Harley Davidson (HOG) reported its third quarter earnings yesterday. The company topped the EPS estimate but missed on the revenue estimate. This time around, organizations have been streamlining their operations to achieve leaner cost structures. However, due to the recessionary economic environment, sales have not been able to meet expectations. The interesting fact is that despite lower than expected sales for this quarter, the company maintained that its shipment guidance is the same as announced before i.e. 245k-250k shipments for 2012. Bike sales are highly correlated to housing activity and as housing markets improve, HOG's sales will rise too.
The YoY growth shows terrible figures. However, the YoY declines were natural given the expected production disruptions as the ERP system was being upgraded in the company's largest manufacturing plant. However, the production delay was not the only reason for the decline. US sales declined by more than what the sell side expected. Global retail sales were down 1.3% YoY whereas US retail sales were down 5.2% (sell-side expected a decline of 3%). US sales offset the rise in international sales of 7.6%. Looking at the region wise sales for the quarter we find that retail sales improved by 32.3% in Latin America, 9.8% in Asia Pacific region and 1.8% in EMEA. Sales declined by 4.7% in North America.
Margins improved from 33.7% in the same quarter of last year to 34.7 percent for this quarter. The positive change reinforces our idea that industrials are trimming their costs by restructuring operations. The company has been a successful case study of operational restructuring and has been working diligently for the streamlining of its manufacturing processes. The company also has a flexible production strategy, which really helps in an uncertain economic environment like the one currently prevalent in the US. The company is well on its way to achieving its different restructuring milestones that we have already mentioned in one of our earlier articles on HOG. In last quarter's earnings release, the company reduced the expected restructuring cost from $50-60 billion to $40-50 billion for this year. This estimate has been further cut down to $35-45 billion. The company expects to incur costs of $490 million-$510 million on the overall restructuring program. The restructuring that is expected to be completed by 2013 is expected to bring savings of $275-295 million in 2012 and ongoing savings of $315-335 million after 2013.
Investors were pleased to know that despite sales miss for this quarter, the company maintained its guidance of shipping 245-250k motorcycles to dealers and distributors worldwide. This will be 5-7% more than the shipments for the previous year. Also, the company expects to ship 44,500- 49,500 motorcycles in the fourth quarter. This will be 2-12% below the shipments for the previous fourth quarter's shipments. However, this was anticipated earlier on, given the ERP implementation going on at York. The company maintained its guidance as sales picked up momentum at the end of quarter. According to a Goldman Sachs (GS) analyst, sales have started to improve due to the rebound in the housing sector. Bike sales are directly correlated to construction growth. Not only this, the sales are also correlated to housing sector growth because people use home-equity loans to buy bikes.
HOG is determined to restructure its operations in a way that it is least vulnerable to economic uncertainty. Quarter sales were weak because of the production disruptions in the York facility. Also, August sales were weak because the company postponed its new model launch. Goldman Sachs' analyst expects HOG's production to be at the top end of the company's estimates in the fourth quarter. The earnings for the company are expected to grow by 15% per annum for the next five years. With the rebound in the housing sector under way and restructuring going according to plan, the stock is expected to go up and is therefore recommended as a buy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.