Harley Davidson (NYSE:HOG) earnings show that the company is firmly on the path to recovery. The company’s retail sales showed growth in both the U.S. and international markets while its restructuring efforts are on course to sustained cost recoveries. Harley Davidson’s financial unit has been successful in reducing losses and defaults on its loans. The company’s cash flows have improved and it seems on course to achieve its liquidation strategy of having a minimum of 12 months projected liquidity in cash and /or committed credit facilities.
Harley Davidson competes with other major motorcycle manufacturers like Honda Motor Company (NYSE:HMC), Kawasaki Heavy Industries (PINK:KWHIY) and Yamaha Motors (TYO:7272). We currently have a Trefis price estimate of $59 for Harley Davidson, which is about 10% above the current market price.
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Huge jump in U.S. and international retail sales
Harley Davidson’s U.S. retail sales have jumped by 25% in the first quarter, against industry wide retail sales growth of 17.5% for new 651cc-plus U.S. heavyweight motorcycles. This increase in sales was primarily due to strong brand positioning of the company. An unusually mild winter might have also helped drive some of these sales.
The international retail sales for the company grew by 11.2% primarily due to strength in Latin America and Asia/Pacific markets. While Latin America sales were pushed by the new dealer network in Brazil, Asia/Pacific sales were driven by the emerging markets of China and India. Europe continued to stay weak as growth in Germany, France and Switzerland was offset by softness in UK and southern countries.
Improvement in gross margins
The company pushed up its gross margins from 33.1% in the first quarter of 2011 to 35.9% in the last quarter. The increase was primarily due to higher sales volume, increased motorcycle pricing, favorable currency impact and reduction in manufacturing costs. The reduction in manufacturing costs was driven by Harley’s restructuring program which resulted in savings of $6 million for the company in the last quarter. The margins, however, did not reach their full potential due to increase in costs of raw materials and an unfavorable product mix.
Harley Davidson Financial Services moving in right direction
The financial unit of the company has been successful in reducing the percentage of defaults and losses on its loans. While the annualized loss experienced on its managed retail motorcycle loans has come down from 1.58% to 1% in the last quarter, the retail 30+ day delinquencies on managed loans has come down from 3.68% to 2.56%. These losses can be further brought down but their decline in the last few quarters indicate that the company is on right track.