Tuesday, 2 May 2023

Harley-Davidson

Harley Q1 North America Retail Unit Sales -17%, with Global down by -12%; Revenue up by +20% 


In an effort to put a positive spin on what has to be viewed as disappointing first quarter results, Chairman, CEO and President Jochen Zeitz is quoted as saying: "Harley-Davidson delivered a solid start to the year, with consolidated first quarter revenue up 20%, driven by HDMC, reflecting the progress we continue to make in advancing our Hardwire strategic plan.




"Building on our commitment to innovate in our core categories, we have kicked-off a new era of CVO touring bikes, with the all-new 2023 CVO Street Glide and CVO Road Glide," stating that the new Variable Valve Train models were a "landmark for the company and our customers."

While 'making more from less' is somewhat of a Holy Grail for any business, within hours of the results being announced, some were pointing to the 14% increase in Q1 shipments - as opposed to retail sales - as marking a return to the bad old "Channel Stuffing" days that nearly brought the Motor Company to its knees 15 years ago. 


The company points to the increase in available inventory coming "in advance of [the] key riding season," with the increase in wholesale shipments and continued global pricing realization "driving that 21% increase in HDMC revenue."

However, Wall Street is not known for its ability to appreciate nuance.

On the day the fiscals were released (April 27, 2023), Harley stock opened at $38.13 and dropped as low as $33.80 before closing at around $36.00. For context, the year-ago Harley stock price was $36.32, and since then it had been as low as $29.81, with a 12-month high of $51.72 in early February 2023. Despite the success it has had in taking back control of pricing and using scarcity to reinforce brand status, the stock market response was hardly the ringing endorsement of Hardwire strategic plan progress that Zeitz was no doubt looking for. 

Either way it is looked at, the discrepancy represents a roll of the dice. Zeitz is betting that Harley's dealers will be able to sell the units, and more besides - otherwise Q2 results could see unit sales jump, but without a commensurate increase in revenue from motorcycle operations.

Harley says the 21% increase in HDMC revenue also included a 1% pricing-driven increase in Parts & Accessories revenue, with Apparel revenue up 39% "behind sales of 120th anniversary merchandise and product mix."

"First quarter gross margin was up 4.2 points behind pricing, shipment mix, and cost productivity more than offsetting the negative impacts from foreign currency and cost inflation. First quarter operating income margin improved by 4.6 points largely for the same reasons."

Harley-Davidson cites "timing of new product launches, as well as the shifting macro conditions" as driving the 12% year-on-year decline in achieved global retail motorcycle sales (though that excludes the 63 LiveWire units sold!) and the 17% decline seen in North America.

Growth in Asia Pacific "was driven by continued strong demand across key markets, including Japan and Australia. EMEA decline of 6% was primarily driven by market exits, in addition to a planned unit mix shift towards the profitable core product segments, following the sunsetting of Sportster. Latin America continued to be adversely impacted by regional economic conditions."

HDFS' operating income decline of $28m in the first quarter, or down 32%, was driven by higher interest expense and higher credit losses. "The increase in credit losses was driven by several factors relating to the current macro environment. Total quarter ending financing receivables were $7.6bn, which was up 11% versus the prior year, driven primarily by an increase in wholesale receivables."

LiveWire revenue for the first quarter decreased by 2%, due to lower sales of electric motorcycles and STACYC electric balance bikes. "LiveWire operating loss of $25m in the first quarter was driven by product development costs as well as increased costs versus prior year, associated with setting up the new organization."

Consolidated operating income in the first quarter was up 28%, driven by an increase of 53% at HDMC, a decline of 32% at HDFS, and an operating loss of $25m in the LiveWire segment. Consolidated operating income margin in the first quarter was 21% relative to 19% in the first quarter a year ago, representing a 132 basis-point improvement.

Harley generated $47m of cash from operating activities at an effective tax rate of 23% and paid cash dividends of $24m. Q1 diluted EPS of $2.04 was up 41% versus the prior year; the achieved HDMC operating income margin of 21.6% was an increase of 4.6 points versus the prior year, as pricing, unit mix and cost productivity more than offset inflation; Harley executed $84m of share repurchases (2.0 million shares) on a discretionary basis. Cash and cash equivalents were $1.6bn at the end of the quarter, and financing of $1.25bn was raised for HDFS.

The company has reaffirmed its initial guidance for the full year 2023 and continues to expect HDMC revenue growth of between 4 and 7%, with an operating income margin of between 14.1 to 14.6%, an HDFS operating income decline of 20 to 25%, LiveWire motorcycle unit sales of 750 - 2,000, with an operating loss of between $115m to $125m, and H-D Inc. capital investments of $225m to $250m.

Last year, Harley had trailed and implemented a new segment reporting structure as a result of LiveWire Group, Inc. becoming a separate public company, trading on the New York Stock Exchange on September 27, 2022 (Ticker: LVWR). 

Following the close of that SPAC merger, Harley-Davidson was left with an equity interest in LiveWire of approximately 89.4% (well above its 74% target) and had raised some $1.77bn - well below the expected $2.3bn. Harley had continued to consolidate LiveWire Group results with new adjustments for non-controlling shareholder interests. Consolidated net income attributable to Harley-Davidson, Inc. and EPS calculations now reflect these adjustments.

Beginning with the fourth quarter of 2022, the new business segment reporting now includes Harley-Davidson Motor Company (HDMC) - the Group that is accountable for the design, manufacturing, marketing and sales of Harley-Davidson motorcycles and related products; Harley-Davidson Financial Services (HDFS) - the Group that provides motorcycle and related products, financing and insurance products and services for dealers and retail customers, and LiveWire - the Group that is accountable for the design, marketing and sales of LiveWire electric motorcycles and related products, including STACYC electric balance bikes.

Prior period segment results have been retrospectively adjusted based on the new segments. In addition, the consolidated results will continue to be reflected by Harley-Davidson, Inc. (HDI) - the corporate entity for the overall company under which HDMC, HDFS and LiveWire operate.