Consumer Products

What Harley-Davidson Is Up To and Why It Could Work

Iconic motorcycle maker Harley-Davidson Inc. (NYSE: HOG) announced Thursday morning that the company will be taking further restructuring actions over the next 12 months. Among the steps announced this morning, the company will make changes to its global dealer network, leave certain international markets and discontinue sales and manufacturing operations in India.

As a result, Harley expects to spend approximately $75 million in restructuring charges. Added to costs the company has already laid out for its “Rewire” restructuring program, the total cost for the program is estimated at $169 million for this year.

When Harley-Davidson reported second-quarter results in July, the company highlighted some elements of its Rewire program, including producing fewer models and expanding offerings of its best-sellers. The company also said it would concentrate its sales efforts on approximately 50 countries in North America, Europe and parts of Asia Pacific where it sells most of its products. Harley also said it was “evaluating plans to exit international markets where volumes and profitability do not support continued investment in line with the future strategy.” India, where approximately 70 people will lose their jobs, is the first casualty.

The July report also noted that Harley had “revamped its approach to supply and inventory management focusing on products and initiatives that add value, while significantly reducing discounting and price promotions.” The approach focuses on profit by “aggressively” managing supply to the company’s dealer network.

The new strategy was working, at least in the second quarter. The company said in its quarterly filing that “on average,” new motorcycles were selling at the manufacturer’s suggested retail price in the United States and that Harley had seen a “meaningful” increase in used bike prices both at retail and auction. At the end of the quarter, dealer inventory worldwide was down by a third worldwide.

Harley-Davidson wants to save money by playing the scarcity card. Where the company once wanted to offer a motorcycle for everyone, now it wants to offer higher-margin products to a more targeted market. The company said in July that the force behind its Rewire program “will be Harley-Davidson as the most desirable motorcycle brand in the world for its customers, employees, community and investors.”

COVID-19 likely helped persuade the company to make the strategy change. Global lockdowns clearly hurt shipments to dealers due to forced store closures. Worldwide shipments for the first half of the year were down nearly 60%. Shipments in the United States were down by nearly 75%. Yet, the prices paid for the bikes that sold went up.

If Harley-Davidson can build fewer motorcycles and make more profit on each one, why not do so? One quarter does not make a trend, but company management may have figured out a way to make lemonade out of coronavirus-infected lemons.

Just ahead of its second-quarter earnings report, Wedbush analyst James Hardiman upgraded Harley-Davidson stock from Neutral to Outperform. The long-time Harley bear also raised his price target on the stock from $27 to $36.

Thursday’s announcement also noted that more restructuring actions “are expected to occur” and that additional costs are likely.

Harley-Davidson stock closed down about 2.8% Wednesday, at $23.28 in a 52-week range of $14.31 to $40.89. The consensus price target on the shares is $31.64. Shares were inactive in Thursday’s premarket.