Harley-Davidson(NYSE:HOG) is scheduled to announce its Q4 and full-year earnings on January 30. The iconic manufacturer of heavyweight motorcycles saw its shares jump 40% in 2013, with nearly 35% of the gains coming in the last six months of the year. The company launched its 2014 Project Rushmore motorcycles comprising eight new models in August last year, which turned out to be its largest product launch in over two decades. Retail sales in the U.S. alone surged 20% year on year in the third quarter ending September.  Another highlight for the automaker in 2013 was the introduction of its first lightweight motorcycle since 1974. The Street 500 and Street 750, built on the new “Revolution X” platform, are set to arrive in the U.S. by the second quarter this year, while the Street 750 already debuted in India earlier this month.
Besides selling motorcycles to independent dealers all around the world, Harley-Davidson offers its branded merchandise, mechanical and cosmetic bike accessories, and also provides wholesale/retail financing and insurance programs to dealers and customers.
We have a $59 price estimate for Harley-Davidson, which is around 10% lower than the current market price.
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Project Rushmore Bikes To Push Up Pricing
Revenue for the automaker’s motorcycle business increased 7.4% to ~$4.3 billion through nine months ending September, following the strong performance of its recently launched Project Rushmore bikes. 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.  These new features increased prices of motorcycles and contributed to an 8.2% year-over-year increase in revenue per unit in the third quarter. However, average pricing for the three quarters was up by only ~3%. As sales of the refreshed models gain traction, we can expect pricing to have firmed up further in the fourth quarter.
Rebounding Sales In The U.S.
U.S. constitutes almost two-thirds of Harley-Davidson’s motorcycle shipments, with ~140,000 units shipped through September.  Even as the domestic market recovers following the economic downturn, it seems less likely that the peak of 2006 (~555,000 units) will be matched in the near future.  This is because the company’s core demographic of middle-aged Caucasian males has been on a decline in the U.S. in recent years. However, the new motorcycles have been instrumental in boosting sales in this otherwise maturing market. The Project Rushmore bikes have sold well among the core customers as well as the company’s outreach customers, represented by young adults (ages 18-34), women, Hispanics and African-Americans. Retail sales in the U.S. increased 4% through September, and we expect another strong quarter for the newly launched bikes to further boost sales in the country.
Harley will also introduce its cheaper Street 500 and Street 750 motorcycles in the U.S. by the second quarter this year. The lightweight motorcycle segment ( less than 650 cc) constituted 38% of the overall motorcycle market in the U.S. in 2012. Going forward, the automaker will hope to leverage its strong brand appeal to attract a wider customer base that prefers affordable lightweight bikes and scooters.
Emerging Markets Could Provide Growth
Although international markets (non- U.S. and Europe) constituted only 12% of the overall sales in 2012, the automaker has witnessed rapid growth in some emerging economies. Sales were up 10% in the Asia-Pacific region through September, driven by India and China. Harley-Davidson also opened its first dealership in Manila, Philippines, citing growth opportunities in the country, which has 800-1000 Harley owners presently. 
Harley-Davidson already has a strong presence in the Indian heavyweight motorcycle market. The company manufactures nine of its eleven models in completely knocked-down units in the country itself, thereby evading hefty import taxes. Going forward, with the introduction of a cheaper Street 750 in January, and a possible launch of the lightweight Street 500 later this year, sales could gain further traction in India.
Gross Margins Could Improve
Harley-Davidson’s gross margins for the first three quarters stood at 36.3%, an improvement of 80 basis points over the previous year figure. Margins were partly helped by lower restructuring expenses and improvements in operational efficiency as a result of the ongoing restructuring. Harley is at the rear end of its five year long restructuring operations that began in 2009. The company expects restructuring activities to result in annual savings of $305 million in 2013 and ~$320 million on an annual ongoing basis starting this year.
Back in 2009, margins were in the range of 32%-33%, and now they consistently cross 35%. In the third quarter, the figure stood at 35.3%, lower than the three-quarter average, because extra expenses associated with the model makeover trimmed gross margins by ~60 basis points. During the third quarter earnings release, Harley-Davidson gave out a full-year guidance of 35.25%-36.25% gross margins. The company remained cautious on the outlook due to further dilutive effect of higher costs related to the Project Rushmore bikes in the fourth quarter.Notes:
- “Harley-Davidson third quarter earnings“ [↩]
- Harley-Davidson dealer: 2014 lineup brings ‘revolutionary changes’, August 22, 2013, bizjournals.com [↩]
- “Harley-davidson 10-q“ [↩]
- “Harley-Davidson 10-k“ [↩]
- “Harley-Davidson opens Manila dealerships with a loud bang“, business.inquirer.net [↩]