YETI Holdings, Inc.

Greetings and welcome to Yeti's third quarter 2021 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 call over to Tom Shaw, Vice President of Investor Relations. Thank you. You may begin.

Good morning, everyone, and thanks for joining us to discuss Yeti Holdings' third quarter 2021 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 relating 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, please refer to the risk factors details in our most recently filed quarterly report on Form 10-Q. We undertake no obligation to revise or update any forward-looking statements made today as a result of new information, future events, or otherwise, except as required by law. During our call today, we'll be discussing certain non-GATT measures pertaining to completed fiscal periods. Reconciliation of these non-GATT measures to their most directly comparable GATT measures are included in the press release issued this morning. We use non-GATT measures as a 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. Applying our prepared remarks will open the call for your questions. Before I turn the call over to Matt, I want to remind everyone that today is Veterans Day, as well as an SEC holiday. As such, we anticipate that our 10Q and 8K for the earnings press release will be available tomorrow. With that, I'll turn the call over to Matt.

Thanks, Tom. Good morning. Before we begin, with this being Veterans Day, I want to take a moment to recognize and honor all those that served, and in particular, our veterans here at Yeti. Thank you all for your service. Turning now to Yeti. we delivered a strong third quarter supported by strength and demand for the Yeti brand and our product portfolio. Amidst the demand signals and the persistent supply disruptions, we continue to drive deep, relevant connection with our customers through a commitment to innovation in our brand and product. As we've discussed since our IPO three years ago, these connections are rooted in products designed to exceed expectations and provide a very high level of performance. Aspirational and inspirational brand and product storytelling an investment in the digital future of customer acquisition, consideration, purchase, and retention across all our channels. Shifting to our Q3 highlights, we delivered top-line growth of 23%, which was well-balanced across our categories and channels. These results come on top of our strong performance last year as we delivered third-quarter growth up 58% relative to Q3 2019. Putting 2021 in context, Year-to-date growth is up 57% relative to the same period in 2019. On adjusted operating margin, for the third quarter, 2021 remained an impressive 20.5%, and we drove better-than-planned adjusted EPS growth. Before diving into our strategic growth priorities, I want to provide a closer look at how we're executing in this very dynamic and challenging supply chain environment. While we do not know exactly when global operations will return to normalcy or fully settle out, our team, alongside our partners, are taking actions where possible to mitigate disruption in the current quarter and into 2022. Let me start with reports of COVID-19 disruptions to production in Vietnam. As we originally discussed last quarter, the government-mandated shutdown impacted one of our soft cooler suppliers, resulting in a nine-week closure through late September. Our factory has resumed production in the current quarter and is ramping capacity as they work closely with the local government on the full reopening. Through a combination of our incredibly tight working relationships with our local partner, our team in the region, the benefits of supplier redundancy that we have built over the past three years, and leveraging the rest of our product portfolio to offset supply disruption on soft coolers, we expect negligible net impact to planned Q4 sales. We currently expect soft cooler supply to continue to ramp through 2021 and into 2022 to support our wholesale and direct channels, as our suppliers focus on production of existing products and new product innovation. As it relates to freight costs, Yeti faces the same broad-based challenges impacting many industries. Extended shipping times driven by port and transportation delays, plus the rising cost pressures seen throughout 2021. Our team is doing a nice job of staying close to this fast-evolving landscape and making adjustments, but yet in the best supply and cost position possible to maximize product availability against the demand we are seeing. The resulting cost pressures from freight increased in the third quarter, and we don't expect or see a near-term easing, so our team is fully focused on managing our mitigation efforts in the quarters ahead. Finally, our suppliers have seen inflationary pressures across key raw material procured for our products. However, the financial impact to us has been much more limited year-to-date as we have been able to leverage our growing global scale and strong standing with many of our key suppliers. This balance has kept us in line with our annualized cost savings this year. While we work closely with our supplier partners to combat rising input costs, we do expect these pressures will persist into next year. As we analyze these various cost headwinds against the strong demand for our products, we continue to develop and execute strategies that we believe are strong not only short-term, but also are long-term strategic for Yeti. Based on our expectations of the above factors continuing into next year, we are planning to implement targeted price increases in 2022 to help offset some of the cost pressure that we believe will persist. We'll provide more specific color on these actions on our fourth quarter call. Even with this disrupted supply chain environment, customer demand remains incredibly strong and resilient, with consumer sell-through in our omnichannel showing strength. Now I'd like to turn our attention to some of our key brand growth efforts during the quarter. As travel started to resume, Yeti launched a multifaceted campaign dubbed Take Back Travel, with a focus on travel as an active outdoor pursuit. At the brand level, this included 30-second digital spots that showed traditional travel amenities such as infinity pools and penthouse suites reimagined as saltwater flats and hanging from the side of a rock face in the wild. As we do in our blend of brand and product marketing, we focused on cross-category consideration of Yeti products from coolers to bags to drinkware. This combination of meaningful brand connections with effective product storytelling continues to be a formula that works for Yeti and delivers exceptional consumer engagement. While Take Back Travel focused on audience reach and consideration, we also used the opportunity to connect with our history and founding, celebrating the brand's 15th anniversary. We leveraged our archive of content to create a social series that featured our first ad for the original Tundra, our journey to pass the grizzly bear test, and endorsements from our very earliest ambassadors. We also brought back in a very limited run a special colorway of a retired Yeti cooler that was particularly beloved in the angling community as a casting platform. This special edition Tundra 50 sold out within hours of launch. As today is Veterans Day, it seems fitting to mention that we partnered once again with Folds of Honor last week to sell a limited edition Veterans Day tumbler for the benefit of families of fallen and disabled service members. This limited edition sold out in under 24 hours, and Yeti will be donating $150,000 to this worthy cause. In addition to the consumer receptivity to the brand, we are seeing recognition for the work our team is doing to grow and expand it. We were honored to be selected by Fast Company in its inaugural list of Brands That Matter. Beyond just numbers, this recognition focuses on brands that have achieved relevance through cultural impact and social engagement, featuring branding that authentically communicates their mission and ideals. We were also pleased with the overall execution of marketing, supporting new products during the third quarter, while also reintroducing older Yeti favorites to newer fans of the brand. Starting with fall colors, we evolved our approach and unveiled the complete range of color upfront before highlighting the inspiration and story behind each separate colorway. This had the positive effect of revealing the entire launch and then giving an opportunity to elongate the product release. This latest collection featured Highlands Olive in early August, Sharptail Taupe in late August, and Harvest Red in early September. Extending our color story and in conjunction with Breast Cancer Awareness Month, we also launched Sandstone Pink in early October. This colorway launch included integrated marketing support and a donation in support of Boarding for Breast Cancer and Casting for Recovery, two great organizations that we have proudly partnered with each October for the past five years. Our reintroduced travel mugs were released in 20- and 30-ounce sizes. Our Rambler 18-ounce hot shot bottle for hot beverages provided a great extension to the 12-ounce version. And further targeting demand for large capacity drinkware, we released our Rambler 64-ounce bottle, which is off to a great start. In bags, our second-generation Camino Tote is exceeding expectations for this incredibly versatile and durable product. We've also been pleased with the performance of our new lineup of bags and luggage, in particular our backpacks. Overall, our bags business continues to grow in product awareness and sales performance as supply availability improved in the quarter. The entire portfolio of bags continues to receive very strong consumer ratings consistent with Yeti products. Finally, on hard and soft coolers, demand remains robust. Our flow of seasonal colors help drive the quarter, and we expect core color inventory positions will begin to improve across channels in Q4. Our supply chain and innovation work will continue to drive improved in-stocks and evolution across the product family as we move into 2022. Our channel strategy is focused on being excellent when and where the customer finds us. Our D2C channels represented 54% of our sales mix during the third quarter. Our largest D2C business, Yeti.com, generated strong growth supported by gains across our region. This performance is underscored by the overall quality of our customer base, which we see through retention rates, year-to-date growth of new customer acquisition on top of last year's strength, and double-digit year-over-year percentage increases in revenue per customer. Overall, we are making great strides in our data analytics and are focused on leveraging data to personalize the brand and product journey. Corporate sales remain robust as the consumers head back to the office and employers resume employee gifting, in addition to the success of the outbound vertical market sales structure we implemented in the spring. Finally, Yeti-owned retail is performing well above plan as we heightened our focus on execution of the store experience and merchandising. During Q3, we successfully implemented an enhanced merchandising approach, improved store layout, and expanded gear garage destinations. last week we opened our ninth store with houston and are excited to debut in arizona next week with a location in scottsdale bringing our total fleet to 10. within wholesale we are primarily focused on rebuilding channel inventory when we are in stock and fully merchandised we see sell-through performance follow suit we saw great response when new product efficiently flowed to our partners and onto shelves continuing to give us confidence in channel demand as we focused on our replenishment work moreover We are working closely with our wholesale partners to optimize their assortment and merchandising. We are also actively managing our wholesale footprint and reach, which is evident for our consumers. We made the choice to reduce our independent wholesale footprint to approximately 3,000 accounts. While this will not have a material financial impact, as we will allocate future inventory to the rest of our strong wholesale partners, This action builds upon our efforts to align our distribution and focus on accounts where there is a high standard of merchandising. I want to reiterate that the wholesale network remains an integral part of Yeti and our ability to drive connection of the brand with consumers.