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Wednesday, 4 April 2018

Comment by Editor-in-Chief, Robin Bradley

Shark Bait II

As the April edition of AMD Magazine went to press, the fall-out from the debate about Harley’s leadership, the dissatisfaction and churn in the dealer network, the soft share price and Harley’s increasingly exposed spend on dividends, the controversial share buyback programs and the uncertainty about new model policy continue to reverberate around a nervous market.
Common sense, logic and necessity dictate that this summer’s MY 2019 announcement must, surely, please to goodness, see a fairly substantial rabbit pulled from Milwaukee’s bag if it is to keep pace with its “100 new models in 10 years” pledge and sustain the momentum created by the 2018 Softails and 2017’s M-8 Tourers.
The problem is that way more people than ever, and well informed, experienced and “connected” observers at that, are saying they hope the E-bikes-in-2019  plan (one apparently reinforced by last month’s Alta Motors investment) turns out to be a smoke screen to deflect attention from impending news this summer, then we are now, more than ever, in a place where the normal rules of sense and logic are suspended.
As one authorized Harley dealer put it to me recently, if there were a plan then sure, changing leadership at this time would be folly, “but as far as many of us can determine, the only plan is to, at some stage, devise a plan.”
With over $5 bn of capital (some of it borrowed), tied up in share buybacks which are mostly worth less than was paid given the present share price, against a current reduced market cap of around $7.5 bn, it has been said that where Harley’s vulnerability is concerned, “Shark Bait” (see AMD March*) simply doesn’t do the extent of Harley’s potential difficulties justice.
Interestingly, with Polaris shares trading at around the $120 mark, Matt Levatich’s once dismissive shot across their competitors’ bow as being half the company that Harley is, looks a little hollow now - Polaris Industries’ current market cap is $7.22 bn and heading north as Harley’s continues south.

 ‘can they afford it?’

Harley has again increased its dividend for the first quarter of 2018 ($0.370 up from $0.365). If it follows its own form book, then that sets the level now for the year as a whole, resulting in an annual dividend of $1.48. That may be only modestly up from the $1.46 paid out in 2017, it is up again nonetheless – but can they afford it?
In fact, taken over the five full years from 2013 to 2017, Harley’s annual dividend growth rate has been 18.68 percent, during a timescale in which revenues have only grown by 0.24 percent. Meanwhile senior executives continue to divest themselves of tranches of personal share holdings.
The company still appears to have a relatively healthy 2017 EBIT (given the circumstances) of $891.26 m, which is 18.13 percent of the $4,915.027 bn of the motorcycle and related products revenues achieved.
However, in a final quarter that saw the new Softails come on stream and included a full impact M-8 Touring platform cycle, revenue of $1047.045 bn only produced an EBIT of $101.26, - 9.67 percent on a matching revenue basis.
If Harley’s game-plan is to go private, then, like many I have discussed this with, I applaud the ambition. But can they afford it?
Doing so appears to be the only viable explanation for yet another new share buyback authorization - a further 15 m shares, while some 10 m still open from the February 2017 authorization. Harley has now reduced its outstanding common stock from around the 260 m mark to approximately 160 m in something like three or four years.
To not be prioritizing creative incentive packages to shift the new metal is to fly in the face of conventional capitalist wisdom. Whilst Harley is to be applauded for resisting the temptation to discount, incentives are not the same as discounts if based on list price. Incentives are a common-sense response to softening demand and a prime weapon in the locker of defending brand status, not diluting it.
Harley’s dealers are as much invested in the demand for Milwaukee’s metal as the factory and shareholders are, and to not be plowing as much budget as possible into recognizing that, and to not be working with their dealers to weather that storm is, in my humble opinion, an abrogation of the responsibility that all manufacturers have to their independent dealer networks.
After all, if its traditionally a good enough strategy for ‘Detroit’ and pretty much all other brands (premium or otherwise), isn’t it good enough for Harley?
The best way to defend a “Premium Product” is to make someone want it - desire (aka demand) is king! If there is demonstrably weak demand, then where’s the desire? Harley-Davidson is not Ferrari. At present many would say it isn’t even Harley-Davidson, it isn’t sufficiently “in the game” to be spoken of in the same breath as the determinedly creative sales drives of the past that got it to its 115th anniversary.
For me, as I have said before, quite apart from apparent product design uncertainty and engineering tardiness, it is marketing that is the big Black Hole at the heart of their universe – quantity as well as quality and suitability. Incentive driven selling is a marketing weapon, not brand capitulation!

*Issue # 224 at