Harley-Davidson Earnings: Sales Fall as Riders Tighten Purse Strings and Shipments Stall

Wide-moat Harley-Davidson HOG failed to escape the macroeconomic headwinds that have been pervasive across the discretionary landscape in its third quarter. Moreover, given rising evidence that softer consumer spending is likely to persist, we think it is prudent to modestly decrease our 3% sales and 14% motorcycle operating margin estimates in 2024. As such, we plan to lower our $46.50 fair value estimate by a high-single-digit rate, which will still render shares undervalued. However, we’d caution investors that sentiment on the stock may not turn until consumer confidence stabilizes (facilitated by flat or declining interest rates), given the highly volatile macroeconomic environment. Shares are trading down 9% after earnings and 36% in 2023 as consumer spending on services has continued to outpace goods, and we don’t believe spending on recreational products will turn around imminently (indeed, we think the powersports industry should prove virtually flat over the next five years).

Enterprise level sales contracted 9%, with motorcycle revenues contracting 9%, despite a midteen lift in average selling prices as shipment volume declined 20%. Financial services also aided the top line on improved interest income. However, profitability unraveled, with Harley booking a motorcycle operating margin of 13.5%, down 610 basis points as the firm’s cost structure was adversely affected primarily by disjointed operating expenses because of the production suspension, lower throughput from softer demand, and foreign exchange headwinds. Although Harley has maintained its outlook for motor company sales to rise 0-3% and deliver a segment operating margin of 13.9%-14.3% in 2023, we still think bike revenues will track down at a double-digit rate in the fourth quarter, and fear that flat bike sales could be the bull case for Harley next year given that consumers continue to shy away from the brand (Harley put up a 39% market share in the third quarter, below its historical levels).