Harley looks ahead as sales, profit fall

Shipments shifting to Q4 to address inventory issues

Harley-Davidson headquarters
Harley-Davidson Inc.'s headquarters in Milwaukee.

Retail sales of Harley-Davidson Inc. motorcycles were down more than 4 percent in the first quarter and shipments declined almost 15 percent, but company executives said they still believe shipments will end the year flat to slightly down.

Harley-Davidson headquarters
Harley-Davidson Inc.’s headquarters in Milwaukee.

The confidence comes from a plan that calls for the reduction of dealer inventories over the first three quarters of the year, with most 12,200 shipments moving from the first quarter to the back half of the year.

Executives acknowledged the company oversupplied the market with model year 2016 motorcycles after industry sales slowed starting in the second quarter last year. The company used a combination of financing and dealer incentives, along with limiting delivery of 2017 models, to end the first quarter with U.S. inventories down by 8,200.

“The dealer network did a fantastic job of reducing overall 2016 inventories,” said John Olin, chief financial officer at Harley-Davidson.

He said the decision to limit 2017 model year shipments was a difficult one, noting the new touring models with the Milwaukee Eight engine introduced last year are the company’s hottest selling and most profitable products.

Those actions showed up in the company’s results, with net income down 25.6 percent from the same period last year, to $186.4 million. Earnings dropped from $1.36 to $1.05 per diluted share and revenue was down 15.7 percent, to $1.33 billion.

Retail sales were down 5.7 percent in the United States and 1.8 percent internationally, including a 9.3 percent drop in the Asia Pacific region.

“We are on plan as we move out of the first quarter, with the exception of Asia Pacific,” Olin said, attributing the decline to weakness in the Japanese market and the continued impact of demonetization in India.

Olin did say the company’s gross margin, which was down 1.5 percentage points, did better than the 2.5 percentage point decline that was expected. The drop was the result of a shifting product mix and lower absorption of costs because of limited shipments, but manufacturing costs were more favorable than expected.

“Overall productivity came in higher than expected, so the plants are running well,” Olin said.

The company’s operating income benefited from $19.1 million in lower selling, general and administrative costs, but Olin said that was mostly the result of marketing spending that has been shifted to the third quarter.

Matt Levatich, Harley’s chief executive officer, also discussed the company’s strategic plans going forward. The plans call for the introduction of 100 new, high-impact models over the next 10 years, along with growing international sales to 50 percent of the business and attracting 2 million new riders.

“As the clear market leader, we have an obligation and an opportunity to invest to maintain the long-term viability of our sport,” Levatich said.

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Arthur covers banking and finance and the economy at BizTimes while also leading special projects as an associate editor. He also spent five years covering manufacturing at BizTimes. He previously was managing editor at The Waukesha Freeman. He is a graduate of Carroll University and did graduate coursework at Marquette. A native of southeastern Wisconsin, he is also a nationally certified gymnastics judge and enjoys golf on the weekends.

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