Monday, March 23, 2009

NYT: Harley Davidson (HOG) - You're Not Getting Any Younger

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The New York Times has a solid piece on one of our long time favorite "tells" on the over indebted US consumer. In fact, we tagged Harley Davidson (HOG) as one of the names we'd be watching [Sep 7, 2007: More Retail Tells? Harley Davidson and Office Depot] as the great middle of the nation is forced away from the conspicuous consumption culture society. In fact this broad theme has been the bedrock of areas we've been betting against [Stuff I've Been Negative on Since Fall 2007] at least in theory if not practice (we could not short individual names until the beginning of 2009).

In January 2008 [Jan 25, 2008: I Can't Believe this Pig...err HOG was up Today]

Talk about the prototypical company to short in this recessionary environment where the consumer is getting squeezed. I cannot short individual names, but there was a great opportunity to short this at $42 this morning (it's already down to $38). This is like the men's version of Coach (COH) - any spike, it should be shorted. At least for another year. I can't think of another company that better represents the excesses of credit (house ATM, over spending) we've had over the past decade.


It's been an interesting journey since; despite investors "knee jerk" reaction to the Buffet financing in February - as I wrote back then, the rate was egregious and a company who is borrowing funds at 15% is not in happy place.

[Jan 9, 2009: Harley Davidson: "Oink"]
[Feb 3, 2009: Buffet Provides Financing to Harley Davidson]
[Feb 12, 2009: Harley Davidson Cuts Dividend to Protect Cash]


  • SPUCK BENNETT’S dealership just outside Ocean City, Md., is cluttered with 65 shiny Harley-Davidson motorcycles, including the chrome Sportster and the sleek V-Rod. Last year, Mr. Bennett, 79, sold 200 bikes, down from 280 the year before. This year, sales have slowed to a crawl. “I haven’t seen anything like this in the 33 years I’ve owned a dealership,” he says. “We’re just trying to survive.”
  • Harley’s core customers are graying baby boomers, whose savings, in many cases, have gone up in smoke in the market downturn. Few are in the mood to shell out up to $20,000 or more for something that is basically a big toy, and the company, in turn, has not captured much of the younger market.
  • In a pattern similar to that of the housing bust, Harley goosed sales by luring many buyers with no-money-down loans. A subsidiary created about 15 years ago, Harley-Davidson Financial Services, made those loans and packaged them into securities to sell to investors. As the credit market skidded, so did this subsidiary.
  • As much as one-fourth of the $2.8 billion in loans issued by Harley-Davidson Financial Services last year were subprime, with interest rates as high as 18 percent. As the downturn took hold, some borrowers started defaulting on loans and investors stopped buying the securities, forcing Harley to write down $80 million of debt last year, analysts said.
  • Although it recently tightened lending standards, the company is still chasing buyers by offering credit. “It’s an unsustainable strategy to continue financing this way,” says Robin Farley, an analyst with UBS. “In the last few months, they’ve been running into a liquidity wall.”
  • CONCERNS about Harley’s future grew after the departures of its two top executives were announced. In December, Jim Ziemer, 59, said he planned to retire as C.E.O. this year. In early January, the company announced that Saiyid Naqvi, the head of the finance unit, was resigning after less than two years at Harley. Since September, Harley’s stock has plunged 70 percent, to under $13, compared with a 36 percent decline for the Standard & Poor’s 500.
  • In early February, Harley announced that Berkshire Hathaway, Warren E. Buffett’s company, would buy $300 million of its unsecured debt. (Harley reported total debt of $3.9 billion last year, more than double what it held in 2007.) In exchange for his good name and millions, Mr. Buffett demanded 15 percent interest from Harley on his investment (similar to deals he received from Goldman Sachs and General Electric when he invested in those companies last fall). Harley’s largest investor, Davis Selected Advisers, matched Mr. Buffett’s deal, pumping $300 million more into the company, also at 15 percent interest.
  • But even $600 million isn’t enough to enable the financial arm to continue making loans through year-end. Company executives announced that the finance unit needed a total of $1 billion for loans. While that’s one-third lower than last year, the executives are bracing for plummeting sales and continued frozen securities markets. (Federal Reserve TALF to the rescue! The country could not go on without $20K cycles roaring through the foothills - this is a much needed toy for the country to thrive) Congress included the motorcycle industry in a Treasury Department program intended to unclog financial markets by lending to investors buying securities backed by mortgages and other types of loans.
  • A DECADE ago, Harley executives made a decision that, along with the loan push, now appears to be a major contributor to its current problems. Determined to appease consumers who were stuck on two-year waiting lists, the company ramped up production. Last year, Harley built more than 303,000 bikes, up from 159,000 in 2000.
  • Some dealers also took advantage of heightened demand for Harleys to charge more, a move that may have done long-lasting harm. “Dealers were charging more than the suggested manufacturer price and it made Harley look greedy and jeopardized our brand that we spent a long time building,” Mr. Ziemer said. (I thought greed was good? or is that only in the movies? Or on Wall Street?)
  • HARLEY has lived through troubled times before. The company is 106 years old, after surviving the Great Depression and a major blow in the 1970s when sales grew sharply for cheaper bikes from Japanese makers like Honda and Kawasaki. The company even flirted with bankruptcy in 1985 as its foreign rivals soared.
  • When customers buy a Harley, they’re instantly a member of a family of zealous fans — guys with tattoos and unruly hair as well as lawyers and doctors. (The average household income of today’s rider is about $87,000.) (subprime borrowers come from all income classes)
  • But Harley’s longtime strategy of marketing to the boomers, which was a blazing success, is now backfiring. Its core customers have grayed, and they are buying new bikes less often. The average age of a Harley rider is 49, up from 42 five years ago. But company executives don’t seem outwardly worried by the lackluster growth among those 35 and younger, even as it takes steps to turn them into Harley owners. (uhh, they're sort of facing other more pressing issues i.e. food and rent)
  • As Harley keeps most of its focus on its aging consumers, rivals like BMW, Honda and Yamaha are attracting younger customers who seem less interested in cruising on what their old man rides. United States sales of light sport bikes, intended for the younger crowd, have increased more than 50 percent in the last five years, and the Japanese makers have popular cruisers of their own.
  • To curb additional loan defaults, Harley adopted stricter credit standards in November, requiring buyers to put down 20 percent. (good luck with that, down payments are so pre Baby Boomers)
No position

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