Fueled by a strong new product lineup and expanding gross margins, Yeti Holdings Inc.’s earnings on an adjusted basis increased 29 percent in the third quarter on a 17 percent sales jump. The company raised its guidance for the year.

In the quarter ended September 28, net income increased 25.3 percent to $21.3 million, or 25 cents per share. Adjusted net income increased 29.2 percent to $26.1 million, or 30 cents, exceeding Wall Street’s consensus estimate of 26 cents.

Adjusted earnings exclude costs related to Yeit’s transition to a public company as well as those related to investments in new retail locations and international market expansion.

Sales in the quarter grew 16.8 percent to $229.1 million.

Direct-to-consumer (DTC) sales increased 30.5 percent to $92.9 million, led by strong performance in both of its product categories, particularly in Drinkware. Wholesale channel sales increased 9.0 percent to $136.2 million, driven by strong performance in both Coolers & Equipment and Drinkware categories.

Among categories, Drinkware sales increased 21.5 percent to $126.4 million, primarily driven by the continued expansion of product offerings, including the introduction of new colorways and sizes, and strong demand for customization.

Coolers & Equipment sales increased 12.8 percent to $97.8 million, primarily driven by strong performance in soft coolers and outdoor living.

The bottom line was bolstered by a 270 basis point increase in gross margin. The improvement was primarily driven by cost improvements, particularly in the Drinkware category and a favorable shift in its channel mix led by an increase in DTC channel net sales, partially offset by higher tariff rates.

SG&A expenses increased 24.0 percent to $86.1 million, or to 37.6 percent of sales from 35.4 percent in the year-ago quarter. Of the 220 basis points increase, approximately 100 basis points were attributable to costs incurred in its ongoing transition to a public company. The balance, or approximately 120 basis points, was primarily due to higher variable selling expenses to support the expanding DTC channel, increased marketing expenses, and increased personnel to support long-term growth, partially offset by lower stock-based compensation expense and professional fees.

On a conference call with analysts, Matt Reintjes, president and CEO, talked about the progress Yeti is making on expanding its customer base, introducing new products, accelerating direct-to-consumer, and international.

On expanding its customer base, Reintjes noted that Yeti released its year-end brand and product ad campaigns. The first episode featured soft coolers with professional snowboarder, Robin Van Gyn, and the second highlighted its recently released bags with fly fishing pro, Oliver White.

Said Reintjes, “We continue to test the mix of broad-based awareness campaigns and direct consumer engagement activities, including events, ambassadors and partnerships. Our objective is to stoke brand passion, and our incredibly high 95-plus percent peer-to-peer referral rate, quality of engagement and interaction is of paramount importance to us. As we look at amplifying how and where we speak to our customers, we’re finding balance between the art and science of engagement.”

A new global media agency was recently retained and the collaboration will include data analytics to fully capitalize on customer insights and metrics.

On partnerships, Yeti in September signed on as the official insulated cooler of the PGA Tour and PGA Tour Champions. The brand also during the quarter expanded its on-mountain partnerships and activations to 10 mountain resorts, following the three recent additions of Telluride, Snowbowl and Purgatory. To support National Breast Cancer Awareness Month, Yeti ambassadors, Hilary Hutcheson and Robin Van Gyn, partnered with Casting for Recovery and Boarding for Breast Cancer.

On products, Reintjes noted that Drinkware was “strong across the board, including a very positive response to our strategic seasonal color offerings.” He said the overall strength in the category this year was “indicative of the growing consumer trend away from single use.” The latest bottle offering, the Rambler, Junior, was a “huge success” in the period.

Color, including the return of charcoal hard coolers late in Q3, also contributed to growth in Coolers & Equipment. The new soft cooler line, the Hopper M30, received positive accolades from Men’s Journal, Golf Magazine and Gear Patrol.  Daytrip, Yeti’s first insulated lunch bag, likewise saw a strong debut and is expected to be a strong gifting item for the holidays.

In equipment, the two newest styles in the bag family, the Crossroads Tote and Backpack, remain only available in Yeti’s DTC channels, but remain “an exciting long-term opportunity and natural expansion for the brand,” said Reintjes. A pinnacle Yeti hard cooler product will debut during the fourth quarter.

Regarding accelerating DTC, the 31 percent growth in the quarter resulted in DTC expanding to 41 percent of Yeti’s sales. Said Reintjes, “Growth remained balanced across D2C with yeti.com, corporate sales, Yeti retail and the Amazon Marketplace, all performing and all well-positioned for the upcoming holidays.”

A partnership with a 3PL to establish a distribution base in Salt Lake City is expected to reduce shipping times to the West Coast and the recent expansion of its customization capability is expected to support holiday selling.

At brick & mortar retail, Reintjes said he is “encouraged” by Charleston’s performance in its first quarter and a Chicago store opened in late September to favorable response. In its home state of Texas, Yeti recently announced plans to a pop-up store at The Domain in Austin and another temporary store in Dallas. Due to the pop-ups, a planned opening in Denver in the fourth quarter will be delayed until the first quarter.

At the wholesale level, Yeti continues to target new distribution points that support one or many of the following criteria: creates a new buying occasion, reaches a new consumer, or augments or enhances our existing portfolio.

Finding new buying occasion or customers supported the brand’s expansion into Williams-Sonoma, Whole Foods and more recently, Total Wine. A new channel will be home improvement with plans to roll out at Lowe’s in a couple of hundred doors in late 2019.

At the same time, Reintjes noted that since 2016, Yeti has been consolidating its wholesale base, eliminating nearly 1,400 accounts, or roughly 3,000 locations. It’s also been investing in further engagement with core accounts. Said Reintjes, “Our leadership positioning with relevant category leaders, such as Dick’s Sporting Goods in broad-line sporting goods, REI and Outdoor, Bass Pro Shops and Cabela’s and Hunt-Fish and West Marine in water-based activities, to name a few, strongly complement our independent specialty channel’s unique power to build deep and authentic customer engagement.”

Finally, Yeti remains in the early stages of international expansion, but is “off to a good start in the U.K. and Europe.” In July, Yeti launched local e-commerce sites and has sold products directly in 31 countries across Europe. Yeti also opened the London-based fishing shop, Farlows, marking its first wholesale account in Europe.

Progress continues to be made in Canada growing its wholesale relationships and establishing an online presence. Australia “continued to see fantastic results” in the quarter and the brand officially entered New Zealand in the period.

Yeti’s updated 2019 full year outlook includes:

  • Net sales are now expected to increase between 14.5 percent and 15.0 percent, up from the previous outlook of between 13.5 percent and 14.0 percent;
  • Operating income as a percentage of sales is now expected to be between 14.0 percent and 14.2 percent (versus the previous outlook of 13.9 percent to 14.1 percent), reflecting margin expansion of 90 to 110 basis points, primarily driven by higher gross margin;
  • Adjusted operating income as a percentage of sales is now expected to be between 16.8 percent and 17.0 percent (versus the previous outlook of 16.3 percent to 16.6 percent), reflecting margin expansion of 90 to 110 basis points, primarily driven by higher gross margin;
  • EPS is now expected to be between 90 and 92 cents, reflecting 29 percent to 33 percent growth (versus the previous outlook of 88 to 90 cents). Assuming a normalized tax rate of 24.5 percent in 2018 (the effective tax rate for 2018 was 17 percent), EPS growth would be between 42 percent to 46 percent;
  • Adjusted EPS is now expected to be between $1.12 and $1.14, reflecting 23 percent to 26 percent growth (versus the previous outlook of $1.07 and $1.09, reflecting 18 percent to 21 percent growth). Assuming a normalized tax rate, adjusted EPS growth would be between 33 percent and 36 percent (versus the previous outlook of 27 percent to 30 percent);
  • Adjusted EBITDA is now expected to be between $178.2 million and $181.2 million, or between 20.0 percent and 20.2 percent of sales, reflecting 20 percent to 22 percent growth (versus the previous outlook of $174.8 million and $177.7 million, or between 19.8 percent and 20.0 percent of net sales, and reflecting growth of 17 percent to 19 percent).

Photo courtesy Yeti