American motorcycle giants Harley-Davidson (HOG 34.08, -2.53, -6.91%) and Polaris Industries (PII 80.97, -3.83, -4.51%) opened lower
on Tuesday in reaction to underwhelming fourth quarter results and equally weak
full year 2019 guidance.
Milwaukee-based Harley saw fourth quarter earnings per share of $0.17 miss market expectations as restructuring plan costs and the impact of tariffs, coupled with waning interest in the overall motorcycle industry, hurt the company. Specifically, motorcycle shipments in the quarter totaled 43,489, declining by 7.9% from a year ago and falling short of the company’s guidance for shipments of 45,800-50,800 from three months ago.
Overall, Harley retail motorcycle sales declines in EMEA and Asia Pacific pressured the worldwide total. However, it was HOG’s largest market, the U.S., that did the most damage as fourth quarter retail motorcycle sales in the region fell 10.1% year/year in the period to 20,849 vehicles. This is a sign that, indeed, Harley is having trouble with an aging demographic as well as with bringing more riders on board in the U.S., especially among younger crowds. The company, which endeavors to build two million new riders in the U.S. by 2027, has been dedicating initiatives to building a new generation of riders through strategies like increased media presence and programs such as its Riding Academy, complementing the broader goals of its More Roads to Harley-Davidson growth objectives.
In the fourth quarter, costs related to manufacturing optimization initiatives were $19.1 mln; Harley expects to incur an additional $50-60 mln of operating expense in 2019, which is lower than its most recent expectations. The company now expects total capital investment in the project of about $65 mln through 2019, a decrease of $10 mln from previous expectations, and continues to expect resultant ongoing annual cash savings of $65-75 mln after 2020. About $20 mln of the company’s projected capital expenditures for 2019 are earmarked to support manufacturing optimization.
Revenue from the Motorcycles segment fell in the fourth quarter, though it did improve on a full-year basis compared to 2017. Operating margin as a percent of revenue decreased in the quarter due to restructuring charges, incremental tariffs, and higher recall costs. All told, the Motorcycles and Related Products segment saw overall revenues fall 8.7% to $955.63 mln on a 30 basis point gross margin decline to 27.6%, and a 96 point operating margin decline to -6.2%.
Looking ahead, Harley expects full year 2019 motorcycle shipments to be between 217,000-222,000 motorcycles, including expect shipments of about 53,000-58,000 motorcycles in the first quarter. Management also gave expectations for Motorcycles segment operating margin as a percent of revenue to be about 8.0-9.0% and for capital expenditures of $225-245 mln.
Indian motorcycle and off-road vehicle manufacturer Polaris, too, turned in an unimpressive – though admittedly mixed – fourth quarter. All told, Polaris reported EPS of $1.83, a moderate beat compared to expectations, on revenue growth that wasn’t as robust as the market had foreseen, up 13.7% to $1.63 bln with a miss on adjusted gross profit of 24.2%.
The metric that jumps out immediately are the declines in the motorcycle segment; all told, the business saw fourth quarter sales fall 15% to $87.36 mln. Though this group is this company’s smallest in terms of overall percentage of sales, it illustrates the troubling trend of falling motorcycle vehicle sales; the pattern has not been confined to just Harley. Management added the caveat that Indian sales did post a slight increase in the quarter, but these were more than offset by a decline in sales of Slingshot, the company’s three-wheel open air roadster vehicle line. North American consumer retail sales for the Polaris motorcycle segment in total decreased by high-teens during the quarter. Gross profit in this segment was hurt by negative product mix and higher costs related to tariffs, logistics, and commodities.
Off-Road Vehicles for Polaris were a point of strength. The company’s largest segment saw fourth quarter sales increase about 7% to $1.06 bln, driven by growth in snowmobile sales reflecting a successful SnowCheck pre-order program in 2018. Breaking it down a bit, ORV wholegood sales for the quarter were down 2%, largely due to a tough comparison versus the prior year period, at which time shipments were accelerated to address shortages and demand requirements in the second half of 2017. Snowmobile wholegood sales in the fourth quarter increased by 49% to $195 mln, largely due to positive impact from the timing of shipments of pre-season SnowCheck orders, the highest in 17 years, driven by the strength of the new 850 Patriot engine, which was available only in a pre-ordered snowmobile.
Looking ahead, Polaris offered mixed full year 2019 guidance of EPS between $6.00-6.25 and revenues in the range of $6.752-6.874 bln. Management highlighted that the full year earnings guidance is inclusive of the company's expectations related to the impact of external factors such as the annualized impact of current tariffs, which assumes that 301, list 3 remains at the current 10% rate for the full year; adverse foreign exchange impacts; and higher interest rates, totaling about $1.50 per diluted share, on a combined basis. Absent these items, the company is expected to generate positive earnings growth on a year/year basis.
Overall, the company believes that tariffs, foreign currency translation, and interest rates will remain headwinds in 2019 but remains encouraged by growth prospects for 2019 and beyond.
Harley’s More Roads plan has yet to bear fruit as fewer riders came on board in the quarter than the company had expected. Bike issues weren’t solely on the shoulders of HOG, though, as Indian-maker Polaris, too, saw waning interest in bikes in the fourth quarter. What’s obvious is that the industry is in the grips of a disconnect between riders and manufacturers. Yes, the older demographic is going to buy bikes, and yes, some new riders will come on board, but the fact remains that the actual numbers and expectations seem to still have a distance between them.
Harley’s EV push and Polaris’ The Boat Holdings deal could push results in the right direction, but it appears that the Street is taking a wait-and-see approach, instead opting to sell-the-news of underwhelming results and guidance on Tuesday.
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