Thin ice at Arctic Cat

Arctic Cat snowmobiles used to be a hot seller for Motoprimo South in Lakeville, but the dealer is getting ready to drop the line from its store.

"This is our last year," Motoprimo business manager Tina Sommer said. "Arctic Cat is not doing so hot lately. A lot of dealerships have been dropping the Arctic Cat brand."

Ten years of light snowfall, rising gasoline prices and, recently, a drop in consumer discretionary spending have hurt sales of all-terrain vehicles (ATVs) and snowmobiles across the nation and in Minnesota in particular. Snowmobile sales have plummeted 50 percent over the past 10 years, while the once-hot ATV sector has dropped 11 percent this year.

While other players in the field, such as Polaris Industries Inc., have also retrenched, it is the smaller Arctic Cat Inc. that has taken the bigger beating.

For its fiscal second quarter reported Oct. 24, the Thief River Falls, Minn.-based manufacturer's earnings fell 30 percent; six-month earnings were down 56 percent. Company officials expect a 30- to 37-cent per share loss in the third quarter on a 21 percent fall in sales.

No sales turnaround is in sight. For fiscal 2008, which ends in March, sales are expected to drop from $782 million in 2007 to between $710 million and $736 million. Full-year earnings are anticipated to be 89 to 95 cents a share in 2008. The company has issued no guidance for 2009.

Sliding against that backdrop, Arctic Cat stock is 45 percent below its July high of $20.77 per share and is bumping along near its 52-week low. Polaris, which is also restructuring, is down 22 percent.

In an interview this week, Twomey said the company plans to cut $8 million in supply costs, close a South Dakota plant to save $1 million a year, cull its snowmobile production by 30 percent, delay shipments to dealers and adopt a new management model with three new general managers -- one for ATVs, another for snowmobiles and one for the parts, garments and accessories business.

The plan also involves relocating Arctic Cat's headquarters functions to Minneapolis, new snowmobile and ATV models and the introduction of a new ATV engine.

It will be the industry's most powerful: the twin-cylinder H2 ThunderCat 1000.

The changes will "make us more efficient and agile, and help us move more quickly" without having to route travel through faraway Thief River Falls, he said.

Arctic Cat is also beefing up its parts, garments and accessories products, which have been selling well. And it is increasing European ATV sales.

Inventory levels in dealerships are down 15 percent, and Twomey told analysts during a recent conference call that Arctic Cat "will be able to replenish inventory with a lot of new product."

"Hopefully that will not only get the dealers excited, but get the consumer retail sales going as well," he said.

The strategy, however, is getting Arctic Cat no traction with Wall Street.

"My feeling has always been that the stock will take care of itself," Twomey said. "Our customers are enthused" at trade and riding shows.

Robert W. Baird research analyst Craig Kennison wrote to clients that Arctic Cat is more vulnerable to the trend toward warmer winters than its competitors.

As the stock price has plummeted, some of the institutional holders have bailed out, selling 12 million shares. However, two of the company's largest institutional shareholders remain believers, and added 477,152 shares to their holdings in the past quarter.

Twomey insists that whenever there has been good snowfall in recent years, snowmobile sales rise in that region, such as in the Pacific Northwest.

Some dealers are not convinced that the company needs only more snowy winters, though.

Sommer, who sells Yamaha and Honda ATVs in addition to Arctic Cat's snowmobiles, said the company has some retooling to do with its image and product mix.

Four-wheeler ATVs and two-seater, "side-by-side" ATVs "are booming," she said.

While total ATV sales will be flat, Arctic Cat said it is getting higher prices on its newest models, such as the Prowler, Thundercat 1000 and its 700-series models.

Arctic Cat officials said they have orders in hand that will allow them to boost ATV shipments 35 percent over the next six months -- a figure that Kennison at Baird called "aggressive."

He said it's "unclear whether retail demand can support a 35 percent jump in ATV shipments ... even including the favorable impact of international growth, higher sales prices and healthy demand for ATVs."

Kennison has a neutral rating on the stock and cut his price target from $21 to $18.

"While we remain concerned that core ATV demand is slowing and consumer credit problems could pressure spending on discretionary items, we believe the company's fiscal 2008 plan is achievable. It remains less certain, however, that these units will turn as quickly as dealers hope," he wrote.

"Even with lower dealer inventories, we are just not comfortable with [Arctic Cat's] implied fourth-quarter guidance," RBC Capital Markets analyst Ed Aaron said.

Aaron cut his price target for the stock from $16 to $15, and maintained an "underperform" rating.

Most dealers who RBC has talked to "believe inventory still needs to come down, given the double-digit decline in core ATV retail growth," Aaron said. "We question whether the company can hit its sales targets without jeopardizing the fiscal '09 outlook."

Dee DePass • 612-673-7725