Supply chain issues complicate Polaris' continued growth

While overall revenue increased 40% in Polaris Inc's second quarter, North American retail sales for the Medina-based company fell 28% compared with the pandemic-fueled surge in late spring and early summer of last year.

Profit for the quarter was $158 million, or $2.52 a share, compared with a net loss of $235 million, or $3.82 a share, in the same period of 2020 that included a $379 million pre-tax asset impairment charge related to its aftermarket business.

"All of our segments performed extremely well, posting strong increases in both sales and profitability in the face of a challenging supply chain and increasing input cost environment," said Polaris CEO Mike Speetzen in the company's earnings release. "While supply chain-related headwinds and higher input costs will continue into the second half of the year ... I remain confident in our ability to meet the product demands of our dealers and consumers and deliver value for our shareholders."

Revenue was $2.1 billion for the quarter, with retail sales up 14% over the same period in 2019.

However, the North American sales dip was due to depleted inventory from an unusually high interest in outdoor pursuits during the pandemic. On top of that, supply chains have been stressed from the pandemic, and parts can be hard to come by, so there is low availability of finished products.

"Dealer inventory literally got cut in half," Speetzen said in an interview. "Consumer demand went up. They basically were buying everything the dealers had, and then we've been trying to catch up since then."

Polaris has the overall capacity to meet the increased demand but efforts to rebuild dealer inventories have been constrained by both a continued consumer interest and shifting issues in the supply chain from a lack of components and transportation to labor shortages at Polaris suppliers.

"We don't expect the supply chain issue to abate until the end of the year," Speetzen said. "And at that point, it will be a slow improvement."

Polaris has been able to adjust better than other manufacturers. Instead of buying off dealer show floors consumers have been switching their purchasing to dealer pre-orders. Polaris dealers have some visibility into available inventory and build schedules so they can attach a customer name to the order. Prior to the coronavirus pandemic, about 3% of monthly off-road vehicle sales came from dealer pre-orders. By June, the percentage had grown to 80.

Polaris carefully audits those orders, but it's a way to maintain consumer interest while available dealer inventories remain low. Depending on the type of product and model ordered, delivery can take six to eight weeks. Consumers have shown their patience knowing products from appliances to consumer electronics to furniture are constrained, and the company has seen very low fall-out rates from their pre-order customers.

Second quarter sales for its all-terrain and side-by-side vehicles, plus snowmobiles, increased 38% in the quarter to $1.3 billion. Sales in the motorcycle segment, which includes Slingshot and parts, garments and accessories (PG&A), increased 50% to $212 million, but were behind industry growth due to the short supply of finished bikes.

Sales of its pontoon and deck boats including related PG&A rose 49% to $198 million.

For the second quarter in a row, the company increased its financial guidance for 2021. After the first quarter the company raised its expectations to say it would earn between $9 and $9.25 per share. Polaris now says it expects to earn $9.35 to $9.60 per share while tightening its sales forecast to 19% to 21% growth over 2020.

Polaris shares ended Tuesday at $130.91, down 6%.