It wasn't long ago Harley-Davidson (NYSE: HOG) not only ruled the road but had the respect of brand managers everywhere. Its products were unique, limited and sexy, qualities marketers dream of. But the Great Recession and capacity expansion proved to be too much for Harley to overcome as it reported its first quarterly loss in 16 years in 2009.
As results suffered, the stock tanked, and Harley undertook a big restructuring plan like much of the auto industry. The plan was updated last week and after spending $221 million in 2009, Harley expects to spend $295 million to $330 million over the next three years, eventually resulting in an estimated $290 million to $310 million in annual savings while increasing flexibility. The savings and flexibility come, in part, from union workers who have either been laid off or moved to temporary status and the state of Wisconsin who agreed on a $25 million tax incentive to keep jobs in the state.
Cost-cutting at Harley is a good step, but I am still concerned about the motorcycle market and Harley's cache among an aging demographic of loyalists. Younger riders often go toward smaller sport bikes built by diversified manufacturers Honda (NYSE: HMC), Kawasaki, and Yamaha. A bigger point of concern is that the core demographic is getting too old and not trading in for new bikes. Plus, if you're given the current economic environment, it's tough to make a case for a discretionary purchase like a Harley over a vehicle that can actually carry a load of groceries. Ford's (NYSE: F) improving conditions could be coming at the expense of Harley.
An undiversified product line and high prices haven't helped Harley, but its problems hinge around overcapacity. In its heyday, Harley planned to sell 400,000 bikes a year. This year, it is projecting to build just over half that. The effect of Harley's ill-fated expansion is its bikes are no longer hard to come by, killing pricing power, brand equity, and margins.
Harley's stock has come back nicely since March 2009 when it hit bottom, but investors should be concerned about $5 billion in net debt hanging over the company and lagging demand. A lot of dominos will have to fall for Harley to get back to the strong results we saw in the mid-'90s.
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