Polaris: 2006 Was 'Disappointing'

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Polaris Industries CEO Tom Tiller describes 2006 as a "disappointing" year for the company. It was, he says, a year in which "the negatives outweighed the positives."

Victory motorcycle sales increased 13 percent over 2005, to $112.8 million, marking the first year of profitability for the Victory business since the brand began production in 1998. Full-year ATV sales were $1.1 billion, down 10 percent from 2005; snowmobile sales were $156.9 million, down from $256.7 million the previous year; and parts, garments and accessories (PG&A) sales fell 2 percent, correlating with lower shipments of ATVs and snowmobiles.

"This past year proved to be challenging for us," says Tiller. "For the first time in the past 25 years we did not produce record earnings-per-share results. Both the ATV and snowmobile industries declined, and we lost market share in each. We did not do a good job managing dealer inventory, we were not successful in completing the KTM transaction, and our gross margins eroded."

Tiller says that Polaris is responding to those challenges and that the results would gradually become more apparent this year.

For 2007, Polaris expects combined ATV and UTV sales to be anywhere from flat to up 3 percent. Core ATV sales likely will be down for the year. Snowmobile sales may be down, according to Tiller, "in the single-digit percent range." However, he forecasts a much more rosy picture for Victory: an increase "in the mid-teens percent range."

"We believe 2007 will be a year of getting the business back on track," says Tiller. "We should see better results than in 2006, but frankly still nothing spectacular. The environment will remain tough, with a down core ATV industry and a down snowmobile industry."

Dealer morale down. "Snowmobile dealers are under stress, particularly in the Northeast," says Tiller. "I believe we will lose some dealers, and I suspect that's true across the industry.

"Regarding dealers generally," adds Tiller, "I think the primary impact comes from dealer inventory, and I think if we can give the dealers a reason to believe in the future of the Polaris ATV business, I think the dealer situation will significantly improve.

"If you can track the dealer inventory, the inverse of that would probably be dealer morale. I'd say dealer morale right now is not great, but I think with the new products it's improving, and as we exit the year in '07 I suspect it will be substantially better than it is now."

Polaris is not alone, he adds; dealer depression is spreading across the industry.

"If you go look at some of our Japanese competitors and survey their dealers, you hear a lot of the same things: Consumer spending is down, we've had 17 interest rate increases, and the market is overall sluggish toward discretionary purchases. So dealers are being conservative; they're watching their bottom lines, being cautious about advertising."