#harleydavidson

Long Way Up for Harley

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Ewan McGregor and Charley Boorman are apparently planning to ride electric Harley-Davidson Livewire motorcycles from South America to Los Angeles. CM loved the first two series – even bought a BMW R1200GS Adventure in the knowledge of what the bike could do. CM rode to every prefecture in Japan on that bike which to date has been one of the fondest memories of living there 20 years. Experiencing different cultures and places that contrast the crowded cities of Tokyo, Osaka and Nagoya.

The duo is looking to replicate the successful formula of ‘Long Way Round‘ (riding from London to NY) and its sequel ‘Long Way Down‘ (riding from John O’Groats to Cape Town). Unfortunately, the latest offering is unlikely to whip up the same cult status of the originals. Why?

The first two chapters focused on serious hardcore off-roading through the likes of Mongolia, Kazakhstan, Siberia and Africa with all manner of struggles, mishaps and adventures along the way. BMW’s GS series motorcycles did a roaring trade off the back of the success of this trip. It was beta tested to the extreme. It remains BMW’s best selling motorcycle even today.

Unfortunately, given the diabolical long term decline trend in unit sales at Harley-Davidson, it is unlikely that an electric bike with a limited range and next to no luggage carrying capability will make sense in resurrecting the former glories of Milwaukee’s divine franchise. Although it is in line with the rudderless board at H-D which CM has made reference to multiple times.

Harley is planning to launch an adventure bike to compete with the BMW GS, so why hasn’t it chosen that so the brand can promote capabilities which would bring far more attention to the brand’s new capabilities? Will it camp or just check into 5-star hotels with wall sockets?

Sorry, but a bulk of Harley owners want to be seen as leather-clad rebels, not soy latte sipping trendies. Harley-Davidson is probably one of the very few brands that customers are willing to tattoo to their bodies. That is brand power! Furthermore, the whole point of owning a Harley was to enable owners to hide in their mancaves looking and tinker for hours to get peace and quiet from the trouble and strife. Plugging in the Livewire to a wall socket is not the game-changer product Harley needs and will only force husbands to discuss for hours whether ivory or off-beige would be the best tile colour for the bathroom. It will be the worst decision of his life and force a trade-in to fossil-fuel power. 

Harley would be better off buying a scooter maker if it wants to go down the electric route. If Harley analysed its own history it would recall it tried to patent its distinctive sound. How soon it forgets.

The Long Way Up move looks like a massive marketing exercise whereby Ewan and Charley are getting a small fortune to promote a bike that won’t transform Harley in the slightest. CM understands Harley needs to totally revamp its approach to markets but electricity is as far removed from its core brand proposition as to beggar belief.

CM has always said that Harley needs to get back in touch and listen to its core customer base, the very thing Willie Davidson did in the dark days when Harley nearly went bust in the 1980s. That seminal but simple strategy by the founder’s grandson saved Harley.

Often the most sensible business strategies focus not around trying to be something they’re not but celebrating and embracing exactly what they are. Brands have spent a lifetime emulating Harley. Why channel a wonky Taiwanese white goods maker who dabbles in Uber Eats carrying commuter junk?

Harley-Davidson- Delinquencies vs Denial

Harley-Davidson (HOG) announced 2Q figures overnight. Shares rallied 6.42% on the back of awful numbers in 1Q. In a nutshell:

Motorcycle revenue fell 6% vs 2Q 2018 and group operating income crashed 26%. US retail sales fell 8.0%. Operating margin fell from 16% to 12.6% in 2Q. 11% for 1H down from 14% in 1H 2018. Supposedly these were better than market expectations.

-Market share in 2Q 2019 down 1.8% to 46.6% in domestic market, and European market share at 8.8%, down 1.6%. No doubt Trump to blame for this.

-Volumes down 5.3% for 2Q and 6.5% for 1H

-Operating margin down. HOG expected 8-9% in 1Q. This has now been lowered to 6-7% in the 2Q statement for the full year.

– weak volume guidance unchanged at 217,000-220,000. This marks 5 years of straight volume declines.

– 30+ day delinquencies on finance up again to almost a 9 year 2Q high to 3.3% of the book. Note HOG in Q1 delinquencies at 3.73%.

– 2Q annualized loss experience up to an 8 year high to 1.82%

Never mind the company embarked on a $42.9m share buybacks in Q2 and $95.5m for the year so far. Happy days.

The company’s presentation pack still smacks of denials with all the mystical customers that aren’t being converted into new customers.

Harley delinquencies at 8 year high

Just noted from the conference call that Harley-Davidson (HOG) motorcycle loan delinquencies (30+ days in arrears) are at an 8 year high of 3.73%. While actually loss experiences have tracked sideways for the past few years, they are still higher than 8 years ago.

Interestingly, HOG loans outstanding were $7.53bn in 1Q 2015. In 1Q 2019 that figure was $7.63bn. So next to no loan growth against c.20% lower unit sales. In 1Q 2015 HDFS made $683.6m in new loans, 80% prime out of $1.5bn in 1Q motorcycle (incl parts/accessories) sales (43.6% financed). In 1Q 2019, $685.3m in new loans were made with a claimed 80-85% “prime” against $1.124bn (61.0%) of m/c and P&A sales. Essentially total sales would be worse without the finance arm. Why does CM smell Ford Credit all over?

So delinquencies up against a strategy to pump more bikes through financing. Is it the non-prime portion is faltering at greater rates? Or the prime?

Luxury motorcycles are generally considered discretionary spend items. Are aspirational consumers just tapped out?

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 ethically 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.

It doesn’t much matter if HOG hit targets for new riders, the actual financial results point to further deterioration across the board at the top of the cycle. Most competitor luxury brands are ticking along just fine.

100 new high impact motorcycles has all the hallmarks of chucking spaghetti at the wall and hoping some of it sticks.

This stock should continue to flounder. CM thinks it will get back to the GFC $8 handle.

CM is not invested in HOG nor short the stock. This doesn’t constitute financial advice.

Harley has another howler

Harley-Davidson (HOG) announced Q1 2019 earnings today. The results continued the horrendous pattern we’ve written about. HOG is a good example of discretionary spend.

Motorcycle revenue fell 14% vs Q1 2018 and group operating income crashed 37.3%. US retail sales fell 4.2%, slightly better than market decline of 4.7%. Operating margin fell from 12.7% to 9.1%. The company expects FY margins to be 8-9%.

Volume projections of 217,000-220,000. This is down from 228,000 deliveries in 2018.

CM has been critical of the company’s mid term business plan. It is preposterously over optimistic. How has CEO Matt Levatich managed to hold on over the past 4 years? Since taking the helm, volumes have fallen from 268,000. Revenues have shrunk from $6bn to $5.7bn and EBIT of $1.2bn to $733mn.

Harley continues to suffer from the divine franchise. It isn’t about introducing 100 new high impact motorcycle models. It needs to revamp what it has. It needs to go back to is roots. Not use the metrics of an expensive consultant to paint rosy pictures that are unattainable.

Harley bought a kid’s electric scooter company. It should be looking to M&A to diversify the portfolio of motorcycle brands and segments. Harley building an adventure bike is not going to cut it. They need to buy Ducati, something CM has encouraged for ages.

Harley has another Howler

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Harley-Davidson (HOG), perhaps the most iconic form of discretionary spending, came out with a howler set of Q4 numbers.  Revenue down 9% and operating losses in the last period. FY operating income fell 30% on revenues that finished 1% up. Domestic sales for the 2018 year fell 10% while international sales were flat. Worse was guidance pointed to unit sales falling between 217,000 & 222,000 units down from 228,000 in the fiscal year just past. This new range of unit targets would mean a decline for five consecutive years. If this pattern continues into 2020, luxury competitor BMW, which targets 200,000 units, will likely even up the tally, despite being less than half HOG was in FY2012.

Operating margin guidance for the motorcycle segment is forecast at 8-9% in 2019 down from 12% in 2017.

In June 2018, 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.

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Harley may have a grand master plan to incubate 2,000,000 new riders and launch 100 new bikes out to 2027, but all the while they remain stuck in a design studio, the competition, including the Japanese, keep stealing sales away from the Milwaukee icon.

The strategy looks completely unrealistic because growing 200,000 new bikers a year for a decade in the domestic market would mean that based on 2019 global unit sales projections,  92% of customers would need to be brand new, not repeat or existing. However the plan is to grow in the US where it had 138,000 sales in 2018 that would mean new customers would need to be 145% of all current sales in the US. No auto maker on the planet has ever had such pie in the sky assumptions for cultivating new customers, much less at that pace for 10 straight years. How can the board of HOG honestly think this is even remotely achievable? Sadly the company has been too eager conducting buybacks to flatter EPS. Net income for HOG was +1.8% for FY2018, diluted EPS was +5.6%. Time to stop playing games and properly delivering for shareholders.

Motorcycling reduces stress

According to a Harley-Davidson funded UCLA study, motorcycling reduces stress. The report findings were:

  • Riding a motorcycle decreased hormonal biomarkers of stress (cortisol) by 28%

  • On average, riding a motorcycle for 20 minutes increased participants’ heart rates by 11% and adrenaline levels by 27% —similar to light exercise

  • Sensory focus was enhanced while riding a motorcycle versus driving a car, an effect also observed in experienced meditators versus non-meditators

  • Changes in study participants’ brain activity while riding suggested an increase in alertness similar to drinking a cup of coffee.

CM already knew the benefits. Nice to have them confirmed.

Harley-Davidson to go into the Adventure category

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Actually credit where credit is due. Harley maybe very late to the party but realizes it must be bold to survive in the long run. Adventure (ADV) bikes (think of them as 2-wheeled SUVs)  are one of the most popular motorcycle segments now due to versatility but the competition is fierce and only getting moreso. Harley plans to launch a 1250cc ADV bike in 2020.

It is unlikely to cause segment leader BMW to quake in its boots with respect to its best seller GS series although the question is can the Harley brand can carry any sales at all? At the luxury end BMW, KTM, Ducati, Triumph, Moto Guzzi and Aprilia all have ADV bikes. BMW & KTM are the sales chart leaders. BMW for inventing the segment and KTM for strapping a 160hp nuke to its expertise in off road and 17 straight wins in the Paris-Dakar.

It is fast becoming a horsepower war. BMW is looking to launch a 145-150hp 1250cc next year for the GS from the 125hp 1170cc twin it currently has to keep up with the competition.

Without a spec sheet it is hard to tell much about the Harley ADV. It looks heavy. Weight matters. The BMW is around 240kg. The KTM 210kg. Will the Harley keep it under 260kg?

Horsepower is not a Harley strong suit. You won’t find power in a Harley spec sheet at the dealer. Will it use a clump of lazy torqued Milwaukee pig iron for an engine? In a low slung cruiser one can get away with it but in a tall ADV bike, when negotiating goat tracks (that’s a wide belly pan!), traction, power delivery and how a bike carries its weight is crucial. Can Harley produce over 120hp from this 1250cc engine with flexibility across the rev range? Will it be chain driven? Shaft? Belt? These things matter to the ADV snobs.

The design of the ADV Harley is certainly bold. CM likes it although if you drop it that headlight unit sure looks expensive to replace. Like many SUVs never see more off-road than a gravel driveway, the most dirt tracking Harley ADVs will see might be some road repairs on Route 66. The Pan America name certainly rings of highway biased use.

The next thing will be price. Even before (and after) we have full specs can Harley launch the bike at a competitive price? Harley can’t just rock up into a segment it’s never been active in and demand the type of premium it’s cruisers carry. It’s top of the line CVO series can be $50,000. BMW is considered the premium offering in ADV. Luxury Italian brand Ducati tried to price it slightly north and was caned in the sales race. KTMs are priced slightly cheaper but BMW remains king and having owned one know exactly why. The BMW is good at absolutely EVERYTHING.

Harley has history in new ventures. It broke the mold decades ago and took a stab at sports bikes with the Buell brand, but it was an abject failure. Porsche was called into help develop the V-Rod engine some 18 years ago but that is no longer sold.

Harley also aims to launch electric bikes, smaller 250-500cc categories for Asian markets and a mid range 500-1250cc for new sport type street fighters. All looks margin crushing from a distance.

From an investor perspective the accountants will require a lot of volume to justify the R&D expense. The shares closed toward the lows on the announcement.

Without getting too Harvard MBA, Harley feels extension of product is vital. To a degree it is right. Unfortunately graveyards for such strategies are too commonplace. Few get it right. Buell was case in point. BMWs K1600 Bagger will flop because it was an excuse trying to find a home for its 1600cc 6-cylinder regardless of capabilities. Customers see through this.

Harley’s ADV will have distribution channels as it’s biggest weapon. It will have a hard time converting ADV faithful unless it offers something truly better at a competitive price. Otherwise it will gather dust on showroom floors.

Personally this ADV will probably do better than most think. It won’t get close to toppling the Beemer but there are enough quirky people out there who want to be different. Nice job Harley but can it turn groups profitably around? The last 5 years have been a disaster. The question is all this product arrives at a time when the economy is likely to turn south.