SCOTTS VALLEY, Calif. (BRAIN) — Marzocchi is unlikely to contribute much to Fox Factory’s bottom line for at least a year, Fox executives warned investors Wednesday, saying it will take some time and money to resurrect the Italy-based brand, which is currently dormant.
Fox has agreed to buy the Marzocchi name, intellectual property, inventory, testing equipment and other bicycle-related assets from Tenneco, an Illinois-based Fortune 500 company that primarily is in the automotive parts business. Fox is not planning to buy Marzocchi’s power sport-related assets, and Fox executives made clear that they are buying assets — mostly non-physical — but not getting an ongoing business.
“Tenneco announced they were shutting this down in July and … we are in the process of purchasing it in November — not a lot good was happening in that time,” Fox CEO Larry Enterline told analysts during a third-quarter earnings call.
Fox plans to move Marzocchi’s operations from Italy to Taichung, Taiwan. Fox will likely continue to offer some existing Marzocchi products and will also use the brand to help extend its reach to lower prices. Prior to the Marzocchi opportunity, Fox already was planning to introduce a fork in mid-2016 that will bring the brand down to its lowest price ever.
“We are looking at how we take (the Marzocchi acquisition) with the plan we already had and optimize the two of those things,” Enterline said. “We look at this as a way to help us extend maybe deeper and faster into that price range. Also, I think we’ve got a brand here with a following … and clearly we are looking to take advantage of that.”
Fox president Mario Galasso said the company is still evaluating how to best use the Marzocchi brand.
“It will fill some holes for us and we may have some overlap,” he said. “But Marzocchi has a good history to it and it continues to have a following and that’s going to be part of our story.”
“Some of their products will continue to live on,” Galasso added. “We will have an expanded product line offering and some of the new products will say Fox and some of the new ones will say Marzocchi. We are in the midst of figuring out how that line is going to lay out."
Assuming the purchase is completed this quarter, company officials expect Marzocchi’s fourth-quarter sales to be negligible. But CFO Zvi Glasman said the brand could generate “a couple million” dollars in sales next year. New costs related to the acquisition and moving Marzocchi to Taiwan will create an operating loss of about 1 cent per share in the fourth quarter and next year, Glasman said.
The Marzocchi purchase was the subject of several analysts’ questions in the 66-minute conference call, and in answering one of the final questions, Enterline sought to downplay the acquisition’s importance.
“This was obviously not a landscape-changing deal for us,” he said with a chuckle. “It’s pretty small.”
Easton/Race Face contribute
While Marzocchi’s bottom-line contributions are far off, Fox’s purchase of Easton Cycling and Race Face late last year is adding revenue. The company said a 17 percent increase in bike-related sales in the third quarter was almost entirely due to the addition of Easton/Race Face business. Fox’s sales in the quarter, including power vehicle-related business, totaled $106.2 million.
Besides the new Easton/RaceFace business, Fox’s bike business benefitted from a good reception of Fox’s 2016 model year products, which helped it earn back some OE marketshare it lost in the prior season, Enterline said.
“We think (model year 20)17 will be very good also, so we will continue to get back some of the spec’ position we may have lost a year ago,” Enterline said.
Fox’s bike business also enjoyed higher margins in the third quarter in part due to lower manufacturing costs in Taiwan. The company is now making about 79 percent of its forks and 63 percent of its shocks at its Taichung factory. By the end of the year, Enterline said he expects the factory will be making 80 to 85 percent of both shocks and forks.
Fox Factory was split off from Compass Diversified in a 2013 IPO. It acquired RaceFace and Easton Cycling in December 2014. The company’s stock is traded on the Nasdaq exchange under the FOXF symbol and its stock performance is tracked on BRAIN’s stock page.
