Harley-Davidson tops expectations; shares up

CHICAGO (Reuters) - Harley Davidson Inc (HOG.N) reported stronger-than-expected quarterly results on Tuesday, helped in part by a rebound at its in-house finance unit, and its shares rose more than 6 percent.

But the company warned that the motorcycle market would remain challenging throughout the year.

First-quarter net profit tumbled nearly 70 percent to $35.4 million, or 14 cents a share, from $117 million, or 50 cents a share, a year earlier.

But excluding one-time items, Harley reported a profit of 29 cents a share from continuing operations. On that basis, analysts on average had expected 22 cents a share, according to Thomson Reuters I/B/E/S.

Revenue fell 18 percent to $1.04 billion, excluding financial services.

Analyst Ed Aaron at RBC Capital Markets said he was especially impressed by Harley's gross margins, which were better than expected and provided "an important indicator of the underlying health of the business."

The results included $26.7 million in operating income from Harley's in-house finance unit, which snapped a three-quarter streak of losses as the performance of its loan portfolio improved and the cost of funds fell.

Worldwide retail sales of new Harley-Davidson motorcycles declined 18.2 percent, a smaller drop than in the prior three quarters.

The brightest spot was international retail sales, which fell just 2.8 percent after posting double-digit declines for a year. Sales in Europe and Canada were both up slightly.

"We are seeing directional improvement in our dealers' retail motorcycle sales as we enter the key selling season," Chief Executive Officer Keith Wandell said in a statement.

"At the same time, given the global economic uncertainty that still exists, we believe conditions will remain challenging throughout this year," he said, "and we will continue to factor that into how we manage the business."

Revenue from sales of Harley-Davidson motorcycles fell 20 percent to $808.8 million.

Parts and accessories sales fell 12 percent to $149.1 million, and general merchandise sales, which include Harley-branded apparel, fell 12 percent to $66.3 million.

Like other manufacturers of pricey, discretionary consumer products, Harley-Davidson has suffered from a sharp decline in demand as a result of the global economic downturn and related tightening of credit.

In response, the company has slashed costs and consolidated operations -- an exercise it estimates will cost $175 million to $195 million in 2010 alone.

But Harley's challenges are more than cyclical. Its core customer base is aging, so it needs to find ways to bring younger riders into its fold without damaging the brand.

The company has tried to meet its demographic challenges by offering new products like the three-wheeled trikes that it hopes will extend the riding life of existing customers. Meanwhile, it is hoping new products like the Sportster and Forty-eight will appeal to a new, younger clientele.

Harley shares were up 6.4 percent at $34.86 in early New York Stock Exchange trading.

(Reporting by James B. Kelleher; Editing by Derek Caney, Gerald E. McCormick and Lisa Von Ahn)