Why Analysts Think Harley-Davidson's 3Q Earnings Will Remain Weak

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Part 5
Why Analysts Think Harley-Davidson's 3Q Earnings Will Remain Weak PART 5 OF 8

Why Harley-Davidson’s 3Q17 Margins Could Contract

Harley-Davidson’s 3Q17 results

In the previous part of this series, we looked at how analysts were expecting Harley-Davidson’s (HOG) third-quarter revenues to fall. Analysts don’t expect improvements in the company’s sales in North America, and international demand has been weak in the recent quarters, which could be the main reasons for these low estimates.

Now, let’s explore analysts’ estimates for Harley-Davidson’s margins for 3Q17.

Why Harley-Davidson&#8217;s 3Q17 Margins Could Contract

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HOG’s margins

In 2Q17, Harley-Davidson’s gross profits from its motorcycle and related products segment stood at $607.6 million, which reflected an increase of ~5.6% from its $575.6 million gross profit in 2Q16. The company’s second-quarter gross margins were at 36.5% this year, nearly flat as compared to 36.4% gross margin in the second quarter of the previous year.

Flat to weaker margins are one of the key concerns that Harley is currently struggling with. Although the company has demonstrated an ability to improve its home market margins, its margins from international markets continue to be weak.

Gross margin estimates for 3Q17

Analysts were estimating Harley-Davidson’s consolidated gross margin to have contracted to 31.2% in 3Q17 from 33.6% in 3Q16. Similarly, analysts estimate the company’s fiscal 2017 consolidated gross margins to contract to 34.5% as compared to 35.1% in 2016.

Harley-Davidson has increased its efforts to expand in the international markets in the last one year due to ongoing challenges in the US market. With this, the shipments of HOG’s low-priced motorcycle models have risen as the demand for such low-priced models is high outside the US. This could be the reason why analysts don’t expect major improvement in HOG’s margins in the next couple of quarters.

In the last few years, auto giants (VCR) including General Motors (GM), Ford (F), and Fiat Chrysler (FCAU) have been trying to improve their manufacturing efficiencies in order to protect profitability. Likewise in 2016, Harley also decided to reduce its manufacturing-related costs by improving efficiencies.

Continue to the next part where we’ll discuss what investors can look forward to from HOG’s 3Q17 earnings event.


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