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Harley-Davidson Pre-Earnings: Low Shipments Expected Due To Slowing U.S. Heavyweight Motorcycle Market

The iconic motorcycle manufacturer Harley-Davidson ( HOG ) has had a tough time in the last year or two, firstly, competing with foreign manufacturers who undertook aggressive discounting to nab market share, and secondly, maneuvering through the slowing demand in the U.S. The domestic market forms two-thirds of the net motorcycle shipments for Harley, which is why a slowdown in deliveries there casts a shadow on the overall results for the company. Through Q3, retail sales of Harley's motorcycles dropped 4.7% year-over-year in the U.S., and the overall retails were down 1.9% year-over-year. While the company has been able to increase its market share in the U.S. heavyweight motorcycle market (601+ cc) (Harley's retails declined 4.7%, while the overall U.S. market fell 5.6%), the slowing of demand, and in turn, retail sales, prompted a revision in shipment guidance for 2016 during last year. Harley expects to have shipped 264,000-269,000 bikes in 2016, down from the earlier estimate of 269,000-274,000 bikes made at the start of 2016. This amounts to only -1% to 1% growth over 2015 levels. In Q4, the company expects to have shipped 44,200-49,200 motorcycles, up 2% to down 8% year-over-year.

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An expense Harley had announced it will incur in Q4 will be the cost to reorganize and reduce its workforce to streamline functions, in view of the continually lower sales, especially in the domestic market. For this, the company will incur expenses of approximately $20 million to $25 million in the fourth quarter. The company had previously announced that it was laying off casual workers in its U.S. plants. This step is in accordance with the trend of softer customer demand, which is expected to lower production levels at the iconic motorcycle maker's facilities. A trimmer business might help the company boost its profitability moving into the new year. For 2016, Harley's operating margin is expected to stand at 15-16%, down from an earlier estimate of 16-17%.

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While domestic growth has slowed down, international sales have remained positive for Harley, emerging as the silver lining of 2016 for the manufacturer. The company always looked at international markets to drive future growth, and for this, it set an aim to add 150-200 international dealerships by 2020, in order to increase its reach and availability. Harley added 9 international dealerships in Q3, after adding 11 in the first half of the year. Markets outside the U.S. form approximately 30% of the company's top line, which remained flat through the first three quarters of 2016 (includes only motorcycles and related products revenue). While Harley's retail sales declined 1.9% year-over-year through September, as aforementioned, international sales were up 3.3% year-over-year. Retail sales grew 6.6% in the EMEA region through Q3, and by 6.3% in Canada. Harley is expected to report another quarter of low sales in the U.S. and growth in international markets. However, given that international markets still don't form a majority of the company's top line, the heavy reliance on the U.S. could drag down the top line in the last quarter.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Harley-Davidson

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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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