YETI Holdings, Inc. (YETI) Earnings Call Transcript & Summary

Good afternoon and welcome to the next session of the Goldman Sachs Global Retailing Conference. My name is Alex Walvis. I cover the discretionary brands and the apparel retailers here at GS. I'm very pleased to welcome the team at YETI for our next session. I'm joined by Matthew Reintjes, President and CEO; by Paul Carbone, SVP and CFO; and by Tom Shaw, Head of Investor Relations. Thank you all so much for joining us.

We're going to start with a high-level question. Matt, YETI operates in the outdoor market. And that market has recently seen a real acceleration in growth. Can you talk about how sustainable you think that elevated demand level is? And what strategies YETI is doing to participate in that growth and really stand out as a brand?

Yes. Thanks, Alex, and thanks for having us. We're excited to be here and always excited to talk about YETI and the dynamic things that are happening in the market today. I think one of the things maybe to contextualize a little bit for us as we think about the macro commentary right now around the outdoor market and the active and getting outside in this backdrop of the pandemic is we really look at this as a continuation and a little bit of an elevation of what we've seen from our very beginning. The growth in -- and identification of pursuits and being active and being outdoors and both the activities outdoors and the fitness benefits and the health benefits of being outdoors. So we tend to look at what's happening right now as really the market catching up from an awareness perspective of what had been happening, and the trend that had been happening. We look back and we talk about trends like Van Life and Glamping, watching all of those things build in addition to the core pursuits of fishing and climbing and boating, all of those things are continuations of what we've seen. So we really like it. We don't look at it as a moment in time. While we all hope that pandemic is a moment in time type event, we actually look at the evolution in the market and what's happening in the market as really an acceleration and continuation of YETI and YETI's relevance. So when we think about our products being what we would call pursuit-agnostic, different than somebody picking up a new activity in this moment in time, our coolers, whether they're used for small backyard family gatherings right now or whether they're used for fishing or they're used to go to the beach or they're used just to go to your local park, that same product works in all those environments. And so we really like the sustainability of the awareness and the sustainability of the trend that we're seeing right now.

And part of the success is, of course, the strength of the brand. And as you expand into being that more holistic lifestyle brand, can you talk to us about how we should think about relevant product expansions, increasing the number of touch points the YETI brand can have with consumers. And perhaps you can also share your thoughts on how important newness is in maintaining customer relationships?

Yes. There's a lot of things in that question. I would say, it all starts with product. That's our origin story. And so product focus and product expansion is an important part of YETI's story. But if you think all the way back, for our first 8 years in our history, starting in 2006 to 2014, we sold one product, which was our hard cooler and we kept telling the consumer about it. We kept building the brand. We built this momentum. And then in 2014, introduced soft coolers and Drinkware, which then expanded, the use cases expanded, the market opportunity expanded the consumers that we could address. We're taking that same mindset as we build out this product portfolio and wanting to continue to drive consumer-focused customer engagement through innovation. And sometimes, that innovation is just reintroducing them or reintroducing people to products that they haven't considered in a while. So the same Tundra 45, which is one of our top-selling hard coolers that we launched in 2008, we still get reviews in magazines today as if it's a new product. And part of that just shifts the longevity of what we do. And then we add on top of that, innovation. As we think about touch points with the consumer, we're at a moment in time where it's evolving pretty rapidly. We've been on a journey, what we call our omnichannel journey with a heavy focus on digital over the last 5 years and have built what we believe is a very strong D2C and wholesale balanced business. Our D2C business is a higher growth business than our wholesale business today. But the importance of that omnichannel and being where the consumer shops win the consumer shopping. And I think there's never been a more obvious time than in this pandemic period where you're seeing consumer buying behavior shift, you're seeing the channels they buying shift. We're seeing our wholesale partners rapidly evolve to making sure that their e-tail business is relevant, while we're also building out our direct-to-consumer business. So those touch points with the consumer from a buying, I think, is really important. The other important thing, and we really highlighted this through the pandemic is the touch point of brand and how we build a digital brand and how we digitally engage consumers, whether that's through original content, whether that's through product marketing and brand marketing. And so we've been probably our most innovative with our marketing and branding over the last 4 to 6 months than maybe we have in the last 10 years in finding new ways to engage the consumer in between purchases and also keep the brand and the product top of mind.

Let's talk about some of those initiatives. You've done -- you've had a long history of unique marketing. And indeed, recently, you've had a lot of new initiatives [indiscernible] solution in the marketing strategy and what's really working?

Yes. There's a few things. One of the things -- at different points in time, we've highlighted brand storytelling versus product storytelling, and other times, we highlight product storytelling versus brand. Over the last 6 months, we really tried to find that balance between the 2 and almost meld them so that our product storytelling has become very brand-oriented and brand-focused. I'll give an example of a couple of things. Recently, we launched a new 10-ounce cup. And when we looked at that cup, we saw the relevance of using it for both in the morning with coffee, and in the evenings, for cocktails. So we launched this caffeine and cocktails program, leveraging our ambassadors. So highly relevant people who are the top of the game and what they do in their pursuit, talking about what their morning coffee rituals were or their evening cocktail ritual was, and our product was central to that. It wasn't an overt product ad, but it was to really balance that credibility of our ambassador, a little bit of the human connection of everyone stuck at home right now trying to find their enjoyment in their pursuit, and then highlighting a new product. So we did a deal with Live Nation, with Crew Nation in their -- to try and help provide some relief for the roadies that are out of work. We tied it in with the launch of our new Roadie cooler. This was a concept that came up during the pandemic. Our team came to us and said, we do some things in the live music world. Roadies are really hurting. We're launching a new entry price point hard cooler that we call a Roadie. What could we do together? We reached out to Live Nation and had some great conversations, created this One-for-the-Roadies campaign, which we sent one of our coolers to about 40 different high-profile artists, who then -- musicians, who then designed a cooler and then we auctioned them off. We raised about $135,000 for Crew Nation's kind of relief fund for all the people who are out of work that are part of live event world. So those kind of things are just ways that the brand has found its relevance amidst a really challenging time.

Very clear. Now I do want to talk a little bit about some of the current transitions in the business over the last few months. You've shown very strong revenue growth relative to many other companies in the space, and you pointed to some -- an attractive outlook. Can you discuss the drivers of that, perhaps also discussing the trends across product categories and channels?

Yes. From a revenue growth perspective, one of the things that with the disruption in late March and early April with the pandemic and the unknowns of what was going to be, we like a lot of businesses said, we need to protect the business, first and foremost for the unknowns. And so we made sure that we were in a strong cash position that we protected the balance sheet and that we protected the brand. And we decided very early on that we're not going to duck and cover that we're actually going to lean into the opportunities that the disruption provides, that everyone is working from home, stores are shut down, some of the other recreational outlets were shut down, how do we create an engaging brand experience. On top of that -- so in addition to doing that, we said we're going to continue to launch new products, and we're going to continue to put new innovation, whether that's colorways, form factors, product expansions in front of the consumer in engaging ways and keep the brand top of mind. And I think, for us, from a revenue driver, that innovation pipeline and the innovation, both from a product perspective but in innovation on how we do our product marketing, have been the biggest drivers and biggest contributors. And it's why we're focused on driving productivity at our wholesale accounts versus being a price-driven or a rooftop addition to drive revenue-focused business. And then really being focused on the D2C business and how do we directly engage the consumer.

Are you at all concerned that some of the recently strong demand represents a pull-forward? What confidence do you have that, that could continue?

Yes. I think, for us, in -- we spend a lot of time with other outdoor brands and brands across the sector. And so we've got a pretty good feel on what's happening out there. I would say where we're in a little different situation is that our momentum was strong going into the pandemic disruption. So what we've seen is a continued pull-through of strong demand that we saw pre-pandemic. So I wouldn't call it as smart as the kind of spiky-type demand that you would see if there was a moment in time. We think it's as much an elevation of awareness of getting outdoors, being active. The other thing is you think about our products, unlike some things where, because of the disruption, you may go try something for the first time. In our case, your cold drinks are cold drinks and cold beer is cold beer. And whether that's in a cooler in your backyard or a cooler at the park or a cooler on the boat or a cooler out in the woods or on the beach, it's really that product can move with you. And the same for our Drinkware. So we don't look at ours as much of a moment in time kind of spike of interest in the category. We actually look at it as really just the continued evolution of the activity that's happening or that had been happening and the demand we've created for the brand.

With all the disruption, with all the uncertainty, and in fact, with all the -- some of the strength that we've seen in your category and we've heard a lot about [indiscernible] disruptions, delays in getting product [indiscernible] centers and into stores. Can you talk a little bit about your business? Are you seeing any delays? And should demand continue to be strong, do you have [indiscernible] to service that?

Yes. So maybe I'll take the front end of that and then let Paul talk a little bit about how we're managing the supply chain and inventory. And I'll frame it up in that -- when we went from really strong growth in the first 11 weeks of Q1 to a pretty quick shutdown in the back half of March going into April, we made some decisions, as I said, to protect the balance sheet, protect the inventory, manage cash and protect the brand. And that had -- we went back to our supply chain and said, we don't know what the future at that time is going to look like. So let's be really prudent in how we manage inventory, let's be prudent with how we manage our inventory, let's be prudent with how we manage the channel inventory, our wholesale channel inventory, and make sure we don't get our suppliers or us into a situation if there was a prolonged decline. We were fortunate, as we talked about in Q2, that we didn't see that. But then you have to turn your supply team back on. And that's really where we are right now, which is, as we said on our Q2 call, we're really flexing our supply chain to follow the demand signals that we're seeing. And we'll continue to build in that or build into that as we go through the rest of 2020.

I think I would add -- thanks, Matt. I would add, we were fortunate in the sense of we exited Q1, plus 23% inventory. And I think, Alex, as you remember, starting in Q2 of 2019, we started to build inventory in advance of tariffs. So we ended Q2 of '19, plus 21%; and then Q3 of '19, plus 33%; and then Q4 at plus 28%; and as I said, Q1 of '20 at plus 23%. Coming into the end of June or the end of the second quarter, we did exit the quarter down 23% on inventory, so over a big rollover of plus 21% from the prior year, but we were down. And what we've said is, as Matt mentioned just now as well, reflexing our supply chain, reflexing that capacity to deliver and meet demand, we do expect inventory to end down for the year. And again, because we're rolling over big increases over last year. And then as we go through '21, it will normalize and begin to grow. As I often say, as a CFO, a little bit less than sales preferably, but it will continue to grow as we're growing the top line.

Super clear. I want to talk a little bit about the wholesale channel. Can you talk a little bit about end market demand? Contrast that to perhaps what you're seeing in terms of sell in? And when we could expect those two to recover?

Yes. So I can start and talk about certainly what we saw in Q2. And this is one of the great things. As we talked about in August, through all the disruption in the wholesale channel in the second quarter, sell-through or consumer demand was positive, which was fantastic. So where the customer can access the brand, and clearly, on our DTC channel, we were plus 61% for the quarter. So where the consumer can access the brand, there is clear demand for the brand. So we really like that. They ended the quarter. We -- our wholesale in the second quarter was minus 24%. So obviously, with a positive sell-through and a negative sell-in, they work down a lot of their inventory as they were doing the same thing as Matt talked about us doing and managing and protecting the balance sheet. We continue to like what we're seeing for demand. But most importantly, what I would say is we're very cognizant of making sure we don't have this bubble sell-in, right? And we know what that looks like of too much inventory in the channel. So we're very cognizant of balancing that as we continue to go through post second quarter. We're allocating inventory appropriately across our channels and feel very good about the way the inventory, as we just talked about, is playing out into the back half of the year.

One of the big initiatives in the wholesale channel recently has been the expansion of distribution to the Lowe's. Could you update us on that partnership?

Yes. I think when we -- and we'll lean a bit on our Q2 comments, Lowe's has been a great partner. We've learned a lot as we've evolved that over a little more than a year that we've been in conversation with them, and obviously, started that relationship live late 2019. So like many of our wholesale partners, we look for people that are going to be highly engaged with us. They're going to test into the relationship as far as what works in their stores and their footprint, what works as far as it relates to location and assortment. And I would say Lowe's is no exception in that, and they've been a strong and consistent partner as far as how do we continue to maximize the opportunity for intersecting with the consumer in that shopping occasion, which, as we said at the beginning, our thesis in opening up new wholesale really comes down to 1 of 3 things or a combination of 3 things, which is, is it a relatively unique consumer, a relatively unique buying occasion or does it augment or support our existing wholesale. And we think Lowe's checks some of those boxes and that it provides a relatively different buying occasion than we have with the rest of our wholesale. It gives us a chance to intersect with some consumers that we may not be naturally intersecting with the rest of our wholesale. And we think it strengthens our overall wholesale portfolio.

So as I pull together some of those things, the trends we're seeing in current wholesale partners, the new additions, perhaps potential additions going forward. How should we think about the growth potential of the U.S., and indeed, the total wholesale channel going forward?

Yes. I would say there are definitely addition opportunities out there. We talked about it in the past. We are very thoughtful about how we bring on wholesale partners. We've been in a mode for the last 5 years of kind of rightsizing our wholesale footprint to make sure that we're supporting and building strength in our existing wholesale and making sure the wholesale partners that aren't right for the brand long term don't stay in the pool of wholesale partners. We have been -- it's been a long time since we've fully rolled out a national partner. The last end-to-end national partner we rolled out was in 2012 with DICK's Sporting Goods. So we take these steps in with new wholesale partners very thoughtfully. And we look for them to join in kind of the growth of the business to not be a disruptive force, either for just moving demand around or creating kind of spikes or bubbles in our business. So we've said in the very beginning, we're going to be thoughtful with how we roll those out and how we time that. But we like all of our wholesale partnerships today.