Hardwire Strategic Plan — Mission Accomplished

Harley-Davidson reported better than expected quarterly profit today. Below are some of the highlights:

• Q2 had a profit of $206 million, GAAP diluted EPS of $1.33, up $1.93 over Q2 2020
• Q2 H-D, Inc. total revenue up 77 percent over Q2 2020; Revenue from Harley’s motorcycles and related products nearly doubled to $1.3 billion
  North America Q2 retail sales up 43% over Q2 2020 and up 5% over Q2 2019 and Worldwide sales were up 24%.
• Delivered strong Motorcycles and Related Products (Motorcycles) segment gross margin and operating margin driven by product portfolio adjustments
• Delivered Financial Services segment Q2 2021 operating income growth of $90 million over Q2 2020 driven by a lower provision for credit losses

Announcements in Q2 2021:

• The MOCO launched the standalone brand LiveWire and introduced LiveWire ONE™ – a new more “price friendly” electric motorcycle
• Rolled out the Sportster® S, a new Sportster motorcycle built on the Revolution Max platform
• Launched H-D1™ Marketplace, an online destination for pre-owned Harley-Davidson motorcycles in North America and enhanced by the Harley-Davidson Certified™ program.

The Motorcycle Industry Council reports that the demand for motorcycles continues to surge as new motorcycle sales climbed 37% in the first three months of the year. Year-to-date sales of dual-purpose motorcycles were up the most, by 47 percent. Off-highway sales were up 45.4 percent. Scooter sales rose 34.6 percent. And on-highway motorcycle sales increased 31.4 percent. The results are an indicator of continued and growing interest in riding among new and returning riders.

In other, somewhat more important news: Oreo announced a new “Protection Program,” it’s discreet packaging so you can hide them from the kids.  The spines make the Oreos look like: A cookbook . . . or a package of frozen vegetables!  Next up will be . . . the Harley-Davidson motorcycle owner’s manual . . . as a pack of t-shirts . . . so you always take it along on the next road trip!

Photos courtesy Harley-Davidson and Oreo

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Harley-Davidson Holes At The Top

Matthew S. Levatich — Ex Harley-Davidson President and CEO

Harley-Davidson, Inc. announced yesterday that Matthew Levatich has stepped down as President and CEO and as a member of the Board of Directors. The Board of Directors appointed current Board member Jochen Zeitz as interim President and CEO following the abrupt resignation of Levatich.  A search committee is being formed, and the Company will utilize an external search firm to undertake the process to find a new CEO. The press release also stated that Levatich would assist with the transition through the end of March.

Levatich had a 26-year career at Harley-Davidson with the last five years as President and CEO. The abrupt departure marks 5-years of sliding sales and the value of the Milwaukee motor company has been cut in half.  It was not a cheerful week at Harley-Davidson!

The board and the CEO share responsibility for corporate performance, so it stands to reason that when a CEO fails, the board has failed as well.  I would speculate the company board is reacting to pressure from shareholders and seeks to appease investors in the short term by handing them the CEO’s head on a platter.  The investment community will want a replacement CEO who’s both promising and reassuring—and they’ll want him fast.

Jochen Zeitz — Harley-Davidson interim President and CEO

If we were to step into a time-machine and journey back to the future… from the V-Rod to the Buell Blast. Who can forget the MV Agusta dumpster fire and in the parlance of our time, there is now a green machine— LiveWire—a motorcycle short on juice, and one that few people want or can afford to buy.  Harley’s attempts to branch out has with out a doubt shown mixed results, at best.  In fact, some observers wonder if the company is “asleep at the switch.”

It would seem that “seeing the problem is easier than fixing it!”  Levatich’s mantra that Harley-Davidson doesn’t build motorcycles, it builds riders, always seemed a bit odd.  That’s like saying, “It’s not about horsepower, but more ideas per horsepower.”  Or “we don’t build motorcycles, we’re a lifestyle merchant company.” It’s that line of reasoning which is nice for marketing collateral, but when you actually dissect its meaning, it’s a  “wait, huh?” moment.

Harley-Davidson Five-Year Sales Slump

Levatich was promoted when Harley announced in February 2015 that he would succeed Keith E. Wandell as President and CEO of Harley-Davidson, Inc. upon Wandell’s retirement on May 1st.

You might even recall that back in August 2008, Matt Levatich, who at that time was vice president and general manager of parts and accessories and custom vehicle operations (CVO), was named managing director of its newly acquired premium Italian motorcycle company MV Agusta Group.  I blogged about this $108 million acquisition being a train wreck (Go Italian) back in 2008.  That deal was heavily promoted as a major part of Harley’s bid to increase its presence in Europe, where it had seen sales grow in the double digits the previous three years, offsetting weaker performance in the US.  The $108 million included $69 million paid to erase MV’s debts and included the Cagiva brand.

Just 14 months later, the Milwaukee “jetsetters” revealed during the Q3’09 financial results, the motor company would divest from the Italian national symbol of motorcycling and the real gut punch was—they would discontinue the Buell® product line.  I don’t recall seeing a lot of MV Agusta T-shirts, coffee and dog collars so, I guess it wasn’t a good fit.  Unfortunately, Levatich will go down in the motorcycle history books as the man that shut down Buell.  Granted the previous CEO, Keith E. Wandell, started unwinding the process caught up in the axel, but Levatich concluded the 16-years of collaboration.  It never added up as a smart business decision and every time I go back and research the articles and press releases it sounds more like someone had a vendetta they wanted to settle.

It’s my view that the blame for Harley-Davidson’s poor results lies squarely with the board of directors!

Poor performing companies don’t get that way because of any single decision or for that matter any single leader. Patterns of historical decisions, strategic neglect, and misallocation of resources all contribute to the deterioration in performance; some contributing factors may even lie outside the company’s control—looking at you tariffs!

Typically a CEO is dismissed not because the board has thoughtfully and deliberately concluded that it’s time for a change at the top, but because investors, concerned about poor performance, demand a change.

Let’s hope Mr. Zeitz and the board of directors have a blueprint for success.

UPDATED: March 1, 2020 — added sales chart and text on length of Levatich career.

UPDATED: March 4, 2020 — According to the company’s 8-K regulatory filing on Monday, March 2nd, Levatich will receive a severance in line with the company executive severance plan.  The company’s 2019 proxy statement states; top company officers will receive a cash severance of 24 months of base salary and 18 months continuation of certain employee benefits, such as life insurance, medical, dental, vision, as well as outplacement and financial planning benefits, if employment is terminated for reasons other than for cause.  The Milwaukee motor company had 12 previous quarters of sales decline, and Levatich’s severance payment will be $2,152,500.  Assuming a 2018 base salary of $1,076,250.

Photos courtesy of Harley-Davidson.  Sales chart courtesy of Bloomberg news.

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Harley-Davidson Wonders Who Rides Motorcycles These Days

Harley-Davidson CEO Meets POTUS

Earlier this year, the President met with Harley-Davidson exec’s and put a spotlight on the company in his address to Congress, yet there was no “Trump Bump” as the motor company reported earnings which included sharp declines in revenue and profit for the first quarter of the year.

Some of the key Q1’17 stats:
— $186.4 million in net income, or $1.05 per share, for the period ended March 26, down more than 25% from $250.5 million, or $1.36 a share, in the same period a year ago.
— Revenue was $1.5 billion, down from $1.75 billion in the first quarter of 2016.
— Motorcycle sales in the U.S. were down 5.7% in the quarter compared with a year ago and International sales fell 1.8%
— Reported motorcycle shipments fell 14.7% to 70,831 in Q1
— Market share in the 601cc-plus segment was up to 51.3%.  Execs stated that the Victory liquidation helped market share.

Nothing screams Americana more than deep vehicle discounts and Harley-Davidson jumped head first into that pool by offering its dealers financial incentives to clear out the leftover 2016 motorcycles.  And in an unusual move the company has purposely constrained the supply of its 2017 hottest-selling new models, including bikes with the new Milwaukee Eight engine, leaving some customers waiting to conquer the open road.  All of this is happening with only 4-months until the 2018 model-year launch.

If you listened to the earnings call this week there was a lot of “feel good” expressions from management about the way the company is performing yet, there are tepid sales, a downbeat outlook, and consumer confidence numbers that don’t reflect spending behavior.  Clearly households worldwide are slow to embrace new motorcycles as a way to enjoy life.

According to Harley-Davidson this is the 9th year in a row (based on IHS Market New Registrations) for motorcycles with 601+cc where they were the number one seller of new on-road motorcycles in the U.S. on both their “outreach” and “core” customers.  “Outreach” is defined as four segments — young adults ages 18-34, women, African Americans and Hispanics.  “Core” is defined as Caucasian men aged 35-plus.

Harley-Davidson reported that more people than ever before are discovering motorcycles and claimed that they are dominating the motorcycle market as well as being recognized as the leader in addressing key demographics — women, younger riders, African Americans and Hispanics, however, the patterns of growth remain elusive.

So whats going on?

Let’s drill down:
— Press and media continue to push negative motorcycle narratives (motorcycle crashes, distracted driving, club violence (last years Waco example) etc.).
— Increased pricing on new motorcycles have pushed out the average length of ownership.  For example new autos reached 6.5 years in Q1 2015.
— In the northwest along with parts of California the wet weather has limited the number of days to ride in 2017.
— Increasing Insurance rates  — on auto, home and health care biting into the discretionary funding of a motorcycle hobby.
— Income growth has declined.
— Interest rates have increased (in past years people pulled $$ from their house to buy a “toy” and now there is no where else to pull $$).
— Fewer “Outreach” customers (aged 18-34) own vehicles or don’t drive as much, they UBER.
— Apathy of the motorcycle hobby/life style as a form of entertainment

All or some elements of this could be weighing down new motorcycle purchases.  But I’m an optimist, and Harley-Davidson has a 10-year strategy to train 2 million new U.S. riders, grow international business to 50% of sales (currently about 32%) and launch 100 new “high-impact” motorcycles.

As it turns out and according to this report, about 22% of all new motorcycle purchases come from first-time buyers. This figure has remained relatively stable since 2001.  It’s very likely some of those 2M new riders will buy a new “high-impact” Harley.

Photos courtesy of CNBC and Harley-Davidson

Full Disclosure:  I don’t currently hold or intend to hold any $HOG shares.

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