Fox Factory Holding Corp. reported net sales for the second quarter of fiscal 2023 were $400.7 million, a decrease of 1.5 percent, compared to net sales of $406.7 million in the second quarter of fiscal 2022. This decrease reflects a 41.0 percent decrease in Specialty Sports Group (SSG) net sales, offset by a 32.6 percent and 26.2 percent increase in Powered Vehicles Group (PVG) and Aftermarket Applications Group (AAG) net sales, respectively.

In the second quarter of 2023, the Fox Factory realigned its Powered Vehicles Group into the Powered Vehicles Group (PVG) and the Aftermarket Applications Group (AAG) to align more with its end customers and drive additional focus on product development.

Higher inventory levels across various channels reportedly drove the decrease in SSG net sales. The increase in PVG net sales was primarily due to strong demand in the original equipment manufacturer (OEM) channel. The increase in AAG net sales was reportedly primarily due to the inclusion of revenue from the Custom Wheel House subsidiary, which was acquired in March 2023, and strong performance in the upfitting product lines.

“Strong sales growth in PVG and AAG coupled with continued efficiency gains in our North American facilities enabled us to deliver on net sales and to exceed our expectations on adjusted EBITDA and adjusted EBITDA Margin,” commented Mike Dennison, CEO of Fox Factory Holding Corp. “Our solid cash flow generation and strong balance sheet place us in a position of strength heading into the second half of the year as we advance our organic growth strategy, address softness in SSG and continue to evaluate various acquisition targets that would be accretive to our brands and our financial performance.”

Gross margin was 32.9 percent of sales for the second quarter, a 220 basis-point decrease from the gross margin of 35.1 percent in the second quarter 2022. The decrease in gross margin was primarily driven by the amortization of an acquired inventory valuation markup and a shift in product line mix, offset by increased efficiencies at Fox’s North American facilities. Adjusted gross margin, which excludes the effects of amortization of acquired inventory valuation markup, decreased 90 basis points to 34.4 percent from the comparable prior-year period.

Total operating expenses were $79.2 million, or 19.8 percent of net sales, for Q2, compared to $72.5 million, or 17.8 percent of net sales, in Q2 2022. Operating expenses increased by $6.7 million primarily due to the inclusion of Custom Wheel House operating expenses of $4.8 million and the amortization of intangibles obtained in the acquisition of Custom Wheel House. 

Adjusted operating expenses were $71.0 million, or 17.7 percent of net sales, in the second quarter, compared to $66.5 million, or 16.3 percent of net sales, in the second quarter last year.

Net income in the second quarter was $39.7 million, or 94 cents a share, compared to $53.5 million, or $1.26 a share, in the year-ago quarter.

Adjusted net income in Q2 was $51.4 million, or $1.21 of adjusted earnings per diluted share, compared to adjusted net income of $58.6 million, or $1.38 of adjusted earnings per diluted share, in the prior-year period.

Adjusted EBITDA in the second quarter was $79.4 million, compared to $88.1 million in the second quarter 2022. Adjusted EBITDA margin in the second quarter 2023 was 19.8 percent of sales, compared to 21.7 percent in the second quarter last year.

“Strong double-digit EBITDA margins demonstrate the strength of our brands, product diversification and commitment to continuous improvement. Our operating model, coupled with our strong balance sheet and cash flows, sets us up well to achieve our growth goals,” Dennison concluded.

Balance Sheet
Fox Factory had cash and cash equivalents of $105.4 million at quarter-end, compared to $145.3 million as of December 30, 2022. The decrease in cash and cash equivalents was primarily due to increased pre-paids and other current assets driven by higher chassis deposits as Fox ramps up to meet current-year demand, which aligns with the upfitting business cycle.

Inventory was $355.2 million at quarter-end, compared to $350.6 million as of December 30, 2022. Inventory increased by $4.6 million, reportedly driven by the inclusion of $16.5 million of acquired inventory from Custom Wheel House, offset by the continuous improvement efforts to optimize inventory levels throughout the organization.

As of June 30, 2023, accounts receivable and accounts payable were $171.3 million and $99.3 million, respectively, compared to $200.4 million and $131.2 million, respectively, as of December 30, 2022. The changes in accounts receivable and accounts payable reflect the timing of customer collections and vendor payments.

Pre-paids and other current assets were $214.8 million as of June 30, 2023, compared to $101.4 million as of December 30, 2022.

Total debt was $325.0 million at quarter-end, compared to $200.0 million as of December 30, 2022. During the first quarter of fiscal 2023, the company incurred additional debt to support its working capital and the acquisition of Custom Wheel House, and subsequently, was able to pay down $35.0 million of the revolver borrowings.

Fiscal 2023 Guidance
Looking ahead, Fox expects net sales in the range of $390 million to $410 million and adjusted earnings per diluted share in the range of $1.00 to $1.20 for the third quarter of fiscal 2023.

For the fiscal year 2023, Fo Factory expects net sales at the low end of $1.67 billion to $1.70 billion, adjusted earnings per diluted share 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.

Adjusted earnings per diluted share exclude the following items net of applicable tax: amortization of purchased intangibles, litigation and settlement-related expenses, acquisition and integration-related expenses and strategic transformation costs. A quantitative reconciliation of adjusted earnings per diluted share for the third quarter and full fiscal year 2023 is not available without unreasonable efforts because management cannot predict, with sufficient certainty, all of the elements necessary to provide such a reconciliation.

Photo courtesy Fox Factory