YETI Holdings, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended September 28, 2019, and the nine months then ended—not 2018 Q3 as stated in the request metadata. It was filed November 4, 2019. Unless otherwise noted, figures below are in millions of dollars.
Business context and reporting period
YETI designs, markets, retails, and distributes premium coolers, drinkware, equipment, apparel, and accessories through wholesale and direct-to-consumer (DTC) channels. The filing reports unaudited results for the three and nine months ended September 28, 2019, with comparisons to the periods ended September 29, 2018.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $229.1 (+17%) | $196.1 | $616.1 (+15%) | $537.7 |
| Gross profit / margin | $120.1 / 52.4% | $97.5 / 49.7% | $313.0 / 50.8% | $255.3 / 47.5% |
| SG&A | $86.1 | $69.4 | $235.2 | $190.7 |
| Operating income / margin | $34.0 / 14.8% | $28.1 / 14.3% | $77.8 / 12.6% | $64.6 / 12.0% |
| Net income | $21.3 | $17.0 | $45.7 | $32.6 |
| Diluted EPS | $0.25 | $0.21 | $0.53 | $0.39 |
| Interest expense | $5.3 | $7.8 | $17.1 | $24.5 |
| Income tax expense | $7.1 | $3.1 | $14.8 | $7.2 |
For the nine months, operating cash flow was $26.6, down from $118.8; investing cash outflow was $39.2 versus $23.9, and financing cash outflow was $32.8 versus $96.5. Cash declined to $34.6 from $80.1 at December 29, 2018. The operating cash flow decline chiefly reflected a $64.1 inventory build, including strategic Drinkware purchases ahead of potential tariffs and inventory to support expected growth.
At September 28, 2019, current assets were $331.8 and current liabilities $201.1. Debt carrying value was $294.8, including $42.1 current and $252.7 long-term; principal debt outstanding was reported as $298.0. There were no revolving-credit borrowings, and $100.0 of the $100.0 revolving facility was available. The company said it was in compliance with credit-facility covenants and expected cash plus revolver availability to meet needs for at least 12 months.
Material changes versus comparable periods
- Q3 sales growth came from both channels: DTC rose 31% to $92.9, and wholesale rose 9% to $136.2. For the nine months, DTC grew 34% to $237.2 and wholesale 5% to $379.0. Drinkware and Coolers & Equipment increased 21% and 13% in Q3, respectively.
- Gross margin improved 270 basis points in Q3 and 330 basis points year to date. Management cited product-cost improvements and higher-margin DTC mix; tariff costs and Hopper Two 30 end-of-life discounts partly offset the gains. For the nine months, lower inbound air freight also helped.
- SG&A grew faster than sales: 24% in Q3 and 23% year to date. Drivers included marketing, DTC-related variable selling costs, staffing, public-company transition costs, IT, and facilities.
- Interest expense declined with lower Credit Facility balances. Effective tax rates rose to 25% for Q3 and 24% year to date, versus 16% and 18%; prior-year rates included a discrete state deferred-tax benefit.
- Comparability is affected by accounting changes. YETI adopted ASC 606 in 2019 using the modified retrospective method; prior periods were not restated. The company reported that adoption increased 2019 nine-month sales by $7.0 compared with amounts under the prior accounting method. Management also said reported nine-month growth benefited by about $8 million from the timing of a 2018 Amazon Marketplace revenue adjustment. These effects warrant caution when interpreting reported growth.
Outlook, commentary, risks, and unusual items
- No full-year sales or earnings guidance is provided in the supplied filing text. YETI expected 2019 property-and-equipment capital expenditures of $30–$35, primarily for product development, IT, retail stores, molds and equipment, and customization capacity.
- Management identified growth initiatives including international launches, new products, retail expansion, and a new Salt Lake City distribution operation. New retail locations opened in Charleston and Chicago; Denver was planned for Q1 2020. New Zealand and UK wholesale fulfillment began in 2019, alongside additional regional websites.
- Tariffs are a notable margin and inventory risk. Management cited a Q3 gross-margin reduction of approximately 150 basis points from increased tariff rates and described the inventory build as partly intended to prepare for potential tariffs.
- In Q4 2019, YETI anticipated using $14–$17 of cash for tax withholding on certain employee RSU vesting and settlement.
- Disclosure controls were assessed as ineffective at September 28, 2019 because a previously reported material weakness in IT general controls had not been fully remediated. The company hired a CIO and an IT Compliance Manager and continued remediation; it cautioned that dependent automated and manual controls may also be ineffective.
- YETI expected to cease qualifying as an emerging growth company at fiscal year-end December 28, 2019, triggering additional reporting and auditor-attestation requirements. The ongoing IT-controls weakness could affect the company’s ability to assert effective internal control over financial reporting.
- Risks highlighted include brand and product demand, competition, forecasting and inventory management, reliance on concentrated third-party manufacturers and key retailers, tariffs and other trade restrictions, international expansion, consumer spending, debt and variable interest rates, and IT/cybersecurity. The company said existing legal claims were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether revenue growth remains strong after separating underlying demand from ASC 606 timing effects and the cited 2018 Amazon comparison impact.
- Whether the inventory build converts to sales without markdowns, excess stock, or additional working-capital pressure.
- Whether gross-margin gains persist as tariffs, product mix, and DTC-related fulfillment costs change.
- Progress remediating IT general controls and the conclusions in the next annual internal-control assessment and auditor report.
- Cash needs against debt service, planned capital expenditures, retail and international expansion, and anticipated $14–$17 RSU tax withholding.