Mathematics. It's not a concept you might ordinarily associate with Harley-Davidson (NYSE: HOG ) , but yesterday's earnings report still gives us a good lesson in subtraction.
79 - 71 = ?
Despite hitting analyst targets for Q3 sales, Harley missed on earnings -- badly. Expected to earn $0.79 per share, the hogmeister instead turned in just $0.71. So, eight cents less than expected.
And speaking of expectations, what does Harley expect to earn by year-end? In management's words, guidance for fiscal 2008 has now been "narrowed" to $3 from $3.10. But consider what the company's previous guidance was -- $3 to $3.18. Seems to me, Harley didn't so much "narrow" its forward guidance, but simply reduce it by the amount it missed estimates yesterday -- the aforementioned eight cents.
At the same time, you'll notice that Harley left the floor on its annual income expectations intact. This suggests to me that whatever Harley thought it would earn in Q4 six months ago, it expects still. But it begs the question: If Harley didn't see the Q3 miss coming -- only three months into the future -- what are the chances it correctly predicted the results six months out, in Q4?
Not likely
Don't get me wrong. Harley is making some progress in righting its ship. At last report, sales so far this year were off just 1% versus where Harley was this time last year. Inventories are up 6% -- which is bad, but not as bad as we were at midyear. And accounts receivable are up 79% from last year, although they're only a bit higher than they were in the first quarter. In short, the numbers here are bad, but getting less so.
The problem, as I see it, is that Harley's core business isn't the problem. Harley's sales performance isn't that much worse than we're seeing in the auto world, where each of Ford (NYSE: F ) , Toyota (NYSE: TM ) , and Honda (NYSE: HMC ) also suffered single-digit sales declines in their most recent quarters. It's considerably better than GM's (NYSE: GM ) double-digit dive.
Harley's real problem, I dare say, mirrors the woes we're seeing at CarMax (NYSE: KMX ) and General Electric (NYSE: GE ) , in that its financing segment has been hurt badly by the global credit crunch. Harley had to write down $9.4 million on the value of its "finance receivables held for sale." And Harley's balance sheet shows a five-fold increase in those held-for-sale receivables from last year's levels.
Foolish takeaway
Even if Harley is able to unload these "assets," chances are they'll need to be written down again and again, hurting profits even worse than we've seen so far.
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