YETI Holdings, Inc. — Form 10-Q Summary
Period: Three months ended March 30, 2019. The request metadata says “2018 Q1,” but the supplied filing is for 2019 Q1 and compares results with the three months ended March 31, 2018. Unaudited results; dollars below are in millions unless stated otherwise.
Business context and results
YETI designs, markets, sells, and distributes premium outdoor and lifestyle products through wholesale and direct-to-consumer (DTC) channels. Net sales rose 15% to $155.4 million. Drinkware sales increased 20% to $91.0 million; Coolers & Equipment increased 11% to $59.7 million. DTC sales grew 28% to $61.7 million, while wholesale sales grew 8% to $93.6 million. International sales were $6.7 million, versus $1.5 million a year earlier.
Financial performance and liquidity
- Gross profit was $76.6 million, up 34%; gross margin expanded 700 basis points to 49.3%.
- SG&A rose 26% to $67.8 million, or 43.7% of sales versus 39.9%. Operating income increased to $8.8 million from $3.2 million; operating margin was 5.7% versus 2.4%.
- Net income was $2.2 million, or $0.03 per diluted share, compared with a net loss of $3.3 million, or $0.04 per share. Interest expense declined to $6.1 million from $8.1 million.
- Management’s non-GAAP measures: adjusted operating income was $14.7 million, adjusted net income $6.6 million, and adjusted EBITDA $21.3 million. These measures exclude specified costs; the filing cautions they are not substitutes for GAAP results.
- Operating cash flow was negative $30.0 million, versus positive $25.3 million. The 2019 outflow primarily reflected a $19.2 million inventory increase and other working-capital uses. Investing cash outflow was $19.8 million, including $11.4 million for intangible assets and $8.4 million for property and equipment; debt repayments used $11.1 million.
- Cash declined to $19.0 million from $80.1 million at year-end 2018. Current assets were $266.4 million and current liabilities $172.5 million. The company reported $100 million available and no borrowings on its revolving facility.
- Balance-sheet debt carrying value was approximately $317.5 million, including current maturities. Separately, the filing reports $320.3 million of Credit Facility principal and $1.5 million under a promissory note. The Credit Facility is variable-rate and secured by substantially all company assets and certain subsidiary assets.
Material changes and unusual items
- Gross-margin expansion reflected product-cost improvements, higher DTC mix, the absence of prior-year inventory-reserve charges, and lower inbound air freight; higher tariffs reduced margin by about 70 basis points.
- SG&A growth reflected higher marketing and DTC-related variable costs, increased headcount and stock compensation, public-company transition costs, and higher IT costs. The absence of Cortec management fees partly offset increases.
- YETI adopted ASC 606 using the modified retrospective method. Adoption reduced reported Q1 2019 sales by $4.0 million and net income by $1.9 million compared with results without adoption; prior-year figures were not restated. Adoption also resulted in a $0.5 million decrease to accumulated deficit at transition.
- In March, YETI acquired YETI brand intellectual-property rights in several jurisdictions, primarily Europe and Asia, for approximately $9.1 million. It also signed a 10-year Denver retail lease with monthly payments of approximately $27,000.
Outlook, risks, and controls
Management stated that cash on hand and revolver availability should meet liquidity needs for at least the next 12 months, while noting that business growth, international expansion, and retail openings may increase cash requirements. Expected 2019 property-and-equipment capital expenditures were $35–$40 million. The filing provides no sales or earnings guidance.
Key risks include maintaining brand demand, competition and pricing pressure, reliance on concentrated third-party manufacturers, inventory forecasting, tariffs and other trade changes, retail-partner concentration, international expansion, variable-rate debt and covenant compliance, and seasonal demand. The company said existing legal claims were not expected to have a material adverse effect.
Disclosure controls were not effective as of March 30, 2019 because a previously disclosed material weakness in IT general controls had not been fully remediated. The filing says the inventory-valuation weakness had been remediated, but remediation of the IT-related weakness was ongoing.
Important facts for investors to verify
- Reconcile the 2019 Q1 reporting period with the “2018 Q1” request metadata.
- Assess the effect of ASC 606 on comparability, including the $4.0 million sales and $1.9 million earnings reduction and the non-restated prior-year comparison.
- Review the causes and sustainability of the 700-basis-point gross-margin improvement, including cost savings, DTC mix, tariffs, and inventory-reserve timing.
- Monitor inventory, operating cash flow, planned capital spending, and cash depletion against the company’s stated liquidity outlook.
- Confirm total debt, including the difference between reported carrying value and disclosed principal balances, and review variable-rate exposure and facility covenants.
- Track remediation of the material weakness in IT general controls and any effect on the reliability of financial reporting.