Faced with disappointing earnings and declining market share, companies typically reduce prices to regain a competitive edge. Harley-Davidson (HOG), though, is anything but typical.
The motorcycle maker that's been synonymous with loud, powerful bikes roaring down the highway for more than 100 year is one of the world's most recognizable brands. But it has struggled lately in the face of heightened competition and the rising dollar. According to Harley-Davidson, now isn't the time to cut prices even though its market share fell 3.9 percent in the latest quarter.
"While we anticipated some level of share loss following the 13.4 points of market share gains in recent years," said Harley CEO Matthew Levatich during Harley's earnings call on Tuesday, "our market share over the last four quarters was more severely impacted than we expected as a result of the competitive environment and the inclusion of autocycles in the industry numbers." In case you're wondering, autocycles are three-wheel vehicles that are part automobile and part motorcycle.
"We aim to put out foot down and defend our leadership position," said Levatich in interview Wednesday with CNBC, adding that the company's "incredible brand loyalty" would be undermined if it starting discounting its bikes.
Harley still has a dominant market position, with a 52.4 percent share, and its rivals are willing to do whatever it takes to take sales from the Milwaukee-based company, including offering discounts.
Polaris Industries (PII), parent of Indian Motorcycle, is offering some models for no money down, with a complimentary five-year warranty and a $1,500 credit for accessories. That strategy is working. Polaris, which also makes snowmobiles and all-terrain vehicles, reported on Wednesday that its motorcycle sales surged 154 percent in its latest quarter to $160.4 million, fueled by strong demand for Indian, Victory and Slingshot bikes.
That far surpassed industrywide sales growth of midsize and heavyweight cycles, which rose in the low-single digits, according to Polaris. However, the company's stock sold off sharply (down 10.2 percent to $107.83) on Wednesday after it reduced its 2015 revenue growth forecasts from a range of 10 percent to 12 percent to a range of 10 percent to 11 percent.
"Basically, Polaris and some of these other guys have brought their pricing down to the point where a used Harley was competitive with their new bikes," said Brad Lamensdorf, who manages AdvisorShares Ranger Equity Bear ETF, which is shorting Harley, meaning he profits when its shares fall. He added that Harley will need to start pricing "more aggressively" to counter these market trends.
"We really felt like this premium that Harley-Davidson had over the rest of the industry for a long time, was part of the feel-good phenomena from the baby boomers," he said, adding that boomers are now trading in their bikes for La-Z-Boy recliners.
Harley remains unmoved by such arguments. Instead, it plans to rev up demand for its bikes by ratcheting up spending on "customer-facing marketing" by 65 percent in 2016 compared with this year. It also will hike outlays on new product development by 35 percent. To pay for all this, Harley says it will cut an undetermined number of jobs.
Longbow Research analyst David S. MacGregor, who has a "neutral" rating on Harley and Polaris, argues that Harley should stick to its guns about discounting.
"It's definitely the right call to avoid discount and heavy rebating, and focus more on delivering a better product, a more relevant product," he told CBS MoneyWatch, adding that executing such a strategy is easier said than done.
Harley shares, which have dropped 29 percent so far this year, fell by 2.5 percent on Wednesday to $47.03, continuing Tuesday's sell-off. Investors sent the company's shares into a skid after it slashed its outlook for 2015 shipments.