YETI: Exciting Growth Opportunities With Some Short-Term Risk
Summary
- Direct to consumer sales channel growth signals brand strength.
- A slight regression in net income margin towards pre-stay-at-home levels would result in negative net income growth for FY 2021.
- Drinkware saturation fears are overblown as YETI continues to benefit from secular consumer trends.
- The recent hire of Head of International signals management focus on the massive international growth opportunity.
- Entry into the bags and luggage market is a significant growth opportunity and a chance to prove that YETI is more than a two-trick - drinkware and coolers - consumer product company.
YETI Holdings (NYSE:YETI) is a designer, retailer, and distributor of high-end outdoor recreation products with a cult-like following. Despite trading close to all-time highs, YETI is not overvalued for what it is: a premium consumer recreation products company growing close to 20% annually with high margins, a strong brand that shows no signs of weakening, and exciting growth opportunities. However, YETI may struggle to maintain its 14% net profit margin in 2021, previously 6% in 2020, if the proportion of revenue comprised of higher-margin direct-to-consumer sales (DTC) regresses closer to pre-stay-at-home levels with reopening.
YETI's Revenue Continues to Grow
YETI's revenue grew 19.5%, $178 million, from $914 million in 2019 to $1,092 million in FY 2020 and management gave a 15% to 17% revenue growth target for FY 2021.
YETI's price to sales ratio is close to its all-time high:
Though YETI's price to sales ratio is close to its all-time high, we believe that YETI is fairly valued on a price to sales ratio basis given YETI's high growth rate and its peer's ratios.
Product Category Growth
YETI operates as one reportable segment and only reports revenue for product categories. YETI products are grouped into three categories: Coolers & Equipment, Drinkware, and Other.
(Source: YETI Q4 2020 Presentation)
YETI's Coolers and Equipment category sales decreased from 48.8% of YETI's FY 2017 revenue to 40.9% of FY 2020 revenue. Drinkware category sales increased from 48.5% of sales in FY 2017 to 57.57% in FY 2020 sales. We believe that the release of YETI's new baggage and luggage line may drive growth in YETI's Coolers and Equipment category.
Sales Channels' Performance
YETI sells its products through its wholesale and direct-to-consumer (DTC) channels. DTC channel growth drove YETI revenue growth in FY 2020. DTC channel revenue increased 50%, $194.8 million, from $386.1 million in 2019 to $580.9 million in 2020.
DTC sales has been accelerated by more consumers shopping online while sheltering-in-place during the pandemic. Though YETI management has projected that DTC growth will continue to outpace wholesale, we view slowing or stagnant DTC sales as a proportion of overall revenue as the greatest risk to the growth of YETI's net income margin. We believe that there is a possibility that some types of customers who bought online due to COVID restrictions will switch back to buying in-store.
DTC increased 50% in FY 2020 and 34% in FY 2019. An increase in DTC sales from 42% to 53% of net sales improved YETI's gross margin by 2.8%, which means that the majority of FY 2020 gross profit margin growth, 5.6%, came from increased direct-to-consumer sales (DTC) relative to wholesale sales.
Net Income Margin Doubled in FY 2020
YETI's net income was $58 million in 2018, $50 million in 2019, and $156 million in 2020. YETI's net income margin was 7% in 2018, 6% in 2019, and 14% in 2020.
FY 2020 Income Statement (dollars in thousands):
YETI management has issued flat guidance for FY 2021 gross profit margin. We believe that YETI may struggle to maintain a 14% annual net income margin in 2021 if DTC channel sales decrease as a proportion of revenue.
Net income margin and net income with $1.28 billion in revenue (assuming 17% growth in FY 2021 which is the high end of management's target):
| Net income margin | Net income |
| 6% | $76,638.81 |
| 7% | $89,411.95 |
| 8% | $102,185.09 |
| 9% | $114,958.22 |
| 10% | $127,731.36 |
| 11% | $140,504.49 |
| 12% | $153,277.63 |
| 13% | $166,050.76 |
| 14% | $178,823.90 |
A 2% decrease in net income margin, from 14% to 12%, with 17% revenue growth and all other relevant metrics being held constant, would result in negative net income growth for FY 2021.
Drinkware saturation fears seem to be overblown
YETI's CEO addressed the drinkware saturation fear concerns that many investors have voiced during the same Bank of America conference mentioned above. YETI has successfully introduced new drinkware products for the past several years and drinkware revenue continues to grow.
And we think broadly about Drinkware, if properly define Drinkware, Drinkware is a large global category made up of glassware and ceramics and all kinds of items that we think, we can continue to expand opportunity. Our YETI owner studies would say that YETI owners are multiples owners. And not only do they own multiples for themselves, but gifting is a high part, and peer-to-peer referral was a high part of how we've built the brand through word-of-mouth.
YETI's drinkware offerings are still very narrow compared to potential drinkware products. Additionally, YETI continues to benefit from the secular consumer trend of increased outdoor recreation. Even if the growth of the drinkware category begins to stagnate, that does not mean that YETI doesn't have other paths to growth:
So you have a lot more consumers who come into the brand buy a Drinkware. And we see that as unlock opportunity for expansion further into the product portfolio, whether that's hard cooler, a soft cooler, a lunch bag, dog bowl, a dog bed or more recently in the -- similar to cooler price points, our bags, backpacks, duffle bags, luggage.
Before YETI went public, the introduction of drinkware coincided with slowing growth in the cooler business. In recent years, YETI has focused most of its attention on growing the drinkware category but is now planning on entering the bags and luggage markets and ramping up international growth.
Bags and luggage opportunity
Yeti is launching a major push into the bag and luggage markets with the release of the new Crossroads collection:
And so as we, over the next couple of weeks, start the beginning of our bag rollout and our bag buildup, you're going to see what we believe is the most comprehensive YETI product launch and addressing new and expanding audiences than we've done in our history.
YETI has spent the past several years researching this market and creating products that are YETI-Quality. YETI's CEO argues that YETI has found a niche in the large, global, highly fragmented bag market with "brand premium pricing, premium design, technical but not a technical pack" and that the Crossroads collection rollout will be the most comprehensive YETI product launch in YETI's history. The Crossroads collection is only available in the DTC channel for now as YETI ramps up the supply chain.
YETI's new Crossroads collection has received positive reviews. YETI's CEO has implied that the bag and luggage category can be larger than the drinkware category since the market for bag and luggage is much larger than drinkware. YETI has a cult-like following in drinkware and coolers markets and will likely convert some of those followers to new product lines such as the new Crossroads, bags and luggage, collection. We also believe that YETI has a massive international growth opportunity.
International Growth Opportunity
YETI does not break down international sales by country. However, YETI's CEO mentioned that the majority of YETI's international sales are in Canada during the March 9th, 2021 Bank of America Consumer & Retail Technology Conference. This indicates that YETI has not yet penetrated far into other international markets which makes sense since YETI has only entered larger markets like the U.K. and EU in the past two years:
(source: YETI Q4 2020 Presentation)
YETI recently hired a Head of International, and is allocating more resources on international growth than in the past. We expect YETI's international sales to be in the hundreds of millions within several years.
(Source: YETI Q4 2020 Presentation)
Conclusion
YETI is an excellent brand with excellent differentiable products and several significant growth opportunities, which we believe will create value for shareholders in the long run at the current price. However, YETI may struggle to maintain or grow its FY 2020 14% net income margin, 6% previously in FY 2019 and 7% in FY 2018, if the growth of the proportion of revenue made up of higher-margin direct-to-consumer sales (DTC) slows or regresses towards pre-pandemic levels as wholesale sales increase with the reopening of retail stores.
A decrease of 2% in net income margin, from 14% to 12%, with 17% revenue growth and all other relevant metrics being held constant, would result in negative net income growth for FY 2021. Investors should consider holding off purchasing YETI until it is evident that net profit margins are unlikely to regress towards pre-stay-at-home levels with the reopening.
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