Analyst on Harley-Davidson’s dealer margin reduction

In a research note titled “Hogging More for Itself” provided to Powersports Business, BMO Capital Markets analyst Gerrick Johnson provides insight on Harley-Davidson’s “decision to reduce dealer margin, keeping more for itself on each bike sold.”

Here’s how BMO sees it:

“We are increasing our ASP, gross margin, and EPS estimates for Harley-Davidson (HOG) owing to HOG’s decision to reduce dealer margin, keeping more for itself on each bike sold. While demand for Harley-Davidson motorcycles remains strong, we are reducing our shipping and retail sales estimates owing to slower than anticipated deliveries to dealers. While flow is said to have improved, we doubt it’s to the level we had originally expected. The net result though, is a better bottom line and an increase in EPS.

“Key Points

“We are encouraged by strong consumer demand for Harley-Davidson motorcycles. The reaction to new models like Sportser S, Pan America, ST Sport Touring, and CVOs has been particularly strong. So strong that HOG has already passed through a $500 increase on several MY22 sportser models. These areas of outperformance illustrate the Harley consumer’s desire for new, unique, and different. Recent spikes in gas prices have also increased interest in motorcycles. Retailers are still frustrated, though, by the slow pace of deliveries, and retail sales continue to be constrained by availability.

“Given strong demand, some dealers have been able to charge above MSRP, capturing more margin. To keep more of that for itself, dealers tell us that HOG has reduced dealer margin to 18% per bike from 20%. For HOG, the net result is ~2.5% increase in revenue per bike, which falls right to the bottom line.

“But for dealers it’s a -10% gross profit hit. HOG is taking additional actions to pass cost to dealers, like increasing the fee on its point-of-sale system and increasing accessories rewards targets. While benefiting HOG’s bottom line, these moves have heightened antagonism between dealers and the motor company.

“In our 2022 model we are reducing our shipment estimate to 206,900 units (+10% y/y) from 213,250 (+13%), all of the reduction coming in 1H. We are increasing our ASP estimate to $19,239 (+4%) from $18,861 (+2%). The net is a slight reduction in motorcycle revenue growth to +15% from +16%.

“But we are increasing our gross margin assumption to 31.3% from 30.4%, resulting in a slight increase to our 2022 EPS estimate to $4.70 (+12%) from $4.60, with leverage to the upside should delivery pace pick up.

“We are lowering our worldwide retail sales estimate to +3% from +7% owing to supply constraints.”