Honda Motor Co. (NYSE:HMC) is back on track. After a disappointing fiscal 2015, there's little doubt that the first quarter of fiscal 2016 was a big relief for its investors. Honda's shares jumped more than 7% on July 31, as both the top and bottom lines increased double digits from the comparable period last year.
Tired of back-to-back recalls, quality issues, and slowing sales across geographies, especially North America, Honda was desperate to improve its situation. Its latest quarterly performance shows that it's back to moving in the right direction. Let's zero in.
Being quality-conscious boosts revenue growth
Honda's first-quarter revenue increased by 15.5% year over year -- the highest in the past five quarters. In fact, revenue growth was almost three times the growth rate in the first quarter of 2015, thanks to a nice upturn in the automotive segment that reversed a downtrend.
Last year, quality issues were a big setback for Honda's image and sales. Former CEO Takanobu Ito set ambitious sales targets that led to quality-check slip-ups. Honda recorded its highest-ever number of car recalls globally last year, between faulty Takata airbags and software glitches in the subcompact Fit.
As a result, Honda decided to focus more on quality, adding another level of quality check last October. Though this addition came at the cost of delayed product launches, the company made sure the new launches were devoid of any issues. And that's reflected in its results.
Regaining strength in North America
Geographically, North America was the strongest segment in the quarter, growing unit sales by 29.2% over the comparable period last year. The region reported its best unit sales in the past 11 quarters, doing well enough to make up for the double-digit sales decline in Japan and Europe. Though the CR-V and Pilot played their part, Honda's newly launched small crossover HR-V helped.
It's crucial for Honda to do well in North America, which is the company's largest market, with more than a 40% contribution to total unit sales. After 10.6% growth in the second quarter of fiscal 2014, sales in the region declined in the subsequent three quarters. Growth returned in the third quarter of 2015, but the pace slowed.
Slowing growth in North America can be attributed to quality issues and a small presence in the SUV and crossover segments. Until last year, Honda's SUV best-sellers were the CR-V and Pilot, while its Japanese rival Toyota had the RAV4, Highlander, and 4Runner.
The oil-price dip beginning in July 2014 spurred SUV and crossover sales, but Honda failed to capitalize on it fully. In the first quarter, though, the company's North American sales gained traction from the newly launched HR-V, which marked the company's entry in the small crossover segment. The HR-V hit stores in May, and the company sold 14,141 units in the first quarter.
Sedan sales in the U.S. are cooling down, and so are Honda's. But the shortcoming has been more than offset by the increased sales of the company's SUV/crossover portfolio. Honda also tasted success with its Acura TLX, the new and competitively priced luxury sedan.
Honda is taking care of vital issues that stalled growth in the previous quarter. It's getting back to top-notch quality and filling up product gaps. The first quarter is a testament to its efforts and has given the company much-required impetus.