Harley Davidson Earnings Could See Slower Growth

HOG: Harley-Davidson logo

Harley-Davidson (NYSE:HOG) is scheduled to report its earnings for the second quarter on August 1. The company manufactures heavyweight motorcycles and related parts, and also provides wholesale and retail financing and insurance programs to dealers and customers. As of Q1 2012, around two-thirds of its motorcycles were delivered in the US, with the remaining one-third delivered internationally.

Harley-Davidson reported strong revenue and operating income growth in the previous quarter driven by strong performance of the motorcycles division. It also increased its full-year guidance for total motorcycle shipments and revenues, based on revised consumer demand estimates. The company has posted impressive increases in revenues in the past four quarters (y-o-y), and will be looking to continue this trend.

We currently have a Trefis price estimate of $58.60, which is about 32% above the market price.

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Factors Affecting Upward Trend

Reasons cited by management for the strong Q1 results include lower restructuring costs, improving macroeconomic conditions, and, most importantly, unusually mild weather during the early months of the year, which encouraged a number of customers to purchase the vehicles earlier than expected (most motorcycle purchases are traditionally made during spring season). We expect this to have had a negative effect on sales this quarter. Second, consumer confidence was far higher in the first quarter when the economy seemed to be back on track. However, it now looks like the road to recovery will take longer than initially expected, and we expect this to have a negative effect on consumer spending on luxury goods such as motorcycles. The company also expects expenses of around $50-60 million over the course of this year for the restructuring process, and this has the potential to affect reported margins this quarter.

Long Term Outlook

Long term, we expect Harley-Davidson to continue to capitalize on its cult brand status, although changing demographics may have a negative effect. The company’s core customer base consists of 40-49 year old males, a segment of the population which is shrinking. As these people move into the 50-59 year old segment, statistics indicate that there is less of a chance that they will replace their bikes. The company is transforming its brand, in an attempt to gain market share in new consumer segments, expanding international operations, tweaking its manufacturing processes to increase efficiency, and aggressively cutting costs to improve margins.

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