YETI Holdings Stock: More Risk Than Reward (NYSE:YETI)

YETI Holdings, Inc. (NYSE:YETI) is out, and Stanley is in. Of all the wildest social media sensations to hit us this year, the TikTok-driven rise of the Stanley cup is perhaps the most surprising. In the blink of an eye, these decade-old products have gone from being practical household staples to collectors’ items, with many resellers seeing stocked-out shelves and even large theft attempts.

The question is: how does this impact YETI, arguably Stanley’s biggest competitor in the drinkware space? Year to date, shares of YETI are down ~7%, trailing a ~2% rise in the S&P 500. Over the trailing twelve months, meanwhile, shares of YETI are flat, missing out on massive gains in the S&P 500.

Now, I’m not one to make stock calls on isolated, potentially fad-driven impacts alone. But it would be remiss not to assess the potential impact of Stanley’s resurgence on YETI’s fiscal 2024 (the company’s last quarterly update came in November, and as such, YETI has not yet offered any hint of competitive dynamics impacting its forward-year estimates). And at the same time, I already called out building fundamental risks on YETI in my last article on the company in August, downgrading the stock to neutral. With all of this considered, I am now bearish on YETI for 2024.

Expensive for meager growth prospects and a loaded bear case

The first observation we have to make for a downside case in YETI: even if we put competitive dynamics aside for a moment, YETI stock is quite richly valued for relatively dismal prospects.

Consensus is currently calling for $2.69 in pro forma EPS for FY24, representing 16% y/y earnings growth – on $1.85 billion in revenue, or 9% y/y revenue growth. If we take consensus expectations at face value, at current share prices near $47, YETI trades at a 17.3x P/E ratio – effectively in line with the S&P 500, despite its growth risks.

Then we have to consider the fact that consensus is banking on YETI trends to improve in 2024. 9% revenue growth is far from a likely case scenario, in my view: especially with YETI sales at flat y/y in its most recent quarter (Q3) and dropping -4% y/y in Q2. Direct-to-consumer (DTC) sales are up double-digits, fortunately, which is justifying the company and consensus’ expectations for continued margin expansion (EPS growth above revenue growth) in FY24, but it is unclear if channel partners will continue to slow down orders of YETI products and reduce their inventory holdings – especially if more shelf space is needed to satiate demand on a competitor. I find it unlikely that YETI can truly accelerate revenue growth in FY24, especially with January exposing a truly competitive challenge to YETI and potentially burdening the year ahead.

Here, in my view, is the full bear case for YETI:

• 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.
• YETI relies on wholesale partners for roughly half of its revenue, so even if the brand is holding up strong, it won’t be able to avoid a downturn in the retail industry if channel partners are feeling squeezed. Stores could close or decide to slim down their SKU assortments, ultimately risking YETI’s exposure to end customers.
• International missteps may cost the bottom line. 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.
• Brand stained by recent product recalls. Yeti voluntarily recalled a number of products in February 2023, primarily in the company’s popular cooler line. Though the company is proactive about remedying these issues, the tarnish to the YETI brand may be sustained in consumers’ minds (similar to how Peloton (PTON) arguably never recovered from its own product issues).

Drinkware risk

Though variations of these cups exist and resellers run their own gamut of promos, we should start with a basic comparison: a 30oz Stanley cup costs $35 at retail; whereas a 30oz YETI rambler runs slightly more expensive at $38.

Though price isn’t a primary consideration in why Stanley cups took off on social media this year, it certainly doesn’t help YETI to have the higher-priced product and the reputation for being a premium brand.

The slide below showcases YETI’s current, and very broad, drinkware lineup. Like Stanley, note that YETI also puts out “limited edition” seasonal colors in an attempt to stoke collector fervor and spur buyers to action.

Investors should be aware of the fact that Drinkware is YETI’s largest segment. In Q3, YETI’s most recent quarter, Drinkware generated $253.3 million in revenue (+6% y/y), or 58% of YETI’s total revenue.

We have yet to see the impacts of Stanley’s success on YETI’s financials: but if this is the start of a longer-term trend where consumers continually shift away from YETI products, the company’s current situation of channel partners pulling back will continue to compound and get worse for YETI. And since “retro” seems to be the driver for Stanley’s success, it’s unlikely that YETI can pull off a win with new products in an attempt to win customers back.

Margin gains

Now, here’s the one positive thing we can and should say in YETI’s favor: the company has done an excellent job at continuing to raise its gross margin profile.

As shown in the chart above, gross margins leaped to 58.0% in the most recent third quarter, up 670bps y/y. That richer margin profile is a reflection of the company’s much stronger DTC sales mix – the one comforting offset to lower reseller sales.

This means that YETI does have room from a margin perspective to support a higher promotional environment if it wants to compete more aggressively against Stanley and other brands that are currently lower-priced than YETI products.

Key takeaways

All in all, I find more risk than reward in YETI stock. Trading at a ~17x forward P/E despite a potentially heated competitive environment this year that may cap revenue/earnings growth, I think YETI will continue to slide.