Subject to the effects of cold winter weather, the first-quarter earnings report is never a highlight for Harley-Davidson (HOG -0.29%). Sales typically don't pick up until the warmer spring and summer months, as the second and third quarters represent 60% of total annual sales. However, because last year's earnings report was especially bad as U.S. sales tumbled 12%, it's possible the bike-maker's results could actually look better by comparison.
Investors should be mindful that any sales gains will probably be a result of low expectations. But if Harley-Davidson isn't able to surpass those already depressed numbers when it announces first-quarter financials next Tuesday, April 23, investors will need to reassess just how much further down the motorcycle leader needs to fall before the bottom is reached.
Image source: Harley-Davidson.
Not looking good
Harley hasn't given investors confidence that it will be able to beat last year's numbers. Three out of four quarters last year suffered double-digit declines, leading the bike maker to end 2018 with U.S. sales down 10% (and 6% worldwide), its fourth-consecutive year of falling sales.
Management also cautioned that the first quarter would be difficult as it would be shipping fewer bikes because it had taken its Street models down, due to a big recall for faulty brakes. There was also a massive recall of its touring and Softail models due to bad clutches. First-quarter shipments tend to be among the highest as Harley prepares for the big spring push.
That's not likely to be the case this year, and with sales in a tailspin, Harley-Davidson doesn't need any hits to its reputation for quality. The bike maker has come a long way from the days when it was a joke that you needed to buy two Harleys, one to ride and one for parts.
Data source: Harley-Davidson SEC filings. Chart by author.
Harsh headwinds still ahead
Yet the motorcycle giant would be happy to sell you just one. Its core customer is aging out of the market and a new generation of riders hasn't really stepped forward to replace them. Motorcycles of the sort Harley makes don't appeal as much to today's riders, which is why the LiveWire electric motorcycle will make its debut later this year. The bike maker is hoping the high-performance electric bike can create a halo bright enough to attract buyers to the brand once again.
But the more immediate threat is higher commodity costs, further tariff uncertainty, and until recently, a union disagreement over contracts. Harley just settled its negotiations with the United Steelworks, however, with both sides agreeing to 14% wage hikes over five years, with additional signing bonuses.
It's a fairly generous agreement for a bike maker spiraling down, but perhaps a necessary one since relations were strained due to Harley moving assembly of certain bikes destined for international markets to foreign plants. While that was seen as a necessary, but temporary, fix to get around the trade dispute that saw duties of 25% slapped on Harley motorcycles, the longer that trade tensions exist, the higher the probability that the movement overseas will become a permanent part of Harley-Davidson's business.
As much as that's a smart financial move for the bike maker, it doesn't necessarily sell well to its domestic stakeholders, who have long bought into the American-made ethos of Harley-Davidson. Moreover, with President Trump considering some $11 billion in new tariffs, it's unknown where any retaliatory strikes by the European Union will fall.
How low can you go?
Still, Harley is seeking to minimize the U.S. market by having international sales account for half of its sales volume. Currently, the U.S. represents some 60% of the total, but it won't do to achieve its goal simply by having domestic sales wither away. And sales overseas haven't been stellar, either.
International sales were essentially flat in 2018 but dropped 2.5% in the fourth quarter. It could mean overseas markets have turned against Harley, too.
Harley-Davidson isn't going out of business, and it still produced nearly $1 billion in free cash flow last year. It also pays a dividend that attracts investors with its 3.7% yield. But in the future, it's likely to be a much smaller motorcycle company, and Harley's first-quarter earnings report may begin to reveal just how far it needs to shrink to get there.
