Shares of Toro Co. (TTC) fell around 0.3% since the company reported first-quarter fiscal 2014 (ended Jan 31, 2014) results on Feb 20. Earnings declined about 17% year over year to 44 cents per share. The results, however, came ahead of the Zacks Consensus Estimate of 38 cents and management’s guidance of 33 cents.
Operational Update
Sales inched up around 0.3% year over year to $446 million, beating the Zacks Consensus Estimate of $436 million. The year-over-year growth was led by favorable weather conditions, increased retail activity and improved international demand.
Cost of sales rose to $282 million from $278 million in the year-ago quarter. Gross profit declined 1.3% year over year to $165 million. Consequently, gross margin contracted 60 basis points (bps) year over year to 36.7%, due to unfavorable currency exchange rates and higher commodity costs. These were partly offset by realized pricing.
Selling, general, and administrative expense rose 2.7% year over year to $122.9 million primarily driven by higher administrative expense. Operating profit decreased 12% year over year to $8.4 million. Consequently, operating margin contracted 130 bps year over year to 9.1%.
Segmental Performance
Professional: Net sales from this segment fell 10% year over year to $295.5 million, primarily due to lower channel demand for large turf equipment related to Tier 4 diesel engine emission standards as compared with the prior year quarter. This was partly offset by favorable pre-season shipments of landscape maintenance equipment and increased global micro-irrigation sales. The Professional segment posted earnings of $47.5 million, down 21.9% from the prior-year quarter.
Residential: This segment reported sales of $147.6 million, up 22% year over year. The increase was attributable to rise in retail demand for snow products due to significant snowfall across key North American markets. Sales also benefited from pre-season shipments of domestic residential mowers as well as additional shipments of handheld solutions. These positives were however, partly offset by unfavorable currency exchange rates. Consequently, the Residential segment’s earnings came in at $18.1 million, rising 49.2% year over year.
Financial Update
Toro ended the quarter with cash and cash equivalents of $104 million, as against $60.7 million at the end of the year-ago comparable period. Cash from operations during the quarter was $12.5 million versus $23.4 million in the prior year quarter.
Long-term debt was $223.8 million as of Jan 31, 2014, flat compared with $223.5 million as of Feb 1, 2013. The debt-to-capitalization ratio contracted 10 bps to 39.6% as of Jan 31, 2014, from 39.7% as of Feb 1, 2013.
The company repurchased over 0.6 million shares during the quarter and has about 3.7 million shares remaining in repurchase authorization.
Outlook
For full-year 2014, Toro raised its revenue growth guidance from 4%–5% to 5%–6%. The company also modified net earnings for the year in the range of $2.90–$2.95 per share from the previous band of $2.85–$2.90.
The positive outlook was based on the introduction of innovative products and services. Additionally, landscape contractor equipment sales will expectedly benefit from the additional revenues generated by contractors and the increased demand for zero turn radius mowers.
For the second quarter of 2014, Toro expects net earnings to be about $1.45 to $1.50 per share. According to the company, golf course development is progressing, along with improvement in the housing and construction sector. Moreover, consistent focus on enhancing shareholders’ value and exploitation of acquisition opportunities will expectedly bolster growth.
Toro will continue to benefit from global food demand and increased water use restrictions which will drive the need for more efficient irrigation solutions for agriculture. Furthermore, recent investments in micro irrigation business will facilitate expansion of the company’s global footprint. However, foreign exchange volatility, along with social and political unrest remains headwinds.
Bloomington, Minnesota-based Toro is a worldwide provider of turf and landscape maintenance equipment as well as irrigation solutions for golf courses, sports fields, public green spaces, commercial and residential properties as well as agricultural fields. The company operates through two segments: Professional and Residential.
Toro currently carries a short-term Zacks Rank #3 (Hold).
However, some better-ranked stocks in same sector include Snap-on Inc. (SNA), USG Corporation (USG) and Joy Global, Inc. (JOY). All of these have a Zacks Rank #2 (Buy).
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