bgton
Summary
Readers may find my previous coverage via this link. My previous rating was a buy, as I believed YETI Holdings (NYSE:YETI) had released convincing data that demand was stabilizing. Importantly, YETI was trading at a cheap valuation, which made the risk-reward situation attractive. I am reiterating my buy rating as I expect YETI to see growth acceleration in FY24 as it continues to launch new products, restart its marketing engine to drive direct-to-consumer growth, and retailers restock their inventory to face demand.
Financials / Valuation
YETI reported total adjusted sales of $433.6 million in 3Q23. By product type, beverage sales saw $253.3 million (6% y/y) and Adjusted Coolers & Equipment sales saw $171.6 million (-8% y/y). By channel, adjusted DTC sales grew 14%, while adjusted wholesale sales declined 16% y/y. The reason for the adjustment was the $6.3 million gift card redemption related to the previous product recall. Margin wise, YETI gross margin expanded 650bps to 57.8%, and adjusted EBIT margin came in at 16.5%.
Based on author’s own math
In terms of share price, YETI has performed well against my previous expectations. Now that the share price has reached my previous target price of $48, I am updating my model to refresh my target price. Based on my updated view of the business, I am increasing my growth expectation for FY24 to 15% as I expect near-term growth acceleration from product launches, a reignition in marketing that will drive direct-to-consumer [DTC] growth, and retailers restocking inventory tailwinds. My previous assumption was 12.3% for FY24. I think it is fair to assume that these near-term growth tailwinds will drive a couple of percentage points improvement. I grasp this is an arbitrary figure, but if we look at the historical quarters y/y growth, the average growth is around mid-teens.
However, I kept my margin expectation the same as I expect YETI to continue reinvesting the profits into innovating new products and marketing. With my new assumptions, my FY25 earnings are adjusted slightly upwards to $287 million. A major contributor to the share price enhance is that YETI valuation multiples have recovered from the lows of 15x to the current 18x. I believe there is still room for valuation to recover (the mean multiple is 24x), but it is more conservative to assume no change in valuation.
Comments
Now that the product recall issue is largely done and dusted, I believe the growth outlook has become clearer and brighter. Firstly, YETI can finally go back to its innovative mode and roll out new products to advance penetrate each product line. YETI was not able to take full advantage of this as it was impacted by the 2023 stop sale. I think we are going to see an outsized impact in the near term due to the new product launches, as YETI has accelerated its pace of innovation across categories. Since 2Q23, YETI has rolled out multiple new products and variations, admire broadening the definition of drinkware to include tableware, wine chillers, beverage buckets, etc. This is a slightly different path from the previous standard of drinkware, as the new product now includes multi-person use. In other words, this effectively broadens YETI’s addressable market to include household use. This adjacent penetration indicates that YETI has the backend capacity to continuously create and preserve product launches and sales. As such, with the new product launches on the back of easy comps in FY23 due to the stop sale, I expect growth to accelerate in FY24. Longer-term, I expect YETI to continue penetrating adjacent categories to advance extend its addressable market and growth runway.
As Matt outlined earlier, we think we can advance capitalize on these trends in Q4 with our extensive lineup of new innovation. This includes an expanded range of products designed for coffee occasions with three smaller sized cups and mugs.
I think on the product side, you’re going to see us continue to, to invest in innovation, that’s capabilities and capacity in as an asset light business that smartly adding talent to an incredibly talented R&D and product and design and sourcing team that we have within YETI. Source: 3Q23 earnings
The next positive indication that growth will accelerate in FY24 is the strong direct-to-consumer [DTC] performance seen in 3Q23. In 3Q23, YETI reported DTC growth of 14.1%, led by Amazon sales and supported by higher growth rates in each of YETI’s DTC channels. I think the opportunity for growth is huge here as YETI re-ignites its growth engine now that the brand image has cleared off the product recall issue. Fundamentally, the more buyers buy from YETI’s DTC channels (specifically its own digital channel), the more data it has, which will furnish the necessary data that feeds into YETI’s innovation engine. As YETI reinvests in marketing here, it should drive more customer awareness, which should direct to advance DTC growth. I believe management has provided sufficient hints that this is going to be the case, as they called out strength in new and returning customer growth as well as overall transactions. For 4Q23, they expect DTC to preserve a double-digit growth rate.
My belief that DTC can continue to grow is not just based on management’s comments. If we look at YETI’s historical DTC y/y growth, it has performed extremely well, sustaining >10% growth rate before the product callback. And we can see the immediate inflection in DTC growth when that issue was settled. Specifically, in 3Q23, growth inflected by almost a full 10 percentage points. Another datapoint that propose DTC still has room to “standardize” from here is the annual growth vs SGA as a percentage of revenue ratio. Historically, the figure trends above >0.5x, but has dipped to ~0.15x during the product recall phase. With that phase over, and YETI reinvesting into marketing, I expect this ratio to recover back to at least 0.5x.
Based on author’s own math Based on author’s own math
“And enhancing our customization process, we continue to leverage learnings from our digital commerce and analytics teams to create more personalized experiences and targeted marketing spend across different customer cohorts.” Source: 2Q23 earnings
The last growth accelerator would be in YETI’s wholesale segment. Although they performed well in sell-through, retail partners remained cautious, leading to limited sell-in growth in 3Q. This is a perfect setup for 4Q23, as the inventory-vs.-sell-through mismatch is going to widen if retailers do not restock. Once they do, it will result in growth acceleration as retailers need to restock to a normalized level and stock up more inventory for the December festive season. In the long run, YETI should also achieve benefits from the gradual rollout of products to Tractor Supply stores. Regarding the partnership with Tractor Supply, I believe this is definitely a beneficial partnership for YETI. It allows YETI to reach a different customer segment, which provides it with a new market to launch, which paves another way to extend to adjacent markets. In terms of how the partnership will impact YETI’s top line, the widened distribution should enhance sales as YETI is reaching a new customer segment. In terms of cadence, YETI should see a sell-in tailwind from Tractor Supply stores as the stores need to stock up the initial base of inventory.
Risk & conclusion
Key downside risks include weak growth in the core US market if the current macro environment weakens. YETI products are not super cheap, and as such, they are likely to be off the purchase list for consumers as their discretionary income shrinks. Continuous cost inflation could also put advance pressure on growth as YETI would be forced to enhance product prices, which is likely to hurt volume.
In conclusion, I am going to continue recommending a buy rating for YETI. YETI’s ability to create, evident in the widened product line, enables it to extend its market reach. The re-focus on marketing investment for heightened customer awareness also bodes well for DTC growth. Furthermore, the impending restocking by retail partners and partnerships, emphasize growth acceleration.
