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April 17, 2008
Harley-Davidson Inc. will significantly cut shipments of motorcycles to dealers and trim more than 700 jobs this year as it confronts a steep reduction in U.S. sales.
The Milwaukee-based maker of iconic, high-end motorcycles -- which early Thursday reported a 2.5% decline in first-quarter profit -- also scaled back its earnings expectations for the remainder of the year amid a challenging economic scenario.
Chief Executive Officer Jim Ziemer said during a conference call with analysts that there's "no sign of when things will turn around" for the economy, adding that the retail environment in the U.S. will remain tough throughout 2008.
Harley-Davidson posted a first-quarter net profit of $187.6 million, or 79 cents a share. Overall revenue increased 11% to $1.31 billion, but a 13% decline in U.S. sales during the period was cause for concern, easily offsetting continued growth internationally.
The sales weakness illustrates the impact that the U.S. economic slump and tight credit conditions are having on consumer decisions to purchase discretionary products, even those with such a strong brand name and dedicated customer base as Harley-Davidson.
While the bottom line came in slightly higher than the consensus view on Wall Street, the revised guidance is considerably lower than analysts have forecast up until now.
Harley-Davidson now expects earnings to fall between 15% and 20% versus the 2007 result, to a range of $3.00 to $3.18 a share. The company had said in January that it expected EPS to rise between 4% and 7% this year.
Despite the big adjustment, Citigroup analyst Gregory Badishkanian said in a research note that dealer checks for the past six weeks indicate that sales are weakening further. "So we do not view management's downwardly revised guidance as conservative by any means."
J.P. Morgan analyst Steve Rees said that, with no signs of stabilization in the U.S. retail sales environment, "we think near-term earnings visibility remains low" for Harley-Davidson.
Steps to Cut Costs, Improve Loan Ops
Analysts, however, applauded the steps to scale back deliveries and cut costs, measures that Chief Financial Officer Tom Bergmann said are necessary "to ensure we are protecting our premium brand and maintaining our strong financial position for the long term."
Harley Davidson plans to ship between 23,000 and 27,000 fewer motorcycles this year than in 2007, putting the total dealer deliveries in 2008 at no more than 307,500 units.
The company will implement temporary plant shutdowns and adjustments to daily production rates, which will result in a reduction of about 370 unionized employees, or about 6.5% of that workforce. In addition, about 360 non-production jobs, or 10% of that segment of workers, will be cut.
Harley-Davidson will take a charge of $20 million to $25 million in 2008 to implement the workforce reduction. But Mr. Ziemer, the CEO, said that beginning in 2009 the leaner workforce should result in an annual benefit of as much as $40 million.
While Harley-Davidson has been able to offset U.S. weakness with increasing business abroad, the motorcycle manufacturer continues to rely on the U.S. for more than two-thirds of its sales.
Mr. Bergmann, the CFO, said that Harley-Davidson's U.S. retail sales in January and February were slightly off year-ago levels, but that the decline accelerated in March, leading the company to revisit its plans.
He said the majority of the decline in retail sales for Harley-Davidson was attributable "to macroeconomic conditions in the U.S. and the issues that we see around consumer confidence and home equity." He added that only a small portion of the decline could be attributable to tighter credit conditions.
Harley-Davidson Financial Services, like other consumer lenders, has been forced to adjust lending standards amid an increase in payment delinquencies and loan losses.
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