Fox Factory Holding Corp. delivered $332.5 million in revenue in the fourth quarter, with approximately $17 million in revenue contribution from Marucci Sports.
Company CEO Mike Dennison said the fourth quarter for Fox Factory saw wins, achievements and significant headwinds with the ongoing OE challenges, which the company started seeing after Labor Day. Dennison said its view on these issues will persist into the first half 2024.
Three main factors in near-term results reportedly created the challenges:
- Ongoing inventory recalibration in the bike category;
- The impact of the UAW strike on the Powered Vehicle Group (PVG) and Aftermarket Applications Group (AAG) businesses and
- Higher interest rates caused customers to be more conservative in their purchasing decisions.
“The successes provided partial offsets within the quarter, including year-on-year growth in our aftermarket components businesses such as Wheel, Lift Kits and aftermarket Shocks, as well as e-commerce growth within our Bike business. While these product lines and channels grew, they were unable to offset the declines in OE-impacted areas of our business,” Dennison offered.
Total consolidated net sales in the fourth quarter of 2023 were $332.5 million, a decrease of 18.6 percent versus sales of $408.6 million in the fourth quarter of 2022.
Powered Vehicle Group net sales were $118 million in Q4, down 10.7 percent from $133 million in the prior-year quarter due to the direct impact of the UAW strike on production and the indirect effect of the strike on original equipment manufacturers, who ramped slowly as the company expected following the conclusion of the strike. Dennison said the combination of direct and indirect influence from the strike resulted in lower production, which led to lower sales. He said the company recovered some by the end of November, while others exhibited sharp declines in order volume through the end of the quarter.
“Based on our consistent long-term growth within the PVG business and the importance of retaining a highly trained and skilled workforce to make our technologically advanced products, we elected not to lay off or shut down any facilities during or after the strike. Consequently, the costs associated with these actions had a significant impact on profitability,” Dennison said.
Powersports also saw less demand as Fox Factory’s distributors and dealers worked through elevated inventory levels and seasonality factors, including a warm winter, which drove down sales in the snowmobile market.
“To further complicate the problem high interest rates continued to cause conservatism due to inflated floorplan financing costs,” Dennison added.
Dennison noted that, on the positive side for PVG, even with the external headwinds mentioned, the business grew 21 percent organically year-over-year, illustrating its market share and the power of its product portfolio.
“In a year with so many businesses in this space exhibiting reduced revenue, we grew significantly,” he boasted.
Aftermarket Applications Group sales rose 3.5 percent to $121 million in Q4 from $117 million in the prior-year quarter. The primary contributor to the increase was the Custom Warehouse business, which delivered nearly $20 million in revenue in the quarter—record quarters in Sport Truck and overall expanded e-commerce solutions reportedly contributed to the growth. However, Dennison said the UAW strike significantly impacted the upfitting business, primarily due to aluminum chassis availability and chassis mix caused by production delays as factories shut down due to the strike.
“As we saw in Powersports, the high-interest rate environment put pressure on floorplan financing and, as a result, dealers are seeking a more conservative position on inventory,” the CEO explained. “Positively, dealers are reducing existing aged inventory ahead of the release of a slew of new redesigned model year vehicles, which are expected to launch throughout the year. These model year changes will be an exciting opportunity for us as we develop and launch new packages in conjunction with these new models. Expansion in our kit sales is also driving future growth in our outdoor business.”
Dennison said OE partners have started placing new orders for model year 2025 product, which is a positive sign that the business will begin returning to a normal environment in the late second quarter.
Specialty Sports Group segment revenues fell $66.1 million, or 41.4 percent, year-over-year to $93.6 million in the fourth quarter from $159.7 million in the prior-year quarter. Fourth quarter sales in 2022 inched down 1.2 percent verus the 2021 comparable period.
The Bike business generated $77 million in net sales in Q4, less than half of the $159 million of revenue in the fourth quarter of 2022, due to the persistent high inventory level across various channels and, therefore, fewer new model year launches.
“The OE 2025 model year launches remain scheduled to begin midyear, and we are excited as our innovative new products have maintained and gained spec share across our customers,” Dennison noted. “While it is too early to articulate the volume of model-year 2025 bikes that will ultimately be ordered, we are excited by our share of whatever volume that will eventually be.”
The Marucci acquisition closed on November 14. The company reported that Marucci generated $16.8 million in net sales following the completion of the acquisition. These results were better than expected for both the top and bottom lines. Excluding the impact of Marucci, SSG sales declined by 52 percent.
“The key drivers from Marucci revenue were strong, new product sales driven by direct-to-player and team sales, plus additional product launches in Japan led by aluminum and wood bats,” Dennison detailed. “Like our other businesses, we are inspired by the level of execution in the Marucci team and their ability to have an incredible product roadmap across all product lines throughout 2024.”
Dennison continued to say that 2023 was a tale of two halves, with the first half of the year generally on plan and, as expected, in the back half of the year, especially after Labor Day, the previously discussed headwinds grew significantly.
“We continue to have confidence that this is a fixable problem for these companies and that the back half of 2024 will begin to return to a more normal operating environment,” Dennison said. “Bike is well-positioned as always tuned to new model launches and product expansion, some of which are already in our back half forecast.”
Consolidated gross margin was 27.7 percent of net sales in the fourth quarter, a 430 basis-point decrease from 32 percent in the same period in the prior year. Company CFO Dennis Schemm said the decrease in gross margin in Q4 was primarily driven by a shift in the portfolio mix with lesser sales from high-margin biking upfitting, the impact of the UAW strike as the company absorbed less costs given the decreased production, and the decision to maintain the manufacturing workforce, offset by increased efficiencies at the company’s 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 300 basis points to 29 percent versus 32 percent in Q4 of 2022.
In the fourth quarter, total operating expenses were $81.0 million, or 24.4 percent of sales, compared to $74.2 million, or 18.1 percent of sales, in the prior year corresponding quarter.
Operating expenses, as a percentage of sales, were higher compared to the prior-year period due to the inclusion of custom warehouse and Marucci operating expenses and the amortization of intangibles, partially offset by cost controls and continuous improvement.
Adjusted operating expenses, as a percentage of sales, increased by 440 basis points to 20.6 percent in the fourth quarter of 2023 compared to 16.2 percent in the corresponding period in the prior year.
The company’s effective tax benefit was $3.1 million in the fourth quarter, compared to an effective tax expense of $0.2 million in the fourth quarter of 2022. The company’s income tax expense decreased primarily due to a decrease in pre-tax income.
Net income in the fourth quarter was $4 million, or 10 cents per diluted share, compared to $53 million, or $1.25 per diluted share, in the prior-year comp period.
Adjusted net income was $20.3 million in Q4, or 48 cents per diluted share, a decrease of approximately $40.6 million, or 66.7 percent, compared to $60.8 million, or $1.43 a share, in the 2022 fourth quarter.
Adjusted EBITDA decreased by 49.5 percent to $38.8 million in Q4, compared to $76.8 million in the 2022 fourth quarter. Adjusted EBITDA margin decreased by 710 basis points to 11.7 percent in the fourth quarter of 2023 compared to 18.8 percent in the fourth quarter of 2022. The decrease in the adjusted EBITDA margin in the fourth quarter of 2023 was said to be primarily due to the change in the portfolio mix, the impact of the UAW strike and the slow ramp-up after the strike ended, the decision to keep a highly trained workforce and cost increases associated with the facilities expansion to support continued growth.
Full Year Summary
Consolidated net sales declined 9 percent to $1.46 billion for the full year, compared to $1.6 billion in 2022. The decline for the year was reportedly attributable to the Specialty Sports Group (SSG) Bike segment. The Bike business was down $309 million, or 45 percent year-over-year, as the company dealt with a massive inventory glut.
The decline in the SSG Bike segment overshadowed significant accomplishments in PVG and AAG for the year, which grew over 21.2 percent and 12.7 percent, respectively—for the full year, even considering the UAW strike, the slow ramp-up after the strike’s conclusion, and the mix of chassis allocation decline that impacted the up-fit business.
On a full-year basis, net income was $120.8 million compared to $205.3 million in the prior fiscal year. Earnings per diluted share for fiscal year 2023 were $2.85 compared to $4.84 in fiscal year 2022. Adjusted net income in fiscal year 2023 was $167.5 million or $3.95 of adjusted earnings per diluted share compared to $232.7 million or $5.49 of adjusted earnings per diluted share for the prior year.
Adjusted EBITDA decreased to $261 million in fiscal year 2023 compared to $321.8 million in fiscal year 2022. Adjusted EBITDA margin decreased to 17.8 percent in fiscal year 2023 compared to 20.1 percent in fiscal year 2022.
Balance Sheet
Schemm said the company’s balance sheet continues to be a strength for Fox and underpins its capital allocation strategy.
The increase in inventory of $21.2 million is driven by the inclusion of $52.5 million of inventory from the Marucci and $13.5 million from Custom Wheel House acquisitions. Excluding Marucci and Custom Wheel House, Fox decreased inventory by $44.7 million year-over-year, driven by lower sales and continuous improvement efforts to optimize inventory across the organization further.
The increase in goodwill and intangibles reflects the Custom Wheel House and Marucci acquisitions.
“Our net leverage is 2.3 times as of year-end and in line with our expectations,” Schemm said. “Our flexible capital structure gives us the ability to invest in growth through R&D, CapEx and sales and marketing and provides the option to repurchase shares and pay down debt.”
The company’s revolver balance as of December 29, 2023, was $370 million versus $200 million as of December 30, 2022. The term loan A balance is $380 million.
“We drew $400 million from our existing revolver and $400 million from our new term loan during 2023 to finance our purchase of Custom Wheel House in March 2023 and Marucci in November 2023 and to support our working capital. These withdrawals were partially offset by $230 million in payments on our revolver and $20 million in prepayments on our new term loan,” Schemm noted.
“In the third quarter of 2023, our Board of Directors approved a $300 million share repurchase program. During the fourth quarter, we repurchased $25 million in shares at an average purchase price of $58.80 per share. CapEx spend for the quarter was $14.8 million, up 81.8 percent versus the prior year quarter of $8.1 million,” he said.
Outlook
Schemm said Fox Factory continues facing headwinds in AAG and PVG due to the higher interest rate environment and macroeconomic outlook at the consumer and dealer distributor levels as the cost of carrying inventory is more expensive.
“While SSG Bike hit tough levels in the fourth quarter, we expect to see further declines in the first half, with the first quarter of 2024 being the lowest since the de-stocking began as the inventory recalibration is taking longer than anticipated and consumer demand is expected to decline year-over-year but will be partially offset by new product launches and growth in e-commerce,” Schemm shared.
For the first quarter of 2024, FOXF expects sales in the range of $315 million to $350 million and non-GAAP adjusted earnings per diluted share in the range of 17 cents to 27 cents.
“Our net sales and EPS are lower year-on-year in Q1, given the continuation of Bike OE de-stocking overhang from the UAW strike that impacted chassis availability and mix, model year changeover timing, which is delaying dealer purchases, and weaker demand from Powersports and PVG,” Schemm detailed.
He said the company expects it will see sequential improvement into the second quarter as they prepare for model year 2025 releases, chassis mix and availability improve, model year change for Ram has launched, and the expectation that the interest rate environment improves.
“As a result, we expect the first half of 2024 to decline year-over-year for expanding to growth in the second half of 2024,” Schemm shared.
For the fiscal year 2024, the company expects sales in the range of $1.53 billion to $1.68 billion and adjusted earnings per diluted share of $2.30 to $2.60. The full-year guidance assumes an income tax rate to be in the range of 15 percent to 18 percent.
Image courtesy Fox Factory Holding
