Archive for October 2010

Harley’s 3Q results disguise the bigger problem

October 24, 2010

Harley-Davidson posted its third quarter report on the 19th and USA shipments were down 9.4% over the same quarter last year.

Harley didn’t mention that shipments year-to-date are down over 11% from year-to-date last year—which was, of course, the worst year of the Great Recession.

But Harley has fallen much farther than that in ways that have nothing to do with the recession. When YTD 2010 is compared with YTD 2006 shipments are down over 35%:

However, Wall Street was very impressed that Harley roughly tripled its profits over the previous quarter. How can that be when sales sagged like the turkey necks on its aging demographic? Primarily it was thanks to its Financial Services division. The Motor Company attributed the increase in 26% profitability to lower cost of funds and fewer loans going into default.

As this article rom Bloomberg.com stated, “Motorcycle demand is slumping, and that slump has yet to show signs of abating,” Brent Miller, an analyst with Gradient Analytics in Scottsdale, Arizona, said in an interview. “That’s a bit concerning. How long can a company continue to count on its financial services arm to fill in that gap of dragging demand?”

As I’ve said before—at some point a motorcycle manufacturer has to start selling motorcycles if its going to stay in business—or stay as a publicly traded company. 4Q 2010 is not going to be when it happens—the 4Q is traditionally the lowest quarter for shipments because demand drops severely and especially in snowbelt states. Harley is planning on 20% of its year-long sales to occur in the 4Q or an additional 40,000 some motorcycles at the minimum. That’s far lower than 4Q sales prior to 2009, however it is likely to be thousands more than they will ship this year.

And this is where Harley’s aging demographics and recession-fear (because it has technically ended) directly impact H-D growth for several years:

Harley has bragged for years that they were in the dream-selling business and that truism came back to bite them hard—and perhaps in the jugular—because of who exactly was buying that dream.

According to Harley, 88% of their customers are male, nearly 2/3rds of its customers are between 36-54, have a median income of over $84,000 and 3/4ths of them have at least one year of college. And most of them are married. And, as Harley alludes to in its annual reports, Harley’s base is overwhelmingly white. That—along with age—might affect Harley’s future profitability in ways no one anticipated:

The Harley and its lifestyle was not just a statement about who the rider saw himself as (or wanted others to see him as) but it was also the prestige brand—the high price (and previously the difficulty obtaining a Harley) also said something about his solid finances (or how he wanted others to see him.

In this way a Harley was the visible, tangible indicator the owner belonged to a specific kind of elite—those for whom the American Dream had become American Reality: they had the wife/family; house; comfortable lifestyle; and a future (or actual) retirement that would comfortably provide for themselves and their families. The Harley, then, was the embodiment of the American Dream: the rugged individual  who conquered the New Frontier and rightfully enjoyed the fruits of his (white collar)  labors.

As HDFS’s 30% subprime loans revealed and crushing default rate in 2008-2009 that was often more dream than reality.

However, Harley’s base was not the group that primarily suffered job loss or salary/hour adjustment. According to Pew Research, younger people and minorities have suffered the majority of job loss or salary/job adjustment Though white men certainly lost jobs, Harley’s core weren’t primarily hit by unemployment.

But, as many of my readers know, it’s not who is laid off that matters as much as the uncertainty that remains in the workplace afterwards. Those who still have jobs struggle with both gratitude they escaped the axe and worry they’re next.

However, the Pew Research Center found, “Middle-aged adults have gotten the worst of the downturn in house values, household finances and retirement accounts. Men have lost many more jobs than women.”

Iow, Harley’s core market has been hit hardest in the areas that make the buying decision difference—even if they still have a job.

And even though the market is now over the 11,000 mark and even though 401ks and mutual funds are generally recovering, the housing and job market haven’t—and neither has the kind of people that fit into Harley’s core:

According to the Pew Research wealthier, white, middle-aged and older Republicans and Independents with higher incomes think their personal financial situation will get worse—and that their financial health won’t recover for three to six years. And, of among all respondents, 39% believe the damage caused by the recession on the U.S. economy is permanent.

High negativity and low trust could keep customers who could afford Harley’s high prices away from the showroom long after the economy and housing improves and unemployment drops. And that would be bad news for Harley—and, as we’ll see, in more than one way.

Otoh, younger, less-affluent minorities with Democratic leanings are optimistic about their personal finances improving, believe things are getting better and the majority of respondents believe America will recover from the recession. And that optimistic profile matches the consumer who chooses sport and adventure motorcycles—or, to put it another way, the kind of motorcycles Harley-Davidson doesn’t manufacture.

They are ready, as Kawasaki says, to “Let the Good Times Roll” again. The kind of motorcycles these young optimists prefer are generally less expensive than Harleys. Iow, even with lower-paying jobs and an economy that’s not recovering fast enough for the pessimist Harley core these younger positive thinkers can afford to buy now. As a result, it’s very likely that Harley’s competitors will benefit low price and high customer optimism while Harley will continue to suffer for more than a year.

Beyond that, there’s two other possible effects that makes it even less likely Harley will recover and more likely it will become a niche manufacturer for ten or more years. That’s the next entry.