8-K: Holley Inc. Reports Third Quarter 2024 Results, Strategic Initiatives Drive Growth

Holley Inc. announced its third quarter 2024 financial results, highlighting a decrease in net sales but progress in strategic initiatives and brand growth.

Summary

• Holley Inc. reported a net sales decrease of 14.4% to $134.0 million in the third quarter of 2024, compared to $156.5 million in the same period last year.
• The company experienced a net loss of $6.3 million, or $0.05 per diluted share, a significant drop from the net income of $0.8 million, or $0.01 per diluted share, in the prior year.
• Net cash used by operating activities was $1.7 million, a shift from the $22.5 million provided by operating activities last year.
• Adjusted net loss was $0.5 million, compared to an adjusted net income of $3.5 million in the prior year.
• Adjusted EBITDA decreased to $22.1 million from $27.9 million year-over-year, and free cash flow was negative $2.1 million compared to positive $21.7 million last year.
• Despite the overall sales decline, the direct-to-consumer channel saw a 16% year-over-year increase, and B2B out-the-door sales experienced a 10% median lift during event windows.
• Several power brands, including ADS, Stilo, Dinan, APR, and Simpson, saw growth, some exceeding 30% year-to-date.
• The company's total net inventory was reduced to $179.3 million from $207.2 million in the third quarter of last year, with inventory turns improving to 2.2x from 1.9x.
• Moody's upgraded Holley's corporate family rating to B2 from B3, with a stable outlook.
• Holley's bank-adjusted EBITDA leverage ratio was 4.25x, below the covenant ceiling of 5.00x.
• The company has lowered its full-year expectations due to continued industry softness and distribution partner inventory adjustments.
• Holley anticipates fourth-quarter net sales between $133 and $143 million and adjusted EBITDA between $24 and $29 million.
• Full-year 2024 net sales are projected to be between $595 and $605 million, with adjusted EBITDA between $115 and $120 million.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to the significant decrease in net sales and the shift to a net loss. While there are positive aspects like DTC growth and brand performance, the overall financial results and lowered guidance weigh heavily on the sentiment.

Positives

• Direct-to-consumer sales increased by 16% year-over-year.
• B2B out-the-door sales saw a 10% median lift during event windows.
• Several power brands experienced growth, some exceeding 30% year-to-date.
• Total net inventory was reduced to $179.3 million.
• Inventory turns improved to 2.2x.
• Moody's upgraded Holley's corporate family rating to B2 from B3.
• The bank-adjusted EBITDA leverage ratio was 4.25x, below the covenant ceiling of 5.00x.
• The company's flagship LS Fest East event attracted a record attendance of 45,000 enthusiasts.
• Gross margin improved year-over-year.
• Revenue per SKU increased by 133% year-to-date.
• New product revenue increased by 25% year-to-date.

Negatives

• Net sales decreased by 14.4% year-over-year.
• The company reported a net loss of $6.3 million, compared to a net income of $0.8 million in the same quarter last year.
• Net cash used by operating activities was $1.7 million, compared to $22.5 million provided last year.
• Adjusted EBITDA decreased to $22.1 million from $27.9 million year-over-year.
• Free cash flow was negative $2.1 million compared to positive $21.7 million last year.
• Overall quarterly sales were impacted by distributor inventory normalization.
• The company has lowered its full-year expectations due to industry softness and inventory adjustments.

Risks

• The company faces risks related to competition, maintaining customer and supplier relationships, and retaining key employees.
• Holley's ability to compete effectively in the market is a risk.
• The company's ability to successfully design, develop, and market new products is a risk.
• Changes in vehicle ownership and type could impact the company.
• Holley's ability to maintain and strengthen demand for its products is a risk.
• The company faces risks related to managing growth effectively.
• Attracting new customers in a cost-effective manner is a risk.
• Expanding into additional consumer markets is a risk.
• Costs related to being a public company are a risk.
• Disruptions to operations, including cybersecurity incidents, are a risk.
• Changes in applicable laws or regulations are a risk.
• The outcome of any legal proceedings is a risk.
• General economic and political conditions, including the current macroeconomic environment, political tensions, and war, are risks.
• The possibility of being adversely affected by other economic, business, and/or competitive factors is a risk.
• Holley's estimates and expectations of its financial performance and future growth prospects are subject to risk.
• The company faces risks related to disruptions and higher costs in manufacturing, supply chain, logistical operations, and shortages of certain products.

Future Outlook

Holley has lowered its full-year expectations due to continued industry softness and distribution partner inventory adjustments. The company anticipates fourth-quarter net sales between $133 and $143 million and adjusted EBITDA between $24 and $29 million. Full-year 2024 net sales are projected to be between $595 and $605 million, with adjusted EBITDA between $115 and $120 million.

Management Comments

• Matthew Stevenson, President and CEO of Holley, stated that the company's organization now operates with unprecedented capabilities and professionalism.
• Stevenson noted that digital modernization, customer service optimization, B2B sales capabilities, new product launches, and a revamped pricing strategy have been upgraded within the last year.
• Stevenson mentioned that the company's marketing calendar helped drive a 16% year-over-year increase in the direct-to-consumer channel and a 10% median lift in B2B out-the-door sales during event windows.
• Jesse Weaver, Holley's CFO, added that the company was recognized by ratings agencies for strengthening its balance sheet.
• Weaver noted that sales were at the low end of the guidance range due to industry softness and distribution partners cleaning up inventories.

Industry Context

The announcement reflects the challenges faced by the automotive aftermarket industry, including inventory adjustments by distributors and overall market softness. Holley's focus on direct-to-consumer sales and strategic brand growth aligns with broader trends in the industry, where companies are seeking to diversify their sales channels and build stronger brand recognition.

Comparison to Industry Standards

• Holley's performance is being impacted by similar trends affecting other automotive aftermarket companies, such as Advance Auto Parts (AAP) and AutoZone (AZO), which have also reported challenges related to inventory management and consumer demand.
• While Holley's direct-to-consumer growth is a positive sign, it needs to be compared to the performance of companies like Amazon (AMZN) and eBay (EBAY) in the automotive parts sector to gauge its competitiveness in the online retail space.
• The inventory reduction and improved inventory turns are positive steps, but they need to be benchmarked against industry leaders like Genuine Parts Company (GPC) to assess their effectiveness.
• The Moody's rating upgrade is a positive development, but it needs to be seen in the context of the overall credit ratings of other companies in the automotive aftermarket sector, such as LKQ Corporation (LKQ).
• Holley's adjusted EBITDA margin of 16.5% is lower than some of its peers, indicating a need for further operational improvements.

Stakeholder Impact

• Shareholders will be impacted by the decreased net sales, net loss, and lowered full-year guidance.
• Employees may be affected by the company's restructuring and cost-cutting measures.
• Customers may benefit from the company's focus on digital modernization and customer service optimization.
• Suppliers may be impacted by the company's inventory adjustments and changes in demand.
• Creditors will be monitoring the company's financial performance and leverage ratio.

Next Steps

• The company will continue to focus on its strategic initiatives, including digital modernization and customer service optimization.
• Holley will continue to partner with distribution partners and invest in the direct-to-consumer channel.
• The company will be monitoring industry trends and distribution partner inventory adjustments going into 2025.
• Holley will be hosting a conference call to discuss the results.

Key Dates

Keywords

automotive aftermarket, performance products, net sales, net loss, EBITDA, inventory, direct-to-consumer, B2B sales, Moody's rating, financial results