Harley-Davidson Earnings Preview: Volumes To Rise, Restructuring And Start-Up Costs To Impact Margins

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Harley-Davidson

Leading manufacturer of heavyweight motorcycles, Harley-Davidson (NYSE:HOG) is scheduled to announce its Q1 earnings on April 22. The company is expected to gain from growth in developing markets and stabilizing European markets. In addition, we also expect sales in the U.S. to grow, carrying momentum from the second half of last year. Harley sells around two-thirds of its motorcycles in the U.S. itself. Following the launch of the Project Rushmore bikes in August, the company saw a 15% year-over year jump in retail sales in the domestic market for the latter half of 2013. For the full year, sales were up 4.4%, improving market share by one percentage point to nearly 54.6% in the domestic 601+ cc category. [1] Harley also started selling its much anticipated Street 750 in India in March, and will follow it up with launches in the U.S., Italy, Spain and Portugal this year. The bike is the cheapest Harley on sale, equipped for tough urban roads, and aims to attract millennial consumers who prefer lighter and cheaper motorcycles. However, the impact of this launch on volumes will only be seen from the next quarter. The company also rolled out its Tri Glide in Japan, in view of the growing demand for trikes in the country. With the launch of the Street and Tri Glide, the company cemented its intentions to evolve with the ever-changing trends. Harley expects to have shipped around 76,500-81,500 bikes in the first quarter, up 2%-8% year-over-year.

We have a $64.53 price estimate for Harley-Davidson, which is around 3% below the current market price.

See our full analysis for Harley-Davidson

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European Markets Expected To Stabilize

Sales for Harley-Davidson have fallen in each of the last two years in Europe, hurt by weak economic conditions. In an environment of slow economic activity, customers have looked to avoid luxury spending, which also includes large expensive motorcycles. However, motorcycle sales improved in the first two months of this year in Europe, showing signs of growth going forward. Bike sales grew 14.8% though February, fueled by an impressive 47.8% growth in Germany. [2] As Germany is the biggest European market for Harley, this growth could translate into improved volumes for the company in the region this quarter. What also works for Harley-Davidson is that its market share in Europe has increased in each of the last couple of years, reflecting how the motorcycle giant has fared better than its competitors in the region during tough times. The company’s market share has risen 1.7 percentage points since 2011 to 15.1%. The Street 750 will now be introduced in Spain, Italy and Portugal this year, exported from the assembly plant in India. A further possible increase in market share and growth in the overall European market could spur volumes for the company, going forward.

Asia-Pacific Could Provide Growth

The Asia-Pacific region reported solid growth of 9.8% in retail motorcycle sales in 2013. [3] Japan and Australia are Harley’s largest markets in Asia-Pacific, together constituting around 8% of net revenues last year. However, the company’s unit sales rose only 1% year-over-year in Japan, while revenues decreased 11% in the country due to unfavorable currency translations last year. The launch of the Tri Glide in Japan this quarter could provide an impetus to Harley-Davidson’s ambitions in the country, owing to the growing demand for trikes. In addition, China and India delivered double-digit volume increases last year. With growing disposable incomes and higher proportion of high net worth individuals, developing markets could continue to fuel growth for Harley-Davidson.

Especially in India, the Street 750 is expected to add incremental sales for the company. Harley already boasts a massive 87% share in the Indian 800+ cc market, selling 1,500 units in the ten months ending January. With the entry of the Street 750 cc and the anticipated launch of the Street 500 in January 2015, Harley-Davidson will now compete in the 500 cc-800 cc segment of the Indian motorcycle market as well. As the majority of bikes in the 500 cc+ category are constituted by the lower range 500 cc-800 cc segment, the Street might significantly increase unit sales for the company. This is because consumers in India, especially millennial customers, generally prefer lighter and affordable motorcycles. The only downside is that emerging economies account for only 6% of Harley’s worldwide sales presently. Any pronounced growth is expected to have only a small impact on the company’s price estimate.

Margins To Be Affected By Start-Up Costs And Restructuring

Gross margins for Harley have improved in the last couple of years to reach 35.5% in 2013. As the company closed out its restructuring activities last year, profitability is expected to improve this year. The company realized $310 million in savings from restructuring activities in 2013, and expects to save $320 million annually from this year on. In addition, while motorcycle fixed costs were 20%-25% of variable costs at the beginning of restructuring operations, the figure is expected to decline to 15%-20% this year. This will lower the degree of operating leverage for the company, and mean higher margins on incremental sales. Harley expects gross margins of 47% on additional volumes. However, margins are expected to be hit by higher start-up costs related to the new Street motorcycles this quarter, somewhat offsetting restructuring benefits. The motorcycles are being assembled at Bawal in India and in Missouri, on a completely new “Revolution X” platform with a liquid-cooled engine.

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Notes:
  1. Harley-Davidson earnings transcript“ []
  2. Market update“, April 2014, acem.com []
  3. Harley-Davidson 10-k“ []