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Shares of Polaris Industries Inc. Slide 10% After Rough 4th Quarter and Challenging Start to 2016

By Daniel Miller - Jan 27, 2016 at 6:00AM

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With declining sales of off-road vehicles and snowmobiles in the fourth-quarter, Polaris' earnings call wasn't much fun.

Off-road vehicles recorded a steep sales decline to finish 2015. Image source: Polaris Industries.

Well, there's really no sugar-coating the figures from Polaris Industries (PII 0.43%) -- the results are bad. It was a bad quarter that put the finishing touches on a challenging year. Most of that was already expected, as the company reduced its guidance in December, and quite frankly, it's easy to anticipate a decline in business from a company that sells a lot of snowmobiles at a time when a snowstorm before Christmas is becoming a rarity.

If you're an investor on board for the long haul and can stomach the brutal numbers, here's a glance at some of the important figures from the fourth quarter and full year, as well as what to expect for this year.

Seeing red
Sales in the fourth quarter dropped 13%, down to $1.10 billion thanks in large part to an 18% decline in Polaris' sales of off-road vehicles (ORVs) and snowmobiles. Polaris' fourth-quarter net income declined at a faster rate than sales, down 18% to $110 million. Fourth-quarter net income per share checked in at $1.66, a 16% decline compared with last year's $1.98 per diluted share.

Despite a brutal fourth quarter, Polaris managed to squeeze out a 5% sales gain for the full year, but that's about half the sales gain management initially expected during 2015. Earnings per share checked in with a meager 2% increase to $6.75 for the full year compared with 2014, with net income margin down 49 basis points from 2014. The 2% EPS growth is also far behind initial guidance of between 10% and 11% for the full year.

"The strengthening dollar and weakening oil markets combined with an unseasonably warm winter, constrained demand for off-road vehicles and snowmobiles, placing pressure on dealer inventory and forcing us to curtail shipments in the fourth quarter. While our execution to plan did not meet our historically high standards, we have taken numerous actions to position Polaris for better performance in 2016," said Scott Wine, Polaris' chairman and chief executive officer, in a press release.

Net cash provided by operating activities declined 17%, from $529 million during 2014 down to $440 million for the full 2015. Part of that drop was due to the increased working capital, as Polaris reduced shipments during the fourth quarter.

For the most part, the figures Polaris reported on Tuesday were bad, but if there is a silver lining amid a challenging year, it's that the company managed to grow market share in all of its businesses in 2015 despite the economic and industry headwinds.

Q1 2016 won't bring relief
There's also no sugar-coating the near-term struggle: The first quarter of 2016 is also going to be brutal. In a slightly surprising twist, as Polaris doesn't typically comment on sales guidance quarter to quarter, it made an exception to warn investors that the pain will continue when it reports its first-quarter results.

Management said foreign exchange will negatively affect Polaris' top-line revenues by about 2%, and that it will be a "substantial" headwind to the company's bottom line. Management also said the first quarter of 2016 will improve sequentially from the fourth quarter, in terms of retail trends and sales, but that it will still be weaker than through most of 2015. More specifically, Polaris' ORV/snowmobile sales are expected to decline by high single digits during the first quarter. Further, earnings per share for the first quarter of 2016 are expected to check in at roughly half the amount reported during the first quarter of last year. 

Full-year 2016 guidance calls for total company sales to check in between a 2% decline and a 3% gain -- however, constant currency levels improve both of those figures by 2 percentage points, or 200 basis points. Gross profit margins are expected to be flat or as much as 50 basis points lower, on a constant currency basis, and earnings per share will check in with a wider range between flat and a 9% gain, again on a constant currency basis.

There's no question that the fourth quarter was tough for Polaris, and its investors and the results had sent the stock price 10% lower as of 11:00 a.m. ET, after previously dropping roughly 10% when the company announced reduced guidance mid-December. All the doom and gloom aside, one thing investors need to watch is how the company maintains or improves its market share in the industry, because if it does that, the company will be in an even stronger position when these economic, retail and currency exchange headwinds subside. 

Daniel Miller has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Polaris Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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