Fox Factory Holding Corp. cut its earnings and sales outlook for the year after third-quarter results came in at the low-end of guidance due to weak orders from its OEM (original equipment manufacturer) customers.
Third Quarter Fiscal 2024 Highlights
- Net sales for the third quarter of fiscal 2024 were $359.1 million, a sequential increase of 3.1 percent and an 8.5 percent increase over the prior year
- Revenue and earnings per diluted share within the low end of our guidance range
- Bike revenues grew 21.9 percent sequentially, and 38.7 percent over the prior year
- Executed $400 million in interest rate swap hedges to reduce interest expense and provide greater predictability
- Initiated strategic actions in AAG segment in third quarter aimed at improving inventory position
- Announced expanded cost optimization efforts targeting more than $25 million across enterprise to recapture margin amid challenged macroeconomic backdrop
Sales of $359.1 million arrived at the low-end of guidance in the range of $355 million to $385 million. Adjusted EPS of 35 cents a share compared with guidance calling for EPS in the range of 35 cents to 50 cents.
Management Commentary
“Although we delivered sequential and year-over-year revenue growth in the third quarter, our OEM customers remained challenged due to broader market conditions impacting consumer discretionary spending, which pushed results towards the lower end of our expectations,” commented Mike Dennison, Fox’s chief executive officer. “We’ve responded decisively to these challenges by implementing both immediate and longer-term actions to strengthen our business, including aggressive cost management and strategic operational improvements. Importantly, underlying demand for Fox’s innovative products remains strong across our segments, particularly evident in our aftermarket channels where we continue to see growth.”
Dennison continued, “During the third quarter, we began developing and implementing plans across a series of key priorities, reflecting a commitment to adjust our business structure to operate efficiently in a number of demand environments so that we can protect margins and drive significant, and consistent, free cash flow to de-lever our balance sheet. We have initiated this strategy through swift actions in our AAG segment that we expect to improve margins in the fourth quarter, and are extending these efforts across our other business segments as well. We expect our combined efforts to result in more than $25 million of annualized cost reductions to strategically position ourselves to capitalize on opportunities as consumer demand accelerates in the future.”
Third Quarter 2024 Results
Net sales for the third quarter of fiscal 2024 were $359.1 million, an increase of 8.5 percent, as compared to net sales of $331.1 million in the third quarter of fiscal 2023. This increase reflects a $77.5 million or 107.6 percent increase in Specialty Sports Group (SSG), which includes the brands Fox Factory, Marucci, Easton cycling, and Race Face. The gains reflect the acquisition of Marucci Sports in November 2024. The gains were partially offset by a $35.8 million or 26.3 percent decrease in Aftermarket Applications Group (AAG) and a $13.7 million or 11.2 percent decrease in Powered Vehicles Group (PVG). The increase in SSG net sales from $72.0 million to $149.5 million is primarily related to the inclusion of $49.6 million in net sales from Marucci, which it acquired in November 2023, and a $27.9 million increase in bike sales. Sequentially, bike revenues grew by 21.9 percent. Although bike sales improved compared to prior year, the ongoing channel inventory recalibration and, to a lesser extent, lower end consumer demand remain headwinds. The decrease in AAG net sales from $136.0 million to $100.3 million is driven by lower upfitting sales due to product mix, higher interest rates impacting dealers and consumers, and higher inventory levels at dealerships. The decrease in PVG net sales from $123.1 million to $109.3 million is primarily due to lower industry demand in power sports and automotive because of higher interest rates.
Gross margin was 29.9 percent for the third quarter of fiscal 2024, a 250-basis point decrease from gross margin of 32.4 percent in the third quarter of fiscal 2023. The decrease in gross margin was primarily driven by shifts in its product line mix and reduced operating leverage on lower volume. Adjusted gross margin, which excludes the effects of organizational restructuring expenses in the prior year, decreased 330 basis points to 29.9 percent from the same prior fiscal year period.
Total operating expenses were $88.7 million, or 24.7 percent of net sales, for the third quarter of fiscal 2024, compared to $65.9 million, or 19.9 percent of net sales in the third quarter of fiscal 2023. Operating expenses increased by $22.8 million primarily driven by the inclusion of Marucci operating expenses of $19.7 million. Adjusted operating expenses were $75.8 million, or 21.1 percent of net sales in the third quarter of fiscal 2024, compared to $58.3 million, or 17.6 percent of net sales, in the third quarter of the prior fiscal year.
Tax expense was $0.3 million in the third quarter of fiscal 2024, compared to tax expense of $3.5 million in the third quarter of fiscal 2023. The decrease in the company’s income tax expense was primarily due to a decrease in pre-tax income.
Net income in the third quarter of fiscal 2024 was $4.8 million, compared to net income of $35.3 million in the third quarter of the prior fiscal year. Earnings per diluted share for the third quarter of fiscal 2024 was $0.11, compared to earnings per diluted share of $0.83 for the third quarter of fiscal 2023. Adjusted net income in the third quarter of fiscal 2024 was $14.8 million, or $0.35 of adjusted earnings per diluted share, compared to adjusted net income of $44.8 million, or $1.05 of adjusted earnings per diluted share, in the same period of the prior fiscal year.
Adjusted EBITDA in the third quarter of fiscal 2024 was $42.0 million, compared to $63.7 million in the third quarter of fiscal 2023. Adjusted EBITDA margin in the third quarter of fiscal 2024 was 11.7 percent, compared to 19.2 percent in the third quarter of fiscal 2023.
First Nine Months Fiscal 2024 Results
Net sales for the nine months ended September 27, 2024, were $1,041.1 million, a decrease of 8.0 percent compared to the first nine months in fiscal 2023. This decrease reflects a $121.1 million or 28.1 percent decrease in AAG net sales and a $60.3 million or 14.9 percent decrease in PVG net sales, partially offset by a $90.8 million or 30.7 percent increase in SSG net sales. The decrease in AAG net sales from $430.4 million to $309.3 million is driven by lower upfitting sales due to product mix, higher interest rates impacting dealers and consumers, and higher inventory level at dealerships. The decrease in PVG net sales from $405.5 million to $345.2 million is primarily due to lower industry demand in power sports and automotive because of higher interest rates. The increase in SSG sales from $295.8 million to $386.6 million is related to the inclusion of $150.8 million in net sales from Marucci, partially offset by a reduction in bike sales of $60.0 million because of the ongoing channel inventory recalibration and, to a lesser extent, lower end consumer demand.
Gross margin was 30.9 percent in the first nine months of fiscal 2024, a 200-basis point decrease, compared to gross margin of 32.9 percent in the first nine months of fiscal 2023. The decrease in gross margin for the first nine months of fiscal 2024 was primarily driven by shifts in its product line mix and operating leverage on lower volume. Adjusted gross margin, excluding the effects of the amortization of an acquired inventory valuation markup and organizational restructuring expenses, was 31.3 percent in the first nine months of fiscal 2024, a 270-basis point decrease, compared to 34.0 percent in the first nine months of fiscal 2023.
Total operating expenses were $275.3 million, or 26.4 percent of net sales, for the first nine months of fiscal 2024, compared to $223.7 million, or 19.8 percent of net sales in the first nine months of fiscal 2023. Operating expenses increased by $51.6 million primarily due to the inclusion of Marucci operating expenses of $59.9 million, partially offset by cost controls. Adjusted operating expenses were $234.5 million, or 22.5 percent of net sales in the first nine months of fiscal 2024, compared to $199.6 million, or 17.6 percent of net sales, in the first nine months of the prior fiscal year.
Net income in the first nine months of fiscal 2024 was $6.7 million, compared to $116.8 million in the first nine months of the prior fiscal year. Earnings per diluted share for the first nine months of fiscal 2024 was $0.16, compared to $2.75 in the same period of fiscal 2023. Adjusted net income in the first nine months of fiscal 2024 was $42.6 million, or $1.02 of adjusted earnings per diluted share, compared to $147.2 million, or $3.46 of adjusted earnings per diluted share in the same period of the prior fiscal year.
Adjusted EBITDA decreased to $126.6 million in the first nine months of fiscal 2024, compared to $222.3 million in the first nine months of fiscal 2023. Adjusted EBITDA margin decrease to 12.2 percent in the first nine months of fiscal 2024, compared to 19.6 percent in the first nine months of fiscal 2023.
Balance Sheet Summary
As of September 27, 2024, the company had cash and cash equivalents of $89.2 million, compared to $83.6 million as of December 29, 2023. Inventory was $401.4 million as of September 27, 2024, compared to $371.8 million as of December 29, 2023. As of September 27, 2024, accounts receivable and accounts payable were $192.5 million and $134.6 million, respectively, compared to $171.1 million and $104.2 million, respectively, as of December 29, 2023. Prepaids and other current assets were $128.0 million as of September 27, 2024, compared to $141.5 million as of December 29, 2023. The increase in cash and cash equivalents was primarily due to a decrease in prepaids and other current assets driven by lower chassis deposits as it worked to sell through model year 2024. Inventory increased by $29.5 million driven by timing and some seasonal inventory. The change in accounts receivable is due to higher sales in fiscal quarter ended September 27, 2024 compared to fiscal quarter ended December 29, 2023. The change in accounts payable reflects the timing of vendor payments. Total debt was $768.4 million as of September 27, 2024, compared to $743.5 million as of December 29, 2023.
Fourth Quarter and Fiscal 2024 Guidance
For the fourth quarter of fiscal 2024, the company expects net sales in the range of $300 million to $340 million and adjusted earnings per diluted share in the range of $0.25 to $0.40.
For the fiscal year 2024, the company now expects net sales in the range of $1.341 billion to $1.381 billion, adjusted earnings per diluted share in the range of $1.27 to $1.42, and a full year adjusted tax rate in the range of 15 percent to 18 percent. Previously, Fox expected sales in the range of $1.407 billion to $1.477 billion and adjusted earnings per diluted share in the range of $1.40 to $1.72.
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, organizational restructuring expenses, and strategic transformation costs. A quantitative reconciliation of adjusted earnings per diluted share for the fourth quarter and full fiscal year 2024 is not available without unreasonable efforts because management cannot predict, with sufficient certainty, all of the elements necessary to provide such a reconciliation. For the same reasons, the company is unable to address the probable significance of the unavailable information, which could be material to future results.
Image courtesy Marucci