- The Washington Times - Tuesday, February 20, 2007

MINNEAPOLIS

Here is an ironclad rule for selling snowmobiles: You need snow.

Warmer weather and thin snowfalls since the late 1990s have melted sales at Polaris Industries Inc. and Arctic Cat Inc., the only two U.S. snowmobile makers. After one more wimpy winter in a long string of them, some dealers say they are struggling to clear out last year’s sleds, let alone sell out of this year’s. Some gave up months ago.

“When there was nothing here indicating that we were going to have a winter, by the first of October there was a business decision: Pull the cork,” said Dick Tschida, who sells sleds in Forest Lake, a suburb of Minneapolis.

Mr. Tschida returned more than 50 Arctic Cat snowmobiles and all-terrain vehicles (ATVs) and is switching to boats instead. The returns cost him about $7,000, but that’s a far cry from the $250,000 loss he figured he’d take by the time he discounted them enough to sell.

The late-season storm that socked the Northeast last week came far too late for dealers like Mr. Tschida — and for the manufacturers.

Mr. Tschida’s days of selling snowmobiles are over. Too many people, he said, are hesitant to spend money on a toy they may not be able to use.

“They’re more apt to spend on a new aluminum boat to go fishing, because they know they can go fishing from at least the first of May until the end of September,” he said.

“The industry has been down for basically a decade straight,” RBC Capital Markets analyst Edward Aaron said. This year was “probably the toughest of any of those years.”

Polaris snowmobile sales have dropped by more than half, from $373 million in 2001 to $157 million last year. Its 2006 profits dropped 22 percent to $107 million on revenue of $1.7 billion.

Arctic Cat snowmobile sales have been more stable over the past five years, but still dropped to $238 million during the year ended March 31, down more than 5 percent from the previous year, and profits were battered by incentives to move sleds off dealer floors. Arctic Cat’s earnings of $23.7 million for the year ended March 31 represented a 16 percent drop from the previous year, even as revenue rose 6 percent to $732.8 million.

For years, Polaris and Arctic Cat seemed like twins, synonymous with Minnesota’s snowy north. The first Polaris snowmobile was built by Edgar Hetteen and some relatives at his derrick and hoist company in the mid-1950s. He left what was by then Polaris Industries in 1960, and a year later started the company that became Arctic Cat at a time when dozens of fledgling snowmobile entrepreneurs were building snow vehicles with tracks in the back and skis in the front.

Arctic Cat’s Thief River Falls, Minn., headquarters is only about 60 miles from Polaris’ main plant in Roseau, and the two companies are now the only snowmobile makers in the U.S. Japan’s Yamaha and Canada’s Bombardier Recreational Products also make snowmobiles.

Demand for their sleds has been shrinking. Worldwide snowmobile sales peaked at 260,000 sleds in 1997, but are expected to fall to about 160,000 this year, according to the International Snowmobile Manufacturers Association.

The two U.S. companies have reacted in very different ways.

Polaris added Victory motorcycles and has tried to strengthen ATV sales to the military. It cut production of its 2007 snowmobiles by 40 percent to give dealers a shot at clearing out inventory. Snowmobiles accounted for less than 10 percent of Polaris sales last year.

Arctic Cat has stuck with the snowmobiles-in-the-winter and ATVs-in-the-summer formula, and snowmobiles still account for about a third of its sales. Arctic Cat cut snowmobile production just 4 percent last year, far less than Polaris did, and another weak winter is making that look like a mistake.

Early this month, Arctic Cat announced plans to lay off 65 workers, and in January it cut its full-year profit forecast to $1.07 to $1.15 per share, down from $1.13 to $1.19 per share.

A bright spot for both companies has been growth of utility ATVs, on which the riders sit side-by-side — think of a golf cart with a roll cage and off-road tires. Polaris added its Ranger ATV in 1998 and has said it thinks sales of a new, sportier version of the vehicle can add sales of $150 million over the next three years. Arctic Cat added a side-by-side ATV in 2005.

Mr. Aaron, the analyst, said Polaris also was quicker to expand international sales.

“Arctic Cat is just starting to dabble with that,” he said. “Polaris has been faster and more aggressive in terms of its diversification.”

Polaris said snowmobiles remain a key part of its business. Polaris President and Chief Operating Officer Bennett Morgan said the production cut last year means the business is ready to grow again if the snow flies.

“We took some tough medicine. A lot of the other manufacturers chose not to,” he said. “Surprising as it may seem, we feel much better about our snowmobile business today than we did in April.”

He said Polaris never considered spinning off its snowmobile business despite the downturn in recent years.

“It is our heritage,” he said. “It is the heart and soul of this company.”

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