YETI(YETI) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements (Unaudited) Unaudited financial statements reflect the significant impact of 2023 voluntary product recalls on sales and liabilities Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $791,332 | $718,920 | | Cash | $281,360 | $234,741 | | Inventory | $341,348 | $371,412 | | Total Assets | $1,155,882 | $1,076,765 | | Total Current Liabilities | $360,829 | $409,040 | | Accounts payable | $179,086 | $140,818 | | Total Liabilities | $517,097 | $550,288 | | Total Stockholders' Equity | $638,785 | $526,477 | Condensed Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | 9 Months 2023 | 9 Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $433,561 | $433,556 | $1,138,920 | $1,147,226 | | Gross profit | $251,251 | $222,407 | $627,959 | $596,366 | | Operating income | $61,877 | $68,467 | $127,306 | $170,103 | | Net income | $42,657 | $45,520 | $91,292 | $117,431 | | Diluted EPS | $0.49 | $0.52 | $1.05 | $1.35 | Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2023 | Nine Months Ended Oct 1, 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $114,769 | $(72,215) | | Net cash used in investing activities | $(58,263) | $(40,417) | | Net cash used in financing activities | $(11,931) | $(120,213) | | Net increase (decrease) in cash | $46,619 | $(234,426) | - In January 2023, the company initiated a global stop sale and subsequent voluntary recall for certain soft cooler and gear case products due to a potential safety concern with magnet-lined closures[71] Product Recall Reserve Activity (in thousands) | Item | Amount | | :--- | :--- | | Balance, Jan 1, 2023 | $94,807 | | Actual product refunds, replacements, etc. | $(50,707) | | Gift card issuances | $(26,685) | | Reserve adjustment | $8,515 | | Balance, Sep 30, 2023 | $25,930 | Net Sales Disaggregation - Nine Months Ended Sep 30, 2023 (in thousands) | Category | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | By Channel | | | | | Wholesale | $486,066 | $539,014 | (9.8)% | | Direct-to-consumer | $652,854 | $608,212 | 7.3% | | By Product | | | | | Coolers & Equipment | $432,511 | $482,030 | (10.3)% | | Drinkware | $676,978 | $639,055 | 6.0% | | By Geography | | | | | United States | $964,569 | $1,005,238 | (4.0)% | | International | $174,351 | $141,988 | 22.8% | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Q3 2023 performance shows flat net sales due to a product recall, offset by DTC growth and improved gross margin - A voluntary recall of certain cooler and gear case products initiated in Q1 2023 resulted in a $24.5 million reduction to net sales and a net unfavorable impact of $17.4 million to gross profit for the first nine months of 2023[83][87][105] Q3 2023 vs. Q3 2022 Performance Summary (in thousands) | Metric | Q3 2023 | Q3 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net sales | $433,561 | $433,556 | $5 | 0.0% | | Gross profit | $251,251 | $222,407 | $28,844 | 13.0% | | Gross margin | 58.0% | 51.3% | +670 bps | - | | SG&A expenses | $189,374 | $153,940 | $35,434 | 23.0% | - In Q3 2023, sales performance varied significantly by channel, with DTC channel sales increasing 14% to $259.5 million while Wholesale channel sales decreased 16% to $174.1 million[96] - The 670 basis point increase in Q3 gross margin was primarily driven by lower inbound freight rates (+480 bps), lower product costs (+150 bps), and a favorable channel mix shift to DTC (+110 bps)[97][101] - The company amended its Credit Facility in June 2023, extending the maturity to 2028 and increasing the revolving credit facility from $150.0 million to $300.0 million[82][115] - Cash flow from operations for the first nine months of 2023 was $114.8 million, a significant improvement from a cash use of $(72.2) million in the prior year period, primarily due to a decrease in inventory[120][121] Quantitative and Qualitative Disclosures About Market Risk Market risk exposures and management strategies remain materially unchanged from the prior fiscal year-end - There have been no material changes to market risk exposures or management of market risk from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022[128] Controls and Procedures Management concluded that disclosure controls and procedures were effective with no material changes to internal controls - Based on an evaluation as of the end of the period, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective[130] - There were no changes in the company's internal control over financial reporting during the quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, internal controls[131] PART II. OTHER INFORMATION Legal Proceedings Ongoing legal proceedings are not expected to have a material adverse effect on the company's financial condition - The company does not expect existing claims and legal proceedings to have a material adverse effect on its financial position, results of operations, or cash flows[136] Risk Factors Key business risks include brand dependency, product recalls, manufacturer concentration, and adverse economic conditions - The business is highly dependent on maintaining its premium brand image to attract customers and maintain demand[139] - The company faces significant risk from product recalls, as evidenced by the voluntary recall of certain soft coolers and gear cases in 2023, which has subjected the company to substantial costs and potential brand harm[193][194] - There is a significant concentration risk with third-party manufacturers, as the two largest manufacturers accounted for 71% of hard coolers, 92% of soft coolers, and 70% of Drinkware production volume in the first nine months of 2023[164] - Adverse economic conditions, such as inflation and rising interest rates, could reduce consumer discretionary spending on premium products, which could materially harm sales and profitability[201] - The company's reliance on information technology systems exposes it to risks of failure, interruption, or cyberattacks, which could disrupt operations and damage customer relationships[206] Other Information No officers or directors adopted or terminated Rule 10b5-1 trading plans during the third quarter - During the three months ended September 30, 2023, no officers or directors adopted or terminated any Rule 10b5-1 trading plans[242] Exhibits This section lists filed exhibits, including required CEO and CFO certifications under the Sarbanes-Oxley Act - The report includes required certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[242]