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Harley-Davidson Inc. Is Still Being Too Optimistic

By Rich Duprey - Oct 28, 2015 at 11:02AM

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The motorcycle maker has been wearing rose-colored glasses -- so investors may need to put on their green eyeshades now.

Harley-Davidson may be seeing only the taillights of the competition if its sales record doesn't begin to improve soon.

Harley-Davidson (HOG 1.04%) couldn't ignore reality any longer. Even in the face of sliding sales, management maintained it would be able to maintain its full-year guidance for bike shipments to dealers, but an ugly third-quarter earnings report exposed the awful truth: It was going to have to lower expectations.

Not that this should have come as a surprise to investors who saw that after Harley's second-quarter performance, it was going to be nearly impossible to maintain projections.

Harley-Davidson's first and second quarters comprise its busiest sales period, typically accounting for 55% of total full-year sales and 62% of shipments (last year, the first half represented 64% of shipments). By the end of June, however, it had shipped fewer than 165,000 bikes to dealers worldwide, or 5% below the near-173,000 bikes it shipped out last year, but management somehow believed at the time it would be able to still send as many as 281,000 bikes to dealer lots this year, or 4% more than it did last year.

It's hard to see how management hoped the math would add up. I warned early on that Harley's projections were much too optimistic, and that it would have to reduce guidance at some point. That the company ended up doing so isn't surprising. That the market was shocked -- shocked! -- by the announcement and sent Harley-Davidson's stock sharply lower afterward was, though. It lost 17% of its value at one point, and its shares are a quarter of the value they were at the start of the year.

Harley blames the competition for its woes, saying the promotional environment is reducing the attractiveness of its bikes as it tries to maintain its premium image. Rival Polaris Industries (PII 1.76%) bemoaned the discounting going on, too, but felt it had to join in to maintain its market share.

Polaris' gross margins dropped by 126 basis points in the third quarter across all of its divisions, mostly due to currency headwinds like those suffered by Harley, but also because of manufacturing problems it's still in the midst of working out, and the price-cutting initiatives.

Refreshing the Indian Motorcycles nameplate with new models like the Scout has allowed Polaris Industries to steal market share from Harley-Davidson. Image source: Indian Motorcycles.

Yet while Harley only saw a 30-basis-point decline in its gross margins, its sales fell 1.4% worldwide and 2.5% in the U.S. Polaris motorcycle sales, on the other hand, surged 154% year over year, with North American demand up 60%, driven primarily by its Indian Motorcycles nameplate.

Since resurrecting the Indian brand last year, Polaris has seen consumer appetite for the nameplate stay at healthy levels, even beyond the well-known Chieftain model. Both the Scout and Chief Dark Horse models have been well received by the market, leading the bike maker to steal share from its bigger rival.

It's true that the number of motorcycles Polaris sells in a year is what Harley manufactures in just a few days, but as the latest quarterly results indicate, Polaris is no longer a company Harley-Davidson can ignore. It may want to maintain its premium price point to prop up both its prestige and bottom line, but bike buyers may be able to get a Harley for less sooner than many believe. In the scramble for market share, of which Harley still owns more than half for 600 cc-plus bikes, it's on a downward trajectory, and it lost almost 4 percentage points this year compared to last.

At least management recognizes that the road ahead isn't going to be smooth: It reduced its dealer shipment guidance from a range of 276,000 to 281,000 motorcycles this year to 265,000 to 270,000 motorcycles -- a 4% decline.

Unfortunately, unless Harley gets aggressive again with its shipments like it did last year to just make it over the low end of its guidance, it may still be too optimistic in its outlook. Based on its historical averages, Harley-Davidson can only expect to ship enough bikes to just hit its low-end numbers, and if it follows last year's example, it could tumble to as low as 257,000 bikes, or 3% lower than the low end of guidance.

And the way sales have been falling, it looks like there's little justification for pushing shipments aggressively. As a result, if investors are counting on management to come through like they were this quarter, there's a good chance they'll be sorely disappointed again.

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Stocks Mentioned

Harley-Davidson, Inc. Stock Quote
Harley-Davidson, Inc.
HOG
$31.99 (1.04%) $0.33
Polaris Industries Inc. Stock Quote
Polaris Industries Inc.
PII
$101.03 (1.76%) $1.75

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