Harley-Davidson Earnings Preview: Refreshed Models Could Lift Pricing, Gross Margins May Not Decline

Harley-Davidson (NYSE:HOG) is scheduled to announce its Q3 earnings on October 22. Shares of the motorcycle maker have gained more than 10% in the past three months due to the optimism surrounding the launch of the refreshed models. A couple of months back, the company announced its decision to launch eight new models this year, the biggest product revamp in its 110-year-old history. In addition to restyling the eight models, the company has added a lot of technological features such as touchscreen, Bluetooth connectivity, GPS and voice recognition technology. ^[1]

Besides selling the iconic motorcycles, Harley-Davidson also offers its brand merchandise, and provides wholesale/retail financing and insurance programs to dealers and customers.

We have a $59 price estimate for Harley-Davidson, which is about 10% lower than the current market price.

Newer Models Could Boost Profits In Near Term

Since the U.S. accounts for about two-thirds of the company’s unit sales, Harley’s operations on its home turf are critical to the company’s bottom line. The model refreshments should help lift pricing and boost overall sales, which in turn should enhance the profitability. However, since the new models are still underway, the impact might not be felt in the upcoming earnings. From the fourth quarter, we can start expecting a higher pricing on its models.

Impact Of International Sales Limited On The Earnings

Internationally, the company is doing well in the developing markets of Asia Pacific and Latin America. However, since these two markets combined account for only about 15% of the unit sales, the impact on the upcoming earnings will be limited. As the proportion of sales from the developing markets increases, its contribution on the income statement will be more evident.

Harley-Davidson’s European sales fell 5% (year-over-year) in the first half of 2013, which is actually better than overall 9% decline witnessed by the entire market. There is no general consensus as to when the European heavyweight market will bottom out. Any surprises in the data relating to the European market could be pleasant news for Harley.

Even though the global unit sales in the first half grew by 8.2% to ~160,000 units, Harley-Davidson stuck to its previous forecast of selling 259,000 to 264,000 units for the entire year, an increase of 4% to 6% over the previous year figure. ^[2] Sales tend to be seasonal and typically peak with the onset of summers.

Gross Margins May Not Decline

Harley-Davidson’s gross margins for the first two quarters stood at 36.8%, an improvement of 90 basis points over the previous year figure. ^[3] The margins were partly helped by lower restructuring expenses and improvements in operational efficiency as a result of the ongoing restructuring.

The five year restructuring process began in 2009 with the aim of reducing manufacturing costs, improving efficiency and facilitating more flexibility in labor requirements. Back in 2009, the gross margins were in the region of 32-33%; now they are consistently exceeding 36%.

For the full year, Harley expects gross margins in the region of 35.25-36.25%. ^[2] During the second quarter earnings release, the management announced that it was cautious on the margins for the remainder of the year due to a possible currency devaluation (relative to the U.S. dollar) in its international markets.

However, now that the Fed has delayed the tapering and the dollar has depreciated against the major currencies in the last month, we could actually see some improvement in the gross margins. The impact should be felt more in the fourth quarter. This factor combined with a stronger pricing due to the launch of the new models should lift the margins in the subsequent quarters.

See our full analysis for Harley-Davidson

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Harley-Davidson dealer: 2014 lineup brings ‘revolutionary changes’, August 22, 2013, bizjournals.com [↩]
2. ref:2 [↩] [↩]
3. HOG 10-Q [↩]