Ten years ago: As Uncertain Times Grip U.S., Americans Turn to Pricey Toys
Easy Credit, 'Nesting Instinct' Drive Rise
In U.S. Sales of RVs, ATVs and Jet Skis
By JOSEPH T. HALLINAN
Staff Reporter of THE WALL STREET JOURNAL
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Few Americans really need an all-terrain vehicle, that half-jeep, half-go-cart contraption that can ride up the sides of mountains. So when hard times strike, sales could be expected to drop at Polaris Industries Inc., maker of ATVs and other adult toys.
But with the economy recovering only haltingly and the stock market suffering withering declines, Polaris is thriving. It can barely keep up with ATV sales, which rose 5% in the second quarter. Sales of its personal watercraft, popularly known as jet skis, climbed 10%. Overall, net income for the quarter increased 16%, to a record $19.9 million -- even as the Dow Jones Industrial Average was down about 12% at the end of June from a year earlier.
"There are a lot of things for people to worry about out there, from terrorism to the economy, the stock market, anthrax," says Tom Tiller, president and chief executive of the Minneapolis company. But all that, he says, is a boon to Polaris. "What we offer people is the opportunity to get away from that, typically with their family."
A Discernible Trend
It's a phenomenon that is revving up many makers of sport and recreational vehicles. Second-quarter net income jumped 11% at Brunswick Corp., a maker of treadmills, pool tables, boats and motors, and 25% at motorcycle maker Harley-Davidson Inc. At Winnebago Industries Inc., maker of big recreational vehicles, earnings rose 45% for the quarter ended June 1. Industrywide, sales of ATVs and motorcycles are up more than 10% this year.
Apparently, play is one thing Americans haven't been willing to give up. The same people who are cutting back on expensive dinners and clothes are still willing to dig deep into their pockets for luxury toys, even as their nest eggs have shrunk and the job market has soured.
"If I put the money in the stock market, I'll probably lose it anyway, so what the hell: I may as well enjoy it," says 43-year-old Ira Holtzman of Glenview, Ill. The energy broker just dropped $10,000 on off-road motorcycles and gear for himself and each of his two sons, ages 16 and nine.
Cheap money is helping drive the trend. "This is the time to buy now," says George Schunk, 69, of Litchfield, Minn. Since he retired from his excavating business four years ago, he and his wife, Edna, have a lot more time to travel. So a few weeks ago he borrowed money to buy a brand-new $178,000 Winnebago Journey, which Mr. Schunk pronounces "wonderful." His interest rate: just over 7%.
The People Who Spend
Demographics also help. The huge baby-boom generation now makes up that group of Americans who account for the most discretionary spending, those in their 40s and 50s. Jim Leopardo is one.
After years of hard work, the 48-year-old owner of a construction firm, who lives in North Barrington, Ill., has bought six ATVs in the past 18 months.
"Having time with your kids is extremely important," says Mr. Leopardo, who has sons ages 10, 13 and 16. He even hauls the ATVs to Wisconsin on a custom 24-foot trailer for tailgate parties with friends. "You set up the tailgate grill and have some brats and dogs with the kids, and it's just kind of an event."
Another factor appears to be Sept. 11. "The nesting instinct has become much stronger since Sept. 11," says Trent Tobias, a 41-year-old father of two. He says he and his wife had a long talk after the terrorist attacks, and one result is that they doubled their fleet of ATVs to four.
"I tell you, it's something that my family enjoys the heck out of," says Mr. Tobias, a vice president of a car dealership in northern Illinois. He says that many of his neighbors are just as enthusiastic about riding ATVs with their children. "In my son's eighth-grade class, now probably 50% of the boys have them."
The fact that demand remained strong after the economy weakened and after the terrorist attacks surprised some industry executives, but not as much as when the sales stayed robust through sickening declines in the stock market this year. After all, many of these products tend to appeal to upper-middle-class Americans of the sort who are fervent market investors.
But for some of these customers, market losses -- far from triggering conservative impulses -- made them want to spend. Jonas Nygard's financial setbacks began early in 2001 when the Internet start-up he worked for crashed and burned. The 33-year-old management consultant quickly signed on at Deloitte & Touche LLP, but then watched as his stock-market investments tumbled.
His reaction was to decide "just to make sure to enjoy the moment." He went out this April and bought a $5,000 Arctic Cat snowmobile. His investment losses, he says, taught him that he can use his money either to gamble on the market, "or I can have some fun with it."
Some losers in the stock market have gained winnings elsewhere. Bob Lewis, a 54-year-old retired police sergeant in Claycomo, Mo., says that thanks to the bear market, "my 401(k) is nearly cut in half from the police department."
But Mr. Lewis also runs two security businesses with his sons. Since Sept. 11, demand for those services is so extraordinary that a few weeks ago, Mr. Lewis bought himself a $155,000 Winnebago.
Car sales have remained strong, too. But for most people, cars are a necessity. What's surprising about this trend is it involves discretionary spending.
Expecting the Worst
No one is more surprised than Bruce D. Hertzke, chief executive officer of Winnebago in Forest City, Iowa. As vice president of Winnebago operations back in the recession of the early 1990s, he watched sales weaken. In fiscal 1991, production of the company's motor homes plunged almost 35%, to nearly 5,500 units from about 8,400 the year before, and the company was forced to lay off nearly 14% of its workers.
So when the economy entered a recession last year, Mr. Hertzke prepared for a rerun. After all, Winnebago's RVs average $80,000 in price, and some go for more than $250,000. Anticipating a slowdown, he trimmed the number of college students working summer jobs and reduced overtime hours among full-time employees.
Then came Sept. 11. In the wake of the tragedy, Mr. Hertzke says, the company's dealers were reluctant to order new RVs. The gloom seemed to deepen, and by Thanksgiving, the company shut down production for an entire week.
But the dealers turned out to be wrong. Back orders skyrocketed 100% in the fiscal second quarter, which ended March 2, and 125% in the third quarter, to the highest level in Mr. Hertzke's memory. Demand is so strong, he says, that Winnebago buyers now have to wait 10 to 12 weeks to take delivery of their RVs. For the fiscal year ended Aug. 31, the company is expected to produce 11,000 units, a 22% increase from the previous year.
"We went from shutdown the last week in November to overtime the first week of January," says Mr. Hertzke -- an unusual move, given that the period is among the slowest times of the year in the RV industry.
Other makers of sport and recreational vehicles report nearly identical experiences. "We had a hiccup for a week in September, then every week and every month was stronger than the year before," says Chris A. Twomey, CEO of Arctic Cat Inc., a maker of snowmobiles and ATVs in Thief River Falls, Minn.
Like Mr. Hertzke, Mr. Twomey was preparing for the worst. As the recession approached last year, Mr. Twomey recalls, "I started to worry: What's going to happen with retail sales? Then we have 9/11, and I think, 'Oh my goodness, sales are going to be awful.' And they weren't." For the year ended March 31, Arctic Cat's sales rose nearly 11%, to $556.1 million from $502.4 million the previous year.
Buyers aren't reaching for the lowest-priced models either. Through the first six months of this year, unit sales of Polaris's top-of-the-line ATV models -- the $7,000 Sportsman 500 and the $7,400 Sportsman 700 -- were up 50.1% from year-earlier levels. These models carry features such as automatic transmission, four-wheel drive and MacPherson strut suspension.
"The people who are buying are buying the best," says Mr. Tiller of Polaris. "They're not buying Yugos. They're buying Lexus."
So strong is the demand for some products that companies have actually been able to raise their selling prices. At Polaris, the average sales price of its ATVs rose between 2% and 3% in the first quarter of this year from a year earlier. At Harley, 2003 model prices are going up between 3% and 5%. (The company says that's partly because the new models will incorporate details -- logos embossed or painted on various parts -- to mark Harley's 100th anniversary.)
The strength of this and other consumer-product categories has helped support the economy through recession and subsequent weakness. The Business Cycle Dating Committee of the National Bureau of Economic Research, the quasi-official referee in these matters, says the recession began in March 2001, and it has yet to officially declare it over, though the government has reported modest growth in gross domestic product for the past three quarters.
The Question of Debt
Could purchases of ATVs, RVs and snowmobiles this year sidetrack a recovery next year by adding to American consumers' already heavy debts? Consumer debt payments as a percentage of disposable personal income have climbed to levels not seen since 1987, hitting a high of 8% in the fourth quarter of 2001, before slipping to 7.85% in the first quarter of this year. The percentage of disposable income dedicated to savings, meanwhile, last year plunged to just 2.3%, the lowest annual level recorded since the Great Depression.
But many families feel more secure buying expensive toys these days because they have two incomes to rely on, instead of one. They also have been able to refinance mortgages at much lower interest rates. This can free up hundreds of dollars a month -- more than enough to make the monthly payments on a new motorcycle or ATV.
Credit is a new source of profit for many recreational-vehicle makers, even at today's low rates. Three years ago, Polaris began financing the sales of its ATVs, motorcycles and other products to customers. Last year, the company's financing business -- both wholesale and retail -- contributed about 50 cents to the company's earnings per share of $3.88.
At Harley-Davidson, finance-unit operating income for the second quarter rose 60% over year-ago levels to $37 million, and is expected to rise 50% this year over 2001 levels. Financing its motorcycles not only adds to profits -- it also boosts sales, says dealer Karl Kegel, owner of Kegel Motorcycle Co. in Rockford, Ill. Banks in Rockford required a 25% down payment, Mr. Kegel says, and wouldn't extend a loan for more than 48 months. Harley, on the other hand, requires only 10% down and will extend the loan for up to seven years. "And you get approvals in under an hour," he says.
With interest rates as low as they are, "we're going to have a record year," says Mr. Kegel. He is almost sold out of Harleys, with only five current-model bikes left on his showroom floor.
Will the buying continue? Polaris recently lifted its earning estimates for all of 2002. And Winnebago feels so confident that RV sales will keep rising that it plans to open a new facility in 2003 that will boost motor-home production capacity by 30%.
Write to Joseph T. Hallinan at joe.hallinan@wsj.com1
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