Harley-Davidson (HOG) Slips to Q2 Loss, Looks for Turnaround

Harley-Davidson, Inc. HOG, which has already been battling challenging demographic trends over the past few years, seems to be in more trouble, thanks to the coronavirus impact. The iconic motorcycle maker posted quarterly loss for the first time in more than a decade. 

It reported second-quarter 2020 loss of 60 cents per share against the Zacks Consensus Estimate of earnings of 6 cents, as coronavirus shutdowns sapped motorcycle sales. In the year-ago quarter, the company recorded earnings of $1.23 per share. Notably, the Motorcycles and Related Products segments swung to an operating loss of $121 million against the consensus mark of earnings of $9.03 million. High restructuring costs also weighed on the firm’s results.

Total revenues from Motorcycle and Related products, which constitute bulk of the firm’s overall revenues, declined 53.3% year over year to $669 million in the reported quarter. The top line also missed the Zacks Consensus Estimate of $798 million. The company reported consolidated revenues (including motorcycle sales and financial services revenues) of $865 million, down 47% year over year.

HarleyDavidson, Inc. Price, Consensus and EPS Surprise

HarleyDavidson, Inc. Price, Consensus and EPS Surprise

HarleyDavidson, Inc. price-consensus-eps-surprise-chart | HarleyDavidson, Inc. Quote

Segmental Highlights

Motorcycles and Related Products: The Motorcycles and Related Products segment incurred an operating loss of $121 million against operating income of $181 million reported in the year-ago period. This decline was mainly due to lower productivity and suspension of global motorcycle manufacturing during most of the quarter amid the coronavirus crisis. In the quarter under review, the company shipped 28,369 motorcycles, down 59% year over year.

Harley-Davidson’s worldwide retail motorcycle units sold dropped to 52,712 from the year-ago quarter’s 71,846. The company’s retail motorcycle units sold in the United States declined 27% from the year-ago quarter to 31,340. International units sold decreased 26% year over year to 19,100 motorcycles. Sales in the Middle East and Africa, Asia Pacific, Canada and Latin America declined 30%, 10%, 30% and 51%, respectively, from the year-ago period.

Revenues for Parts & Accessories fell 24% from the prior year to $169 million. The same for General Merchandise — including Motor Clothes apparel and accessories — declined 42% from the prior-year quarter to $38 million.

Financial Services: Revenues for Harley-Davidson Financial Services decreased to $196 million from the prior-year quarter’s $199 million. Operating income slumped 94% to $5 million from the year-ago quarter’s $76 million due to increasing provision for loan losses amid coronavirus blues.

Financial Position

Harley-Davidson had cash and cash equivalents of $3,856 million as of Jun 28, 2020. Net long-term debt increased to $6,488.5 million from the year-ago period’s $4,650.2 million.

The firm generated $610.2 million of cash from operating activities in first-half 2020 compared with $496.2 million in the comparable year-ago period. Capital expenditure in the first six months of 2020 was $67 million compared with $83.2 million recorded in corresponding period of 2019.

While the company suspended discretionary share repurchases, it paid a cash dividend of 2 cents per share during second-quarter 2020. Third-quarter dividend of 2 cents per share will be paid on Sep 25 to shareholders of record as of Sep 10.

Given coronavirus-induced uncertainty, Harley-Davidson refrains from providing any outlook and forecast for full-year 2020.

‘Rewire’ & ‘Hardwire’ to Reboot Business

To pull out the company from the sales slump, Harley Davidson’s CEO Jochen Zeitz laid out a turnaround plan, dubbed as ‘Rewire’, and is working on a five-year (2021-2025) strategic plan ‘Hardwire’ that is expected to be shared in fourth-quarter 2020. The plan aims to overhaul its operating model and revamp the organization powered by the strength of its legacy brands, optimization of dealer network and prudent inventory management.It should be noted that Harley-Davidson expects 2020 cash savings of $250 million, including SG&A and capex reductions under the Rewire plan.  

Putting quality over quantity, the company is focused on clearing excess inventory and streamlining the model line-up by 30%. It is also assessing plans to exit unprofitable international markets and emphasize on 50 markets, primarily in North America, Europe and the regions in Asia-Pacific that hold high potential. Nonetheless, the firm will concentrate on expanding product offerings of the best-selling motorcycles.

Importantly, Harley-Davidson is pushing back the debut of its first adventure touring bike, the Pan America 1250 model, to 2021. As a matter of fact, the company intends to change the annual product launch timing from late summer to early in the first quarter. To drive the brand desirability, the firm aims to reinvigorate product launch efforts via collaborations with key influencers. In fact, the company is soon set to launch a marketing campaign in collaboration with Aquaman and Game of Thrones star Jason Momoa.

Zacks Rank and Key Picks

Harley-Davidson currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the auto sector include Sonic Automotive Inc. SAH, Lithia Motors LAD and AutoNation AN, each carrying a Zacks Rank of 1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

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