Shares of outdoor-goods retailer Yeti (YETI -0.25%) have declined this year, even as the S&P 500 has risen about 4%. In total, as of market close on Monday, Yeti stock has fallen nearly 6% year to date. A large portion of this decline has been driven by one primary factor: voluntary product recalls. But is the recall-driven sell-off a buying opportunity? After all, this issue should prove to be only temporary.
Here's a look at both what's weighing on Yeti stock and why Wall Street may be overreacting to some recent bad news.
Why shares are down
New first broke of Yeti's planned voluntary recalls in a filing with the U.S. Securities and Exchange Commission (SEC) on Feb. 6. The retailer determined there was "a potential safety concern" regarding the magnet-lined closures of some of its products.
Recalls may have created more concern for investors when Yeti released its fourth-quarter results last week, as the report revealed the extent of the financial damage the company expects to endure from its voluntary recalls. Management reported that its fourth-quarter sales of $448 million were negatively impacted by a $38.4 million unfavorable impact from recalls (nearly 9% of total revenue). Furthermore, management's guidance for a growth rate in 2023 of 3% to 5% year over year is 500 basis points lower than it would be if the company wasn't recalling products.
Another factor likely weighing on the stock is that the company's fourth-quarter adjusted revenue came in slightly below analysts' expectations. However, the results were notably in line with management's guidance for the quarter.
A buying opportunity
While the financial impact of voluntary recalls on Yeti's business is real, it's still important to consider how well the company would be doing without recalls; this is likely a better way to assess the momentum of the company's brand, product innovation, and sales trends. Fourth-quarter sales, adjusted to exclude the impact of the product recall, rose 10% year over year. Looking to the company's guidance, management expects adjusted revenue to increase at a rate of between 8% and 10%. In other words, Yeti's sales momentum remains robust when excluding the impact of the recall.
Another reason to be upbeat about Yeti stock is the company's rosy outlook for its adjusted profitability. This is good news since the company faced some margin pressure in 2022 as it faced supply chain challenges. But those headwinds started easing in the fourth quarter. Looking to the rest of the year, management said it expects its adjusted gross margin to improve in the upcoming quarters.
"Gross margin tailwinds are expected to ramp throughout the year, as lower freight costs work through our inventory and flow through our income statement," said Yeti CEO Matt Reintjes in the fourth-quarter earnings release.
If you view this positive adjusted top-line and adjusted profitability momentum next to Yeti's price-to-earnings ratio of less than 20, the stock looks attractive. And if you're interested in the stock but have remained on the sidelines so far, you have another chance to consider buying some shares at a reasonable price.
