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Lots of Common Tread readers have commented here that Harley-Davidson should build some smaller and less expensive motorcycles to attract new riders to the brand. S&P Global, the credit rating agency, is basically saying, "Yes, but..."
Adding new and less expensive models to the lineup is exactly what Harley-Davidson plans to do as part of its new strategic plan, called "Back to the Bricks," under new CEO Artie Starrs. Harley-Davidson is bringing back the Sportster 883 and the units destined for U.S. sales will be built domestically, at the company's plant in York, Pennsylvania. The company also plans to sell the new Sprint model, which I expect to be a version of the single-cylinder X 440 built by Hero MotoCorp in India and already sold under the Harley-Davidson brand in other countries. But the credit rating agency expects these moves to cut into profitability and it lowered the rating on Harley-Davidson's debt as a result.
The change moves Harley-Davidson's rating from the lowest level of investment-grade bonds to the highest level of "junk" bonds. While the "junk" label may make the situation sound dire, the downgrade is relatively small and not entirely surprising, since S&P has telegraphed the move as a possibility since February.
S&P Global didn't issue the downgrade because the anaylsts believe the Sportster and Sprint models are a bad idea, exactly. "New lower-margin motorcycle models should modestly grow retail sales — particularly in the initial years following launch," the S&P note said. But while those models should increase unit sales, they will reduce profit margins. S&P noted that the company's gross margins were above 30% in 2022 and 2023 but are projected to be in a range from 25% to 30% over the next three to five years, putting the company in a slightly weaker financial situation. The S&P analysis is based on projections that the U.S. motorcycle sales overall will be flat in the coming years.
Increasing profit margins by focusing on more expensive models was the strategy pursued by previous CEO Jochen Zeitz but Starrs has steered the company in a new direction, bringing back the Sportster that many dealers want to have as an entry model, and also bringing the low-cost Sprint to the U.S. market.
No doubt there are already half a dozen videos on YouTube with provocative titles suggesting Harley-Davidson has been declared "junk" and is about to go under. While the company does face significant structural issues, it's also not going to declare bankruptcy any time soon. S&P Global notes that Harley-Davidson has plenty of cash on hand and credit lines it can tap if needed, and has also been cutting costs.
The downgrade is another headwind for Harley-Davidson, in that some institutions may no longer buy or hold its debt because the bonds are not considered investment grade. But it's more of an issue for Harley-Davidson's financial team than something that we, as motorcyclists or potential customers, will notice.
