St. Louis, MO
Posted - 02/28/2011 : 8:25 AM
Harley has been the darling of MBA programs and marketers since it's extraordinary turnaround in the mid-1980s after management bought out the company from American Machinery and Foundry Incorporated (AMF).
AMF, who had bought the company in 1969, had taken the already legendary brand and nearly destroyed its viability with both too fast expansion, shoddy production and poor quality control. Harley's reputation by the early 1980s could be summed up by the old joke "most Harleys ever made are still on the road...waiting for the tow truck to pick them up."
It took several years to turn Harley-Davidson around and restore its mechanical reputation and another decade to reinvent its public image into one seen as a highly desirable, premium and exclusive lifestyle purchase. This was reflected in its stock price:
On October 16, 1986-five years after the AMF buyout-the stock was trading for $0.25 a share.
Ten years later to the day it was trading for $11.68.
Jump ahead to Oct. 16, 2006, and the price had risen to $66.70
A few months after that, the stock hit its all-time high of over $72 per share.
That remarkable turnaround and growth was rewarded: In 2001, Harley became the only motorcycle manufacturer elected to the Marketing Hall of Fame-a prestigious award sponsored by the New York American Marketing Association, which honors "brands that have established themselves as true icons by achieving enduring, sustained success in the marketplace and that have contributed to the marketing discipline through their pioneering practices."
It joined brands such as Barbie and Budweiser, Coke and Marlboros, McDonald's and Visa in the "Classic Brands" category that only honors brands "that have enjoyed continuous success for 25 years or more". Harley then celebrated it's 100 year anniversary in 2003. It certainly seemed as though its star would continue to rise.
But by January 27, 2009, HOG stock hit a low of $11.69-almost the exact same price as it was in 1996.[i] Like many of the corporations on the stock market, Harley appears to be rebounding. It closed yesterday, Friday, October 15, 2009 at $27.86. While that's quite a comeback, it hasn't come back as much as analysts predicted it would at this point. And, as Harley's press release stated, it plans on even more draconian measures to stop the bleeding-including cutting production even more.
Nowhere, perhaps, is the fall of Harley more evident than what the third quarter motorcycle shipments reveal: In 2009 only 132,849 H-D's were shipped compared to 226,898 in 2008.
The easy answer to Harley's Icarus-like descent is because people don't buy discretionary luxuries in a recession-particularly one that's as expensive as many cars. Once the recession is over, many stockholders believe, Harley will rise again. They particularly believe that after two analysts RBC Capital and Wells Fargo & Co. upgraded the stock to outperform last week.[ii] All that it takes is continuing to restructure operating costs, selling MV Augusta, dropping Buell, and Harley rebuying stock and all will be well. "It was the economy, stupid" is the thinking.
But as most easy answers are, the recession explanation doesn't hold up to examination:
Historically, motorcycle sales aren't related to recessions
AMF bought H-D in 1967 when the company was at the point of bankruptcy. By the early-mid 1970s, the country was in a recession. Interest rates rose throughout the decade to a high of 20% and unemployment was 9% for many months in mid-decade. However, motorcycle registrations jumped from 2.8 million in 1970 to almost 5 million in 1975-a 76% increase.
In the early 1980s, the country was very much like today: in a recession and Harley sales were declining. However, just as in the 1970s, motorcycle registrations were at their highest-a height not equaled for another 20 years even though the prime rate was over 15% and unemployment soared to 10.8% in the autumn of 1982 and stayed there for months.
Clearly, the recession wasn't affecting motorcycle registrations. Instead, the reverse seems to be true: in the mid-late 1980s, as employment improved, the prime rate dropped motorcycle sales and registrations dropped swiftly.
Rather, Harley's difficulties were caused by AMF's blundering mismanagement in the 1970s-a blinding ignorance of what the motorcycling community valued and how to position the brand as well as abysmally low production and quality control standards-that almost drove the company into bankruptcy. It was also a decade of foolish choices-Harley's move into snowmobiles, lawnmowers and boats-all of which ultimately failed to transfer brand loyalty. As in this current recession, Harley's bad shape in the 1980s recession coincided with it rather than was caused by it.
In the brief 1990-1991 recession, the prime rate was about 10%. Unemployment continued to rise to a high of 7.9% by mid-1992. In the very year that unemployment was the highest (and didn't drop to roughly 5% until 1997) was the same year the most recent motorcycle boom began.
While not all experts would agree there was a recession in 2001, it met many of the requirements[iii] and was characterized by extensive layoffs, outsourcing, and a jobless recovery. Once again, during the "recession" motorcycle sales and registrations zoomed upward.
In short, in four out of four of the past economic downturns, motorcycle registrations did not mimic the recession. Rather registrations rose during or remained high or peaked during the worst of the recession and fell as the economy improved. Investors in any motorcycle manufacturer would be wise to be aware of that.
That doesn't mean that there weren't boom and bust cycles in motorcycle sales-it's just that they weren't easily associated with the broader economic cycle.
Then what's going on with Harley-Davidson?
No doubt about it-the precipitous plunge of HOG stock price last fall through early February had a great deal to do with last fall's Wall Street crisis-all kinds of stock prices fell as the market sought a new bottom. But no matter what problems Harley had and has, it didn't deserve to fall that far that fast. But it did deserve to fall quite a bit because recession are sooner ended than motorcycle bust cycles.
In many ways, the recession masked what was already occurring-Harley was already slowing down and would've continued to slow down quickly even if there hadn't been a recession. The recession simply masked what would've happened anyhow and will continue to happen for a number of years.
A couple basics must be recalled: The summer of 2008 saw soaring gas prices, but unemployment was barely edging up.[iv] While heavyweight motorcycle sales dropped, scooter sales soared and training classes were jammed in many states (except Harley-Davidson's Rider's Edge classes) But it wasn't just Rider's Edge that was suffering-simply put people who want to save money on gas don't buy motorcycles that cost as much as new cars. Harley had nothing to sell that economy riders wanted and they were the ones buying.
Motorcycle shipments also traditionally go up in the second and third quarters. The second quarter corresponds with the beginning of the riding season and the third quarter shipments reflect the new model year.
As you see, however, Harley's 2009 second quarter was down 27.57% and third quarter shipments were down 27.39% from 2008-but 2008's 2Q were down 15.55% and 3Q were down 13.67% from 2007 and the 3Q was down 10.8% from 2006.
Japanese motorcycle manufacturers' 2008 USA 3Q shipments were also down (15.13%) from 2007-which were also down from 2006 (27.8%). According to the chart on webbikeworld (scroll way down till you get to it) [ v] 2005 marked the apex of this latest cycle for motorcycle sales-even though, according to the Bureau of Traffic Statistics registrations continued to rise.
However many economists believe the current recession began at the end of 2007 by-almost three years after motorcycle sales peaked and began to fall even though all manufacturers were writing subprime loans and credit was easy.
In fact, if the major manufacturers hadn't done the exact same thing-writing too many subprime loans and securitizing those bad loans-that mortgage lenders did with houses, the boom would've turned bust that much sooner.
Iow, recessions don't drive motorcycle boom and bust cycles-something analysts and stockholders would be wise to keep in mind. Just because the recession is over and unemployment drops doesn't mean that motorcycle sales will rebound for several years. In the USA, the boom and bust cycle arise from what's happening in society and are culturally driven responses that consequently have economic effects-more on that one day.
Much of Harley's suffering now and in the future, however, comes from an abysmal lack of understanding of the brands and mismanagement of them-and that lack of understanding of what makes someone ride and how to manage the brand will doom them in the next major boom. That's what the next entry is about.
[i] Though it closed that day at $12.35.
[ii] Wells Fargo, incidentally, received $25 billion in TARP bailout funds and hasn't repaid it yet-and, of course, Wells Fargo Advisors was Wachovia Securities-part of a company that lost billions in reckless risk-taking. So, whether they're as good at analyzing stock as they were at managing the rest of their business is anyone's guess
[iii] In the USA there were not two consecutive periods of negative growth, which is why the period in 2001 was not called a recession.
[iv] Unemployment was still below 6% in July, 2008 and still only 6.2% in September and only after that began to go up rapidly.
Otoh, BMW, Ducati and Aprilia sold more motorcycles than previously.