St. Louis, MO
Posted - 03/04/2011 : 12:20 PM
Many stock market analysts believe motorcycles are a sign of consumer confidence. If that belief is true, then the economy is slightly improving:
Harley's second quarter shipments were slightly up from first quarter 2010, and, as Harley announced in its 2Q earning report, at the end of the 2Q income was 71.2 million compared to 19.8 million at the same point last year. It seems things are looking up in the Beer and Bike city and thus for the nation.
And, despite all this, more analysts say hold-even sell-than buy. So why aren't they all woo, woo, go Harley? Let's look deeper at Harley's self-proclaimed road to renewing health:
Shipments up but not over 2009
Harley counts a shipment as a sale-that means the motorcycle is sold to the dealer. It doesn't mean it's sold to the consumer. It also cut shipments back severely over 2009 and lowered inventory.
Harley's Stock Price and Shipments at the end of the 2 quarter for each year:
In its second quarter report, Harley announced shipments were down 8.4% from the same quarter in 2009. Of course, that was in the throes of the Great Recession and an abysmal year for the Motor Company.
H-D would have to meet their goal of selling 53,000-58,000 motorcycles in the 3Q in order to hit their goal of shipping 201,000-212,000 motorcycles by the end of 2010. That's still 5%-10% down from 2009, which was significantly lower than 2008.
The growth in shipments over 1Q is good-but distracts from the real picture: shipments are worse than at the height of the Great Recession.
Dealer sales are down A report commissioned by analysts show that 66% of the dealers surveyed at the end of the second quarter said their sales fell by 20% in the 2Q.
If product is choking showroom floors and dealers are choking on the interest payments from that unsold stock, third quarter orders are likely to be lower especially since there's nothing particularly new or exciting in the 2011 models to driver consumers to buy. This makes it harder for Harley to make their shipment goal.
According to Matt Andrejczak in a July 30, 2010 MarketWatch article, "How short-selling sleuths spot accounting gimmicks on financial reports","Typically, inventories should rise at about the same pace as sales. If a company's inventories are growing faster than sales or expected sales growth, it's a clue that products aren't moving. In that case, gross margins could get squeezed."
Harley is aware of that-and set what TPTB thought were modest shipment goals. Dealers, clearly, thought they could sell what they bought but were wrong and inventories have grown, in many cases faster than sales.
Needless to say, paring shipments further is likely to end in more layoffs, which doesn't help the nation's recovery (or the workers, obviously).
But high unemployment is a major reason why dealer sales are down-H-D's core demographic has been hit hard by both job loss and uncertainty that their savings and investments are secure. And Harleys are high-end discretionary products.
Until Harley's base is securely employed, sales will continue to lag. But the slower the recovery goes, the slower sales and the slower Harley recovers. Hello, vicious circle. And this is true of a great many companies and entities in the USA that are busy cutting benefits and wages: they feed into the very process that undermines their future profitability.
Dealers have unhappy choices to deal with their inventory: They can-and would-cut orders for new product, which exacerbates the problems H-D already faces. They can cut prices, which also cuts into gross margin profits. It could also damage the brand-it's no longer a prestige product if it's on the sale rack.
Market saturation Harley's problems are exacerbated by market saturation (both here and in Canada). More and more analysts are realizing the Motor Company's inability to attract women, minorities and younger men and caution that it will affect the corporation's recovery. Nor is Harley making significant inroads in other countries.
These domestic and international failures are the result of the same branding that made the company such a success. It's an image that's dated, narrow and even a joke among the very people the company needs to attract. More so, the essential elements of motorcycling-individuality, daring, independence-have been successfully incorporated by Harley's competitors in their sport, tourer, adventure models in ways that appeal to the very groups Harley has been unable to attract.
Bottom line: when times were good, the leadership failed to find a creative way to translate the brand for a new generation and new concerns. It dwelt in the past even as it aggressively pursued questionable business practices (such as the subprime loan fiasco). Unless a marketing miracle occurs, Harley's market share will continue to shrink.
This suggests that, unless something dramatically positive happens in the economy in the next few weeks, both sales to consumers and shipments to dealers will be down in the 3Q. And that would mean that Harley may not make its already depressed and modest shipment goal this year. And that does not bode well for the Motor Company.
Both sluggish sales and market saturation affects the other two main streams of revenues: Motorclothes/accessories and Harley-Davidson Financial Services. How it affects the first, the Motorclothes division, is obvious-the second deserves a bit of explanation.
Harley-Davidson Financial Services At the height of the recession almost 30% of Harley's Financial Services loans were subprime and the Financial Services subsidiary lost about 60 million. This is where the 600 million dollar loan from Buffet and Davis Selected Advisers, L.P. went. A change in the subprime loan policy, the restructuring and infusion of cash has made the subsidiary profitable in the 2Q. For now. And, of course, since Harley loans the dealers money to buy its motorcycles Harley makes money from the interest on shipments dealers paid for but can't sell.
The bottom line is: Demand for loans is contingent on demand for bikes and it's going to be years before Harley gets back to even 2007 shipments. HDFS' recovery looks good on paper but under the surface lurks the hefty 15% interest on that 600 million loan that and the debt itself that is due in just three years.
Ultimately though, a motorcycle manufacturer has to sell motorcycles to be successful or even to stay in business. It's still behind.
As "Harley-Davidson: Easy Riding on Less Bad Results" published on July 20, 2010, stated, "At Ockham, we would not recommend buying Harley's stock following today's earnings report because "less bad" just is not good enough."
In the next entry we'll look at some troubling signs some analysts have found when they looked behind the numbers of the 2Q report. And what they worried about in July is likely to be even more true as the end of the 3Q approaches.