Fox Factory Holding Corp. (NASDAQ:FOXF) is a leading designer, manufacturer, and marketer of performance-defining products and systems for customers worldwide. The company's premium brand, performance-defining products and systems are used primarily on bicycles, side-by-side vehicles, on-road vehicles with and without off-road capabilities, off-road vehicles and trucks, all-terrain vehicles, snowmobiles, and specialty vehicles and applications. In addition, the company also offers premium baseball and softball gear and equipment.

Business Overview

Fox Factory's diversified product portfolio and end-markets have been a key driver of the company's resilience amidst the current industry cyclicality. For the fiscal year ended December 29, 2023, the company reported annual net income of $120,846,000, annual revenue of $1,464,178,000, annual operating cash flow of $178,743,000, and annual free cash flow of $131,891,000.

Financials

In the first quarter of fiscal 2024, the company delivered $333.5 million in revenue, a 16.6% decrease compared to the prior year period. The decline was primarily driven by lower demand in the Powersports and Bike segments, partially offset by the inclusion of $59.6 million in net sales from the recently acquired Marucci business. Gross margin for the quarter was 30.9%, compared to 33.3% in the prior year period, due to shifts in product mix and reduced operating leverage on lower volumes.

Net loss in the first quarter of fiscal 2024 was $3.5 million, or $0.08 per diluted share, compared to net income of $41.8 million, or $0.98 per diluted share, in the same period last year. Adjusted net income was $11.9 million, or $0.29 per diluted share, compared to $51.0 million, or $1.20 per diluted share, in the prior year quarter. Adjusted EBITDA was $40.4 million, with an adjusted EBITDA margin of 12.1%, compared to $79.2 million and 19.8% in the prior year period.

Segment Performance

The company's performance continues to reflect the temporary and unique challenges that exist within the various industries it serves. In the Powered Vehicles Group (PVG), net sales decreased 16.9% to $118.1 million, primarily due to lower OEM demand in Powersports. In the Aftermarket Applications Group (AAG), net sales decreased 26.5% to $101.9 million, driven by lower upfitting sales due to product mix and higher interest rates impacting industry dealers and consumers. In the Specialty Sports Group (SSG), net sales decreased 4.5% to $113.5 million, primarily due to a $65.0 million reduction in Bike sales as a result of the ongoing channel inventory recalibration, partially offset by the inclusion of $59.6 million in net sales from the Marucci acquisition.

Risks and Challenges

Despite the near-term headwinds, Fox Factory remains focused on managing the elements of the business that it can control. The company has taken prudent cost reduction actions, while maintaining its highly trained engineering and leadership teams to support long-term growth. Additionally, the company continues to invest in research and development to drive innovative new product introductions across its diversified portfolio.

Outlook

Looking ahead, the company expects the first half of fiscal 2024 to be down year-over-year, with the second quarter being sequentially stronger than the first quarter. For the full year, the company now expects sales in the range of $1.53 billion to $1.61 billion and adjusted earnings per diluted share in the range of $2.30 to $2.55. This revised guidance reflects the company's prudent approach in light of the persistent high interest rate environment, which is expected to continue impacting consumer discretionary spending.

Geographic Distribution

Geographically, the company generates the majority of its revenue from North America, which accounted for 85.4% of total net sales in the first quarter of fiscal 2024. Europe and Asia contributed 8.2% and 5.4% of net sales, respectively, during the same period.

Liquidity

From a liquidity perspective, Fox Factory's balance sheet remains a source of strength, with net leverage of 2.9x as of the end of the first quarter. The company's flexible capital structure provides the ability to invest in growth through R&D, capital expenditures, and sales and marketing, while also allowing for opportunistic share repurchases. During the first quarter, the company repurchased approximately $25 million in shares and has a remaining balance of $250 million on its $300 million share repurchase authorization.

Conclusion

In conclusion, Fox Factory's diversified business model and strategic growth initiatives have allowed the company to navigate the current industry headwinds. While the near-term outlook reflects the impact of macroeconomic pressures, the company remains focused on managing the elements it can control, investing in innovation, and positioning itself for long-term success. The company's strong balance sheet and cash flow generation provide the financial flexibility to weather the cyclical challenges and capitalize on future growth opportunities.