Harley-Davidson (HOG -0.29%) posted a big second-quarter loss Tuesday because the coronavirus pandemic shut motorcycle dealerships across the country, crushing sales. But given the downward spiral the bike maker has been on for the past five years, management realized a major shakeup of its business was in order if it wants to remain a "high-performance company."
In a statement accompanying Harley's second-quarter earnings results, Jochen Zeitz, Harley's chairman, president, and CEO, announced a series of changes the company will make that will undoubtedly change the Harley-Davidson we know. Here's the big takeaway from all this.
Image source: Harley-Davidson.
Yet another ugly quarter
Second-quarter revenue of $865 million was down 47% year over year, but came in above analyst estimates of $765 million. Motorcycle sales, though, plunged 53% in the quarter to $669 million while shipments tumbled 59% to just 28,400 units, an unsurprising outcome considering 60% of its dealers worldwide weren't open to sell motorcycles early in the quarter, though by the end of June, 93% were operating again.
Even with the lower sales, Wall Street was expecting Harley-Davidson to post a $0.04 per share profit for the period, but the bike maker instead swung to a surprising adjusted loss of $0.35 per share compared to $1.46 per share profit a year ago.
The crushing blow is causing management to rethink the business, and Zeitz announced Harley will have yet another roadmap to follow: The Hardwire, the bike maker's third visionary plan in two years. Here's what investors can expect.
Data source: Harley-Davidson SEC filings. Chart by author.
Two steps forward, one back
The More Roads to Harley-Davidson plan unveiled in July 2018 called for developing 100 new models over 10 years, giving more attention to international markets than its bread-and-butter U.S. market, and putting a greater focus on electric vehicles.
That plan was largely jettisoned earlier this year when then CEO Matt Levatich was ousted in favor of chairman Zeitz and More Roads was replaced by the loosely defined The Rewire, which incorporated some of the predecessor plan, but would instead focus more on key markets and products to drive the bike maker's profitability and growth potential.
That strategic vision is now being replaced again by The Hardwire, Harley's latest attempt at a five-year plan that seems to be getting down to the core essence of what made Harley-Davidson great.
Back on the beat track
While the details remain almost as vague as those offered when The Rewire debuted, it appears the future of the motorcycle giant will be as a much smaller company, albeit one that still has a global presence.
- 700 jobs will be eliminated worldwide
- 30% fewer new motorcycle models will be introduced
- The company will concentrate on its 50 best markets in North America, Europe, and parts of the Asia-Pacific region
- It will exit low-volume or unprofitable international markets
- Product launches will shift to early in the first quarter from their current August release date
- Harley will focus on selling more parts, accessories, and merchandise
- The company will concentrate on value-added products to reduce discounting
The Rewire plan will guide Harley-Davidson through the end of the year. The Hardwire roadmap is expected to take over in the fourth quarter and serve as the strategic plan for the company to follow through 2025.
Riding on the edge
The initial read-through indicates Harley-Davidson is focusing on what matters most, a hopeful development that management has a better grasp of what the bike maker needs to do to change. Yet risk remains.
Focusing efforts on international markets at the expense of its primary U.S. market seemed an ill-advised plan when it was broached two years ago, but it can't be ignored that sales here are dwindling.
That's why The Hardwire's plan to "protect value" (i.e., keep pricing elevated) could undermine the rest of the new roadmap. Its motorcycles are already viewed by today's buyers as overpriced, so keeping them expensive -- even if they have value added -- could simply exacerbate the problem.
While this quarter's results were once again terrible, Harley-Davidson was still able to sell over 31,000 motorcycles in the U.S. in the second quarter during a global health crisis that closed off its retail stores. That suggests latent demand exists for its bikes that management may be able to exploit, even if it takes yet another strategic roadmap to do so.
