Holley Inc.: Margin Inflection Meets Market Share Gains in Aftermarket Resilience (NYSE:HLLY) - HLLY Stock Research Report

## Executive Summary / Key Takeaways - Operational Excellence Drives Margin Inflection: Q3 2025 gross margins reached 43.2%, up over 400 basis points year-over-year, while adjusted EBITDA margins expanded to 19.6%—demonstrating that Holley's multi-year transformation is converting into durable profitability gains despite macro headwinds. - Market Share Gains in a Contracting Market: Core business growth of 6.4% in Q3 2025 marks the third consecutive quarter of year-over-year expansion, with the company explicitly stating it is "successfully gaining market share from competitors" while navigating reseller destocking and weak consumer sentiment. - Balance Sheet Repair Strengthens Strategic Flexibility: Net debt-to-EBITDA leverage fell below 4x for the first time since 2022, with $100 million in debt prepayments since September 2023 generating up to $4 million in annualized interest savings and positioning Holley to invest through cycles. - Tariff Mitigation Proves Management Credibility: The company has already offset over $15 million in tariff-related costs through 2026 via strategic sourcing, supplier relocations, and an 8.75% price increase, with no projected adverse impact to free cash flow or margins—validating execution capability. - Strategic Transformation Delivers Tangible Results: SKU rationalization removed 12,000 underperforming products while new launches generated $2.5 million in year-over-year growth, with six products exceeding $1 million in first-year sales, proving the phase-gate innovation system works. ## Setting the Scene: The Enthusiast Aftermarket Ecosystem Holley Inc., founded in 1903 and headquartered in Bowling Green, Kentucky, has evolved from a carburetor manufacturer into the leading designer and marketer of high-performance automotive aftermarket products for enthusiasts. The company operates through a four-division structure—Domestic Muscle, Euro & Import, Truck Off-Road, and Safety & Racing—serving a passionate customer base that prioritizes performance over price. This enthusiast focus creates a defensible niche: when consumers are trading down on groceries, they still spend on weekend project cars, but they become more selective about value. The business model blends B2B distribution through national retailers and specialty shops with a growing direct-to-consumer (D2C) channel that surpassed $100 million in 2024. This omnichannel approach matters because it provides multiple levers for growth while insulating the company from any single channel's disruption. In Q3 2025, B2B sales grew 7.3% through deeper partner integration and data sharing, while D2C increased 4.2% as third-party marketplaces like Amazon expanded 28% year-to-date to $12.9 million. The Amazon program alone drove over 50% growth in chemical product sales, demonstrating digital capabilities that traditional aftermarket competitors lack. Holley sits in the automotive aftermarket value chain as both manufacturer and brand aggregator, owning iconic names like MSD, Flowmaster, and Simpson Safety. This brand portfolio creates a moat that pure private-label competitors cannot replicate. When a racer trusts Simpson for safety equipment, they're more likely to buy Holley fuel injection systems for compatibility and peace of mind. This ecosystem effect drives cross-selling that smaller, single-product competitors cannot match, enabling Holley to capture more wallet share per enthusiast. The industry faces macro headwinds that make Holley's performance more impressive. The University of Michigan Consumer Sentiment Index declined sharply in Q1 2025 to its lowest level since November 2022, with inflation and tariff uncertainty pressuring discretionary spending. Yet Holley's core growth accelerated to 6.4% in Q3 2025, suggesting the company is taking share from fragmented competitors who lack its scale and digital capabilities. The modern truck and off-road market provides a natural tailwind, as 80% of vehicles sold in the U.S. are trucks, CVs, and SUVs, but Holley's ability to grow in this environment while expanding margins separates it from the pack. ## Technology, Products, and Strategic Differentiation Holley's competitive advantage rests on three pillars: proprietary technology integration, brand ecosystem loyalty, and operational excellence in product development. The company's EFI (electronic fuel injection) systems and tuning technology offer enthusiasts significantly greater fuel efficiency and power customization than basic competitors' carburetors or generic fuel pumps. This creates switching costs: once a customer invests in Holley's ecosystem, moving to a competitor requires replacing not just one component but potentially the entire fuel and ignition system. Product innovation is not a side project but the engine of growth. In Q3 2025 alone, Holley launched digital dashes for Holley EFI, heavy-duty brake kits under the Baer brand, at-home BMW tuning solutions from Dinan, and Club Sport racing seats from Simpson. These launches contributed $2.5 million in year-over-year growth, proving that R&D investment translates directly to revenue. The phase-gate development system has increased new product revenue per SKU by 75%, with six products exceeding $1 million in first-year sales. This disciplined approach contrasts sharply with competitors who spray numerous low-quality products into the market hoping something sticks. The January 2025 acquisition of a perpetual exclusive North American license for Cataclean chemical products for $23.8 million expands Holley's addressable market into vehicle maintenance and emissions solutions. This diversifies revenue beyond pure performance parts into recurring chemical sales, which are less cyclical and benefit from the same distribution channels. The chemical category's 50% growth on Amazon demonstrates cross-selling potential that competitors lacking Holley's digital infrastructure cannot replicate. SKU rationalization—removing 12,000 underperforming products—improved inventory efficiency and focused resources on winners. In-stock rates for the top 2,500 products improved 2.2% year-over-year in Q3 2025, while past-due orders fell 20.7%. This operational discipline directly impacts margins by reducing carrying costs and obsolescence write-downs, a structural advantage over smaller competitors who lack the data analytics to identify underperformers systematically. ## Financial Performance: Evidence of Strategic Execution Holley's Q3 2025 results provide compelling evidence that the transformation is working. Core business growth of 6.4% marked the third consecutive quarter of year-over-year expansion, driven by a 4% volume increase and a 1% pricing tailwind. This volume-led growth indicates genuine market share gains rather than simply passing through cost inflation. Gross margin expansion to 43.2%—up over 400 basis points—demonstrates pricing power and operational leverage that competitors cannot match.

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The margin expansion stems from multiple sources, each with different durability. Cost-to-serve initiatives reduced freight expenses and warranty claims, contributing $6.2 million in total savings in Q3 2025. These operational improvements are structural, representing permanent efficiency gains. Strategic pricing actions, including the 8.75% increase implemented in June 2025 to offset tariffs, show the company's ability to pass through costs without demand destruction—a critical capability in an inflationary environment. By contrast, many competitors lack the brand strength to raise prices, compressing their margins. Operating income surged 185% to $15.9 million, while net income turned positive at $0.8 million versus a $6.3 million loss in Q3 2024. This inflection proves the business can generate earnings, not just revenue. Selling, general, and administrative expenses increased 11.1% to $33.5 million, reflecting investments in SOX compliance, cybersecurity, and tariff mitigation—necessary spending to support a larger, more complex organization. The fact that margins expanded despite these investments underscores the underlying operating leverage.

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Free cash flow of $5.5 million in Q3 2025 represented a $7.6 million improvement from the prior year, driven by higher margins and disciplined capital management. This cash generation enabled additional debt prepayment of $10 million after quarter-end, bringing total prepayments to $100 million since September 2023. These prepayments generate up to $4 million in annualized net interest savings, directly boosting future earnings power. The company ended Q3 with $50.7 million in cash and $97.5 million available under its revolving credit facility, providing ample liquidity to invest in growth initiatives.

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Net debt-to-EBITDA leverage of 3.9x marks the first time below 4x since 2022, a critical threshold that reduces financial risk and provides flexibility for strategic acquisitions. This deleveraging transforms Holley from a highly leveraged post-SPAC story into a financially stable platform company capable of weathering downturns and capitalizing on distressed competitors. ## Competitive Positioning: Winning in a Fragmented Market Holley's performance stands out when benchmarked against publicly traded peers. Fox Factory (TICKER:FOXF), a suspension specialist, grew sales 4.8% in Q3 fiscal 2025 with gross margins around 30-35%—well below Holley's 43.2%. While FOXF excels in niche suspension technology, Holley's integrated ecosystem approach enables cross-selling that FOXF cannot replicate. A customer buying FOXF shocks might purchase fuel systems elsewhere, but a Holley customer can buy Flowmaster exhaust, MSD ignition, and Simpson safety gear in one transaction, capturing more margin per sale. Dorman Products (TICKER:DORM) grew revenue 7.9% in Q3 2025 with strong 20.5% operating margins, but its focus on replacement parts rather than performance upgrades positions it in a more commoditized segment. Dorman's 35-40% gross margins trail Holley's, reflecting less pricing power. Holley's enthusiast-focused brands command premiums that repair-oriented parts cannot, creating a more defensible moat. When consumers trade down, they may delay Dorman's replacement parts but still splurge on Holley's performance upgrades for their passion projects. Motorcar Parts of America (TICKER:MPAA) operates at just 19-20% gross margins, highlighting the cost pressures facing undifferentiated aftermarket suppliers. MPAA's 6.4% revenue growth matches Holley's, but its margin profile suggests a business struggling with pricing power and operational efficiency. Holley's brand strength and integrated technology allow it to avoid this commodity trap, maintaining premium pricing even as competitors discount. LKQ Corporation (TICKER:LKQ), the distribution giant, grew just 1.3% in Q3 2025 despite its massive scale. While LKQ's 38% gross margins are respectable, they trail Holley's, and its low-single-digit growth reflects market maturity and lack of innovation. LKQ's scale advantage in logistics is offset by Holley's product development edge—Holley can grow faster by creating new categories (like the Cataclean chemicals) while LKQ relies on market expansion.

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Holley's competitive moat rests on three pillars that peers cannot easily replicate. First, brand ecosystem loyalty creates switching costs and cross-selling opportunities. Second, proprietary EFI and tuning technology provides performance advantages that generic parts cannot match. Third, the integrated omnichannel distribution—combining B2B relationships with D2C digital capabilities—captures more margin per transaction. These advantages manifest in superior gross margins and growth rates, suggesting Holley is gaining share in a consolidating market. ## Outlook and Execution Risk Management raised the bottom end of full-year 2025 guidance, now expecting revenue of $590-605 million and adjusted EBITDA of $120-127 million. This implies 3.8% growth at the midpoint over a 2024 core base of approximately $575 million. The guidance assumes macro conditions do not worsen and incorporates the company's ability to continue gaining market share despite potential market softness. This signals management confidence that strategic initiatives can overcome cyclical headwinds. The guidance is back-half loaded, reflecting the lapping of 2024's reseller destocking and past-due burn-down, which allows transformative initiatives more time to take root. Capital expenditures will be at the higher end of historical ranges to support ERP and WMS improvements for scalability, digital enhancements, and operational efficiency. These investments are necessary to support the multi-brand, omnichannel model and should generate returns through improved inventory turns and customer experience. Tariff mitigation remains a key execution risk, though management has demonstrated competence. The company projects that sourcing optimization and modest price increases will fully offset incremental tariff actions, with no meaningful impact to free cash flow or margins in 2025 or 2026. This confidence is backed by over $15 million in mitigated costs already identified. However, the fluid nature of trade policy creates uncertainty that could pressure margins if mitigation efforts fall short. International expansion provides a growth vector. Mexico shipments reached 240,000 units in September 2025, tracking toward a $2.5 million annual run rate. The company signed 15 direct distributors by Q1 2025, targeting a market estimated at $3-5 billion—roughly 5% of the U.S. market size long-term. This direct-to-distributor approach bypasses traditional import channels, capturing margin that previously went to intermediaries. The car park in Mexico skews older, benefiting Holley's Domestic Muscle carburetor and fuel injection lines, while jeep and truck modifications support the Modern Truck and Off-Road division. The BMW dealer program demonstrates progress in the Euro & Import division, with 22 dealers participating in the Dinan brand program by Q1 2025. This B2B penetration into OEM dealer networks provides a sticky, high-margin channel that competitors cannot easily access. New inline tuning modules for BMW S58 engines show product innovation tailored to this channel's needs. ## Risks and Asymmetries The most material risk is consumer discretionary spending. The University of Michigan Consumer Sentiment Index's sharp decline to its lowest level since November 2022 suggests enthusiasts may delay purchases. Management acknowledges caution, noting that factors such as higher unemployment, persistent inflation, and tariff uncertainty have influenced sentiment. However, the company's 6.4% core growth in this environment suggests it is taking share from weaker competitors—a dynamic that could accelerate if the market contracts further, as financially stronger players consolidate share. The EV transition poses a long-term structural risk. As electric vehicles capture more of the vehicle park, demand for traditional performance parts like carburetors, exhaust systems, and fuel injection may decline. Holley's gas-focused product lines could face 20-30% revenue pressure long-term if EV adoption accelerates faster than expected. The company is less diversified into EV-compatible products than some competitors, though its EFI technology could potentially adapt to hybrid applications. This vulnerability requires monitoring of R&D investments in electrification. The putative securities class action filed in November 2023 remains in early stages, with the court denying the motion to dismiss in August 2025. While the company disputes the allegations and intends to vigorously defend, the potential range of loss cannot be reasonably estimated. This overhang creates headline risk and could distract management, though it does not appear to impact operations. Scale remains a disadvantage versus giants like LKQ. Holley's $509 million market cap and $1.03 billion enterprise value pale next to LKQ's $7.97 billion market cap, limiting bargaining power with suppliers and retailers. This results in qualitatively higher operating costs per unit—estimated at 10-15% above LKQ's efficiency—which could pressure margins during price wars. However, Holley's premium branding and technology offset this disadvantage in the performance niche, where LKQ's scale provides little benefit. ## Valuation Context At $4.23 per share, Holley trades at an enterprise value of $1.03 billion, or 1.73x trailing revenue and 8.70x trailing EBITDA. These multiples appear reasonable for a company demonstrating margin expansion and market share gains. The price-to-free-cash-flow ratio of 33.65x reflects the recent cash flow inflection, while the price-to-operating-cash-flow ratio of 11.53x suggests the market may be undervaluing the company's cash generation capability. Gross margins of 44.4% and operating margins of 12.45% compare favorably to most peers, though the negative profit margin of -4.16% reflects one-time transformation costs and legal expenses that should normalize. The debt-to-equity ratio of 1.30x is manageable and declining, with net leverage now below 4x. Return on assets of 5.03% shows improving capital efficiency, while the negative return on equity of -5.54% reflects the recent losses that are turning positive. Relative to peers, Holley's EV/Revenue multiple of 1.73x sits between LKQ's 0.94x and Dorman's 2.07x, appropriate for its growth rate and margin profile. The EV/EBITDA multiple of 8.70x is below Dorman's 10.60x but above LKQ's 8.04x, reflecting Holley's margin expansion trajectory. The key valuation driver will be whether the company can sustain 40%+ gross margins and reach its 20% EBITDA margin target, which would justify a premium multiple. ## Conclusion: Execution Validates the Transformation Holley Inc. has reached an inflection point where operational excellence is translating into measurable financial outperformance. The 400+ basis point gross margin expansion to 43.2% and 300+ basis point EBITDA margin improvement to 19.6% in Q3 2025 demonstrate that the multi-year strategic transformation—spanning leadership changes, SKU rationalization, digital capabilities, and tariff mitigation—is working. This margin expansion, combined with three consecutive quarters of core business growth, proves the company can gain market share even in a challenging macro environment. The balance sheet repair, with leverage falling below 4x for the first time since 2022 and $100 million in debt prepayments generating $4 million in annual interest savings, provides strategic flexibility to invest in growth or acquire distressed competitors. Tariff mitigation success—offsetting over $15 million in costs through 2026—validates management's execution credibility and protects margins from policy volatility. The investment thesis hinges on whether Holley can sustain this momentum while navigating the EV transition risk and potential consumer spending weakness. The company's brand ecosystem, proprietary technology, and omnichannel distribution create defensible moats that peers cannot easily replicate. If management continues executing on its 20% EBITDA margin target and expands internationally, the current valuation leaves room for meaningful upside. The critical variables to monitor are core business growth sustainability and EV product development progress—two factors that will determine whether this transformation story delivers long-term value.