Yeti Holdings Inc. reported significant improvement in earnings on an adjusted basis in the first quarter ended March 31 as gross margins expanded 700 basis points and revenues grew 15 percent. The company lifted its guidance for the year.

Matt Reintjes, president and chief executive officer, commented, “We are off to a great start in 2019 with solid growth across our product categories and distribution channels. Additionally, our ongoing focus on disciplined growth allows us to drive stronger profitability while making the investments required to expand brand and product awareness to existing and new customers. As we continue to execute our strategic plan, we are raising our full-year outlook and remain excited about the tremendous opportunities ahead for the company.”

Q1 2019 Highlights

Net sales increased 15 percent to $155.4 million compared with $135.3 million during the same period last year. Net sales growth benefited by approximately 400 basis points from shipments late in the quarter that were expected to ship in the second quarter.

Direct-to-consumer (“DTC”) channel net sales increased 28 percent to $61.7 million, compared to $48.3 million in the prior year quarter, led by strong performance in the Drinkware category.

Wholesale channel net sales increased 8 percent to $93.6 million, compared to $87.0 million in the same period last year, primarily driven by Coolers & Equipment.

Drinkware net sales increased 20 percent to $91.0 million compared to $75.8 million in the prior year quarter, primarily driven by the continued expansion of our Drinkware product offerings, including the introduction of new colorways and strong demand for customization.

Coolers & Equipment net sales increased 11 percent to $59.7 million, compared to $53.7 million in the same period last year, primarily driven by color updates across several hard and soft cooler lines, as well as the introduction of the CaminoTM Carryall bag to our wholesale channel. Net sales during the period include $1.2 million of net sales related to our Boomer 8 Dog Bowl, which was previously reported in our Other category.

Gross profit increased 34 percent to $76.6 million, or 49.3 percent of net sales, compared to $57.2 million, or 42.3 percent of net sales, in the first quarter of 2018. The 700 basis point increase in gross margin was driven by cost improvements across our product portfolio, a favorable shift in our channel mix led by an increase in DTC channel net sales, the absence of an inventory charge taken in the prior year due to a fire at a vendor’s warehouse facility, and lower inbound freight expenses, partially offset by higher tariff rates.

Selling, general, and administrative (“SG&A”) expenses increased to $67.8 million, or 43.7 percent of net sales, compared to $53.9 million, or 39.9 percent of net sales, in the first quarter of 2018. Approximately 290 basis points of the 380 basis points increase were attributable to higher selling expenses, including marketing and outbound freight. The balance of the increase was primarily due to incremental costs associated with our transition to becoming a public company, higher information technology-related costs, and increased non-cash stock-based compensation expense, partially offset by other general and administrative cost savings.

Operating income increased 171 percent to $8.8 million, or 330 basis points to 5.7 percent of net sales, compared to $3.2 million, or 2.4 percent of net sales, during the prior-year quarter.

Adjusted operating income increased 89 percent to $14.7 million, or 370 basis points, to 9.4 percent of net sales, compared to $7.7 million, or 5.7 percent of net sales, during the same period last year.

Net income was $2.2 million, or $0.03 per diluted share, compared to a net loss of $3.3 million, or a $0.04 net loss per diluted share, in the prior-year quarter.

Adjusted net income increased to $6.6 million, or $0.08 per diluted share, compared to adjusted net income of $0.3 million, or $0.00 per diluted share, in the prior-year quarter.

Adjusted EBITDA increased 58 percent to $21.3 million from $13.4 million during the same period last year.

Balance Sheet and Cash Flow Highlights

Inventory increased 4 percent to $164.3 million, compared to $158.5 million at the end of the first quarter of 2018.

Total debt, excluding unamortized deferred financing fees, was $321.8 million, compared to $473.3 million at the end of the first quarter of 2018. During the first quarter of 2019, we made an $11.1 million mandatory debt payment. Our ratio of net debt to adjusted EBITDA for the trailing twelve months (as defined below) was 1.9 times at the end of the first quarter of 2019, compared to 4.0 times at the end of the same period last year.

Cash flow used in operating activities was $30.0 million and capital expenditures were $8.4 million for the first quarter of 2019.

Updated 2019 Outlook

  • Net sales are still expected to increase between 11.5 percent and 13 percent compared to 2018, with growth across both channels and led by the DTC channel;
  • Operating income as a percentage of net sales is now expected to be between 14.2 percent and 14.5 percent, reflecting margin expansion of 110 to 140 basis points, primarily driven by a higher gross margin (versus the previous outlook of 13.9 percent and 14.4 percent, reflecting margin expansion of 80 to 130 basis points);
  • Adjusted operating income as a percentage of net sales is now expected to be between 16.2 percent and 16.5 percent, reflecting margin expansion of 30 to 60 basis points, primarily driven by a higher gross margin (versus the previous outlook of 15.9 percent and 16.3 percent, reflecting margin expansion of zero to 40 basis points);
  • An effective tax rate at a more normalized level of approximately 24.5 percent, which remains unchanged from the previous outlook;
  • Net income per diluted share is now expected to be between $0.87 and $0.90, reflecting 25 percent and 31 percent growth (versus the previous outlook of $0.84 and $0.89, reflecting 22 percent and 29 percent growth); assuming a normalized tax rate of 24.5 percent in 2018 (the effective tax rate for 2018 was 17 percent), earnings growth would be between 38 percent and 44 percent (versus the previous outlook of 34 percent and 42 percent);
  • Adjusted net income per diluted share is now expected to be between $1.02 and $1.06, reflecting 13 percent to 17 percent growth (versus the previous outlook of $0.99 and $1.04, reflecting 10 percent to 15 percent growth); assuming a normalized tax rate of 24.5 percent in 2018 (the effective tax rate for 2018 was 17 percent), adjusted earnings growth would be between 21 percent and 26 percent (versus the previous outlook of 18 percent and 24 percent);
  • Diluted weighted average shares outstanding of 86 million, which remains unchanged from the previous outlook;
    Adjusted EBITDA is now expected to be between $171.9 million and $176.3 million, reflecting 15 percent to 18 percent growth (versus the previous outlook of $169.0 million and $174.3 million, reflecting 13 percent to 17 percent growth);
  • Capital expenditures are still expected to be between $35 million and $40 million; and
  • Debt repayments of approximately $80 million and a ratio of net debt to Adjusted EBITDA of approximately 1.0 times at the end of 2019, which remains unchanged from the previous outlook, compared to 1.7 times at the end of 2018.

Ratio of Net Debt to Adjusted EBITDA Trailing Twelve Months

Net debt for the first quarter of 2019, which is the total debt of $321.8 million less cash of $19.0 million, divided by adjusted EBITDA for the trailing twelve months was 1.9 times. Adjusted EBITDA for the trailing twelve months ending March 30, 2019, was $156.9 million and is calculated using the full year 2018 adjusted EBITDA of $149.0 million less adjusted EBITDA for the first quarter of 2018 of $13.4 million, plus adjusted EBITDA for the first quarter of 2019 of $21.3 million.

Net debt for the first quarter of 2018, which is total debt less cash of $60.4 million, divided by adjusted EBITDA for the trailing twelve months was 4.0 times. Adjusted EBITDA for the trailing twelve months ending March 31, 2018, was $104.4 million and is calculated using the full year 2017 adjusted EBITDA of $97.5 million less adjusted EBITDA for the first quarter of 2017 of $6.5 million, plus adjusted EBITDA for the first quarter of 2018 of $13.4 million.