Yeti Inc reported sales grew 12 percent in the first quarter but declined 25 percent in the final two weeks due to the impact of the pandemic. The company withdrew its full-year outlook and detailed an action plan to respond to the COVID-19 pandemic.
“Yeti entered 2020 with tremendous momentum as a brand and delivered a great first quarter. Our results were particularly robust through mid-March, with quarter-to-date sales up 21 percent year-over-year with strength in both wholesale and DTC,” said Matt Reintjes, president and chief executive officer. “As the COVID-19 pandemic drove unprecedented disruption and volatility in the marketplace, our results were sharply impacted with sales declining 25 percent in the final two weeks of the quarter. As we adjusted to the uncertainty of the global crisis, our first and foremost responsibility has been to ensure the safety of our employees and community. This focus along with the decisive actions outlined today help preserve what we value the most as an organization – nurturing a powerful, innovative and lasting brand; maintaining financial strength and flexibility; and driving a positive impact across our Yeti community.”
Yeti’s actions to support its business during the COVID-19 pandemic include the following:
- Business Operations – In response to the COVID-19 outbreak and the guidance of government and public health officials, Yeti closed all of its retail stores and business offices in order to protect its employees, customers, and communities. Nearly all of Yeti’s employees are currently working from home and continue to support the business. As of May 7, 2020, all of Yeti’s retail stores remain closed and management will continue to monitor each individual location in conjunction with local opening mandates.
- Supply Chain – To date, Yeti has not experienced any significant supply-chain disruptions related to COVID-19 and have been able to meet its customers’ needs. Yeti’s supply chain and logistics operations are functioning, and a significant portion of its customization capacity continues to operate with the remaining local capacity expected to re-open later this month. Management believes Yeti is well-positioned to respond to demand when the economy recovers as well as meet holiday demand.
- Executive Compensation – Yeti’s senior leadership team, including named executive officers, voluntarily elected to temporarily reduce their base salaries. Yeti’s Board of Directors has also voluntarily elected to waive payment of all of the director’s annual cash retainer fees.
- Other Compensation Actions – Following a thorough review of Yeti’s employee base, management has made several decisions to adapt to the continued economic uncertainty. Yeti previously placed certain employees on unpaid leave beginning on April 4, 2020, during which time Yeti will cover full benefits for eligible employees. These employees primarily support Yeti’s retail and customization operations. Yeti has also taken additional action across its workforce by suspending all non-essential hiring and eliminating select roles across all levels in the organization. Employees affected by this action will receive severance benefits as well as outplacement services and support.
- Cost Management Initiatives – Yeti is taking additional action to aggressively manage operating costs, capital expenditures, and working capital while also continuing to focus investments on strategic projects, in its brand, innovation, and technology. Yeti is working closely with its supply chain partners to diligently manage and prioritize inventory levels for the remainder of the year.
- Liquidity – As a precautionary measure to enhance its liquidity position and to increase available cash on hand, Yeti drew down $50.0 million from its $150.0 million revolving credit facility on March 24, 2020. Following the drawdown, availability under the revolving credit facility was $100.0 million and the cash balance was $118.0 million as of March 28, 2020. Yeti remains comfortable with its ratio of net debt to adjusted EBITDA of 1.3 times as of March 28, 2020 and expects to remain in compliance with its debt covenants for the remainder of the year. Notably, Yeti has no near-term debt maturities.
- Withdrawal of Fiscal 2020 Outlook – With the high degree of uncertainty persisting with the duration and impact of the COVID-19 pandemic, Yeti is withdrawing its full-year fiscal 2020 outlook last provided on February 13, 2020.
- Sales Updates – While not providing an updated outlook, Yeti believes it is important to provide visibility into topline sales during the first quarter and April 2020. Net sales in the first quarter through mid-March 2020 increased 21 percent, while sales for the remainder of the quarter through March 28, 2020 decreased 25 percent. Wholesale channel net sales increased 13 percent growth through mid-March 2020, while wholesale channel net sales decreased 43 percent during the last two weeks of the quarter as Yeti’s wholesale partners closed retail locations and order flow was limited. DTC channel net sales increased 31 percent through mid-March 2020 and increased 15 percent during the last two weeks of the quarter. For the five-week period ending May 2, 2020, sales decreased further relative to the 25 percent decline experienced during the last two weeks of the quarter, driven by continued store closures and limited operations in the wholesale channel. While historically a relatively small part of the wholesale business, there was a sharp increase in Yeti’s retail partners’ e-commerce sales in April 2020, which management believes is a validation of the demand in the brand. Within the DTC channel, Yeti’s online businesses have contributed to strong positive growth due to product innovation and digital performance led by Yeti.com and Yeti Authorized on the Amazon Marketplace, though gains have been somewhat tempered by the year-over-year declines in its corporate sales.
Reintjes concluded, “In adjusting to today’s dynamic and challenging environment, we understand that not all decisions are easy. These discrete actions announced today allow us to focus on the controllable elements of our business. With an unrelenting focus on our brand and innovation, the long-term opportunity for Yeti remains bright and we look forward to supporting people and the pursuits they enjoy with Yeti as we move forward together.”
For the Three Months Ended March 28, 2020
Net sales increased 12 percent to $174.4 million, compared to $155.4 million during the same period last year.
- Direct-to-consumer (“DTC”) channel net sales increased 29 percent to $79.6 million, compared to $61.7 million in the prior-year quarter, driven by both Drinkware and Coolers & Equipment.
- Wholesale channel net sales increased 1 percent to $94.8 million, compared to $93.6 million in the same period last year, primarily driven by Drinkware.
- Drinkware net sales increased 24 percent to $112.6 million, compared to $91.0 million in the prior-year quarter, primarily driven by the continued expansion of our product offerings, including the introduction of new colorways and sizes, and strong demand for customization.
- Coolers & Equipment net sales were relatively flat at $59.5 million, compared to $59.7 million in the same period last year. The strong performance of soft cooler and outdoor living products was more than offset by a decline in hard coolers and bags.
Gross profit increased 21 percent to $92.5 million, or 53.0 percent of net sales, compared to $76.6 million, or 49.3 percent of net sales, in the first quarter of Fiscal 2019. The 370 basis point increase in gross margin was primarily driven by cost improvements, particularly in our Drinkware category, a favorable shift in our channel mix led by an increase in DTC channel net sales, lower inventory reserves, and lower inbound freight.
Selling, general, and administrative (SG&A) expenses increased to $76.3 million compared to $67.8 million in the first quarter of Fiscal 2019. SG&A expenses as a percent of net sales were essentially flat at 43.7 percent, compared to Fiscal 2019. An increase of approximately 180 basis points in variable selling expenses, driven by our faster-growing DTC channel which grew to 46 percent of net sales during the period. Non-variable expenses leveraged 170 basis points primarily resulting from lower marketing expenses and non-cash stock-based compensation expense, partially offset by higher fixed selling expenses and depreciation and amortization expense.
Operating income increased 84 percent to $16.2 million, to 9.3 percent of net sales, compared to $8.8 million, or 5.7 percent of net sales, during the prior-year quarter.
Adjusted operating income increased 40 percent to $18.0 million, to 10.3 percent of net sales, compared to $12.9 million, or 8.3 percent of net sales, during the same period last year.
Net income increased 291 percent to $8.5 million, or 4.9 percent of net sales, compared to $2.2 million, or 1.4 percent of net sales, in the prior-year quarter; Net income per diluted share increased 284 percent to $0.10, compared to $0.03 per diluted share in the prior-year quarter.
Adjusted net income increased 88 percent to $9.9 million, or 5.7 percent of net sales, compared to $5.3 million, or 3.4 percent of net sales, in the prior-year quarter; Adjusted net income per diluted share increased 84 percent to $0.11, compared to $0.06 per diluted share in the prior-year quarter.
Adjusted EBITDA increased 22 percent to $23.8 million, or 13.7 percent of net sales, from $19.5 million, or 12.5 percent of net sales, during the same period last year.
Balance Sheet and Cash Flow Highlights
Inventory increased 23 percent to $202.4 million, compared to $164.3 million at the end of the first quarter of 2019. Inventory levels are primarily non-seasonal in nature and include the buildup of inventory to support new product introductions.
Total debt, excluding finance leases and unamortized deferred financing fees, was $346.3 million, compared to $321.8 million at the end of the first quarter of 2019. During the first quarter of 2020, Yeti made $3.8 million in mandatory debt payments and as a precautionary measure drew down $50.0 million from its revolving credit facility. Our ratio of net debt to adjusted EBITDA for the trailing twelve months was 1.3 times at the end of the first quarter of 2020 compared to 2.0 times at the end of the same period last year.
Cash flow provided by operating activities was $3.8 million and capital expenditures were $1.8 million for the three months ended March 28, 2020.
Ratio Of Net Debt To Adjusted EBITDA
Net debt as of March 28, 2020, which is total debt, excluding finance leases and unamortized deferred financing fees, of $346.3 million less cash of $118.2 million, divided by adjusted EBITDA for the trailing twelve months was 1.3 times. Adjusted EBITDA for the trailing twelve months ending March 28, 2020 was $175.9 million and is calculated using the full year 2019 adjusted EBITDA of $171.6 million, less adjusted EBITDA for the first three months of 2019 of $19.5 million, plus adjusted EBITDA for the first three months of 2020 of $23.8 million.
Net debt as of March 30, 2019, which is total debt, excluding unamortized deferred financing fees, of $321.8 million less cash of $19.0 million, divided by adjusted EBITDA for the trailing twelve months was 2.0 times. Adjusted EBITDA for the trailing twelve months ending March 30, 2019 was $155.1 million and is calculated using the full year 2018 adjusted EBITDA of $149.0 million, less adjusted EBITDA for the first three months of 2018 of $13.4 million, plus adjusted EBITDA for the first three months of 2019 of $19.5 million.
Photo courtesy Yeti