2023-05-30 10:53:39 ET
Summary
- Despite the recession, consumer spending remains strong, and YETI, a maker of hard coolers, has potential for a rebound with strong fundamentals.
- The stock trades at an attractive ~13x FY24 P/E.
- In spite of softer wholesale revenue, the company notes that sell-through remains strong, particularly in its core drinkware category.
- With this backdrop, we can potentially bank on revenue re-acceleration in the back half of the year.
Here's the surprising thing about this recession: Consumer spending is still strong. In spite of rampant inflation and widespread layoffs, consumers are still plowing money into everything from goods to travel.
Amid that backdrop, I'm keenly looking out for strong consumer brands that have seemed weakened share prices since the start of the year that nevertheless have strong fundamentals and rebound potential. YETI Holdings ( YETI ), the maker of famed hard coolers that are well-associated with the football tailgate crowd, is one such company. Down 25% year to date, YETI is still managing to grow sales in its direct channel, even though its B2B sales are down due to reseller partners thinning out their inventory to be more conservative.
We have to take a long-term perspective here: does YETI have a great product and brand equity that will continue to expand to more categories? Check. Does YETI have room to grow from a geographical market perspective? Check. And does the company have levers to increase gross and operating margins to expand its bottom line? Check.
I remain bullish on YETI. A lot of the long-term bullish drivers for YETI still hold very true:
- The company is extending its immensely popular brand into new products. Drinkware and coolers are still the bread-and-butter categories for YETI, but the company is now taking advantage of its rising brand profile to roll out new products. During the pandemic, the company announced a new collection of bags, backpacks, duffels, and luggage - another high-margin category that can fuel further growth. The company is also adding heavy-duty cargo buckets and containers this year.
- Continued strong direct channel execution. Thanks to YETI's focus on social media advertising and digital sales, the company has seen a growth index stronger in its direct channel than in resellers, and direct is now more than half of YETI's overall revenue mix.
- Tremendous margin gains thanks to direct channel mix shift. For consumer products and retail-oriented companies, gains in gross margins are equally as important to investors as overall growth, and the company's DTC growth has pushed margins into the 50-60% range. This indicates that YETI's revenue stream is much richer in profitability and scalability than other typical retail names.
- Regional and international expansion. YETI has been primarily popular in the South and Midwestern regions of the U.S., but brand penetration on the West and East coasts as well as internationally is still low and provides YETI with plenty of room for growth. The company's recent tilt toward online and social media marketing also makes it easier for the brand to flower in new places.
It's worth zooming into international expansion briefly. In YETI's most recent quarter (into which we'll dive into more detail in the next section), international revenue grew 33% y/y. Looking at the chart below, you can see that YETI's trailing-twelve month international revenue mix was only 13%, which is low compared to a variety of similar outdoors/sportswear companies that are in a more mature phase than YETI:
From a valuation standpoint: this year, YETI is guiding to $2.12-$2.23 in pro forma EPS, down 5-10% y/y. We can't discount the macro factors at play here in FY23, of course, but we do note that consensus is pegging YETI's FY24 pro forma EPS at $2.77, on the back of 12% y/y revenue growth to $1.9 billion.
At current share prices just under $37, this puts YETI's valuation multiples at 17.0x FY23 P/E and 13.3x FY24 P/E. In other words, if you still believe in YETI's attractive brand as well as its ability to execute through the current macro climate, this stock presents a very cheap entry point at the moment.
My recommendation here: stay long and wait patiently for the rebound.
Q1 download
Let's now go through YETI's most recent quarterly results in greater detail. The Q1 earnings summary is shown below:
Needless to say, this wasn't YETI's strongest quarter, but the company still managed to grow revenue at a 3% y/y pace to $302.8 million, outpacing Wall Street's expectations of $294.0 million (flat y/y). Note that YETI's ability to grow here is especially impressive due to the fact that Q1 was impacted by YETI's voluntary recall of several of its soft cooler products due to a magnet safety issue.
From a channel mix perspective, note that direct-to-consumer ((DTC)) sales grew 7% y/y to $167.0 million (representing 55% of revenue), while wholesale revenue declined -1% y/y. The wholesale piece is being echoed across the industry, as retailers prepare for softer sales and shrink inventory/shutter store locations amid the potential recession. But the mix shift into the direct channel has been YETI's trajectory for several years now (in 2015, the company's direct-channel mix was less than 10%), and it has been a major factor driving margins.
Note as well that as long as end customer sell-through holds up, retail partners will eventually have to restock inventory - so the "weakness" in wholesale sales may end up being a timing shift. CEO Matt Reintjes noted on the Q1 earnings call that "we have seen positive sell-through despite the more tepid sell-in environment, resulting in inventory levels that have improved since the start of the year." This is a positive signal that YETI may enjoy a catch-up of wholesale sell-in revenue later in the year.
Here is some helpful anecdotal color from Reintjes on how YETI's core product categories performed during the quarter, taken from his prepared remarks on the Q1 earnings call:
In Hard Coolers, revenues were down for the period, primarily reflecting less sell-in at wholesale even as sell-through remained positive. As we move into cooler season for moms, dads, grads in the beginning of summer, we have amplified our on-the-go story lines now that the Roadie 48 and 60 Wheeled Coolers are available across our omnichannel.
Regarding cargo, I've already mentioned the success of the GoBox launch, where early demand exceeded expectations. This is a category where we will continue to invest in product innovation and build out across our wholesale footprint. Rounding out the highlights in Coolers & Equipment, we continue to see solid growth in bags where we remain focused on pace distribution decisions to continue building awareness and consideration.
In Drinkware, we saw growth for the period within the range of our expectation. The hydration story has emerged as a key driver of the broader category this year, which we believe is supported by our continued strength and performance across our Rambler bottle line and Straw lid tumblers [...] Drinkware innovation will continue throughout the year and includes more premium category offerings, expanded bottle options and newer entries that will extend how we think beyond individual use products."
From a margin perspective, YETI's gross margin expanded slightly to 53.5%, an 80bps improvement over 52.7% in the year-ago quarter. The primary driver behind improved gross margins was lower freight costs (freight rates spiked during the pandemic while everything was supply-constrained, and now they've reset to more normal levels) as well as the favorable direct channel mix.
From an overall profitability standpoint, over, the company's overall adjusted SG&A expenses grew 16% y/y, driven by headcount, demand generation activities, and supply chain investments. This drove adjusted operating income margins to 7.2%, down from 13.0% in the year-ago quarter.
The good news here is that for the full year, while YETI remains committed to investing in the business (SG&A as a percentage of revenue is expected to grow 400bps y/y), the company also expects to see further gross margin gains, and remains confident in a full-year gross margin target of 55.0% (230bps higher than the current quarter). YETI is also retaining its full-year adjusted operating margin target of 15.0-15.5%, significantly higher than in Q1.
Key takeaways
2023 isn't the year by which to judge YETI. The company is still handling the impacts of a voluntary product recall, navigating nervous buying patterns from its resellers, and investing into the business to drive future growth. But looking ahead, we like the company's trajectory of boosting gross margins as well as delivering international expansion opportunities. Stay long here and buy confidently at a cheap ~13x P/E against FY24 earnings.
For further details see:
YETI: Powerful Consumer Brand With Rebound Potential