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-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.”
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.
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.
CM testrode the latest KTM 1290 Super Adventure S (SAS) model and redicovered what a lunatic’s grin was. Having owned the KTM 1290 Superduke R (SDR) CM was aware of how addictive the shared 1301cc v-twin engine is. While the SAS does with only 160hp vs the SDR’s 180hp, the engine is still a thermonuclear device. It dominates. It’s probably a bad choice in nanny state NSW. It is truly addictive.
While a more extensive test ride is required (like the 3 day test ride of the BMW R1200GS Rallye X) to find how it is to live with from day to day some short observations here.
Engine – KTM 4.5/5
The KTM has so much grunt but gets cranky at low rpm. It will protest below 3,000rpm in higher gears. Yet the BMW is far happier to pootle around in any gear and pull away regardless of what speed. Yet when winding the throttle open, the KTM’s extra 35hp quickly shows itself.
Suspension – KTM 4.5/5
The SAS has semi-active WP suspension which has a wide range of adjustment. The BMW’s self leveling suspension set up seems simpler (dialing in height and firmness) than the SAS which requires individual selection of each load. The BMW telelever front end behaves differently to the traditional telescopic forks but the feedback on the KTM is superior. Part of that is down to the lighter weight of the Austrian.
Brakes – 5/5
The brakes have plenty of bite, feel and the rear has good modulation. Fork dive is noticeable under heavy application but half of that is due to the fact the BMW won’t dive due to the telelever set up
Gearbox – 5/5
The quick shifter is far slicker than the BMW especially upshifts. BMW gearboxes are usually rubbish. CM blew two of them in his old K1600GT (see below) inside 4,000km.
Ergonomics – 4/5
The KTM feels slightly firmer in the seat than the BMW but there is a power parts option including one with heating. TFT screen is excellent. Clear and allows one’s mobile maps to synchronize to the screen and headset. The menu operation is not as good as the BMW’s mouse wheel.
The KTM offers a mobile phone compartment with a USB socket but it won’t swallow a iPhone Plus with cover on. Petty but something that will be righted soon enough. Backlit switchgear good.
The Pirelli Scorpion Trail II tyres on the KTM are so much better than the BMW’s Michelin Anakee III although later models are shod with Bridgestone A41s.
Quality – 4/5
The tactile feel of the switchgear is better on the BMW. No question. Fit, finish and attention to detail are all better on the BMW. KTM has improved miles in this regard but the industrial design of the Beemer is better.
Overall – 4.5/5
A bit early to judge but no question that the SAS puts a smile on the rider’s face immediately. Something the BMW can’t manage. The BMW is very competent everywhere but rarely does it excite the rider. The KTM is good in some areas (quality) and amazing (engine) in others. That 1301cc engine dominates the experience in noise and performance. You buy the BMW with the head and the KTM with the heart.
Note BMW is introducing a new R1250GS (1254cc) which will have 136hp (up 11hp) in 2019. It supposedly has variable valve timing but it is unlikely to be much more than a nice improvement on the 1170cc engine’s civility. The faithful will be pleased.
Indian Motorcycles – owned by Polaris Industries – saw a mid single digit bump in unit sales in 2Q18. Gross profit was up 17% in the m/cycles segment although some funnies in the like for likes with the wind down of the Victory brand. Slingshot soft. Polaris Off Road Vehicles strong. Group 2Q ahead of market expectations, even factoring in the buyback and retirement of around 2.2% of outstanding shares in 2Q.
Exciting new launches like the Indian FTR1200 flat tracker next year will keep the registers ticking over. Scout series continues to do well. Heavier Indians finding it tougher going which is in line with market trends. Doing well with limited editions.
Polaris see the Indian brand performing strongly in international markets and expect momentum to improve over the year. Indian market share growing in domestic (at the expense of H-D) and international markets including Europe. Expect a $40mn impact from tariffs across all Polaris lines.
Share Buyback Activity: During the second quarter of 2018, Polaris repurchased and retired 1,429,000 shares of its common stock for $177 million. Year-to-date through June 30, 2018, it has repurchased and retired 1,562,000 shares of its common stock for $192 million. As of June 30, 2018, the company has authorization from its Board of Directors to repurchase up to an additional 4.9 million shares of Polaris common stock equivalent to c.10% of outstanding.
Indian had a contrasting set of results vs Harley. Both complaining of sluggish domestic market in big bikes but Indian remaining the more agile of the two with innovation. FTR1200 will hit it out of the park.
Yahoo Japan reports Harley-Davidson Shinjuku, a central Tokyo dealer for the motorcycle brand has gone out of business after almost 70 years in the trade. Established in August 1953 before Harley Davidson Japan became the domestic agency, it ran a parallel imports business of the iconic brand. In the fiscal year ended July 1992, the annual turnover was estimated to be about 2,426 million yen. However, as the motorcycle market contracted, annual sales in the fiscal year ended July 2017 fell 85% to about 376 million yen. Even after closing the Yokohama, Hachioji stores, losses continued every year.
Debt is approximately 146 million yen as of the end of July 2017. “Harley Davidson Shinjuku” was closed on July 11.
It has since reopened under new ownership. Customers of the dealership have been informed of the ownership change according to HD Japan. Harley had peak sales of 16,000 units in Japan and is likely to do around 9,500 units in 2018.
Harley can blame tariffs for ruining margin but the rot set in well before. 2Q motorcycle shipments came in at 72,593 (-11.3%). The other luxury brands continue to climb. Its long time American arch rival Indian continues to grow. Indian’s parent Polaris Reports Q2 tonight. Indian sales were up double digit in Q1. The limited edition Indian Jack Daniels Scout Bobber sold out in 10 minutes. Product anyone?
Harley is losing share in America, it’s largest market, and Australia and Japan remain soft. Harley used to sell 16,000 units in Japan. In 2018 it will be lucky to ship 9,500. Ironically Europe is its most encouraging growth area yet tariffs will impact it.
Luxury motorbike brands BMW Motorrad, KTM, Ducati, Triumph etc are ALL growing. Just Harley is flailing – the best motorcycle brand in the business (one where customers are prepared to tattoo the brand to their bodies) is chasing dreams from some consultant inspired long term plan which misses one core ingredient – listening to customers.
Expect the Harley management to keep the excuses rolling. It suffers from the divine franchise and its leadership seem more willing to point to external factors for its issues when internal complacency and resting on the laurels of the glory days seem the biggest factor. It is so obvious.
So Harley met its Luke warm 2Q EPS guidance. Maybe shareholders should reflect on the $103mn (1.3% of outstanding) of the $700mn in planned share buybacks which flatters EPS. E is not rising, S is falling. 10% of the stock is being shorted.
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!