Harley-Davidson’s Retail Sales To Rise In The U.S. And Europe

Harley-Davidson (NYSE:HOG) has been in steady recovery since the collapse of the U.S. heavyweight motorcycle market in the thick of the recession between 2008-2010. But Harley’s growth in the domestic market hit a roadblock in the second quarter this year when retail sales remained flat, while shipments to dealers rose 10%. As a result, the company lowered its full-year outlook on shipments, in order to keep supply in line with demand and protect its luxury brand image. However, following the lower shipment levels in the U.S. in Q3, wholesale shipments are expected to rise in the last quarter and remain strong in the country through the early part of next year, mainly due to new product launches and rejuvenated demand. On the other hand, after declining by 14% in the last couple of years, the European heavyweight motorcycle market (601+ cc) grew by 13.2% in the first nine months of this year, signalling improving economic conditions and strengthening consumer demand.

The U.S. forms almost two-thirds of Harley’s annual shipments, and Europe is another 15-20%, highlighting the company’s dependence on these markets. Evolving with changing demographics and customer trends, Harley has looked to launch new products, such as lightweight motorcycles and concept electric bikes, more suited to the current crop of potential motorcycle owners, who prefer cheaper, lighter and economically viable vehicles. These new products could provide the necessary push to Harley’s motorcycle sales in the coming years. In this article, we will discuss why sales in the U.S. and Europe are expected to remain strong for Harley in the near term.

Our current price estimate for Harley-Davidson stands at $65, which is around 5% lower than the current market price.

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Road Glide And Street Bikes To Boost Domestic Sales

As mentioned, the U.S. makes up around two-thirds of the net shipments for Harley, which is why sales in the country play a crucial role in molding the overall results for the company. The two main reasons why volumes were weak in the second quarter for the company were the absence of the touring motorcycle Road Glide from the 2014 model year and low availability of the much anticipated lighter-weight Street motorcycles. Potential Sportster buyers also decided to wait for the Street launch to compare the varying features and make an informed buying decision. However, after retail sales in the U.S. remained essentially flat to slightly positive in the first half of the year, volumes rebounded to a 3.4% growth in Q3 on the back of pent-up demand and new model launches.

The launch of Road Glide along with other 2015 model year launches in August is expected to boost Harley’s near-term retail sales in the U.S. The Road Glide was the highest selling bike from the new model year in Q3, but constituted only 4% of the net retail sales in the third quarter, down from 8% in Q3 2013. ^[1] This was because the model was only available since the latter part of the quarter, and is now expected to spur domestic sales in the next quarter. On the other hand, improved availability of the recently launched Street 500 and 750 should also boost year-end shipments for Harley. The company managed to remove the bottlenecks that limited availability of the Street bikes in the U.S. in Q2, and witnessed stronger sales of these lighter motorcycles in Q3, improving proportionate sales of the Sportster and Street motorcycles by nearly four percentage points compared to the previous year to 25.8% of the net retail sales in Q3. The Street bikes are expected to draw incremental sales for the company as millennial customers might prefer lighter, cheaper, and more “manageable” Harleys. In addition, the Street pair is expanding Harley’s reach to new and outreach customers, which means that the company’s sales in the coming years could remain strong in its biggest sales-base, the U.S., despite the aging core customer base of baby boomers.

Europe Sales Could Continue To Remain Strong

Harley’s retail sales in Europe picked up by 6.3% over the previous year in the first nine months of the year, reversing the declining trends seen in the last two years. One of the main reasons why we expect Harley’s Europe sales to rise is the launch of the lightweight Street pair in the region.  The company launched the Street 500 and 750 in Italy, Portugal, and Spain this year, and has reported higher than expected sales of these bikes in the countries so far. Now, the company plans to increase shipments of the Street in Europe in the fourth quarter, and enter other markets within this region by next year, which should see volumes rise significantly by this time next year. The Street motorcycles could form around 7-8% of the net shipments in their first full year in 2015, according to our estimates, expanding Harley’s customer base to those who might be inclined to buy cheaper and lighter motorcycles. ^[1]

However, seeing how the euro zone economy hasn’t rebounded as expected, following the double-dip recession, Harley’s sales-growth might be slightly impeded. The euro zone economy continues to stagnate, with falling inflation rates and consumer price rises. Inflation dropped to 0.4% in October, below the European Central Bank’s target of around 2%, giving rise to fears of deflation. The euro has also depreciated around 7% against the U.S. dollar over the last twelve months, and further unfavorable currency translations in the region could drag down Harley’s revenues. With tightening incomes, consumers typically look to cut down on luxury spending, which could see a fall in demand for Harley’s heavyweight motorcycles. However, despite the fact that economic recovery in Europe has been weaker than expected, Harley’s volume growth in the region could be steady. The new Street motorcycles, having relatively lower prices and carrying the strong Harley brand name, could attract the millennial customers.  Going forward, Harley expects to ship 46,500-51,500 motorcycles in the last quarter, flat to 10% above the last year’s fourth quarter shipments of 46,618 motorcycles.

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1. Harley-Davidson earnings transcript [↩] [↩]