The Road Ahead For Harley-Davidson In The Domestic Market

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America’s largest heavyweight motorcycle manufacturer Harley-Davidson‘s (NYSE:HOG) stock almost reached the all-time high of $74.93 seen in November 2006 at the end of April this year, but has since fallen nearly 14%. This fall might be primarily due to the company’s lowered shipment guidance, owing to tepid U.S. sales, and the mass recall of motorcycles issued recently. Harley recalled 66,421 Touring and CVO Touring bikes manufactured between July 1, 2013 and May 7, with anti-lock brakes due to a front-wheel locking problem. Nonetheless, Harley-Davidson might not be majorly impacted by the recalls as the motorcycle-maker boasts a strong global brand appeal and has built a loyal consumer base, owing to its superior quality and services perception.

However, the company has been struggling in its largest market, the U.S., mainly due to tough weather conditions in the first half that stalled economic activity. The domestic market constituted 64% of the net motorcycle shipments for Harley last year, and 68% of the net shipments through June, but the retail sales data hasn’t mirrored the strength in shipment data so far this year. Lower demand in the U.S. also prompted Harley to lower its full-year guidance on bike shipments. However, with the removal of bottlenecks in the supply of Street motorcycles, return of the popular Road Glide, new model year launches and strengthening of the U.S. economy in the latter half of the year, Harley’s sales in the domestic market could rise.

We have a $64.79 price estimate for Harley-Davidson, which is around 2% higher than the current market price.

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See our full analysis for Harley-Davidson

Harley’s Domestic Sales Fall Below Expected Levels

While Harley-Davidson’s motorcycle shipments in the U.S. rose 8.9% through June, retail sales in the country increased by only 1.1%. 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. Only a modest growth in retail sales reflects low demand for heavyweight motorcycles in the U.S., where due to an unusually cold winter and low consumer spending, the GDP contracted by 2.1% in Q1. In order to protect its premium brand image and maintain supply in line with demand, Harley lowered its previous guidance of shipping 279,000-284,000 motorcycles in 2014 to shipping 270,000-275,000 motorcycles, up 3.7-5.6% year-over-year. However, as economic conditions improve in the latter half of the year, and Harley lines-up new model launches, there could still be room for volume-growth above the currently estimated levels.

Street Motorcycles, Project Rushmore Could Boost Volumes

Following a 2.1% GDP contraction in the U.S. in the first quarter, consumer spending rebounded to boost economic activity. The country’s GDP grew by 4% in the second quarter, with consumer spending rising 14%, after only a 3.2% growth in Q1. [1] Strengthening macro conditions in the domestic market might also start to favor growth in the motorcycle industry, which saw only a 1.9% rise in heavyweight motorcycles (601+ cc) registrations through June. What has hurt Harley’s sales in the U.S. most, is a decline in market share in the second quarter. The figure declined from 57.4% in Q1 to 52% in Q2, dragging down the manufacturer’s volumes in an already weak-performing domestic motorcycle market.

Heavyweight motorcycle registrations in the U.S., which stood at 305,852 units in 2013, are still almost half the motorcycle registrations in 2006. Although the baby boomer generation is ageing, the core customer base for Harley-Davidson, the company has increased its focus on outreach customers, comprising young adults (ages 18-34), women, African-Americans and Hispanics. In 2013, Harley’s volume growth rate for outreach customers in the U.S. was more than twice the growth rate for core customers. This means that even with the growing population of outreach customers in the country, the company’s volumes might still be headed for positive development. The Hispanic population in the U.S. is expected to grow by 12% between 2015-2020 to form nearly 20% of the country’s net population, which is estimated to grow by only 4% during this period. [2] In addition, we expect new model launches to spur Harley’s domestic volumes in the second half of the year.

  • Improved Availability Of Street Motorcycles

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. Moreover, as consumers decided to wait for the Street motorcycles, volumes for Harley’s Sportster line-up also remained weak.Volume growth could be higher for Harley in the U.S. in the following quarters due to pent-up demand, and also due to improved availability of the Street pair. The company plans to ship two units for retail to each dealer in the U.S. by the end of this month. 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. Around 2,200 Street 500 units were sold to U.S. dealers through June for use in the company’s Riding Academy, and higher availability and consumer demand could increase this figure to around 5,000-6,000 units in the country this year.

  • Return Of The Road Glide In The New Model Year

One of the other main reasons why Harley’s retail sales remained flat in the U.S. in the second quarter was the absence of the touring motorcycle Road Glide in the 2014 model year, which formed around 10% of the company’s U.S. retail sales in Q2 2013. After a one-year hiatus, the Road Glide has now returned to the country, as part of the technically-upgraded 2015 model year line-up, this month. Harley-Davidson was also cycling the launch of Project Rushmore motorcycles in the U.S. last quarter, which is also why year-over-year retail sales remained weak. Due to the return of the Road Glide, along with other new model year launches this month, Harley-Davidson’s U.S. retail sales are expected to increase in the next quarter sequentially. In addition, on the back of the 2014 model year launch, retail sales in the country rose by an impressive 20% in Q3 2013, which could act as a reference for our estimate for 2014.

Incremental sales from the Street motorcycles, coupled with the new 2015 model year launch, including the popular Road Glide, could help bolster Harley’s U.S. volumes in the second half of the year. U.S. shipments grew 4% last year, and if we add the anticipated incremental sales from the Street Motorcycles and Road Glide, there could be a 6% increase in the company’s motorcycle volumes in the country this year. If U.S. volumes form 64% of the net shipments for Harley, similar to the composition in 2013, the net shipments for the company would exceed the currently estimated figure of 270,000-275,000 units by around 1,000 units.

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Notes:
  1. U.S. GDP growth rate []
  2. U.S. demographic projections []