Fire hazards in Polaris Industries' (NYSE: PII) popular RZR side-by-side vehicles are still torching its profits: The powersports vehicle maker said earnings plunged 80% in the third quarter.

The ATV maker said sales of its trailblazing RZR fell more than the industry as a whole, leading to a loss of market share. The vehicles and others have been plagued by a "thermal hazard" that -- though it  fortunately has cost the life of only one rider -- has tarnished the vehicle's reputation and required a series of recalls. Polaris said retail sales dropped "precipitously" over the first two months of the quarter, though side-by-side sales improved in September as it engaged in aggressive promotions.

Those actions have sent its profits up in smoke. Though virtually giving away its vehicles has kept something of a floor under its sales declines, it also caused earnings to tumble to $32.3 million, or 80% below the $155.2 million it recorded last year. On a per share basis, profits were $0.50 compared to $2.35 a year ago, and they would have been even worse had Polaris not bought back some 2.3 million shares over the past year. It plans to buy back more than 1 million shares in the fourth quarter, too.

Recalls are impacting its once popular three-wheeled Slingshot motorcycle as well. Despite higher sales of its Indian and Victory brands of motorcycles, segment revenues fell 3% year over year as Slingshot sales fell sharply in the period.

Polaris laid most of the blame on last year's big push to bulk up inventory, when it shipped a large number of trikes to fill the backlog of demand. But after undertaking a comprehensive review of its processes, it now anticipates it will need to engage in recalls of Slingshots, as well as additional recalls for its ATVs.

Beyond all of the company specific issues, weak industry fundamentals in both ATVs and motorcycles are weighing Polaris down. While ATVs have been going through a prolonged slump due in large part to economic softness in oil patch states, motorcycles sales have only more recently begun to suffer. In its own recent quarterly earnings conference call, Harley-Davidson cited the impact of macroeconomic headwinds as being partially responsible for its own declining sales, though Polaris said in September both Indian and Victory sales grew more than twice as fast during the month as those of its rival.

While the strength of its motorcycle business has helped keep Polaris going in recent years, it can no longer ignore the trends, and it said it now expects segment sales to only rise by low single-digit rates, which is less than what it had been guiding toward.

Polaris Industries still has not categorically resolved the fire hazards that have led to the repeated recalls of its vehicles, so investors should expect sales and profits will be burnt in future periods too, until it does.

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Rich Duprey has no position in any stocks mentioned. 

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