H-D commits to electric as it outlines its five-year Hardwire plan

Those were some of the takeaways as Harley-Davidson management went into more detail yesterday about The Hardwire, its five-year strategic plan that has been developed over the past year under CEO Jochen Zeitz. That long-term plan, however, was presented against a grim short-term backdrop. In the fourth quarter of 2020, Harley-Davidson reported a net loss of $96 million as motorcycle shipments were 48 percent lower than Q4 of 2019. That was partially due to Harley-Davidson intentionally tightening inventory as part of the new strategy, but retail sales at dealers were also down 14 percent year over year in the quarter.

All told, Harley-Davidson showed net income of just $1 million in 2020, which comes to a penny a share. Retail motorcycle sales for all of 2020 were down 17 percent. Further, Harley-Davidson management projected steady but modest growth over the course of the five-year Hardwire plan. As one analyst listening to the call pointed out, that means that by some metrics by 2025 the company will just be getting back to where it was in 2019. HOG stock fell by about 20 percent after the news and projections came out.

All of that makes The Hardwire critical to the company's future. So let's look at what new information we got yesterday.

A few new Hardwire details

There were no big surprises in Zeitz's update on the Hardwire, but some new information did emerge. For the most part, he emphasized the direction already outlined: keeping inventory tight, keeping selling prices up, limiting the number of models to reduce costs, and focusing on international markets only when they have a chance to be materially profitable. He used the word "desirability" another dozen or so times.

The Pan America adventure bike to be unveiled on February 22 has always been secure as part of Zeitz's strategy, but some were beginning to question whether Harley-Davidson would follow through on its plans to move into the electric motorcycle market, beyond its expensive LiveWire halo bike. The answer, Zeitz says, is yes.

"Electric motorcycles are important to our long-term success," Zeitz said. "We are fully committed to and passionate about" electric motorcycles.

Toward that end, a new business unit and leadership team is being assembled to focus exclusively on electric motorcycles. At least we can presume they will be motorcycles, since the company previously spun off its electric bicycle line into the new company, Serial 1. Zeitz understands the limitations of electric motorcycles, which can't carry a huge load of batteries like cars, and he said that Harley-Davidson's traditional lines, like touring bikes, will therefore be the last to convert to electric. But he said he does see opportunities in urban transportation.

"Electrification in the motorcycle segment will happen much faster in what I call the mobility segment," Zeitz said. "It's absolutely critical for us to invest in electric now."

While the Bronx streetfighter model still goes unmentioned in Harley-Davidson presentations, the "Custom" cruiser model using the liquid-cooled V-twin Revolution engine is still on, it appears. Zeitz said we'd also get a first look at that model on February 22, along with the Pan America.

Another new development that came out yesterday was the creation of a Harley-Davidson Certified program. Used motorcycles with no more than 25,000 miles and less than five years old will be inspected and sold at participating Harley-Davidson dealerships.

Zeitz also said the possibility of selling small-displacement models in international markets is still under consideration. That was a plan under former CEO Matt Levatich that some speculated Zeitz would kill off. (Maybe we'll see something like the XR338?)

Also raised was the possibility of expanding Harley-Davidson Financial Services, the company's lending arm, to overseas markets. A plan to give equity in the company to all employees was also mentioned.

The tight supply will continue

One thing that isn't going to change is Zeitz's strategy of keeping supply limited to support prices. If "desirability" has been the most often repeated buzzword on any Harley-Davidson earnings call in the past year, the two forbidden words in Milwaukee are "discounts" and "promotions."

"It really is a fundamental change in how we're doing business going forward," said Chief Commercial Officer Larry Hund. "We're going to continue to manage inventory tight" and "continue to drive that desirability."

That means there will be fewer Harley-Davidson dealers and they'll have less inventory on the floor than in the past, and they'll likely be selling more used motorcycles, including certified pre-owned Harleys.

The Hardwire also comes with modest projections for single-digit annual percentage growth over its five-year span. Those projections, probably even more than the quarterly loss, likely account for most of the drop in the stock price. But Zeitz said the new approach is essential.

"In past years we've overcommitted and underdelivered," Zeitz said. "That's got to stop."