An old business adage says, "The most important sale is the next one." YETI Holdings's (YETI +7.27%) durable, long-lasting products have garnered incredible sales growth over the last several years, but that same durability may make the company's next sale elusive.
Built to last, unfortunately
YETI has done a remarkable job of branding something never branded before -- premium drinkware and coolers. Fishermen, hunters, campers, and outdoor adventurers are drawn to YETI's rugged products.
YETI's sales have grown at a compound annual rate of over 18% since 2015 . The company sold $350 million of cooler and equipment products and $447 million of drinkware in 2016. In 2021, those sales numbers jumped to $552 million for cooler and equipment and $832 million for drinkware .
Image source: Getty Images.
YETI has delivered the quality and durability that customers expect from their premium products. For instance, each cooler comes with a five-year warranty. In addition, one 2022 cooler review gave four of its top five durability ratings to YETI coolers. Meanwhile YETI's drinkware includes ramblers, water bottles, coffee mugs, jugs, and even wine tumblers. Each is made with stainless steel and comes with a three-year warranty. But these sturdy products pose a critical question: How long until customers need to buy another such offering from YETI?
Worse yet, that same long-lasting quality may have allowed the competition time to enter the market and steal new and replacement sales. For instance, one recent review by CNET tested different cooler categories for capacity, ice retention, mobility, and durability. YETI won only one of six categories. The reviewers concluded, "Everyone expects a Yeti cooler to perform well. But they also expect them to cost more than their competitors. I recommend keeping an eye on other brands we've come to respect that have a more palatable price tag."
YETI's premium coolers are some of the most expensive coolers on the market, typically costing around $300 to $400, with prices going as high as $1,500 . In CNET's roundup, prices for the five category winners outside YETI ranged from $80 to $350. In May of this year, another review by the New York Times made picks for six cooler categories. Although four YETI coolers earned honorable mention, they received no top picks.
Green light to yellow light?
Last quarter, YETI's sales increased a healthy 19%. Although that's impressive, it represented the slowest quarterly sales growth since the first two pandemic-plagued quarters of 2020 . YETI has also guided to 19% sales growth for the full year 2022. If the guidance holds up, that would represent the slowest annual sales growth since 2019 .
In addition, there is a growing chorus of business leaders warning of a recession resulting from high inflation, supply chain disruptions, and the conflict between Russia and Ukraine. If a recession plays out, customers may not be willing to spend top dollar on discretionary items like coolers and drinkware.
Like many companies fearing further supply chain issues, YETI has stocked up on inventory. At the end of the first quarter of 2022, YETI's inventory was at its highest level as a public company. The company went through inventory issues in 2016 , which caused sales to plummet 22% and EPS to fall 68% in 2017. A slowdown in sales this year could lead to costly write-downs and harm earnings.
These concerns by no means spell out an imminent demise for YETI. For instance, international sales could be a source of new customers. In 2021, sales outside the US grew an eye-popping 102% and 44% in the first quarter of 2022. At this point, though, international sales make up less than 13% of total sales.
The company deserves credit for its past growth. However, an economic slowdown, new competition, or market maturation could lead to a steep decline in revenue growth and earnings for both US and international markets. YETI stock is down 45% over the last six months , while the iShares S&P 500 Growth ETF is down only 19 % over the same time.
Investors may want to watch YETI's sales growth guidance in the coming quarters and years to see whether its products are just too good for its own good, and whether competitors are winning the race to catch up with its quality and undercut its pricing. If the company's future numbers do not compare favorably to sales growth in years past, YETI's success story may turn into a cautionary tale.
