Harley-Davidson Earnings: U.S. Growth And Margin Support Are Key

Harley-Davidson (NYSE:HOG) is scheduled to announce its second quarter earnings on July 25. Shares of the company have traded in a narrow range in the last few months, mainly because Harley has been reporting numbers close to its guidance. Besides selling the iconic motorcycles, the company also offers its brand merchandise and provides wholesale/retail financing and insurance programs to dealers and customers.

The U.S. accounts for about two-thirds of its total motorcycle sales. Harley predicts its sales volume to grow 10-18% in the first half of 2013, helped by the new surge in manufacturing capability at its York facility, launched at the start of the year. ^[1] Harley’s American numbers have rebounded post the 2008 crash, but it will be difficult for the company to clock the kind of numbers it once boasted. This is mainly because of changing demographics, which don’t suit the company. Most of Harley’s customers are men in their 40s and 50s, a segment of the population which is declining.

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Harley has been trying to target other demographic groups such as women and men outside the aforementioned age bracket, but with mixed success. Despite selling 5% more motorcycles in 2012, the company sold only 160,000 bikes in the U.S. compared to more than 273,000 back in 2006. ^[2] The disparity in the two numbers suggests that there is a potential to grow in the U.S. from here on, but also that the current demographics don’t offer the same opportunity as it once existed.

Therefore, it doesn’t surprise us to see the company pouring in investments in the emerging markets for further growth. International markets offer tremendous potential; however, growth will be slow and steady. Setting up plants to manufacture products locally and building new motorcycles to cater to the needs of the local population takes a significant amount of time. Moreover, for a company like Harley Davidson to post significant volumes in emerging markets requires a good proportion of population with high disposable incomes. Countries like India and the Philippines offer significant upside, but the volumes will remain a tiny fraction of the American sales for the foreseeable future.

The company is doing well though. For instance, Asia Pacific and Latin America combined accounted for 13.8% of total shipment volumes in 2012, up from 12.2% in 2011. It rose further to 15.3% in the first quarter of 2013. ^[1]

Back in 2009, the company had set a goal of adding 100 to 150 new international dealerships within the next five years. By the end of 2012, it had opened 93 new dealerships. As the proportion of sales from the developing markets increases, their contribution on the income statement will be more evident. In total, Harley estimates it will sell 259,000 to 264,000 motorcycles in 2013.

Stable Margins

Gross margins have been improving consistently thanks to the company’s ongoing restructuring process. They widened 80 basis points to 36.7% in the first quarter. The company expects gross margins of 35.25% to 36.25% for the full year.

Harley is nearing the end of a comprehensive five-year long restructuring process and will hope to see substantial cost savings from its efforts going forward. The restructuring process began in 2009, and is expected to reduce manufacturing costs, improve efficiencies and facilitate far more flexibility in labor requirements. Back in 2009, the gross margins were in the region of 32-33%, now they are consistently exceeding 35%.

We have a $60 price estimate for Harley-Davidson, which is about 5% above the current market price.

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1. HOG 10-Q [↩] [↩]
2. HOG 10-k [↩]