Investors shouldn’t have been surprised by Harley-Davidson‘s (NYSE:HOG) dismal

second-quarter earnings report, though the sharp drop in its stock suggests they were.

It was clear early on the maker of big steel horses was being too optimistic about its

numbers because its sales weren’t supporting the amount of bikes it was shipping to

dealers.

 

Harley-Davidson’s Earnings may have limped over the low end of the shipment

guidance it provided after the first quarter, but with sales plunging 6.7% compared

to last year, the bike maker now says it needs to make dramatic production cuts in

the second half of the year to keep pace with weakening demand. It might not be

the last time it does so.

 

Stuck in the slow lane

Second-quarter motorcycle sales are down to levels not seen since 2010 when Harley

was just emerging from the grips of the recession. It plans to ship only 39,000 to

44,000 motorcycles in the current quarter or as much as 20% below last year’s effort.

For the full year, Harley said it expects to ship between 241,000 to 246,000

motorcycles, compared to 262,221 in 2016. Previously, the bike maker said shipments

would be flat to modestly down, but it still hasn’t come to grips with reality.

Harley-Davidson's Earnings

 

Based upon Harley-Davidson’s Earnings and its shipment projections for the third

quarter and the full year, this means Harley thinks it’s going to be shipping more

than 49,000 motorcycles in the fourth quarter — and it hasn’t shipped that many

motorcycles in what typically is the weakest quarter of the year since 2011. Let’s just

say we’re probably going to see some downward revisions again.

 

Harley-Davison’s core customer is disappearing, and millennials aren’t riding to the rescue.

In last year’s Motorcycle Industry Council annual statistical report, the percentage of

motorcycle owners aged 50 and over had swelled to 46% from just 25% a decade prior.

In contrast, owners under 18 years of age had dwindled from 4% of the total to 2%, and

those aged 18 to 24 had declined from 11% to 6%.

 

Harley-Davidson’s core customer has been the fairly well-off middle-aged male, but he was

largely wiped out in the financial recession and has yet to recover, or simply choose not to

spend money on motorcycles anymore. At the same time, fewer younger riders are entering

the market.

 

And because Harley refuses to engage in discounting like its competition is doing, its

motorcycles face additional competitive hurdles to get over.

Youthful appeal

There are things that can be done to Harley-Davidson’s Earnings make a U-turn, but they

don’t include buying up a low-volume, high-priced prestige brand like Ducati, which

won’t bring more riders to the sport, and certainly not to Harley-Davidson. Instead,

it needs to cultivate the next generation of motorcycle enthusiasts.

 

Harley recognizes a new crop of riders is needed, and it has said it wants to grow not only

its own sales, but also the number of riders coming to the sport. It’s why many of its new

models have been geared toward attracting them and was purportedly one of the reasons

it considered making a bid for Ducati. But that would be a mistake and would take

Harley-Davidson in the wrong direction.

 

As the MIC data highlights, the real direction it needs to go is to the youngest riders. If

you’re not replenishing that end of the market, you’re not going to have riders buying

your bikes later on. Instead of another big bike or a flashy, expensive sports bike, Harley

ought to be thinking about going to the gritty end of the market — entry level dirt bikes.

 

It’s in that segment where many motorcycle enthusiasts get their first taste of the sport,

and as they get older, they trade up to street bikes. Cultivating riders from that community

would plant the seed for future Harley sales.

 

Read More: https://www.fool.com/investing/2017/08/06/you-shouldnt-have-been-

surprised-by-harley-davidso.aspx