"Fun" vehicle maker Polaris
- Quarterly sales declined 10% year over year.
- Profits per share dropped 7%.
- The company missed guidance for Q3.
- And management lowered guidance for Q4.
If you guessed the stock would trade 2% higher on the news initially, and 4% as of this writing, well, you may not be thinking logically, but you did get the right answer. So there must have been some good news, right? Right. For one thing, although ATV and snowmobile sales came in light again (falling 12% and 16%, respectively), sales of the Victory line of motorcycles rose 60% in comparison with last year's Q3. For another, consider the relationship between declines in sales and declines in the profits on those sales.
Profits per share declined less than sales -- 7% vs. 10% -- in Q3. And in predicting its Q4 results, management said it expects more of the same. Profits are expected to fall about 7% in comparison with last year's $0.99 per share, which is only about half as much as management expects sales to fall. In part, this owes to the 1.3 million shares bought back during the third quarter (bringing the total buyback to 2.6 million shares year to date); by taking 3% of the stock out of circulation, Polaris concentrated its profits among fewer shares outstanding. However, that's not the last of it, because the board of directors has approved the repurchase of another 2.1 million shares. It also seems that Polaris is making good on its promise to "streamline [its] business through ongoing efficiency improvements, low cost sourcing and expense management."
As I pointed out in last week's Foolish Forecast, Polaris has struggled to cut costs in tandem with its falling sales this year. While sales were down 10% the first two quarters of the year, it cut its operating costs only 6%. The third quarter marked a happy reversal of this trend, however. Sales were still down 10%, but costs fell 10%. Management predicts that next year, there will be a return to earnings growth, and considering these efficiency improvements, I'm inclined to believe it.
One problem remains, however, and that's inventories. Polaris managed to cut them less than 3% year over year, far slower than sales are falling. And the firm warned that part of the reason for next quarter's walk-back on sales projections is because dealers are proving reluctant to order new ATVs while they clear out their own inventories. That both explains why Polaris' inventories are proving stubbornly difficult to sell down, and bodes ill for major reductions in the near future.
In other news
Rival motorcycle maker Harley-Davidson
How are things at ATV and snowmobile competitor Arctic Cat
For more Foolish adventurous reading:
- Foolish Forecast: Polaris Launches
- Will Polaris Twinkle Again?
- Investors Hit by Polaris' Falling Star
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