Fox Factory Holding Corp.’s sales of mountain bike products decline 8.1 percent in the third quarter due to incursions by competitors, lower than expected sell through of Fox equipped bikes and lingering supply chain issues outside its control.

FOXF reported sales of its high-performance forks and rear suspension components for mountain bikes (MTBs) were off 2 percent for the first nine months ended Sept. 30, compared with the first three quarters of 2013.
CEO Larry Enterline said sales of premium MTBs are still growing, albeit at a slower pace than recent years, but that Fox lost market share in both the OEM and aftermarket channels to competitors in model year 2015, which kicked of this fall.

“It’s not that it’s huge numbers, but it certainly …[was] a deviation from what we had initially anticipated,” said Enterline. “I think a combination of some of the plus and minusing on spec and then the sell-through of those bikes, did give us, I think a negative outcome from what we were expecting.”

Put another way, some bike brands reduce their use of Fox components relative to competing vendors while bikes that were equipped with Fox components did not perform as expected at retail. Enterline said competitors gains came more from improved functionality than price cutting and that Fox anticipates it will win back market share with Model 2016 bikes.

Those efforts got a boost during the recently concluded 2014 racing season, when Fox athletes pulled off their first sweep of men’s and women’s world championship titles in both the cross-country and downhill categories and the men’s title in the Enduro World Series. FOXF President Mario Galasso said he expects the strong showing as well as favorable reviews of the next-generation products developed under FOXF’s Racing Applications Development program, will help FOXF regain its share  of OEM orders  for next year’s models.
“Our Racing Applications Development program is where we develop new technologies and features with our top athletes on the world’s toughest terrain and courses,” he explained. “Oftentimes these technologies and features are integrated into upcoming model year product lines.”

FOXF total net sales increased 9.5 percent to $90.1 million thanks to 50.5 percent growth in sales of powered vehicle products primarily driven by Sport Truck USA Inc., which FOXF acquired in April.

Gross margin reached 31.7 percent, up 90 basis points (bps) from the third quarter of fiscal 2013 thanks to manufacturing and supply chain efficiencies related to a shift in production of all MTB components from California to Taiwan to be closer to its OEM customers and the epicenter of premium bicycle manufacturing. In the third quarter, FOXF made approximately half its finished bicycle forks in Taiwan, keeping it on pace to move all such manufacturing offshore by the end of 2015 to it can accommodate more of its powered vehicle production at its factory in California.

Total operating expenses were $14.6 million, or 16.2 percent of sales, compared to $10.6 million, or 12.8 percent of sales, in the third quarter of the prior fiscal year. The increase was primarily due to the inclusion of Sport Truck’s operating expenses, higher stock-based compensation expense, acquisition and integration costs, additional costs to operate as a public company and investments in infrastructure, brand and technology to support future growth.

Operating income declined 6.1 percent to  $13.9 million, or 15.4 percent of sales, down from 18.0 percent in the third quarter of 2013. The 260 bps decline was due primarily to 45.9 percent increase in sales and marketing expenses and a 38.7 percent increase in R&D spending.

Net income increased 3.7 percent to $10.3 million, or 27 cents per diluted share, which was flat with the prior fiscal year. Non-GAAP adjusted net income was $12.2 million, up 1.3 percent, while non-GAAP adjusted earnings per diluted share was 32 cents, up a penny from a year earlier. Adjusted EBITDA margin was 20.1 percent, compared to 21.0 percent in the third quarter of fiscal 2013. 

Enterline said that the industry supply chain problems that contributed to the decline in MTB sales in the third quarter spilled over into the fourth quarter. As a result, FOXF expects the year-over-year decline of its mountain bike product will continue, but slow, in the fourth quarter. FOXF fourth quarter forecast calls for overall sales in the range of $69-$75 million and non-GAAP adjusted earnings per diluted share in the range of 15-20 cents. For all of fiscal 2014, the company expects sales of $302-$308 million and non-GAAP adjusted earnings per diluted share 85-90 cents.