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Harley-Davidson (HOG) Registers Profit in Q3 on Rewire Strategy

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Harley-Davidson, Inc. HOG reported third-quarter 2020 financial results, delivering the strongest third-quarter net income since 2015. This reflects the initial positive impact of management’s The Rewire efforts.  Remarkably, the firm managed to yield profits in the third quarter, as against the loss of 60 cents per share posted in the prior quarter.

It recorded third-quarter 2020 adjusted diluted earnings of 78 cents per share, handily surpassing the Zacks Consensus Estimate of earnings of 22 cents.
 
This outperformance resulted from higher-than-anticipated revenues across both segments of the company. Notably, revenues from the Motorcycles and Related Products segment, and Financial Services segment came in at $964 million and $202 million, respectively, beating the consensus mark of $890 million and $199 million. Moreover, the bottom line surged 50% from the year-ago quarter’s profit of 55 cents per share.

The iconic motorcycle manufacturer generated consolidated revenues (including motorcycle sales and financial services revenues) of $1,166 million, down 8% from the year-earlier quarter’s $1,273 million.

HarleyDavidson, Inc. Price, Consensus and EPS Surprise

HarleyDavidson, Inc. Price, Consensus and EPS Surprise
HarleyDavidson, Inc. Price, Consensus and EPS Surprise

HarleyDavidson, Inc. price-consensus-eps-surprise-chart | HarleyDavidson, Inc. Quote

Segmental Highlights

Motorcycles and Related Products: Total revenues from the Motorcycle and Related products segment, which constitute bulk of the firm’s overall revenues, declined 10% year over year to $964 million in the reported quarter. This decline was primarily due to the shift in timing of the launch of new model year motorcycles from August each year to early first quarter in a bid to better align with seasonality.
 
Nonetheless, the segment registered an operating income of $47 million, flat year on year.

For the September-end quarter, revenues from the sale of motorcycles came in at $684.3 million, declining 12% year on year. The company shipped 42,983 motorcycles worldwide, down 6% year over year.

For the third quarter, Harley-Davidson retailed 53,802 motorcycle units globally, down 8% year over year. The company’s retail motorcycle units sold in the United States slid 10% from the year-ago quarter to 31,304. Sales in the Middle East and Africa climbed 7%, while in Asia Pacific, Canada and Latin America declined 6%, 25% and 29%, respectively, from the year-ago period.

Revenues for Parts & Accessories (P&A) were up 3% from the prior year to $209.8 million. However, revenues for General Merchandise (GM) — including Motor Clothes apparel and accessories — dropped 18% from the prior-year quarter to $49.4 million.

Financial Services: Revenues for Harley-Davidson Financial Services decreased to $202 million, down 1% year on year. Operating income jumped 25% sequentially to $91 million from $73 million on lower provisions, aided by reduced actual losses at the end of the third quarter compared with the previous quarter.

Financial Position

Markedly, during the September-end quarter, selling, general and administrative expenses (SG&A) dropped to $196.9 million from the $265.5 million witnessed in third-quarter 2019.

Harley-Davidson had cash and cash equivalents of $3,560 million as of Sep 27, 2020. Net long-term debt increased to $6,171.7 million from the year-ago period’s $5,124.8 million.

The firm generated $525.1 million of cash from operating activities during the reported quarter compared with the year-earlier quarter’s $352.6 million. Capital expenditure during the July-September period totaled $25.3 million compared with the $38 million recorded in the corresponding period of 2019.    

While the company continues to suspend discretionary share repurchases, it will pay a cash dividend of 2 cents per share during the fourth quarter, in line with its second- and third-quarter dividends. The dividend will be paid on Dec 18 to shareholders of record as of Dec 4, 2020.

Given the coronavirus pandemic-induced uncertainty, Harley-Davidson has refrained from issuing any outlook and forecast for the ongoing year.

‘Rewire’ Steers Company in Q3

To pull out the company from the sales slump, Harley-Davidson’s CEO Jochen Zeitz rolled out a turnaround plan, dubbed as ‘Rewire’ in the June-end quarter. The Rewire efforts have reinforced management’s focus on customers and dealers, and reinstated desirability for the company's brand and products, setting the base for its 2021-2025 strategic plan ‘Hardwire’ that is expected to be shared in fourth-quarter 2020.

Harley-Davidson made significant progress across all five key elements of the Rewire during the third quarter. The company's new operating model eradicated duplication and difficulty across operations worldwide, thus ensuring substantial savings in expected selling, general and administration expenses and vast improvements in effectiveness. The company plans to focus on approximately 50 markets, primarily in North America, Europe and parts of Asia Pacific, that have the maximum contribution to its expected volume and growth potential. Its international business has been significantly redesigned and refocused, along with investment and input of necessary resources, in tune with the anticipated market potential.

Putting quality over quantity, Harley-Davidson has cleared excess inventory, and streamlined the model line-up by 30% and overhauled the launch timing and go-to-market practices for maximum impact and success. Moreover, management has set up fresh business units for P&A and GM, which will enable each segment to invest resources for new channel strategies and better product portfolios. This will help the company boost growth in the upcoming period.

Harley-Davidson expects 2020 cash savings of $250 million, including SG&A and capital expenditure reductions under the Rewire plan.  Also, the company anticipates to achieve $115 million annual savings from the restructuring actions, beginning 2021.

Zacks Rank & Stocks to Consider

Harley-Davidson currently carries a Zacks Rank #3 (Hold). Shares of the company have declined 9%, year to date, underperforming the industry’s rise of 129.5%.

Some better-ranked stocks in the auto sector are Lear Corporation LEA, Autoliv Inc ALV and LCI Industries LCII, all of which sport a Zacks Rank of 1 (Strong Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

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