Does a Big Earnings Miss Mean Trouble at Harley Davidson?

Shares of American motorcycle manufacturer Harley Davidson (HOG) traded sharply lower on Tuesday after a disappointing Q4 earnings report. The company operated at a break-even for the quarter, well short of expectations for ne t earnings of $0.17/share.

It's been a difficult multi-year period for the iconic manufacturer, but it's definitely not the first time Harley Davidson has faced challenging conditions. As the oldest continually operating US producer of motorcycles, the company has survived two world wars, the great depression (one of only two motorcycle companies to do so), and the financial crisis of 2008-2009.

The company's ability to adapt to a rapidly changing landscape in the transportation industry and its "More Roads" strategic plan for the next four years will be crucial to the continued survival of the world's most recognizable motorcycle brand.

The most recent problems for Harley Davidson include costs associated with tariffs, expensive recalls and a general demographic shift pushing consumers away from Harley's large (and expensive) cruiser-style motorcycles.

The tariff issue started in the summer of 2018 and turned into a major PR nightmare for Harley Davidson . In response to the news that Harley would manufacture more motorcycles overseas to avoid the retaliatory tariffs enacted by US trading partners, Harley owners organized a boycott of the brand that received public support - via Twitter - from President Trump.

Tariff costs were $13.4M in the fourth quarter. When added to $19.4M in restructuring expense and inflated selling and administrative expenses that included almost $55M in recall costs, that left an operating loss of $59M on motorcycles and equipment. Operating income from the financial services division kept the net from being a red number.

While those issues may prove to be temporary, the demographic shift is potentially more problematic in the long run.

Aging Customer Base

Since the 1960's, the Harley Davidson brand has been synonymous with big, powerful and loud motorcycles that featured classic American styling and a vast number of options for customization. Even as foreign competitors entered the US market with smaller, lighter and more efficient motorcycles, Harley fostered a rabidly loyal following that allowed it to sell its bikes at high prices and strong margins.

That strong brand recognition also allowed the company to grow the sales of branded and licensed apparel and other merchandise to over $200M/year.

Other brands have tried to copy the Harley style with mixed success, notably Polaris Industries (PII) with its revival of the Indian brand and the (now-shuttered) Victory line. Asian brands Honda, Yamaha and Kawasaki also offer less expensive cruiser bikes, but the Harley mystique has been largely unaffected.

Until now.

Harley's US sales have disproportionately depended on middle aged (40-60) American men. Younger riders, women and buyers in world markets often don't want a motorcycle that's as big - and expensive - as a Harley. Riders older than 60 tend to reduce the number of miles they put in on a motorcycle and don't buy nearly as many new bikes. If fact, the market for used motorcycles can also depress Harley's sales as older riders increasingly sell their bikes at prices that are more attractive to buyers.

Because of the sheer size of the baby boom generation, Harley found millions of its target audience with checkbooks in hand in the early 2000s, but the aging of that population has been measurably affecting sales for the past few years. Knowing that Gen Y and the Millennials simply don't have the numbers to make up the shortfall, Harley has targeted previously underserved groups - riders from 18-35 years old, women, minorities and European and Asian customers - but with mixed success.

Electric Future?

While new offerings like smaller displacement cycles and lower seat heights have made Harley Davidson motorcycles more appealing to new audiences, the company is betting on launching 100 new high-impact motorcycle models over the next 9 years. Figuring prominently in that effort is their recently announced "LiveWire" electric cycle.

Electric motorcycles are especially appealing to younger riders and potential riders because of their ease of use (no shifting gears), lower maintenance costs and considerably less noise and air pollution relative to traditional gasoline-powered cycles.

After at least 4 years of development, the LiveWire will be available for purchase at Harley Davidson dealerships starting later in 2019. The flagship electric cycle is a high performance motorcycle with an equally high price - just a few dollars short of $30,000. That price puts the LiveWire at the high end of base retail price for Harley's offerings.

Similar electric bikes from competitor Zero Motorcycles cost considerably less, with the most expensive models priced under $20,000 - even with maximum range upgrades.

Electric cycle maker Lightning had made headlines by producing the world's fastest motorcycle that also happens to be electric powered. Its LS-218 can reach a top speed of - you guessed it - 218 miles per hour. The LS-218 sells for $38,888.

Harley has hinted at plans for a smaller, lighter electric motorcycle and a scooter-like electric vehicle sometime in 2021-22. Exact specifications have not yet been released.

The plan is to showcase the new technology in the LiveWire and then offer more accessible versions in the future. It's a bold move. The company is simultaneously going after new clientele with new products and new technology. They're betting on powerful brand recognition and an extensive dealer network to vault them past more nimble competition.

It's a difficult balancing act.

It's hard to bet against a company that has survived challenging conditions so many times in the past, but it's also easy to see Harley Davidson fading into relative obscurity amid high-tech competition.

The Zacks Rank is a quantitative measure rather than a value judgement, but Harley's Zacks Rank #3 (Hold) seems especially appropriate here. It's simply too soon to tell whether the company can surmount serious demographic challenges and create another 100 years of dominance.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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