Sunday, July 20, 2008

Harley-Davidson Reducing Dealer Inventories

In recent years, many analysts have accused Harley of "channel-stuffing". Basically, Harley records revenue (and thus earnings) when a dealer receives a bike. But if Harley ships more bikes to a dealer than the dealer sells to its customers, then the problem is that Harley's earnings are artificially high (because they've "stuffed" the dealer with extra bikes), and sooner or later they'll have to cut shipments to reduce dealer inventory.

Let's take a look at shipments versus retail sales for the last few years to see if this is occurring (numbers in thousands):


(Note that it's difficult to get accurate worldwide retail sales for Buell, so both of these numbers include strictly Harley-Davidson bikes.)

According to the table, since 2004 Harley has tacked onto dealers 28,000+ more bikes than dealers have sold. However, the number of dealerships within the US as well as around the world has continued to grow...so is it possible that these new dealerships have absorbed these bikes as part of their showrooms?

Based on data within the annual reports, I estimate Harley has increased its number of dealerships by about 42 since the end of 2003. Spreading those 28,000 bikes across the 42 new dealerships gives us about 679 bikes per new dealership. Considering analyst Craig Kennison at Robert W. Baird estimates US dealers carry about 50 bikes each (source: 2008 Q2 Conference Call), 679 is a bit excessive, suggesting earnings since 2004 for HOG have been higher than what is sustainable.

But in the first half of 2008, it appears Harley has already more than reversed this trend. First half retail sales are almost 34,000 more than shipments, bringing shipments over retail sales to a negative 5,000 since 2004. That means on average each dealer is carrying 3 bikes less than it was in 2004.

Could this be good news for HOG going forward? Well the US economy is still behaving badly, bringing down Harley's worldwide retail sales in the quarter by 3.6% year over year, so challenges still remain. But at least the overhang of a shipment reduction due to channel-stuffing is behind us.

Disclosure: Author has a long position on HOG

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