Fox Factory Holding Corp. saw net sales for the second quarter decline 13.0 percent to $348.5 million, compared to net sales of $400.7 million in the second quarter last year.

The decrease for the quarter reportedly reflects a 31.2 percent decrease in Aftermarket Applications Group (AAG) net sales and a 16.0 percent decrease in Powered Vehicles Group (PVG), partially offset by a 17.8 percent increase in Specialty Sports Group (SSG) net sales.

SSG Segment
The increase in SSG net sales from $104.9 million to $123.6 million was said to be primarily related to the inclusion of $41.6 million in net sales from Marucci, which the company acquired in November 2023, partially offset by a reduction in bike sales of $22.9 million due to the ongoing channel inventory recalibration and, to a lesser extent, lower end consumer demand. Sequentially, bike revenues grew by 52.0 percent from the first quarter.

“Second quarter results were consistent with our expectations, demonstrating continued sequential improvement in net sales and profitability in light of challenging conditions,” commented Mike Dennison, CEO, Fox Factory Holding Corp. “Although our broader industries we address remain pressured by the challenging macro environment, we see encouraging signals of stabilization within areas of our business that have been facing disproportionate impacts resulting from industry oversupply of inventories.”

AAG Segment
The decrease in AAG net sales from $155.6 million to $107.1 million was reportedly driven by lower upfitting sales due to product mix and higher interest rates impacting dealers and consumers.

The company noted that CFO Dennis Schemm has been appointed president of AAG, effective immediately, while retaining existing CFO responsibilities as Thomas (Tom) Fletcher, who has served as president of AAG since May 2021, leaves the company. Schemm will take on additional responsibilities including oversight of the segment’s manufacturing operations, commercial activities, and research and development efforts, while retaining his existing leadership of the finance organization.

Chief accounting officer Brendan Enick will assume treasurer responsibilities in support of the AAG leadership transition. His additional responsibilities will include working with Mr. Schemm and the finance organization to lead the company’s cash flow management and provide oversight of the balance sheet and capital allocation priorities while working to mitigate financial risk.

PVG Segment
The decrease in PVG net sales from $140.2 million to $117.8 million was said to be primarily due to lower industry demand in Power Sports because of higher interest rates.

Income Statement Summary
Gross margin was 31.8 percent of net sales for the second quarter, a 110 basis point decrease from gross margin of 32.9 percent in the 2023 second quarter. The decrease in gross margin was said to be primarily driven by shifts in the product line mix and reduced operating leverage on lower volume, partially offset by increased efficiencies at North American facilities.

  • Adjusted gross margin, which excludes the effects of organizational restructuring expenses, decreased 250 basis points to 31.9 percent from the same prior fiscal year period.

Total operating expenses were $92.4 million, or 26.5 percent of net sales, for the quarter, compared to $79.2 million, or 19.8 percent of net sales in the year-ago quarter. Operating expenses increased by $13.2 million, reportedly due primarily to the inclusion of Marucci operating expenses of $19.4 million, and to a lesser extent, the Custom Wheel House acquisition, which were partially offset by strong cost management actions.

  • Adjusted operating expenses were $78.4 million, or 22.5 percent of net sales in the second quarter, compared to $71.0 million, or 17.7 percent of net sales, in Q2 2023.

The company reflected a tax benefit of $0.4 million in the second quarter of fiscal 2024, compared to a tax expense of $8.1 million in the second 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 second quarter was $5.4 million, or 13 cents per diluted share, compared to net income of $39.7 million, or 94 cents per diluted share, in the second quarter last year.

  • Adjusted net income in Q2 was $15.9 million, or 38 cents of adjusted earnings per diluted share, compared to adjusted net income of $51.4 million, or $1.21 of adjusted earnings per diluted share, in the prior-year quarter.

Adjusted EBITDA in the second quarter was $44.1 million, compared to $79.4 million in the second quarter of fiscal 2023. Adjusted EBITDA margin in the second quarter of fiscal 2024 was 12.7 percent, compared to 19.8 percent in the second quarter of fiscal 2023.

Balance Sheet Summary
As of June 28, 2024, the company had cash and cash equivalents of $82.2 million, compared to $83.6 million as of December 29, 2023.

Inventory was $380.4 million as of June 28, 2024, compared to $371.8 million as of December 29, 2023. Inventory increased by $8.6 million driven by driven by planned inventory builds to ensure sufficient inventory to meet anticipated demand, partially offset by our strong execution of continuous improvement efforts to optimize inventory levels across the organization, particularly within PVG.

As of June 28, 2024, accounts receivable and accounts payable were $157.9 million and $144.0 million, respectively, compared to $171.1 million and $104.2 million, respectively, as of December 29, 2023. The change in accounts receivable reflects the timing of customer collections. The change in accounts payable reflects the timing of vendor payments.

Prepaids and other current assets were $171.1 million as of June 28, 2024, compared to $141.5 million as of December 29, 2023. The increase in prepaids and other current assets is primarily due to carrying new model year chassis to meet current year production needs for the upfitting product lines and, to a lesser degree, slowing sales of older model years.

Total debt was $758.1 million as of June 28, 2024, compared to $743.5 million as of December 29, 2023.

During the first six months of fiscal 2024, the company drew $200 million on its delayed draw term loan and used those proceeds to pay down its revolver balance, resulting in net increase in debt of $14.6 million. The Company recently secured an improved covenant profile on its capital structure to provide more flexibility given the uncertain macro environment.

“As we look towards the second half of fiscal 2024, we are adjusting our expectations in light of ongoing industry challenges and macroeconomic headwinds,” offered Dennison. “While we still anticipate sequential improvement from second to third quarter, the pace of acceleration is likely to be more moderate than initially projected. It is our commitment to innovation and our product roadmap that gives us confidence in our prospects for growth while most of our peers experience declining sales growth in this environment. In this dynamic environment, we are intensifying our focus on managing the controllable aspects of our business, implementing stringent cost management measures, and engaging in prudent resource allocation. These efforts are designed to navigate current market conditions while ensuring we remain strategically positioned to capitalize on long-term growth opportunities as the market environment improves.”

Third Quarter and Fiscal 2024 Guidance
For the third quarter of fiscal 2024, the company expects net sales in the range of $355 million to $385 million and adjusted earnings per diluted share in the range of 35 cents to 50 cents per diluted share.

For the fiscal year 2024, the company now expects net sales in the range of $1.41 billion to $1.48 billion, adjusted earnings per diluted share in the range of $1.40 to $1.72, and a full year effective tax rate in the range of 15 percent to 18 percent.

The company’s expectation to achieve sequential growth in the second half of the year is underpinned by:

  • Bike stabilizing and launch of new products into the entry-premium Bike market;
  • Marucci’s launch of CATX2 and growth from its diversified portfolio; and
  • Improving chassis mix and availability in AAG and new product launches in the Aftermarket space.

The company noted the impact of these positive factors has been tempered by ongoing industry challenges and macroeconomic headwinds.

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 third 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.

CEO Dennison concluded, “We wish Tom well as he transitions out of Fox, and we want to recognize his leadership in helping lead our Aftermarket Applications Group (AAG) segment through a series of strategic acquisitions that have positioned FOX as a leader in the aftermarket channel. I am looking forward to Dennis’ contributions as AAG’s new leader, as his past operating experience and fresh perspectives on FOX’s operations have been invaluable to our leadership team since joining Fox approximately a year ago. To further support this transition, Brendan Enick, our Chief Accounting Officer, will be taking over the role of Treasurer, where he will continue to work closely with Dennis and the finance organization to drive our capital allocation strategy and optimize our balance sheet and cash flows.”

Image courtesy Marucci