As it continues to struggle with its sputtering performance, Harley-Davidson (NYSE:HOG) announced two long-overdue steps aimed at returning the company to the halcyon days of two years ago: Shutting down its Buell line and selling off the legendary high-performance brand MV Augusta. The moves will cost the company millions, but will allow it to refocus on its core business, the cruiser bike market.
Buell represented the company's foremost attempt to break out of the cruiser mold. Harley bought the name and product of inventor Erik Buell in 2003 with the hope of breaking into new markets, including sport (high performance) and standard bikes. However, a lack of acceptance by the company's dealer network and inadequate investment in building the brand kept Buell from finding any real traction. According to CFO John Olin, the Buell brand is not accounted for separately on the Harley-Davidson books, and therefore the company has chosen to kill it rather than sell it off. Another explanation might be that the brand has little to no value.
MV Augusta has long been known for the high performance sport bikes that once dominated Grand Prix racing, but in recent years the brand name has changed hands several times. Harley-Davidson bought MV Augusta, now a very minor player in the market, in 2008 for $109 million, a move that mystified many onlookers at the time. Now, the move is even more mystifying when you consider that the company expects to incur $125 million in one-time costs in order to unload both of these losers.
The company's third quarter results demonstrate the need for a more focused and efficient company. Sales of Harley-Davidson bikes were down 22.9 percent from the same period in 2008. Revenue for the quarter dropped 22.1percent year over year, while distribution fell by 27.4 percent. Earnings per share were 10 cents shy of analysts' expectations of around 21 cents a share. To help reduce dealer overstock, the company said it would be cutting back on manufacturing in the fourth quarter.
In the webcast that accompanied the company's third quarter report, CEO Keith Wandell continued to talk tough about negotiations with the union at Harley's York, Pa. manufacturing plant, stating that the company would decide in December whether to keep the plant in operation or move work to another (read: cheaper) plant. Blue-collar workers have long been the most fervent supporters of the Harley-Davidson brand, so this confrontation is a double-edged sword for the company, and speaks to the financial pressure that the economic downturn has put on its balance sheet. Unlike its competitors, the uniquely American brand cannot offshore its business without risking damaging backlash from its customers.
Several questions were asked during the conference call about the company's troubled Harley-Davidson Financial Services unit, which recorded an operating loss of $31.5 million for the quarter. In response, Wandell said the company was looking at many alternatives for the unit.
While Harley-Davidson remains constrained by its narrow identity as a cruiser bike company, unloading two very marginal brands can only help the company to refocus. The real question remains, however, just how much unfulfilled market for its machines remains? And how soon will the economy recover and credit loosen up to the point that people are once again willing to spend on what many perceive as a luxury item?
Tom Barlow is a former Membership Development Director for the American Motorcyclist Association.
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