Inventories down, profits up. An unexpected COVID-19 response. And 7x (!) turns: CDF

By Jeremy Jansen, Powersports Business Contributing Writer

I think it’s safe to say this year was nothing like we thought it would be. As the COVID-19 pandemic emerged in the early months of 2020, our everyday lives shifted and adjusted to the “new normal.” Along with this shift came a longing and curiosity for new outdoor activities that could both entertain and adhere to social distancing rules, leading to an unexpected resurgence of the powersports industry. Over the past six months, North American powersports retail has seen unprecedented activity, with an impact on the wholesale financing market and our powersports dealers that has defied our early COVID-19 performance models, resulting in the collective industry entering 2021 with a strong tailwind.

Inventory levels have reduced by as much as 50%+ since mid-April, as monthly retail dollars continue to outpace 2019 levels. Through Q3, Wells Fargo has seen more than 20% liquidation (pay-off) growth versus the prior year. The resulting impact of lower inventory and higher sales dollars equates to current inventory turn greater than 7x — or more than half of a dealer's inventory liquidating on a monthly basis — as compared to a normalized industry turn of 3-4x in 2019.

Powersports manufacturers are doing their best to meet demand, with wholesale volume being flat year-over-year through the end of the third quarter. This is a remarkable performance being that wholesale volume was down 25% in March and April, as dealers and manufacturers across the globe experienced impacts from the pandemic. Global supply chain concerns remain a key headwind for powersports manufacturers, but we are seeing capacity shifts to the North American market given the incredible retail performance year-to-date.

Additionally, dealer profitability and liquidity are generally strong. Many dealers we spoke with were able to take advantage of the Small Business Association’s Paycheck Protection Program in the early stages of the pandemic, and are now seeing record sales and margin levels, leaving them in a financially stable position as the year closes out. Dealers are also experiencing meaningful increases in service-related work as existing riders bring older vehicles out of the garage and into the fresh air. The amount of inventory more than 360 days old is the lowest it’s been in a decade. Dealers have cleaned up their aged inventory, which reduces overall interest charges, and will go into 2021 with a healthy inventory mix. The lower levels of inventory have also helped dealers maintain pricing composure, meaning less of their products need discounts. This in turn is driving a strong margin on new retail, so from a pricing perspective, it continues to be a seller’s market.

In the second quarter, during the earlier months of the favorable powersports response to the pandemic, sales were centered in ATV, side-by-side, off-road motorcycle, and personal transport vehicles. However, in the third quarter, on-road motorcycles gained popularity as well. For 2020, all modes of key powersports retail are up by double digits—growth levels we haven’t seen since post-2008 financial crisis. Early fourth quarter payoff data suggests that we will end the year on a positive note. Nearly all retail cylinders are firing in unison as new riders enter our market, existing riders upgrade their products, and hibernating riders return to the sport they once loved.

Many dealers and vendors are curious how 2021 will shape up after this unprecedented year of sales activity, and I would typically look to history and data to make an educated assessment, but current circumstances make it more challenging to predict the year ahead with certainty. However, with so many new riders in the powersports community, I’m optimistic that the metaphorical “water level” for the industry has risen. In addition, I believe that 2020 growth factors will continue into 2021, including less travel, less organized youth sports, continued remote working, and greater interest in outdoor family activities. I also believe there are enough macro-economic tailwinds to support continued elevated levels of retail activity next year. While drawing comparisons will be very difficult as we enter summer next year, I remain optimistic that we will see favorable retail comparisons to a 2018/2019 baseline across the spectrum of powersports products.

Jeremy Jansen is Head of Motorsports for Wells Fargo Commercial Distribution Finance.

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