The increase in sales in Arctic Cat's all-terrain vehicles was primarily because of strong dealer and customer demand for the all-new Wildcat model and its Prowler side-by-side utility vehicle.

"Most impressive, in our opinion, was the 92.5 percent increase in ATVs, which was driven by strong consumer demand for the Wildcat," wrote Scott Hamann, an analyst with KeyBanc Capital Markets, in a research note.

Side-by-sides differ from traditional ATVs is that they are more like cars, with steering wheels instead of handle bars and with the driver and passengers sitting next to one another.

Over the past few years, the company has focused on driving down dealer inventory levels. Now dealer demand is picking up.

"Big picture, given the uncertain economic outlook, we prefer consumer discretionary ideas that have lean dealer inventory and strong product cycles—supporting our favorable view of Arctic Cat," wrote Craig Kennison, an analyst with Robert W. Baird & Co., in a research note.

Claude Jordan, Arctic Cat's chief executive officer, told analysts that the company is rolling out a new just-in-time ordering system called RPM designed to keep dealer inventory levels lower. Dealers now can order a month in advance, not only a few times a year as in the past.

Arctic Cat books its revenue once its units are shipped to the dealer. Inventory can overwhelm dealers.

The new ordering system was welcome news to Roger Tuckner, owner of Century Power Sports in Stillwater, MN. He is just clearing out older models, going back to 2009 inventory. Shorter lead times would help match inventory to consumer demand for particular models.

Ordering so far ahead of time, up to six months in advance, he's just guessing what consumers will want. Allowing an order time of two months would help him replenish what seems to be popular models and forgo buying so many that don't move as quickly. "You never know what products are going to sell, and at six months it's just a guess."

"Our goal is to transition to a wholesale retail mentality, where if dealers retail a unit, then we go ahead and ship a unit," Jordan said.

In August, Arctic Cat will begin shipping new model year ATVs including five traditional ATV models and a new limited edition Wildcat, offering upgraded styling.

The company revised its earnings guidance upward and now anticipates fiscal 2013 earnings of $2.55 to $2.65 per share, up from previous guidance of 2.40 to $2.50. Revenue also was revised up to a range of $662 million and $682 million, up from prior guidance of $631 million to $650 million.

Shares ended the day up 11 percent, or $4.17, at $42.15.

Julie Forster can be reached at 651-228-5189. Follow her at twitter.com/bizbeatPiPress.







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