Yeti Holdings, Inc. managed to deliver 3.1 percent growth in first quarter that beat expectations despite the period being negatively impacted by a massive voluntary recall and the expected slow pace of orders in the North American wholesale channels.
Yeti reiterated its guidance for the year.
“Yeti’s off to a good start to 2023 as we continue to drive demand globally for our branded product. We delivered top and bottom-line results that put us on pace for our full year financial commitments,” said Matt Reintjes, president and CEO, on a call with analysts. “Our team did a tremendous job driving focus on our brand and innovation. In addition, we were pleased with the design improvements on the products impacted by our voluntary product recall, solidifying our plans to return new and improved versions of these products to the market in Q4 of this year.”
He reiterated Yeti’s goal to return to double-digit growth in the fourth quarter of this year.
On February 8, Yeti implemented a global stop sale of its Hopper M20 Soft Backpack Cooler, the Hopper M30 Soft Cooler and the SideKick Dry Gear Case with a formal voluntary recall arriving in March. Yeti identified that the magnetic closure on the products could fail and release magnets, posing injury or death if ingested.
Yeti previously established reserves for unsalable inventory on hand and estimated product recall expenses as of December 31, 2022. The voluntary recalls did not have a material impact to its first quarter of 2023 results, with the exception of a $1.2 million favorable impact from a reserve adjustment.
In the first quarter, sales advanced 3.1 percent to $302.8 million, surpassing Wall Street’s consensus target of $291.7 million.
Net income fell 58.8 percent to $10.6 million, or 12 cents a share, from $25.7 million, or 29 cents, a year ago. On an adjusted basis, earnings tumbled 45.8 percent to $15.5 million, or 18 cents from $28.6 million, or 32 cents, a year ago.
Adjustments exclude charges associated with voluntary recalls as well as employee severance costs in connection with the previously announced organizational realignment, including its commercial and sales organization.
On the call, CFO Michael McMullen said the stop sale of recalled products impacted the first-quarter growth rate by approximately 600 basis points with some of the impact offset by higher demand for other soft coolers that remain in the market. McMullen estimated Yeti had recaptured about half of the 600-basis point stop sale impact although it doesn’t expect similar offsets in future quarters.
Regarding the wholesale performance in the quarter, McMullen said that as expected, wholesale accounts ordered more cautiously although sell-through growth outpaced sell-in growth for both Coolers & Equipment and Drinkware in Q1. McMullen said, “We continue to believe we are in a healthy overall channel inventory position.”
Finally, McMullen noted that the latest quarter’s sales were challenged by tough comparisons in customized Drinkware, where a significant number of orders shipped in the 2022 first quarter were placed in the 2021 peak holiday quarter. Due to investments in custom capacity in 2022, Yeti did not experience the same level of order carryover in the first quarter of this year, while offering shorter lead times for customers.
McMullen added, “It did lead to a dynamic in Drinkware and in DTC, where growth on a demand basis was higher than our reported growth. When you view our results with all of these factors in mind, it gives us confidence that demand for the brand is much stronger than the 3 percent top-line growth that we reported this quarter.”
By product category, Drinkware sales increased 3.4 percent to $190.3 million, primarily driven by strong demand for Rambler bottles, as well as introductions of its new Yonder bottles and Rambler straw lid mugs.
Coolers & Equipment sales increased 1.4 percent to $104.4 million. A strong performance in cargo, bags, and in its soft coolers which were not impacted by the voluntary recalls, was partially offset by a decline in hard coolers and outdoor living products.
By channel, DTC sales increased 7.1 percent to $167.0 million, due to growth in both Coolers & Equipment and Drinkware. Reintjes said the DTC growth benefited from both customer acquisition and retention.
Wholesale sales dipped 1.4 percent to $135.8 million, primarily driven by a decline in Coolers & Equipment, partially offset by Drinkware growth.
“As we communicated in our Q4 call, wholesale inventory within our North American partners was above expectations to start the year and continued to improve as we progressed through the quarter, paced by sell-through,” said Reintjes. “However, in upcoming quarters we’ll have some continued selling headwinds, particularly given the introductions of the two very successful soft coolers introduced last year that are part of the active recall.”
Reintjes noted that gross margins returned to positive expansion for the first time since the second quarter of 2021, reflecting the initial impact of lower container costs flowing through the income statement. He added, “We also remain committed to investing in Yeti during the period and will do so throughout 2023, leaning into strategic areas of growth as we see a continued global opportunity for the brand and our products.”
Gross margins in the quarter improved 80 basis points to 53.5 percent as lower inbound freight offset higher product costs and the unfavorable impact of foreign currency exchange rates. Gross profit also included a $1.2 million, or 40 basis points, favorable impact from adjustments to inventory reserves related to the voluntary recalls.
Adjusted gross margins improved to 53.0 percent from 52.7 percent in the first quarter of 2022.
SG&A expenses climbed 21 percent to $146.8 million and grew 710 basis points as percent of sales to 48.5 percent from 41.4 percent in the prior year period. This increase was due to an increase in variable expenses, driven by the increased mix of its faster growing and higher gross margin DTC channel, coupled with increased non-variable expenses driven by higher employee costs, including investments in headcount to support future growth, warehousing costs, and marketing expenses.
Adjusted SG&A expenses increased 19 percent to $139.0 million, expanding 610 basis points to 45.9 percent year over year.
Operating income decreased 54.7 percent to $15.1 million while adjusted operating income sunk 42.9 percent to $21.7 million.
Inventory decreased 16 percent to $347.0 million against the year-ago quarter. On a sequential basis, inventory decreased $24.4 million, marking the third consecutive quarter with a sequential decline in Yeti’s inventory balance.
Discussing strategic growth priorities, Reintjes pointed to a number of global partnerships that helped drive global engagement and activations in the quarter, including partnerships with the World Surf League, the Natural Selection Tour snowboard event, and The Freeride World Tour ski competition. Yeti also became the official cooler and drinkware sponsor of the Formula One champion, Oracle Red Bull racing team, and began a specialty VIP program supporting Metallica’s new tour.
Well-received marketing campaigns included one supporting the expanded GoBox collection and its ‘Craigs Lost’ campaign.
In product, a strong performance in its Hopper Flip lines supported overall Coolers & Equipment category growth in the first quarter although comparisons will become more challenging in the second and third quarters as Yeti laps the launches of the M20 and M30 Soft Coolers. In Hard Coolers, revenues were down for the first quarter, primarily reflecting less sell-in at wholesale even as sell-through remained positive. Said Reintjes, “As we move into the cooler season for moms, dads and grads in the beginning of summer, we have amplified our on-the-go storylines now that the Roadie 48 and 60 Wheeled Coolers are available across our omnichannel.”
Cargo growth was supported by the GoBox launch, where early demand exceeded expectations. Bags also saw solid growth with the focus continuing to be on building awareness and consideration around the newer category.
In Drinkware, growth for the first quarter was within the range of expectations. Said Reintjes, “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.”
Straw lid mugs have become some of Yeti’s top-performing SKUs at wholesale and color customization for Yonder water bottles was just launched for the first time on Yeti.com last month.
Regarding growth via channels, Reintjes noted that Yeti recently hired its first hired chief commercial officer to help the brand “deliver consistent, high-impact experiences” regardless of where the consumer shops.
Yeti.com is amplifying product positioning and storytelling while also adding differentiation through better visibility of its used gear offerings and the debut of the Yonder color customization
Yeti’s Amazon business is strong with improved inventory positioning while corporate sales continue to post solid growth on top of strong year-ago gains. At physical retail, Yeti recently opened its 14th store overall outside of Omaha, and “it’s already off to a fantastic start,” said Reintjes.
At wholesale, positive sell-through is being seen for Yeti products despite the more tepid sell-in environment, resulting in inventory levels that have improved since the start of the year. Said Reintjes, “Some caution remains in the channel, combined with the tougher soft cooler comparisons that will keep growth pressure in the near term, but we continue to have positive and productive conversations with our accounts and remain encouraged with our success in elevating our positioning and merchandising with our partners.”
Looking ahead, Yeti reiterated its guidance for 2023.
Adjusted sales are expected to increase between 3 percent and 5 percent with adjusted sales growth weighted to the second half of the year, inclusive of an approximate 500 basis points unfavorable impact on the growth rate from the stop sale of the affected products by the voluntary recalls. Yeti expects roughly flat sales over the first three quarters of the year in aggregate, including a low single-digit decline in sales for the second quarter, followed by an approximately flat growth rate for the third quarter, before returning to double-digit growth in the fourth quarter.
Adjusted net income per diluted share between $2.12 and $2.23, reflecting a 5 percent to 10 percent decrease, with earnings growth beginning in the fourth quarter of the year;
Reintjes said, “In closing, Yeti remains well positioned for 2023. I’m proud of how we have collectively rallied to execute on our growth agenda. We have already expanded the scope of our product assortment, driven global brand awareness through new partnerships, made steps to scale our international foundation and establish circularity programs to drive our long-term commitment to the wild.
On top of this, we are excited to have the soft coolers coming back in the market later this year and how these build upon the innovation story to be a platform for future growth.”
Photo courtesy Yeti
