Harley-Davidson’s Q4 Slightly Better, But 2015 Results Still Disappointing

January 29th, 2016 by Trefis Team

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Harley-Davidson

Harley-Davidson (NYSE:HOG) has ended 2015 with slightly better results in Q4, boosting its stock by more than 9% just after the announcement of results on January 28. However, revenues and retail sales still declined in the quarter, although the rate of decline compared to the last three quarters fell. For the full year, Harley’s motorcycle segment revenue fell 4.7% year-over-year, on the back of a 1.6% decrease in motorcycle shipments.^[1] What hurt Harley the most during the past year was the pressure arising from the shift in world currencies, which were a 4.4 percentage point headwind on the top line.

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The continually strengthening U.S. dollar also handed a pricing advantage to Harley’s European and Japanese motorcycle manufacturers, and as Harley did not resort to heavy discounting of its models, the company lost market share in the U.S., as well as some international markets. The demand for heavyweight motorcycles was definitely there throughout the year in U.S. and Europe, which together form approximately 46% of the valuation for the company, as per our estimates. Registrations of heavyweight motorcycles (601+ cc) in the U.S. and Europe rose 5% and 10% year-over-year, respectively, in 2015. However, Harley’s retail sales fell 1.7% and 4% in U.S. and Europe, respectively. The price discounting by competitors weighed heavily on the company’s financials all through the year.

Could Harley’s Retail Figures Improve Going Forward?

Evidence in Q4 would suggest that Harley is heading in the right direction. Let’s take the example of the company’s sales in the U.S., crucial because the domestic market forms approximately two-thirds the net shipments. Registrations in the U.S. heavyweight motorcycle market declined 3.8% in Q4, more than the retail sales decline of 3.4% for Harley. The company managed to avoid losing any more market share in the fourth quarter, despite losing 3.7 points of share in the previous three quarters, and maintained a share of over 50% in the market. In Europe too, although retail sales declined for the full year, sales in Q4 rose 2.2%. Elsewhere, Canada retails increased 12.3%, representing the benefit from the direct distribution to independently-owned dealerships, wherein the company manages sales to dealers, marketing, dealer recruitment and retail capabilities, consumer events, and other aspects of its in-market activities.^[2]

Going forward, the company is hoping to stir customer demand for its lineup by pumping more money into 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.^[3] 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.">Harley-Davidson earnings transcript)) 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. Harley has consistently emphasized increasing its customer base, seeing how its core base is thinning. Sales to the outreach customer base comprising young adults, women, African-Americans, and Hispanics have increased at a CAGR of 7% in the last five years, and are expected to continue growing, but their percentage composition still remains much less than that of the core customers.

The manufacturer is also looking to boost sales by making it easier for prospective buyers to learn riding, i.e. helping in growing the sport of motorcycling. The goal 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. Seeing how international growth also lags, Harley is looking to increase its reach and availability to further penetrate international markets. Through 2015, the company put up 40 dealerships internationally. Over the next five years, Harley is looking to open 150 to 200 new dealerships internationally.

New models such as the Street 750 and 500 are also helping Harley draw-in new customers. 7 out of 10 Harley-Davidson Street Riders were new to the brand in the duo’s first full year in 2015, with the number rising to 9 out of 10 in EMEA, and nearly 10 out of 10 in India. Incremental sales from new models, which don’t cannibalize sales of sister models, are also expected to bode well for Harley.

The dollar has continued to rise this year, and the heightened competitive environment might force Harley into entering the pricing war — but that will risk its gross profit margin, which came in at a strong 36.8% (2014 was 36.4%) last year, despite the fall in motorcycle and related products revenues. The solid margin performance also reflects how commodity prices have remained low all through last year. Harley believes that its increased spending plans will help in bringing in more customers going forward. Of course, the efforts might not bear fruit immediately. In 2016, the company expects to ship 269,000-274,000 motorcycles, 1-3% above 2015 levels. 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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