Stock Analysis & Ideas

Yeti Holdings: Strong Execution, but There are Risks

Story Highlights

YETI’s execution over the past few years has been phenomenal, leading the company to rapidly grow its presence and brand value in the outdoors industry. The company’s sales momentum remains robust, with certain growth prospects appearing very promising. However, investors must be wary of the stock’s seemingly humble valuation, as the company’s investment case does exhibit notable risks, especially regarding future profitability.

Based in Austin, Texas, Yeti Holdings (YETI) is an international designer, retailer, and distributor of innovative outdoor products. The company’s products range from coolers and drinkware to bags and apparel and are made to satisfy the unique and various needs of most outdoor pursuits.

The company’s products are known among outdoorsmen for delivering high-performance, durability, and reliability, resulting in YETI building a vigorous following of brand loyalists across the globe.

YETI’s management has been leveraging the benefits resulting from a strong brand value to quickly grow the company into something greater than merely a soft cooler company. In fact, YETI has evolved from developing products for two niche communities (fishing & hunting) in 2006 to 13 wider communities currently, expanding its total addressable market.

On the one hand, the company is likely to continue to grow rather rapidly as its brand awareness increases, especially at the international forefront. Further, entering Fiscal 2022, sales growth momentum remained robust, despite COVID-19 artificially boosting sales in the prior couple of years.

On the other hand, YETI’s products inherently have no moat. Basically, designing and manufacturing a very similar product and sticking a different logo is not that hard. After all, there’s nothing proprietary in the cooler business, no matter their admittedly high quality in YETI’s case.

The company’s sole competitive advantage is its brand value, which management has excelled at developing. Further, the company’s margins are easily compressible, while the valuation may not be as attractive as it looks.

Accordingly, I am neutral on the stock.

Growth Momentum Persists…

The COVID-19 pandemic was proven a positive catalyst for companies like YETI, as outdoor activity was boosted, especially during lockdowns. This was notable in YETI’s results, with the company achieving revenue growth of 29.4% in Fiscal 2021 compared to revenue growth of 19.5% in Fiscal 2020.

Naturally, investors expected either a material slowdown in sales growth or, even more likely, a decline in sales amid last year’s inflated results. Yet, YETI positively surprised the market in its Q1-2022 results, with sales growing 19% to $293.6 million. This is impressive, considering it compares against the prior year’s 42% growth.

Higher sales were driven by a 23% growth in the Direct-To-Consumer chunk of sales. Further, the Wholesale channel’s sales rose 14% to $137.7 million, powered by increased demand experienced by both coolers & equipment and drinkware.

It’s worth noting that internationally, sales grew 45% to 37.4 million. While international sales remain a tiny chunk of sales, this is the geographical segment the company believes has the strongest growth prospects in the near future. Thus, seeing a robust performance is undoubtedly encouraging as well.

…But Margins are Being Compressed 

However, there were some headwinds when it came to profitability. Gross profits increased by a much humbler 7% to $154.9 million, suggesting a gross margin of 52.7% compared to last year’s 58.6%.

The 590 bps decline compared to Q1 2021 was mainly driven by a 680 bps headwind from increased inbound freight costs. This was partially offset by some late trailing invoices from the company’s main freight forwarder, which led to a true-up that should have flowed through Q4 2021.

Logistics headwinds could ease going forward, leading to a decline in freight costs. However, this doesn’t appear to be the case thus far, with containership rates remaining at record levels.

This also highlights the weighty nature of YETI’s products, which comes with increased risks related to margins. For instance, increased commodities inflation that could raise production costs could also impact margins if the company runs out of pricing power.

For Fiscal 2022, management expects full-year sales to grow between 18% and 20% year-over-year. This suggests that growth is not expected to slow down throughout the rest of the year. However, due to the current headwinds in margins, consensus estimates foresee the company will achieve humbler growth in earnings per share of 12.9% to $2.90.

The Valuation 

Assuming YETI achieves earnings per share close to $2.90 in Fiscal 2022, the stock is currently trading at a forward P/E of 14.5. Assessing the valuation’s fairness is quite polarising. If YETI’s growth is sustained, this is obviously a very enticing multiple, especially if margins were to rebound, further boosting the bottom line.

However, it’s equally possible that production costs could increase in the ongoing inflationary environment. Further, consumers’ purchasing power could decline if the economy undergoes a recession, favoring YETI’s cheaper competitors that don’t charge a premium for their products.

The combination of a decline in sales and a compression in margins could adversely impact YETI’s profitability. Even if such a scenario materializes two or three years from now, it should still be reflected in today’s valuation. This is why the market may be cautious with YETI’s investment case, which would explain today’s seemingly humble valuation.

Wall Street’s Take

Turning to Wall Street, Yeti Holdings has a Moderate Buy consensus rating based on nine Buys and four Holds assigned in the past three months. At $71.92, the average Yeti Holdings price target implies 71.2% upside potential.

Takeaway

YETI’s execution over the past few years has been phenomenal, leading to the company growing its presence in the outdoors industry quite rapidly while building a powerful brand value. The company’s sales momentum remains robust, with the international division’s growth prospects appearing very promising.

However, with headwinds affecting margins likely to last, the possibility of consumers’ spending on premium products declining, and a lack of moat, YETI’s seemingly low multiple may not necessarily suggest that the stock is undervalued.

Disclosure

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