Mapping the Obstacles Ahead for Harley-Davidson

In this Market Foolery segment, host Chris Hill and Motley Fool Funds' Bill Barker discuss the future of America's iconic motorcycle company -- and it doesn't look strong. As the recent analyst report notes, millennials just aren't as into motorcycles as boomers and Gen Xers were, and the Harley-Davidson (HOG 0.56%) brand has less cachet with them. The report predicted years of shrinking sales ahead, but unlike Chris, Bill isn't surprised that HOG shares only wobbled.

A full transcript follows the video.

This video was recorded on July 12, 2017.

Chris Hill: We have to start, though, with Harley-Davidson. Shares are down a little bit because Bernstein put out a little note downgrading the stock. I find this interesting because the stock drop today is not indicative of this report. The shares are down, last time I checked, which was within the past hour, was down a little over 1%. This report is not at all good for Harley-Davidson shareholders. Among the highlights, it's all about demographics and how the baby boomer generation has a lower propensity to ride motorcycles than Generation X or Y, and the biggest finding for Bernstein was, I'm just going to quote here, "Younger millennials have shown dramatically lower interest in riding motorcycles." I suppose that's one more thing you can blame millennials for.

Did you have the same reaction to this report that I did? You know the company better than I do. The report was worse than what we're seeing with the stock today.

Bill Barker: Well, if your reaction was, "This is old news, this is what everybody has been talking about for years in the case of Harley, and whether it will be able to solve this problem," then yes, my reaction was the same. Is that what your reaction was?

Hill: That was not my reaction.

Barker: Oh, so you haven't been paying attention. But the market has been. The stock is already down 15% over the last three months. The last quarterly report highlighted many of these issues. So the analyst isn't really breaking new ground here.

Hill: But I think it's deeper ground. We've talked on this podcast before about Harley-Davidson and the aging demographic that they depend upon. This is the first thing I've seen. Again, I don't follow it as closely as you, which is why you're in the studio for stuff like this. But this is the first thing I've seen to really drill down, going generation by generation. And I suppose, if you're looking for a silver lining, it lies with Generation X and Generation Y.

Barker: I think it highlights the fact that you're looking at, the story is reasonably low ceiling but a reasonably high floor. You have a very dedicated consumer base for Harley. The people who buy Harley are big fans, as we've pointed out here and others pointed out before us. There aren't that many companies where people get the company's logo tattooed onto them in great numbers. Harley has that, and it has a place in America which is very secure, and that's a positive and a negative. They produce their motorcycles here, and their customers expect them to continue to do that, which gives them the inside track on a certain amount of patriotism. But that also makes it a very American thing abroad, which is attractive to a certain number of consumers, but they're produced here. And you can produce things, so I'm told, cheaper in other parts of the world at times than here. 

Hill: I've heard that.

Barker: So Harley is kind of locked in to producing things which are more costly to do so here, but create a more stable base. And the generations, as this report points out, and it's not the first to point out, but I think it probably does a better job than some of breaking down the exact numbers, of what the challenge is for the company. I think they have said in the past that they need to create 2 million new customers over the next few years.

Hill: That seems high.

Barker: It does seem high for a company that has not really created new customers over the last 10 years. Their sales over the last 12 months are right where they were 10 years ago.

Hill: Yeah, that really seems high and ambitious.

Barker: Yes.

Hill: Do you think there is a silver lining, in terms of our generation, and the one right after ours?

Barker: Which generation are we?

Hill: I believe we're Generation X, although you're older than I am. Are you technically a boomer? Are you part of the problem here?

Barker: No, I just missed that, thank God. Yeah, there's always some hope. Where they can make in roads are more women riders, and international has been, generally, a bright spot for them, although that tends to come and go as the dollar moves around. Then, the next generation is the biggest challenge. They've got the older baby boomer generation, which is helping, to a degree, as they retire and choose to spend money on that. I don't think they're in the same crosshairs for the autonomous-vehicle experience that other carmakers might be. That's probably neither a challenge nor an opportunity to the same degree that it is for the carmakers.