Harley-Davidson Earnings Review: Can It Get Better From Here On In?

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Harley-Davidson (NYSE:HOG) announced its Q2 and mid-term results on July 21, with both revenues and net income beating consensus estimates, although remaining below prior year figures. ((Harley-Davidson earnings results)) As expected, currency headwinds and aggressive product pricing by the competition hurt motorcycle sales, and, in turn, revenues for Harley in Q2. The results for the first half reflect weakness for the company, with motorcycles and related products revenues down ~7% year-over-year, on a 4.7% decline in wholesale motorcycle shipments. EPS for the first half is down 8% too, compared to 2014 levels. But will this trend last? Maybe not.

Harley’s wholesale shipments have fallen through the first half, as aforementioned, but the company still expects to ship 276,000-281,000 motorcycles to dealers and distributors this year, up 2-4% year-over-year. This means that shipments will have to be up 7-10% in the next two quarters. And this could very well happen, for two reasons. Firstly, Harley is right now battling a very competitive pricing environment, marred by the stronger dollar, which might only be a short-term hindrance. Secondly, the company will lap lower shipments in the second half of last year, after bad weather in the U.S. forced the iconic maker of heavyweight motorcycles to lower its shipment outlook.

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

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See our full analysis for Harley-Davidson

The bottom line is–Although the first half results paint a rather grim image for Harley-Davidson, this might be temporary, and the company could be geared for growth in the second half.

  • The Street Forms A Big Part Of Why Harley Can Bounce Back

Sales for the Street 500 and 750 grew by double-digits in the quarter– a silver lining in an earnings release which mostly showed decline. 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 cannibalizing sales. According to Harley, in its first year, 7 out of 10 Street motorcycles in the U.S., and 9 out of 10 Street motorcycles in EMEA were to customers who were new to the Harley brand. In fact, in India, almost every Street buyer was new to the Harley brand. [1] The Street is a good example of how Harley is looking to further bring in new customers, and 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 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, the rest of Europe and Asia-Pacific this year, proportionate sales of these bikes could rise to 7-8% of the net Harley shipments in 2015.

Harley-davidson

  • U.S. And Europe Retails Feeling Pressure Due To Pricing

Retail sales in the U.S. and Europe combined form over 80% of the net retail sales for the company. And thus the declines in these regions dragged down the overall results for the company in Q2. Retail sales were down 0.7% in the U.S. and 7.7% in EMEA in the first half of the year for Harley. This comes despite strong motorcycle demand in both these regions. The U.S. and Europe heavyweight motorcycle markets grew 7.5% and 9.7% year-over-year through June. Harley has lost out due to the aggressive model discounts offered by its European, Japanese, and other foreign counterparts. This loss in price competitiveness for the company has been on the back of a continually strong dollar, which rose throughout Q2 against certain crucial currencies such as the euro, Japanese yen, Russian ruble, and Australian dollar.

However, Harley has remained committed to its premium brand image and has not opted to actively participate in the pricing war, mainly because this might be a fleeting trend. The Harley brand continues to focus on the longer term, which is why the company has lowered its shipment outlook twice in two years, in order to keep supply in line with demand and keep inventory levels in check.

Fact is, Harley is facing pressure due to a stronger dollar, which is expected to drag down full year motorcycle segment revenues by approximately 4.25 percentage points, and gross margins by 0.75%, taking into account the natural hedges in place for the motorcycle maker. Negative currency translations are hampering the top line, and a stronger domestic currency has played into the hands of Harley’s competition, particularly in markets where customers are more price-sensitive.

But what also remains a fact is that Harley-Davidson has been able to maintain solid operating performance despite the falling production numbers. The company has a relatively high degree of operating leverage, and despite lower wholesale shipments, gross margins stood at near record levels, i.e. at 39.2%, in Q2. This was mainly due to strong manufacturing productivity. Harley continues to expect operating margins to range between 18-19% this year, compared to 18% in 2014. This, despite the pressure of depreciating foreign currencies and lower motorcycle volume sales. Moving into the second half, trends such as competitive pricing and the strong dollar might become less prominent features in Harley’s financial results, paving the way for growth, especially as the core operating performance remains strong.

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Notes:
  1. Harley-Davidson earnings transcript []