Since January, Harley-Davidson Inc. (HOG) stock has shifted from second gear to third gear and back again. Harley-Davidson reported a sales decline of about 80,000 HOG bikes in 2009 compared with 2008, from 303,000 to 223,000. The forecast of HOG sales for 2010 were even lower, in a range of 201,000-212,000.

Harley had also taken significant restructuring costs in 2009, about $224 million, and appeared to be betting the ranch on a leaner, meaner operation.

It could be paying off, as the company reported second quarter EPS this morning of $0.59 on revenues of $1.14 billion. Analysts had been expecting EPS of $0.42 on revenues of $1.12 billion.

Harley reiterated its guidance on 2010 sales, but raised its expected full-year gross margins from 32%-33.5% to 32.5%-34%. Gross margins for 2009 came in at 32.3%, substantially lower than 2008 gross margin of 34.6%. There was no change to forecast capital expenditures, which includes $95-$110 million in additional restructuring charges.

The company reported that retail sales in the second quarter were down 5.5% year-over-year, but revenue was up 2.8% on shipments of 59,046 motorcycles to dealers. For the first six months of the fiscal year, gross margins stand at 35.7%, flat with the first half of 2009, while operating margins fell from 16.8% in the first half of 2009 to 13.1% in the first half of 2010.

A significant fraction of the company’s ability to meet, or perhaps exceed, its 2010 guidance rests on labor negotiations with unions at its Wisconsin plants. The outcome of these negotiations, which would take effect when the current contract expires in 2012, will likely determine whether or not Harley closes the plants and moves production to other US locations. The company said it wants an agreement by mid-September, or it will begin the process of closing the plants. Harley has not included restructuring costs for this move in its current forecast, so there is considerable impact from these negotiations on the company’s earnings going forward.

But the sun is shining on Harley today, as the stock price is up nearly 12% in early trading.

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