Earnings Cheat Sheet: Rubber Meeting the Road, Harley US Sales decline 9.4%

Harley Davidson (HOG) is the most well known motorcycle brand in the world. The Milwaukee based company produces and sells heavyweight motorcycles, as well as sells parts and accessories. It’s been a rough ride for HOG and investors the past couple of years. HOG has been seeing its sales and stock price deteriorate as baby boomers are approaching an age where riding a Harley isn’t fitting into their lifestyle anymore. Last year, Warren Buffett agreed to buy $300 million worth of bonds from HOG, at an annual interest rate of 15%, about double what junk bonds usually pay. Is Harley showing signs of acceleration with its recent earnings release?

Earnings: Third quarter income from continuing operations increased to $93.7 million ($.40 per share), compared to $56.4 million ($.24 per share) in the year-ago quarter. A large portion of the improvement came from Harley’s financial services unit, Harley Davidson Financial Services (HDFS). Operating income in the third quarter from financial services were $50.9 million, compared to a loss of $31.5 million in the year-ago quarter.

Revenue: Third quarter sales were disappointing. Retail sales of new motorcycles decreased 7.7% worldwide, and 9.4% in the United States. However, Harley is beating the industry-wide sales slump. Across the entire US heavyweight motorcycle industry, sales decreased 14.4% in the third quarter, compared to the year-ago quarter. Revenue from Harley motorcycles for the third quarter was $798.8 million (down 0.6% from last year). Revenue from parts and accessories were also down 1.2% to $219 million.

Actual versus Wall Street Expectation: Net revenue from motorcycles and related products was $1.09 billion, analysts were expecting $1.10 billion for the third quarter. The company’s net income was $ 88.83 million ($.38 per share), up from $26.48 million ($.11 per share) a year ago. Analysts were expecting about $.36 per share for the third quarter.

Notable Stats: Even though sales are decelerating, gross margins are on cruise control. Gross margin was 34.9% in the third quarter, compared to 33.4% last year.

Did You Hear That? CEO Keith Wandell stated, ” The Harley-Davidson brand has remarkable strength globally. Few products or brands rank as highly in terms of awareness and affinity on the part of customers and non-customers alike. We have continued to gain market share in the U.S. and Europe. Since 2008, we also have been the U.S. leader in new motorcycle sales to young adults for the entire on-road motorcycle category. Going forward, we will continue to build on this brand strength and leadership position.”

Commentary: Investors need to remain cautious as it is too early to tell if Harley can appeal to its ageing consumer. The stock price has recovered slightly since the lows of just under $10 in early 2009. However, the Street put the brakes on HOG, as the stock fell nearly 7% Tuesday.

Disclosure: No positions.