Holley Regains Growth, But the Turnaround Still Has a Margin Problem

Holley Inc. entered its second-quarter report with a straightforward task: prove that the first-quarter stumble was temporary. By that measure, the company largely delivered. Net sales rose 3.2% to $172 million, while core business net sales grew 4.9%, and three of four divisions posted double-digit core growth. Management framed it as both a return to growth and evidence that the strategic reset is working.

As CEO Matt Stevenson put it:

three of our four divisions delivered double-digit core sales growth year-over-year. That's a meaningful acceleration from where we began the year and reflects both the underlying strength and breadth of our portfolio, as well as the disciplined execution of our strategic priorities.

A Return to Growth, With Caveats

The headline number is encouraging, but the composition matters. The growth engine came from Modern Truck & Off-Road (+15.7%), Euro & Import (+13.1%), and Safety & Racing (+13.8%), while American Performance—the largest division—declined 2.1% as channel inventories normalized and the company deliberately shifted some marketing calendar items into the back half. The sequential improvement from -9.7% to -2.1% shows the inventory drag is fading, but it also underscores how much of the company's momentum now depends on the breadth of the portfolio rather than a single dominant category.

Management attributed part of the acceleration to the National Retailers channel, which is starting to pay off after more than two years of development. The company has secured approximately $12 million in new national retailer placements set to launch in Q3. In the words of CEO Matt Stevenson, these partnerships are long-cycle, but the payoff is starting to show: “It's a growth category for us, not only in the U.S., but in the national retailer footprint outside of the U.S.” — Matthew Stevenson, President and Chief Executive Officer · 2026-08-05

There is also a qualitative shift worth noting. The marketing organization was rebuilt—more than 20 professionals hired in-house and embedded within divisions—reducing reliance on outside agencies. That is precisely the kind of operational brand activation work that doesn't show up immediately in the P&L, but management believes it is already lifting engagement and direct-to-consumer performance.

The Balance Sheet Is the Story

If the growth story is still being proven, the balance sheet is already delivering. Holley generated $40.9 million of free cash flow in the quarter, up $5.2 million year-over-year. Crucially, leverage ended at 3.74x—the lowest in four years—and after the quarter-end, the company made a further $15 million voluntary debt repayment, bringing total voluntary repayments to $115 million since September 2023.

The cash flow generation is now tangible enough to fund both debt paydown and share repurchases. The company opportunistically bought back ~$2 million of stock during the quarter, and management signaled it would continue to buy when the price is disconnected from fundamentals. The balance-sheet trajectory is visible in the fundamentals: effective net cash improved from roughly -$603 million in late 2020 to -$498 million as of Q1 2026, a meaningful tightening of the resource constraint that has capped optionality for years.

This is also where the portfolio rebalancing initiative becomes more than a buzzword. Year-to-date, the company has divested four brands, closed two facilities, cut ~16% of its SKU portfolio, and reduced headcount by about 5% through divestitures. The proceeds and freed-up capital are being redeployed toward higher-return growth—including the HRX acquisition, which contributed $4.7 million in revenue in the quarter.

The Tariff Overhang Remains

The main reason the adjusted EBITDA margin fell 223 bps to 19.6% is not operational deterioration—it's the accounting of tariffs. Jesse Weaver explained in the Q&A:

It's about $3 million to $3.5 million. So if you add that back, you would see that we'd be a slight EBITDA dollar-wise better than last year with a decent pickup on the margin rate...

The company also received a one-time tariff refund under IEEPA totaling $10–11 million, which helped free cash flow but is explicitly non-recurring. As Jesse noted, “the IEEPA refund is a one-time thing... the other tariffs that came in more than offset that.” — Jesse Weaver, Chief Financial Officer · 2026-08-05 The company has passed through a modest price increase to help offset freight and memory-chip cost inflation, but the wait-and-see stance on further pricing reflects the balanced relationships with national retailers.

This tariff environment has been a recurring theme across the company's recent quarters. In the prior quarter call (May 2026), Jesse Weaver noted: “out-the-door sales were very strong within the quarter for our distribution partners. And we're probably in the plus 4% range.” — Jesse Weaver, Chief Financial Officer · 2026-05-06 That emphasis on sellout versus sell-in has been a consistent way management justifies the resilient demand. And in the August 2025 call, Jesse reinforced the same underlying point: “When we look at sort of our out-the-door growth relative to what the overall business is doing in these distribution partners, we continue to outperform there.” — Jesse Weaver, Chief Financial Officer · 2025-08-07 Those earlier comments highlight why the current quarter's growth is meaningful: it is not merely a restocking event, but a reflection of underlying consumer demand that has stayed durable despite macro noise.

Looking at the margin trajectory, management expects a slight uptick in the second half due to pricing and efficiency. As Jesse said, “You would expect it to slightly tick up a little bit, just like you have in previous years between first half and back half.” — Jesse Weaver, Chief Financial Officer · 2026-08-05 But the 41% gross margin remains below last year's level, and the company will need operating leverage to deliver the >20% adjusted EBITDA margin target it reiterated.

What's Next: Retail Placements and Innovation

Looking to the back half, the company is banking on several catalysts: the $12 million national retail placements, a robust new product pipeline (especially in Safety & Racing and Modern Truck), and continued HRX contribution. The HRX acquisition is a template for the kind of bolt-on deal management wants—founder-led, double-digit growth, positive free cash flow—and it's already adding to both top and bottom lines.

The company has also reaffirmed its full-year guidance, which implies the improvement in Q2 is expected to persist. Management's comments about a "dynamic" macroeconomic environment, elevated fuel costs, and the evolving tariff landscape suggest the guidance embeds conservatism—but the underlying revenue trajectory is at least pointing in the right direction.

The key risk is the margin story. Excluding the one-time tariff capitalization benefit and the IEEPA refunds, the business appears to be growing but not yet expanding margins. The 41% gross margin is slightly below last year, and the company expects a "slight tick up" in the second half due to pricing. Whether that materializes depends on consumer elasticity and the ability to pass through costs without losing traction.

Holley's equity is still depressed—shares trade at roughly 0.6x trailing revenue and about 9.6x free cash flow. The market is waiting for proof that the growth is sustainable and the deleveraging can continue. This quarter provided some of that proof, but the real test will come from the execution on the retail placements and the pace of margin recovery in the back half.