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.