The Year That Was: Harley-Davidson

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Harley-Davidson

Harley-Davidson (NYSE:HOG) has had a tough 2016, reporting a decline in almost all key metrics except the top line. Worldwide retail sales of the iconic motorcycle maker were down 1.9% year-over-year through September. This is mainly as the company is heavily reliant on its domestic market, which is witnessing a subdued demand for heavyweight motorcycles (601+cc) this year. The U.S. alone forms almost two-thirds of the net shipments for Harley, and the shrinking of the market hasn’t helped the company, which was struggling all through last year to keep up with the European and Japanese competitors who gained from the rising U.S. dollar. The U.S. heavyweight motorcycle market (601+ cc) was expected to shrink this year, as it was lapping the positive growth in the year-ago period, driven by the onset of aggressive competitive discounting during the first half, and due to weak anticipated sales in oil-dependent areas. However, the market was down by more than expected, especially in Q2.

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The U.S. heavyweight motorcycle market hasn’t filled up to the peak levels of 2005-2006, and it might not in the near future as well. This is primarily as the millennials are typically more price-conscious, especially after the recession, and are looking to hold off on making discretionary expenditures, which includes the luxury heavyweight motorcycles. The good news for Harley is that it has been able to increase its market share, as its retail sales in the U.S. declined by a smaller percentage than the overall market through the first nine months of the year. 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.

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Harley has readjusted its full-year outlook on motorcycle shipments in view of the slowdown in demand in the U.S. To avoid inventory build up, Harley expects to ship 264,000-269,000 bikes in 2016, down from the earlier estimate of 269,000-274,000 bikes at the start of the year. This amounts to only -1% to 1% growth over 2015 levels. According to a survey by Robert W. Baird & Co., 35% of Harley dealers in September said that the inventory of motorcycles was too high.

While 2016 may seem grim due to the decline in retail sales, especially in the home market, there are some major positives for Harley-Davidson going into 2017:

  • International Growth: With slowing activity in the U.S., Harley has looked to ramp up international growth to boost its financials. Markets outside the U.S. form approximately 30% of the company’s top line, which remained flat through the first three quarters of 2016 (includes only motorcycles and related products revenue). While Harley’s retail sales declined 1.9% year-over-year through September, as aforementioned, international sales were up 3.3% year-over-year. Retail sales grew 6.6% in the EMEA region through Q3, and by 6.3% in Canada.The company is focusing on higher international sales growth than U.S. growth. Harley added 9 international dealerships in Q3 to increase its reach and availability, after adding 11 in the first half of the year. Their aim is to add 150-200 international dealerships by 2020.
  • Re-organization: Harley is looking to reorganize and reduce its workforce to streamline functions, for which it will incur expenses of approximately $20 million to $25 million in Q4. The company previously announced that it was laying off casual workers in its U.S. plants. This step now is in accordance with the trend of softer customer demand, which is expected to lower production levels at the iconic motorcycle maker’s facilities. A trimmer business might help the company boost its profitability moving into the new year.

Harley’s stock has grown over 28% year-to-date, and there is reason to believe that the company’s underlying business remains strong. However, the caveat remains the slow demand for the motorcycle maker in the U.S., which forms approximately 70% of the top line.

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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