Polaris Stalls After Capping a Great Year

Polaris Industries Inc. (PII 2.25%) announced record fourth-quarter 2017 results on Tuesday, highlighting accelerating demand for its side-by-side vehicles and "massive" outperformance by its Indian Motorcycle brand compared with the broader industry.

However, the market didn't react well after management also issued underwhelming guidance and a near-term sales warning following delays getting certain models into showrooms. So let's take a closer look at what drove Polaris last quarter, as well as what to expect from the company as it kicks off the new year.

Image source: Polaris.

Polaris Industries results: The raw numbers

Data source: Polaris Industries. 

What happened with Polaris this quarter?

• On an adjusted (non-GAAP) basis -- which excludes costs related to the ongoing wind-down of Victory Motorcycles, the integration of Transamerican Auto Parts (TAP), and the impact of U.S. tax reform -- net income increased 25% year over year to $95 million, or $1.47 per share.
• International revenue climbed 18% year over year to $211 million, driven by growth in the low-20% range from the Europe, Middle East, and Africa region, high-single-digit growth from the Asia-Pacific region, and mid-teens percentage growth in Latin America.
• Parts, garments, and accessories revenue, excluding aftermarket segment sales, grew 8% year over year.
• Off-road vehicle (ORV) and snowmobile sales grew 13% year over year to $881 million, once again driven by improved side-by-side unit shipments.
  • ORV whole-good sales grew 14%, helped by strength in both RZR and RANGER model shipments. 
  • Snowmobile whole-good sales increased 11% to $131 million, driven mostly by shipment timing.
• Motorcycle sales fell 2% to $103 million, primarily because of the absence of revenue from Victory Motorcycle, compared with last year's fourth quarter. Indian Motorcycles whole-good sales grew in the high-single-digit percentage range, and Slingshot sales more than doubled thanks to improved product availability.
• North American consumer retail demand for Indian Motorcycle and Slingshot collectively grew 30% year over year.
• Global adjacent market sales increased 19% to $117 million, including 24% growth in commercial/government/defense category sales on military orders and demand for Goupil light-utility products.
• Aftermarket sales grew 62% year over year to $218 million, primarily from the acquisition of TAP. TAP sales climbed 4% year over year on a pro forma basis.
• The company repurchased 13,000 shares for roughly $2 million, bringing full-year 2017 stock repurchases to 1,028,000 shares for $90 million. Polaris has 6.4 million shares remaining under its existing repurchase authorization.

What management had to say

Polaris CEO Scott Wine stated:

I am proud of the Polaris team and excited to see their dedication and hard work pay off as we returned the company to sustainable profitable growth in 2017. Indian Motorcycles massively outperformed the motorcycle industry, building on its existing momentum with a flood of product news and a very successful year on the race track. We accelerated North American demand for side-by-sides throughout the year led by strong retail sales of RANGER and Polaris [GENERAL] along with increased international sales growth in all regions outside North America. Additionally, we made significant investments and improvements in our people, processes, product innovation, and quality, which led to notable execution improvements in our off-road vehicle business, marked progress on the TAP integration, and a substantial upgrade of our quality control systems and infrastructure.

Looking forward

However, Wine also noted that "between strong demand and our intense focus on delivering high quality products," Polaris experienced delays in getting certain 2018 ORV models into showrooms, hurting North American sales in the process. As such, Polaris is scrambling to ensure its dealers' inventories are in line ahead of the crucial peak retail selling season.

In the meantime, Polaris expects full-year 2018 adjusted sales growth of 3% to 5% -- or to a range of $5.59 billion to $5.70 billion -- which should translate to adjusted net income in the range of $6 to $6.20 per share. By comparison, Wall Street was expecting significantly higher 9% revenue growth to result in earnings near the low end of Polaris' guidance range.

Although Polaris' long-term story remains intact, its guidance could be conservative, especially if its aforementioned corrective action solves its current inventory challenges ahead of the peak selling season. It's also worth noting that Polaris stock was up nearly 60% over the past year leading into this report, with much of that rise following its blowout quarterly report in late October.