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
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.
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
And because Harley refuses to engage in discounting like its competition is doing, its
motorcycles face additional competitive hurdles to get over.
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.