YETI Holdings, Inc. (NYSE:YETI) Q1 2024 Earnings Call Transcript

And we remain excited by the growth of our tabletop and barware offerings such as the beverage bucket and wine chiller. Coolers & Equipment sales increased 15% to $120 million. Both hard coolers and soft coolers posted growth for the period. We are excited to now have our full assortment of products available in the market, including in seasonal colors. And we continue to add to this product lineup with the recent innovation in hard coolers that Matt mentioned. While we do continue to expect to see some pressure on higher price point items as we go through this year, we believe we are in a strong position to win in coolers as we head into the peak summer months. Beyond coolers, we saw strong organic performance from our legacy YETI bags lineup, led by our Panga waterproof line and the expansion of our SideKick Dry Gear Case line.

The category also benefited from the inclusion of Mystery Ranch which was on plan for the quarter. From a channel perspective, direct-to-consumer sales grew 12% to $188 million, representing 55% of total sales, driven by growth in both Drinkware and C&E. Additionally, we drove solid growth across each of our DSC channels during the period, including e-commerce, corporate sales and Amazon. While still a relatively small contributor, we were also pleased with the growth of YETI Retail. As Matt mentioned, we are modestly accelerating our new store plans this year, as we look to expand our reach and provide more opportunities for consumers to experience the full breadth of our product assortment. Wholesale sales increased 13% to $154 million, driven by growth in both C&E and Drinkware.

Importantly, sell-through for both product categories was positive and our channel inventory levels remain in good position. Outside the U.S., sales grew 32% to $66 million, representing 19% of total sales, driven by outsized growth in Europe and Australia. The opportunity outside the United States remain significant as we look to drive brand awareness, expand our wholesale footprint and leverage our full set of D2C capabilities. Gross profit increased 22% to $196 million or 57.5% of sales compared to 53% in the same period last year. Positive drivers of this 450 basis point increase include 370 basis points from lower inbound freight and 190 basis points from lower product costs. These gains were partially offset by 60 basis points from higher customization costs given the continued growth of our custom business, 20 basis points from strategic price decreases on certain hard coolers that we implemented during the quarter and 30 basis points from all other impacts.

SG&A expenses for the quarter increased 13% to $157 million and remained flat at 45.9% of sales. Non-variable expenses increased 10 basis points as a percent of sales, offset by variable expenses decreasing 10 basis points as a percent of sales. Within non-variable, higher employee costs and marketing expenses were offset by lower warehousing costs. Operating income increased 82% to $40 million or 11.6% of sales, an increase of 440 basis points over the 7.2% that we reported in the prior year period. Net income increased 89% to $29 million or $0.34 per diluted share compared to $0.18 in the prior year period. Turning to our balance sheet. We ended the quarter with $174 million in cash compared to $168 million in the year ago period. The decline in cash on a sequential basis was driven by our accelerated share repurchase agreement, the acquisitions of Mystery Ranch and Butter Pat and the normal seasonality of our cash and working capital.

Inventory increased 5% year-over-year to $364 million. We expect year-end inventory to generally grow in the range of sales but there may be quarters this year, where it grows at a faster rate than sales as we build inventory ahead of new product launches. Total debt, excluding unamortized deferred financing fees and finance leases, was $81 million compared to $84 million at the end of last year’s first quarter. During the quarter, we made a principal payment of $1 million on our term loan. Now turning to our fiscal 2024 outlook. We continue to expect full year sales to increase between 7% and 9% compared to fiscal 2023’s adjusted net sales, inclusive of approximately 200 basis points of contribution from our 2 acquisitions. As we previously indicated, we expected a stronger growth rate in the first quarter.

Looking ahead, we continue to expect relatively balanced growth across the upcoming quarters, with Q2 plan slightly below our growth rate in the second half of this year. There are a number of compare dynamics to consider this year, including gift card redemptions which we will start to compare against in Q2. The largest impact from prior-year gift card redemptions will be in the second quarter, when we saw $12.5 million worth of redemptions in the prior-year quarter. We are reiterating our expectations for growth across channels, categories and geographies. By channel, we expect balanced growth between wholesale and D2C. By category, Coolers & Equipment is expected to outpace Drinkware, given both the return of our full soft cooler lineup and the incremental sales of Mystery Ranch products.

And we expect International growth of between 20% and 25% compared to Domestic growth in the mid-single-digit range. As a final comment on sales, consistent with last quarter, we continue to take a prudently conservative approach to how we plan the remainder of the year. Moving down the P&L. Supported by our strong performance in the first quarter, we are increasing our 2024 gross margin target to approximately 58% compared to our original target of approximately 57.5% and up from 56.9% last year. This increase is due to slight benefits across a number of drivers within our gross margin line versus one single factor. The ongoing recovery of inbound freight costs remains the largest driver of our year-over-year gross margin expansion this year but we do continue to see some offsetting rate pressure due to the Red Sea conflict.

From a phasing perspective, we expect margin expansion to start to ease in Q2 versus the significant increases we have seen over the past 4 quarters. As we move into the second half of the year, we expect to have largely comp the benefit of lower inbound freight costs. Thus, our gross margins in the second half will be much more in line with the prior year. But over the long term, we still see opportunities to continue to expand our gross margins through drivers such as sales mix, product cost savings and other supply chain efficiencies. With the increase in our gross margin outlook, we are also raising the high end of our operating income outlook. We now expect adjusted operating margin of between 16% and 16.5%, up from our prior outlook of approximately 16% and compared to 15.6% in fiscal 2023.

On a quarterly basis, we expect operating income growth to be roughly in line with sales growth. As we have discussed previously, we will continue to use a portion of our gross margin upside to incrementally invest in our business. These investment areas include our global expansion efforts, our D2C business and support for inorganic opportunities. Therefore, while full year SG&A is expected to grow at the high end of our sales range, the timing of investments may drive some variability in our SG&A growth rate on a quarter-to-quarter basis. More importantly, our focus is on delivering our top and bottom line outlook for the year and on driving top line growth over the long term. Below the operating line, we continue to expect an effective tax rate of approximately 25.3% for the year, slightly above the 24.8% rate in 2023.

As we disclosed in an 8-K filing, we entered into a $100 million accelerated share repurchase agreement during Q1. That contract fully executed as of April 22 and thus, we expect full year diluted shares outstanding of approximately 86.1 million. Due to this lower share count and raising the high end of our operating income range, we now expect adjusted earnings per diluted share to increase 11% to 16% to between $2.49 and $2.62 compared to $2.25 in fiscal 2023. As for cash, we continue to expect capital expenditures of approximately $60 million and free cash flow of between $100 million and $150 million this year. We will remain opportunistic going forward as we look to deploy cash between M&A and further share buybacks. As a reminder, we have $200 million remaining on our most recent share buyback authorization.

In summary, we were pleased with our first quarter execution. We delivered balanced top-line growth across the business, continue to improve our profitability, made progress on the integration of our recent acquisitions and delivered on key pieces of our capital allocation strategy. At the same time, we are mindful of the relative size of the first quarter and some ongoing uncertainties in the overall market. Thus, some caution continues to be reflected in our updated full year outlook. But we will also remain opportunistic as we go forward, making investments and taking actions that support our long-term growth ambitions and drive value to our shareholders. Now, I would like to turn the call back over to the operator to take your questions.

Operator: [Operator Instructions] At this time, we will take a question from Joe Altobello from Raymond James.

Unidentified Analyst: This is Martin [ph] on for Joe. Just wondering if we can get an update on overall demand trends, particularly on hard coolers? And just any explanation that might be driving them, whether it’s affordability, competition, saturation or sort of some combination of all of the above?