YETI Holdings, Inc. — Form 10-Q summary
Period clarification: The request identifies “2017 Q3,” but the filing is for the quarter ended September 29, 2018, with comparisons to the quarter ended September 30, 2017. The financial results below are for 2018 Q3 and the first nine months of 2018. Statements are unaudited.
Business context and reporting period
YETI designs, markets, and distributes premium outdoor and recreation products under the YETI brand. It sells through wholesale retail partners and direct-to-consumer (DTC) channels. The filing describes results for the three and nine months ended September 29, 2018, against the comparable 2017 periods.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $196.1 million | $183.0 million | $537.7 million | $437.1 million |
| Gross profit / margin | $97.5 million / 49.7% | $82.2 million / 44.9% | $255.3 million / 47.5% | $201.5 million / 46.1% |
| Operating income | $28.1 million | $24.7 million | $64.6 million | $40.1 million |
| Net income | $17.0 million | $11.3 million | $32.6 million | $11.4 million |
| Diluted earnings per share | $0.21 | $0.14 | $0.39 | $0.14 |
| Adjusted EBITDA (non-GAAP) | $38.4 million | $30.5 million | $96.8 million | $64.3 million |
Q3 sales rose 7%; growth came from DTC, up 23% to $71.2 million, while wholesale sales were essentially flat at $125.0 million. Drinkware sales grew 37% to $104.0 million; Coolers & Equipment fell 16% to $86.7 million, partly because prior-year sales included a one-time clearance of older soft-cooler inventory. For the nine months, sales increased 23%, with DTC up 49% to $176.9 million and wholesale up 13% to $360.7 million. Drinkware rose 44% to $280.7 million.
Q3 gross margin expanded 480 basis points, primarily reflecting product cost improvements, higher DTC mix, and the absence of prior-year inventory-related charges and low-margin clearance sales; price reductions on selected products partly offset these gains. Nine-month gross margin improved 140 basis points, with price reductions offsetting several favorable factors. SG&A increased 21% in Q3 to $69.4 million (35.4% of sales), but rose 18% for the nine months to $190.7 million (35.5% of sales, down from 36.9%). The filing attributes expense growth mainly to staffing, professional fees, marketplace fees, logistics, and other operating costs.
For the first nine months, operating cash flow was $118.8 million, investing cash outflow was $23.9 million, and financing cash outflow was $96.5 million. Cash declined $1.6 million from year-end 2017 to $52.1 million. Capital expenditures were $13.3 million. The filing attributes stronger operating cash flow versus 2017 mainly to collection timing and mix, including increased DTC sales, and higher net income.
At September 29, 2018, gross debt principal was approximately $394.0 million, including $344.9 million on Term Loan A, $47.6 million on Term Loan B, and $1.5 million owed to Rambler On. The company had no revolver borrowings and reported $80.0 million available under its revolving facility, subject to $20.0 million of letters of credit reducing availability. The company reported compliance with its credit-facility covenants. Stockholders’ deficit was $37.2 million. Liquidity at the date included $52.1 million cash.
Changes, outlook, risks, and unusual items
- Business and earnings: Sales, gross profit, operating income, and net income increased year over year. Strong Drinkware and DTC growth outweighed Q3 weakness in Coolers & Equipment. The effective tax rate was 16% in Q3 and 18% for the nine months, down from 32% and 34%, respectively, mainly due to U.S. tax reform and deferred-tax revaluation.
- Debt and IPO after quarter-end: YETI completed its IPO on October 24, 2018 at $18 per share. The company sold 2.5 million shares and received $42.4 million net of underwriting discounts; selling stockholders sold the other 13.5 million shares and received no proceeds for the company. On November 29, YETI repaid $50.0 million of term debt using IPO proceeds and additional cash, leaving $342.5 million on Term Loan A and none on Term Loan B. These events occurred after the reporting date.
- Management outlook: The company stated that it expects sales to continue increasing, while growth may moderate; it expects seasonality, with sales typically highest in the second and fourth quarters. Management anticipated higher SG&A from hiring, marketing, new stores, and public-company costs, while expecting SG&A to decline as a percentage of sales over time. It believed available cash and credit would meet liquidity needs for at least 12 months, while noting growth and expansion could increase cash requirements. No specific full-year revenue or earnings guidance is provided in the filing text.
- Planned investment and leases: Management anticipated approximately $4 million in Q4 2018 technology infrastructure spending and approximately $2 million related to retail-store openings in late 2018 or the first half of 2019. New 10-year leases were signed for Chicago and Charleston stores; YETI also sublet part of its Austin headquarters.
- Controls and reporting risk: Management concluded disclosure controls were not effective at September 29, 2018 due to material weaknesses involving IT access/change controls and inventory valuation controls. Remediation was underway, but not complete.
- Other risks and items: Key disclosed risks include dependence on contract manufacturers and concentrated suppliers, retail-partner demand, consumer spending and brand strength, tariffs and input costs, international expansion, and variable-rate debt. Management did not expect pending ordinary-course legal matters to have a material adverse effect. The filing also describes RSU compensation tied to a change of control and EBITDA targets; $44.8 million of unrecognized RSU compensation was expected to be recognized upon a change of control.
Important facts for investors to verify
- Confirm the intended reporting period: this filing is 2018 Q3, not 2017 Q3.
- Assess whether DTC and Drinkware growth can continue and whether Coolers & Equipment sales recover without prior-year clearance activity.
- Track gross-margin sustainability, including the effects of pricing actions, product costs, channel mix, and tariffs.
- Review debt reduction after the IPO, remaining variable-rate exposure, covenant headroom, and cash needs for expansion.
- Monitor remediation and independent assessment of the disclosed material weaknesses in financial reporting controls.
- Distinguish GAAP results from management’s non-GAAP adjusted measures, which exclude specified costs and have limitations described in the filing.