The Year That Was: Harley-Davidson

December 28th, 2015 by Trefis Team

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Harley-Davidson

Saying that 2015 has been a tough year for Harley-Davidson (NYSE:HOG) would be an understatement. The stock is down almost 30% year-to-date as the iconic American motorcycle maker suffered a 2.4% decline in wholesale shipments through the first three quarters. The company has, in fact, lowered its full-year shipment guidance twice in the last three quarters. From the first estimate of shipping 4-6% more motorcycles this year compared to 2014, the estimate is now down to shipping flat to 2% fewer motorcycles.

Our current price estimate for Harley-Davidson stands at $57, which is above the current market price.

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Stiff competition from foreign manufacturers, buoyed by the stronger U.S. dollar throughout the year, didn’t help Harley’s case. Moreover, the motorcycle maker looked to protect its premium brand image, resulting in no serious discounting on model prices to compete with foreign counterparts. Supply was kept in line with the demand, and with the demand remaining low for Harley, wholesale shipment levels suffered throughout the year — not only in the U.S., but also in international markets. This is evident from the motorcycle registration figures for the U.S. and Europe, which together form almost half of Harley’s value, as per our estimates. Harley’s home market forms approximately two-thirds the net shipments, but the stronger dollar allowed European and Japanese motorcycle makers to lower their model prices in the U.S., cutting into Harley’s market share. While motorcycle registrations in the country rose 6.6% through September, Harley’s retail sales were down 1.3%.

Aggressive discounting by competitors, and Harley’s higher model prices to counter the impact of the stronger dollar, had a more adverse impact on the Milwaukee-based manufacturer’s sales in Europe. Retail sales were down 5% through the first three quarters in a market which grew overall by a strong 10%.

Q4 is not expected to be any different. Even if shipment levels fall within Harley’s outlook, that’s still a de-growth of 2% for the full year, or at best flat volume sales.

…But What Lies Ahead?

With product lines such as the Project Rushmore bikes and forthcoming Project LiveWire, Harley has shown that it remains committed to evolving with the ever-so-changing market trends. Its biggest customer base comprised of Baby Boomers is now aging, so the need of the hour is to focus on new potential customers.

Need To Get More Outreach Customers-

Harley has consistently emphasized increasing its customer base, seeing how its core base is thinning. The company 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.^[1] 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. 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 four years for Harley, and are expected to follow that trend this year as well, but their percentage composition still remains much less than that of the core customers.

Need To Encourage The Sport Of Motorcycling-

The manufacturer is looking to boost sales by making it easier for prospective buyers to learn riding, i.e. helping in growing the sport of motorcycling. Harley has trained more than 220,000 riders worldwide since 2010 through its Harley-Davidson Riding Academy. Dealerships are offering the opportunity to learn to ride on a Street 500, and along with the launch of U.S. Military Rider Training initiative, the company has trained 25% more riders this year, compared to 2014. The goal now is to increase the number of riders trained in a year to over 100,000 globally by the end of the decade, with the majority in the U.S. Basically, Harley is hoping to increase its sales by helping in creating more demand for heavyweight motorcycles.

Need To Penetrate International Markets-

Growing disposable incomes and urbanization is supporting growth of the heavyweight motorcycle market in emerging markets. With such growth potential, Harley will need to increase its reach and availability to further penetrate international markets. In the last quarter alone, the company put up 14 dealerships internationally, a rise of 2% in its overall international dealerships. Over the next five years, Harley is looking to open 150 to 200 new dealerships internationally, representing a 20% to 25% increase in its international dealerships.

The dollar might continue to get stronger going into 2016, and the heightened competitive environment might force Harley into entering the pricing war — but that will risk its operating profit margins, which have remained strong at 20% (2014 was 21%) through September, despite the 5% fall in motorcycle and related products revenues. Harley believes that its increased spending plans will help in bringing in more customers going forward. Of course, the efforts might not bear fruits immediately. It might take a couple of years or more for Harley to return to solid growth in both its home and international markets, probably coinciding with the launch of its electric motorcycle, Project LiveWire.

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Notes:

Harley-Davidson earnings transcript [↩]

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