How Bad Will Harley-Davidson's Q2 Report Be?

Rich Duprey, The Motley Fool

When Harley-Davidson (NYSE: HOG) reports on its second quarter  Tuesday, we can expect to see more of the same on the domestic front. The motorcycle maker is likely to deliver its 10th consecutive quarter of falling U.S. sales, and its 16th such decline out of the last 17. 

The more pressing questions though, are not just how steep the drop will be, but also how much it matters. Harley is unleashing its all-electric LiveWire motorcycle on the market next month, and it has advanced plans to build smaller motorcycles for foreign markets over the next two years. And with Harley focusing more on growing its international business -- the goal is to boost foreign sales to equal those in the U.S. market -- the real test may be how it's faring overseas.

Harley-Davidson Pan American 1250

The Pan American 1250 is one of the mid-size motorcycles Harley-Davidson will be producing. Image source: Harley-Davidson.

Importance of foreign markets grows

The U.S. market provided 57% of Harley's total sales in the first quarter, about the same as a year prior, but down from 62% five years ago. The company's transition toward an even balance between foreign and domestic sales is already under way, though much of the narrowing gap can be traced to the sharp declines in U.S. sales rather than sales increases overseas.

Indeed, total international sales last year of 95,183 motorcycles were 1.8% below the 96,920 Harley moved internationally in 2014. But U.S. sales fell 22% over the period to just below 133,000 motorcycles.

While it's not ignoring the U.S. market, Harley-Davidson believes its future lies elsewhere, so it's putting more energy into building its brand in international markets. 

That's why it might not matter so much how domestic sales performed in Q2. Harley knows it is in free fall at home, and it doesn't see much of a way to reverse that, so it's looking to where it thinks its efforts could make a difference. The plan to build smaller-displacement bikes for India and elsewhere, along with two really small motorcycles for the China market, makes it clear where its priorities lie.

The high price of electric bikes

Here at home, motorcycle buyers can look forward to the LiveWire. A technological marvel to be sure, but one that Harley-Davidson has erected a huge hurdle in front of by pricing it at almost $30,000. 

Given that the Zero S/RF from leading established electric bike maker Zero Motorcycles starts at just under $19,000, and Lightning Motorcycles is taking reservations for its Strike Carbon Edition electric bike that starts at $10,000 before generating a personalized build, and a standard Strike will be priced under $13,000, Harley will be hard-pressed to sell LiveWires.

There is also no market yet for the sort of high-end electric motorcycle Harley has built, meaning it will have to create one from nothing. Nor is there a clear indication of demand for this type of bike. Certainly it will sell some, but not likely enough to change the company's sales trajectory.

Not that Harley is completely unhappy about that either. It has indicated it views the LiveWire as a "halo" product, one that will cast a glow on the other electric vehicles the bike maker will eventually add to its catalog, such as the two working prototypes of electric bikes -- actual bikes, not motorcycles -- it unveiled in January at the 2019 X Games in Aspen, Colorado. However, those are years away from being brought to market.

The future remains bleak

Harley-Davidson will also be facing rising credit losses from its financial services division. Although the losses it's already experiencing are within a manageable range, they are rising, and the bike maker's return to the securitization market shows it is trying to remove some debt from its balance sheet.

Harley is still counting on its traditional, big-bore motorcycles for sales, and analysts from Raymond James indicate sales could fall 6% this quarter. That's worse than the 4% decline in Q1, but not so bad as the double-digit drops it suffered in the back half of 2018.

No one believes Harley-Davidson will come out of its skid this quarter. But at least there is the silver lining that regardless of how far its U.S. sales fall, the direction its international sales are heading might just matter more.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.