Bombshell Omission Regarding FOX Factory CEO Mike Dennison's Q4 2023 Earnings Call

 I do not own FOX Factory stock.

FOX Factory Holding Corp. held its Q4 Earnings call on February 22, 2024, at 4:30 PM. I am focusing on FOX CEO Mike Dennison's two comments during that call.

“And then in AAG, again, fantastic growth over the last couple of years with the upfit business. I mean, it was 40% for two years back-to-back. And so that growth is fantastic in the upfit business. But this year, definitely slower just because we’re not getting the right chassis. We’re not getting enough chassis. And then you have dealer floor plan financing just really inhibiting dealers from taking more risk and putting the product on their lot. And so that’s having a pretty significant influence on us, and quite frankly from a margin standpoint as well.”

The upfit growth was an anomaly driven by dealers' inventory situation post-COVID. If you recall, dealers could not keep trucks on their lots, so they contacted upfitters and snatched up any available chassis they had. The consumer demand was for the chassis, NOT the upfit package.

Mike Dennison states that they are not getting the right chassis or enough chassis. 

The Bombshell Omission:
All new truck dealers can have trucks drop shipped from the factory to any OEM-branded upfitters location.  So, OEM-branded upfitters, such as FOX, are not dependent on obtaining dealer upfit orders for only the chassis they have in their area (s).  Dealers can have ANY new stock truck upfitted with an OEM-branded upfit package on order.  Dealers may order a truck chassis from the OEM-branded upfitters bailment program instead of using a vehicle the dealer has on the order because bailment chassis do not count towards dealer vehicle allotment.

Terminology Definitions:
OEM-branded upfitter - A vehicle upfitter recognized by vehicle manufacturers and authorized to modify new vehicles.  These companies include SCA Performance Group, Tuscany, American Luxury Coach, Sherrod Trucks, and Waldoch.  They have a bailment program with the truck manufacturer where the manufacturer ships new vehicles directly to them to fulfill dealer orders of their upfit package(s).

Vehicle allotment - Truck manufacturers allocate how many vehicles a dealer can re-order based on previous sales numbers.    
 

Nationwide search of New 2023 & 2024 Chevy Silverado 1500 in dealer inventory
Source: Cargurus 3/28/24

Nationwide search of New 2023 & 2024 Ford F150 in dealer inventory

Source: Cargurus 3/28/24

FOX's current new upfitted inventory

Source: LiftedTrucksForSale 3/28/24

 According to Cargurus, 73K new 2023 and 2024 Chevy Silverado 1500s are in dealer inventory nationwide. Of the 73K, FOX has 536 vehicles upfitted or headed to dealer lots. If the other OEM-branded truck upfitters had the same matching number of their products on dealer lots, that would leave 72,500 vehicles that could be upfitted. With the Ford F150, FOX has 1,330 upfitted F150 vehicles out of 51K that could be upfitted.

“So what we’re seeing from the dealers is a very conservative approach to model your changes. So let’s say you’re a Ram dealer. You know, Ram has had the same truck for five years. They haven’t updated that truck in the last five years. And so while there’s inventory available for them to put on their lot right now, they’re holding out for model year 2025, which is actually going to get launched in early 2024. So you’ll find dealers who because of full-time financing, that don’t want to go with the current model year, because they’re just going to wait for the next model year. In this case, it’s going to come out fairly early in the year. So you’ve got to challenge the dealer who’s really trying to understand, what do I want to have on my lot and when?

How many vehicles do I want to have on my lot? It’s a dynamic that’s pretty interesting. It just means, as I said before, it’s going to come down to, do you have the new product, the new models with the new custom packages? When you have that, the selling and stuff will work out just fine. I don’t think it’s going to be a problem at all. Even if we’re still in a bit of an elevated interest rate world, I think if you can show the customer something new and fresh, they’re going to come buy it. And we feel the same way about side-by-side upfitting. But it really comes down to when do those new model year vehicles launch and how fast can we get our custom up-fit model year trucks out the dealer lots to sell.”

A nationwide search of New 2023 & 2024 RAM 1500 in dealer inventory

Source: Cargurus 3/28/24

There are 32K RAM 1500 trucks on dealer lots. FOX has upfitted 541 of them. In previous earnings calls, Mike stated that FOX must purchase the chassis from RAM for their bailment. Other truck manufacturers provide vehicles on a floor plan, as they know that the chassis cost will be transferred to the dealer. Again, any RAM dealer can have their truck chassis shipped to FOX to be upfitted, and thus, FOX isn't dependent on OEMs to ship them chassis; dealers can.

The total of the three truck models in dealer inventory mentioned at the time of this writing is 155,481 units, or the current total addressable market of vehicles that could be sold as new lifted.  FOX has only 2,407 of the vehicles upfitted, or zero total market penetration of their vehicles!

Due to the new lifted truck market being an obscure sub-market of the new truck market, there needs to be a lot of education for the public and consumers. The branded upfitters FOX owns were all privately owned family businesses chugging along like family hobby businesses.  FOX's initial purchase of Tuscany didn't move the scrutiny needle; however, the purchase of the SCA Group, the overpriced purchase amount, and FOX being public warrant very close scrutiny of what's being reported to the public.   

The positive for the new lifted truck market is that there's a massive growth opportunity, and I project the growth to be 5-7% of the new truck sales.  Considering that many of the branded upfitters started out as conversion van upfitters, at the peak of that market, over 200K new conversion vans were sold in a year.