Foolish Forecast: Arctic Cat Slinks In

"Bad kitty!" shouted Mr. Market. "No mice for you."

That's how investors reacted to Arctic Cat's (Nasdaq: ACAT  ) May 2 news that it was lowering guidance for fiscal Q4 2006; the stock price got dropped 9% over the several succeeding days. Official results on the quarter are due out tomorrow morning.

What analysts say:

• Buy, sell, or waffle? Five disappointed analysts are stuck with the task of herding this equity feline. Just as in January, four of them rate it a hold. The one new rating is a sell.
• Revenues. Analysts are looking for a 2% decline in quarterly sales, to $154.4 million.
• Earnings. Instead of last year's profit, they expect a $0.04-per-share loss tomorrow.

What management says:
Management's earnings guidance walk-back reduced sales expectations to $153 million, below estimates and far below earlier guidance of $160 million to $170 million. And the promised $0.03- to $0.05-per-share loss is a terrible blow to shareholders who had been relying on previous guidance of a $0.09- to $0.13-per-share profit.

CEO Christopher Twomey explained that although Arctic Cat experienced strong ATV sales and "gain[ed] ATV market share with [its] ATV retail sales outpacing the industry in the quarter," the mild winter we all experienced here in the Eastern U.S. depressed sales of snowmobiles and snow-related "parts, garments, and accessories." This may well be the clearest case I've yet encountered of a company blaming the weather for weak sales -- and being entirely justified in doing so. Apparently, Arctic Cat's customers figured that if there was no snow last winter, they had little need for snowmobiles. Go figure.

What management does:
Forced to lower prices to keep moving product during the warm winter, Arctic Cat has seen its gross margins slump about 70 basis points on average over the past year. The cost of goods sold rose 12% in the last six-month period, but Arctic Cat's sales increased only 10% year over year. Naturally, this compressed the gross margins. The company kept its operating costs under tight control, however, and their mere 6% rise during the period helped to keep operating margins steady. With no exceptional charges or credits during the period, net margins likewise held firm.

Margins	9/04	12/04	3/05	6/05	9/05	12/05
Gross	20.1%	19.3%	19.7%	20%	19.4%	19%
Op.	6%	5.2%	5.8%	5.8%	5.5%	5.2%
Net	4.2%	3.6%	4.1%	4.1%	3.9%	3.7%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

The Fool says:
Investors were disappointed with Arctic Cat's recent earnings warning, and they'll quite likely be disappointed with tomorrow's confirmation of the same. But to put the company's news in context, remember that archrival Polaris (NYSE: PII  ) isn't exactly rolling in the catnip these days, either. In March, Polaris reported its own troubles moving snowmobiles. Worse, when Polaris reported earnings in April, it fessed up to an 8% decline in ATV sales. Guess we know now from whom Arctic Cat has been "gaining ATV market share."

With its margins holding more or less steady as it steals market share from the competition, shareholders taking a long-term view of things might want to stick with Arctic Cat awhile longer, near-term losses and declining sales notwithstanding.

Competitors:

• Deere (NYSE: DE  )
• Cycle Country Accessories (AMEX: ATC  )

Customers:

• AGCO (NYSE: AG  )

Suppliers:

• Hawk (NYSE: HWK  )

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Fool contributor Rich Smith does not own shares of any company named above.