Business Overview

Harley-Davidson, Inc. (HOG) has long been synonymous with the American spirit of adventure and freedom. As the iconic motorcycle manufacturer navigates the challenging macroeconomic landscape, the company remains steadfast in its commitment to innovation, brand loyalty, and delivering exceptional experiences for its customers.

Harley-Davidson was founded in 1903 in Milwaukee, Wisconsin, as a partnership between William S. Harley and Arthur Davidson. The company began by building its first motorcycle in a small wooden shed and has since grown to become a global leader in the motorcycle industry. In 1981, Harley-Davidson, Inc. was incorporated when the company purchased the Harley-Davidson motorcycle business from AMF Incorporated in a management buyout, allowing the company to regain control and focus on its core operations.

The 1980s were a challenging time for Harley-Davidson as it faced competition from Japanese motorcycle manufacturers and struggled with quality and reliability issues. To address these challenges, the company focused on improving its manufacturing processes and product quality in the 1990s. This turnaround effort, known as the "Renaissance," was successful and helped reestablish Harley-Davidson as a leading brand in the heavyweight motorcycle market. During this time, the company also expanded its international presence and financial services division.

In the 2000s, Harley-Davidson continued to grow both its motorcycle and financial services businesses. The company expanded its product lineup to appeal to a wider range of customers, including the introduction of the V-Rod and Street models. Harley-Davidson also made investments to improve the capabilities of its dealer network and enhance the customer experience.

The company operates through three main segments: Harley-Davidson Motor Company (HDMC), LiveWire, and Harley-Davidson Financial Services (HDFS).

HDMC designs, manufactures, and sells Harley-Davidson motorcycles, parts, accessories, and apparel. The company's products are sold primarily through a network of independent dealers in the United States, Canada, Europe, Middle East, Africa, Asia Pacific, and Latin America. HDMC is the backbone of the Harley-Davidson brand, responsible for maintaining the company's legacy and driving innovation.

The LiveWire segment focuses on the production and sale of electric motorcycles, balance bikes, and related products and services. As the industry moves towards electrification, LiveWire is Harley-Davidson's foray into the burgeoning electric vehicle market.

HDFS provides retail and wholesale financing services, as well as insurance and voluntary protection products, primarily for the purchase of Harley-Davidson and LiveWire motorcycles. This segment plays a crucial role in supporting the company's sales and customer loyalty.

Financial Performance

In the fiscal year 2024, Harley-Davidson reported consolidated revenue of $5.19 billion, a decrease of 11% compared to the previous year. This decline was primarily driven by a 15% decrease in revenue from the HDMC segment, partially offset by a 9% increase in revenue from the HDFS segment.

The company's consolidated operating income for the year was $417.63 million, down 47% from 2023. This was mainly due to a 58% decrease in operating income from the HDMC segment, partially offset by a 6% increase in operating income from the HDFS segment and a 6% improvement in the operating loss from the LiveWire segment.

Net income attributable to Harley-Davidson, Inc. for the fiscal year 2024 was $455.36 million, or $3.44 per diluted share, compared to $706.59 million, or $4.87 per diluted share, in the previous year.

Breaking down the performance by segment:

HDMC revenue was $4.12 billion in 2024, down 14.9% from 2023, with motorcycles accounting for 76.1% of total HDMC revenue. Gross profit for the HDMC segment was $1.15 billion in 2024, with an operating margin of 6.7%.

LiveWire's revenue was $26.4 million in 2024, down 31.2% from 2023, primarily due to lower volumes of electric balance bikes and electric motorcycles, as well as lower average prices on electric motorcycles. The LiveWire segment had an operating loss of $109.6 million in 2024, an improvement from a $116.8 million loss in 2023, driven by lower operating expenses.

HDFS revenue was $1.04 billion in 2024, up 8.9% from 2023, driven by higher interest income. HDFS operating income was $248.4 million in 2024, up 5.8% from the prior year, despite an increase in the provision for credit losses and higher operating expenses.

In the most recent quarter (Q4 2024), Harley-Davidson reported revenue of $687.61 million, down 35% year-over-year, and a net loss of $116.89 million, compared to a net income of $18.00 million in Q4 2023. The decrease in Q4 revenue and net income was primarily due to a 43% decline in wholesale motorcycle unit shipments as the company worked to reduce dealer inventory levels.

Liquidity

Harley-Davidson generated strong operating cash flow of over $1 billion in 2024, a nearly 40% increase from the prior year. Free cash flow for the year was $867.27 million. This impressive cash flow generation has allowed the company to continue investing in its strategic initiatives while also returning capital to shareholders through share repurchases.

As of the end of 2024, Harley-Davidson had $1.59 billion in cash and cash equivalents. The company's debt-to-equity ratio stood at 2.22, while its current ratio was 1.40 and quick ratio was 1.19. Harley-Davidson also had access to $1.42 billion in credit facilities and $1.07 billion in net asset-backed U.S. commercial paper conduit committed facility availability.

Strategic Initiatives and Outlook

Harley-Davidson's Hardwire strategic plan, introduced in 2021, has been the driving force behind the company's transformation. The Hardwire focuses on five key pillars: Profit Focus, Selective Expansion and Redefinition, Lead in Electric, Growth Beyond Bikes, and Integrated Customer Experience.

Under the Profit Focus pillar, the company has continued to invest in its strongest and most profitable motorcycle segments, such as Grand American Touring, Cruiser, and Trike. This strategy has paid off, with the Touring segment recording an 18% increase in retail sales in the first half of 2024 and Harley-Davidson achieving a 74.5% market share in the Touring segment in the U.S., the highest since 2019.

In the Selective Expansion and Redefinition pillar, Harley-Davidson is focused on winning in attractive motorcycle segments and markets. The company has ambitious plans for its entry-level motorcycle offering in select markets and the small cruisers segment starting in 2025. Additionally, the Adventure Touring segment, introduced as part of the Hardwire strategy, has shown promising growth potential.

The Lead in Electric pillar is anchored by the LiveWire segment, which continues to refine its product portfolio and explore new market opportunities, such as the planned electric maxi-scooter launch in Europe in 2026. While LiveWire has faced some challenges, the company remains committed to this strategic initiative.

The Growth Beyond Bikes pillar encompasses Harley-Davidson's efforts to create products, services, and experiences that inspire customers to discover adventure and live the Harley-Davidson lifestyle. This includes enhancing the company's digital capabilities, strengthening its events and experiences, and expanding its licensing opportunities.

Finally, the Integrated Customer Experience pillar focuses on providing seamless, personalized interactions with the Harley-Davidson brand, both online and in-person. This includes initiatives like the Harley-Davidson Riding Academy, which has trained over 1 million riders, and the company's continued investment in its dealer network.

Looking ahead to 2025, Harley-Davidson expects:

• Retail units to be flat, with positive performance skewed towards the second half of the year.

• Wholesale units to be flat to down 5% as they continue to manage dealer inventory levels.
• Global inventory levels to come down by more than 10% by the end of 2025, with a reduction of over 30% in the first half.
• HDMC revenue to be flat to down 5%.
• HDMC operating income margin to be between 7-8%.
• Earnings per share to be flat to down 5% compared to $3.44 reported in 2024.
• HDFS operating income to be down 10-15%.
• LiveWire to achieve unit sales of 1,000-1,500 units and an operating loss of $70-80 million.
• Capital investments of $225-250 million.

The company remains cautious and realistic about the near-term outlook given the uncertain macroeconomic environment, but believes they are well-positioned to take advantage of any uptick in consumption of discretionary products.

Risks and Challenges

Harley-Davidson faces several risks and challenges that could impact its future performance. These include:

1. Macroeconomic Conditions: The company's business is highly dependent on consumer discretionary spending, which can be affected by factors such as interest rates, inflation, and overall economic uncertainty.

2. Competitive Landscape: The motorcycle industry is highly competitive, with both domestic and international manufacturers vying for market share. Harley-Davidson must continually innovate and adapt to stay ahead of the competition.

3. Regulatory Environment: Harley-Davidson's operations are subject to various environmental, safety, and emissions regulations, which can impact the company's costs and product development timelines.

4. Supply Chain Disruptions: The company has faced challenges related to supply chain issues, raw material shortages, and logistics bottlenecks, which can disrupt production and impact financial performance.

5. Electrification Transition: As the industry shifts towards electrification, Harley-Davidson must successfully navigate the transition with its LiveWire segment and ensure it remains competitive in the emerging electric motorcycle market.

Human Capital Management

As of December 31, 2024, Harley-Davidson had approximately 5,900 employees globally, with 82.5% based in the U.S. and 57.9% salaried. The company has collective bargaining agreements with hourly unionized employees at its U.S. manufacturing facilities.

Harley-Davidson focuses on attracting, retaining, and developing top talent through competitive compensation, a positive work environment, and investment in employee safety, well-being, and development programs. This approach to human capital management is crucial for maintaining the company's innovative edge and operational efficiency.

Conclusion

Harley-Davidson, Inc. is a storied American brand navigating a challenging macroeconomic environment. The company's Hardwire strategic plan has positioned it for long-term success, with a focus on profitability, strategic expansion, electric vehicle leadership, and enhancing the customer experience.

While the company faces significant risks and headwinds, Harley-Davidson's strong brand recognition, loyal customer base, and continued investment in innovation provide a solid foundation for weathering the current storm. As the company adapts to evolving market conditions and consumer preferences, investors will be closely watching Harley-Davidson's ability to execute on its strategic priorities and deliver sustainable growth.

With a global presence and a focus on key markets, particularly the U.S. and European 601cc+ segments, Harley-Davidson is working to maintain its market leadership while exploring new opportunities for growth. The company's financial performance, while challenged in recent quarters, demonstrates resilience and the potential for recovery as market conditions improve.

As Harley-Davidson continues to execute its Hardwire strategy and navigate the complexities of the motorcycle industry, its ability to innovate, manage costs, and connect with consumers will be critical to its long-term success. The company's guidance for 2025 reflects a cautious but optimistic outlook, with a focus on inventory management, operational efficiency, and strategic growth initiatives across its HDMC, LiveWire, and HDFS segments.