Harley-Davidson Profit Down, Outlook Dim Due to Production Halt

Harley-Davidson, the iconic American motorcycle maker, delivered sobering financial results recently, showing a plunge in profit and revising its outlook downward. The Milwaukee-based company has faced headwinds from the coronavirus crisis, which forced it to halt production for a time. But Harley's troubles run deeper, reflecting slumping demand in its home market.

Harley-Davidson's Financial Results

Harley's second-quarter profit skidded to just $5.6 million, an incredible 95% drop from $195.6 million a year earlier. Earnings per share crashed to 9 cents, far below Wall Street forecasts. In response, Harley revised its full-year 2020 outlook sharply downward. It now expects total motorcycle shipments to fall by 30% to 35% compared to 2019, versus its prior estimate of shipments falling 20% to 22%.

Profit Plummets

Few companies have seen profits evaporate as quickly as Harley amid the pandemic. Just one year ago, it earned over $195 million in Q2 2019. But temporary plant shutdowns in the spring to combat COVID-19 wiped out virtually all its earnings. Making matters worse, the company remains mired in a years-long sales slump, especially in the U.S.

Outlook Revised Downward

Beyond Q2, Harley's troubles will likely persist. It projects motorcycle revenue could plunge by 30% to 35% for the full year. Prior to the crisis, its worst annual motorcycle sales drop was during the Great Recession in 2009 when revenue fell 18.2%. But 2020 could bring an unprecedented crash in sales, forcing Harley to trim production sharply.

Reasons for the Decline

Harley faces a double whammy of challenges: temporary production halts from the pandemic and lasting struggles in its core U.S. market. Both factors have severely strained the iconic company.

Coronavirus Production Halt

Harley's sales were humming along early in 2020, aided by mild winter weather. But the company was forced to suspend manufacturing in March as the virus spread rapidly, closing its U.S. plants and slowing output at facilities in Australia, Thailand and India. The shutdown lasted into April, cutting deeply into earnings.

Ongoing Sales Slump

More worrying for Harley is that sales were already depressed before the health crisis struck. U.S. retail motorcycle sales slid in 2019, marking the fifth straight year of falling sales. Shipments to dealers nose-dived 10.2% globally and 5.2% in the U.S. The home market has long been Harley's profit center, generating about two-thirds of bike sales. But demand is steadily dropping as Harley's core customers age.

Harley's Turnaround Efforts

Facing a shrinking U.S. market, Harley has scrambled to roll out new models aimed at overseas growth and revive interest from younger riders at home. But the 110-year old company admits changing course has been challenging.

Focus on High-Margin Markets

Harley is focused on "profitable growth" rather than chasing volume, targeting sales gains in segments and international markets where it can maximize revenue. For example, it aims to expand sales of profitable touring bikes rather than less-lucrative cruiser bikes favored by its core U.S. boomer fans.

New Middleweight Bikes

To attract younger riders, Harley plans to debut new middleweight bikes, including adventure touring, sport touring and custom models. These should hit a pricing "sweet spot" around $10,000, compared to prices up to $40,000 for heavy touring motorcycles. Harley views this as critical to increase appeal among non-boomers.

Electric Bike Launch

Harley is also taking the revolutionary step of launching its first electric motorcycle, the LiveWire. The high-tech but pricey LiveWire aims to appeal to a younger, more environmentally conscious audience. However, sales have been underwhelming so far, underscoring the challenges Harley faces.

Industry Headwinds

Beyond its own miscues, Harley faces broad slumping demand for motorcycles across North America and other developed regions. The entire industry has struggled to ignite interest from millennials and Gen Z riders.

Declining Motorcycle Sales

Motorcycle sales peaked in the U.S. in 2006 at over 1.1 million and have drifted down since. An aging population of baby boomer riders is gradually losing interest in big bikes, while younger cohorts have not filled the void. Motorcycle sales are forecast to keep declining over the next five years.

Younger Buyers' Preferences

Younger generations like millennial and Gen Z lack the same enthusiasm for motorcycles as baby boomers. They are more focused on utility, favoring cheaper options from Asian rivals. Harley's American retro style has less appeal among younger riders. Attempts to create new models for them have stumbled.

Outlook and Conclusion

Harley faces demographic and cultural headwinds that pose an existential threat to its long-term future. But the company remains a legendary brand with a loyal customer base. If it can roll out new products tailored to changing tastes, Harley can avoid riding off into the sunset.

Challenges Ahead

No doubt the short-term outlook appears gloomy for Harley. The coronavirus has made a bad situation worse, revealing how vulnerable its profits are. Even if a recession passes, a years-long downward drift in U.S. motorcycle demand represents an enormous challenge. Harley needs a whole new generation of customers.

Cautious Optimism

Yet there are some reasons for optimism if Harley can adapt. For example, its core boomer fans remain devoted to the brand. Meanwhile, global markets like Asia and Latin America offer growth potential as incomes rise. If Harley's new models strike a chord with younger riders, it could successfully diversify its audience. But that is a big "if" that depends on Harley recapturing the cool factor.