Harley's Near-Term Throughput Compressed by Higher Borrowing Costs for Dealers and Consumers

Senior Equity Analyst

Jaime M Katz

With a long history of manufacturing experience, Harley-Davidson has brand strength and a dealer network that give the firm a wide economic moat and solid position in the US motorcycle market. However, there are no switching costs to protect Harley's brand when consumers replace their bikes, and the premium price Harley commands relative to its peers has proven problematic during cyclical downturns and periods of competitive pricing, hurting Harley's retail sales and shipments. In 2020, as a result of temporary factory shutdowns, dealer closures, and shifted product launches, Harley ceded massive market share. While still a key market player, Harley's market share fell around 800 basis points, to 42% in 2020 from above 50% in 2019. And while it recovered 3% of share in 2021, it had again ceded share to 38% in 2023. We plan to monitor Harley's market share to help determine the strength of Harley's brand intangible asset.

On a positive note, covid-19 gave Harley the chance to reset its long-term strategy and focus efforts back on its core consumer, which has returned the motorcycle company segment back to higher profit margins (we forecast 12.3% in 2024). With "The Hardwire" strategy, CEO Jochen Zeitz has chased high ROI opportunities for Harley, focused on selectively expanding into new channels (for example, with the launch of the Pan America), evolving consumer trends (growing into EV), better managing complementary businesses (like high-margin parts and accessories), and improving customer experience (to elevate awareness and engagement). 

The EV line is now liberated from the business (but still consolidated), allowing Harley to focus on capitalizing upon electric trends, however, we aren't convinced this will accelerate the production and adoption of such units. Although Harley initially expected to ship more than 100,000 electric units in 2026, we have modeled a more muted 2,500 bikes at that time. While electric units provide volume growth, we believe Harley will fall significantly short of its unit target and believe lower electric unit profitability will hold the motorcycle segments (HDMC + EV) of the enterprise to low-double-digit operating margins.

Business Strategy & Outlook

Harley's distribution channel (composed of exclusive sellers) and brand loyalty give the firm a wide economic moat, which support its long-standing brand intangible asset. As proof of the brand’s weight with consumers, the company has been able to launch new products with average selling price increases over the last decade (3% on average), helped by consistent product innovation. Additionally, its robust dealer network (with around 650 dealers in North America and about 1,300 globally) allows the company to have broad reach and awareness with its products, and we believe the breadth of this distribution channel would be difficult and expensive to replicate quickly, particularly in North America and in certain international markets. Most of the company’s peers, including Polaris’ Indian brand and BRP’s Spyder/Ryker motorcycles, currently share floor space with other powersports peers, and would have to build an independent dealer base that sells only its own products from scratch. This would force the competing brands to find willing participants that agree to sell just one brand, forgoing flexibility to sell the most popular products at certain times depending on product launches, something we think is unlikely. Conversely, Harley dealers have a long-standing commitment to sell just one brand, and we think this type of loyalty helps elevate Harley’s brand perception. Further, dealer profitability is wholly tied to unit sales, with all marketing efforts at the dealer level solely focused on selling the Harley brand. The combination of loyalty from both dealers and consumers gives us confidence in the firm’s ability to boast economic profits for the next two decades, consistent with our wide moat rating.

We surmise Harley’s brand loyalty is underpinned by its manufacturing of high-quality, heavyweight motorcycles for more than 120 years, and its record for product innovation and reliability over a long timeframe is difficult to copy. Harley's dominance in the U.S. market for heavyweight motorcycles--with 38% share in 2023 (according to the firm)--has allowed it to achieve local economies of scale that have so far eluded its competitors (by our estimate, Honda still trails Harley’s share of the heavyweight market). And the company held a leadership position prior to the pandemic, with more than 50% of heavyweight market share between 2009 and 2019, despite secular demographic headwinds in its traditional core cohort. 

While demographic headwinds are set to persist domestically (which has waylaid profit growth and market share retention in past years), ROIC performance still remains healthy, despite falling from historical levels, in line with our wide economic moat rating. We expect ROICs including goodwill of 27% in 2024 as leadership focuses on the core consumer, helping extract excess economic profits. More specifically, over the next five years, we have adjusted ROICs including goodwill that average 29%, around the average adjusted ROICs of 33% the company has achieved over the past five years and in excess of our 8% weighted average cost of capital estimate. Our forecast includes a shipment base that is flat on average between 2024-33 and 2% average selling prices. We surmise new product introductions will attempt to elevate the brand's goodwill with heritage products while tactically reaching a wider user base than in the past through adjacent product introductions.

Wide

Economic Moat

Harley-Davidson

Harley-Davidson, Inc. is engaged in the manufacture and sale of custom, cruiser, and touring motorcycles. It operates through the following segments: Motorcycles & Related Products and Financial Services. The Motorcycles & Related Products segment manufactures, designs, and sells at wholesale on-road Harley-Davidson motorcycles as well as motorcycle parts, accessories, general merchandise, and related services. The Financial Services segment consists of financing and servicing wholesale inventory receivables and retail consumer loans, primarily for the purchase of Harley-Davidson motorcycles. The company was founded by William Sylvester Harley, Arthur Davidson, Walter C. Davidson, Sr. and William A. Davidson in 1903 and is headquartered in Milwaukee, WI.

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Harley-Davidson reports robust 2022 performance, eyes growth opportunities in 2023

Harley-Davidson's strong finish in 2022 reflects its commitment to profitable growth and innovation. While facing challenges in certain segments, the company is well-positioned for future growth through strategic investments and product enhancements. By focusing on core markets and maintaining profit margins, Harley-Davidson aims to return to historical levels of profitability.

Harley-Davidson reports robust Q1 revenue growth and strategic shifts

Harley-Davidson's Q1 2023 showed strong revenue growth and operational improvements, with a focus on premium segments and brand desirability.
Challenges include declining global retail sales, moderation in margins, and credit loss rates, but opportunities exist in new product launches and credit loss reduction strategies.
The company maintains full-year guidance, emphasizing profitability over volume and addressing challenges through strategic initiatives.
Overall, Harley-Davidson's performance in Q1 reflects a balanced approach to growth, profitability, and brand enhancement.

Harley-Davidson navigates revenue challenges with strategic focus and innovations

Harley-Davidson's Q2 performance reflects progress on strategic initiatives amidst revenue challenges and operational efficiencies.
The company's strengths lie in its customer-centric approach, product innovation, and focus on profitability and inventory management.
Challenges include financial pressures, inventory imbalances, and market uncertainties, requiring strategic adjustments and operational resilience.
Opportunities in new markets, promotional strategies, and operational enhancements offer avenues for growth and customer engagement in the future.

Harley-Davidson navigates challenges, sees growth potential in key categories

Harley-Davidson faced challenges in Q3 due to macroeconomic factors and production suspensions, impacting revenue and operating income.
Despite these challenges, the company demonstrated strength in key categories, profitability growth, and effective inventory management.
Opportunities lie in managing current challenges, aligning inventory levels, and driving growth through promotional activities and new initiatives.
Maintaining focus on cost productivity, dealer inventory mix, and supporting promotions is crucial for navigating the challenging market conditions ahead.

Harley-Davidson reports mixed Q4 results, eyes growth in retail units

Harley-Davidson's Q4 2023 showed mixed financial results with revenue down but improved profitability margins. The company faces challenges in retail sales decline and negative operating leverage impacting margins in 2024. However, opportunities exist in retail unit growth, stable HDFS income, and LiveWire expansion.

Harley-Davidson Q1 2024: Revenue Decline, LiveWire Launch Success

Harley-Davidson faced revenue and operating income declines in Q1 2024, with a focus on improving margins and clearing inventory.
Strengths include successful LiveWire launch, reaffirmed guidance, and strategic pillars driving growth.
Challenges include regional softness, margin pressure, and operational improvements needed in the LiveWire segment.
Opportunities lie in cost reduction, inventory clearance, financing adoption, and stable HDFS business health.

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