Source: Douglas Dynamics
An industry doesn't define a company, business models and strategies do. Douglas Dynamics (NYSE: PLOW ) , the largest distributor of snowplows in the U.S., has successfully built up strong recurring revenue streams through customer replacements of old snowplows, and managed risk factors such as seasonality and long lead times for success.
Douglas Dynamics also shares similar characteristics with Black Diamond (NASDAQ: BDE ) , a manufacturer of active outdoor performance products and apparel; and ski resort operator Intrawest Resorts (NYSE: SNOW ) , which will be discussed later.
Managing a cyclical image
FactSet classifies Douglas Dynamics as part of the "Cyclical Consumer Goods & Services" sector, but Douglas Dynamics' business isn't as cyclical as perceived. Notwithstanding the amount and timing of snowfall, snowplows have to be replaced every seven to nine years of active usage.
More importantly, snowplows aren't discretionary purchases, but mission-critical products. For safety reasons, snow and ice have to be removed from outdoor surfaces such as roads during the three to four month snow season every year. Therefore, over a multi-year period, any cyclicality is smoothed out.
Douglas Dynamics has an edge over its competitors by virtue of its large installed base and strong brand name. First, it has the largest installed base of its peers at more than 500,000 units, making it more likely that existing customers will return to Douglas Dynamics to replace their damaged or old snowplows.
Second, reliability is a key issue in the purchase of snowplows. As a result, buyers tend to gravitate toward leading brands with a long history of consistent performance. Douglas Dynamics' market leadership in the snowplow category, with about 50%-60% market share, speaks volumes about its dominance.
One other company benefiting from increased snowfall is Black Diamond. About a quarter of its sales are generated from products in the ski category; while products targeted at mountaineers and climbers account for the remaining revenue.
While some of its ski products are discretionary in nature, others are more safety-based, exhibiting mission critical characteristics similar to those of Black Diamond's products. For example, POC, its sport lifestyle brand for gravity sports, offers protection gear such as helmets, body armor, goggles, and gloves for skiers and snowboarders. Black Diamond's other brand, PIEPS, sells snow safety products that offer protection and rescue assistance against avalanches, like transceivers, probes, and shovels.
While Douglas Dynamics and Black Diamond are perceived as consumer cyclical, most of the products they sell actually fall into the "must-have," and not the "good-to-have," product categories.
Managing customers' demand for responsiveness
Given the unpredictability of weather conditions, Douglas Dynamics' customers require that that it meets product demand promptly. Since it adopted lean manufacturing practices, Douglas Dynamics has seen a significant improvement in its operating metrics. Firstly, its lead times have been reduced from two to four weeks to less than a week. Secondly, order fulfillment accuracy has been improved, with 98% of goods shipped on time compared with 60% in the past.
Furthermore, Douglas Dynamics has complemented its lean manufacturing practices with a lower variable cost structure and an experienced team of workers. It hires temporary workers to supplement its workforce in times of strong demand, so that it isn't overburdened by substantial fixed labor costs later. Douglas Dynamics also boasts a non-union, experienced labor force, with each worker having worked an average of 9.3 years at the company.
Source: Douglas Dynamics
Since the sales of snowplows are affected by local snowfall levels in the prior snow season, there is still a certain element of seasonality to the business in the short term. Douglas Dynamics has implemented a pre-season order program to offer discounts for "early bird" distributors placing orders prior to the retail selling season, allowing it to better manage working capital needs.
The results speak for themselves. Douglas Dynamics has greater visibility into working capital needs from month to month, which follows a fairly standard cycle. It builds up inventory in the second quarter in anticipation of shipping orders in the third and fourth quarters, with working capital reaching its peak in September at around $92 million and returning to average levels at about $61 million by November.
Another "snow company" which managed to mitigate the impact of seasonality is Intrawest. Intrawest has made its loyal customers contribute stable recurring revenue streams to its business by converting them to season pass holders. Season pass and frequency product sales currently contribute close to a third of Intrawest's lift revenues.
Moreover, retention rates of season pass holders have been as high as 70% in 2013. Furthermore, the company also sells real estate at its ski resorts to interested customers through its vacation club business
While seasonality is a key risk factor for Douglas Dynamics and Intrawest Resorts, they have sought to reduce the negative impact through changes to their business models.
Foolish final thoughts
Douglas Dynamics delivered an excellent set of results in the fourth quarter of 2013, registering record quarterly revenues of $73.0 million aided by higher than average snowfall levels. Notwithstanding weather conditions in the future, Douglas Dynamics' mission critical products and good risk management practices suggest that it will do well going forward.
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