For consumer-goods companies, it's hard to create a business model that has wide profit margins. But it appears that Yeti Holdings (YETI 0.64%) didn't get the memo. The maker of rugged coolers, cups, and other outdoor gear had a gross profit margin of 48% in 2022. And that was actually a bad year by Yeti's standards.
Billionaire investor Warren Buffett has a lot to say about high-margin consumer-goods businesses (more on that in a moment). And just how good are Yeti's margins? Well, when it comes to high-margin businesses in the consumer-goods market, few have performed as well as Apple and Nike over the years. And yet, Yeti easily surpasses both companies.
Data source: YCharts. YETI gross profit margin
In my opinion, this one statistic warrants a closer examination of Yeti stock to see if it can beat the market from here.
Why Buffett could be a fan of Yeti
As a long-term investor, I'm concerned about businesses first, not stock prices. But how do you evaluate a business? Buffett once said: "The single-most important decision in evaluating a business is pricing power. If you've got the power to raise prices without losing business to a competitor, you've got a very good business."
Yeti most certainly has pricing power, as we'll see. In 2022, 59% of the company's sales came from the drinkware category: tumblers, mugs, water bottles, and more. And 38% of sales came from coolers and equipment: hard coolers, soft coolers, dry bags, backpacks, and more. The rest came from goods such as T-shirts and hats.
To be sure, Yeti makes high-quality merchandise. There are fun online videos of people failing to destroy its products despite their best efforts. However, these products are also pricey, as evidenced by the company's high gross margin -- there's a huge markup here. And that worries some investors because there are lower-priced comparable products on the market.
However, this hasn't been a problem for Yeti because it seems to have the pricing power that Buffett loves. Indeed, in 2022, the company's gross margin fell to 48% compared to 58% in 2021. But it's not because it was lowering prices. To the contrary, Yeti raised prices and still increased sales 13% year over year in 2022.
Rather, Yeti is taking a hit right now from a voluntary recall on one of its products. There's a cost to doing this, which does hit margins. But the company maintains it high-quality perception, which is important for maintaining pricing power. This narrowing of gross margin should prove temporary, and management expects it to widen to 55% in 2023. In summary, Yeti is a business with pricing power.
Can Yeti stock beat the market?
If Yeti has pricing power, will the stock outperform the market? Not necessarily. Investors can never take one business metric in isolation when building an investment thesis.
To beat the market over the next five years, I believe Yeti will need to grow substantially. One great growth driver for the company will likely be international expansion. Just 12% of revenue in 2022 came from outside the U.S., which is a smaller percentage than other popular consumer-discretionary brands. But this is a fast-growing part of the business, jumping 42% year over year in 2022.
Yeti doesn't have recurring revenue, so expansion into new markets and product lines won't necessarily drive growth unless it can maintain the business it already has. Without recurring revenue or regular repeat purchases, it's hard for investors to confidently predict sales in the future.
Some might point out that other companies with pricing power such as Apple and Nike face a similar issue. And that's technically true. But consumer-tech devices go through frequent upgrade cycles. And shoes wear out within a couple of years. Fans of the Apple or Nike brand could thus make purchases more frequently than fans of the Yeti brand, with its commitment "to making some of the most durable products on the planet."
Indeed, Yeti's high-quality products are great for consumers. However, even the biggest fans of the brand could go a long time without making repeat purchases because the products hold up so well. And that makes sales and future cash flows tough to predict as an investor.
In 2023, Yeti only expects 3% to 5% year-over-year sales growth. Beyond that, management is forecasting annual "double-digit" percentage growth. If it were to fall on the lower end of those anticipated ranges, the stock might not have enough growth to outperform the market, in my opinion.
In conclusion, the long-term outlook isn't quite inspiring enough for me. And I see its prospects as more unpredictable than what I like in an investment, preventing me from buying shares today.
