"Back to Bricks" low-price strategy raises profit concerns, Standard & Poor's cuts rating on Harley-Davidson, Inc. (HOG.US) to junk.

On Wednesday, S&P Global Ratings announced the downgrade of American motorcycle manufacturer Harley-Davidson, Inc.'s long-term credit rating from investment grade BBB- to BB+, falling into junk status. Standard & Poor's also downgraded the company's unsecured debt, its financial subsidiaries, and medium-term notes, and removed all ratings previously placed on negative credit watch list on February 11, 2026. The outlook for the ratings is stable. The direct trigger for this downgrade was Harley's "Back to Bricks" strategic plan announced in May of this year. The plan aims to introduce a series of low-cost models, including the reintroduction of the Sportster and the all-new model Sprint, with entry prices of around $10,000 or lower, expected to be launched by the end of 2026 to 2027. The goal is to attract new riders and regain lost market share. Data shows that Harley's motorcycle registration share in the United States has dropped significantly from 49.1% in 2019 to 34.5% in 2025. S&P expects that if the new products are successful, the share is expected to rise to around 45%. However, S&P expressed deep concerns about the profitability of this strategy. The rating agency estimates that because the company is currently prioritizing market share over individual bike profits, its adjusted EBITDA profit margin will remain at a low 5% to 6% in 2026 and may take "several years" to recover to close to 10%. For comparison, this indicator exceeded 16% in 2022 and 2023. The company's own three to five-year targets are only 10% to 12% for EBITDA profit margin and 25% to 30% for gross margin, all significantly lower than previous levels. Additionally, there are multiple financial pressures accumulating. S&P pointed out that restructuring costs and tariff costs will erode profits in the short term. The company has set aside about $15 million related to severance-related restructuring expenses in the first quarter to achieve a $150 million annual cost reduction target. At the same time, the cost impact of steel and aluminum tariffs is expected to reach $75-90 million in 2026, lower than the previous estimate of $75-105 million. Management believes that the impact of tariffs will peak in 2026, and the tariff pressure is expected to ease as trade policy adjustments and some motorcycle components receive new exemptions. Chief Executive Officer Artie Starrs, who took office in October of last year, is leading this pricing strategy transformation, aiming to increase sales with more affordable prices, thereby driving high-profit parts, accessories, and personalized customization business through a larger vehicle ownership base, ultimately restoring overall profitability. Despite the downgrade in ratings, Harley's liquidity remains solid. As of the end of March 2026, the company holds approximately $1.8 billion in cash and cash equivalents, and has a commercial paper program capacity of over $2 billion, with long-term net debt of approximately $1.63 billion. S&P stated that the stable outlook reflects the company's ample liquidity position and its commitment to maintaining a relatively low level of internal leverage. Currently, other rating agencies have a relatively relaxed attitude towards Harley: Moody's Corporation's ratings are one notch higher than S&P, while Fitch's ratings are two notches higher, both of which are still in the investment grade range.