Harley-Davidson, Inc. Finally Shows Signs of Good Times Down the Road

Harley-Davidson, Inc. (NYSE: HOG  ) is an iconic American brand facing a demographic cliff. Its core customer base -- white male baby boomers -- propelled the company to a record $5.9 billion in sales in 2008. Five years later, sales are back at the 2008 level after a sizable dip in the interim.

As the boomers hit their 60s, many observers are concerned that demand for Harley's high-end motorcycles will fall off a cliff. In all likelihood, aging boomers will buy fewer Harleys in the years ahead. However, the company may have just turned the corner in appealing to a wider audience -- one that could fuel growth for decades.

Harley-Davidson expands its boundaries
Harley's 2013 third-quarter results are a potential game-changer for the company. Its 2014 Project Rushmore motorcycles, a set of eight new touring motorcycles, appeal to a much wider audience than the company has typically served in the past. The new lineup experienced the highest year-over-year sales increase for the company in 20 years and the best initial-model-year launch in the company's history.

The Rushmores have sold surprisingly well among Harley's outreach customers: adults 18-34, women, Hispanics, and African-Americans. Moreover, data from market research firm R.L. Polk reveals that outreach customers buy more Harleys than any other brand of street motorcycle. The company has tried for more than a decade to lure women and minorities to its brand, so the strong demand from these groups suggests Harley is slowly backing away from the demographic cliff.

In addition to attracting a wider demographic, Harley aims to expand internationally. Its share of the European heavyweight market is just 12.6% compared to its 56.5% share of the U.S. market. The company's European market share rose nearly 1% in the quarter, and sales were up 10% in Asia and 16% in Latin America. These figures are encouraging given Harley's desperate need to scale-up in international markets.

Harley faces competition from Polaris Industries and Honda Motor
Harley may be making headway in international markets, but it will not easily match its domestic market share outside of the U.S. Polaris Industries (NYSE: PII  ) already has a foothold in international markets, with 1,100 dealers internationally.¬†Some 28% of its $3.2 billion in sales -- or $900 million -- comes from outside of North America.

Harley has 822 dealers outside of the U.S., but these establishments generate approximately $1.6 billion in sales for the company. That comes out to $1.9 million per international dealer, whereas Polaris sells only $818,000 per international dealer.

The difference in sales efficiency is largely due to product mix -- Polaris is the market leader in the low-priced powersports niche, besting Harley and Honda Motor (NYSE: HMC  ) by a wide margin. Harley, however, has a higher price point and earns a higher margin on its motorcycles, leading to relative outperformance.

Whereas Polaris competes only at the low end of Harley's lineup, Honda represents a bigger threat to Harley's touring and custom motorcycles. Honda originally manufactured motors for motorized bicycles before it diversified its product lines to include just about everything that has a motor. Now only about 13% of its revenue comes from motorcycles and motorcycle parts, but that comes out to more than $12 billion in sales -- dwarfing Harley's sales.

Although Honda has a larger presence in the lightweight market, its Gold Wing touring model and ST1300 compete with Harley's lineup of heavyweights. Moreover, Honda -- a Japan-headquartered company -- has a much larger international distribution system than Harley.

One of the reasons that Harley has been so profitable in the United States is that it has a large network of dealers that allows it to efficiently sell and deliver its motorcycles to customers. Harley does not have the same scale advantage overseas -- but Honda does in many markets. Harley's U.S. dealerships average $5.1 million in sales per dealer -- much higher than its international rate. This may be an indication of just how much further the company's brand and distribution capabilities go in the U.S. versus elsewhere.

Nevertheless, Harley's international sales will become an increasingly important part of its growth strategy as boomers age.

Bottom line
In order to stave off a decline due to an aging core customer base, Harley needs to attract non-traditional customers and expand overseas. The company attracts more outreach customers than any other motorcycle brand in the United States and its international dealers have significant growth potential compared to their domestic counterparts. Investors should keep an eye on outreach market share and international growth for indications of Harley's future profitability.

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  • Report this Comment On December 25, 2013, at 10:13 AM, 20Victory03 wrote:

    Sorry Harley...

    You still have Outdated technology even with your new 2014 frame change and engine upgrades to obtain more power. The 2014 Harley Ultra is still under-powered and at idle sits and shakes the entire bike and the rider at idle.

    I also took the new 2014 Victory Cross Country Touring for a test ride...and is the Most Comfortable Motorcycle I have ever rode... Power to spare...And lives up to its motto...if you ride'll own one. It's also American Made !!!

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