Polaris can't keep up with demand due to supply chain problems; earnings fall

Polaris Inc.'s North American retail sales fell 24% over the summer months as the Medina-based recreational vehicle manufacturer could not keep up with demand because of the supply chain disruption.

"Retail sales were impacted by the substantial deterioration of the supply chain permeating the global economy, but continued interest and demand from existing riders and new customers advanced our market position," said Mike Speetzen, Polaris' chief executive, in a news release Tuesday announcing the company's earnings.

Third quarter earnings fell 7% to $114.6 million, or $1.84 a share. Overall revenue was flat compared with the comparable quarter last year, but missed analyst expectations. Shares on Tuesday lost 8% of their value, closing at $116.25.

Strong demand for off-road vehicles, snowmobiles and motorcycles positioned the company well in the market, Polaris said.

Unfortunately, the supply chain disruption hitting companies globally limited production of new vehicles, leading to product shortages at dealers and the decline in North American sales.

The company said it expects the supply chain challenges — including clogged ports and a shortage of truckers — will continue into 2022.

Adjusted net income for the quarter was $1.98 a share, slightly above analysts expectations of $1.96 a share. Analysts, though, were expecting overall revenue to increase 9%.

The supply chain issues meant Polaris produced 12% fewer vehicles in the third quarter than it expected, and after updating its anticipated production numbers, the company now expects fourth quarter production to be 20% below the mid-year estimates.

Speetzen told analysts on the company's earnings call that Polaris was adjusting its manufacturing lines for the supply chain shortages of components including shocks and semiconductors.

The company has established rework lines and increased efficiency of those lines at nearly every facility, he said. Workers are pulling nearly completed vehicles aside to install components as they become available.

"We are still battling every day," Speetzen said.

Buyers expecting to find vehicles on showroom floors were disappointed as dealer inventory levels reached unprecedented low levels. Dealer inventory for ORVs, snowmobiles and motorcycles were down 40% to 50% compared with the third quarter of last year and 60% to 80% when compared to dealer inventories in the pre-pandemic third quarter of 2019.

Consumers will see increased pricing and fewer promotional discounts as consumer demand remains high, the company said.

Speetzen told analysts that price increases were in line with competitors and that consumers so far have accepted the higher price tags. The company's dealer pre-sold orders continued to rise in the third quarter, as the company adjusted some of its procedures to maintain customer interest and improve communication.

Due to the supply chain issues, Polaris lowered its guidance for the remainder of 2021 and now expects earnings per share at $9. Sales are now expected to be $8.15 billion, which would still be a 16% increase over 2020.

Polaris also announced plans to divest its Global Electric Motorcar and Taylor-Dunn businesses by the end of the year. GEM has produced some innovative electric vehicles but both businesses combined contribute less than $100 million in annual total revenue.

Polaris did say it was on track to launch in December its all-new Electric Ranger side-by-side, which could give it a foothold in a new market segment that expects to see more competition from traditional and nontraditional competitors.

Analysts from Morgan Stanley wrote in a note to investors earlier this month that they expect Tesla to start producing an electric ATV in 2022. The electric car-maker had said back in 2019 that an electric ATV was on its drawing board, but it hadn't gotten much attention until Tesla CEO Elon Musk briefly mentioned the ATV at Tesla's annual meeting on Oct. 7.