Harley-Davidson isn't making enough of its most expensive motorcycles to meet demand.
That shortfall disappointed investors, who sent the Milwaukee company's stock down 7 percent on Tuesday even though Harley reported its third-quarter profit more than doubled.
Harley wasn't able to produce as many of the larger touring and custom bikes that customers wanted, shifting sales to smaller, less profitable models and reducing the average amount of money made on each.
The reason: as part of a larger restructuring, Harley has consolidated production of several models in a state-of-the-art assembly line at York, Penn. The changes, designed to boost the company's long-term profitability, reduced York's production of the more profitable bikes.
The result: third-quarter sales that fell short of Wall Street predictions and a drop in profit margins that worried investors and sparked a sell-off of shares.
After the global economy stalled in 2008 and the company's sales plunged 23 percent the next year, it embarked on a massive plan to slash its costs and transform the way it manufactures its motorcycles.
The plan has helped turn things around despite tough economic conditions. Harley's sales have picked up considerably this year, and on Tuesday it announced its second-straight quarter of higher U.S. sales. But the success is being offset by the manufacturing problems and currency issues.
Sales of new motorcycles rose 5.1 percent to 61,838 bikes and included a 5.4 percent increase in U.S. sales.
And while revenue from bike sales and related products rose 13.4 percent to $1.23 billion, it missed Wall Street predictions of $1.29 billion.
Harley-Davidson's third quarter gross margin _ or the proportion of revenue the company kept as profit _ fell to 33.7 percent from 34.9 percent a year earlier, which company officials attributed to the production issues at York and an increase in the value of the U.S. dollar compared with the Euro and other currencies.
The motorcycle maker also cut its profit margin prediction for the full year, citing the continued uncertainty surrounding future currency values.
The company earned $183.6 million, or 78 cents per share, up from $88.8 million, or 38 cents per share, a year earlier. Analysts, on average, expected earnings of 76 cents per share, according to a FactSet poll.
Harley-Davidson Inc.'s Chief Executive Keith Wandell said he knew the restructuring would be a massive undertaking, but added the changes are still in the best long-term interest of the company.
"Are we disappointed that things haven't been perfect? Yes. But I will tell you that we are pleased with where we are in this transformation," he said.
Harley makes motorcycles ranging from $8,000 sport bikes to custom touring models that can start at more than $30,000.
In heavy afternoon trading, the stock price tumbled $2.62, or 7 percent, to $34.59 a share. Over the past 52 weeks, the shares have traded between $29.86 and $46.88
Wedbush analyst Rommel Dionisio called the margin trends "disappointing." He said the company's overall recovery appears to be on track and noted that the bulk of the restructuring will be completed by the end of this year. The pressure on its margins should ease by early 2012. He backed his "Outperform" rating for Harley's stock.
Harley held its motorcycle shipment forecast steady for 2011, saying it still expects to ship between 228,000 and 235,000 new bikes worldwide. That would reflect an increase of 8 percent to 12 percent from 2010 levels.
Through the third quarter of this year, the company has shipped 182,387 motorcycles to its dealers and distributors, representing a 10-percent increase from the first nine months of 2010.
The company also lowered its prediction for the total cost of the big restructuring it began two years ago, saying it now expects one-time charges of $480 million to $495 million, including charges of $70 million to $80 million this year.
AP Auto Writer Tom Krisher in Detroit contributed to this report.