Harley Gains as Reduced Profits Still Beat Analysts’ Estimates

(Bloomberg) -- Harley-Davidson Inc. overcame higher tariff costs to post better-than-expected profit, but its business is once again the subject of President Donald Trump’s tweets.

While adjusted net income fell by 26 percent in the first quarter, the slump was less severe than Wall Street feared. Excluding costs of restructuring, tariffs and other factors, the motorcycle maker posted earnings of 98 cents a share, beating analysts’ average estimate for 85 cents.

Harley’s approach to mitigating the impact of higher tariffs implemented by the European Union landed the iconic American company in Trump’s doghouse last year. With the EU putting a 31 percent tax on U.S.-built motorcycles as retaliation for the president’s steel and aluminum levies, the manufacturer said it would shift some production overseas.

Rather than attack Harley, as he did throughout 2018, Trump aimed his ire at the EU shortly after the Milwaukee-based company reported earnings Tuesday. In a tweet, the president called the bloc’s tariffs “so unfair” to the U.S. and threatened retaliation.

Trump’s post was an about-face from last June, when he accused Harley of using tariffs as an excuse to ship American jobs overseas. In August, he said he’d support a boycott of the company’s bikes.

In addition to staying squarely in the crossfire of Trump’s trade disputes, Harley is trying to attract younger riders amid a shift in U.S. consumer tastes away from pricier, heavyweight motorcycles. Chief Executive Officer Matt Levatich closed an assembly plant in Missouri last year and built a factory in Thailand as part of a plan to sidestep tariffs and boost sales abroad. He wants half of revenue to come from outside the U.S. by 2027.

What Bloomberg Intelligence Says

“While Harley-Davidson topped consensus at the EPS line, the holistic view still fails to inspire confidence that the company has turned any corners in the reinvention of its business. Harley must realign its product portfolio as the market shifts from higher-priced and wider-margin bikes to more nimble models for commuters.”
-- Kevin Tynan, global autos analyst
Click here to read the research

Harley is awaiting confirmation from the EU that exporting motorcycles to the region from its Thailand plant will allow it to avoid the 31 percent levy, which is scheduled to jump to 56 percent in 2021, Levatich said on a call with analysts. If not, the company will consider assembling the bikes in Europe instead, he said.

“Should approval be denied, we have other plans to enter Europe,” Levatich said. “Clearly this is imperative for us as a business.”

Harley expects to pay between $100 million and $120 million in incremental tariff costs in 2019, though Levatich said the majority of those costs should be mitigated by the end of the year through production coming from the Thailand plant.

Harley shares slipped 0.4 percent to $39.56 as of 11:01 a.m. in New York after dropping as much as 4 percent earlier. The stock has rallied 16 percent this year after closing at an eight-year low on Dec. 24.

U.S. retail sales fell 4.2 percent in the first three months of the year, Harley’s ninth consecutive quarterly drop. Still, that was the smallest decline since the end of 2016. Executives attributed the improvement to dealer and customer incentives and more spending on marketing that paid off in March.

“We’ve got a plan in place, and the plan is working,” Levatich said.

As part of its bid to attract younger riders, Harley debuted its first electric motorcycle, LiveWire, in January and acquired an e-bike company in March. The LiveWire bikes go on sale in the U.S. in August.

Sales in Europe and Asia -- regions Levatich has pinned hopes for growth on -- fell 0.6 percent and 4 percent, respectively. Motorcycle sales in the U.K. continued to suffer because of consumer uncertainty surrounding Brexit, executives said. Asia sales were stymied by a recall.

Even as it aims to expand abroad, Harley is still investing in the U.S. It committed to put $65 million into its Milwaukee facility and $10 million into its Tomahawk, Wisconsin plant as part of a five-year contract with the United Steelworkers that was ratified this month.

--With assistance from Karen Lin and Jonathan Stearns.

To contact the reporter on this story: Gabrielle Coppola in New York at gcoppola@bloomberg.net

To contact the editors responsible for this story: Craig Trudell at ctrudell1@bloomberg.net, Chester Dawson

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