New Models Lift Harley-Davidson’s Pricing; Guidance Remains Unchanged

Harley-Davidson (NYSE:HOG) announced solid third quarter results, somewhat in line with the company’s own guidance. Total revenues grew 7.5% to $1.34 billion, while the operating income surged 15.8% to $251.5 million. The company’s net income jumped 24% to $162.7 million or $0.73 per share. ^[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. However, we are in the process of revising our estimates in order to incorporate the latest earnings.

Margin Expansion Continues

Higher gross margins and improvements in operational efficiency helped by the ongoing restructuring, expanded the company’s operating margins by 160 basis points to 14.9%. Harley incurred a restructuring expense of $0.6 million vs $9 million in the previous year’s quarter. The company is nearing the end of its five-year long restructuring which began in 2009 aimed at reducing manufacturing costs, improving efficiency and facilitating more flexibility in labor requirements. Harley-Davidson estimates the savings from restructuring to total $305 million in 2013 and expects additional savings of $15 million next year.

New Models Push Up Pricing

In the previous quarter, Harley-Davidson announced its decision to launch eight new models this year, the biggest product revamp in its 110-year-old history. The new models helped push up the pricing by 5.9% for the quarter (year-over-year). However, for the three quarters, the average revenue per model is up only 0.8%. As the sales of the refreshed models gain traction, we can expect the pricing to firm up further in the fourth quarter and in 2014.

Unit Shipments Jump

Unit shipments for the quarter rose 2.3% to 54,025 units, although the retail sales jumped 15.5%. There is a difference between the retail sales and the unit shipments – retail sales represent the number of motorcycles sold by the dealers of Harley-Davidson, while unit shipments are the number of motorcycles shipped by Harley-Davidson to its dealers.

Bad weather in the first quarter of 2013 impacted the retail sales of the company. As a result, retail sales dropped 9% in the first quarter, even though the unit shipments surged 17%. The unusually high retail sales growth witnessed in the third quarter is primarily due to pent up demand.

For the first nine months of the year, total shipment volumes are up 6.6% to 213,853 units. For the full year, the company stuck to its previous forecast of selling 259,000-264,000 motorcycle units (i.e. the shipment volumes) in 2013,  an increase of 4 to 6% over the previous year sales.

Gross Margin Outlook Remains Unchanged

For the quarter, gross margins widened 60 basis points to 35.3%. The margin expansion comes despite the fact that extra expenses associated with the model makeover trimmed the gross margins by ~60 basis points.

Margins were helped by lower manufacturing costs. At the start of the year, Harley-Davidson initiated a new facility at its York plant that allows the company to better match the seasonal variation in motorcycle demand and consequently lower the manufacturing expenses.

Harley-Davidson’s guidance for the full year gross margins remains unchanged at 35.25 – 36.25%. For the first three quarters, gross margins stood at 36.4%. The company expects higher costs related to the model makeover to weigh on margins in the fourth quarter, and is therefore cautious on the outlook. ^[2]

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

1. HOG 8-k [↩]
2. HOG Q3 2013 Earnings Transcript [↩]