YETI Holdings, Inc. — 2018 Form 10-K
Period note: The filing covers the fiscal year ended December 29, 2018, with comparisons to the fiscal year ended December 30, 2017. Although the request metadata says “2017 Q4,” the filing is a 2018 annual report; it also provides unaudited fourth-quarter results for both years.
Business context and reporting period
YETI designs, markets, sells and distributes premium coolers, drinkware and related outdoor products. It operates as one reportable segment through wholesale and direct-to-consumer (DTC) channels. The company completed its IPO in October 2018; its shares began trading on the NYSE as YETI on October 25.
Financial results and key metrics
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net sales | $778.8 million | $639.2 million | +22% |
| Gross profit / margin | $383.1 million / 49.2% | $294.6 million / 46.1% | Margin +310 bps |
| Operating income / margin | $102.2 million / 13% | $64.0 million / 10% | +60% |
| Net income / diluted EPS | $57.8 million / $0.69 | $15.4 million / $0.19 | Net income +275% |
| Operating cash flow | $176.1 million | $147.8 million | +$28.3 million |
| Capital expenditures and intangible purchases | $31.7 million | $38.7 million | Cash used in investing |
- Growth drivers: Drinkware sales rose 37% to $424.2 million, led by product-line extensions, accessories and new colors. Coolers & Equipment increased 6% to $331.2 million.
- Channels: DTC sales grew 48% to $287.4 million and represented 37% of net sales, up from 30%. Wholesale sales grew 10% to $491.4 million.
- Margins and expenses: Higher sales, cost improvements, fewer prior-year inventory and product charges, and DTC mix supported gross margin. These benefits were partly offset by product price reductions, which reduced margin by approximately 360 basis points. SG&A rose 22% to $281.0 million but remained 36.1% of sales.
- Cash and liquidity: Year-end cash was $80.1 million; current assets were $297.0 million and current liabilities $187.3 million. Management reported $29.6 million of working capital excluding cash and $80.0 million available under the revolving facility.
- Debt: Principal debt totaled $332.9 million at year-end, including $331.4 million under the Term Loan A and a $1.5 million Rambler On note, versus $484.7 million a year earlier. YETI repaid the $47.6 million remaining Term Loan B balance in Q4, using IPO proceeds and cash on hand. The Term Loan A carried a 6.35% variable rate; the company estimated a 1 percentage-point rate change would affect annual interest expense by about $3.3 million.
- Non-GAAP measures: Adjusted EBITDA was $149.0 million (19.1% of sales), compared with $97.5 million (15.2%) in FY2017. These company-defined measures exclude specified items and are not substitutes for GAAP results.
Material changes versus the prior comparable period
- FY2018 sales and profitability recovered from FY2017, when wholesale sales had fallen amid excess retailer inventory. The filing says 2017 commercial actions helped reduce channel inventory and improve retailer sell-through.
- Net income benefited in part from a lower effective tax rate: 17% in FY2018 versus 52% in FY2017. The 2017 rate was unusually high, primarily because the Tax Act required remeasurement of deferred tax assets; FY2018 also included stock-compensation tax benefits.
- Operating cash flow increased, supported by net income and working-capital movements, including lower inventory and higher accounts payable and accrued expenses.
- Year-end stockholders’ equity improved to $29.0 million from a deficit of $76.2 million, reflecting earnings and IPO proceeds.
- Fourth-quarter 2018 sales were $241.2 million and net income was $25.2 million, compared with $202.1 million and $4.0 million, respectively, in Q4 2017.
Outlook, commentary, risks and unusual items
- Outlook: Management provided no specific FY2019 revenue or earnings guidance in the supplied filing text. It forecast FY2019 capital expenditures of $35–$40 million for product development, technology, retail openings, molds and equipment, and expansion of drinkware customization. Management said available cash and credit were expected to meet liquidity needs for at least the next 12 months, while noting that growth and expansion could increase cash requirements.
- Growth plans: YETI planned to open stores in Chicago and Charleston during 2019 and continued to pursue international expansion. International sales were 1% of FY2018 revenue.
- Key business risks: Strong dependence on brand demand and discretionary spending; intense competition and pricing pressure; reliance on third-party manufacturers and logistics; and concentrated production. The two largest manufacturers accounted for 91% of hard cooler, 99% of soft cooler and 89% of drinkware production. One national customer represented approximately 16% of FY2018 gross sales.
- Debt and controls: Debt is variable-rate, secured by substantially all company and guarantor assets, and subject to financial covenants; YETI reported covenant compliance at year-end. The company disclosed that IT general-control weaknesses affecting financial reporting remained unremediated. The inventory-valuation weakness identified previously was deemed remediated. Disclosure controls were reported ineffective due to the remaining material weakness; the auditor did not provide an opinion on internal-control effectiveness.
- Unusual items: The IPO generated $42.4 million in net proceeds before $4.6 million of offering costs; proceeds plus additional cash were used to repay debt. FY2018 included a $0.7 million loss on debt extinguishment and $2.2 million of long-lived asset impairment charges. The company reported a clean audit opinion on its financial statements and said pending legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Reconcile the request’s “2017 Q4” label with the filing’s FY2018 reporting period and review the unaudited Q4 figures separately.
- Assess whether FY2018 sales and margin growth can persist, including the contribution from DTC mix, product launches, price changes and lower prior-year charges.
- Monitor manufacturer concentration, key-customer exposure, inventory forecasting and retailer sell-through.
- Review debt amortization, variable interest-rate exposure, covenant headroom and planned FY2019 capital spending.
- Track completion and testing of IT-controls remediation, and any future disclosures on reporting controls.
- Distinguish GAAP results from adjusted measures and examine the recurring nature of excluded expenses.