Harley-Davidson Continues Profit Slide at the Hands of Victory and Indian Motorcycles

Harley-Davidson, who commands a massive 52 per cent market share in the United States is facing growing headwinds in part thanks to increasing competition from Victory and Indian Motorcycles, both companies under the Polaris umbrella. HD’s global sales were down 1.4 per cent in the third quarter while profits fell 6.5 per cent. And the trend looks unlikely to reverse anytime soon.

For those hoping that HD might see this as an opportunity to improve their product offering, think again. Instead, CEO Matt Levatich announced 250 job cuts (equating to roughly 4% of employees), the savings from which will be funneled into a huge marketing spend – up a massive 65% for next year.

Which really highlights the issue with Harley-Davidson – its continued reliance on style over substance. No doubt, Harley-Davidson’s image is its biggest draw, but it’s also its greatest weakness. Essentially, you either love Harley-Davidson’s or hate them and hence why Polaris has made such inroads with both Victory and Indian. Polaris has created one brand and resurrected another and have relied instead on good quality motorcycles at fair prices.

Not only has it captured some older riders who previously would have opted for a Harley, it’s grabbing younger and newer riders for the brand before HD gets a chance due to their cost. Polaris reported just two days ago that its motorcycle sales jumped 154% in its latest quarter to $160.4 million and given that Victory sets to expand its range to sportsbikes plus their acquisition of electric manufacturer Brammo, that momentum is likely to continue.

In fact, buyers in the US and other countries can now get a brand new Victory or Indian bike that is sometimes cheaper than a second hand HD. And when your bikes continue to suffer quality concerns, that second hand purchase is increasingly risky.

Harley-Davidson have often been criticised for the quality of their bikes. Some of that is undeserved as they do make some good machines. But it’s also fair to say that some of their bikes are overpriced and below par. The statistics back this up. Recalls of Harley-Davidson bikes have increased tremendously over the last few years. All manufacturers issue recall notices but HD has stuck out like a sore thumb in recent times.

According to an article in the Wall Street Journal, 210,000 HD bikes were recalled in 2014 and 312,000 have been recalled this year as of September. That compares with an average of 94,000 annually in the 10 years through 2013. Recent Harley recalls have involved problems including a faulty cylinder that could prevent the clutch from disengaging, a defective fuel-pump seal, and a clasp that could allow saddlebags to fly off the back of the bike. Harley reported 35 crashes or other incidents from the defects and six minor injuries.

The article further stated that the recalls have cost Harley-Davidson about $30 million in the three years through 2014. That is up from $7.9 million in the three years through 2004, even though Harley sold about 27% more motorcycles in the U.S. in the earlier period.

So what can Harley-Davidson do? It needs to realise that the baby boomer generation that was behind so much of its success is waning and they need to completely overhaul their image for broader appeal. To do that they need to start making quality bikes with technology that comes from the 21st century and isn’t priced so far ahead of competitors. So far, Matt Levatich doesn’t seem to be too interested in rocking the boat. Let’s hope it doesn’t spring too many more leaks.

Victory Project 156 Unveiled

The teasing thankfully hasn’t lasted long with Victory Motorcycles and Roland Sands Design today unveiling the finished the awkwardly named Project 156 motorcycle a few weeks after first announcing the build. Project 156 will be entered into the Pikes Peak Hill Climb later this year and marks a big change in direction for the traditionally cruiser orientated motorcycle brand.

The prototype racing motorcycle, named Project 156 for the 156 turns in the Pike’s Peak International Hill Climb, also known as the Race to the Clouds, will feature a liquid-cooled engine and be piloted by Cycle World Road Test Editor Don Canet. It’s by no means a pretty bike, but given that it’s been created for a one off race, function is far more important that form.

The plumbing is clearly visible, the tri-split radiator on show for all and the lack of a front cowl obviously makes Project 156 built for speed and not pretty. The press release admits that Project 156 represents “the future performance of the Victory brand.” While it hasn’t confirmed the origins of the engine, it’s clearly adapted from the V-Twin used by the Indian Scout. Liquid cooled, twin 67mm throttles with downdraft runners for maximum power and torque as well as a performance valve train including titanium intake and exhaust valves to allow for maximum engine speed.

The Roland Sands Design team developed and built the chassis to cradle the Project 156 motor. “This truly has been an All-American effort,” said Roland Sands. “The Race to the Clouds is a legendary event and we couldn’t be more proud to partner with Victory on the endeavor. We’ve built lots of custom motorcycles, but building a purpose-built race bike for this project has been a unique experience that we’ll remember for a long time.”

It’s a big time for Victory Motorcycles, with the company also racing in the Isle of Man TT this week with a Brammo electric powered sportsbike.


Polaris Reports Record First Quarter 2015 Results

Polaris Industries Inc. today reported record first quarter net income of $88.6 million, or $1.30 per diluted share, for the quarter ended March 31, 2015, an increase of nine percent from the 2014 first quarter net income of $80.9 million, or $1.19 per diluted share. Sales for the first quarter 2015 totaled $1,033.3 million, which represents an increase of 16 percent from last year’s first quarter sales of $888.3 million.

“I am pleased to report record sales and earnings for our 2015 first quarter, with sales up 16 percent, operating income up 19 percent and net income up nine percent, our 22nd consecutive quarter of record earnings performance,” commented Scott Wine, Polaris’ chairman and chief executive officer.  “We outperformed the market again in most of our businesses in spite of increased competitive promotional pressures, weakening global markets and the corresponding negative effect from currencies. While we are justifiably proud of these accomplishments, we remain focused on seizing the numerous opportunities we missed to perform better.  From factory inventory being too high to ongoing production inefficiencies, particularly in motorcycles, we did not perform to our capabilities or our expectations.  However, we are making great strides towards addressing these issues, and I am confident those efforts will allow us to continue outperforming our markets.”

Wine continued, “My confidence comes first and foremost from the skill and passion of Polaris’ 8,000 team members.  Our team has never been stronger or deeper, demonstrated by the recent internal promotions of Chris Wolf and Craig Scanlon, both 10+ year Polaris veterans, to run our Snowmobile and Slingshot® businesses, respectively, following Mike Jonikas’s retirement.  Second, product innovation remains a significant growth driver.  During the quarter, we added to our stable of innovative motorcycles with the introduction of the Indian Chief Dark Horse®, the Victory Magnum X-1®, and a limited edition Slingshot SL.

Additionally, we unveiled seven new mountain snowmobiles incorporating our award winning Axys® chassis, making the best mountain sled, the Polaris RMK®, even better. And we expanded our manufacturing footprint to China, while extending the breadth and reach of our ORV business, with the acquisition of Hammerhead Off-Road®, which produces light gas and electric utility vehicles and gasoline powered go-karts.”

Wine concluded, “We suspected 2015 would have its share of challenges and the first quarter confirmed our suspicions.  Nevertheless, we continue to see another year of solid growth and market share gains, which gives us confidence in achieving our sales and earnings guidance for the full year.”

2015 Business Outlook:

For the full year 2015, the Company is narrowing its guidance range and now expects earnings to be in the range of $7.27 to $7.42 per diluted share, an increase of 9 to 12 percent over full year 2014 earnings of $6.65 per diluted share.  Full year 2015 sales are expected to grow in the range of 9 to 12 percent over full year 2014 sales, unchanged from previous issued sales guidance.

Off-Road Vehicle (“ORV”) sales increased eleven percent from the first quarter 2014 to $645.4 million.  This increase reflects ongoing market acceptance of our industry leading brands, particularly the RANGER® and RZR® side-by-side brands, during the 2015 first quarter. Polaris’ North American ORV unit retail sales were up mid-single digits percent from the first quarter of last year, with consumer purchases of RANGER’s and RZR’s each increasing from the first quarter last year. North American ATV retail sales decreased low-single digits percent due to heavy competitive promotional spending during the 2015 first quarter with ACE up significantly.

The Company estimates North American industry ORV retail sales in the first quarter 2015 increased mid-single digits percent. Polaris ORV dealer inventory was higher in the 2015 first quarter compared to a year ago reflecting new segments and models added, an increase in dealer count and the change to the ATV RFM sales order process.  Sales of ORVs outside of North America decreased ten percent in the first quarter 2015 when compared to the first quarter 2014, primarily due to weak economic conditions, primarily in the Europe, Middle East and Africa (“EMEA”) region, as well as the currency impact of a strengthening U.S. dollar.

Snowmobile sales totaled $14.5 million for the 2015 first quarter compared to $15.6 million for the first quarter of 2014.  Historically, the first quarter is a slow quarter for snowmobile shipments to dealers. The North American snowmobile industry finished the season strong with industry retail sales up mid-single digits percent for the entire season ending March 31, 2015 due to favorable early snowfall levels in parts of the North American snowmobile riding areas and strong new product introductions.  Polaris’ North American retail snowmobile sales were up high-single digits percent for the full 2014-2015 season resulting in an increase in market share. Polaris dealer inventories, while elevated from the prior season-end, remain at acceptable levels for the 2014-2015 season-end.  Sales to customers outside North America decreased 12 percent in the first quarter 2015 primarily due to the currency impact of a strengthening U.S. dollar.  During the quarter, the Company introduced its model year 2016 snowmobile lineup highlighted by the all-new 408-pound 800 PRO-RMK®, the industry’s lightest and strongest sled designed to deliver the ultimate deep snow and mountain riding experience.

Motorcycle Sales:

Motorcycle sales increased 74 percent in the 2015 first quarter to $137.4 million.  All three brands, Victory,Indian Motorcycle® and Slingshot, increased sales in the first quarter.  Consumer retail demand for Victory and Indian Motorcycles during the 2015 first quarter, was up nearly 40 percent over last year’s first quarter, driven primarily by strong Indian Motorcycle retail sales, while first quarter North American industry heavyweight cruiser and touring motorcycle retail sales were up low-single digits percent from 2014.  Slingshot retail sales were ahead of expectations.  All three brands added to their product portfolios during the quarter with Indian Motorcycle introducing the Indian Chief Dark Horse, which is built upon the successful and award-winning Indian Chief® platform with only a flash of chrome and a heavy dose of matte black paint; Victory showcased the new Magnum X-1, a new bagger with a 200-watt, 10 speaker audio system and custom factory paint; and Slingshot adding a limited edition model packed with head-turning features, including striking Nuclear Sunset Orange coloring, dual windscreens and an interior LED lighting package.  Sales of Polaris motorcycles outside of North America decreased 12 percent in the first quarter of 2015 as compared to a year ago due to the currency impact of a strengthening U.S. dollar.

Global Adjacent Markets’ sales increased seven percent to $65.4 million compared to the first quarter of 2014.  The Company’s government/military group experienced double digit percent sales growth during the 2015 first quarter. Work and Transportation (“W&T”) group sales increased mid-single digits percent during the 2015 first quarter with North American W&T sales increasing double digits percent while W&T outside North America declined partly resulting from lower Aixam sales in EMEA due to the impact of negative currencies.

Parts, Garments and Accessories (“PG&A”) sales increased 12 percent during the first quarter 2015 to $170.6 million compared to the same period last year.  The Company experienced sales increases in ORV, Motorcycles and Global Adjacent Markets driven by continued product innovation, increased integration of accessories, improved product availability and an ongoing focus on apparel sales through the Klim business, offset somewhat by weak snowmobile parts sales due to poor snowfall levels in key riding areas during the 2015 first quarter.

International sales to customers outside of North America totaled $153.1 million for the 2015 first quarter, down seven percent from the same period in 2014.  The decrease in first quarter sales was due to a 15 percent decline in sales in the EMEA region, partially offset by a 75 percent increase in Latin American sales and a six percent increase in sales in Asia/Pacific.

Gross profit increased 14 percent to $293.7 million in the 2015 first quarter compared to $258.4 million in the first quarter of 2014.  As a percentage of sales, gross profit margin declined 66 basis points to 28.4 percent of sales for the first quarter of 2015, compared to 29.1 percent of sales for the same period last year.  As expected, negative currency movements, primarily the Canadian dollar, along with unfavorable product mix, pressured gross margins during the 2015 first quarter, which was somewhat offset by lower product costs and higher pricing.

Financial Position and Cash Flow:

Net cash provided by operating activities was $4.2 million for the first quarter ended March 31, 2015 compared to net cash provided by operating activities of $44.7 million for the first quarter of 2014.  The decline in net cash provided by operating activities in the 2015 first quarter was the result of increased working capital requirements primarily from higher factory inventory, decreased accounts payable and lower accrued expenses offset somewhat by higher net income.  Total debt, including capital lease obligations and notes payable, at the end of the first quarter 2015 was $329.1 million.  The Company increased its quarterly dividend payment for the 20th consecutive year by ten percent to $0.53 per share and paid a total of $35.1 million in dividends to shareholders, and repurchased 571,000 shares for $86.3 million during the 2015 first quarter.  The Company’s debt-to-total capital ratio was 28 percent at March 31, 2015, compared to 35 percent a year ago.  Cash and cash equivalents were $111.0 million at March 31, 2015, compared to $101.8 million for the same period in 2014.

Polaris Trademarks Name ‘Victory Charger’

Just weeks after announcing that it had purchased the electric motorcycle division of Brammo (makers of the Empulse and Enertia), Polaris have lodged a trademark application for the name ‘Victory Charger’. The application goes on to mention that the name would be associated with an electric motorcycle (or parts thereof).

Polaris owns both Victory and Indian Motorcycles, but since purchasing Indian back in 2011, the Victory lineup has been quite neglected. As it currently stands, Victory sells 10 models that are all based on the same platform and which all use the same 1731cc V-Twin. No truly new models have come out for years.

We’re not entirely convinced of the viability of an electric cruiser which would be the likely outcome should Victory release an electric powered bike. While Harley-Davidson stole headlines with its Project Livewire concept, they weren’t silly enough to try and attract electric motorcycle fans with a cruiser, instead opting for a far more sporty (un-Harley-Davidson) machine. Perhaps we’re being a bit prejudiced but we’d expect cruiser fans to be the last of all demographics to embrace electric power.

Polaris however does like to push into new markets, the three wheeled Slingshot being a perfect example of Polaris being happy to mix things up. Upon its purchase of Brammo’s bike division, Polaris indicated that they would aim to begin production of electric bikes at their Spirit Lake, Iowa facility from the second half of 2015 though we expect this may be to produce Empulse’s and Enetria’s, rather than brand new machines.

Polaris Trademarks Name 'Victory Charger'

Owner of Indian Motorcycles Has Record Year

Polaris Industries, owner of both Indian Motorcycles and Victory Motorcycles has announced a record sales year. In fact, 2014 was the fifth successive record sales year and included an increase in revenue of its motorcycle division of 59 per cent – more than double any other product segment that Polaris deals in.

A big part of Polaris’ success was the release of the new 2015 Roadmaster and the rebirth of the mid-sized motorcycle (and well received) Indian Scout which so far has done so well that there’s a few months back order in some locations. Also released was the unique three-wheeled ‘motorcycle’, the Slingshot, although that particular product has had a few hiccups. Certain states are not happy with it’s designation as a motorcycle (which determine what license you require to drive it) and Polaris only yesterday issued a recall on the Slingshot due to roll hoops that do not meet hardness specifications.

“2014 marks our fifth consecutive year of double digit sales and earnings growth, an accomplishment which testifies to the innovative spirit and dedication of the 8,000 member global Polaris team. It is inspiring to see how they overcame obstacles ranging from negative foreign exchange impacts and a weakening European economy, to highly volatile oil and crop prices, to record a 19 percent increase in both sales and net income for the full year 2014. During the year, we added over thirty new vehicles to the Polaris armada, expanding and strengthening our portfolio with our largest ever new product introduction, while our strategic acquisitions and significant investments in our global manufacturing infrastructure allow us to both create and meet the increasing demand for our products,” explained Scott Wine, Polaris’ Chairman and Chief Executive Officer.

Overall, total revenue for the 2014 financial year was up 19 per cent to $4.47 billion while net profit was also up 19 per cent to $454 million. Polaris has forecast an increase in both revenue and profit for 2015 of 9 to 12 per cent. Polaris was also recently in the news after announcing the purchase of Brammo’s electric motorcycle division.


Polaris Acquires Electric Motorcycle Business From Brammo

Polaris, the owner of Victory and Indian Motorcycles as well as the manufacturer of a wide range of recreational vehicles including ATV’s and the three wheeled Slingshot has announced that is has purchased the electric motorcycle division of Brammo, makers of the Empulse and Enertia electric bikes.

The relationship between Polaris and Brammo stretches back to 2011 when Polaris first invested into the company. The Brammo Empulse and Enertia have received fairly solid reviews though most seem to favor Zero range of motorcycles which are closely matched on performance and price. The purchase by Polaris means that Brammo can now focus exclusively on the design, development and integration of electric vehicle powertrains.

In a press release, Chairman and CEO of Polaris, Scott Wine stated that “We have enjoyed our involvement with Brammo Motorcycles over the past three years, and our excitement about their industry-leading lithium-ion electric drivetrain technology has increased commensurate with their improvements in cost and performance. Polaris and Brammo share a goal of adding the most advanced and highest capability electric solutions to Polaris’ portfolio of leading powersports products.”

Polaris will begin to produce electric motorcycles at its Spirit Lake, IA facility in the second half of 2015. There’s no indication of whether these motorcycles will simply be rebadged Empluse’s and Enertia’s or if Polaris and Brammo have already been working together on a new range of bikes.