Harley-Davidson Earnings Review: It’s Not Just A Macro Headwind Anymore, Core Performance Needs To Pick Up

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HOG: Harley-Davidson logo
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Harley-Davidson

It’s no longer just the ‘near-term’ currency headwind, effective pricing by the competition, and macroeconomic headwinds in overseas markets, that are denting sales of the iconic motorcycle maker Harley-Davidson (NYSE:HOG). The company has admitted that it needs to step up its game, increase brand awareness, and spend more on R&D and marketing, to bring-in more customers to the Harley brand. Basically, hogs need more now than just to rely on their strong cult following, after years and years, to ramp up sales.

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Retail sales of motorcycles were down 1.4% year-over-year in Q3, on a 2.5% fall in sales in the U.S. alone. [1] Although international sales rose by almost 1%, because U.S. sales constitute approximately two-thirds the net shipments for Harley, performance in the home market has a significant impact on the overall results. The company expected to ship 276,000-281,000 motorcycles to dealers and distributors this year, up 2-4% year-over-year, despite wholesale shipments declining almost 5% through the first half of the year. With the disappointing sales results in Q3, Harley has now re-adjusted its estimates for the full-year wholesale shipments, and now expects to ship 265,000-270,000 units, flat to down 2% compared to a year ago. The main focus for the company remains keeping supply in line with demand, and not give out excessive price discounts, in a bid to protect its premium brand image.

So What Steps Is Harley Taking To Try And Recuperate?

Given that registrations of heavyweight motorcycles (601+ cc) in the U.S. rose 6.5% year-over-year through the first nine months of the year, and economic conditions in the domestic market were relatively favorable, with a solid 3.9% GDP growth in Q2, Harley’s decline in retail sales reflects how its stronghold in this market is waning. And this might not only be due to the stronger dollar — which might not be a long-term trend. Harley has lost 3.7 percentage points of market share in the U.S., partly due to the aggressive model discounts offered by its European, Japanese, and other foreign counterparts, on the back of a continually strong dollar. But in addition, Harley also needs to buck up on a core level.

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, and evolving preferences of customers, Harley has somewhat lost out on the demand for heavyweight motorcycles. The millennial customers are typically more price-conscious, especially after the recession, and they might look to think twice or maybe even put off discretionary expenditures — which includes the heavier and premium motorcycles. 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 in the last couple of years, and are expected to follow the trend this year as well, but their percentage composition still remains much lesser than that of the core customers. The hole made by the contraction of the large core customer base might just be too big to be filled by the addition of the outreach customers.

Harley is now planning to increase investment in customer-facing marketing next year by approximately 65% above 2015 levels, and increase investment in new product development by approximately 35% from 2015 levels. [2] In dollar terms, this represents a $70 million increase from 2015 levels in investment by Harley in a bid to raise brand awareness, grow ridership in the domestic market, and increase reach and availability.

Moving away from the domestic market, Harley is also planning to grow its international dealer network by 150 to 200 new dealerships by 2020, which includes development of new retail formats for urban centers and tastes, beyond traditional dealerships. Basically, Harley is aiming to evolve with the shifting market trends and is making more of an effort to build products that resonate with customers in today’s world.

Harley’s stock has taken a substantial hit, and is down 16% since the announcement of results to its two-year low. The company has yet again reduced its shipment guidance, for the third time in just over a year. While the stronger dollar remains a headwind, dragging down the top line by over 5 percentage points this quarter, the core performance of the motorcycle manufacturer has also remained weak all through the year. Now, with the plan of increased investments in product development and marketing, Harley might be looking to turn over a new leaf, soon.

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Notes:
  1. Harley-Davidson press release []
  2. Harley-Davidson earnings transcript []