Despite fresh tariff costs stemming from the U.S. trade war with China, Polaris Industries beat expectations for the second quarter, delivering growth across all product divisions and bumping up the lower end of its 2019 forecast.
The Medina-based maker of outdoors vehicles has taken such action as moving some component-supply purchases from companies in China to U.S. suppliers, CEO Scott Wine and Chief Financial Officer Mike Speetzen told analysts during a conference call discussing second quarter results.
While sales rose 18% to $1.78 billion during the quarter, net income fell 5% to $88.3 million, mostly due to increased trade-tariff costs. Still, excluding acquisition costs and other one-time items, the company's adjusted profit amounted to $1.73 cents a share, 8 cents better than analysts expected.
Even with new tariffs implemented by the U.S. government on another $200 million in Chinese-made imports, Polaris narrowed its full-year 2019 earnings guidance by increasing the lower end of its prior range. The company now expects 2019 earnings of $6.10 to $6.30 per share range. Polaris also said it expects full 2019 sales to grow 12% to 13% over the $6.08 billion reported in 2018.
Polaris saw sales jump across all lines of business. Sales of the largest segment — off-road vehicles — rose 6% to $1.049 billion, while motorcycle sales rose 15% to $196 million.
RBC Capital Markets Analyst Joseph Spak was particularly pleased by the sales uptick for motorcycles, an industry that has seen slower sales in recent months. "On motorcycles [it is] a nice sales increase." He noted that motorcycle sales jumped about $25 million from a year ago with help from Polaris' new FTR 1200 Indian Motorcycle that began shipping during the quarter. The FTR sales "looks great," he said.
Investors welcomed the quarter's results. Polaris' stock rose nearly 12% to close at $92.47 a share on Tuesday.
"Our second-quarter results reflect the deft leadership and disciplined execution of our Polaris team," Wine said in a statement. "We worked diligently to overcome the impacts of tariffs, a very wet spring and an aggressive promotional environment, delivering financial results slightly favorable to expectations but trailing our long-term performance goals."
The new forecast includes an additional $30 million to $40 million in costs to the company because of the latest "list 3" tariffs against China, which the United States increased from 10% to 25% on nearly $200 billion worth of imported goods.
Polaris' newest "tariff mitigation" work — such as shifting some supply chains back to the United States — should help the company maintain the high end of Polaris' 2019 forecast, Wine and Speetzen said on the call.
Polaris performed better than expected considering that in May, Wine complained bitterly about the U.S. trade war with China. He warned that should the Trump administration go ahead with its threat to impose an additional $300 million worth of U.S. trade tariffs on Chinese component imports, it could be "catastrophic" for Polaris and cost it $200 million in additional supply chain costs in the coming years.
The threat has prompted Polaris to act swiftly.
It is reassessing its supply chains. Polaris separately requested exemptions from the federal government in respect to prior List 1 and List 2 tariffs on Chinese goods. U.S. trade officials are currently evaluating those requests but it's not yet known if there will be relief, officials said.
Polaris generated $6.1 billion in total revenue last year from key products made in factories from Minnesota to Alabama, and in Mexico, Poland, France and China. The company makes its own Hammerhead brand of light utility and go-cart vehicles in Shanghai and separately buys components from outside Chinese firms.
During the quarter, Polaris opened a new distribution center in Nevada and is working to store some imported supplies in designated "free-trade-zone" warehouses as another way of containing tariff-related costs, officials told analysts.
Separately during the quarter, Wine noted strategic price hikes that affected some volume sales as competitors engaged in aggressive price cutting. Still, the firm's Indian Motorcycle business gained market share, he said. In addition, sales of off-road vehicles shot up by $59 million during the quarter.
Polaris was "encouraged by our market share gains and year-to-date growth in boats, as well as the continued improvement at TAP, where retail store sales growth was up nicely," Wine said
The newly acquired boat business added about $182 million in sales to the quarter that ended June 30.
Transamerican Auto Parts is the aftermarket retail store outfit Polaris bought in 2016. The chain of stores caters to jeep and other four-wheel enthusiasts that want customized vehicle accessories.