Harley Rides Global Growth But Cautious On Outlook

Harley-Davidson (NYSE:HOG) announced its earnings for the second quarter on August 1. Despite strong growth in earnings and a marginal increase in sales year-on-year, shares fell almost 4% amid concerns regarding motorcycles demand for the rest of the year, which is expected to fall sharply.

Worldwide retail sales grew 2.8% y-o-y, boosted by robust growth in regions including Asia Pacific (10%) and Latin America (38%). This was partially offset by a decline in the EMEA region (6.4%). Retail sales in the United States were up 4%, in spite of being affected by an unusually early spring season, which pulled some portion of sales to the previous quarter. The company’s year-to-date market share increased 2.3 percentage points to 56.1%, which is a new record.

Sales in Latin America and Asia Pacific have been trending upward over the past few years. Combined sales in Asia Pacific and Latin America in this quarter constituted 10.1% of worldwide retail sales. This compares to 9% in the second quarter of 2012. By contrast, sales in the EMEA region have declined as a percentage of worldwide sales, primarily due to a large decline in sales in Europe – Europe constituted 20.3% of worldwide sales in second quarter 2010, while now it makes up 17.1%. We expect these trends to continue, as the company attempts to capitalize on consumer spending changes in these regions through branding and marketing efforts.

The company reported marginal growth in gross margins on a year-on-year basis, mainly due to higher shipment volumes, price increases of the 2012 models, and lower manufacturing costs as a result of the restructuring plan. This was partially offset by foreign exchange losses. In spite of the currency hedges set up by the company, we expect gross margins in the coming quarters to be negatively affected by exchange rate fluctuations. Operating income grew 40.8% due to the higher gross margins and lower restructuring related expenses relative to the same quarter last year.

Looking forward, the company’s management is not very optimistic about performance in the next couple of quarters. This is for a number of reasons. The economic slowdown will affect shipment volumes and sales worldwide, especially in the Euro-zone. The macroeconomic uncertainty will also lead to exchange rate fluctuations, which will affect margins. Margins will also be affected by restructuring spending, which is estimated to be about $40-50 million for the rest of this year. In spite of this, management expects gross margins to be around 35% for this year, boosted by savings from restructuring, more efficient manufacturing processes and higher motorcycle prices.

We currently have a Trefis price estimate of $58.60, which is about 40% above the market price.

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