4 Key Takeaways From Polaris Industries Inc.'s Q2 Earnings Report

By Markets Fool.com

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The RZR side-by-side has been hugely popular since it was first introduced, but a series of product recalls for potential fire hazards threatens to damage its reputation. Image source: Polaris Industries.

Polaris Industries (NYSE: PII) reported second-quarter earnings that beat analysts' expectations on both the top and bottom lines, despite the harsh toll on profits that multiple recalls of its popular RZR side-by-sides has taken.The markets liked what they saw, even in the face of Polaris lowering its full-year outlook.

Shares of the powersports vehicle manufacturer rose as much as 4% following the earnings report, though they've settled down since. Here are four key items from its conference call with analysts that will likely impact results and performance in the immediate future.

1. It doesn't really have a handle on its RZRs' "thermal hazards" yet.

Although CEO Scott Wine said Polaris "discovered gaps in our design, development and manufacturing processes and are urgently addressing these gaps," the fact that the off-road vehicle maker just announced its fourth RZR recall in less than a year suggests it hasn't fully corrected the problem.

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On Monday, Polaris issued a stop-ride/stop-sale advisory pending a formal recall for its MY2016 RZR Turbo off-road vehicles due to a potential fire hazard.The company says it's evaluating a comprehensive repair solution, which sounds like it has yet to trace the problem back to its source. Coming after its massive recall of 160,000 RZRs earlier this year for a similar fire hazard, this indicates Polaris is facing a major brand-reputation crisis.

2. It's losing market share in off-road vehicles.

The recalls are obviously having an impact on sales, even if Polaris thinks it's mostly unrelated to them. During the conference call, Wine said Polaris lost a few points of market share, which he admits is unacceptable, even if it wasn't wholly unexpected. He pointed to the value end of the side-by-side market as the real problem.

"The bigger issue was on value ATVs and the utility side of the business," Wine said. He also noted that there's a plan in place to address the shortfall and generate a turnaround.

RZRs have certainly been the industry's most-popular trail vehicles since they were first introduced in 2007, but there are a lot of competitors on the market now. Polaris Industries can't afford to have its commitment to quality questioned by a relentless string of recalls.

3. The industry outlook is worsening, not improving.

The off-road and side-by-side industry still is weakening, as a continued slowdown in oil-producing and agricultural states drags down industry sales. Coupled with the recalls, though, this is a really inopportune time for this to happen to Polaris.

Arctic Cat (NASDAQ: ACAT) recently introduced more-powerful, competitively priced Wildcats at the same time it expanded its new Alterra ATV brand. Last quarter, it reported a 38% jump in ATV and side-by-side sales.Even Wine had to admit Polaris' retail sales were weaker than expected, down by low double-digit rates for the quarter.

Both the Indian Scout and Scout Sixty, pictured here, are proving popular with new riders and those new to the Indian Motorcycle brand. Image source: Indian Motorcycle.

4. Motorcycles face tougher times, too.

While motorcycles remain a bright spot for Polaris, especially its Indian Motorcycle brand -- although Victory sales also finally turned up this quarter -- the U.S. market is facing particularly strong headwinds in consumer demand. Harley-Davidson (NYSE: HOG) just reported earnings that showed sales fell, yet again, down more than 5% this time, causing it to lower full-year shipment forecasts.

Certainly, Harley's previous outlook was too rosy, but Polaris CFO Michael Speetzen noted that, despite a 23% jump in sales and an increase in market share, "We are, however, lowering our full-year guidance for motorcycles to be up double-digit percent, taking into account weaker industry trends."

The bottom line

No doubt the recalls will be seen in time as transient issues on the road to future growth. But investors need to consider the impact these repeated problems will have on the brand's reputation, particularly as the competition heats up.

Motorcycles will also remain strong, but economic headwinds can't be ignored, either. Polaris reining in its growth estimates suggests there may be a time in the near future when slowing rates of growth become worrisome.

Polaris Industries is still the powersports vehicle leader, but its stock may not power up much further for the foreseeable future.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Polaris Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.