H-D Q3 - Unit Sales and Market Share Down; Cost Savings Drive Best Q3 Income since 2015 as Inventory and Dealer Network Continue to be Trimmed
In announcing its 2020 Q3 fiscals Harley-Davidson has said that it is "sharpening its focus and reigniting its culture" as the delayed model year introduction cycle results in reduced sales and dealer inventory shortages.
The company says that it has made "further progress implementing The Rewire, a critical overhaul of its business, setting a strong foundation for the company including a new operating model that realigns the organization for performance, reduces costs and sharpens focus on profitable products and markets.
"The end of The Rewire will be the foundation for The Hardwire, the company's forthcoming 5-year strategic plan [to be unveiled in January 2021], to deliver profitable growth and shareholder value based on expanding the desirability of Harley-Davidson." In reporting its third quarter 2020 financial results it has reported "the strongest third quarter net income since 2015, reflecting initial positive impacts of The Rewire efforts" - in other words by implementing cutbacks and cost savings.
"We have driven significant progress across each key element of The Rewire playbook, and we believe the positive changes we have executed are setting our course for a winning future," said Jochen Zeitz, Chairman, President and CEO, Harley-Davidson.
"We have started on our journey to become a high-performance company where business structure, leadership principles and our culture are all aligned. The platform we are creating will support the work ahead as we continue to develop and execute our new 5-year strategic plan, The Hardwire."
Harley says it is "evolving its culture to drive a high-performing, winning organization. The company is ramping up the competitive spirit of its employees and dealers to promote the heritage and value of the Harley-Davidson brand. Earlier this year, the company revealed a new vision and mission that are guiding and defining the company's roadmap."
The Vision is cited as "building our legend [?!] and leading our industry through innovation, evolution and emotion"; the Mission as "more than building machines, we stand for the timeless pursuit of adventure. Freedom for the soul."
Harley claims that its 'Rewire' efforts to date have "strengthened the company's focus on customers and dealers and reinforced desirability for the company's brand and products, setting the foundation for its 2021-2025 strategic plan."
Anybody from outside the company who has tried to have dealings with Harley in the past decade or more will be painfully aware of just how sclerotic the corporate bureaucracy in Milwaukee (and elsewhere in the organization) had become. As remarked upon before, Zeitz is clearly aware of this and the company says that its "New Operating Model" is to be one of "Reduced Complexity and Increased Speed," and that it has already "eliminated duplication and complexity across global operations, resulting in significant expected ongoing SG&A savings and vast improvements in agility and efficiency.
"The company also refreshed the leadership structure and team with most of the leaders being new to their roles and many bringing new perspectives and capabilities from outside the company.
"Harley-Davidson plans to concentrate on approximately 50 markets, primarily in North America, Europe and parts of Asia Pacific, that represent a high percentage of the company's expected volume and growth potential. The company's international business has been significantly reset and refocused with investment and resources aligned with projected market potential. Under the new participation model, approximately 36 highest potential markets will remain, with the resources and autonomy within a clearly defined framework, to best drive growth and profitability.
Some "17 markets will transition to more cost-effective distributor models. This includes India, where Hero MotoCorp will be the exclusive Harley-Davidson distributor" and be "licensed to develop and sell a range of Harley-Davidson motorcycles."
Of the remaining global markets that Harley is currently in, 39 "will be exited due to volume, profitability or potential that does not support continued investment."
Additionally, the company says it has 
"streamlined its planned product portfolio by 30 percent and overhauled launch timing and go-to-market practices for maximum impact and success."
Highlights of the new approach will include "further streamlining - eliminating optional offerings in the product portfolio with low customer uptake; sharper focus - reducing complexity and directing resources toward the highest priority and core stronghold products; priority - deliver Harley-Davidson's first Adventure Touring motorcycle in 2021; outsource - new venture created for eBicycles with minority equity participation for Harley-Davidson" to be marketed as "Serial 1, Powered by Harley-Davidson."
In terms of its seasonal realignment, plans are underway for a "virtual, new model year launch for dealers and consumers in Q1 2021 - shifted from August to be closer to the start of the riding season."
Addressing the dire state that Harley's marketing has been in for the past 10 or more years the company appears to be embracing the blindingly obvious with "Marketing that drives desirability - the company executed new marketing campaigns featuring Jason Momoa, and Ewan McGregor and Charley Boorman, stars of The Long Way Up, generating significant leads and growing awareness, excitement and desirability for the Harley-Davidson brand and products." Highlights include 500 million+ views of 'United We Will Ride' video by Jason Momoa; 56 million+ views of The Long Way Up trailer; 92,000 visits to The Long Way Up page on H-D.com and 105 million+ positive media impressions of Long Way Up.
To drive growth, Harley-Davidson has established new business units for Parts and Accessories (P&A) and General Merchandise (GM) "that enable each to invest resources to establish new channel strategies and better product assortments." The P&A Strategy will "better leverage opportunity to inspire riders through customization; synergize with motorcycle product strategy; improve pricing and inventory strategy; reduce SKUs by 15 percent for 2021 and enhance training and field support to drive sales growth."
Its GM Strategy will "realign product in critical categories; build category management plans; re-establish design principles centered around authenticity, brand heritage and quality; sharpen focus on the most profitable SKUs and reduce GM SKUs overall by 25 percent for 2021."
Adapting the playbook that served Jochen Zeitz well at Puma and at the parent Group that eventually became the Kering luxury goods empire (Printemps, Gucci, YSL, Boucheron, Alexander McQueen, Stella McCartney etc.), "Zeitz places a premium on Protecting Value."
Harley says it is now operating with a "remodeled approach to supply and inventory management with a focus on a powerful dealer network to better preserve the value and desirability of Harley-Davidson motorcycles for customers. Some initial outcomes of this approach as of the end of the third quarter include a reduced price gap between new and used Harley-Davidson motorcycles in the U.S.; a reduction in global dealer inventory by over 30 percent" and, essentially, "eliminating promotions and discounting with a focus on brand building."
Harley says that "a strong network of profitable dealers is essential to delivering the most desirable Harley-Davidson experience. The company continues to optimize its network to strengthen priority markets and provide an improved and integrated customer experience."
The company says it "continues to proactively manage its business through the pandemic and has maintained robust protocols to keep workers safe in its factories. Most non-production workers will continue to work from home at least until the end of the year.
"Included in the company's broad cost and cash savings measures are SG&A reductions, curtailed capital spending, suspended discretionary share repurchases and a prudent approach to dividend payments. The company will pay a fourth quarter cash dividend of $0.02 per share, in line with its second and third quarter dividends. The dividend is payable December 18, 2020 to the shareholders of record of the company's common stock as of December 4, 2020."
The company says it has also "maintained its strong liquidity position with $4.7bn in liquidity at the end of the quarter."
Net income in Q3 2020 was $120m, up 39 percent over prior year and the highest Q3 result since 2015. Q3 results reflect the actions taken in the third quarter under the company's The Rewire effort. Q3 GAAP diluted EPS was $0.78, compared to $0.55 in Q3 2019. Excluding restructuring plan costs and the impact of tariffs, adjusted Q3 diluted EPS was $1.05 compared to $0.70 in Q3 2019.
Global retail motorcycle sales in the third quarter of 2020 were down 8 percent compared to the prior year, reflecting, among other things, the company's shift in timing of the launch of new model year motorcycles from August each year to early Q1 to better align with seasonality.
Revenue from the Motorcycles and Related Products segment was down in Q3 compared to the prior year due to, among other things, the shift in model year change-over. Gross margin was flat compared to the prior year and operating margin was up during the quarter compared to Q3 2019, primarily due to aggressive cost management in the face of the COVID-19 pandemic and actions taken under The Rewire.
Financial Services segment third quarter operating income was up 25 percent due primarily to a decrease in the provision for loan losses, driven by lower actual losses at the end of Q3 versus the previous quarter.
Cash and cash equivalents were $3.6bn at the end of Q3 2020, compared to $862m at the end of Q3 2019. Harley-Davidson generated $1.1bn of cash from operating activities year-to-date 2020 compared to $849m year-to-date 2019.
"Given the uncertainty that remains surrounding the impact and duration of the COVID-19 pandemic, the company is not providing 2020 financial guidance."
Highlights at the End of the Third Quarter:
• $250m cash savings including SG&A and capital reductions expected in 2020
• $115m annual savings from restructuring actions taken expected starting in 2021
• $3.6bn cash and cash equivalents compared to $862m in 2019
• $1.1bn of cash generated from operating activities compared to $849m in 2019
• Global dealer inventory down over 30 percent compared to third quarter 2019
• 2020 motorcycles selling at full MSRP (avg. U.S. during the third quarter)
• Used Harley-Davidson prices up significantly (U.S.)
