As a Harley-Davidson lover and owner, one thing I noted during the bubble years of the early-to-mid 2000s was the influx of mega-gaudy Harley-Davidson complexes – huge, new, brick buildings with massive square footage, casting an immense footprint on pricey, suburban land. Harleys were flying out of the door of these dealerships, thanks to ultra-low (or no) interest rates and other monetary policy interventions. I watched folks turn around one-or-two-year-old Harleys for new ones, on impulse, like they were buying a pack of gum. The company’s finance arm, Harley-Davidson Financial services (HDFS), was chasing subprime borrowers who liked to overspend on toys they couldn’t afford. This careless lending led HD to take on a huge subprime portfolio, and as a result, the company booked a $6.3M write-down because of default rates.
The good times went on for years until 2007-2008 came upon us and a financial meltdown and prolonged recession forced consumers to stop spending money they didn’t have. The HD dealers were hurting, and the company spiraled in 2009. Twenty+ HD dealers closed in 2009, the company dropped its Buell line, and it laid off workers. 2009 financial results for Harley-Davidson show the following:
- Revenue down $1B from 2008
- Income decreased year-over-year from $684M (2008) to $70M (2009)
- An earnings per share drop of 89% from 2008
- A 4th quarter loss of $147M
- In the 4th quarter 2009, HD shipped 20,000 motorcycles in the US, compared to 57,000 in the same quarter in 2008.
Everyone in the HD world was so heavily over-expanded that when the meltdown became manifest, the company’s margin was being eroded by its massive fixed costs attached to that very expansion activity.
The problem HD faced was that consumers need discretionary income to buy $15k+ motorcycles, expensive accessories, and desirable, overpriced clothing, but the company’s buyers were losing their ability to borrow and spend on non-essentials. In 2008, Americans in some sectors were still consuming, refusing to believe that the meltdown was anything more than a temporary blip in their spending frenzy. By 2009, it became obvious to the average consumer that the party was over. A chart in the WSJ shows Harley-Davidson hit its peak pre-bubble bust in 2006-2007, with the bottom falling out in 2009.
Roll forward to 2016. HD reported a 43% decline in 4th quarter 2015 profit (from the 4th quarter 2014) after a relatively unremarkable first three quarters of 2015. The company announced, in January, that it was rolling back its shipment forecast for 2016. HD stock also lost 30% of its value in 2015. And just last week Harley-Davidson announced another stock buyback, and that is on top of the repurchase authorization its Board approved in June 2015. Moody’s had deemed the June 2015 share repurchase a “credit negative event,” however, there was no credit rating action taken against the company. The graph below shows HD’s 12-month stock chart and its precipitous decline.
Crain’s Detroit just did a story on a local HD dealer, Motor City Harley-Davidson, and its project to construct a new 106,00 square foot facility in Farmington Hills, MI, a suburb of Detroit. The ostentatious complex will include a brew pub, gourmet market, outdoor movie theatre, and a riding academy. And this is in spite of the company’s late 2015 financial performance, sagging market indicators, and the company’s revised forecast numbers. Due to all of the above, I am therefore seeing Harley as a honking bubble risk that may go boom, especially in light of its stock buyback frenzy.