Two weeks ago CM wrote, “Harley-Davidson (HOG) is the classic case of a divine franchise. While still the world’s largest maker of cruiser motorcycles, it is being swamped by new competition. HOG’s EBIT performance has slid for the last 4 years and is even below the level of 2012…Sadly for HOG, 1Q 2018 has revealed even worse numbers. Global unit sales were 7.2% down on the previous year and 12% down at home. Japan and Australia were soft. Looking at the strategy it looks like throwing spaghetti at a wall and hoping it sticks.”
There is a touch of irony in that Harley was starting to do better in EMEA markets in Q1 2018 (+6.8%). Now EU tariffs are likely to sting the maker some $2,200 a unit average on motorcycles sold there. The company is seeking to bypass this in the short term by sucking up the cost of the tariff to help dealers before arranging (one imagines) for final knock down kit assembly outside the USA. A downturn in EMEA is a nightmare that exacerbates the weakness elsewhere around the globe. H-D Japan shifted 16,000 units at the peak. It will be lucky to do 9,500 this year. The business has lost its compass.
At the moment it seems the brand is stuck in an echo chamber. Harley announced at the start of the year it was closing a Kansas City plant for a net loss of 350 jobs. The rot has been in since before the tariffs. Trump lambasted Harley Davidson on Twitter for waving the white flag too soon but it is probably more evidence of the scatterbrain negative spiral approach to dealing with the predicament it finds itself in. Harley may want half of sales to come from overseas markets but it may not come through growth outside of America, rather a decline from within.
In closing Harley’s are a cult. There aren’t many brands where customers are prepared tattoo it to their bodies. Sadly this mentality means that Harley is still committed to conduct $700mn in buybacks which smacks of denial for a company seeing EBIT dwindle at 40% below peak. Then again, we shouldn’t be surprised when buybacks have made up 72% of all S&P500 earnings growth since 2012!! A recent survey that showed 75% of asset managers have not experienced the tech bubble collapse in 2000. Sure it is nothing to be worried about! Experience is a hard teacher. You get the test first and the lesson afterwards!