There was a time when, if you wanted to buy a Harley-Davidson (NYSE:HOG) motorcycle, you had to get in line. Demand so far outstripped production that months-long waiting lists at dealerships were the norm, and used bikes sold for just as much as -- and sometimes more than -- their original purchase price.
A nice problem to have
Rival Polaris Industries (NYSE:PII) currently finds itself in a similar position. Having successfully resurrected the Indian Motorcycles nameplate and introduced several new line extensions beyond the well-known Chieftain (both the Scout and the recent Dark Horse line are proving extremely popular), Polaris finds itself unable to keep up with demand.
In its second-quarter earnings report issued last week, Polaris said it continues to scale up production and is adding new capacity at its Spirit Lake, Iowa, paint facility to overcome what is proving to be a particularly nettlesome bottleneck.
Although it's made a few mistakes along the way -- it says it's been a bit too cheap and now actually has to outsource the painting of its bikes, for which it's paying a steep premium -- if Polaris takes a look at what Harley-Davidson did when it was running full throttle, it may be able to avoid the serious case of road rash that accompanied the inevitable crash.
Heading out to the highway
As weekend warriors strapped on leather for the first time and sought to take a bite out of the renegade mystique of Harley's legacy, demand went through the roof, and the bike maker began pumping out motorcycles at an ever-faster rate, eventually peaking at over 361,600 bikes in 2006.
Of course, the recession kicked in soon afterward and suddenly, people could no longer afford high-priced toys. Bike shipments tumbled, and by 2010, they had fallen to just under 210,500 motorcycles.
Although Harley-Davidson has built production back up over time -- last year, it shipped more than 270,000 motorcycles to dealers -- it still remains far below peak level, and its forecasts for the current year call for shipments to be at best 2% to 4% above 2014's level. Unfortunately, that may be a bit too rosy.
For two quarters running now, Harley-Davidson has sold fewer bikes than it did the year before -- 145,592 bikes compared to 147,633, or a better than 1% decline. Management, which has cut shipments by nearly 5%, maintains it can still meet its worldwide guidance of shipping 276,000 to 281,000 motorcycles this year.
The problem with that confidence is that the first half of the year typically accounts for 55% of all sales and more than 62% of all shipments. Harley's numbers across the first and second quarters of 2015 suggest it will ship and sell approximately 263,000 motorcycles this year. That's almost 2% fewer sales than a year ago, and 3% fewer shipments, but it also misses by a wide margin management's shipment growth estimates.
A straight line higher
Now look at the huge gains Polaris is making. Second-quarter motorcycle sales jumped 57% from last year, with sales of Indian motorcycles and Slingshot trikes surging 80% in the period. Indian sales alone during the second quarter more than doubled.
It's clear the bike maker needs to iron out the difficulties it has with the paint facilities, because it's dragging down earnings by substantially adding to its costs, which it has to absorb. Fortunately, motorcycles only account for around 14% of Polaris Industries' total sales right now; it generates most of its revenues through ATVs and other off-road vehicles. In fact, even parts and accessories bring in more money than motorcycles.
However, having tapped into an obvious desire of motorcycle enthusiasts for big, American-made bikes not named Harley-Davidson, Polaris Industries is going to have to start treating the division more seriously.
It needs to produce enough bikes without saturating the market like Harley did, but also make them in sufficient quantities to keep buyers from going to the competition. It's a delicate balancing act that Harley is still having difficulty figuring out. Polaris, though, also needs to prove to investors that it can run its bike operations with the same success and efficiency that it's had with ORVs.
The market initially gave Harley-Davidson a bounce after its earnings report while knocking Polaris down a peg or two. I think it got the responses exactly reversed. Polaris appears to be learning its lessons, albeit sometimes the hard way, but investors would do better keeping their eyes on the Indian Motorcycle maker rather than running hog wild with Harley-Davidson.