2023-08-19 01:30:16 ET
Summary
- YETI Holdings creates innovative outdoor products, known for coolers and drinkware, with a diverse range of additional products.
- The company uses brand ambassadors and a diverse omni-channel approach to attract new customers and expand internationally.
- YETI has a healthy balance sheet, impressive financial performance, and potential for future growth, but faces competition and the risk of product recalls.
A shoe is just shoe without the Nike ( NKE ) swoosh logo. Remove the pink Barbie logo and all that remains is an ordinary doll. Take away the Heinz Tomato Ketchup logo you're left with a bottle of red glop.
A remarkable brand can resonate with consumers. It can create lifelong memories and produce lasting customers. Again, going back to Barbie, you can clearly see the positive childhood memories evoked from the classic Mattel ( MAT ) toy as the movie has smashed records , becoming the box office hit of the summer.
Today I'd like to discuss a company creating outdoor products that I believe has to potential to similarly create lifelong clientele, the company is YETI Holdings.
The Company
YETI Holdings ( YETI ) creates innovative outdoor products for consumers. Most people know YETI from their coolers and drinkware. From the company's latest 10K filing , 38% of the company's 2022 net sales came from coolers and equipment, and 59% came from drinkware (the rest was categorized as "Other").
YETI presents their products as quality and high-performance thus as such the products are priced at a premium.
Speaking as a consumer I can attest to the value of YETI's products. Despite being expensive relative to peers, their products are exceptional. I have numerous friends and family that feel the same way.
While YETI is most widely known for their drinkware and coolers you can see from the below graphics the company has added new products such as ice buckets, skillets, backpacks, chairs, and even products for dogs.
To help the brand attract new customers and continue to stay relevant in today's global market YETI has enlisted the help of "ambassadors." As stated on the company's 10K , these ambassadors are "…a diverse group of people throughout the United States and select international markets, comprised of world-class anglers, hunters, rodeo cowboys, barbecue pitmasters, surfers, brewmasters, fitness experts, skateboarders, and outdoor adventurers who embody our brand…"
As you can see below, YETI has a large and growing social media presence:
The company's brand ambassadors will play a key role in continuing to grow this online presence.
YETI offers their products to consumers using a diverse omni-channel approach. Direct to consumer ((DTC)) sales accounted for 58% and 56% of the company's net sales in 2022 and 2021. In terms of wholesale, YETI products can be found at retail partners such as REI, Dick's Sporting Goods, and Ace Hardware.
Growth and Opportunities
YETI has various opportunities to grow both domestically and internationally. From a domestic perspective, the company is using their brand ambassadors to reach different communities. YETI has primarily been associated with hunting and fishing however with 177 brand ambassadors the organization can try to attract new customers as the below graphic illustrates:
As noted on the company's Q2 earnings call, one strategic priority is expanding internationally. In the last quarter international adjusted sales grew 19% year-over-year and reached 13% of total adjusted net sales.
As you can see from the graphics below YETI has been increasing their international sales mix over the last few years. However, there is still plenty of room to grow as illustrated in the international mix opportunity graphic below:
Management
Matt Reintjes has served as YETI's President and CEO since 2015. The company's CFO is Mike McMullen. McMullen has been with the organization since 2016 but has held his current position for less than a year.
As you can see from these Glassdoor ratings, YETI is viewed as a fantastic place work. Additionally, employees at the company clearly approve of Reintjes as the CEO.
I like the focus management has on reinvesting in the business to generate shareholder returns. For example, here is a statement Reintjes made in the Q2 earnings call when asked about the company's cash balance,
" We'll continue to look at uses of cash that we believe feed and kind of fund the innovation engine. As I mentioned earlier, the brand reach that we have and the brand reach that we continue to build, create opportunity for innovation underneath that halo. And we think there are strategic uses of cash where we can bring innovation into the YETI portfolio and then leverage the incredible marketing and commercial teams that we have to go drive outsized returns."
When it comes to management, I like to see them using their capital effectively. As you can below, the ROCE and ROIC numbers are impressive although I would like to see an improved ROE:
Nonetheless, I feel that YETI's management have been allotting capital wisely while making YETI a desirable place to work.
Financials
YETI has a great balance sheet as the company has a healthy cash balance of roughly $220 million as of Q2 2023 and the company's current assets far exceed current liabilities. Also, as you can from the information presented in the Q2 financial results investor presentation, the company's debt has continued to decline over the years while the company has maintained a healthy cash balance:
For Q2 2023, sales were roughly $427 million which was a 2% increase compared to Q2 2022. DTC sales accounted for $235 million which was a 4% increase compared to the prior period last year. Wholesales accounted for $193 million which were down 1%. (As noted as the call, these are adjusted non-GAAP metrics which the company believes provide a better picture of performance given the voluntary product recall).
From a product perspective, coolers and equipment sales were roughly $180 million which was down 6% compared to Q2 2022 although management did note the new GoBox products continued to resonate with customers. Drinkware sales were $233 million, an increase of 8% compared to prior year's second quarter. New colors and the addition of the Yonder water bottles contributed to this increase.
If you zoom out, it's clear YETI has made significant strides since the company's IPO in 2018. Adjusted net sales have increased year after year.
The organization had a voluntary product recall which had an unfavorable impact of roughly $129 million in 2022. If YETI can avoid more costly recalls, I believe the company can continue to growth gross profit and operating income in the years to come.
Risks
Despite YETI holding numerous patents, trademarks, copyrights and other various intellectual property rights, I don't believe those give YETI much of a competitive advantage.
Competition is fierce and there are low barriers to entry within this market. Also, consumers have plenty of alternatives. For example, Igloo and Coleman are well-known legacy cooler brands and in drinkware, HydroFlask and Carmelbak are quite popular.
The company must continue to create high-quality products for their clientele or else consumers will shop elsewhere. Additionally, in a world where social media is more important than ever, YETI must continue to stay relevant and hope a brand mishap doesn't occur, such as the ones Target ( TGT ) and Bud Light have recently experienced.
Also as mentioned in the financial section, product recalls can adversely impact the company like the one that occurred in 2022. Should more recalls occur, the company will certainly suffer from a financial perspective and it could damage the brand's reputation.
Finally, with interest rates remaining high and the end of the student loan repayment hiatus, consumers will likely be spending less . Additionally, consumers may spend less on goods compared to services , and especially goods which are at a higher price point. This could impact YETI, especially their higher priced items such as coolers.
Valuation
According to the below valuation metrics from Seeking Alpha, the overall value grade for YETI is a "D."
I actually don't think YETI's valuation is too unreasonable. If the forward P/E earnings was closer to the sector median I would be a buyer. As a long-term investor, I don't think the current valuation is horrible and one could cost average and build a position over time.
Conclusion
There are numerous risks YETI is facing, as the consumer is spending less compared to the last several years. Additionally, there are numerous competitors in this industry with little to no barriers to entry in this industry.
However, as a long-term investor I'm bullish on YETI. Their products are excellent, and the company has a strong social media following with brand ambassadors from all walks of life. Additionally, YETI has grown international sales over the last several years and there are still plenty of opportunities to generate further sales overseas.
For long-term investors willing to withstand the upcoming pressures facing consumers, I think this company will be winner in the decade to come and there will be numerous opportunities to grab this stock at a discount in the upcoming months.
For further details see:
YETI Holdings: The Outdoor Brand For Your Portfolio