YETI Holdings, Inc. — Form 10-K Summary
Period clarification: The supplied filing is for the fiscal year ended December 28, 2019, not a 2018 Q4 filing. Fiscal 2019 was a 52-week year; the filing states fiscal 2020 will be 53 weeks. Figures below are in U.S. dollars.
Business context
YETI designs, markets, sells and distributes premium coolers, drinkware and related outdoor and lifestyle products. It operates as one reportable segment through wholesale and direct-to-consumer (DTC) channels. Fiscal 2019 sales were 58% wholesale and 42% DTC, compared with 63% and 37%, respectively, in 2018.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $913.7 million | $778.8 million |
| Gross profit / margin | $475.3 million / 52.0% | $383.1 million / 49.2% |
| Operating income / margin | $89.8 million / 9.8% | $102.2 million / 13.1% |
| Net income | $50.4 million | $57.8 million |
| Diluted earnings per share | $0.58 | $0.69 |
| Cash provided by operating activities | $86.9 million | $176.1 million |
- Sales rose 17%. DTC sales increased 34% to $386.1 million; wholesale sales increased 7% to $527.6 million. Drinkware sales grew 24% to $526.2 million, while Coolers & Equipment grew 11% to $368.9 million.
- Gross margin expanded 280 basis points, chiefly from product cost improvements, higher DTC mix and lower inbound air freight. Tariffs, inventory reserves and product price reductions partly offset the improvement.
- SG&A increased 37% to $385.5 million, or 42.2% of sales versus 36.1%. The increase included higher personnel, marketing and DTC-related selling costs, public-company and technology expenses, and a substantial non-cash stock-compensation charge.
- Net income fell 13% despite sales growth. Operating income declined as SG&A growth exceeded gross-profit growth. Interest expense decreased to $21.8 million from $31.3 million; the effective tax rate increased to 25% from 17%.
- Year-end cash was $72.5 million; inventory was $185.7 million, up from $145.4 million. The company reported $117.7 million of working capital excluding cash and $150 million available under its undrawn revolving facility.
- Term Loan A principal was $300 million; the reported long-term debt balance, net of current maturities and financing fees, was $281.7 million. The company reported compliance with credit-facility covenants. Cash less term-loan principal implies approximate net debt of $227.5 million.
- Investing cash outflow was $48.7 million, including $32.1 million for property and equipment and $16.6 million for intangible assets. Financing cash outflow was $45.7 million. Operating cash flow was lower than 2018, primarily reflecting a $63.9 million unfavorable working-capital movement, including inventory buildup.
Material changes, outlook and risks
- In Q4 2019, net sales were $297.6 million versus $241.2 million in Q4 2018; net income was $4.7 million versus $25.2 million. The 2019 quarter included the vesting of pre-IPO performance-based RSUs, with $40.7 million of associated non-cash compensation expense recognized during the year.
- The company amended and extended its credit facility in December 2019: maturity moved to December 2024, the term loan principal was set at $300 million, revolver commitments increased to $150 million, and interest-rate spreads were reduced. The term loan rate at year-end was 3.99% and variable; management estimated a 1 percentage-point rate change would affect annual interest expense by about $3 million.
- Management said cash, operating cash flow and revolver availability should cover liquidity and capital needs for at least the next 12 months. It expected 2020 property-and-equipment capital expenditures of $30–$35 million. No specific revenue or earnings guidance is provided in the filing.
- Key operating exposures include concentrated third-party manufacturing, tariffs and other trade restrictions, supply-chain and logistics disruption, inventory forecasting, competition and pricing pressure, discretionary consumer demand, international expansion and foreign exchange. The filing also flags the early-2020 coronavirus outbreak as a potential supply disruption risk.
- Internal control over financial reporting and disclosure controls were reported ineffective at December 28, 2019 because of a material weakness in IT general controls over user access and program changes. Management had implemented remediation activities but said the weakness would remain until controls operated effectively for a sufficient period and testing confirmed remediation. The auditor issued an adverse opinion on internal control, while giving an unqualified opinion on the financial statements.
- YETI adopted the new revenue standard in 2019, recognizing certain wholesale and e-commerce sales earlier, generally at shipment rather than delivery. The filing’s comparison indicates adoption increased reported 2019 net income by approximately $1.5 million versus the amount without adoption.
Important facts for investors to verify
- Whether the IT-control material weakness has been fully remediated and controls independently tested in subsequent filings.
- Whether DTC growth and higher gross margin can continue without SG&A growth eroding operating profitability.
- How tariffs, manufacturer concentration and inventory levels affect product availability, margins and cash conversion.
- Debt amortization, variable-rate exposure and compliance with leverage and interest-coverage covenants.
- Execution and returns from international expansion, new retail locations and planned 2020 capital expenditures.