Harley Davidson has a Middle-Aged White Guy Problem

Rodney Johnson |

When my son went off to college a few years ago, he bought a motorcycle…with his own money. He had a car, which I’d paid for, but he wanted a bike as well. I knew about his love for motorcycles, so I wasn’t surprised. When he told me about the purchase, I asked a few questions: What style is it? How big is the motor? How much did it cost? What I didn’t ask was an obvious question: What brand is it?

I vaguely knew what his answer would be - a Honda (HMC), Kawasaki, or Suzuki most likely. I also knew what it wouldn’t be – a Harley (HOG).

That’s a problem for the American cycle company.

At the time, my son was 19, brash, and ready to meet the world. He wasn’t a delinquent, but he was, and remains, an independent thinker. He is exactly the kind of person Harley would love to capture, perhaps molding him into a lifelong Harley rider, and part of their new wave of customers. And yet the idea of buying one of their bikes – used, of course – didn’t cross his mind.

As far as he’s concerned, Harleys are for old guys. More specifically, they’re built for people valuing comfort over speed who want a passing association with outlaws and rebels. They’re still the bikes of James Dean, Marlon Brando and Peter Fonda. That’s an image Harley has worked tirelessly to change, but it’s slow going, and their earnings show it.

Harley Struggling to Appeal to Millennials

Since the mid-2000s, Harley has recognized their demographic hurdle, for which I give them a ton of credit. The pool of aging, professional men willing and able to spend $25,000 on a motorcycle to foster a rebel spirit was dwindling. The company needed to attract new types of clients or face falling sales.

The downturn of 2008 hurt Harley along with every other company that relied on customer financing… but their pain went deeper. While sales and their stock price have since rebounded, they still haven’t cracked the code of appealing to younger and more varied clients.

On their website, Harley has a tab labeled “Demographics.” It takes you to a page where the company discusses its new focus on young buyers, women, African-Americans and Hispanics. Harley describes the company’s new “Street” bike series, which cost about a third of their typical cycle, and points to its sales leadership across most categories.

Company officials clearly understand their dilemma and are working to bridge the gap with potential growth segments of the population.

But Harley doesn’t bring up a couple of key points.

The company shipped 36% of its bikes overseas, so there’s no doubt a strong dollar hurt sales, but here at home things just aren’t going their way. Overall, their US market share fell from 56% in 2013 to 52% last year, and 2015 third-quarter earnings were flat when analysts expected a 13% increase.

Some of the problem with changing their image stems from their dealer network. An example: the grand opening of a store in Scottsdale, AZ featured a performance by the Doobie Brothers. I’m certain my son can’t name a single song of theirs.

While such marketing tactics seem at odds with the company’s focus, dealers are still in the game to make money. Twenty-somethings might be the riders of the future, but today they focus on the low-cost – and low-profit – street models, whereas older riders pony up for the $25,000-plus models.

What’s a Company to Do?

Harley will announce fourth-quarter earnings on January 28. Analysts expect the company to report $0.20 per share. The whisper number – the unpublished analyst earnings per share (EPS) – is a bit higher at $0.23. It would be great if Harley beat expectations, but those figures have to be put in perspective.

In the fourth quarter of 2014, Harley earned $0.35, so the consensus number would be a 43% drop, while the whisper number is a fall of “only” 34%. About the best that investors can hope for is that unit sales beat the company’s lowered forecast of flat to -2%.

As for changing the company’s image, they’re doing all the right things and pursuing the right strategies, and yet it’s not working. So far, the company is a victim of its past success. It is so closely associated with the existing theme that the company spent decades building, there’s little room for anything else.

To prove the point, imagine a person riding a Harley. Do you see a young person, perhaps a woman or person of color? Or do you see a grizzled old guy who rides on the weekends and wears a tie at work?

Given the recent report on retail sales, lack of progress in reaching the young set and continued strength in the US dollar, I’m guessing Harley will report another disappointing quarter.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
HOG Harley-Davidson Inc. 59.98 0.27 0.45 1,728,255
HMC Honda Motor Company Ltd. 29.43 0.06 0.20 775,578

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