Harley-Davidson: Tough Times Ahead In The Domestic Market?

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Harley-Davidson

Harley-Davidson (NYSE:HOG) lowered its guidance, after Q2, of shipping 269,000-274,000 motorcycles in 2016 to 264,000-269,000 units, down 1% to up 1% from 2015 levels, hurt by softer U.S. demand, which typically accounts for two-thirds the net shipments. The U.S. forms a massive ~70% of Harley’s top line, and the company lowered its full-year guidance despite a 4.4% growth in international retail sales through the first half due to a 5.2% year-over-year drop in the U.S. retails — a decline worse than expected.

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The silver lining for Harley here is that it managed to gain market share in the U.S. 601+cc heavyweight motorcycle market in Q2, as the overall market declined by a larger 8.6%. This growth for Harley mainly came on the back of the expected shrinking in the U.S. heavyweight motorcycle market, which 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. 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’s performance has remained somewhat consistent, so not much can be made out of the increase in market share, one would think.

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Another reason to enforce this is the continual rise in Polaris and its motorcycle division comprising the Indian and Victory brands. In Q2, Polaris’ motorcycle sales grew 23% year-over-year and gross profit increased by 63%. Although Harley’s motorcycle and related parts revenue is more than 7x that of Polaris’, what is notable here is the trend. While the overall motorcycle industry retail sales for 901+cc were down mid-single digit percent in the second quarter, North American consumer retail demand for the Polaris motorcycle segment was up mid-teens percent. This means that Polaris is growing much more than Harley. This, however, isn’t surprising, since Polaris is much smaller and Harley already has a massive ~50% market share to protect. However, the growth levels that Polaris is managing are more than commendable and could hurt Harley’s market share — which is already under pressure from international manufacturers. While Harley lowered its full-year shipment guidance on tepid U.S. sales, Polaris announced that it expects its motorcycle sales to be up by a double-digit percentage this year.

On the back of the reduced shipment guidance, Harley is now laying off 200 or so workers across its U.S. plants. These layoffs will take place in the company’s assembly plant in York, Pennsylvania, and the manufacturing plants in Menomonee Falls, and Tomahawk. This number represents around 3.5% of the 5,700 workers employed by Harley in its motorcycle segment till the end of last year. The company has always looked to keep supply in line with demand, and managed its inventory well in times of weaker demand. This step now is also in accordance with the trend of softer customer demand, which is expected to lower production levels at the iconic motorcycle maker’s facilities. The question remains if this is Harley being at the top of its game and eliminating extra costs while production slows, or if this reflects signs of tougher times to come.

Motorcycle demand in the U.S. has slowed, meaning that companies will now look for growth in terms of increasing market share and incentives. Harley already faces stiff competition from the European and Japanese manufacturers, which have benefited recently from the stronger U.S. dollar, and domestic competition in the face of Polaris. This could pressure Harley’s operations and deter it from even reaching its revised target of 264,000-269,000 motorcycle shipments this year.

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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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