What Can We Learn From Harley-Davidson’s First Half?

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HOG: Harley-Davidson logo
HOG
Harley-Davidson

The stronger U.S. dollar and stiff competition from domestic as well as foreign competitors had Harley-Davidson (NYSE:HOG) report less than expected retail shipments last year, and lower its guidance. This hurt investor confidence and Harley’s stock lost one-third of its value in 2015. However, this year has been fairly positive for the company.

See our full analysis for Harley-Davidson

Although retail sales of motorcycles are down 0.6% year-over-year through June, motorcycle and related parts revenue is up 2.7%, flat to up against consensus estimates in both Q1 and Q2. In the face of a shrinking core customer base of Baby Boomers, Harley has looked to boost sales in non-traditional categories such as outreach customers, comprising young adults, women, African Americans, and Hispanics, and in international markets. This has been a positive for the company this year. Despite the consistently strong U.S. dollar, which has handed a pricing advantage to foreign competitors, such as the Europeans and the Japanese, international retail sales grew 4.4% year-over-year for the company through the first half, boosted by a solid 8.4% growth in the Europe, Middle East, and Africa region. This reflects the impact of the strong brand that Harley is, and the impact of the company’s push for more reach and availability in markets outside the U.S. The company has added 11 dealerships in international markets through the first half, and cumulatively aims to add 150-200 international dealerships by 2020.

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But what we wish to focus on in this analysis is the performance of Harley-Davidson in its home market, the U.S., which forms a massive ~70% of the top line, and almost two-thirds of the net motorcycle shipments. As aforementioned, Harley has been losing out to competition in the last year or two due to the aggressive discounting by its competitors on account of the stronger U.S. dollar. Harley has looked to keep supply in line with demand to protect its premium brand image, and chosen not to lower its model prices to an extent that rivals its competition. This has definitely cost the company sales, but the strategy for Harley has always been to first maintain its iconic brand and develop the sport of motorcycling.

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Through the first half, although Harley has reported a decline in retail sales in the U.S., prompting the company to lower its year-end shipment guidance, the company has grown market share in the country — and this is a major positive. The U.S. heavyweight motorcycle market (601+ cc) was expected to shrink in the first half of this year, as it was lapping the positive growth of 7.6% in the year-ago period, driven by the onset of aggressive competitive discounting, and due to weak anticipated sales in oil-dependent areas. However, the market was down by more than expected, especially in Q2. Harley’s decline was lower than that of the overall market’s, and this reflects the core strength in Harley’s business. The incremental growth in the U.S. last year was due to the aggressive discounting by competitors, and the de-growth this year has also been due to lower sales for the competition. Harley grew its market share in the U.S. to 49.5% in Q2, up 2 percentage points year-over-year.

Despite the positives of gaining market share in the U.S. and growth in international markets, the problem for Harley remains the slowing demand in the domestic market. Softer demand in the U.S. is what prompted the company to lower its full-year guidance on motorcycle shipments to 264,000-269,000 units, down 1% to up 1% from 2015 levels, from the earlier estimate of 269,000-274,000 shipments. Harley will now hope for demand to rise, and for this to happen, the company is doing its part. 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 is training riders 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 trained ~25% more riders in 2015, 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.

The other positive for Harley so far this year has been the 7.4% year-over-year growth in diluted EPS. Cash dividends per common share have grown 13% year-over-year through the first half, in line with the growth seen last year, too. Harley has faced headwinds in the U.S. due to slowing demand, but the continual growth in dividends should boost investor confidence. After the decline in 2015, the company’s stock is up ~20% year-to-date.

Have more questions on Harley-Davidson? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Harley-Davidson

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