BRP Inc

BRP's second quarter saw sales growth of 18% to CAD 2.2 billion and a normalized EPS loss of CAD 0.18. The firm raised its full-year outlook to include CAD 9.225 billion-CAD 9.475 billion in sales and CAD 4.00-CAD 4.50 in EPS, up from CAD 9.125 billion-CAD 9.375 billion and CAD 3.00-CAD 3.50 prior.

Why it matters: North American industry retail sales rose 1% aided by continued demand for utility products. For BRP, this led to all geographies printing positive retail sales growth except for Latin America (8% of fiscal 2026 sales), indicating its brands are resonating with consumers. BRP gained market share for both ATV and SSV in North America thanks to solid product innovation. It committed to major product announcements every six months over the next four years, which should allow it to protect or grow its leadership position. Dealer inventory rose 2%, the first increase in two years. This signals that dealer units are largely aligned with registrations and that channel inventory is appropriately sized. As such, lower promotional cadence should prevail, helping mitigate some inflationary pressures.

The bottom line: We don't see a major change to our CAD 100 ($72) fair value estimates even after incorporating recent outperformance and see shares as fairly valued. While sales were around 10% above our second-quarter forecast, we are cautious on profit upside given the evolving tariff landscape. Given the updated outlook, BRP should easily reach its Mission 28 goal for CAD 9.5 billion in fiscal 2028 sales. But with tariffs acting as a more than CAD 3 drag, reaching CAD 8 in EPS in 2028 is unlikely. However, if tariffs were repealed, we surmise the target would be achievable. CFO Sebastien Martel will be replaced by Minh Thanh Tran on Oct. 1. With stints in corporate strategy, mergers and acquisitions, transformation, and product strategy since 2017, we don’t expect any change to the financial strategy and hold our Exemplary Morningstar Capital Allocation Rating.

In the second quarter, top-line growth of 18% was primarily carried by year-round segment (66% of period sales) growth of 33%, to CAD 1.5 billion benefiting from improving retail demand and better mix. Seasonal sales contracted 9%, to CAD 428 million, largely due to the timing of shipments (in the first quarter, seasonal segment sales rose 36%). Even with higher throughput, the gross margin decreased a whopping 940 basis points to 11.7%, hindered by Section 232 tariffs (740-basis-point impact), as well as the effect of a supplier financial restructuring (330-basis-point headwind), which were partially mitigated by absorption gains and lower promotions.

Since last quarter, inflation has crept up across areas like logistics and input costs, adding another 50-basis-point drag on profitability in fiscal 2027. Along with tariffs, this points BRP to a roughly 11% EBITDA margin this year, down from 13% last year but about 100 basis points better than previously expected. Assuming tariffs remain, we think it will take around two years to get back to 14% EBITDA margin levels, which would still be below the 17% midcycle level the firm believes it can reach.

We are lowering our fair value estimate to USD 74 per share from USD 72 (based on a 1.39 USD/CAD exchange rate). The change incorporates recent results and updated tariff policy that has had a material impact on current-year profitability. The firm offered an updated fiscal 2027 outlook, which includes sales of CAD 9.225 billion-CAD 9.475 billion (versus prior CAD 9.125 billion-CAD 9.375 billion) and EPS of CAD 4.00-CAD 4.50 (CAD 3.00-CAD 3.50 previously). Our updated forecast includes CAD 9.4 billion in sales and CAD 4.04 in EPS (up from CAD 9.3 billion in sales and down from CAD 3.04 in EPS previously). We think BRP's dealer inventory, which rose just 2% year over year but remains down 19% over the past two years is in good condition.

Beyond fiscal 2027, we expect shipments will continue to closely match demand. Over the next decade, our sales growth outlook averages 4.4%, benefiting from consistent product launches. This cadence of sales should outpace industry retail sales for recreational vehicles, which we forecast to be up at a low-single-digit rate through 2029, largely affected by weak near-term demand. Consumer spending patterns on recreational goods and vehicles and conventional outdoor products should return toward a historical proportion of wallet, implying market share gains as spending growth on goods and services normalizes.

By segment, over the next decade, our 4.4% average sales growth is predicated on annual year-round product growth of 5.1% (including a 16% rise in fiscal 2027) and 3.3% seasonal product growth (including a 6% sales hike this year), with R&D spending lifting long-term demand for improved offerings.

Additionally, better supply chain and distribution network processes should help support operating margins. In our base case, we forecast BRP sales of more than CAD 10.5 billion in fiscal 2030. While expenses as a percentage of sales should decline as volume rises over time, faster product-to-market speed across the industry will force operators to manufacture smarter, innovate faster, and compete intermittently on price. This will constrain the full potential for operating margins.

Despite industry competition, BRP has been implementing steps to restore long-term operating margins to 10% from the high single digits historically (the metric bumped to more than 15.5% in fiscal 2022 as a result of robust demand—which has already normalized). With solid cash flow generation ahead, we expect BRP will reinvest in product innovation, facilitate share repurchases, and increase its dividend over time. BRP has historically generated ROICs above our WACC assumption (9%) and should be able to achieve average ROICs, including goodwill, of 15% over the next decade.

We rate BRP's economic moat as wide, as we think performance at the business signals a brand intangible asset and a cost advantage. On the brand side, innovation has consistently won with consumers, thanks to healthy research and development spending, resulting in impressive market share metrics, which we don’t believe will permanently recede (although share has intermittently been eroded by peer discounting). Additionally, the evolving sales composition of the enterprise should help BRP refocus on its core competencies, with the sale of most of its boat manufacturing business in 2025 and exit from the boat engine business in 2020. This should also help elevate the return on product development costs, while lifting the perception and profitability of the enterprise.

BRP’s brand strength is evident in its industry-leading market share, supported by consistent investment in product innovation. The firm spends 4%-5% of sales on R&D—about CAD 450 million annually—to ensure a steady pipeline of new offerings. This commitment has helped BRP secure a high 20% share in side by sides and Can-Am all-terain vehicle share of above 20%, more than double its level in 2015. Year-round products, including ATVs, made up 57% of fiscal 2026 sales, underscoring the brand’s durable appeal.

BRP has held strong consumer appeal in off-road products and remains the dominant brand in personal watercraft. Its PWC share has averaged above 50% for a decade, supported by best-in-class products and an industry structure with only three major players. With global demand at just 95,000 units in 2025, the market is too small to attract new entrants; splitting volume further would erode returns for everyone. Even a facility sized precisely to demand would face heavy startup costs and long payback periods, making entry economically impractical.

BRP benefits from similar entry barriers in snowmobiles, where limited North American demand—about 90,000 units in 2025—helps protect its position. The brand has held about 50% share since before the pandemic, and we expect that to continue. The category has long been consolidated, with only four major manufacturers (Yamaha, Polaris, Arctic Cat, BRP), reducing the risk of disruptive share shifts. With Yamaha exiting the market, it has become an oligopoly.

Quantitatively, brand resonance with consumers can be ascertained via pricing power, which ultimately surfaces in improving gross margin performance. BRP’s average gross margin over the last five fiscal years was 25%, versus 24% in the five years prior, even as the firm has faced inflationary headwinds. This metric is now slightly above that of Polaris. We think gross margin should return to more stable levels ahead, reaching 23% by fiscal 2029 (from an average of 21% during 2027-29).

BRP’s brand strength is reinforced by a long‑built dealer network of 2,425 locations, giving it broad reach and a distribution base that new entrants would struggle to match. Because most dealers carry multiple brands, any newcomer would need high volumes to gain bargaining power and move meaningful inventory—an unlikely prospect given the time and capital required to build manufacturing capacity, produce inventory, and secure dealer commitments. These entrenched relationships support intangible assets we expect to endure.

BRP’s scale gives it a clear cost edge: higher volumes improve fixed-cost absorption, strengthen vendor terms, and boost manufacturing efficiency, reinforced by its shift back to off-road, snowmobiles, and personal watercraft. As demand steadies and tariffs ease, margins and return on invested capital should benefit. Sales have grown from CAD 3.8 billion in fiscal 2016 to CAD 8.4 billion in 2026, with core year-round and seasonal products still 84% of revenue. These segments continue to outperform the industry—up 13% and 8% annually over five years versus 3% and 4% declines in ATV/ORV and PWC units. Recent volume softness has hurt fixed-cost absorption and trimmed excess returns, but efficiency gains should recover.

BRP’s growth reflects disciplined portfolio reshaping. Its 2018 move into marine (Alumacraft and Manitou) produced about CAD 430 million in 2023, but the segment never met profitability goals, prompting divestiture in 2024–25; Sea-Doo stays in seasonal, and Telwater remains for sale. BRP also exited Evinrude in 2020—roughly CAD 400 million in annual sales—after chronic underperformance and limited traction in packaged boats, concluding the investment needed to reach company level margins wasn’t justified.

BRP’s manufacturing footprint gives it a durable cost edge. Its facilities are close to demand and benefit from lower labor costs, though recent tariff uncertainty has clouded the size of that advantage. Still, the efficiency gains are hard to replicate: BRP spent more than 15 years building out its Mexico base, expanding from a single Juarez plant in 2007 to additional capacity in Querétaro in 2013 and later adding motorcycles and other lines. Given the industry’s concentration, it’s improbable that a new entrant could scale fast enough to match BRP’s cost structure or approach the performance of BRP or Polaris over any reasonable horizon.

BRP’s scale also creates a capital barrier for would be entrants. The firm has averaged CAD 495 million in annual capital expenditure over the past five years (6% of sales), and we expect spending to remain around CAD 440 million. As capex and operating costs moderate, margins should recover from 7.8% in fiscal 2026 to above 10% by 2030 as fixed cost leverage improves with renewed top-line growth.

BRP has white-space opportunities to expand revenue growth faster than we expect, particularly in the parts and accessories segment and in some niches of the year-round lines.

Demand from less exposed international markets and expansion into nascent markets like China could lead to demand growing faster than we forecast, which could raise utilization and productivity, leading to higher profitability.

Profit margins could tick up faster than we expect with a return to volume growth from the higher-margin, sizable off-road segment.

Tariff policy could remain restrictive longer than we expect, raising unit costs. Also, protracted inflation in costs, including commodities, labor, or logistics, could weigh on profitability for an extended duration.

BRP competes with some formidable brands, such as Polaris in snowmobiles and Honda in ATVs, which also have deep pockets for advertising and promotional spending.

Business depends on credit availability in the wholesale and retail segments. The withdrawal of financing sources along with higher interest rates could prevent inventory from retailing quickly.