The Strong U.S. Dollar Is Weighing On Harley-Davidson’s Financials

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Harley-Davidson (NYSE:HOG) is going through a rough patch, not only because of the looming threat of an aging core population of Caucasian males, but also because of a strengthening dollar. The iconic manufacturer of heavyweight motorcycles carried its weak form from the previous three quarters into Q1 this year. Revenues from sales of motorcycles and related products were down 3.9% year-over-year to $1.51 billion in Q1, due to a fall in wholesale shipments and the impact of negative currency translations. The U.S. dollar rose approximately 10% against most foreign currencies in the last quarter, and this took a toll on the financials of many large American companies, including Harley-Davidson.

Our current price estimate for Harley-Davidson stands at $60.50, which is above the current market price.

See our full analysis for Harley-Davidson

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Harley has already been struggling in the domestic market, which forms almost two-thirds of its net motorcycle shipments, due to shifting preferences of millennial customers, trouble in speeding up the roll-out of the lighter weight bikes, Street 500 and Street 750, and the unavailability of the Road Glide model in the first half of last year. After lower U.S. sales in Q2 of last year prompted Harley to lower its full-year guidance, the company again lowered its shipment outlook for 2015 on less-than-expected retail sales in the country at the start of this year. Overall shipments were down 1.4% year-over-year to 79,589 units in Q1, near the lower end of the estimated 79,000-84,000 unit shipments. While shipments in the U.S. rose by over 4% in Q1, retail sales were down 0.7%.

Lower-than-expected retail sales for Harley-Davidson in Q1 went against previous expectations of solid growth, considering how the economic conditions in the U.S. improved, and low fuel prices boosted customer purchasing power, which meant that customers could afford to pay a little extra for the Harleys. So, what is going wrong for Harley?

The U.S. alone constitutes two-thirds of the net volumes for Harley-Davidson, as aforementioned, but forms approximately 40% of the net valuation for the company, according to our estimates. We expect growth in international markets, especially Asia-Pacific, where concentration and penetration of heavyweight motorcycles is relatively low, to drive growth for Harley, going forward. But the company is still heavily dependent on the U.S. and needs volumes to rebound in the domestic market, to get back on track.

2011 saw a surge in sales for Harley-Davidson in the U.S., which can mainly be attributed to pent-up demand, following a slow sales period during the recession. But since, volume growth levels have slowed down. Sales in the country have a major impact on the company’s overall results. Lower retail sales and high shipments in the U.S. in the last few quarters have prompted Harley to lower its shipments to dealers in the near term, in order to keep supply in line with demand, avoid inventory pile-up, and protect its premium brand image. Management now expects to ship between 83,000 and 88,000 units in the second quarter, a 4.5% to 10% decrease from 2014 production levels. Lower guidance and less-than-expected demand sent Harley’s stock tumbling last year. The stock is down 20% since the end of June last year, after rising 316% in the five-year period before that.

International demand might be crucial to Harley’s future, but reigniting domestic sales seems like the number one issue for the company. Last quarter, retail sales for Harley were down 0.7% year-over-year in the U.S., even as registrations in the country’s 601+cc motorcycle market rose an impressive 9%. Why Harley couldn’t benefit from the surge in demand in the overall market was mainly due to increased competitive price discounting by the competition, especially international manufacturers who scaled down their product prices in the U.S., as the dollar continued to strengthen against other currencies. Harley’s market share is down 4.7 percentage points from a year ago, to 51.3% in the U.S., mainly as its Japanese and European competitors took advantage of the strengthening U.S. dollar and manufacturing in low-cost countries, and subsequently adopted aggressive product pricing. This trend could continue in the near term, and as Harley is not looking to discount its bikes, this will mean slower volume growth for the company in the next few quarters.

Sales for the Street 500 and 750 remained strong in Q1, after the new models sold 9,900 units worldwide in their debut year in 2014, and with increased availability of this lineup going forward, volume sales could get a boost. However, Harley-Davidson’s recent results tell a story of lost sales on strategic pricing by the competition in the U.S., and negative currency translations, which were a 3.5% headwind on the top line in the last quarter, and could continue to dent revenue growth. Going forward, continual discounting by other motorcycle manufacturers could further eat into Harley’s market share in the U.S. and drag down the top line.

Harley-Davidson is looking to protect its premium brand image but, in the meantime, the company’s competitors are gaining from the strengthening U.S. dollar. This could continue to drag down sales for Harley.  However, the company will hope to leverage its strong brand appeal, and loyal customer following, to grow sales, once its competitors raise their product prices once again.

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