Harley-Davidson (NYSE:HOG) really doesn't need this massive motorcycle recall right now.
The bike maker has bounced back strongly from the collapse in sales it suffered during the recession. Though the 260,000 units it shipped last year is not anywhere near the heights it hit in 2006, when it shipped 350,000 units, it still marked a healthy recovery, and its recent unveiling of the 2015 lineup set the stage for another bang-up year.
So, word that Harley is recalling its entire lineup of 2014 touring bikes, as well as its trikes and custom-designed bikes, could cause that surge to stall.
A case of road rash
The issue itself seems relatively minor, all things considered. The clutch can develop a tear that would allow the bike to creep forward when the rider intended to be at a stop, which could cause it to crash, most likely by toppling over. Harley has reported 19 such accidents, and though there have been three injuries associated with it, they've all been minor. The fix is apparently simple as well, requiring the clutch assembly to be rebuilt, which takes less than an hour.
Really, the problem lies with the fact that Harley recalled a smaller number of motorcycles last year with the same part. While it only affected 29,000 bikes then, it was a far more serious issue, and a "Do not ride" letter was sent to owners along with a "Do not deliver" letter to dealers until the problem was fixed. Why can't Harley get its clutches right?
Objects are closer than they appear
Competition is heating up this year in ways Harley hasn't experienced in a while. Polaris Industries (NYSE:PII) is out with a number of new models that seek to take on Harley head-to-head, and the resurrection of its Indian nameplate is turning riders' attention in a way that its Victory bikes couldn't.
Last quarter, Polaris reported that sales in its motorcycle division doubled year over year to $103.7 million, driven largely by new Indian sales, demand for which was up 50%, and outside North America, where Polaris said it was gaining market share, sales almost doubled as well.
Now, those results are about what Harley makes in a week. Its own second-quarter motorcycle sales were up 16% as revenues hit $1.48 billion, so we're talking orders of magnitude larger than what Polaris is doing.
But sales, while still growing, are growing at a slower rate than they have been. Harley can't afford to have an image of shoddy workmanship since it took a long time for the bike maker to shake off that perception following its ownership by AMF. Back then, there was a running joke that you had to buy two Harleys: one to ride and one for parts.
It was the sale of the company in 1981 that marked the start of its comeback, and it's been a heck of a ride since then. It can't afford to go back.
Not the mother of all recalls
The recall covers Harley's 2014 Touring, CVO Touring, CVO Softail, and Trike motorcycles. It's also recalling about 1,400 of its 500 and 750 Street bikes from the 2015 model year for a possible fuel tank leak.
Earlier this summer, it recalled more than 60,000 2014 Touring and CVO Touring motorcycles because of a problem with the anti-lock braking system that caused the front wheels to lock up without warning. In August, it recalled over 4,500 bikes for a faulty ignition switch.
This year's recalls still pale in comparison to the massive 300,000 bike recall issued in 2011, but that was simply a rear brake light problem.
In its annual report filed with the SEC in February, Harley said that over the last three years, it had initiated 16 voluntary recalls that cost it some $22 million, almost half of which naturally came in 2011. While the cost decreased markedly to $4 million by the end of 2013, it jumped to almost $7 million in the second quarter, and with the latest recall, we're going to see those numbers rise once more.
For a company reporting $308 million in quarterly net income, even if the liability expenses doubled, it's still a pretty insignificant amount, but it's the credibility issue that becomes more of the problem. Polaris said its North American retail sales fell in the mid-single digits for its Victory brand primarily because of a recall related to a faulty crankcase that could cause it to seize.
Up on blocks
Quality control issues are bedeviling the auto industry, and though manufacturers are on target to sell more cars this year than ever, recalls are plaguing them, and General Motors alone has recalled nearly 29 million vehicles. At one point, it seemed the carmaker was issuing recalls every week.
If Harley-Davidson wants to avoid having the same kind of reputation for shoddy workmanship that seems to shadow some automakers (and raises the ghost of Harley's past), it would do well to get a tighter grip on this issue and instill once again the pride of craftsmanship that should be the bike maker's hallmark.
Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends General Motors and Polaris Industries. The Motley Fool owns shares of Polaris Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.