By Mike from riding with the Ozarks
Following Harley Davidson’s third quarter business update call, the business update went over things like the number of units sold for quarter three versus prior year, the revenue and income for quarter three versus prior year in different segments of their business. It also reviewed their business plan, which includes the rewire initiative, which, is what their plan was for the company through the remainder of 2020. And, it got into the hardwire plan, which is their five-year strategic plan for the company for the years 2021 through 2025.
I’m going to touch on some stuff that I think is important from the call and I really want to get into one thing I took away from the call that I think affects all Harley-Davidson customers, and potentially future customers. It doesn’t matter if you’re planning to buy, sell or just have one currently. I think it’s important when you look at this slide, for the five-year strategic plan to remember that, this is designed for investors and stakeholders not for customers. The wording in the beginning stated: “Harley-Davidson is the most desirable motorcycle brand in the world”. So, they’re focused on desirability they’re not talking about making the best machine for the value to make that more desirable; nothing’s that specific in this strategic plan, but they’re talking about parts and accessories general merchandise how they’re going to streamline operations in the work place environment and the much bigger big picture type plan. Let’s move on and get into the rewire that was the initiative for the rest of 2020.
So the next slide talked about the key elements of the rewire. The first thing listed is about the new operational model and then the next bullet point talked about refreshed leadership structure with new capabilities and fresh perspectives. That doesn’t sound very good for the old dogs in upper management and as a matter of fact they filled the CFO position that had been vacant since July. They brought in Gina Goeter who was a top finance executive at Tyson foods. By the way there’s no mention of her riding motorcycles in her Bio.
The next section was titled “Protecting Value”. The first bullet is reduced gap between new and used. This is the one I really want to get into and I think it affects all current and perspective buyers. The second bullet is Q3 dealer inventory was down 30+%, worldwide sales was down 18% from the prior year. The total shipments were down 28.3% versus prior year. Well if they shipped less motorcycles than they sold – remember we’re working in negatives here – than that means they sold existing inventory thus further reducing the inventory on the floor. Hopefully everybody is following along cause that’s going to be important as we talk about some of the strategy that they’re under. The third bullet under “protecting value” is nearly eliminated promotions and discounts, so you know what this all means right there… There is going to be no more special year-end pricing to get rid of old models, because the new models don’t come out till Q1 now, which means that, the consumer is going to pay MSRP to get that bike at the end of the year and if he/she does not the next guy with more cash will pick it up. And, not all models may come out in Q1 but we’ll get into that too.
Now the goal was expressed during the call that they want to have all bikes selling at or nearly at MSRP to maximize profits. Those are the three things I really want to talk about but we are going to run through some more of the highlights really quick.
First: They’re going to focus on the fifty highest growth and potential markets, ok I get that. Investments and resources align with projected market potential yeah that sounds good too. Streamlined product portfolio thirty plus percent, well we all know that they’re reducing models and they’ve already cancelled the Bronx. Deliver the first adventure touring motorcycle Pan America in 2021. Well I’m glad to see that happening personally I think the adventure market is a growing segment and I’m glad to see Harley is trying to get into that segment. I think it will be an interesting motorcycle and I think the new design will not break away from the iconic styling that people love and it will give them a chance to introduce some new technology
Second: As it was mentioned during the call that new products may not be released in quarter one. Quarter one launch is for existing models primarily, and new products may release in different quarters, so don’t expect to see that Pan America on a dealership floor near you in quarter one.
Third: The last section of this slide talked about parts and accessories and general merchandise. They did mention a 15% SKU reduction in parts and accessories and that sparked my interest. It’s one of the things Harley is known for, is being highly customizable, and now we’re talking about reducing the number of accessories that are available, but considering the outstanding after market support from other vendors I’m really not worried about that at all. This whole general marketing focusing on the most profitable SKU to me that says we want to sell you more hats and t-shirts.
Now let’s review, and see what all this really means to the every day customers. First they say reduce gap between new and used. That doesn’t mean lower prices on new bikes but what it actually means is higher prices on used bikes. You can take this two different ways: it’s either going to cost you more to buy a used Harley or you’re going to get more trade in value out of your used Harley or more cash if you’re selling your bike outright. I’m not going to say this is actually a good or bad thing because it all depends on what perspective you’re coming from as an existing customer and whether you’re buying, selling or trading. But I think there’s a purpose behind this and that’s to truly encourage customers to buy new bikes over used bikes because there is not that much difference in price. Now I think there’s some secret sauce in this formula that’s going to drive profits at Harley-Davidson and I’m going to share that with you.
Many of us heard that Harley-Davidson dealers were buying up used bikes this summer. The initial thought was just because inventory was down due to the factory being closed, DUE DO COVID, and they didn’t want to have empty space on the floor when people came in to shop, but I think there is a little more to that. If you look at the ads Harley dealers were running, they were offering up to 130% of NADA on any used bikes traded in on a new in stock Harley-Davidson. Now one of the key points of the call that was mentioned several times was managing their inventory. We know they shipped less inventory than what they were selling, so that means they’re dipping in to the existing inventory that was already on the floor to some degree. And we all know how supply and demand works so let’s think about this. Let’s look at financing. The HD financial segment represents about 17% of the company’s revenue. And if my math is right, and you look at the income it represents, 65% of the operating income from something that is only 17% of the revenue that says profit to me. Do you follow? I don’t know about you but you know I heard of a time once a long long time ago where you had to sign up on a waiting list to buy a new Harley and used bikes cost almost as much new bikes. Do you think we can see that again in the future? Well I hope it doesn’t get to that point but I do see them driving up the price of used bikes.
A couple of others things that they did was, they did not touch on the earnings but, they discussed spinning off e-bikes into a new company under a different name (we see that happening with Serial 1 e-bikes) but they are going to say powered by Harley-Davidson. I’m not just talking about the little e-bikes that they’ve been selling in the dealership but actual e-bicycles. They also mentioned in the call that they reduced their global dealer network by 4%. I see a new dealership that’s getting ready to open up just 60 miles from me they should be opening any day now one thing that’s kind of surprising is it’s only 30 or 40 miles from their sister dealership I don’t know how they got that approved when the company is reducing their dealer network. Oh, and one other important thing to mention, is they did not talk about the recent Harley-Davidson Livewire recall… you know the electric motorcycle from Harley-Davidson, that live wire!