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    Harley-Davidson Inc (HOG)

    Q2 2024 Earnings Summary

    Reported on Jan 16, 2025 (Before Market Open)
    Pre-Earnings Price$33.87Last close (Jul 24, 2024)
    Post-Earnings Price$37.16Open (Jul 25, 2024)
    Price Change
    $3.29(+9.71%)

    What went well

    • Strong Product Innovation Driving Market Share Gains: Harley-Davidson's new touring motorcycles, including the 2024 models, are receiving an "extraordinarily positive" reception, leading to significant growth in the touring segment and market share gains. The company believes this innovation will help their business in years to come and has more innovation planned for the coming years.
    • LiveWire's Rapid Growth in Electric Motorcycles: LiveWire, Harley-Davidson's electric motorcycle brand, reported a "triple-digit increase" in unit sales compared to Q2 2023, becoming the "#1 on-road electric motorcycle retailer in the U.S. for the first half of 2024." Operating losses improved by 12%, underscoring the company's commitment to reducing costs while expanding its product line and market presence.
    • Confidence in Second Half Retail Growth: Despite a challenging market environment, Harley-Davidson expects retail units sold to grow between 0% to 3% for the full year. The company is confident in its product lineup, manufacturing consistency, and dealer network, which positions it well for the second half of the year.

    What went wrong

    • The decrease in operating income margin guidance is primarily due to production volume reductions and deleverage impacts, indicating potential profitability challenges for Harley-Davidson.
    • Harley-Davidson Financial Services (HDFS) is experiencing higher consumer delinquency rates and credit losses than desired, which may signal potential credit risk concerns within their financial services segment.
    • Despite significant innovation and new product launches, Harley-Davidson is not seeing the expected volume growth, suggesting challenges in driving sales even with new products. Only about 30% of their engaged customers are aware of the new products, which may hinder sales growth.

    Q&A Summary

    1. Retail Guidance and Second Half Growth
      Q: How will retail grow in the second half?
      A: Harley-Davidson expects retail growth of 0% to 3% for the full year, implying positive growth in the second half. Despite a year-to-date retail decline of about 2%, the company is confident due to strong product reception, improved inventory availability, and consistent manufacturing operations. Tough comparables from last year and a well-prepared peak season support this outlook.

    2. Operating Margin Outlook
      Q: What affects the updated operating margin guidance?
      A: The operating margin is primarily impacted by production volume and leverage effects. Reduced production to align with inventory levels leads to deleverage and affects margins. The company is not planning for incremental dealer support costs but remains confident in its long-term operating income margin targets.

    3. Dealer Inventory Reduction
      Q: Are dealers seeking further inventory reductions?
      A: Dealers will see inventory reductions of approximately 35% in the U.S. during the second half. While higher interest rates and inventory values are considerations, there has been minimal pushback from dealers. The reductions are significant, and dealers will start feeling the effects as shipments decrease.

    4. Health of HDFS Portfolio
      Q: How is HDFS performing amid credit losses?
      A: Harley-Davidson Financial Services' portfolio is performing well, with credit losses broadly in line with expectations and seasonality. The company maintains a thoughtful reserve position and is pleased with how the HDFS team is managing delinquency and supporting customers.

    5. Touring Market Share Gains
      Q: What's happening with touring market share?
      A: The company achieved a significant increase in touring market share in the U.S. during the second quarter. The strong performance is attributed to new product introductions and exceptional reception, differentiating significantly from previous models.

    6. International Market Dynamics
      Q: How are international markets performing?
      A: International markets show mixed results with no consistent pattern. Asia is significantly impacted by economic conditions in China, resulting in retail declines after six quarters of growth. Some European markets are strong, while others are weaker, influenced by local economic developments.

    7. Dealer Network Optimization
      Q: How will dealership closures affect profitability?
      A: Harley-Davidson is refining its dealer network to ensure optimal locations and support dealer profitability. The company aims to create a sustainable network that generates returns for dealer partners while optimizing the distribution footprint without harming shareholder value.

    8. Continued Innovation Plans
      Q: Can Harley-Davidson keep innovating successfully?
      A: Yes, the company has a product portfolio plan spanning many years, initiated with the Hardwire strategy in 2021. The recent significant refresh of the touring lineup is just the beginning, with more innovation expected in the coming years to resonate with core consumers.

    9. Promotional Activities and Inventory
      Q: What promotional levers are available to reduce inventory?
      A: Currently, there are no promotions active for model year '24 motorcycles. Minimal levels of '23 inventory remain, and the company has stopped promoting them. They are watching market conditions carefully but have not planned additional promotions for the second half.

    10. Customer Demographics and Average Age
      Q: Is the average customer age acceptable?
      A: The average customer age is consistent and acceptable, with 30% of loan originations from customers 35 and younger. Additionally, 75% of customers are under 54. The average income of new customers has increased, reflecting a healthy customer base.

    11. Current Trading and Comps
      Q: How is current trading affecting guidance?
      A: Although the company prefers not to comment on current trading with only three weeks into the month, all current observations have been incorporated into the full-year guidance, accounting for the impact of prior-year comparables and production disruptions.

    12. Average Income Trends
      Q: Are customer income levels changing?
      A: The average income of Harley-Davidson customers has increased by 15% over the past five years, now exceeding $100,000. This trend signifies a positive development in the customer base and aligns with the company's premium positioning.

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