YETI Holdings, Inc.

Good morning, and thanks for joining us to discuss Yeti Holdings' second quarter 2023 results. Leading the call today will be Matt Reintjes, President and CEO, and Mike McMullen, CFO. Following our prepared remarks, we'll open the call for your questions. Before we begin, we'd like to remind you that some of the statements that we make today on this call 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 detailed in our most recently filed Form 10Q and the Form 8K filed with the SEC today. 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. Unless otherwise stated, our financial measures disclosed on the call will be on a non-GAAP basis. We use non-GAAP measures as we believe they more accurately represent the true operational performance and underlying results of our business. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the press release or in the presentation posted this morning to our investor relations section of our website at yeti.com. And now I'd like to turn the call over to Matt.

Thanks, Tom, and good morning, everyone. Yeti remains on pace in 2023 with sales moving to the higher end of our prior range, strong gross margin expansion, and a raise to our adjusted operating margin and full-year EPS. Before diving into the results and our strategic priorities, I would like to start with what we are seeing across our diverse channels in this increasingly dynamic environment. Starting with soft coolers and gear bags that have been out of the market for the majority of 2023. We remain on track to reintroduce the M20 backpack, the M30 tote, and our Sidekick dry gear bag in the fourth quarter. We will also launch smaller sizes for each style of soft cooler in the fourth quarter and extend the sizes of the dry bag line in early 2024. Again, I would like to thank our Yeti employees, partners, and customers for their tremendous focus and execution throughout this effort to get these products back to market. Regarding overall consumer demand, we continue to see a range of performance across our wholesale and DTC channels. There remains a focus on drinkware with strong trends around hydration, color, and new styles. We're seeing this play out within our own portfolio and across specific consumer demographics. Customers are increasingly gravitating towards many newer formats of our bottles, straw-lit tumblers, and our new color-matched bottles. As we continue to grow and diversify our drinkware category, we have expanded our products to include new size and customization offerings across a range of yonder water bottles, and we're pleased with the highly successful introduction of our Rambler beverage bucket. In hard coolers, we saw strength this past quarter, particularly with our expanded line of wheeled coolers. Offering mobile options will continue to unlock opportunities across customers and geographies, and we're excited about the innovation pipeline of both soft and hard coolers. Yet he is well-positioned to win across our product categories and we're focused on our product development and marketing to take advantage of the trends we view as long-term. Looking at our second quarter non-GAAP performance, adjusted sales grew 2% for the quarter. Results included a nine-point drag from the absence of certain soft coolers, offset by solid growth within the rest of the portfolio. This is comping against a very strong year-ago period, particularly in wholesale and corporate sales. As indicated, we remain well-positioned to deliver on our full-year sales target. Our drinkware business grew 8%, led by strong demand in our D2C channel and great reception to our product innovation. Demand for hard coolers and cargo helped offset some of the impact of the soft coolers as a category decline just 6% for the quarter. By channel, DTC sales grew 4% led by Amazon and e-commerce, balancing a bit softer corporate sales, which faced its toughest quarterly compare from the year-ago period. Wholesale performance came in better than planned, supported by positive sell-through, excluding the soft cooler impact, as well as the initial shipments of specific fall products. We made a decision to move our fall limited edition launch to early Q3, sensing we had a winner ready to go. as you have seen with the reception to our lilac and camp green colorways this product was well set up to take advantage of the demand trends we were seeing our supply chain team did an excellent job of having product ready earlier than anticipated and our wholesale partners were supportive of the opportunity to take advantage of what we believe would be strong offerings these products officially launched on july 20th as a reminder in the year ago period Our full commercial launch of second half colors happened in late Q2 versus in July this year. Gross margin continues to be a highlight with adjusted gross margins gaining 270 basis points to approach 55%. We are delivering against what we said as it relates to gross margin expansion. Importantly, we are now on pace to exceed our initial gross margin outlook for the year and we see momentum here into 2024. At the same time, As has been our pattern, we continue to invest across our business. We remain focused on the many growth opportunities ahead as we see the impact of product, brand, and channel expansion. Finally, our balance sheet continues to be a source of strength for our business, highlighted by cash exceeding $220 million. We also expanded our credit agreement to better align with our growth trajectory and to provide additional flexibility. Again, these results put us on pace to deliver at the higher end of our top-line commitments for the year while also driving bottom-line upside. Now shifting deeper into our strategic growth priorities. As we broaden our consumer base domestically and globally, we continue our balanced approach of deeply endemic connections across 15 communities of passion-fueled pursuits. A great example of leveraging our heritage in outdoor activities is the evolution from barbecue and live-fire cooking enthusiasts to the growing influences in the broader world of culinary. Here are a couple micro examples. We recently added Genevieve Taylor and Gil Meller to our ambassador roster. Genevieve is the founder of the Bristol Fire School and a well-respected culinary voice in the UK. Gil is a highly regarded outdoor chef, food show host, and author. We partner with both in uniquely Yeti ways to highlight their approaches to culinary and cooking in the wild. We have also built partnerships across several new YouTube channels. This includes a multifaceted and integrated partnership during the second season of Eater's Vendor Series. In addition, our ambassador, Brad Leone, recently launched two series, Local Legends and Making It, focused on uncovering the human stories of the fascinating people and what they eat. This is highly consistent with our Yeti brand storytelling. In conjunction with expanding audience reach, we're also seeing opportunity in additional seasonal buying moments. We've historically mentioned our moms, dads, and grads in these Q2 calls. but we look to enhance additional purchase occasions. Finally, we recently published our third ESG report, showcasing our progress as well as the opportunities that remain ahead. The report highlights two new circularity programs, Yeti Rescues and Rambler Buyback, both of which we are actively looking to expand. We're also building our own distinct voice as it relates to the durability of our portfolio by highlighting our product and the inherent strength of our design. The launch of our everyday single-use campaign this month focuses on durability, a story that is natural to our brand and positions our products against single-use alternatives. You'll see this come to life across out-of-home placement, media platforms, and as a centerpiece of several music festivals this summer, including last weekend's Lollapalooza in Chicago. As we shift to product innovation, let me give you a little more insight into the trends we are seeing and how we continue to build upon Yeti's legacy of innovation and long-term relevance. Beginning with drinkware, we have meaningfully diversified our portfolio over the past 10 years. This not only includes form factors, colors, and sizing, but also the broadening of use environments and use cases. We are seeing great reception to our bottle assortment with excellent early results of the color-matched options available across a wider range of our bottles. Our expansion into both smaller and larger size hydration has enhanced the breadth and reach of our products. We are prioritizing drinkware products, including extended sizes of our successful travel mug launched in 2021 and its various straw lid sizes. Customization opportunities continue to extend the value of this category. Our yonder water bottles are a good example here as we added new sizes, new lid solutions, and most recently, our first use of multicolor customizations. Beyond traditional drinkware, we debuted our Rambler beverage bucket during the quarter, which performed incredibly well and led to renewed interest in another great Yeti-caliber product in our ice scoop. We see continued opportunity to introduce products that encompass both outdoor and everyday use, whether that be at home, around the campfire, or in the backyard. We have more products coming that will further extend these use cases and environments. Starting with the introduction of the Yeti Cocktail Shaker, which delivers the incredible value proposition of being backwards compatible with a very large portion of the Yeti tumblers sold over the past decade. Finally, we were excited to partner with one of the best cast iron masters in the business at Butterpad Industries to introduce the very limited run Yeti 12-inch Cast Iron Skillet. This premium cast iron pan was created as a smoother and lighter skillet without giving up performance or durability. resulting in perfectly balanced heat for any cooking occasion. It was fun to see the incredible reaction to this product as it was the third highest social engagement for a Yeti product release since 2015. We were also able to give a strong nod to our culinary community. On the coolers and equipment side, adjusted sales declined 6% for the quarter as we lapped last year's full introduction of our M20 and M30 soft coolers and the impact of those products not in the market this year. As mentioned, Hard coolers performed well during the quarter, with Roadie 48 and Roadie 60 wheeled coolers leading the way during the early summer buying season. Combined with the Tundra haul, our volume of wheeled coolers more than doubled from last year. In soft coolers, our hopper flip posted strong growth ahead of our upcoming relaunch of the M20 and M30 in Q4. We also look forward to the introduction of our M12 backpack cooler and the M15 tote cooler, two new sizes in the lineup. Our Sidekick dry gear case will also return later in the fourth quarter with additional sizes planned for early 2024. Outside of coolers, we continue to see strong results with our expanded GOBOX cargo line, which has also resulted in a nice uptick in our loadout bucket. On bags, we continue our wholesale expansion strategy and are excited about the colorway extensions in the second half of the year. In addition, Our original, fully submersible, waterproof Pangoline, which launched in 2017, continues to perform very well. Now, turning to our Omnichannel, BTC sales were up 4%, supported by continued growth in both new and returning customers. Amazon led the way in the quarter as the channel continues to have a wide reach and to capture a largely distinct BTC audience. Of note, we did see very effective results from our participation in Prime Day last month, where we offered a range of products concentrated in older, seasonal colors and end-of-life products, as we continue a planned and effective transition of products to newer generations. On Yeti.com, our focus is on building the optimal brand and purchase experience. This includes showcasing Yeti, simplifying the buying decision, and enhancing our customization process. We continue to leverage learnings from our digital commerce and analytics teams to create more personalized experiences and targeted marketing spend across different customer cohorts. From a practical perspective, this means we continue to provide a dynamic website that will best match product and content with the individual customer. In our corporate sales business, sales were roughly flat, up against a very strong last year. Even with this, our total customer count continued to grow, This remains an important channel for us, and we are confident in driving growth here given the product interest, strengthening backlogs, and untapped international opportunities. Yeti Retail continues to be a strong awareness and customer acquisition vehicle, driving the highest rate of new customers across our D2C channels. While we have seen strong customer acquisition and customer count, we are seeing slightly smaller baskets due primarily to the soft cooler products, and change in units per transaction, which we attribute to some retail consumer conservatism. Our retail stores remain a very important part of the awareness, consideration, and purchase both in-store and throughout our DTC and wholesale channels. This is supported by results from our market-based analytics across the 14 existing markets with Yeti stores. During the third quarter, we will open our 15th and 16th stores in San Jose, California, and just outside of Minneapolis in Edina, Minnesota. On the wholesale side, sell-through was positive, excluding the impact of the recall. Results also included the previously mentioned earlier-than-planned shipment to support the commercial launch of our lilac and camp green colorways. This contributed to the better-than-planned sales performance for the channel, so we expect to keep combined Q2 and Q3 results in line with prior expectations. International sales grew nearly 20% for the quarter to reach 13.4% of sales, up from 11.5% in last year's Q2. While growth in Australia and Europe remained robust, we did see slower growth in Canada given many of the same demand trends facing the domestic business and the outsized impact of the soft coolers. As we have previously outlined, enhancing capabilities to support growth is an overarching theme across our international businesses this year. We've made strong progress on the transition of three of our non-US distribution centers with the Netherlands opening in June, Australia in the coming days, and the UK plan in the fourth quarter. Customization is another big opportunity that we will continue to build in our international regions. Australia and Europe both plan to have the added benefit of customization co-located in their three PLs. We've also started our investment in data analytics internationally, including marketing attribution work in Australia and Canada. Understanding our customers and driving enhanced effectiveness in our engagement remains significant initiatives in all global markets. On the front end of the business, we continue to invest in driving brand awareness in these markets and continue to actively add international partners and ambassadors, who now represent nearly a quarter of our global roster. We continue to support some of our newer global reach partnerships, such as Oracle Red Bull Racing and the World Surf League, while also establishing newer local relationships with the Rangers Football Club in Glasgow and the North Queensland Cowboys Rugby Club in Australia. Finally, we continue to drive in-person engagement and relevance across a range of local events, including the massive Calgary Stampede in Canada, the Seize the Day Women's Surf Festival in Australia, and several outdoor and culinary experiences across the UK and Europe, from the Game Fair to Meatopia and the Big Grill Barbecue and Food Fest. In summary, our second quarter performance highlights our consistent execution and ability to adapt. While there remain unknowns in the market, we continue to deliver on the basics, building a brand, making great product, driving demand, growing our profitability, and scaling internationally. This is supported by an increasingly agile team that is adjusting to meet the needs of the consumer while always maintaining focus on what makes a Yeti a Yeti. I'll now turn the call over to Mike to discuss our financials and outlook in more detail.

Thanks, Matt. To start, I would like to provide a summary of the adjustments and charges associated with a voluntary product recall that are included in our GAAP results. I'll then focus on our adjusted non-GAAP performance, which we believe provides a better picture of our underlying performance for the period. Finally, I'll discuss our updated outlook, including the increase to our full year adjusted EPS target. Regarding the recall, our initial expense reserve taken in the fourth quarter was based on certain redemption assumptions, including the rate of redemption and type of remedy chosen. We began processing returns and claims from customers during the second quarter, which has informed several adjustments to our reserve. While the overall redemption rate has been on plan, there have been differences in redemption rates across the impacted products. In addition, of the remedy options we are offering our customers impacted by the recall, we have seen higher than expected gift card elections versus the product replacement remedy option. We have therefore made the following three adjustments to our recall reserve. First, we increased the estimate for future gift card elections, resulting in a reduction to second quarter gap sales of $24.5 million. Second, the update to our assumption of future gift card elections also resulted in a corresponding $5.1 million reduction in gap cost of goods sold, given the lower estimated cost of future product replacements. And third, our recall-related logistics costs are now expected to be lower than our original assumptions, thus resulting in a $10.7 million benefit to GAAP SG&A expense. Overall, these three adjustments drove a net increase in the estimated recall expense reserve of $8.5 million this quarter. For more information on these reserve adjustments, which are excluded from our non-GAAP results, Please refer to our Q2 earnings press release and 10Q filing. Now moving on to our adjusted non-GAAP metrics. Second quarter sales increased 2% to $427 million compared to $420 million in the prior year period. As we have previously outlined, we estimate that the stop sale of recalled products impacted our growth rate in Q2 by approximately 900 basis points. The quarter also had a $12.5 million benefit from gift card redemptions related to remedies we are offering customers impacted by the product recall. While not specifically included in our prior outlook, we do believe that some of these redemptions replaced what would have been existing demand and sales during the period. In particular, we saw redemptions across a wide range of products, including products with limited supply, such as seasonal colors and new product launches, thus removing an opportunity for us to fulfill an existing order in other channels. Another dynamic that impacted our growth in the second quarter was related to the timing of wholesale shipments. To better support the strong color trends resonating in the market, we made the decision to accelerate the omnichannel launch of our newest seasonal colors Cosmic Lilac and Camp Green within Q3. This required us to start shipping these colors to the wholesale channel in Q2, which was earlier than what was assumed in our prior outlook. While modestly impacting the timing of sales between the second and third quarters, this dynamic has no impact on our full year results. As Matt mentioned, since their July launch, we have been very pleased with the performance of these new color offerings. From a channel perspective, direct-to-consumer sales grew 4% to $235 million, representing 55% of total sales, led by growth in our Amazon business. In the D2C channel, we saw strong performance in cargo, hard coolers, and drinkware, more than offsetting the impact of the recall on soft coolers. Wholesale sales decreased 1% to $193 million, with a decline in coolers and equipment partially offset by growth in drinkware. The decline in coolers and equipment was driven again by the impact of the recall on soft coolers, partially offset by strong growth in hard coolers and cargo. From a point of sales perspective, we were pleased with our overall sell-through performance in Q2, which was positive after we excluded the impact of the product recall. By category, coolers and equipment sales decreased 6% to $181 million, but did see strength in cargo and hard coolers. Our expanded line of go boxes continues to resonate as we expand distribution in the market. Hard coolers have been supported by ramping demand for the Rode 48 and 60-wheel coolers, as well as by solid growth in our core Tundra line. And within soft coolers, we continue to see good growth in our products that remain in the market, including the hopper flip line. Drinkware sales increased 8% to $233 million, with growth in both the wholesale and D2C channels. We continue to see the strongest results when we highlight the breadth of our product portfolio, drive newness with color, and extend the category into new areas. Our all-day Drinkware campaign was very successful, highlighting our wide range of products in the category while also driving engagement and conversion. Bottles remain a strong growth story for the brand, supported by larger formats, new color-matched straw caps, and the addition of yonder water bottles. Expanding on the strong demand for straw lid options in the category, we continue to see great results with our Rambler 25 and 35-ounce mugs with straw lids. exceeded our expectations and supports our optimism as we look to extend the brand into new areas. Internationally, sales grew 19% to $57 million, representing approximately 13% of total sales, and led by strong growth in Europe and Australia. Gross profit increased 7% to $234 million, or 54.9% of sales, compared to 52.2% in the same period last year. The two primary benefits this quarter included 330 basis points from lower inbound freight and 130 basis points from lower product costs. These gains were partially offset by 40 basis points from higher depreciation and amortization related to investments and production capacity, 40 basis points from higher customization costs given the continued growth of our custom offerings, 30 basis points from unfavorable P&A expenses for the quarter increased 15% to 167 million, or 39.1% of sales, compared to 34.6% in the same period last year. Non-variable expenses increased 390 basis points as a percent of sales, driven by two items that had roughly an equal impact on our year-over-year deleverage. First, incentive compensation costs for our employees. Note that Q2 will see the largest impact from incentive compensation during the year. And second, the impact of the stop sale on our top-line growth combined with our continued investments in areas such as headcount, warehousing, and demand creation to support our growth. Variable expenses increased 60 basis points as a percent of sales, primarily reflecting higher Amazon Marketplace fees. Operating income decreased 9% to $67 million or 15.7% of sales compared to 17.6% during the same period last year. Net income also decreased 9% to $50 million or $0.57 per diluted share compared to $0.63 in the prior year period. Turning to our balance sheet, we ended the second quarter with $223 million in cash compared to $92 million in the year-ago period. Inventory decreased 34% to $322 million year-over-year. Inventory declined sequentially for the fourth straight quarter, down another $25 million for a cumulative reduction of over $168 million from our peak levels in Q2 of 2022. Total debt excluding unamortized deferred financing fees and finance leases was $84 million compared to $101 million at the end of last year's second quarter. We did not have a principal payment due in Q2 given we amended our credit facility during the quarter. This amendment included an increase of our revolver from $150 million to $300 million as well as the refinancing of our existing term loan balance of $84 million with an extended maturity date to June of 2028. Now turning to our updated fiscal 2023 outlook. We now expect full-year sales to increase between 4% and 5% compared to fiscal 2022's adjusted net sales. The narrowing of our outlook reflects the second quarter impact of gift card redemption, keeping the rest of the full year factors relatively unchanged. Given the unpredictability of future gift card redemption, this outlook does not include the impact of any redemptions in the second half of the year. We do have some fluctuations of growth across quarters versus our last outlook. However, we continue to expect approximately flat sales growth over the first three quarters of the year in aggregate, followed by a return to double-digit growth in the fourth quarter. This implies a low single-digit decline in the third quarter compared to the prior assumption of approximately flat growth, with the primary change coming from the updated timing of the shipment of seasonal colors into the wholesale channel. Second half sales include the following assumptions. We expect both product categories will see a sequential decline in year-over-year growth rates from Q2 to Q3 before returning to growth in Q4 as we bring our full soft cooler product lineup back to the market and continue to expand our drinkware offering. We expect wholesale to be down double digits in Q3 on top of a strong comp last year and then return to growth in Q4. We expect DTC growth to strengthen and then to carry that strength into Q4. Also, we continue to expect DTC mix to reach approximately 60% for the year. And finally, we expect an approximate 900 basis point total impact related to the stop sale in Q3. To reiterate, we remain bullish on our positioning for the fourth quarter, where we expect to drive a lot of energy and newness across the product portfolio and see meaningful acceleration across both our primary product categories and sales channels. Looking at margins, we are increasing our 2023 gross margin target to between 55.5% and 56%, up from 52.7% in fiscal 2022. The favorable impact of lower inbound freight costs continues to be the most significant driver of margin performance this year. In addition, we now expect a favorable impact from product costs for the full year. On the SG&A side, we expect full-year SG&A dollar growth in the mid to high teens. The factors that are driving our SG&A rate remain consistent. They include the impact of the stop sale on our top-line growth, incentive compensation, variable expenses to support our D2C businesses, and investments to support our future growth. From a timing perspective, we expect the SG&A dollar growth rate to be in the mid to high teens for both the third and fourth quarters. We are raising our operating margin range to 15.5% to 16% for the full year. While the third quarter margins are expected to be lower sequentially, we continue to expect over 20% operating margins in the fourth quarter due to both an expected return to double-digit revenue growth and our strengthening gross margin profile. Including interest expense of approximately $4 million and an effective tax rate of 25.1%, we are raising our full-year adjusted earnings per diluted share outlook to between $2.23 and $2.32 compared to $2.36 in fiscal 2022. As a reminder, This includes a 30 to 35 cent estimated impact from the stop sale of products included in the voluntary recall. Looking at cadence, we expect that third quarter adjusted earnings per share will decline versus the prior year at a higher rate in Q3 versus what we saw in Q2, ahead of an expected return to strong earnings growth in the fourth quarter. On the cash side, we now expect a slightly higher level of free cash flow for the year in the $150 million to $200 million range, driven by inventory improvements. This includes a $60 million outlook for capital expenditures, which is consistent with our previous outlook. In summary, our Q2 top line results were above our expectations, and we are on track to deliver our full-year sales target. We continue to react to market trends and extend the brand smartly into new areas and we look forward to having our full product lineup available later this year with the return of the products impacted by the product recall. Gross margins continue to improve, supporting our ongoing investments across the business, but also improving bottom line profitability. Our balance sheet is stronger than ever, driven by continually improving inventory levels and higher free cash flow. And coupled with the recent changes to our credit facility, We believe this will provide additional flexibility as we look to drive future shareholder value. Now I'd like to turn the call back over to the operator to take your questions.