Fox Factory Holding Corp. reported third-quarter sales came in well below guidance while significantly lowering its outlook for the year due to the impact of the United Auto Workers strike and continued inventory destocking in bike channels.
Fox Factory also announced that it reached an agreement to acquire Marucci Sports from Compass Diversified. Read SGB Media‘s coverage of the acquisition here.
Sales in the quarter were $331.1 million compared to guidance in the range of $390 million to $410 million. Adjusted EPS was $1.05, at the low end of guidance in the range of $1.00 to $1.20.
“We delivered an adjusted EBITDA margin of 19.2 percent even with a 17.4 percent sequential decline in sales as the business was impacted by the UAW strike and a slower bicycle channel inventory destock. At the onset of the strike, we took decisive action to reduce costs and improve cash flows. Our laser focus on cost control and swift execution of cost reduction initiatives allowed us to sequentially maintain EBITDA margins, protect our balance sheet and cash flows and operate from a position of strength to further our capital allocation priorities,” said Mike Dennison, Fox Factory’s CEO. “Not only did our Board of Directors authorize a share repurchase plan of up to 8 percent of our outstanding shares, but we also signed a definitive agreement to acquire Marucci, an industry-leading manufacturer and distributor of premium performance baseball, softball, and other sports equipment.”
Net sales for the third quarter of fiscal 2023 were $331.1 million, a decrease of 19.1 percent, as compared to net sales of $409.2 million in the third quarter of fiscal 2022. This decrease reflects a $102.0 million or 58.6 percent decrease in Specialty Sports Group (SSG) net sales, partially offset by a $13.6 million or 12.4 percent and a $10.3 million or 8.2 percent increase in Powered Vehicles Group (PVG) and Aftermarket Applications Group (AAG) net sales, respectively. The decrease in SSG net sales from $174.0 million to $72.0 million is driven by higher levels of inventory across various channels. The increase in PVG net sales from $109.5 million to $123.1 million is primarily due to strong demand in the original equipment manufacturer (OEM) channel, partially offset by the impact of the United Auto Workers (UAW) strike. The increase in AAG net sales from $125.7 million to $136.0 million is primarily due to the inclusion of revenue from its Custom Wheel House subsidiary, which was acquired in March 2023, partially offset by the impact of the UAW strike.
Gross margin was 32.4 percent for the third quarter of fiscal 2023, a 110 basis point decrease from gross margin of 33.5 percent in the third quarter of fiscal 2022. The decrease in gross margin was primarily driven by a shift in its product line mix and costs associated with keeping its workforce as production slowed due to the UAW strike, offset by increased efficiencies at its North American facilities. Adjusted gross margin, which excludes the effects of amortization of acquired inventory valuation markup, organizational restructuring expenses, and strategic transformation costs, decreased 70 basis points to 33.2 percent from the same prior fiscal year period.
Total operating expenses were $65.9 million, or 19.9 percent of net sales, for the third quarter of fiscal 2023, compared to $71.9 million, or 17.6 percent of net sales in the third quarter of fiscal 2022. Operating expenses decreased by $6.0 million primarily due to strong cost controls, partially offset by the inclusion of Custom Wheel House operating expenses of $4.7 million, amortization of acquired intangibles and operating expenses associated with facility expansion. Adjusted operating expenses were $58.3 million, or 17.6 percent of net sales in the third quarter of fiscal 2023, compared to $64.8 million, or 15.8 percent of net sales, in the third quarter of the prior fiscal year.
The company’s effective tax rate was 9.0 percent in the third quarter of fiscal 2023, compared to 20.8 percent in the third quarter of fiscal 2022. The decrease in the company’s effective tax rate was primarily due to the U.S. research and development tax credit for multiple periods.
Net income and net income margin in the third quarter of fiscal 2023 were $35.3 million and 10.7 percent, respectively, compared to $50.8 million and 12.4 percent, respectively, in the third quarter of the prior fiscal year. Earnings per diluted share for the third quarter of fiscal 2023 was 83 cents, compared to earnings per diluted share of $1.20 for the third quarter of fiscal 2022. Adjusted net income in the third quarter of fiscal 2023 was $44.8 million, or $1.05 of adjusted earnings per diluted share, compared to adjusted net income of $57.4 million, or $1.35 of adjusted earnings per diluted share, in the same period of the prior fiscal year.
Adjusted EBITDA in the third quarter of fiscal 2023 was $63.7 million, compared to $85.1 million in the third quarter of fiscal 2022. Adjusted EBITDA margin in the third quarter of fiscal 2023 was 19.2 percent, compared to 20.8 percent in the third quarter of fiscal 2022. “Maintaining strong double-digit adjusted EBITDA margins demonstrates the strength of our brands, product diversification and commitment to continuous improvement,” Dennison commented.
The Board of Directors authorized a share repurchase plan for up to $300.0 million in shares of the company’s common stock, par value of $0.001 per share.
“The primary objective of the plan is to manage the impact of dilution from future employee equity grants and to allow for opportunistic share repurchases. We are a growth company at heart, and we continue to see the significant runway to drive both organic and inorganic growth in a thoughtful and disciplined manner. Given the current macro environment and its strong cash flow generation, we believe that using a portion of its free cash flow to repurchase its shares is a strategic use of capital.” Dennison remarked. Repurchases of shares of common stock under the stock repurchase plan will be made in accordance with applicable securities laws and may be made under a variety of methods, which may include open market purchases. The stock repurchase program does not obligate the company to acquire any particular amount of common stock, and it is scheduled to expire on November 1, 2028 and may be suspended or terminated at any time at the company’s discretion.
To support its capital allocation strategy, including the Marucci transaction, the company entered into a commitment letter to secure a term loan in an amount not to exceed $400.0 million and a delayed draw term loan in an amount not to exceed $200.0 million through its existing credit facility, and the interest rate is expected to be 0.5 percent higher than the current rate of the revolver. The additional debt will provide the liquidity needed to pursue capital allocation priorities including future organic and inorganic growth opportunities and the cushion to withstand macroeconomic or geopolitical shocks.
“We are executing on our organic and inorganic growth opportunities at a very high level in a disciplined approach which is reflected in our strong EBITDA margins. Our ability to perform at this level given the challenging macro environment gives me confidence to reaffirm our 2025 targets which we expect to achieve by continuing to be the industry leader focused on innovation of performance-defining products,” Dennison concluded.
Fiscal 2023 Guidance
For the fourth quarter of fiscal 2023, the company expects net sales in the range of $300 million to $340 million and adjusted earnings per diluted share in the range of $0.75 to $1.00.
For the fiscal year 2023, the company expects net sales at the low end of $1,430 million to $1,470 million, adjusted earnings per diluted share at the low end of the range of $4.20 to $4.45, and a full-year effective tax rate in the range of 15 percent. Under its previous guidance, Fox Factory expected net sales at the low end of $1,670 million to $1,700 million, adjusted EPS at the low end of the range of $5.00 to $5.30, and a full-year effective tax rate to be within the range of 15 percent to 18 percent.
Photo courtesy Fox Factory
