Harley-Davidson’s ‘Hardwire turnaround gaining steam’: analyst

BMO Capital Markets analyst Gerrick Johnson has provided a research note to Powersports Business following strong 3Q results from Harley-Davidson.

“HOG surpassed Street expectations for the second consecutive quarter behind much better than expected margin, robust shipments, and stronger pricing, once again illustrating the significant improvement in operations and execution accruing from restructuring actions taken over the last two years. According to HOG, retail steadily improved through 3Q, and continued that trend into 4Q. We are lowering our estimates for 4Q and 2023, though, to reflect management’s prudent decision to tightly manage the dealer channel given the current macroeconomic backdrop. We still remain quite confident in ongoing turnaround.

“Key Points

“HOG reported 3Q22 EPS grew +70% y/y to $1.78, exceeding our $1.36 estimate and the Street consensus of $1.40; HOG reported GAAP EPS of $1.05 in 3Q21.

“HOG’s motorcycle-related sales increased +24% to $1.44 billion, ahead of our and the Street’s expectation for a +17% increase to $1.36 billion. Revenue from parts & accessories declined -2% while apparel jumped +41% and licensing grew +26%.

“Worldwide retail sales declined -2% (-15% vs. 2019), below our +8% estimate. US retail sales contracted -5% (-14% vs. 2019) and missed of our +7% expectation. Management attributed the y/y retail decline to lower-than-ideal inventory levels coming into the quarter owing to the production shutdown in 2Q22. As production ramped back up, retail turned positive in mid-August, with September retail increasing +5% in the US and +7% worldwide. Management commented that retail has remained positive into October as well.

“Retail inventory for HOG’s worldwide network was up +22% y/y but still down -49% vs. 2019. However, management has decided that this is the appropriate level of dealer inventory…for now. Considering the uncertain macroeconomic backdrop, HOG would rather err on the side of conservatism. Management estimated it has a “few thousand” units left to fully make up the lost production volume due to its ~2-week production shutdown in 2Q22, and expects to make up the remaining volume in 4Q22. Then, going forward, shipments will match retail, at least in the near term.

“HOG maintained its prior 2022 guidance and is still expecting +5% to +10% motorcycle segment revenue growth and operating margin of between 11% and 12% (vs 9.1% in 2021). HDFS operating income is still expected to decline -20% to -25%. All in, implied EPS guidance is in a range of $4.22 to $4.70, with a midpoint of $4.46.”