Four wheels move the body, two wheels move the soul.
That’s how many Harley-Davidson, Inc. (HOG) motorcycle owners describe their spiritual connection with their bike and the open road.
HOG Chief Financial Officer (CFO) John Olin hopes to enjoy a similar feeling of exultation after buying 13,500 shares of the motorcycle maker’s stock at $19.02, laying out more than a quarter-million-dollars. (1) Since 2012, the company’s main numbers cruncher used HOG shares as his personal ATM, cash out seven times. In total, he unloaded 157,290 shares, collecting a little more than $7.4 million. (2)
Buying Harley stock wasn’t in Olin’s playbook until last week. Maybe it’s a quarter-million-dollar vote of confidence in new Chief Executive Officer (CEO) Jochen Zeitz. The new top Hog is credited with turning around Puma after the athletic apparel and shoemaker was on its back with corporate rigor mortis beginning to take hold.
Zeitz put his money where his mouth is too, buying more than $3 million of HOG since the start of May 2020. (3) Prior to taking on head honcho status, he was also a Harley ATM user, withdrawing almost $350,000 as a director.
Now, the dynamic duo is hoping to ride the HOG higher. Let’s take a look at the company’s most recent annual report to see where the company might look to improve so that Wall Street can take the stock in the right direction.
In our view, these are three of the most pressing items for Olin and Zeitz to turn around.
The first thing we noticed is that HOG’s motorcycle sales in the US dipped slightly more (-5.2%) than the decrease in the number of new registrations (-4.1%). Then we see the number of registrations in Europe went up 7.1% while the company’s European sales fell 6.6%.
What does that tell you?
It tells us the Harley brand isn’t strong with new motorcycle riders. While the name is losing its luster, management cut its selling & administrative expense budget (which includes market/advertising) by a touch more than 11% as revenue slipped 6.2% in 2019 compared to 2018.
We don’t profess to be marketing gurus other than knowing that effective advertising works. It might hurt near-term results, but management might be wise to increase their marketing budget. Harley has a rich tradition that few other motorcycle makers can match. Perhaps they can find a way to use their legacy to re-build their reputation and appeal to new bikers.
The company also needs to reduce their cost of goods (COGs). While sales dropped 6.2%, the COG line item inched down just 3.6%, increasing to 60.24% of sales in 2019 from 58.63% in 2018. That’s the exact opposite of what we would like to see, which is COGs falling in-line with sales, at a minimum.
To his credit, Zeitz says cutting costs is a major goal for him as CEO. Hopefully shareholders will see this income statement item come into line with sales.
Better inventory controls are essential, in our view. Inventory rose 8.5% as sales slowed. That’s bad news as the company will likely need to offer incentives to buyers to move product. Lower prices mean lower profit margins, increasing the likelihood of missing Wall Street’s expectations.
In our opinion, Harley-Davidson, Inc. (HOG) stock could be in for a ride higher if management can re-build the brand, cut COGs, and use real-time data to effectively manage inventory.