With Harley-Davidson (HOG +4.04%) expected to report fourth-quarter and full-year earnings later this month, investors might rightly wonder if the motorcycle manufacturer will once again fall back on some financial gymnastics to make their year-end numbers.
Image source: Pixabay.
Filling up the channel
For two years running, Harley has just managed to squeak over the low end of its shipment guidance threshold. In 2014, it shipped 270,726 bikes worldwide that allowed it to just barely hit its revised guidance of 270,000 to 275,000 motorcycles. It happened again last year when it said it expected to ship between 265,000 and 270,000, but bumped up U.S. shipments in the fourth quarter by 1% so that it ended up shipping 266,382 bikes for the year.
What was notable is that Harley's fourth quarter is historically one of the bike maker's slowest sales periods, and the higher shipments came even as it was experiencing falling sales. It has failed to post a single period of higher sales for eight straight quarters, and there's nothing to suggest they'll be any higher last year than they were in 2015. That is why investors ought to watch what Harley does when it comes to shipments for the period.
Sales for the first three quarters of 2016 are down 1.3% worldwide and down almost 5% in the U.S., but shipments are 0.7% higher. While most of the increase does come from Harley-Davidson's international markets where shipments are up 2% -- in the U.S. shipments are essentially flat as Harley has shipped just 176 fewer bikes over the first nine months -- it's not exactly warranted to push bikes on overseas distributors.
Revenue growth outside the U.S. is slowing so that although sales are up 3.3% year to date internationally, that was mostly the result of first-half results when sales rose more than 4% in each of the first two quarters, but were up only 1% in the third.
Data source: Harley-Davidson quarterly SEC filings.
Fighting for every customer
Harley admits it is confronted with "a fiercely competitive environment and an ongoing weak U.S. industry," and rival Polaris Industries (PII +1.89%) estimates the overall motorcycle industry for bikes 900 cubic centimeters and above was down by high-single-digit percentage rates.
Harley also steadfastly maintains it will still ship between 264,000 and 269,000 motorcycles this year, the midpoint of which is as many bikes as it sold in all of last year. The one thing Harley-Davidson might have going for it is its new Milwaukee-Eight engine, which replaces the Twin Cam, the company's first new engine design in 15 years.
There was rightly a lot of excitement around the introduction of the new power house. Harley noted that although U.S. motorcycle sales fell over 7% in the the third quarter, once it introduced the new Milwaukee-Eight in August on its new 2017 model touring bikes, segment sales climbed higher in September.
Image source: Harley-Davidson.
Touring bike sales jumped 6% from last year to about 23,300 bikes. While touring is Harley's biggest segment, or nearly half of total sales, it still wasn't enough to offset the big drop it experienced in cruisers and smaller bikes. Harley will eventually be adding the Milwaukee-Eight to all of its bikes, the question is whether Harley can sustain the momentum after initial enthusiasm fades. If not, it will have to continue resorting to dodgy tactics like shipping to its dealers more bikes than their lots can handle and their sales warrant.
Taking its eye off the ball
The real problem with Harley engaging in such practices is that it shows it is more concerned with how it looks to Wall Street than how it can attract more riders to its bikes. Indeed, it's one of the reasons I think the big bike maker should be taken private. Between falling sales, losing market share, and deterioration in its loan portfolio because one of out every five bike buyers is a subprime borrower, it needs to be out of the public eye to address its business problems and not have to worry about whether it is meeting analyst expectations.
Fourth-quarter earnings will show whether Harley-Davidson can turn its business around or if it will keep playing games with the numbers to justify its forecasts.
