MILWAUKEE – Consumer credit woes, coupled with a blustery winter across much of the United States, have created financial head winds for Harley-Davidson Motor Co.

Retail sales remain weak, although not significantly worse than an expected 15 percent decline, according to a recent survey from Robert W. Baird & Co.

Industrywide, U.S. sales of large motorcycles, the most profitable class of bikes, fell 5 percent in 2007, according to an annual U.S. regulatory filing Friday from Harley.

Baird analyst Craig Kennison surveyed 86 Harley dealers across North America for their assessment of business trends in the first seven weeks of the year.

Sales were slightly below dealer expectations, Kennison said, although 35 percent of the dealers said new motorcycle sales were better than expected.

“Many dealers (32 percent) think that new bike inventory is too high,” Kennison said.

Some dealers were frustrated by the late delivery of models such as the Rocker, new for 2008.

Forty-eight percent of the dealers said they were selling new Harleys for below the manufacturer’s suggested retail price – a nagging problem that recent production cuts haven’t fully addressed.

“That’s partly a sign of the economy we are in, and it’s partly due to the inventory levels” at some dealerships, Kennison said.

Twenty-eight percent of the dealers said it had become more difficult for customers to obtain motorcycle financing. Half of the dealers said that Harley should offer more sales incentives, and they complained that interest rates were too high.

Harley is being cautious about its 2008 outlook. The company has pledged to ship fewer motorcycles than what it expects dealers will sell this year, helping to shore up prices.

Last week, Harley-Davidson Financial Services, the company’s consumer lending division, securitized $486 million in retail motorcycle loans for an estimated loss of between $4.1 million and $5.4 million, according to a regulatory filing.

In part, the loss was driven by volatility in the capital markets, the company said. Out of a total amount of $540 million, Harley-Davidson Financial Services retained notes for $54 million in retail motorcycle loans.

The company had to retain the $54 million on its balance sheet because of weak market demand, analyst Robin Farley with UBS Investment Research wrote in a note to clients.

“If the securitization market remains difficult, Harley is willing to use $1 billion-plus of its own balance sheet to provide liquidity to Harley-Davidson Financial Services,” Farley wrote. “Also, subprime borrowers are approximately 15 percent of Harley’s sales. Management plans to continue subprime lending, since stopping subprime loans could have a materially negative impact” on Harley sales.

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AP-NY-02-25-08 1704EST