"Hey, it could have been worse."

Harley-Davidson (NYSE:HOG) investors are a stoic bunch, and this seems to be the position they're taking in response to this morning's news of a massive 91% collapse in earnings. Harley wrote down $101 million for goodwill impairments and "reclassification of motorcycle loan receivables" at the firm's financial services division in the second quarter (yes, shades of Textron (NYSE:TXT)). So much siphoning, though, left HOG's profits running on fumes by quarter's end -- just $0.08 per share. Yet the shares are up today.

"Hey, it could have been worse"
Last month, we discussed the worst-case scenario laid out by the banking gurus at UBS (NYSE:UBS) when they aligned with fellow banker Citigroup (NYSE:C) in taking a bearish stance on Harley. UBS's research suggested Harley would see sales slide 35% in Q2, and because this is Harley's biggest sales season, this would likely crash earnings for the year.

Indeed, sales did drop 35% in the U.S., or roughly in line with sales declines at four-wheeled rivals GM and Chrysler (if more than Ford's (NYSE:F) negative 11%). But thanks to a more muted decline of 18% in non-U.S. markets, Harley's global sales were down "only" 30%.

Spin, baby, spin
What's more, Harley says it outperformed its rivals insofar as "retail sales of heavyweight motorcycles in the U.S. declined 48.1 percent" industrywide. So what was bad news for Harley may have been worse for rivals like BMW, Polaris (NYSE:PII), and Honda (NYSE:HMC).

But I'm not buying it.

Longtime Fool readers will know by now that in gauging the firm's progress toward recovery, I make inventory reduction my odometer -- and I'm not the only one. CEO Keith Wandell made clear that he aims to reduce inventory, too: "We plan to ship fewer Harley-Davidson motorcycles worldwide this year than we anticipate dealers will sell at retail." In furtherance of which, Harley plans to ship between 25%-30% fewer bikes this year than it did last.

Not good enough, my friend
While I admire the sentiment, Harley's talked a good game about reducing inventory in quarters past -- yet made precious little progress. Inventories climbed again in Q2, and are now up 27% year over year. A first-half cut in shipments of only 12.7% relative to the sales declines – near 25% -- is simply unacceptable.

Foolish takeaway
Harley's in trouble, Fools. If trends continue, cash burn could approach $490 million this year. Inventories are running away from management, and the brake lines seem cut. My advice: Use today's irrational rally to abandon ship.

(Am I wrong about Harley this time? Drop by Motley Fool CAPS and sound off if you think I am. But before you do, remember: I highlighted the inventory issue years ago, and correctly predicted the dividend cut. I'd love to be proven wrong on this one -- but I'm not.)

Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. The Motley Fool has a disclosure policy.