Like most Harley-Davidson (NYSE: HOG) investors, I imagine, I really could have done without the company's labor strike last quarter -- but not for the reason you think.
Investors in the company (of which I am not one) are upset at the 8% slide in revenues and the 18% decline in net profits that were partially a result of a three-week labor stoppage at the firm's York, Pa., manufacturing plant. Motorcycles not built are motorcycles not sold, after all.
But this dark cloud hanging temporarily over Harley did have a couple of silver linings to it.
For one thing, it demonstrates the flipside of what we're seeing at Harley's four-wheeled peers, Ford (NYSE: F), GM (NYSE: GM), and DaimlerChrysler (NYSE: DCX). By flooding the car market with cash rebates, and "0% financing" cars boasting "employee prices for everyone," the Detroit automakers mortgaged their futures by selling cars cheaply today and robbing themselves of market-priced sales in the future -- a future that has come to pass today.
In contrast, Harley's lost sales of yester-quarter will only create backed-up demand -- demand that, if anything, should translate into higher-priced sales in future quarters. Moreover, as CEO Jim Ziemer cagily observed, now that the strike is over and a new contract is in place, Harley is "better positioned for the future," having negotiated lower wage rates, and having reduced matching funds paid on pension contributions for new employees. In both respects, these are developments likely to reduce the firm's operating costs going forward.
So what are you upset about?
Let me tell you. What has me burned about the strike is that it threw a monkey wrench into my analysis of the firm's inventory trends. If you've read last week's Foolish Forecast, you know that I've been tracking Harley's rising inventories for a few quarters now. I've noted its rate of increase as being twice the rate of sales growth, and I suggested that this will compress margins in the future -- because opposed to motorcycles that are not built, motorcycles that are built must be sold -- and if necessary, if inventories get too high, they get sold at a discount.
In any ordinary quarter, a sales decline coupled with a 44% rise in inventories would confirm my hypothesis that Harley is in dire straits. But knowing that Harley's largest manufacturing facility was offline for three weeks, I can't make that assumption. Inventories almost certainly rose in part because they weren't getting turned into bikes, shipped to stores, and sold. The question is how much of the inventory growth arose from the strike.
Unfortunately, we're going to need to wait through a strike-free quarter or two before we can get a grasp on the answer.
What did we expect from Harley last quarter, and what did we get? Find out in:
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Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.
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