Yeti Holdings, Inc. raised its EPS guidance for the year after seeing margins in the second quarter top expectations, expanding over 600 basis points. Q2 Sales were flat as a 6 percent gain in drinkware sales offset a recall-related decline in cooler sales.

Adjusted EPS was 60 cents a share, topping analyst’s consensus expectations of 54 cents. Revenue of $433.6 million exceeded expectations of $425.17 million.

Matt Reintjes, president and chief executive officer, commented, “Our third quarter results demonstrate the continued and consistent execution of the Yeti growth playbook, driving strong brand and product interest, while setting up the business for long-term, sustainable growth. Sales in the quarter were in line with our prior outlook, as a diverse range of new product offerings drove strong consumer demand across our major sales channels. Gross margin performance remained exceptional and above expectations, led by strong partnerships with our suppliers on product cost and the ongoing optimization of our transportation and logistics expenses. These gains continue to support growth-focused investments across our business, while still driving upside to our bottom line.”

Reintjes continued, “In addition to disciplined execution during the third quarter, we also successfully launched our expanded line of Hopper M Series soft coolers back to the market earlier in the fourth quarter. We are well positioned to build upon our leadership position in the soft cooler category as these products are more fully distributed across our channels into next year. In addition, we have extended a key customization capability across our global business with the debut of our first eCommerce customization options outside of the U.S. Our consistent ability to drive innovation, combined with our unique omnichannel approach to reaching consumers and our continued brand investments, builds a strong and scalable platform for future growth.”

Third Quarter 2023 Results
Sales were flat at $433.6 million compared to the same period last year. Sales and adjusted sales for the third quarter of 2023 include $6.3 million of sales related to gift card redemptions in connection with recall remedies. Yeti said its 2023 results have been materially adversely impacted by the stop sale of the soft coolers included in the recalls initiated during the first quarter of 2023.

  • DTCchannel sales increased 14 percent to $259.5 million, compared to $227.4 million in the prior year quarter, due to growth in both Drinkware, Coolers and Equipment.
  • Wholesale channel sales decreased 16 percent to $174.1 million, compared to $206.2 million in the same period last year. This decrease was due to a decline in both Coolers & Equipment and Drinkware.
  • Drinkware sales increased 6 percent to $253.3 million, compared to $239.0 million in the prior year quarter, led by strong demand for Rambler straw lid mugs, expanded offerings in Rambler and Yonder bottles, its new beverage bucket, and new seasonal colorways.
  • Coolers & Equipment sales decreased 8 percent to $171.5 million, compared to $185.7 million in the same period last year, primarily due to the stopped sale of the soft coolers affected by the recalls. Despite strong overall consumer demand, hard coolers declined year-over-year primarily due to the success in rebuilding channel inventory during the same period last year. These impacts were partially offset by strong performance in its existing Hopper Flip soft cooler line as well as cargo.

Gross profit increased 13 percent to $251.3 million, or 58.0 percent of sales, compared to $222.4 million, or 51.3 percent of sales, in the third quarter of 2022. Gross profit included a $0.8 million, or 20 basis points, favorable impact related to lower-than-anticipated recall-related costs. The increase in gross margin was primarily due to lower inbound freight costs and lower product costs.

Adjusted gross profit, which excludes the favorable impact related to lower recall costs, increased $28.0 million to $250.4 million, or 57.8 percent of adjusted sales, compared to $222.4 million, or 51.3 percent of adjusted sales, in the third quarter of 2022.

SG&A expenses increased 23 percent to $189.4 million, compared to $153.9 million in the third quarter of 2022. As a percentage of sales, SG&A expenses increased 820 basis points to 43.7 percent from 35.5 percent in the prior year period. This increase was due to higher non-variable expenses and variable expenses. The increase in non-variable expenses was primarily driven by higher employee incentive compensation costs as well as investments in marketing expenses and in headcount to support future growth. Variable expenses increased due to the increased mix of its growing Amazon Marketplace business as well as overall higher outbound freight costs.

Adjusted SG&A expenses increased 20 percent to $179.0 million, compared to $149.1 million in the third quarter of 2022. As a percentage of adjusted sales, adjusted SG&A expenses increased 690 basis points to 41.3 percent from 34.4 percent in the prior year period.

Operating income decreased 10 percent to $61.9 million, or 14.3 percent of sales, compared to $68.5 million, or 15.8 percent of sales during the prior-year quarter.

Adjusted operating income decreased 3 percent to $71.4 million, or 16.5 percent of adjusted sales, compared to $73.3 million, or 16.9 percent of adjusted sales during the same period last year.

Net income decreased 6 percent to $42.7 million, or 9.8 percent of sales, compared to $45.5 million, or 10.5 percent of sales in the prior year quarter; Net income per diluted share decreased 6 percent to $0.49, compared to $0.52 in the prior-year quarter.

Adjusted net income decreased 3 percent to $52.9 million, or 12.2 percent of adjusted sales, compared to $54.7 million, or 12.6 percent of adjusted sales in the prior year quarter; Adjusted net income per diluted share decreased 5 percent to $0.60, compared to $0.63 per diluted share in the prior-year quarter.

Nine Months Results
Sales decreased 1 percent to $1,138.9 million, compared to $1,147.2 million in the prior year. Sales were unfavorably impacted by $24.5 million due to a recall reserve adjustment in the second quarter of 2023. See “Product Recall Updates” below for additional information on the impact of the recalls referenced throughout this press release.

Adjusted sales, which exclude the unfavorable impact of the recall reserve adjustment, increased 1 percent to $1,163.4 million.

Sales and adjusted net sales for the first nine months of 2023 include $18.8 million of sales related to gift card redemptions in connection with recall remedies. 2023 sales have also been materially adversely impacted by the stop sale of the soft coolers included in the recalls initiated during the first quarter of 2023.

  • DTC channel sales increased 7 percent to $652.9 million, compared to $608.2 million in the prior year period, due to growth in Drinkware. Excluding the $8.1 million unfavorable impact of the recall reserve adjustment, DTC channel adjusted sales increased 9 percent to $661.0 million due to growth in both Drinkware and Coolers & Equipment.
  • Wholesale channel sales decreased 10 percent to $486.1 million, compared to $539.0 million in the same period last year. Excluding the $16.4 million unfavorable impact of the recall reserve adjustment, wholesale channel adjusted sales decreased 7 percent to $502.5 million due to a decline in both Coolers & Equipment and Drinkware.
  • Drinkware sales increased 6 percent to $677.0 million, compared to $639.1 million in the prior year period, reflecting strong demand for Rambler straw lid mugs, expanded offerings in Rambler bottles, the introductions of its new Yonder bottles and beverage bucket, and new seasonal colorways.
  • Coolers and Equipment sales decreased 10 percent to $432.5 million, compared to $482.0 million in the same period last year, and include a $24.5 million unfavorable impact related to the recall reserve adjustment. Excluding the unfavorable impact of the recall reserve adjustment, Coolers & Equipment adjusted sales decreased 5 percent to $457.0 million. This decrease was primarily due to the stopped sale of the products affected by the recalls. These impacts were partially offset by increases in hard coolers, its existing Hopper Flip soft cooler line, and cargo.

Gross profit increased 5 percent to $628.0 million, or 55.1 percent of sales, compared to $596.4 million, or 52.0 percent of sales in the prior year. Gross profit included a $17.4 million, or 40 basis points, unfavorable impact primarily related to the recall reserve adjustment. The increase in gross margin was primarily due to lower inbound freight costs and lower product costs.

Adjusted gross profit, which excludes the unfavorable impact primarily related to the recall reserve adjustment, increased $49.0 million to $645.3 million, or 55.5 percent of adjusted sales, compared to $596.4 million, or 52.0 percent of adjusted sales, in the prior year.

SG&A expenses increased 17 percent to $500.7 million, compared to $426.3 million in the prior year. SG&A expenses included a $10.5 million favorable impact primarily related to the recall reserve adjustment. As a percentage of sales, SG&A expenses increased 680 basis points to 44.0 percent from 37.2 percent in the prior year period. This increase was due to higher non-variable expenses and variable expenses. The increase in non-variable expenses was primarily driven by higher employee incentive compensation costs as well as investments in marketing expenses and in headcount to support future growth. Variable expenses increased due to the increased mix of its growing Amazon Marketplace business as well as overall higher outbound freight costs.

Adjusted SG&A expenses, which exclude certain items including the favorable impact related to the recall reserve adjustment, increased 18 percent to $485.2 million, compared to $411.2 million in the prior year. As a percentage of adjusted sales, adjusted SG&A expenses increased 590 basis points to 41.7 percent from 35.8 percent in the prior year period.

Operating income decreased 25 percent to $127.3 million, or 11.2 percent of sales, compared to $170.1 million, or 14.8 percent of sales during the prior year, and includes a $6.8 million unfavorable impact primarily from the recall reserve adjustment.

Adjusted operating income decreased 13 percent to $160.2 million, or 13.8 percent of adjusted sales, compared to $185.2 million, or 16.1 percent of adjusted sales during the same period last year.

Net income, which includes the unfavorable impact from the recall reserve adjustment, decreased 22 percent to $91.3 million, or 8.0 percent of sales, compared to $117.4 million, or 10.2 percent of sales in the prior year; Net income per diluted share decreased 22 percent to $1.05, compared to $1.35 per diluted share in the prior year.

Adjusted net income decreased 14 percent to $118.2 million, or 10.2 percent of adjusted sales, compared to $138.0 million, or 12.0 percent of adjusted sales in the prior year period; Adjusted net income per diluted share decreased 15 percent to $1.35, compared to $1.58 per diluted share in the same period last year.

Balance Sheet and Other Highlights
Cash increased to $281.4 million, compared to $77.8 million at the end of the third quarter of 2022.

Inventory decreased 22 percent to $341.3 million, compared to $439.4 million at the end of the prior year quarter.

Total debt, excluding finance leases and unamortized deferred financing fees, was $83.3 million, compared to $95.6 million at the end of the third quarter of 2022. During the third quarter of 2023, we made mandatory debt payments of $1.1 million.

Updated 2023 Outlook
Reintjes concluded, “As we move through our biggest quarter of the year, we are focused on continuing to be innovative with our brand and our products while demonstrating value to consumers who we expect will remain discerning with their spending through the holiday period. We remain committed to delivering our full-year sales outlook, while also updating our full-year adjusted EPS outlook to the high end of our prior range to reflect continued gross margin expansion. Finally, our balance sheet and our ability to generate strong cash flow will afford us a range of opportunities as we look to further expand the reach of the Yeti brand, open new markets and drive shareholder returns.”

For 2023, Yeti expects:

  • Adjusted sales to increase approximately 4 percent, versus the previous outlook of between 4 percent and 5 percent. Expected adjusted sales are inclusive of an approximate 500 basis points unfavorable impact on its growth rate from the stopped sale of the products affected by the recalls. Expected adjusted sales also include $18.8 million of sales from recall-related gift card redemptions during the second and third quarters of 2023;
  • Adjusted operating income as a percentage of adjusted sales of approximately 16.0 percent, versus the previous outlook of between 15.5 percent and 16.0 percent. The benefit from the adjusted gross margin expansion is expected to be more than offset by adjusted SG&A deleverage, which is driven by the unfavorable topline impact from the stop sale of the products affected by the recalls as well as strategic investments;
  • An effective tax rate of approximately 25.1 percent, compared to 22.8 percent in the prior year period, which reflected an income tax benefit related to stock-based compensation;
  • Adjusted net income per diluted share of approximately $2.32, versus the previous outlook of between $2.23 and $2.32, reflecting a 2 percent decrease, with earnings growth beginning in the fourth quarter of the year;
  • Diluted weighted average shares outstanding of approximately 87.4 million, versus the previous outlook of 87.3 million; and
  • Capital expenditures of approximately $55 million, versus the previous outlook of $60 million, primarily to support investments in technology and new product innovation and launches.

Product Recall Updates
(new and expanded Hopper M Series Soft Cooler line)

In October 2023, the company introduced its redesigned and improved Hopper M30 Soft Cooler and Hopper M20 Soft Backpack Cooler and also launched two new sizes with the Hopper M15 Soft Cooler and the Hopper M12 Soft Backpack Cooler. Yeti reported that the improved design of the Hopper M Series Soft Cooler line adequately addresses the potential safety concerns caused by the magnet-lined closures of the previous-generation products, which were affected by the product recalls.

Product Recall Reserve
As previously disclosed, in February 2023 Yeti proposed a voluntary recall of its Hopper M30 Soft Cooler, Hopper M20 Soft Backpack Cooler, and SideKick Dry gear case. As a result, the company established reserves for unsalable inventory on hand and estimated product recall expenses as of December 31, 2022.

In March 2023, Yeti initiated voluntary recalls of the affected products. During the second quarter of 2023, Yeti began processing recall returns and claims, reevaluated its assumptions and adjusted its estimated recall expense reserve. These trends included higher-than-anticipated elections to receive gift cards in lieu of product replacements, variations in individual product participation rates and lower logistics costs than previously estimated. As a result, Yeti updated its initial recall reserve assumptions, which increased the estimated recall expense reserve by $8.5 million in the second quarter of 2023; however, the overall consumer recall participation rate has remained consistent with the company’s expectations.

During the three and nine months ended September 30, 2023, Yeti recorded the following impacts as a result of the recall reserve adjustment and other incurred costs. These impacts are excluded from its non-GAAP results:

  • Sales: For the three months ended September 30, 2023, an immaterial reduction in sales for higher returns-related costs. For the nine months ended September 30, 2023, a reduction to net sales for higher estimated future recall remedies (i.e., estimated gift card elections) of $24.5 million, of which $8.1 million and $16.4 million was allocated to its DTC and wholesale channels, respectively. These amounts were allocated based on the historical channel sell-in basis of the affected products;
  • Cost of goods sold: For the three months ended September 30, 2023, a benefit of $0.8 million related to lower than anticipated recall-related costs. For the nine months ended September 30, 2023, favorable impacts of $5.0 million primarily related to lower estimated costs of future product replacement remedy elections and logistics costs, $1.3 million from an inventory reserve adjustment and $0.8 million related to lower recall-related costs; and
  • SG&A: For the nine months ended September 30, 2023, a benefit of $10.5 million primarily related to lower estimated other recall-related costs.

In addition, Yeti’s sales have also been materially adversely impacted by the stopped sale of the affected products initiated during the first quarter of 2023.

Photo courtesy Yeti