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Arctic Cat Q1 net sales grow, earnings drop

Arctic Cat Inc. (NASDAQ: ACAT) today reported net earnings of $3.6 million, or $0.27 per diluted share, for the fiscal first quarter ended June 30, 2014, on record net sales of $143.6 million. The company recorded a severance charge in the 2015 first quarter that reduced earnings by $0.08 per diluted share. Excluding this charge, the company’s first quarter earnings totaled $0.35 per diluted share, as adjusted. In the prior-year quarter, Arctic Cat had record net earnings of $5.5 million, or $0.40 per diluted share, on net sales of $120.8 million.

Commented Christopher Twomey, Arctic Cat’s chairman and chief executive officer: “We had record sales for a first quarter, with strong contributions from snowmobile sales. We shipped a large percentage of our lower-margin OEM partner models in the quarter. Sales of ATVs and side-by-sides were lower in the first quarter, as planned, to reduce dealer inventories ahead of our ATV dealer show in September.”

Added Twomey: “Higher sales were not enough to overcome the unfavorable Canadian currency and the planned increase in OEM sales in the 2015 first quarter, resulting in lower profitability compared to record earnings in the year-ago period. Going forward, we remain focused on increasing sales this fiscal year by introducing innovative new products, as well as continuing to leverage the company’s operating efficiency.”

First-Quarter Operating Review

Arctic Cat’s fiscal 2015 first-quarter net sales rose approximately 19 percent to $143.6 million, chiefly due to higher snowmobile sales to its OEM partner, in addition to increased sales from its parts, garments and accessories (PG&A) business.

Gross profit margin in the 2015 first quarter was 21.4 percent compared to 24.1 percent in the prior-year quarter. The gross profit margin decline of 270 basis points stemmed primarily from the unfavorable Canadian currency exchange, as approximately 30 percent of Arctic Cat’s annual sales are to Canada. Also impacting gross margin in the quarter were lower-margin OEM sales.

The company continued to invest in research and development to ensure a strong pipeline of new products and technologies. Operating expenses as a percent of sales were 17.6 percent compared to 17.1 percent. General and administrative expense includes the severance charge of $1.5 million for Arctic Cat’s former CEO, who left the company on May 30, 2014. Operating profit in the 2015 first quarter was $5.6 million compared to $8.5 million in the same quarter last year. Excluding the charge, Arctic Cat’s operating profit was $7.1 million, as adjusted.

Arctic Cat ended the 2015 first quarter with cash and short-term investments totaling $24.3 million, and no long-term debt. During the quarter, the company repurchased approximately 27,000 shares of its stock at a cost of approximately $1.0 million.

Business Line Results

ATVs/Side-by-Sides — Sales of Arctic Cat’s all-terrain vehicles (ATVs) and side-by-sides totaled $63.8 million, down 16 percent compared to prior-year sales of $76.3 million. The company focused on lowering dealer inventory in advance of its September dealer show, where it plans to introduce 14 new models for the 2015 model year.

Retail sales of Arctic Cat’s side-by-sides rose in the 2015 first quarter, primarily driven by demand for the new Wildcat Trail model which began shipping in late fiscal 2014. With a narrower stance, the 50-inch Wildcat Trail allows riders access to authorized ATV trails, making it a versatile option for consumers.

Snowmobiles — Snowmobile sales in the fiscal 2015 first quarter rose 149 percent to $56.2 million, up from $22.6 million in the prior-year quarter. The increased snowmobile sales in the quarter were largely due to Arctic Cat’s expanded OEM partnership. Following strong retail sales and market share gains in fiscal 2014, Arctic Cat anticipates higher snowmobile sales to its dealers in the current fiscal year.

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Parts, Garments & Accessories — Sales of parts, garments and accessories (PG&A) in the fiscal 2015 first quarter grew 8 percent to $23.7 million versus $21.9 million in the prior-year quarter. The growth was driven by sales of newly developed accessories for the exciting new Wildcat Trail model, as well as core ATV accessories.

Fiscal 2015 Full-Year Outlook

Commented Twomey: “We continue to anticipate delivering the highest sales in the history of Arctic Cat for fiscal 2015, driven by our strong pipeline of innovative new products and technologies. However, as we have previously stated, our profitability faces significant headwinds this fiscal year.”

For the fiscal year ending March 31, 2015, Arctic Cat continues to anticipate net sales in the range of $775 million to $786 million. The company estimates its full-year fiscal 2015 earnings will be in the range of $2.25 to $2.35 per diluted share, including the executive severance charge of $0.08 recorded in the fiscal 2015 first quarter and the anticipated unfavorable Canadian currency impact up to $0.79 per diluted share for the fiscal 2015 full year. Excluding the severance charge, the company anticipates that fiscal 2015 earnings per share will be in the range of $2.33 to $2.43 per diluted share.

Arctic Cat’s fiscal 2015 outlook includes the following assumptions versus the prior fiscal year: core ATV North America industry retail sales flat to up 2 percent; side-by-side North America industry retail sales up 6 percent to 9 percent; North America snowmobile industry retail sales flat to up 3 percent; slightly higher operating expense levels as a percent of sales primarily due to the Canadian currency hedge benefit received during last fiscal year 2014; and increasing cash flow from operations. The company expects gross margins to be down 110 basis points, chiefly due to Canadian currency and, to a lesser extent, product mix and tooling amortization.

“We expect this to be a challenging year, particularly in the first half of fiscal 2015,” Twomey said. “Yet, we are excited about the underlying strength of our business, product portfolio and future growth prospects, and we remain committed to shareholder value creation.”

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