YETI Holdings, Inc. — Form 10-Q Summary
Period: Quarter and six months ended June 29, 2019. The request metadata says “2018 Q2,” but the filing is for 2019 Q2; the comparable quarter ended June 30, 2018. Amounts below are in U.S. dollars.
Business context and results
YETI designs, markets, retails, and distributes premium coolers, drinkware, equipment, apparel, and accessories through wholesale and direct-to-consumer (DTC) channels. It opened a second retail store in Charleston in June and expanded its online customization offering.
| Metric | Three months 2019 | Three months 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $231.7M | $206.3M | $387.0M | $341.5M |
| Gross profit / margin | $116.3M / 50.2% | $100.6M / 48.8% | $192.9M / 49.8% | $157.8M / 46.2% |
| Operating income / margin | $35.0M / 15.1% | $33.2M / 16.1% | $43.8M / 11.3% | $36.4M / 10.7% |
| Net income | $22.2M | $18.8M | $24.4M | $15.6M |
| Diluted EPS | $0.26 | $0.23 | $0.28 | $0.19 |
- For the quarter, sales rose 12%; DTC grew 43% to $82.5M while wholesale was essentially flat at $149.2M. Drinkware sales increased 16% and Coolers & Equipment increased 9%.
- For the six months, sales grew 13%; DTC increased 36% to $144.2M and wholesale rose 3% to $242.8M.
- Reported gross margin improved year over year, supported by product cost improvements, increased DTC mix, and lower inbound air freight. Tariffs and other inventory and product-related factors partly offset gains.
- SG&A grew faster than sales: 21% in the quarter and 23% for the half year. It included growth-related staffing and infrastructure, marketing and DTC costs, public-company and secondary-offering expenses, and higher stock compensation. Consequently, quarterly operating margin declined despite higher operating income.
- Interest expense declined to $5.7M for the quarter and $11.8M for the half year, primarily reflecting lower credit-facility balances. Effective tax rates were 24% in both 2019 periods; the prior-year six-month rate was 21%, partly due to a discrete tax benefit.
Cash flow, debt, and liquidity
- For the six months, operating cash flow was $9.8M, down from $83.6M. The 2019 result reflected a $44.3M increase in working capital, including a $36.2M inventory build and $15.9M increase in receivables, partly offset by higher payables and accrued expenses.
- Investing cash outflow was $30.0M, including $16.8M for property and equipment and $13.2M for intangible assets. Financing cash outflow was $21.7M, primarily debt repayments.
- Cash declined to $38.0M from $80.1M at year-end 2018. At June 29, 2019, the company had no revolver borrowings and $100M available under its revolving facility.
- Debt principal outstanding under the credit facility was $309.1M; the balance sheet reported $305.4M of debt, net of applicable items. The company stated it was in compliance with all credit-facility covenants. It also repaid the remaining $1.5M Rambler On note principal in May.
Changes, outlook, risks, and unusual items
- Comparability is affected by adoption of ASC 606 in 2019 without restating 2018. The company said 2019 sales growth benefited by approximately $8M from a prior-year Amazon Marketplace revenue-recognition transition. ASC 606 adoption reduced reported 2019 net income by $1.1M for the quarter and $3.0M for the half year versus balances without adoption.
- Management expects 2019 capital expenditures of $35M–$40M, mainly for product development, IT, stores, tooling, and customization capacity. It believed cash and revolver availability would meet liquidity needs for at least 12 months, while noting that growth and expansion could raise cash requirements. No specific revenue or earnings guidance is provided in the filing text.
- Growth initiatives include UK and European DTC websites launched in July 2019, a Canadian website launched in June, and planned Chicago and Denver store openings in the second half of 2019. The filing also describes new product introductions and a $9.1M acquisition of YETI intellectual-property rights, primarily in Europe and Asia.
- Key disclosed risks include brand and product demand, competition, concentrated third-party manufacturing, demand forecasting and inventory management, tariffs and sourcing costs, retail-partner dependence, international expansion, cybersecurity and IT, and variable-rate debt. One customer represented approximately 17% of gross sales in the quarter; Dick’s Sporting Goods represented approximately 16% of gross sales in 2018 and the first six months of 2019.
- Disclosure controls were not effective at quarter-end because a previously disclosed material weakness in IT general controls had not been fully remediated. The company hired a CIO and IT Compliance Manager in July 2019; remediation was still in progress. The company expected to cease qualifying as an emerging growth company at year-end 2019 and become subject to auditor attestation of internal controls.
- Management said existing legal claims were not expected to have a material adverse effect. No material changes to market-risk exposures were reported.
Important facts for investors to verify
- Confirm the correct reporting period: the filing covers Q2 2019, not Q2 2018.
- Assess sales and earnings comparisons in light of ASC 606 adoption and the approximately $8M Amazon-related comparison benefit.
- Track inventory, receivables, operating cash flow, and cash availability given the substantial working-capital use.
- Review debt repayment, variable-rate exposure, covenant headroom, and planned capital spending.
- Monitor remediation of the IT-control material weakness ahead of required auditor attestation.
- Evaluate tariffs, manufacturing concentration, major-customer and retail-partner exposure, and the execution risks of international and store expansion.