Increase In Global Volumes And Margin Expansion Drive Harley-Davidson’s Q1 Growth

Harley-Davidson‘s (NYSE:HOG) stock jumped 7.8% after the announcement of the quarterly results on April 22, underscoring the solid performance of the company’s motorcycle division. Despite disruptive cold weather conditions in the U.S., motorcycle revenues rose over 13% year-on-year to $1.3 billion through March. ^[1] This growth was mainly fueled by stabilizing European markets, rising sales in emerging markets, and increasing outreach customer demand in the domestic market. With a contracting proportion of the core middle-aged Caucasian men demographic, Harley emphasized focus on sales to young adults (ages 18-34), women, African-Americans, and Hispanics, also known as its outreach customers, in order to add incremental volumes. In 2013, the volume growth rate for outreach customers in the U.S. was more than twice the growth rate for core customers. In the first quarter as well, Harley’s domestic sales remained strong, with wholesale shipments rising over 7%. With the Street 750 and 500 going on sale in the second quarter in the U.S., Harley aims to attract the millennial customers who prefer cheaper and relatively more urban motorcycles. The company has kept its full-year guidance unchanged, anticipating 279,000-284,000 unit shipments this year, up 7-9% over 2013.

We have a $66.68 price estimate for Harley-Davidson, which is around 7% below the current market price.

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Sales In Europe Grow For The Second Straight Quarter

Retail sales in the overall Europe, Middle East and Africa region rose 8.2% year-over-year in the first quarter, primarily driven by growth in Europe. After two years of volume decline amid difficult economic conditions, Harley followed up a 5.5% rise in retail sales in Europe last quarter with a larger 8.8% growth through March. ^[2] This result was boosted by favorable weather conditions and an uptick in 601+ cc motorcycle registrations in the region, which increased by an impressive 25% this quarter. Bike sales in Europe constitute just over 10% of Harley’s valuation by our estimates. In an environment of slow economic activity, customers had looked to avoid luxury spending, which also includes large expensive motorcycles. However, with certain key European markets stabilizing and some bottoming out, the motorcycle market returned to positive growth. Bike sales grew 14.8% though February, fueled by an impressive 47.8% growth in Germany, the biggest European market for Harley-Davidson. ((“Market update“, April 2014, acem.com)) The company will now begin shipping the Street 750 in Italy, Spain and Portugal before the end of the second quarter. This new addition could add meaningful growth to Harley’s wholesale shipments, mainly in the last quarter of the year.

International Market Sales Continue To Grow

The Asia-Pacific and Latin America regions together constituted around 17% of the retail mix for Harley this quarter, up from 15.3% a year ago. Sales in Asia-Pacific in particular grew by an impressive 25%, bolstered by a 33% surge in Japan. With the consumption tax in Japan increasing from 5% to 8%, effective as of April 1st, consumers rushed to make motorcycle purchases in the first quarter. In addition, the rebounding Japanese Yen also fueled growth in revenues from the country. Devaluation of the Yen against the U.S. dollar had caused revenues from Japan to slide 11% last year, despite an increase in volumes. On the other hand, retail sales were up 9% in Latin America, riding on growth in Mexico and Brazil. With increasing disposable incomes and higher proportion of high net worth individuals in emerging markets, the target consumer base for Harley-Davidson could keep growing, going forward. In India, the company launched its Street 750 in March, entering into the 500 cc-800 cc market in the country. As the majority of bikes in the 500+ cc category in India are constituted by the lower range 500 cc-800 cc segment, the Street might significantly increase unit sales for Harley-Davidson. According to our estimates, the company’s wholesale shipments outside the U.S. and Europe will cross 100,000 before the end of this decade.

Despite Start-Up Costs, Margins Beat Expectations

Harley-Davidson’s gross margins for the motorcycle division improved 100 basis points from last year to 37.7% through March. The company had earlier expected start-up costs for the Street motorcycles, being built in Kansas city and in India, to lower profitability in the first two quarters. However, larger volumes and pricing along with a favorable mix contributed to higher than expected margins for the company. In addition, operating profit was boosted by the absence of expenses related to restructuring activities, which completed last year. 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, with sales of the cheaper Street pair expected to gain traction later on in the year, margins are expected to be impacted due to lower revenues per motorcycle. Harley-Davidson plans to ship 7,000-10,000 units of the Street motorcycles this year.

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1. “Harley-Davidson Q1 results“ [↩]
2. “Harley-Davidson earnings transcript“ [↩]