Harley-Davidson’s Profitability Remains Under Threat Due To Trade Tariffs, Unveils New Plan For Growth 

by Trefis Team
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Harley-Davidson (NYSE: HOG) released its second-quarter results and conducted a conference call with analysts on 24th July 2018. The company topped earnings and revenue estimates and posted an EPS (Non-GAAP) of $1.52, almost 3% higher compared to the same period last year. The company’s revenue, however, edged lower by 3% year-over-year (y-o-y) and was reported at $1.53 billion due to continued lower sales volume. The company’s bottom line, fortunately, benefitted from a favorable impact of the recently imposed U.S. tax reform.

Harley-Davidson’s top line continues to remain distressed due to the prevalent weakness in the U.S. motorcycle market for the company’s product offering as a result of its aging population. As per the latest report released by the company, Harley’s retail motorcycle sales in the U.S. were down by 6.4% y-o-y. Increased international sales provided some relief to this decline as retail sales volume in the international markets increased by 0.7% compared to the same period last year. The company experienced the greatest volume increase in its international volumes in its Europe, Middle East, and African (EMEA) and Latin American region, which currently remains under the threat of increased trade tariffs, broadly in the European Union (EU).

The most vital update provided by the company during its second-quarter earnings release has been regarding the downgrade of its profit outlook for full-year 2018. Harley-Davidson now expects its operating margin to range between 9%-10% in comparison to its initial guidance of 9.5%-10.5%. The lower guidance directly reflects the negative impact of the recently imposed trade tariffs in the U.S. and Europe. Although the company had earlier announced its decision to move a portion of their production facilities overseas, from the U.S., to avoid the recently imposed European Union (EU) trade tariffs, yet the company expects an additional $45 million to $55 million cost headwind for the year owing to tariffs. These additional costs pertain to both, the metal tariffs in the U.S. and the import tariffs at the EU. Furthermore, in case the company is unable to mitigate the impact of the tariffs by the end of 2018, the company expects an incremental annual cost headwind of about $90 million to $100 million hitting the company’s overall profitability.

However, lower tax rates have had a favorable impact on the company’s bottom line in the recent quarters. Additionally, the company has outlined a new strategic plan which is expected to accelerate the company’s growth in the coming years. Harley-Davidson has scheduled July 30th to share detailed information about this strategy to the market. Thus, the earnings beat coupled with a strategic ambition to deliver growth has boosted investor confidence in the company’s stock. We have kept our initial estimates for the company unchanged based on the company’s latest results. You can modify these assumptions and arrive at your own fair price estimate for the company by using our interactive dashboard: Harley-Davidson’s Q2 Results Imply Relatively Flat Post Earnings Price Estimate.


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