"Don't know why, there's no sun up in the sky
Stormy weather, since my man and I ain't together
Keeps raining all the time"
-- Billie Holiday, "Stormy Weather"
Today we continue the theme begun last week -- a boating industry in turmoil, still rocked by the wave of consumer malaise that began brewing well over a year ago in Q4 of 2005. On Friday, we discussed how the trend in lower unit sales continues, especially with smaller boats. We talked about boat makers' efforts to mitigate the falloff in demand: cutting production, laying off workers, discounting product, and shifting sales efforts toward higher-margin boats, still attractive to less price-sensitive, affluent buyers.
Today, we'll continue discussing the measures being taken by boat makers Marine Products (NYSE:MPX) and Brunswick (NYSE:BC), but we'll focus even more on the retail end of the industry and its emerging goliath, MarineMax (NYSE:HZO).
Less is more, continued
As discussed last week, the boat makers are doing their very best to reduce inventories, both by cutting prices on existing product and cutting production of new product. Good thing they are, too, because one of their biggest buyers (especially true for Brunswick) is also looking to trim down. According to its CEO Bill McGill, MarineMax is currently "buying less product. ... And the amount less that we're buying is high single digits, 8%, 9%, less in dollars."
From MarineMax's perspective, McGill confides that "if we're 8%, 9% less in dollars, and if we do the mid-single digit same-store sales growth, which is also a dollar related growth ... [then] you're going to see a decline in same-store inventories. And that's kind of how we're tracking."
In solving its inventory problem, though, MarineMax makes it more difficult for its suppliers to solve their own, since it won't be taking boats off their hands.
Bad news for Marine Products and Brunswick? Sure -- but it gets worse. You see, MarineMax is actually doing better than the average boat retailer (which suggests that its rivals may cut their buying even more). We know this because its CEO confided that the boat industry as a whole declined 12% in the September quarter, while MarineMax headed the other way, posting "30% unit growth." And again in the December quarter, "the industry reportedly is following the same trend," while MarineMax's unit sales "were up slightly." The logical conclusion would be that if even MarineMax is trying to work down its inventories, its competitors must be absolutely frantic to move their merchandise.
Bigger is better again
Another thing all three firms agree on: When the going gets tough, the tough get ... bigger. During an economic upcycle, making money is the name of the game. But as sales slip and profits go missing, clever companies try to take advantage of their scale to grab market share from their smaller -- and weaker -- rivals.
In this regard, the clear winner of the current cycle appears to be mega-boat retailer MarineMax. Marine Products was able to claim that: "Our market share has held firm" through the downturn, and to almost wistfully declare its "hope to capture market share when market conditions improve." For its part, Brunswick admitted that while its market share at US Marine is "actually a little bit up," at "Sea Ray, we've held share basically flat to down slightly versus 2001."
Compare those statements to the words of MarineMax's McGill. He waxes first philosophical: "In challenging times, we take market share, and in good times, we drive incremental gains in cash flow. 2007 is the year for gaining market share, as we invest for the future." Then opportunistic: "This deterioration in the industry is unfortunate, but also presents MarineMax with opportunities to grow. ... Our strategy of capitalizing on our formidable balance sheet and taking market share by bringing in new customers and driving sales has been quite effective." But regardless of how he expresses it, the sentiment is clear, and the numbers back him up: MarineMax is clearly playing the industry downturn right.
Scanning the horizon
And now for the part of this column that you've all been waiting for: What does the future hold? Absent a crystal ball, we'll again use the sentiments of the three companies' CEOs as our guide to the future. Last time we looked closely at the industry, all signs were negative. Marine Products CEO Rick Hubbell gave us the most useful information, essentially saying that until buying weakened among buyers of expensive boats, the industry cycle would not have hit its nadir. Nearly six months later, as sales trends continue to deteriorate, I'd say that Hubbell's sentiment was right on target. (And what's more, with larger boats continuing to sell well, I suspect the nadir still hasn't been reached.)
This year, it's not Hubbell, but rival CEO Dustan McCoy of Brunswick, and MarineMax's McGill who give us the most useful (if somewhat conflicting) information on industry trends.
McCoy: "While many of the fundamentals that drive buying behavior have settled down or even improved, we have not yet seen any sustainable increase in retail demand. ... Going into 2007, we are planning our year on the basis that marine retail markets will not improve. And, in fact, we're assuming retail during the year will be down in the low- to mid-single digits."
McGill: "I can tell you that the economic signs out there sure indicate that things are starting to recover.... I think there's some positive signs on the horizon, but we're not -- we're surely not seeing it in boat show attendance, because overall, it appears that that's down some." (Just to be clear, McGill then distinguished this low boat-show interest from his own company's sales successes, by pointing out that MarineMax had made an effort to seek out and close sales at other than the standard, on-location sales events.)
So that's where the sentiments lie: mixed at best. Meanwhile, boat makers Marine Products and Brunswick are both acting as if they expect a prolonged downturn in sales -- cutting production, and trying to grab market share from competitors who are in even worse shape. MarineMax the boat retailer, while sounding a bit more optimistic, acts just like the boat makers (in its own way): It's fighting hard for sales in unconventional ways, grabbing as much market share as it can, and cutting its own inventories.
In other words, while their words may differ, everyone's acting the same: battening down the hatches for an extended bear market in boats. I'd suggest investors do likewise.
Now that you've seen the big picture, to get the Fool skinny on these companies' individual performances, hoist sail for:
- Foolish Forecast: Marine Products Sinking?
- Choppy Waters at Brunswick: Fool by Numbers
- MarineMax Stays Afloat: Fool by Numbers
Marine Products is a Motley Fool Hidden Gems recommendation. Want to know about more small companies poised for big returns? Take a 30-day free trial of the newsletter.
Fool contributor Rich Smith does not own shares of any company named above. The Fool's disclosure policy is mighty yar.
