Harbor Freight business model may collapse?

[Bill Dufour]

I have seen a lot of new Harbor Freight stores being built. They do not do franchises. The son recently tool over and took out big loans to expand. Will he be able to keep paying off those loans? China tarriffs may force higher prices on almost everything in the store. If he can no longer compete on price will they try to compete on quality? I have seen a few things made in Russia, India, and Italy.
Bill D

https://www.bloomberg.com/graphics/2018-collateralized-loan-obligations/?srnd=fixed-income

[Ken Combs]

They've already started. There have been several recent higher priced, hopefully higher quality, tools introduced. Tool storage, wrench sets, battery tools, etc. All under new names.

[Art Mann]

Even with the new tariffs, Chinese merchandise is still far cheaper than European or US made equipment.

[Jim Koepke]

Recently my wife wanted her own hand truck. We didn't like the 'quality' (for lack there of) HF had on hand. While out on her own a few days later she found one at the big orange or big blue that was better for less.

There really isn't much at HF to entice me into accepting lower quality for a lower price unless my purpose is to purchase something for a one time use.

jtk

[Curt Harms]

................................
There really isn't much at HF to entice me into accepting lower quality for a lower price unless my purpose is to purchase something for a one time use.

jtk

There are a lot of homeowners that would find Harbor Freight hand tools perfectly adequate to assemble their latest KD cabinet or 'furniture' acquisition and are not inclined to spend large $$ for tools used 30 minutes per year. That customer probably doesn't know the difference between a Wera and Pittsburgh screwdriver and as long as they can get their half dozen screws tight don't really care.

[Roy Petersen]

There have been several recent higher priced, hopefully higher quality, tools introduced.
And in that may lie the end of their successful model, one that was built on being lower priced "adequate" tools and products. It is/was the place to go for bargains, knowing that they weren't high end, but remained affordable. Unless they do this change *very* well, the stigma of reduced quality will likely cause them to be taken less seriously as higher end sellers/brands. I'd personally expect a rebranding or spinoff of some sort to get away from the history some.

[Van Huskey]

And in that may lie the end of their successful model, one that was built on being lower priced "adequate" tools and products. It is/was the place to go for bargains, knowing that they weren't high end, but remained affordable. Unless they do this change *very* well, the stigma of reduced quality will likely cause them to be taken less seriously as higher end sellers/brands. I'd personally expect a rebranding or spinoff of some sort to get away from the history some.

I am not sure I agree that any "store level" rebranding is needed. Youtube creators are extremely good marketers for HF. You can find solid comparisons and reviews on most of the newer "brands" HF has brought in and a lot of them (at least price considered) acquit themselves quite well.

In my view the "acceptability" of owning HF "gems" has only been growing.

[John Goodin]

I wonder the extent the tariffs are going to hurt since many of the comparable brands that compete with HF are made in China as well. Those items will be subject to the same tariffs.
It also depends on if HF passes the all, some or none of the extra costs along to the consumer. Contrary to what is taken and reiterated as an economic truth not all costs are passed on to the consumer.

[Van Huskey]

It also depends on if HF passes the all, some or none of the extra costs along to the consumer.

The more HF is willing to hold the line vs, as you point out, their mostly tariff impacted competition they may be able to keep or increase their bottom line with increased volume.

[David Ragan]

I am not sure I agree that any "store level" rebranding is needed. Youtube creators are extremely good marketers for HF. You can find solid comparisons and reviews on most of the newer "brands" HF has brought in and a lot of them (at least price considered) acquit themselves quite well.

In my view the "acceptability" of owning HF "gems" has only been growing.


Van is so right here. Since my knee went south, I've become more of an expert @ what can be found on YouTube (sadly) than woodworking.

There are more than a few very smart folks out there sorting out for us how these different brands/tools match up. I personally love the one w the bear, and the professional welder gives presentations that I like.

Now, a certain Canadian-the self-styled "smartest idiot on YouTube" does tool deconstruction and very technical analyses, and colorful language that even my wife enjoys on occasion.

That said, it been I guess a couple years since I been in HF. Northern sold me a hydraulic lift table year or two ago.

[Bill Dufour]

To me HF seems to just be slapping a new name on the same old products. Seems like they use a new name until word gets around that it is the same old junk. Then they slap a different name on it for the next go round. Brands last a little under two years. They aslo switch plastic colors along with the labels.
Bil lD.

[Frederick Skelly]

I don't personally believe HF's growth can be sustained and the bottom seems likely to fall out. Guess we'll see.

Regarding the Bloomberg article...... sigh. Yup, the greedy ones are setting us up for the next recession or worse. I've done some homework. It looks to me like almost every big financial crisis the USA has experienced since the mid-1800s was caused by one or more peoples' attempt to make a ton of money - often on Wall Street but not always. For me, the non-stop greed has gotten very old. (But then, I think the Enron crowd should have gone to "real" prisons instead of country club jails.)

Fred

[Mel Fulks]

I guess they will fold at some point. Everything does, but they have a long way to go. There are many things there that
work just fine. I didn't hear anyone saying HF would make tool rental places go under,but it happened . While some of their
stuff isn't the best you do get all the pieces! That was not happening at the rental stores. HF has had good one family
management and I'm guessing that many said they would fail. The prognosticators are taking another stab at it!

[Larry Foster]

A good percentage of the stuff I have is Harbor Freight and I've been pretty happy with them.

But, my skills and needs are way below what many here have.

[Perry Hilbert Jr]

When it comes to some tools, Harbor Freight simply can't be beat. Others, I would not buy on a bet. One thing overlooked by some in the financial business, is that a place like Harbor Freight depends on volume. Certain consumables sell constantly. I go to HF about 2x a month. Sometimes just to wander and see what is new. I am there enough to recognize some other customers. I see some buying hundreds of dollars worth of stuff every visit. I probably spend $400 to $500 a year there. Can't beat the goat skin gloves for $5.99 a pair. I go through five or six pair a year with farm work. sand paper, tools chip brushes, paint sprayers. ( I have to admit, I stopped trying to clean them, I just buy another $20 one when I have to paint again.) I go through several cut off wheels a year on my angle grinder. (That cheap $9 angle grinder has lasted me 15 years and countless hours of use. I keep expecting it to die and it keeps on surprising me. ) I have three tractors, a baler and a back hoe, each with their own set of tools. The more extensive set in the barn and another set in the truck, and one in the wood shop. I needed a giant allen wrench. Darn thing was $24.00 at sears. got a set of three allen sockets at HF for $17. I sometimes need a really big wrench or socket for the machinery. If it is a thing I need once, why buy Craftsman or Husky?

[Ronald Blue]

It must indeed be a "slow news day" when we are debating whether HF is going to survive. They seem to be doing fine from what I can see. I see plenty of people going in and out. I picked up a quick hitch for my compact utility tractor and it works fine at a better price than anywhere else. Not everything is a deal and that's true virtually everywhere.

[Brian Henderson]

It must indeed be a "slow news day" when we are debating whether HF is going to survive. They seem to be doing fine from what I can see. I see plenty of people going in and out. I picked up a quick hitch for my compact utility tractor and it works fine at a better price than anywhere else. Not everything is a deal and that's true virtually everywhere.

Agreed. Every time I have been in any store, and they just opened another one locally within the last couple of months, the parking lot has been full and there has been a line to the back of the store waiting to check out. They're doing just fine, in fact, I think that by introducing higher-end brands as well as the cheap Chinese stuff, they are just expanding their market. I don't think they're going anywhere any time soon.

[Dave Lehnert]

Agreed. Every time I have been in any store, and they just opened another one locally within the last couple of months, the parking lot has been full and there has been a line to the back of the store waiting to check out. They're doing just fine, in fact, I think that by introducing higher-end brands as well as the cheap Chinese stuff, they are just expanding their market. I don't think they're going anywhere any time soon.



I have to agree, HF is not going anywhere soon.
Just because a place is packed with shoppers is no guarantee they are a healthy business. All depends on the business model. I can start a car dealership and sell brand new pickup trucks for $100. but not going to last long.

What surprises me is there is not someone opening a like store to compete. Yes, Home Depot or Lowes has tools but nothing like the selection of HF.
Is it because they cant see a like business model that works????

[Stan Calow]

What surprises me is there is not someone opening a like store to compete.

We have a new chain store called Northern Tools that appears to be competition. I think the HF business model is "sell cheap tools cheap". And thats always going to work as their stuff will always be cheaper than the higher quality stuff, no matter where it comes from. Thats the same business model that the dollar stores are using, which are now Walmarts prime competition.

[Dave Lehnert]

We have a new chain store called Northern Tools that appears to be competition. I think the HF business model is "sell cheap tools cheap". And thats always going to work as their stuff will always be cheaper than the higher quality stuff, no matter where it comes from. Thats the same business model that the dollar stores are using, which are now Walmarts prime competition.



Yes, you may be correct about Northern Tools. Just looked and for some reason seem to be going all around us here in Ohio.

[Mel Fulks]

We have had a Northern here for many years. It has more big stuff. Farm and commercial stuff,not a big selection of
small hand tools. They do have all kinds of cleaners and additives.

[Ronald Blue]

Northern Tool started out as Northern Hydraulics. They as Mel says have more big ticket items. I don't see them going head to head only in a few areas. Although they might evolve more that direction. I think they have their niche but I don't see them anywhere there isn't a good population base. HF is going into cities that are around 30,000 and the major retail hub in the area. Obviously they were already in much larger locations.

[Rick Potter]

Anyone remember Western Auto stores? Auto parts, washing machines, bicycles, and more. Seemed like one in every town in the late 50's.

[Jim Koepke]

Anyone remember Western Auto stores? Auto parts, washing machines, bicycles, and more. Seemed like one in every town in the late 50's.

A lot of stores from that era have gone away. Remember Grand Auto and Pep Boys? There was also a Standard Brands which was great for paint thinner at 25¢ a gallon if you brought your own can.

Montgomery Wards, the Emporium, Circuit City, Lafayette Radio & Electronics, Allied Radio seem to have gone the way of the Packard. Some of these live on due to the name being bought.

Now Sears may be the next big one to close shop if it doesn't get financing by tomorrow:

https://www.newsweek.com/sears-closing-all-stores-good-liquidation-possible-deadline-nearing-no-bid-1273200

Changes in little things can have a major effect on businesses who do not have the ability to react. Sears wasn't able to transition their marketing to work with the internet.

My recollection is Circuit City decided it was paying their long term staff too much and laid them off to lower the cost of employee compensation. They likely didn't run any numbers on each employee's sales.

In the case of Lafayette Radio, they were stuck with a large commitment to purchase 23 channel CB radios when the FCC changed the available spectrum to 40 channels.

It is easy for a company to collapse. Often it is done by management or another company buying them out to suck all the profits out before liquidation. This has happened to one of my old favorites here in the west, OSH or Orchard Supply Hardware. They have been shaky since they were bought by Sears back in 1996. My recollection of the time was many shelves were empty in the stores. The ownership changed with Lowes being the last owner and the one to close the doors.

jtk

[Bill Dufour]

Post Tools was wiped out by Horror Fright. Post tools started out as cheap junk then moved in to quality Japanese wood working tools then it died. Someone bought it out and ran it under a different name for a while. It might have been western tool? The guy who started it retired and his daughters did not take over so that was the end. It was based in Oakland California.
Bil lD.

[Kev Williams]

A lot of stores from that era have gone away. Remember Grand Auto and Pep Boys?
? There's still 800 Pep Boys stores in this country, 4 of 'em within 7 miles of me, 2 more within 30 miles--

[Mel Fulks]

? There's still 800 Pep Boys stores in this country, 4 of 'em within 7 miles of me, 2 more within 30 miles--

We need a mnemonic device to remind us there are lots of PEP BOYS still around ...hmmm, Ive got it! ...
"There's Manny Moe, Jack!"

[Jim Koepke]

? There's still 800 Pep Boys stores in this country, 4 of 'em within 7 miles of me, 2 more within 30 miles--

My error, they closed up stores in my area.

jtk

[Edwin Santos]

Hi,

I think some are missing the question raised in the original post. It links to an article that talks about debt fueled expansion using complicated, fee rich derivative instruments that have been constructed by our good old friends in the Wall Street investment banks.
So if there were a bump in the road, would these derivatives become toxic assets just like the housing crisis? Would tariffs be just that hiccup for HF and would it be fatal for the beloved tool store chain?

My reading of the article is that the risks are not to HF, so much as to the investors that would be holding these "cov-light" bonds. HF is only one company and not even a rounding error in the context of a market wide CLO crisis. Specifically the article says out of a $600bn CLO market, HF represents 3 tenths of 1% of the overall so not much.

My subjective opinion? I think these types of debt instruments are a product of a historically low interest rate and historically low inflationary environment and HF is very smart for taking advantage of it. For them it is a clever low cost access to financing even after the insanely rich investment banking fees and management fees that Wall Street is raking in. Plus if they get to pay interest on these loans at low fixed rates, and maybe with inflated dollars, way into the future, they may be laughing all the way to the bank for decades.
Yes, the Wall St banks are a bunch of greedy diabolical hogs who have structured these instruments to pass the risk on to the investors that will hold them, probably a lot of whom are their own clients (look up "conflict of interest" in the dictionary and why Congress after the Great Depression passed legislation called the Glass-Steagall Act to protect investors from these particular conflicts of interests, only to have the Act repealed in 1999 thus setting the stage for the 2008 financial crisis - but I digress).

As to the the narrower question of whether HF might suffer enough of a hiccup in its business model due to tariffs such that it might default on its CLO obligations.....
I say don't hold your breath waiting for their demise. First off, their tools are insanely cheap, and even if 25% or even 50% more expensive, they'd just be cheap. Second, tariffs are a political phenomenon, and likely won't be any more permanent than a fashion trend that has at most a 4 or 8 year life span.
Lastly, there are those of us (me included) that love sitting around discussing fine Blue Spruce chisels, Lie Nielsen planes, Centauro bandsaws, Hammer sliding table saws and other premium tools. We are a tiny, tiny minority in comparison to the millions of contractors, homeowners and others who are looking for an inexpensive "good enough" tool to get a particular job done, not a family heirloom tool.

By comparison, think of Lie Nielsen or Lee Valley as a nice, solid family run California winery producing excellent Parker rated wine, in comparison to E&J Gallo who has $4.8bn in annual sales and is one of America's largest private companies. HF in this metaphor is Gallo, who realized that there are 000's of people who want to buy decent not-junk wine at an affordable price for every one connoisseur. This every-man market is the one that holds best, and even grows during a recession, while the connoisseurs pull in their horns. The last guy quoted in the article speaks to this.

So my take is that HF is going nowhere but up, the Wall St banks are still hogs, and so long as the leverage levels are not contemplating unrealistically high earnings performance (coverages), then the HF debt is probably a decent bet for the buyers that are buying it when thinking about default risk. Again, the devil's in the details.
Corollary point here is caveat emptor for the investor, although please note that here the investors are large institutional buyers, not little guys. But still, the underwriters are not underwriting with the buyer's best interests in mind, they are thinking about their fees (back to that conflict of interest thing).

And again, HF is not representative of a massive industry class like housing was, they are just one company with it's one business model.
My $.02. Sorry if this is a complicated post.
Edwin

PS - one cautionary note in the article is the one about some % of companies funding dividends with CLO proceeds. That's not normal nor healthy practice.

[Jim Koepke]

Yes, many folks will bail when it looks like they might soon be 'underwater' as it is called in the housing market. Others may take a longer view. Our house in California was 'underwater' for a few years. Wanting to do the right thing for our financial history, we held on. Of course history repeats itself and the house rose above water before we sold it. In the end we did better by hanging on.

Taking out loans to pay dividends has taken some companies into their demise. It is likely were the term 'vulture capitalist' originated. Someone just looking for money buys up a company, the new board votes a big dividend financed by a loan then all the folks who got theirs let the house of cards fall.

Those who are in it only for the money do not care if their making a few million dollars puts thousands of people out of work.

jtk