Outdoor power equipment manufacturer The Toro Co.’s financing joint venture experienced another decline in originations in the third quarter as consumer uncertainty and high interest rates limited sales.
Red Iron, owned 45% by Toro and 55% by Huntington Distribution Finance, saw originations decline again as professional segment sales slowed during Q3 of fiscal 2024, which ended Aug. 2, according to Toro’s 10-Q filing with the Securities and Exchange Commission.
Toro’s overall professional net sales declined as rising consumer uncertainty and interest rates, as well as concern about the geopolitical environment, led to a July slowdown amid dealer inventory normalization efforts, Richard OIson, chairman and chief executive, said during today’s earnings call.
“This uptick in caution resulted in trade-down activity and purchase deferrals, which led to lower-than-expected shipments of residential and professional segment lawn care products during July,” he said. “We continue to execute on our objective of normalizing dealer field levels for these products, and once again, made significant progress in both the professional and residential segments.”
Despite the declines, Toro saw improvement in days sales outstanding (DSOs), which measures days to collect payment on sales, Angela Drake, vice president and chief financial officer, said on the call.
“We once again saw significant improvement in Red Iron DSOs, a decrease of about 30 days,” she said. “This is a reflection of our progress in rebalancing dealer field levels of lawn care products as sell-through continues to exceed sell-in.”
The improvement followed a 46-day improvement in DSOs in Q2, which Drake reported during the second-quarter earnings call on June 6.
NOTEWORTHY: While total professional segment sales declined in Q3, some segments maintained strong demand, Olson said.
“Within our professional segment, we delivered net sales growth in our underground construction and golf and grounds businesses, where strong demand is keeping order backlog at high levels,” he said. “We successfully drove increased output within our existing manufacturing footprint to address this sustained demand and best serve our customers.”
BY THE NUMBERS: Amid Red Iron’s slowdown, third-party financial institutions picked up market share in Q3. According to the 10-Q:
- Net receivables financed for dealers and distributors under Red Iron for the first nine months of fiscal 2024 totaled $1.9 billion, down 12.9% year over year;
- Total Red Iron outstandings landed at $927.8 million, down 8.2% YoY;
- Total receivables due from Red Iron to Toro were $28.6 million, down 5.9% YoY;
- Net receivables financed for dealers and distributors by third-party financial institutions for the nine months reached $442 million, up 17.4% YoY;
- Total third-party financial institutions’ outstandings finished at $228.5 million, up 22.1% YoY;
- Toro’s total investment in Red Iron as of Aug. 2 reached $46.4 million, down 4.3% YoY.
Despite declining professional segment sales in Q3, Toro’s net sales improved, according to the company’s earnings presentation:
- Total net sales landed at $1.2 billion, up 6.9% YoY;
- Professional segment net sales fell to $880.9 million, down 1.7% YoY;
- The professional segment’s earnings rate as a percentage of net sales declined to 18.8%, up 17.3% YoY.
MARKET REACTION: Shares of The Toro Company (NYSE: TTC) were down 10.09% or $9.18 from market open to $81.82 as of market close today. The Toro Company has a market capitalization of $9.45 billion.
THE BOTTOM LINE: While improving inventories and days sales outstanding remains a priority for Toro headed in its fiscal fourth quarter, the company continues to see progress relative to the beginning of its fiscal year on Nov. 1, Olson said.
“We’re on track, we’re at 80%, and we still have some of the year left to go,” he said. “We made tremendous progress, and it’s a combination of strong retail in those businesses drawing down our inventory and there’s relatively higher general inventory from competitors that are a factor, but we’ve done what we expected to do, and we’ll be close to getting exactly where we’re expected to be.”
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