Harley Warning Stinks To Hog Heaven

Is it just me -- or is this there something about today's earnings warning from Harley Davidson (HOG) that doesn't necessarily ring true?

Either Harley, which has left its tire marks on more than its share of critics and short-sellers, is one of the few companies telling the truth as the ultimate canary in the coal mine for high-end, frivolous products or it's using this quarter to conveniently and smartly start unwinding the stuffing of its past. Or maybe, just maybe, it's a little of both!

In warning that third quarter shipments and full year 2007 and 2008 earnings would be lower than expected - while withdrawing guidance for 2009 altogether - the company, which has left its tire marks on more than its share of critics and short-sellers, cited "a difficult time for the consumer." Well, duh! Especially in the wake of the credit crunch.

However, critics have long pointed out that Harley, the mother of cult stocks, has long been stuffing its distributors with excessive inventory while sparking sales through its its internal finance operation, which it turn has sold the good, bad and ugly loans via securitization. (Doug Kass, who is short Harley, has long been pointing out rising delinquencies in the loan portfolio.)

The trouble with stuffing, as we all know, is that it works until it doesn't. For Harley, the "doesn't" is the sudden inability of its customers to either tap their homes for equity and/or get financing from Harley, which no doubt is finding it harder to find buyers for its loans.

Comments

[User 105960]

I think you are right on with the Harley thoughts. In the past, I am told that you had to wait months for some models of Harleys but more recently they are readily available from the dealer. I will stick to riding my Honda Goldwing which is paid for. Have never cared to be part of the "Harley Elite".

[goatfarmer]

All very well to talk about stuffing. But what about the numbers? Since 2004, inventory has increased as a percentage of current assets by about 50%. (From around 6% to around 11%). Is this a sufficient increase to affect the 10 years of consistently good earnings?

Or is there something more foreboding in the divergent growth trend? Growth peaked in 2002. The trends for revenue, operating income and EPS growth have been on an unbroken downtrend since then. Are we about to see growth turn negative?