netrashetty
Netra Shetty
Harley-Davidson (NYSE: HOG) is the largest manufacturer of heavyweight motorcycles in the world by market share, capturing half the U.S. market and a third of the global market.[1] As a luxury good, Harley competes primarily on design and quality, rather than price, which keeps margins high; gross margin during 2009 was 31%, as opposed to 34.5% in 2008.[2][1]
Harley's past growth and continued success is closely tied to its customers brand loyalty; Harley is arguably the only company whose customers have been known to regularly tattoo its trademark on their bodies. Despite this rebellious image, the average Harley customer is an upper-class 47-year-old white male, and has been getting older at a rate of 6 months every year for the last 20 years.
Despite brand loyalty, the company had to shut down and consolidate factories in 2009 due to the effects of the recession and the fall of the U.S. Housing Market. About 15% of Harley's business used to be writing loans to its motorcycle buyers. The company's finance arm has since collapsed.
Company Overview
Business and Financial Metrics
Q4 FY 2010 Quarterly and Annual Earnings
Harley Davidson announced a 1 percent decrease in retail sales of Harley motorcycles for the fourth quarter of 2010 when compared to the fourth quarter of 2009.[3] Sales in the U.S. decreased by 0.2 percent for the quarter whereas international sales decreased by 2.1 percent.[3] Retail sales decreased by 8.5% for FY2010 when compared to retail sales in FY2009.[3] Decreased U.S. sales drove these figures, with retail sales in the united states decreasing by 11.7 percent and international sales decreasing by 1.9 percent.[3]
Contents
1 Company Overview
1.1 Business and Financial Metrics
1.1.1 Q4 FY 2010 Quarterly and Annual Earnings
1.1.2 Q3 FY 2010 Quarterly Earnings
1.1.3 Q2 FY 2010 Quarterly Earnings
1.1.4 Q1 FY 2010 Quarterly Earnings
1.2 Business Segments
1.2.1 Motorcycles (75% of 2009 revenue)
1.2.2 Parts & Accessories (17.9% of 2009 revenue)
1.2.3 General Merchandise (6.6% of 2009 revenue)
1.3 International Sales
2 Trends and Forces
2.1 An Aging Customer Base Limits Consumer Base for Harley Davidson's Products
2.2 The Strength of the US Dollar Abroad Impacts Earnings
2.3 The "American-made" Premium Negatively Affects Consumer Perceptions
3 Comparison to Competitors
3.1 Major Competitors
4 Notes
Revenue for the fourth quarter, however, increased to $697.8 million, a 26.4 percent increase from the fourth quarter of 2009.[3] Shipments of Harley-Davidson motorcycles increased to 44,481 from 35,938 in year ago results. Similarly, gross margin was 29.6 percent for this past quarter as compared to 20.3 percent in the fourth quarter of 2009.[3] For the full year, revenue decreased by 1.2 percent to $3.14 billion.[3] Shipments also decreased by 5.6% for the 2010 fiscal year.[3]
Q3 FY 2010 Quarterly Earnings
Harley Davidson posted Q3 FY 2010 earnings of $93.7 million as compared to $56.4 million in the third quarter of the previous year.[4] Harley Davidson's financial services drove income for the quarter, announcing gains of $50.9 for the quarter as compared to losses of $31.5 million for the previous quarter.[4] Income from motorcycles, however, decreased from $130.7 in the third quarter of 2009 to $101.5 million in the third quarter of 2010.[4] These losses were driven by a decrease in sales for the quarter. Worldwide sales decreased by 7.7% as compared to the previous year.[4] U.S. sales decreased by 9.4% and international market sales decreased by 3.6% when compared to last year's results.[4]
Q2 FY 2010 Quarterly Earnings
Harley Davidson posted quarterly income of $139.3 million as compared to $33.4 million the same quarter one year ago. This gain reflected a 417% increase in income from continuing operations.[5] Driving this increase in income was an increase in revenues. Revenue from Motorcycles sales was $831.6 million, a 2.8% increase from the second quarter of 2009.[5] Harley Davidson also increased its shipments by 1.5% from 58,179 in Q2 FY2009 to 59,046 in Q2 FY2010.[5]
Revenue from Parts and Accessories increased by 0.2% to $231.8 million; revenue from General Merchandise, however, fell by 3.2% to $67.4 million.[5] Gross margin increased from 34.1% in the second quarter of 2009 to 35.0% in the second quarter of 2010.[5] Operating margin fell to 13.9% from 15.3% in year-ago comparisons.[5]
Despite these gains, sales in both the United States and international markets decreased. In U.S., motorcycle sales were down 8.4% and international sales were down 0.2%.[5] Overall, worldwide retail sales fell by 5.5% in relation to year-ago figures.[5]
Q1 FY 2010 Quarterly Earnings
Harley Davidson posted $68.7 million in operating income for the first quarter of 2010, an 18% decline from the first quarter of 2009, but an improvement from the three previous quarters.[6] These losses were driven by a 28% decrease in U.S. retail sales and a 2.8% decline in international retail sales.[6] Revenue from 2010 first quarter business operations were down across all business segments. Revenue for motorcycle sales was $808.8 million, a 20% decrease when compared to year-ago results.[6] Revenue from Parts and Accessories was down 12.1% and revenue from General Merchandise was down 11.9%, culminating at $149.1 million and $66.3 million respectively.[6] Gross margin was 36.6% for the first quarter of 2010 as compared to 37.1% in the first quarter of 2009.[6] Operating margins similarly dropped from the first quarter a year ago, from 18.1% to 12.2%.[6]
Business Segments
Harley has two main businesses: selling Harleys, and giving people credit to buy Harleys. Specifically, Harley Davidson sells motorcycles directly, sells motorcycle parts and accessories, operates retail motorcycle dealerships, sells motorcycle gear and general merchandise, and offers loans to buyers.
Motorcycles (75% of 2009 revenue)
The primary business of the Motorcycles segment is to design and manufacture premium motorcycles for the heavyweight market and sell them at wholesale. Harley-Davidson branded motorcycle products emphasize traditional styling, design simplicity, durability and quality. The Company manufactures five families of motorcycles: Touring, Dyna, Softail, Sportster, and VRSC. The Company’s Harley-Davidson engines range in displacement size from 883cc’s to 1803cc’s.
The touring segment of the heavyweight market was pioneered by Harley-Davidson and includes the Harley-Davidson Touring family of motorcycles, including three-wheeled motorcycles, which are generally equipped with fairings, windshields, saddlebags and/or Tour Pak luggage carriers.
U.S. Heavyweight Motorcycle Registration Data (in thousands)
2007 2008 2009
Total Market New Registrations 516.1 479.8 304
Harley-Davidson New Registrations 251.4 218.2 162
Harley-Davidson Registrations as a Percentage of Total 48.7% 45.5% 53.3%
European Heavyweight Motorcycle Registration Data (in thousands)
2007 2008 2009
Total Market New Registrations 387.9 389.7 313.6
Harley-Davidson New Registrations 38.7 41.1 37.7
Harley-Davidson Registrations as a Percentage of Total 10% 10.6% 12%
Parts & Accessories (17.9% of 2009 revenue)
Parts and Accessories (P&A) products are comprised of replacement parts (Genuine Motor Parts) and mechanical and cosmetic accessories (Genuine Motor Accessories).
General Merchandise (6.6% of 2009 revenue)
General Merchandise includes revenue from MotorClothes apparel and accessories. The Company’s licensed products include t-shirts, vehicle and vehicle accessories, jewelry, small leather goods, toys and numerous other products. Although the majority of licensing activity occurs in the U.S., the Company continues to expand these activities in international markets. Royalty revenues from licensing, included in Motorcycles segment net revenue, were $38.3 million in 2009.
In 2008, the Company opened the Harley-Davidson Museum in Milwaukee, Wisconsin. The Museum builds and strengthens bonds between riders and the Company and enhances the brand among the public at large. The 130,000 square foot facility houses the Harley-Davidson Museum and Archives, a restaurant, café, retail store and special event space.
International Sales
The Company’s revenue from the sale of motorcycles and related products to independent dealers and distributors located outside of the United States was approximately $1.38 billion, or approximately 32% of net revenue of the Motorcycles segment, during 2009. Europe accounts for about 50% of international sales. Canada accounts for about 15%, while Japan accounts for 13%.
Demand in Japan and the rest of Asia declined only about 7% in the past year, whereas Canada saw a decline of 36.7%. This could be due to Canada’s exposure to the United States Market, which saw a 26% decline. Overall, world sales have not been affected nearly as much as North American either due to premium brand recognition (in the case of Asia) or the depreciation of the US Dollar (Europe). [7]
Trends and Forces
An Aging Customer Base Limits Consumer Base for Harley Davidson's Products
Harley Davidson’s average customer has been getting 6 months older for the past 20 years, and is now 48 years old. The children of Baby Boomers generally do not want huge bikes that drive most of Harley's sales. Younger generations have a taste that errs towards smaller, cheaper Japanese bikes.
To address this trend, Harley bought out Buell, a fast bike producer, in 1998, introduced the unconventional V-Rod in 2002, and bought out the Italian MV Agusta company which makes premium light-weight bikes in 2008. However, Harley-Davidson has decided that this strategy does not fit well with its brand image. On October 15, 2009, Harley-Davidson announced its intent to divest MV Agusta and that it would exit from the Buell product line.
Harley will need to attract younger buyers to maintain its long-term market share, while not alienating its core customer.
The Strength of the US Dollar Abroad Impacts Earnings
Harley Davidson is increasingly reliant on international sales, especially in Europe. In 2004, only 18% of the company’s sales were international. This figure had moved to 32% by 2009, helped by a heavily weakening dollar. [8] Because Harley incurs its production costs in the United States, it benefits when the dollar weakens against the Euro and the Yen.
People tend to buy dollars to buy U.S. goods, or to hedge against the fluctuation of global currency (the U.S. Dollar is the world's most trusted currency). When people buy dollars, the dollar goes up, and Harley gets hurt.
The "American-made" Premium Negatively Affects Consumer Perceptions
Some say the collapse of General Motors (GMGMQ) was the end of an era for American manufacturers. GM did not just collapse because of high pension obligations. Its cars did not sell well. Asian competitors were making cheaper cars that broke less, took less gas, and went faster. [9]
As an increasing number of American factories go overseas to reduce expenses and do not see a decline in quality. Even Harley imports some Japanese parts due to their higher quality. The "American-made" premium is more nostalgic at this point than anything else. Honda and Kawasakis compete head-to-head with Harleys on technical specifications.[10] Harley is able to charge premium prices for their motorcycles primarily because of their brand image.
The question is: can a brand built on an increasingly distant past survive the future?
Harley faces two threats with its reliance on its brand image. First of all, cool retro-"Easy-Rider" culture could fade out of style along with corresponding demand for Harley's. Secondly, custom American chopper producers such as Big Dog Motorcycles and American IronHorse actually deliver the promise of an All-American bike that is more powerful and customized than almost anything out there.[11]
Comparison to Competitors
Major Competitors
Harley-Davidson maintains a large margin in its dominance in the U.S. Heavyweight Motorcycle market as compared to its major competitors. While the United States is HOG's most important market, the company sells motorcycles in many other markets worldwide. The two most important are Europe, where the company has grown market share from 9.8% in 2005 to 10.7% in 2007, and Canada where HOG had a 39.0% market share for 2007, up from 32.7% in 2005. Worldwide, Harley has a dominant worldwide market share of 33% in what is a growing industry.
Harley-Davidson's main competitors include:
Honda Motor Company (HMC): headquartered in Japan, Honda is the world's fifth largest automaker and largest motorcycle producer by FY2009 sales.
Suzuki Motor (SZKMF): a Japan-based manufacturing company, Suzuki operates in four business segments. The Two-wheel Vehicle segment is engaged in the manufacture of two-wheel vehicles, as well as the manufacture of parts for two-wheel vehicles and the sale of two-wheel vehicles in domestic and overseas markets. The Company has 141 subsidiaries and 37 associated companies.
Yamaha Motor (YAMHF): Yamaha Motor is the world's second largest producer of motorcycles (after Honda). It also produces many other motorized vehicles such as all-terrain vehicles, boats, snowmobiles, outboard motors, and personal watercraft.
Kawasaki Heavy Industries (KWHIY): Kawasaki is a global manufacturer of transportation equipment and industrial goods. KHI manufactures ships, rolling stock, aircraft and jet engines, gas turbine power generators, environmental and industrial plants, and range of manufacturing equipment and systems. KHI also produces consumer products, such as Kawasaki-brand motorcycles and personal watercraft.
Harley's past growth and continued success is closely tied to its customers brand loyalty; Harley is arguably the only company whose customers have been known to regularly tattoo its trademark on their bodies. Despite this rebellious image, the average Harley customer is an upper-class 47-year-old white male, and has been getting older at a rate of 6 months every year for the last 20 years.
Despite brand loyalty, the company had to shut down and consolidate factories in 2009 due to the effects of the recession and the fall of the U.S. Housing Market. About 15% of Harley's business used to be writing loans to its motorcycle buyers. The company's finance arm has since collapsed.
Company Overview
Business and Financial Metrics
Q4 FY 2010 Quarterly and Annual Earnings
Harley Davidson announced a 1 percent decrease in retail sales of Harley motorcycles for the fourth quarter of 2010 when compared to the fourth quarter of 2009.[3] Sales in the U.S. decreased by 0.2 percent for the quarter whereas international sales decreased by 2.1 percent.[3] Retail sales decreased by 8.5% for FY2010 when compared to retail sales in FY2009.[3] Decreased U.S. sales drove these figures, with retail sales in the united states decreasing by 11.7 percent and international sales decreasing by 1.9 percent.[3]
Contents
1 Company Overview
1.1 Business and Financial Metrics
1.1.1 Q4 FY 2010 Quarterly and Annual Earnings
1.1.2 Q3 FY 2010 Quarterly Earnings
1.1.3 Q2 FY 2010 Quarterly Earnings
1.1.4 Q1 FY 2010 Quarterly Earnings
1.2 Business Segments
1.2.1 Motorcycles (75% of 2009 revenue)
1.2.2 Parts & Accessories (17.9% of 2009 revenue)
1.2.3 General Merchandise (6.6% of 2009 revenue)
1.3 International Sales
2 Trends and Forces
2.1 An Aging Customer Base Limits Consumer Base for Harley Davidson's Products
2.2 The Strength of the US Dollar Abroad Impacts Earnings
2.3 The "American-made" Premium Negatively Affects Consumer Perceptions
3 Comparison to Competitors
3.1 Major Competitors
4 Notes
Revenue for the fourth quarter, however, increased to $697.8 million, a 26.4 percent increase from the fourth quarter of 2009.[3] Shipments of Harley-Davidson motorcycles increased to 44,481 from 35,938 in year ago results. Similarly, gross margin was 29.6 percent for this past quarter as compared to 20.3 percent in the fourth quarter of 2009.[3] For the full year, revenue decreased by 1.2 percent to $3.14 billion.[3] Shipments also decreased by 5.6% for the 2010 fiscal year.[3]
Q3 FY 2010 Quarterly Earnings
Harley Davidson posted Q3 FY 2010 earnings of $93.7 million as compared to $56.4 million in the third quarter of the previous year.[4] Harley Davidson's financial services drove income for the quarter, announcing gains of $50.9 for the quarter as compared to losses of $31.5 million for the previous quarter.[4] Income from motorcycles, however, decreased from $130.7 in the third quarter of 2009 to $101.5 million in the third quarter of 2010.[4] These losses were driven by a decrease in sales for the quarter. Worldwide sales decreased by 7.7% as compared to the previous year.[4] U.S. sales decreased by 9.4% and international market sales decreased by 3.6% when compared to last year's results.[4]
Q2 FY 2010 Quarterly Earnings
Harley Davidson posted quarterly income of $139.3 million as compared to $33.4 million the same quarter one year ago. This gain reflected a 417% increase in income from continuing operations.[5] Driving this increase in income was an increase in revenues. Revenue from Motorcycles sales was $831.6 million, a 2.8% increase from the second quarter of 2009.[5] Harley Davidson also increased its shipments by 1.5% from 58,179 in Q2 FY2009 to 59,046 in Q2 FY2010.[5]
Revenue from Parts and Accessories increased by 0.2% to $231.8 million; revenue from General Merchandise, however, fell by 3.2% to $67.4 million.[5] Gross margin increased from 34.1% in the second quarter of 2009 to 35.0% in the second quarter of 2010.[5] Operating margin fell to 13.9% from 15.3% in year-ago comparisons.[5]
Despite these gains, sales in both the United States and international markets decreased. In U.S., motorcycle sales were down 8.4% and international sales were down 0.2%.[5] Overall, worldwide retail sales fell by 5.5% in relation to year-ago figures.[5]
Q1 FY 2010 Quarterly Earnings
Harley Davidson posted $68.7 million in operating income for the first quarter of 2010, an 18% decline from the first quarter of 2009, but an improvement from the three previous quarters.[6] These losses were driven by a 28% decrease in U.S. retail sales and a 2.8% decline in international retail sales.[6] Revenue from 2010 first quarter business operations were down across all business segments. Revenue for motorcycle sales was $808.8 million, a 20% decrease when compared to year-ago results.[6] Revenue from Parts and Accessories was down 12.1% and revenue from General Merchandise was down 11.9%, culminating at $149.1 million and $66.3 million respectively.[6] Gross margin was 36.6% for the first quarter of 2010 as compared to 37.1% in the first quarter of 2009.[6] Operating margins similarly dropped from the first quarter a year ago, from 18.1% to 12.2%.[6]
Business Segments
Harley has two main businesses: selling Harleys, and giving people credit to buy Harleys. Specifically, Harley Davidson sells motorcycles directly, sells motorcycle parts and accessories, operates retail motorcycle dealerships, sells motorcycle gear and general merchandise, and offers loans to buyers.
Motorcycles (75% of 2009 revenue)
The primary business of the Motorcycles segment is to design and manufacture premium motorcycles for the heavyweight market and sell them at wholesale. Harley-Davidson branded motorcycle products emphasize traditional styling, design simplicity, durability and quality. The Company manufactures five families of motorcycles: Touring, Dyna, Softail, Sportster, and VRSC. The Company’s Harley-Davidson engines range in displacement size from 883cc’s to 1803cc’s.
The touring segment of the heavyweight market was pioneered by Harley-Davidson and includes the Harley-Davidson Touring family of motorcycles, including three-wheeled motorcycles, which are generally equipped with fairings, windshields, saddlebags and/or Tour Pak luggage carriers.
U.S. Heavyweight Motorcycle Registration Data (in thousands)
2007 2008 2009
Total Market New Registrations 516.1 479.8 304
Harley-Davidson New Registrations 251.4 218.2 162
Harley-Davidson Registrations as a Percentage of Total 48.7% 45.5% 53.3%
European Heavyweight Motorcycle Registration Data (in thousands)
2007 2008 2009
Total Market New Registrations 387.9 389.7 313.6
Harley-Davidson New Registrations 38.7 41.1 37.7
Harley-Davidson Registrations as a Percentage of Total 10% 10.6% 12%
Parts & Accessories (17.9% of 2009 revenue)
Parts and Accessories (P&A) products are comprised of replacement parts (Genuine Motor Parts) and mechanical and cosmetic accessories (Genuine Motor Accessories).
General Merchandise (6.6% of 2009 revenue)
General Merchandise includes revenue from MotorClothes apparel and accessories. The Company’s licensed products include t-shirts, vehicle and vehicle accessories, jewelry, small leather goods, toys and numerous other products. Although the majority of licensing activity occurs in the U.S., the Company continues to expand these activities in international markets. Royalty revenues from licensing, included in Motorcycles segment net revenue, were $38.3 million in 2009.
In 2008, the Company opened the Harley-Davidson Museum in Milwaukee, Wisconsin. The Museum builds and strengthens bonds between riders and the Company and enhances the brand among the public at large. The 130,000 square foot facility houses the Harley-Davidson Museum and Archives, a restaurant, café, retail store and special event space.
International Sales
The Company’s revenue from the sale of motorcycles and related products to independent dealers and distributors located outside of the United States was approximately $1.38 billion, or approximately 32% of net revenue of the Motorcycles segment, during 2009. Europe accounts for about 50% of international sales. Canada accounts for about 15%, while Japan accounts for 13%.
Demand in Japan and the rest of Asia declined only about 7% in the past year, whereas Canada saw a decline of 36.7%. This could be due to Canada’s exposure to the United States Market, which saw a 26% decline. Overall, world sales have not been affected nearly as much as North American either due to premium brand recognition (in the case of Asia) or the depreciation of the US Dollar (Europe). [7]
Trends and Forces
An Aging Customer Base Limits Consumer Base for Harley Davidson's Products
Harley Davidson’s average customer has been getting 6 months older for the past 20 years, and is now 48 years old. The children of Baby Boomers generally do not want huge bikes that drive most of Harley's sales. Younger generations have a taste that errs towards smaller, cheaper Japanese bikes.
To address this trend, Harley bought out Buell, a fast bike producer, in 1998, introduced the unconventional V-Rod in 2002, and bought out the Italian MV Agusta company which makes premium light-weight bikes in 2008. However, Harley-Davidson has decided that this strategy does not fit well with its brand image. On October 15, 2009, Harley-Davidson announced its intent to divest MV Agusta and that it would exit from the Buell product line.
Harley will need to attract younger buyers to maintain its long-term market share, while not alienating its core customer.
The Strength of the US Dollar Abroad Impacts Earnings
Harley Davidson is increasingly reliant on international sales, especially in Europe. In 2004, only 18% of the company’s sales were international. This figure had moved to 32% by 2009, helped by a heavily weakening dollar. [8] Because Harley incurs its production costs in the United States, it benefits when the dollar weakens against the Euro and the Yen.
People tend to buy dollars to buy U.S. goods, or to hedge against the fluctuation of global currency (the U.S. Dollar is the world's most trusted currency). When people buy dollars, the dollar goes up, and Harley gets hurt.
The "American-made" Premium Negatively Affects Consumer Perceptions
Some say the collapse of General Motors (GMGMQ) was the end of an era for American manufacturers. GM did not just collapse because of high pension obligations. Its cars did not sell well. Asian competitors were making cheaper cars that broke less, took less gas, and went faster. [9]
As an increasing number of American factories go overseas to reduce expenses and do not see a decline in quality. Even Harley imports some Japanese parts due to their higher quality. The "American-made" premium is more nostalgic at this point than anything else. Honda and Kawasakis compete head-to-head with Harleys on technical specifications.[10] Harley is able to charge premium prices for their motorcycles primarily because of their brand image.
The question is: can a brand built on an increasingly distant past survive the future?
Harley faces two threats with its reliance on its brand image. First of all, cool retro-"Easy-Rider" culture could fade out of style along with corresponding demand for Harley's. Secondly, custom American chopper producers such as Big Dog Motorcycles and American IronHorse actually deliver the promise of an All-American bike that is more powerful and customized than almost anything out there.[11]
Comparison to Competitors
Major Competitors
Harley-Davidson maintains a large margin in its dominance in the U.S. Heavyweight Motorcycle market as compared to its major competitors. While the United States is HOG's most important market, the company sells motorcycles in many other markets worldwide. The two most important are Europe, where the company has grown market share from 9.8% in 2005 to 10.7% in 2007, and Canada where HOG had a 39.0% market share for 2007, up from 32.7% in 2005. Worldwide, Harley has a dominant worldwide market share of 33% in what is a growing industry.
Harley-Davidson's main competitors include:
Honda Motor Company (HMC): headquartered in Japan, Honda is the world's fifth largest automaker and largest motorcycle producer by FY2009 sales.
Suzuki Motor (SZKMF): a Japan-based manufacturing company, Suzuki operates in four business segments. The Two-wheel Vehicle segment is engaged in the manufacture of two-wheel vehicles, as well as the manufacture of parts for two-wheel vehicles and the sale of two-wheel vehicles in domestic and overseas markets. The Company has 141 subsidiaries and 37 associated companies.
Yamaha Motor (YAMHF): Yamaha Motor is the world's second largest producer of motorcycles (after Honda). It also produces many other motorized vehicles such as all-terrain vehicles, boats, snowmobiles, outboard motors, and personal watercraft.
Kawasaki Heavy Industries (KWHIY): Kawasaki is a global manufacturer of transportation equipment and industrial goods. KHI manufactures ships, rolling stock, aircraft and jet engines, gas turbine power generators, environmental and industrial plants, and range of manufacturing equipment and systems. KHI also produces consumer products, such as Kawasaki-brand motorcycles and personal watercraft.
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