YETI forecasts Q4 revenue of $241.2 mln, comfortably ahead of the $226.4 mln consensus, representing year/year growth of 19%. Within this guidance, a couple of items really stand out. First, the anticipated solid results were almost entirely driven by the direct-to-consumer channel, which rose up 45% in the quarter to $110.5 mln (46% of revenue). Meanwhile, net sales in the wholesale segment struggled again, increasing by a modest 4% to $130.7 mln.
Last year, recall, YETI's financials and growth took a big hit because its sales to wholesale partners plummeted. For 2H17, net sales in the wholesale channel fell a whopping 40% due to an inventory issue that was created by retail partners over-buying in the first half of 2016. Given that YETI is lapping a very rough 2H17 in its wholesale segment, we would have expected to see a more material pick-up in growth in 4Q18.
Over the past couple of years, YETI has focused on diversifying its distribution channel, looking to become less reliant on its retailers. To put that into perspective, in 2015, about 90% of its sales were wholesale-based. That dropped down to about 67% over the first three quarters of 2018. Continuing the trend, in Q4, the wholesale channel accounted for just 54% of sales. While a more diversified approach certainly makes business sense, the speediness with which the re-alignment has taken place is a bit disconcerting because a key reason for the drop seems to be related to some weakness in that channel. This could be cause for some concern and is worth keeping an eye on in future quarters.
For FY18, YETI lifted its EPS guidance to $0.88-$0.90 from its prior outlook of $0.79-$0.82, and ahead of the $0.82 consensus estimate. On a growth basis, this would equate to an increase of 214-221%. Furthermore, YETI nudged its adjusted operating income margin higher to 15.7% from 15.2-15.5%, up sharply from 11.9% from last year. The improvement here goes hand-in-hand with the acceleration in growth from the higher-margin DTC channel.
Another positive is that YETI's Drinkware category products are resonating well with consumers as that product category saw a 24% jump in sales to $143.5 mln. YETI is mostly known for its sturdy and durable coolers, but drinkware and accessories have steadily become a larger piece of the pie for the company. Today, slightly more than half of the company’s sales are generated from drinkware.
Although slower growth for its core cooler products are part of the equation here in allowing drinkware to gain share, YETI has also been rather aggressive in terms of new product launches. Its strategy revolves around launching an anchor product first and then adding product expansions (new sizes, colors, accessories). For instance, in 2017, the company’s activities included expanding its drinkware line to new color options, launching its Hopper Two soft cooler, and adding new size and color variations for Hopper Flip coolers. The company believes that its product families, extensions, variations, and color schemes, in addition to new product launches, result in repeat purchases by existing customers and consistently attract new customers.
Investors are cheering YETI's upside outlook as Drinkware products and the DTC channel lead the way. But whether the company can continue to deliver this level of growth as growth for its cooler products decelerates and as its wholesale channel continues to struggle remains to be seen.