What Factors Are Hindering Harley-Davidson’s Profitability?

Harley-Davidson's Mixed 1Q16 Results: A Long and Winding Road

(Continued from Prior Part)

Harley-Davidson’s profitability

In the previous part, we saw how Harley-Davidson’s (HOG) margins shrank in 1Q16. We also found out how currency headwinds are stealing the company’s profits.

As noted earlier in this series, Harley-Davidson has a good reputation of having industry-leading margins. Therefore, it becomes crucial for investors to understand how these margins are trending before making any investment decisions. In this part, we’ll look at some other key factors that are affecting Harley-Davidson’s profitability.

Unfavorable product mix

Currently, Harley-Davidson produces a variety of models. These models range from lightweight motorcycles to large heavyweight motorcycles. Among its heavyweight motorcycles, touring motorcycles tend to yield the highest margins for the company. However, in the last couple of years, the company’s margins have been negatively affected by the increasing share of Sportster and street motorcycles in total shipments.

In 1Q16, Harley-Davidson reported a shift in its product mix. The shipments of Harley’s touring motorcycles fell by 0.8% while shipments of the cruiser and Sportster/street motorcycles rose by 15.1% and 1.2%, respectively. This affected Harley-Davidson’s profitability for the quarter.

Likewise, other mainstream automakers (XLY) such as General Motors (GM), Ford (F), and Fiat Chrysler (FCAU) also make higher profits by selling heavy vehicles as compared to smaller cars.

Increased manufacturing costs

Lately, Harley-Davidson (HOG) has been trying to enhance the efficiencies of its manufacturing plants. In 1Q16, HOG’s gross margin was negatively affected by $15.6 million driven by higher year-over-year startup costs.

This includes the costs related to the implementation of ERP (enterprise resource planning) system at the company’s manufacturing plant located in Kansas City. The implementation of the ERP system is likely to continue in the coming quarters. The company expects it to be completed by the end of 3Q16.

Also, due to its lower production in 1Q16, Harley-Davidson’s fixed cost absorption fell as compared to 1Q15.

Continue to the next part to learn how Harley-Davidson’s Financial Services arm performed in 1Q16.

Continue to Next Part

Browse this series on Market Realist:

• Part 1 - Why Harley-Davidson’s 1Q16 Earnings Triggered a Selling Spree

• Part 2 - A Closer Look at Harley-Davidson’s 1Q16 Revenues

• Part 3 - What Harley-Davidson’s Shrinking Margins Mean for Investors