Harley-Davidson (NYSE:HOG) surged 22% after its third-quarter earnings report beat analyst expectations, and though it has given back some of the gains in the days afterwards, the motorcycle maker's stock has largely wiped out all the losses incurred during the pandemic.

Yet with sales still falling at double-digit rates and the improvements made this quarter coming on the back of cost-cutting initiatives, not a better business environment, investors need to ask whether Harley-Davidson deserves the support it's being given.

Motorcycle with American flag in front of Washington Monument

Image source: Getty Images.

Shrinking down to size

The earnings report certainly seems to validate the turnaround plan of CEO Jochen Zeitz, who believes Harley-Davidson can be a dynamic, profitable company, albeit a smaller one than it has been. 

This summer the bike maker announced plans to eliminate 700 jobs to help right-size the business while also reducing dealer inventories. It also said it would be exiting from some 40 international markets, while in a handful of the 50 core markets in which it remained, sales would be handled through third-party dealers.

For example, Harley recently announced sales in India, a country it previously said it would be exiting, would be made through Hero MotoCorp.

While the U.S. will continue to be its top tier-market -- a change in direction from Zeitz predecessor Matt Levatich, who wanted to deprioritize domestic sales in favor of growing them overseas -- Harley will also reduce the number of motorcycles by cutting the product lineup by 30%.

It seems like a smart program that focuses on the company's key strengths and which it has named The Rewire, Harley's third roadmap for the future in two years. But investors also need to see whether it works.

Down a different path

The motorcycle company has suffered 15 consecutive quarters of falling sales. While the 10% decline in U.S. sales was significantly better than the 27% drop it recorded during the depths of the coronavirus pandemic, it was still a double-digit decline, even though it had a relatively low bar to get over.

In comparison, Polaris Industries (NYSE:PII) also reported third-quarter sales. Although its results were mostly overshadowed by the Harley hoopla, motorcycle revenue rose 11% and generated a 78% increase in profits. 

While much of the gain was the result of renewed strength from its revamped three-wheeled Slingshot, it also said North American consumer retail sales for its Indian Motorcycle brand were up in the low-40% range. Industry sales for middleweight and heavyweight motorcycles were up by low-single digits.

That means the market as a whole was rising during the quarter, and Indian motorcycles were up, too, but Harley-Davidson continued to see a substantial decline in sales.

Electric vehicles will be big

Harley also remains fully committed to electric vehicles. While it didn't release any data surrounding the LiveWire electric motorcycle, Zeitz said the bike is the best-selling model in the industry, "actually selling more than double the next highest electric motorcycles."

That would be remarkable indeed, and Zeitz reiterated that "electric needs to play an important role in the future of Harley-Davidson."

Harley has also just announced it will soon introduce its first electric bicycle. The Serial 1 Cycle Company will be a business separate from Harley-Davidson, based out of Salt Lake City, Utah, with its first model coming this spring. Designed with all the hallmarks of the very first motorcycle Harley made (and what the name of the company and the bike harken back to), the new bike is a harbinger of what's in store for the business.

A good start

Part of Harley's underperformance in the third quarter is the result of pushing back the launch of its new season motorcycles until the spring, instead of in August when it has typically released new models.

That also seems to be a smart decision, as it gets the newest bikes before the consumer just as they're ready to ride with the coming warmer weather. 

The many restructuring moves the motorcycle company has made are expected to gain traction in 2021, and Harley said it expects to realize $115 million in annual savings from them beginning next year.

Perhaps, but it still needs to prove any of this will work. Zeitz has reduced inventory while propping up pricing, which he says preserves value for buyers, but high prices have long been one of the impediments to consumers buying its motorcycles.

There are definitely hopeful indications Harley-Davidson can resurrect its legacy, but the market's reaction seems to put the cart before the horse. Investors may want to wait for more proof (any proof, really) that this turnaround will be successful.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.