#harleydavidson

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

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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.