Polaris Q3: Dealer inventory drops 55% due to retail sales growth

Polaris released its Q3 2020 financial and operational results today, reporting reported and adjusted sales increased 10% to $1.955 billion and $1.953 billion, respectively.

Here are other highlights of the Polaris quarter ended Sept. 30, 2020:

• Third quarter reported net income was $2.66 per share; adjusted net income for the same period was $2.85 per share

• North American retail sales increased 15% for the quarter compared to last year led by strength in ORV, Motorcycles and Snow. Boats retail sales were also strong during the quarter.

• Gross profit margin for the third quarter was 27.3%, up 270 basis points over prior year. Adjusted gross profit margin was 27.5%, up 260 basis points versus last year primarily due to positive product mix and lower promotional costs

• Dealer inventory levels decreased 55% given continued strong retail sales growth

• Polaris' liquidity profile remains solid with debt/EBITDA at 2.45 times and total liquidity of $1.5 billion at quarter end

• Polaris raising full year 2020 sales and adjusted earnings guidance with full year adjusted earnings in the range of $7.15 to $7.30 per diluted share and full year sales up in the range of 2% to 3%

The 2021 General XP 1000 Factory Custom LE figures to bring added sales growth to Polaris.

CEO Commentary

“Our continued strength in the third quarter reflects the broad-based consumer demand for our industry leading powersports products, and tremendous execution by our Polaris team and dealers,”  said Scott Wine, Chairman and Chief Executive Officer of Polaris. “Their focus and determination enabled Polaris to generate double-digit sales increases in ORV, Motorcycles and Boats, which were somewhat limited by supply chain capacity constraints,” Wine added. “I am extremely proud of the diligent and efficient efforts of our team to mitigate these supplier disruptions and drive a three-year high in quarterly gross profit margins. Demand has remained strong to start the fourth quarter and we expect our sales and earnings momentum to continue for the rest of the year. This pushes our expectations for overall company performance to exceed our pre-Covid-19 targets for 2020, demonstrating our confidence in the team to accelerate production as we manage through continued challenges. Thanks to the dedication, innovation and customer-centric work of our entire Polaris team, whom we are working relentlessly to keep safe, we are realizing tremendous progress from our strategic investments in supply chain and digital transformation, electrification, and breakthrough product development programs. I am very optimistic about the future growth and profitability prospects for Polaris and our stakeholders.”

Three months ended Sept. 30, 2020

Polaris Inc. today released third quarter 2020 results with reported sales of $1.955 billion, up 10% from reported sales of $1.772 billion for the third quarter of 2019. The company reported third quarter 2020 net income of $167 million, or $2.66 per diluted share, compared with net income of $88 million, or $1.42 per diluted share, for the 2019 third quarter. Adjusted net income for the quarter ended Sept. 30, 2020 was $179 million, or $2.85 per diluted share compared to $104 million, or $1.68 per diluted share in the 2019 third quarter.

Retail demand remained strong during the quarter benefiting company performance as both new and existing customers continued taking advantage of off-road vehicles, snowmobiles, motorcycles and boats to enjoy the outdoors while maintaining social distancing etiquette.

Gross profit increased 22 percent to $535 million for the third quarter of 2020 from $437 million in the third quarter of 2019. Reported gross profit margin was 27.3% of sales for the third quarter of 2020, up 271 basis points compared to 24.6% of sales for the third quarter of 2019. The improvement in gross profits was primarily driven by positive product mix and lower promotional costs incurred during the quarter. Adjusted gross profit for the third quarter 2020 was $537 million, or 27.5 percent of adjusted sales compared to the third quarter of 2019 adjusted gross profit of $441 million, or 24.9% of sales. Adjusted gross profit for the third quarter of 2020 and 2019 excludes the negative impact of $2 million and $5 million of restructuring and realignment costs, respectively.

Operating expenses decreased four percent for the third quarter of 2020 to $313 million from $328 million in the same period in 2019. Operating expenses were lower primarily due to the company's ongoing cautionary approach to spending given the pandemic-generated economic uncertainty.

Income from financial services was $18 million for the third quarter of 2020, down 17% compared with $22 million for the third quarter of 2019. The decrease was primarily the result of a decrease in wholesale financing income during the quarter due to lower dealer inventory levels.

Interest expense was $17 million for the third quarter of 2020 compared to $20 million for the same period last year due to lower interest rates.

Other (income) expense, net, was $3.2 million of expense in the third quarter of 2020 compared to $1.7 million of income in the third quarter of 2019. Other (income) expense is the result of currency exchange rate movements and the corresponding effects on currency transactions related to the Company’s international subsidiaries.

The provision for income taxes for the third quarter of 2020 was $52 million, or 23.7% of pretax income, compared with $20 million, or 18.3% of pretax income, for the third quarter of 2019. The increase in the effective income tax rate is primarily due to domestic manufacturing deduction benefits realized from the filing of amended returns in the third quarter of 2019.

Product Segment Highlights (Reported)

Off-Road Vehicles (“ORV”) and Snowmobiles segment sales, including PG&A, totaled $1.289 billion for the third quarter of 2020, up 12% compared to $1.152 billion for the third quarter of 2019 driven by broad based strength across ATV and side-by-side sales. PG&A sales for ORV and Snowmobiles combined increased 32% in the third quarter of 2020 compared to the third quarter last year. Gross profit increased 23% to $378 million in the third quarter of 2020, compared to $308 million in the third quarter of 2019. Gross profit percentage increased 255 basis points during the 2020 third quarter compared to the prior year due to strong retail demand, and as a result, lower promotional and floor-plan financing costs, in addition to positive product mix.

ORV wholegood sales for the third quarter of 2020 increased 13%. Polaris North American ORV retail sales increased low-double digits percent for the quarter with both side-by-side vehicles and ATV vehicles up low-double digits percent. The North American ORV industry was up low-20s percent compared to the third quarter last year.

Snowmobile wholegood sales in the third quarter of 2020 were $70 million, down 34% compared to $106 million in the third quarter last year. Snowmobile sales were impacted by the timing of shipments for the company's pre-season snowmobile orders year-over-year and intermittent supply-chain disruptions.

Motorcycles segment sales, including PG&A, totaled $167 million, up 11% compared to the third quarter of 2019, driven primarily from increased sales of Slingshot and PG&A. Gross profit for the third quarter of 2020 was $16 million compared to $9 million in the third quarter of 2019. The increase in gross profit margin was driven by a decrease in promotional costs and lower European Union retaliatory tariffs as more motorcycles were produced in the Poland manufacturing facility for the region.

North American consumer retail sales for Indian Motorcycle increased in the low-40 percent range during the third quarter of 2020 in a weak mid to heavyweight two-wheel motorcycle industry that was down low-single digits percent. North American consumer retail sales for Polaris' motorcycle segment, including both Indian Motorcycle and Slingshot, increased in the mid-40 percent range during the third quarter of 2020, while the North American motorcycle industry retail sales for mid- to heavyweight motorcycles including three-wheel vehicles, was up low-single digits percent in the third quarter of 2020.

Global Adjacent Markets segment sales, including PG&A, decreased 6% to $107 million in the 2020 third quarter compared to $114 million in the 2019 third quarter driven by ongoing spending restraints in industrial, educational, government and rental organizations during the pandemic. Gross profit increased 2% to $32 million or 29.7% of sales in the third quarter of 2020, compared to $31 million or 27.0% of sales in the third quarter of 2019. Gross profit percentage increased during the quarter primarily due to positive product mix.

Aftermarket segment sales of $237 million in the 2020 third quarter increased slightly compared to $236 million in the 2019 third quarter. Transamerican Auto Parts (TAP) sales of $194 million in the third quarter of 2020 increased 1% compared to $193 million in the third quarter of 2019. The company's other aftermarket brands sales were down 1% compared to the third quarter of 2019. Gross profit increased three percent to $64 million or 26.9% of sales in the third quarter of 2020, compared to $62 million or 26.2% of sales in the third quarter of 2019.

Boats segment sales increased 30% to $155 million in the 2020 third quarter compared to $119 million in the 2019 third quarter, driven by broad based strength across all brands. Gross profit increased 49% to $33 million or 21.5% of sales in the third quarter of 2020, compared to $22 million or 18.8% of sales in the third quarter of 2019 due to volume and positive product mix.

Supplemental Data:

Parts, Garments, and Accessories (“PG&A”) sales increased 28% for the 2020 third quarter.

International sales to customers outside of North America, including PG&A, totaled $203 million for the third quarter of 2020, up 9% from the same period in 2019.

Financial Position and Cash Flow

Net cash provided by operating activities was $676 million for the nine months ended Sept. 30, 2020, compared to $436 million for the same period in 2019. Total debt at Sept. 30, 2020, including finance lease obligations and notes payable, was $1,864 million. The company’s debt-to-total capital ratio was 66% at Sept. 30, 2020 compared to 64 percent at Sept. 30, 2019. Cash and cash equivalents were $821 million at Sept. 30, 2020, up from $122 million at Sept. 30, 2019.

2020 Business Outlook

Given the continued strong retail environment, the company is raising its sales and adjusted earnings guidance for the full year 2020. Adjusted net income is expected to be in the range of $7.15 to $7.30 per diluted share for the full year 2020 compared to adjusted net income of $6.32 per diluted share for 2019. Sales are now expected to be in the range of $6.925 billion to $7.0 billion, up 2-3% compared to 2019 adjusted sales of $6.783 billion.

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