Why Polaris Industries Is Shutting Down Victory Motorcycles

By Steve Symington Markets Fool.com

Though Polaris (NYSE: PII) is arguably known best for its flagship line of off-road vehicles, its motorcycle division has offered a key source of supplemental growth in recent years. So it came as a surprise to some earlier this week when Polaris announced it will immediately begin winding down its Victory Motorcycles brand and related operations.

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According to the company, the choice was clear, and should help solidify its leadership position in the broader powersports industry.

Polaris has begun to wind down Victory Motorcycles. Image source: Polaris Industries, Inc.

A tough choice

But that doesn't mean it was an easy choice to make."This was an incredibly difficult decision for me, my team, and the Polaris Board of Directors," lamented Polaris CEO Scott Wine. "Over the past 18 years, we have invested not only resources, but our hearts and souls, into forging the Victory Motorcycles brand, and we are exceptionally proud of what our team has accomplished."

That's also not to say Polaris will come out empty-handed."The experience, knowledge, infrastructure and capability we've built in those 18 years gave us the confidence to acquire and develop the Indian Motorcycle brand," Scott added, "so I would like to express my gratitude to everyone associated with Victory Motorcycles and celebrate your many contributions."

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A matter of market share, competition

For perspective, Polaris acquired Indian Motorcycle in early 2011 for an undisclosed sum.And in Polaris' most recent quarter, the Victory and Indian Motorcycle brands together achieved solid low-teens percentage growth, while the overall motorcycle industry endured a mid-single-digit percentage decline. Meanwhile, Polaris' Slingshot saw sales fall slightly from the same year-ago period, albeit primarily due to shipment timing, as the company worked to aggressively reduce its backlog for Slingshot deliveries following its first year of production.

According to Polaris' press release this week, however, the Victory brand "has struggled to establish the market share needed to succeed and be profitable." Moreover, those struggles have intensified given competitive pressures in today's challenging motorcycle market. Add to that the combination of Indian Motorcycle's relative outperformance and significant incremental investments required to launch new Victory platforms to adapt to consumers' changing tastes, and the company insists "the decision to more narrowly focus Polaris' energy and investments became quite clear."

To be fair, it likely didn't help that Polaris also recently closed on its $665 million acquisition of Transamerican Auto Parts (TAP), a deal that sapped financial resources over the near term given its primary funding through Polaris' existing revolver and term loan.

"Our focus is on profitable growth," Wine added, "and in an environment of finite resources, this move allows us to optimize and align our resources behind both our premium, high-performing Indian Motorcycle brand and our innovative Slingshot brand, enhancing our focus on accelerating the success of those brands."

Brighter days ahead

Polaris won't be abandoning those consumers and dealers invested in the Victory brand. To the contrary, Polaris will help dealers liquidate their inventories, will continue to supply parts for another 10 years, and will still provide service and warranty coverage to both Victory dealers and owners.

So investors will need to wait until Polaris reports fourth-quarter 2016 results and forward guidance two weeks from now to receive more color on any expected one-time costs associated with these efforts in the coming year. But for now, it appears Polaris is reluctantly convinced it's doing the right thing by shuttering its sentimental Victory operations.

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Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Polaris Industries. The Motley Fool has a disclosure policy.