Harley-Davidson: Where Will Growth Come From?

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Harley-Davidson

Harley-Davidson (NYSE:HOG) had a rough last year in the domestic market. Worldwide retail sales fell 1.4% year-over-year through the first half of the year, which was, as expected, impacted by the 2.5% fall in international markets.  This weakness resulted from the increased volatility in some of the emerging markets, and a tough pricing environment in other markets, due to the stronger dollar. But what has also been a downer for Harley, is the 0.7% fall in retail sales in the U.S., which forms approximately two-thirds of net shipments for the company.  And which is why, a weak performance in the domestic market is dragging down the overall financials.

Our current price estimate for Harley-Davidson stands at $64, which is above the current market price.

See our full analysis for Harley-Davidson

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The U.S. economy had picked up in the second quarter of last year, following a rough winter, with the job market doing well and the housing sector also registering solid growth. Oil prices reached historical lows, which can only be a positive for the heavyweight motorcycle market, as customers were flush with cash. However, while the overall U.S. heavyweight motorcycle market witnessed growth, Harley somewhat faltered.  There were a number of reasons why that happened — lesser availability of the much anticipated Street 500 and Street 750, absence of the Road Glide through the first half of the year, or maybe this generation is simply not buying as many Harleys?

Harley-davidson

This year, the U.S. heavyweight motorcycle market grew 7.5% through June, but Harley’s retail sales in the country fell 0.7%, as aforementioned. 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 has risen this year against certain crucial currencies such as the euro, the Japanese yen, the Russian ruble, and the Australian dollar. With the euro still forecast to hit parity with the U.S. dollar this year, pricing could continue to be an issue for Harley, especially as the company has remained committed to its premium brand image and has not opted to actively participate in the pricing war. This has cost Harley market share, and could continue to do so.

And now with China going through a slowdown, concerns over the contagion effect of this on the rest of the world, including the U.S., could also impact sales of heavyweight motorcycles. This means that Harley, which is already losing share in the domestic market, could be hit by an overall slowdown in demand for heavyweight motorcycles, considering how these heavier motorcycles (601+cc) are typically luxury buys, and with a looming fear of a possible economic slowdown in the U.S., customers might look to hold off on making such discretionary purchases.

Despite the 4.7% decline in wholesale motorcycle shipments through the first half of the year, 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. Harley 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, so the year-over-year growth in the second half could be strong. However, the increased volatility in the U.S. might deter growth for the company.

Harley has released its new 2016 model year motorcycles, and along with the Street pair, these bikes could make a difference. Sales for the Street 500 and 750 grew by double-digits in the last quarter. 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.

However, a majority of Harley’s sales still come from the core customer base of middle-aged Caucasian males. Sales to the outreach customer base comprising young adults, women, African-Americans, and Hispanics have increased by more than that to the core customer base, but given the aging core customer base and rough pricing environment for Harley, growth might be a little tough.

The main question remains whether Harley can meet its motorcycle shipment targets this year.

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Notes:
  1. Harley-Davidson earnings transcript []