The announcement of layoffs at Harley-Davidson's York manufacturing plant may signal the motorcycle maker is about to flame out. Image source: Flickr user Scott.
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When Harley-Davidson (NYSE: HOG) admitted last month it couldn't sustain its previous rosy forecast of motorcycle shipments for the year, it was clear that sales for the year were going to be down, but the latest announcement that it is laying off about 200 workers suggests things are going to be even worse than expected.
Shifting expectations into low gear
Harley's second-quarter earnings were a disappointment in a number of respects, but not least because it reduced the company's shipment forecast by about 5,000 bikes. Where it had maintained it would be able to ship to dealers between 269,000 and 274,000 motorcycles for 2016, it now said it expected to ship only 264,000 to 269,000 bikes worldwide.
It seemed to be an admission that rival Polaris Industries (NYSE: PII) was hurting its business more than it cared to state. Where Harley global sales fell 2% during the period, dragged down by a better than 5% decline in the U.S., its largest market, Polaris was reporting Indian Motorcycle sales were surging 23% -- and even its ailing Victory nameplate had seen sales turn positive.
However, even the revised shipment numbers Harley-Davidson offered may still be too high. The second quarter is Harley's biggest quarter, representing a third of U.S. sales and 22% of global sales, and as it has been selling fewer bikes than it's been shipping to dealers for some time (the motorcycle market slows in the back half of the year), Harley dealership inventories may already be full, and it could have a hard time pushing even more bikes onto them.
Retooling growth estimates
The reason the layoff announcement should worry investors that Harley's year will be even worse than anticipated is because more than half of them will be occurring at its York, Pennsylvania, facility, the plant that got a major overhaul just a couple of years ago and was the blueprint of efficiency for how its manufacturing plants in Menomonee Falls and Tomahawk, Wisconsin, were updated. Those two facilities will also see some layoffs, though its plant in Kansas City will apparently be spared.
The new factory model represented by the York plant was supposed to allow Harley-Davidson to better respond to the ebb and flow of changes in the workplace. Automation was now front and center, and employee job classifications shrank from 62 to just five, meaning it would better allow the motorcycle maker to shift employees around to wherever they were needed most.
Harley was also able to wrangle much-need concessions out of the the International Association of Machinists and Aerospace Workers union, including higher healthcare contributions from employees and a seven-year wage freeze. It was also allowed to use so-called "casual" workers who were unionized, but were paid a lower wage rate, about half or less the wages of regular union workers. The current round of layoffs will see some 102 regular workers fired and 15 casual employees.
An industrywide issue
That Harley-Davidson feels it needs to lay off around 12% of the workers at the York plant, which assembles its touring, Softail, CVO, and Trike models, indicates business is not going all that well. CEO Matt Levatich said during the earnings conference call that the market was weaker than expected, but sales might be decelerating even more.
That might not be a problem only for Harley, as Polaris also highlighted a weaker-than-expected motorcycle market despite its sales gains. It also revised its outlook for the year, reducing its expectations from high-teen percentage increases to just "double digits."
The difference, of course, is that Polaris Industries is expecting sales growth, while Harley-Davidson is likely going to post another year of declining sales. While its reduced shipment outlook was an indication the situation wasn't good, the layoff announcement just might mean it's now going from bad to worse.
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Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Polaris Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.