A Softail at retail
Harley dealers less likely to get premium prices
By RICK BARRETT
rbarrett@journalsentinel.com
Posted: Oct. 12, 2005
Harley-Davidson motorcycle dealers who have charged premium prices for bikes may have to throttle back some as customers refuse to pay more than the manufacturer's suggested retail price.
The market for used Harleys has cooled off, too, company officials said Wednesday during a conference call that outlined third-quarter earnings.
For the three-month period that ended Sept. 25, Harley earnings rose nearly 16% to $265 million, or 96 cents per share, from $229 million or 77 cents per share a year ago. Revenue increased 10% to $1.43 billion, driven by double-digit sales growth in the United States, Europe and Japan.
It was the company's best quarter in a year, and the results beat Wall Street's expectations. After the announcement, Harley shares closed at $46.90, up $1.30.
"They keep plugging away. They're consistently solid," said Kevin Tynan, an Argus Research analyst in New York.
Sales of Harley-Davidson motorcycles increased 12% in both the U.S. and Europe and 13% in Japan. While sales remained strong, the company softened its long-term forecast for wholesale unit growth to a range of 5% to 9% annually, and annual earnings per share growth ranging from 11% to 17%.
Harley was able to "gracefully back away from what had been too high of a range," Robin Farley, a UBS Investment Research analyst, wrote in a note to clients. "That said, we maintain that the actual near-term growth outlook should be 5 percent or below."
For years, many Harley dealers have charged more than the manufacturer's suggested retail price for popular Harley models such as Softails and Road Kings. Some bikes have been in such short supply that if one customer walked away, another would pay a premium to avoid waiting months for a new motorcycle.
But those days may largely be gone, said Harley CEO Jim Ziemer.
"In our research, we have found that many potential riders refuse to pay over MSRP for a motorcycle. In fact, more than 80 percent of the people interested in owning a Harley-Davidson said that having to pay more than the MSRP for one of our motorcycles was a reason they would not buy one."
Some Harley shoppers no longer have the patience for waiting lists, either. That's especially true for first-time buyers, who make up about 50% of the company's customers, according to Ziemer.
"When they come into a dealership and you tell them they're going to be on a waiting list for a new bike, they will probably go someplace else," Ziemer said.
The premiums over the manufacturer's suggested retail price have come down an average of 2% to 3% a year, according to the company. Some of the change has been fueled by higher dealer inventories, which give buyers more pricing leverage.
"It really irritates customers" to pay too much, or to wait too long, for a new bike, Ziemer said.
But some Harley dealers might not be getting the message on customer service, according to a recent report from Piper Jaffray & Co., a Minneapolis investment firm.
"For the past decade, Harley-Davidson dealers have essentially been 'order takers,' making easy money opening a crate, overcharging customers, and rolling a motorcycle out the front door to rich urban bikers," the report notes.
"In our view, the forward Harley-Davidson story only works if dealers learn how to build a relationship with customers, sell them a motorcycle, and service them long-term. The good news is that bikers have few alternatives to Harley-Davidson motorcycles. The bad news is that too many dealers have a lot to learn about client relations and selling a motorcycle. While many sophisticated and very smart dealers are evident, we would not place our bet on the dealer base yet. The bottom line: We would not be surprised to see 2006-'07 as a period of no increase to motorcycle production."
Prices of used Harleys have been slipping roughly 3% a year, according to the company.
"Let me set the record straight about used Harley-Davidson motorcycle prices," Ziemer said. "It makes sense that if premiums on new Harley-Davidson motorcycle prices have come down over time, so have the prices on used Harley-Davidsons . . . But even with used bike prices, to have any product that's several years old selling for close to MSRP is almost unheard of. So we still have the best of both worlds."
The decline in used bike prices could be greater than 3%, according to Piper Jaffray.
"Our fall 2005 survey study reveals that a 2- to 3-year-old bike today sells for a 16 percent discount to MSRP. We view the rapid decline to used bike prices as a leading risk factor to the Harley-Davidson story and the removal of a catalyst toward a new bike purchase."
Bloomberg News contributed to this report.
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