Venture over to The Motley Fool's latest investing innovation, called CAPS, and you'll find that investors aren't completely sold on the idea of Harley-Davidson
The motorcycle manufacturer's third-quarter results raced past expectations, revving up with a top-line increase of 14.3% to $1.64 billion as its EPS grew 25% to $0.96. There is nothing slim about this Fat Boy.
In this edition of Fool on Call, we will look at the earnings conference call to provide greater detail as to what's driving top-line growth. The discussion will center on the company's international segment, highlighting these topics:
1. International growth
2. International strategy
3. Focusing products for international markets
1. Free bird soars internationally
Last spring, I wrote about the company's first-quarter results, following the grand opening of its first dealership in Beijing. Since then, a couple of readers familiar with China's laws contacted me stating that Chinese restrictions on motorcycle usage would significantly hamper Harley's growth opportunities there. I have no reason to doubt the legitimacy of what they were saying; in fact, a search will yield several articles on the topic.
However, I couldn't help but think to myself, "Yeah, but we are talking about a Chinese population of a billion people." It seems Harley's management is thinking the same thing. For them, it is worth establishing a beachhead there, albeit a small one, in anticipation of a day when those restrictions are lessened.
In the meantime, other regions around the world are fueling Harley's international growth initiatives. Total international revenue growth for the period was 18.7%, compared with 6.7% in the U.S. You can see why emerging markets are the key to Harley's future. Management reiterated in the conference call that it fully expects international growth to continue outpacing the domestic market.
2. Battle plan
International growth has been made possible by a focused and intentional plan. During the call, CFO Tom Bergmann stated, "It is evident that a number of foundational [international] strategies we have been implementing over the last several years are really starting to take hold." Improvements to its "dealer base," as well as "enhanced marketing programs" and a "more efficient distribution" system, were all contributing factors.
In the question-and-answer portion of the call, management elaborated further on the changes made to its international dealership base. When it surveyed the landscape a couple of years ago, it found there were "too many dealers selling too few bikes." In response, management embarked on a plan it utilized 25 years ago in the U.S.: reduce the number of dealerships to those who are "better capitalized," improve the level of expertise of those remaining dealers, and finally, relocate some of the dealerships into more visible areas.
In Germany, for instance, the number of Harley dealerships has been significantly reduced by about 25%, yet they are selling more bikes and are "more profitable." Management is in the process of applying this same strategy to other international markets, including Italy and Spain.
3. I can't get 80 miles to the gallon on this hog, but I can get there in a hurry
A more focused dealership model and distribution channel has helped Harley concentrate its products that are best suited to specific regions of the world. Again, this discussion was raised in Q&A while addressing the European market.
It was pointed out that European riding styles are "more aggressive," with 75% of the bikes sold in the region classified as "performance." Not surprisingly, then, Harley customers there are opting for the V-Rod and liquid-cooled motorcycles in its VRSC series of bikes.
To help target the market, it was necessary for management to reduce the number of dealerships, placing them in more visible locations, and employ a more focused marketing campaign. The result is that these dealerships became much more profitable and were freed up to employ more European-style product promotions like rallies and special events.
The success in performance is now having a trickle-down effect. What management is finding is that consumer acceptance and positive media coverage of its performance bikes are leading European bikers to try out other categories, like Softail or Touring, keeping the positive "momentum" going for the company.
Born wild, born international
Harley shareholders have to be very pleased with what they heard this conference call. The company fully expects EPS to grow in a range of 11% to 17% through 2009. This growth is made possible by the "benefits of strong free cash flow," "margin improvement," and "solid revenue growth." Rest assured that top-line growth is driven considerably by Harley's continued acceptance among international bikers.
Harley has always had that born-wild and born-free image, a mainstay of American culture. It is becoming increasingly apparent that the idea of freedom, as symbolized by a one-seat rocket on the highways and byways, is one that translates well to the international community. Welcome news indeed for shareholders who intend to ride this hog for the long haul.
Keep your engine revved with further conference-call analysis:
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