Buying a motorcycle is the kind of purchase that for many falls squarely in the camp of a discretionary purchase. With higher interest rates and the potential for an economic slowdown, Milwaukee-based Harley-Davidson is seeing that translate to customer behavior.
“We see a lot of customers sitting on the sidelines, essentially putting this level of discretionary purchase to the side in 2023,” Edel O’Sullivan, chief commercial officer at Harley, said on the company’s third quarter earnings call.
Harley reported overall revenue of $1.55 billion in the third quarter, down 6% from the same time last year. In its motorcycle segment, revenue was down 9% to slightly less than $1.3 billion.
Retail sales of Harley motorcycles in North America declined 15% year-over-year and are down 10% year-to-date.
“You see a lot of customers, maybe even those with high credit worthiness, look at the level of rates and having a certain level of rate shock and saying ‘we’re not going to pay those level of rates,” O’Sullivan said, noting many customers have years of low interest rates still in their minds when thinking about purchases.
In its Harley-Davidson Financial Services business, the company has seen annualized retail credit losses climb from a low of 1.2% in 2021 to 1.9% in 2022 to 2.7% in the third quarter. It’s allowance for credit losses has also increased from 5.1% at the start of the year to 5.4% as of the third quarter.
“We are seeing a more stressed consumer,” said Jonathan Root, chief financial officer of Harley-Davidson.
Ultimately, Harley saw its net income decline nearly 24% to around $198 million for the quarter and diluted earnings per share dropped from $1.78 to $1.38.
However, shifting consumer behaviors was not the only factor driving the company’s results. Late in its second quarter, Harley was forced to stop motorcycle assembly because of a potential regulatory compliance issue with parts from one of its suppliers. Securities filings later identified the supplier, which also caused a shutdown in May 2022, as Proterial Cable America.
Jochen Zeitz, chairman and chief executive officer of Harley-Davidson, said the company continues to work through the impact of the shutdown, which created timing, product mix and inventory challenges. He declined to estimate its impact on retail sales and it remains to be seen how much of any missed sales can be picked up in the fourth quarter.
“It delayed deliveries of high-demand units to the end of Q3 rather than earlier in the season,” Root said.
Still, the company affirmed its previous financial guidance, which called for its motorcycle segment to end the year with revenues flat to up 3% and operating margins of 13.9% to 14.3%. Through the first three quarters of the year, the motorcycle segment has seen a 2% increase in revenue and operating margin of 17.4%.
