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. 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.

Company CEO Michael Dennison said the third quarter results reflected continued sequential improvement as the company delivered a 3.1 percent increase from the second quarter and an 8.5 percent increase compared to the prior-year third quarter. The sequential growth was reportedly led by the company’s Bike business, which delivered a second consecutive quarter of double-digit sequential growth – up 22 percent – following a 52 percent increase in the second quarter.

Dennison said the acquisition of Marucci also provided growth as the team delivered another quarter of solid growth.

“While the underlying demand for Fox’s innovative and performance-defining products remain strong, our results in the third quarter landed at the lower end of our guidance range, as OEM partners further reduced their forecast for our products during the quarter,” Dennison detailed. “These forecast reductions align with the quarterly results and commentary by many of these companies, and are consistent with reductions in [consumer] discretionary spending and uncertain macroeconomic outlook, high interest rates, the fatigue from inflation and the upcoming elections.”

Additionally, Dennison said ongoing quality issues and model year changeovers at several of of the company’s automotive OEM partners continue to impact chassis mix and availability.

“Although we continue to evolve our business through diversification and expansion within the aftermarket, over half of our business remains closely tied to our OEM customers,” he noted. “And when they face challenges, whether from constrained demand, quality concerns, misaligned inventories or production slowdowns, those impacts flow through to our business. The good news is that we have seen the lingering issues begin to abate in Q4 as model year ’25 vehicles are beginning to ship to our facilities now.”

Dennison said the company has responded decisively to the challenges throughout the year by implementing both immediate and longer-term actions to strengthen its business.

“For example, as we saw demand tighten, we’ve aggressively managed and reduced controllable costs across our corporate structure, and at our plants by reducing direct and indirect labor,” he said. “We have also taken more strategic action by closing a plant in Colorado in our AAG business and making other factory efficiency improvements. However, there is more we must do, and we must do it with the same level of urgency and commitment we have in building our world-class brands.”

The CEO said the company began began developing plans across a series of key priorities, reflecting the need to adjust the business structure to align with its view of its OEM’s expected production levels for the near term.

“In a nutshell, we need to deliver our historical EBITDA margins, regardless of the volume commitments for our OEMs,” Dennison said on a conference call with analysts.

“We hit the ground running in Q3, driving initial actions that while they negatively impacted the profitability of the quarter, they are designed to enable margin growth in Q4 and beyond,” Dennison shared. “The focus of our work is centered around the following four initiatives: Simplify and consolidate our footprint; reduce and eliminate non-performing products in our portfolio; reduce inventory; and finally, reduce costs. Beyond the four initiatives, I have challenged our entire team to identify opportunities to strategically optimize our cost structure across all of our segments.”

He said that while Fox Factory remains a company oriented toward generating long-term growth, they want to ensure that the business is optimally positioned to operate efficiently in a number of demand environments so that they can protect margins and drive significant and consistent free cash flow.

Dennison noted an important step of this process was a change in leadership in the AAG segment.

“In his first quarter, he has identified opportunities to reduce inventory, and has taken action to drive significant improvement within the quarter,” he explained. “We are developing similarly impactful strategies across our other businesses that we expect to implement this year. We are also continuing to focus on creating diversification across our segments, products, markets and geographies to create a more resilient organization that can be nimble in response to demand shifts in the industry cyclicality.”

Dennison highlighted other recent growth initiatives, like the move into the entry premium bike category, the Marucci acquisition and MLB partnership, and the accelerated international growth have significantly expanded the company’s addressable market, while improving multiple price points for consumers to access Fox Factory brands.

Segment Summary

Specialty Sports Group (SSG), which includes the Fox Factory, Marucci, Easton cycling, and Race Face brands, posted net sales of $150 million in Q3, compared to $72 million in Q3 last year, said to be primarily reflecting a $49.6 million increase from inclusion of Marucci (acquired in November 2023) and a $27.9 million increase in Bike sales.

“Our bike business delivered a $28 million increase in sales year-over-year and built on last quarter’s 52 percent sequential increase with another 22 percent sequential increase in Q3,” Dennison noted.

  • Bike revenues grew 21.9 percent sequentially, and 38.7 percent over the prior-year third quarter.

Dennison said they achieved this improvement while maintaining flat operating expenses year-to-date, demonstrating the significant operating leverage potential in their business model. Although bike sales improved compared to prior year, the company said the ongoing channel inventory recalibration and, to a lesser extent, lower-end consumer demand, remain headwinds.

“While our Bike business grew sequentially and year-over-year, which certainly supports a return to a more balanced outlook than we have seen in the last 18 months, we are not ready to call the inventory destocking complete. As I have said previously, not every channel or customer will exit at the same time or rate, and that lumpiness will persist into next year,” the CEO suggested.

“Our strategic expansion into the entry premium bike segment and consistent strength in the top 10 OEMs has buffered us from some of the softness in the smaller OEM customers,” he said. “The entry premium category represents a transformative opportunity for us to challenge the status quo, further diversifying our business and effectively doubling our total addressable market, while maintaining our brand’s premium positioning.”

Dennison said the early response from their OEM customers has been overwhelmingly positive, further validating the strategy to broaden market participation, while staying true to the company’s performance-defining heritage.

“We’re also seeing similar success in the e-bike category, which represents another important avenue for market expansion,” he noted.

From a regional perspective, Dennison said the European market reportedly maintains its relative strength due to better inventory positioning, while the U.S. market continues to progress towards stabilization.

“In the third quarter, we also launched our new NEO Live Valve wireless solutions to overwhelming positive reviews and early success. Another example of our commitment to innovating at the premium high-performance end of the sport,” Dennison noted.

Turning to Marucci, Dennison said the company’s brands continue to demonstrate relative strength and market share expansion.

“While we are seeing particular excitement around Marucci with the world series and stars, such as Freddie Freeman, utilizing our bat to become the MVP and our new Marucci CAT X2 bat launch, we are focused behind the scenes preparing with Major League Baseball to take the field as official bat partners beginning 2025. The amount of work to ensure that 2025 is the first year of a multiyear success story is keeping us busy 24/7,” he shared.

“In addition, we believe that recent investments in Hitter’s House softball as well as new product lines from both Marucci and Victus set us up very well for 2025,” he said.

Dennison said some of the upcoming product launches will likely weigh on near-term margins as the brand builds the capacity and capability to “deliver home runs.”

“With all of this excitement around Marucci business, it is important to also acknowledge that we are seeing some signs of softness from the consumer as they balance their budgets for discretionary items against their immediate needs during this uncertain period,” he cautioned.

Powered Vehicle Group (PVG) net sales were $109 million in the third quarter, down from $123 million in the prior-year quarter, which reportedly reflects a reduction in demand forecast from the company’s OEM partners in response to broader market conditions and a deferral of larger ticket discretionary spending by consumers.

“This hesitancy, combined with ongoing OEM quality issues that are continuing to delay production at the OEMs resulted in lower volumes than we anticipated. This has impacted our facility utilization rates and consequently, our margin performance in the quarter,” the CEO detailed.

“In the automotive sector, while our premium truck category has historically demonstrated more resilience to market pressures, we’re now seeing some moderation in demand within this category as well,” the CEO shared. “The broader OEM automotive space continues to face excess dealer inventory, and although we’re seeing gradual improvement as we move through the year, inconsistent general consumer demand continues to weigh on the pace of de-stocking.”

Dennison said the level of de-commit from automotive OEM customers in the quarter was significant.

“For the top three automotive customers, this translated to a sequential reduction by customer of 9.2 percent, 37.1 percent and a whopping 87 percent unforecasted reduction from Q2 to Q3. Overall, this equated to a 19.5 percent drop in this overall product sector within the quarter. This was partially offset by our PVG aftermarket business, which improved 28.3 percent sequentially,” he noted.

“Similarly, the power sports market faces ongoing challenges, with our OEM partners deliberately managing production well below retail demand to address dealer inventory levels consistent with the prior quarter. The forecast reductions we have previously taken in this segment appear to be within line of current expectations,” he said.

But Dennison also noted that while customer demand outlook within PVG continues to be a headwind, the Fox brand remains the standard and continues to be sought after by consumers.

“In fact, in the PVG aftermarket, we achieved the highest level of new bookings in both domestic and international channels in over six quarters, which highlight that customers will fix their current vehicles if they can’t justify the expense of a new one,” he noted.

We also continue to win across new customers, new partnerships and as always, in racing. In Q3, we announced a return to our motorcycling roots by partnering with Buell USA under our new Super Cruiser bikes launching in 2025. In side by side, we kicked off new products and announced a partnership with CFMOTO on their ZFORCE line as well as new wins with BRP on the Maverick R 4-seater and a new Outlander UTV.

With Ford, we were not only awarded the new program on the JMC Ranger Extreme, but also unveiled the new Raptor T1 Dakar race vehicle at the annual Goodwin event. And finally, in racing, there are frankly too many wins to list, but overall we were at the top of the podium in six different races across both UTV and trucks.

Aftermarket Applications Group (AAG) net sales were $100 million in Q3, compared to $136 million in the prior-year third quarter.

“Alongside the AAG leadership transition, we’ve completed a comprehensive assessment of the business that has led to a clear phased approach to drive improvement,” Dennison noted. “Phase 1 included a deep dive into team, customers and the operations, identifying both challenges and opportunities, including the critical need to optimize our inventory position and strengthen our dealer relationships. And we closed our facility in Colorado, transitioned business to other facilities to further improve productivity.

“Phase 2, which we’re executing now, has centered on taking decisive action. While inventory optimization was always part of our plan for the second half of ’24, it became clear, following discussions with key OEMs and dealer partners, that accelerating this activity in September would best position the business for 2025, with new late model trucks that meet the latest consumer preferences.”

Dennison said they provided incremental support to their dealers through targeted promotional programs to help move inventory in an efficient manner.

“The acceleration of our plan impacted third quarter margins to a greater degree than we contemplated in our prior guidance. However, completing this before year-end has removed a significant constraint to future growth, and has positioned us to capture the full benefit of the recovery when the market rebounds,” he said. “Thus, we expect Q3 will be the low watermark for AAG margins before inflecting upward in the fourth quarter, which we expect to continue through 2025.”

Phase 3 of the strategic plan focuses on building and diversifying AAG through multiple initiatives.

“This includes partnering new relationships with existing and potential OEMs and other partners, expanding our products to new platforms, implementing a common marketplace for our up-fits and aftermarket components and increasing overall brand accessibility,” Dennison summarized.

“Importantly, we’re renewing our focus on our performance routes, while building the infrastructure to support significant long-term margin improvement,” he continued. “The enthusiasm among our teams is building as we execute these initiatives. In Q3, our product development teams launched Race Wheels from Method, designed to better support 4-6-inch lifts with 20-22-inch wheels for the light truck market. Ridetech launched a front-end rear suspension system that modernizes the popular Ford Fox Body Mustang and Sport Truck launched the GM 1500 long travel suspension, with Baja kits by the Brenthel Brothers.”

Income Statement Summary

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.

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 25 cents to 40 cents.

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 said it is unable to address the probable significance of the unavailable information, which could be material to future results.

Image courtesy Marucci Sports/Fox Factory Holding Corp.