A a couple key catalysts have sparked its resurgence. First, as sales of its trademark coolers have slowed, its drinkware category has experienced robust growth. To put that into perspective, drinkware products -- including mugs, coolers, ramblers, wine tumblers, etc. -- grew by 24% last quarter compared to 10% for coolers.
As drinkware growth has out-paced cooler growth, it has become a much larger piece of the pie in terms of total revenue. For the six months ended June 30, 2018, drinkware accounted for roughly 50% of revenue. As of Q4, that percentage has inflated to nearly 65%.
The other significant driver has been YETI's strategy to emphasize its direct-to-consumer channel over the wholesale channel. Rewinding back to when the company went public in late October 2018, it reported in its IPO prospectus that net sales for its wholesale business tumbled by 40% due to inventory issues caused by retailers over-buying in 1H16. At that time, wholesale represented nearly 70% of total sales, which effectively gave outside retailers considerable control over YETI’s products, pricing, and inventory.
Since then, YETI has focused on building out its DTC channel, investing in its e-commerce capabilities, and bolstering its marketing. That strategy has paid off nicely: DTC sales have rocketed higher (+45% in Q4). The initiative has provided a lift to gross margin as well, up a whopping 690 basis points last quarter to 53%.
Heading into tomorrow's report, it seems investors are anticipating a continuation of these positive trends as shares have rallied by 15% over the past couple of weeks. Consequently, YETI has a high bar to hurdle and will likely need a convincing upside report to keep the momentum going, especially when considering its lofty 29x forward P/E.
What's Expected for Q1
Analysts are forecasting EPS and revenue of $0.02 and $143.2 mln, respectively, for the quarter. Gross margin is expected to decline to 46% from the 53% it achieved in Q4, which is attributable to seasonal factors as retailers stock up on inventory for the summer season and as the DTC channel slows from the seasonally strong fourth quarter.
YETI will also likely provide an updated outlook for the fiscal year in its earnings press release. In its Q4 report, YETI issued upside FY19 guidance, seeing EPS of $0.99-$1.04 vs. the prior $0.92 consensus, and revenue growth of 11.5-13.0%, equating to approximately $868.4-$880.0 mln vs. the former $869.7 mln expectation.
Currently, analysts are forecasting FY19 EPS and revenue of $1.00 and $878.04 mln.
Key Takeaways: YETI has thus far proven skeptics wrong, who believe its products (and its stock) are over-priced and that there are cheaper alternatives available. It's hard to argue with that logic, but similar to Canada Goose (GOOS), the company has built a large, loyal base of customers who are quite willing to pay up for its products.
The company has managed to offset slowing growth for its high-priced coolers by launching many new drinkware products over the past few quarters. This product innovation, combined with the company’s increased focus on its DTC channel, has generated strong quarterly results and has catapulted the stock sharply higher.
However, the question now facing YETI is whether this growth is sustainable, especially as it begins to lap more difficult yr/yr comparisons. With the strong results come heightened expectations from investors, some of whom may be itching to take profits given the significant gains and rich valuation.
Simply put, the risk-reward scenario is not nearly as appealing as it was several months ago, and YETI will need a very solid report to avoid a sell-the-news type of reaction tomorrow morning.