Harley Davidson sneaks in a 50% cut to future hoping no one would spot it

Harley-Davidson’s (HOG) Q3 results continued the poor run. Declining global unit sales and 30+ day delinquencies plus annualized loss experience are at 9-year highs. The company sneakily halved its outlook on plans to cultivate its rider base which further shows the management is clueless and running out of options. It smacks of desperation.

Shares bounced almost 10% on the numbers. The funny thing is that quarter after quarter, the earnings releases read like Groundhog Day. Of any positive news, international ended up slightly positive (+2.7% for Q3, -3.9% for 9M) but were was still below expectations). Japan was cited as a positive. Then again Japan sales are 40% below the peak and have been dwindling for 10 years. Australia was ok but EU weak.

Only two thing worth paying attention to in these results.

1) Targets

For the last few years, HOG has been banging on about how it will create 2 million “new” US riders into the Harley fold by 2027. Indeed CEO Matt Levatich was adamant on the conference call that “the team is laser-focused on building riders today and preparing us and our dealers to welcome a broader array of new riders moving forward.” Typical bluster.

Levatich must be using lasers from The Dollar Store given their accuracy to date.

In Q3, HOG has shifted that language to 4m total riders in the US by 2027. It currently stands at just over 3m. So that 2m new US rider target has effectively more than halved but no explanation for the change was given which proved CM’s hunch. It was snuck in. HOG management said “we’ve done the math“. CM would argue, “what, so you hadn’t done it properly beforehand?” This only reveals the ineptitude within management ranks. Instead of investigating where the problem is needless share buybacks are continuing at a heady clip. $112.5m for the quarter.

CM has written in the past sets of results,

HOG’s 2mn new riders in the US by 2027 seems an irrelevant target. 200,000 “new” riders per year by definition should not include existing customers. Management combine new and used sales using IHS Markit Motorcycles in Operation (MIO) data, not their own! That is fine if all are new Harley customers yet the brand has some of the highest loyalty rates of any maker period. Are we to believe that long term Harley owners didn’t upgrade?

Of the 138,000 new domestic US sales in 2018, the brand assumed 278,000 new riders to the family. It also cites that 50% of that were 18-34yo (implies poorer product mix), women (smaller capacity hence poorer product mix) or ethnically diverse (irrelevant) riders. So by definition at least 140,000 sales were used bikes. Harley used bike sales in America are around 2.5x new, or 350,000 units. So assuming half were new customer sales for new bikes, 60% of used sales must have been to ‘never owned a Harley’ customers. Seems high.”

Yet Levatich continued in the conference call by saying,

guiding all our efforts is deeper analysis and insights on why people engage, participate and disengage from riding. Our advanced analytics capabilities and rider migration database has evolved into a powerful asset and a wealth of information and inspiration for us.

But Mr Levatich, HOG unit sales and revenues have been in retreat for 5 years in a row. Sure, motorcycle markets are tough but it hasn’t affected other premium makers BMW Motorrad, KTM, Ducati and Triumph at the luxury end. HOG sounds a bit like the Australian Wallabies. Lots of positive talk despite overwhelmingly negative signals, results and glaring problems with the management structure. It is time to wake up. HOG is missing the simplest of things – product that customers want.

This is a company that continues to rely on its 116-yo divine franchise. Basing its future on what seems to be a marketing company puffing up fanciful predictions in the face of a dire outlook. The worst thing about it is that management is in denial.

2) Finance

HOG is the ultimate discretionary spending item. Doesn’t seem that they are spending at HOG. If anything, the financial services business shows current customers are struggling to pay their loans. An interesting anecdote from Polaris (PII) Q3 results overnight was the claim that its Indian brand (which competes directly with Harley) admitted,

North American consumer retail sales for Polaris Indian motorcycles decreased mid-teens percent during the third quarter of 2019 primarily due to the weak mid to heavy-weight two-wheel motorcycle industry that was down high-single digits percent and retail pressure from heavy competitive promotional spending.”

If HOG is cranking up the finance and promotional spending shouldn’t investors be wary of a further deterioration in the types of customers they are lending to? When CM covered HOG as an analyst 20 years ago, the then management told CM that Harley owners would forgo the mortgage before payments on the bike, such was the rock-solid nature of the finance arm.

No, HOG’s loan book is unlikely to bury it but the signals are such that it is having to resort to pushing so much harder to make sales. That is evidence of a soft backdrop which management is not being open and transparent enough about.

HOG fortunes are bound to get a lot worse before they get better. The hopes and dreams of the delayed electric LiveWire e-bike is too expensive to attract eco-mentalist millennials and completely unattractive to overweight bearded men covered in tattoos to desire. Harleys were always an escape tool. Products where owners could hide away in the man cave tinkering. That isn’t to say that Harley doesn’t need to innovate but at the moment it isn’t staying true to itself. That is why customers are disengaging.

Expect the 2020 numbers to follow the trend of the last 5 years. An utter disaster.

NB this piece does not constitute as investment advice. CM has no positions in HOG.

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