Toro Company (TTC)

TOP CONTRIBUTORS

Thomas Shyr

J.D. Thornton

The Toro Company (TTC) makes lawn mowers, irrigation systems, snow blowers and other equipment aimed at both professional landscapers and residential homeowners. Toro distributes its products through retailers such as Wal-Mart Stores (WMT) and Home Depot (HD), independent hardware stores as well as direct sales through e-commerce.

Demand for Toro's landscaping and irrigation equipment is directly related to the development of new commercial and residential real estate. A prolonged slump due to subprime lending would likely decrease demand for Toro products, which can be expensive (many finance their purchases).

Business Overview

Toro sells lawn mowers, irrigation systems, snow blowers and other landscaping equipment to residential households as well as commercial landscapers. The company distributes its produces through retail stores such as Wal-Mart Stores (WMT) and Home Depot (HD), as well as other hardware stores and directly to consumers via an e-commerce channel.

Business Financials

Total revenues in 2009 were $1.52 billion, a significant decrease from its 2008 revenues of $1.88 billion. This 18.9% decline in net sales was due to lower demand that resulted because of the global recessionary economic climate.^[1]As a result, Toro's net income declined from $120 million in 2008 to $63 million in 2009, a 47.5% decrease.

Business Segments

Toro breaks its business into two business segments: i) Professional and, ii) Residential.

Professional (63% of 2009 Revenues)

Toro's Professional segment produces and sells turf and agricultural products to government customers, rental companies, and large retailers. These customers are generally professional users engaged in creating landscapes, irrigating turf and agricultural fields, and maintaining turf, such as golf courses, sports fields, municipal properties, and residential and commercial landscapes. In 2009, this segment had $965.9 million in total sales.^[2]

Residential (35% of 2009 Revenues)

The Residential segment sells products to homeowners through a variety of distribution channels, including outdoor power equipment dealers, hardware retailers, home centers, mass retailers, and over the Internet. This segment also licenses Toro's trade name to other manufacturers and retailers on certain products as a means of expanding its brand name and image. During 2009, this segment posted $532.7 million in revenues.^[3]

Other (2% of 2009 Revenue)

Toro's Other segment includes sales from subsidiary distribution companies. In 2009, this segment had $24.8 million in total revenues.^[4]

Trends and Forces

U.S. Housing and Commercial Construction

The demand for Toro's landscaping and irrigation equipment is directly related to the development of new commercial and residential real estate. A prolonged slump due to subprime lending would likely decrease demand for Toro products. This is especially true for Toro because many of its products are relatively expensive, requiring many customers to make purchases through third-party financing.

The U.S. Dollar Affects Demand from abroad

Toro generates about 29% of revenue outside the United States. A less valuable U.S. dollar makes Toro's American produced products more attractive on the world market. On the other hand, a strengthening Dollar makes Toro's products more expensive to international buyers, and would reduce overall sales. Toro estimates that the strengthening dollar in 2009 reduced their overall sales by $32 million.^[5] However foreign currency fluctuations make sales revenues difficult to predict.

Seasonality and Weather affect earnings

Toro's sales are relatively cyclical with regards to its residential products. More specifically, sales are particularly strong in the second and third quarters of each year, as homeowners stock up on gardening and other outdoor home products. Evidence can be seen in Toro's 2009 quarterly earnings, as 59% of its 2009 revenues for residential products came during the second and third quarters.^[6]

Worldwide weather patterns also affect demand for Toro products. Evidence of this is weak snow blower sales during the mild winter of 2006-2007. Conversely, worldwide water shortages are increasing demand for Toro's efficient irrigation systems (see also China's Water Scarcity).

Competition

Toro faces competition from companies including Deere & Company (DE), Black & Decker (BDK), and Honda Motor Company (HMC). In order to remain competitive, Toro must continue to devise and produce innovative high quality products that exceed consumer demands. If Toro fails to successfully innovate, these large competitors will undoubtedly use their superior resources to create products that attract new consumers and reduce Toro's market share. On the other hand, many of these large competitors are highly diversified companies that cannot bring the same focus to lawn care products as Toro.

• Deere & Company (DE) is a leading manufacturer of all kinds of agricultural equipment

• MTD Products produces a wide range of lawn care product lines such as Cub Cadet and Troy-Bilt. MTD is a privately held company.

• Black & Decker (BDK) produces a variety of lawn and garden equipment, including trimmers, lawn mowers, edgers, and pruners.

• Makita (MKTAY) has a full line of professional power equipment, including a variety of lawn care products.

• Honda Motor Company (HMC) makes lawn mowers, lawn tractors, and snow throwing equipment.

• Briggs & Stratton (BGG) produces lawn care equipment through its subsidiary Murray.

References

1. ↑ TTC 10-K 2009 Item 7 Pg. 26
2. ↑ TTC 10-K 2009 Item 7 Pg. 29
3. ↑ TTC 10-K 2009 Item 7 Pg. 30
4. ↑ TTC 10-K 2009 Item 7 Pg. 31
5. ↑ TTC 10-K 2009 Item 7 Pg. 28
6. ↑ TTC 10-K 2009 Item 1 Pg. 7