Harley-Davidson Pre-Earnings: U.S. Retail Sales Could Return To Strong Growth In Q1

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Harley-Davidson (NYSE:HOG) is scheduled to announce its Q1 results on April 21, which might set the tone for the rest of the year for the iconic motorcycle maker. In particular, the lighter-weight Street 500 and 750 could boost retail sales for Harley in their first full year in 2015. The Street pair sold 9,900 units last year, forming 3.7% of the company’s net wholesale shipments. As Harley hopes to make the Street motorcycles available in almost each of its markets this year, volume sales for the company could significantly rise, and the proportionate mix of these bikes in 2015 could more than double from 3.7% last year.

Harley’s net retail sales growth slowed to 2.7% last year, down from 4.4% and 6.2% in 2013 and 2012, respectively, mainly as rough weather in the early part of the year slowed sales in the U.S., which forms two-thirds of the company’s net shipments. Year-over-year growth in motorcycle shipments to dealers has slowed for Harley sequentially in the last three years, but a stronger economic environment in the U.S. and incremental sales from the Street 500 and 750 could reverse this trend of declining volume growth this year. Harley grew wholesale motorcycle shipments by 3.9% to 270,726 units in 2014, and expects to ship 4-6% more motorcycles to dealers this year. The company expects to have shipped 79,000–84,000 motorcycles in Q1, compared with 80,682 motorcycle shipments in Q1 last year. Much will depend on the demand in the domestic market for Harley to achieve volume growth near the higher end of the estimated shipment range this quarter.

Our current price estimate for Harley-Davidson stands at $67, which is roughly 10% above the current market price. The stock has declined by 4.11% in the last three months.

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See our full analysis for Harley-Davidson

High Demand In Domestic Market To Boost Retail Sales

The U.S. economy grew 2.4% last year, performing strongly in the last three quarters, after a 2.1% contraction in Q1. Increasing customer purchasing power, especially due to lower oil prices, and a jobless rate of only 5.5% at present means that demand for Harley-Davidson’s luxury heavyweight motorcycles could have been high this quarter. Retail sales in the U.S. were up only 1.3% year-over-year in 2014, and as the country forms a huge chunk of Harley’s overall sales, lower sales in the domestic market kept a check on the company’s overall retail sales. The core customer base for Harley comprising baby boomers is aging, and millennial customers have looked to hold off on extravagant purchases, a term which can be associated with heavyweight luxury motorcycles, especially after a prolonged period of slow economic activity. However, 2015 could be different. A conducive economic environment, emphasis on sales to outreach customers, higher availability of the Street pair and launch of the Road Glide along with other new 2015 model year bikes, should have a significant impact on the Q1 results, compared with the year ago period.

The highly anticipated Street 500 and 750 went on sale in the U.S. in June last year, and the Road Glide motorcycle was absent from the Touring lineup in the first half of the year. Following the re-launch of the Road Glide, sales for the model rose significantly, and represented 14% of Harley’s U.S. retail mix in Q4 2014, up from 4% a year ago. Harley has also looked to derive higher sales from outreach customers, comprising young adults, women, Hispanics, and African-Americans, to grow its customer base. And for the third consecutive year, Harley grew sales to outreach customers by more than twice the sales-growth to core customers. Incremental sales from the Street bikes and Road Glide, and continued momentum in sales to outreach customers, are expected to boost U.S. sales for Harley this quarter.

Growth In Asia-Pacific And Europe To Increase International Sales

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. The Europe, Middle East and Africa (EMEA) region forms approximately 10% of Harley’s valuation, by our estimates, and continued growth momentum in this region in Q1 could further bolster the company’s top line, especially as the U.S. is also expected to return to strong growth this quarter. The Street 500 and 750 were launched in parts of Southern Europe last year, and reported encouraging initial sales. The Street bikes are cheaper and lighter, more suited to the tastes and preferences of the moped and scooter-riding general European customer, and with the pair being launched in other European markets in Q1, we expect Europe sales to rise. Harley could leverage its strong brand appeal, cheaper prices of the Street, and higher customer purchasing power to boost sales in the region.

Another important division for Harley is the non U.S. and Europe motorcycles division, which forms just under 14% of the company’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 2014, and 11.8% for the full year. Harley has added 136 new international dealerships in the last five years, and as the company remains committed to deriving strong growth from international markets through growing distribution networks and launch of new products, we expect a strong sales increase in international markets in Q1. In particular, Harley expanded distribution of the Street motorcycles to most of Western Europe, Japan, Australia, Mexico, and Canada this quarter, which should add incremental sales from the year ago period.

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. Although higher sales of the cheaper Street 500 and 750 are expected to impact the product mix and reduce the average revenue per model in Q1, higher volume sales in general should bolster margin growth for Harley this quarter. This is as Harley has a high degree of operating leverage, and large fixed costs mean that the company’s profitability is sensitive to changes in the top line.

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