Pricing Disadvantage Due To Unfavorable Currency Trends To Remain The Biggest Story Of Harley-Davidson’s 2015

As Harley-Davidson (NYSE:HOG) readies the announcement of Q4 and full year results on January 28, we take a look at how the fourth quarter could have panned out for the Milwaukee-based motorcycle manufacturer. Nine-month revenue from motorcycles for the company was down 6.2% year-over-year to $3.38 billion, on a 2.3% fall in motorcycle shipments. Investors haven’t been too kind, with the company lowering its full-year shipment guidance twice in the last three quarters. The stock is down over 40% in the last 52 weeks. At the start of 2015, Harley had forecast 4-6% more motorcycle shipments for the year compared to 2014, but has since lowered the estimate to flat to 2% fewer motorcycle shipments. Harley expects to have shipped 47,000-52,000 motorcycles in the last quarter, flat to up 10% year-over-year.

See our full analysis for Harley-Davidson

2015 can go down as a transitional year for Harley, which has seen subdued demand in its home market, as well as international markets. The primary reason for this is believed to be the continually strengthening U.S. dollar, which hurt Harley all through the year, while handing a pricing advantage to its Japanese and European competitors. Millennials are typically more price conscious, and the loss in price competitiveness for Harley shows through its results for the first three quarters. Shipments were down 2.3% in both the U.S. and international markets alike, and considering that Harley has looked to keep model pricing up, to protect its profitability and premium brand image, shipments could have taken yet another hit in Q4, to cap off a forgettable year for the company in terms of sales volume.

What Harley could do to counter the falling sales is reduce its model prices, and risk its margins. Much of the rest of the industry, such as Polaris, maker of the Indian and Victory motorcycles, has resorted to discounting. However, this has dragged down gross margins for these companies. Harley’s operating margins have remained strong at 20% (2014 was 21%) through September 2015, despite the 5% fall in motorcycle and related products revenue.

So instead of reducing model prices, what could the company do to boost it motorcycle sales? Because the demand is definitely there. Registrations of heavyweight motorcycles (601+ cc) in the U.S. and Europe rose 6.6% and 10.2% year-over-year, respectively, through the first nine months of the year. In this case, the company is hoping to stir customer demand for its lineup by pumping more money in product development and marketing, and banking on models such as the Street 500, which are relatively cheaper, to draw-in new customers. Harley is now planning to increase investment in customer-facing marketing this 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.

Seeing how international growth also lags, Harley is looking 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.

Taking steps to encourage the sport of motorcycling, increasing customer-facing marketing, and international presence through more dealerships, could help Harley-Davidson recover some of its lost sales. The Street 500 and 750 have been a popular addition to the company’s portfolio, and are expected to constitute 7-8% of the net shipments in their first full year in 2015. Despite a 5% increase in retail sales in Asia-Pacific during Q3, sales were somewhat hindered by the lack of selling Street motorcycles for up to six weeks during the quarter, followed by a voluntary recall initiated in July. Incremental sales from the Street bikes should help boost Harley’s Q4 results, especially as these cheaper and relatively lighter motorcycles are known to draw-in customers new to the Harley brand.

However, despite Harley’s optimistic future plans and strong expected growth for the Street duo, negative currency translations are expected to remain the main story of Q4 and the full year. The company’s full year motorcycle segment revenue is expected to be adversely impacted by approximately 4-4.5% due to negative currency translations, considering one-third the net shipments are to markets outside the U.S.

See the links below for more information and analysis:

• Harley-Davidson earnings review: it’s not just a macro headwind anymore, core performance needs to pick up
• Harley-Davidson earnings preview: turnaround in the latter half of the year?
• Not as bad as it seems for Harley-Davidson
• Could delaying the launch of project LiveWire cost Harley-Davidson?
• The strong U.S. dollar is weighing on Harley-Davidson’s financials
• Strategic pricing by competitors and unfavorable currency impact hurt Harley-Davidson’s q1 results
• Trefis analysis: Harley-Davidson U.S. Motorcycle Revenues
• Trefis analysis: Harley-Davidson Europe Motorcycles Revenues

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1. Harley-Davidson earnings transcript [↩]