One Wall Street saying that resonated with me early in my career was
Do not short stocks where consumers tattoo the company logo somewhere on their body.
This held true through much of the 90's and has also held true through the 2009 bottom, as shares rose from $25 in 2011 to a recent high of $74 in 2014, as shares were difficult to have in a short portfolio.
Yesterday, though, Harley-Davidson Inc. (HOG) guided lower in their Q1 earnings call, sending shares lower by 10% during the day's trading. There are many reasons this iconic American brand is trading lower – many point to the fact that the competition have such a huge currency edge with the explosion of the dollar that direct competitors of Harley are discounting many models by as much as $3000 per unit.
“Given the first-quarter retail results and ongoing, increased levels of aggressive competitive discounting in the US, which we expect will continue, we are taking the precautionary step of lowering our estimated growth rate for full-year motorcycle shipments in order to manage supply in line with demand and protect the premium nature of our brand,” Chief Executive Officer Keith Wandell said in a company statement.
Union Busting Deflates the Harley Brand
Milwaukee-based Harley has had production issues in its aging Tomahawk, WI plant where they make windshields, touring accessories and essentially every part aside from the mainframe. However, the reality is that the union busting that took place in Wisconsin in 2010, where they eliminated the union wage scale and filled jobs with "casual" employees who received no benefits and low wages, is finally catching up to Harley.
This was evident when I did tours of the Wisconsin plants and talked to both casual and legacy employees. The new employees hated the veteran line workers, and conditions at the "Somo" plant in Tomahawk were terrible. Yet, because jobs were hard to find in this small Wisconsin town, everyone was clamoring for these $14 per hour jobs, giving Harley a seemingly endless supply of low wage workers.
For the company, the problem is that the quality of the product fell significantly over the four to five year period since the union busting began. I don’t think this is what Willy Davidson would have wanted, but had the company not succumbed to the terms, everyone would have lost their jobs and Harley would have closed these plants in Tomahawk, WI.
So What’s Next for the Iconic Motorcycle Brand?
I believe the axiom of NOT shorting Harley still holds true. The brand has such incredible loyalty from cyclists, and the success will come from the tattoo generation of today, who are replacing the baby boomers who own Harleys. As the rally in the dollar nears it's end, Harley will ramp up production and fix the morale in Wisconsin.
If you attend any of the rallies that revolve around Harley, you will find that the riders are a 50-something swath ranging from doctors and lawyers to cops and mechanics, and they love their bikes. They love everything about them – they love the way they ride, and they love the way they sound. I think the biking enthusiast will always consider Harley the pedigree brand for motorcycles, and the younger generation will follow their parents – both in purchases and tattoos.
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