In 2020, Yeti Holdings' (YETI +2.20%) stock jumped more than 100% as the premium lifestyle brand successfully adapted to changes in consumers' shopping habits. But that success doesn't look like it's stopping any time soon. Here are three reasons Yeti looks poised for an even better 2021.
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1. Fast growth
As lockdowns remained in place throughout the summer, Yeti customers all over spent more time outdoors and switched to an online-first shopping approach. Driven by strong demand for its two leading revenue drivers -- drinkware and coolers & equipment -- Yeti wrapped up its most recent quarter with 29% year-over-year growth in total sales.
Entering the pandemic, Yeti was already well-equipped to handle the boost in online demand that it saw. Of the $295 million in revenue it generated over the quarter, 51% came from direct-to-consumer sales (DTC) -- up from 41% from a year prior. However, despite handling the online traffic well, the unexpected demand plus a few COVID-related supply chain constraints resulted in Yeti's inventory balance dropping 36% year over year. Management addressed the plummeting inventory, stating that it was working to expand its supplier capacity heading into the holiday season. But it doesn't look like Yeti's pulling back the reins on other initiatives, either.
In the latest conference call, Yeti hinted at its new 2021 product launchesand even touted the company's large digital presence as a great marketing tool. While Yeti rarely preannounces upcoming product launches, it has a pretty easy time bringing new items to market. For example, Yeti successfully introduced its Rambler 10-oz. tumbler this quarter despite being limited to DTC sales only, and Yeti's massive social media following was likely a key driver for that. With 1.5 million Instagram followers and 187 million views on the #Yeti TikTok page, it is able to easily introduce new products to its customers without having to spend tons of money to raise awareness.
In its most recent quarter, Yeti's operating expenses, which consist of marketing-related costs, fell from 38% to 35% of overall revenue. This decrease in expenses should help more dollars fall to the bottom line over time.
In addition to the growth from new product launches, Yeti continues to see robust adoption internationally. Revenue across other regions grew 165% year over year in the third quarter and now accounts for 7% of total sales. Canada seems to be leading the surge thanks to the reopening of Yeti's Canadian wholesale business, but Yeti is also seeing strong growth across Australia, the UK, and Europe. While CEO Matt Reintjes didn't pinpoint any specific international initiatives, he did mention that Yeti was intending to build out the proper infrastructure to support global growth.
2. Increasing profits
As the pandemic forced many shoppers to switch to a digital-first approach, Yeti was right there to reap the benefits. DTC revenue for the quarter grew 62% year-over-year and drove gross profit margins from 52% to 59%. Yeti also generated $70 million in operating income for the quarter -- more than double the year prior.
In an attempt to expand margins further, Yeti opened its eighth retail location during the quarter. Whether it's direct-to-consumer or wholly owned retail stores, keeping the sales in-house instead of selling through wholesalers lets Yeti receive a bigger slice of each sale.
Another way Yeti is able to increase profits is through pricing power. Yeti touted 59% gross profit margins in its most recent quarter, and while Yeti doesn't have any direct public competitors, Newell Brands (NASDAQ: NWL) is a consumer goods manufacturer that owns and operates eight different outdoor and recreation brands, but it only reports about half that gross margin figure -- around 34%. While that comparison isn't apples-to-apples, the difference in gross margins demonstrates that Yeti can charge a higher price versus the costs required to build its products. Unlike its more ordinary competitors, Yeti is viewed as a premium brand and is consistently ranked among the top hard and soft coolers available by outdoor enthusiasts -- allowing Yeti to charge a much higher price tag.
On Amazon.com, shoppers can get a 70=quart Coleman cooler for around $50, while Yeti sells a similarly sized cooler for roughly $300. Customers aren't shopping with Yeti to save money; they're looking for reliable, best-in-class products with a relevant brand name others will recognize.
3. Improved balance sheet
One of the biggest concerns for Yeti shareholders has been the looming long-term debt. In 2019, Yeti decided to borrow $300 million at a 6.25% interest rate. Entering the 3rd quarter, it still owed a remaining $290 million by 2024. However, as demand strengthened throughout 2020, management took the initiative to voluntarily pay back roughly $50 million of the long-term debt before it was due.
Between the $235 million in cash Yeti has on the balance sheet, and its stable quarterly free cash flow, it seems unlikely that it will struggle to pay down the remaining $237 million in debt.
With consistent cash flow, sustainable sales growth, and a brand customers love, investors should feel optimistic about Yeti moving forward.
