2023-04-28 14:45:44 ET
Summary
- YETI recently issued a costly voluntary recall for its soft coolers and gear cases, which may impact profitability and sales growth in the short term.
- While YETI has seen success in expanding its international presence, the company may face challenges in standing out in a crowded market and building brand recognition in some regions.
- The current pricing is factoring in the continuation of steady growth from the past and the guaranteed success of international expansion, which I find challenging to achieve.
- Investors may want to reflect on the value that YETI can bring to an already saturated market and its long-term prospects.
Thesis
YETI (YETI) has been a fast-growing company in the outdoor products industry, known for its premium products that are designed to last. The company has achieved impressive growth in recent years, utilizing a multi-channel distribution strategy and effective marketing initiatives to reach a wider range of customers and increase brand awareness.
One factor to consider is the recent voluntary recall of 1.9 million soft coolers and gear cases. While YETI handled the recall timely and proactively, being transparent and taking responsibility for any potential safety issues or defects in its products, it was still a costly endeavor for the company.
Another factor to consider is YETI's expansion into the international market. While the company has seen success in expanding its international presence, YETI may face challenges in standing out in a crowded market and building brand recognition in Europe or Asia.
The current pricing is factoring in the continuation of steady growth from the past and the guaranteed success of international expansion, which I find difficult to achieve. Even if it does succeed, I will not want to take the risk of paying a premium as the potential reward may not be worth it if growth falls short of expectations or if the YETI brand power weakens. Hence, I am neutral to the stock and recommend a "Hold" position.
Investors may want to reflect on the value that YETI can bring to an already saturated market, and its long-term prospects.
Company Overview
YETI business model revolves around creating premium products that are designed to last, specializing in designing and manufacturing high-quality outdoor products including coolers, drinkware, bags, and other accessories. YETI uses a multi-channel distribution strategy, which includes their own e-commerce platform, retail stores, and partnerships with other retailers, to reach a wider range of customers and increase their brand awareness.
In 2023, YETI issued a voluntary recall for its soft coolers and gear cases and recording a financial impact in their books. YETI sales grew by 13% y-o-y (16%, if excluding the recall). Sales through DTC and wholesale grew by 17% and 8% respectively. DTC accounts for 57% of the sales mix in 2022, up from 56% in 2021 and 53% in 2020. The management's objective of enhancing the yeti.com experience is being pursued through their strategy of utilizing their investments in analytics advancement.
YETI operates in a highly competitive market with many established players in the outdoor industry, including Igloo, Coleman and Pelican.
1. Voluntary recall, though beneficial for the company's image, is costly.
In 2023, YETI has voluntarily recalled 1.9 million soft coolers and gear cases in collaboration with the U.S. Consumer Product Safety Commission. The reason for the recall is that the magnet-lined closures on these products can malfunction and release magnets, creating a potential risk of serious injury or even death if ingested. Customers are being offered a refund or replacement for affected products. This is not the first time YETI has issued a voluntary recall, as YETI recalled over 240,000 Rambler® 20 oz Travel Mugs in October 2020.
A voluntary recall can have both positive and negative effects on a company, depending on how it is handled and perceived by consumers and stakeholders.
For YETI, the voluntary recall was handled timely and proactively, being transparent and taking responsibility for any potential safety issues or defects in its products. This can help to protect the company's reputation and build consumer trust, especially for their premium products.
However, a voluntary recall is costly for the company. In the FY2022 Q4 earning call ( YETI Holdings, Inc. ( YETI ) Q4 2022 Earnings Call Transcript), Yeti reported it absorbed $129 million in write-offs related to the recall and will have a stop-sale in 2023 until the designs are fixed in FY2023 Q4. The impact of the recall is $38.4 million sales, approximately 7.9% of the FY2022 Q4 total sales. Yeti also mentioned that 2023 profitability and sales would be impacted with growth planned between 3-to 5 percent, which is lower than their long-term target of 10-to 15 percent.
Though a voluntary recall is beneficial for YETI for its transparency and commitment to provide the best for the consumers, the financial impact and product launch will be impacted at least in the short-term.
2. YETI's niche marketing strategy, like sport event and partnership, is time-consuming and challenging to secure.
When it comes to niche marketing like premium outdoor gears, it is essential to assimilate and connect with their customer lifestyle, and to showcase how the products can create value to the customers.
Instead of spending on product placements on TV or billboards, YETI has long taken the marketing approach of building diverse international partnerships, sports events, and ambassador programs.
YETI's recent partnership with the World Surf League serves as a prime example of their marketing strategy. The partnership makes YETI the official Drinkware and Cooler sponsor for the WSL's championship and Challenger series, as well as a partner in the We Are One Ocean initiative aimed at preserving the world's oceans. As mentioned in the FY2022 Q4 earning call, it is after nearly eight years of supporting surf ambassadors and friends, the extensive partnership with WSL officially began last month at Pro Pipeline in Oahu.
YETI has been reporting an increase in sales annually (except for 2017), averaging around 20% increase in recent years. Though strategies are effective ways to build brand awareness, reach like-minded audiences, and create long-term relationships with the customers, it can be time-consuming to foster relationship and challenging to secure in a competitive field.
3. Replicating the sales success may be challenging in the international market.
Generally, drinkware and gear are relatively accessible products that do not require a high level of technical expertise or specialized equipment to manufacture. The product is not new or unique in the international market, and there may be a larger number of competitors already existing in the market. It can make it more challenging for YETI to differentiate and stand out, as the brand recognition may not be as strong as in North America.
YETI begun selling its products to international market in 2012, with Canada being its first international launch. Since then, YETI has expanded its global presence to other countries like Australia, New Zealand, Japan, and several countries in Europe.
Some challenges that YETI might face when expanding internationally are:
- Should YETI lower their product price or offer a new range of products to compete in the international market. If so, will it deteriorate the branding power.
- Would YETI have the same or better branding and pricing power compared to the other brands?
- Will the customers' demand, supply chain and logistics be able to support the price and margin?
- YETI is popular in North America because there is an outdoor culture like hiking or camping. However, in other parts of the world like Asia, outdoor activity is more of a hobby than a lifestyle. Hence, will there be a strong demand for YETI products?
In FY2022, international sales accounted for 12.6% of the overall sales and grew 40.4% y-o-y. Majority of the international sales is through the YETI.com , and there is limited physical stores carrying the products for customers to test and feel the product. As of now, the amount of sales generated through international channels is relatively small, and this aspect of the business is still in its infancy. However, given the company's commitment to investing in its online platform and offering customizable designs to attract customers, it is likely that more resources and marketing expenses will be devoted to this area in the future.
Valuation and Opinion
My valuation for YETI stock is based on YETI's financial statement and earning forecast, and the data is driven by Seeking Alpha data. ( YETI Holdings, Inc. ( YETI ) Earnings Estimates)
While YETI has demonstrated impressive growth in recent years, there are several factors that investors may want to consider before investing in it.
The company recently issued a costly voluntary recall, which may impact profitability and product launch in the short term. Additionally, while YETI has seen success in expanding its international presence, the company may face challenges in standing out in a crowded market and building brand recognition in Europe or Asia.
The current price is assuming that the past, steady growth will continue, and that the international expansion is guaranteed to be successful, which I believe will be challenging. Even if it does, I would not risk paying the premium as it does not offer the risk-reward when growth is lower than expected or when YETI brand power weakens. Hence, I am neutral to this stock.
As such, investors may want to reflect on the value that YETI can bring to an already saturated market, and its long-term prospects.
For further details see:
YETI: Limited Value Creation In An Already Saturated Market