Harley, Short Sellers and Franchisees

Editor’s note: It’s time again for another article by guest expert, John Wyckoff. This month he looks at the sudden drop in the price of Harley Davidson stock, and what it means and doesn’t mean for Harley’s many dealers, virtually all of which are small businesses.

By John Wyckoff

Earlier this month (April 2005), Harley-Davidson stock (HOG) plummeted from a year’s high of $63.75 to a low on April 15th, of $45.80. What happened? Harley told Wall Street and their stockholders that they were going to reduce the number of motorcycles they plan to manufacture for the remainder of 2005. Adding to that they also said they would make less profit for the remaining quarters of 2005.

Let’s put things into perspective. The Dow Jones Industrial Average dropped from 10,500 a year ago to 10,088 on the 15th of April. At the same time the price of gasoline continues to rise at what can only be called an alarming rate.

Now, lets look at the rest of the auto, truck and motorcycle industry. The major American, German and Japanese auto and motorcycle manufacturers have resorted to substantial discounts and other incentives to bolster lagging sales.

Naysayers and short sellers were delighted with the drop in Harley-Davidson’s stock value. After all, they’ve been predicting a drop in the company’s stock for more than a decade. Finally, it happened.

Why? The supply and demand of Harley-Davidson motorcycles is closer to becoming in balance. For many years now the demand for bikes has been greater than supply. No matter how many bikes the factory produced each year, dealers and consumers wanted even more.

The disparity created a phenomenon new to the motorcycle industry. It’s called “market pricing.” Harley-Davidson was always against market pricing. To define that term, market pricing is a price well above the MSRP (Manufacturer’s Suggested Retail Price). In some cases dealers in high demand areas were asking as much as a $5,000 premium on a $19,000 motorcycle. Others asked for about half that but also insisted the buyer purchase several thousand dollars worth of accessories and apparel. Despite the demanded premium, sales continued to outstrip supply.

Harley-Davidson’s management continued to urge their dealers to sell the bikes at MSRP. They were concerned they could lose customers to other brands, most of which were selling for considerably less than MSRP. They were also concerned that the brand was in danger of becoming an elitist’s toy. New Harleys were selling for as much as, or more than, many new cars.

By the way, during the same time Harley was announcing the reduction in production for the remainder of this year they have not backed off their unit growth projections of 7 to 9 percent annually. That fact seems to have eluded Wall Street.

So what’s the reality of all this? Many market price dealers will now revert to MSRP. That alone should boost sales by making Harley-Davidson motorcycles more reasonably priced for those who resent market price sales tactics or those who simply could not afford or would not buy a bike for more than MSRP.

In the meantime Harley, will continue to have fewer bikes available than the market demand. It’s been the company’s philosophy, according to the previous Chairman of the Board, Rich Teerlink, to keep Harley’s “one short.” Rich was keenly aware of the perceived value of Harley-Davidson motorcycles. He was also aware that other companies have found over-production causes a disorderly marketplace. When supply exceeds demand prices fall, not only for new units — the value of used units suffers even more.

It’s a delicate balancing act — on the one hand keeping quality and quantity in check and on the other satisfying the consumer. Harley’s management are keenly aware of this and are willing to do whatever it takes to keep their products in high demand while assuring the financial success of their dealers.

I’m not a stock analyst, nor do I have a vested interest in Harley-Davidson. I do recall when the company stock first went public it sold for $11.00 a share. Shortly after that it slipped to $7.00. Since then the stock has risen to about $50.00 to $60.00 then split two-for-one four times. Those who’ve stuck with the company have prospered greatly.

Of the more than 600 Harley-Davidson dealers in the United States I suspect that the vast majority who’ve been in business since the “old” days have become wealthy beyond their wildest dreams. Imagine starting out with perhaps a $100,000 investment 20 years ago and now operating a retail store doing more than ten-million dollars in sales per year with a 20% gross margin of profit.

Is Harley-Davidson stock a good investment? I don’t know but I do know that if Harley is able to produce 400,000 units by 2007 and keeps adding new, young and aggressive dealerships, chances are their stock will climb past its 2005 high.

I do not see this as a trend impacting the dealers greatly. For any small (under one-hundred million dollars in sales) retail business it’s important to stay focused on the customer. The machinations of the stock market, the buying and selling and merging of corporations, should not have the small business owner bouncing off the walls wondering whether to bail out or if the franchise is becoming worthless.

All business is local. If the product is in demand the company that makes it will find a way to continue supplying it. Customer loyalty is related more to the local retailer and the personnel than to the brands of products offered.

UPDATE May 4, 2005:
Harley repurchased 20-million shares of their stock on May 2nd. They also increased their dividend. Zimmer is now the new CEO. Their stock is up from $45 to $48. I expect it to go up substantially by Sturgis time (big Harley Davidson rally in August in South Dakota). I expect to see the stock climb to $55. There are not many stocks that can boast such gains. We’ll see if I’m right.

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John Wyckoff, author of The Complete Guide to Profitable Powersports DealershipsJohn Wyckoff is the author of Mind Your Own Business, 2nd Edition: The Complete Guide to Profitable Powersports Dealerships. To read more of John Wyckoff’s guest articles like this one, visit our Experts directory.

Like this article? Read more by John Wyckoff: Chinese Competition’s Impact on the U.S and Powersports Industry Trends for 2005.


John Wyckoff John Wyckoff (now deceased) is the author of Mind Your Own Business, 2nd Edition: The Complete Guide to Profitable Powersports Dealerships. He founded Intersports Fashion West, a wildly successful powersports leather accessories business which he sold to Hein Gericke. In later life he appeared as a frequent speaker and consulted with motorcycle dealership owners on profitability and retailing.

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