Motorcycle manufacturer Harley-Davidson (HOG
37.34, -1.39) trades lower for a fourth-straight session on Tuesday despite a
solid Q3 performance as commentary about a declining U.S. motorcycle market
planted the seed of doubt about Harley’s More Roads plan.
In general the Q3 performance was solid out of the Milwaukee-based motorcycle company. Earnings per share (EPS) of $0.78 and revenue growth of 16.8% to $1.12 bln were both solidly ahead of market expectations. Gross margins were up 240 basis points to 30.9% as a result of higher shipments, strong mix, and higher pricing partially offset by unfavorable currency and higher raw materials costs. What’s more, Harley shipped 48,639 vehicles in the period, a little better than midpoint of the company’s 45,500-50,500 guidance coming into the period.
What’s more, Harley-Davidson international retail motorcycle sales were up 2.6% in Q3 compared to 2017 while U.S. retail sales were down 13.3%. Taken as a whole, worldwide retail sales decreased 7.8%.
The company also noted that manufacturing was slightly favorable in Q3 versus the prior year, driven by increased absorption on higher production and shipments offset by higher year-over-year tariffs and efficiencies related to the manufacturing optimization. Also, tariff costs increased by $9.9 mln, driven by higher fuel tariffs.
Management also notified dealers yesterday of a voluntary recall of some 238,300 bikes for a hydraulic clutch assembly fix on all model year 2017 and 2018 touring track and touring models as well as certain 2017 softail models. Management noted the recall is expected to cost about $35 mln, to be incurred in Q4. Given the recall, management detailed that operating margin for the year will likely finish at the low end of the company’s 9-10% range.
Harley made strides on its More Roads plan which is aimed at launching new products, giving broader access through a multi-channel retail experience, and improving dealer financial strength. In that vein, Harley’s chief goal with this plan is to build the next generation of riders. As a bit of background, in early 2017 Harley outlined objectives including a goal to launch 100 new high-impact products by 2027. Since 2012 Harley has more than doubled its product development investment and has built significant product innovation and speed-to-market capabilities. In the way of broader access, Harley has expanded partnerships and select products are now accessible through its Harley-Davidson branded Amazon (AMZN 1,741.00, -48.30, -2.7%) store front.
Despite these inroads Harley is making by broadening its access and innovating products the stock is still feeling the sting of commentary from the conference call wherein management detailed a “challenging” United States motorcycle market, increased costs, and a production move which is slated to up the capital spending budget.
On the first point Harley management outlined on the conference call declining U.S. Q3 retail sales, headlined by steep industry declines, with lower market share to boot. All told, through nine months Harley worldwide retail sales were down 5.9% driven by U.S. industry declines of 8.7%. Despite what management characterized as a very weak U.S. industry performance the company continues to expect to meet its full year shipment guidance of 231,000-236,000 vehicles. However, Harley gave the caveat that now, it believes the full year result will likely finish toward the low end of said range.
In terms of Harley’s ongoing shift of production management offered that it would outline a more specific plan to investors in the first part of next year while also offering that management is looking at all the things that it needs to do to move the production of European Union volumes to plants outside the United States, a process the company originally stated would take 12-18 months.
Things are going quicker and smoother than planned for Harley in its production move from Kansas City, Mo. to its plant in York, Pa.; Harley now expects to incur restructuring and other consolidation costs of $155-185 mln compared to the previous expectation of $170-200 mln through 2019. The company continues to expect capital investment of about $75 mln through 2019 and ongoing annual cash savings of $65-75 mln after 2020. In Q3, costs related to the manufacturing optimization were $21.0 mln and year-to-date were $83.4 mln.
Harley management updated guidance as follows:
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