Common Tread

Incentives, loans, tree-huggers: Three thoughts from Harley-Davidson's quarterly financial report

Apr 19, 2017

Harley-Davidson announced first-quarter financial results yesterday, generally confirming evidence that the U.S. motorcycle market is muddling along, without any real growth.

The headlines were that U.S. motorcycle shipments were down 5.7 percent year over year (as expected) while international sales were down 1.8 percent. Earnings per share dropped 22.8 percent year over year, but were still slightly better than analysts expected. As far as outlook, Harley still expects 2017 sales to be flat or slightly down, compared to 2016.

Below the headlines, however, here are three other things I found interesting.

The crack in the wall?

Harley-Davidson is known for not discounting its product as part of its strategy to remain a premium brand. But one of the big problems the company has faced in recent months is excess dealer inventory. Dealers had too many 2016 models, especially since news of the new Milwaukee-Eight engine was out, which gave many buyers a reason to put off buying and get a 2017 Harley with the new engine.

Harley-Davidson counteracted that by making new 2017 models scarce. Shipments were reduced 30 percent in the fourth quarter of 2016, giving dealers time to move the old 2016s. The company also offered incentives to consumers, such as special financing offers, up until February. But then Harley-Davidson did something else it doesn’t usually do. It offered incentives directly to dealers.

Lemmy spotted and sent to me a Reuters story out yesterday quoting several dealers anonymously as saying Harley-Davidson was offering incentives to move 2016s, and confirming that such incentives are unusual, if not unprecedented. I was hoping one of the analysts on the earnings report conference call would ask, and fortunately the Goldman Sachs analyst did. CFO John Olin essentially confirmed the news report.

“Yes, we have provided incentives to the dealers to defray the costs of moving those motorcycles,” Olin said. “That is very atypical. But it’s also atypical that we have had this much model year carryover.”

Unusual measures are prompted by unusual times. Olin said the U.S. motorcycle market was down about six percent last year. New motorcycle sales have been sliding since the second quarter of last year and used bike prices have declined nine straight quarters. Despite lower sales, Harley-Davidson actually made a small gain in market share in its over-601 cc street motorcycle segment because others did even worse.

Harley-Davidson loan chart
Loan delinquencies are ticking higher, matching events in the auto-financing world. Harley-Davidson illustration.

Did you make that loan payment on time?

Common Tread contributor Tom Byrne is not the only one who is noticing that consumers are having a somewhat harder time making those loan payments. Harley-Davidson Financial Services, the arm that provides financing for motorcycles, showed lower results in the first quarter mainly because it increased provisions for loan losses by $6.6 million.

Delinquencies and defaults are ticking up and Olin said that is consistent with overall trends in vehicle loans.

Those Harley-riding tree-huggers?

It’s well known that Harley-Davidson has been working for years to expand its customer base. It even has terms for its two kinds of customers: Core (white men over 35) and Outreach (women, people 18 to 34, African-Americans and Latinos). The Harley-Davidson Riding Academy, which offers how-to-ride training, is one part of that effort, but CEO Matt Levatich said he wants to see a more fundamental transition in the company.

Instead of talking about how many motorcycles the company built, “We need to be able to talk about how many customers we built today,” he said. “It starts with a mindset shift. When you think about building riders you think about the business differently.”

It’s a plan that applies not just to the U.S. market, but everywhere. Part of Harley-Davidson’s 10-year plan is to increase international sales to half of the company’s total.

What was less well known to me until recently is Harley-Davidson’s self-portrayal as a “green” company. This is not something new this quarter, but an ongoing program. On social media, you’ll see Harley-Davidson promoting its alliance with The Nature Conservancy to help plant 50 million trees. Or consider these words above Levatich’s signature in the annual “Sustainability Report,” that promise the company will “continue to lower our environmental impact — generating less waste, using less energy and creating fewer greenhouse gases.”

I’m pretty sure this is aimed at the Outreach customers. I’ve run into more than a few of Harley-Davidson’s Core customers who revel in ripping the “EPA bullshit” off their new Harleys as soon as possible, probably even before leaving the dealership. I wonder if they know the Motor Company is worried about greenhouse gases.

I wonder if they’re making their loan payments on time. I wonder if they are taking advantage of those now not-so-secret dealer incentives to move the 2016s.