YETI Holdings, Inc.

Greetings and welcome to the Yeti third quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Tom Shaw, Vice President of Investor Relations. Please go ahead, sir.

Good morning, and thanks for joining us to discuss Yeti Holdings' third quarter 2020 results. Before we begin, we'd like to remind you that some of the statements that we make today on this call, including those statements related to the impact of the COVID-19 pandemic on our business, may be considered forward-looking. and such forward-looking statements are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. For more information regarding these forward-looking statements, please refer to the risk and uncertainties detailed in this morning's press release, as well as the risk factors discussed in our Form 10-Q for the quarter ended September 26, 2020, filed with the SEC earlier this morning. We undertake no obligation to revise or update any forward-looking statements made today as a result of new information, Thank you for joining us. We use non-GAAP measures as the lead in some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business. Today's call will be led by Matt Reintjes, President and CEO of Yeti, and Paul Carboni, CFO. Following our prepared remarks, we'll open the call for your questions. We're also working remotely and connecting with you from different locations today, so please bear with us should we experience any delays during the call. And with that, I'll turn the call over to Matt.

Good morning, everyone. We appreciate you joining us today. Yeti had a great quarter highlighted by excellent performance across our four strategic growth drivers. Our quarter was punctuated by 29% sales growth with balance across coolers and equipment and drinkware, coupled with strong, sustained margin expansion. Thanks to the incredible work of our Yeti team and amazing support from our customers and partners, Yeti crossed $1 billion in net sales for the trailing 12 months. In the quarter, Our direct-to-consumer business continues to lead the way with 62% growth. We drove mid-single-digit wholesale growth for the period as we continued to flex our supply chain and work to replenish channel inventories. Importantly, sell-through in the wholesale channel performed in line with our overall top-line results, leading to the aforementioned demand for channel replenishment. Our international business also performed very well, posting triple-digit growth to reach a Yeti high of 7% of sales, showing broadening demand in Canada, Europe, the UK, and Australia. Gross margin expanded 670 basis points to reach a record 59.1%, while our adjusted SG&A rate decreased to 200 basis points. Finally, we ended the quarter with $235 million in cash on the balance sheet following a voluntary debt payment of $50 million. Overall, we saw excellent demand for our products in all our channels. Importantly, we're continuing to invest in evolving our business to support our long-term growth ambitions. Now, let's discuss our strategic growth priorities. We continue to deepen the connection of our brand with our customers. This is highlighted by our breadth and depth strategy where we extended to new customers across diverse pursuits while also deepening ties within our existing active outdoor communities. As we have discussed, the pandemic has focused us on digitally relevant engagement, and we have further supported this trend with accelerated investments to build out our in-house content and creative teams. We're seeing impact of this investment with our ability to drive geographic growth and the evolving diversity of our customer base. When we are at our most effective, we tell powerful brand stories that inspire our customers, connect through product storytelling, and extend a positive impact on our communities. Let me give you a few recent examples. In August, displaying the broadness of our appeal and audience, culture aficionados High Snobiety published an article titled, How Yeti Beats Streetwear at the Business of Making Things Cool. While driving awareness will continue to be a priority, we also balance a focus on the depth of engagement with our long-standing customers, which keeps us centered. From a storytelling perspective, the pandemic created a unique opportunity to launch our latest collection of Yeti Presents films. After the pandemic caused us to cancel our in-person Yeti film tour in March, this summer, we released the eight new films through a YouTube Live premiere. Featuring video introductions from our ambassadors, filmmakers, and film subjects, this event showcased the power and reach of the Yeti community. To compliment YouTube, an extension of the virtual tour was aired in partnership with Vice Media and CBS. In September, we also launched a socially distanced drive-in film tour across eight stops from LA to Montauk to Central Texas, creating a safe, uniquely Yeti experience for our fans. From the product introduction side, we partnered with our ambassadors for our caffeine and cocktails campaign, where our brand partners shared their favorite drink recipes to help introduce our newest tumbler, the 10-ounce Rambler. From Conrad Anker's classic coffee pour-over to Hilary Hutchinson's Huckleberry whiskey, these short social videos are a tremendous example of how we use our internal content creation ambassadors to showcase our product in real and engaging ways. Our efforts to positively impact the communities we reach often matters most when those communities face adversity. As we mentioned on our last call, in July we launched our One for the Roadies campaign in partnership with Crew Nation to benefit out-of-work touring and venue workers. After securing 37 music artists to customize 42 of our Roadie 24 coolers for our online auction, the program raised $135,000. The campaign was an incredible success and attracted interest from additional top-tier artists who were eager to support future efforts. We have also focused on finding ways to ensure the wild is open, welcoming, and accessible to all. We continue to support our relationships with both Thrive Outside and Big City Mountaineers, two organizations committed to driving diversity in the outdoors. We also launched a new partnership with Black Outside, an incredible organization based out of San Antonio, Texas, which connects black youth to the outdoors. Moving to Yeti innovation, we continue to see sustained strength across drinkware, coolers, and equipment. The underlying demand for Yeti was strong before the pandemic, and we are now seeing the strength continue through the third quarter as a result of more fully open channels, plus positive trends in digital engagement, outdoor pursuits, a focus on hygiene and individual use, and people taking near-home vacations. These dynamics support the robust demand we are seeing across the product portfolio, and particularly both hard and soft coolers. In drinkware, we have seen a success with the performance of our bottles business, where we included the popular chug cap as a standard lid, and our expanded Colster can insulator line, where we now offer broader products for hard seltzers and large cans. While currently limited to D2C, we are also encouraged by the early success of our Rambler 10-ounce tumbler, which, as mentioned earlier, was supported by our Caffeine and Cocktails digital campaign. Color remains an important part of our innovation mix. Following the July launches of Northwoods Green and Drinkware and Sagebrush Green and Coolers, we launched our third second-half color, Ice Pink, in mid-September. Demand for this extremely popular color extended into our breast cancer awareness initiatives Throughout October, we're excited to once again support Boarding for Breast Cancer and Casting for Recovery, our fourth year with both of these incredible organizations. We also expanded our Rambler Elements metallic collection to the colster and lowball and extended sagebrush from coolers into drinkware. I would like to take a moment to address the voluntary recall which was announced yesterday in partnership with the U.S. Consumer Product Safety Commission of the Rambler 20-ounce travel mug with our stronghold lids. We launched the travel mug on October 1st as our newest travel-ready product. However, shortly after our limited initial launch on Yeti.com and in our retail stores, we discovered a potential safety issue with the stronghold lid and out of an abundance of caution, decided to pull the product from these channels and voluntarily began work with the CPSC. To date, there have been no reports of injuries from customers. To put this recall in perspective, we sold less than 15,000 units during the nine days it was available in these direct channels of the approximately 242,000 total produced mugs mentioned in our release. In addition, we did not ship the product to our wholesale partners. Customer safety is our priority, which is why we took such an aggressive stance addressing this issue. We are actively engaged in working on an enhanced design that will continue to meet the high standards that our customers place on each and every product carrying the Yeti brand. This delay, while disappointing in the near term, is fully contemplated in our outlook and will continue to make us better. In addition to our lineup of new products launched this year, we are continuing to energize some of our existing categories as part of our marketing strategy to drive broadened awareness. This includes the Come Hell or High Water campaign in early July that showcased the versatility and performance of our Panga fully submersible bags. More recently, our Built for Generations Yeti V-Series films launched digitally on Yeti Social are centered around our innovative premium stainless steel cooler, which is designed to be passed down through the generations. expect continued targeted product storytelling through the holidays with our holiday gift guides and upcoming Yeti Dispatch Magalog, which will begin to drop mid-November. We also remain laser-focused on working towards rebuilding in-stock levels. As a reminder, to protect our balance sheet in late Q1, we initially reduced purchase orders at the start of the pandemic, and as demand recovered, we have worked to flex our supplier capacity to meet rising demand. With demand accelerating in the third quarter, coupled with some pandemic-driven supply disruptions through the summer and early fall production, we expect inventory will remain tight through the holidays. We have taken additional action to mitigate risk and increase visibility of our supply chain during the holidays, but do expect our overall restocking initiatives will extend into early 2021. As we look at the balance of the year, we remain focused on driving deeper engagement across the Yeti portfolio and executing in stocks across all channels. Looking at our omnichannel efforts, consumer dynamics are clearly accelerating the digital shift and building upon the activities we've been driving for the past five years. Along with the heightened focus of our brand team in delivering amazing, highly relevant digital content, we're taking additional action to drive greater consumer acquisition and conversion through investments in incremental consumer insights and behavior work, and enhanced product customization experience, new digital tools and talent additions to our team. This is work that will evolve as we match the speed of our customers' purchasing habits and the rapidly evolving consumer expectations. The biggest proof point of our success here is our direct-to-consumer business, which grew 62% and reached 51% of total sales this period and year-to-date. Our strong third quarter DTC performance was led by Yeti.com due to excellent traffic and conversion on the site. We continue to see a great mix of new versus existing customers and have maintained great engagement as a result of our targeted and relevant content. Rounding out our online presence, the Amazon marketplace continued to post solid growth through the quarter. On the corporate sales side, revenues turned slightly positive for the quarter as healthy demand was limited by inventory availability. Increased capacity and delivery for custom is our focus as we ramp through the holiday season. In Yeti Retail, we added our eighth location in West Palm Beach in August. We continue prioritizing operational excellence in all our stores while also monitoring the real estate environment for opportunity as we evaluate store expansion potential for 2021. Turning to wholesale, demand and channel sell-through remained robust. Retailers were able to support demand with in-store inventory. However, they did in the quarter with inventory down double digits compared to the prior year. We have opportunity to drive stronger in stocks, particularly in high demand areas such as hard coolers and soft coolers, which had significant sell-through during the quarter. As the wholesale business evolves, were working to support the expanded Omni capabilities of our wholesale partners through their own e-commerce, curbside, and in-store, which combined are expected to be an important part of this holiday season. We had a very strong performance in our international businesses quarter with international wholesale more than doubling while our international e-commerce quadrupled in size, still off a low base but showing great potential. Overall, international grew 165% to reach 7% of sales, the highest mix Yeti has registered to date. The biggest factor in the growth was the reopening of our Canadian wholesale, which delivered significant year-over-year growth this quarter. Importantly, the DTC side of the Canadian business, including both e-commerce and corporate sales, also registered exponential growth during the period. While Canada still drives the majority of our current international business, We continue to be highly encouraged with demand we see in other markets. Australia showed more than a three-fold increase in both the wholesale and e-commerce businesses due to the extraordinary performance and execution of our Australian team. As we hit the one-year mark in our UK and Europe expansion, we're seeing this business build larger each quarter, and we continue to see a meaningful opportunity to drive performance as retail reopens. We remain highly focused on building the brand internationally in a thoughtful manner while developing the infrastructure to support smart, sustainable growth. Outside of our strategic priorities, we were excited to announce earlier this week the next step in our board evolution as our board of directors appointed Allison Dean, former CFO of iRobot, as an independent director and a member of our audit committee. Allison brings over 30 years of financial leadership experience, including 15 years with iRobot and seven years as a company CFO before stepping down earlier in 2020. Allison's addition corresponds to the resignation of Mike Najjar, who returns to his role managing Cortex. Additionally, our Chair and Cortec Co-President Dave Schnodig has informed the Board that he intends to step down as Chair of the Board and the Nominating and Corporate Governance Committee effective at the 2021 Annual Meeting of Shareholders. Dave has indicated that he would be willing to stand for re-election to the Board if so nominated in May. We appreciate the many contributions Dave and Mike have made to Yeti through the years. With these moves, One of our nine current board members is affiliated with our original private equity sponsor. Seven are now independent directors and one-third are women. We are proud to continue adding diverse thought and incredible experience to our board as we further build out the long-term opportunity for the brand. As I pass the call over to Paul, I would again like to reiterate how thrilled we are with the holistic performance during the third quarter, and I would like to thank our Yeti team for their exemplary efforts and ability to adapt and thrive so well against a very challenging backdrop. To our customers and partners who have continued to show their confidence in our products and our brand, thank you. While challenges remain pervasive in the headlines, we are fully focused on our people and what we do best, driving passion for the Yeti brand and delivering innovative product. We look forward to building upon the strength of our 2020 to-date performance with strong execution through the holiday season and Q4. Paul?