Is It Time to Panic Over Harley-Davidson?
Harley-Davidson (NYSE: HOG) may be in panic mode as the end of the year looms. Analysts at research firm UBS say their channel checks show the decline in motorcycle sales is accelerating.
Those analysts are forecasting a double-digit drop for the full year. And because the fourth quarter is typically the slowest period for the bike maker and sales are already in a tailspin, it becomes a question of just how bad the decline will be.
International market troubles
Harley has made it clear that growth in foreign markets is where it's placing its bets on future growth. It wants international sales to become half of its total volume, and the roadmap it laid out this past summer puts a lot of emphasis on India as a key to making this happen.
Many of the new, smaller motorcycles it will be releasing in the next few years will be for the Indian market. Harley cites data showing sales of motorcycles with engine displacements of between 250 cubic centimeters and 500 cc will grow at a compounded rate of 25% annually between 2017 and 2020, and it plans to introduce there a motorcycle in that size bracket within the next two years.
But right now it's feeling competitive pressure from India's leading motorcycle maker, Royal Enfield, which introduced two 650 cc motorcycles recently, the Interceptor and the Continental, that are challenging what has been Harley's most popular bike in the market, the Street 750.
Harley-Davidson has a manufacturing plant in India that produces the bike for markets outside North America. Although initial reports indicate sales of the motorcycle were strong, that may have abruptly changed after Royal Enfield released its bikes because it's marking down prices by as much as 15%. That's significant beyond just the amount of the discount, because Harley-Davidson hardly ever runs promotions, preferring instead to protect the brand value and its profit margins by keeping them premium priced.
Royal Enfield is also taking on Harley in the U.S. with these motorcycles, believing smaller-displacement bikes is where manufacturers will find sales. While Harley does want to sell smaller motorcycles here, it may be a few years before buyers will see them. Instead, it's wagering a lot of its prestige on bringing to market a high-performance electric motorcycle, and that could be a tough sell.
Getting expenses under control
Harley's other tack for containing the fallout from falling sales is by cutting costs. The roadmap said it would be able to reduce costs through "prioritization, automation, continuous improvement, and closing gaps to best-in-class benchmarks," and it expects to cut or reallocate some $450 million to $550 million by 2022, though the majority of the cuts will come this year and next.
Perhaps a portion of the savings will also come from the sale of one or both of Harley-Davidson's corporate jets, certainly an extravagance in what are decidedly lean times for the bike maker. A source relayed to me that Harley was in the process of selling one of its two Bombardier Challenger 300 aircraft as it attempts to save money during the crunch, but the bike maker did not respond to numerous requests for comment. A used Challenger 300 can sell for around $10 million each, which could fill more than a few gaps in the company's cost-cutting plan.
Lowering prices in key markets to fend off challenges from rivals, undertaking deep cost-cutting initiatives, and maybe even selling a corporate jet or two indicates Harley-Davidson is taking it seriously that it's losing a lot of ground. The bike maker may not be panicking yet -- drastically cutting the price of its bikes in the U.S. would be one sure sign of that -- but investors should be worried that it can't sell its motorcycles and brace for what could be a very ugly quarter.
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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.