Fox Factory Holdings Corp. has seen no sign of slowing demand for its high-end forks and shocks among mountain bike manufacturers, its CEO told analysts last week.



While it’s still early in the season, CEO Larry Enterline told analysts he sees none of the weakness being reported by makers of road bike and lower priced mountain bikes.

 

“Any difficulty we’ve seen is with certain manufacturers in the 26-inch wheel size and we don’t see that as a factor that is going to drag high-end mountain bike orders down,” Enterline said during the company’s first quarter earnings call. “The premium end of mountain bikes is holding certainly better than mountain bikes as a whole and certainly road bikes.”

 

FOXF reported sales of its mountain bike products declined 4.4 percent, which was anticipated due to the planned shut-down of the company's factory in January. To ensure adequate stocks of the company’s high-end forks and shocks, mountain bike manufactures pulled forward their orders for the 2015 models into the fourth quarter of last year. U.S. sales increased 29.9 percent, while International sales declined 31.0 percent. Sales at the company’s much smaller powered vehicles business increased 14.1 percent. 

 

Gross margin improved 170 basis points to 30.3 percent, reflecting the company's ongoing efforts to reduce lead times with mountain bike manufacturers in Taiwan. FOXF is shifting fork manufacturing from California to Taiwan this year and will shift shock manufacturing to Taiwan next year. It has also launched a product design for manufacturability program.

 

 

Those changes are expected to help the company boost gross margins by 200 basis points in fiscal 2014.
In the first quarter, however, operating expenses rose 430 basis points to 21.9 percent of sales, compared with the first quarter of 2013. The increase was due largely to transaction costs related to the company’s acquisition of a distributor, Sport Truck USA, Inc., for $40.9 million in cash plus up to $29.3 million in earn out payments. Expense also rose as FOXF continued to beef up its infrastructure as a public company following its August, 2013 IPO, which raised approximately $36 million for the company.

 

Operating income declined 21.7 percent to $4.7 million, or 8.5 percent of sales, compared with 11.0 percent in the first quarter of fiscal 2013. Net income declined 17.1 percent to $2.9 million, or 8 cents per share, which was still at the high end of the company’s guidance.

 

FOXF affirmed its April 1 guidance, which calls for full year sales of $300 million to $320 million.

 

Enterline said strong initial model year 15 orders from OEMs have reaffirmed FOXF’s expectations for strong model year 2015 orders.

“What we see in order pattern makes us feel pretty good at this stage,” Enterline said. Everyone is rushing to get new model bikes out there and we are as anxious as anyone to see how those sell through and that will determine how we do.”

 

Enterline said he was encouraged by traffic at the company’s booth at Sea Otter Classic, the annual bicycle festival that draws about 65,000 people to the Laguna Seca Raceway near Monterey, CA every April. He said a strong performance by the company’s mountain bike race teams also augurs well for sell through of 2015 model bikes.
“We experienced a lot of foot traffic, including on the slower first and last days of the show, which is usually a strong indicator for the upcoming season,” said Enterline.