YETI Holdings: Return To Solid Growth And Consistent Margin Expansion (NYSE:YETI)

While the stock market has risen robustly this year, the rising tide has not lifted all boats. Many companies in the consumer discretionary sector still remain holdouts in the rally as overall spending weakens, and YETI (NYSE:YETI) is no exception.

Year to date, shares of the cooler and drinkware maker have fallen more than 10%: that being said, a hopeful Q1 earnings print in May has helped to drive a bit of a rebound in the stock. As YETI looks ahead to a future of continued margin expansion and resuscitating growth rates, it’s a good time for investors to pay heed.

I last wrote a bearish note on YETI in January, when the stock was still trading in the high $40s. Since then, the company has released a series of stronger earnings reports that have showed a return to growth, while also announcing a new $100 million buyback program (roughly ~3% of the company’s current market cap) to take advantage of lower share prices. With this in mind, I’m keen to upgrade my viewpoint on YETI to neutral.

While I think YETI still has a lot to prove (will it be able to sustain its growth? And can it continue to expand in the reseller channel, especially overseas, as it builds out its DTC franchise further?), the stock’s new lower valuation and discounted valuation versus the broader markets make it more appealing. Overall, I think it’s worth adding this one back to your watch list.

At current share prices, I see a relatively balanced bull and bear case for YETI. On the bright side for this company:

• Gross margin expansion has led to double-digit profit gains. YETI has been focused on building up its social media presence and driving sales growth through its DTC channels, which has led to considerable increases in its gross margin profile that has led to double-digit EPS gains.
• Expanding production lineup. The company now has a broad product lineup that suits a wide variety of outdoor interests. Beyond coolers and drink ware, the company also has an “other” segment consisting of apparel and other outdoor accessories that currently make up less than 5% of overall revenue, which is a major expansion opportunity for the company.

On the other side of the coin, however, we have to be mindful of a few risks:

• YETI is a premium-priced product that has few distinguishing factors versus peers. In a pinched consumer environment, buyers may choose cheaper alternatives. REI, in particular, has its own house brand for the majority of YETI’s gear. Stanley cups have also resurged in popularity in early 2024, creating a tough competitive dynamic.
• Aggressive international expansion plans may hold back profitability and create additional risk. YETI is putting steam on its international expansion plans. While it’s true that international is still a small percentage (<15%) of YETI’s revenue, other retail companies (like Stitch Fix) have recently pulled out of international markets to slim down SG&A costs. With YETI’s overall revenue declining domestically, there may not be enough brand power to truly succeed at international expansion.

That being said, we also have to note that YETI trades at discount to the broader market. The company recently updated its 2024 outlook, holding its expected growth rate for the year consistent at 7-9% y/y growth (there could be opportunity here: the company grew at 12% y/y in the first quarter, and second-half comps may get easier as the company laps a period of flattish growth in Q2 and Q3 last year). It did, however, boost its pro forma EPS expectations to a new range of $2.49-$2.62:

Against the midpoint of this outlook, we note that YETI trades at a ~15.6x P/E ratio – which, against an S&P 500 that is currently trading at >21x FY25 EPS expectations, and given the fact that YETI is expecting mid-teens EPS growth this year, looks relatively modest.

All in all, I think there’s room for YETI to rebound, especially as expectations have been reset lower for the company after a string of slower growth quarters. Add this stock back to your watch list and look out for a buying opportunity if it slips further to the high $30s.

Q1 recap

In my view, Q1 results for YETI helped to revive hope in a fundamental rebound. Take a look at the Q1 results below:

Revenue grew 12% y/y to $341.3 million, which is a refreshing change after near-zero growth throughout most of FY23 with the exception of Q4. Growth was relatively balanced between the wholesale and direct channels, with the former growing 13% y/y and the latter 12% y/y. International, however, led the way in terms of segment growth, up 34% y/y while U.S. revenue grew only 9% y/y.

The company still expects a relatively measured macro environment. The company has raised prices, which means its channel partners are being more cautious about stocking up on inventory. Still, the company is noting both strong sell-in and sell-through performance (the latter representing sales to final end-customers rather than to resellers themselves). Per CEO Matt Reintjes’ remarks on the Q1 earnings call:

We saw positive global demand for our brand and our broadening range of products and we had great execution across multiple fronts, driving double-digit growth in both our wholesale and DTC channels as well as our Coolers & Equipment and Drinkware categories.

Our wholesale performance was supported by sell-in and sell-through relative to the year ago period, while our DTC business showed continued growth across e-commerce, corporate sales, Amazon and YETI retail. In Coolers, with our new innovation and expanded awareness campaign, we believe we are well positioned for the upcoming seasonal demand. In Drinkware, our range of bottles and tumblers continue to deliver strength within the category […]

From a top-line perspective, we remain optimistic on our demand drivers for the full year. We expect sales performance consistent with our original guidance, as we balance performance against anticipated ongoing conservative purchasing at higher price points, balanced channel sell-in and demand and are compared against headwinds as a result of last year’s recall-related gift card redemptions.”

Importantly, even though the company’s sales mix by channel remained consistent y/y, gross margins continued improving, with 350bps of y/y upside to 57.1%, and 450bps y/y expansion on a pro forma basis to 57.5%. We note that YETI’s strong gross margins, especially for a consumer products company selling a highly commoditized product, gives it plenty of firepower for future profit expansion.

Adjusted operating margins also leaped 440bps y/y to 11.6%, while adjusted net income nearly doubled y/y to $29.3 million:

Pro forma EPS of $0.34 also beat Wall Street’s expectations of $0.24 with 42% upside.

Key takeaways

Without a doubt, many execution questions still remain for YETI. We’d like to see the company continue to sustain low teens or high single digit revenue growth moving through the rest of FY24, as well as continued aggressive expansion in margins and EPS. That being said, with the positive commentary on partner sell-through and ordering behavior, plus >30% y/y growth in the international segment, there are reasons to be optimistic; and on top of that, the company’s new $100 million buyback program is a great way for the company to leverage its net cash position to boost its EPS.

Keep a close eye out for this name.