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Arctic Cat Posts a Big Loss, Sees a Tough Year Ahead

By Dan Caplinger - May 13, 2015 at 9:17AM

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The snowmobile and ATV specialist is in the middle of a turnaround but hopes for better long-term success.

Source: Arctic Cat.

When it comes to seasonal businesses, it's natural to figure snowmobile maker Arctic Cat (ACAT) would thrive during the winter months. Yet despite its name, Arctic Cat relies on all-terrain vehicle sales for most of its business, and the timing of sales to dealers traditionally makes the company's fiscal fourth quarter its slowest time of year. Coming into Wednesday morning's quarterly financial report, Arctic Cat investors were bracing for big declines in revenue and earnings as the company went through what it has called a transitional period. Arctic Cat's results confirmed those concerns and highlighted just how long it might take for the company to get back on track. Let's look more closely at Arctic Cat's most recent quarter and why fiscal 2016 might be a difficult year for the ATV and snowmobile specialist.

Arctic Cat stays stuck in the mud
Arctic Cat endured large declines in its fiscal fourth-quarter performance from the same period last year. Revenue plunged 32% to $98.9 million, far exceeding the 23% drop that most of those following the company had expected. Arctic Cat's quarterly loss bloomed to $21.5 million, and even taking into account previously announced charges for reducing ATV dealer inventory and other one-time items, the net loss of $1.15 per share was much worse than the $0.12-per-share loss Arctic Cat posted last year.

Arctic Cat's business lines were weak across the board. All-terrain vehicle and side-by-side sales were down 37% from a year ago, with rising sales of its Wildcat recreational off-road vehicle not coming close to offsetting weakness in its core ATV business. Snowmobile revenue dropped 17%, and sales of parts, garments, and accessories fell 19% due in part to a lack of snow in certain high-use areas.

Arctic Cat's full-year fiscal 2015 results weren't quite as troubling, although they still illustrated the challenges facing the company. Revenue of $698.8 million was down more than 4% from fiscal 2014, and adjusted earnings of $1.40 per share were roughly half what the company earned in the prior year.

Source: Arctic Cat.

CEO Christopher Metz tried to put the quarter into a broader perspective. "We made significant progress in many areas in the fourth quarter during a transitional period," Metz said in the earnings press release, and "we are committed to positioning the company for long-term profitable growth." Pointing to inventory reduction, product innovation, and the opportunity for partnerships and acquisitions, Metz said Arctic Cat is moving in the right direction to bounce back from its slowdown.

How long will Arctic Cat's recovery take?
The big question for investors, though, is how long Arctic Cat's turnaround will take. "We will continue to take bold actions to enable a return to growth," said Metz, but "it will take time to implement and benefit from our plans." Metz further stated that Arctic Cat's goal is to "rebuild and reposition the company for a return to long-term growth in fiscal 2017 and beyond."

Arctic Cat's guidance for fiscal 2016 will nevertheless come as a shock to many shareholders. Net revenue of $690 million to $705 million represents essentially stagnant sales from fiscal 2015, even as investors had expected modest growth to roughly $734 million. Similarly, earnings in a range of $0.80 to $0.95 per share would fall far short of consensus projections, even if you adjust upward for the $0.60 to $0.70 per share of negative impact from expected foreign-currency declines relative to the U.S. dollar.

Arctic Cat shares have rebounded sharply from their worst levels of the year in late January, with investors gaining confidence in the long-term vision of the company's management. Impatient short-term traders might well not be prepared to wait out the full turnaround for the ATV and snowmobile specialist, but any pullback that results from Arctic Cat's recent performance could offer an opportunity for more patient investors who believe in the company's long-term strategic vision to pick up shares more cheaply.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Arctic Cat. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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