YETI Holdings, Inc (NYSE:YETI)

Per its 2021 Annual Report, Yeti Holdings Inc (NYSE: YETI), referred to as “Yeti” for the duration of this writeup, “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.” Per the most recent annual report again, Yeti achieved record revenues and profits of ~$1.4 billion and ~$212 million respectively in 2021. The business is headquartered in the mean streets of Austin, Texas.

History

Yeti was started by two brothers, Roy and Ryan Seiders, after not being able to find a cooler that could handle the wear and tear of their fishing excursions. Per the Inc. article about the two brothers which is linked here, “The whole idea behind Yeti, the company that the pair co-founded, was to design a cooler that could withstand their fishing tactics— primarily, one they could stand on without fear of collapse as they sight-casted for redfish. The secondary goal was to afford them time for fishing and hunting.” I reference the article frequently in this section and recommend reading it in its entirety. At the time Ryan had a custom fishing rod business while Roy had a custom boat building business. While looking for coolers to put on the boats that Roy was building, they randomly found a cooler at a local store from a company in Thailand that they liked and became distributors for it. The brothers got frustrated with the products they were hawking and travelled to Thailand to meet with the company to discuss design improvements. The discussions with the Thai company didn’t go well so the brothers were back to square one. Per the Inc. article again, “They then heard about a plant in the Philippines that seemed promising. “Ryan and I debated whether we should go to the Philippines,” says Roy. “We convinced ourselves to go, and we sat down with that factory and quickly realized that these guys were on a different level. They were capable of building a great product for us.” When they left, Roy remembers thinking to himself: “Hey, this is now our future. It’s time to start our own dealing and our own brand name.’” They had money saved up and decided to move forward with designing a prototype. Looking back with the benefit of hindsight, what happened after the design of the initial prototype was simple, clever and genius. The brothers knew that they needed to do something different to sell their product. Per the Inc. article again, “When they got to a prototype, they realized they’d have to sell their cooler at retail for about $300 a pop initially. No such market existed. There was no point in selling to Walmart or Target; they needed another distribution path. Calling on hardware and tackle shops, they offered this proposition: Why try to compete with Walmart selling $30 coolers and keeping the $5 margin? You can sell a $300 cooler and keep $100.’” Their target market was interesting too. They initially appealed to outdoorsmen which I will discuss in more depth in the “Valuation” section of this writeup. The business had a successful launch and did ~$3 million in sales in its first year. Rapid growth ensued over the next several years. The business became too big for the brothers and they sold a majority share of it to a private equity firm called Cortec Group in 2012. The business continued its growth and the deal ended up being successful for both parties. Per Wikipedia, Cortec reportedly made 26x its initial investment in Yeti. In September of 2015, Roy Seiders was still the CEO of the business. He decided to step away from day-to-day operations at that time and brought in Matt Reintjes who is still running Yeti to this day. The business IPO’d in October of 2018.

CEO

As stated above, Matt Reintjes has been the CEO of Yeti since September of 2015. Per the 2018 Annual Report, before becoming CEO, Mr. Reintjes was a Vice President at Vista Outdoor Inc. from 2013-2015, Chief Operating Officer at Bushnell Holdings Inc. from May 2013 - November 2013, Chief Operating Officer of Hi-Tech Industrial Services, Inc. from January 2013 – May 2013 and held various roles at Danaher Corporation from 2004 – 2013. He has a B.A. in Economics from the University of Notre Dame and an MBA from the Darden School of Business at the University of Virginia.

CEO Compensation

Mr. Reintjes’ compensation is made up of a base salary, short-term incentives and long-term incentives. Per p. 49 of the 2022 Proxy Statement, his base salary is $975,000.

Per the same page of the 2022 Proxy Statement, the short-term incentive for Mr. Reintjes is “… a cash plan that rewards NEOs for the achievement of key short-term financial and operational objectives that the Compensation Committee views as critical to the execution of our business strategy and ensures each executive officer is focused on strategic goals that ultimately will drive long-term value for our stock holders.” The performance metrics for Short-Term Incentives are net sales and “adjusted operating income”. “Adjusted operating income” is operating income minus stock-based compensation, asset impairment charges and “business optimization” expenses. Net sales make up 40% of the total bonus and “adjusted operating income” makes 60% of the total bonus. Per p. 49 of the 2022 Proxy Statement, the business achieved 109% of its sales target and 111% of its adjusted operating income target but this somehow equated to a bonus payout of 198% of the CEO’s salary. There is no further explanation given as to why the bonus payout percentage far exceeds the actual results. The screencap below is from p. 60 of the 2022 Proxy Statement and shows the performance metrics, actual results and payout percentages for the CEO. His total short-term incentive payout was $2,878,615 in 2021.

Long-term incentives are comprised 50/50 of performance based restricted stock (PBRS) and time-based restricted stock.  The screencap below shows how PBRS’ and the time-based restricted stock award payouts are determined and paid out. The screencap was taken from p. 62 of the 2022 Proxy Statement.

Like the short-term incentives, the long-term awards are capped at 200% of the target. Regarding free cash flow, I am unsure as to whether stock-based compensation is included in the calculation of operating cash flow as I could not find any information on how its calculated in the proxy statement. Adding it back into operating cash flow would obviously increase the figure. Yeti doesn’t issue a ton of stock-based compensation, but more on that later in the “Valuation” section of this writeup. The actual hurdle rates for cumulative free cash flow are not provided in the 2022 Proxy Statement. The screencaps below explain the cumulative free cash flow and TSR performance metrics in further detail. Portions of the text have been highlighted for emphasis and are taken from pp. 62-63 of the 2022 Proxy Statement.

I like that the Compensation Committee uses cumulative free cash flow and a TSR modifier to issue performance-based restricted stock awards. However, I would appreciate more insight into what the hurdle rates are for cumulative free cash flow. I was also unable to find additional information about the Restricted Stock portion of the long-term incentives.

The screencap below is of the Summary Compensation Table from p. 68 of the 2022 Proxy Statement.

What Does Yeti Do?

To simplify the description in the introduction of this writeup, Yeti designs and sells premium outdoor products which are broken out into three segments: Coolers and Equipment, Drinkware and Other. The first product type includes Hard Coolers, Soft Coolers and Cargo, Bags and Outdoor Living products. Describing its Hard Coolers p. 9 of the 2021 Annual Report, “Unlike conventional hard coolers, our hard coolers are built with seamless rotationally-molded, or rotomolded, construction, making them nearly indestructible. For superior ice retention, we pressure-inject up to two inches of commercial grade polyurethane foam into the walls and lid and utilize a freezer-quality gasket to seal the lid. We offer five product ranges within our core hard cooler category: YETI Tundra™, YETI Roadie®, Tundra Haul™, YETI TANK®, and YETI Silo™ 6G. We also offer related accessories, including locks, beverage holders, and other add-ons, to enhance our products’ versatility.” The Tundra is the product that most people are familiar with when they see or think of Yeti. It’s a standard looking cooler that will keep the items inside of it cold for days at a time. The Roadie coolers are smaller than the Tundras, but have wheels and handles that make them mobile. The Tundra Haul is a combination of the Tundra and the Roadie. The Yeti Tank is a glorified ice bucket. Yeti Silo is a water cooler. The rotomolded design of its coolers, Yeti’s flagship product, is one of the key’s to understanding why the business has been so successful. From day one, Yeti coolers have been produced through a process called biaxial rotomolding. Per the Inc. article referenced above, “Yeti’s hard coolers are made through a process called biaxial rotomolding. Kayaks and those orange plastic barriers you pass on the road are made with this process. It involves pouring a powdered polyethylene plastic resin into a mold, and then heating and spinning the mold along two axes. As the powder liquefies, it layers across the mold precisely, creating a seamless, nearly indestructible product.”

Describing Soft Coolers on p. 9 of the 2021 Annual Report, “The Hopper® is our line of soft coolers, which are designed to be leakproof and provide superior durability and ice retention compared to ordinary soft coolers. The Hopper soft cooler product line includes: the next-generation Hopper® M30, Hopper BackFlip™, Hopper Flip®, Daytrip™ Lunch Bag, and Daytrip™ Lunch Box.” The Hopper is a personal cooler with a strap on it so you can schlep your items (read as “beer”) over your shoulder without having to carry them in a cooler. The tradeoff is that the Hoppers hold a lesser number of items (read again as “beer”) than a traditional cooler. The Daytrip Lunch Bag and Daytrip Lunch Box are straightforward to understand. The only thing different about them versus the competition is that they’re better insulated and have a big ole’ Yeti logo emblazoned across them.

Cargo, Bags and Outdoor Living products are described on p. 10 of the 2021 Annual Report where it states, “Our cargo, bags, and outdoor living product category includes: the Panga™ submersible duffel bag, Panga™ Backpack, LoadOut® Bucket™, LoadOut® GoBox™, Crossroads™ Collection of backpacks, duffel bags and luggage, Camino™ Carryall, Hondo™ Base Camp Chair, Trailhead™ Camp Chair, Lowlands™ Blanket, Trailhead™ Dog Bed, and Boomer Dog Bowls.”

Drinkware, like the word “alpha” in the finance industry, sounds sophisticated, but it’s not. Yeti’s drinkware are its lines of cups, mugs and bottles. Per p. 10 of the 2021 Annual Report, “Our Drinkware product family is made with durable, kitchen-grade, 18/8 stainless-steel, double-wall vacuum insulation, and our innovative No Sweat™ design. The result is high-performing drinkware products that keep beverages at their preferred temperature — whether hot or cold — for hours at a time without condensation. Our Drinkware product line currently includes eight product families including the Rambler Colster, Rambler Lowball, Rambler Wine Tumbler, Rambler Stackable Pints, Rambler Mugs, Rambler Tumblers, Rambler Bottles, and Rambler Jug. Related accessories include the Rambler Bottle Straw Cap, Rambler Tumbler Handles, Rambler Jug Mount, and Rambler Bottle Sling.” I can personally attest to the quality of Yeti’s drinkware. I don’t own one, but I’ve used them before. It seems like it shouldn’t be possible to keep drinks cold for several hours at a time on a hot summer day, but Yeti’s design team figured it out. I wouldn’t call what they do “God’s work”, but they’ve occasionally made my life a little bit sweeter.

The third and final segment is Other. Per p. 10 of the 2021 Annual Report, “We offer an array of YETI-branded gear, such as hats, shirts, bottle openers, and ice substitutes.”

So, what separates Yeti from the competition? The answer is that it has become a status symbol. What makes the business and its product status symbols? I think the answer is composed of three components. The first is that its products are well built, second is its marketing and third is its pricing. The quality of Yeti’s products has been alluded to in the previous sections of this writeup. As mentioned above, the founders built the first Yeti coolers to be rugged enough to meet their rigorous standards. Owners of Yeti coolers can stand on them without any damage to the product. The coolers are famously “Grizzly proof”. The link here to Yeti’s viral grizzly bear video explains what I’m talking about. Bears, with all their might, can’t damage a locked Yeti cooler. Another video linked here shows a 500lb man jumping on a Yeti cooler without being able to damage it. You can find other videos demonstrating the Yeti cooler’s toughness here in the Yeti Versus playlist on its YouTube channel. Building tough and well-designed products continues to be a core focus of the business and is one of the main appeals of any Yeti product.

Yeti’s marketing is excellent. It’s on par with Revolve and possibly even better. Like Revolve, Yeti sells a lifestyle and has built its brand around it. Per the Inc. article referenced above, “For entrepreneurs and product designers, this is the ultimate goal: turning a commodity into an object of desire. “It’s just a fucking cooler,” laughs David Srere, co-CEO and chief strategy officer of the branding and design agency Siegel+Gale, with obvious admiration. Because what the Seiders brothers have produced is more than a box that will keep your brewskies chilled longer. Their ability to carefully build an authentic, durable brand story is just as important, maybe more so, than the indestructibility of their product.’” Referencing the article again, “What their story is about is not this cooler,” says Srere. “It could have been a zillion things, but they have built their community, their operating philosophy, around their passionate commitment to the outdoors.” Large corporations would pay anything for this kind of credibility, which is what makes it unobtainable to them.’” A commitment to the outdoors is what initially drove Yeti’s sales. Quoting the Inc. article again, “Ryan and Roy were convinced Yeti would sell to people just like them. So they continued to work the small accounts and the trade shows. That’s where Walt Larsen, head of Scales Advertising, now Yeti’s agency, found Ryan, standing in front of a table looking like he was selling pies. “I loved their product,” he says. “I loved that they were going opposite the market.” Yeti’s other big advantage, Larsen says, was its target audience: “I told them the outdoorsman is easy and inexpensive to reach, and that there was a monumental opportunity if they were aggressive. And they said, ‘Sounds great.’” Watching some videos on Yeti’s YouTube channel will drive home what I’m getting at. A link to the channel is here. I would look at the YETI Presents playlist in particular which is linked here. It is a series of videos that are several minutes long highlighting the lives and achievements of Yeti brand ambassadors. All of them have a connection to the outdoors. Their professions range from bull riders to rodeo cowboys, fishermen, hunters and everything in between. These outdoorspeople are the essence of the Yeti brand and marketing strategy. Their lifestyles and the appeal of them is what the business is selling. You’ll gain a greater understanding of what I’m talking about if you take the time to watch some of the videos in the playlist. What’s important about these videos is what Yeti isn’t showing. You rarely see a branded cooler or cup in the videos. You see flashes of them, but mainly there’s a story being told. There must be a reason why the business does this. I think that it has figured out some kind of associative tendency with the stories it tells and the products it sells.

The last component of what makes Yeti a status symbol is its pricing. Its cheapest cooler is the YETI TANK 45 Ice Bucket which retails on its website for $200. Remember that the YETI TANK is nothing more than a well-insulated ice bucket. Its most expensive product is the YETI Tundra 350 Hard Cooler which will run you $1,500. Soft Coolers range in price from $200-$350. Don’t think for one second that Yeti is going to cut you a deal on its Drinkware products. A 10oz. Tumbler will run you $20. A 30oz. version is $38. There is a 64oz. Rambler water bottle for $65. The 12oz. kids’ version is $25. A Yeti bottle sling (yes, it’s real) costs $35. This product allows you to put your 18oz. Yeti Rambler bottle into a Yeti branded sling. One of the more interesting Yeti products that I came across on its website was the Yeti Brick Bottle Opener. It is described on the Yeti website as follows, “Why make a ¾lb cast stainless steel bottle opener? Because 1lb would’ve been overkill. The Brick Bottle Opener has the power to open any capped glass bottle in its path. At a whopping 5.25”x.75”x1”, this handsome bottle cap buster looks good mounted, on your bar top, or out on your desk. We’re not judging, it’s a party trick in its own right.” The cost? 50 U.S. dollars. The business knows that its customers love their dogs, so it got smart and developed a line of products for man’s best friend. The business offers two kinds of dog bowls. One is $40 and the other is $50. The Yeti Trailhead Dog Bed is $300. The Yeti Trailhead Dog Bed Bolster Cover, whatever that is, costs $80. My personal favorite might be the lunch boxes and lunch bags. They each cost $80. Imagine paying $80 for a lunch container. Yeti’s price points are so high that its 350 Hard Cooler made it on to 2 Chainz’ Most Expensivest show. A link to the segment can be found here. I have hyperlinked each product in case you don’t believe me about their respective prices.

All three components combined make Yeti a status brand. You may be wondering who buys this stuff. Yeti’s products are still purchased by lovers of the outdoors. There is no question about that. Increasingly, Yeti has seen its products be sold to “Yeti Guy”. You may not be familiar with “Yeti Guy”, so I’ll do my best to describe him. “Yeti Guy” can be found commonly in the Southern portions of the United States. He is increasingly found in the midwestern and western regions of the country. You won’t find him as much in the Northeast, but I bet he’ll be around sooner rather than later. “Yeti Guy” is often a well-to-do or has the appearance of being a well-to-do white guy who wants to let everyone know how cool he is, how long he can keep his beer cold and how much money he has to be able to afford a Yeti cooler. You can usually find him wearing a polo shirt and talking about his affinity for nature. The reality is that he would start kvetching if he didn’t have air conditioning for more than an hour or so. He drives the most expensive truck that he can afford and will stretch his finances to get all the bells and whistles on it. “Yeti Guy” has no problem talking about his love for the brand or his fleet of other Yeti products. The video below does an excellent job of explaining other aspects of “Yeti Guy”. Full credit goes to the You Betcha channel.

Valuation

Please note that I use 2017 as the year which I base Yeti’s growth from because that is the first year that had complete data on its balance sheet, income statement and cash flow statement. Yeti increased its revenues from ~$639 million to ~1.4 billion over the last five years which is a CAGR of 16.98%. Yeti’s market capitalization is ~$4.3 billion as of the publishing date of this writeup meaning that its currently valued at ~3x revenue. I have provided a table which breaks down Yeti’s revenues by sales channel, product category and geographic region. The table is shown in the screencap below.

Notable takeaways include the business’ thriving direct-to-consumer sales and the rapid expansion of Drinkware and international sales. Direct-to-consumer now makes up ~56% of total sales versus ~30% back in 2017 and sales in this channel have CAGR’d at 32+% over the last five years. Drinkware is ~60% of total sales versus ~49% in 2017 and sales in this product category have CAGR’d at just under 22% over the last five years. International sales, while still at less than 10% of total sales, have grown 33x since 2017 which indicates a vast growth area for Yeti. On to its capital structure.

The screencaps below are YETI’s balance sheet since 2017. The data was taken directly from TIKR.

As of year-end 2021, Yeti had roughly $110 million of long-term debt on its balance sheet. This figure has been reduced considerably since 2017 when it had ~$475 million of long-term debt so the business deserves credit for paying down this balance over the last five revolutions around the sun. The other worrying line item that you’ll see is the explosion in inventory which more than doubled in 2021 versus 2020 to $318.86 million. Q1 2022 brought worse news. Per the Q1 2022 earnings call, inventory increased 125% year-over-year to $413 million.

Paul Carbone, Yeti’s CFO, addressed this issue in Q4 2021 earnings call. I copy and pasted the question from the analyst about inventory and his response below:

Kimberly Conroy Greenberger; Analyst, Morgan Stanley & Co. LLC - “Great. Thank you so much. Good morning. I wanted to ask, surprise, about inventory and supply chain as well. Sorry to beat this dead horse here. I'm wondering, it seems like the reaction that is – has been necessary to the slow – the slowing of the supply chain is just to basically plan for a little bit more safety stock in your inventory. And I'm wondering if you can look forward as inventory or as supply chain begins to catch up, is your plan then at that time to sort of ease back on your inventory orders in order to prevent an over inventory situation once we get caught up on supply chain or how should we think about the inventory plan and how it evolves after supply chain gets caught up? Thanks so much.”

Paul C. Carbone; Senior Vice President & Chief Financial Officer, YETI Holdings, Inc. – “Great, great question. So, the short answer is, yes, we would expect that to normalize. And the way we think about it is the in-transit inventory will, if supply chain normalizes as you said, the in-transit inventory should go back to a normalized in-transit amount. And then our inventory should grow at or slightly below or maybe even slightly above based on new product launches, our sales. So it should be closer tied to our sales.” He went on to say, “Now, on a two-year basis, our inventory is up 31%. Our overall sales are up 24%. I will tell you, Kimberly, excluding freight, our product inventory is up 24% on a two-year basis and our sales are up 24%. So even if – once you start peeling it back and part of it is the freight, the GSP duties that are all baked into my inventory balance, it is more aligned. But the short answer is as transit times reduce, if they go back to whatever normal is, our inventory balance would also reduce and really driven by that in-transit inventory.”

Mr. Carbone also mentioned the inventory increase in the Q1 2022 earnings call. He stated, “Inventory increased 125% to $413 million compared to $183.9 million during the same quarter last year. Similar to last quarter, nearly two-thirds of the inventory growth for the period reflects the combination of higher in-transit inventory given the extended lead times and the impact of higher inbound freight costs. Looking solely at product inventory, which includes the impact of freight, roughly 40% of our product inventory was in transit at quarter-end, which we believe highlights the quality of our overall inventory position. As we compare back to a more normalized level from Q1 of 2019, product inventory has grown at a 29% compounded growth rate compared to sales growth of 24%.”

For those of you who may be unaware, inventory-in-transit are finished goods that have been sent to, but not received by the buyer. What do his answers mean at the end of the day? From my understanding, management thinks that increases in inventory should roughly match the increase in sales which makes sense and is what has happened excluding increases in freight costs. Management also believes that the increases in freight costs should normalize and are not long-term concerns. Links to transcripts for both earnings calls can be found here and here. On to free cash flow.

My calculation for Yeti’s real free cash flow (RFCF) over the last five years is shown in the screencap below.

The results were frustrating because RFCF has varied considerably every year since 2017. 2021’s RFCF was almost 20% lower than it was five years ago. If you want to base the valuation multiple of the business on 2021 RFCF then Yeti currently trades at ~57x RFCF which isn’t a clearance rack price. Kudos to the Compensation Committee for keeping stock-based compensation under 10% of sales each year. I’ve posted the entire operating cash flow statement over the last five years in the screen cap below to give you some sense of what’s going on with the business’ RFCF. The data was taken from TIKR.

There are a few items of note in this statement. First, accounts receivable (which includes accrued expenses), inventories and accounts payable are all over the place. There is limited to no information in any of the annual reports as to why each line item has fluctuated so much. My opinion, after learning about the business, is that Yeti has experienced rapid growth, has had to deal with COVID and all its related supply chain and logistical problems and has shifted its primary sales channel from wholesale to direct-to-consumer. Is this the right answer? I don’t know for sure, but at the very least I don’t think that the business is playing games with its cash flow statement when taking all those factors into consideration. Another encouraging sign in the operating cash flow statement above is that almost every other line item has seen relative stability or incremental increases as the business has grown. The final item of note is Yeti’s net income over the last five years. It is up almost 14x while revenues are up a little more than 2x indicating that the business has operating leverage. Moving on to returns on capital.

The screencap below shows Yeti’s returns on invested capital (ROIC) since 2017.

There was quite a gap between NOPAT and net income at the beginning of the measurement period. It was due entirely to interest expense and the gap between NOPAT and net income has closed because the amount of interest has decreased as the business has made consistent, sizeable debt repayments. These debt payments along with the Yeti’s operating leverage have allowed the business to improve its ROIC as it has grown since 2017. Given these results, I think it’s fair to say that Yeti is a high return on capital business. What about the returns on incremental invested capital?

Yeti’s returns on incremental invested capital (ROIIC) are shown in the screencap below.

You’ll notice that I put notes in the cells for cumulative dividends and cumulative buybacks. The business paid ~$5 million in dividends between 2017-2019 but have not paid any since so I left the cumulative dividends blank due this being a negligible amount. Regarding buybacks, there were share repurchases of $100 million in Q1 2022. These repurchases were approved during 2022 so they were not included in the calculations above because they are for full fiscal years. They will be included once the 2022 Annual Report is published next spring. Otherwise, Yeti’s ROIIC has been impressive. By my calculations, the business has been compounding its value anywhere from 29-40% since 2017. Its stock price has CAGR’d ~32% since going public which is in line with my calculations.

Risks

The biggest risk I can think of with Yeti is its brand. It even lists the brand as the first risk in the “Risk Factors” section of the 10-K. The business will have to continually evolve its marketing efforts as it grows and increasingly appeals to the masses and away from its core outdoorsy customer and “Yeti Guy”. How its brand equity will be affected by future advertising/marketing/brands schemes is unknowable and can only be assessed after these events happen.

A related risk is product evolution. Yeti has three product lines as of now, but, like its brand, it must continually develop new products in its existing lines and entirely new product categories. The most recent investor presentation, linked here, sheds some light on this risk. Screencaps of slides 6 and 10 are shown below.

The number of “communities” that Yeti reaches and has ambassadors in has swelled from two in 2006 to thirteen today. However, its current products appeal to all its communities but none specifically. Do I think Yeti is trying to say something without saying it in slide 6? Yes. Do I have proof of this? No. It’s just a gut feeling. I wouldn’t be surprised if we started seeing Yeti cutlery for the culinary community or Yeti workout gear for the wellness community in the next few years. The same goes for any other Yeti community. I think the business will start developing community focused products in the future. Slide 10 shows Yeti’s product evolution over the last five years. I posted it to convey that Yeti hasn’t been resting on its laurels and has been proactive with introducing new products which makes me think they’ll continue to do so in the future. Whether the future products will be as successful as those in the past remains to be seen and is a risk that I cannot underwrite.

Yeti has significant manufacturer concentrations. Quoting p. 19 of the 2021 Annual Report, “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 89%, 84%, 75%, 93%, and 92% respectively, of our production volume during 2021. For cargo, two manufacturers accounted for all of the production in 2021. 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 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.” Although these haven’t been detrimental to the business previously, they are risks that I cannot underwrite going forward.

Tailwinds

The business is seeing increased brand awareness in the United States. The percentage of awareness across the country is under 25% in every region except one indicating that there are still large, untapped markets for its products in the United States. The screencap below is taken from slide 9 of the investor presentation linked above.

A related tailwind to the one listed above is that the U.S. market for outdoor recreation products is huge. The Bureau of Economic Analysis estimated that outdoor recreation accounted for 1.8% of GPD in 2020 which equated to $374 billion in spending. The retail trade segment of this market was worth $100 billion. The bureau has not released data for 2021 so this is the most up to date and reliable information that I could find. I found other sources which estimated higher amounts of spend on outdoor recreation, but I felt like using the lowest amount that I came across would be the most conservative way to measure its home market size. A link to the data that I referenced can be found here and here. Given this data and the growth in international sales mentioned in the “Valuation” section, I feel like Yeti has significant growth runways both at home and abroad.

Conclusion

Do I think Yeti is a compounder? Yes. Do I think it’s worth investing in at the current stock price? I think so. Like its products, Yeti’s stock is fully priced, but I’m bullish on its prospects given the risks that it faces going forward and its varying free cash flow. If I were to buy the stock, it would be the most expensive one on a valuation basis that I’ve come across. Unfortunately, I don’t have any disposable income so I can’t buy shares. I’ll tell you what though, I really liked the stock price when it was around $40/share back in late May, but it has rallied almost 25% since then. I’m eager to learn more about the business as time goes on and will watch it like a hawk. I’m also moving near the top of my watch list.

Thanks again as always for reading. If you liked this writeup then please feel free to share it and subscribe!

Please reach out to me at possiblevalueresearch@gmail.com, @PossibleValue on Twitter and @Heshy on MicroCapClub with any comments, concerns or questions. Lastly, don’t forget to tell someone that you love them.

*** Remember that this isn’t investing advice. Consult a trusted financial or investment advisor before making any kind of investment decision. ***

Disclosure: I do not own shares in Yeti.