Getting Up to Speed on YETI: An Introduction for Investors

Following a late October IPO, YETI Holdings (YETI -1.04%) shares have fluctuated on either side of the company's $18 offering price, where they now sit after a mixed third-quarter earnings report.

In the following segment from Industry Focus: Consumer Goods, host Vincent Shen and Fool.com contributor Asit Sharma introduce listeners to this high-end cooler, drinkware, and accessories manufacturer.

A full transcript follows the video.

This video was recorded on Nov. 27, 2018.

Vincent Shen: It feels like the company has absolutely exploded in the past few years, in terms of popularity. That would match pretty closely the growth that the company's enjoyed. I feel like the first time I saw a Yeti cooler was on someone's fishing boat a couple of years ago. At that point, it was still something new and novel. I actually got to check out the company's single brick and mortar location when I was in Austin this past March. I was thinking myself, holy cow! I didn't realize that they were at the point where they were opening physical stores. I didn't realize until doing the research for the show that that was their single location. We'll get more into that later.

At this point, you see the Yeti logo on a pretty regular basis, even living in an area like D.C. I was rummaging through my brother's kitchen, looking for something last week, and boom, right there, I see a Yeti water bottle in the cabinet that belonged to my sister-in-law. It really is growing its presence. This is a very interesting consumer business. The growth is especially impressive given how focused its product portfolio is.

Roy and Ryan Seiders founded the company in 2006 in Austin, Texas. This started as a pretty niche cooler company marketed to avid hunters and anglers. It's grown into a much bigger company since then. A big driver of that was Yeti's takeover by Cortec. This is a private equity firm. They took it over in 2012. We've seen firsthand how Cortec has taken the Yeti brand and expanded the product line from those core coolers to other accessories, cups, tumblers, water bottles, soft coolers. Most importantly, they've also broadened the target market for these products to everyday users. In the prospectus, Yeti shares some interesting data from customer studies that highlight this strategic change. First, from 2015 to 2018, the customer base shifted from 69% hunters to just 38%. In that same period, women grew from 9% to 34% of the company's customer base.

Under Cortec, Yeti went from a company with $90 million in revenue in 2013 to $640 million dollars in 2017. On the surface, that's 60% plus compound annual growth. THat's crazy for any company, let alone a consumer one churning out coolers and tumblers. There are also some gray areas working through Yeti's recent results that we'll get to.

I'll pass the baton to you, Asit. Can you walk us through any key numbers that stood out to you? Anything with profitability and other longer-term prospects? Where do you want to start?

Asit Sharma: I want to walk back briefly to one more comment about Cortec making this into a more viable operation for larger-scale business. They also brought in more seasoned management. The two Seiders brothers are still with the company. Roy Seiders owns 10%, Ryan Seiders owns 9%. After this IPO, Cortec still retains a majority 52% of shares, but they brought in a CEO, Matt Reintjes, and, more important to me, a new CFO this year, Paul Carbone. Those of you who are familiar with Dunkin Donuts, he was their CFO and left to join this company. Leaving a great outfit like Dunkin, which itself is growing, and coming to this, maybe tells you something about the opportunity.

Let's dive into some top line numbers and talk through those. I think that'll frame a lot more of this discussion for us. We have from their prospectus the first six months of net sales. This is about $342 million worth of sales. On that, the company has a gross profit of $158 million. All the way down to the net income line, net income is $15.5 million. Rough numbers. Net profitability is about 5%.

This is a function of the product line that this company sells. We were talking before the show about one of the phrases in the prospectus, which mentions that Yeti has a product line from a $20 tumbler all the way up to its top-of-the-line $1,300 Yeti cooler. When you have such a wide variety of price points -- listeners, you can build in your head -- you can sell more of those high-end products and up the margin or you can sell the lower-end products, which hurts your margin but helps that revenue growth. In fact, as we'll talk about later in the show, drinkware products are really leading sales for the company over the last year.

One more point to mention about the financial statements. I talked about $15.5 million in net income. Interest expense on the company's debt is $19.6 million -- even more than final net income. We'll return to that thought.

Vince, I was curious, we've talked a lot about distribution strategies on other IPOs we've covered. I noticed that Yeti has a very interesting one. It's split up between a direct channel and a wholesale channel, which involves a lot of major retailers. I wanted to talk about that following these numbers.

Shen: Absolutely. The way Yeti splits up its product categories and its distribution, the coolers category that I think they're most famous for, in terms of the product line, made up 45% of top line in the first half of 2018. The drinkware, some of the lower-priced products that you mentioned, Asit, those came in at 52% of revenue. That product category is growing quite a bit faster than the coolers line. The company distributes its products through wholesale and direct-to-consumer channels, with about a 70-30 split, respectively, between the two. For wholesale, Yeti's biggest partners include chains like Dick's Sporting Goods, Bass Pro Shops, REI, and also about 4,800 smaller independent retailers. For the direct-to-consumer part of the business, these include Yeti's own online stores. They also sell through Amazon and that flagship store location that they have in Texas. We see this for a lot of consumer and retail companies, that DTC business is growing faster than wholesale, 75% year over year in the first half of 2018. The tailwind for the company is that there are higher profit margins for DTC that they enjoy over wholesale.