Harley-Davidson's retail motorcycle sales have been steadily declining since 2015, but the company remained profitable during that slide — until now. In its quarterly financial report yesterday, Harley reported a $92 million loss, provided more details on its restructuring and dropped hints that the Bronx streetfighter model could be delayed or even killed outright.
Beyond the headline earnings numbers, much of the quarterly conference call with new CEO Jochen Zeitz was devoted to plans for the future. Three months ago, before he was promoted from interim to permanent CEO to replace Matt Levatich, Zeitz revealed the outlines of a plan called The Rewire that would change Harley-Davidson's structure and strategy. In yesterday's call, we got a little more detail about those plans, as well as the promise of a new five-year strategic plan to be revealed in six months, called The Hardwire.
Let's take a look at what we know about Harley-Davidson's present and future, based on yesterday's report.
H-D present: Sales down, earnings negative
The net loss of $92 million for the second quarter of 2020 resulted from retail sales of new Harleys that were 27 percent lower in both the U.S. market and globally in the quarter, compared to the same period last year. That resulted in a loss of $0.60 per share when financial analysts were expecting a profit of a few pennies per share.
The company was hampered by most of its dealers being closed at the height of the COVID-19 restrictions. Production was also halted, so when dealers did reopen, inventory was well below normal. Harley's Thailand factory was closed during the month of April and the York, Pennsylvania, factory was closed for two thirds of the quarter. By the end of the quarter, 93 percent of Harley-Davidson dealers were open for retail sales.
With not all dealers having all the new bikes, sales of used motorcycles were strong at dealerships with used-motorcycle prices at dealers up six percent and prices at auction up 10 percent, Harley-Davidson executives reported.
An important profit center for the company is Harley-Davidson Financial Services. Revenue fell just one percent but operating income dropped 94 percent as HDFS set aside much larger reserves to cover potential loan losses. Harley-Davidson reported that loan losses were actually down slightly in the quarter, in part because it offered payment extensions to loan customers who were impacted by the pandemic, but reserves were increased dramatically because of risks going forward.
In recent weeks, the company announced the elimination of 700 positions, which included layoffs of 500 current employees, including CFO John Olin. A search for a new CFO is underway, Zeitz said. And while the practical effect may be minimal, it is perhaps symbolic of the company's decline that its stock was dropped from the S&P 500 index in June.
Harley also announced a forthcoming social media campaign featuring actor Jason Momoa, a long-time Harley fan.
Adventure 1 of 4 ON THE ROAM x @harleydavidson what a dream come true being able to take my friends and babies on an amazing adventure around America I love this country and I love seeing and feeling America on a HARLEY-DAVIDSON there is nothing better back road, off road, lone highway, FREE TO ROAM. BIG MAHALOS to my favourite @colterwall amazing music check him out. @harleydavidson @love_cycles @i.am.aurelius @captainriff @da_bray @jasonericlaciste @charliebrumblyproductionscom @betterinthewind @jenlowney @ktruethat @calilla @maineikinimaka @xventuretrailers @monamabel @dormanmd @s_p_o_n_g_e shot on @reddigitalcinema @leitzcine @leicacamerausa. Aloha j song. Devil wears a suit and tie. @colterwall
H-D future: The Rewire, The Hardwire, fewer models, guarding "desirability"
As Zeitz talks more about The Rewire, it's becoming clearer just how firmly he is rejecting the strategy implemented by his predecessor, Levatich. That strategy, under the "More Roads to Harley-Davidson" banner, was aimed at reaching out to new riders and expanding Harley's lineup into new segments. Remember when Harley-Davidson under Levatich made the surprising promise to introduce 100 new models? Zeitz made it clear that plan has been reversed, stating several times that the model lineup had become too complex, too confusing and too expensive to produce.
"Complexity needed to be dramatically reduced. Goals set needed to be achievable and realistic," Zeitz said, in what I read as a reference to the 100 models promise.
"We are streamlining our motorcycle models by approximately 30 percent with plans to further refine our product portfolio," Zeitz said. "This enables us to invest in the products and platforms that matter the most while better balancing our investment in new, high-potential segments. In this context, we plan to expand our offering of iconic motorcycles, those which most embody the spirit of Harley-Davidson."
The Pan America ADV bike apparently falls into one of those "high-potential segments." "We see strong potential in adventure-touring," Zeitz said. It was previously announced that launches of new models will happen in the early part of the year instead of August or September of the previous year, as in the past, and Zeitz confirmed the Pan America is still on schedule for an early 2021 release. The future for the other already-announced new model, the Bronx, is more murky, however.
On the Harley-Davidson website, the Bronx is still listed as "Coming in 2021," but when a financial analyst on the conference call asked for confirmation that the Bronx will be out early next year, Zeitz avoided answering.
"At this point, adventure-touring will be the focus going into next year," Zeitz said. "As I said earlier, we expect to streamline our product line by about 30 percent in terms of model reductions and color reductions. Other product line decisions we will be revealing in real time. So it's not really something we can and want to talk about at this time."
My take? I expect we won't see the Bronx early next year and there's a chance it could be scrapped altogether.
Zeitz was also asked for an update on Harley-Davidson's plans to build a small-displacement motorcycle in Asia with partner Qianjiang, Ltd., but he refused to provide any details or updates.
The partnership to build a small bike, mainly for Asian markets, makes a lot less sense in light of one of Zeitz's other initiatives. The company is pulling back globally and plans to focus on 50 markets globally that offer the most potential. That means primarily North America, Europe and parts of the Asia-Pacific region. Harley-Davidson is planning to pull out of markets where it sells few bikes.
"We are not willing to sacrifice the strength of our legacy in a quest for pure volume growth going forward," said Harley-Davidson's German CEO, sounding a lot like a man who is not inclined to build a less expensive, small-displacement motorcycle to sell in markets that can't afford Low Riders or Softails or even a Street 750.
Doubling down on being a premium brand
Every time I write about Harley-Davidson, some readers argue that the company needs to lower its prices to be competitive. Those readers are not likely to change their opinions any time soon because Zeitz is taking the opposite approach. Several times during yesterday's call he talked about the importance of maintaining Harley-Davidson's desirability. He said one focus of The Hardwire, the new five-year strategic plan to be unveiled early next year, will be to keep Harley-Davidson the "most desirable motorcycle brand in the world."
"For 117 years, Harley-Davidson motorcycles have ignited desirability and that desirability will form the foundation of our strategy in every aspect of the Harley-Davidson experience into the future," Zeitz said.
That means no discounting, keeping inventories lean and continuing to position Harley-Davidson as a premium brand that deserves a premium price.
"We will not oversupply the market," Zeitz said. "We are not going to pursue volume at the expense of the right fundamentals for our business."
While Zeitz is consistent with his predecessors in believing that having "Harley-Davidson" on the tank makes a motorcycle worth a premium over other brands, he is taking a different view from past management on the need to diversify the customer base. Even nearly 20 years ago, Harley-Davidson executives were talking about the need to address the aging of its core customers. The introduction of the V-Rod and the acquisition of Buell Motorcycles and MV Agusta were among the responses. But when the financial crisis hit more than a decade ago, Harley-Davidson closed down Buell and sold MV Agusta at a loss, returning to its core strategy.
Subsequently, and especially under Levatich, the company tried to reach out beyond its "core customers" of white, male, Baby Boomers and it actually had success in attracting women and customers from other ethnic groups — but not enough to prevent sales declines as core customers aged. Zeitz took a different perspective.
"We also need to look at who has been buying Harley-Davidson in the past and who do we expect to buy Harley-Davidson in the future," he said. "And quite honestly I think we have had a rather oversimplified view.
"I've heard now so often that our consumer is aging out. Well, I'm aging, as they say, and I feel like riding right now. In fact, I would say consumers are aging into riding as they have more free time and resources, especially post this pandemic. Harley-Davidson is really more about attitude and emotion than age and demographics."
I would argue that age, demographics and attitude are all working against Harley-Davidson right now and explain the five-year decline in sales. But then I'm not the CEO of Harley-Davidson. In time we'll see whether The Rewire, the Hardwire and the retrenchment of the Motor Company can reverse its steady decline.