(Bloomberg) — Harley-Davidson Inc. plunged the most in more than five months after warnings of supply chain bottlenecks and tight motorcycle inventories overshadowed better-than-expected second-quarter earnings.
Cost savings and a recovery in sales after the US pandemic helped Harley beat Wall Street estimates. But Chief Executive Officer Jochen Zeitz warned that chip shortages and shipping delays are hampering efforts to replenish motorcycle inventories after last year’s pandemic shutdowns.
“We would have liked them to be higher, but because of the situation particularly related to the supply chain, that was impossible,” Zeitz said during a meeting with analysts on Wednesday. “We don’t expect that in the second half either, because we have to sell what we make.”
Motorcycle shipments have been held up in freight traffic and the company has raised prices for this year’s models by 2% to offset rising aluminum and steel costs, and tariffs on exports to Europe, executives said.
Harley fell 6.4% to $41.01 at 1:58 p.m. in New York, after a whopping 8.3% decline, the largest intraday drop since Feb. 2. The stock was up 19% through Tuesday this year, outperforming the S&P Midcap 400 Index.
Zeitz, a former Puma SE executive who took over from the troubled manufacturer in February 2020, has cut costs, trimmed Harley’s product portfolio, cleared dealers and tightened inventory to improve prices. He puts the savings into electrification and more expensive motorcycles. At the same time, he is dealing with chip shortages, shipping delays and expensive European tariffs – the fallout from a trade dispute with the US, where Harley has become the whip boy.
Adjusted earnings for the second quarter were $1.41 per share, compared to a loss of 38 cents a year earlier, the Milwaukee-based company said Wednesday. Analysts expected earnings of $1.26 per share for the last quarter, according to the average of estimates prepared by Bloomberg.
While sales in North America were up 43%, they fell in every other region as Zeitz ripped unprofitable bikes from its lineup and reduced Harley’s global footprint. Deliveries decreased by 7% in Europe, 31% in Latin America and 13% in Asia.
Investors are overlooking the 5% gain in deliveries for 2019 in the US, Harley’s largest market, said James Hardiman, an analyst at Wedbush Securities. This year’s successful launch of the off-road Pan America, which marked Harley’s entry into a new motorcycle segment, is a positive sign of growth, he said.
Harley also unveiled two new bikes this month: the LiveWire One, a lower-cost, longer-range version of its $29,000 debut electric bike, and the Sportster S, a lightweight bike meant for short-term urban rides that starts at $14,999. At the same time, it has discontinued cheaper entry-level bikes.
“New products are the lifeblood of a company like this,” Hardiman said by phone. “We hope they can continue to come up with exciting new products that will appeal to not only their core customer, but also the outreach customer — international customers, women, minorities — that’s the goal here.”
Harley gross margin increased from 16.1% to 30.6%, and parts and accessories revenue grew 32%, reflecting Zeitz’s strategy to cut costs, increase prices and strengthen the iconic brand .
Still, there’s a lot of skepticism about whether Zeitz’s turnaround plan, dubbed “Hardwire,” will improve the company’s future.
The elimination of entry-level motorcycles represents a pullback from Harley’s lengthy quest to attract younger riders in its core US market, UBS Group AG analyst Robin Farley said in a note this month.
Joseph Spak, an analyst at RBC Capital Markets, said Harley exceeded the bank’s estimate due to a lower loan loss provision in the financing arm.
“We think investors will view this as more one-off in nature,” he wrote in a note to clients. “So overall, somewhat better results, but not as strong as the headline suggests.”
Zeitz, a brand expert who revived Puma in the late 1990s, was a board member of Harley for many years before becoming CEO. In February, he unveiled his turnaround plan, which calls for an annual investment of $190 million to $250 million, in part to develop Harley’s electrification technology, which is lagging behind Asian and European rivals.
He turned LiveWire into a standalone electric bicycle brand earlier this year and, in March, hired the company’s first “chief electric vehicle officer,” a former Bain & Co. advisor with extensive experience in mergers and acquisitions. .
Zeitz replaced Matt Levatich, a veteran of a company that stepped down in early 2020 amid dwindling sales and pressure from activist investor Impala Asset Management.
(Updates with comments from the CEO and analysts)
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