Because of the broad range of power sports vehicles that Polaris Industries (NYSE: PII) produces, its performance will be different from others in the space, even as new economic realities change the industry's landscape. But that doesn't mean the picture will be pretty when the company reports quarterly results on April 28.
Image source: Polaris Industries.
Off-road vehicles face tough times
Polaris was already expecting off-road vehicles to see lower sales and shipments in the first quarter -- a typically slow one -- as ATV and side-by-side vehicles as a whole are in decline. ATVs are an especially price-sensitive segment of the market and side-by-side sales typically carry higher margins for Polaris. The coronavirus pandemic has undoubtedly made expectations for the quarter even worse.
At the end of March, Polaris announced it was shutting down all of its manufacturing plants. It has since selectively restarted manufacturing some products with "adequate demand and supply chain coverage."
The real problem for Polaris may actually be what comes after. This year's first quarter is pretty much written off for most businesses, but subsequent quarters could be hit even harder as the economic shutdown drags on. Even if the economy begins to reopen -- and several states have begun the process -- unemployment remains high and purchases of large, expensive discretionary items will be delayed, if not forgone.
Running on empty
A bigger impact might come from the plunge in oil prices we’re seeing. Sales of off-road vehicles correlate fairly closely with oil pricing, as oil- and gas-producing businesses rely heavily upon them.
When oil prices tumbled in 2015, Polaris was hit hard and off-road vehicle and snowmobile sales fell by 10% the following year. The collapse in oil prices this year is worse than anything seen before, with prices on some-near term contracts turning negative because there is no place to store the glut of oil.
Demand may not recover for some time, meaning depressed pricing could be a further drag on Polaris sales. While Polaris has reduced its dependence on off-road vehicles somewhat since 2016 (they account for about 60% of sales today versus 78% back then) they are still the key component of its business.
Stuck in the slow lane
Motorcycles, boats, and aftermarket truck parts aren't likely to fare much better in this environment.
Polaris' Indian Motorcycle business will have just as hard a time moving bikes as Harley-Davidson, and it was also looking to reboot its struggling three-wheeled Slingshot this year. While that was already a dubious possibility, the current environment makes that all but impossible, and with the vehicle maker already putting it on a short leash, it wouldn't be surprising to see Polaris abandon that project sooner rather than later.
Less than a year after buying Larson Boats, Polaris has essentially eliminated the entire business, saying it was ending all production on sports boats and fishing boats because the market for their sales has vanished. Instead, it will focus on the pontoon and deck boat business it acquired in 2018.
It's true that auto parts stores have been deemed essential businesses during the pandemic, but demand is still likely to be depressed. As this segment of Polaris now accounts for 13% of sales, any decline could have a sizable impact on its performance.
Here to stay
Polaris Industries is still a financially strong company, and the measures it's taken during the pandemic, such as postponing all nonessential capital expenditures, eliminating share repurchases, slashing executive salaries, and drawing down $150 million of its revolving credit line along with a new $300 million short-term loan, should help it weather the storm.
The first quarter won't be pretty, though, and it is quite possible its second and third quarters, which are its biggest sales producers, will be even worse. Polaris stock may have bounced off of its lows, but investors may not have seen the bottom yet.
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