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Polaris Industries Offers 1 Surprise Amid a Gloomy Q1 Report

By Rich Duprey - May 1, 2020 at 11:46AM

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The powersports vehicle maker doesn't sound too hopeful for the rest of the year, or into 2021 either.

Diversity of product across seasons has often served Polaris Industries (PII -0.24%) well, but amid the coronavirus pandemic where much of the economy has been locked down, not even a broad selection of powersports vehicles could stem the decline in the first quarter.

Yet Polaris did report one surprising development: Motorcycle sales rose 7% for the period as both Indian Motorcycles and the three-wheeled Slingshot saw gains. Considering that Harley-Davidson (HOG -0.13%) just reported that its U.S. sales plunged 15.5% and tumbled over 50% in international markets, Polaris's ability to notch growth was remarkable.

Two riders on Indian motorcycles

Motorcycles proved to be the one bright spot for the vehicle maker. Image source: Polaris Industries.

A broad-based decline

While the leading powersports vehicle maker reported higher motorcycle sales; off-road vehicles (ORVs), snowmobiles, utility vehicles, boats, and aftermarket parts all declined in the first quarter, sometimes sharply compared to a year ago.

Polaris's biggest segment is the combined ORV and snowmobile business, which accounts for almost 60% of total revenue and 69% of gross profit. It witnessed a 5% drop in sales and a 16% decline in gross profits.

ORV sales were down 7% year over year, while snowmobiles tumbled 54%. Although Polaris's decline was better than the industry in North American ORVs, it lagged behind the snowmobile market, which was off 30% in the quarter.

Global adjacent markets were down 6% for the period, while boat sales plummeted 16% from last year. The company's retail business of aftermarket parts also dropped 8%, as sales at its Transamerican Auto Parts business, which accounts for 88% of the segment's total revenue, declined. Polaris's other aftermarket brands, however, saw sales rise 6%, and it was able to see a 7% gain in parts, clothes, and accessories.

The international market suffered an 11% drop.

A sinking feeling

The results were not surprising, considering big-ticket purchases would be a secondary consideration during a pandemic. It also gave Polaris the opportunity to exit from some segments of the boating market that it ultimately decided wouldn't have as much of a growth trajectory as it originally believed.

Polaris said it was discontinuing production of cruisers and fishing boats, which virtually eliminates all of the business of Larson Boats that it purchased last summer. Polaris said it would focus solely on the pontoon and deck boat business that it acquired when it bought Boat Holdings two years ago.

The pandemic seems to have changed the company's thinking about how the business might evolve, but it doesn't believe it will improve anytime soon. Considering the altered landscape, Polaris may have thought it best to exit now instead of waiting for worse results to come.

In addressing the company's overall performance, chairman and CEO Scott Wine said in a statement: "We expect the COVID-19 pandemic, and its corresponding shock to the economy, to be a substantial challenge for the global economy and our business through the remainder of the year and possibly longer."

Investors should prepare for deeper fissures to open as the year progresses.

A recovery paused

Yet it still remains a noteworthy achievement that Polaris was able to record gains in motorcycles. It's possible the growth it recorded would have been significantly higher had the pandemic not struck.

Harley-Davidson had reported that its own U.S. motorcycle sales for the first quarter were actually up almost 7% until the pandemic was declared in mid-March, at which time sales simply fell off the table and ended up down nearly 16%.

Equally important was the turnaround Polaris was apparently seeing with the Slingshot. The three-wheeled bike was on life support as the company sought to reverse a multi-year decline, so the fact that the company was able to report gains means the retooling it did was working.

That makes it all the more unfortunate that the crisis arose when it did, and Polaris needs to hope it can regain the momentum it had when the economy reopens.

Dark days ahead

That Polaris Industries had a difficult quarter surprised no one. All things considered, it could have been a much worse result.

Still, the powersports vehicle maker saw a $0.78 per share profit a year ago turn into a $0.09 per share loss this time out. Management is preparing for an extended downturn for the balance of 2020, and maybe even into next year.

Polaris's investors will need patience until the market for such discretionary purchases can gain traction once again.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of Polaris Industries. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Polaris Industries Inc. Stock Quote
Polaris Industries Inc.
PII
$119.43 (-0.24%) $0.29
Harley-Davidson, Inc. Stock Quote
Harley-Davidson, Inc.
HOG
$39.53 (-0.13%) $0.05

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