YETI Holdings, Inc. — Form 10-Q Summary
Period and metadata: This filing reports the 13-week quarter and six months ended June 27, 2020, compared with periods ended June 29, 2019. This conflicts with the request metadata identifying “2019 Q2”; the filing itself is for 2020 Q2. Amounts below are in U.S. dollars.
Business context and results
YETI designs, retails, and distributes outdoor products through wholesale and direct-to-consumer (DTC) channels. Its products include coolers, equipment, drinkware, bags, and accessories. COVID-19 disrupted retail and wholesale activity, while digital commerce remained open.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $246.9m | $231.7m | $421.4m | $387.0m |
| Gross profit / margin | $137.5m / 55.7% | $116.3m / 50.2% | $230.0m / 54.6% | $192.9m / 49.8% |
| Operating income / margin | $46.5m / 18.8% | $35.0m / 15.1% | $62.7m / 14.9% | $43.8m / 11.3% |
| Net income | $33.5m | $22.2m | $42.0m | $24.4m |
| Diluted EPS | $0.38 | $0.26 | $0.48 | $0.28 |
| Operating cash flow | Not presented by quarter | $72.4m | $9.8m |
Performance drivers and changes
- Q2 sales grew 7%; first-half sales grew 9%. DTC sales rose 61% in Q2 and 47% for the first half, while wholesale sales fell 24% and 14%, respectively. For Q2, DTC growth was attributed to strong online demand and increased interest in outdoor recreation; wholesale was hurt by temporary retail closures.
- Q2 Coolers & Equipment sales increased 18% to $128.6m; Drinkware decreased 2% to $114.3m. For the first half, the categories grew 11% to $188.1m and 9% to $226.9m, respectively.
- Gross margin expanded 550 basis points in Q2 and 470 basis points for the first half. Management cited higher DTC mix, product cost improvements, lower tariffs and freight costs; increased inventory reserves partly offset these gains.
- SG&A increased 12% in both the quarter and first half, to $91.0m and $167.3m. Faster-growing DTC activity increased variable costs, including shipping, marketplace, logistics, and payment fees. Lower marketing, stock compensation, professional fees, and COVID-related savings partly offset increases.
- Interest expense declined to $2.7m in Q2 and $5.8m for the first half, primarily due to lower interest rates and lower average debt. The first-half effective tax rate was 25%, versus 24% in 2019.
Cash, debt, and liquidity
- At June 27, 2020, cash was $127.5m; working capital excluding cash was $108.8m. The revolving facility had $150.0m available and no outstanding revolver borrowings.
- Term Loan A principal outstanding was $292.5m. The credit facility matures December 17, 2024; its borrowings carry variable rates based on LIBOR. YETI reported compliance with all financial covenants and expected to remain compliant through the rest of 2020.
- First-half operating cash flow was $72.4m, versus $9.8m a year earlier. Inventory declined $46.7m, supporting cash generation; accounts payable and accrued expenses declined $52.8m. Investing cash outflow was $10.9m, including $7.2m of property and equipment purchases and $3.8m of intangible additions. Financing cash outflow was $6.9m, including $7.5m of debt repayments.
- Cash increased $55.0m from year-end 2019. YETI drew $50.0m on its revolver in March as a precaution and repaid it in full during Q2.
Outlook, risks, and unusual items
- YETI withdrew its full-year 2020 outlook on May 7 and said it did not intend to provide a full-year outlook at the time of filing. It cited uncertainty about the duration and business effects of COVID-19.
- Cost and liquidity actions included reduced discretionary spending and capital investment, inventory receipt management, payroll reductions, a hiring suspension, furloughs and workforce reductions, temporary senior leadership salary cuts, and waived Board cash compensation. Employees began returning from furlough as stores reopened.
- Management said supply-chain, customization, and logistics operations were functioning and disruptions had been minimal to date. It considered its cash, inventory, operating plan, and revolver availability sufficient to fund operations for at least 12 months. COVID-19 could nevertheless materially affect demand, sales, cash flow, supply, and inventory if conditions worsened or persisted.
- YETI expected 2020 capital expenditures of $25m–$30m. It recorded a $0.6m long-lived asset impairment for the first half. After a qualitative assessment, it did not perform an interim quantitative impairment test on goodwill or indefinite-lived intangibles.
- Disclosure controls were deemed ineffective as of June 27, 2020 because a previously reported material weakness in IT general controls had not been fully remediated. The filing states remediation depends on controls operating effectively for a sufficient period and successful testing.
- Other risks include dependence on concentrated third-party manufacturers, demand forecasting and inventory exposure, retail-partner credit and store closures, variable-rate debt and LIBOR transition, and brand, product-quality, cybersecurity, and international trade risks. Management said existing legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Confirm the period discrepancy: the filing is for the quarter ended June 27, 2020, not 2019 Q2.
- Track whether DTC growth can offset wholesale weakness and how channel mix affects margins and fulfillment costs.
- Monitor COVID-19 effects on consumer demand, retail operations, supply chains, and inventory, especially given the withdrawn full-year outlook.
- Assess cash generation quality, including the effects of inventory reductions and lower payables, alongside planned capital spending and debt repayments.
- Check progress on remediating the ITGC material weakness and whether disclosure controls become effective.
- Monitor debt covenant compliance, variable interest costs, LIBOR transition arrangements, and continued access to the revolver.