Motorcycle

Harley’s horrible huffing contains plenty of puffing

HDQ1US

When companies won’t give guidance, we must find ways to see where we were relative to history to get a picture of the future. Harley-Davidson (HOG) makes a good case study. Coronavirus may be one factor but the company has already produced results that have undercut the worst levels experienced during the GFC. We have long criticised HOG for fuzzy maths under the disastrous leadership of the recently ousted CEO Matt Levatich.

While there are strictly no direct apples for apples comparisons on the timing of coronavirus and the GFC (the latter requiring no lockdown), we note the weakness in Q1 2020 unit sales in the chart above.

This is what the trend of Q2 looks like.

HDUSQ2

If we assumed a similar slowdown for April and May then theoretically the company would comfortably breach the Q2 2009 unit sales level of 58,179 which is only 18.6% below the Q2 2019 level. Q1 2020 global sales fell by 17.7%, even though the company made a very misleading statement which we’ll get to in a moment.

One thing that struck us was the steadily rising value of quarterly inventory as a percentage of quarterly non-finance revenues since Q1 2014. While the former value is a balance sheet item and the latter P&L, Q1 is generally a period where new models are rolled out ahead of the busiest Q2 & Q3 seasons to ensure the distribution network can move metal.

HDQ1Inv

Shipments reflect this. The inventory metric drops off into Q2 although exhibits a similar type of trend to Q1. Given Q2 2009 was the beginning of the tough times post-GFC, will we see the high watermark breached or will the slowdown in production offset it? How badly are revenues affected such even flat inventories lead to a deterioration of this measure?

In Q4 2019, inventories to motorcycle revenues surged to 69.1%.

We note that Q1 2020 shipments equated to an inventory of 12,534 units (+29.0%YoY).

HDq2Inv

Here is where it gets interesting. By HOG’s own admission in the quarterly investor presentation pack (p.7), it noted that Q1 2020 US retail sales were on target to be one of ‘the strongest quarters in the last 6 years through to mid-March‘, until COVID. 6 years ago US Q1 unit sales hit 35,730 units. US sales in Q1 2020 ended up at 23,732.

By deduction,

In Q1 2014, over 90 days HOG shifted on average 397 bikes per day. (35,730/90 = 397)

In Q1 2020, over the 74 days to mid-March, HOG was moving on average 321 bikes per day. (23,732/74 = 320.7027).

If we assumed that HOG was to hit that magic target over the 16 days stolen by COVID19, it would have had to punch out 750 bikes a day. (11,998/16 = 749.875).

We would love to see the order book for these magical beasts that were waiting for a home…it would seem the sales and marketing department cherry-picked one strong day and multiplied it over the quarter to create such a questionable statement.

Here is a chart of motorcycle related revenue for Q1 since 2008. No wonder the shares have underperformed since 2014, even with a small fortune squandered on share buybacks.

HSQ1rev

The Q2 revenue book doesn’t look too flash either if April is wiped out. At present 50% of dealers are shut since late March. Is the market prepared for a sub Q2 2009 print? The share price has rebounded strongly after the Q1 results even though there is no guidance to speak of.

HDq2Rev

But it gets worse. So poor has the Q3 season become for HOG that its unit sales have missed the Q3 2009 post-GFC low for seven out of the last 10 years. Are we to believe if the world is out of lockdown by Q3 that there will be a miraculous surge in new bike sales when unemployment is likely to remain at troubling levels potentially above that of GFC?

HDq3US

HOG is a great example of a divine franchise. It wasted far too much money on share buybacks (now suspended) and sits with a credit rating just two notches above junk.

The annualised Q1 2020 loss experience for the finance business sit at 10-year highs even before it has been thumped by the coming turndown. People buy HOGs as a hobby, not transport. A purely discretionary purchase. We imagine that restoring household balance sheets will take precedence to stumping up serious coin for a Harley cruiser.

Sadly Levatich and his 2027 vision have not been consigned to the dustbin of history which is the only logical filing cabinet for it. Completely unrealistic, devoid of reality and totally in denial of the shifting sands in the global motorbike market.

The new “Rewire Plan” (p.5) while sketchy on detail (as it would with an interim CEO) is a reheat of Levatich’s plan. Sad.

In our view, the entire motorcycle industry needs a strong HOG. New management is a good start but it won’t help if they intend to convince investors that they were on course to shoot Q1 to its best level in 6 years with questionable math. How quickly can inventory be pared? What models will revive its fortunes?

HOG needs to get in touch with its core customer base the way Willie Davidson did after the dark days of AMF ownership. It needs to build products which hark back to its former glory rather answer questions in segments that no one is asking it to fill.

Indian, its rival of 100 years ago is killing it with the FTR1200. Indian’s parent company, Polaris Industries, posted a small single-digit increase for motorcycles in Q1 2020. Enough excuses HOG. You are running out of time and your retained earnings are 1/5th what they were 5 years ago!

Why is the market giving it the benefit of the doubt when the worst is still ahead?

HOG

Harley needs a crisis manager. Will the incoming CEO possess those skills?

Harley Davidson board finally ditches its pillion passenger

HD Delinq

We had been expecting for years that Harley Davidson (HOG) CEO Matt Levatich wasn’t the right person to lead the company out of years of misery. Finally, the board took that view too. In 2017 we wrote,

Harley-Davidson is suffering from divine franchise syndrome. It has failed to modernize its line up… its competitors do not seem to be suffering as BMW, KTM and Triumph hitting new shipment records.

We also wrote in 2018 that

“Harley is losing share in America, it’s largest market…Australia and Japan remain soft. Harley used to sell 16,000 units in Japan. In 2018 it will be lucky to ship 9,500.”

Unit sales in Japan fell below 9,000 units in 2019. An utter disaster.

Global sales went backwards for all 5 years of his tenure. 30+ day delinquency rates and annualised loss experiences are at 9-year highs. Instead of investing harder in solving the rout, the company embarked on an aggressive share buyback program to pad the softening earnings, which was expanded again this year, two weeks ahead of his departure.

We pondered last year,

How has CEO Matt Levatich managed to hold on over the past 4 years? Since taking the helm, volumes have fallen from 268,000 [to 228,000]. Revenues have shrunk from $6bn to $5.7bn and EBIT of $1.2bn to $733mn.”

In FY 2019 HOG global sales slumped to 218,000 units, revenues fell to $4.57bn and EBIT of $290m.

We never thought the maths added up. The strategy, which seemed formulated by a communications firm rather than one led by passionate bikers, was the problem. Its historic rival, Indian Motorcycles (Polaris Industries), has led with innovative products – such as the FTR1200 – that harked back to its flat track history. Indian parent Polaris Industries cites tough overall market conditions but is confident that “product” will be a major factor.

Image result for indian fTR750

The announcement of CEO Levatich’s departure should cause the shares to jump. The aftermarket is already showing +5%.  Going back in history, when failed CEO Jurgen Schrempp stepped down from Daimler-Chrysler, the shares added 10bn euro to its market cap the very next day. 

If Chairman Jochen Zeitz’s comments are anything to go by, Harley should bounce hard.

The Board and Matt mutually agreed that now is the time for new leadership at Harley-Davidson. Matt was instrumental in defining the More Roads to Harley-Davidson accelerated plan for growth, and we will look to new leadership to recharge our business.

The motorcycle industry needs a strong Harley. Let the healing begin.

Sports Illustrated defines our woke age

You have to hand it to society nowadays. So desperate are people to appear virtuous they will go above and beyond to prove themselves worthy. Sports awards tend to be a mix of on-field performance and off-field service to promote the game for the greater good.

Megan Rapinoe has won the Sports Illustrated 2019 Sportsperson of the Year. Yes, the US Women’s National Team (USWNT) has won the Soccer World Cup back to back. It is an admirable achievement even though the USWNT were defeated 5-2 by a bunch of 14yo boys from Dallas.

260m watched the Women’s Soccer World Cup final in 2019. The 2018 men’s World Cup in Russia saw 1.12bn tune in for the final. 4.3x the audience. Sponsors are well aware of this and tailor advertising dollars accordingly. If the women’s teams garnered more eyeballs, we can be guaranteed women would be paid more.

Unfortunately, Rapinoe is such a dreadful role model for children even though she ticks the diversity and LGBT boxes. Her profanity-laden victory parade speech (in front of kids) after the World Cup win (from 6:30 in the video) was all class. All about identity politics and screaming for “equal pay” even though the stats reveal the USWNT gets more funding than the men’s team (USMNT). The USMNT generates more revenues, despite the poorer results.

Yet Rapinoe defines the age. All about equal pay regardless of revenue generated. Perhaps every soccer player in the world should be benchmarked against Cristiano Ronaldo at Juventus. Perhaps his 81mn Twitter followers and talent allow him to charge a premium for his services which the market is willing to bear i.e. $108mn in 2019. Neymar should be up in arms for the pithy $90m at Real Madrid! Surely those on the bench should be protesting the fact they aren’t on an even playing field! Equal Pay, Equal Pay!

If Sports Illustrated truly wanted to brand a female success story in sports against the odds and shove it in the face of the white patriarchy, they could have championed the brilliance of 21yo Spanish rider Ana Carrasco, who became the first-ever woman to win a world motorcycle racing championship competing alongside men. She won the World Supersport 300s crown. If there was ever a better display of rising to a challenge in a sport dominated by males, this was it! She beat them all! More than that she embodies great sportsmanship.

CM wrote in January about her first-ever race win last year on equal machines with the boys. Shows that grit, determination and skill can make the difference without this recent desire to throw handicaps to even it out. Great job indeed to win on identical bikes.

Rapinoe is a talent in her own right. No one can dispute that. It is just a shame that it comes with all unnecessary identity politics based bluster.

Perhaps Sports Illustrated should heap lashings of praise on the Football Federation of Australia’s (FFA) kneeling at the altar of political correctness by carrying through with equal pay. Little does the FFA realise that pandering to social justice does nothing to win over fans. Because if the right talent isn’t paid accordingly, an overseas league will quickly bid the best players away and hollow out the local market. Attendance will drop and the revenues and sponsorship dollars will dry up with it. Doesn’t require rocket science.

The Aussie women’s Matildas achieved a peak crowd attendance of 16,829. The men’s Socceroo team saw 77,060 supporters at ANZ Stadium on 15 November 2018. 4.6x more fans watched the men’s national team over the women’s. It is nothing to do with gender. Fans prefer watching the men’s game, including women. Because of that, sponsors are willing to pay for greater exposure.

That isn’t casting aspersions on the female players per se. It is just that sports will always be driven by the sponsorship dollar. In certain fields, men get paid more than women. Perhaps male supermodels should take umbrage that Kate Moss gets paid multiples more for the same job.

Abu Dhabi Police get new wheels

Good to see that Abu Dhabi Police have spared no expense on buying the most technologically advanced superbikes at A$40k a pop. 300km/h+ performance should allow them to keep ahead of those young sheikhs in their supercars.

Sadly this isn’t far off the truth in 2019

In the whacky world of trying to justify the ridiculous, this parody is a great stab at identity politics in sport…

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.

Long Way Up for Harley

charley-boorman-confirms-long-way-up.jpg

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?

Soweto Gospel Choir

A member of the Grammy Award winning Soweto Gospel Choir was fascinated with CM’s bike. Demanded to sit atop. How could one refuse the smile.

The SWG is on tour in Australia. Here for 37 days. Here are the remaining dates.

Video of their performance on the first link. CM will take the Mrs.