Harley-Davidson: An Uphill Ride Powered By Its Premium Segments

Summary:

• Despite a global decline in retail motorcycle sales, Harley-Davidson’s Touring and CVO segments have performed strongly, especially in the U.S. and EMEA regions.
• Harley’s $400 million productivity program is paying off, helping fund new bikes like the RevMax and keeping their premium brand strategy intact.
• Wholesale shipments in the HDMC segment fell 39%, causing a 32% yoy revenue decline. Operating margins were cut in half, even with the company’s cost-cutting efforts.
• Their electric bike brand, LiveWire, lowered 2024 delivery targets and posted big losses, though it’s still the U.S. market leader.
• Given the mixed financial performance and valuation metrics, I maintain a hold rating, recommending investors monitor the impact of lower U.S. interest rates on motorbike demand.

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Harley-Davidson, Inc. (NYSE:HOG) has seen its share price trade sideways over the last 12 months.

Despite a global decline in retail motorcycle sales, the Touring and CVO segments have delivered strong results in the last quarter.

With the FED cutting interest rates down to 4.5%, investors should keep an eye on the Q4 2024 earnings release for improvements in retail sales in the low- to mid-range motorbike category.

This year, the company has been relying on the segments targeted toward affluent consumers (Touring, CVO, trikes), however, this could change in 2025 if interest rates improve consumer spending.

In this article, I will discuss the recent performance of the company, including the challenges and some of the strategic initiatives that could turn around the company in the long term.

In my opinion, it is too early to see all the benefits from their strategic initiatives, and therefore, I maintain a hold rating for this stock.

Business Overview

Harley-Davidson is a Milwaukee-based motorcycle company, well known around the world, that has been in business for well over 100 years.

They are renowned for manufacturing heavyweight motorcycles.

From an operational perspective, the company has three business segments:

1. Harley-Davidson Motor Company (HDMC): this segment focuses on the design, manufacturing, and sales of motorcycles, parts, accessories, and apparel.
2. Harley-Davidson Financial Services (HDFS): this segment provides financing and insurance products to customers and dealers.
3. LiveWire: initially an electric vehicle division launched in July 2021 and spun off in September 2022, Harley-Davidson still retains 74% of the ownership stake in LiveWire.

According to the last 10-Q, out of three segments, the HDMC (Harley-Davidson Motor Company) accounts for 83% of the sales revenue for FY 2023 while LiveWire only accounts for 1%. In other words, the brand is still highly focused on the ICE (internal combustion engine) division, which, I believe, is something that shareholders see with a positive eye.

In terms of sales globally, North America accounts for 54% and EMEA accounts for 17% of all sales in FY 2023. The other two regions, Asia and Latin America, account for less than 10% each.

Touring and CVO Segments Outperforming

The Touring and CVO segments performed really well despite a tough economic environment.

According to the last earnings release, the Touring segment grew almost 10% in the US for the first 9 months of the year. Moreover, this segment gained more than 4 percentage points in market share within its category.

The latest conference call transcript mentioned the Touring, the CVO and the trike motorcycle categories were the strongest segments in EMEA. However, the latest 10-Q did not provide a specific value for the revenue growth of these segments in EMEA.

In the Asian-Pacific region, Australia and New Zealand showed positive trends in the above segments despite an overall decline of 16% in the region. Again, in the 10-Q there was no specific breakdown in regard to the improvement driven by these two segments.

New Product Launches

The focus still remains on Touring, CVO and trike motorcycles. Innovations in the pipeline for 2025 are expected to drive revenue growth.

The RevMax innovation addresses the market’s dynamics and caters to the needs of younger riders and the broader audience with more affordable models.

LiveWire, the electric motorcycle subsidiary, still remains the market leader in the U.S., with a 69% market share at the end of last quarter.

Harley-Davidson has a $400 million productivity improvement program to underpin the innovations. It has been on track for the past 3 years and for the first 9 months of 2024 the program delivered $84 million in productivity improvements. The total achievement is $231 million for 2022, 2023 and 2024.

Harley-Davidson Financial Services Saw Decent Revenue Growth

In Q3, the revenue of this segment was over $26 million more than the revenue in the same quarter, last year. In fact, the revenue of this segment increased by 10% yoy as interest rates increased.

Commercial financing activities rose by 18% to reach $1.2 billion in Q3 2024.

As you probably know, the company does not run sale offers on their products to keep the brand reputation high; however, they do provide incentives in terms of flexible finance options and interest rates.

In fact, HDFS (the financial segment) provides dealers with these attractive financing options to sustain motorcycle demand during downturns​.

Riding on an Uphill Road

Out of all the regions, Latin America was the only one to post a 4% increase in retail sales.

In North America, retail sales declined by 10% yoy, but less than the industry average.

In EMEA, sales had the steepest drop by 23% yoy, followed by the Asian-Pacific region with a 16% drop in retail sales.

According to management during the earnings call, the overall global motorcycle market had a 13% decline in retail sales due to various reasons like high interest rates, sluggish economies and geopolitical uncertainties, to name a few.

This impact contributed to a decline of 13% in global retail sales of new motorcycles for Q3.

The company noticed that most motorcycle buyers come from high-income groups. During the earnings call, management pointed out that middle- and lower-income customers face challenges in affording motorcycles.

Looking at the latest financial results, the Harley-Davidson Motor Company experienced a 32% decline in revenue yoy.

Even more concerning is the 39% yoy decline in wholesale shipments. This decline reflects the low demand for their motorcycles, with dealerships reducing their inventories significantly yoy.

Other concerns include the 49% decline in consolidated operating income, with HDMC operating income margins falling from 13.5% in Q3 2023 to 6.3% in Q3 2024.

This decline in margin happened despite the $27 million yoy reduction in operating expenses. The improvement in productivity was mainly driven by the HardWire strategy, which YTD has delivered $84 million in savings.

Another cost-saving target is to cut inventory by an extra 20% by year-end. As I mentioned previously, inventory dropped by 13% in Q3 2024 compared to Q2.

Moving onto other headwinds, management revised downwards the guidance for the LiveWire segment, now expecting deliveries to be between 600 and 1,000 units for FY 2024.

Additionally, the LiveWire segment had an operating loss of $26 million in Q3 alone. This year, LiveWire went through a restructuring program to reduce cash burn by 40% in 2025. The initiatives include centralizing operations in Milwaukee and cutting its workforce by 30%.

Fundamentals Overview

From the income statement, we can see a major decline in the past quarter, particularly in operating income (82.7% yoy) and in net income (40% yoy).

As I mentioned above, the overall market decline in motorcycle sales had a direct impact on the total revenue of the company. In fact, the total revenue decline in the last quarter was 25.7% yoy.

From a financial health perspective, the balance sheet shows their total debt is quite high compared to their cash and short-term investments. To be specific, the total debt to cash and ST investments ratio is about 3.3 which leads us to a net debt of $5.46 B.

In my opinion, the company still has enough liquidity to cover their debt. Both the quick ratio and the current ratio are above 1 despite the relatively low cash reserves.

As I mentioned before, the company has been struggling with inventories due to lower overall demand. Currently, a good amount of their current assets is locked in these inventories.

Moving on to the cash flow statement, the increase in operating and free cash flow looks quite promising. Since the start of the year, the company has seen double-digit growth in both operating and free cash flows.

In my view, despite the overall decline in demand for motorcycles, especially in the US, the fact that the company has been able to generate close to $1 billion in operating cash flow is quite encouraging.

However, I cannot rate this stock as a buy at the moment, as the income statement looks unfavorable compared to the cash flow statement. As soon as I see revenue growth followed by an improvement in profitability, I will revisit this stock and reconsider my rating.

Valuation

A quick look at the valuation section of the company shows a mixed picture with some valuation ratios, including a P/E of 7 and a P/CF of 4 (TTM) trading below the median of the consumer discretionary sector.

On the other hand, I can see other ratios that are trading slightly above the sector median, including EV/EBITDA (TTM) which stands at 12% above the sector median.

The company pays a quarterly dividend; however, the dividend yield is at 5% below the sector median. Therefore, I do not believe this is an attractive yield to compensate for the dire financial results of the company this year.

Conclusion

After considering the factors discussed in my thesis, I rate this stock as a hold.

On the bright side, the Touring, CVO, and trike segments outperformed in key regions, gaining market share even as global retail motorbike sales declined. They are already seeing positive results from the $400 productivity improvement program, with $84 million in productivity improvements this year alone.

Furthermore, the RevMax innovation pipeline and LiveWire’s dominant U.S. market share show promise in attracting enthusiasts and more diverse riders.

On the flip side, wholesale shipments for the Harley-Davidson Motor Company declined by 39% leading to a 32% decline in revenue for this segment. Operating income dropped by 49% yoy, and operating margins slashed in half despite cost reductions. LiveWire continues to underperform, with a reduced FY 2024 delivery guidance and mounting losses.

From a valuation perspective, the P/E ratio (TTM) of the company looks quite decent, trading 60% below the sector median. Other ratios, mentioned above, seem to indicate that the company is fairly priced when compared to its sector. Therefore, I maintain a hold rating and I recommend investors keep an eye on the impact of lower interest rates in the U.S. on the demand for motorbikes, particularly the ones in the low- to mid-range.

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