Sunday, July 24, 2011

Why Harley-Davidson's Earnings Are (Finally) Roaring

Amidst all the economic anxiety gripping Washington and the rest of the nation, more new Hogs are hitting the road.
On Tuesday Harley-Davidson reported stellar growth: income for the second quarter was $190.6 million, up 36.8% compared with the second quarter of last year. In the U.S., unit sales of new motorcycles rose 7.5%, the first year-over-year quarterly rise since the fourth quarter of 2006.  Harley Davidson generated $1.34 billion in sales, well ahead of a consensus expectation of $1.263 billion in sales. The company's second quarter earnings per share  - $0.81 - also exceeded expectations ($0.71).

The company says it now expects to ship between 228,000 to 235,000 Harley-Davidson motorcycles worldwide in 2011: in April, the company said it planned to ship between 215,000 and 228,000 bikes.

In late-2009 and 2010, many consumer goods companies saw their first year-over-year sales rises since the recession. After all, things bottomed out in late-2008 and 2009: there was nowhere to go but up. What took so long for motorcycles to pick up? For any company, this seems like an odd time for a first strong quarter in over four years, since the pace of economic recovery has certainly slowed.

Several factors may explain the motorcycle lag. First off, a $15,000-20,000 Harley is a big-ticket discretionary purchase. Harley's core customers are not the stereotypical tattooed, blue-collar biker dudes. They're affluent white men over the age of 35, with average incomes around $80,000. "The Harley customer has changed," says Rommel Dionisio, analyst at Wedbush Securities. "Baby boomers are particularly important for Harley. The motorcycles are luxury toys for them."

These white-collar customers are less anxious about their job security and retirement savings - the Dow is back over 12,500 - than they were during the worst of the recession, or the months coming out of it. Plus, as bigger ticket items, the Harleys may be benefitting from pent-up demand. Consumers eased back into the luxury market, spending money on smaller ticket items like clothes before splurging on a bike.

Plus, the dynamics of the motorcycle market worked against Harley-Davidson. During the downturn, cheaper used Harleys seemed like a much better deal than a new motorcycle, especially since the economy depressed the values of trade-in vehicles  (63% of U.S. Harley buyers had previously purchased a Harley motorcycle). “The used bikes were an easy sell,” says James Hardiman, analyst at Longbow Research. Not only was Harley competing against itself, but Japanese competitors like Kawasaki, Yamaha and Suzuki were discounting their vehicles, even through the 2010 recovery, says Dionisio. Now, the March earthquake in Japan has challenged the supply chain of these companies. So Harley is picking up market share.

Do these Harley results say something more about the economy? Yes, says Dionisio. “We're really seeing a bifurcation of retail,” says Dionisio, who also covers luxury brands like Sotheby's and Estée Lauder. “The ultra low-end is doing well, and so are the high-end luxury goods. Harley shows that this discretionary spending is getting healthier by the day.”

The performance of Harley's financial services arm is also a good sign for the economy. The unit earned $82 million in income, the highest quarterly total on record. More importantly, thirty-day delinquencies fell to 3.5%, from 4.5% last year. America may go bankrupt. But at least the bikers are paying their bills.

Sean Gregory is a staff writer at TIME. Find him on Twitter at @seanmgregory. You can also continue the discussion on TIME's Facebook page and on Twitter at @TIME.

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