Harley-Davidson (HOG) reported second-quarter earnings that surprised many analysts. But the financial management is a bit overshadowed by a continually concerning story of declining sales. And with further sales guidance to the downside, HOG seems like a poor play, even at pretty decent price. While I always root for Harley-Davidson -- that kind of old time Americana cannot be replicated -- my enthusiasm for our history doesn't help much.
Getting into the Numbers
Despite beating expectations, Harley Davidson's net income still declined by 19.27% year-over-year to $195.6 million. That income broke down to $1.23 per diluted share, which just beat some estimates of $1.20. The surprise doesn't hold much merit for me, as the earnings still pale in comparison to last year's $1.45 per diluted share.
In many ways, these earnings were insulated by a 4.7% decrease in the number of diluted shares outstanding. These progressive buybacks have been a common move by Harley-Davidson to keep its earnings per share respectable. Nonetheless, it doesn't hide the simple fact that sales are not good.
In the second quarter, total motorcycle and product revenues declined by 6% year-over-year to $1.43 billion. For the first six months of the year, this segment of the business, which is basically almost all of the business, is down 9% in sales revenue. The declines are across the board, with motorcycles down 6.1%, accessories down 4.2%, and general merchandise down 5.8%. Of course, the bulk of the sales revenue is in bikes themselves, which created $1.13 billion in the second quarter.
Harley's gross margins on the motorcycle and products business decreased 3.2 basis points year-over-year to 31.7%. Operating income decreased 25.8% to $180.7 million. That income means operating margins decreased 3.4 basis points to 12.6%. The performance here is slowly, but surely eroding.
An area with actual revenue growth is the financial services end. Harley-Davidson bikes are expensive, and financing seems to be an ever more popular move. Financial services revenue increased 5.6% in the second quarter to $198.6 million. This bright spot was a bit soured though, as actual operating income from the segment decreased 6.2% to $75.5 million.
Guidance to Where?
The story for the future is not helping the situation. Harley-Davidson actually revised its guidance to the downside. The company did note that it has received approval for easier tariffs on European-bound motorcycles that are shipped from Thailand. It noted this hurt European prospects for the year more than it had hoped. This accounts for the adjustment in expected shipments to 212,000-217,000 motorcycles for the full year. That would mark a decrease from last year's 228,665 units.
Personally, I think Harley Davidson has a bigger problem than overseas expansion. Its domestic market is faltering. Year-over-year, U.S. sales of motorcycles are down 6.5% in the first six months of the year. They decreased 8% in the second quarter.
Don't Drive to This Stock
Overall, this continues to be a game where Harley Davidson makes financial maneuvers to keep their earnings per share going, while it tries to find a solution to its woes. I don't think this is going to be an easy fix. Stock buybacks are eating cash that could be used in actually changing up the lineup to fit more in line with consumer tastes.
Regardless of how they fix it, Harley has a very real and progressive problem here. The stock is up 5% today at the time of writing. I do think HOG has some trading room to perform from the sense that it's very cheaply priced. That said, I think it's better to stay away from a company that is showing such a consistent progression of weaker sales and earnings. Stock buybacks will only help this for so long. I will give credit to the incredibly attractive dividend, but take caution. This company has suffered revenue stagnation for years. Just because Harley says it can fix it, doesn't mean it will. I don't think it's time for HOG just yet.