Yeti Holdings (YETI -1.42%) is only a few years old as a publicly traded company. It was founded in 2006 and is best known for making premium coolers and drinkware for people who like the outdoors. 

The shares are up 444% since its 2018 initial public offering (IPO), with most of those gains coming over the last year. The company is experiencing strong demand for its products as people get out of the house, but there's still a lot of potential for this brand to grow. Here are three reasons Yeti stock is a good reopening play with long-term upside.

Two hikers walking through a dense forest.

Image source: Getty Images.

1. Accelerating growth

Yeti has seen sales growth improve significantly since the first quarter of 2020. Sales improved 12% year over year before dipping to a 7% growth rate in the second quarter at the beginning of the pandemic. But then sales exploded in the third quarter, up 29% year over year, and finished 2020 strong with an increase of 26% in the final quarter. 

Demand remained high through the start of 2021, with Q1 sales up 42% over the year-ago quarter. This growth has been driven by its two largest categories -- coolers and equipment, and drinkware -- that accounted for 41% and 58% of total sales, respectively, in 2020. 

Management raised its full-year guidance and now expects the top line to increase between 20% to 22% over 2020. This represents faster growth than in 2019 when sales increased 17%. 

Most importantly, Yeti is very profitable thanks to its premium pricing, product cost improvements, and a growing direct-to-consumer (DTC) channel. In 2020, gross margin improved by 5.6 percentage points to a healthy 57.6%. That lifted adjusted earnings per share (EPS) by 76% to $1.87. That performance continued in the first quarter with adjusted EPS tripling year over year to reach $0.38, compared to $0.11 in 2020. 

2. Online growth

The higher-margin DTC channel made up 51% of total sales in Q1, up from 46% in the same quarter last year. Management is doubling down on the momentum to build a deeper connection between the brand and consumers. The company is putting more resources behind digital marketing and data analytics, and management credited its strong Q1 to these initiatives.

"We believe that these efforts will not only foster a deep connection between our brand and consumers both digitally and, as the world reopens more fully, in a direct, personal way, but will also support our plans for long-term, sustainable growth," CEO Matt Reintjes said in the earnings report. 

3. International growth

Yeti recently achieved the milestone of crossing $1 billion in trailing-12-month sales. This shows a small business graduating to the big leagues, and management has a global expansion strategy to grow even larger.

In Q1, international sales grew by triple digits and accounted for 9% of total sales. Yeti is expanding in Australia, New Zealand, Japan, and Europe. Management has identified meaningful growth opportunities to meet consumer needs in these markets with its premium products.

Yeti has had success introducing new products, such as bags and backpacks. The brand has also seen its customer base widen in recent years, with women making up 39% of 2020 sales compared to just 9% in 2015. It's also seen the percentage of sales going to hunters decline from 69% in 2015 to 32% in 2020. 

The brand is still broadening its horizons in terms of demographic appeal, which is why crossing $1 billion in sales is so important. Yeti's increasing scale and profitability will only enhance its ability to expand its product range and market those products with a bigger ad budget.

A highly profitable business with room to grow

The stock is not cheap. It currently sits close to new highs and trades at a high price-to-earnings (P/E) ratio of 38.6 times forward earnings estimates for 2021. 

Still, Yeti generates a high return on capital (an alternative calculation of return on equity) of 49% and has tremendous opportunities to continue deploying capital to expand globally. Typically, companies that have plenty of opportunities to keep investing for growth at high returns are worth a big premium versus the average stock.

Growth likely won't remain at current robust levels forever, and Yeti's success has attracted new competition. But management's raised outlook for 2021 and the improving gross margin show that customers value Yeti's products.

Analysts expect the company to increase EPS by 20% annually over the next five years, which seems reasonable if it succeeds with international expansion and growth of its digital channel. It's for these reasons that I believe Yeti is showing staying power in a competitive market and could be a good long-term investment.