Fox Factory Holding Corp said it achieved the highest volume of shocks and forks ever shipped in a quarter as bike riding has soared in popularity during the pandemic.
Sales in the Specialty Sports Group, which makes front fork and rear suspension products for mountain bikes, road bikes, and e-bikes; experienced a 32.4 percent increase in sales in the third quarter ended September 30 compared to the same period last year, driven by high demand in both the OEM and aftermarket channels.
“Our business continues to benefit from the on-going robust trend in outdoor recreational activities,” said Mike Dennison, CEO, on a conference call with analysts. “Importantly, the environment is attracting new and diverse participants to the bicycling category, which is propelling demand for our product offerings in both OEMs and aftermarket channels to record levels.”
COVID-19 Vaccine Not Expected To Slow Momentum
Dennison also said he doesn’t see the potential arrival of a COVID-19 vaccine significantly slowing momentum in either Fox Factory’s bike or power vehicle businesses. On Monday, drugmaker Pfizer reported favorable clinical trials for its coronavirus vaccine.
He said, “We’re really excited, obviously, as everybody is on the planet, if not at least the country, that a vaccine is apparently near term. I don’t think that’s a surprise for anybody, right? We’ve all been watching the news and tracking all these companies, pharmaceutical companies, as [as to how] soon a vaccine will emerge. We’re excited about that. We think that’s positive for sports in general and biking specifically. I don’t think it takes away from this renaissance we’re seeing in the biking space, or in the power vehicle space.
“We think it actually brings people back to work and creates prosperity and allows people to invest in the hobby we’ve created over the last year or over nine months as it may be.”
Asked about demand in the cycling business, Dennison cited an “extreme shortage of bikes in showrooms” and suspected buyers would shift to purchasing premium bikes and e-bikes with a shortage of lower-priced bikes in the market. He said, “We’re seeing that continued growth in our order book and what we’re looking at for Q4 at least [through] the first half of 2021.”
He also sees strong potential for e-bikes increasingly becoming a commuter option with greater use spurred by the pandemic. He said, “I think it’s big. I think it’s in one of our primary growth drivers in our mountain bike business.”
One challenge has been supply-chain constraints, but Fox Factory has been able to work with partners to overcome hurdles. Dennison said, “This is a significant achievement in an environment where production for practices and supply chains have to be constantly monitored to minimize the impact of COVID-19 and social distancing. We have seen our customers and our suppliers adapt to the extended reality we find ourselves in, and we continue to successfully optimize our production to replenish pipelines and meet exceptionally strong customer demand.”
Third-Quarter Results Top Wall Street Targets
Sales in the third quarter were $260.7 million, an increase of 23.4 percent year-over-year. Wall Street’s consensus estimate had been $251.4 million.
Sales at Fox Factory’s other segment, Powered Vehicles Group (PVG) grew 17.7 percent due to the inclusion of SCA Performance Holdings, a truck and SUV manufacturer acquired in March 2020. The PVG segment also benefited as OEMs came back from significant shutdowns as well as continued strong demand in the aftermarket with market share gained due to the SCA acquisition.
The strong topline growth, coupled with gross margin expansion and operating expense leverage, fueled third-quarter profitability ahead of expectations.
Non-GAAP adjusted net income advanced 38.8 percent to $45.4 million, or $1.07, from $32.7 million, or 83 cents, a year ago. Results were well above Wall Street’s consensus estimate of 87 cents. Reported earnings, after non-recurring items, came to $38.0 million, or 90 cents, against $29.5 million, or 75 cents.
Gross margins in the latest quarter improved 130 basis points to 34.3 percent. The increase was driven by its SCA acquisition, better product and channel mix and improved supply chain efficiencies.
Total operating expenses climbed 27.2 percent to $43.9 million due to the inclusion of SCA operating costs of $4.4 million, amortization expense of $3.6 million and acquisition-related compensation costs of $1.3 million. As a percent of sales, non-GAAP operating expenses decreased by 90 basis points to 14 percent. This rate is slightly lower than previous long-range guidance of 15 percent to 19 percent, primarily due to the realization of foreign tax credits and excess benefits related to stock-based compensation.
Adjusted EBITDA climbed 38.1 percent to $60.1 billion. EBITDA margin expanded 250 basis points to 23.1 percent primarily due to the impact from higher sales and gross margins, the positive impact of SCA and improvement in supply chain efficiencies.
As of October 2, Inventory was $135.7 million compared to $128.5 million as of January 3, 2020.
Strong Growth Predicted For Fourth Quarter
Looking ahead, Dennison said in the long term, Fox Factory expects its Specialty Sports Group segment to grow in the mid- to high-single-digits and Powered Vehicle Group segment to grow in the low-double-digits.
Fox Factory also reinstated its guidance due to more visibility into its order backlog and the overall outlook for the business. For the fourth quarter, sales are expected in the range of $240 million to $250 million, representing an approximate 32 percent gain from $185.9 million a year ago. On an adjusted basis, non-GAAP adjusted EPS is projected in the range of 72 cents to 80 cents, which compares with 65 cents a year ago.
For the year, sales are expected in the range of $868.2 million to $878.2 million and non-GAAP adjusted EPS in the range of $2.84 to $2.92. In 2019, non-GAAP adjusted EPS was $2.72 a share on sales of $751.0 million. Cautioned Dennison, “As I’m sure you understand, our guidance assumes there are no additional government restrictions or other unforeseen COVID-19-related impacts.”
On Wednesday in interday trading, shares of Fox Factory were up $8.87 to $94.23, or 10.4 percent. The stock began 2020 at $69.57.
Jim Duffy, an analyst at Stifel, reiterated his “Buy” rating and lifted his price target on Fox Factory to $107 from $97 on expectations that “buoyant end-market demand” keeps channel inventories lean and that healthy demand for both of Fox Factory’s segments continues through 2021. Duffy wrote in a note, “Specialty Sports and gross margin strength are propelling an impressive 2H20 rebound, and preliminary commentary on 2021 (revenue upwards of $1bn) endorses strong visibility into the New Year.”
Photo courtesy Fox Factory