Harley Davidson: First Loss in 16 Years

“We’ve got Harley-Davidson having a tough morning because their orders dropped 53% compared to the same period last year. Going to be a tough time in 2010…” — CNBC’s Squawk on the Street 1/22/2010

Iconic motorcycle maker Harley-Davidson (HOG) reported an extremely rough fiscal fourth quarter on Friday morning in which the company lost $.63 per share excluding one-time charges. Overall, including restructuring costs, the company reported a net loss of $218.7 million or $.94 per share. This is the first quarterly loss for them since 1993, and it was nearly twice as wide a loss as analysts had anticipated. Profits have fallen in nine consecutive quarters and the bigger than expected fourth quarter loss dragged down the fiscal year to a lost $55.1 million or 24 cents per share.

Harley’s problems are not difficult to diagnose, fourth quarter total revenue fell 40% to $764.5 million from $1.28 billion. Global shipments dropped by a whopping 53%, and management expects to ship between 201,000 to 212,000 motorcycles in 2010 which would be 5% to 10% below even 2009’s level of 223,023. CEO Keith Waddell admitted that coming out of the recession consumers will almost certainly be more cautious about spending. Unfortunately, the company is losing market share in a marketplace that is quickly contracting anyway. Harley said 2009 shipments to dealers fell off 27% in the year, which was worse than industry-wide figures showing declines of 21%. Yet, Harley is not willing to discount their bikes, as many competitors have resorted to, because it is feared discounting might tarnish the reputation of their brand.

Waddell and his team have been hard at work streamlining operations in the face of terrible sales. Harley-Davidson has cut capacity by shuttering one of its two factories in York, PA and has reduced its testing facilities from three down to just one. He has also reportedly put the MV Agusta and Buell sport-bike lines for sale, and will instead focus on its name brand which produces higher margins. The Harley Davidson Financial unit, which caused so much pain last year, has narrowed losses considerable to just $7.1 million or just a quarter of losses a year ago. The widespread restructuring is poised to deliver up to $260 million in annual cost savings once restructuring is completed and is expected to save $155 million in 2010.

One way Harley plans to turn things around is with a greater emphasis overseas, as that segment of their business–while small–has held up better than the domestic side. HOG will release 12 models for consumers in India, which may provide a much needed avenue for revenue growth. It is clear that the sheer number of motorcycles sold in the US may not recover to pre-recession levels any time soon.

We have a neutral Fairly Valued stance on Harley Davidson shares as of this week’s report, but we were also not anticipating them to report such a wide loss. The stock is selling off about 7% in late trading on Friday, and it is likely we will reaffirm our neutral stance coming into next week. We think Waddell and his management team are making the necessary effort to scale down operations to ease the pains of flagging sales. However, we think that they may want to budge on some of their discounting policies in order to get more buyers interested. The lower priced bikes are already the weakest sellers, so a reduction in price may help stem the bleeding. The best thing for Harley would be a robust economic recovery which would inspire more confident consumers, but we have concerns that may be asking quite a bit in this environment. This is a stock that has plenty of risk to the downside and limited upside in the near term, so we would advise investors to look elsewhere.

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