Harley-Davidson's 3rd-Quarter Results NYSE:HOG Silver Lining

While Harley-Davidson (NYSE:HOG) is easily one of the most recognizable and successful brand names

in America, the third quarter was clearly a disappointment for investors in the motorcycle manufacturer,

with shares trading as much as 15{6afdcdf14f1f3d0d6d046bdd6bb6844d1d6f78a435ef85ae323b1d28ccc5d3f7} lower in early trading Tuesday. Harley faced increased competition and

challenging foreign currency exchange headwinds, which caused declines in market share and net income.

Let’s dig into the details and better understand how bad the third quarter really was.

By the numbers
Starting from the top: Harley-Davidson’s U.S. retail sales declined 2.5{6afdcdf14f1f3d0d6d046bdd6bb6844d1d6f78a435ef85ae323b1d28ccc5d3f7} in the third quarter compared to last

year, which was partially offset by a sales gain internationally of 0.9{6afdcdf14f1f3d0d6d046bdd6bb6844d1d6f78a435ef85ae323b1d28ccc5d3f7}; that equated to a 1.4{6afdcdf14f1f3d0d6d046bdd6bb6844d1d6f78a435ef85ae323b1d28ccc5d3f7} sales decline

worldwide to 72,178 units. Furthermore, while revenue from motorcycles and related products rose a meager

0.9{6afdcdf14f1f3d0d6d046bdd6bb6844d1d6f78a435ef85ae323b1d28ccc5d3f7} to $1.14 billion — thanks to a 5.5{6afdcdf14f1f3d0d6d046bdd6bb6844d1d6f78a435ef85ae323b1d28ccc5d3f7} increase in shipments, despite weaker retail sales — it fell short of

analyst estimates of $1.21 billion.

Harley-Davidson’s ” NYSE:HOG ” average motorcycle revenue per unit decreased $899 compared to last year’s

third quarter, driven by unfavorable currency exchange and a less lucrative product mix. The challenging business

environment contributed to a 6.5{6afdcdf14f1f3d0d6d046bdd6bb6844d1d6f78a435ef85ae323b1d28ccc5d3f7} decline in net income, down to 140.3 million. Earnings per share checked in

at $0.69, which was flat compared to last year’s third quarter but fell far short of analyst estimates of $0.78 per

share.

While financial numbers certainly fell short of expectations, one of the red flags in the third-quarter presentation

was Harley-Davidson’s market share.

Due to ongoing and aggressive price discounting from competition, as well as new product introductions from

competitors in the U.S. market, Harley’s U.S. new 601+ CC (heavyweight motorcycle) retail market share fell from

56.3{6afdcdf14f1f3d0d6d046bdd6bb6844d1d6f78a435ef85ae323b1d28ccc5d3f7} during last year’s third quarter to 52.4{6afdcdf14f1f3d0d6d046bdd6bb6844d1d6f78a435ef85ae323b1d28ccc5d3f7} — a 390 basis-point decline, or 3.9 percentage points. For additional

context, here’s how Harley’s year-to-date market share looks when compared to recent history.

The road ahead
Because management expects headwinds and the challenging environment to persist through the end of the year, full-year

motorcycle shipment guidance was moved lower, to 265,000-270,000 — that’s roughly flat to about 2{6afdcdf14f1f3d0d6d046bdd6bb6844d1d6f78a435ef85ae323b1d28ccc5d3f7} lower compared

to the year previous and down from the previous guidance of 276,000-281,000.

Management also noted that the company would incur expenses between $30 million and $35 million during the fourth

quarter due to employee layoffs and reorganization costs.

“We expect a heightened competitive environment to continue for the foreseeable future of NYSE:HOG , and now is the time for us to dial

things up with significant additional investments in marketing and product development,” said Matt Levatich, Harley-Davidson’s

president and chief executive officer, in a press release.

There isn’t a quick fix for Harley-Davidson investors, and going forward, management plans to increase product and brand

awareness through increased advertising, grow new ridership in the U.S. market through its rider training programs, and

open 150 to 200 dealerships globally by 2020 to try to stoke growth for investors — but that’s a game plan that is likely to

take three to five years to gain significant traction.