Harley-Davidson Earnings Preview: Turnaround In The Latter Half Of The Year?

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Harley-Davidson (NYSE:HOG) laid out an optimistic estimate of global motorcycle shipments for the second half of the year, and, the announcement of Q3 results on October 20 will be the moment of truth for the Milwaukee-based manufacturer. The results for the first half reflected slight weakness for the company, with motorcycles and related products revenues down ~7% year-over-year, on a 4.7% decline in wholesale motorcycle shipments. However, the iconic motorcycle maker stuck to its year-end shipment guidance of 276,000-281,000 motorcycles, up 2-4% year-over-year. This also meant that the company expected to ship 7-10% more motorcycles to dealers and distributors this year in the next two quarters, compared to a year ago period. But the continual strengthening of the U.S. dollar, which is expected to have hindered Harley’s price competitiveness in Q3, could drag down wholesale shipments yet again.

The expected high demand for the Street 500 and 750 bikes, growth in sales to outreach customers (young adults, women, Hispanics, and African-Americans), and the fact that Harley is lapping lower shipments from the second half of last year (bad weather in the U.S. last year forced the iconic maker of heavyweight motorcycles to lower its shipment outlook then), are reasons that back Harley’s growth projections. However, a tepid macroeconomic environment in some of the emerging markets, and continual stiff competition from foreign manufacturers in the domestic market, are expected to cloud the company’s Q3 results. The quarterly results might show growth, but still lower than was expected at the start of the year.

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

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Stronger Dollar To Act As Spoilsport Again This Quarter

As the U.S. dollar continues to strengthen against foreign currencies such as the Japanese yen, the Russian ruble, and the Australian dollar, American multinationals that generate a significant portion of their revenues from overseas have struggled to mitigate the impact of unfavorable currency translations. Raising product prices to offset the negative effect of currency conversions in turn hurts competitiveness.

Stiff pricing competition has been an issue for Harley this year. In the past, some customers have had to even wait to get their hands on a Harley, as the demand for the iconic bike maker sometimes outweighed the supply. But with fiercer competition from foreign manufacturers, especially the European and Japanese companies, Harley has lost market share in the U.S. This year, the U.S. heavyweight motorcycle market grew 7.5% through June, but Harley’s retail sales in the country fell 0.7%. Harley has lost out due to the aggressive model discounts offered by its European, Japanese, and other foreign counterparts, on the back of a continually strong dollar. The manufacturer has looked to protect its premium brand image, so it might not look to give out significant discounts on its line of motorcycles anytime soon, either. So shipments might suffer this quarter due to the more attractive model prices of the competition.

Harley-davidson

Another problem that the stronger U.S. dollar is expected to pose, is the loss in revenues. One-third of the net shipments for Harley are to markets outside the U.S., and the stronger dollar could deplete the top line yet again this quarter. Negative currency translations are 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.

How Much Could The Street Demand Help Shipment Growth?

A silver lining in the Q2 results, which mostly showed decline, was the double-digit growth in sales for the Street 500 and 750. The Street pair sets itself apart from most of Harley’s lineup because sales of these bikes go down as incremental sales. These 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 (2014), 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 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. High demand for the the Street, especially as the motorcycles attract new customers, could boost the company’s net shipments.

But the question remains whether Harley can score a 7-10% year-over-year rise in wholesale shipments this quarter. While the high demand for the Street pair, more sales to outreach customers, and the newly released 2016 model year bikes should boost growth, the stronger dollar and its impact on the dynamics of the heavyweight motorcycle market could deter Harley from achieving its year-end targets. After EPS declined 8% in the first half of the year, compared to 2014 levels, analysts expect Harley to report a 14.5% year-over-year rise in EPS in Q3 ($0.79, up from $0.69 per share in Q3 2014). [2]

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Notes:
  1. Harley-Davidson earnings transcript []
  2. Anticipated Earnings Per Share Decrease for Harley-Davidson Inc (HOG) []