Harley-Davidson Q2’11 Financials

H-D announced Q2’11 financial results this morning.

In a word – Booyah!

By every financial measure Harley-Davidson generated improvements in the second quarter of 2011, with strong earnings growth, increased shipments and growth in its dealers’ new motorcycle sales both in the U.S. and globally.  Here are some of the stats that CEO Keith Wandell and CFO John Olin reviewed from Anaheim, CA. where the annual dealer meeting and new product launch was in progress:

• Revenue in Q2’11 was $1.51B (up 15%) with income up 36.8% to $190.6M
• Motorcycle shipments up 7,769 in Q2’11 vs. Q2’10; Motorcycle segment revenue up $204.6M (18%) vs. Q2’10
• Touring motorcycle shipments made up 38.3% in Q2’11; up 3.6%
• International shipments were 36.2% in Q2’11 vs. Q2’10 at 42.5%
• Shipment forecast for 2011 rose by about 8% and now H-D expects to ship between 228,000 and 235,000 motorcycles worldwide
• Market segment share (651+cc) is 53.8%; up 0.2% from 2010
• U.S. dealer network sales of uses motorcycles up 11% through May; Used bikes sales continue to firm up (meaning they offer the dealer a method to help offset the “sticker shock” of new bikes)

Did anything go less positive?  Well that depends on your viewpoint.  From a shareholder’s perspective it’s “Houston, we’re ready to throttle up”!   Stock price set a new 52-week high at $46.88.

As a rider/layman the touring motorcycle shipment increases were offset by the decreases in Custom and Sportster declines.  There were no age demographics quoted in the analyst call, but we’ve been told that typically “youngsters” don’t buy the higher priced baggers.  In addition, the new 2012 touring models that were announced earlier in the month have… shall we say… “lean” engineering innovation compared to previous years.  In a number of cases there we’re only paint palette changes and price increases made up the so-called “new” touring models.  There was about a 1% price increase in the U.S. market.  The lack of innovation is especially troubling (to me) given that product development spending was up $7M in the first half of 2011 which was described as a continuation of their strategy and focus on leaner engineering.  Sure metals and fuel costs are up, but the lack of stronger product changes is not always a recipe for long term success.

Nothing was noted on the call about the recent expansion in India.  Not sure why given that SG&A expenses were up about $13M on the strategy to grow 100 – 150 international dealers by 2014.  Latin America saw a decrease in retail sales which was largely due to all Brazil dealers being terminated.  There was a restart in that country and the new dealers (6) were coming up to speed.

Congrats to H-D on a great quarter!

UPDATE: Full transcript of the analyst call is HERE courtesy of SeekingAlpha.

Photo courtesy of H-D.  Full Disclosure: I don’t own H-D stock

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Harley-Davidson 2012 – Same As It Ever Was

2012 Paint Palette

Have you been reading the headlines? There was a big earthquake in Haiti. Some men were rescued from a mine in Chile. Oh, and apparently there was a gigantic oil spill in the Gulf of Mexico.

What’s that you say? This all sounds like last year’s news?

Well, don’t tell that to Harley-Davidson. The motor company recently introduced 15 new models, which it considered innovative and groundbreaking  products:  a “tubeless” laced wheel option, and six new colors or color combinations on the touring models!   Then in a déjà vu lapse they announced the retention of last year’s integrated branding firm Graj + Gustavsen Inc. to continue advising the company on strategic branding initiatives related to apparel and apparel-related accessories.

It would seem that even Harley-Davidson understands that the touring models have so few innovations that their only hope of differentiating itself from the other players is through paint palettes…. So, the only buying question you’ll have to ask yourself, then, is: Does H-D make a convincing enough “color case” that you should invest about $20K in a “new” touring model?

Here’s the crux of H-D’s argument.  First of all, the new colors or color combinations are beautiful. The mostly unchanged motorcycles from 2011 are even more beautiful in 2012.  The unchanged frame is beautiful, too. It’s graphically coherent, elegant, fluid and satisfying. That, apparently, is the payoff when a single company designs and builds both the engine and frame housing?  The ‘advanced’ Harmon/Kardon radio retains its 1970’s BMW inspired ‘red’ glow and that glossy Vivid black paint — continues to be a magnet for fingerprints, boot scuffs, and unfortunately looks wicked great only in the dealer showroom. I think the words in the H-D press release were “The Legend Lives On.”  The band, Talking Heads, said it best… in the song “Once In A Lifetime.”  The “same as it ever was, same as it ever was” lyrics… really resonates for the 2012 touring models.

It’s been a while since I’ve had a good, proper, Harley-Davidson rant. Part of that has been the adventures of this year; I think it’s softened me and given me more patience, made me a little more graceful. Another part of it, probably closer to the heart of the matter is that I’ve been busy doing other things and a good rant takes time to incubate.

Well a rant has been building and I finally snapped as I read an article in last week’s “Wall Street Journal” (subscription required) where there was a front page story on Hyundai. How it went from a laughingstock to a runaway success in the car market. Now that they’ve solved the quality problem, now that they’ve caught up with Toyota and Honda, the company is confronted with a huge issue going forward, creativity. How do you lead when you’ve spent your entire manufacturing life following? Read WSJ article HERE.

The new Elantra is so far ahead of the market that Corolla sales have stalled and the new Civic has been blasted by critics as it fails to fly from the showroom. Instead of focusing on the econo box look, Hyundai imitated BMW and Mercedes-Benz. And the model was redesigned in four years instead of five, trumping its competitors in the marketplace.  The success of the Elantra is testimony to the change in culture at Hyundai. To one now focused on leading, on creativity.

This leads me to the question of is there a culture of innovation at Harley-Davidson?  When talking about innovation we often define the term too narrowly. In fact, innovation can – and does – occur in every industry of our economy, from consumer electronics to health care.  Yet, when I re-review the 2012 touring models, instilling creative thinking must be a work in progress.

For comparison, a few times a week, video screens around Hyundai’s headquarters in Seoul show a one-minute clip that has become a favorite. It shows an open office where workers wearing the same shirt and haircut are “beavering” away (that’s Oregon slang). Then a new person arrives with a different hair cut. Each time he voices an idea, the others shout him down. Eventually he gets the same haircut and everybody likes him. Then a question appears: ‘Aren’t we stuck in conventional thinking?’

I don’t know if a video loop like that would necessarily fly in a Milwaukee plant with the union workers, but that’s not the point of this post.

It’s about how most every American business is in a mad dash to innovate except for H-D.  The only answer can be the titans at the top are traffic cops sans creativity?  Don’t blame the public or the economy, blame the fat cat executives who are denying they’re the problem like the honchos at Goldman Sachs. What makes the rich believe they’re invulnerable, always right and entitled?   Somehow in the “dash-for-cash”, it’s all about shooting low, to the sweet spot, where most people live so the purveyors can make money.  Good enough just doesn’t cut it and of course there are exceptions, but generally speaking we’re in a low point for H-D touring motorcycles.

It’s a new game. No one gets to rest on his laurels. Making it today is no insurance you’ll thrive tomorrow, look at the carcasses strewn along the highway… OCC, Indian, or Big Dog.

We’ve got endless hype and yet sales are anemic.  Mediocrity thrives at Harley-Davidson because it’s all about the money.  About playing it safe… with new paint palettes!

Photo courtesy of  Hyundai and H-D.

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Reconsidering Happiness

Keith Urban

Whoa!  My two previous posts on the current state of the Harley-Davidson state was clearly like a sad country song in an old rundown coffee shop, yup one of those “bummer zones” so, we need a change of scenery.

Speaking of, have you been to Nashville?  If you haven’t been to the Country Music Hall of Fame and Museum you’re the worse for it.  Yeah, you may think you don’t care about boot-kickers, but you’re missing out on the history of America.  From slavery to the Dust Bowl to Elvis and the tragedy of the Williams family.  To go to the Country Music Hall of Fame and Museum is to become a fan.  And to insure that it lives on, Vince Gill proposed a “All For The Hall” event where every artist cough up one night of revenue for the Hall.

Keith Urban is one who took him up on it and at the Sommet Center (the Staples Center of Nashville), he hosted some of country music’s finest as they raised money for the Hall.   Keith and his band played one my favorites, “Who Wouldn’t Wanna Be Me“:

“I got no money in my pockets
I got a hole in my jeans
I had a job and I lost it
But it won’t get to me”

That’s the power of music.  It crowds out all the negative and replaces the bad thoughts with joy and inspiration.  And when you watch Keith Urban ride his Harley and hear him wail on his guitar, you’ll smile with a good feeling.  I don’t know about you, but after yesterday’s jaw-dropping news from H-D and the layoffs at Buell I needed some “sunshine blown up my skirt.”

Life.  It’s full of hopes and dreams.  And victories and losses.  What gets you through is your friends, family and the music.

Photo courtesy of Keith Urban.

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Are You Significant

This is the question I’ve been pondering over after having an opportunity to spend a couple of hours with “No Barriers” founder Neal Petersen.

To save you some time the short version of Neal’s story is — He is a black South African who grew up poor and disabled during apartheid yet achieved his dream of racing/sailing solo around the world.  He now does motivational speaking and is involved in peace talks in multiple countries across the world.  During Mr. Petersen’s speech he routinely ask the audience; “Does what I do on a daily basis at work have a positive impact?”

This resonated with me and while I personally reflect on this I can’t help, but ask the question of Harley-Davidson’s CEO, Keith Wandell.

Today, Harley-Davidson reported out the Q3’09 quarterly results and announced a massive 21.3% decline in revenue for the 3rd quarter and an 84.1% decline in net income from a year ago quarter.  Apparel and general merchandise represents 23% of H-D revenue to date.  Then the news got interesting.  They announced that 14 dealers have closed year-to-date and set the expectation that 15-30 additional dealers will close in the next 6 months as the company reduces inventories to match sales.  They discussed the HDFS bad loan/delinquencies and financial progress.  The Harley-Davidson brand value (note: its moved down from 43 to 71 position) and the more important announcement was to shutter the Buell product line as well as divest its MV Agusta unit.  A busy day of spin as Mr. Wandell went on to discuss the going forward 4-piller strategy of: growth; continuous improvement; leadership development and sustainability.

On the Buell front I can’t say that I’m not surprised because it was reported a couple weeks ago in the Milwaukee Journal-Sentinel that Erik Buell didn’t renew his employment contract with the motor company and there were a number of rumors circulating as to what that might mean.  I want to personally thank Erick Buell and the Buell employees.  I believe what they did on a daily basis at work had a positive impact.  They should be proud of what they accomplished.  They are an American innovation poster-child and represent what passionate and inspired people can do through engineering and manufacturing some of the best-handling bikes in the world.  But, in biker speak… it’s WTF?  An American designed and manufactured motorcycle that out performed Asian manufactures all year in the AMA Pro Roadracing circuit and Mr. Wandell dumps it?  This is forward thinking?  2009 marked the first year H-D had a non-motorcycle enthusiast running the company and I have to ask if he really got out there to see what all that (Harley) race stuff was about and how it enhanced the brand?

Since I was rather harsh in a blog post last year about the $108 million MV Agusta deal and describing it as a train wreck, I agree with the decision to abandon it.  Sure this happened under ex-CEO James Ziemer shift who retired shortly after cutting the deal, but the board members clearly approved Mr. Ziemer’s compensation package who walked away with only $5.6M compensation, up 26.5% from 2007.   And in part the compensation was based on the boards admiration of the MV Agusta deal, right?  The board members should be put on notice as there are now another 180 employees set to hit unemployment due to the management of the company and we all know they had line of sight just 12 months ago to the economic issues.

The shocker in the financial call was the statement of investing more in emerging markets up to and including local market design and manufacturing!  Is this a precursor to moving manufacturing off-shore?  A lot of talk about taking Hogs to China and India, but nothing about how well the strategy has worked to woo women, African-Americans and Latinos.  The value of the brand was weaved into the growth strategy, but nothing about why it dropped 43% in 2009.  They’ve talked for two quarters about reducing inventory yet made little progress.  And loans made to iffy borrowers aren’t just taking down housing.

The push by H-D corporate for dealers to build increasingly larger and high-end-glamorous retail outlets meant more dealer debt and subsequent failures.   Chapter 11’s continue to stack up across the northwest.  Three locations of Shumate H-D with one in Kennewick (owner hub), another in Spokane and a satellite location in Lewiston, ID.  I blogged earlier this week about Dave Tuomisto’s, $16M and 6-acre mega-expansion at Timpanogo, UT which went under.  It’s not clear when or if any of these dealers will reemerge and the real downside will be H.O.G. groups folding, lengthy drives for service or to hang and drop in which overall effects customer service and having a healthy Harley community.

Harley is in major trouble.  The spin, baby, spin from Mr. Wandell is not good enough, my friend.

Photo courtesy of H-D.  Financial call transcript courtesy of SeekingAlpha.  Disclosure: I have no investment in HDI

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