Polaris Industries (PII -1.57%) managed to pull off yet another quarter of higher sales of its Indian Motorcycle brand, but continuing to outperform rival Harley-Davidson (HOG -2.24%) or buck industry trends could become more difficult.

Indian sales were up low single digits in the quarter, even as the market for motorcycles with engine displacements of 900 cubic centimeters or larger declined by 10% and Harley-Davidson saw sales plunge more than 13% for the period. But pressure from President Trump's tariffs on steel and aluminum imports may soon finally take their toll.

U.S. producers are taking advantage of the situation by raising their prices, and because three-quarters of Polaris's suppliers are domestic producers, the powersports vehicle manufacturer is still experiencing increased costs.

Two motorcyclists on Indian Scout Bobbers

Image source: Indian Motorcycle.

Following where the market leads

Polaris has been able to sell more motorcycles despite a host of broad negative factors buffeting the motorcycle industry as consumers positively respond to its smaller, lightweight motorcycle lineup, which includes the Scout, Scout Sixty, and Scout Bobber. Where heavyweight bike sales fell in the third quarter, this trio of motorcycles was able to still notch gains, particularly overseas, where sales surged 18%.

With the coming release of the new FTR 1200 motorcycle, a flat-track styled racer meant for the street that has generated a lot of buzz, Polaris's midsize motorcycle lineup can keep the momentum going into 2019. That, however, could all come undone as the next round of higher tariffs takes its toll.

Polaris has already raised prices to pass on some of the costs of the tariffs, showing that consumers always pay for a trade war, but if it is not able to negotiate exemptions from the enhanced tariffs coming, it is ready to implement more "aggressive" pricing actions, which could undermine the growth story.

One of the issues Harley-Davidson has faced is that its motorcycles are too expensive. They come with a premium price tag, prices arguably befitting a manufacturer with a 50% share of the market, but the cost has caused sales to plummet for 14 out of the last 15 quarters.

But the trends impose a cost

Changing industry dynamics have also affected Polaris's profitability. Because new buyers are looking for those smaller, lighter-weight motorcycles, that carry lower price tags and narrower margins. With demand tilting toward the Scout bikes, Polaris experienced a 4% drop in its average selling price, and while adjusted gross margins are up year to date due to lower warranty and promotional costs, Polaris now expects motorcycle gross profits to be down due to lower volume and product mix.

Polaris initiated several strategic initiatives a few years ago to make sure it is able to properly maintain inventory at dealers, helping the powersports leader navigate these challenging times. Because the trend in motorcycles has been toward these smaller bikes, its production capabilities are now geared in that direction, even though it hasn't abandoned the big bike market. The new Chieftain Limited motorcycle, which starts at just under $26,000, has been an exception to the rule, but you'll still find more Scouts flowing to dealers than other models.

It's been the Scouts, though, that allowed Indian to surpass a 25% share of the midsize motorcycle market in the third quarter, and assuming the entire economy doesn't tank because of the trade war or other factors, Polaris is looking to gain even more.

Key takeaway

Indian Motorcycle has been incredibly popular ever since Polaris resurrected it out of bankruptcy a few years ago, and it's been able to inspire continued enthusiasm for the brand despite the industry downdraft. While it might have been able to sell a few more bikes because of a spat Harley-Davidson got into with Trump over moving production overseas, it is on the basis of producing a quality product that Indian continues to see sales growth.

So far Polaris has weathered the storm, but there are more clouds moving its way and there is a very good possibility it will get dragged down just as Harley-Davidson did because of them.