Harley CEO asks investors for patience as sales, stock slide

[February 13, 2018]   By Rajesh Kumar Singh

MILWAUKEE, Wis. (Reuters) - To Harley-Davidson Inc's <HOG.N> investors, its chief executive has a simple message - be patient with his strategy to turn around the slump in demand for its iconic motorcycles.

In an interview with Reuters, Matt Levatich said the company is not exploring a merger with a rival or a private equity buyout, as some investors have speculated.

Instead, Harley is spending millions of dollars on product development and marketing efforts, including promoting its learn-to-ride academies at showrooms, where Harley-Davidson certified coaches provide riding and safety lessons.

Levatich said the ridership program would transform the motorcycle-maker into a "customer-creator." But he does not have an answer when it will return Harley to sales growth in the United States, its biggest market.

"Mindset shifts are not something that happen overnight," he said in the interview in his office at the company's headquarter in Milwaukee, Wisconsin. "But that's very much core to the 10-year strategy for the company."

However, nearly three years into Levatich's tenure as Harley CEO, investors are getting restless. Harley's stock has fallen over 23 percent since mid-March last year.

Since Levatich came to the helm, the shares are down 14 percent, and Harley is losing share in a declining market for motorcycles in the United States.

Harley investors and executives have worried for years about what would happen in the future when the company's devoted Baby Boomer got too old to ride.

Now, Harley has reached that demographic cliff. The company last month projected shipments to dealers could plunge to their lowest level in eight years in 2018 after sales fell in every region last year.

GO IT ALONE

Falling sales have made Wall Street speculate whether the company, which symbolized the counterculture movement of the 1960s, would seek refuge in a buyout or turn private to rework its product lines and branding without the pressure from shareholders to shield its profit margins.

Levatich, however, sees no alternative to the current ownership structure.

"The moment, however, we feel that the ownership structure of the company...is starting to dictate our strategy, that's the moment to consider whether that ownership model is the right model," he said. "So, it is not the case. We are very clear in our strategy."

In 2017, the ridership program added 32,000 new riders in the United States. Levatich sees it as a "positive" trend and wants to build on it.

More riders, however, do not necessarily mean higher sales.

Harley-Davidson CEO Matt Levatich poses for pictures during an interview at the company’s headquarter in Milwaukee, Wisconsin, U.S., February 7, 2018. REUTERS/Rajesh Kumar Singh

Bill Koester, a general manager at a Harley dealership in Illinois, says only 35 percent to 40 percent of the riders trained at his dealership last year bought a new or pre-owned bike.

To woo the next generation of riders, last month Levatich unveiled his big bet on the small but growing market for electric bikes.

Yet, the new technology is still very expensive and not as profitable as automakers may have to sacrifice margins to succeed in selling battery vehicles.

"There are some practical problems with EV that still most auto companies are also struggling with," said Levatich. "It is very expensive."

HEADWINDS

Harley is still the dominant player in the heavyweight motorcycle market in the United States, but its market share has steadily fallen to 50.8 percent from 58 percent in 2013.

In the last quarter alone, its market share shrunk by 2.6 percentage points, forcing it to announce the closure of one of its four U.S. factories and 800 job cuts.

Harley's challenges are in part related to demographic shifts bigger than its strategy or products. Overall, new motorcycles retail sales in the United States have more than halved since 2006 as younger people shun big motorcycles, according to the Motorcycle Industry Council.
 

Harley has also stuck to a strategy of protecting profit margins and limiting discount offers, even as rivals such as Polaris Industries Inc <PII.N> are undercutting Harley prices to move bikes out of their showrooms.

Polaris enjoyed a 30 percent on year jump in North American retail sales in the last quarter, whereas Harley's sales dived 10 percent.

Levatich attributed the divergent performance to "math."

"Growth percentages of a small base are easy to achieve. When you have a high base like ours, a little bit of decline shows up very quickly," he said. "We are not going to discount to increase our market share."

Analysts at RBC Capital Markets said Harley's weak performances in the past have dented its credibility.

"We won't sugar-coat it. HOG has a tough road ahead of them," RBC Capital Markets said.

(Reporting by Rajesh Kumar Singh; Editing by Lisa Shumaker)

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