YETI Holdings, Inc. - Quarter Report: 2023 September (Form 10-Q)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________________________
FORM 10-Q
____________________________________________________________________________________________
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended September 30, 2023
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 86,852,881 shares of Common Stock ($0.01 par value) outstanding as of November 2, 2023.
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 our future expectations relating to our voluntary recalls, expected market or macroeconomic environment, 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 further 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
•If we fail to attract new customers and maintain our brand image, we may be unable to maintain demand for our products, which 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 or our growth rate and demand for our products.
•We may not be able to effectively manage our growth.
•We may not be successful in expanding into additional markets.
•If we fail to compete effectively, we could lose our market position.
•Unauthorized use or invalidation of our intellectual property or proprietary rights could damage our brand and harm our results of operations.
•We may be subject to liability if we infringe upon the intellectual property rights of third parties.
•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 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.
•If we cannot maintain prices or effectively implement price increases, our margins may decrease.
•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.
•If we fail to appropriately address emerging environmental, social and governance matters, or if we fail, or are perceived to fail, to meet our goals regarding environmental, social and governance matters, our reputation and our business could be harmed.
•Climate change, and related legislative and regulatory responses to climate change, may adversely impact our business.
•A significant portion of our sales are to national, regional, and independent retail partners, and if they cease to carry our current products or choose not to promote or carry new products that we develop, our brand as well as our results of operations and financial condition could be harmed.
•If our plans to increase sales through our direct-to-consumer e-commerce channel are not successful, our business and results of operations could be harmed.
•If we do not successfully implement our retail store expansion plans, 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, warranty liability, 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
•Public health crises could negatively impact our business, sales, financial condition, results of operations and cash flows.
•Adverse economic conditions, such as a downturn in the economy or inflationary conditions resulting in rising prices, could adversely affect consumer purchases of discretionary items, 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 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.
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.
•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 be the target of stockholder activism, an unsolicited takeover proposal, a proxy contest, or short sellers, which could negatively impact 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.
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 shares and par value)
| September 30, 2023 | December 31, 2022 | ||||||||||
| ASSETS | |||||||||||
| Current assets | |||||||||||
| Cash | $ | 281,360 | $ | 234,741 | |||||||
| Accounts receivable, net | 127,896 | 79,446 | |||||||||
| Inventory | 341,348 | 371,412 | |||||||||
| Prepaid expenses and other current assets | 40,728 | 33,321 | |||||||||
| Total current assets | 791,332 | 718,920 | |||||||||
| Property and equipment, net | 132,215 | 124,587 | |||||||||
| Operating lease right-of-use assets | 60,376 | 55,406 | |||||||||
| Goodwill | 54,293 | 54,293 | |||||||||
| Intangible assets, net | 114,140 | 99,429 | |||||||||
| Other assets | 3,526 | 24,130 | |||||||||
| Total assets | $ | 1,155,882 | $ | 1,076,765 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | 179,086 | $ | 140,818 | |||||||
| Accrued expenses and other current liabilities | 130,333 | 211,399 | |||||||||
| Taxes payable | 11,962 | 15,289 | |||||||||
| Accrued payroll and related costs | 19,570 | 4,847 | |||||||||
| Current operating lease liabilities | 13,366 | 12,076 | |||||||||
| Current maturities of long-term debt | 6,512 | 24,611 | |||||||||
| Total current liabilities | 360,829 | 409,040 | |||||||||
| Long-term debt, net of current portion | 79,529 | 71,741 | |||||||||
| Operating lease liabilities, non-current | 60,212 | 55,649 | |||||||||
| Other liabilities | 16,527 | 13,858 | |||||||||
| Total liabilities | 517,097 | 550,288 | |||||||||
| Commitments and contingencies (Note 10) | |||||||||||
| Stockholders’ Equity | |||||||||||
Common stock, par value $0.01; 600,000,000 shares authorized; 88,523,065 and 86,846,514 shares issued and outstanding at September 30, 2023, respectively, and 88,107,787 and 86,431,236 shares issued and outstanding at December 31, 2022, respectively | 885 | 881 | |||||||||
Treasury stock, at cost; 1,676,551 shares | (100,025) | (100,025) | |||||||||
Preferred stock, par value $0.01; 30,000,000 shares authorized; no shares issued or outstanding | — | — | |||||||||
| Additional paid-in capital | 378,556 | 357,490 | |||||||||
| Retained earnings | 359,843 | 268,551 | |||||||||
Accumulated other comprehensive loss | (474) | (420) | |||||||||
| Total stockholders’ equity | 638,785 | 526,477 | |||||||||
| Total liabilities and stockholders’ equity | $ | 1,155,882 | $ | 1,076,765 | |||||||
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 | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | ||||||||||||||||||||
| Net sales | $ | 433,561 | $ | 433,556 | $ | 1,138,920 | $ | 1,147,226 | |||||||||||||||
| Cost of goods sold | 182,310 | 211,149 | 510,961 | 550,860 | |||||||||||||||||||
| Gross profit | 251,251 | 222,407 | 627,959 | 596,366 | |||||||||||||||||||
| Selling, general, and administrative expenses | 189,374 | 153,940 | 500,653 | 426,263 | |||||||||||||||||||
| Operating income | 61,877 | 68,467 | 127,306 | 170,103 | |||||||||||||||||||
| Interest expense, net | (285) | (1,495) | (1,610) | (3,221) | |||||||||||||||||||
| Other expense | (4,032) | (7,281) | (2,782) | (12,202) | |||||||||||||||||||
| Income before income taxes | 57,560 | 59,691 | 122,914 | 154,680 | |||||||||||||||||||
| Income tax expense | (14,903) | (14,171) | (31,622) | (37,249) | |||||||||||||||||||
| Net income | $ | 42,657 | $ | 45,520 | $ | 91,292 | $ | 117,431 | |||||||||||||||
| Net income per share | |||||||||||||||||||||||
| Basic | $ | 0.49 | $ | 0.53 | $ | 1.05 | $ | 1.36 | |||||||||||||||
| Diluted | $ | 0.49 | $ | 0.52 | $ | 1.05 | $ | 1.35 | |||||||||||||||
| Weighted-average common shares outstanding | |||||||||||||||||||||||
| Basic | 86,783 | 86,208 | 86,663 | 86,580 | |||||||||||||||||||
| Diluted | 87,589 | 86,831 | 87,290 | 87,305 | |||||||||||||||||||
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 | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | ||||||||||||||||||||
| Net income | $ | 42,657 | $ | 45,520 | $ | 91,292 | $ | 117,431 | |||||||||||||||
| Other comprehensive income (loss) | |||||||||||||||||||||||
| Foreign currency translation adjustments | 1,713 | 921 | (54) | 2,132 | |||||||||||||||||||
| Total comprehensive income | $ | 44,370 | $ | 46,441 | $ | 91,238 | $ | 119,563 | |||||||||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements
3
YETI HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands, including shares)
| Three Months Ended September 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
Balance, July 1, 2023 | 88,407 | $ | 884 | $ | 371,348 | (1,677) | $ | (100,025) | $ | 317,186 | $ | (2,187) | $ | 587,206 | |||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 7,805 | — | — | — | — | 7,805 | |||||||||||||||||||||||||||||||||||||||
| Common stock issued under employee benefit plans | 129 | 1 | (1) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Common stock withheld related to net share settlement of stock-based compensation | (13) | — | (596) | — | — | — | — | (596) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 1,713 | 1,713 | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 42,657 | — | 42,657 | |||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2023 | 88,523 | $ | 885 | $ | 378,556 | (1,677) | $ | (100,025) | $ | 359,843 | $ | (474) | $ | 638,785 | |||||||||||||||||||||||||||||||||
| Three Months Ended October 1, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
Balance, July 2, 2022 | 87,851 | $ | 878 | $ | 346,675 | (1,677) | $ | (100,025) | $ | 250,769 | $ | 1,564 | $ | 499,861 | |||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 4,662 | — | — | — | — | 4,662 | |||||||||||||||||||||||||||||||||||||||
| Common stock issued under employee benefit plans | 86 | 1 | 277 | — | — | — | — | 278 | |||||||||||||||||||||||||||||||||||||||
| Common stock withheld related to net share settlement of stock-based compensation | (13) | — | (581) | — | — | — | — | (581) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 921 | 921 | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 45,520 | — | 45,520 | |||||||||||||||||||||||||||||||||||||||
| Balance, October 1, 2022 | 87,924 | $ | 879 | $ | 351,033 | (1,677) | $ | (100,025) | $ | 296,289 | $ | 2,485 | $ | 550,661 | |||||||||||||||||||||||||||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements
4
YETI HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands, including shares)
| Nine Months Ended September 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | 88,108 | $ | 881 | $ | 357,490 | (1,677) | (100,025) | $ | 268,551 | $ | (420) | $ | 526,477 | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 21,918 | — | — | — | — | 21,918 | |||||||||||||||||||||||||||||||||||||||
Common stock issued under employee benefit plans | 475 | 4 | 1,569 | — | — | — | — | 1,573 | |||||||||||||||||||||||||||||||||||||||
| Common stock withheld related to net share settlement of stock-based compensation | (60) | — | (2,421) | — | — | — | — | (2,421) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (54) | (54) | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 91,292 | — | 91,292 | |||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2023 | 88,523 | $ | 885 | $ | 378,556 | (1,677) | $ | (100,025) | $ | 359,843 | $ | (474) | $ | 638,785 | |||||||||||||||||||||||||||||||||
| Nine Months Ended October 1, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, January 1, 2022 | 87,727 | $ | 877 | $ | 337,735 | — | — | $ | 178,858 | $ | 353 | $ | 517,823 | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 14,883 | — | — | — | — | 14,883 | |||||||||||||||||||||||||||||||||||||||
Common stock issued under employee benefit plans | 229 | 2 | 276 | — | — | — | — | 278 | |||||||||||||||||||||||||||||||||||||||
| Common stock withheld related to net share settlement of stock-based compensation | (32) | — | (1,861) | — | — | — | — | (1,861) | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | (1,677) | (100,025) | — | — | (100,025) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 2,132 | 2,132 | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 117,431 | — | 117,431 | |||||||||||||||||||||||||||||||||||||||
| Balance, October 1, 2022 | 87,924 | $ | 879 | $ | 351,033 | (1,677) | $ | (100,025) | $ | 296,289 | $ | 2,485 | $ | 550,661 | |||||||||||||||||||||||||||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements
5
YETI HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| Nine Months Ended | |||||||||||
| September 30, 2023 | October 1, 2022 | ||||||||||
| Cash Flows from Operating Activities: | |||||||||||
| Net income | $ | 91,292 | $ | 117,431 | |||||||
| Adjustments to reconcile net income to cash provided by (used in) operating activities: | |||||||||||
| Depreciation and amortization | 34,391 | 28,504 | |||||||||
| Amortization of deferred financing fees | 441 | 458 | |||||||||
| Stock-based compensation | 21,918 | 14,883 | |||||||||
| Deferred income taxes | 20,699 | (1,138) | |||||||||
| Impairment of long-lived assets | 1,963 | 181 | |||||||||
| Loss on modification and extinguishment of debt | 330 | — | |||||||||
| Product recalls | 8,538 | — | |||||||||
| Other | 239 | 10,215 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | (48,836) | 14,679 | |||||||||
| Inventory | 28,180 | (127,362) | |||||||||
| Other current assets | (6,505) | (2,944) | |||||||||
| Accounts payable and accrued expenses | (36,288) | (121,515) | |||||||||
| Taxes payable | (3,323) | (6,773) | |||||||||
| Other | 1,730 | 1,166 | |||||||||
| Net cash provided by (used in) operating activities | 114,769 | (72,215) | |||||||||
| Cash Flows from Investing Activities: | |||||||||||
| Purchases of property and equipment | (38,983) | (32,493) | |||||||||
| Additions of intangibles, net | (19,280) | (7,924) | |||||||||
| Net cash used in investing activities | (58,263) | (40,417) | |||||||||
| Cash Flows from Financing Activities: | |||||||||||
| Repayments of long-term debt | (6,680) | (16,875) | |||||||||
| Payments of deferred financing fees | (2,824) | — | |||||||||
| Taxes paid in connection with employee stock transactions | (2,421) | (1,861) | |||||||||
| Proceeds from employee stock transactions | 1,573 | 278 | |||||||||
| Finance lease principal payment | (1,579) | (1,730) | |||||||||
| Repurchase of common stock | — | (100,025) | |||||||||
| Net cash used in financing activities | (11,931) | (120,213) | |||||||||
| Effect of exchange rate changes on cash | 2,044 | (1,581) | |||||||||
| Net increase (decrease) in cash | 46,619 | (234,426) | |||||||||
| Cash, beginning of period | 234,741 | 312,189 | |||||||||
| Cash, end of period | $ | 281,360 | $ | 77,763 | |||||||
See Notes to Unaudited Condensed Consolidated Financial Statements
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YETI HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Headquartered in Austin, Texas, YETI Holdings, Inc. 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,” “YETI,” 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 balances and 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 December 31, 2022 is derived from the audited financial statements included in our Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2022, which should be read in conjunction with these unaudited consolidated financial statements and notes thereto.
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. 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- or 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 December 30, 2023 (“2023”) is a 52-week period. The first quarter of our fiscal year 2023 ended on April 1, 2023, the second quarter ended on July 1, 2023, and the third quarter ended on September 30, 2023. Our fiscal year ended December 31, 2022 (“2022”) was a 52-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 September 30, 2023 and October 1, 2022.
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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. Our allowance for credit losses was $0.5 million as of September 30, 2023 and $0.7 million as of December 31, 2022, 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). At September 30, 2023 and December 31, 2022, inventory reserves were $2.9 million and $37.3 million, respectively. The balance at December 31, 2022 primarily consisted of reserves related to unsalable inventory on-hand in connection with our voluntary recalls. The decrease in the inventory reserve is primarily related to the physical scrapping of the unsalable inventory. See Note 10 for further discussion of our voluntary recalls.
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 our senior secured credit facility (“Credit Facility”) carries a variable interest rate that is based on the Secured Overnight Financing Rate (“SOFR”).
Supplier Finance Program Obligations
We have a supplier finance program (“SFP”) with a financial institution which provides certain suppliers the option, at their sole discretion, to participate in the program and sell their receivables due from us for early payment. Participating eligible suppliers negotiate the terms directly with the financial institution and we have no involvement in establishing those terms nor are we a party to these agreements. Our payments associated with the invoices from the suppliers participating in the SFP are made to the financial institution according to the original invoice. The outstanding payment obligations under the SFP program recorded within accounts payable in our condensed consolidated balance sheets at September 30, 2023 and December 31, 2022 were $60.9 million and $70.7 million, respectively.
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Recently Adopted Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU is intended to ease the potential accounting and financial reporting burden of reference rate reform, including the expected market transition from the London Interbank Offering Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. The guidance provides optional expedients and scope exceptions for transactions if certain criteria are met. These transactions include contract modifications, hedge accounting, and the sale or transfer of debt securities classified as held-to-maturity. We adopted this ASU in the first quarter of 2023. Adoption of this new standard did not have a material impact on our consolidated financial statements.
In September 2022, the FASB issued ASU 2022-04, Liabilities-Supplier Finance Programs (Topic 405-50) - Disclosure of Supplier Finance Program Obligations, which requires disclosures intended to enhance the transparency of supplier finance programs. The ASU requires buyers in a supplier finance program to disclose sufficient information about the program to allow a user of financial statements to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude. The ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. We adopted provisions of this ASU in the first quarter of 2023, with the exception of the amendment on rollforward information, which will be adopted in the first quarter of 2024. Adoption of the new standard did not have a material impact on our consolidated financial statements.
In July 2023, the FASB issued ASU 2023-03 to amend various SEC paragraphs in the Accounting Standards Codification to conform to past SEC announcements and guidance issued by the SEC. The ASU does not provide any new guidance so there is no transition or effective dates associated with it, resulting in the ASU being effective upon issuance. Consequently, the adoption of this ASU did not have a material impact on our consolidated financial statements.
Recent Accounting Guidance Not Yet Adopted
No other new accounting pronouncements issued or effective as of September 30, 2023 have had, or are expected to have, a material impact on our consolidated financial statements.
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 contract liabilities include advance cash deposits received from customers for certain customized product orders and unredeemed gift card liabilities. As products are shipped and control transfers, we recognize contract liabilities as revenue.
During the second quarter of 2023, we began issuing gift cards as remedies in connection with our voluntary recalls. We recognize sales from gift cards as they are redeemed for products. As of September 30, 2023, $7.8 million of our contract liabilities represented unredeemed gift card liabilities. See Note 10 for further discussion of our recalls.
The following table provides information about accounts receivable and contract liabilities at the periods indicated (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||
| Accounts receivable, net | $ | 127,896 | $ | 79,446 | |||||||
| Contract liabilities | $ | (17,004) | $ | (7,702) | |||||||
For the nine months ended September 30, 2023, we recognized $7.7 million of revenue that was previously included in the contract liability balance at the beginning of the period.
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Disaggregation of Revenue
The following table disaggregates our net sales by channel, product category, and geography (based on end-consumer location) for the periods indicated (in thousands):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
September 30, 2023(1) | October 1, 2022 | September 30, 2023(1) | October 1, 2022 | ||||||||||||||||||||
| Net Sales by Channel | |||||||||||||||||||||||
| Wholesale | $ | 174,062 | $ | 206,153 | $ | 486,066 | $ | 539,014 | |||||||||||||||
| Direct-to-consumer | 259,499 | 227,403 | 652,854 | 608,212 | |||||||||||||||||||
| Total net sales | $ | 433,561 | $ | 433,556 | $ | 1,138,920 | $ | 1,147,226 | |||||||||||||||
| Net Sales by Category | |||||||||||||||||||||||
| Coolers & Equipment | $ | 171,547 | $ | 185,657 | $ | 432,511 | $ | 482,030 | |||||||||||||||
| Drinkware | 253,274 | 238,987 | 676,978 | 639,055 | |||||||||||||||||||
| Other | 8,740 | 8,912 | 29,431 | 26,141 | |||||||||||||||||||
| Total net sales | $ | 433,561 | $ | 433,556 | $ | 1,138,920 | $ | 1,147,226 | |||||||||||||||
| Net Sales by Geographic Region | |||||||||||||||||||||||
| United States | $ | 365,695 | $ | 377,067 | $ | 964,569 | $ | 1,005,238 | |||||||||||||||
| International | 67,866 | 56,489 | 174,351 | 141,988 | |||||||||||||||||||
| Total net sales | $ | 433,561 | $ | 433,556 | $ | 1,138,920 | $ | 1,147,226 | |||||||||||||||
_________________________
(1)Includes an unfavorable impact from the recall reserve adjustment. See Note 10 for further discussion of our recalls.
For the three and nine months ended September 30, 2023, no single customer represented over 10% of gross sales. For both the three and nine months ended October 1, 2022, our largest single customer represented approximately 12% of gross sales.
3. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets include the following (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||
| Prepaid expenses | $ | 20,767 | $ | 18,149 | |||||||
| Prepaid taxes | 14,807 | 10,222 | |||||||||
| Other | 5,154 | 4,950 | |||||||||
| Total prepaid expenses and other current assets | $ | 40,728 | $ | 33,321 | |||||||
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4. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following at the dates indicated (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||
Product recall reserves(1) | $ | 25,930 | $ | 94,807 | |||||||
| Accrued freight and other operating expenses | 33,868 | 56,354 | |||||||||
| Contract liabilities | 17,004 | 7,702 | |||||||||
| Customer discounts, allowances, and returns | 13,631 | 9,948 | |||||||||
| Advertising and marketing | 11,505 | 11,547 | |||||||||
| Warranty reserve | 9,783 | 9,996 | |||||||||
| Interest payable | 164 | 941 | |||||||||
| Accrued capital expenditures | 844 | 895 | |||||||||
| Other | 17,604 | 19,209 | |||||||||
| Total accrued expenses and other current liabilities | $ | 130,333 | $ | 211,399 | |||||||
(1)See Note 10 for further discussion of our product recall reserves.
5. LONG-TERM DEBT
Long-term debt consisted of the following at the dates indicated (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||
| Term Loan A, due 2028 | $ | 83,320 | $ | 90,000 | |||||||
| Finance lease debt | 5,731 | 7,309 | |||||||||
| Total debt | 89,051 | 97,309 | |||||||||
| Current maturities of long-term debt | (4,219) | (22,500) | |||||||||
| Current maturities of finance lease debt | (2,293) | (2,111) | |||||||||
| Total long-term debt | 82,539 | 72,698 | |||||||||
| Unamortized deferred financing fees | (3,010) | (957) | |||||||||
| Total long-term debt, net | $ | 79,529 | $ | 71,741 | |||||||
At September 30, 2023, the future maturities of principal amounts of our debt obligations, excluding finance lease obligations, for the next five years and in total consisted of the following (in thousands):
| Amount | |||||
| 2023 | 1,054 | ||||
| 2024 | 4,219 | ||||
| 2025 | 4,219 | ||||
| 2026 | 4,219 | ||||
| 2027 | 4,219 | ||||
| 2028 | 65,390 | ||||
| Total | $ | 83,320 | |||
Credit Facility
On March 31, 2023, we amended the Credit Facility, leaving the material terms of the Credit Facility substantially unchanged, with the exception of certain changes to implement the replacement of LIBOR with SOFR.
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On June 22, 2023, we further amended the Credit Facility, which extended the maturity date of both the term loan (the “Term Loan A”) and the revolving credit facility (the “Revolving Credit Facility”) from December 17, 2024 to June 22, 2028; refinanced and replaced the existing Term Loan A in full with a new $84.4 million Term Loan A; and increased the commitments under the Revolving Credit Facility from $150.0 million to $300.0 million. As a result of the amendment, we recognized a $0.3 million loss on modification and extinguishment of debt and we capitalized $2.8 million of new lender and third-party fees in the second quarter of 2023.
Pursuant to the agreement governing the Credit Facility (the “Credit Agreement”), we are required to make quarterly principal payments equal to 1.25% of the then-outstanding aggregate principal amount of the Term Loan A. As amended, the scheduled quarterly principal payments begin on September 30, 2023 and are due each December 31, March 31, June 30 and September 30 thereafter, with the remaining principal balance due on the maturity date. Borrowings under the Term Loan A and the Revolving Credit Facility bear interest at Term SOFR or the Alternate Base Rate (each as defined in the Credit Agreement) plus an applicable rate ranging from 1.75% to 2.50% for Term SOFR-based loans and from 0.75% to 1.50% for Alternate Base Rate-based loans, depending upon our total Net Leverage Ratio (as defined in the Credit Agreement).
6. INCOME TAXES
Income tax expense was $14.9 million and $14.2 million for the three months ended September 30, 2023 and October 1, 2022, respectively. The effective tax rate for the three months ended September 30, 2023 was 26% compared to 24% for the three months ended October 1, 2022. The increase in both the income tax expense and the effective tax rate was primarily due to a discrete tax expense related to a change in the reserve estimate for an uncertain tax position in the three months ended September 30, 2023.
Income tax expense was $31.6 million and $37.2 million for the nine months ended September 30, 2023 and October 1, 2022, respectively. The decrease in income tax expense was due to lower income before income taxes. The effective tax rate for the nine months ended September 30, 2023 was 26%, compared to 24% for the nine months ended October 1, 2022. The higher effective tax rate was primarily due to discrete tax expenses related to the vesting of certain stock-based compensation and a change in the reserve estimate for an uncertain tax position in the nine months ended September 30, 2023.
Deferred tax assets were $2.6 million as of September 30, 2023 and $23.2 million as of December 31, 2022, which is presented in other assets 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.
7. STOCK-BASED COMPENSATION
We award stock-based compensation to employees and directors under the 2018 Equity and Incentive Compensation Plan (“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 (“2012 Plan”), as amended and restated on June 20, 2018. 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 $7.8 million and $4.7 million for the three months ended September 30, 2023 and October 1, 2022, respectively. For the nine months ended September 30, 2023 and October 1, 2022, we recognized stock-based compensation expense of $21.9 million and $14.9 million, respectively. At September 30, 2023, total unrecognized stock-based compensation expense of $56.7 million for all stock-based compensation plans is expected to be recognized over a weighted-average period of 2.1 years.
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Stock-based activity for the nine months ended September 30, 2023 is summarized below (in thousands, except per share data):
| Stock Options | Performance-Based Restricted Stock Awards and Units | Restricted Stock Units, Restricted Stock Awards, and Deferred Stock Units | |||||||||||||||||||||||||||||||||
| Number of Options | Weighted Average Exercise Price | Number of PBRSs and PRSUs | Weighted Average Grant Date Fair Value | Number of RSUs, RSAs, and DSUs | Weighted Average Grant Date Fair Value | ||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | 642 | $ | 20.10 | 233 | $ | 53.63 | 812 | $ | 51.28 | ||||||||||||||||||||||||||
| Granted | — | — | 279 | 38.59 | 962 | 38.50 | |||||||||||||||||||||||||||||
| Exercised/released | (64) | 24.41 | (99) | 32.84 | (312) | 52.90 | |||||||||||||||||||||||||||||
| Forfeited/expired | — | — | (15) | 64.98 | (112) | 46.45 | |||||||||||||||||||||||||||||
| Balance, September 30, 2023 | 578 | $ | 19.64 | 398 | $ | 48.14 | 1,350 | $ | 42.22 | ||||||||||||||||||||||||||
8. EARNINGS PER SHARE
Basic income per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted income per share includes the effect of all potentially dilutive securities, which include dilutive stock options and other stock-based awards.
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 | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | ||||||||||||||||||||
| Net income | $ | 42,657 | $ | 45,520 | $ | 91,292 | $ | 117,431 | |||||||||||||||
| Weighted-average common shares outstanding—basic | 86,783 | 86,208 | 86,663 | 86,580 | |||||||||||||||||||
| Effect of dilutive securities | 806 | 623 | 627 | 725 | |||||||||||||||||||
| Weighted-average common shares outstanding—diluted | 87,589 | 86,831 | 87,290 | 87,305 | |||||||||||||||||||
| Earnings per share | |||||||||||||||||||||||
| Basic | $ | 0.49 | $ | 0.53 | $ | 1.05 | $ | 1.36 | |||||||||||||||
| Diluted | $ | 0.49 | $ | 0.52 | $ | 1.05 | $ | 1.35 | |||||||||||||||
Effects of potentially dilutive securities are presented only in periods in which they are dilutive. For the three and nine months ended September 30, 2023, outstanding stock-based awards representing 0.1 million and 0.2 million shares of common stock, respectively, were excluded from the calculation of diluted earnings per share, because their effect would be anti-dilutive. For the three and nine months ended October 1, 2022, outstanding stock-based awards representing 0.5 million and 0.4 million shares of common stock, respectively, were excluded from the calculation of diluted earnings per share, because their effect would be anti-dilutive.
9. STOCKHOLDERS’ EQUITY
On February 27, 2022, the Board of Directors authorized a common stock repurchase program of up to $100.0 million. During the three months ended April 2, 2022, we repurchased 1,676,551 shares for an aggregate purchase price of $100.0 million, including fees and commissions, at an average repurchase price of $59.66 per share. Following the repurchases, no shares remained available under the program. All of the common stock repurchased is held as treasury stock.
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10. 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.
Product Recall Reserves
In January 2023, we notified the U.S. Consumer Product Safety Commission (“CPSC”) of a potential safety concern regarding the magnet-lined closures of our Hopper® M30 Soft Cooler, Hopper® M20 Soft Backpack Cooler, and SideKick Dry® gear case (the “affected products”) and initiated a global stop sale of the affected products. In February 2023, we proposed a voluntary recall of the affected products to the CPSC, and other relevant global regulatory authorities. Accordingly, we established a reserve for expected future returns and the estimated cost of recall remedies for consumers with affected products on our consolidated balance sheet as of December 31, 2022.
In March 2023, we announced separate, voluntary recalls of the affected products in collaboration with the CPSC. During the second quarter of 2023, we began processing claims and returns, and based on such experience and observed trends, we reevaluated our prior assumptions and adjusted our estimated product recall reserve. These trends included higher than anticipated elections by consumers to receive gift cards in lieu of product replacement remedies, variations in individual product participation rates, and lower logistics costs than previously estimated. As a result, we updated our initial recall reserve assumptions, which increased the estimated recall expense reserve by $8.5 million during the three months ended July 1, 2023. However, the overall consumer recall participation rate has remained consistent with our expectations.
The product recalls, which includes the recall reserve adjustment and other incurred costs, had the following effect on our income before income taxes (in thousands):
| Three Months Ended | Nine Months Ended | ||||||||||
| September 30, 2023 | September 30, 2023 | ||||||||||
Decrease to net sales(1) | $ | (18) | $ | (24,524) | |||||||
Decrease to cost of goods sold(2) | 843 | 7,148 | |||||||||
Increase (decrease) to gross profit | 825 | (17,376) | |||||||||
Decrease to selling, general and administrative expenses(3) | — | 10,549 | |||||||||
Increase (decrease) to income before income taxes | $ | 825 | $ | (6,827) | |||||||
_________________________
(1)Primarily reflects the unfavorable impact of the recall reserve adjustment related to higher estimated future recall remedies (i.e., estimated gift card elections). Of the total net sales impact, $8.1 million and $16.4 million was allocated to our DTC and wholesale channels, respectively, for the nine months ended September 30, 2023. These amounts were allocated based on the historical channel sell-in basis of the affected products.
(2)For the three months ended September 30, 2023, reflects a benefit of $0.8 million related to lower than anticipated recall-related costs. For the nine months ended September 30, 2023, reflects favorable impacts of $5.0 million primarily due to the favorable impact of the recall reserve adjustment related to lower estimated costs of future product replacement remedy elections and logistics costs, $1.3 million from an inventory reserve adjustment, and $0.8 million related to lower recall-related costs.
(3)Primarily reflects the favorable impact of the recall reserve adjustment related to lower estimated other recall-related costs, including logistics costs.
The reserve for the estimated product recall expenses is included within accrued expenses and other current liabilities on our consolidated balance sheets. Estimating the cost of recall remedies required significant judgment and is primarily based on i) expected consumer participation rates; and ii) the estimated costs of the consumer’s elected remedy in the recalls, including either the estimated cost of offered product replacements or the elections to receive gift cards, logistics costs, and other recall-related costs. We will reevaluate these assumptions each period, and the related reserves may be adjusted when factors indicate that the reserve is either not sufficient to cover or exceeds the estimated product recall costs.
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The following table summarizes the activity of the reserve for the estimated product recall expenses (in thousands):
| September 30, 2023 | |||||
| Balance, January 1, 2023 | $ | 94,807 | |||
| Actual product refunds, replacements and recall-related costs | (50,707) | ||||
Gift card issuances(1) | (26,685) | ||||
| Reserve adjustment | 8,515 | ||||
Balance, September 30, 2023 | $ | 25,930 | |||
_________________________
(1)For the three and nine months ended September 30, 2023, we recognized net sales of $6.3 million and $18.8 million, respectively, from redeemed recall-related gift cards. As of September 30, 2023, we had $7.8 million in unredeemed recall-related gift card liabilities, which are included in contract liabilities within accrued expenses and other current liabilities on our consolidated balance sheet.
The ultimate impact from the recalls may differ materially from our estimates, and may harm our business, financial condition, and results of operations. See Part I, Item 1A “Risk Factors - Risks Related to Our Business, Operations and Industry.”
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The terms “we,” “us,” “our,” “YETI,” and “the Company” as used herein, and unless otherwise stated or indicated by context, refer to YETI Holdings, Inc. and its subsidiaries.
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.
Business Overview
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, among others. 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, 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 in our retail stores. Additionally, we offer customized products with licensed trademarks 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 events and activities, and in certain instances may also offer products to re-sell.
Product Introductions and Updates
During the first quarter of 2023, we expanded our cargo offerings with the launch of the new LoadOut® GoBox in three sizes, introduced the new stackable Rambler® Lowball, built new customization capabilities for our Yonder™ bottles, and introduced new seasonal colorways.
During the second quarter of 2023, we expanded our drinkware offerings with the launch of the new Rambler™ beverage bucket, introduced new color-matched straw lid Rambler® bottles and our first ever cast iron skillet, and continued to expand our seasonal colorways.
In October 2023, we introduced our redesigned and improved Hopper® M30 Soft Cooler and Hopper® M20 Soft Backpack Cooler, and also launched two new sizes with the Hopper® M15 Soft Cooler and the Hopper® M12 Soft Backpack Cooler (collectively, the “Hopper M Series Soft Cooler line”). We believe the improved design of the Hopper M Series Soft Cooler line adequately addresses the potential safety concerns caused by the magnet-lined closures of the previous-generation products, which were affected by the product recalls discussed below.
Credit Facility Amendment
On June 22, 2023, we amended our senior secured credit agreement (the “Credit Facility”) to, among other matters, extend its maturity to June 22, 2028 and increase the commitments under the revolving credit facility (the “Revolving Credit Facility”) from $150.0 million to $300.0 million. For additional information on the Credit Facility, see “Liquidity and Capital Resources - Credit Facility” below.
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Product Recall Update
In January 2023, we notified the Consumer Products Safety Commission (“CPSC”) of a potential safety concern regarding the magnet-lined closures of our Hopper® M30 Soft Cooler, Hopper® M20 Soft Backpack Cooler, and SideKick Dry® gear case (the “affected products”) and initiated a global stop sale of the affected products. In February 2023, we proposed a voluntary recall of the affected products to the CPSC and other relevant global regulatory authorities. Accordingly, we established reserves for unsalable inventory on-hand, as well as expected future returns and the estimated cost of recall remedies for consumers with affected products as of December 31, 2022.
In March 2023, we announced separate, voluntary recalls of the affected products in collaboration with the CPSC. During the second quarter of 2023, we began processing recall returns and claims and based on such experience and trends, we reevaluated our assumptions and adjusted our estimated recall expense reserve. These trends included higher than anticipated elections to receive gift cards in lieu of product replacement remedies, variations in individual product participation rates, and lower logistics costs than previously estimated. As a result, we updated our initial recall reserve assumptions, which increased the estimated recall expense reserve by $8.5 million in the second quarter of 2023. However, the overall consumer recall participation rate has remained consistent with our expectations.
During the three and nine months ended September 30, 2023, we recorded the following impacts as a result of the recall reserve adjustments and other incurred costs:
•Net sales - For the three months ended September 30, 2023, an immaterial reduction to sales for higher returns-related costs. For the nine months ended September 30, 2023, a reduction to net sales for higher estimated future recall remedies (i.e., estimated gift card elections) of $24.5 million, of which $8.1 million and $16.4 million was allocated to our DTC and wholesale channels, respectively. These amounts were allocated based on the historical channel sell-in basis of the affected products;
•Cost of goods sold - For the three months ended September 30, 2023, a benefit of $0.8 million related to lower than anticipated recall-related costs. For the nine months ended September 30, 2023, favorable impacts of $5.0 million primarily related to lower estimated costs of future product replacement remedy elections and logistics costs, $1.3 million from an inventory reserve adjustment, and $0.8 million related to lower recall-related costs; and
•SG&A - For the nine months ended September 30, 2023, a benefit of $10.5 million primarily related to lower estimated other recall-related costs including logistics costs.
The ultimate impact from the recalls may differ materially from our estimates, and may harm our business, financial condition and results of operations. See Part I, Item 1A “Risk Factors - Risks Related to Our Business, Operations and Industry.”
In addition, our sales have also been materially adversely impacted by the stop sale of the affected products. We have developed solutions to address the potential safety concern of the affected products. In October 2023, we introduced our redesigned and improved Hopper® M30 Soft Cooler and Hopper® M20 Soft Backpack Cooler, as discussed above.
Macroeconomic Conditions
During 2021 and 2022, we experienced challenges associated with the complex and uncertain macroeconomic environment in which we operate. Consistent across many industries, we experienced inflationary pressures and supply chain challenges, including port congestion, container and labor shortages, which resulted in longer transit times, higher distribution, logistics, and product input costs. As a result, we experienced decreased profitability and delayed product availability for certain products in 2022. However, in the second half of 2022, these inflationary pressures and supply chain challenges, including inbound freight rates, began improving. In 2023, freight rates have stabilized at near pre-pandemic levels. The reduction in freight rates has resulted in an improvement to our gross margin during the first nine months of 2023 compared to the prior year period. We continue to expect to see improvements in our gross margin for the remainder of 2023 due to these lower freight rates.
There is significant uncertainty regarding how macroeconomic trends, including high levels of inflation, higher interest rates and heightened concerns about a recession, will impact consumer demand. While some of these conditions have negatively impacted consumer discretionary spending behavior, we continue to see strong consumer demand for our products.
In addition to the trends discussed above, foreign exchange rate fluctuations and geopolitical issues add to significant uncertainty in the macroeconomic environment. A worsening of any of the macroeconomic trends discussed herein may adversely impact our business, operations, and financial results in the future. We will continue to monitor and, if necessary, mitigate the effects of the macroeconomic environment on our business.
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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 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 is primarily composed of 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, tooling, and equipment, and the cost of customizing 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 variable SG&A costs are generally higher as a percentage of net sales than our wholesale channel distribution costs.
Fiscal Year. We have a 52- or 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 December 30, 2023 (“2023”) is a 52-week period. The first quarter of our fiscal year 2023 ended on April 1, 2023, the second quarter ended on July 1, 2023, and the third quarter ended on September 30, 2023. Our fiscal year ended December 31, 2022 (“2022”) was a 52-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 September 30, 2023 and October 1, 2022.
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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 | ||||||||||||||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | ||||||||||||||||||||||||||||||||
| Statement of Operations | |||||||||||||||||||||||||||||||||||
| Net sales | $ | 433,561 | 100 | % | $ | 433,556 | 100 | % | $ | 1,138,920 | 100 | % | $ | 1,147,226 | 100 | % | |||||||||||||||||||
| Cost of goods sold | 182,310 | 42 | % | 211,149 | 49 | % | 510,961 | 45 | % | 550,860 | 48 | % | |||||||||||||||||||||||
| Gross profit | 251,251 | 58 | % | 222,407 | 51 | % | 627,959 | 55 | % | 596,366 | 52 | % | |||||||||||||||||||||||
| Selling, general, and administrative expenses | 189,374 | 44 | % | 153,940 | 36 | % | 500,653 | 44 | % | 426,263 | 37 | % | |||||||||||||||||||||||
| Operating income | 61,877 | 14 | % | 68,467 | 16 | % | 127,306 | 11 | % | 170,103 | 15 | % | |||||||||||||||||||||||
| Interest expense | (285) | — | % | (1,495) | — | % | (1,610) | — | % | (3,221) | — | % | |||||||||||||||||||||||
| Other expense | (4,032) | 1 | % | (7,281) | 2 | % | (2,782) | — | % | (12,202) | 1 | % | |||||||||||||||||||||||
| Income before income taxes | 57,560 | 13 | % | 59,691 | 14 | % | 122,914 | 11 | % | 154,680 | 13 | % | |||||||||||||||||||||||
| Income tax expense | (14,903) | 3 | % | (14,171) | 3 | % | (31,622) | 3 | % | (37,249) | 3 | % | |||||||||||||||||||||||
| Net income | $ | 42,657 | 10 | % | $ | 45,520 | 10 | % | $ | 91,292 | 8 | % | $ | 117,431 | 10 | % | |||||||||||||||||||
Comparison of the Three Months Ended September 30, 2023 and October 1, 2022
| Three Months Ended | ||||||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | Change | ||||||||||||||||||||||||
| (dollars in thousands) | $ | % | ||||||||||||||||||||||||
| Net sales | $ | 433,561 | $ | 433,556 | $ | 5 | — | % | ||||||||||||||||||
| Gross profit | $ | 251,251 | $ | 222,407 | $ | 28,844 | 13 | % | ||||||||||||||||||
Gross margin (gross profit as a % of net sales) | 58.0 | % | 51.3 | % | 670 basis points | |||||||||||||||||||||
| Selling, general, and administrative expenses | $ | 189,374 | $ | 153,940 | $ | 35,434 | 23 | % | ||||||||||||||||||
| SG&A as a % of net sales | 43.7 | % | 35.5 | % | 820 basis points | |||||||||||||||||||||
Net Sales
Net sales were flat at $433.6 million for the three months ended September 30, 2023, compared to the three months ended October 1, 2022. Net sales for the three months ended September 30, 2023, include $6.3 million of sales related to gift card redemptions in connection with recall remedies. Our results have been materially adversely impacted by the stop sale of certain soft coolers included in the recalls initiated during the first quarter of 2023.
Net sales in our two channels were as follows:
•DTC channel net sales increased $32.1 million, or 14%, to $259.5 million, compared to $227.4 million in the prior year quarter, due to growth in both Drinkware and Coolers & Equipment. DTC channel mix was 60% in the third quarter of 2023 compared to 52% in the third quarter of 2022.
•Wholesale channel net sales decreased $32.1 million, or 16%, to $174.1 million, compared to $206.2 million in the same period last year. This decrease was due to a decline in both Coolers & Equipment and Drinkware.
Net sales in our two primary product categories were as follows:
•Drinkware net sales increased by $14.3 million, or 6%, to $253.3 million, compared to $239.0 million in the prior year quarter, reflecting the strong demand for Rambler® straw lid mugs, expanded offerings in Rambler® and Yonder® bottles, our new beverage bucket, and our new seasonal colorways.
•Coolers & Equipment net sales decreased by $14.1 million, or 8%, to $171.5 million, compared to $185.7 million in the same period last year primarily due to the stop sale of the products affected by the recalls. Despite strong overall consumer demand, hard coolers declined year-over-year primarily due to the success in rebuilding channel inventory during the same
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period last year. These impacts were partially offset by strong performance in our existing Hopper® Flip soft cooler line as well as cargo.
Gross Profit
Gross profit increased $28.8 million, or 13%, to $251.3 million, compared to $222.4 million in the prior year quarter. Gross margin rate increased 670 basis points to 58.0% from 51.3% in the prior year quarter. The components of the change in gross margin rate were as follows:
•lower inbound freight rates, which favorably impacted gross margin by 480 basis points;
•lower product costs, which favorably impacted gross margin by 150 basis points;
•an increase in the mix of DTC channel net sales, which favorably impacted gross margin by 110 basis points;
•the favorable impact of lower than anticipated recall-related costs, which favorably impacted gross margin by 20 basis points; and
•other impacts, net of higher customization costs and depreciation and amortization expense, which favorably impacted gross margin by 20 basis points.
These were partially offset by higher promotions in our DTC channel, including Amazon Prime Day promotions, which unfavorably impacted gross margin by 110 basis points.
Selling, General, and Administrative Expenses
SG&A expenses increased $35.4 million, or 23%, to $189.4 million for the three months ended September 30, 2023, compared to $153.9 million for the three months ended October 1, 2022. As a percentage of net sales, SG&A expenses increased 820 basis points to 43.7% for the three months ended September 30, 2023 from 35.5% for the three months ended October 1, 2022, which was partly driven by deleverage due to the impact of the stop sale on our net sales growth, as discussed above. The increase in SG&A expenses was primarily driven by:
•an increase in variable expenses of $13.7 million (increasing SG&A as a percent of net sales by 320 basis points) comprised of:
–higher distribution costs, including outbound freight and Amazon Marketplace fees; and
•an increase in non-variable expenses of $21.7 million (increasing SG&A as a percent of net sales by 500 basis points) comprised of:
–an increase in employee costs, primarily driven by incentive compensation and, and to a lesser degree, investments in headcount to support future growth, investments in marketing expenses, and asset impairments.
Non-Operating Expenses
Interest expense, net was $0.3 million for the three months ended September 30, 2023, compared to $1.5 million for the three months ended October 1, 2022. This decrease was primarily driven by higher interest income, partially offset by an increase in interest expense due to higher interest rates on our outstanding long-term debt.
Other expense was $4.0 million for the three months ended September 30, 2023, compared to other expense of $7.3 million for the three months ended October 1, 2022. The change in other expense was due to a reduction in foreign currency losses on intercompany balances.
Income tax expense was $14.9 million for the three months ended September 30, 2023, compared to $14.2 million for the three months ended October 1, 2022. The effective tax rate for the three months ended September 30, 2023 was 26%, compared to 24% for the three months ended October 1, 2022. The increase in both the income tax expense and the effective tax rate was primarily due to a discrete tax expense related to a change in the reserve estimate for an uncertain tax position in the three months ended September 30, 2023.
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Nine Months Ended September 30, 2023 Compared to October 1, 2022
| Nine Months Ended | Change | |||||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | |||||||||||||||||||||||||
| (dollars in thousands) | $ | % | ||||||||||||||||||||||||
| Net sales | $ | 1,138,920 | $ | 1,147,226 | $ | (8,306) | (1) | % | ||||||||||||||||||
| Gross profit | $ | 627,959 | $ | 596,366 | $ | 31,593 | 5 | % | ||||||||||||||||||
Gross margin (gross profit as a % of net sales) | 55.1 | % | 52.0 | % | 310 basis points | |||||||||||||||||||||
| Selling, general, and administrative expenses | $ | 500,653 | $ | 426,263 | $ | 74,390 | 17 | % | ||||||||||||||||||
| SG&A as a % of net sales | 44.0 | % | 37.2 | % | 680 basis points | |||||||||||||||||||||
Net Sales
Net sales decreased $8.3 million, or 1%, to $1,138.9 million for the nine months ended September 30, 2023, compared to $1,147.2 million for the nine months ended October 1, 2022. Net sales for the nine months ended September 30, 2023 were unfavorably impacted by $24.5 million related to the recall reserve adjustment (See “Product Recall Update” above for additional information). Excluding the unfavorable recall reserve adjustment, net sales increased $16.2 million, or 1%, primarily due to growth in our DTC channel. Net sales for the nine months ended September 30, 2023, include $18.8 million of sales related to gift card redemptions in connection with recall remedies. Our results have also been materially adversely impacted by the stop sale of certain soft coolers included in the recalls initiated during the first quarter of 2023.
Net sales in our two channels were as follows:
•DTC channel net sales increased $44.6 million, or 7%, to $652.9 million, compared to $608.2 million in the prior year period, due to growth in Drinkware. Excluding the $8.1 million unfavorable impact of the recall reserve adjustment (as discussed above), DTC channel net sales increased $52.8 million, or 9%, due to growth in both Drinkware and Coolers & Equipment. DTC channel mix was 57% in the first nine months of 2023 compared to 53% in the first nine months of 2022.
•Wholesale channel net sales decreased $52.9 million, or 10%, to $486.1 million, compared to $539.0 million in the same period last year. Excluding the $16.4 million impact of the recall reserve adjustment (as discussed above), wholesale channel net sales decreased $36.6 million, or 7%, due to a decline in both Coolers & Equipment and Drinkware.
Net sales in our two primary product categories were as follows:
•Drinkware net sales increased by $37.9 million, or 6%, to $677.0 million, compared to $639.1 million in the prior year period, reflecting the strong demand for Rambler® straw lid mugs, expanded offerings in Rambler® bottles, the introductions of our new Yonder® bottles, our new beverage bucket, and new seasonal colorways.
•Coolers & Equipment net sales decreased by $49.5 million, or 10%, to $432.5 million, compared to $482.0 million in the same period last year, and were unfavorably impacted by $24.5 million due to the recall reserve adjustment (as discussed above). Excluding the $24.5 million unfavorable impact of the recall reserve adjustment, Coolers & Equipment sales decreased $25.0 million, or 5%, primarily due to the stop sale of the products affected by the recalls. These impacts were partially offset by strong performance in hard coolers, our existing Hopper® Flip Soft Cooler line, and cargo.
Gross Profit
Gross profit increased $31.6 million, or 5%, to $628.0 million compared to $596.4 million in the prior year period. Gross margin rate increased 310 basis points to 55.1% from 52.0% in the same period last year. Gross margin for the first three quarters of 2023 was unfavorably impacted by $17.4 million related to the product recalls (See “Product Recall Update” above for additional information), which unfavorably impacted gross margin by 40 basis points. The other components of the change in gross margin rate were as follows:
•lower inbound freight, including the favorable impact of a prior year out-of-period adjustment as well as lower rates, which favorably impacted gross margin by 330 basis points;
•lower product costs, which favorably impacted gross margin by 80 basis points; and
•an increase in the mix of DTC channel net sales, which favorably impacted gross margin by 40 basis points.
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These were partially offset by:
•higher promotions in our DTC channel, including Amazon Prime Day promotions, which unfavorably impacted gross margin by 40 basis points;
•the unfavorable impact of foreign currency exchange rates, which negatively impacted gross margin by 20 basis points; and
•other impacts, including higher depreciation and amortization expense and customization costs, which unfavorably impacted gross margin by 40 basis points.
Selling, General, and Administrative Expenses
SG&A expenses increased by $74.4 million, or 17%, to $500.7 million for the nine months ended September 30, 2023 compared to $426.3 million for the nine months ended October 1, 2022. As a percentage of net sales, SG&A expenses increased by 680 basis points to 44.0% for the nine months ended September 30, 2023 compared to 37.2% for the nine months ended October 1, 2022, which was partly driven by deleverage due to the impact of the stop sale and the recall reserve adjustment on our net sales growth, as discussed above. The increase in SG&A expenses was primarily driven by:
•an increase in variable expenses of $24.6 million (increasing SG&A as a percent of net sales by 230 basis points) comprised of:
–higher distribution costs, including outbound freight and Amazon Marketplace fees;
•an increase in non-variable expenses of $60.3 million (increasing SG&A as a percent of net sales by 540 basis points) comprised of:
–an increase in employee costs, primarily driven by incentive compensation and, to a lesser degree, investments in headcount to support future growth, investments in marketing expenses, warehousing costs, facility costs, and asset impairments; which were partially offset by
•a favorable $10.5 million impact related to the recall reserve adjustment (decreasing SG&A as a percent of net sales by 90 basis points). See “Product Recall Update” above for additional information.
Non-Operating Expenses
Interest expense, net was $1.6 million for the nine months ended September 30, 2023, compared to $3.2 million for the nine months ended October 1, 2022. The decrease was primarily driven by higher interest income, partially offset by an increase in interest expense due to higher interest rates on our outstanding long-term debt.
Other expense was $2.8 million for the nine months ended September 30, 2023, compared to $12.2 million for the nine months ended October 1, 2022. The change in other expense was primarily due to a reduction in foreign currency losses on intercompany balances.
Income tax expense was $31.6 million for the nine months ended September 30, 2023, compared to $37.2 million for the nine months ended October 1, 2022. The decrease in income tax expense is due to lower income before income taxes. The effective tax rate for the nine months ended September 30, 2023 was 26%, compared to 24% for the nine months ended October 1, 2022. The higher effective tax rate was primarily due to discrete tax expenses related to the vesting of certain stock-based compensation and a change in the reserve estimate for an uncertain tax position in the nine months ended September 30, 2023.
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Liquidity and Capital Resources
General
Our cash requirements have principally been for working capital purposes, long-term debt repayments, and capital expenditures. We fund our working capital, which primarily consists of inventory and accounts receivable, and our capital investments from cash flows from operating activities, cash on hand, and borrowings available under our Revolving Credit Facility. We believe that our current operating performance, operating plan, our strong cash position, and borrowings available under our Revolving Credit Facility, will be sufficient to satisfy our foreseeable liquidity needs and capital expenditure requirements for at least the next twelve months.
Current Liquidity
As of September 30, 2023, we had a cash balance of $281.4 million, working capital (excluding cash) of $149.1 million, and $300.0 million of borrowings available under the Revolving Credit Facility.
Credit Facility
Our Credit Facility provides for a $300.0 million Revolving Credit Facility and a $84.4 million term loan (“Term Loan A”).
On March 31, 2023, we amended the Credit Facility, leaving the material terms of the Credit Facility substantially unchanged, with the exception of certain changes to implement the replacement of London Interbank Offered Rate (“LIBOR”) with the Secured Overnight Financing Rate (“SOFR”) as the reference rate therein.
On June 22, 2023, we further amended the Credit Facility, which extended the maturity date of both the Term Loan A and the Revolving Credit Facility from December 17, 2024 to June 22, 2028; refinanced and replaced the existing Term Loan A in full with a new $84.4 million Term Loan A; and increased the commitments under the Revolving Credit Facility from $150.0 million to $300.0 million. As a result of the amendment, we recognized a $0.3 million loss on modification and extinguishment of debt and we capitalized $2.8 million of new lender and third-party fees in the second quarter of 2023.
At September 30, 2023, we had $83.3 million principal amount of indebtedness outstanding under Term Loan A under the Credit Facility and no outstanding borrowings under the Revolving Credit Facility. The weighted-average interest rate for borrowings under Term Loan A was 6.70% during the three months ended September 30, 2023.
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. At September 30, 2023, we were in compliance with all covenants and expect to remain in compliance with all covenants under the Credit Facility.
Share Repurchase
On February 27, 2022, the Board of Directors authorized a common stock repurchase program of up to $100.0 million. During the three months ended April 2, 2022, we repurchased 1,676,551 shares for an aggregate purchase price of $100.0 million, including fees and commissions, at an average repurchase price of $59.66 per share. Following the repurchases, no shares remained available under the program. All of the common stock repurchased is held as treasury stock.
Material Cash Requirements
Other than as disclosed above with respect to extension of the maturity date of the Term Loan A, there have been no material changes in our material cash requirements for contractual and other obligations, including capital expenditures, as disclosed under “Material Cash Requirements” included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the U.S. Securities and Exchange Commission (“SEC”).
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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 | |||||||||||
| September 30, 2023 | October 1, 2022 | ||||||||||
| Cash flows provided by (used in): | |||||||||||
| Operating activities | $ | 114,769 | $ | (72,215) | |||||||
| Investing activities | $ | (58,263) | $ | (40,417) | |||||||
| Financing activities | $ | (11,931) | $ | (120,213) | |||||||
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 increase in cash provided by operating activities during the nine months ended September 30, 2023 compared to cash used by operating activities during the nine months ended October 1, 2022 is primarily due to an increase in net cash provided by working capital, partially offset by a decrease in net income, adjusted for non-cash items, including the impact of our recalls, for the periods compared. The increase in cash provided by working capital was primarily due to a decrease in inventory, partially offset by an increase in accounts receivable, and a decrease in accounts payable and accrued expenses and taxes payable.
Investing Activities
The increase in cash used in investing activities during the nine months ended September 30, 2023 was primarily related to increased purchases for production molds, tooling and equipment, and leasehold improvements.
Financing Activities
The decrease in cash used by financing activities during the nine months ended September 30, 2023 was primarily driven by repurchases of common stock in the prior year period.
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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 December 31, 2022 filed with the SEC.
Product Recall Reserves
As described in Note 10 of the Notes to the Unaudited Condensed Consolidated Financial Statements, we announced voluntary recalls for our Hopper® M30 Soft Cooler, Hopper® M20 Soft Backpack Cooler, and SideKick Dry® gear case (the “affected products”). Estimating the cost of recall remedies required significant judgment and is primarily based on i) expected consumer participation rates; and ii) the estimated costs of the consumer’s elected remedy in the voluntary recalls, including estimated cost of offered product replacements and elections to receive gift cards in lieu of product replacements, logistics costs and other recall-related costs.
In the second quarter of 2023, we began processing claims and returns for our product recall, and based on such experience and observed trends, we reevaluated our prior assumptions and adjusted our estimated product recall reserve. These trends included higher than anticipated elections by consumers to receive gift cards in lieu of product replacement remedies, variations in individual product participation rates, and lower logistics costs than previously estimated. As a result, we updated our initial recall reserve assumptions, which increased the estimated recall expense reserve by $8.5 million in the second quarter of 2023. However, the overall consumer recall participation rate has remained consistent with our expectations.
We will continue to reevaluate these assumptions each period, and the related reserves may be adjusted when factors indicate that the reserve is either not sufficient to cover or exceeds the estimated product recall expenses. The ultimate impact from the recalls could differ materially from these estimates. As of September 30, 2023 and December 31, 2022, the reserve for the estimated product recall expenses was $25.9 million and $94.8 million, respectively, and is included within accrued expenses and other current liabilities on our consolidated balance sheets. In addition, we recorded an inventory reserve, or write-off, of $34.1 million for our unsalable inventory on-hand as of December 31, 2022. As of September 30, 2023, the balance of the inventory reserve was nominal and decreased from December 31, 2022 due to physical scrapping of the unsalable inventory on-hand.
There have been no other 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 December 31, 2022.
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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 (“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 September 30, 2023.
Changes in Internal Control over Financial Reporting
During the quarter ended September 30, 2023, 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
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 Pronouncements” in Note 1 of the Unaudited Condensed Consolidated Financial Statements.
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 Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on February 27, 2023. Other than the addition of a risk factor regarding risks related to our environmental, social and governance goals, there have been no material changes to the risks and uncertainties previously disclosed in such Annual Report on Form 10-K.
Our business, financial condition and operating results can be affected by a number of risks and uncertainties, whether currently known or unknown, any one or more of which could, directly or indirectly, cause our actual results of operations and financial condition to vary materially from past, or from anticipated future, results of operations and financial condition. 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 adversely affect our business, financial condition and results of operations.
Risks Related to Our Business, Operations and Industry
Our business depends on maintaining and strengthening our brand to attract new customers and 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 is rooted in passion for the outdoors. To sustain long-term growth, we must continue to successfully promote our products to consumers who align with the values of our brand, as well as to individuals who simply value products of uncompromising quality and design. Our ability to execute our marketing and growth strategy depends on many factors, such as the quality, design, performance, functionality, and durability of our products, the image and reputation of our e-commerce platform, the design of our retail partner floor spaces, the impact of 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 have made, and we expect that we will continue to make, significant investments in promoting our products and 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. Ineffective marketing, ongoing and sustained promotional activities, negative publicity, product diversion to unauthorized distribution channels, product or manufacturing defects, product recalls, 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. Actions taken by individuals that we partner with, such as YETI ambassadors, influencers or our associates, that fail to represent our brand in a manner consistent with our brand image, whether through our social media platforms or their own, could also harm our brand reputation and materially impact our business. Further, as our brand becomes more widely known, future marketing campaigns may not attract new customers at the same rate as past campaigns. Inflation and rising product costs may also affect our ability to provide products in a cost-effective manner and hinder us from attracting new customers. 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 could be harmed.
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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 materially harmed if we are unable to accurately forecast our growth rate and 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. Forecasts are particularly challenging as we expand into new markets and geographies, develop and market new products, and face uncertainties related to consumer discretionary spending and general market conditions, including current uncertainty related to interest rates, inflation rates, and geopolitical events. Our historical sales, expense levels, and profitability may not be an appropriate basis for forecasting future results. If we fail to accurately forecast customer demand, including relating to our expected growth, we may experience excess inventory levels or a shortage of product to deliver to our customers. Failure to accurately forecast our results of operations and growth rate could also 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, or at all.
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) impacts on consumer demand due to unseasonable weather conditions; (f) weakening economic conditions or consumer confidence in future economic conditions or inflationary conditions resulting in rising prices, which could each 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, or public health crises, 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 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.
Difficulty in forecasting demand, which we have encountered from time to time as a result of global supply chain constraints, 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.
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. 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.
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We have expanded our operations and 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. Consequently, if our operations continue to grow at a rapid pace, we may experience difficulties in managing our 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 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, cargo, 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. 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 and retail partners, 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.
In addition, our customers have become increasingly technologically savvy and expect a seamless omni-channel experience regardless of whether they are shopping in stores or online. Innovation by existing or new competitors could alter the competitive landscape by improving the customer experience and heightening customer expectations or by transforming other aspects of their business through new technologies. If we are unable to develop and continuously improve our technologies, the efforts of which typically require significant capital investments, we may not be able to provide a convenient and consistent experience to our customers, which could negatively affect our ability to compete with other retailers and could result in diminished loyalty to our brands, which could adversely impact our business.
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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.
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.
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.
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 may be subject to liability if we infringe upon the intellectual property rights of third parties.
Third parties have sued us and may in the future 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.
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, typically through a series of purchase orders. Manufacturers may breach our agreements with them, including purchase orders, and we may not be able to enforce our rights under these agreements or may incur significant costs attempting to do so. We therefore face the risk that these third-party contract manufacturers may not produce and deliver our products in adequate quantities, on a timely basis or at all, or that they will fail to comply with our quality standards. 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 emergencies, 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
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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. In addition, our manufacturers may raise prices in the future, which would increase our costs and harm our margins. Any 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.
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 Memphis, Tennessee, and Salt Lake City, Utah. Our reliance on only two geographical locations for our domestic distribution centers makes us more vulnerable to natural disasters, weather-related disruptions, accidents, system failures, public health emergencies, 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 import our products, and rely on the timely and free flow of goods through open and operational ports from our suppliers and manufacturers. Accordingly, we are subject to certain risks, including labor disputes, union organizing activity, inclement weather, public health crises, and increased transportation costs, associated with our third-party contract manufacturers’ and carriers’ ability to provide products and services to meet our requirements. Such events could result in delayed or canceled orders by customers, unanticipated inventory accumulation or shortages, and harm to our business, results of operations, and financial condition. 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. Global events may also impact the import of our products.
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, adversely impacts our gross margins.
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. 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.
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 71%, 92%, 70%, 79%, and 81%, respectively, of our production volume during the nine months ended September 30, 2023. For cargo, one manufacturer accounted for all of the production during the nine months ended September 30, 2023. 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
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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 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 continually assess, and re-engineer as needed, our supply chain management and business processes to support our expanding scale. Our expansion to a global scale requires significant investment of capital and human resources, the adaptation and evolution 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 are 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 to expand globally, could harm our results of operations and financial condition.
If we cannot maintain prices or effectively implement price increases, our margins may decrease.
Our ability to maintain prices or effectively implement price increases may be affected by several factors, including pricing pressure due to intense competition in the retail industry, effectiveness of our marketing programs, the continuing growth of our brand, general economic conditions, and changes in consumer demand. For example, in 2022, increasing demand, supply constraints, inflation, and other market conditions resulted in shortages and higher costs for the production of some of our products, which led us to implement a price increase for certain of our products. We effectively implemented this price increase, but there can be no assurance that we will be able to effectively implement future price increases. During challenging economic times, consumers may be less willing or able to pay a price premium for our branded products and may shift purchases to lower-priced or other value offerings, making it more difficult for us to maintain prices and/or effectively implement price increases. In addition, our retail partners and distributors may pressure us to rescind price increases we have announced or already implemented, whether through a change in list price or increased promotional activity. If we cannot maintain prices or effectively implement price increases for our products, or must increase promotional activity, our margins may be adversely affected. Furthermore, price increases generally result in volume losses, as consumers purchase fewer units. If such losses are greater than expected or if we lose distribution due to a price increase, our business, financial condition and results of operations may be materially and adversely affected.
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 and available capacity. The effects of the COVID-19 pandemic and the ongoing conflicts in Ukraine and the Middle East have contributed to significant volatility in the price of oil. Global political conditions, threatened or actual acts of war or terrorism, instability or other disruptions in oil producing regions, such as in the Middle East, South America and Europe, and trade, economic or other disagreements involving oil producing nations, can, and recently have, significantly affected 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, Mexico, Thailand, and Malaysia. In addition, we have other key 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. 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, any of which 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 Global System of Preferences (“GSP”) program. The GSP program expired on December 31, 2020, resulting in additional duties and negatively impacting gross margin. YETI expects 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.
Current and potential 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.
Our aspirations, disclosures, and actions related to environmental, social and governance (“ESG”) matters expose us to risks that could adversely affect our reputation and performance.
There is an increased focus from investors, customers, associates, business partners and other stakeholders concerning ESG matters. The expectations related to ESG matters are rapidly evolving, and we announce initiatives and goals related to ESG matters from time to time. We have established and publicly announced certain ESG goals, including our commitments to advancing racial and ethnic diversity, achieving gender parity within our workforce and reducing our greenhouse gas emissions. These statements reflect our current plans and aspirations and are not guarantees that we will be able to achieve them. Our failure to accomplish or accurately track and report on these goals on a timely basis, or at all, could adversely affect our reputation, financial performance and growth, and expose us to increased scrutiny from the investment community as well as enforcement authorities. In addition, we could be criticized for the scope of our ESG initiatives or goals.
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Our ability to achieve any ESG objective is subject to numerous risks, many of which are outside of our control. Examples of such risks include:
• the availability and cost of alternative energy sources;
• the evolving regulatory requirements affecting ESG practices and/or disclosures;
• the availability of suppliers that can meet our sustainability, diversity and other ESG standards;
• our ability to recruit, develop and retain diverse talent in our labor markets;
• the locations and usage of our products and the implications on their greenhouse gas emissions; and
• the success of our organic growth and acquisitions.
Standards for tracking and reporting ESG matters are relatively new, have not been formalized and continue to evolve. Collecting, measuring, and reporting ESG information and metrics can be difficult and time consuming. Our selection of voluntary disclosure frameworks and standards, and the interpretation or application of those frameworks and standards, may change from time to time or differ from those of others. This may result in a lack of consistent or meaningful comparative data from period to period or between YETI and other companies in the same industry. In addition, our processes and controls may not comply with evolving standards for identifying, measuring and reporting ESG metrics, including ESG-related disclosures that may be required of public companies by the SEC and other regulators, and such standards may change over time, which could result in significant revisions to our current goals, reported progress in achieving such goals, or ability to achieve such goals in the future, and could cause us to undertake costly initiatives to satisfy such new criteria.
If our ESG practices do not meet evolving investor or other stakeholder expectations and standards, then our reputation, our ability to attract or retain employees, and our attractiveness as an investment, business partner, acquiror or supplier could be negatively impacted. Further, our failure or perceived failure to pursue or fulfill our goals and objectives or to satisfy various reporting standards on a timely basis, or at all, could have similar negative impacts or expose us to government enforcement actions and private litigation.
Climate change, and related legislative and regulatory responses to climate change, may adversely impact our business.
As climate change and other environmental concerns become more prevalent, federal, state and local governments, non-governmental organizations and our customers, consumers and investors are increasingly concerned about these issues. New governmental requirements or changing consumer preferences could negatively impact our ability to obtain raw materials or increase our acquisition and compliance costs, which could make our products more costly, less attractive to consumers than other competitive products or reduce consumer demand. We could also lose revenue if our consumers change brands or our customers move business from us because we have not complied with their preferences and investors may choose not to invest in our securities if we do not comply with their business expectations.
Significant changes in weather patterns, including an increase in the frequency, severity and duration of extreme weather conditions and natural disasters, could also directly impact our business. Physical risks related to these events could disrupt the operation of our supply chain and the productivity of our manufacturers, increase our production costs, impose capacity restraints or impact the types of products that consumers purchase. These events could also compound adverse economic conditions and impact consumer confidence and discretionary spending. As a result, the physical effects of climate change could have a long-term adverse impact on our business and results of operations.
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A significant portion of our sales are to national, regional, and independent retail partners. If these retail partners cease to promote or carry our current products or choose not to promote or carry new products that we develop, our brand as well as our results of operations and financial condition could be harmed.
We sell a significant amount of our products through national, regional, and independent retail partners. Twelve percent of our gross sales were made to independent retail partners for each of 2021 and 2022. For 2021 and 2022, one national retail partner accounted for approximately 10% and 11% of our gross sales, respectively. 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. 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.
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 or cease 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; (h) store closures, decreased foot traffic, or other adverse effects resulting from public health crises; and (i) economic conditions, including levels of consumer discretionary spending, which may be impacted by rising inflation, unemployment and interest rates.
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.
If our plans to increase sales through our DTC e-commerce channel are not successful, our business and results of operations could be harmed.
For 2022, our DTC channel accounted for 58% of our net sales, and our sales through the Amazon Marketplace represented approximately 13% of our net sales. Part of our growth strategy involves increasing sales through our DTC e-commerce channel. 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 continued DTC channel growth, our business, and results of operations could be harmed. Furthermore, any adverse change in our relationship with Amazon, including restrictions on the ability to offer products on the Amazon Marketplace or termination of the relationship, could adversely affect our continued DTC channel growth, our business, and results of operations.
Our DTC business subjects us to numerous other risks, including, but not limited to, (i) U.S. or international resellers purchasing our merchandise and reselling it outside of our control, (ii) failure of our DTC operating and support systems, including computer viruses, theft of customer information, privacy concerns, telecommunication failures and electronic break-ins and similar disruptions, (iii) credit card fraud, (iv) diversion of sales from our wholesale customers, (v) difficulty recreating the in-store experience through e-commerce channels, (vi) liability for online content, (vii) changing patterns of consumer behavior and (viii) intense competition from other online retailers. Our failure to successfully respond to these risks might adversely affect sales in our DTC channel, as well as damage our reputation and brand.
We currently have a limited number of country and region-specific YETI websites and have plans to expand our e-commerce platform to others. Expanding into new countries and regions 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 retail store expansion plans, our growth and profitability could be harmed.
We have and may continue to expand our existing DTC channel by opening new retail stores. We currently operate seventeen retail stores across ten states. 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; and
•general economic and business conditions affecting consumer confidence and spending and the overall strength of our business.
We may not be able to successfully address the risks that opening retail stores entails. 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. Further, economic conditions resulting in diminished liquidity or credit availability, increases in inflation rates, rising interest rates, declines in consumer confidence, declines in economic growth, or uncertainty about economic stability, 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.
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.
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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 emergencies, including the outbreak of a pandemic or other public health crisis; (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.
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.
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Our financial results and future growth have been, and could in the future be, harmed by currency exchange rate fluctuations.
As our international business grows, our results of operations have been and could in the future 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 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 are periodically involved in, and may in the future become involved in, 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, warranty liability, 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 (“CPSC”) 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 CPSC, and other relevant global regulatory authorities, 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. Furthermore, the occurrence of any material defects in our products could expose us to liability for warranty claims in excess of our current reserves, and if our warranty reserves are inadequate to cover future warranty claims on our products, our financial condition and operating results may be harmed.
In January 2023, we notified the CPSC of a potential safety concern regarding the magnet-lined closures of our Hopper® M30 Soft Cooler, Hopper® M20 Soft Backpack Cooler, and SideKick Dry® gear case (the “affected products”) and initiated a global stop sale of the affected products. In February 2023, we proposed a voluntary recall of the affected products to the CPSC and other relevant global regulatory authorities. In March 2023, we announced separate, voluntary recalls of the affected products in collaboration with the CPSC. The global stop sale of the affected products and voluntary recalls has subjected and will continue to subject us to substantial costs, including, but not limited to, product recall remedies, legal and advisory fees, and recall-related logistics costs. These actions may also result in adverse publicity, harm our brand and divert management’s attention and resources from our operations. As the voluntary recalls have commenced, we have made certain adjustments to our estimates regarding the impact of the voluntary recalls. Actual costs related to the global stop sale and voluntary recalls of the affected products may vary from our estimates, which are primarily based on expected consumer participation rates and the estimated costs of the consumer’s elected remedy in the proposed voluntary recall and may have further negative effects on our business. Any of these events or claims could harm our reputation, business, financial condition and results of operations.
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 result in substantial losses or other costs, and our insurance coverage may be insufficient or unavailable 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, and our third-party contract manufacturers ship most of our products to our distribution centers in Memphis, Tennessee, and Salt Lake City, Utah, which are susceptible to floods, earthquakes and wildfires. 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. Facilities of third-party logistics providers located in other countries that warehouse and distribute our finished products internationally also face local extreme weather conditions. Acts of terrorism and public health crises could also cause disruptions in our or our suppliers’, manufacturers’, and logistics providers’ businesses or the economy as a whole. For example, the COVID-19 pandemic contributed significantly to global supply chain issues, with restrictions and limitations on related activities causing disruption and delay. These disruptions and delays strained certain domestic and international supply chains, which affected the flow or availability of certain of our products. 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. Any such disruptions to our third-party contract manufacturers could have similar effect.
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. Historically, we have experienced our net sales to be highest in our second and fourth quarters, with the first quarter generating the lowest sales. However, we expect the stop sale of the products related to the voluntary recalls to impact our traditional seasonal patterns in 2023, with net sales to be highest in the fourth quarter. 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. Our results have also been, and may continue to be, impacted by the voluntary recalls of certain of our products and timing and our ability to provide a remedy with respect to the affected products. 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, 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 public health crises and may not offer coverage for such interruptions related to future pandemics or epidemics. 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
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; adverse economic conditions, such as a downturn in the economy or inflationary conditions resulting in rising prices, could adversely affect consumer purchases of discretionary items, 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 premium 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 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. For example, increased oil costs, inflationary conditions resulting in rising prices, including the prices of our products, and increased interest rates could lead to declines in discretionary spending by consumers, resulting in a reduction in demand for our products, and in turn may materially adversely impact our sales, profitability, and financial condition. Adverse economic conditions in markets in which we sell our products particularly in the United States, may materially harm our sales, profitability, and financial condition.
Public health crises could negatively impact our business, sales, financial condition, results of operations and cash flows.
Public health crises and preventative measures taken to contain or mitigate them have caused, and may in the future cause, business slowdowns or shutdowns in affected areas and significant disruption in the financial markets both globally and in the United States. The emergence of a pandemic, epidemic, or infectious disease outbreak could, among other risks, lead to:
•the possibility of 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 illnesses, or measures taken by federal, state or local governments to reduce the spread of illness, 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.
For example, the COVID-19 pandemic contributed significantly to global supply chain constraints, with restrictions and limitations on related activities causing disruption and delay. These disruptions and delays strained domestic and international supply chains, resulting in port congestion, transportation delays as well as labor and container shortages, and affected the flow or availability of certain products. In addition, increased demand for online purchases of products impacted our fulfillment operations and small parcel network, resulting in potential delays in delivering products to our customers. Other future public health crises could have a similar effect.
The emergence of another pandemic, epidemic or infectious disease outbreak, including any required or voluntary actions to help limit the spread of illness, could impact our ability to carry out our business and may materially adversely impact global economic conditions, our business, results of operations, cash flows and financial condition. Such events could materially increase our costs, negatively impact our sales and damage our results of operations and liquidity, possibly to a significant degree. The extent of the impact of such events on our business and financial results cannot be predicted.
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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, 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, process financial and accounting information, manage inventory and our supply chain, operate our website, host and manage our services, support our remote-working employees, store data, process transactions, respond to user inquiries, and conduct and manage various other operational activities. Any of these information systems could fail or experience a service interruption for a number of reasons, including our or a third party’s failure to successfully manage significant increases in user volume, computer viruses, ransomware, programming errors, security breaches, hacking or other unlawful activities, disasters, system failures, or a third party’s failure to properly maintain system redundancy or protect, repair, maintain or upgrade our or their systems. Any material disruption or slowdown of our systems or those of third parties that we depend upon 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. These events could also subject us to lawsuits, as further described under “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 continuously make improvements to our information systems, including undertaking various technology upgrades and enhancements to support our business growth. 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, 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.
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 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, our financial condition and operating results may be adversely impacted.
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
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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 cyberattacks. For example, system administrators may misconfigure networks, inadvertently providing access to unauthorized personnel or 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 media reports regarding increased cybersecurity threats and potential breaches because of the increase in numbers of individuals working from home. Additionally, external events, like the conflict between Russia and Ukraine, can increase the likelihood of cybersecurity attacks. Cyberthreats are constantly evolving, increasing the difficulty of detecting and successfully defending against them.
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 that compromises 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 became 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.
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. Global economic factors affecting the financial and credit markets, such as diminished liquidity and credit availability, increases in inflation rates, rising interest rates, declines in consumer confidence, declines in economic growth, and uncertainty about stability could impact our ability to obtain 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.
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 September 30, 2023, we had $83.3 million principal amount of indebtedness outstanding under the Credit Facility (as defined in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Overview” 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, 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
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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.
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.
For example, on August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022 (the “IRA”) which includes changes to the U.S. corporate income tax system, a 15% book minimum tax on corporations with three-year average annual adjusted financial statement income exceeding $1 billion and a 1% excise tax on share repurchases. These provisions are generally effective for tax years beginning after December 31, 2022. If we become subject to additional taxes under the IRA, particularly in connection with any future share repurchase program, our financial condition, results of operations, effective tax rate, and cash flows could be negatively impacted.
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In addition, member states of the Organization for Economic Co-Operation and Development (“OECD”) are continuing discussions surrounding fundamental changes to the taxing rights of governments and allocation of profits among tax jurisdictions in which companies do business. In December 2022, the European Union (“EU”) member states reached an agreement to a 15% global minimum tax rate pursuant to the OECD’s tax reform initiative. The directive is expected to be enacted into the national law of the EU member states by December 31, 2023. Although it is uncertain if more 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. We regularly assess all of these matters to determine the adequacy of our income tax provision, which is subject to significant judgment.
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 relating to 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 credit losses, 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
If we are unable to maintain effective internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our reported financial information and the market price of our common stock may be negatively affected.
As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal controls. Section 404 of the Sarbanes-Oxley Act of 2002 requires that we evaluate and determine the effectiveness of our internal control over financial reporting and provide a management report on our internal controls on an annual basis. If we have material weaknesses in our internal control over financial reporting, we may not detect errors on a timely basis and our consolidated financial statements may be materially misstated. We have enhanced our systems, processes and documentation to comply with Section 404 of the Sarbanes-Oxley Act and have hired additional employees and outside consultants to assist us in complying with these requirements; however, we may need to make additional improvements or hire additional employees or outside consultants to maintain such compliance.
Additionally, even if we conclude our internal controls are effective for a given period, we may in the future identify one or more material weaknesses in our internal controls, in which case our management will be unable to conclude that our internal control over financial reporting is effective. Our independent registered public accounting firm is required to issue an attestation report on the effectiveness of our internal control over financial reporting every fiscal year. Even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may conclude that there are material weaknesses with respect to our internal controls or the level at which our internal controls are documented, designed, implemented or reviewed.
If we are unable to conclude that our internal control over financial reporting is effective or if our auditors were to express an adverse opinion on the effectiveness of our internal control over financial reporting because we had one or more material weaknesses, investors could lose confidence in the accuracy and completeness of our financial disclosures, which could cause the price of our common stock to decline. Irrespective of compliance with Section 404, any failure of our internal control over financial reporting could have a material adverse effect on our reported operating results and harm our reputation. Internal control deficiencies could also result in a restatement of our financial results.
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;
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•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
•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.
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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.
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 be the target of stockholder activism, an unsolicited takeover proposal or a proxy contest or short sellers, which could negatively impact our business.
In recent years, there has been an increase in proxy contests, unsolicited takeovers and other forms of stockholder activism. We may be subject to such actions or proposals from stockholders or others that may not align with our business strategies or the interests of our other stockholders. If such a campaign or proposal were to be made against us, we would likely incur substantial costs, such as legal fees and expenses, and divert management’s and our Board’s attention and resources from our businesses and strategic plans. Stockholder activists may also seek to involve themselves in the governance, strategic direction and operations of our business through stockholder proposals, which could create perceived uncertainties or concerns as to our future operating environment, legislative environment, strategy, direction, or leadership. Any such uncertainties or concerns could result in the loss of potential business opportunities, harm our business and financial relationships, and harm our ability to attract or retain investors, customers and employees. Actions of activist stockholders may also cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business. We may also be the target of short sellers who engage in negative publicity campaigns that may use selective information that may be presented out of context or that may misrepresent facts and circumstances. Any of the foregoing could adversely affect our business and operating results.
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
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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.
Item 5. Other Information
Insider Trading Arrangements
During the three months ended September 30, 2023, none of our officers or directors adopted or terminated any contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or constituted a “non Rule 10b5-1 trading arrangement.”
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 September 30, 2023, 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 9, 2023 | By: | /s/ Matthew J. Reintjes | ||||||
| Matthew J. Reintjes | ||||||||
| President and Chief Executive Officer, Director (Principal Executive Officer) | ||||||||
| Dated: November 9, 2023 | By: | /s/ Michael J. McMullen | ||||||
| Michael J. McMullen | ||||||||
| Senior Vice President, Chief Financial Officer and Treasurer | ||||||||
| (Principal Financial Officer and Principal Accounting Officer) | ||||||||
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