Harley-Davidson (NYSE: HOG) announced today that August sales sucked the tailpipe, and the rest of the year looks similarly grim. Third quarter shipments will fall several thousand units short of expectations, and it projects 2007 total shipments to finish at 328-332,000, down over 10,000 units over 2006. It's new projection for 2007 EPS is $3.69-$3.77, down from $3.93 in 2006.

The market reacted sharply to the news and the stock is down almost 9% in early trading. Since April, the stock has dropped from almost $66 a share to under $50.

The company points to dropping demand and a promotion-heavy July to explain the shortfall. I think Harley-Davidson is caught in a particularly awkward spot in this economy. As the number of Harleys on the road grew, the resale price has fallen, which creates more of a barrier for riders interested in trading up. About 35% of purchases financed by Harley-Davidson Financial Services were subprime, and the troubles in this market are bound to be reflected in sales declines, much as they have in the auto sector. Growing unemployment figures could also have an impact on sales.

The company entered 2007 with an overabundance of inventory in dealerships, and the July incentives used to clear out these models would have made 2008 models seem more expensive by comparison.

The company further cautioned that 2008 could be another slow year for bike sales, projecting moderate revenue growth and EPS up 4-7%.

I'd keep an eye on international growth, to see if the company can make enough inroads in foreign markets to absorb some of the excess capacity. Domestically, Harley-Davidson looks to be running into some rough road ahead.