Harley-Davidson Lowers Full-Year Guidance on Disappointing Q2 Retail Sales

Harley-Davidson (NYSE:HOG) announced robust growth in Q2 revenues and operating income, on the back of restructuring benefits and strong volume and price mix, on July 22. However, the Milwaukee-based motorcycle manufacturer’s stock fell by over 5% just after the announcement of quarterly results as the company lowered its full-year shipment guidance on less than expected retail sales. ^[1] Worldwide retail sales remained flat in the second quarter as growth in the European and some emerging markets was largely offset by volume declines in Japan, Canada and Latin America. Unit sales in the U.S. also remained flat during the period, impacted by absence of the Road Glide, and lower sales of the Sportster line-up as consumers waited for the launch of the Street motorcycles. Harley doesn’t expect retail figures to pick-up to the previously estimated levels in the U.S., its single largest market, which also prompted the company to lower its full-year guidance on motorcycle shipments.

Harley-Davidson now expects to ship 270,000-275,000 units in 2014, up 3.5-5.5% year-over-year, lower than the previously estimated shipment range of 279,000-284,000 units. In order to protect its premium brand image, Harley has lowered its third quarter motorcycle shipment estimate to 49,000-54,000 units, flat to 9% down from 2013 levels, as the company plans to keep supply in line with the demand. Looking ahead, new model year launches scheduled in August and improved availability of the Street motorcycles in the domestic market could strengthen retail sales in the next two quarters.

We have a $69.55 price estimate for Harley-Davidson, which is around 10% higher than the current market price. However, we are currently in the process of incorporating the latest quarterly data into our forecasts.

See our full analysis for Harley-Davidson

Retail Sales Remain Flat in the Domestic Market

The U.S. is the most important market for Harley-Davidson, constituting almost two-thirds of the net shipments last year. After rising 3% year-over-year in Q1, retail sales for the company remained flat in the country in the second quarter. Lower sales of the Sportster motorcycle lineup, as consumers waited for launch of the Street 750 and 500, is one of the reasons why Harley couldn’t achieve positive retail sales growth in the domestic market this quarter. ^[2] Built on the new “Revolution X” platform, the highly anticipated Street 500 and 750 went on sale in the U.S. in June, but start-up issues limited product availability, thereby affecting unit sales. In addition, the absence of the touring motorcycle Road Glide in the 2014 model year also hampered volume growth this quarter. Road Glide formed around 10% of Harley’s U.S. retail sales in Q2 2013. As a result, the company’s U.S. market share fell to 50.3% in the quarter, down 2.6% from 2013 levels. Continued rough weather conditions in parts of the country also hindered increase in heavyweight motorcycle sales this quarter.

Volume growth could be higher for Harley in the U.S. in the next quarter due to pent-up demand, and also due to incremental sales contributed by the recently launched Street motorcycles. The company plans to improve availability of the Street pair by shipping two units for retail to each dealer in the U.S. by August end. Harley launched the Street 750 in India early this year, and also introduced the motorcycle in Italy, Spain and Portugal recently. The company has reported higher than expected retail sales of the Street 750 in India and Southern Europe so far, and continues to expect overall Street shipments to range between 7,000-10,000 this year. In addition, Harley will launch its 2015 model year in August, including return of the Road Glide bike. Incremental volumes contributed by Road Glide should also boost the company’s retail sales in the U.S. going forward.

Japan and Latin America Volumes Decline

Harley-Davidson’s sales in Asia-Pacific grew by only 1.5% in Q2, after rising by an impressive 25% in the previous quarter, mainly hurt by the 20.9% fall in Japan volumes. Japan is the second largest international market for the company behind Canada, accounting for just over 4% of the net retail sales in 2013. ^[3] With the consumption tax in the country increasing from 5% to 8%, effective as of April 1st, consumers rushed to make motorcycle purchases in the first quarter. This pushed some of the potential second quarter sales into the first quarter, resulting in a 33% rise in Harley’s Japan volumes in Q1. In addition, devaluation of the Japanese Yen also lowered revenues from the country this quarter. Devaluation of the Yen against the U.S. dollar had also caused revenues from Japan to slide 11% last year, despite an increase in volumes.

Latin America volumes also slid 10.4% year-over-year for Harley-Davidson in the quarter, partly impacted by the economic instability in Brazil. Brazil’s economy is slowing owing to higher interest rates put in place to control inflation. These measures have impacted consumer spending, which slightly slowed down this year, as compared to the last quarter of 2013. ^[4] Rising unemployment, higher inventory levels, and lower demand in Brazil has also affected the country’s automotive sector, where production levels dropped by over 10% in the first half of the year. The dip in Harley’s Latin America retail sales this quarter was also as the company cycled last year’s strong volume growth of 39.2% in Q2 in the region.

Revenues and Margins Expand on Higher Shipments and Price Mix

Harley-Davidson generated revenues of around $2 billion in the second quarter, an 11.5% increase from 2013 levels. This growth was bolstered by a 9% increase in shipments to 92,217 units during this period, in line with the company’s guidance of shipping 92,000-97,000 units. In addition, the average revenue per motorcycle was up almost $1000 year-over-year, due to favorable volume mix, higher net pricing and a 1% positive impact of currency translations in the quarter. Volume mix was favorable due to lower sales of the relatively cheaper Sportster models, and growth in Touring motorcycle volumes, owing to high demand for the Project Rushmore bikes launched in August last year. However, the average revenue per unit is expected to slightly fall going forward, as sales of the cheaper Street 750 and 500 gain traction and Sportster volumes pick up.

Higher revenues and net pricing resulted in a 260 basis points year-over-year rise in gross margins to 39.5% in the quarter. Operating margins also expanded 390 basis points to 25.8%, due to benefits from the restructuring activities, which completed in 2013. While motorcycle fixed costs were 20%-25% of variable costs at the beginning of restructuring operations in 2009, 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 going forward. However, the company expects third quarter gross margins to be down 2.5% from previous year levels, cycling the strong mix gains delivered by Project Rushmore motorcycles last year.

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1. Harley-Davidson Q2 results [↩]
2. Harley-Davidson earnings transcript [↩]
3. “Harley-Davidson 10-k“ [↩]
4. Consumer spending in Brazil [↩]