Harley-Davidson CEO: Political Circus Isn't Helping Sales
Monday, August 1, 2016
The combative tone that has engrossed the U.S. presidential election isn't helping one of the most well-known American brands sell more products, says its chief.
The contentious election season "is damaging to the American brand, and it's damaging to the health and well-being of American companies who are trying to do business such as Harley-Davidson (HOG) ," the company's President and CEO Matt Levatich told TheStreet in a phone interview. Levatich, who has lived outside the U.S. for work twice in his career, said, "Harley-Davidson is in 90-plus countries worldwide and our brand identity is connected strongly to the ideals of America, and when the ideals of America seem to no longer be our ideals anymore, it can't help things."
Concerns over who will be the next U.S. president -- and what policies he or she will adopt -- may have eroded confidence for consumers considering spending thousands of dollars on a new motorcycle in the second quarter.
Harley's worldwide sales fell 1.9% year over year. Earnings rose 7.6% from a year ago to $1.55 a share, beating Wall Street estimates by 1 cent. U.S. sales fell 5.2% from the prior year. In the first quarter, U.S. sales fell slightly. International sales rose 4.3%, fueled by increases in Canada, Europe and the Asia Pacific regions.
The company lowered its full-year shipment expectations to 264,000 to 269,000 bikes, down from a prior estimate of 269,000 to 274,000. Operating margins are now pegged in a range of 15% to 16% compared to a prior outlook of 16% to 17%.
TheStreet talked with Levatich about Harley's latest earnings, current operating conditions in the U.S., and the election season. What follows is a condensed and edited version of our conversation.
Harley-Davidson President and CEO Matt Levatich.
TheStreet: Lost in the typical earnings coverage frenzy was the fact Harley-Davidson actually gained market share in the U.S. after seeing pressure over the past year. Did you take share from the Japanese bike makers such as Honda(HMC) that have been aggressively discounting?
Levatich: I think yes, we did take share from them and some European competitors. In the U.S., there are a lot of single-digit market share players and there are a lot of ebbs and flows in that space -- so it is hard to say precisely where we got it from at the end of the day. But we got the share. Ultimately, we have got to win that battle in the customer's mind and make sure that Harley is the undeniable choice.
All of that said, we are at 49.5% market share in the U.S. -- it is actually above our 20-year average of 45% plus or minus two percent. Coming out of the economic downturn it went up to 54% because there were a lot of competitors that retreated from the U.S. market. As they regrouped, and they did, we lost some share.
Last year was a real shift in the competitiveness of the U.S. market and we lost share, but we have found our footing, have pushed back against competitors and now we are gaining share. It's as simple as that.
TheStreet: Are the newer models -- which have been part of your ramped up R&D efforts -- driving the share rebound?
Levatich: The new products that we launched in the model year 2016, which reflected our investments in new high-impact product, drove the share gain. The bikes really caught people's attention and drove awareness, and then trial-through-demo ride increases in the U.S. and Europe. U.S. demo rides are up 30%.
So, there has been a lot of investment in really great product in the cruiser bike space -- both small and large. We had a product mix shift into those models as a result, which is great because they helped us achieve the U.S. market share gain. Unfortunately some of those models are lower profit margin than the touring bikes, so that impacted our gross margin.
But we competed with product and got people on our bikes. I'm excited because the mindset in the company has shifted to being on the front foot.
TheStreet: Even though you gained share in the U.S., the overall market for bikes seemed more challenging than you expected. Countless other big consumer companies such as Starbucks (SBUX) and McDonald's (MCD) also saw weaker-than-anticipated results in the U.S.
Does it feel like we are in a mild recession?
Levatich: If you look at some of the big company earnings from the second quarter and actions they are taking -- such as Caterpillar (CAT) -- layoffs, plant closings, all tied to the mining industry. You have Joy Global (JOY) based here in Milwaukeepotentially being bought out by Komatsu, and as a result there is an unknown as to what will happen.
The consequence of prolonged cheap oil on the oil industry, the supplier to the oil industry, the steel pipe industry, the mining industry -- these are companies that have a lot of capital investment and a lot of high-wage jobs that are continuing to cut back. If you look at unemployment rates, they are low, yes, but then you step back and look at things and it feels very cautionary.
That is why we took the step to bring down our full-year shipment guidance, while also bringing down inventory levels by the end of the year, because there isn't anything that suggests woo-hoo, we are off and running.
I am not an economist. But certainly none of the economic trends I see that are impactful ones are positive.
TheStreet: And the impact from Brexit?
Levatich: We are seeing nothing in either the U.K. or Europe in our forward demand markers that suggest a negative impact. We are obviously going to watch it carefully, but there is nothing going on -- whether it's terrorism, nationalism, or political circus behavior -- that speaks to, and supports, confidence, security and well-being for Joe Public.
TheStreet: The last time we talked, you said the contentious U.S. election season was damaging the American brand. Do you still feel that way?
Levatich: I do. I wouldn't contain it necessarily to any political party. I watched the Republican convention, and am now watching the Democratic convention, and I think the degree to which intelligent people are talking about intelligent policy is almost non-existent.
I have lived outside of the U.S. twice, and I remember being in Switzerland in 2008 and moving into this new apartment. Tradespeople were coming in and out, and every time one of these guys would come into the apartment he would do one of these thumbs up signs and say "Obama, Obama."
The real message here is that the world pays attention to the United States of America. They are watching us, probably more so than most American citizens, and they are watching more carefully.
I don't know for sure, but I bet they are worried because of this circus mentality and this total lack of smart policy and leadership.
And that is damaging to the American brand. And it's damaging to the health and well-being of American companies who are trying to do business such as Harley-Davidson. We are in 90-plus countries worldwide and our brand identity is connected strongly to the ideals of America -- and when the ideals of America seem to no longer be our ideals anymore, it can't help things.
So I don't feel any differently. And it isn't just the Republican party, though quite frankly they seem to be leading the crazy parade.