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Tuesday 30 April 2024

Comment by Editor-in-Chief, Robin Bradley

Less Really Is Starting To Look Like Less

This has been one of those occasions when the Harley (and Polaris) results were published just as we were going to press. So, for my 'Comment' piece this month I thought it appropriate just to take a quick canter through the primary bullet points, with the usual detailed reporting appearing in the next (June- already!) edition.

The headline reporting is of a +6% increase in unit retail growth in North America (up by 1,500 units to 27,500 compared to Q1, 2023), but declines of -11% (down 600 units to 5,300), and -12% (down 900 units to 6,000) in EMEA and Asia Pacific respectively left Harley flat in global terms at 39,400 units - dead level with 2023. Latin America was up by +2%, but at only 600 units was also essentially flat.

Chairman, President and CEO Jochen Zeitz is quoted as saying: "We are very pleased with the reception of this year’s new product line-up led by our new Touring motorcycles and look forward to continuing the positive momentum as the riding season comes into full swing.”

Harley's formal take of Q1 unit retail was "Global retail motorcycle sales in the first quarter were flat versus prior year. North America retail performance was up 6%, driven by sales of the new Touring motorcycles, which were introduced at the end of January. International markets did not receive new 2024 Street Glide and Road Glide motorcycles in dealerships until the end of the first quarter. 

"The decline in EMEA of 11% was driven by weakness in Germany and France. The decline in APAC of 12% was due to weakness in particular in China. Latin America experienced modest growth in both Mexico and Brazil."

There you are then. Three full years of Hardwire. A share price that dumped some 11% of its stock market price to as low as $32 and changed on the morning that the results were released, and just 18 months of 'wire' left, hard or otherwise!

Consolidated HDMC operating revenue was down by -3% at $1,730m for the quarter, but with operating income down by -29% at $263m for the quarter from the $370m that was reported for a 'bad' first quarter of 2023.

"break it to make it"

The so-called "planned" slowdown in Q1 shipments saw Harley come down by -7% (actually a greater shipments reduction than "planned") from 62,200 in Q1 2023 to 57,700 this year. The revenue generated by motorcycle shipments specifically was down -6% at $1,222m. Overall, revenue in HDMC was down by -5% at $1,476m for the quarter, resulting in the HDMC gross margin dipping by 4.5 pts to 31.2% from 35.8% - calling into question whether the "less is more" strategy is working in the way intended.

The hemorrhaging of operating income suggests not. The net income (aka 'profit') attributable to Harley-Davidson, Inc was a mere $234.9 (down from $301.8m in that "bad" year ago Q1). The Hardwire plan was that a reduction in supply, to increase demand, unit price-points, revenue per unit and perceived 'brand value', could be done profitably. Instead, it would appear that less really is just exactly that - less! 

Harley (namely Zeitz) had been making much of the increased revenue achieved per unit as an indicator of how well the strategic plan was working. However, let's look at it not so much in terms of revenue per bike, but in net profitability per bike - after all, manipulating unit numbers profitability was Hardwire's primary success metric when it was published at the start of 2021.

Please correct me if I am wrong (and I hope I am), but my (perhaps erroneous?) read of the Q1 results shows 39,400 units reported as sold in Q1 of 2023 and 2024 (this is going by 'retail', not by 'shipments'), but with operating income (aka profit) achieved per unit of (very crude math) approx. $790 per bike retailed in Q1 2024 versus approx. $840 per bike in Q1 2023.

Now this is approximate rounded math, and I am never going to pass convincingly as a qualified auditor at the Christmas fancy dress party in this or any other lifetime.

But is this not the very antithesis of what lies at the core of the Hardwire strategy? By this measure less really is less. As a brand 'fan boy', should I be worried? As the most modest of stakeholders, I definitely am worried.

Please somebody either tell me to throw away the calculator and stick to the day job, or else please explain how this is going to get turned around in 18 months?

And don't just fall back on the "times are hard" Dickensian universal excuse mantra. Yes sure, multiple wars, high inflation, pandemics, high interest rates - these are the stuff of economic nightmares, but when has it never been thus for one reason or another?

In 30-plus years of writing about this stuff, month-in, year out, a short ten-year period from the mid-1990s to the mid 'noughties' aside, when has the economic climate ever been anything other than 'tricky' at best? Even that 'Golden Decade' that saw the halcyon days of peak Harley didn't stop everyone in the Harley and wider V-twin market from complaining.

And why should it have - after all we all love complaining, don't we? And my, how good at it we are!

Was it a 'fever dream', a fantasy of hope triumphing over reality, but isn't the biggest complaint that we have all been hearing recently (certain V-twin markets aside, such as Germany especially), that the economy in most of 'the West', but especially in USA, is doing just too well? Isn't that what Wall Street's primary concern is at this time?

So, save me the default economic angst, and look for the answers inside the plan itself. Look for the fundamentally flawed logic of the fundamentally flawed premise that in this choice-rich demographically changed mid-21st century motorcycle market, less can and will only ever be less.

Isn't the plain truth of the matter that, for all the CEO's theoretical capitalist chops, Harley is simply failing to compete? This is taking 'fail fast and fail often' into entirely new territory - 'break it to make it' would appear to be the mantra that 'Milwaukee' is chanting. Oh, and don't get me going about Livewire!