Harley-Davidson, Inc. (NYSE:HOG) benefits from an ongoing replacement cycle, with buyers returning to the motorcycle market owing to better access to credit, renewed confidence from rising home prices, and innovative and quality new products.
Milwaukee, Wisconsin-based Harley-Davidson manufactures heavyweight cruiser and touring motorcycles. The company's Motorcycles segment designs and manufactures premium motorcycles for the heavyweight market and sells them at wholesale. This segment manufactures five families of motorcycles: Touring, Dyna, Softail, Sportster, and V-Rod.
Consumer and dealer reaction to new, 2014 model Harley-Davidson motorcycles has been strong, and dealers are quickly selling through initial allocations, especially new "Rushmore" touring bikes. These new motorcycles are getting high marks for comfort, power, styling, and innovative new features.
"We believe the company has been successful in strengthening the brand with its core customers as well as attracting new ones, such as women and minorities. Below the top line, we expect gross margin to grow and operating expense ratios to improve as the company exits its four-year-long restructuring program," BMO Capital Markets analyst Gerrick Johnson wrote in a note to clients.
The ongoing replacement cycle is the key, with motorcycle owners trading up to new bikes after riding older models longer than normal. The best replacement cycle catalyst is innovation, and the 2014 Harley-Davidson portfolio offers more newness and innovation than most riders have ever seen in one model year.
"We think the new 2014 lineup is also highly attractive to new riders, whether they be new to motorcycling or new to the brand," Johnson said.
In addition, delayed purchases from earlier in the year owing to cold and damp weather in the spring and early summer (in both North America and Europe) bodes well for the company.
Consumers were aggressively buying 2013 Road Glide touring bikes, reacting to (accurate) rumors ! that the popular model would not be in the 2014 lineup. The Road Glide is not being discontinued, however as some customers may have feared, but re-tooled and re-launched in MY2015 with Rushmore upgrades.
"We believe dealers placed heavy orders for Road Glides to keep up with this demand," Johnson noted.
The company is also cycling against easy comparisons. Last year, retail sales declined 1.3 percent worldwide (down 5.2 percent in the US) as the 2013 new models were slow to make it to dealers lots; a by-product of planned production disruptions.
Last year, dealers were initially receiving just two to three bikes at a time, with the volume shipped building over time compare that to this year, when HOG distributed 25,000 motorcycles over the course of two weeks, starting the morning of Aug. 19. This works out to 17 bikes per dealer worldwide.
Calendar 2014 also looks like a promising year for HOG, driven by easy comparisons in the first half of 2014 owing to the poor weather experienced across much of the US and Europe in the first half of 2013.
"Even without the weather benefit, we would expect retail demand to be strong. Many prospective buyers, enticed by the new 2014 models, will likely wait until next year's riding season to buy a new bike, not wanting to pay financing costs during the off-season," Johnson said.
Others who may be interested in a new Harley motorcycle, but perhaps were skeptical of "twin cooled" (aka, partial liquid cooled) bikes, may be taking a wait-and-see approach.
The 2014 Rushmores represent the first model year, post economic downturn, where a rider might have "new model envy." Keeping up with the Jones's is a strong motivator when it comes to new motorcycle purchases. The Harley brand has been strong, gaining share in the heavyweight cruiser segment and attracting new riders, especially minorities and women.
The 2014 models go far to strengthen that brand and could help to re-engage some customers who may have strayed from the ! brand. De! alers, also, appear re-energized and happy.
"We think it is probably well known by the market that retail sales of new MY2014 Harley-Davidson motorcycles have been strong. However, we do not believe that Street consensus estimates fully reflect just how strong demand has been, and will likely to continue to be," Johnson added.
The overwhelmingly positive reaction and strong demand should lead to increased shipments for HOG in the balance of 2013 and in 2014, which, in turn, should generate EPS ahead of current Street consensus estimates.
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