Arctic Cat’s Losses Swell on Foreign Currency Headwinds

Snowmobile maker launches first wave of 2017 model year ATVs and ROVs to ramp up sales

A1Snowmobile manufacturer Arctic Cat Inc. (NASDAQ: ACAT) announced its Q1 FY17 financial results on July 29th, 2016. The Plymouth, Minnesota-based company designs, engineers, manufactures, and markets snowmobiles and all-terrain vehicles (ATVs) and recreational off-highway vehicles (side-by-sides or ROVs), as well as related parts, garments and accessories (PG&A). The Company offers its products under the Arctic Cat and MotorFist brand names. The Company, through MotorFist LLC, designs, develops and distributes technical snowmobile riding garments and accessories. Arctic Cat operates through three main segments: Snowmobiles, ATV/ROV, and PG&A. Read more about Arctic Cat’s financial results below.

Q1 FY17 financial highlights

During Q1 FY17, Arctic Cat’s net sales plummeted 22% to $104.9 million versus $134.4 million in the prior-year quarter, mainly because of the negative impact of foreign currency headwinds, which hit net sales by approximately 1.6%.

The Company’s gross profit and gross profit margin during the reporting quarter fell to approximately $11.8 million and 11.2%, respectively, compared to $22.6 million and 16.8% in the prior-year quarter. Lower sales volumes and unfavorable foreign currency impact reduced gross profit by approximately $1.6 million, or $0.08 per share, during Q1 FY17.

To add to its woes, Arctic Cat’s operating expenses during the reporting quarter increased to approximately $29.1 million compared to $24.1 million in the year-ago quarter. The Y-o-Y increase was mainly due to unfavorable foreign currency exchange rates totaling $2.7 million and higher R&D costs. As a result, the Company’s operating losses jumped to $17.3 million during Q1 FY17 versus an operating loss of $1.5 million in the same quarter last year.

As a result, Arctic Cat went deeper into the red with losses of $10.6 million, or $0.81 per share, during Q1 FY17, as compared to net losses of $1.1 million, or $0.08 per share in the year-ago period. The impact of unfavorable foreign currency exchange movements Y-o-Y was $0.20 per share during the reporting quarter.

Arctic Cat ended Q1 FY17 with cash and cash equivalents of $13.5 million compared to $20.3 million in the year-ago period.

Segmental highlights

ATVs/ROVs: Q1 FY17 sales of Arctic Cat’s ATVs and ROVs nosedived 17.3% to $43.7 million compared to prior-year sales of $52.9 million. While sales of Arctic Cat’s side-by-side ROVs remained strong, including the Wildcat, core ATV sales decreased as the company continued to lower core ATV inventory at its North America dealers. Arctic Cat decreased ATV/ROV dealer inventory by approximately 9% during the reporting quarter.

Snowmobiles: Q1 FY17 sales of Arctic Cat’s Snowmobiles plummeted 30.4% to $40.5 million versus $58.2 million in the prior-year quarter, due mainly to the timing of shipments. At its March 2016 dealer show, the Company launched its new snowmobile lines with many award-winning models to ramp up sales of this segment.

Parts, Garments & Accessories: Q1 FY17 sales of Arctic Cat’s PG&A declined 11.5% to $20.6 million versus $23.3 million in the prior-year quarter. The decline is primarily attributable to an overall weakening of the powersports market, as well as lower pre-season sales of snow-related items, resulting from poor snowfall last winter in key geographies.

Other highlights

On July 6th, 2016, Arctic Cat announced the launch of its first wave of 2017 model year ATVs and ROVs, including six all-new models and a total of 27 class-leading machines for all categories of off-road work and play. Over the next several months, Arctic Cat will have two more waves of 2017 model year launches that demonstrate the company’s emphasis on customer-driven products and performance: the Alterra TRV® two-rider vehicle and the HDX™ Crew 700 XT. These new launches are expected to compete with the new 2017 models that rival Polaris Industries Inc. (NYSE: PII) will soon launch.A2

Arctic Cat has been looking to grab market share from rival Polaris, which initiated a recall of 160,000 RZR 900 and 1000 ORVs manufactured since model year 2013 in April 2016 due to reports of thermal-related incidents, including fires. The recall has dented the popularity of its hugely popular RZR ORVs, giving an opportunity for Arctic Cat’s Wildcat Trail to take over the dominant position of the RZR.

Guidance for full year FY17

For the fiscal year ending March 31, 2017, Arctic Cat is retaining its estimated full-year net sales ranging between $635 million to $655 million, assuming a favorable foreign currency exchange impact on sales in the range of $2 million to $5 million. On the other hand, the Company is revising downwards its full-year FY17 net earnings to range from a loss of $0.70 per share to $1.00 per share due to a weak powersports market, increased promotional costs, and unfavorable product mix.

Continued foreign currency headwinds, driven by Y-o-Y impact of foreign currency exchange hedge losses, are expected to reduce net earnings to about $0.42 to $0.53 per share in FY17.

Source: Arctic Cat
Source: Arctic Cat

In H1 FY17, Arctic Cat expects that its net sales will decline 12% to 15% as it improves dealer inventory, prepares to launch new products, and other strategic initiatives. In H2 FY17, Arctic Cat expects stronger financial results owing to new product launches.

Stock Performance

A4Arctic Cat’s stock finished the day at $15.50, gaining 3.68%, at the close on Thursday, August 4th, 2016, having vacillated between an intraday high of $15.72 and a low of $14.34 during the session. The stock’s trading volume was at 151,740 for the day. The Company’s market cap was at $236.84 million as of Thursday’s close.

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