Where do UTVs ‘outsell ATVs 10 to 1?’
The Polaris RZR XP 900 Jagged X Edition has been a top-seller at Phoenix area dealerships, according to a report from BMO Capital Markets analyst Gerrick Johnson.
BMO Capital Markets analyst Gerrick Johnson recently completed a round of dealer checks in the areas of Phoenix and Las Vega and provides an update on Arctic Cat, Harley-Davidson and Polaris. Here’s the research note he provided to Powersports Business:
US Desert Southwest: Sun, Sand, and Side-by-Sides
Our latest round of dealer visits targeted the important desert Southwest market, where plentiful wide-open space makes the area highly attractive for large, high-horsepower recreational side-by-sides (SxS), and sport All-Terrain Vehicles (ATV).
During this round of checks we visited off-road vehicle and motorcycle dealers in the Las Vegas, Nevada, and Phoenix, Arizona. We found off-road vehicle business to be very brisk for dealers in these areas, with high-performance side-by-sides performing best. One dealer’s unscientific, off-the hip statistic was that SxSs outsell ATVs 10 to 1 in this market, with more expensive four-seaters outselling less expensive two-seat variants.
Despite new competitive entrants, Polaris (PII, Outperform, $105 target) is regarded as THE brand in this region; the brand that created the market and the brand everyone’s friends have. Business appears strong, and we think sales are growing well enough to easily absorb new competition. In fact, business for high-performance recreational side-by-sides is so strong, the best selling model, said one dealer, is, “whichever one we get in first.”
We found motorcycle dealers to be less enthusiastic than off-road vehicle dealers. Las Vegas Harley dealers appeared to be doing good business, but some Phoenix area dealers were less than enthusiastic about their spring seasons.
Overall, Polaris and Harley-Davidson (HOG, Outperform, $65) had excellent distribution in these areas, while Arctic Cat’s was disappointing.
Polaris (PII, Outperform, $105 Target)
Side-by-Side vehicles are legal to be driven on-road in Arizona, with the addition of some simple modifications and a few (high-margin) parts. The RZR XP 900 is undisputed king of the hill for this application, with the family-friendly XP 900 4-seater being the best seller (base price of $17,999).
Assessing the total addressable market for the on-road RZRs in Arizona is difficult. But there were 4.3 million cars registered in Arizona in 2012. If PII could take just 1% of that market it would represent 43,000 vehicles worth $600 million in vehicle sales alone. We estimate that the company did worldwide RZR sales of $800 million in 2012. This could be an area where the company’s recent, and aggressive, investment in electric technology could be applied to build even more demand for the RZR line as a neighborhood vehicle.
At this point, though, the vast majority of the market in the Phoenix area is off-road recreation. With lots of wide-open space, rock crawling, and sand blasting, the entire line of RZR XP 900 vehicles is in strong demand. In addition to the 4-seat RZR XP 900 lineup ($17,999-$19,599), the two-seat $18,139 Walker Evans RZR XP 900 and the $21,999 Jagged X are said to be the strong sellers in the two-seat models. The RZR 900 Jagged X, a limited edition, has been selling as soon as it hits the floor, say dealers in this area.
In Las Vegas, which is likely a younger overall market, the RZR XP 900 two-seat ($15,999) sold as well as the four-seat version. Most two-seat 900 models were fully loaded with accessories and options, pushing retail prices into the high teens.
Both Phoenix and Las Vegas dealers sell a lot of SxSs preloaded with new accessories. A base price RZR XP 900 4, at $17,999, will be sold for up to $20,000-$22,000 with new accessories like roofs, doors, lights, speakers, safety harnesses, or graphics. We saw some fully tricked-out and accessorized Jagged Xs priced to move at $33,000. One dealer said his parts department does $100,000 a month in side-by-side accessories.
Overall we saw very little interest in the smaller RZR 570, 800, or 800 4 in this market and even less demand for traditional ATVs. Both are lower-priced segments of the Off-Road market, with the price of smaller side-by-sides ranging from $10,299 to $14,499 and PII’s ATVs selling in a range of $3,599 to $11,999. The Scrambler, however, is one ATV that dealers say gets high marks from anyone who still rides sport ATVs. The only complaint is, at a price of $9,499, many potential buyers would rather pay a little more for a SxS.
We found a Victory dealer in Phoenix that sat right across the street from a popular Harley-Davidson dealership. “We like being across the street,” the dealer said, believing it was a good traffic driver. This dealer encourages customer test drives immediately after a Harley test drive, believing the Victory has a superior ride.
This Victory dealer felt the company’s renewed effort to improve its apparel is having a positive impact. This particular dealer also wanted to become an Indian dealer for the coming relaunch, but was deemed to have too little floor selling space to dedicate to the proper Indian display.
We are taking this opportunity to adjust our PII model slightly. Though we are keeping our annual 2013 EPS estimate unchanged at $5.40, we are shifting some anticipated sales into the back half from the second quarter, owing to continued unseasonably cold April weather in many northern climates that could shift sales to later in the year and affect timing of new product releases. We are lowering our 2Q EPS estimate to $1.13 from $1.24, while increasing our 3Q13 EPS estimate to $1.61 from $1.55 and our 4Q13 EPS estimate to $1.58 from $1.54.
We are not adjusting our 2014 EPS estimate of $6.35. For the second quarter we expect sales growth of 14% to $862 million, with off-road vehicles growing 12.5% and motorcycle/on-road sales growing 27%.
Harley-Davidson (HOG, Outperform, $65 target)
Las Vegas Harley dealers seemed to be doing good business, both in terms of vehicle sales as well as high-margin clothing and merchandise (we note a high level of tourist souvenir traffic in these dealerships). The 110th anniversary bikes still get good marks, and the new CVO Breakout is a hot seller.
While Las Vegas appeared strong, Phoenix area dealers seemed a bit disappointed. In this area, the selling season ends in May as snowbirds return north and summer heat pushes riders inside.
The final assessment of the recently completed season was simply “OK.” The most popular response was, “we’re holding our own,” with season sales flat to up slightly over last year. One HOG dealer said she felt the payroll tax increase affected her business. Others felt that the snowbird traffic had slowed this season, for reasons unknown. From a longer-term perspective, this area of the country benefits from an aging core customer. These customers usually have money to spend and new-found time on their hands.
For 2Q13, we are expecting 10% retail sales growth for HOG’s motorcycles in the US, with 2% growth in international markets, resulting in 7% worldwide retail. While Arizona may be tracking below this estimate, our observations in Las Vegas, as well as discussions with dealers in other parts of the country, give us confidence in our +10% US retail sales estimate.
Arctic Cat (ACAT, Market Perform, $41 Target)
In Las Vegas and Phoenix Arctic Cat is represented by only one dealer in each area: Bass Pro Shop. This lack of Southwestern distribution puts ACAT at disadvantage to its competition as it tries to gain market share in the high performance recreational side-by-side market in this highly attractive market. ACAT’s competitors in this space have many more sales outlets, and all are dedicated powersports dealers.
At Bass Pro Shops, the Arctic Cat vehicle must compete against Tracker boats, giant tanks filled with largemouth bass, and myriads of really cool outdoor supplies. A search on the website for “wildcat” shows where it stands in the pecking order, with search results returning Wildcat Crossbows followed by University of Arizona golf cub covers.
At these Bass Pro Shops we were never approached by a salesperson, nor could we find one if we had questions.
We couldn’t find much in the way of parts and accessories, either. In Las Vegas, we found Four Wildcat 1000s, three were 2012 models, and all had significant discounts.
The positive is that this lack of distribution in the popular Southwestern market provides the company with an opportunity for growth. As the company improves the product and builds out its offering the brand could be more attractive to dealers. In the near term, however, larger competitors are solidifying their lead in this market. As a result, we think that, in the near-term, SxS sales could be trailing estimates.
ACAT reports 4Q13 results tomorrow before the open. We are expecting a loss of $0.43 per share, which is an improvement over 4Q12’s loss of $0.49 per share. The Street consensus is currently expecting a loss of $0.40 per share. We expect revenue growth of 23% ($122 million), coming from 66% growth in side-by-side sales ($51 million). Based on our observations from the important Southwestern market, we wonder if our estimates are too high.
While late season snow helped clear the retail channel, we think it will have little impact on ACAT’s 4Q13 results, as it is not a snowmobile shipping quarter. However, good spring orders and a clean channel could help forecast 2Q14 snowmobile sales, as well as the company’s 2014 guidance when it is released concurrent with fourth quarter results.