The law of averages catches up with everyone eventually. As I pointed out last week, it had been a full year since the last time motorcycle maker Harley-Davidson (NYSE:HOG) missed a Wall Street consensus estimate for earnings. Turned out the company was due for another miss.
On Friday, Harley announced that sales had slipped 6% in the third quarter versus Q3 2006 numbers. That translated into a 15% decline in net profits, mitigated somewhat by the firm's continuing to buy back shares -- the effect of which is to reduce the number of shares among which profits get split up. Result: Per-share profits fell only 11%.
Management called the numbers "disappointing," and based on where things are heading, they predicted that unit shipments would decline a total of about 5.5% this year in comparison to last. Revenue is expected to suffer a "modest" decline, which, when combined with a lower operating margin, would drop earnings per share about 5%, despite the concentrating affect of buybacks. Regardless, CEO Jim Ziemer remains "optimistic and confident" about the future.
Me, I'm not so sure.
As I mentioned last week (and many times before), I find Harley's balance sheet particularly troublesome. Not in the sense of impending bankruptcy or anything; just in the sense of how the numbers are moving, relative to what's happening on the income statement. With sales down 6% year over year, we've got accounts receivable up 23% and inventory up 34%. This is precisely the opposite trend from the one we'd like to see, and it also shows inventory growing objectively, rather than shrinking as we'd hoped.
The taller Harley allows its pile of unsold inventory to grow, the greater the pressure becomes to sell off old inventory to make room for new wares. In this sense, Harley is no different from automakers like Ford (NYSE:F) or GM (NYSE:GM), or industry rivals Honda (NYSE:HMC) and Polaris (NYSE:PII) for that matter -- all these guys need to clear out one year's models to make room for the new year's line. The longer they postpone moves to slash inventory, the deeper the price cuts that must ultimately be made to move the goods.
Being "optimistic and confident" about the future isn't enough. At some point, management needs to bite the bullet and take steps to make that future happen, or else Harley won't be riding for long.
This song remains the same from quarter to quarter. Read:
