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Tickers in this Article: HOG, PII, HMC
Motorcycle manufacturing titan Harley-Davidson (NYSE:HOG) nearly went bankrupt in the early 1980s when deteriorating product quality and competition from less expensive imports flattened operating results. A successful management buyout in 1981, an initial public offering in 1986 and a wildly successful campaign to market to baby boomers sent the company's stock soaring high for a few decades thereafter. But Harley-Davidson finds itself skidding once again, thanks to some nasty near-term trends.

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Quarterly Recap
Weakening economic growth across the globe could not have come at a worse time for Harley-Davidson. In recent years, the company's domestic market already had faced saturation issues that caused management to look overseas for unsatisfied demand. Full-year trends in both geographic segments deteriorated quickly last year, with motorcycle retail sales falling 13% domestically and 10.3% abroad. In addition, dealers struggle as namesake motorcycle sales fell 3.8% to $4.3 billion. Sales of parts and accessories declined only 1.1%, while general merchandise sales improved 2.8%. Unfortunately, these sales categories account for only 21% of the overall top line, which dropped 2.3% to $5.6 billion for the full year.

Higher product costs, lower product margins and lower sales leverage from tough top-line trends helped send operating income down a hefty 21.5%. Meanwhile, a plunge in profitability from the company's financial services arm, which is reeling from the challenging credit market conditions and higher projected credit losses, sent total operating income down 27.8% to $1 billion. Lower income taxes were not enough to offset lower interest income and higher interest expense. Thus, net income
declined 29.9% to $654.7 million. Lower shares outstanding slightly offset the drop in diluted earnings per share (diluted EPS), which ended up down 25.4% to $2.79 per diluted share. (Learn how this statistic can help you evaluate a company in Getting the Real Earnings.)

Competitive Landscape
In Harley's defense, it is not alone in its troubles. Companies that manufacture discretionary, big-ticket items ranging from automobiles to luxury boats also are suffering. Most motorcycles qualify as luxury lifestyle products, with rivals such as Victory motorcycles from Polaris Industries (NYSE:PII) also reporting muted demand as of the third quarter, although its sales most likely continued to deteriorate towards the end of 2008. Auto giant Honda (NYSE:HMC) also sells motorcycles and reported a deterioration in North American sales for the previous fiscal year. While its international sales had held up to a point, they now are dropping in sympathy with slowing global demand. (Determine if your stock is a bargain or a bank breaker at Sympathy Sell-Off: An Investor's Guide.)

Bottom Line
In the foreseeable future, conditions likely will remain grim for Harley-Davidson. Management refrained from providing earnings guidance, but the company plans to ship 10% to 13% fewer motorcycles. As a result, Harley-Davidson is consolidating manufacturing facilities, reducing jobs and closing distribution facilities to cut costs. These measures should help stem the company's slide in operating cash flow, which fell to a negative $393 million for 2008. In addition, the company looks to shore up liquidity in its financing business.

Due to its iconic brand name, Harley-Davidson is in a more favorable position to withstand the economic downturn than it was in the 1980s. However, the company's adjustment to a world that needs fewer high-end motorcycles will be quite an undertaking.

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