DULUTH, Ga. (BRAIN) — Fox Factory's bicycle-related business — under the Fox Factory suspension, Marzocchi, Easton and RaceFace brands — saw a 30% decline in sales in the first quarter compared to the same quarter last year.
It was the second consecutive quarterly year-over-year decline in revenue for the division, following a 1.9% decline in the final quarter of 2022. Fox executives said the decline was a return to seasonality after several years of pandemic-driven demand for bike products in its Speciality Sports Group.
SSG revenue in Q1 was $119 million, down from $170 million in the period last year.
Company-wide, Fox Factory's first-quarter revenue was up 5.8% to $399.9 million, compared to $378 million in the same period last year, driven by a 35% increase in its other business segment, the Powered Vehicles Group.
“Thanks to our diversified product offerings and differentiated market position, we are pleased with our strong start to fiscal 2023 in a bumpy economic and demand environment. Our strong results were achieved despite shifting demand and changing product mix,” CEO Mike Dennison said in a statement.
In prepared remarks on an earnings call, Dennison revealed that the company had cut a number of jobs, primarily in the SSG division, during Q1. The layoffs had not been previously announced and Dennison did not say how many people were let go. He said the company now expects SSG sales to be down more than 20% for the full year.
"We are continuing to hear about the larger than-anticipated inventory glut, foreshadowing a longer period of decline before a return to a more normal environment. Hence we now expect our Specialty Sports Group to be down over 20% for the full year, with the worst of the impact occurring in Q2. ... We feel confident equilibrium in the bike industry will return to normal as we continue to see positive signs of end-customer demand."
After the prepared remarks, analysts had many questions for Dennison about the bike market. As a major supplier to bike factories, Fox is in a position to see long-term trends.
In answer to one analyst's question about the positive signs he mentioned in his prepared remarks, Dennison said "We are seeing customer demand in certain markets picking back up. That happened late in the quarter in Q1 so it does give us confidence that demand is not yet fully gone. In fact it isn't gone: it's just the massive amount of inventory that's bigger than expected pushing through ... We were hoping that Q2 would show more positive signs and in fact it's not really showing any improvement and probably some further weakening from Q1 ... We just are waiting until this thing processes through so we can get back on the gas ... or pedal."
To another question on the SSG performance, Dennison responded that one of the larger inventory gluts challenging Fox involves e-bikes because a shortage of motors prevented factories from completing e-bike assemblies. However, he is bullish on the segment. "When we come out of this, the e-bike will be on fire. It will recover very quickly," he said.
Asked how the inventory glut is affecting bike and suspension model-year introductions, Dennison said "smaller, more nimble" OEMs have less inventory and are moving to model year 2024 faster than bigger brands. "Now there's good news and bad news .. the good news is we have really good relationships with those smaller boutique OEMs that are healthy ... bad news is there's a lot of volume tied up with the bigger guys, the bigger OEMs. And they are struggling. ... "
He said larger OEMs are reluctant to bring out new model-year bikes that could devalue MY23 inventory. "So it's bit of a quagmire for them ... what we are really seeing is it took them a while for them to figure out the level of the issue and now in Q2 they are getting very aggressive about how to resolve it. So the good news is they've gotten serious and I think they know exactly what they've got to go do and I think Q2 is when we're going to see that play out."
Finally, asked about the environment for acquisitions in the industry, Dennison said high valuations during the pandemic discouraged any new purchases, but conditions have improved. He said Fox recently made a "small acquisition" in the bike industry. A Fox representative told BRAIN the purchase is not final so Fox is not ready to reveal the acquisition target's identity.
Company-wide, Fox Factory gross profit increased 10.8% to $133.3 million in the quarter, compared to $120.3 million in the same period last fiscal year. Gross margin percentage increased 150 basis points to 33.3%, compared to 31.8% in the same period last fiscal year.
Fox did not change its full-year earnings guidance significantly. It slightly lowered guidance for full-year earnings per share from $5.15 to $5.45 per share to $5.00 to $5.30.
Fox's shares are traded on Nasdaq under the FOXF symbol. Stock quotes are available at investor.ridefox.com.
