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Wednesday, 1 February 2017


Harley plans 50 new models in next five years; U.S market share +2% in Q4, but Q1 new unit shipments (including M-8s) will be -15 to -20% due to unsold “carry-over” inventory

Harley-Davidson says it has gained market share in 2016 in the United States as domestic motorcycle sales have continued to soften. For the full-year 2016, worldwide Harley-Davidson retail motorcycle sales were down -1.6 percent compared to 2015; U.S. retail sales decreased -3.9 percent, partially offset by international growth of 2.3 percent.  

However, CFO and Sr. VP John Olin has warned investors that Harley doesn’t expect 2017 unit sales to be anything better than “flat to modestly soft” and that the first quarter of 2017 could be down between -15 percent to -20 percent in terms of new unit shipments to dealers worldwide as the company continues to try and help unwind an over-inventory situation that saw Harley “exit quarters 3 and 4 of 2016 with historically high levels of carry-over products.”
“We intend to get them flushed out by the end of the first quarter of 2017, and we expect to be in-line with historical levels of (current vs prior MY unit) mix by then.”
CEO Matt Levatich said that “there’s no question that 2016 was a difficult year with the decline in domestic U.S. motorcycle sales overall becoming volatile from May through October in particular” – the speculation being that this was caused by election uncertainty and global economic concerns.

‘new normal’

Harley says that this resulted in MY 2017 availability needing to be lower than “the year prior” and that they are making sure that it continues to be lower this first quarter “as we continue to constrain MY 2017 shipments.”
That decline saw Harley domestic retail sales at -3.9 percent for 2016 at 161,700 units compared to 168,200 in 2015, but with 4th quarter retail sales essentially flat versus the final quarter of 2016 (actually +0.1 percent) at 26,100 units.
In the midst of the reduced sales, Harley’s market share in the 601cc+ sector in which it competes actually grew by +1 percent in 2016 as a whole to a 51.2 percent market share and by +2 percent in the final quarter to 53.4 percent.
Levatich said that he “couldn’t be more pleased with our market share performance, especially in the fourth quarter,” but that Harley-Davidson (and by implication everybody in the motorcycle industry) had to come to terms with what he described as a “new normal” in terms of short to medium-term domestic industry expectations.
In which connection, the previously announced increase in rider training focus and investment has seen Harley’s dealers train some 65,000 new entrants to the sport; though there are questions to be answered over retention – how many of those trained are going on to buy Harley branded motorcycles - the company says it aims to re-double those efforts moving forward. Matt Levatich said that as “the” iconic and leading brand in the motorcycle market “Harley-Davidson not only needs to be in the business of building new bikes, but in the business of building new riders also” and, in what may be a reference to new models to come as well as to conversion of learnees, described the “small cruiser market” as “vital”.

‘in the business of building new riders’

While wider economic concerns will continue to evolve uncertainly (“we have to be about long-term play and long-term value”), Levatich cites his and Harley’s strategic intent as being to “attract more new riders to the market, training new riders and encouraging returnees,” while in fiscal terms the 50 new models in five years announcement is based on the success of the new model “drivers” that have come to market on his watch so far (the Rushmores, the ‘S’ models, the M-8s etc.) and the aim of “growing share and profit in every market.”
The success and impact on the balance sheet of the new models and initiatives launched under Levatich’s leadership so far is what is driving Harley’s stated aim of launching “50 new motorcycles over the next five years – demonstrating the power and strength of our products and changing the way people view Harley-Davidson.”
Levatich said that “it is our product development excellence that has been driving us in the right direction, and impressive though the new products of the past four years have been, you haven’t seen anything yet.”
In what maybe tacit acknowledgement that Harley maybe has been slow to ‘do a BMW’, Levatich has confirmed that this new model blitz will see Harley-Davidson embracing “new segments” relative to the traditional interpretation of what the Harley brand has meant. In response to any specific opportunities the cancellation of Victory may represent, Levatich actually went deeper by indicating that it is his belief that Harley should be able to “compete for every available customer.”
Levatich also drew attention to the used motorcycle market as a factor that Harley-Davidson is about to start taking way more seriously than it has done in the past. Describing used models as Harley’s “low cost entry-point,” Levatich said that “we and the industry as a whole have experienced softness in used bike sales and prices for eight straight quarters. Quite apart from market and economic conditions, it is a fact that new product innovations force used prices down.
“We believe in embracing the used marketplace more fully. The used market is our ‘Value Brand’ - it has great potential,” Levatich says.
While Harley’s domestic fortunes continue to have issues, internationally Levatich said that they had “grown sales in every international market except Brazil, India and Indonesia.”

‘you haven’t seen anything yet’

Harley’s market share has now hit a record 10.8 percent in Europe (in a highly competitive but nonetheless growing market), up 0.3 percentage points over 2015. Their overall international retail motorcycle sales were down a tad (-1.9 percent) in the 4th quarter, but overall were +2.3 percent for the year, with EMEA leading the growth at +2.6 percent in Q4 and +5.9 percent in 2016; Canada was +5.5 percent in 2016, Asia Pacific +2 percent, but Latin America -13.2 percent thanks in large part to the economic issues in Brazil.
Harley added some 40 new dealerships internationally in 2016, 20 of them opening in the final quarter, with Levatich saying they are well on course to open the intended 150 to 200 new international dealerships between 2016 and 2020, and that Harley plans to continue to grow international sales at a faster rate than in the United States.
Worldwide retail sales of Harley-Davidson motorcycles were -0.5 percent in the fourth quarter at 46,610 units, 20,533 of which were international, and -1.6 percent at 260,289 units for 2016 in total, 98,631 units of which were international (+2.3 percent). Harley-Davidson net income was -5.9 percent for the fourth quarter, at $1.11 Bn., with net income +11.8 percent at $47.2 Mn., and EPS (Earnings Per Share) +22.7 percent at $0.27 percent. Harley says it remains fundamentally committed to “returning shareholder value,” citing its ongoing discretionary share repurchasing programs, increasing dividends per share ($1.40 per share in 2016 against $1.24 in 2015) and intent to keep its ROIC in the top quartile of the S&P 500.
Motorcycle segment revenue was off by -8.8 percent at 685.0 Mn. for the final quarter and -0.1 percent at $4,122.1 Mn. for the year; average revenue per unit year on year actually increased by $546 in Q4 “behind higher pricing, a richer product mix and slightly favorable currency exchange.”

Motorcycle segment gross margin was down, at 35.1 percent of revenue at $1,851.7 Mn. for the year; operating margin was up at +14.7 percent of revenue at $875.5 Mn. for the year.
“The global competitive environment remains intense, but our 2016 results demonstrate that our increased investments to drive demand and bring impactful new products to market are working,” said Levatich. “Our market share performance gives us great confidence in the strength of our long-term strategy.”
“Our long-term strategy is all about growing ridership in the U.S., growing reach and impact internationally, and growing share and profit in every market we serve,” stated Levatich. “Our goal over the next 10 years is to build the next generation of Harley-Davidson riders worldwide.” 
For 2017, Harley-Davidson anticipates full-year motorcycle shipments to be flat to down modestly in comparison to 2016. In the first quarter of 2017, Harley-Davidson expects to ship approximately 66,000 to 71,000 motorcycles. 
Harley-Davidson expects full-year 2017 operating and gross margin as a percent of revenue to be approximately in line with 2016 and its full-year effective tax rate to be approximately 34.5 percent. The company anticipates 2017 capital expenditures of $200 million to $220 million.
Harley Share Price latest – despite closing at $57.89 The evening before these announcements, Harley’s share price dropped to $55.22 In initial trading on Tuesday January 31st before recovering some ground to close at $57.03.
Harley had seen the share price recover from a low of $37.23 in January 2016 to a high of $62.07 in December for a calendar year gain of 58 percentage points.
It would appear that expectations among analysts had not been great in the weeks leading up to the release of the 2016 fiscals and that despite the new model, inventory management and other initiatives announced, the focus on delivering investor value has not, so far, impressed.