Harley-Davidson’s Mid-Year Earnings Preview: Strong Dollar And U.S. Sales In Focus

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Harley-Davidson will report its Q2 and mid-year earnings on July 21, and our focus will be on the progress in retail sales for the manufacturer, especially in the U.S.  Q1 was a disappointing quarter for Harley in terms of retail sales in the domestic market, which were down 0.7% year-over-year. Revenues from sales of motorcycles and related products were down 3.9% year-over-year to $1.51 billion in the last quarter, due to a 1.4% fall in wholesale shipments and the impact of negative currency translations. [1] Why the U.S. is most crucial for Harley is because it forms approximately two-thirds of the net shipments, which is why, the demand trend in this market plays a big part in shaping the company’s overall results.

As retail sales were down in the U.S. in Q1, and also took a hit international markets, Harley aimed to ship 83,000-88,000 motorcycles in Q2, 5-10% lower than the year ago period, in order to keep supply in line with demand and protect its premium brand image. Lower shipments are expected to dent the top line this quarter.

Our current price estimate for Harley-Davidson stands at $60, which is above the current market price.

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What is also expected to be a major cause for concern is the stronger dollar. To mitigate the impact of a stronger U.S. dollar, Harley has raised its model prices, which has played into the hands of its competition in the recent past. Let’s see how:

  • Stronger Dollar Eats Into Harley’s U.S. And Europe Market Share

The U.S. dollar continued to rise against certain crucial foreign currencies such as the euro, Japanese yen, and Australian dollar in the second quarter as well, which might be a downer again for Harley-Davidson. Last quarter, retail sales for Harley were down 0.7% in the U.S. as aforementioned, even when 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.

The U.S. dollar rose approximately 10% against most foreign currencies in the first quarter alone, allowing Harley’s foreign manufacturers to cut their model prices, in some cases, by as much as $3,000 off the manufacturer’s suggested retail price.

Harley Davidson revenue growth

In Europe too, Harley’s market share in Q1 was 9.8%, down 1.5 percentage points, hurt by the introduction of several low-priced models by the competition. Retail sales for the company were down 3% in Europe, despite registrations in the European heavyweight motorcycle rising 9.7% over the year ago period.

The stronger dollar is hurting Harley’s competitive edge, and this is expected to reflect in the Q2 financial results as well. 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.

…What Could Be The Bright Spots This Quarter?

Well, for one, the Street duo. The lighter weight Street 500 and 750 sold 9,900 units (~3.5% of the net shipments) in their debut year in 2014 across the U.S., India, and parts of Southern Europe. With the availability of the Street pair spreading to Canada and the rest of Europe this year, proportionate sales of these bikes could rise to 7-8% of the net Harley shipments in 2015.

Why the Street is important, and is not just another model series at Harley, is because these cheaper and relatively lighter urban motorcycles are expected to bring-in customers that are new to the Harley brand, thereby increasing the manufacturer’s reach and customer base, rather than self-cannibalizing sales. Take India for example, where Harley sold 2,406 units of the Street 750 between April-December last year, approximately one-fourth of its total Street shipments, forming about 70% of the company’s net India sales since its launch. The Street is a good example of how Harley is looking to further penetrate emerging economies with motorcycles that are more suited to the local taste, i.e. are cheaper, lighter, and made to withstand the uneven roads.

The other strong point for Harley might be its profit growth story. The company’s margins are expected to be hurt by negative currency translations in the near term, but higher production should boost profitability going forward. Despite a decline in net revenues in Q1, the company was able to achieve gross margins of 39.1%, its highest in at least 15 years. Harley is expected to continue to reap the benefits of its restructuring operations which ended in 2013. While motorcycle fixed costs were 20%-25% of variable costs at the beginning of restructuring operations, the figure declined to 15%-20% at the end of last year. This lowered the degree of operating leverage for the company, and meant higher margins on incremental sales. Sales for the Street 500 and 750 remained strong in Q1, and with increased availability of this lineup in most markets in Q2, volume sales, and, in turn, margins, could get a boost.

According to Fitch Ratings, Harley’s adjusted EBITDA margin in the 52 weeks to March 29, 2015, was 22.1%, and although this figure might slightly decline this year, it is expected to remain at least in the high teens, which is still strong for the sector. [2]

So to wrap it up, we expect the strong dollar and the pricing disadvantage to hamper Harley-Davidson’s Q2 results, while the anticipated higher sales for the Street duo, and continued solid margin performance, could be the silver lining this quarter for the Milwaukee-based iconic motorcycle manufacturer.

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Notes:
  1. Harley-Davidson 8-K []
  2. Fitch Affirms Harley-Davidson’s IDR at ‘A’; Outlook Stable []