Another quarter, another dismal performance by Harley-Davidson (NYSE:HOG), though the market seemed to buy into the promise that this time it will be able to turn things around. Don't count on it.
Same old, same old
U.S. sales of motorcycles tumbled 12% in the first quarter and were down 7% worldwide. Sales were up 8% in Europe, though, a rebound from last quarter, which saw sales drop there, too. But it is, of course, the U.S. market that remains of primary concern because it continues to represent almost 60% of total sales, and they continue to be in a tailspin.
That hasn't stopped management from promising to fix things again by "crafting strategy accelerants" to deliver shareholder returns. Yet admitting that its efforts thus far haven't worked, it also said it was "refining" the plans it had already devised, but it wouldn't reveal how it was going to achieve them until this summer.
Out of favor
The problems Harley-Davidson are encountering aren't necessarily of its own making, though it also hasn't helped itself along the way. It noted that the motorcycle industry for bikes 601 cubic centimeters and larger had shrunk over 11% in the first quarter, so Harley's performance was only minimally worse than the market average.
The problem is that Polaris Industries (NYSE:PII), which also sells into that market, continues to notch higher motorcycle sales. Indian Motorcycle wholegood sales were up by double-digit percentages, with retail demand rising by low single-digit percentages. Its target market is the slightly large engine displacement segment of 900 cc and above (where most of Harley's bikes also reside), and it notes the industry was down by mid-teen percentages in the quarter.
What those two positions say is that although the market for big bikes continues to fall hard, those who are buying prefer Indian Motorcycles. Even though Harley-Davidson still owns half of the U.S. market, Indian continues to gain market share at the expense of the leader.
Unfortunately, Harley-Davidson CEO Matt Levatich remains vague on what the motorcycle company is going to do to change that dynamic. He asserts Harley will achieve its goals of bringing in 2 million new U.S. riders, building 100 new bikes, and increasing international volumes to attain 50% of the total, but that's a pretty tall order in a rising market, let alone one in decline.
Harley also refined its wording on when we would see its new electric motorcycle, changing from within the next 18 months to "before 2020." While both indicate the e-bike will appear in 2019, it sounds like Harley-Davidson may have pushed back its deadline a few months.
Too high a price to pay
That's where Harley has contributed to its problems. It has failed to make motorcycles that today's current bike buyer wants. As it became clear that its core customers were no longer buying bikes, it still produced big, gleaming machines. It has more recently tried producing some smaller bikes, like its Street 500 and 750s, but sales in that segment fell 30% year over year.
Now it has a new contender in Royal Enfield targeting the low end of the market, along with Honda and others, and though there is potential in its investment in electric bike maker Alta Motors, it's hard to see Harley producing the kind of small, lightweight, but affordable e-bike the market would probably respond to.
Harley-Davidson continues to protect its premium image at all costs, and even this quarter, as sales were falling, it was able to report higher revenues (up almost 3%) because it isn't discounting its bikes like its rivals, but instead has introduced pricey new bikes equipped with its powerful Milwaukee-Eight engine. It's rising prices, not higher sales that are sustaining Harley-Davidson at the moment, yet the market is counting on it getting the equation right this time even though it's failed before.
The spring season is when Harley makes most of its sales, and the first half of it has already been extremely disappointing. Even so, management maintained its guidance that it will ship to dealers between 231,000 and 236,000 motorcycles globally this year. That's only 2% to 4% less than what it shipped in 2017, suggesting once again we're going to need a big revision as the year progresses.
It's not going to be only Harley-Davidson's unit numbers going from bad to worse, but its earnings, too.