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Harley-Davidson’s Downshift in Second-Quarter Retail Sales

Well ahead of estimates, Harley-Davidson’s second-quarter EPS rose 34%, to $1.62. The quarter’s upside was driven by a gross margin of 39.3%, up 240 basis points, exceeding estimates on increased volume and manufacturing efficiencies, price benefit and favorable mix, currency and raw materials
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Operating margin jumped 320 basis points to 29.7%, together with an improvement of 170 basis points and better financial services income. Retail sales were disappointing in second quarter, as worldwide sales disappointed against projections. A likely factor, per management, was a lingering winter during the quarter. Steep declines in Sportster sales ahead of the Street launch were also to blame, with this being made worse by delays in the Street’s supply chain.

In addition, as in the first quarter, comparisons against Road Glide sales a year ago are skewing metrics. Road Glides represented around 10% of Harley’s retail sales in the first half of 2013. Management encouragingly announced Road Glide’s introduction for model year 2015 will be August. Though Polaris’s launch of Indian concerns investors, Touring bike sales remain strong and have risen double digits in the first half of the year. Declining 260 basis points to 50.3%, Harley’s overall domestic market share reflects the loss of Road Glide sales and soft Sportster sales.

A learning curve, with many new suppliers in an International supply chain, reflects in Harley’s start-up issues. US shipments were also delayed due to finish and quality issues. Harley expects a strict Street allocation of two bikes per dealer through August, with increases into the fourth quarter. Incremental airfreight is expected to total $5 million in Street-related costs in the third quarter.

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