HOG Financial Analysis

Analysis Date: 2/6/2025

Business Model

Harley-Davidson Motor Company (HDMC) generates revenue primarily from the sale of motorcycles, parts and accessories, apparel, licensing, and other related products and services. Harley-Davidson Financial Services (HDFS) generates revenue from financial services, including financing and insurance for Harley-Davidson customers and dealers. LiveWire generates revenue from the sale of electric motorcycles and STACYC electric balance bikes.

Revenue Sources

• Motorcycles: Sale of Harley-Davidson motorcycles across various categories including Grand American Touring, Cruiser, Sport and Lightweight, and Adventure Touring.
• Parts & Accessories: Sale of motorcycle parts and accessories to enhance and customize motorcycles.
• Apparel: Sale of Harley-Davidson branded riding gear and apparel.
• Licensing: Revenue from licensing the Harley-Davidson brand for various products.
• Financial Services (HDFS): Interest income from financing receivables and insurance services.
• Electric Motorcycles (LiveWire): Sales of LiveWire electric motorcycles and STACYC electric balance bikes.

Income Statement Analysis

• Revenue significantly decreased by 47% in Q4 2024 compared to Q4 2023, primarily due to a 53% decrease in motorcycle shipments as HDMC focused on dealer destocking and faced challenging market conditions. (Con)
• Gross profit turned into a gross loss in Q4 2024, driven by lower revenue, unfavorable mix, unfavorable foreign exchange, and negative operating leverage. (Con)
• Operating expenses decreased by 6.68% due to cost discipline. (Pro)
• Operating loss significantly widened in Q4 2024 to $213.64 million from $44.17 million in Q4 2023, reflecting the sharp decline in revenue and gross profit. (Con)

Balance Sheet Analysis

• Cash and cash equivalents increased by 3.64%, indicating a slightly stronger liquidity position. (Pro)
• Inventories decreased significantly by 19.8%, reflecting successful dealer destocking efforts and potentially improved inventory management. (Pro)
• Total current assets decreased slightly by 3.24%, mainly driven by decrease in receivables and inventories. (Neutral)
• Total assets decreased marginally by 2.13%. (Neutral)
• Short-term debt decreased significantly by 27.16%, suggesting improved short-term financial health or refinancing into long-term debt. (Pro)
• Current portion of long-term debt increased significantly by 47.41%. (Con) - This increase offsets the decrease in short-term debt and needs further investigation.
• Long-term debt decreased by 10.46%. (Pro) - However, when considering the increase in current portion of long-term debt, the net decrease might be less impactful.
• Total liabilities slightly decreased by 1.96%. (Neutral)
• Shareholders' equity decreased by 2.88%, reflecting the net loss for the year and share repurchases, partially offset by capital contribution. (Neutral/Slight Con)

Capital Allocation

Harley-Davidson's capital allocation strategy prioritizes funding profitable growth initiatives under 'The Hardwire' strategy, including capital expenditures, paying dividends, and executing discretionary share repurchases. In 2024, they paid cash dividends of $91 million and repurchased $450 million of shares. For 2025, they plan to repurchase $350 million of common shares, demonstrating ongoing commitment to the $1 billion share repurchase plan announced in July 2024. Capital investments are planned in the range of $225 to $250 million, focused on product development, manufacturing automation for cost reduction, and LiveWire investments.

Management Commentary

Launch of new Street Glide and Road Glide touring motorcycles contributed to nearly 5% growth in the U.S. Touring segment and drove H-D’s market share to 74.5% in ‘24.

Harley-Davidson dealer inventory levels of new motorcycles finished the year down over 4% year-over-year.

We are realistic and cautious not having reliable signals yet in either direction as we start the year. Hence, our guidance to flat retail sales for the year, positive performance skewed towards the second half.

In 2024, we saw our performance being significantly impacted by the continued cyclical headwinds for discretionary products, including the high-interest rate environment affecting consumer confidence.

While we were unable to achieve our original guidance of '24 given the overall environment...

LiveWire: electric motorcycle unit sales of 1,000 – 1,500 and an operating loss of $70 to $80 million expected in 2025.

Overall Sentiment: Cautiously optimistic. Management acknowledges current headwinds impacting performance but expresses confidence in their strategic plan ('Hardwire'), product pipeline, and ability to capitalize on any market recovery. They are taking proactive steps to manage costs and inventory, while investing in core product segments and future growth areas. Sentiment is tempered by realistic outlook and reduced guidance for 2025, particularly in terms of revenue and earnings per share, and ongoing losses in LiveWire segment.

Recommendation

Rating: Hold

Reason for Rating: Given the mixed financial performance in Q4 and full year 2024, and a cautious outlook for 2025, a Hold recommendation is appropriate. While Harley-Davidson is making progress in key strategic areas and has strong market share in its core segments, the current macroeconomic headwinds, declining revenue, and operating losses in Q4 raise concerns. The positive aspects include strong operating cash flow, reduced inventory, and cost management, but these are balanced by the uncertain near-term market conditions and continued losses at LiveWire. A 'Hold' allows time to observe if the company can navigate the challenges and achieve its targets for 2025 and beyond.

Disclaimer: This report is for informational purposes only and not investment advice. The analysis is based on limited information and subject to change. Investing in securities involves risks, including potential loss of principal. Past performance doesn't guarantee future results. Always conduct your own research, understand the risks, and consult a financial professional before making investment decisions.

Generated on: 2/6/2025, 10:45:01 AM