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WIKI ANALYSIS
With half the US market and a third of the global one, Harley-Davidson is the largest manufacturer of heavyweight motorcycles in the world by market share, capturing half the US market and a third of the global market with revenues of $5.9 billion.[1] The company markets products under the Harley-Davidson, Buell, and MV Augusta brands. As a luxury good, Harley competes primarily on design and quality, rather than price, which keeps margins high; gross margin during 2009 was 31%, as opposed to 34.5% in 2008.[2][1]
Harley's past growth and continued success is closely tied to its customers brand loyalty; Harley is arguably the only company whose customers have been known to regularly tattoo its trademark on their bodies. Despite this rebellious image, the average Harley customer is an upper-class 47-year-old white male, and has been getting older at a rate of 6 months every year for the last 20 years. Because Harley's primary value is in its brand, investors would be well advised to monitor the growth or decline of Harley culture.
Despite brand loyalty, the company had to shut down and consolidate factories in 2009 due to the effects of the recession and the fall of the U.S. Housing Market. About 15% of Harley's business used to be writing loans to its motorcycle buyers. The company's finance arm has since collapsed and has shown no signs of stabilizing as of Q3 2009.[3]
Business Financials
Quarterly and Annual Earnings
Q4 and Annual 2009 Earnings
Harley Davidson posted drops in both revenue and profits for the year, with decreases being driven primarily by reduced motorcycle shipments and company restructuring efforts.[4] Harley-Davidson's full-year 2009 revenue was $4.29 billion and its full-year operating income was $70.6 million, 23.1% and 89.7% decreases from the previous year respectively.[4] Fourth quarter revenue was $764.5 million and income from continuing operations was a loss of $147.2 million, marking a 40.2% decrease in revenue as compared with the previous year and a gain of $91.9 million in operating income in FY 2008.[4] As stated earlier, these losses were driven by a 53.1% reduction in motorcycle shipments and $167.1 million in costs incurred from restructuring and ending the Buell production line.[4]
Revenue from motorcycle sales for the past quarter was down 45.6% as compared to the previous year, finishing at $552.0 million with 35,938 motorcycles being shipped out to dealers.[4] Gross margin percent dropped during the quarter seeing as how fewer units were being produced with existing capital.[4] Numbers were similarly down for full-year reporting, with revenue dropping from $4.24 billion the previous year to $3.17 billion.[4] Motorcycle shipments dropped from 303,479 to 223,023; gross margin dropped to 32.3% for the year as compared to 34.6% the previous year.[4]
Q3 FY 2009 Quarterly Earnings
HOG faced another tough quarter when it announced drops in revenue, net income and earnings per share for Q3 FY 2009 compared to the similar quarter last year; the rate of decline in retail sales, however, decreased from the previous quarter.[3]. Worldwide retail sails fell by 21.3% in Q3 FY 2009 compared to the same quarter in FY 2008. [3] Net income for the Q3 was $26.5 million, a $140 million from $166.5 million in the Q3 FY 2008; revenue of decreased by $300 million to $1.12 billion, as compared to $1.42 billion the previous year.[3]
These decreases come in light of impacted, though improving, sales worldwide. This decline continues to force HOG to reduce motorcycle shipments, shipping only 54,236 Harley-Davidson motorcycles reflecting a 27.4% drop in shipments from the third quarter in 2008.[3] Responding to drops across the board, HOG has unveiled a long-term business strategy, ending its Buell product line and divesting in the MV Agusta unit.[3]
Q2 FY 2009 Quarterly Earnings
Harley Davidson’s 2009 second quarter earnings declined 91% from the same quarter in 2008. Revenues declined 26%. Harley Davidson’s credit facility has been seeing rising defaults, which led to a write down accounting for 35% of Harley’s total losses. Another 14% of the losses were due to an impairment of the company’s goodwill due to prevailing negative economic conditions. The rest was simply because the company could not sell as many motorcycles. [5]
This serious hit to earnings is forcing Harley Davidson to ship 25% fewer motorcycles in 2009, and to fire about 2,500 of its employees (2200 hourly positions, and 300 salaried positions). This accounts for about 25% of its total workforce. It is shutting down, or consolidating numerous manufacturing facilities to accommodate the drastically reduced capacity. Because it is actually shutting down factories, Harley will be able to produce fewer motorcycles for years to come. [5]
Q1 FY 2009 Quarterly Earnings
Harley Davidson's revenue increased by 10.8% in the first quarter of 2009 to $1.31 billion as compared to $1.18 billion in the same quarter the previous year, driven primarily by revenue from Harley-Davidson motorcycles.[6] Despite these gains, net income decreased by 2.5% from $192.3 million in Q1 FY2008 to $187.6 million in Q1 FY2009.[6] Similarly, retail sales in the U.S. were down 12.8% for the quarter, beating however, the industry-wide average of a 14.0% drop.[6] Shipments managed to increase by 6.1% despite the economic downturn and the losses mentioned above.[6]
FY 2008 Annual Summary
Net revenue decreased by 2% in 2008 from $5.7 billion the previous year to $5.6 billion dollars.[7] Gross profit similarly fell from $2.1 billion in 2007 to $1.9 billion in 2008, marking a 9% decrease.[7] Driving these losses is a decrease in income from operations and investment income, posting 28% and 58% drops respectively.[7] Income from operations ended at $1.0 billion in 2008 as compared to $1.4 billion the previous year.[7] Similarly, investment income ended at $9.5 million as compared $22.3 million in 2007.[7]
FY 2007 Annual Summary
Net revenue decreased by 2% in 2007 from $5.8 billion the previous year to $5.7 billion dollars.[7] Gross profit similarly fell from $2.2 billion in 2006 to $2.1 billion in 2007, marking a 5% decrease.[7] Driving these losses is a decrease in income from operations which fell from $1.6 billion in 2006 to $1.4 billion in 2007, marking an 11% drop.[7] Net income, in turn, also dropped by 11% to $933 million from $1.0 billion the previous year.[7] The number of shareholders increased in 2007 to 90,748 from 89,995 the previous year.[7]
Operating Segments
Harley has two main businesses: selling Harleys, and giving people credit to buy Harleys. Traditionally, the financing arm generates about 15% (+/-3%) of Harley's income, while the motorcycle branch generates about 85%. 2008-2009 have been atypical because the financing arm has actually lost money.[8]
Specifically, Harley Davidson sells motorcycles directly, sells motorcycle parts and accessories, operates retail motorcycle dealerships, sells motorcycle gear and general merchandise, and offers loans to buyers.
The following graph shows how badly each of these sectors performed in 2009 versus 2008. The 3 month comparison deals with Q2 2009 and Q2 2008. The 6 month deals with Q1 and Q2 of both years.[5]
The graph shows not only that every single sector of Harley Davidson has declined since last year, but also indicates that every sector is declining at an accelerating rate (with the exception of the gear and clothing sector).
International Sales
Harley Davidson generates 70% of its sales in the United States, and 30% internationally. Europe accounts for about 50% of international sales. Canada accounts for about 15%, while Japan accounts for 13%. [5]
Demand in Japan and the rest of Asia declined only about 7% in the past year, whereas Canada saw a decline of 36.7%. This could be due to Canada’s exposure to the United States Market, which saw a 26% decline. Overall, world sales have not been affected nearly as much as North American either due to premium brand recognition (in the case of Asia) or the depreciation of the US Dollar (Europe). [9]
Trends and Forces
An aging customer base
Harley Davidson’s average customer has been getting 6 months older for the past 20 years, and is now 47 years old. The children of Baby Boomers generally do not want huge bikes that drive most of Harley's sales. Younger generations have a taste that errs towards smaller, cheaper Japanese bikes. To address this, Harley bought out Buell, a fast bike producer, in 1998, introduced the unconventional V-Rod in 2002, and bought out the Italian MV Agusta company which makes premium light-weight bikes. These acquisitions of fast bike companies have not yet slowed the aging of the Harley customer base. [9] While Harley’s faster smaller bike segments have been growing steadily since 2004, they still account for less than 20% of Harley’s total sales. [10]
Harley will need to attract younger buyers to maintain its long-term market share, while not alienating its core customer too much.
The strength of the US Dollar versus the Euro and the Yen
Harley Davidson is increasingly reliant on international sales, especially in Europe. In 2004, only 18% of the company’s sales were international. This figure had moved to 32% by 2008, helped by a heavily weakening dollar. [10] Because Harley incurs its production costs in the United States, it benefits when the dollar weakens against the Euro and the Yen.
People tend to buy dollars to buy US goods, or to hedge against the fluctuation of global currency (the US Dollar is the world's most trusted currency). When people buy dollars, the dollar goes up, and Harley gets hurt.
The "American-made" premium
Some say the collapse of General Motors (GMGMQ) was the end of an era for American manufacturers. GM did not just collapse because of high pension obligations. Its cars did not sell well. Asian competitors were making cheaper cars that broke less, took less gas, and went faster. [11]
As an increasing number of American factories go overseas to reduce expenses and do not see a decline in quality. Even Harley imports some Japanese parts due to their higher quality. The "American-made" premium is more nostalgic at this point than anything else. Honda and Kawasakis compete head-to-head with Harleys on technical specifications.[12] Harley is able to charge premium prices for their motorcycles primarily because of their brand image.
The question is: can a brand built on an increasingly distant past survive the future?
Harley faces two threats with its reliance on its brand image. First of all, cool retro-"Easy-Rider" culture could fade out of style along with corresponding demand for Harley's. Secondly, custom American chopper producers such as Big Dog Motorcycles and American IronHorse actually deliver the promise of an All-American bike that is more powerful and customized than almost anything out there.[13]
The housing market
Homes serve as the traditional collateral for credit. Harley Davidson has frequently been called a banking stock in drag due to its own extensive financing branch. Depressed housing prices mean a higher percentage probability of loan default due to moral hazard (“Go ahead and take my house, but good luck selling it.”). Higher loan defaults mean greater losses, neccesitating higher rates, which encourages further defaults and so on.
June 2009 housing data beat expectations, but renting is cheaper than owning in many parts of the country. [14]
Harley’s financing arm, which is hemorrhaging cash needs the housing market to recover. If the housing market does not recover in the immediate future, Harley will have difficulty selling motorcycles.
Comparison to Competitors
Major Competitors
Harley-Davidson maintains a large margin in its dominance in the US Heavyweight Motorcycle market as compared to its major competitors.
| US Market Share | 2007 | 2006 | 2005 | 2004 | 2003 | |
|---|---|---|---|---|---|---|
| Harley-Davidson | 49.4% | 50% | 49.6% | 50.2% | 50.3% | |
| Honda | 14.2 | 15.1 | 16.6 | 18.7 | 18.4 | |
| Suzuki | 12.5 | 12.9 | 12.4 | 10.2 | 9.8 | |
| Yamaha | 9.2 | 8.6 | 8.9 | 8.7 | 8.5 | |
| Kawasaki | 7.2 | 6.8 | 6.5 | 6.4 | 6.7 | |
While the United States is HOG's most important market, the company sells motorcycles in many other markets worldwide. The two most important are Europe, where the company has grown market share from 9.8% in 2005 to 10.7% in 2007, and Canada where HOG had a 39.0% market share for 2007, up from 32.7% in 2005.[16] Worldwide, Harley has a dominant worldwide market share of 33% in what is a growing industry.
Financial Resources
While the company’s competitors, notably Honda Motor Company (HMC) and Suzuki, do not have as dominant a market position, they often have greater financial resources. This is largely because companies like Honda have more diverse product lines (like cars), and are greater in size than Harley-Davidson, a far more specialized company. For example, motorcycle sales at the company’s largest competitor, Honda, hover around 12% of total revenue.
Difference in Product Lines
Harley-Davidson is the premier manufacturer of heavyweight motorcycles. As compared to lightweight motorcycles, the products typically appeal to very different cross sections of the population, with the lightweight market catering more to younger buyers seeking speed, agility, and affordability in a motorcycle and the heavyweight market to older buyers seeking style, quality, and, sometimes, status. Because heavyweight bikes are perceived as a luxury good, they offer greater margins for the manufacturer.[17] Thus, Harley’s true competitors are other heavyweight manufacturers, though the company competes to some degree with any motorcycle manufacturer. Heavyweight motorcycles accounted for 54% of the U.S. motorcycle market in 2007.[18]
History
With the first Harley (or, as a Harley bike is often known, “Hog”) produced in 1903, the company began a storied history extending over a century. In just a few decades, the company emerged as the largest motorcycle manufacturer in the world, before stumbling like most companies through the Depression. Harley nonetheless survived, and soon supplied products to the U.S. Army during World War II. Harley-Davidson was sold to investors for $80 million in 1981, before it was taken public in 1986. It has since enjoyed a period of tremendous growth, achieving annualized gains of over 30% for investors since its IPO. Through the long history of the company, the Harley-Davidson brand name has been extraordinarily well-recognized within the industry.
Notes
- ↑ 1.0 1.1 Harley Davidson Google Finance Profile
- ↑ HOG 2008 10K
- ↑ 3.0 3.1 3.2 3.3 3.4 3.5 Harley-Davidson announces 3rd quarter results, Unveils long-term business strategy
- ↑ 4.0 4.1 4.2 4.3 4.4 4.5 4.6 4.7 Harley-Davidson Reports 2009 Results
- ↑ 5.0 5.1 5.2 5.3 Finance, AP 2q Results
- ↑ 6.0 6.1 6.2 6.3 Harley-Davidson Reports First Quarter Results
- ↑ 7.0 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 Harley-Davidson Reports 2008 Annual Results
- ↑ [http http://www.sec.gov/Archives/edgar/data/793952/000110465908012386/a08-2394_110k.htm | The Harley Davidson 2008 Annual Report, p. 95]
- ↑ 9.0 9.1 [ http://seekingalpha.com/article/149315-hog-spends-yet-another-quarter-at-the-trough?source=yahoo|Harley Earnings Release Analysis, Seeking Alpha]
- ↑ 10.0 10.1 [ http://investor.harley-davidson.com/shipments.cfm?locale=en_US&bmLocale=en_US| HOG Company Website]
- ↑ Declining American Premium, US News
- ↑ HOG Performance Specs Article
- ↑ |Harleys losing their cool?
- ↑ |Housing crash recovery indicators
- ↑ 2007 Harley Davidson 10K, page 9
- ↑ 2007 Harley Davidson 10K, page 10
- ↑ Harley Davidson 2007 Annual Report, page 8
- ↑ Harley Davidson 2007 Annual Report, page 8
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