VOXX - VOXX International: Sell On Mounting Financial Challenges

2023-08-15 15:38:27 ET

Summary

• Last month, VOXX International Corporation reported weak Q1/FY2024 results with sales, margins, and profitability challenged by changing retail consumer consumption patterns post-COVID.
• Even worse, management does not expect the business environment to improve anytime soon and abstained from reiterating previous projections for a return to growth in the second half of FY2024.
• Adding insult to injury, a previous $39.4 million arbitration award against the company has recently been confirmed by the United States District Court.
• The company ended the quarter with $5.6 million in cash and $36.7 million in outstanding debt principal under its various credit facilities. Availability under the company's up to $165 million asset-backed revolving credit facility decreased to $71.3 million, down from $84.0 million at the end of FY2023.
• With no positive catalyst in sight, investors should continue to avoid the shares or even consider selling existing positions.

Note:

I have covered VOXX International Corporation ( VOXX ) previously, so investors should view this as an update to my earlier articles on the company.

Last month, VOXX International Corporation or "VOXX" reported disappointing Q1/FY2024 results with sales, margins, and profitability all down on a quarter-over-quarter and year-over-year basis mostly due to the ongoing change in retail customer consumption patterns post-COVID:

Even worse, management does not expect the business environment to improve anytime soon:

Our primary obstacle near-term is the global economy as it continues to impact consumer spending and our customers. The worldwide retail environment in particular is tough, and our Automotive business continues to be impacted by inconsistent customer production, though supply chain conditions have improved. Perhaps the biggest impact to our retail business is the ongoing consumer pivot from durables to more travel and luxury-oriented goods, and we are making adjustments as a result. (...)

We anticipate continued global softness and are in the process of realigning our operations, reducing our workforce and bringing down overhead to be profitable on lower sales volumes. New products and expanded distribution within our Consumer segment, and new vehicle models coming online in our Automotive segment should help offset some of the weakness, but we are expecting a weak global economy throughout 2023. Our main focus is on returning VOXX to profitability.

Adding insult to injury, a previous $39.4 million arbitration award against the company has recently been confirmed by the United States District Court.

While VOXX plans to file an appeal, I would expect former supplier Seaguard Electronics, LLC ("Seaguard") to ultimately prevail in the ongoing court proceedings. As of the end of Q1, the company had accrued $44.4 million, including interest payments related to the award.

Please keep in mind that Seaguard might be awarded additional damages related to potential patent infringements by VOXX with a trial date having been set for October 16.

On a more positive note, net favorable working capital movements resulted in VOXX generating $5.3 million in cash from operating activities for the quarter, with the majority being utilized for the repurchase of 371,087 common shares at an average purchase price of $11.08.

The company ended the quarter with $5.6 million in cash and cash equivalents and $36.7 million in outstanding debt principal under its various credit facilities.

Availability under the company's up to $165 million asset-backed revolving credit facility amounted to $71.3 million at the end of Q1, down from $84.0 million at the end of FY2023.

On the conference call , management elaborated on a host of issues currently pressuring sales and profitability in addition to the above-discussed changes in retail customer consumption patterns:

• Margins in the automotive OEM business remain tight due to current contract pricing
• Production ramp continues to be delayed by certain OEMs
• Automotive aftermarket sales continue to be challenged by lower car production volumes in recent years and customers working through existing inventory
• Ongoing project delays in the Biometrics segment

Management also abstained from reiterating previous projections for a return to year-over-year revenue growth in the second half of FY2024.

In closing, we anticipate fiscal '24 will be difficult due to the uncertainty of the global economy and the continued impact of shifting consumer preferences. We expect markets to remain hard pressed. Many economists are expecting that we'll be in recession in this fourth quarter or first quarter of next year. Therefore, clearly more action is needed.

Bottom Line

VOXX International Corporation started FY2024 on a weak note and warned of a challenging fiscal year ahead as sales and profitability continue to be pressured by changing retail consumer consumption patterns and a host of other issues.

Moreover, following the most recent court setback, last year's $39.4 million arbitration award against the company might become enforceable in the not-too-distant future, with potentially dire consequences for the company's remaining liquidity position.

Despite mounting operational and financial challenges, VOXX has continued to repurchase shares during the first quarter, but considering the company's dismal outlook and ongoing overhang from the arbitration award, I do not expect this pattern to continue for the remainder of FY2024.

With no positive catalyst in sight, investors should continue to avoid the shares or even consider selling existing positions.

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