Fox Factory Holding Corp. reported its sales of bicycling components grew 5.7 percent in the fiscal first quarter ended March 31 as the addition of sales from RaceFace/Easton Cycling more than offset declining sales of its mountain bike (MTB) suspension products.
The components maker, which is now growing much faster in the power vehicle market than the mountain bike market, said sales by RaceFace/Easton Cycling grew in the high-single digits as expected. FOXF acquired the companies early this year in a deal that added cranks, bars, stems and seat posts to the list of products it can supply bike manufacturers and marked its entry into the road bike business through Easton's wheel business.
Sales of MTB forks and rear shocks, meanwhile, declined due to increased competition and weaker sell-through of model year 2015 products during what is the slowest quarter of the year for that business. FOXF's bicycle sales rise sharply in the second and third quarter as manufacturers begin assembling and shipping new model year bikes specked with its components. The company makes all its forks in Taiwan and expects to make 85 percent of its rear shocks there by year end in a bid to cut lead times to Taiwan's bike manufacturers.
FOXF reported total sales grew 20.8 percent to $67.8 million thanks to primarily to a 43.5 percent increase in sales at its powered vehicle business, which provides suspension products for motorcycles, snow mobiles, ATVs and increasingly off-road pick-up trucks and SUVs.
Gross margin declined 260 basis points to 27.7 percent due to amortization of the inventory adjustment related to the company's acquisition of RaceFace/Easton Cycling and cost incurred mitigating a logistics nightmare created by congestion at West Coast ports. Those costs included use of air freight, diverting freight through other ports and higher manufacturing costs, explained FOXF CEO Larry Enterline.
“We would have to stop our production line one week and then work it overtime the next,” Enterline said. “You just can't run a factory very efficiently doing that.”
Enterline said he sees no evidence that late deliveries will lead to any lingering inventory issues in the bicycle business.
FOXF's SG&A expenses reached 14.7 percent of sales, up 90 basis points as the company boosted its sales and marketing spending by 37.8 percent and its general and administrative costs rose 18.1 percent. Operating margin plunged 630 basis points to 2.2 percent, due $2.1 million in charges and expenses related to two acquisitions and the West Coast ports slowdown.
FOXF said adjusted EBITDA increased 9.3 percent to $9.4 million, or 13.8 percent of revenue, compared to 15.4 percent in the first quarter of fiscal 2014. Net income declined 72.4 percent to $800,000, or 2 cents per diluted share, but was flat at 12 cents on a non-GAAP adjusted basis.
Executives said they feel more optimistic about their MTB business than a year ago based on how many bike brands have specified its products, victories by its racing team and product reviews. FOXF President Mario Galasso said the 2016 version of its Float 34 suspension fork introduced to consumers at Sea Otter Classic last month is generating a lot of positive buzz. The fork was completely redesigned to accommodate the fatter 27.5-inch tires that are becoming increasingly popular with mountain bikers and is expected to appeal to those looking for a lighter weight, stiffer bike with longer travel.
“Local dealers are telling us that their customers are walking in with photos of our latest offerings taken from Sea Otter and asking when they will be able to get them,” Galasso said, noting that model year 2016 bikes started shipping in volume this quarter.
He added, however, that currency headwinds make it difficult to know how profitable the bike business will be.
“We have currency and certain things that are outside of our control, but the things that we've been able to control, we're happy with the results of and now we'll deliver and see what happens,” said Galasso.
