HOG - Harley-Davidson: Seeing Good Sales But I Need More Proof To Believe The Tides Have Turned

Summary

• Harley-Davidson has struggled to regain growth over the past decade.
• The business has failed in many growth initiatives, but may have something with building out new models.
• I am not an investor without more proof of concept, and may reevaluate in 2023 if results continue to be good.

Introduction

Harley-Davidson ( HOG ) is one of the most iconic motorcycle brands in United States history. But once a symbol of freedom and counterculture, the brand has been dwindling for years with younger demographics. Thus, the company has tried to focus on markets abroad and making new models. But so far, this effort has been to no avail. The company has seen some success with the new motorcycle models, but I need more proof before I would make an investment.

Industry Is Declining

Overall, the 601+cc market in the United States is declining. But the hope is that the growing 601+cc market in Europe could make up for this.

Over the past five years in the United States, the market has declined in total 601+cc registrations by 0.51% since and saw a four-year rate of decline of 4.34% from 2017 to 2020. While there was 16.42% growth in 2021 US registrations, the first nine months of 2022 are down again by 7.7%.

On the other hand, Europe has grown incrementally and is a larger market. Europe 601+cc registrations have only seen one down year, in 2020, at a -0.31% decline. So far in 2022 though, European registrations are down by 8.2%. In total, it seems these two markets (which make up over 80% of total sales) are not a high growth tailwind to the business.

Harley-Davidson's Share Of Industry Is Decreasing

Not only is the industry slow-to-no growth, but Harley-Davidson branded bikes are also seeing decreasing registrations, and therefore lower market shares.

Registrations of the company's motorcycles in the United States declined at a faster clip from 2017 to 2020 than the market, at a rate of 8.71% per year. This lowered Harley-Davidson's market share in the US from 50% to 42%. Some ground was made in 2021, with the brand registrations outpacing the US market and about 2% in market share was gained. But again, in the nine months of 2022, the business has a market share of just 41%.

While the European market is massive and growing, Harley-Davidson has not been able to capture any of it. Registrations of the brand have seen a strong downward trajectory since 2018. The market share has declined from 10% at the peak to 6%. So far in 2022, Harley-Davidson has kept steady at 6% market share.

What this shows is that the industry as a whole isn't growing fast, and Harley-Davidson seems to be unable to gain any market share. This is due to the company's dwindling brand equity with consumers across the globe.

This Is Due To Low Demand & Brand Depreciation

The company has tried to combat these issues by setting out multiple initiatives in the last decade, but so far none have worked. The focus now is on creating new models/improving product lines, creating a lifestyle brand, and focusing on the customer.

One thing the company was focused on in prior years was expanding the brand's sales abroad. But as can be seen above, this has not gone well at all. To pair along with a decline of 14.96% in units sold in the United States, Harley-Davidson has seen decreasing sales in all other regions. This shows that the brand is not viable internationally and will need to be overhauled to have any significant growth there. Harley-Davidson's brand is based on freedom and counterculture, which is more unique to the United States than other countries. In 2022, units sold in each region have declined by 14%, 2%, & 10% in North America, EMEA, & Latin America. Asia Pacific this year is strong, with 12% growth so far.

So the company has now focused on building out new models and improving existing models. A couple of ways Harley-Davidson has done this is by venturing into electric and making the new Adventure Touring motorcycle. The Adventure Touring in the first year of sale has actually performed great, with sales almost at 10,000 units. And in the nine months of 2022, the Adventure Touring already has 12,355 units sold. So while there is weakness in the Grand Touring, Cruiser, and Sportster, the newest addition to the product line is strong. Overall, though, total units sold were still down 22% since 2017, so the new model will really need to explode to regain ground.

Harley-Davidson's other focus is rebuilding the brand to be a lifestyle again. I think this will be a very hard task with younger demographics, and the sales breakdown shows that so far this hasn't had any success. I think a good gauge of if the brand is achieving "lifestyle" status is apparel sales. Apparel sales have actually stayed at the same percentage of the total sales since 2017, this is even as total sales have declined. This shows how the brand equity has deteriorated. In 2022, apparel is down to 4.6% of sales, in-line with prior years.

And The Financials Are Showing These Factors

Of course, the decline in almost all areas of the company has led to terrible financial performance. Revenue over the past five years has declined by 5.51%. Operating and net income have also declined from 2017 to 2020 but saw nice jumps in 2021 growing by 8130% and 64900% from 2019 levels. And this increase from 2021 has carried into 2022. Revenue in 2022 is higher by 7%, with operating and net income also up by 9% and 11%, each.

Now, taking all this information together shows that the trend since 2017 for the business is downward. But there have been some great bounces in parts of the business in 2021 and into 2022. Harley-Davidson is most likely not going to have great success internationally, as previous results show. On top of this, the United States market in the 601+cc space is not what it once was. The company's best bet is not being a lifestyle brand, but reinventing itself to become desirable in younger demographics. The new electric bikes and changed models have provided some hope. But overall, Harley-Davidson is still in the middle, trying to appeal to the old customer while at the same time trying to obtain customers in new markets. The business needs to pick a lane a run with it.

At Least The Balance Sheet Can Hold The Business Up

While Harley-Davidson struggles to figure it out, the balance sheet can withstand the slow bleed. The company has a current and quick ratio of 1.36x and 1.18x, showing the ability to pay current obligations. The business is a bit highly leveraged but has nothing to worry about currently, with a debt-to-equity of 3.12x. This balance sheet is healthy and can hold up for variance in operational performance year to year if needed.

Not A Terrible Valuation If You Believe 2021 Is The New Normal

As for an investment in the business, it depends. As of writing, Harley-Davidson trades around the $50 price level. This makes for a 10.7x trailing and forward P/E. Not too shabby if you think the results from 2021 and the nine months of 2022 are the new normal. I have my doubts, so I would not invest in Harley-Davidson right now. If 2023 shows a similar result, I may re-think this opinion.

Conclusion

Harley-Davidson has had a very tough road over the last decade. Sales have declined on the back of a declining marketplace for 601+cc motorcycles and a diminishing brand. The company hasn't had much success abroad, but is finding new models to be a growth source. This powered quality financials in 2021 and 2022, but I need more proof to invest in this company.

For further details see: