Real world: Harley Davidson and Kraft Heinz
In the first quarter of 2020, Harley Davidson (HOG +1.05%) reported an operating profit margin in its motorcycle division of 7.7%, down from 9.1% in the first quarter of 2019. (The company also makes money on financial services.)
Motorcycle division sales in the same quarter were down about $95 million. The stock price had also fallen more than 50%, from about $35 per share in January down to $15 per share in March.
At the time, the pandemic was raging around the world and HD had paused production. When it published quarterly results, the company announced a massive cost restructuring. Its primary strategies included a hiring freeze, temporary salary reductions, a pause on merit increases, and a more conservative product launch calendar.
HD also suspended share repurchases and slashed its dividend from $0.38 to $0.02 per share. The goal of the program was to preserve approximately $250 million in cash in 2020.
Fast forward one year, and Harley Davidson had raised its motorcycle operating margin to 18.5%, more than double the 7.7% from the first quarter of 2020. Also in the first quarter of 2021, the company raised its dividend from $0.02 to $0.15 per share and stepped up its share repurchase activity. The stock price benefited from the improvements, climbing back into the mid-$30s.
One year later, in the first quarter of 2022, the company's motorcycle operating margin had moderated down to 15.6%. Even with the step back, it was still well above the single-digit performance HD had experienced in earlier years.
In this case, the cost restructuring efforts positioned the company for improved profitability going forward. But such efforts don't always go according to plan.
Packaged food maker Kraft Heinz (KHC +2.26%) had a different experience with cost restructuring. The company followed an aggressive cost-cutting strategy between 2017 and 2019 before abruptly changing course.
The shift happened after the company wrote down the value of two major brands by billions and cut its dividend. Kraft Heinz also restated three years of financial results after an SEC accounting investigation.
Kraft Heinz installed CEO Miguel Patricio in 2019 to implement the strategy change. In an interview with Reuters at that time, Patricio said, "Cost cutting should be a priority for any company. However, you cannot cut costs every year."
Cost cutting: Sometimes good, sometimes bad
At the end of the day, cost cutting can be good or bad. Changes that a company makes should either be sustainable or temporary. You don't want to see permanent cuts that degrade the company's ability to grow, compete, or return value to shareholders.
