This morning, shares of motorcycle manufacturer Harley-Davidson (HOG 51.43, -3.86 -7.0%) give up the majority of their gains from thus far in 2018 as its FY2018 motorcycle shipment guidance was worse than market expectations and Q4 earnings were not as investors expected.
Put simply HOG’s diluted EPS for Q4 was $0.05, adversely impacted by a $53.1 million income tax charge related to the enactment of the 2017 Tax Cuts and Jobs Act and a $29.4 million pre-tax charge for a voluntary product recall. The top line fared slightly better as revenue growth of about 12.2% to about $1.05 billion beat Street expectations.
In all, HOG shipped about 47.2K bikes in Q4, an 11.3% increase compared to last year. Strength from the motorcycle line in Q4 saw revenues from that segment increase 17.0% to about $801.7 million, while both Parts & Accessories and General Merchandise saw segment revenue declines. Q4 bike strength wasn’t enough to combat weakness from earlier in the year, though, as Worldwide total FY17 shipments were down about 6.7% to 242,788 vehicles.
Harley also announced plans to further improve its manufacturing operations and cost structure by commencing a multi-year manufacturing optimization initiative anchored by the consolidation of its motorcycle assembly plant in Kansas City, Mo. into its plant in York, Pa. As such, the company expects the elimination of about 800 jobs in Kansas City with about 450 jobs added in York as capacity shifts to that facility in 2019. The company expects to incur restructuring and other consolidation costs of $170-200 million and capital investment of about $75 million during the next two years and expects ongoing annual cash savings of $65-75 million after 2020.
On taxes, Harley noted its 2017 effective tax rate was 39.6% compared to 32.4% in the prior year. The company expects its 2018 full-year effective tax rate to be about 23.5-25.0%, down considerably behind the expected benefit of the new tax legislation.
As for guidance, HOG management began by stating that they expect international retail growth but do not expect a reprieve from the challenges in the U.S. motorcycle industry. Thus, their global expectations given an ongoing disciplined supply management plan is for reduced year-over-year shipments.
Specifically, for 2018 Harley anticipates full-year motorcycle shipments to be about 231,000-236,000 motorcycles. In Q1, Harley expects to ship about 60,000-65,000 motorcycles. These assumptions include expectations for U.S. dealer retail sales to be down, partially offset by growth in international retail sales.
Operating margins as a percent of revenue for the motorcycle segment are expected between 9.5-10.5% for the full year 2018 including manufacturing optimization costs of $120-140 million. Gross margins as a percentage of revenue is expected to benefit from pricing of the 2018 model year and 2019 motorcycles with a more favorable foreign currency exchange environment than last year. However, Harley expects these positives to be more than offset by rising steel and aluminum costs and increased manufacturing expenses.
Also, Harley anticipates 2018 capital expenditures of $250-270 million which includes about $50 million to support manufacturing optimization.
All told, Harley expects retail sales to be positively impacted by strong headwinds from new product momentum with 2018 motorcycles, a rebound in emerging market retail sales and the expansion of the international dealer network. However, these headwinds will be more than offset by a weak U.S. new motorcycle industry, driven by flat to declining demand, and soft but improving Harley used bike prices.
On a parting note, Harley highlighted that the previously announced Project LiveWire -- HOG's all electric bike -- is being prepped for market within the next 18 months.
Notwithstanding today’s move, shares of HOG had been down about 4.5% during the past 52-weeks but as of recently have been on a modest recovery from early-November lows near the $44.50 level.