Harley Davidson Reducing Dealer Inventories - A Positive Sign

In recent years, many analysts have accused Harley (HOG) of "channel-stuffing". Basically, Harley records revenue (and thus earnings) when a dealer receives a bike. But if Harley ships more bikes to a dealer than the dealer sells to its customers, then the problem is that Harley's earnings are artificially high (because they've "stuffed" the dealer with extra bikes), and sooner or later they'll have to cut shipments to reduce dealer inventory.

Let's take a look at shipments versus retail sales for the last few years to see if this is occurring (numbers in thousands):


(Note that it's difficult to get accurate worldwide retail sales for Buell, so both of these numbers include strictly Harley-Davidson bikes.)

According to the table, since 2004 Harley has tacked onto dealers 28,000+ more bikes than dealers have sold. However, the number of dealerships within the US as well as around the world has continued to grow...so is it possible that these new dealerships have absorbed these bikes as part of their showrooms?

Based on data within the annual reports, I estimate Harley has increased its number of dealerships by about 42 since the end of 2003. Spreading those 28,000 bikes across the 42 new dealerships gives us about 679 bikes per new dealership. Considering analyst Craig Kennison at Robert W. Baird estimates US dealers carry about 50 bikes each (source: 2008 Q2 Conference Call), 679 is a bit excessive, suggesting earnings since 2004 for HOG have been higher than what is sustainable.

But in the first half of 2008, it appears Harley has already more than reversed this trend. First half retail sales are almost 34,000 more than shipments, bringing shipments over retail sales to a negative 5,000 since 2004. That means on average each dealer is carrying 3 bikes less than it was in 2004.

Could this be good news for HOG going forward? Well, the US economy is still behaving badly, bringing down Harley's worldwide retail sales in the quarter by 3.6% year over year, so challenges still remain. But at least the overhang of a shipment reduction due to channel-stuffing is behind us.

Disclosure: Author has a long position on HOG

Comments

[Richard Neva:]

I have a Vespa and I can't afford to ride that. It needs new tires and it does run on gasoline which I need to cut my weeded lawn very infrequently!

2008 Jul 20 08:13 AM

[BlueOkie:]

If you can afford a HOG $5 gas wouldn't bother you! In fact, you can justify your purchase with gas savings.

2008 Jul 20 08:20 AM

[ez rider (I...:]

I think of the Harley business in terms of my memories of it from the 60s and 70s, when, in fact, it is much larger, more conservative and "big business" than I could have imagined.

I looked into buying a Harley Franchise - as it seemed to embody everything I longed for from my youth, and looked like a job I'd enjoy getting up in the morning for . . .

Not to happen. They have gotten too big, too corporate and highly profit driven. Not that that is a bad thing . . . it just doesn't encourage independent franchise owners . . . .

I do have the stock, (which I believe in even more now!) and am considering my first bike at 56.

Women on Harleys has become a good niche for them . . .

2008 Jul 20 11:10 AM

[Joyful Alte...:]

Early every Sunday morning the Harley dealership down the road has maybe a dozen people in helmets in the parking lot. They appear to be taking riding lessons.

2008 Jul 20 01:20 PM

[Joseph Wagda:]

The author makes a good point about HOG's efforts to reduce dealer inventory. However, there is a significant seasonality to retail sales of Harleys and the second quarter always starts with the highest dealer inventory of the year and the third quarter ends with the lowest dealer inventory of the year. At that point, dealer inventory again builds in advance of the next sales cycle.

By the end of 2008, it is unlikely that dealer inventory will be lower than it was at the end of 2003.

2008 Jul 23 11:59 AM

[Saj Karsan:]

Hi Joseph, that's a good point. We should see one more quarter of dealer inventory draw-downs, followed by an increase in Q4. I'd be interested to re-visit this topic at the end of the year to make a better comparison to the situation at the end of 2003.

2008 Jul 24 10:49 AM

[FUJIMO:]

How many days accumulate before a dealer starts paying on there floor plan and is the plan flexible?

2008 Jul 26 10:57 AM

[Saj Karsan:]

I don't know the exact answer to that Fujimo, but based on some HDFS and A/R numbers of Harley's, it would appear pretty flexible. I would guess that most if not all bikes on the floor are fully financed (with a less than market interest rate).

2008 Jul 27 06:43 PM

[FUJIMO:]

I find past trend numbers hard to read in an unstable year.


On Jul 27 06:43 PM Saj wrote:

> I don't know the exact answer to that Fujimo, but based on some HDFS
> and A/R numbers of Harley's, it would appear pretty flexible. I would
> guess that most if not all bikes on the floor are fully financed
> (with a less than market interest rate).

2008 Jul 31 12:05 PM