Harley-Davidson Earnings Review: International Growth And Street Drive Shipment Growth

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Harley-Davidson‘s (NYSE:HOG) 2014 results, announced on January 29, highlighted how the iconic heavyweight motorcycle manufacturer is committed to deriving growth from international markets and through new product launches more suited to the current trends. The company’s motorcycle revenues rose 5.9% last year, and net revenues crossed the $6 billion mark for the first time since 2006. [1]  Overall motorcycle shipments grew 3.9% to 270,726 units, in line with the company’s guidance, which was previously lowered to 270,000-275,000 units following Q2, from the estimated 279,000-284,000 units, as bad weather and low customer demand in the U.S. stalled sales.

The U.S. forms approximately two-thirds of the net shipments for Harley, and, as expected, subdued retail sales in the country, which were up only 1.3% in 2014, kept a check on the company’s overall retail sales. Harley’s net retail sales growth has slowed to 2.7% last year, down from 4.4% and 6.2% in 2013 and 2012 respectively. However, the company expects to ship 4-6% more motorcycles to dealers this year, which means that the company expects volume growth to take off after falling sequentially in the last four years. One of the major contributors to this expected growth will be the Street 500 and 750 motorcycles, which after a successful start last year, will aim to significantly impact volume sales in their first full year in 2015.

Our current price estimate for Harley-Davidson stands at $65, which is roughly 1% above the current market price. However, we are currently in the process of incorporating the recent quarterly results into our estimates.

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Street Motorcycles Drive Shipment Growth In 2014

The Street 500 and Street 750, built on the new “Revolution X” platform, are the first lightweight motorcycles for Harley-Davidson since the 350 cc Sprint, which was discontinued in 1974. The highly anticipated bikes went on sale in the U.S. in June last year, and before that, the Street 750 was launched in India at the beginning of the year. The company also launched the Street pair in Italy, Portugal, and Spain in 2014, and expected to ship a cumulative 7,000-10,000 units throughout the year. The Street pair lured customers who preferred a Harley-branded cheaper and lighter motorcycle, raising overall shipments of these bikes to 9,900 for the full year. In fact, on the back of incremental Street sales, the proportion of Sportster/Street bikes rose to 21% of the net volume sales, up from 19.3% in 2013. [2] High sales for the new Street 750 and 500 further boosted international sales for Harley in Q4, and somewhat offset the declining sales of other motorcycle lines in the domestic market.

  • U.S. Retail Sales Remain On The Lower Side-

Harley’s U.S. retail sales remained essentially flat to slightly positive in the first half of 2014, which kept the full-year results subdued. Lower sales were mainly as customers avoided purchasing Sportster motorcycles, in anticipation of the launch of the Street bikes, and due to the absence of the Road Glide motorcycle from the Touring lineup in the first half. But with the launch of the Road Glide along-with other new 2015 model year bikes, sales for the model rose significantly, and represented 14% of Harley’s U.S. retail mix in Q4, up from 4% a year ago. Higher availability of the Street bikes also bolstered growth in the country in the third and fourth quarters. In fact, why Street sales are crucial for the company is because these bikes are drawing customers that are new to the Harley brand, thereby increasing the manufacturer’s reach and customer base, rather than self-cannibalizing sales.

With an aging population of Baby Boomers, which form the core customer base for Harley-Davidson, the company has looked to derive growth from its outreach customers, comprising young adults, women, Hispanics, and African-Americans. And for the third consecutive year, Harley grew sales to outreach customers by more than twice the sales-growth to core customers. One reason why retail sales in Q4 in the country were down, was that the company was cycling the large sales growth in the latter half of 2013, buoyed by the launch of the iconic Project Rushmore motorcycles.  But as the Street enters its first full year in 2015, volume sales in the U.S. for Harley could rise considerably.

  • International Growth Buoyed By The Street-

Non U.S. and Europe motorcycles form just under 16% of Harley’s valuation by our estimates. The company has for long depended on its domestic sales to fuel growth, but with an expansion of the dealership network outside the U.S., and launch of new models such as the Street, the contribution of Harley’s international volumes has increased to 36% of the net mix, up from 30% in 2008. In particular, fueled by high sales for the Street 750 in India, and resurgence of demand in Japan in the last three months, Harley’s Asia-Pacific retail sales were up 14.2% in Q4 and 11.8% for the full year. On the other hand, low fuel prices, higher customer purchasing power, tax breaks, and incentives, helped Harley improve its Europe retail sales by 6.7% year-over-year in 2014, after volumes declined in the region for two consecutive years. Going forward, Harley hopes to make the Street motorcycles available in almost each of its markets this year, which means that the proportionate mix of these bikes in 2015 could more than double from 3.6% in 2014.

Harley-Davidson has looked to evolve with the shifting market trends by launching lightweight motorcycles, and deriving growth from the relatively underpenetrated international heavyweight motorcycle markets. In addition, the company could also launch its first plug-in motorcycle next year, in order to tap the potential of the electric motorcycle segment. Going forward, much of Harley’s growth is expected to come from international markets and the outreach customers in the U.S.

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Notes:
  1. Harley-Davidson 8-k []
  2. Harley-Davidson earnings transcript []