YETI Holdings, Inc. - Quarter Report: 2018 September (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 29, 2018

OR

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to           

Commission file number 001‑38713

YETI Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

7601 Southwest Parkway
Austin, Texas 78735

(Address of principal executive offices)
(Zip Code)

(512) 394‑9384

(Registrant’s telephone number, including area code)

Unchanged

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☐  No  ☒

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and such files). Yes  ☒  No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes  ☐  No  ☒.

There were 84,196,079 shares of Common Stock ($0.01 par value) outstanding as of December 6, 2018.

 

 

 

FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains ‘‘forward-looking statements’’ within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical or current fact included in this Quarterly Report on Form 10-Q are forward-looking statements.  Forward-looking statements include statements containing words such as “anticipate,” “assume,” “believe,” “can,” “have,” “contemplate,” “continue,” “could,” “design,” “due,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “likely,” “may,” “might,” “objective,” “plan,” “predict,” “project,” “potential,” “seek,” “should,” “target,” “will,” “would,” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operational performance or other events. For example, all statements made relating to growth strategies, the estimated and projected costs, expenditures, and growth rates, plans and objectives for future operations, growth, or initiatives, or strategies are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that are expected and, therefore, you should not unduly rely on such statements. The risks and uncertainties that could cause actual results to differ materially from those expressed or implied by these forward-looking statements include but are not limited to:

 

These forward-looking statements are made based upon detailed assumptions and reflect management’s current expectations and beliefs. While we believe that these assumptions underlying the forward-looking statements are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect actual results.

   

The forward-looking statements included herein are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events, or otherwise, except as required by law.

Table of Contents

 

 

 

PART I – FINANCIAL INFORMATION

Item 1.   Financial Statements.

YETI Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except per share data)

 

 

See accompanying notes to the unaudited consolidated financial statements

YETI Holdings, Inc. and Subsidiaries

Condensed Consolidated Income Statements

(Unaudited)

(In thousands, except per share data)

 

See accompanying notes to the unaudited consolidated financial statements

YETI Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(in thousands)

 

 

See accompanying notes to the unaudited consolidated financial statements

YETI Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Deficit

(Unaudited)

(In thousands)

 

See accompanying notes to the unaudited consolidated financial statements

YETI Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

See accompanying notes to the unaudited consolidated financial statements

YETI Holdings, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1—Organization and Significant Accounting Policies

Organization and Business

YETI Holdings, Inc. acquired the operations of YETI Coolers, LLC (“YETI Coolers”) on June 15, 2012. We are headquartered in Austin, Texas, and are a designer, marketer, and distributor of premium products for the outdoor and recreation market which are sold under the YETI® brand. We sell our products to independent retailers and national accounts across a wide variety of end user markets as well as through our direct‑to‑consumer channel (“DTC”), primarily our e‑commerce presence.

In addition to YETI Coolers, YETI Australia Pty Ltd, YETI Canada Limited, YETI Hong Kong Limited, and YETI Outdoor Products Company Limited were established and consolidated as wholly‑owned foreign entities in January 2017, February 2017, March 2017, and June 2017, respectively. Furthermore, YETI’s exclusive customization partner, Rambler On was previously consolidated as a VIE since August 2016, and on May 15, 2017, YETI Custom Drinkware, LLC (“YCD”) acquired the assets and liabilities of Rambler On. We consolidate YCD as a wholly‑owned subsidiary.

The terms “we,” “us,” “our,” and “the Company” as used herein and unless otherwise stated or indicated by context, refer to YETI Holdings, Inc. and its subsidiaries.

Initial Public Offering

On October 24, 2018, the Company completed its initial public offering (the "IPO") of 16,000,000 shares of our common stock, including 2,500,000 shares of our common stock sold by the Company and 13,500,000 shares of our common stock sold by selling stockholders. The underwriters were also granted an option to purchase up to an additional 2,400,000 shares from the selling stockholders, at the public offering price, less the underwriting discount, for 30 days after October 24, 2018. The shares were sold at the IPO price of $18.00 per share for net proceeds of $42.4 million to the Company, after deducting underwriting discounts and commissions of $2.6 million. The Company did not receive any proceeds from the sale of shares of common stock by the selling stockholders. Additionally, offering costs incurred by the Company are expected to total approximately $4.4 million.

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and do not include all of the information and notes required for complete financial statements. These financial statements should be read in conjunction with our most recent annual audited consolidated financial statements for the year ended December 30, 2017 included in the prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933 with the United States Securities and Exchange Commission on October 25, 2018 (the “Final Prospectus”). In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary to fairly present the consolidated financial position, results of operations and cash flows for the interim periods presented. Operating results for the three and nine months ended September 29, 2018 are not necessarily indicative of results that may be expected for any other interim period or for the year ending December 29, 2018.

The unaudited consolidated financial statements include our accounts and those of our wholly owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.

We operate on a “52‑53 week” fiscal year ending on the Saturday closest in proximity to December 31, such that each quarterly period will be 13 weeks in length, except during a 53‑week year when the fourth quarter will be 14 weeks. The unaudited consolidated financial results represent the three and nine months ended September 29, 2018 and September 30, 2017.

Stock Split

On October 12, 2018, the Company effected a 0.397-for-1 reverse stock split of all outstanding shares of the Company’s common stock. All share and per share information presented in the condensed consolidated financial statements and accompanying footnotes has been retroactively adjusted for all periods presented for the effects of the stock split.

Fair Value of Financial Instruments

For financial assets and liabilities recorded at fair value on a recurring or non‑recurring basis, fair value is the price we would receive to sell an asset, or pay to transfer a liability, in an orderly transaction with a market participant at the measurement date. In the absence of such data, fair value is estimated using internal information consistent with what market participants would use in a hypothetical transaction. In determining fair value, observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions; preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:

 

Our financial instruments consist principally of cash, accounts receivable, accounts payable, and bank indebtedness. The carrying amount of cash, accounts receivable, and accounts payable, approximates fair value due to the short‑term maturity of these instruments. The carrying amount of our long‑term bank indebtedness approximates fair value based on Level 2 inputs since the Credit Facility (as defined below) carries a variable interest rate that is based on London Interbank Offered Rate (“LIBOR”).

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014‑09, “Revenue from Contracts with Customers: (Topic 606).” The new guidance establishes a single comprehensive model for entities to use in accounting for revenue and supersedes the most current revenue recognition guidance. It introduces a five-step process for revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards under current guidance. It also requires significantly expanded disclosures regarding revenues.  We have begun a detailed evaluation of the impact of our adoption of ASU 2014-09; however, given the nature of our business, we do not believe there will be a material impact in how or when revenue is recorded and that the impacts will primarily be related to increased disclosures. We do expect the adoption and consequent changes to our procedures and methodologies to require adjustments to our internal controls over financial reporting. As interpretations of the new rules continue to evolve, we will continue to monitor developments and expect to finalize our conclusions in the fourth quarter of 2018.  We plan to adopt this standard in the first quarter of 2019.  Providing we ultimately conclude that the impacts of adoption are immaterial, we would expect to use the modified retrospective method. Under this method, we would recognize the cumulative effect of the changes in retained earnings at the date of adoption but would not restate prior years.

On July 2018, the FASB issued ASU No. 2018‑11, “Leases—Targeted Improvements.” The standard is effective for interim and annual reporting periods beginning after December 15, 2018. Under ASU 2018‑11, adopters may take a prospective approach, rather than a retrospective approach as initially prescribed, when transitioning to ASU 2016‑02. The most significant impact of ASU 2018‑11 is relief in the comparative reporting requirements for initial adoption. Instead of recording the cumulative impact of all comparative reporting periods presented within opening retained earnings of the earliest period presented, we will now assess the facts and circumstances of all leasing contracts as of December 29, 2019, the beginning of our fiscal 2020. For lessors, ASU 2018‑11 adds an optional practical expedient permitting lessors, under certain circumstances, not to separate the lease and non‑lease components by class of underlying assets, but rather to account for them as a single combined component, and further clarifies the accounting treatment for such a combined component. We are in the process of evaluating the effect the guidance will have on our existing accounting policies and

the consolidated financial statements, but we expect there will be an increase in assets and liabilities on the consolidated balance sheets at adoption due to the recording of right‑of‑use assets and corresponding lease liabilities, which may be material.

 

Note 2—Share Data

The number of common shares outstanding totaled 81.1 million and 81.5 million at September 29, 2018 and December 30, 2017, respectively. Basic income per share is computed by dividing income available to common stockholders by the weighted‑average number of common shares outstanding during the period. Diluted income per share includes the additional effect of all potentially dilutive securities, which includes dilutive share options granted under stock‑based compensation plans.

A reconciliation of shares for basic and diluted net income per share is set forth below (in thousands, except per share data):

 

Effects of potentially dilutive securities are presented only in periods in which they are dilutive. Stock options representing 0.1 million and 0.2 million shares of common stock were outstanding for both the three and nine months ended September 29, 2018 and September 30, 2017, respectively, but were excluded from the computation of diluted earnings per share as their effect would be anti‑dilutive.

On May 17, 2016, our Board of Directors approved a dividend. In connection with the dividend, pursuant to anti‑dilution provisions in the 2012 Equity and Performance Incentive Plan (as amended and restated June 20, 2018), the “2012 Plan”, the option strike price on outstanding options was reduced by the lesser of 70% of the original strike price or the per share amount of the dividend. Any difference between the reduction in strike price and dividend was paid in cash immediately for vested options. For holders of unvested options as of May 17, 2016, we will pay a dividend which accrues over the requisite service period as the options vest. We paid $2.4 million and $2.7 million to vested option holders in the three months ended September 29, 2018 and September 30, 2017, respectively. We paid $2.5 million and $2.8 million to vested option holders in the nine months ended September 29, 2018 and September 30, 2017, respectively. We will pay the remaining $0.6 million of the original $7.9 million to holders of unvested options in fiscal year 2019. At September 29, 2018, $0.1 million was accrued. The payment of future dividends is subject to restrictions under the Credit Facility we entered into in May 2016 with certain lenders and Bank of America, N.A., as administrative agent, as amended, which we refer to as the “Credit Facility.”

 

Note 3—Repurchase of Common Stock

On March 5, 2018, we purchased 0.4 million shares of our common stock at $4.95 per share from one of our stockholders. The purchase price was below our current market value and did not trigger the requirements of ASC 505‑30‑20‑2, “Allocation of Repurchase Price to Other Elements of the Repurchase Transaction.” We accounted for this purchase using the par value method, and subsequently retired these shares.

 

Note 4—Property and Equipment

Property and equipment consisted of the following (in thousands):

 

For the three months ended September 29, 2018 and September 30, 2017, depreciation expense totaled $5.0 million and $4.6 million, respectively. Depreciation expense totaled $14.3 million and $11.1 million for the nine months ended September 29, 2018 and September 30, 2017, respectively.

 

Note 5—Intangible Assets

The following is a summary of our intangible assets as of September 29, 2018 (in thousands):

 

The following is a summary of our intangible assets as of December 30, 2017 (in thousands):

 

For the three months ended September 29, 2018 and September 30, 2017, amortization expense totaled $1.4 million and $1.2 million, respectively. Amortization expense totaled $3.9 million and $4.1 million for the nine months ended September 29, 2018 and 2017, respectively.

In February 2017, a binding settlement was reached in the United States District Court related to lawsuits brought by the Company against RTIC Coolers. Under the terms of the agreement, RTIC Coolers was required to make a financial payment to the Company; to cease sales of all products subject to the lawsuit—this includes hard‑sided coolers, soft‑sided

coolers, and Drinkware; and to redesign all products in question. In accordance with our policy on intangible assets, amounts received under the settlement agreement were credited against the carrying value of the related intangible asset.

 

Note 6—Long‑term Debt

Long‑term debt consisted of the following (dollars in thousands):

 

Per the terms of the Rambler On purchase agreement (see Note 9), the Company issued Rambler On an unsecured promissory note on May 16, 2017 for the principal amount of $3.0 million with a term of two years (payable 50% on the first anniversary and 50% on the second anniversary with 5% interest). As of September 29, 2018, we had $1.5 million outstanding and classified as short‑term debt.

 

As of September 29, 2018, we had issued $20.0 million in letters of credit with a 4.0% annual fee to supplement our supply chain finance program. While our issuance of letters of credit does not increase our borrowings outstanding under our revolving credit facility, it does reduce the amount available.

As of September 29, 2018, we were in compliance with all covenants under the Credit Facility, which governs our term loan A and term loan B.

Note 7—Income Taxes

Income tax expense was $3.1 million and $5.2 million for the three months ended September 29, 2018 and September 30, 2017, respectively. The effective tax rate for the three months ended September 29, 2018 was 16% compared to 32% for the three months ended September 30, 2017. The decrease in income tax expense and the effective tax rate was primarily due to the reduction in the U.S. corporate income tax rate from 35% to 21%, enacted as part of the Tax Cuts and Jobs Act (“the Act”), and the revaluation of deferred tax assets for state income taxes.

Income tax expense was $7.2 million for the nine months ended September 29, 2018 compared to $6.0 million for the nine months ended September 30, 2017.  The increase in income tax expense is due to higher income before income taxes. The effective tax rate for the nine months ended September 29, 2018 was 18% compared to 34% for the nine months ended September 30, 2017.  The decrease in the effective tax rate was primarily due to the reduction in the U.S. corporate income tax rate from 35% to 21%, enacted as part of the Act, and the revaluation of deferred tax assets for state income taxes.

For interim periods, our income tax expense and resulting effective tax rate are based upon an estimated annual effective tax rate adjusted for the effects of items required to be treated as discrete to the period, including changes in tax laws, changes in estimated exposures for uncertain tax positions, and other items. We considered the provisions of the Act in calculating the estimated annual effective tax rate.

 

Note 8—Stock‑Based Compensation

We have an incentive plan, the 2012 Plan, which provides for up to 8.8 million shares of authorized stock to be awarded as stock options, in the form of incentive stock options or nonqualified stock options, or restricted stock units

(“RSUs”). The exercise price of options granted under the 2012 Plan is equal to the estimated fair market value of our common stock at the date of grant. The fair value of RSUs granted under the plan is equal to the estimated fair market value of our common stock on the date of grant. Forfeitures are recorded as they occur, and compensation expense previously recognized for an award that was forfeited is reversed in the period of the forfeiture.

We estimate the fair value of stock options on the date of grant using a Black‑Scholes option‑pricing valuation model, which uses the expected option term, stock price volatility, and the risk‑free interest rate. At the time that the outstanding awards were granted, there was no active market for our common shares, and as such, volatility was estimated in accordance with Accounting Standards Codification 718 Compensation—Stock Compensation (“ASC 718”), using the historical closing values of comparable publicly held entities. The expected option term assumption reflects the period for which we believe the option will remain outstanding. This assumption is based upon the historical and expected behavior of our employees and may vary based upon the behavior of different groups of employees. The risk‑free interest rate reflects the U.S. Treasury yield curve for a similar instrument with the same expected term in effect at the time of the grant.

On June 20 and 29, 2018, our Board of Directors approved the grant of an aggregate of 1,407,583 RSUs to various employees and directors, which approvals became effective on June 23 and July 2, 2018, respectively. Of the aggregate RSUs approved on June 20 and 29, 2018, 9,160 RSUs were cancelled prior to issuance. On August 22, 2018 our Board of Directors approved the grant of 27,480 RSUs to one employee, which approval became effective on August 25, 2018. As of September 29, 2018, 1,425,903 RSUs had been granted, 1,410,718 RSUs were outstanding, and 15,185 had been forfeited under the 2012 Plan. The RSUs vest upon the occurrence of a change of control and the achievement of certain EBITDA targets for calendar years 2018 and 2019, provided that if a change of control occurs prior to the date on which our Board of Directors certifies that the applicable EBITDA target has been achieved, all RSUs that have not already been forfeited will become nonforfeitable and shares of our common stock will be delivered to the applicable grantee within 30 days of the RSUs becoming nonforfeitable. 385,241 of those RSUs were granted as replacement awards in exchange for 104,411 out‑of‑the‑money stock options which were cancelled. The concurrent cancellation and replacement was a modification for accounting purposes, which GAAP requires continued recognition of the cancelled awards’ fair value plus the recognition of the new awards’ fair value for any awards likely to vest. Any incremental compensation cost resulting from the modification will not be recognized prior to the consummation of a change in control as GAAP deems satisfaction of a change in control contingency to be unlikely.

 

We recognized $2.9 million and $2.7 million for the three months ended September 29, 2018 and September 30, 2017, respectively, of compensation expense in the accompanying consolidated statements of operations. For the nine months ended September 29, 2018 and September 30, 2017 we recognized $10.0 million and $9.2 million, respectively, of compensation expense in the accompanying consolidated statements of operations. As of September 29, 2018, total unrecognized compensation expense for unvested options totaled $9.8 million, and will be recognized over the next three years. As of September 29, 2018, total unrecognized compensation expense for unvested RSUs totaled $44.8 million, and will be recognized upon consummation of a change in control.

 

Note 9—Variable Interest Entities and Acquisition of Assets and Liabilities

In July 2016, we entered into a secured promissory note with our exclusive Drinkware customization partner, Rambler On, to assist them with the acquisition of new equipment as they expanded their operations. Under the terms of the note, we advanced to Rambler On up to $7.0 million for the acquisition of new equipment. The advancement period of the note ran through May 2017, at which time the note balance would convert to a 5 year note with principal and interest due monthly. The note accrued interest at 5.0%, was scheduled to mature in July 2022, and was secured by all the assets of Rambler On.

Additionally, in November 2016, we converted a portion of our accounts receivable from Rambler On’s account receivable into a secured promissory note of $7.7 million. This note accrued interest at 5.0% with interest payments due monthly. The secured promissory note was scheduled to mature in November 2017.

In 2016, we determined we held a variable interest in Rambler On based on our assessment that Rambler On did not have sufficient resources to carry out its principal activities without our support. We examined specific criteria and

determined that we are the primary beneficiary of the VIE and therefore were required to consolidate Rambler On; however, we had no obligation to provide financial support to Rambler On.

On May 16, 2017, an agreement was entered into by Rambler On and YCD, whereby YCD acquired substantially all assets and liabilities of Rambler On for $6.0 million. We paid the consideration for the acquisition by making a cash payment to Rambler On of $2.0 million on the closing in May 2017 and subsequently paying $0.9 million following the determination of the final assets sold as part of the acquisition in October 2017. In addition, we issued a promissory note to Rambler On for a principal amount of $3.0 million with a two‑year term and bearing interest at 5% per annum, payable in two equal installments on May 16, 2018 and May 16, 2019. As part of the acquisition, all of the notes outstanding prior to May 16, 2017 between the Company and Rambler On were forgiven.

We consolidated Rambler On effective August 1, 2016, and YCD effective May 16, 2017; therefore, the financial results of Rambler On and YCD have been included in our consolidated financial statements since those dates. All intercompany balances have been eliminated since fiscal year-end 2016.

 

Note 10—Related‑Party Agreements

We have entered into a management services agreement with Cortec Group Fund V, L.P. and its affiliates (“Cortec”), our majority stockholder, that provides for a management fee to be based on 1.0% of total sales, not to exceed $0.8 million annually, plus certain out‑of‑pocket expenses. During each of the nine months ended September 29, 2018 and September 30, 2017, we incurred fees and out‑of‑pocket expenses under this agreement totaling approximately $0.8 million, which were included in selling, general, and administrative expenses. We incurred no expense for these management fees during the three months ended September 29, 2018 and September 30, 2017. This agreement was terminated on October 24, 2018 and no further payments are due to Cortec.

We lease warehouse and office facilities under various operating leases. One warehouse facility is leased from an entity owned by our Founders, Roy and Ryan Seiders. The lease, which is month to month and can be cancelled upon 30 days written notice, requires monthly payments of $8,700 and is included in selling, general, and administrative expenses.

 

Note 11—Commitments and Contingencies

In August 2018, we entered into two new operating leases for space to be used for two new retail locations. One lease agreement is for a first floor and basement of a building in Chicago, Illinois, with an exterior footprint of approximately 5,538 square feet. The term of the lease is 120 months, and the monthly payments over the lease term are approximately $45,000. The second lease agreement is for a building in Charleston, South Carolina, totaling approximately 5,039 square feet. The term of the lease is 120 months, and the monthly payments over the lease term are approximately $28,000.

In August 2018, we sublet 29,881 square feet of our Austin, Texas headquarters to a third party. The lease term is approximately 6 years and expires on July 31, 2024. The monthly receipts over the lease term are approximately $72,000.

There were no other significant changes to the contractual obligations reported in our most recent annual audited consolidated financial statements for the year ended December 30, 2017 other than those which occur in the normal course of business.

We are subject to various claims and legal actions that arise in the ordinary course of business. Management believes that the final disposition of such matters will not have a material adverse effect on our financial position, results of operations, or cash flows.

 

Note 12—Subsequent Events

On October 12, 2018, the Board of Directors approved a 0.397‑for‑1 reverse stock split, that occurred prior to the completion of our IPO. All share and per share data have been retroactively adjusted to give effect to the reverse stock split (see Note 1).

On October 12, 2018, the Board of Directors approved an increase in our authorized capital stock of 200.0 million shares of common stock and 30.0 million shares of preferred stock, which occurred prior to the completion of our IPO. No shares were issued in connection with the increase in authorized capital stock.

On October 24, 2018, the Company completed the IPO of its common stock (see Note 1).

In October 2018, the Board adopted the 2018 Equity Incentive Plan (the "2018 Plan") and ceased granting awards under the 2012 Plan. The 2018 Plan became effective in connection with the IPO. The Company reserved 4,764,000 shares of its common stock for issuance under the 2018 Plan. Any remaining shares available for issuance under the 2012 Plan as of our IPO effectiveness date are not available for future issuance. However, shares subject to stock awards granted under the 2012 Plan (i) that expire or terminate without being exercised, (ii) that are forfeited under an award, or (iii) that are transferred, surrendered, or relinquished upon the payment of any exercise price by the transfer to us of our common stock or upon satisfaction of any withholding amount, return to the 2018 Plan share reserve for future grant.

On October 24, 2018, in connection with the IPO, the Company granted 761,031 time-based stock options at an exercise price of $18.00 per share to senior executives. The stock options vest in substantially equal installments on the anniversary of the grant date over a four-year period through October 2022 and expire 10 years from the date of grant.

In addition, two non-employee directors serving on the Board of Directors were granted 16,693 RSUs, per their compensation agreement, with the award granted on the effective date of our IPO, or October 24, 2018. These non-employee directors elected to defer 13,388 of the RSUs in the form of deferred stock units (“DSUs”). The RSU awards will vest in full in one installment on the earlier to occur of (i) the first anniversary of the pricing of the IPO or (ii) immediately prior to our first annual meeting of our stockholders at which directors are elected, subject to the director’s continued service through the applicable vesting date. The DSU awards will vest in full in one installment on the same basis as a non-employee director’s RSUs will vest and will be settled in shares of our common stock on the earlier to occur of (i) the first anniversary of the pricing of the IPO or (ii) immediately prior to our first annual meeting of our stockholders at which directors are elected. However, the DSUs will be subject to accelerated vesting if either of the following occur (i) death or disability or (ii) a change in control. During the period of deferral, non-employee directors will accrue dividend equivalents on their deferred stock units as, if and when dividends are paid on shares of our common stock. The definitive terms regarding any deferred stock units will be set forth in the DSU award agreement and the accompanying deferral election form completed by the applicable director.

On November 28, 2018, the underwriters exercised, in part, their option to purchase an additional 918,830 shares of common stock at the public offering price of $18.00 per share, less the underwriting discount, from selling stockholders. The Company did not receive any proceeds from the sale of shares by selling stockholders.

On November 29, 2018, we made voluntary principal payments on our term loan A and term loan B in the amount of $2.4 million and $47.6 million, respectively, using the net proceeds from our IPO and additional cash on hand. After the voluntary debt payments, we had outstanding borrowings of $342.5 million and $0 under our term loan A and term loan B, respectively.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes to those statements included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical financial information, the following discussion and analysis contains forward‑looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward‑looking statements as a result of many factors, including those discussed under “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. See also “Forward-Looking Statements” immediately prior to Part I, Item I in this Quarterly Report on Form 10-Q. Some of the numbers included herein have been rounded for the convenience of presentation.

Executive Summary

We are a designer, marketer, retailer, and distributor of a variety of innovative, branded, premium products to a wide‑ranging customer base. Our brand promise is to ensure each YETI product delivers exceptional performance and durability in any environment, whether in the remote wilderness, at the beach, or anywhere else life takes you. By consistently delivering high‑performing products, we have built a following of engaged brand loyalists throughout the United States, Canada, Australia, and elsewhere, ranging from serious outdoor enthusiasts to individuals who simply value products of uncompromising quality and design. Our relationship with customers continues to thrive and deepen as a result of our innovative new product introductions, expansion and enhancement of existing product families, and multifaceted branding activities.

Our marketing strategy has been instrumental in driving sales and building equity in the YETI brand. We have become a trusted and preferred brand to experts and serious enthusiasts in an expanding range of outdoor pursuits. Their brand advocacy, combined with our various marketing efforts, has broadened our appeal to a larger consumer population. We produce original short films and distribute them through our content‑rich website, active social media presence, and email subscriber base. We maintain a large and active roster of YETI Ambassadors, a diverse group of men and women throughout the United States and select international markets, comprised of world‑class anglers, hunters, rodeo cowboys, barbecue pitmasters, surfers, and outdoor adventurers who embody our brand. We also directly engage with our current and target customers by sponsoring and participating in a variety of events, including sportsman shows, outdoor festivals, rodeos, music and film festivals, barbecue competitions, fishing tournaments, and retailer events. We believe our innovative consumer engagement reinforces the authenticity and aspirational nature of our brand and products across our expanding customer base.

We bring our products to market through a diverse and powerful omni‑channel strategy, comprised of our select group of national and independent retail partners and our direct-to-consumer (“DTC”) channel. Within our wholesale channel, our national retail partners include Dick’s Sporting Goods, REI, Academy Sports + Outdoors, Bass Pro Shops, and Ace Hardware. Our network of independent retail partners includes outdoor specialty, hardware, and farm and ranch supply stores. Our DTC channel is comprised of YETI.com, YETIcustomshop.com, YETI Authorized on the Amazon Marketplace, corporate sales, and our flagship store in Austin, Texas. Our DTC channel provides authentic, differentiated brand experiences, customer engagement, and expedited customer feedback, enhancing the product development cycle while providing diverse avenues for growth.

From 2013 to 2016, yearly net sales were $89.9 million, $147.7 million, $468.9 million, and $818.9 million, respectively, representing a CAGR of 109% for the three-year period. Beginning in late 2016 and throughout 2017, we were affected by a confluence of internal and external factors that adversely impacted our growth and profitability, resulting in a decrease of net sales to $639.2 million for 2017. Driven by strong customer demand and a shortage of product in 2015, retailers aggressively stocked our products during 2016, which led to excess inventory in our wholesale channel and drove many of our retail partners to reduce purchases in the first half of 2017. During this period, we were also impacted by a challenging wholesale marketplace generally, notably the delayed merger of Bass Pro Shops and Cabela’s, which slowed ordering, negative trends in the U.S. retail environment, including several retailer bankruptcies, and the repositioning by a major retail partner towards “every day low prices” and private label products at the expense of our premium products. Additionally, we settled several lawsuits that we had initiated against competitors in which we alleged they were infringing on our intellectual property across our range of products. While these settlements were favorable to

YETI over the long‑term, during the first half of 2017 they resulted in competitors being allowed to liquidate the disputed inventory at low prices.

In response to these events, we immediately implemented several initiatives and made investments that by year‑end 2017 had reduced retailer and company inventory levels to targeted levels, enhanced liquidity, reinvigorated growth, and better positioned YETI for long‑term success. These key initiatives included:

These initiatives enabled us to successfully expand our customer base, both demographically and geographically, enhance existing product lines, accelerate new product innovation, and improve customer service. Furthermore, despite the challenges during 2017, our brand remained strong and YETI awareness continued to grow. Today, we operate a more balanced omni‑channel distribution model, anchored by a stronger and more diversified retailer network and more powerful DTC platform, with a wider range of products. As a result, we believe that we are better positioned to achieve sustainable long‑term growth.

Results of Operations

Components of Our Results of Operations. Net sales are comprised of wholesale channel sales to our retail partners and sales through our DTC channel. Net sales in both channels reflect the impact of product returns as well as discounts for certain sales programs or promotions.

We believe that our net sales include a seasonal component. In our wholesale and DTC channels, we expect our net sales to be highest in our second and fourth quarters, with the first quarter generating the lowest sales. We expect this seasonality will continue to be a factor in our results of operations.

We discuss the net sales of our products in our two primary categories: Coolers & Equipment and Drinkware. The Coolers & Equipment category includes hard coolers, soft coolers, outdoor equipment products, and various accessories to these core products as well as replacement parts. Likewise, Drinkware accessories are included in the Drinkware category. In addition, the Other category is primarily YETI ICE, YETI logo tee shirts, hats, and other miscellaneous products. As a result of our more balanced omni‑channel distribution model and wider range of products, we expect our net sales will continue to increase while our net sales growth rate may moderate.

Gross profit reflects net sales less cost of goods sold, which primarily includes the purchase cost of our products from our third‑party contract manufacturers, inbound freight and duties, product quality testing and inspection costs, depreciation on molds and equipment that we own, and our cost of customizing Drinkware products.

We calculate gross margin as gross profit divided by net sales. Gross margin in our DTC sales channel is generally higher than that on sales in our wholesale channel. We anticipate that our DTC net sales may grow at a faster rate than our net sales in our wholesale channel. If so, and if we are able to realize greater economies of scale, we would expect a favorable impact to aggregate gross margin over time. This favorable anticipated gross margin impact may not be realized or may be offset by other unfavorable gross margin factors. Additionally, any new products that we develop, or our planned expansion into new geographies, may impact our future gross margin.

SG&A expenses consist primarily of marketing costs, employee compensation and benefits costs, costs of our outsourced warehousing and logistics operations, costs of operating on third‑party DTC marketplaces, professional fees and services, cost of non‑cash stock‑based compensation, cost of product shipment to our customers, and general corporate infrastructure expenses. We anticipate that SG&A will increase in the future based on our plans to increase staff levels, open additional retail stores, expand marketing activities, and bear additional costs as a public company, but to decrease as a percentage of net sales over time. In particular, we intend to open a company store for employees in the fourth quarter of 2018 and additional retail stores in 2019.

Change in Fiscal Year and Reporting Calendar. Effective January 1, 2017, we converted our fiscal year-end from a calendar year ending December 31 to a “52‑53 week” year ending on the Saturday closest in proximity to December 31, such that each quarterly period will be 13 weeks in length, except during a 53‑week year when the fourth quarter will be 14 weeks. This did not have a material effect on our consolidated financial statements and, therefore, we did not retrospectively adjust our financial statements.

 

 

 

 

 

 

 

 

Statement of Operations Data

The following table sets forth selected statement of operations data, and their corresponding percentage of net sales, for the periods indicated. The discussion below should be read in conjunction with the following table and our unaudited financial statements, and related notes:

Three Months Ended September 29, 2018 Compared to September 30, 2017

Net Sales

 

Net sales increased $13.1 million, or 7%, to $196.1 million for the three months ended September 29, 2018 compared to $183.0 million for the three months ended September 30, 2017. This increase was driven by growth across our DTC channel. Net sales in our wholesale channel decreased slightly by $0.1 million, or 0%, to $125.0 million for the three months ended September 29, 2018. The wholesale channel decrease was driven by lower Coolers & Equipment net sales, offset by an increase in Drinkware sales. The decrease in Coolers & Equipment net sales was driven by a prior year non-recurring disposition of certain prior generation, excess end‑of‑life soft cooler inventories through a peripheral bulk sales channel during the three months ended September 30, 2017. The increase in Drinkware net sales in our wholesale channel was a result of replenishment orders from our retail partners caused by strong product sell‑through, sales of new products, and additional colorways for existing products. Net sales through our DTC channel increased by $13.2 million, or 23%, to $71.2 million for the three months ended September 29, 2018. DTC net sales increased across both Coolers & Equipment and Drinkware, but most significantly in Drinkware. DTC sales were driven by an increase in customer purchases on our website, YETI.com, and YETI Authorized on the Amazon Marketplace, as well as increased consumer and corporate customized Drinkware, primarily from YETIcustomshop.com.