Premium cooler maker Yeti Holdings' (NYSE: YETI) first quarterly earnings report as a publicly traded company threw investors a curve. After shares initially rose 13% as it beat Wall Street's expectations on the top and bottom line, the stock gave up all those gains and more, tumbling 16% after it revealed extended weakness in its primary business. Yeti eventually closed below its $18-per-share IPO price.
Prices for a Yeti cooler can run as high as $500 or more (the Tundra 350 model costs $1,300), and many sing the praises of its high-performance products, which have a reputation for durability and quality. But is that enough to warrant an investment?
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Cooler sales cool off
To understand Yeti is to understand its coolers, which have developed a cultlike following among outdoors enthusiasts who use them when camping, fishing, or simply tailgating. Made of roto-molded plastic resin, the coolers contain up to three inches of pressure-injected, commercial-grade polyurethane foam with a firm, bear-resistant seal that keeps ice cold longer than the competition.
Yet cooler sales are cooling off, having fallen 16% in the just-reported third quarter to $86.7 million after having risen 21% over the first six months of 2018. Instead, Yeti is seeing much greater growth in drink-related items, like stainless steel tumblers and mugs. Sales for those items in the quarter were up 37%, and they now represent 52% of total sales, more than coolers.
During the earnings conference call with analysts, management noted that even disregarding the one-time sales event it had last year for soft coolers in an attempt to reduce inventory, cooler and equipment segment sales were still down versus the year-ago period. Yeti also said its new Tundra cooler rolled out more slowly than expected in the wholesale channel and that it still faced "rolling over several exciting launches from last year."
However, the management team expects the fourth quarter to pick back up, so it remains to be seen if this is a one-off event or the start of a trend. The market, however, is clearly worried it's more the latter than the former, and that's not completely unjustified.
Creating a bigger footprint
On the call, CFO Paul Carbone said Yeti had a long-term revenue growth rate target of 10% to 15%, which is respectable, but still considerably lower than the 19% to 20% growth it anticipates for all of 2018. That suggests it ramped up sales ahead of its IPO, but won't be able to replicate the feat going forward.
Yeti is also going to expand its bricks-and-mortar retail presence. Having invested previously in e-commerce sales, which helped its direct-to-consumer channel sales grow 23% in the third quarter and 49% over the first nine months of the year, it plans to grow its footprint beyond the one flagship store it now has and open four to six stores each of the next two years. Yeti did reiterate, though, that it is not planning on becoming a retailer.
Still, that means capital expenditures will increase above the typical run rate of $30 million to $35 million it spends on IT, molds, and tooling for new products.
A changing consumer profile
Yeti's performance has been a bit haphazard. Revenues surged 75% in 2016, only to tumble 22% the following year as wholesale channel partners stocked up on coolers after having been caught by the demand surge the prior year, only to see sales fall off. That was partially blamed on the delayed merger of Bass Pro Shops and Cabela's, as well as a broadly weak retail environment.
This year sales are back up thanks to stronger e-commerce and drink-ware sales, but Yeti is expecting the growth rate to ease back.
There is still lots of room to grow, however, as it does more marketing in what it calls its non-heritage markets, which are primarily states outside of the Southeastern U.S. Still, its core markets have a history and culture of hunting and fishing that don't translate easily into other regions of the country, particularly urban centers, which helps explain why mugs and drink flasks are selling more than coolers. How much growth is there in customers merely wanting to look the part and Yeti becoming a lifestyle company?
Yet the cooler maker is also developing an international presence, having recently entered markets in Canada, Australia, and Japan, and it sees more opportunities in other Asian markets. It also likely got a reprieve as the U.S. and China reached a temporary truce in their trade war, since Yeti manufactures some of its products there. But when you're selling $500 coolers, a price increase of a few dollars probably wouldn't dent sales all that much anyway.
Keep an eye on Yeti
Yeti isn't likely going to be a growth stock, but it should be a more consistent performer as time goes on and it becomes a bigger part of the growing outdoors industry. At 18 times this year's expected earnings and less than two times its sales, Yeti isn't a bargain stock, but neither is it an overpriced one.
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