Harley-Davidson’s Sluggish US Sales Offset Solid International Growth

by Trefis Team
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Harley-Davidson (NYSE:HOG) reported its third quarter earnings on October 23. The motorcycle manufacturer announced the launch of the ERP system in York, its largest assembly plant, marking a major milestone for its 5-year long restructuring program. Worldwide retail sales volumes declined 1.3% with robust growth in the international segment being completely offset by a decline in the U.S. Nevertheless, shares of the company rose over 6% following the earnings release boosted by strong results in international markets, continued improvement in gross margins, and the expected launch of a completely revamped product line by 2015.

See our full analysis for Harley-Davidson

Retail sales volumes in focus

Harley-Davidson reported a 5.2% y-o-y retail sales volume decline in the United States. This was primarily due to a steep decline in U.S. retail inventory. The company attributed this to two factors: a decrease in production due to the ERP system implementation at the York facility, and a one-month delay in the introduction of the 2013 product line.

On the other hand, the international segment continued its strong upward trend, growing 7.6% on a y-o-y basis. Retail sales in Latin America grew an impressive 32%, driven by strong growth in Brazil and Mexico. Sales in Asia grew 9.8%, and the Europe, Middle East and Africa segment was up 1.8%. Sales in Europe stayed relatively flat compared to the same quarter prior year, which is a positive sign considering the deteriorating economic environment in the region. We expect sales growth in the non-US & Europe segment to continue driven by growing demand in emerging markets in Latin America and Asia.

Overall, the net decline in worldwide retail sales led to a 12% decline in revenues (excluding financial services) this quarter. A similar decline is expected next quarter due to planned production decreases. However, the company expects a substantial increase in production and sales following the implementation of production capacity improvements at York and other plants. This is expected to complete by early next year and could lead to a significant upside to U.S. and international retail sales going forward. Further, management has stood by its earlier guidance of a 5-7% increase in worldwide retail sales for 2012.

2015 product line could fend off threat from rivals

Another important factor impacting Harley’s performance is its ability to retain market share in the U.S. under increased pressure from competitors. Polaris, for example, has emerged as a formidable rival, gaining substantial market share in U.S. heavyweight motorcycles over the past few years through aggressive investment in its recently acquired motorcycle brands, Victory and Indian.

The 2015 product line is expected to be a game changer for the company. These upcoming models have been in the pipeline since 2009-10 and, according to management, are based on new designs and innovations. This could help the company retain or even grow its market share.

Harley-Davidson’s U.S. market share for the quarter stood at around 57.7%, down by 0.2% y-o-y. Market share for the year is around 56.5%, which is up 1.5% compared to last year. We project market share to increase slightly going forward, reaching almost 57% by the end of our forecast period.

Continued expansion of gross margins

The company now expects restructuring expenses for this year to be between $35-$45 million. This is $5 million lower than last quarter estimates. Restructuring spending for the quarter stood at $9.2 million, compared to $12.4 million last year. The restructuring program is expected to create annual savings in the range of $315-$335 million upon completion.

Gross margins expanded by 100 basis points to 34.7% boosted by lower restructuring spending, higher pricing of the 2013 product line and lower raw material costs. The company’s management expects full year gross margins in the range of 34.75%-35.75%. We expect annual gross margins for the motorcycle segment to continue growing as the company benefits from restructuring cost savings and flexibility improvements, reaching 36.3% by the end of our forecast period.

We will be updating our $56 price estimate for Harley-Davidson based on the earnings release.

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