2023-03-06 11:40:35 ET
Summary
- YETI is down over 60% from its all-time high in 2021.
- The company continues to be impacted heavily by macro headwinds.
- Its latest earnings were disappointing, especially the guidance which missed the consensus badly.
- The current valuation is discounted and bad news should mostly be priced in after the kitchen sink quarter.
- I rate the company as a buy.
Investment Thesis
YETI ( YETI ) has been struggling heavily in the past two years, with the share price down over 60% from its all-time high in 2021. The company is extremely exposed to macro headwinds which continue to put significant pressure on its financials. It reported a “kitchen sink” Q4 earnings with a double miss and guidance for the year was also way below the street’s consensus. This is actually positive in my opinion as it gets rid of all the bad news and reset investors' expectations of its upcoming performance.
After the plummet, the company is trading at an attractive valuation with multiples meaningfully below its historical average. I think its potential upside largely depends on the magnitude of the economic slowdown while the downside should be limited as a lot of pessimism is already priced in. I like the risk-to-reward ratio at the current levels and I rate YETI as a buy.
Macro Headwinds
For those who are unfamiliar with the company, YETI is a Texas-based consumer brand that specializes in outdoor products such as drinkware, coolers, bags, and other related equipment. The company is one of the most popular outdoor brands in the US and has been expanding its presence to other countries like Australia and Japan.
Despite its strong branding, the company is very exposed to the macro economy due to the discretionary nature of its business. As inflation soared in the past two years, the purchasing power of consumers continues to decrease as wage growth couldn't catch up. This causes consumers to spend more on essential items such as food and reduces spending on discretionary items. This is putting heavy headwinds on the company as demand continues to weaken. High inflation also significantly increased the company’s cost and expenses of production and logistics, which puts further pressure on the bottom line. While inflation has eased slightly, the latest January CPI (consumer price index) showed a surprising re-acceleration on a MoM (month over month) basis from 0.1% to 0.5%, as shown in the chart below. I believe this volatility in the economy will last for a while and should continue to impact YETI heavily.
Q4 Earnings
YETI announced its fourth-quarter earnings recently and the results are disappointing, especially the bottom line and guidance.
The company reported revenue of $448 million, up only 1% YoY (year over year) compared to $443.1 million. This quarter’s revenue included a $38.4 million unfavorable impact caused by voluntary recalls. Revenue from DTC (direct-to-consumer) channels increased 17% YoY from $263.9 million to $309.5 million. This was driven by strong traction in the international segment which grew 32%. International continues to be the company’s main focus as it only accounts for roughly 12% of total sales, much lower than other retail brands. The growth was offset by the decrease in wholesale revenue, which dropped 23% YoY from $179.2 million to $138.5 million.
The bottom line was pretty terrible. Gross profit was $167 million compared to $254.8 million, down 34%. Excluding the impact of recalls, gross profit was up 4% to $264 million. This is due to inflationary pressure as costs increased 49.5% YoY from $188.3 million to $281 million. Adjusted operating expenses also increased 13% YoY to $175 million, primarily due to higher distribution expenses and third-party marketplace fees. This resulted in adjusted operating income down 11% from $99.8 million to $89.1 million. The adjusted operating margin contracted 420 basis points from 22.5% to 18.3%. Adjusted EPS was $0.78 compared to $0.88, down 13% YoY. The balance sheet remains strong with $234.7 million in cash and only $90 million in debt.
The company also initiated guidance for FY23 which suggests a further decrease in the bottom line. Adjusted revenue growth is expected to be 3% to 5%, much lower than the 12.5% consensus. EPS is expected to be $2.12 to $2.23, significantly missing the estimate of $2.82. The current estimate represents an EPS decline of 5% to 10%.
Investor Takeaway
The latest earnings results were bad and the guidance was even worse. However, I believe this is actually a good thing. The expectation for YETI in the near term has now lowered substantially and the bar for FY24 will also be much easier to beat. FY23 is going to be disappointing but FY24 is the key and most are overlooking it. If we look at the current analyst’s estimate for FY24 , the company is expected to post 30%+ EPS growth and 10%+ revenue growth thanks to easy comps.
Its fwd PE ratio for FY24 is 13.8x which represents a massive discount of 50.7% compared to its 5-year historical average of 28x. The current PE ratio of 18x also represents a 35.7% discount. The estimate for FY24 will certainly be impacted by the magnitude of the slowdown but even the most pessimistic estimate expects an EPS growth of 20%+. I believe this kitchen sink quarter provides a solid buying opportunity as it prices in all the pessimism which limits the downside, while FY24 should see a strong bounce due to easy comps. I rate YETI as a buy.
For further details see:
YETI Q4 Earnings: A 'Kitchen Sink' Quarter Presents A Buying Opportunity