Harley-Davidson profit falls after cheaper bikes cut into margins

Harley-Davidson Inc, the biggest US motorcycle maker, fell as much as 8.9% after profit margins fell with increased sales of lower-priced models and limited availability of pricier bikes. Third-quarter gross margin narrowed to 33.7% from 34.9% a year ago. Sharon Zackfia, an analyst with William Blair & Co., estimated gross margin of 36.8 percent in the quarter. That shift toward lower-priced bikes, such as the $8,000 SuperLow, lowered gross margin by $26.6 million, Harley said in a presentation on its Web site.

"Sales skewed more toward the Sportsters, and of all the possible reasons for a margin decline, mix shift is one of the more innocuous," Zackfia said in an interview.

The shift toward lower-priced bikes was a product of the reworking of the York, Pennsylvania, factory that makes the brand's high-end bikes. The plant is consolidating from four lines to one, and the new line isn't up to speed yet, so there were fewer of the pricey, high-margin motorcycles to sell.

The changes at York will be "largely complete" by the end of next year, Chief Financial Officer John Olin said in a conference call today. U.S. output will be limited until the end of 2013, he added.

Sales increased 13% to $1.23 billion, short of the $1.28 billion average of 13 analysts' estimates. Harley, the maker of the Fat Boy and VRod motorcycles, sells fewer bikes in the coldweather months. The company has reported quarterly losses in each of the last two fourth quarters, typically its slowest sales period. Net income in the three months ended Sept. 25 rose 107% to $183.6 million, or 78 cents a share, compared with $88.8 million, or 38 cents a share, a year earlier, Harley said today in a statement.

The average estimate of eight analysts surveyed by Bloomberg was 75 cents. "We are pleased with our sustained progress and we continue to realize strong momentum in the transformation our business," CEO Keith Wandell said in the statement.

Retail sales rose 5.4% in the US and 5.1% worldwide, the company said. The worldwide sales gain was the second consecutive quarter of increasing deliveries. Before the second quarter, the company last reported an increase in U.S. sales in the fourth quarter of 2006. The company reaffirmed its forecast of 228,000-235,000 motorcycle shipments this year.