I’ve had a number of people reach out and ask me to do a breakdown of Fox Factory’s financial health. By no means is this analysis (remotely) up to par for a big sell side bank or a buy side fund, but for our hobbyist purposes it ought to suffice. For those who hate reading, I’ll Quinten Tarantino this one and just skip to the ending: Fox Factory (the company) will probably be fine well into the future but I’d probably skip on buying the stock. If you want the full scoop, you’ll have to read the post!
Before I begin, one of the more difficult parts about the bike industry is that most of the companies in the space are private. Of the handful that are publicly traded, Fox Factory (FOXF) stands out as the most “normal” to analyze in that it is relatively big (especially by bike industry standards), has real trading volumes, real analyst coverage and plenty of “traditional” financial data in English for a guy like me to comb over. Unfortunately, as one might expect, there aren’t really any apples to apples public comps despite what the big banks might try and say. No other suspension maker (Rockshox/SRAM) reveals their financial performance, so we really can’t benchmark this against anything specific to the space. However, we can benchmark Fox’s performance to the broader market, analyze their performance since IPO, see how they weathered COVID and assess what kind of position they are in right now.
Also, as a disclaimer, please remember nothing here is to be contrived as financial advice. This is purely “for fun”/for educational purposes. I may own positions in the securities mentioned in this post bla bla bla don’t sue me and don’t use this for trading purposes. If you do, the results are not my fault.
History
Fox Factory was started in 1974 by Bob Fox with his brother Geoff aiming at the motocross market. Geoff later spun off the company’s soft goods operations and started Fox (which became the clothing/softgoods company Fox Head) while Geoff continued to grow the suspension business. Fox entered the mountain bike world in 90s (anyone have an exact date?) with a rear shock. In the early 2000s Fox entered the fork market with their F100 RLC and quickly started adding models to suit all sorts of applications (both front and rear). The company was purchased by a private equity firm in 2008 and this PE firm took the company public in 2013. You can checkout their prospectus (S-1 filing) here.
After going public they acquired a number of firms including:
- Sport Truck (2014)
- RaceFace (2014)
- Easton (2014)
- Marzocchi (2015)
- Tuscany Motors (2017)
- RideTech (2019)
- SCA Performance (2020)
- Outside Van (2021)
- Ride Concepts (No idea; can’t find a PR)
- Marucci Sports (owns Lizard Skins) (2023)
Two pieces of commentary here. First, they (unsurprisingly) did most of their acquisitions in the ZIRP era (interest rates were incredibly low which also lowers your hurdle rate to do any deal). Second, of the acquired brands, RaceFace, Ride Concepts, Easton and Marzocchi are bike industry specific with the remaining in the automotive or powersports world less one, Marucci, the company that makes baseball/softball equipment and also owns Lizard Skins. (fun fact, the acquisition was north of $500M)
Stock Performance Since IPO
The company went public in 2013. Here is a quick snapshot of their stock’s performance from IPO to today. Blue is Fox, red is the S&P 500. As you can tell, the S&P 500 is up ~234% since the company went public whereas Fox is up ~46%.
The company’s best performance from a stock perspective was ~2017-2023, outperforming the broader S&P 500 (if held from IPO). Obviously, the COVID performance was bonkers and the hangover equally as crazy, which is what brings us to 2024, where the stock price lost 57% of its value. Is this because the company is going bankrupt or losing money? In short, no.
We will unpack the financial health below, but the way the market prices a stock is the culmination of a (high) number of variables, including factors specific to the company like demand of a product in addition to factors that are not specific to the company, like interest rates. While there are formulas to objectively figure out what a stock should be worth, be it DCF, Black-Sholes etc., these are mostly academic and requires the modeler to make a high number of assumptions (DCF). They are worth utilizing if you are trying to tease out the value and want to understand the drivers, but its unlikely you’ll truly figure out what it “should” be worth and then go long or short with any sort of reliance of outperformance unless you are quant level smart (in which case you aren’t reading this and are probably training a far more complicated predictive model with a bunch of H100s). The big point I’m trying to make is the price of a stock is the homologation of a high number of factors including financial results, balance sheet health, size of moat, supply and demand of the stock itself, the underlying psychology of the market, interest rates, geopolitics and a whole bunch of other stuff entire volumes of books were written about. The cool part is the stock market and the underlying pricing of an asset is akin to a very unique, nerdy, opaque, crystal ball that is always looking into a future and determining a price of this asset now. Its the distillation of what might happen around a company, and turns all of these possibilities into a price. Unfortunately, this crystal ball has not looked favorably on the company from mid 2023 through to today. I will summarize why I believe this massive repricing occurred later this post.
Company Health
Full year 2024 numbers aren’t out yet for Fox Factory. Those wondering, we’ll receive those marks on February 27th. The good news (for those who don’t follow this stuff) is we do have the first 3 quarters of data for 2024, which we’ll go into in a second. First, however, I want to try and paint the picture of how things were going for the company from a financial perspective over the last 4 years leading into 2024.
Here is a slide from their FY23 presentation (fun fact, Vital is cited in it) that does a good job illustrating performance through COVID. Those wondering, the bicycle stuff is lumped into everything on the left (SSG+Marucci). The big takeaway on the revenue side is that the company is growing the SSG business at a forward looking CAGR of 9%, which seems both reasonable and durable with respect to the longevity of the business.
Profitability measures were down in 2023, but it was a modest drop, not a “sky is falling” type of drop. The big glaring blinking neon sign with respect to this part of the analysis is the fact the company was making money no matter what profitability KPI you use (through 2023).
2024 Performance (thus far)
Its not bad, but its also not good. Here is a direct quote from the CEO atop the firm’s latest earnings release (this fall).
“Although we delivered sequential and year-over-year revenue growth in the third quarter, our OEM customers remained challenged due to broader market conditions impacting consumer discretionary spending, which pushed results towards the lower end of our expectations,” commented Mike Dennison, FOX’s Chief Executive Officer. “We’ve responded decisively to these challenges by implementing both immediate and longer-term actions to strengthen our business, including aggressive cost management and strategic operational improvements. Importantly, underlying demand for FOX’s innovative products remains strong across our segments, particularly evident in our aftermarket channels where we continue to see growth.”
Mr. Dennison continued, “During the third quarter, we began developing and implementing plans across a series of key priorities, reflecting a commitment to adjust our business structure to operate efficiently in a number of demand environments so that we can protect margins and drive significant, and consistent, free cash flow to de-lever our balance sheet. We have initiated this strategy through swift actions in our AAG segment that we expect to improve margins in the fourth quarter, and are extending these efforts across our other business segments as well. We expect our combined efforts to result in more than $25 million of annualized cost reductions to strategically position ourselves to capitalize on opportunities as consumer demand accelerates in the future.”
Before I get into my commentary, a few more things to consider…
- For the first 9 months sales were down from $1.13B to $1.04B year over year (y/y)
- Net income was down from $116.8M to $6.7M y/y
- Bike revenues grew 21.9% sequentially, and 38.7% over the prior year
- “Although bike sales improved compared to prior year, the ongoing channel inventory recalibration and, to a lesser extent, lower end consumer demand remain headwinds.”
- Powersports and automotive saw a pullback in top line; automotive appears to be a problem child atm.
- The company is eating some charges related to some restructuring/other matters that is hurting (but not completely killing) profitability.
While this isn’t a glowing PR, I don’t see it as being “end of days”, either. In fact, this is the exact type of thing that makes me go “that is a good management team”. Even though Fox is still profitable, servicing their debt, and in relatively good financial health (more on that in a second), the team is still proactively finding religion when it comes to operational efficiency and is making the necessary changes to optimize their position for the future. This is what you are supposed to do when in a C-Suite job at a publicly traded company (or any company).
To be fair, there is a lot more worth unpacking on the income statement side of things, but I just don’t get a ton of color from the PR, don’t have a quarterly slide deck and am too lazy to go through the entire earnings transcript (don’t worry, CGPT did look at it for me). In any case, when the FY presentation with more color comes out at the end of the month, I’ll do a follow up post post.
Turning to the firm’s balance sheet as of Q3 2024, there are a few things that stand out. On the assets side of the equation, they have $400M in inventory, which compares to ~$371M at end of Q4 2023. While the inventory number may seem high, their management team suggested this was “planned” in anticipation of future demand. To add, we do need to acknowledge that there is a baseline amount of inventory that’ll always be in the company’s proverbial veins merely to operate. Fox, or any “at scale” suspension manufacturer has a complex supply chain across many countries that has to be juggled against model launches and OEM schedules. While I do see some emphasis on simplification of inventory management via the conference call transcript, I don’t see any cause for broader concern, or rather no indication that forks and shocks are piling up in warehouses around the world (automotive on the other hand…).
Long term debt has increased significantly, to $534M from $359M but the firm’s revolver has gone down from $370M to $210M. This is good CFOing in that long term debt is usually cheaper than short term revolver debt. To add, management has been working on reducing interest rate exposure and underlying interest expense, which tells me their finance team is awake at the wheel. Most importantly, their profitability measures keep debt levels from being overly concerning to me. Here is why: its very easy for Fox to service this debt and have plenty (plenty) for operations. The only time this could prove problematic is if profitability really (really) slips away from them and/or they add to this number significantly (cough KTM cough)
Closing Thoughts:
Despite what your 401K may say, outside a handful of absolutely outstanding performers (like Nvidia), 2024 was not the greatest year for most stocks. This trend started when interest rates began to rise in 2022 resulting in a large scale rotation in what securities you wanted to own, and what securities you really didn’t want to own. Fox, unfortunately, found themselves on the wrong side of this equation. Side point, if there is one theme you should pick up from this blog its how impactful interest rates really are, no matter what kind of business you may own or invest in. Fox’s entire business got re-underwritten by the market based on a new set of macroeconomic assumptions, and the stock got repriced accordingly from ~$100 to ~$26 today.
The good news is I see nothing that is cause for major concern with respect to those who like Fox product and want to continue to buy their stuff well into the future. They are making money, they have durable moats and relatively solid recurring cash flow across a semi-diversified business. The big overhangs they’ll fight into 2025 is consumer spending headwinds, elasticity of their product mix combined with tariffs. These three demand-based factors are enough to keep me from buying the stock, but big picture I do believe Fox Factory will be just fine, even if the stock doesn’t do a whole lot of anything. The company has a good management team that appears to have found religion around cost and operational efficiency, something that usually makes for a long lasting company, so long as they build something people seek out – which Fox most clearly does.
The only thing we might notice as consumers is perhaps a little slower R&D/product release cycle to let the company amortize costs around developing “the new hotness” over a longer period of time. This is boring, but is kind of table steaks when rates are higher and technology in the space more iterative, less revolutionary.
A good reflection of this from a capital allocation perspective was Fox’s GripX released in 2024. There wasn’t a lot of retooling that went into that iteration, and it was more of a minor upgrade than a major generational change. This is exactly what we’ll see more of as the company continues to find a balance of cost against a changing market.
Okay, that’s it for this one. I know I could go a lot deeper, but for a one hour “funalysis” I think this should suffice. As always, email me questions at jeff dot brines at gmail.com or head to the vitalmtb forum and post em up in the thread this post was spawned by! Cheers!!