HLLY - Holley: Holy Moly Financial Results Just Keep Getting Worse

Summary

• The company has completed total of 16 acquisitions over the past three years alone and its business was supposed to be well-prepared for an economic downturn.
• It seems that little has changed since Holley filed for bankruptcy in 2008 as demand doesn’t seem sticky.
• Preliminary data showed that net sales of just $153 million to $155 million and adjusted EBITDA of $13 to $15 million for Q4 2022.
• The CEO has left, and I think that there could be a significant stock dilution or another bankruptcy in the cards.
• I think it could be best for risk-averse investors to avoid this stock.

Introduction

I’ve written several articles on SA about high-performance automotive parts supplier Holley (HLLY). The latest of them was in November when I turned bearish and said that net sales and adjusted EBITDA for the full year could be slightly lower than the new guidance and that I no longer thought that demand for the company’s products is sticky.

Well, Holley’s financial situation keeps getting worse as the company recently announced preliminary data that showed net sales of just $153 million to $155 million and adjusted EBITDA of $13 to $15 million for Q4 2022. In addition, the company's CEO announced he's retiring, and I don’t have high hopes for the 2023 financial guidance which will be announced in early March. Let’s review.

Overview of the Q4 2022 preliminary results

In case you haven’t read any of my previous articles about Holley, here’s a short description of the business. The company was founded in 1896 and specializes in the manufacturing and sales of high-performance products for car and truck enthusiasts such as carburetors, fuel pumps, superchargers, engine tuners, mufflers, wheels, and brake kits. Holley has completed total of 16 acquisitions over the past three years alone and its brands include Flowmaster, NOS, Scott Drake, Accel, and MSD among others. Holley was listed on was listed on the NYSE in July 2021 through a merger with a special-purpose acquisition company (SPAC) company named Empower. When this deal was announced in March 2021, Holley was described as the "largest and fastest growing platform in the enthusiast branded performance automotive aftermarket category". To be fair, the original Holley is long gone. The Holley family exited the business in 1968 and the company filed for bankruptcy in early 2008 as the Great Recession sapped demand for discretionary goods. In March 2008, Holley emerged from Chapter 11 bankruptcy with a plan to focus on expanding its emissions control business. However, a major customer, Caterpillar (NYSE: CAT ), discontinued a line of truck engines and the company filed for bankruptcy again in September 2009. In 2010, Holley emerged from Chapter 11 bankruptcy for the second time in three years as sales declined by 19.5% year on year to $90.2 million in 2009. In 2012, the company was sold to investment firm Monomoy Capital Partners which then sold it to private equity company Lincolnshire Management in 2013. The latter sold Holley in 2018 to sector player Sentinel Capital Partners which then merged it with Driven Performance Brands.

Following the listing in July 2021, the investment thesis was that this iteration of Holley well-prepared to weather an economic downturn thanks to sticky demand as 82% of all car and truck enthusiasts consider budgets on parts recurring expenses. In addition, the company estimated that 64% of its customers frequently trade in their cars and trucks to begin new personalized vehicle builds and 54% of clients earn over $75,000 per year (check slide 13 here ).

The start of 2022 was strong indeed as Q1 net sales rose by 24.8% year on year to $200.1 million and it seemed that the company wasn’t affected by global supply chain issues as adjusted net income soared by 42.4% to $21.5 million. The guidance for the year included net sales in the range of $765 million to $790 million, as well as adjusted EBITDA of between $186 million and $194 million. And then everything went wrong. In Q2, net sales went down by 7.1% year on year to $179.4 million and Holley said that a part of some revenue was pushed into Q3 due to supply chain disruptions, and chip shortages. The full-year net sale guidance was cut to $700 million to $725 million. In Q3, net sales declined by 12.7% quarter on quarter to just $154.8 million despite the company saying supply chain pressures eased in August and September. Sales of electronic systems products were particularly weak as they declined by 15.7% year on year to $62.2 million. The 2022 guidance was cut again and the company was expecting net sales of between $695 million and $710 million and adjusted EBITDA of between $118 million and $124 million. I think that a change of the CFO in December was a bad sign of things to come and on February 6, Holley revealed that it missed its guidance and that its CEO decided to retire. Preliminary data showed that net sales came in at just $687 million to $689 million while adjusted EBITDA stood at $113 million to $115 million. The net loss for Q4 was $17 million to $19 million and Holley complained about supply chain challenges once again and is now talking about streamlining operations. In my view, a sign that demand continues to be weak in 2023 is that Holley is currently having a winter clearance sale offering discounts of up to 86% .

The company revealed that it recently implemented an interest rate collar, but this could be too little too late as the weighted average interest rate on borrowings under its credit facility had risen to 6.8% as of October 2. The company had $650.9 million outstanding under this credit facility back then (see page 31 here ) and I’m concerned that there could be significant stock dilution in the near future as the credit facility has a 5x net leverage covenant.

So, how do you play this? Well, data from Fintel shows that the short borrow fee rate stands at just 1.03% as of the time of writing. However, the market valuation of the company has already declined by over 80% over the past year and I think that much of the negative expectations for the business are already reflected in the share price. In my view, general market sentiment has been driving share price movement over the past few months as we saw the market valuation increase by over 80% between late December and early February despite a lack of news. In my view, it could be best for risk-averse investors to avoid this stock.

Investor takeaway

What can I say besides deja vu. Holley went bust 15 years ago due to macroeconomic headwinds and the 2022 financial results showed that little has changed for the business despite over a dozen acquisitions over the past few years alone. The company’s CEO left just as the financial situation of the company is getting precarious and I think that there could be significant stock dilution or another bankruptcy in the cards if something doesn’t change dramatically soon. However, the market valuation of Holley is now below $300 million, and the share price has been experiencing wild swings over the past few months, which I think makes short selling dangerous. It could be best for investors to avoid Holley.

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