YETI Holdings, Inc. - Quarter Report: 2021 October (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 October 02, 2021
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)
______________________________________________________
| Delaware | 45-5297111 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
7601 Southwest Parkway
Austin, Texas 78735
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code) (512) 394-9384
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common stock, par value $0.01 | YETI | New York Stock Exchange | ||||||||||||
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 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.
Large accelerated filer | ☒ | Accelerated filer | ☐ | |||||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||
Emerging growth company | ☐ | |||||||||||||
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 87,641,906 shares of Common Stock ($0.01 par value) outstanding as of October 28, 2021.
CAUTIONARY NOTE REGARDING 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 the risks and uncertainties listed below under “Risk Factors Summary” and further described under the heading "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q, as such risk factors may be amended, supplemented or superseded from time to time by other reports we file with the United States Securities and Exchange Commission.
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.
Risk Factors Summary
Investing in our securities involves a high degree of risk. The following is a summary of the principal factors that make an investment in our securities speculative or risky, all of which are more fully described below in the section titled “Risk Factors” in Part I, Item 1A of this Report. This summary should be read in conjunction with the “Risk Factors” section and should not be relied upon as an exhaustive summary of the material risks facing our business. In addition to the following summary, you should consider the information set forth in the “Risk Factors” section and the other information contained in this Report before investing in our securities.
Risks Related to Our Business, Operations and Industry
•A significant reduction in demand for our products could harm our results of operations.
•If we are unable to successfully design, develop and market new products, our business may be harmed.
•Our business could be harmed if we are unable to accurately forecast our results of operations and growth rate.
•We may not be able to effectively manage our growth.
•Our marketing strategy may not be successful with existing and future customers.
•If we fail to attract new customers, or fail to do so in a cost-effective manner, we may not be able to increase sales.
•We may not be successful in expanding into additional markets.
•If we fail to compete effectively, we could lose our market position.
•If we are unable to protect or preserve our brand image and proprietary rights, our business may be harmed.
•Problems with, or loss of, our suppliers or an inability to obtain raw materials could harm our business and results of operations.
•If we fail to timely and effectively obtain shipments of products from our manufacturers and deliver products to our retail partners and customers, our business and results of operations could be harmed.
•Our business is subject to the risk of manufacturer concentrations.
•Our results of operations could be materially harmed if we are unable to accurately forecast demand for our products.
•Our business could be harmed if we fail to execute our internal plans to transition our supply chain and certain other business processes to a global scale.
•Our profitability may decline as a result of increasing pressure on pricing.
•Some of our manufacturing relationships are not exclusive, which means that these manufacturers could produce similar products for our competitors.
•Fluctuations in the cost and availability of raw materials, equipment, labor, and transportation could cause manufacturing delays or increase our costs.
•Many of our products are manufactured by third parties outside of the United States, and our business may be harmed by legal, regulatory, economic, political and public health risks associated with international trade and those markets.
•As current tariffs are implemented, or if additional tariffs or other restrictions are placed on foreign imports or any related counter-measures are taken by other countries, our business and results of operations could be harmed.
•A significant portion of our sales are to independent retail partners, and if they cease to carry our current products or choose not to carry new products that we develop, our brand as well as our results of operations and financial condition could be harmed.
•We depend on our retail partners to display and present our products to customers, and our failure to maintain and further develop our relationships with our retail partners could harm our business.
•If our plans to increase sales through our direct-to-consumer channel are not successful, our business and results of operations could be harmed.
•If we do not successfully implement our future retail store expansion, our growth and profitability could be harmed.
•Insolvency, credit problems or other financial difficulties that could confront our retail partners could expose us to financial risk.
•If our independent suppliers and manufacturing partners do not comply with ethical business practices or with applicable laws and regulations, our reputation, business, and results of operations could be harmed.
•We are subject to payment-related risks that may result in higher operating costs or the inability to process payments, either of which could harm our business, financial condition and results of operations.
•Our limited operating experience and limited brand recognition in new markets may make it more difficult to execute our international expansion plan and cause our business and growth to suffer.
•Our financial results and future growth could be harmed by currency exchange rate fluctuations.
•We may become involved in legal or regulatory proceedings and audits.
•Our business involves the potential for product recalls, product liability, and other claims against us, which could adversely affect our reputation, earnings and financial condition.
•Our business is subject to the risk of catastrophic events, and to interruption by problems such as terrorism, public health crises, cyberattacks, or failure of key information technology systems.
•Our results of operations are subject to seasonal and quarterly variations, which could cause the price of our common stock to decline.
•We are subject to many hazards and operational risks that can disrupt our business, some of which may not be insured or fully covered by insurance.
Risks Related to Market and Global Economic Conditions
•The COVID-19 pandemic and its effects could result in declines in consumer discretionary spending or continue to adversely affect the global supply chain, which could negatively impact our business, sales, financial condition, results of operations and cash flows, and our ability to access current or obtain new lending facilities.
•During a downturn in the economy, consumer purchases of discretionary items are affected, which could materially harm our sales, profitability, and financial condition.
Risks Related to Information Technology and Security
•We rely significantly on information technology and any failure, inadequacy or interruption of that technology could harm our ability to effectively operate our business.
•We collect, store, process, and use personal and payment information and other customer data, which subjects us to regulation and other legal obligations related to privacy, information security, and data protection.
•Any material disruption or breach of our information technology systems or those of third-party partners could materially damage our customer and business partner relationships, and subject us to significant reputational, financial, legal, and operational consequences.
Risks Related to our Financial Condition and Tax Matters
•We depend on cash generated from our operations to support our growth, and we may need to raise additional capital, which may not be available on terms acceptable to us or at all.
•Our indebtedness may limit our ability to invest in the ongoing needs of our business and if we are unable to comply with the covenants in our current Credit Facility, our liquidity and results of operations could be harmed.
•If our goodwill, other intangible assets, or fixed assets become impaired, we may be required to record a charge to our earnings.
•Changes in tax laws or unanticipated tax liabilities could adversely affect our effective income tax rate and profitability.
•The uncertainty regarding the phase-out of LIBOR may negatively impact our operating results.
•Our results of operations could be harmed if a material number of our retail partners were not able to meet their payment obligations.
Risks Related to Ownership of Our Common Stock
•Any future failure to maintain effective internal control over financial reporting could harm us.
•Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of the Company more difficult, limit attempts by our stockholders to replace or remove our current management, and limit the market price of our common stock.
•Our Amended and Restated Certificate of Incorporation provides that the Court of Chancery of the State of Delaware is the sole and exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.
•YETI Holdings, Inc. is a holding company with no operations of its own and, as such, it depends on its subsidiaries for cash to fund its operations and expenses, including future dividend payments, if any.
General Risk Factors
•Our future success depends on the continuing efforts of our management and key employees, and on our ability to attract and retain highly skilled personnel and senior management.
•If our estimates or judgments relating to our critical accounting policies prove to be incorrect or change significantly, our results of operations could be harmed.
•We may be the target of strategic transactions, which could divert our management's attention and otherwise disrupt our operations and adversely affect our business.
•We may acquire or invest in other companies, which could divert our management’s attention, result in dilution to our stockholders, and otherwise disrupt our operations and harm our results of operations.
•We may be subject to liability if we infringe upon the intellectual property rights of third parties.
Table of Contents
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
YETI HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except per share data)
| October 2, 2021 | January 2, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current assets | |||||||||||
| Cash | $ | 259,317 | $ | 253,283 | |||||||
| Accounts receivable, net | 83,267 | 65,417 | |||||||||
| Inventory | 265,974 | 140,111 | |||||||||
| Prepaid expenses and other current assets | 23,640 | 17,686 | |||||||||
| Total current assets | 632,198 | 476,497 | |||||||||
| Property and equipment, net | 108,739 | 78,075 | |||||||||
| Operating lease right-of-use assets | 54,270 | 34,090 | |||||||||
| Goodwill | 54,293 | 54,293 | |||||||||
| Intangible assets, net | 94,074 | 92,078 | |||||||||
| Other assets | 1,934 | 2,034 | |||||||||
| Total assets | $ | 945,508 | $ | 737,067 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | 166,080 | $ | 123,621 | |||||||
| Accrued expenses and other current liabilities | 96,857 | 89,068 | |||||||||
| Taxes payable | 6,869 | 18,316 | |||||||||
| Accrued payroll and related costs | 24,513 | 25,810 | |||||||||
| Current operating lease liabilities | 11,008 | 8,247 | |||||||||
| Current maturities of long-term debt | 24,548 | 22,697 | |||||||||
| Total current liabilities | 329,875 | 287,759 | |||||||||
| Long-term debt, net of current portion | 101,723 | 111,017 | |||||||||
| Operating lease liabilities, non-current | 54,043 | 36,546 | |||||||||
| Other liabilities | 20,227 | 13,327 | |||||||||
| Total liabilities | 505,868 | 448,649 | |||||||||
| Commitments and contingencies (Note 8) | |||||||||||
| Stockholders’ Equity | |||||||||||
Common stock, par value $0.01; 600,000 shares authorized; 87,598 and 87,128 shares issued and outstanding at October 2, 2021 and January 2, 2021, respectively | 876 | 871 | |||||||||
Preferred stock, par value $0.01; 30,000 shares authorized; no shares issued or outstanding | — | — | |||||||||
| Additional paid-in capital | 332,299 | 321,678 | |||||||||
| Retained earnings (accumulated deficit) | 105,977 | (33,744) | |||||||||
| Accumulated other comprehensive income (loss) | 488 | (387) | |||||||||
| Total stockholders’ equity | 439,640 | 288,418 | |||||||||
| Total liabilities and stockholders’ equity | $ | 945,508 | $ | 737,067 | |||||||
See Notes to Unaudited Condensed Consolidated Financial Statements
1
YETI HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| October 2, 2021 | September 26, 2020 | October 2, 2021 | September 26, 2020 | ||||||||||||||||||||
| Net sales | $ | 362,643 | $ | 294,603 | $ | 967,864 | $ | 715,953 | |||||||||||||||
| Cost of goods sold | 155,640 | 120,627 | 406,560 | 311,994 | |||||||||||||||||||
| Gross profit | 207,003 | 173,976 | 561,304 | 403,959 | |||||||||||||||||||
| Selling, general, and administrative expenses | 138,274 | 103,864 | 380,101 | 271,152 | |||||||||||||||||||
| Operating income | 68,729 | 70,112 | 181,203 | 132,807 | |||||||||||||||||||
| Interest expense | (833) | (1,963) | (2,519) | (7,730) | |||||||||||||||||||
| Other expense | (1,239) | (82) | (2,492) | (1,020) | |||||||||||||||||||
| Income before income taxes | 66,657 | 68,067 | 176,192 | 124,057 | |||||||||||||||||||
| Income tax expense | (13,690) | (16,622) | (36,471) | (30,650) | |||||||||||||||||||
| Net income | $ | 52,967 | $ | 51,445 | $ | 139,721 | $ | 93,407 | |||||||||||||||
| Net income per share | |||||||||||||||||||||||
| Basic | $ | 0.61 | $ | 0.59 | $ | 1.60 | $ | 1.07 | |||||||||||||||
| Diluted | $ | 0.60 | $ | 0.58 | $ | 1.58 | $ | 1.07 | |||||||||||||||
| Weighted-average common shares outstanding | |||||||||||||||||||||||
| Basic | 87,526 | 87,032 | 87,343 | 86,933 | |||||||||||||||||||
| Diluted | 88,750 | 88,094 | 88,636 | 87,677 | |||||||||||||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements
2
YETI HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| October 2, 2021 | September 26, 2020 | October 2, 2021 | September 26, 2020 | ||||||||||||||||||||
| Net income | $ | 52,967 | $ | 51,445 | $ | 139,721 | $ | 93,407 | |||||||||||||||
| Other comprehensive income (loss) | |||||||||||||||||||||||
| Foreign currency translation adjustments | (84) | (433) | 875 | (100) | |||||||||||||||||||
| Total comprehensive income | $ | 52,883 | $ | 51,012 | $ | 140,596 | $ | 93,307 | |||||||||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements
3
YETI HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands)
| Three Months Ended October 2, 2021 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance, July 3, 2021 | 87,441 | $ | 874 | $ | 329,638 | $ | 53,010 | $ | 572 | $ | 384,094 | ||||||||||||||||||||||||
| Stock-based compensation | — | — | 3,824 | — | — | 3,824 | |||||||||||||||||||||||||||||
| Common stock issued under employee benefit plans | 175 | 2 | 643 | — | — | 645 | |||||||||||||||||||||||||||||
| Common stock withheld related to net share settlement of stock-based compensation | (18) | — | (1,806) | — | — | (1,806) | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (84) | (84) | |||||||||||||||||||||||||||||
| Net income | — | — | — | 52,967 | — | 52,967 | |||||||||||||||||||||||||||||
| Balance, October 2, 2021 | 87,598 | $ | 876 | $ | 332,299 | $ | 105,977 | $ | 488 | $ | 439,640 | ||||||||||||||||||||||||
| Three Months Ended September 26, 2020 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance, June 27, 2020 | 87,004 | $ | 870 | $ | 315,405 | $ | (147,583) | $ | 337 | $ | 169,029 | ||||||||||||||||||||||||
| Stock-based compensation | — | — | 2,279 | — | — | 2,279 | |||||||||||||||||||||||||||||
| Common stock issued under employee benefit plans | 67 | 1 | 635 | — | — | 636 | |||||||||||||||||||||||||||||
| Common stock withheld related to net share settlement of stock-based compensation | (7) | — | (323) | — | (323) | ||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (433) | (433) | |||||||||||||||||||||||||||||
| Net income | — | — | — | 51,445 | — | 51,445 | |||||||||||||||||||||||||||||
| Balance, September 26, 2020 | 87,064 | $ | 871 | $ | 317,996 | $ | (96,138) | $ | (96) | $ | 222,633 | ||||||||||||||||||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements
4
YETI HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands)
| Nine Months Ended October 2, 2021 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance, January 2, 2021 | 87,128 | $ | 871 | $ | 321,678 | $ | (33,744) | $ | (387) | $ | 288,418 | ||||||||||||||||||||||||
| Stock-based compensation | — | — | 11,339 | — | — | 11,339 | |||||||||||||||||||||||||||||
Common stock issued under employee benefit plans | 512 | 5 | 2,788 | — | — | 2,793 | |||||||||||||||||||||||||||||
| Common stock withheld related to net share settlement of stock-based compensation | (42) | — | (3,506) | — | — | (3,506) | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 875 | 875 | |||||||||||||||||||||||||||||
| Net income | — | — | — | 139,721 | — | 139,721 | |||||||||||||||||||||||||||||
| Balance, October 2, 2021 | 87,598 | $ | 876 | $ | 332,299 | $ | 105,977 | $ | 488 | $ | 439,640 | ||||||||||||||||||||||||
| Nine Months Ended September 26, 2020 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (loss) | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance, December 28, 2019 | 86,774 | $ | 868 | $ | 310,678 | $ | (189,545) | $ | 4 | $ | 122,005 | ||||||||||||||||||||||||
| Stock-based compensation | — | — | 6,315 | — | — | 6,315 | |||||||||||||||||||||||||||||
Common stock issued under employee benefit plans | 319 | 3 | 2,030 | — | — | 2,033 | |||||||||||||||||||||||||||||
| Common stock withheld related to net share settlement of stock-based compensation | (29) | — | (1,027) | — | (1,027) | ||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (100) | (100) | |||||||||||||||||||||||||||||
| Net income | — | — | — | 93,407 | — | 93,407 | |||||||||||||||||||||||||||||
| Balance, September 26, 2020 | 87,064 | $ | 871 | $ | 317,996 | $ | (96,138) | $ | (96) | $ | 222,633 | ||||||||||||||||||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements
5
YETI HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| Nine Months Ended | |||||||||||
| October 2, 2021 | September 26, 2020 | ||||||||||
| Cash Flows from Operating Activities: | |||||||||||
| Net income | $ | 139,721 | $ | 93,407 | |||||||
| Adjustments to reconcile net income to cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 23,440 | 22,835 | |||||||||
| Amortization of deferred financing fees | 516 | 712 | |||||||||
| Stock-based compensation | 11,339 | 6,315 | |||||||||
| Deferred income taxes | 3,764 | 732 | |||||||||
| Impairment of long-lived assets | 2,331 | 632 | |||||||||
| Other | 3,213 | 1,414 | |||||||||
| Loss on prepayment of debt | — | 418 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | (18,769) | 10,236 | |||||||||
| Inventory | (126,381) | 50,943 | |||||||||
| Other current assets | (5,206) | 5,570 | |||||||||
| Accounts payable and accrued expenses | 48,184 | 31,537 | |||||||||
| Taxes payable | (11,441) | 11,019 | |||||||||
| Other | 2,488 | 3,329 | |||||||||
| Net cash provided by operating activities | 73,199 | 239,099 | |||||||||
| Cash Flows from Investing Activities: | |||||||||||
| Purchases of property and equipment | (41,159) | (10,904) | |||||||||
| Additions of intangibles, net | (6,749) | (5,377) | |||||||||
| Net cash used in investing activities | (47,908) | (16,281) | |||||||||
| Cash Flows from Financing Activities: | |||||||||||
| Repayments of long-term debt | (16,875) | (61,250) | |||||||||
| Taxes paid in connection with employee stock transactions | (3,507) | (1,027) | |||||||||
| Proceeds from employee stock transactions | 2,794 | 2,033 | |||||||||
| Finance lease principal payment | (600) | (138) | |||||||||
| Borrowings under revolving credit facility | — | 50,000 | |||||||||
| Repayments under revolving credit facility | — | (50,000) | |||||||||
| Net cash used in financing activities | (18,188) | (60,382) | |||||||||
| Effect of exchange rate changes on cash | (1,069) | (138) | |||||||||
| Net increase in cash | 6,034 | 162,298 | |||||||||
| Cash, beginning of period | 253,283 | 72,515 | |||||||||
| Cash, end of period | $ | 259,317 | $ | 234,813 | |||||||
See Notes to Unaudited Condensed Consolidated Financial Statements
6
YETI HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Headquartered in Austin, Texas, YETI is a global designer, retailer, and distributor of innovative outdoor products. From coolers and drinkware to bags and apparel, YETI products are built to meet the unique and varying needs of diverse outdoor pursuits, whether in the remote wilderness, at the beach, or anywhere life takes you. We sell our products through our wholesale channel, including independent retailers, national, and regional accounts across a wide variety of end user markets, as well as through our direct-to-consumer (“DTC”) channel, primarily on YETI.com, country and region-specific YETI websites, YETI Authorized on the Amazon Marketplace, our corporate sales program, and our retail stores. We operate in the U.S., Canada, Australia, New Zealand, Europe, Hong Kong, China, Singapore, and Japan.
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.
Basis of Presentation and Principles of Consolidation
The unaudited condensed consolidated financial statements and the accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, our financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary for a fair statement of our results of operations for the interim periods. Intercompany transactions are eliminated in consolidation. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to applicable rules and regulations of the SEC. The consolidated balance sheet as of January 2, 2021 is derived from the audited financial statements included in our Annual Report on Form 10-K filed with the SEC for the year ended January 2, 2021, which should be read in conjunction with these unaudited consolidated financial statements and notes thereto.
Reclassifications
Certain prior period amounts were reclassified to conform to the current period presentation. Deferred income taxes previously presented separately in Total assets in the consolidated balance sheets are now presented in Other assets.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses during the reporting period and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements. Estimates and assumptions about future events and their effects cannot be made with certainty, including the potential impacts and duration of the COVID-19 pandemic. Estimates may change as new events occur, when additional information becomes available and if our operating environment changes. Actual results could differ from our estimates.
Fiscal Year End
We have a 52-to 53-week fiscal year that ends 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. Our fiscal year ending January 1, 2022 (“fiscal year 2021”) is a 52-week period. The first quarter of our fiscal year 2021 ended on April 3, 2021, the second quarter ended on July 3, 2021, and the third quarter ended on October 2, 2021. Our fiscal year ended January 2, 2021 (“fiscal year 2020”) was a 53-week period. Unless otherwise stated, references to particular years, quarters, months and periods refer to our fiscal years and the associated quarters, months, and periods of those fiscal years. The unaudited condensed consolidated financial results presented herein represent the three and nine months ended October 2, 2021 and September 26, 2020.
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Accounts Receivable
Accounts receivable are carried at original invoice amount less estimated credit losses. Upon initial recognition of a receivable, we estimate credit losses over the contractual term of the receivable and establish an allowance for credit losses based on historical experience, current available information, and expectations of future economic conditions. We mitigate credit loss risk from accounts receivable by assessing customers for credit worthiness, including ongoing credit evaluations and their payment trends. Credit risk is limited due to ongoing monitoring, high geographic customer distribution and low concentration of risk. As the risk of loss is determined to be similar based on the credit risk factors, we aggregate receivables on a collective basis when assessing credit losses. Accounts receivable are uncollateralized customer obligations due under normal trade terms typically requiring payment within 30 to 90 days of sale. Receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded to income when received. For the nine months ended October 2, 2021, our assessment also considered the current and potential future impacts caused by the COVID-19 pandemic. Our allowance for credit losses was $2.0 million as of October 2, 2021 and $1.3 million as of January 2, 2021, respectively.
Inventory
Inventories are comprised primarily of finished goods and are carried at the lower of cost (weighted-average cost method) or market (net realizable value).
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:
Level 1: Quoted prices for identical instruments in active markets.
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3: Significant inputs to the valuation model are unobservable.
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 senior secured credit facility (“Credit Facility”) carries a variable interest rate that is based on London Interbank Offered Rate (“LIBOR”).
Recently Adopted Accounting Guidance
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 is intended to simplify various aspects related to the accounting for income taxes and removes certain exceptions to the general principles of Topic 740 and amends existing guidance to improve consistent application. We adopted this standard effective January 3, 2021 using the modified retrospective approach. The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.
Recent Accounting Guidance Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” which is intended to provide temporary optional expedients and exceptions for applying GAAP to contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. The optional guidance is provided to ease the potential burden of accounting for reference rate reform. The guidance is effective and can be applied anytime from the issuance date through December 31, 2022. The impact of this guidance on the Company's financial statements and related disclosures will continue to be evaluated by the Company through the application period, and is not expected to be significant.
No other new accounting pronouncements issued or effective as of October 2, 2021 have had, or are expected to have, a material impact on our consolidated financial statements.
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2. REVENUE
Contract Balances
Accounts receivable represent an unconditional right to receive consideration from a customer and are recorded at net invoiced amounts, less an estimated allowance for credit losses.
Contract liabilities are recorded when the customer pays consideration before the transfer of a good to the customer and thus represent our obligation to transfer the good to the customer at a future date. Our primary contract liabilities relate to payment advances for certain customized product transactions. We recognize contract liabilities as revenue once all performance obligations have been satisfied.
The following table provides information about accounts receivable and contract liabilities at the periods indicated (in thousands):
| October 2, 2021 | January 2, 2021 | ||||||||||
| Accounts receivable, net | $ | 83,267 | $ | 65,417 | |||||||
| Contract liabilities | $ | (16,430) | $ | (11,074) | |||||||
For the nine months ended October 2, 2021, we recognized $11.1 million of revenue that was previously included in the contract liability balance at the beginning of the period.
Disaggregation of Revenue
The following table disaggregates our net sales by channel, product category, and geography (based on ship to destination) for the periods indicated (in thousands):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| October 2, 2021 | September 26, 2020 | October 2, 2021 | September 26, 2020 | ||||||||||||||||||||
| Net Sales by Channel | |||||||||||||||||||||||
| Wholesale | $ | 165,504 | $ | 144,191 | $ | 447,068 | $ | 352,898 | |||||||||||||||
| Direct-to-consumer | 197,139 | 150,412 | 520,796 | 363,055 | |||||||||||||||||||
| Total net sales | $ | 362,643 | $ | 294,603 | $ | 967,864 | $ | 715,953 | |||||||||||||||
| Net Sales by Category | |||||||||||||||||||||||
| Coolers & Equipment | $ | 149,002 | $ | 124,155 | $ | 400,261 | $ | 312,259 | |||||||||||||||
| Drinkware | 205,035 | 165,934 | 546,796 | 392,877 | |||||||||||||||||||
| Other | 8,606 | 4,514 | 20,807 | 10,817 | |||||||||||||||||||
| Total net sales | $ | 362,643 | $ | 294,603 | $ | 967,864 | $ | 715,953 | |||||||||||||||
| Net Sales by Geographic Region | |||||||||||||||||||||||
| United States | $ | 328,545 | $ | 274,421 | $ | 877,577 | $ | 676,553 | |||||||||||||||
| International | 34,098 | 20,182 | 90,287 | 39,400 | |||||||||||||||||||
| Total net sales | $ | 362,643 | $ | 294,603 | $ | 967,864 | $ | 715,953 | |||||||||||||||
For the three and nine months ended October 2, 2021, our largest single customer represented approximately 11% and 10% of gross sales, respectively. For the three and nine months ended September 26, 2020, no single customer represented over 10% of gross sales.
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3. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets include the following (in thousands):
| October 2, 2021 | January 2, 2021 | ||||||||||
| Prepaid expenses | $ | 13,832 | $ | 12,174 | |||||||
| Prepaid taxes | 605 | 433 | |||||||||
| Other | 9,203 | 5,079 | |||||||||
| Total prepaid expenses and other current assets | $ | 23,640 | $ | 17,686 | |||||||
4. LEASES
We determine if an arrangement with contractual terms longer than twelve months contains a lease at contract inception and determine its classification as an operating or finance lease at lease commencement. We lease certain retail locations, office space, distribution facilities, manufacturing space, and machinery and equipment. While the substantial majority of these leases are operating leases, certain machinery and equipment agreements are finance leases, which are those leases that allow us to substantially utilize or pay for the entire asset over its estimated life. Assets acquired under operating leases and finance leases are recorded in Operating lease right-of use assets and Property and equipment, net, respectively. As of October 2, 2021, the initial lease terms of the various leases range from to 20 years.
Lease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are recognized based on the present value of future payments over the lease term at commencement date. To determine the present value of the future lease payments, we use our collateralized incremental borrowing rate based on the information available at commencement date, including lease term. Our operating leases also typically require payment of real estate taxes, common area maintenance and insurance. These components comprise the majority of our variable lease cost and are excluded from the present value of our lease obligations. In instances where they are fixed, they are included due to our election to combine lease and non-lease components, with the exception of our distribution facility asset class. Operating lease assets include prepaid lease payments and initial direct costs and are reduced by lease incentives. Our lease terms consider various factors such as market conditions and the terms of any renewal or termination options that may exist. We generally do not include options to extend or terminate the lease in the determination of lease term unless it is reasonably certain that the option will be exercised. Fixed payments may contain predetermined fixed rent escalations.
Costs associated with operating lease assets are recognized on a straight-line basis from the commencement date to the end of the lease term. Finance lease assets are amortized on a straight-line basis over the shorter of the estimated useful lives of the assets or the lease term. The interest component of a finance lease is included in interest expense and recognized using the effective interest method over the lease term.
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The following table presents the assets and liabilities related to operating and finance leases (in thousands):
| Balance Sheet Location | October 2, 2021 | ||||||||||
| Assets: | |||||||||||
| Operating lease assets | Operating lease right-of-use assets | $ | 54,270 | ||||||||
| Finance lease assets | 9,843 | ||||||||||
| Total lease assets | $ | 64,113 | |||||||||
| Liabilities: | |||||||||||
| Current | |||||||||||
| Operating lease liabilities | Operating lease liabilities | $ | 11,008 | ||||||||
| Finance lease liabilities | 2,048 | ||||||||||
| Non-current | |||||||||||
| Operating lease liabilities | Operating lease liabilities, non-current | 54,043 | |||||||||
| Finance lease liabilities | 7,818 | ||||||||||
| Total lease liabilities | $ | 74,917 | |||||||||
The following table presents the components of lease costs (in thousands):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| October 2, 2021 | September 26, 2020 | October 2, 2021 | September 26, 2020 | ||||||||||||||||||||
| Operating lease costs | $ | 3,571 | $ | 2,410 | $ | 8,647 | $ | 7,021 | |||||||||||||||
| Finance lease cost - amortization of right-of-use assets | 467 | 53 | 582 | 159 | |||||||||||||||||||
| Finance lease cost - interest on lease liabilities | 57 | 15 | 86 | 49 | |||||||||||||||||||
| Short-term lease cost | 113 | 36 | 268 | 140 | |||||||||||||||||||
| Variable lease cost | 946 | 838 | 2,794 | 2,492 | |||||||||||||||||||
| Sublease income | (186) | (186) | (557) | (557) | |||||||||||||||||||
| Total lease cost | $ | 4,968 | $ | 3,166 | $ | 11,820 | $ | 9,304 | |||||||||||||||
The following table presents lease terms and discount rates:
| October 2, 2021 | September 26, 2020 | ||||||||||
| Weighted average remaining lease term: | |||||||||||
| Operating leases | 5.94 years | 6.39 years | |||||||||
| Finance leases | 4.60 years | 3.93 years | |||||||||
| Weighted average discount rate: | |||||||||||
| Operating leases | 4.87 | % | 6.52 | % | |||||||
| Finance leases | 2.25 | % | 6.24 | % | |||||||
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Minimum lease payments have not been reduced by minimum sublease rentals of $2.5 million due in the future under non-cancelable subleases. We received $0.2 million in sublease income for both the three months ended October 2, 2021 and September 26, 2020, and $0.6 million in sublease income for both the nine months ended October 2, 2021 and September 26, 2020. The following table presents the minimum lease payment obligations of operating and finance lease liabilities (leases with terms in excess of one year) for the next five years and thereafter as of October 2, 2021 (in thousands):
| Operating Leases | Finance Leases | Total | |||||||||||||||
| 2021 | $ | 3,877 | $ | 561 | $ | 4,438 | |||||||||||
| 2022 | 12,620 | 2,244 | 14,864 | ||||||||||||||
| 2023 | 12,743 | 2,078 | 14,821 | ||||||||||||||
| 2024 | 12,762 | 2,325 | 15,087 | ||||||||||||||
| 2025 | 11,998 | 1,995 | 13,993 | ||||||||||||||
| Thereafter | 21,168 | 1,164 | 22,332 | ||||||||||||||
| Total lease payments | 75,168 | 10,367 | 85,535 | ||||||||||||||
| Less: Effect of discounting to net present value | 10,117 | 501 | 10,618 | ||||||||||||||
| Present value of lease liabilities | $ | 65,051 | $ | 9,866 | $ | 74,917 | |||||||||||
The following table presents supplemental cash flow information related to our leases (in thousands):
| Nine Months Ended October 2, 2021 | Nine Months Ended September 26, 2020 | ||||||||||
| Cash paid for amounts included in measurement of liabilities: | |||||||||||
| Operating cash flows used in operating leases | $ | 9,236 | $ | 7,770 | |||||||
| Operating cash flows used in finance leases | 86 | 49 | |||||||||
| Financing cash flows used in finance leases | 600 | 138 | |||||||||
| Right-of-use assets obtained in exchange for new lease liabilities: | |||||||||||
| Finance leases | $ | 9,517 | $ | — | |||||||
| Operating leases | 26,646 | 1,580 | |||||||||
To support the continued growth of our business, we entered into a service agreement with a third-party logistics provider to operate a new distribution facility in Memphis, Tennessee with approximately 970 thousand square feet. The service agreement commenced at the end of the second quarter of 2021. The initial term of the agreement is 5 years. As of July 3, 2021, we recognized an operating lease right-of-use asset and a finance lease with corresponding operating and finance lease liabilities, respectively, for this distribution facility.
5. INCOME TAXES
Income tax expense was $13.7 million and $16.6 million for the three months ended October 2, 2021 and September 26, 2020, respectively. The effective tax rate for the three months ended October 2, 2021 was 21%, compared to 24% for the three months ended September 26, 2020. The impact of a discrete tax benefit related to stock compensation resulted in a decrease in income tax expense and a lower effective tax rate for the three months ended October 2, 2021.
Income tax expense was $36.5 million and $30.7 million for the nine months ended October 2, 2021 and September 26, 2020, respectively. The increase in income tax expense is due to higher income before income taxes, partially offset by higher discrete tax benefit related to stock compensation in the nine months ended October 2, 2021. The effective tax rate for the nine months ended October 2, 2021 was 21%, compared to 25% for the nine months ended September 26, 2020. The impact of a discrete tax benefit related to stock compensation resulted in a lower effective tax rate for the nine months ended October 2, 2021.
Deferred tax liabilities were $8.9 million as of October 2, 2021 and $5.2 million as of January 2, 2021, respectively, which is presented in other liabilities on our unaudited condensed consolidated balance sheet.
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.
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6. STOCK-BASED COMPENSATION
We award stock-based compensation to employees and directors under the 2018 Equity Incentive Plan (the “2018 Plan”), which was adopted by our Board of Directors and became effective upon the completion of our initial public offering in October 2018. The 2018 Plan replaced the 2012 Equity and Performance Incentive Plan, as amended and restated on June 20, 2018 (the “2012 Plan”). Any remaining shares available for issuance under the 2012 Plan as of the date of our initial public offering in October 2018 are not available for future issuance. However, shares subject to stock awards granted under the 2012 Plan (a) that expire or terminate without being exercised or (b) that are forfeited under an award return to the 2018 Plan.
We recognized non-cash stock-based compensation expense of $3.8 million and $2.3 million for the three months ended October 2, 2021 and September 26, 2020, respectively. For the nine months ended October 2, 2021 and September 26, 2020, we recognized non-cash stock-based compensation expense of $11.3 million and $6.3 million, respectively. At October 2, 2021, total unrecognized non-cash stock-based compensation expense of $26.1 million for all stock-based compensation plans is expected to be recognized over a weighted-average period of 2.0 years.
Stock-based activity for the nine months ended October 2, 2021 is summarized below (in thousands, except per share data):
| Stock Options | Performance-Based Restricted Stock Awards | Restricted Stock Units, Restricted Stock Awards, and Deferred Stock Units | |||||||||||||||||||||||||||||||||
| Number of Options | Weighted Average Exercise Price | Number of PBRSs | Weighted Average Grant Date Fair Value | Number of RSUs, RSAs, and DSUs | Weighted Average Grant Date Fair Value | ||||||||||||||||||||||||||||||
| Balance, January 2, 2021 | 1,254 | $ | 16.79 | 146 | $ | 32.84 | 473 | $ | 30.99 | ||||||||||||||||||||||||||
| Granted | — | — | 81 | 79.66 | 225 | 78.50 | |||||||||||||||||||||||||||||
| Exercised/released | (286) | 9.77 | — | — | (226) | 30.28 | |||||||||||||||||||||||||||||
| Forfeited/expired | — | — | (18) | 60.71 | (47) | 50.71 | |||||||||||||||||||||||||||||
| Balance, October 2, 2021 | 968 | $ | 18.86 | 209 | $ | 48.59 | 425 | $ | 54.34 | ||||||||||||||||||||||||||
7. EARNINGS PER SHARE
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 stock-based awards granted under stock-based compensation plans.
The following table sets forth the calculation of earnings per share and weighted-average common shares outstanding at the dates indicated (in thousands, except per share data):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| October 2, 2021 | September 26, 2020 | October 2, 2021 | September 26, 2020 | ||||||||||||||||||||
| Net income | $ | 52,967 | $ | 51,445 | $ | 139,721 | $ | 93,407 | |||||||||||||||
| Weighted-average common shares outstanding—basic | 87,526 | 87,032 | 87,343 | 86,933 | |||||||||||||||||||
| Effect of dilutive securities | 1,224 | 1,062 | 1,293 | 744 | |||||||||||||||||||
| Weighted-average common shares outstanding—diluted | 88,750 | 88,094 | 88,636 | 87,677 | |||||||||||||||||||
| Earnings per share | |||||||||||||||||||||||
| Basic | $ | 0.61 | $ | 0.59 | $ | 1.60 | $ | 1.07 | |||||||||||||||
| Diluted | $ | 0.60 | $ | 0.58 | $ | 1.58 | $ | 1.07 | |||||||||||||||
Effects of potentially dilutive securities are presented only in periods in which they are dilutive. No outstanding stock-based awards were excluded from the calculation of diluted earnings per share for the three months ended October 2, 2021. For the three months ended September 26, 2020, outstanding stock-based awards representing less than 0.1 million shares of common stock were excluded from the calculation of diluted earnings per share, because their effect would be anti-dilutive.
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For the nine months ended October 2, 2021 and September 26, 2020, outstanding stock-based awards representing less than 0.1 million and 0.2 million shares, respectively, of common stock were excluded from the calculation of diluted earnings, because their effect would be anti-dilutive.
8. COMMITMENTS AND CONTINGENCIES
Claims and Legal Proceedings
We are involved in various claims and legal proceedings, some of which are covered by insurance. We believe that our existing claims and proceedings, and the potential losses relating to such contingencies, will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Note Regarding Forward-Looking Statements
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 described in more detail in Part I “Item 1A. Risk Factors” included in this Quarterly Report on Form 10-Q. See also “Cautionary Statement Regarding Forward-Looking Statements” immediately prior to Part I, Item I in this Quarterly Report on Form 10-Q.
Overview of Business
Headquartered in Austin, Texas, YETI is a global designer, retailer, and distributor of innovative outdoor products. From coolers and drinkware to bags and apparel, YETI products are built to meet the unique and varying needs of diverse outdoor pursuits, whether in the remote wilderness, at the beach, or anywhere life takes you. By consistently delivering high-performing, exceptional products, we have built a strong following of brand loyalists throughout the world, ranging from serious outdoor enthusiasts to individuals who simply value products of uncompromising quality and design. We have an unwavering commitment to outdoor and recreation communities, and we are relentless in our pursuit of building superior products for people to confidently enjoy life outdoors and beyond.
We distribute our products through a balanced omni-channel platform, consisting of our wholesale and direct-to-consumer (“DTC”) channels. In our wholesale channel, we sell our products through select national and regional accounts and an assemblage of independent retail partners throughout the United States, Canada, Australia, New Zealand, Europe, and Japan. We carefully evaluate and select retail partners that have an image and approach that are consistent with our premium brand and pricing. Our domestic national and regional specialty retailers include Dick’s Sporting Goods, Lowe’s Home Improvement, REI, Academy Sports + Outdoors, Bass Pro Shops, Ace Hardware, and Scheels. We sell our products in our DTC channel to customers on YETI.com, country and region specific YETI websites, and YETI Authorized on the Amazon Marketplace, as well as customized products with licensed marks and original artwork through our corporate sales program and at YETI.com. Our corporate sales program offers customized products to corporate customers for a wide-range of related events and activities, and in certain instances may also offer products to re-sell. Additionally, we sell our full line of products in our retail stores.
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.
COVID-19 and Operational Update
The COVID-19 pandemic continues to significantly impact the global economy and cause disruption and volatility. We continue to monitor the situation and our focus remains to prioritize the health and safety of our employees and our consumers.
In the final weeks of the first quarter of 2020, our sales were adversely impacted due to the decrease in consumer spending and temporary store closures attributed to the COVID-19 pandemic. However, in the second quarter of 2020, we began to see increased demand for outdoor recreation and leisure lifestyle products and, to date, consumer demand for our products has remained robust.
The COVID-19 pandemic has impacted some of our manufacturing partners and logistics providers. During 2021, we began experiencing extended inventory transit times, primarily due to port congestion and transportation delays as well as labor and container shortages, which has negatively impacted product availability, most prominently in our wholesale channel. As a result, we remain inventory constrained and continue to work to replenish our distribution channels to meet customer demand.
The resurgence of COVID-19 lockdowns in key sourcing countries, particularly Vietnam, has also resulted in additional supply disruptions. Additionally, we have experienced higher inbound freight cost and certain product input costs as a result of this dynamic environment, which negatively impacted gross margin beginning in the second quarter of 2021. We expect inbound freight costs and certain product input costs will continue to be elevated throughout the remainder of the fiscal year.
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To date, the COVID-19 pandemic and its effects have not had a material adverse impact on our net sales or operations. We recognize that we are operating in a challenging and highly uncertain landscape and we believe we may continue to experience varying degrees of disruption and volatility. We are continuing to monitor and navigate these conditions, including disruptions to our supply chain and product availability, as well as costs, and potentially take additional actions to address and manage them. While we intend to focus on disciplined investments for future, long-term growth, in certain circumstances, there may be developments outside our control requiring us to adjust our operating plan. As such, given the dynamic nature of this situation, including resurgences of COVID-19 and, in particular, new and more contagious or vaccine resistant variants, as well as uncertainties about the magnitude and duration of global supply chain constraints, we cannot reasonably estimate the impacts that these conditions may have on our financial condition, results of operations or cash flows in the future. In addition, see Item 1A, “Risk Factors - Risks Related to Market and Global Economic Conditions,” included herein for updates to our risk factors regarding risks associated with the COVID-19 pandemic.
Recent Developments
New Distribution Facility
To support the continued growth of our business, we entered into a service agreement with a third-party logistics provider to operate a new distribution facility in Memphis, Tennessee with approximately 970 thousand square feet. The service agreement commenced at the end of the second quarter of 2021. The initial term of the agreement is 5 years. We began distributing from this facility in the third quarter of fiscal 2021, and we expect to exit our distribution facility in Dallas, Texas by the end of 2021.
General
Components of Our Results of Operations
Net Sales. Net sales are comprised of wholesale channel sales to our retail partners and sales through our direct-to-consumer (“DTC”) channel. Net sales in both channels reflect the impact of product returns, as well as discounts for certain sales programs or promotions.
We discuss the net sales of our products in our two primary categories: Coolers & Equipment and Drinkware. Our Coolers & Equipment category includes hard coolers, soft coolers, bags, outdoor equipment, and cargo, as well as accessories and replacement parts for these products. Our Drinkware category includes our stainless-steel drinkware products and related accessories. In addition, our Other category is primarily comprised of ice substitutes, and YETI-branded gear, such as shirts, hats, and other miscellaneous products.
Gross profit. 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 expense of our molds and equipment, and the cost of customizing Drinkware products. We calculate gross margin as gross profit divided by net sales. Our DTC channel generally generates higher gross margin than our wholesale channel due to differentiated pricing between these channels.
Selling, general, and administrative expenses. Selling, general, and administrative (“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, non-cash stock-based compensation, cost of product shipment to our customers, depreciation and amortization expense, and general corporate infrastructure expenses. Our variable expenses, including outbound freight, online marketplace fees, third-party logistics fees, and credit card processing fees, will vary as they are dependent on our sales volume and our channel mix. Our DTC channel SG&A costs are generally higher as a percentage of net sales than our wholesale channel distribution costs.
Fiscal Year. We have a 52-to 53-week fiscal year that ends 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. Our fiscal year ending January 1, 2022 (“fiscal year 2021”) is a 52-week period. The first quarter of our fiscal year 2021 ended on April 3, 2021, the second quarter ended on July 3, 2021, and the third quarter ended on October 2, 2021. Our fiscal year ended January 2, 2021 (“fiscal year 2020”) was a 53-week period. Unless otherwise stated, references to particular years, quarters, months and periods refer to our fiscal years ended in January and the associated quarters, months, and periods of those fiscal years. The unaudited condensed consolidated financial results presented herein represent the three and nine months ended October 2, 2021 and September 26, 2020.
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Results of Operations
The discussion below should be read in conjunction with the following table and our unaudited condensed consolidated financial statements, and related notes. The following table sets forth selected statement of operations data, and their corresponding percentage of net sales, for the periods indicated (dollars in thousands)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| October 2, 2021 | September 26, 2020 | October 2, 2021 | September 26, 2020 | ||||||||||||||||||||||||||||||||
| Statement of Operations | |||||||||||||||||||||||||||||||||||
| Net sales | $ | 362,643 | 100 | % | $ | 294,603 | 100 | % | $ | 967,864 | 100 | % | $ | 715,953 | 100 | % | |||||||||||||||||||
| Cost of goods sold | 155,640 | 43 | % | 120,627 | 41 | % | 406,560 | 42 | % | 311,994 | 44 | % | |||||||||||||||||||||||
| Gross profit | 207,003 | 57 | % | 173,976 | 59 | % | 561,304 | 58 | % | 403,959 | 56 | % | |||||||||||||||||||||||
| Selling, general, and administrative expenses | 138,274 | 38 | % | 103,864 | 35 | % | 380,101 | 39 | % | 271,152 | 38 | % | |||||||||||||||||||||||
| Operating income | 68,729 | 19 | % | 70,112 | 24 | % | 181,203 | 19 | % | 132,807 | 19 | % | |||||||||||||||||||||||
| Interest expense | (833) | — | % | (1,963) | 1 | % | (2,519) | — | % | (7,730) | 1 | % | |||||||||||||||||||||||
| Other expense | (1,239) | — | % | (82) | — | % | (2,492) | — | % | (1,020) | — | % | |||||||||||||||||||||||
| Income before income taxes | 66,657 | 18 | % | 68,067 | 23 | % | 176,192 | 18 | % | 124,057 | 17 | % | |||||||||||||||||||||||
| Income tax expense | (13,690) | 4 | % | (16,622) | 6 | % | (36,471) | 4 | % | (30,650) | 4 | % | |||||||||||||||||||||||
| Net income | $ | 52,967 | 15 | % | $ | 51,445 | 17 | % | $ | 139,721 | 14 | % | $ | 93,407 | 13 | % | |||||||||||||||||||
Three Months Ended October 2, 2021 Compared to September 26, 2020
| Three Months Ended | ||||||||||||||||||||||||||
| October 2, 2021 | September 26, 2020 | Change | ||||||||||||||||||||||||
| (dollars in thousands) | $ | % | ||||||||||||||||||||||||
| Net sales | $ | 362,643 | $ | 294,603 | $ | 68,040 | 23 | % | ||||||||||||||||||
| Gross profit | $ | 207,003 | $ | 173,976 | $ | 33,027 | 19 | % | ||||||||||||||||||
| Gross margin (Gross profit as a % of net sales) | 57.1 | % | 59.1 | % | ||||||||||||||||||||||
| Selling, general, and administrative expenses | $ | 138,274 | $ | 103,864 | $ | 34,410 | 33 | % | ||||||||||||||||||
| SG&A as a % of net sales | 38.1 | % | 35.3 | % | ||||||||||||||||||||||
Net Sales
Net sales increased $68.0 million, or 23%, to $362.6 million for the three months ended October 2, 2021, compared to $294.6 million for the three months ended September 26, 2020. The increase in net sales was primarily driven by our faster growing DTC channel as well as growth in our wholesale channel. DTC channel net sales increased $46.7 million, or 31%, to $197.1 million, compared to $150.4 million in the prior year quarter, driven by both Drinkware and Coolers & Equipment categories. Net sales in our DTC channel continue to be favorably impacted by strong demand for outdoor recreation and leisure lifestyle products as well as a favorable shift to online shopping, resulting in an increase in sales volume compared to the same prior year period. As a result, our channel mix continued to shift towards our DTC channel from 51% in the third quarter of 2020 to 54% in the third quarter of 2021. Net sales in our wholesale channel increased $21.3 million, or 15%, to $165.5 million, compared to $144.2 million in the same period last year, primarily driven by both Drinkware and Coolers & Equipment categories.
Net sales in our two primary product categories were as follows:
•Drinkware net sales increased by $39.1 million, or 24%, to $205.0 million, compared to $165.9 million in the prior year quarter, reflecting the continued expansion of our product offerings, including the introduction of new colorways and sizes, and strong demand for customization.
•Coolers & Equipment net sales increased by $24.8 million, or 20%, to $149.0 million, compared to $124.2 million in the same period last year, driven by strong performance in bags, outdoor living products, soft coolers, and hard coolers.
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Gross Profit
Gross profit increased $33.0 million, or 19%, to $207.0 million, compared to $174.0 million in the prior year quarter. Gross margin decreased 200 basis points to 57.1% from 59.1% in the prior year quarter. The decrease in gross margin was primarily driven by:
•higher inbound freight, which unfavorably impacted gross margin by 210 basis point;
•the non-renewal of the Global System of Preferences (“GSP”), which impacted import duties primarily on our hard coolers, and unfavorably impacted gross margin by 110 basis points; and
•other impacts, which unfavorably impacted gross margin by 70 basis points.
These decreases were partially offset by 140 basis points from lower inventory reserves as well as 50 basis points from the favorable impact of product cost improvements across our product portfolio.
Selling, General, and Administrative Expenses
SG&A expenses increased $34.4 million, or 33%, to $138.3 million for the three months ended October 2, 2021, compared to $103.9 million for the three months ended September 26, 2020. The 2020 period included the benefit of cost reduction initiatives implemented in response to the COVID-19 pandemic during that quarter. As a percentage of net sales, SG&A expenses increased approximately 280 basis points to 38.1% for the three months ended October 2, 2021 compared to 35.3% for the three months ended September 26, 2020. The increase in SG&A expenses was primarily driven by:
•an increase in variable expenses of $7.8 million. Variable expenses remained flat as a percent of net sales, reflecting a more balanced channel mix in the quarter. The higher variable expenses were comprised of:
–higher distribution costs including outbound freight, credit card processing fees, and third-party logistics fees, partially offset by a decrease in online marketplace fees; and
•an increase in non-variable expenses of $26.6 million, resulting in a 280 basis point increase as a percent of net sales, comprised of:
–an increase in marketing expenses, employee costs, non-variable distribution costs, information technology expenses, facilities costs, professional fees, and other operating expenses.
Non-Operating Expenses
Interest expense was $0.8 million for the three months ended October 2, 2021, compared to $2.0 million for the three months ended September 26, 2020. The decrease in interest expense was primarily due to decreased outstanding long-term debt under our Credit Facility (as defined below).
Income tax expense was $13.7 million for the three months ended October 2, 2021, compared to $16.6 million for the three months ended September 26, 2020. The effective tax rate for the three months ended October 2, 2021 was 21%, compared to 24% for the three months ended September 26, 2020. The impact of a discrete tax benefit related to stock compensation resulted in a decrease in income tax expense and a lower effective tax rate for the three months ended October 2, 2021.
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Nine Months Ended October 2, 2021 Compared to September 26, 2020
| Nine Months Ended | Change | |||||||||||||||||||||||||
| October 2, 2021 | September 26, 2020 | |||||||||||||||||||||||||
| (dollars in thousands) | $ | % | ||||||||||||||||||||||||
| Net sales | $ | 967,864 | $ | 715,953 | $ | 251,911 | 35 | % | ||||||||||||||||||
| Gross profit | $ | 561,304 | $ | 403,959 | $ | 157,345 | 39 | % | ||||||||||||||||||
| Gross margin (Gross profit as a % of net sales) | 58.0 | % | 56.4 | % | ||||||||||||||||||||||
| Selling, general, and administrative expenses | $ | 380,101 | $ | 271,152 | $ | 108,949 | 40 | % | ||||||||||||||||||
| SG&A as a % of net sales | 39.3 | % | 37.9 | % | ||||||||||||||||||||||
Net Sales
Net sales increased $251.9 million, or 35%, to $967.9 million for the nine months ended October 2, 2021, compared to $716.0 million for the nine months ended September 26, 2020. The increase in net sales was primarily driven by our faster growing DTC channel as well as growth in our wholesale channel. DTC channel net sales increased $157.7 million, or 43%, to $520.8 million, compared to $363.1 million in the prior year period, driven by both Drinkware and Coolers & Equipment categories. Net sales in our DTC channel continue to be favorably impacted by strong demand for outdoor recreation and leisure lifestyle products as well as a favorable shift to online shopping, resulting in an increase in sales volume during the period. As a result, our channel mix continued to shift towards our DTC channel from 51% in the first nine months of 2020 to 54% in the first nine months of 2021. Net sales in our wholesale channel increased $94.2 million, or 27%, to $447.1 million, compared to $352.9 million in the same period last year, primarily driven by both Drinkware and Coolers & Equipment. In the second quarter of 2020, wholesale channel net sales were adversely impacted by the temporary store closures due to the COVID-19 pandemic.
Net sales in our two primary product categories were as follows:
•Drinkware net sales increased by $153.9 million, or 39%, to $546.8 million, compared to $392.9 million in the prior year period, reflecting the continued expansion of our Drinkware product offerings, including the introduction of new colorways and sizes, and strong demand for customization.
•Coolers & Equipment net sales increased by $88.0 million, or 28%, to $400.3 million, compared to $312.3 million in the same period last year, primarily driven by growth in bags, outdoor living products, soft coolers, hard coolers, and cargo.
Gross Profit
Gross profit increased $157.3 million, or 39%, to $561.3 million compared to $404.0 million in the prior year period. Gross margin increased 160 basis points to 58.0% from 56.4% in the same period last year. The increase in gross margin was primarily driven by:
•product cost improvements across our product portfolio, which favorably impacted gross margin by approximately 90 basis points;
•lower inventory reserves, which favorably impacted gross margin by 80 basis points;
•an increase in the mix of higher margin DTC channel net sales, which favorably impacted gross margin by approximately 80 basis points;
•fewer promotions in our DTC channel, which favorably impacted gross margin by 20 basis points;
•decreased tariffs, which favorably impacted gross margin by 10 basis points; and
•all other impacts, which favorably impacted gross margin by 10 basis points.
These gains were partially offset by 80 basis points from the unfavorable impact of the non-renewal of the GSP which impacted import duties primarily on our hard coolers, as well as higher inbound freight, which unfavorably impacted gross margin by 50 basis points.
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Selling, General, and Administrative Expenses
SG&A expenses increased by $108.9 million, or 40%, to $380.1 million for the nine months ended October 2, 2021 compared to $271.2 million for the nine months ended September 26, 2020. The 2020 period included the benefit of cost reduction initiatives implemented in response to the COVID-19 pandemic. As a percentage of net sales, SG&A increased 140 basis points to 39.3% for the nine months ended October 2, 2021 compared to 37.9% for the nine months ended September 26, 2020. The increase in SG&A expenses was primarily driven by:
•an increase in variable expenses of $30.6 million, resulting in a 10 basis point increase as a percent of net sales, driven by our faster growing and higher margin DTC channel, which grew to 54% of net sales during the period, comprised of:
–higher distribution costs, including outbound freight, credit card processing fees, online marketplace fees, and third-party logistics fees; and
•an increase in non-variable expenses of $78.3 million, resulting in a 130 basis point increase as a percent of net sales, comprised of:
–an increase in marketing expenses, employee costs, information technology expenses, professional fees, non-variable distribution costs, higher facilities costs, and other operating expenses.
Non-Operating Expenses
Interest expense was $2.5 million for the nine months ended October 2, 2021, compared to $7.7 million for the nine months ended September 26, 2020. The decrease in interest expense was primarily due to decreased outstanding long-term debt under our Credit Facility (as defined below).
Income tax expense was $36.5 million for the nine months ended October 2, 2021, compared to $30.7 million for the nine months ended September 26, 2020. The increase in income tax expense is due to higher income before taxes partially offset by higher discrete tax benefit related to stock compensation in the nine months ended October 2, 2021. The effective tax rate for the nine months ended October 2, 2021 was 21%, compared to 25% for the nine months ended September 26, 2020. The impact of a discrete tax benefit related to stock compensation resulted in a lower effective tax rate for the nine months ended October 2, 2021.
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Liquidity and Capital Resources
Our cash requirements have principally been for working capital purposes, long-term debt repayments, and capital expenditures. We fund our working capital, primarily inventory, accounts receivable, accounts payable as well as capital investments from cash flows from operating activities, cash on hand, and borrowings available under our Revolving Credit Facility (as defined below). As discussed under “COVID-19 and Operational Update” above, although the potential magnitude and economic impacts of COVID-19 and its effects are highly uncertain, we believe that our current operating performance, operating plan, our strong cash position, including cash generated from operations and borrowings available under our Revolving Credit Facility, will be sufficient to satisfy our liquidity needs and capital expenditure requirements for at least the next twelve months.
As of October 2, 2021, we had a cash balance of $259.3 million and $43.0 million of working capital (excluding cash), and $150.0 million of borrowings available under the Revolving Credit Facility.
We are party to a senior secured credit agreement (the “Credit Facility”) that provides for a $150.0 million revolving credit facility maturing on December 17, 2024 (“Revolving Credit Facility”) and a $300.0 million Term Loan A maturing on December 17, 2024 (the “Term Loan A”). At October 2, 2021, we had $118.1 million principal amount of indebtedness outstanding related to Term Loan A under the Credit Facility and no amounts outstanding under the Revolving Credit Facility. The weighted average interest rates for borrowings under Term Loan A was 1.85% during the nine months ended October 2, 2021. At October 2, 2021, we were in compliance with all covenants and expect to remain in compliance with all covenants under the Credit Facility.
Cash Flows from Operating, Investing, and Financing Activities
The following table summarizes our cash flows from operating, investing and financing activities for the periods indicated (in thousands):
| Nine Months Ended | |||||||||||
| October 2, 2021 | September 26, 2020 | ||||||||||
| Cash flows provided by (used in): | |||||||||||
| Operating activities | $ | 73,199 | $ | 239,099 | |||||||
| Investing activities | (47,908) | (16,281) | |||||||||
| Financing activities | (18,188) | (60,382) | |||||||||
Operating Activities
Cash flows related to operating activities are dependent on net income, non-cash adjustments to net income, and changes in working capital. The decrease in cash provided by operating activities in the first nine months of fiscal 2021 compared to net cash provided by operating activities in the first nine months of fiscal 2020 is primarily due to an increase in net cash used for working capital, partially offset by an increase in net income, adjusted for non-cash items, for the periods compared. The increase in working capital was primarily due to an increase in inventory, partially offset by an increase in accounts payable.
Investing Activities
The increase in cash used in investing activities in the first nine months of fiscal 2021 primarily related to purchases for technology upgrades and enhancements, including the phased upgrade of our SAP enterprise resource planning (“ERP”) system and investment in data analytics, as well as production molds, tooling and equipment, and facilities.
Financing Activities
The decrease in cash used by financing activities in the first nine months of fiscal 2021 was primarily driven by higher repayments of long-term debt in the first nine months of fiscal 2020.
For 2021, we expect capital expenditures for property and equipment (excluding finance lease assets) to be between $55 million and $60 million, primarily to support our growing business with investments in technology, including the phased upgrade of our SAP ERP system and investments in data analytics, and production molds and tooling and equipment to support both new product innovation and to increase production capacity.
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Off-Balance Sheet Arrangements
At October 2, 2021 and January 2, 2021, we had no off-balance sheet debt or arrangements.
Recent Accounting Pronouncements
For a description of recently issued and adopted accounting pronouncements, including the respective dates of adoption and expected effects on our results of operations and financial condition, see “Recently Adopted Accounting Guidance” and “Recent Accounting Guidance Not Yet Adopted” in Note 1 of the Unaudited Condensed Consolidated Financial Statements.
Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates. A discussion of the accounting policies that management considers critical in that they involve significant management judgments and assumptions, require estimates about matters that are inherently uncertain and because they are important for understanding and evaluating our reported financial results is included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended January 2, 2021 filed with the U.S. Securities and Exchange Commission (“SEC”). Other than the adoption of recent accounting standards as discussed in Note 1 of our Unaudited Condensed Consolidated Financial Statements, there have been no significant changes to our critical accounting policies.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to our market risk exposures or management of market risk from those disclosed in Quantitative and Qualitative Disclosures About Market Risk included under Item 7A in our Annual Report on Form 10-K for the year ended January 2, 2021.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to ensure that information required to be disclosed is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding disclosures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of October 2, 2021.
Changes in Internal Control over Financial Reporting
During the quarter ended October 2, 2021, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations in Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures, or our internal controls, will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake or fraud. Additionally, controls can be circumvented by individuals or groups of persons or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements in our public reports due to error or fraud may occur and not be detected.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in various claims and legal proceedings, some of which are covered by insurance. We believe that our existing claims and proceedings, and the probability of losses relating to such contingencies, will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
Item 1A. Risk Factors
The risks and uncertainties discussed below update and supersede the risks and uncertainties previously disclosed in Part I, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended July 3, 2021, which was filed with the SEC on August 12, 2021. There have been no material changes to the risks and uncertainties previously disclosed in such Quarterly Report on Form 10-Q.
The risks discussed below are not the only ones facing our business but do represent those risks that we believe are material to us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also harm our business. Please read the cautionary notice regarding forward-looking statements under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Risks Related to Our Business, Operations and Industry
Our business depends on maintaining and strengthening our brand to generate and maintain ongoing demand for our products, and a significant reduction in such demand could harm our results of operations.
The YETI name and premium brand image are integral to the growth of our business, as well as to the implementation of our strategies for expanding our business. Our success depends on the value and reputation of our brand, which, in turn, depends on factors such as the quality, design, performance, functionality, and durability of our products, the image of our e-commerce platform and retail partner floor spaces, our communication activities, including advertising, social media, and public relations, and our management of the customer experience, including direct interfaces through customer service. Maintaining, promoting, and positioning our brand are important to expanding our customer base and will depend largely on the success of our marketing and merchandising efforts and our ability to provide consistent, high-quality customer experiences. We intend to continue making substantial investments in these areas in order to maintain and enhance our brand, and such investments may not be successful. Ineffective marketing, negative publicity, product diversion to unauthorized distribution channels, product or manufacturing defects, counterfeit products, unfair labor practices, and failure to protect the intellectual property rights in our brand are some of the potential threats to the strength of our brand, and those and other factors could rapidly and severely diminish customer confidence in us. Furthermore, these factors could cause our customers to lose the personal connection they feel with the YETI brand. We believe that maintaining and enhancing our brand image in our current markets and in new markets where we have limited brand recognition is important to expanding our customer base. If we are unable to maintain or enhance our brand in current or new markets, our growth strategy and results of operations could be harmed.
If we are unable to successfully design, develop and market new products, our business may be harmed.
The market for products in the outdoor and recreation products industry is characterized by new product introductions, frequent enhancements to existing products, and changing customer demands, needs and preferences. To maintain and increase sales, we must continue to introduce new products and improve or enhance our existing products on a timely basis to respond to new and evolving consumer preferences. The success of our new and enhanced products depends on many factors, including anticipating consumer preferences, finding innovative solutions to consumer problems, differentiating our products from those of our competitors, and maintaining the strength of our brand. The design and development of our products is costly, and we typically have several products in development at the same time. Problems in the design or quality of our products, or delays in product introduction, may harm our brand, business, financial condition, and results of operations. Any new products that we develop and market may not generate sufficient revenues to recoup their development, production, marketing, selling and other costs.
Our business could be harmed if we are unable to accurately forecast our results of operations and growth rate.
We may not be able to accurately forecast our results of operations and growth rate. Forecasts are particularly challenging as we expand into new markets and geographies, develop and market new products, and face further uncertainty related to the duration and impact of the rapidly evolving COVID-19 pandemic and its effects, including the impact of global supply chain constraints. Our historical sales, expense levels, and profitability may not be an appropriate basis for forecasting future results.
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Failure to accurately forecast our results of operations and growth rate could cause us to make poor operating decisions and we may not be able to adjust in a timely manner. Consequently, actual results could be materially lower than anticipated. Even if the markets in which we compete expand, we cannot assure you that our business will grow at similar rates, if at all. Furthermore, if we fail to accurately forecast our results of operations and growth rate, we may experience excess inventory levels or a shortage of product to deliver to our customers. Inventory levels in excess of customer demand may result in inventory write-downs or write-offs and the sale of excess inventory at discounted prices or in less preferred distribution channels, which could impair our brand image and harm our gross margin. In addition, if we underestimate our growth rate and the demand for our products, our manufacturers may not be able to produce products to meet our customer requirements, and this could result in delays in the shipment of our products and our ability to recognize revenue, lost sales, as well as damage to our reputation and retailer and distributor relationships. For more information regarding the inventory risk related to our potential inability to accurately forecast our results of operations, please see “— Our results of operations could be materially harmed if we are unable to accurately forecast demand for our products.”
We may not be able to effectively manage our growth.
As we grow our business, slower growing or reduced demand for our products, increased competition, a decrease in the growth rate of our overall market, failure to develop and successfully market new products, or the maturation of our business or market could harm our business. We have made and expect to continue to make significant investments in our research and development and sales and marketing organizations, expand our operations and infrastructure both domestically and internationally, design and develop new products, and enhance our existing products. In addition, in connection with operating as a public company, we will incur significant additional legal, accounting, and other expenses that we did not incur as a private company. If our sales do not increase at a sufficient rate to offset these increases in our operating expenses, our profitability may decline in future periods.
We have expanded our operations rapidly since our inception. Our employee headcount and the scope and complexity of our business have increased substantially over the past several years. We have only a limited history operating our business at its current scale. Our management team does not have substantial tenure working together. Consequently, if our operations continue to grow at a rapid pace, we may experience difficulties in managing this growth and building the appropriate processes and controls. Future rapid growth may increase the strain on our resources, and we could experience operating difficulties, including difficulties in sourcing, logistics, recruiting, maintaining internal controls, marketing, designing innovative products, and meeting consumer needs. If we do not adapt to meet these evolving challenges, the strength of our brand may erode, the quality of our products may suffer, we may not be able to deliver products on a timely basis to our customers, and our corporate culture may be harmed.
Our marketing strategy of associating our brand and products with activities rooted in passion for the outdoors may not be successful with existing and future customers.
We believe that we have been successful in marketing our products by associating our brand and products with activities rooted in passion for the outdoors. To sustain long-term growth, we must continue to successfully promote our products to consumers who identify with or aspire to these activities, as well as to individuals who simply value products of uncompromising quality and design. If we fail to continue to successfully market and sell our products to our existing customers or expand our customer base, our sales could decline, or we may be unable to grow our business.
If we fail to attract new customers, or fail to do so in a cost-effective manner, we may not be able to increase sales.
Our success depends, in part, on our ability to attract customers in a cost-effective manner. In order to expand our customer base, we must appeal to and attract customers ranging from serious outdoor enthusiasts to individuals who simply value products of uncompromising quality and design. We have made, and we expect that we will continue to make, significant investments in attracting new customers, including through the use of corporate partnerships, YETI Ambassadors, traditional, digital, and social media, original YETI films, and participation in, and sponsorship of, community events. Marketing campaigns can be expensive and may not result in the cost-effective acquisition of customers. Further, as our brand becomes more widely known, future marketing campaigns may not attract new customers at the same rate as past campaigns. If we are unable to attract new customers, or fail to do so in a cost-effective manner, our growth could be slower than we expect and our business will be harmed.
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Our growth depends, in part, on expanding into additional consumer markets, and we may not be successful in doing so.
We believe that our future growth depends not only on continuing to reach our current core demographic, but also continuing to broaden our retail partner and customer base. The growth of our business will depend, in part, on our ability to continue to expand our retail partner and customer bases in the United States, as well as in international markets, including Canada, Australia, Europe, and Japan. In these markets, we may face challenges that are different from those we currently encounter, including competitive, merchandising, distribution, hiring, and other difficulties. We may also encounter difficulties in attracting customers due to a lack of consumer familiarity with or acceptance of our brand, or a resistance to paying for premium products, particularly in international markets. We continue to evaluate marketing efforts and other strategies to expand the customer base for our products. In addition, although we are investing in sales and marketing activities to further penetrate newer regions, including expansion of our dedicated sales force, we cannot assure you that we will be successful. If we are not successful, our business and results of operations may be harmed.
The markets in which we compete are highly competitive and include numerous other brands and retailers that offer a wide variety of products that compete with our products; if we fail to compete effectively, we could lose our market position.
The markets in which we compete are highly competitive, with low barriers to entry. Numerous other brands and retailers offer a wide variety of products that compete with our coolers, drinkware, and other products, including our bags, storage, and outdoor lifestyle products and accessories. Competition in these product markets is based on a number of factors including product quality, performance, durability, styling, brand image and recognition, and price. We believe that we are one of the market leaders in both the U.S. premium cooler and U.S. premium stainless-steel drinkware markets. We believe that we have been able to compete successfully largely on the basis of our brand, superior design capabilities, and product development, as well as on the breadth of our independent retailers, national, and regional retail partners, and growing DTC channel. Our competitors may be able to develop and market higher quality products that compete with our products, sell their products for lower prices, adapt to changes in consumers’ needs and preferences more quickly, devote greater resources to the design, sourcing, distribution, marketing, and sale of their products, or generate greater brand recognition than us. In addition, as we expand into new product categories, we have faced, and will continue to face, different and, in some cases, more formidable competition. We believe many of our competitors and potential competitors have significant competitive advantages, including longer operating histories, ability to leverage their sales efforts and marketing expenditures across a broader portfolio of products, global product distribution, larger and broader retailer bases, more established relationships with a larger number of suppliers and manufacturing partners, greater brand recognition, larger or more effective brand ambassador and endorsement relationships, greater financial strength, larger research and development teams, larger marketing budgets, and more distribution and other resources than we do. Some of our competitors may aggressively discount their products or offer other attractive sales terms in order to gain market share, which could result in pricing pressures, reduced profit margins, or lost market share. If we are not able to overcome these potential competitive challenges, effectively market our current and future products, and otherwise compete effectively against our current or potential competitors, our prospects, results of operations, and financial condition could be harmed.
Competitors have imitated and attempted to imitate, and will likely continue to imitate or attempt to imitate, our products and technology. If we are unable to protect or preserve our brand image and proprietary rights, our business may be harmed.
As our business continues to expand, our competitors have imitated or attempted to imitate, and will likely continue to imitate or attempt to imitate, our product designs and branding, which could harm our business and results of operations. Only a portion of the intellectual property used in the manufacture and design of our products is patented, and we therefore rely significantly on trade secrets, trade and service marks, trade dress, and the strength of our brand. We regard our patents, trade dress, trademarks, copyrights, trade secrets, and similar proprietary rights as critical to our success. We also rely on trade secret protection and confidentiality agreements with our employees, consultants, suppliers, manufacturers, and others to protect our proprietary rights. Nevertheless, the steps we take to protect our proprietary rights against infringement or other violation may be inadequate, and we may experience difficulty in effectively limiting the unauthorized use of our patents, trademarks, trade dress, and other intellectual property and proprietary rights worldwide. We also cannot guarantee that others will not independently develop technology with the same or similar function to any proprietary technology we rely on to conduct our business and differentiate ourselves from our competitors. Because a significant portion of our products are manufactured overseas in countries where counterfeiting is more prevalent, and we intend to increase our sales overseas over the long term, we may experience increased counterfeiting of our products. Unauthorized use or invalidation of our patents, trademarks, copyrights, trade dress, trade secrets, or other intellectual property or proprietary rights may cause significant damage to our brand and harm our results of operations.
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While we actively develop and protect our intellectual property rights, there can be no assurance that we will be adequately protected in all countries in which we conduct our business or that we will prevail when defending our patent, trademark, and proprietary rights. Additionally, we could incur significant costs and management distraction in pursuing claims to enforce our intellectual property rights through litigation and defending any alleged counterclaims. If we are unable to protect or preserve the value of our patents, trade dress, trademarks, copyrights, or other intellectual property rights for any reason, or if we fail to maintain our brand image due to actual or perceived product or service quality issues, adverse publicity, governmental investigations or litigation, or other reasons, our brand and reputation could be damaged, and our business may be harmed.
We rely on third-party contract manufacturers, and problems with, or loss of, our suppliers or an inability to obtain raw materials could harm our business and results of operations.
Our products are produced by third-party contract manufacturers. We face the risk that these third-party contract manufacturers may not produce and deliver our products on a timely basis or at all. We have experienced, and will likely continue to experience, operational difficulties with our manufacturers. These difficulties include reductions in the availability of production capacity, errors in complying with product specifications and regulatory and customer requirements, insufficient quality control, failures to meet production deadlines, failure to achieve our product quality standards, increases in costs of materials, and manufacturing or other business interruptions. The ability of our manufacturers to effectively satisfy our production requirements could also be impacted by manufacturer financial difficulty or damage to their operations caused by fire, terrorist attack, riots, natural disaster, public health issues such as the current COVID-19 pandemic (or other future pandemics or epidemics), or other events. The failure of any manufacturer to perform to our expectations could result in supply shortages or delays for certain products and harm our business. If we experience significantly increased demand, or if we need to replace an existing manufacturer due to lack of performance, we may be unable to supplement or replace our manufacturing capacity on a timely basis or on terms that are acceptable to us, which may increase our costs, reduce our margins, and harm our ability to deliver our products on time. For certain of our products, it may take a significant amount of time to identify and qualify a manufacturer that has the capability and resources to produce our products to our specifications in sufficient volume and satisfy our service and quality control standards.
The capacity of our manufacturers to produce our products is also dependent upon the availability of raw materials. Our manufacturers may not be able to obtain sufficient supply of raw materials, which could result in delays in deliveries of our products by our manufacturers or increased costs. Any shortage of raw materials or inability of a manufacturer to produce or ship our products in a timely manner, or at all, could impair our ability to ship orders of our products in a cost-efficient, timely manner and could cause us to miss the delivery requirements of our customers. As a result, we could experience cancellations of orders, refusals to accept deliveries, or reductions in our prices and margins, any of which could harm our financial performance, reputation, and results of operations.
If we fail to timely and effectively obtain shipments of products from our manufacturers and deliver products to our retail partners and customers, our business and results of operations could be harmed.
Our business depends on our ability to source and distribute products in a timely manner. However, we cannot control all of the factors that might affect the timely and effective procurement of our products from our third-party contract manufacturers and the delivery of our products to our retail partners and customers.
Our third-party contract manufacturers ship most of our products to our distribution centers in Dallas, Texas, and Salt Lake City, Utah. Our reliance on only two geographical locations for our distribution centers makes us more vulnerable to natural disasters, weather-related disruptions, accidents, system failures, public health issues such as the current COVID-19 pandemic (or other future pandemics or epidemics), or other unforeseen events that could delay or impair our ability to fulfill retailer orders and/or ship merchandise purchased on our website, which could harm our sales.
We entered into a service agreement with a third-party logistics provider to operate a new warehouse and distribution facility located in Memphis, Tennessee, which commenced at the end of the second quarter of 2021, and we intend to transition the current Dallas, Texas operations to this facility by the end of 2021. Any disruption as a result of business integration, transition of our primary distribution center to the new third-party logistics facility, or third-party performance at our distribution centers, could result in increased costs, expenses and/or shipping times, and could cause us to incur customer fees and penalties, reduce sales, damage customer service, and harm our business.
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We import our products, and we are also vulnerable to risks associated with products manufactured abroad, including, among other things: (a) risks of damage, destruction, or confiscation of products while in transit to our distribution centers; and (b) transportation and other delays in shipments, including as a result of heightened security screening, port congestion, container and labor shortages, and inspection processes or other port-of-entry limitations or restrictions in the United States. In order to meet demand for a product, we have chosen in the past, and may choose in the future, to arrange for additional quantities of the product, if available, to be delivered through air freight, which is significantly more expensive than standard shipping by sea and, consequently, could harm our gross margins. Failure to procure our products from our third-party contract manufacturers and deliver merchandise to our retail partners and DTC channel in a timely, effective, and economically viable manner could reduce our sales and gross margins, damage our brand, and harm our business.
We also rely on the timely and free flow of goods through open and operational ports from our suppliers and manufacturers. Labor disputes or disruptions at ports, our common carriers, or our suppliers or manufacturers could create significant risks for our business, particularly if these disputes result in work slowdowns, lockouts, strikes, or other disruptions during periods of significant importing or manufacturing, potentially resulting in delayed or canceled orders by customers, unanticipated inventory accumulation or shortages, and harm to our business, results of operations, and financial condition.
In addition, we rely upon independent land-based and air freight carriers for product shipments from our distribution centers to our retail partners and customers who purchase through our DTC channel. We may not be able to obtain sufficient freight capacity on a timely basis or at favorable shipping rates and, therefore, may not be able to receive products from suppliers or deliver products to retail partners or customers in a timely and cost-effective manner.
Accordingly, we are subject to the risks, including labor disputes, union organizing activity, inclement weather, public health crises such as the current COVID-19 pandemic (or other future pandemics or epidemics), and increased transportation costs, associated with our third-party contract manufacturers’ and carriers’ ability to provide products and services to meet our requirements. In addition, if the cost of fuel rises, the cost to deliver products may rise, which could harm our profitability.
Our business is subject to the risk of manufacturer concentrations.
We depend on a limited number of third-party contract manufacturers for the sourcing of our products. For hard coolers, soft coolers, Drinkware, bags, and outdoor living and pet products our two largest manufacturers comprised approximately 89%, 84%, 76%, 91%, and 91% respectively, of our production volume during the first nine months of 2021. For cargo, two manufacturers accounted for all of the production in the first nine months of 2021. As a result of this concentration in our supply chain, our business and operations would be negatively affected if any of our key manufacturers were to experience significant disruption affecting the price, quality, availability, or timely delivery of products. Our manufacturers could also be acquired by our competitors and may become our direct competitors, thus limiting or eliminating our access to manufacturing capacity. The partial or complete loss of our key manufacturers, or a significant adverse change in our relationship with any of these manufacturers, could result in lost sales, added costs, and distribution delays that could harm our business and customer relationships.
Our results of operations could be materially harmed if we are unable to accurately forecast demand for our products.
To ensure adequate inventory supply, we must forecast inventory needs and place orders with our manufacturers before firm orders are placed by our customers. If we fail to accurately forecast customer demand, we may experience excess inventory levels or a shortage of product to deliver to our customers. Factors that could affect our ability to accurately forecast demand for our products include: (a) an increase or decrease in consumer demand for our products; (b) our failure to accurately forecast consumer acceptance for our new products; (c) product introductions by competitors; (d) unanticipated changes in general market conditions or other factors, which may result in cancellations of advance orders or a reduction or increase in the rate of reorders or at-once orders placed by retailers; (e) the impact on consumer demand due to unseasonable weather conditions; (f) weakening of economic conditions or consumer confidence in future economic conditions, which could reduce demand for discretionary items, such as our products; and (g) terrorism or acts of war, or the threat thereof, or political or labor instability or unrest, riots, public health crises such as the current COVID-19 pandemic (or other future pandemics or epidemics), or xenophobia resulting therefrom, which could adversely affect consumer confidence and spending or interrupt production and distribution of product and raw materials.
Inventory levels in excess of customer demand, including Drinkware inventory that we added in 2020 in preparation for recently enacted tariffs or that we may add in preparation for tariffs in the future, may result in inventory write-downs or write-offs and the sale of excess inventory at discounted prices or in less preferred distribution channels, which could impair our brand image and harm our gross margin. In addition, if we underestimate the demand for our products, our manufacturers may not be able to produce products to meet our customer requirements, and this could result in delays in the shipment of our products and our ability to recognize revenue, lost sales, as well as damage to our reputation and retailer and distributor relationships.
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Difficulty in forecasting demand, which we have encountered as a result of the COVID-19 pandemic, also makes it difficult to estimate our future results of operations and financial condition from period to period. A failure to accurately predict the level of demand for our products could adversely impact our profitability or cause us not to achieve our expected financial results.
Our business could be harmed if we fail to execute our internal plans to transition our supply chain and certain other business processes to a global scale.
We are in the process of re-engineering certain of our supply chain management processes, as well as certain other business processes, to support our expanding scale. This expansion to a global scale requires significant investment of capital and human resources, the re-engineering of many business processes, and the attention of many managers and other employees who would otherwise be focused on other aspects of our business. If our globalization efforts fail to produce planned efficiencies, or the transition is not managed effectively, we may experience excess inventories, inventory shortage, late deliveries, lost sales, or increased costs. Any business disruption arising from our globalization efforts, or our failure to effectively execute our internal plans for globalization, could harm our results of operations and financial condition.
Our profitability may decline as a result of increasing pressure on pricing.
Our industry is subject to significant pricing pressure caused by many factors, including intense competition, consolidation in the retail industry, pressure from retailers to reduce the costs of products, and changes in consumer demand. These factors may cause us to reduce our prices to retailers and customers or engage in more promotional activity than we anticipate, which could negatively impact our margins and cause our profitability to decline if we are unable to offset price reductions with comparable reductions in our operating costs. This could materially harm our results of operations and financial condition. In addition, ongoing and sustained promotional activities could harm our brand image.
We rely on a series of purchase orders with our manufacturers. Some of these relationships are not exclusive, which means that these manufacturers could produce similar products for our competitors.
We rely on a series of purchase orders with our manufacturers. With all of our manufacturers, we face the risk that they may fail to produce and deliver our products on a timely basis, or at all, or comply with our quality standards. In addition, our manufacturers may raise prices in the future, which would increase our costs and harm our margins. Even those manufacturers with whom we have purchase orders may breach these agreements, and we may not be able to enforce our rights under these agreements or may incur significant costs attempting to do so. As a result, we cannot predict with certainty our ability to obtain finished products in adequate quantities, of required quality and at acceptable prices from our manufacturers in the future. Any one of these risks could harm our ability to deliver our products on time, or at all, damage our reputation and our relationships with our retail partners and customers, and increase our product costs thereby reducing our margins.
In addition, except in some of the situations where we have a supply contract, our arrangements with our manufacturers are not exclusive. As a result, our manufacturers could produce similar products for our competitors, some of which could potentially purchase products in significantly greater volume. Further, while certain of our long-term contracts stipulate contractual exclusivity, those manufacturers could choose to breach our agreements and work with our competitors. Our competitors could enter into restrictive or exclusive arrangements with our manufacturers that could impair or eliminate our access to manufacturing capacity or supplies.
Fluctuations in the cost and availability of raw materials, equipment, labor, and transportation could cause manufacturing delays or increase our costs.
The price and availability of key components used to manufacture our products, including polyethylene, polyurethane foam, stainless-steel, polyester fabric, zippers, and other plastic materials and coatings, as well as manufacturing equipment and molds, may fluctuate significantly. In addition, the cost of labor at our third-party contract manufacturers could increase significantly. For example, manufacturers in China have experienced increased costs in recent years due to shortages of labor and fluctuations of the Chinese yuan in relation to the U.S. dollar. Additionally, the cost of logistics and transportation fluctuates in large part due to the price of oil. Any fluctuations in the cost and availability of any of our raw materials or other sourcing or transportation costs related to our raw materials or products could harm our gross margins and our ability to meet customer demand. If we are unable to successfully mitigate a significant portion of these product cost increases or fluctuations, our results of operations could be harmed.
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Many of our products are manufactured by third parties outside of the United States, and our business may be harmed by legal, regulatory, economic, political and public health risks associated with international trade and those markets.
Many of our core products are manufactured in China, the Philippines, Vietnam, Taiwan, Poland, and Malaysia. In addition, we have third-party manufacturing partners in Mexico and Italy. Our reliance on suppliers and manufacturers in foreign markets creates risks inherent in doing business in foreign jurisdictions, including: (a) the burdens of complying with a variety of foreign laws and regulations, including trade and labor restrictions and laws relating to the importation and taxation of goods; (b) weaker protection for intellectual property and other legal rights than in the United States, and practical difficulties in enforcing intellectual property and other rights outside of the United States; (c) compliance with U.S. and foreign laws relating to foreign operations, including the U.S. Foreign Corrupt Practices Act (“FCPA”), the UK Bribery Act 2010 (“Bribery Act”), regulations of the U.S. Office of Foreign Assets Controls (“OFAC”), and U.S. anti-money laundering regulations, which respectively prohibit U.S. companies from making improper payments to foreign officials for the purpose of obtaining or retaining business, operating in certain countries, or maintaining business relationships with certain restricted parties as well as engaging in other corrupt and illegal practices; (d) economic and political instability and acts of terrorism in the countries where our suppliers are located; (e) public health crises, such as pandemics and epidemics, in the countries where our suppliers and manufacturers are located; (f) transportation interruptions or increases in transportation costs; and (g) the imposition of tariffs or non-tariff barriers on components and products that we import into the United States or other markets. For example, the ongoing COVID-19 outbreak has resulted in increased travel restrictions, supply chain disruptions, and extended shutdown of certain businesses around the globe. In particular, YETI experienced an extended shutdown in its Vietnam manufacturing facility during the third quarter of 2021 which resulted in additional supply disruptions. The current COVID-19 pandemic or any further political developments or health concerns in markets in which our products are manufactured could result in social, economic and labor instability, adversely affecting the supply of our products and, in turn, our business, financial condition, and results of operations. Further, we cannot assure you that our directors, officers, employees, representatives, manufacturers, or suppliers have not engaged and will not engage in conduct for which we may be held responsible, nor can we assure you that our manufacturers, suppliers, or other business partners have not engaged and will not engage in conduct that could materially harm their ability to perform their contractual obligations to us or even result in our being held liable for such conduct. Violations of the FCPA, the Bribery Act, OFAC restrictions, or other export control, anti-corruption, anti-money laundering, and anti-terrorism laws or regulations may result in severe criminal or civil penalties, and we may be subject to other related liabilities, which could harm our business, financial condition, cash flows, and results of operations.
As current tariffs are implemented, or if additional tariffs or other restrictions are placed on foreign imports or any related counter-measures are taken by other countries, our business and results of operations could be harmed.
Most of our imported products are subject to duties, indirect taxes, quotas and non-tariff trade barriers that may limit the quantity of products that we may import into the U.S. and other countries or may impact the cost of such products. To maximize opportunities, we rely on free trade agreements and other supply chain initiatives, and, as a result, we are subject to government regulations and restrictions with respect to our cross-border activity. For example, we have historically received benefits from duty-free imports on certain products from certain countries pursuant to the GSP program. The GSP program expired on December 31, 2020, resulting in additional duties and negatively impacting gross margin. YETI is expecting the GSP program to be renewed and made retroactive; however if this does not occur, it will continue to have a negative impact on our expected results. Additionally, we are subject to government regulations relating to importation activities, including related to U.S. Customs and Border Protection (“CBP”) withhold release orders. The imposition of taxes, duties and quotas, the withdrawal from or material modification to trade agreements, and/or if CBP detains shipments of our goods pursuant to a withhold release order could have a material adverse effect on our business, results of operations and financial condition.
The Trump Administration put into place tariffs and other trade restrictions between the United States and China. In response, China put into place tariffs of its own. It is unknown whether and to what extent new tariffs (or other new laws or regulations) will be adopted in the future, and, while the Biden Administration has continued with tariffs put into place under the Trump Administration, it is unclear whether the Biden Administration will work to reverse such measures in the future or pursue similar policy initiatives with China and other countries. If additional tariffs or other restrictions are placed on foreign imports, including on any of our products manufactured overseas for sale in the United States, or any related counter-measures are taken by other countries, our business and results of operations may be materially harmed.
Current and additional tariffs have the potential to significantly raise the cost of our products, particularly our Drinkware. In such a case, there can be no assurance that we will be able to shift manufacturing and supply agreements to non-impacted countries, including the United States, to reduce the effects of the tariffs. As a result, we may suffer margin erosion or be required to raise our prices, which may result in the loss of customers, negatively impact our results of operations, or otherwise harm our business. In addition, the imposition of tariffs on products that we export to international markets could make such products more expensive compared to those of our competitors if we pass related additional costs on to our customers, which may also result in the loss of customers, negatively impact our results of operations, or otherwise harm our business.
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A significant portion of our sales are to independent retail partners. If these independent retail partners cease to carry our current products or choose not to carry new products that we develop, our brand as well as our results of operations and financial condition could be harmed.
Fourteen percent of our gross sales for 2020 and approximately 13% of our gross sales for the nine months ended October 2, 2021, were made to independent retail partners. These retail partners may decide to emphasize products from our competitors, to redeploy their retail floor space to other product categories, or to take other actions that reduce their purchases of our products. We do not receive long-term purchase commitments from our independent retail partners, and orders received from our independent retail partners are cancellable. Factors that could affect our ability to maintain or expand our sales to these independent retail partners include: (a) failure to accurately identify the needs of our customers; (b) a lack of customer acceptance of new products or product expansions; (c) unwillingness of our independent retail partners and customers to attribute premium value to our new or existing products or product expansions relative to competing products; (d) failure to obtain shelf space from our retail partners; (e) new, well-received product introductions by competitors; (f) damage to our relationships with independent retail partners due to brand or reputational harm; (g) delays or defaults on our retail partners' payment obligations to us; and (h) store closures, decreased foot traffic, recession or other adverse effects resulting from public health crises such as the current COVID-19 pandemic (or other future pandemics or epidemics).
We cannot assure you that our independent retail partners will continue to carry our current products or carry any new products that we develop. If these risks occur, they could harm our brand as well as our results of operations and financial condition. In addition, store closures, decreased foot traffic and recession resulting from the COVID-19 pandemic will adversely affect the performance and will likely adversely affect the financial condition of many of these customers. The foregoing are expected to have a material adverse effect on our business and financial condition.
We depend on our retail partners to display and present our products to customers, and our failure to maintain and further develop our relationships with our retail partners could harm our business.
We sell a significant amount of our products through knowledgeable national, regional, and independent retail partners. Our retail partners service customers by stocking and displaying our products, explaining our product attributes, and sharing our brand story. Our relationships with these retail partners are important to the authenticity of our brand and the marketing programs we continue to deploy. Our failure to maintain these relationships with our retail partners or financial difficulties experienced by these retail partners could harm our business.
We have key relationships with national retail partners. For both 2019 and 2020, one national retail partner accounted for approximately 15% and 9% of our gross sales, respectively. If we lose any of our key retail partners or any key retail partner reduces its purchases of our existing or new products or its number of stores or operations or promotes products of our competitors over ours, our sales would be harmed. Because we are a premium brand, our sales depend, in part, on retail partners effectively displaying our products, including providing attractive space and point of purchase displays in their stores, and training their sales personnel to sell our products. If our retail partners reduce or terminate those activities, we may experience reduced sales of our products, resulting in lower gross margins, which would harm our results of operations.
If our plans to increase sales through our DTC channel are not successful, our business and results of operations could be harmed.
For 2020 and the nine months ended October 2, 2021, our DTC channel accounted for 53% and 54% of our net sales, respectively. Part of our growth strategy involves increasing sales through our DTC channel. However, we have limited operating experience executing the retail component of this strategy. The level of customer traffic and volume of customer purchases through our country and region-specific YETI websites or other e-commerce initiatives are substantially dependent on our ability to provide a content-rich and user-friendly website, a hassle-free customer experience, sufficient product availability, and reliable, timely delivery of our products. If we are unable to maintain and increase customers’ use of our website, allocate sufficient product to our website, and increase any sales through our website, our business, and results of operations could be harmed.
We currently have a limited number of country and region-specific YETI websites and are planning to expand our e-commerce platform to others. These countries may impose different and evolving laws governing the operation and marketing of e-commerce websites, as well as the collection, storage, and use of information on customers interacting with those websites. We may incur additional costs and operational challenges in complying with these laws, and differences in these laws may cause us to operate our business differently, and less effectively, in different territories. If so, we may incur additional costs and may not fully realize the investment in our international expansion.
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If we do not successfully implement our future retail store expansion, our growth and profitability could be harmed.
We have and may continue to expand our existing DTC channel by opening new retail stores. We opened and currently operate retail stores in Austin, Texas, Charleston, South Carolina, Chicago, Illinois, Dallas, Texas, Denver, Colorado, Ft. Lauderdale, Florida, and Houston, Texas. Our ability to open new retail stores in a timely manner and operate them profitably depends on a number of factors, many of which are beyond our control, including:
•our ability to manage the financial and operational aspects of our retail growth strategy, including making appropriate investments in our software systems, information technology, and operational infrastructure;
•our ability to identify suitable locations, including our ability to gather and assess demographic and marketing data to accurately determine customer demand for our products in the locations we select;
•our ability to negotiate favorable lease agreements;
•our ability to properly assess the potential profitability and payback period of potential new retail store locations;
•the availability of financing on favorable terms;
•our ability to secure required governmental permits and approvals and our ability to effectively comply with state and local employment and labor laws, rules, and regulations;
•our ability to hire and train skilled store operating personnel, especially management personnel;
•the availability of construction materials and labor and the absence of significant construction delays or cost overruns;
•our ability to provide a satisfactory mix of merchandise that is responsive to the needs of our customers living in the areas where new retail stores are established;
•our ability to establish a supplier and distribution network able to supply new retail stores with inventory in a timely manner;
•our competitors, or our retail partners, building or leasing stores near our retail stores or in locations we have identified as targets for a new retail store;
•customer demand for our products;
•governmental orders requiring adherence to social distancing practices, temporary store closures, or reduced hours; and
•general economic and business conditions affecting consumer confidence and spending and the overall strength of our business.
We have limited experience in opening retail stores and may not be able to successfully address the risks that they entail. For example, due to the current COVID-19 pandemic, which resulted in widespread government mandated temporary store closures or reduced hours during the second quarter of fiscal 2020 that may be re-imposed by governmental authorities in certain geographies to reduce the spread of COVID-19, our ability to implement our full retail store strategy, achieve desired net sales growth and maintain consistent levels of profitability in our retail stores has been, and continues to be, disrupted. In order to pursue our retail store strategy, we will be required to expend significant cash resources prior to generating any sales in these stores. We may not generate sufficient sales from these stores to justify these expenses, which could harm our business and profitability. The substantial management time and resources, which any future retail store expansion strategy may require, could also result in disruption to our existing business operations, which may decrease our net sales and profitability.
Insolvency, credit problems or other financial difficulties that could confront our retail partners could expose us to financial risk.
We sell to the large majority of our retail partners on open account terms and do not require collateral or a security interest in the inventory we sell them. Consequently, our accounts receivable with our retail partners are unsecured. Insolvency, credit problems, or other financial difficulties confronting our retail partners could expose us to financial risk. These actions could expose us to risks if they are unable to pay for the products they purchase from us. Financial difficulties of our retail partners could also cause them to reduce their sales staff, use of attractive displays, number or size of stores, and the amount of floor space dedicated to our products. For example, the COVID-19 pandemic caused public health officials to recommend precautions to mitigate the spread of the virus that resulted in widespread temporary store closures or reduced store hours for our retail partners during the second quarter of 2020. These actions had a significant unfavorable impact on our wholesale business during the second quarter of fiscal 2020. Significant uncertainty about the ultimate duration and severity of the spread of COVID-19, uncertainties regarding consumer willingness to visit retail stores during the COVID-19 pandemic and in the future, and the overall economic impact of COVID-19 and the related impact on consumer confidence and spending may lead to a material reduction in sales of our products by our retail partners. Any reduction in sales by, or loss of, our current retail partners or customer demand, or credit risks associated with our retail partners, could harm our business, results of operations, and financial condition.
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If our independent suppliers and manufacturing partners do not comply with ethical business practices or with applicable laws and regulations, our reputation, business, and results of operations could be harmed.
Our reputation and our customers’ willingness to purchase our products depend in part on our suppliers’, manufacturers’, and retail partners’ compliance with ethical employment practices, such as with respect to child labor, wages and benefits, forced labor, discrimination, safe and healthy working conditions, and with all legal and regulatory requirements relating to the conduct of their businesses. We do not exercise control over our suppliers, manufacturers, and retail partners and cannot guarantee their compliance with ethical and lawful business practices. If our suppliers, manufacturers, or retail partners fail to comply with applicable laws, regulations, safety codes, employment practices, human rights standards, quality standards, environmental standards, production practices, or other obligations, norms, or ethical standards, our reputation and brand image could be harmed, and we could be exposed to litigation and additional costs that would harm our business, reputation, and results of operations.
We are subject to payment-related risks that may result in higher operating costs or the inability to process payments, either of which could harm our business, financial condition and results of operations.
For our DTC sales, as well as for sales to certain retail partners, we accept a variety of payment methods, including credit cards, debit cards, electronic funds transfers, electronic payment systems, and gift cards. Accordingly, we are, and will continue to be, subject to significant and evolving regulations and compliance requirements, including obligations to implement enhanced authentication processes that could result in increased costs and liability, and reduce the ease of use of certain payment methods. For certain payment methods, including credit and debit cards, as well as electronic payment systems, we pay interchange and other fees, which may increase over time. We rely on independent service providers for payment processing, including credit and debit cards. If these independent service providers become unwilling or unable to provide these services to us, or if the cost of using these providers increases, our business could be harmed. We are also subject to payment card association operating rules and agreements, including data security rules and agreements, certification requirements, and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, or if our data security systems are breached or compromised, we may be liable for losses incurred by card issuing banks or customers, subject to fines and higher transaction fees, lose our ability to accept credit or debit card payments from our customers, or process electronic fund transfers or facilitate other types of payments. Any failure to comply could significantly harm our brand, reputation, business, financial condition and results of operations.
Our plans for international expansion may not be successful; our limited operating experience and limited brand recognition in new markets may make it more difficult to execute our expansion strategy and cause our business and growth to suffer.
Continued expansion into markets outside the United States, including Canada, Australia, Europe and Japan, is one of our key long-term strategies for the future growth of our business. There are, however, significant costs and risks inherent in selling our products in international markets, including: (a) failure to effectively translate and establish our core brand identity, particularly in markets with a less-established heritage of outdoor and recreational activities; (b) time and difficulty in building a widespread network of retail partners; (c) increased shipping and distribution costs, which could increase our expenses and reduce our margins; (d) potentially lower margins in some regions; (e) longer collection cycles in some regions; (f) increased competition from local providers of similar products; (g) compliance with foreign laws and regulations, including taxes and duties, enhanced privacy laws, rules, and regulations, and product liability laws, rules, and regulations, particularly in the European Union and Japan; (h) establishing and maintaining effective internal controls at foreign locations and the associated increased costs; (i) increased counterfeiting and the uncertainty of protection for intellectual property rights in some countries and practical difficulties of enforcing rights abroad; (j) compliance with anti-bribery, anti-corruption, sanctions, and anti-money laundering laws, such as the FCPA, the Bribery Act, and OFAC regulations, by us, our employees, and our business partners; (k) currency exchange rate fluctuations and related effects on our results of operations; (l) economic weakness, including inflation, or political instability in foreign economies and markets; (m) compliance with tax, employment, immigration, and labor laws for employees living or traveling abroad; (n) workforce uncertainty in countries where labor unrest is more common than in the United States; (o) business interruptions resulting from geopolitical actions, including war and terrorism, natural disasters, including earthquakes, typhoons, floods, and fires, public health issues, including the outbreak of a pandemic or contagious disease, such as COVID-19, or xenophobia resulting therefrom; (p) the imposition of tariffs on products that we import into international markets that could make such products more expensive compared to those of our competitors; (q) that our ability to expand internationally could be impacted by the intellectual property rights of third parties that conflict with or are superior to ours; and (r) other costs and risks of doing business internationally.
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These and other factors could harm our international operations and, consequently, harm our business, results of operations, and financial condition. Further, we may incur significant operating expenses as a result of our planned international expansion, and it may not be successful. We have limited experience with regulatory environments and market practices internationally, and we may not be able to penetrate or successfully operate in new markets. We also have limited operating experience outside of the United States and in our expansion efforts we may encounter obstacles we did not face in the United States, including cultural and linguistic differences, differences in regulatory environments, labor practices and market practices, difficulties in keeping abreast of market, business and technical developments, and preferences of foreign customers. Consumer demand and behavior, as well as tastes and purchasing trends, may differ internationally, and, as a result, sales of our products may not be successful, or the margins on those sales may not be in line with those we anticipate. We may also encounter difficulty expanding into international markets because of limited brand recognition, leading to delayed or limited acceptance of our products by customers in these markets and increased marketing and customer acquisition costs to establish our brand. Accordingly, if we are unable to successfully expand internationally or manage the complexity of our global operations, we may not achieve the expected benefits of this expansion and our financial condition and results of operations could be harmed.
Our financial results and future growth could be harmed by currency exchange rate fluctuations.
As our international business grows, our results of operations could be adversely impacted by changes in foreign currency exchange rates. Revenues and certain expenses in markets outside of the United States are recognized in local foreign currencies, and we are exposed to potential gains or losses from the translation of those amounts into U.S. dollars for consolidation into our financial statements. Similarly, we are exposed to gains and losses resulting from currency exchange rate fluctuations on transactions generated by our foreign subsidiaries in currencies other than their local currencies. In addition, the business of our independent manufacturers may also be disrupted by currency exchange rate fluctuations by making their purchases of raw materials more expensive and more difficult to finance. As a result, foreign currency exchange rate fluctuations may adversely impact our results of operations.
We may become involved in legal or regulatory proceedings and audits.
Our business requires compliance with many laws and regulations, including labor and employment, sales and other taxes, customs, and consumer protection laws and ordinances that regulate retailers generally and/or govern the importation, promotion, and sale of merchandise, and the operation of stores and warehouse facilities. Failure to comply with these laws and regulations could subject us to lawsuits and other proceedings, and could also lead to damage awards, fines, and penalties. We may become involved in a number of legal proceedings and audits, including government and agency investigations, and consumer, employment, tort, and other litigation. The outcome of some of these legal proceedings, audits, and other contingencies could require us to take, or refrain from taking, actions that could harm our operations or require us to pay substantial amounts of money, harming our financial condition and results of operations. Additionally, defending against these lawsuits and proceedings may be necessary, which could result in substantial costs and diversion of management’s attention and resources, harming our business, financial condition, and results of operations. Any pending or future legal or regulatory proceedings and audits could harm our business, financial condition, and results of operations.
Our business involves the potential for product recalls, product liability, and other claims against us, which could adversely affect our reputation, earnings and financial condition.
As a designer, marketer, retailer, and distributor of consumer products, we are subject to the United States Consumer Products Safety Act of 1972, as amended by the Consumer Product Safety Improvement Act of 2008, which empowers the Consumer Products Safety Commission to exclude from the market products that are found to be unsafe or hazardous, and similar laws under foreign jurisdictions. Although we extensively and rigorously test new and enhanced products, there can be no assurance we will be able to detect, prevent, or fix all defects. Under certain circumstances, the Consumer Products Safety Commission or comparable foreign agency could require us to repurchase or recall one or more of our products. Additionally, laws regulating consumer products exist in states and some cities, as well as other countries in which we sell our products, and more restrictive laws and regulations may be adopted in the future. Any repurchase or recall of our products, monetary judgment, fine or other penalty could be costly and damaging to our reputation. If we were required to remove, or we voluntarily removed, our products from the market, our reputation could be tarnished and we may have large quantities of finished products that we could not sell.
We also face exposure to product liability claims and unusual or significant litigation in the event that one of our products is alleged to have resulted in bodily injury, property damage, or other adverse effects. In addition to the risk of monetary judgments or other penalties that may result from product liability claims, such claims could result in negative publicity that could harm our reputation in the marketplace, adversely impact our brand, or result in an increase in the cost of producing our products. As a result, these types of claims could have a material adverse effect on our business, results of operations, and financial condition.
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Our business is subject to the risk of earthquakes, fire, power outages, floods, and other catastrophic events, and to interruption by problems such as terrorism, public health crises, cyberattacks, or failure of key information technology systems.
Our business is vulnerable to damage or interruption from earthquakes, fires, floods, power losses, telecommunications failures, terrorist attacks, acts of war, riots, public health crises, human errors, criminal acts, and similar events. For example, a significant natural disaster, such as an earthquake, fire, or flood, could harm our business, results of operations, and financial condition, and our insurance coverage may be insufficient to compensate us for losses that may occur. Our corporate offices, one of our distribution centers, and one of our data center facilities are located in Texas, a state that frequently experiences floods and storms. In addition, the facilities of our suppliers and where our manufacturers produce our products are located in parts of Asia that frequently experience typhoons and earthquakes. Acts of terrorism and public health crises, such as the current COVID-19 pandemic (or other future pandemics or epidemics), could also cause disruptions in our or our suppliers’, manufacturers’, and logistics providers’ businesses or the economy as a whole. The COVID-19 pandemic has significantly impacted the global supply chain, with restrictions and limitations on related activities causing disruption and delay, and the likely overall impact of the COVID-19 pandemic is viewed as highly negative to the general economy. These disruptions and delays have strained certain domestic and international supply chains, which have affected and could continue to negatively affect the flow or availability of certain of our products. While our domestic customization operations are open and operating currently, we were forced to temporarily close these operations during the pandemic. We may not have sufficient protection or recovery plans in some circumstances, such as natural disasters affecting Texas or other locations where we have operations or store significant inventory. Our servers are also vulnerable to computer viruses, criminal acts, denial-of-service attacks, ransomware, and similar disruptions from unauthorized tampering with our computer systems, which could lead to interruptions, delays, or loss of critical data. As we rely heavily on our information technology and communications systems and the Internet to conduct our business and provide high-quality customer service, these disruptions could harm our ability to run our business and either directly or indirectly disrupt our suppliers’ or manufacturers’ businesses, which could harm our business, results of operations, and financial condition.
Our results of operations are subject to seasonal and quarterly variations, which could cause the price of our common stock to decline.
We believe that our sales include a seasonal component. We expect our net sales to be highest in our second and fourth quarters, with the first quarter generating the lowest sales. To date, however, it has been difficult to accurately analyze this seasonality due to fluctuations in our sales. In addition, due to our more recent, and therefore more limited experience, with bags, storage, and outdoor lifestyle products and accessories, we are continuing to analyze the seasonality of these products. We expect that this seasonality will continue to be a factor in our results of operations and sales.
Our annual and quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including, among other things, the timing of the introduction of and advertising for our new products and those of our competitors and changes in our product mix. Variations in weather conditions may also harm our quarterly results of operations. In addition, we may not be able to adjust our spending in a timely manner to compensate for any unexpected shortfall in our sales. As a result of these seasonal and quarterly fluctuations, we believe that comparisons of our results of operations between different quarters within a single fiscal year, or across different fiscal years, are not necessarily meaningful and that these comparisons cannot be relied upon as indicators of our future performance. In the event that any seasonal or quarterly fluctuations in our net sales and results of operations result in our failure to meet our forecasts or the forecasts of the research analysts that may cover us in the future, the market price of our common stock could fluctuate or decline.
We are subject to many hazards and operational risks that can disrupt our business, some of which may not be insured or fully covered by insurance.
Our operations are subject to many hazards and operational risks inherent to our business, including: (a) general business risks; (b) product liability; (c) product recall; and (d) damage to third parties, our infrastructure, or properties caused by fires, floods and other natural disasters, power losses, telecommunications failures, terrorist attacks, riots, public health crises such as the current COVID-19 pandemic (and other future pandemics or epidemics), human errors, and similar events.
Our insurance coverage may be inadequate to cover our liabilities related to such hazards or operational risks. For example, our insurance coverage does not cover us for business interruptions as they relate to the COVID-19 pandemic. In addition, we may not be able to maintain adequate insurance in the future at rates we consider reasonable and commercially justifiable, and insurance may not continue to be available on terms as favorable as our current arrangements. The occurrence of a significant uninsured claim or a claim in excess of the insurance coverage limits maintained by us could harm our business, results of operations, and financial condition.
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Risks Related to Market and Global Economic Conditions
The COVID-19 pandemic and its effects could result in declines in consumer discretionary spending or continue to adversely affect the global supply chain, which could negatively impact our business, sales, financial condition, results of operations and cash flows, and our ability to access current or obtain new lending facilities.
Since being reported in December 2019, COVID-19 has spread globally, including to every state in the United States, and has been declared a pandemic by the World Health Organization. The COVID-19 pandemic and preventative measures taken to contain or mitigate such have caused, and may continue to cause, business slowdowns or shutdowns in affected areas and significant disruption in the financial markets both globally and in the United States, which could lead to a decline in discretionary spending by consumers, and in turn impact, possibly materially, our business, sales, financial condition and results of operations. The impacts include, but are not limited to:
•the possibility of renewed retail store closures or reduced operating hours and/or decreased retail traffic;
•disruption to our distribution centers and our third-party manufacturing partners and other vendors, including the effects of facility closures as a result of outbreaks of COVID-19 or measures taken by federal, state or local governments to reduce its spread, reductions in operating hours, labor shortages, and real time changes in operating procedures, including for additional cleaning and disinfection procedures; and
•significant disruption of global financial markets, which could have a negative impact on our ability to access capital in the future.
The COVID-19 pandemic has significantly impacted the global supply chain, with restrictions and limitations on related activities causing disruption and delay. These disruptions and delays have strained certain domestic and international supply chains, resulting in port congestion, transportation delays as well as labor and container shortages, and have affected and could continue to negatively affect the flow or availability of certain products. In addition, increased demand for online purchases of products has impacted our fulfillment operations and small parcel network, resulting in potential delays in delivering products to our customers.
The further spread of COVID-19 and its effects, including required actions to help limit the spread of the illness and continued global supply chain disruptions or constraints, could impact our ability to carry out our business as usual and may materially adversely impact global economic conditions, our business, results of operations, cash flows and financial condition. The extent of the impact of COVID-19 on our business and financial results will depend on future developments, including the duration and severity of the outbreak (including the severity and transmission rates of new variants of the virus, such as the Delta variant, that causes COVID-19) within the markets in which we operate, the timing, distribution, rate of public acceptance and efficacy of vaccines and other treatments, the related impact on consumer confidence and spending, the effect of governmental regulations imposed in response to the pandemic and the magnitude and duration of global supply chain constraints, all of which are highly uncertain and ever-changing. The sweeping nature of the COVID-19 pandemic makes it extremely difficult to predict how our business and operations will be affected in the longer run. However, the likely overall economic impact of the pandemic could be is viewed as highly negative to the general economy. Any of the foregoing factors, or other cascading effects of the COVID-19 pandemic, could materially increase our costs, negatively impact our sales and damage our results of operations and liquidity, possibly to a significant degree. The duration of any such impacts cannot be predicted.
Our net sales and profits depend on the level of customer spending for our products, which is sensitive to general economic conditions and other factors; during a downturn in the economy, consumer purchases of discretionary items are affected, which could materially harm our sales, profitability, and financial condition.
Our products are discretionary items for customers. Therefore, the success of our business depends significantly on economic factors and trends in consumer spending. There are a number of factors that influence consumer spending, including actual and perceived economic conditions, consumer confidence, disposable consumer income, consumer credit availability, unemployment, and tax rates in the markets where we sell our products. Consumers also have discretion as to where to spend their disposable income and may choose to purchase other items or services if we do not continue to provide authentic, compelling, and high-quality products at appropriate price points. As global economic conditions continue to be volatile and economic uncertainty remains, trends in consumer discretionary spending also remain unpredictable and subject to declines. Any of these factors could harm discretionary consumer spending, resulting in a reduction in demand for our premium products, decreased prices, and harm to our business and results of operations. Moreover, consumer purchases of discretionary items, such as our products, tend to decline during recessionary periods when disposable income is lower or during other periods of economic instability or uncertainty, which may slow our growth more than we anticipate. A downturn in the economies in markets in which we sell our products, particularly in the United States, may materially harm our sales, profitability, and financial condition. For example, the adverse effects of COVID-19 across geographies could lead to a decline in discretionary spending by consumers, resulting in a reduction in demand for our products, and in turn may materially impact our sales, profitability, and financial condition.
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Risks Related to Information Technology and Security
We rely significantly on information technology, and any failure, inadequacy or interruption of that technology could harm our ability to effectively operate our business.
Our business relies on information technology. Our ability to effectively manage and maintain our inventory and internal reports, and to ship products to customers and invoice them on a timely basis, depends significantly on our enterprise resource planning ("ERP"), warehouse management, and other information systems. We also heavily rely on information systems to process financial and accounting information for financial reporting purposes. Any of these information systems could fail or experience a service interruption for a number of reasons, including computer viruses, programming errors, hacking or other unlawful activities, disasters or our failure to properly maintain system redundancy or protect, repair, maintain or upgrade our systems. We are currently undertaking various technology upgrades and enhancements to support our business growth, including a phased upgrade of our SAP ERP system. The implementation of new software and hardware involves risks and uncertainties that could cause disruptions, delays or deficiencies in the design, implementation or application of these systems. The failure of our information systems to operate effectively or to integrate with other systems, or a breach in security of these systems, could cause delays in product fulfillment and reduced efficiency of our operations, which could negatively impact our financial results. If we experienced any significant disruption to our financial information systems that we are unable to mitigate, our ability to timely report our financial results could be impacted, which could negatively impact our stock price. We also communicate electronically throughout the world with our employees and with third parties, such as customers, suppliers, vendors and consumers. A service interruption or shutdown could have a materially adverse impact on our operating activities. Remediation and repair of any failure, problem or breach of our key information systems could require significant capital investments. Furthermore, the implementation of new information technology systems, such as our SAP upgrade, and/or any remediation of our key information systems requires investment of capital and human resources, the re-engineering of business processes, and the attention of many employees who would otherwise be focused on other areas of our business. The implementation of new initiatives and remediation of existing systems may not achieve the anticipated benefits and may divert management’s attention from other operational activities, negatively affect employee morale, or have other unintended consequences. Additionally, if we are not able to accurately forecast expenses and capitalized costs related to system upgrades and repairs, this may have an adverse impact on our financial condition and operating results.
We collect, store, process, and use personal and payment information and other customer data, which subjects us to regulation and other legal obligations related to privacy, information security, and data protection.
We collect, store, process, and use personal and payment information and other customer data, and we rely on third parties that are not directly under our control to manage certain of these operations. Our customers’ personal information may include names, addresses, phone numbers, email addresses, payment card data, and payment account information, as well as other information. Due to the volume and sensitivity of the personal information and data we manage, the security features of our information systems are critical.
Threats to information technology security can take a variety of forms. Individual and groups of hackers and sophisticated organizations, including state-sponsored organizations or nation-states, continuously undertake attacks that may pose threats to our customers and our information technology systems. These actors may use a wide variety of methods, which may include developing and deploying malicious software or exploiting vulnerabilities in hardware, software, or other infrastructure in order to attack our information technology systems or gain access to our systems, using social engineering techniques to induce our employees, users, partners, or customers to disclose passwords or other sensitive information, or take other actions to gain access to our data or our customers’ data, impersonating authorized users, or acting in a coordinated manner to launch distributed denial of service or other coordinated attacks. Although we have taken steps to protect the security of our information systems and the data maintained in those systems, we have, from time to time, experienced threats to our data and systems, including malware and computer virus attacks and it is possible that in the future our safety and security measures will not prevent the systems’ improper functioning or damage, or the improper access or disclosure of personally identifiable information such as in the event of cyber-attacks. For example, system administrators may fail to timely remove employee account access when no longer appropriate. Employees or third parties may intentionally compromise our security or systems, or reveal confidential information. There have been initial media reports regarding increased cyber-security threats and potential breaches because of the increase in numbers of individuals working from home as a result of the COVID-19 pandemic. Cyberthreats are constantly evolving, increasing the difficulty of detecting and successfully defending against them.
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Any breach of our data security or that of our service providers could result in an unauthorized release or transfer of customer, consumer, user or employee information, or the loss of valuable business data or cause a disruption in our business. These events could give rise to unwanted media attention, damage our reputation, damage our customer, consumer, employee, or user relationships and result in lost sales, fines or lawsuits. We may also be required to expend significant capital and other resources to protect against or respond to or alleviate problems caused by a security breach, which could harm our results of operations. If we or our independent service providers or business partners experience a breach of systems compromising our customers' sensitive data, our brand could be harmed, sales of our products could decrease, and we could be exposed to losses, litigation, or regulatory proceedings. Depending on the nature of the information compromised, we may also have obligations to notify users, law enforcement, or payment companies about the incident and may need to provide some form of remedy, such as refunds, for the individuals affected by the incident.
In addition, privacy laws, rules, and regulations are constantly evolving in the United States and abroad and may be inconsistent from one jurisdiction to another. For example, in December 2020, the State of California enacted the California Privacy Rights Act, or CPRA, which becomes effective on January 1, 2023, and substantially amends and expands the current California Consumer Privacy Act bringing the California regulations more in line with the European Union’s General Data Protection Regulation, or GDPR. Further, as we expand internationally, we are subject to additional privacy rules, such as the GDPR, many of which are significantly more stringent than those in the United States. Complying with these evolving obligations is costly, and any failure to comply could give rise to unwanted media attention and other negative publicity, damage our customer and consumer relationships and reputation, and result in lost sales, fines, or lawsuits, and may harm our business and results of operations.
Any material disruption or breach of our information technology systems or those of third-party partners could materially damage our customer and business partner relationships and subject us to significant reputational, financial, legal, and operational consequences.
We depend on our information technology systems, as well as those of third parties, to design and develop new products, operate our website, host and manage our services, store data, process transactions, respond to user inquiries, and manage inventory and our supply chain as well as to conduct and manage other activities. Any material disruption or slowdown of our systems or those of third parties that we depend upon, including a disruption or slowdown caused by our or their failure to successfully manage significant increases in user volume or successfully upgrade our or their systems, system failures, viruses, ransomware, security breaches, or other causes, could cause information, including data related to orders, to be lost or delayed, which could result in delays in the delivery of products to retailers and customers or lost sales, which could reduce demand for our products, harm our brand and reputation, and cause our sales to decline. If changes in technology cause our information systems, or those of third parties that we depend upon, to become obsolete, or if our or their information systems are inadequate to handle our growth, particularly as we increase sales through our DTC channel, we could damage our customer and business partner relationships and our business and results of operations could be harmed.
We interact with many of our consumers through our e-commerce platforms, and these systems face similar risks of interruption or attack. Consumers increasingly utilize these services to purchase our products and to engage with our brand. If we are unable to continue to provide consumers a user-friendly experience and evolve our platform to satisfy consumer preferences, the growth of our e-commerce business and our net revenues may be negatively impacted. If this software contains errors, bugs or other vulnerabilities which impede or halt service, this could result in damage to our reputation and brand, loss of users, or loss of revenue.
Risks Related to our Financial Condition and Tax Matters
We depend on cash generated from our operations to support our growth, and we may need to raise additional capital, which may not be available on terms acceptable to us or at all.
We primarily rely on cash flow generated from our sales to fund our current operations and our growth initiatives. As we expand our business, we will need significant cash from operations to purchase inventory, increase our product development, expand our manufacturer and supplier relationships, pay personnel, pay for the increased costs associated with operating as a public company, expand internationally, and further invest in our sales and marketing efforts. If our business does not generate sufficient cash flow from operations to fund these activities and sufficient funds are not otherwise available from our current or future credit facility, we may need additional equity or debt financing. If such financing is not available to us on satisfactory terms, our ability to operate and expand our business or to respond to competitive pressures could be harmed. Moreover, if we raise additional capital by issuing equity securities or securities convertible into equity securities, the ownership of our existing stockholders may be diluted. The holders of new securities may also have rights, preferences or privileges which are senior to those of existing holders of common stock. In addition, any indebtedness we incur may subject us to covenants that restrict our operations and will require interest and principal payments that could create additional cash demands and financial risk for us.
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Our indebtedness may limit our ability to invest in the ongoing needs of our business and if we are unable to comply with the covenants in our current Credit Facility, our liquidity and results of operations could be harmed.
As of October 2, 2021, we had $118.1 million principal amount of indebtedness outstanding under the Credit Facility (s defined in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” of this Report). The Credit Facility is jointly and severally guaranteed by certain of our wholly-owned material subsidiaries, including YETI Coolers, LLC, which we refer to as YETI Coolers, and YETI Custom Drinkware LLC, which we refer to as YCD, and any of our future subsidiaries that become guarantors, together, which we refer to as the Guarantors, and is also secured by a first-priority lien on substantially all of our assets and the assets of the Guarantors, in each case subject to certain customary exceptions. We may, from time to time, incur additional indebtedness under the Credit Facility.
The Credit Facility places certain conditions on us, including, subject to certain conditions, reductions and exceptions, requiring us to utilize a portion of our cash flow from operations to make payments on our indebtedness, reducing the availability of our cash flow to fund working capital, capital expenditures, development activity, return capital to our stockholders, and other general corporate purposes. Our compliance with this condition may limit our ability to invest in the ongoing needs of our business. For example, complying with this condition:
•increases our vulnerability to adverse economic or industry conditions;
•limits our flexibility in planning for, or reacting to, changes in our business or markets;
•makes us more vulnerable to increases in interest rates, as borrowings under the Credit Facility bear interest at variable rates;
•limits our ability to obtain additional financing in the future for working capital or other purposes; and
•potentially places us at a competitive disadvantage compared to our competitors that have less indebtedness.
The Credit Facility places certain limitations on our ability to incur additional indebtedness. However, subject to the qualifications and exceptions in the Credit Facility, we may incur substantial additional indebtedness under that facility. The Credit Facility also places certain limitations on our ability to enter into certain types of transactions, financing arrangements and investments, to make certain changes to our capital structure, and to guarantee certain indebtedness, among other things. The Credit Facility also places certain restrictions on the payment of dividends and distributions and certain management fees. These restrictions limit or prohibit, among other things, and in each case, subject to certain customary exceptions, our ability to: (a) pay dividends on, redeem or repurchase our stock, or make other distributions; (b) incur or guarantee additional indebtedness; (c) sell stock in our subsidiaries; (d) create or incur liens; (e) make acquisitions or investments; (f) transfer or sell certain assets or merge or consolidate with or into other companies; (g) make certain payments or prepayments of indebtedness subordinated to our obligations under the Credit Facility; and (h) enter into certain transactions with our affiliates.
The Credit Facility requires us to comply with certain covenants, including financial covenants regarding our total net leverage ratio and interest coverage ratio. Fluctuations in these ratios may increase our interest expense. Failure to comply with these covenants and certain other provisions of the Credit Facility, or the occurrence of a change of control, could result in an event of default and an acceleration of our obligations under the Credit Facility or other indebtedness that we may incur in the future.
If such an event of default and acceleration of our obligations occurs, the lenders under the Credit Facility would have the right to proceed against the collateral we granted to them to secure such indebtedness, which consists of substantially all of our assets. If the debt under the Credit Facility were to be accelerated, we may not have sufficient cash or be able to sell sufficient collateral to repay this debt, which would immediately and materially harm our business, results of operations, and financial condition. The threat of our debt being accelerated in connection with a change of control could make it more difficult for us to attract potential buyers or to consummate a change of control transaction that would otherwise be beneficial to our stockholders.
If our goodwill, other intangible assets, or fixed assets become impaired, we may be required to record a charge to our earnings.
We may be required to record future impairments of goodwill, other intangible assets, or fixed assets to the extent the fair value of these assets falls below their book value. Our estimates of fair value are based on assumptions regarding future cash flows, gross margins, expenses, discount rates applied to these cash flows, and current market estimates of value. Estimates used for future sales growth rates, gross profit performance, and other assumptions used to estimate fair value could cause us to record material non-cash impairment charges, which could harm our results of operations and financial condition.
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Changes in tax laws or unanticipated tax liabilities could adversely affect our effective income tax rate and profitability.
We are subject to income taxes in the United States (federal and state) and various foreign jurisdictions. Our effective income tax rate could be adversely affected in the future by a number of factors, including changes in the valuation of deferred tax assets and liabilities, changes in tax laws and regulations or their interpretations and application, and the outcome of income tax audits in various jurisdictions around the world.
On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act (the “Tax Act”), which requires complex computations to be performed that were not previously required under U.S. tax law, significant judgments to be made in interpretation of the provisions of the Tax Act and significant estimates in calculations, and the preparation and analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the Internal Revenue Service, and other standard-setting governmental bodies could interpret the provisions of the Tax Act or issue related administrative guidance contrary to our interpretation.
As part of Congress’ response to the COVID-19 pandemic, the Families First Coronavirus Response Act, or FFCR Act, was enacted on March 18, 2020, and the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was enacted on March 27, 2020. Both contain numerous tax provisions. In particular, the CARES Act retroactively and temporarily (for taxable years beginning before January 1, 2021) suspends application of the 80%-of-income limitation on the use of net operating losses, which was enacted as part of the Tax Act. It also provides that net operating losses arising in any taxable year beginning after December 31, 2017, and before January 1, 2021 are generally eligible to be carried back up to five years. The CARES Act also temporarily (for taxable years beginning in 2019 or 2020) relaxes the limitation of the tax deductibility for net interest expense by increasing the limitation from 30 to 50% of adjusted taxable income.
In September 2021, the U.S. House Ways and Means Committee passed the Build Back Better Act, which includes significant modifications to key provisions of the existing U.S. corporate income tax regime, including an increased tax rate, promotion of a global minimum tax, and other changes which address taxes on the activities of foreign subsidiaries. In June 2021, finance leaders for the Group of 7 countries agreed to back a new global minimum tax rate that would apply regardless of headquarters location or physical presence, which was followed by the same endorsement by the Group of Twenty countries in October 2021. Although it is uncertain if some or all of these proposals will be enacted, a significant change in U.S. tax law, or that of other countries where we operate or have a presence, may materially and adversely impact our income tax liability, provision for income taxes and effective tax rate.
Regulatory guidance under the Tax Act, the FFCR Act and the CARES Act is and continues to be forthcoming, and such guidance could ultimately increase or lessen impact of these laws on our business and financial condition. It is also likely that Congress will enact additional legislation in connection with the COVID-19 pandemic, some of which could have an impact on our company. We regularly assess all of these matters to determine the adequacy of our income tax provision, which is subject to significant judgment.
The uncertainty regarding the phase-out of LIBOR may negatively impact our operating results.
LIBOR, the London interbank offered rate, is the interest rate benchmark used as a reference rate on our variable rate debt, including our Credit Facility. On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. It is unclear if at that time LIBOR will cease to exist or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. In November 30, 2020, ICE Benchmark Administration (“IBA”), the administrator of LIBOR, with the support of the United States Federal Reserve and the United Kingdom’s Financial Conduct Authority, announced plans to consult on ceasing publication of USD LIBOR on December 31, 2021 for only the one week and two month USD LIBOR tenors, and on June 30, 2023 for all other USD LIBOR tenors. While this announcement extends the transition period to June 2023, the United States Federal Reserve concurrently issued a statement advising banks to stop new USD LIBOR issuances by the end of 2021. In light of these recent announcements, the future of LIBOR at this time is uncertain and any changes in the methods by which LIBOR is determined or regulatory activity related to LIBOR’s phaseout could cause LIBOR to perform differently than in the past or cease to exist.
At this time, no consensus exists as to what rate or rates will become accepted alternatives to LIBOR, although the U.S. Federal Reserve, in connection with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with the Secured Overnight Financing Rate (“SOFR”). SOFR is calculated based on short-term repurchase agreements, backed by Treasury securities. SOFR is observed and backward looking, which stands in contrast with LIBOR under the current methodology, which is an estimated forward-looking rate and relies, to some degree, on the expert judgment of submitting panel members. Given the inherent differences between LIBOR and SOFR or any other alternative benchmark rate that may be established, there are many uncertainties regarding a transition from LIBOR, including but not limited to the need to amend all debt instruments with LIBOR as the referenced rate and how this will impact our cost of variable rate debt. We will also need to consider any new contracts and if they should reference an alternative benchmark rate or include suggested fallback
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language, as published by the Alternative Reference Rates Committee. The consequences of these developments with respect to LIBOR cannot be entirely predicted and span multiple future periods but could result in an increase in the cost of our variable rate debt which may be detrimental to our financial position or operating results.
We are subject to credit risk in connection with providing credit to our retail partners, and our results of operations could be harmed if a material number of our retail partners were not able to meet their payment obligations.
We are exposed to credit risk primarily on our accounts receivable. We provide credit to our retail partners in the ordinary course of our business and perform ongoing credit evaluations. While we believe that our exposure to concentrations of credit risk with respect to trade receivables is mitigated by our large retail partner base, and we make allowances for doubtful accounts, we nevertheless run the risk of our retail partners not being able to meet their payment obligations, particularly in a future economic downturn. If a material number of our retail partners were not able to meet their payment obligations, our results of operations could be harmed.
Risks Related to Ownership of Our Common Stock
We previously identified material weaknesses in our internal control over financial reporting which have since been remediated. Any future failure to implement and maintain effective internal control over financial reporting could result in material misstatements in our financial statements and could cause investors to lose confidence in our financial statements, which could have a material adverse effect on our stock price.
During the preparation of our consolidated financial statements for the year ended December 30, 2017, we identified certain material weaknesses in our internal control over financial reporting. The material weaknesses related to (i) ineffective information technology general controls (“ITGCs”) in the areas of user access and program-change management over certain information technology systems that support our financial reporting process; and (ii) failure to properly detect and analyze issues in the accounting system related to inventory valuation. Although the previously-identified material weakness relating to inventory was remediated as of December 28, 2019 and the material weakness related to ITGCs was remediated as of September 26, 2020, we cannot assure you that other material weaknesses and control deficiencies will not be discovered in the future. If we identify any other material weaknesses in our internal control over financial reporting, or we fail to implement and maintain effective internal controls in the future, investors may lose confidence in our financial statements, which could cause a decline in the price of our common stock, and we may be unable to maintain compliance with the NYSE listing standards.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of the Company more difficult, limit attempts by our stockholders to replace or remove our current management, and limit the market price of our common stock.
Provisions in our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws may have the effect of delaying or preventing a change in control or changes in our management. Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws:
•provide that our Board of Directors is classified into three classes of directors;
•prohibit stockholders from taking action by written consent;
•provide that stockholders may remove directors only for cause, and only with the approval of holders of at least 66 2/3% of our then outstanding common stock;
•provide that the authorized number of directors may be changed only by resolution of the Board of Directors;
•provide that all vacancies, including newly created directorships, may, except as otherwise required by law or as set forth in the Stockholders Agreement be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum;
•provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must provide notice in writing in a timely manner, and also specify requirements as to the form and content of a stockholder’s notice;
•restrict the forum for certain litigation against us to Delaware;
•do not provide for cumulative voting rights (therefore allowing the holders of a majority of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election);
•provide that special meetings of our stockholders may be called only by the Chairman of the Board of Directors, our CEO, or the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors;
•provide that stockholders will be permitted to amend our Amended and Restated Bylaws only upon receiving at least 66 2/3% of the votes entitled to be cast by holders of all outstanding shares then entitled to vote generally in the election of directors, voting together as a single class; and
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•provide that certain provisions of our Amended and Restated Certificate of Incorporation may only be amended upon receiving at least 66 2/3% of the votes entitled to be cast by holders of all outstanding shares then entitled to vote, voting together as a single class.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board of Directors, which is responsible for appointing the members of our management. In addition, we have opted out of the provisions of Section 203 of the General Corporation Law of the State of Delaware (the “DGCL”), which generally prohibit a Delaware corporation from engaging in any of a broad range of business combinations with any interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder. However, our Amended and Restated Certificate of Incorporation provides substantially the same limitations as are set forth in Section 203 but also provides that Cortec Group Fund V, L.P., our controlling stockholder at the time of our initial public offering, and its affiliates and any of their direct or indirect transferees and any group as to which such persons are a party do not constitute “interested stockholders” for purposes of this provision.
Our Amended and Restated Certificate of Incorporation provides that the Court of Chancery of the State of Delaware is the sole and exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.
Our Amended and Restated Certificate of Incorporation provides that, unless we consent to the selection of an alternative forum, the Court of Chancery of the State of Delaware is the sole and exclusive forum for: (a) any derivative action or proceeding brought on our behalf; (b) any action asserting a claim of breach of fiduciary duty owed by any of our stockholders, directors, officers, or other employees to us or to our stockholders; (c) any action asserting a claim arising pursuant to the DGCL; or (d) any action asserting a claim governed by the internal affairs doctrine. The choice of forum provision does not apply to any actions arising under the Securities Act of 1933, as amended (the "Securities Act"), or the Exchange Act, or any other claim for which the federal courts have exclusive jurisdiction. The exclusive forum provision in the Amended and Restated Certificate of Incorporation will not relieve us of our duties to comply with the federal securities laws and the rules and regulations thereunder, and stockholders of YETI will not be deemed to have waived our compliance with these laws, rules and regulations. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage such lawsuits against us and our directors, officers, and other employees. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, results of operations, and financial condition.
YETI Holdings, Inc. is a holding company with no operations of its own and, as such, it depends on its subsidiaries for cash to fund its operations and expenses, including future dividend payments, if any.
As a holding company, our principal source of cash flow is distributions from our subsidiaries. Therefore, our ability to fund and conduct our business, service our debt, and pay dividends, if any, depends on the ability of our subsidiaries to generate sufficient cash flow to make upstream cash distributions to us. Our subsidiaries are separate legal entities, and although they are wholly owned and controlled by us, they have no obligation to make any funds available to us, whether in the form of loans, dividends, or otherwise. The ability of our subsidiaries to distribute cash to us is also subject to, among other things, restrictions that may be contained in our subsidiary agreements (as entered into from time to time), availability of sufficient funds in such subsidiaries and applicable laws and regulatory restrictions. Claims of any creditors of our subsidiaries generally have priority as to the assets of such subsidiaries over our claims and claims of our creditors and stockholders. To the extent the ability of our subsidiaries to distribute dividends or other payments to us is limited in any way, our ability to fund and conduct our business, service our debt, and pay dividends, if any, could be harmed.
General Risk Factors
Our future success depends on the continuing efforts of our management and key employees, and on our ability to attract and retain highly skilled personnel and senior management.
We depend on the talents and continued efforts of our senior management and key employees. The loss of members of our management or key employees may disrupt our business and harm our results of operations. Furthermore, our ability to manage further expansion will require us to continue to attract, motivate, and retain additional qualified personnel. Competition for this type of personnel is intense, and we may not be successful in attracting, integrating, and retaining the personnel required to grow and operate our business effectively. There can be no assurance that our current management team or any new members of our management team will be able to successfully execute our business and operating strategies.
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If our estimates or judgments relating to our critical accounting policies prove to be incorrect or change significantly, our results of operations could be harmed.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets, liabilities, and equity and the amount of sales and expenses that are not readily apparent from other sources. Our results of operations may be harmed if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors and could result in a decline in our stock price.
We may be the target of strategic transactions, which could divert our management's attention and otherwise disrupt our operations and adversely affect our business.
Other companies may seek to acquire us or enter into other strategic transactions. We will consider, discuss, and negotiate such transactions as we deem appropriate. The consideration of such transactions, even if not consummated, could divert management’s attention from other business matters, result in adverse publicity or information leaks, and could increase our expenses.
We may acquire or invest in other companies, which could divert our management’s attention, result in dilution to our stockholders, and otherwise disrupt our operations and harm our results of operations.
In the future, we may acquire or invest in businesses, products, or technologies that we believe could complement or expand our business, enhance our capabilities, or otherwise offer growth opportunities. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various costs and expenses in identifying, investigating, and pursuing suitable acquisitions, whether or not they are consummated.
In any future acquisitions, we may not be able to successfully integrate acquired personnel, operations, and technologies, or effectively manage the combined business following the acquisition. We also may not achieve the anticipated benefits from future acquisitions due to a number of factors, including: (a) an inability to integrate or benefit from acquisitions in a profitable manner; (b) unanticipated costs or liabilities associated with the acquisition; (c) the incurrence of acquisition-related costs; (d) the diversion of management’s attention from other business concerns; (e) the loss of our or the acquired business’ key employees; or (f) the issuance of dilutive equity securities, the incurrence of debt, or the use of cash to fund such acquisitions.
In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill and other intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our results of operations based on this impairment assessment process, which could harm our results of operations.
We may be subject to liability if we infringe upon the intellectual property rights of third parties.
Third parties may sue us for alleged infringement of their proprietary rights. The party claiming infringement might have greater resources than we do to pursue its claims, and we could be forced to incur substantial costs and devote significant management resources to defend against such litigation, even if the claims are meritless and even if we ultimately prevail. If the party claiming infringement were to prevail, we could be forced to modify or discontinue our products, pay significant damages, or enter into expensive royalty or licensing arrangements with the prevailing party. In addition, any payments we are required to make, and any injunction we are required to comply with as a result of such infringement, could harm our reputation and financial results.
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Item 6. Exhibits.
| Exhibit Number | Exhibit | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32.1** | ||||||||
| 101* | The following unaudited financial statements from YETI Holdings, Inc.’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 2, 2021, formatted in Inline eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statements of Equity, (v) Consolidated Statements of Cash Flows, and (v) Notes to the Unaudited Condensed Consolidated Financial Statements | |||||||
| 104* | Cover Page Interactive Data File (embedded within the Exhibit 101 Inline XBRL document) | |||||||
* Filed herewith.
** Furnished herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| YETI Holdings, Inc. | ||||||||
| Dated: November 12, 2021 | By: | /s/ Matthew J. Reintjes | ||||||
| Matthew J. Reintjes | ||||||||
| President and Chief Executive Officer, Director (Principal Executive Officer) | ||||||||
| Dated: November 12, 2021 | By: | /s/ Paul C. Carbone | ||||||
| Paul C. Carbone | ||||||||
| Senior Vice President and Chief Financial Officer | ||||||||
| (Principal Financial Officer and Principal Accounting Officer) | ||||||||
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