Fox Factory Holding Corp. reported sales increased 15.3 percent in the fourth quarter of 2013 to $65.3 million driven by strong growth in sales of suspension parts for both mountain bikes (MTBs) and powered vehicles.
Sales of MTB and powered vehicle products increased 14.2 percent and 17.2 percent, respectively, in the quarter ended Dec. 31, 2013, compared to the year-ago quarter. Fourth quarter 2013 sales included approximately $3 million of sales that were originally scheduled to occur in early 2014.
Fox CEO Larry Enterline acknowledged the results contradict a broad decline in bike sales reported by many of Fox’s customers, but noted that sales of the $2,000-plus MTBs that use Fox forks and shocks have grown faster than the overall market the last three or four years.
“On balance, we believe that premium mountain bikes will continue to do better than bike overall,” Enterline said.
SG&A rose 20.0 percent to $6.59 million, or 10.1 percent of sales, up 80 basis points from the fourth quarter of 2012. Gross margin increased 540 basis points to 28.7 percent, with 220 bps coming from improved efficiencies and the rest from a return to normal warranty costs following a major recall in the fourth quarter of 2012.
Net income increased 174.9 percent to $4.9 million compared to $1.8 million in the same period last fiscal year. Adjusted EBITDA in the fourth quarter of fiscal 2013 was $10.8 million, a 68.1 percent increase compared to $6.4 million in the fourth quarter of the prior year. Adjusted EBITDA margin in the fourth quarter of fiscal 2013 improved 520 basis points to 16.6 percent.
Fox ended the year with inventory valued at $42.8 million, an increase of nearly 25 percent. CFO Zvi Glasman attributed some of the increase to the fact that the company has to stock parts in both California and Asia as it shifts manufacturing of its fork and shocks offshore over the next two years. It also reflects inventory at Toxoholic, a German distributor Fox acquired last year.
“Information on overall industry inventory positions remain widely varying,” said Mario Gallasso, an engineer who was appointed Fox president in February. “Third-party manufacturers have experienced an uptick in tailing model year 2014 orders and strong orders for the strong model year 2015, especially for high-end carbon fiber products. So while . . . there may be regional, OEM specific, or segment pockets of inventory concerns, there does not appear to be an overall inventory position challenge to a strong model year 2015 start.”
Wheel sizes continue to a be hot topic, but Gallasso said it appears the 27.5’ tire is rapidly displacing the 26-inch in longer travel segments and being adopted more quickly than the 29er was.
“We see these as a positive dynamic for bike sales going forward,” said Gallasso. “In the short-term, however, there's a little confusion on which product is best suited for particular consumers and riding styles, as well as dealer inventory concerns to support all three wheel sizes in terms of tubes and tires, et cetera until there is a clear wheel size winner, or until the wheel size share of market settles out.”
Another favorable trend is the growing popularity of enduro racing, which requires completely different components than those Fox makes for XC and downhill MTB racing. Gallasso also called out the growth of high school MTB leagues, which are now operating in 10 states thanks to the work of the industry-backed National Interscholastic Cycling Association.
With about 75 percent of the specking complete for model 2015 bikes, Gallasso said it appears Fox will neither gain nor lose market share. However, the company is preparing to expand its presence in the growing e-bike market, where some European brands are already using Fox forks on power-assisted MTBs. Fox plans to enter the much larger market for commuter e-bikes. While Europeans are now buying about 1 million e-bikes a year, the market is just beginning to gain momentum in North America. Fox also expects to start selling forks and shocks for MTBs under the $2,000 price point for the first time in either 2015 or 2016.
Fox reaffirmed its early February guidance, which calls for fiscal 2014 first quarter sales of $53 million to $57 million and fiscal year 2014 net sales in the range of $275 million to $295 million and non-GAAP adjusted earnings per diluted share in the range of 79 to 89 cent range excluding cost related the its pending acquisition of Sport Truck USA, a full-service global distributor of aftermarket suspension products.