Jan. 25 (Bloomberg) -- Harley-Davidson Inc., the biggest U.S. motorcycle maker, said fourth-quarter profit fell 26 percent as a slowing domestic economy damped sales, capping its first annual earnings decline since 1993.

Net income dropped to $186 million, or 78 cents a share, from $252 million, or 97 cents, a year earlier, Harley said. Per-share earnings trailed the 81-cent average estimate of 17 analysts compiled by Bloomberg. The stock slid 5.4 percent, reversing an earlier gain of as much as 5.8 percent.

The results ``were ever so slightly worse than we were expecting,'' said Janna Sampson, who helps manage $1.2 billion at Oakbrook Investments LLC, in an interview today. The Lisle, Illinois-based firm owns 205,124 Harley shares.

Harley reduced shipments to dealers to avoid an inventory buildup as credit tightened and consumer spending waned. Milwaukee-based Harley's premium bikes can sell for $35,000 or more when customized. Sales tumbled 7.7 percent to $1.39 billion.

Harley fell $2.16 to $37.96 at 4:03 p.m. in New York Stock Exchange composite trading. The stock has plunged 46 percent in the past 12 months.

``We're putting a difficult year behind,'' Chief Executive Officer Jim Ziemer said in an interview.

Marketing Efforts

The 105-year-old manufacturer expects to benefit from marketing efforts in the third quarter tied to its anniversary celebration, including the opening of a Harley museum in Milwaukee in August.

Harley's share of the U.S. market for large-engine motorcycles was 48.5 percent last year, down from 49 percent in 2006, Ziemer said.

``The No. 2 biggest market share in the segment is Honda, at 16 percent,'' Ziemer said. ``We have three times their market share, so we're talking about a small change in a big number. We've held up our position very well.''

Honda Motor Co., the world's largest motorcycle maker, sells more than 10 million two-wheeled vehicles annually. Most are small-engine models purchased in China, India and emerging markets in Southeast Asia and South America.

``We're well positioned to enter 2008, although we're cautious,'' Ziemer said.

Harley expects 2008 earnings of as much as $4 a share, topping analysts' expectations of $3.86, the average of 13 estimates compiled by Bloomberg.

``Initially, investors were enthusiastic about the press release because the com1pany didn't lower 2008 guidance,'' analyst Ed Aaron of RBC Capital Markets in Denver said in an interview after today's earnings release. ``As the conference call went on, investors grew increasingly skeptical about the company's ability to hit those numbers'' and the stock fell. Aaron rates the shares ``sector perform.''

U.S. Decline

A 14 percent slide in retail sales in the U.S., Harley's biggest market, overwhelmed gains in Europe, Canada and Japan. Total U.S. motorcycle sales probably dropped 6.5 percent in the quarter, the most since 1991, UBS Securities LLC analyst Robin Farley in New York said in a Jan. 22 note.

The company said it will ship ``fewer Harley-Davidson motorcycles than it expects its worldwide dealer network to sell'' in 2008. For the first quarter, shipments will be 68,000 to 72,000 bikes, up from 67,761 a year earlier, Harley said.

``They need to maintain their brand image and come out of this period without creating an image that Harley discounts,'' Oakbrook's Sampson said.

`Challenging' Year

Ziemer said he expects the U.S. economy to ``continue to be very challenging'' this year.

Harley's U.S. retail sales declined 6.2 percent for the full year to 251,772 units, compared with a gain of 14 percent for non-U.S. sales. The U.S. accounted for about 75 percent of the company's annual motorcycle sales volume. Sales of its largest motorcycles fell 19 percent, the company said.

Full-year net income dropped 10 percent to $933.8 million, or $3.74 a share, from $1.04 billion, or $3.93 a share in 2006. Sales in 2007 were down 0.7 percent, to $6.14 billion.

Harley's annual profit last declined in 1993 when the company had to write off expenses related to a recreational- vehicle subsidiary it later sold.

Higher prices for metals and other commodities cost the company $30 million last year, Ziemer said. Higher sales in Canada, Europe and Japan generated a foreign currency benefit of about $4 million in the last quarter, he said.

To contact the reporters on this story: Alan Ohnsman in Los Angeles at aohnsman@bloomberg.net; Angela Greiling Keane in Washington at agreilingkea@bloomberg.net.

Last Updated: January 25, 2008 16:22 EST