Among companies seeing enhanced sales from the coronavirus pandemic, investors have been keen to discern which organizations are developing lasting advantages versus short-term benefits. Lifestyle-brand cooler and drinkware specialist YETI (YETI 0.48%), which released its second-quarter 2020 earnings report on Aug. 6, appears to fall in the former category, because of swiftly changing customer purchasing habits.
Revenue increased by 7% to nearly $247 million over the second quarter of 2019, a noteworthy result itself given that sales plunged 20% in April, the first quarter of the month. But as business ramped up in May and June, the composition of the top line was remarkable. Sales through YETI's wholesale channel, which typically provides the lion's share of its revenue, cratered by 24% to roughly $114 million against the prior-year quarter. Direct-to-consumer (DTC) sales, conversely, soared 61% to $133 million.
Let's briefly examine this disparity and the implications for YETI's future growth.
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During the company's earnings conference call, management explained that the channel shift was, as investors might expect, influenced by shelter-in place-restrictions, since customers purchase YETI's wholesale channel products at retail locations. Blossoming DTC sales also resulted from the growing outdoor leisure movement catalyzed by the COVID-19 pandemic.
What are the advantages of DTC sales versus their wholesale counterparts? Most obviously, direct sales carry a higher margin, as the company bypasses the merchant in the middle of the transaction. Because of the overwhelming shift to direct sales, and a product tilt toward higher-margin coolers versus drinkware products, YETI's gross profit margin jumped by 550 basis points against the prior-year quarter. Sharper gross profitability helped drive a 51% leap in year-over-year net income, to $33.5 million.
Direct sales also afford companies more opportunity to create loyalty and create incentives for future purchases through one-to-one brand engagement. YETI understands the importance of this principle; predating the pandemic, "accelerate DTC" had figured as one management's four stated strategic objectives. The others were to "expand [the] customer base," "introduce new products," and "expand internationally."
It's important to note that YETI is still in the early stages of expanding its brand and customer base throughout North America and also internationally, from its initial concentration in the U.S. Southeast. The coronavirus pandemic has furnished an unexpected boon in shifting its millennial-heavy, lifestyle-focused customer base toward direct e-commerce. If it can maintain the new weighting between DTC and wholesale revenue, YETI should reap a rising lifetime value per customer into the foreseeable future as it broadens its geographical footprint.
The consumer discretionary upstart hasn't reaped the financial benefits of the sudden business model evolution through luck alone. YETI's marketing strategy relies heavily on influencer culture, and it employs brand ambassadors who target potential purchases through social media posts, including frequently updated video content on the company's Instagram page. As its already-formidable social media presence has increased during the pandemic, YETI appears to be quite easily shifting existing and new followers over to its branded YETI.com store.
Of course, the organization isn't planning to de-emphasize its wholesale channel any time soon. In late 2019, YETI launched a distribution partnership with do-it-yourself home improvement retailer Lowe's. While the pandemic disrupted the rollout of placing YETI coolers in Lowe's stores was disrupted in early 2020, management appears keen to plumb the long-term opportunities from this and other wholesale tie-ups within a revenue stream that was until very recently the mainstay of YETI's business.
In sum, while management will execute against an omnichannel sales distribution plan, YETI has achieved a years-long business objective almost overnight, and the dividends reaped from direct engagement and customer loyalty will follow for quite a long time. Investors are already acknowledging how valuable this new sales structure is for the trendy lifestyle brand: As of this writing, shares of YETI have soared 45% year to date.
