December 5, 2023

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Truly Business

Harley Davidson is using model into the potential of transportation

7 min read

Harley-Davidson’s just-introduced 2021 styles contain the CVO lineup with the company’s most highly developed audio and infotainment alternatives, as well as its most current braking, steering and security attributes.

Supply: Harley-Davidson

As a custom-minded 118-yr-old bike maker, Harley-Davidson may not appear to be preferably located to prosper in a rapidly shifting earth in which vehicles are ever more electrified, self-driving, and shared. But the legendary enterprise could be much better positioned than many stock marketplace traders betting on transportation suspect.

The company’s U.S. bike profits peaked at additional than 260,000 way again in 2006, and have because dropped about 40%. Demographics are section of the tale, and it is a properly-charted a single, in the inventory cost and broader narrative about Harley’s consumer sector. In 1985, the calendar year right before Harley went community, the median motorbike proprietor was only 27, in accordance to the Bureau of Transportation Statistics. By 2018, the median age experienced risen to 50. But the iconic “HOG” brand is turning itself close to underneath the leadership of president and CEO Jochen Zeitz, who took the helm past 12 months after drawing praise for a turnaround engineered at European buyer model Puma.

Zeitz, and other new executives pushed the “Rewire” initiative, which has driven the manufacturer to exit global markets with minimal opportunity to focus on 36 high-development-likely places in North The usa, Europe and Asia. The organization also laid off 700 employees to trim prices. It closed out 2020 by moving into into a distribution agreement with Indian motorbike maker Hero and spinning off its electric powered bicycle functions to a new organization the place it holds a minority stake.

“We believe they are on the suitable track,” noted Garrett Nelson, senior fairness analyst at CFRA Exploration. He praised Harley’s late-Oct arrangement with Hero as valuable to equally events. “Harley receives access to Hero’s present distribution network in India and Hero benefits from the sale of further bikes at its dealerships,” he mentioned. “It is a trade-off. Harley surrenders some of the margin for obtain to the distribution community in the rapidly-escalating market place.”

He added that Harley should really pursue very similar prospects with other set up players to widen its publicity in faster-developing Asian markets.

Harley in a Tesla world

With the new economic technique in spot, Harley’s is now on the lookout forward. On February 2, it will introduce its program for 2021 to 2025. Referred to as Hardwire, the new program is “grounded in desirability,” in accordance to the enterprise, although it has not launched information.

Next thirty day period Harley also is unveiling the Pan The us, a substantial journey-fashion bike intended to be at property the two on- and off-street. It is the company’s initial foray into the adventure bicycle market in which opponents like BMW and Honda already have a massive presence. The recreational sector has come to be a much more intensive concentrate for consumer makes as a result of shifts driven by the pandemic.

Nelson also was cautiously optimistic about the manufacturer’s prospective clients in an more and more electrified long term.

The LiveWire, Harley’s sole latest electric bike, shows promise, but the firm has been to some degree gradual bringing it to industry since its release in late 2019, he explained. The LiveWire retails for nearly $30,000, earning it one particular of Harley’s extra pricey motorbike choices for the 2021 model calendar year, which vary from $9,500 to $49,000.

“More than time, we are bullish on the opportunity, provided that we believe lithium-ion battery costs are heading to go on slipping in the coming many years and electric powered automobiles are going to be greatly backed by the new administration,” Nelson mentioned. “We expect the charge of electrical vehicles to attain parity with inside combustion motor motor vehicles by the center of this ten years, as battery costs carry on to decline.”

On the other hand, a surge in electrical car production could travel up the price tag of uncooked components these as lithium and cobalt, which is a important concern among brands and is why providers this kind of as Tesla have expressed interest in securing mining belongings.

Harley-Davidson’s share selling price is at a 52-7 days higher — like numerous companies in this prolonged bull market — but continues to be nicely under its 2006 peak.

The firm’s legendary brand name remains attractive, even as its financial fortunes have fluctuated.

“Harley-Davidson is the most precious bike brand on the earth,” wrote Craig Kennison, a senior study analyst and director of exploration operations at Baird, in a recent investigation be aware. Harley’s strong brand name, scale, and loyal buyers give it an edge in excess of rivals, in his view. Meanwhile, Harley’s new leadership has put in spot operational adjustments that should really generate growth in 2021, Kennison mentioned, like streamlining its item portfolio, lowering vendor stock 30%, and instituting ongoing yearly prices personal savings of $115 million. “We significantly like the expense scenario for Harley-Davidson,” he wrote.

There may perhaps be extra charge-slicing to appear, in accordance to Nelson. He stated Harley must search to even further shrink its global footprint to concentrate on markets that are the most worthwhile with the finest very long-phrase development possible. But shrinking the general footprint does not suggest less aim on overseas customers.

Revving up profits

“Right now, they are unfold too broad,” Nelson said. “Concerning 2006-2019, the enterprise grew its non-U.S. exposure from 22% of complete device sales volumes to 42%. We imagine they will need to continue on expanding this share out of requirement simply because we imagine its North American industry is in secular decrease.”

The Harley-Davidson Sportster 1200 Customized.

Supply: Harley-Davidson

A single way Harley-Davidson is responding to a a lot more challenging consumer sector is by shifting its focus from escalating current market share on an complete foundation to raising model exclusivity. The Rewire plan was an acknowledgment from administration that blanketing the globe in a look for for new revenue wasn’t the way to go.

“Rather of attempting to improve its revenue volume, Harley-Davidson is now trying to get paid extra income from each individual sale, even if it means selling much less bikes,” Chung mentioned.

Harley-Davidson recently noted a 39% improve in internet revenue in the 3rd quarter of 2020, as opposed to the identical period in 2019, even although its world-wide retail motorcycle profits in the 3rd quarter of 2020 were down 8% as opposed to the prior 12 months.

The conclusion to reduce its item line by approximately 30% appears like a wise and vital shift, since of overlap. “A large amount of Harley’s products and solutions are extremely similar. Eradicating some of the reduce-undertaking solutions makes a more streamlined item portfolio, which will help lower fees,” Chung stated. He claimed it’s sensible for the business to offer much less designs, but then offer a vary of add-ons and customization options. This way, customers can individualize their bikes in information these kinds of as paint, luggage, seats, stereo systems, brake upgrades, and other areas.

Wall Road sees value in Harley-Davidson. Citi analyst Shawn Collins just lately pegged as much as 15% upside in Harley’s stock ahead of following month’s earnings and investor day, crafting in a take note to buyers that he proceeds to be encouraged by new management’s conclusion-making.

It is really okay to be in a shrinking marketplace, if you are increasing the profitability of the products you sell.

Jaime Katz, Morningstar analyst

The organization dropped a handful of products from its 2021 U.S. lineup – the FXDR 114, Very low Rider, Breakout, Avenue Bob 107, Deluxe, Street 750, Street Rod, and Roadster.

Even with a trimmed portfolio, the maker however offers two dozen diverse bikes, mostly concentrated in the cruiser and touring market place segments, as very well as a trio of three-wheeled bikes.

“We consider Covid-19 has specified Harley the chance to push the reset button on its tactic and refocus effort back on its core shopper, one particular which we believe that retains the important to better profit margins,” mentioned Morningstar senior fairness analyst Jaime Katz in her November report on the manufacturer. She praised the Rewire initiative as a usually means of balancing restoration of the firm’s main small business and entry into new markets. “Prioritizing profitability more than scale should also refocus Harley on the good results of significant-margin pieces and accessories and common items segments,” she added.

“It truly is ok to be in a shrinking current market, if you are enhancing the profitability of the goods you market,” Katz advised CNBC.

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