Q3 2019 Earnings Call
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I'll now turn the conference I'd that she'll Hearts, Tom show, Vice President Investor Relations.
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Good morning, Thanks for joining us to discuss Yeti holdings third quarter 2019 result.
Before we bid we began we would like to remind you that this conference call will include forward looking statements, which are subject to various risks and uncertainties that could cause our actual results to differ materially probably statement.
These statements are detailed in our risk factor discussions that can be found in this mornings press release as well as her filings with the FCC old which can be found on our website at investors got yeti Dot com.
We undertake no obligation to revise or update any forward looking statements or information information.
During our call today, we will reference certain non-GAAP financial information, including adjusted items.
Reconciliations of GAAP to non-GAAP measures as well as a description limitations and rationale for using each measure can be found in the supplemental financial tables included in this mornings press release and in our filings.
We use non-GAAP measures as elite and some of our financial discussion 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 Ryan <unk>, President and CEO of Yeti and Paul Carboni CFO .
Following our prepared remarks, well open the call for your question.
With that I'll turn the call over to Matt.
Thanks, Tom and thanks, everyone for joining us today and happy Halloween.
First off we're pleased to report another strong quarter for Yeti, one that was highlighted by growth across the portfolio and excellent progress against our strategic growth drivers.
Our third quarter results were punctuated by overall revenue growth of 17% with 21% growth in our Drinkware and 13% growth in our coolers in equipment categories.
Our direct to consumer business delivered 31% growth, while wholesale drove 9% growth.
We also continued our trend of posting strong gross margin expansion, which underscores the effectiveness of our strategic initiative.
The investments we've made.
All told these results power, 24% growth in adjusted earnings per share.
When combined with our strong product lineup and overall execution against our strategic growth drivers were confident in raising our full year targets.
Paul will discuss the results and outlook in more detail, but suffice it to say, we're pleased with where the business is nine months into fiscal 2019.
Now, let me provide some updates across our four strategic growth drivers expanding our customer base.
Introducing new products accelerating direct to consumer and international.
As we look at expanding our customer base one of our constant themes is the focus on depth and breadth marketing, including the interplay between brands stories and product stories.
We're hyper focused on deepening the connection within our existing communities, while establishing authentic new communities.
We continue to lean heavily on building strong relationships leveraging the support irrelevant ambassadors rich content endemic media and powerful partnerships.
The Yeti brand was built on the real and the relevant and we believe among our brand fans and those newer to our brand there remains significant growth opportunity and engagement and product expansion.
In late Q3, we released our year end branded product AD campaign. The first episode feature our soft coolers with professional snowboarder.
Robin Van Gene and the second episode highlighted our recently released bags with fly fishing pro Oliver White.
We continue to test the mix, a broad based awareness campaigns and direct consumer engagement activities, including event ambassadors and partnerships.
Our objective is just stope brand passion and are incredibly high 95, plus percent peer to peer referral rate.
Quality of engagement and interaction is a paramount importance to us.
As we look at amplifying, how and where are we speak to our customers are finding balance between art and science that engagement.
We recently selected a new global media agency, which will allow us to leverage increased sophistication and resources to drive brand depth and reach we're also partnering with them from a data analytics perspective.
Leveraging their expertise in tandem with our internal investments and capabilities around customer insights and metrics.
Our focus on finding the right partnerships with also on full display this quarter.
In September we announced our multiyear partnership with the P.J. tour, making yeti the official insulated CCOP and the official insulated cooler of the P.J. tour in PJ Tour champions.
We will have the exclusive right to sell designated product at 32, TPC golf courses as well as product at 12 tour run merchandise menus and signature Cups at 13 tour in tour champions tournaments.
From Green grass, the snow, we expanded our on mountain partnerships and Activations to 10 Mountain resorts. Following the three recent additions of Telluride Snowball and purgatory.
We would be remiss to not acknowledge national breast cancer awareness month, and the amazing efforts of our partners in the fight.
We continue on our third year of support for both casting for recovery and boarding for breast cancer.
These incredible groups partnered with two of our ambassadors Hillary Hutchison and Robin Van gene to bring the joy of the outdoors to the recovery process.
We're honored to stand with Hillary and Robin and these two great organizations.
On product, we had a great flow of new offerings and color throughout the quarter.
Drink, where it was strong across the board, including a very positive response to our strategic seasonal color offerings.
Our drink where it's been a highlight this year is indicative of the growing consumer trend away from single use.
Our latest bottle offering the Rambler junior where the huge success during a period designated as the today show back to school must have.
We're very pleased with how we're positioned and drinkware.
Within coolers equipment color also contributed to strong performance, including the return of charcoal heart coolers late in Q3.
Our latest product in the soft cooler line the Hopper and 30 continues to receive positive accolades from the likes of men's Journal Golf magazine and gear patrol.
We like the early performance here.
Rounding out the cooler side of the business. We also had a strong debut of the Daytrip. Our first insulated lunch back Forbes selected the day trip and its best hiking gear for 2019 list and we see an opportunity to leverage this momentum as a holiday items.
On the equipment side, we launched our two newest styles in the back family the crossroads Tote and backpack.
Customer interest in a category building supported by our recent brand campaign, demonstrating the all day functionality and versatility of our bags.
Well these products are only available at our own direct channels. This is an exciting long term opportunity and natural expansion for the brand and we're excited to build out this family in the future.
These examples showcase the strong product foundation gives us confidence in driving customer engagement throughout the holidays.
In the fourth quarter, we will also debut of Pinnacle Yeti hard cooler product that demonstrates our commitment to push the edges of innovation design and performance.
We look forward to sharing more about this unique addition to our hard cooler family later in the quarter.
Our focus on meeting consumers, where they shop continues to drive results with 31% DTC channel growth this quarter with total DTC mix at 41% of overall sales.
Growth remains balanced across do you see with Yeti dot com corporate sales yeti retail and the Amazon marketplace, all performing and all well positioned for the upcoming holidays.
We're also prepared to better serve our own direct business. This holiday, including the addition of our Salt Lake City, Threepl, which will reduce shipping times to the west coast as well as the recent expansion of our customization capabilities to drive order fulfillment through the gift giving season.
This incremental capacity began ramping in October .
Beyond the online we continue to test and learn from our own yeti retail footprint.
In Charleston, we're encouraged after our first full quarter in the books and are excited about the unique activations at the store such as fly tying competitions and voice or shocking events, we see numerous opportunities to engage both the community and those visiting the low country.
Our Chicago store opened in late September similar to Austin, and Charleston, Chicago, combined local partnerships, including with the Great Lake Alliance and our in store collaboration with local artist Kate. Louis We are similarly enthusiastic about the response in the local community and our early weeks in Chicago.
We have recently announced retail expansion plans here, our home state of Texas, starting with the recent opening up a pop up store at the domain Austin's preeminent shopping destination.
Operating through the holidays. This is a small nimbler footprint.
We're also adding a short term spot next bond with our first Dallas location and Inox Henderson area.
The store will feature a 1700 square foot size and provide a great access point to a vibrant community that aligns well with our brand and bridges us to a longer term location.
Finally on our previously discussed opening in Denver, given the projected timing of this full size store open amidst the holidays, we've shifted our open day to Q1 in favor of focusing on the two temporary locations just discussed.
In addition to the work on our DTC business. We're also focused on delivering an optimal omnichannel experience by evolving and enhancing our wholesale footprint.
First and foremost this means continuing to invest in our great wholesale partners to build deep consistent assortments as well as more informative point of sale.
We know this approach resonates with our customers drives traffic and improves velocity.
As we've said since our IPO last year, we will continue to target new distribution points the support one or many of the following criteria.
Creates a new buying occasion reaches a new consumer.
Or augment or enhances our existing portfolio.
Few examples of the first two criteria that we've discussed in the past include our expansions into Williams Sonoma whole foods and more recently total line.
Each of these destinations brings a customer and buying occasion that complements our historical distribution.
We have taken a thoughtful and measured approach to expansion within each.
With the third criteria Weve worked to align our various wholesale segments over the past four years.
Our leadership positioning with relevant category leaders, such as Dick's sporting goods and broad line sporting goods.
Sorry, I it outdoor bass pro shops, and Capellas in hunt fish, and west Marine and water based activities to name a few strongly complements our independent specialty channels unique power to build deep and authentic customer engagement.
Since 2016.
We have focused on consolidation and strengthening of our wholesale partners during that period on a net basis, we've eliminated nearly 1400 accounts totaling roughly 3000 rooftops.
Well we've enjoyed the success of this strategy, we do continue to see opportunities to round out our current wholesale footprint.
For example, as we look at the large do it yourself home improvement in professional market, we have a longstanding and successful heritage with Ace hardware and other independent specialty as channel.
It is an area of continued investment for us.
Well, we identified with a lack of full reach when considering the high traffic large format DIY and professional stores.
After a strategic evaluation, we targeted Lowe's home improvement as both a strong rounding out within the DIY space in a broader extension with the pro customer for the brand.
We will start a pace rollout program in late 2019 at a couple of hundred doors and based upon our learnings and success continuous store rollout through early 2021.
Our store plan over the next year, plus will be methodical to ensure successor yeti and lows.
Beyond the opportunity to intersect with additional consumers within home improvement, we were attracted to low strong position in pro outdoor and seasonal categories areas that aligned with many of the pursuits that we support as well as a strong collaboration displayed during the planning of this opportunity between our two brands, we're excited to complement our existing home.
No presence with the reach of lows.
Now to our fourth strategic priority International.
We continue to be methodical and the early stages of our global rollout, including a focus on one step distribution and building the brand through a combination of do you see an authentic wholesale accounts.
We were off to a good start in the UK in Europe as we mentioned on last call. We launched our local ecommerce sites in July and if sold yeti products directly and 31 countries across the region to date.
Overall assortment availability continues to grow as we ramp up our regional Threepl.
In addition, we were excited to open our first wholesale account during the quarter with far lows.
Located in the heart of London far Loews has been an outdoor institution for fishing and country sports enthusiasts since 18 40.
It has been granted a royal warrant from his Royal Highness, the Prince of whales for meeting the standards and patronage of the Royal family.
It is a great shop at a fitting launch partner for Yeti.
In Canada, our focus during the quarter centered on growing our wholesale relationships continuing to ramp yeti dot CA and expanding our marketing and PR.
These efforts to tighten our connection with the Canadian consumer will continue to support and unlock our growth across the country.
Australia continue to seek fantastic results and we were pleased to officially entered New Zealand during the quarter through a combination of our own ecommerce site and a local dealer network.
Complementing this new Zealand launch the South pilot it will be the story line of our upcoming Yeti dispatch Magna log.
The Dispatchable land and 1.5 million homes in the us in November .
Deal independent Mises adventure like no other and we were able to bring to life a small part of it through stories of snowboarding surfing and native may already cuisine.
This showcases the intersection of the lifestyles and experienced of our Yeti ambassadors and friends in a way you would expect from us.
Looking across our four growth drivers. We're excited about the excellent progress we continue to make to reach consumers and meaningful ways and ultimately to deliver long term sustainable growth.
Our leadership team remains focused on what we can control being thoughtful and disciplined in our strategy and action.
This includes our approach the terrorists, where we have now been actively mitigating the fluid scenarios across our product portfolio for the last four quarters.
Paul will provide a few more details on our positioning into 2020, but we're confident in the multiple levers that we will use to mitigate tariff and support our growth.
In summary, we remain energized by the ongoing efforts of our employees, who have been instrumental in driving our strong performance year to date and positioning us to win during the holiday season ahead.
I want to thank our customers and partners, who continue to stope the brand and our collective success.
With that ill hand, the call to Paul to review, our financial results and updated outlook.
Thanks, Matt and good morning, everyone I'll begin with an overview of our third quarter results followed by updates to our fiscal 2019 full year outlook in a few thoughts on how we're positioned with tariffs as we look beyond this year.
During the third quarter net sales increased 17% to 229.1 million compared to 196.1 million in the year ago period.
As expected growth in the quarter accelerated from the first half of the year driven in part by our new product offerings.
We're pleased with both the product demand and our overall execution during the quarter.
By channel direct to consumer net sales for the quarter increased 31% to 92.9 million compared to 71.2 million in the same period last year.
Performance remained strong across our three largest direct channels of yeti dot com Amazon marketplace in corporate sales.
We also had strong performance in our two primary product categories with Drinkware, leading the way.
Wholesale net sales for the quarter increased 9% to 136.2 million compared to $125 million and the year ago period with strong performance delivered in both product categories.
We continue to be pleased with the overall health and sell through rates across our wholesale channel.
From a geographical standpoint, our international business grew 58% for the quarter.
Continuing to show strong progress, though off a low base.
And on a year to date basis international represented 4% of our net sales.
By category third quarter, Drinkware net sales increased 21% to 126.4 million compared to 104 million in the prior year quarter.
As Matt mentioned.
Customers responded to both the introduction of our new color ways as well as deeper penetration of these colors across the drinkware portfolio.
The expanded lineup of Drinkware like the Rambler Junior kids bottle resonated with customers and we remain encouraged by the demand we are seeing for customization as our capacity expansion ramps up.
Crews and equipment net sales increased 13% to 97.8 million compared to $86.7 million during the same period last year.
Led by strong performance in soft coolers, including the next generation Hopper and 30 and the day trip lunch bags.
Gross profit increased 23% to 120.1 million or 52.4% of net sales.
Compared to 97.5 million or 49.7% in net sales during the same period last year.
The 270 basis point year over year gross margin expansion.
Was primarily driven by a positive 240 basis point impact from cost improvements.
Led by a drinkware category.
As well as a positive 210 basis point impact from channel mix.
Led by the increase mix of our higher margin direct to consumer net sales.
These gains were partially offset by a 150 basis point impact from higher tariffs.
Adjusted EPS DNA expenses for the third quarter were 79.7 million was 34.8% of net sales.
As compared to 65.9 million or 33.6% of net sales in the same period last year.
Selling expenses, Deleveraged 190 basis points, driven primarily to higher variable expenses tied to our faster growing DTC business, including online marketplace fees and outbound freight.
As well as higher marketing expenses.
Offsetting these increases DNA expenses leveraged 70 basis points, primarily driven by lower professional fees and other cost savings.
Adjusted operating income increased 27% to 40.4 million or 17.6% of net sales.
Compared to $31.7 million or 16.2% of net sales during the same period last year.
Our effective tax rate was 24.9% during the quarter compared to 15.5% in last year's third quarter in roughly in line with our full year outlook.
Adjusted net income grew 29% to 26.1 million or 30 cents per diluted share compared to adjusted net income of 20.2 million or 24 cents per diluted share last year.
Adjusted EBITDA increased 24% to 47.5 million% to 20.7% of net sales.
Compared to 38.4 million or 19.6% of net sales and the same quarter last year.
Now turning to our balance sheet.
As of September 20, Eightth 2019, we had cash of 34.6 million compared to 52.1 million in the year ago period.
We ended the quarter with 209.2 million in inventory compared to 157.7 million last year.
Similar to the actions we began in the second quarter.
The 33% increase in inventory for the period largely represented this strategic buildup of Drinkware inventory.
In advance of list for tariffs.
Which the vast majority of these tariffs are planned to be implemented on December 15th.
This drinkware investment included both inline colors and core Drinkware product.
As well as the earlier receipt of some spring 2020 seasonal colors.
Excluding this investment inventory growth remains below our reported sales growth for the third quarter.
We continue to see a healthy overall inventory position for the company.
We remain well positioned to support our new product introductions and related growth expectations for the balance of the year and as we enter 2020.
We ended the quarter with total debt, excluding unamortized deferred financing fees of 298 million.
Appear to 394 million in last year's third quarter.
During the quarter, we may debt repayments of 11.1 million using cash on hand.
Including our cash balance the ratio of total net debt to adjusted EBITDA for the trailing 12 months improved to 1.5 times compared to 2.6 times in the prior year quarter.
Now turning to our updated 2019 full year outlook.
We are pleased to be able to once again raise our overall full year net sales and earnings outlook.
We now expect full year 2019, net sales to increase between 14.5 and 15%.
This implies a strong fourth quarter with similar dynamics as year to date results across product categories and channel mix.
As mentioned last quarter, we remain bullish on both our product lineup as well as our ability to fill fulfilled growing customization demand during the holidays with our recent investment in expanding our capacity.
Importantly, this guidance does not include our initial shipments to the couple of hundred lows locations. Later this quarter as we begin our strategic rollout.
We feel it's prudent to give a more consistent measure of our financial trends relative to our year to date outlook.
On the margin side, we now expect reported GAAP operating income margins between 14, and 14.2% of net sales, resulting margin expansion of 90 to 110 basis points versus last year.
Adjusted operating margin is now expected to be between 16.8, and 17% of net sales, reflecting margin expansion of 90 to 110 basis points versus the prior year period.
Higher adjusted operating margin continues to be supported by gross margin expansion.
Largely driven by lower product costs, and the favorable shift and channel mix to our direct to consumer business.
Partially offsetting these gross margin gains we continue to expect full year adjusted SGN a de leverage.
Led by higher marketing investments in variable costs associated with our faster growing direct to consumer channel.
Adjusted EBITDA is now expected to be between 178.2 million to $181.2 million.
Reflecting growth of 20% to 22% and margin expansion of 90 to 110 basis points.
Based on diluted weighted shares outstanding of approximately $86.3 million.
GAAP earnings per diluted share and now expected to be between 90 and 92 cents.
Reflecting a 29% to 33% year over year growth.
We expect adjusted earnings per diluted share to be between a $1.12 and $1.14.
Reflecting 23% to 26% year over year growth.
We now expect capital expenditures to be between 30 and $35 million.
Below our prior forecast of $35 million to $40 million when compared to $21 million in fiscal 2018.
We continue to expect the ratio of net debt to adjusted EBITDA to be approximately one times at the end of 2019.
Before turning the call over for questions I wanted to provide a recap of how we're positioned in regards to tariffs as we move into 2020.
As you know we've been working through various tariff impacts for over a year now starting with our list three efforts last fall.
At that time, we also began developing a similar mitigation playbook around at Drinkware business.
In addition to our ongoing costing initiatives that have resulted in higher drink where margins this year.
Our tariff playbook includes cost sharing negotiations in further reductions in non product Cogs like marketing inserts and packaging.
Other mitigation levers include FX tailwind.
The ability to pre position inventory, which we are doing now.
And finally, the ability to take pricing actions as we look across the entire portfolio going forward.
Longer term, we're also working with our suppliers to explore both efficiency and other operational improvements and how each can play into the supply chain equation for our brand.
With nearly all of our Drinkware falling into list for B.
Which is proposed to be in effect on December 15th.
We expect essentially no PNM will impact this year.
As I mentioned, we have and continue to strategically prepositioned drink, where inventory as a tariff mitigation lever, which is expected to result in year end inventory growth in the same range as we have experienced at the end of the third quarter.
We expect to return to more normalized levels throughout the first half of 2020.
Regarding the impact in fiscal 2020.
We will give specific quantitative commentary on our fourth quarter earnings call.
However, please note that our strategic inventory positioning as we exit 2019 in the average costing of inventory will help mitigate the financial impact of tariffs in fiscal 2020.
As Matt mentioned, we are focused on the execution of our long term strategy.
Not only as we manage through this dynamic environment, but also as we continue to support the tremendous opportunities. We see ahead for this brand.
And with that we will now open the call for questions.
Thank you.
Time will be conducting a question answer session.
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One moment, please folly poll for questions.
Thank you. Your first question comes from Randy Konik Jefferies.
Please.
Yeah. Thanks, good morning, guys.
Quick question.
You had some encouraging commentary around response to.
Ian New products that you've launched recently.
Both in type of product and color.
Well, yes, any kind of granularity or perspective on the amount of saw what the proportion is of of sales coming from new products and how that's changed or not changed over the recent past just trying to get some perspective on.
Seeing new products as an additional demand catalyst for that for the brand.
Great. Thanks, Thanks, Randy Good morning, the yes, we think about our product portfolio in the evolution. We've undergone the last few years in the in the business one of things we focused on is continuing to drive our historical products.
Driving vitality in those through color, we mention color a number of times. So color continues to be a meaningful part of the driver in that mix at both the inline colors that we've added over the last few years and then the seasonal and some of the shorter one a shorter run excuse me color drops we've done as we think about new products.
We've talked consistently about new new product families being building into the growth in those and not looking to launch blockbuster products that need to be the need be comped year. After year. So we like the growth as we expand within product families at as we expand in those product categories. The growth in contribution we're seeing.
But as we think about our coolers equipment category. For example, every sub family within our coolers and equipment category was a growth driver in the third quarter and so we like the broad based response, we're getting from both our existing customers in new consumers.
That's very helpful. And then one thing that seems to be very noticeable of late is more call out or attention.
To the custom opportunity on the custom.
Offering.
The brand provides to consumers and it seems like a logical way to kind of drive gifting, whether it's Christmas father's day mother's day graduation et cetera.
Can you give us some perspective on how big that businesses and and more importantly, whats the capabilities and capacity the business in the turnaround times that you're you're improving upon where they are today, where they've been 'cause. It just seems like an area of the business that will continue to kind of drives brand affinity and love going forward just curious there.
Yes, thanks, Randy it is.
We really like our customization and personalization business and over the last few years, we've been continuing to invest behind driving up capacity there as we talked in the past historically about this time of year, we're running out of capacity for the holidays and we turned to just order fulfillment.
What we what we particularly like about is it gives a whether it's a consumer or a corporate customer a way to really personalize yeti products. So you take something that's a high highly valued purchase and add up at a personalization element to it.
We expected to continue to be a growth driver for us. It's a it's a meaningful part of our DTC business, we haven't broken out the size of it.
But we like we like the opportunities. The reason we made the investment in the additional capacity going into going into Q4. This year and we'll continue to do that and we're driving capacity not only through investment but through process improvement.
So far logistics as we talked about the Salt Lake City, Threepl, some things to be able to get product to consumers.
More quickly and keep those lead times down. So we are open for the holidays right now.
Awesome. Thanks, a lot thanks guys.
Thank you Sir your next question comes from patient Benedict Baird go ahead. Please.
Hey, good morning, guys.
My first question.
Matt maybe talk about.
The assortment that you're planning to go into lows with.
At least initially in how you kind of see that.
Maybe evolving that's my first question.
Yes, Peter good morning, the as we think about all of our wholesale partners.
We look to provide the assortment that we think makes the most sense for the way they are displaying the product their store footprint and the consumer that comes comes through the door.
That will be very similar at Lowe's. There are there are products within our portfolio that we think make make complete sense to the opportunity with the pro consumer that's coming in there or the pro user and the consumer.
As we think about our channels, we don't overly assort across our wholesale channels, but there are certain products that make more sense in the sporting goods channel than than they would end the DIY home improvement and so we'll be thoughtful about how we placed the products in there, but there will be a core assortment. We continue to believe in multi category.
Multi product family at all our retail point of sale.
Okay. Thanks for that and then just tell me the international.
Some of the cost opportunities there that Paul is talking about the last one kind of the longer term efficiencies and what not can you talk about.
Maybe where the where your international supply chain is right now how your fulfilling those.
Those those that demand and how that might change over the next year or two and I'm asking because im curious about the longer term gross margin opportunity here I mean your.
Your plan has been kind of 50% to 52% I'm just curious if there's any limiting factors that prevent you from potentially going beyond the high end to that as we think out over the next few years. Thank you.
Yes, Peter I'll take the front end of that and then have Paul Paul step in and I want to.
Separate the international supply chain, the inbound part of that versus versus the outbound.
Or fulfillment to customers piece, one of the things on the outbound side, we announced that we added a threepl partner in the Netherlands to be able to support our growth aspirations in the UK and in Europe . We've added a small threepl in New Zealand to support the entry into that market.
But that worse in conjunction with a threepl partner, we Havent, Australia to create better outbound deficiency.
We also expanded the capabilities in the size of our Threepl in Canada to support the growth in Canada.
We're also looking at the inbound components of our of our Threepl and as products leave our global factories, whether those factories are in the U.S. or were those factories are around the globe, how we optimize good movement to make sure we're putting it into market as efficiently as possible. So our team continues to focus on the.
Operational excellence elements of that there's work to do as a business that a couple of years ago had one threepl in Dallas, Texas and supported our global our global needs out of there too to a multi kind of nodal threepl.
Good morning, Peter So overall, we are very pleased with our performance in Q3 with gross margin expanding 270 basis points year to date were at plus we're at 51% and entering our historically strongest quarter.
And we believe this is a measure of strength when evaluating the health of the brand.
As you mentioned, our long term target of 50 to 52.
We're bumping up against that and again year to date slightly or in the quarter slightly above that there are no structural limitations on margin as the combination of ongoing cost improvements in DTC mix shift.
Can support further expansion terrorists remain a bit of a moving target as you know.
And we are mitigating those cost with the series of actions as we've talked about and I talked about in my prepared remarks. So as we think about 2020, we'll give more color at the end of our fourth quarter or with our fourth quarter earnings call, but there is nothing structurally in the business that says.
We get capped at 52%, we believe ongoing cost improvements ongoing DTC mix offset by some tariff pressure on is the mix as we go into next year, but we feel really good about expanding gross margins.
Great. Thanks, so much guys.
Thank you Sir your next question comes from Sharon Subsea William Blair. Please go ahead. Please.
Hi, good morning.
Paul I just wanted to clarify that I heard something correctly did you mention that guidance for this year does not include any of the lows.
Initial infill and if it doesn't could you give us some kind of color on what that infill might look like in terms of revenue profit and then secondarily.
Just a question that international because that's a little surprise to see it slow in the quarter in terms of the pace of growth. Other obviously still growing really strongly I don't know that was something that had to do with the timing of different launches that maybe if you can touch on that.
Sure. Good morning, So let me reiterate lowes is not included in our updated full year guidance and we did that because we wanted to provide all of you and investors with a comparable outlook as we've gone through the year. So that's number one.
To Dimensionalize that we are finalizing rollout plans. We've said, it's a couple of hundred stores, but we are finalizing store rollout plans less so the merchandise I think we've locked on that in that but really the size of and the exact number of the stores so that will be.
In addition to our outlook can't Dimensionalize that today.
But certainly as we go through and as we talked in the fourth quarter call will help you understand that but again, it's not included in 14.5% to 15% topline growth you asked about profitability, it's similar to our wholesale business. So.
Lows well.
Maintain map pricing and they fall into a normal cadence of wholesale sales so theres no.
Difference in that than the rest of our wholesale business.
On International I'll touch on and then Matt May want to speak a little bit more it's really Sharon just timing throughout the throughout the year in the quarters we had.
International businesses, driven by Canada today, we had a big Q2, it's just really the lumpiness of.
Given quarter year to date, we are plus 4% as I mentioned overall international was up 58% in the quarter, although awful lot low base, but it's really just the lumpiness of.
Any given quarter.
That's helpful and just one other question I know you mentioned for the full year gross margin expansion.
Partly offset by the SGN high growth is that a similar story for the fourth quarter as well I mean, you haven't really really tough year ago gross margin comparison in the fourth quarters I don't know if we should it be expecting that too.
To be a positive in this quarter or maybe a slight negative.
So we continue.
As we look in the fourth quarter to expect gross margin improvement on cost improvements and DTC mix shift to offset by tariffs. We believe overall it will be a positive for the quarter to your direct question and then offset by some ASG in a de leverage both.
In marketing and some of the variable expenses with the faster growing direct to consumer business.
Okay. Thank you very much.
Thank you Sir your next question comes from Robbie I am.
Bank of America go ahead. Please.
Good morning, guys.
I had a couple of follow up questions I guess the.
The first one can can you can you remind us the theme I know, you're not going to give us tariff guidance for 2020 today, but can you just remind us the the strategy for sourcing long term, assuming stare stay in place, Sir and Sir what percent of your sourcing is in China, and then do you expect to move a lot.
One out of China. During 2020 can you just remind us what the strategy is in general.
Yes, Matt ill take the beginning of that and then let Paul Paul weigh in as we think about our strategy going back a year plus has has remained the same regardless of what products were either included or or rumored or.
Supposed to be within.
Within the tariff, which is we first and foremost focus on our continued cost negotiation. We also work with our suppliers.
In the cases, where where they are tariff on on a cost sharing program, we continue to drive and focus on driving efficiency and productivity within our supply chain.
And and then in certain cases, we look at the relocation of that supply chain. Obviously, we've communicated consistently that are soft coolers and bags. We made the decision to move that supply chain out of China.
What I will say about moving a supply chain as we're going to make things make decisions that we believe or in the best long term strategic interest of yet.
The short term moves.
Have a significant amount of complexity to them and potential risk and we think there's a lot of ways across those levers to to mitigate and manage tariffs and as I said on the prepared remarks, the fluid tariff environment and then the last lever, which we did not use in our salt coolers and bags was pricing.
And as we look at.
Contemplating consumer pricing or channel pricing.
We look across the entirety of our portfolio and not necessarily just the things that may be tariffs. So we have by the end of this year will have successfully moved all of our soft coolers and bags.
Materially out of China, and so we'll have successfully executed the strategy that we communicated a year ago.
On Drinkware Drinkware, we'll look at differently.
There is a very well established in large supply chain in China.
There isn't as ready a global supply chain outside of China for those products.
So that lever the up moving maybe a little lower with Drinkware, but when we look across the other levers we have it gives us it gives us confidence that we can continue to execute and drive and support the growth of the business.
And you know unrelated to drink where in just on the cost improvements that are driving your great gross margin expansion. What what are you doing can you give us more color on what you're doing in art is there any deviation now I think drinkware historically had similar gross margins to coolers.
He is is that changing now is our drinkware margins moving up pretty dramatically here.
So let me start with your last question on Threeq, where margins are moving up above cool with an equipment. So they are about 500 basis points better than cool within equipment in just four.
To make sure Theres no confusion cooler than equipment have not gone down Drinkware margins have just increased to your point most of the cost improvement have been and on the Drinkware category I would say the cost improvements.
Fall into a couple of buckets. The first is and we've talked about this of having should cost models and when our supply chain team negotiate with our manufacturing partners. They know what an R. 20, Rambler should cost income from a position of information.
And are able to negotiate the second piece of that.
As.
The increase in the volume right, so drinkware being up 21% in the third quarter. As an example, so the sheer volume that we're driving which allows the contract manufacturers to spread or get efficiencies on their fixed cost.
Is the second and then the third and this is is I talked about this in my prepared remarks more as we think about 2020, just any efficiency gains and.
Things of that nature that the supply chain team works in conjunction with our manufacturing partners to take cost out of the product from efficiency and things of that nature.
One thing Robbie I'd add as we're not taking.
Any quality or any performance out of the product to drive costs, we're doing all this around.
Building the same high quality products at a more efficient and effective manner.
That's that's really helpful. One last quick question on the you're encouraged with Charleston in Chicago.
You know with the stores themselves can you give us any color what happens to the dot com business in the ZIP codes that those stores are opened.
What weve and it's.
I'll caveat this with its early early days in Charleston in very early days Inn in Chicago, what we have seen is really positive really positive as it relates to our ecommerce.
Com business.
I would say those stores serve a number purposes, and we said at the very beginning.
We plan to and intend to open profitable stores, they're not they're not a marketing expense. So we expect them to as a standalone contribute to the overall yeti.
But what they do is they provide a real intangible embodiment of the product portfolio that consumers can come in and see so even if the transaction doesn't happen in a moment.
We do like we do like what we're seeing from an e-commerce perspective, when we like what we're seeing from a introducing consumers to products in the portfolio that they may not have seen before we've also really focused in the stores and continue to optimize.
Both how we engage with consumers and introduce them to the the ship to anywhere concept from the store so even if they're in the store we have the ability to fulfill.
To wherever they are from weather local or visiting.
That sounds great. Thanks, so much guys. Thanks Robbie.
Thank you. Your next question comes from Kimberly Greenberger go ahead. Please.
Great. Thank you so much good morning.
I wanted to just asked about the pop up shop strategy.
And I think Matt you said, you're working on a full time spot in Dallas.
I'm wondering how pop up.
Stores fit into your long term DTC strategy are you looking at these it's sort of holidays specific opportunities or do you see additional opportunities in the pop up shop side.
The equation.
Good morning, Kimberly you know, we actually we look at the.
Pop ups as as part of our overall retail strategy as we as we test into markets and we test into locations, we like the pop up concept from a understanding the local market.
So in Austin, It is truly a holiday pop up.
But it did a then location that we have we have thoughts and an eye towards long term in Dallas, It's a little bit different Dallas, it's it's a multiyear temporary location.
As the area that we moved into in Dallas is undergoing a significant transformation.
At a number of a number of well known brands and retailers are moving around within this within this district and we have our eye on a couple locations that they will come available as that as that transformation continues and so it's really different flavors of things, but what we like about this pop up or temporary space is a very effective way of getting into a.
Market at a cost effective way.
Is anyone who would visit the Austin domain or visit our Dallas.
Location will see it still feels very yeti.
It feels like it fits within our our portfolio and our design. So we're excited to see how this how this works and and use it as part of our ongoing retail strategy.
Great and then I just wanted to have.
Just had a follow up on your operating margin opportunity.
It sounds like you're confident operating margin can continue to March higher from here.
In terms of GAAP EBIT margin it looks like hitting around 14%. This year as you look out over the next let's say three years or so.
What are your long term aspirations for that operating margin in the key levers to get you there.
Good morning, what we've talked about long term is adjusted EBITDA margins as we.
Launch the IPO saw use that framework and we've talked about 19% to 22% will end close to that at the end of.
This year.
We've talked about that SGN, a de leveraged driven by.
As we continue this march of between 10, and 15% topline growth so.
In the near term 2019 2000.
2020.
I would say the margin expansion at the bottom line is driven by gross margin offset by some G and H deleverage and then further out it is gross margin expansion with.
Some of Gionee.
Leveraged, but again the variable cost of that faster growing direct to consumer business just by the math of that growing faster, we'll continue to deleverage and we're happy with that.
And as we are with.
This quarter's 31% growth in direct to consumer.
Terrific. Thanks, so much.
Thank you.
Thank you. Your next question comes from Jim Duffy thoughtful go ahead. Please.
Thank you good morning.
Matt I was hoping you could comment just on the state of channel inventories ahead of holiday and maybe give us a preview of marketing and promotional strategies into holiday.
Occasions, and seasons say similar to as we walked into our Q2 buying with moms dads and grads.
Were similarly prepared and positioned for year end, we feel good about where channel inventory is.
We continue to work with our great wholesale partners on making sure that the right assortment is there at available and on the floor, we know that when our products are well as sorted out front and and while merchandised that they perform well through these to these holiday season. So we feel we show people really good about where.
They are knows we think about.
Largely what we would expect is it will be in line with with prior year, what you'll see from yeti directly our dotcom and our direct properties is that we are we're very limited in promotional activity. During the holidays, we tend to do things around around the big gift, giving seasons that are complimentary to our products as.
You've seen our past things like gift foot purchases so.
We don't tend to use price as a promotional lever through our own direct properties and I think the channel will be very similar to what we've seen through through prior giftgiving seasons.
Yes.
Exactly Jim I mean, that's that's why we're doing it we picked Austin and Dallas for a couple of reasons.
They also logistically gave us a chance to test and learn into the difference in supporting smaller format stores and pop ups dallas's close to our Threepl in Dallas and Austin, obviously is close to.
And is Kimberly asked pop up a wide definition for us pop up can be for a number of months and Dallas case, it's more of a temporary location, but it gives us a chance to lean into a market and learn we absolutely see those opportunities as we move outside of outside of these first two in Texas into.
Into more exploratory markets or newer newer markets to yet in the brands. So.
We like the speed to set up we like the cost we like the muscle we're building operationally the team to support it.
And I think in the past, you've even had mobile locations around brand relevant events has proven to be.
Effective strategy the strategy the merits more capital.
Those things as both marketing and also the retail opportunity we have one coming up with the.
National finals Rodeo in Las Vegas in December they have an event called Callaway Christmas it's incredible.
An incredible event, we show up every year create a in that case, a true pop up location will continue to do more and more of that I think as this.
In a small away the last last few years and we formalized it didnt take on the bigger opportunity. So it really is that range of showing up at events, where we can directly engage with consumers and then showing up in locations, where we're testing into a market.
Great last one from me, Paul leverage ratio coming down nicely.
As a new public company, we have these conversations with our board on optimal capital structure and what were focused on as a management team of using excess cash flow to drive shareholder returns and be that in many different levers that are out there right now were phone.
Focused on Delevering the balance sheet to.
To drive that but as we continue our.
Thanks.
Thinking your next question comes from Alexandra Walter Goldman Sachs Go ahead. Please.
Good morning, guys. Thanks, so much for taking the question I think you mentioned in the prepared remarks that you're planning to launching new products in the Hod coolers category in the fourth quarter I Wonder if you could share a little bit more color on that where it might come from a price point perspective is this included.
In the guided gross rate for the fourth quarter.
Sure. So let me start with.
I'm going to let Matt do the fun stuff of to talk talk of give you some.
Pieces of it or.
At year, what your thoughts on this but it is included in the fourth quarter or the full year.
Outlook It is a limited.
Release, and it will be.
Hopefully very scarce.
So it's not to our business in the fourth quarter. The product, we're very very excited about and again, Matt talked about that but relative to our fourth quarter. It's immaterial at that sense from a financial sense I would say it's included in what we shared this morning.
So Alex Paul Paul gave me a great set up for so we're not actually getting.
What I would say what I would say is.
Just around innovation technology and design.
Incredible melding of the technology across our product portfolio that we think really both both shows what we can do from a design perspective, and also creates incredible value for the consumer.
I'm, sorry, clearly liquid tearing more on that and maybe one more for me here you mentioned in one of the tax mitigation strategies is it pricing actions I believe that you said that you'd consider that across the entirety of the portfolio and can you spend a little bit more time talking about how you're thinking about where it makes it makes sense to increase prices.
And whether there are implications from what you said in a competitive.
From a competitive standpoint, yes, warranty expecting similar types of actions across the competitive set in different categories.
Yes, I think as we as we think about pricing.
We would get to pricing as the last lever, we I, we believe and we have been consistent for for years and believing there's a lot of value to consistent pricing to the consumer.
I believe that if the tariff list for be goes into effect I think there's going be a lot of pricing noise and a lot of pricing pressure in the channel from.
Across many many categories unrelated to yeti. So we want to be we always endeavor to be a little bit of calm in the storm from a from a pricing perspective.
That said when we think about all the levers at chipping away at any tariff risk, including the strategic positioning of our inventory as we think about the efficiencies will drive with our partners as we think about the cost negotiations once we knock all those things down and if theres a remainder that we need to address we expect that to.
A relatively a relatively.
Manageable thing from a pricing perspective that what I say across the portfolio. We may have select products that we bring to market at a slightly different place. We may have we may look at some legacy products and some things we can do around that but once we knocked down those first few things as it relates the mitigation.
We believe we'll be at a manageable price or no price situation.
Front end. Thanks, so much guys know best.
Thank you see our final question will come from Jay.
Al today.
As we get through and were new we've been open with our our pop up in Austin for a handful days and we'll open officially opened in Dallas here in the next couple of days.
Based on the performance of those stores based on the the as we build up our operational support for them as we drive awareness and demand creation in those markets it could affect the four to six.
To the positive we could we could potentially do accelerate some of that.
That said, we're sticking to our four to six for now because we think it's the right number for what we can manage as we as we rollout will end well in this year and the and the five to six store range, including those pop ups, which is a little ahead of the numbers that we thought we'd from us rooftop perspective, we thought we'd be in in 2019.
Got it Okay. Just secondly in terms of the wholesale door count in the U.S.
Relatively flat were stable for sometime now that this morning, you talked about Williams Sonoma whole foods and that will those sort of being a part of that how should we think about the U.S. wholesale door count going forward is that something where you see potential growth.
And the path you talked about partnering with retailers that embraced the entire lineup has that strategy can you talk a little bit.
Yeah, I'll take the second part of that strategy has not changed.
As I said earlier, we want people, who are multi category carriers. We know our product performs when you have a breadth of the category in a breadth of the assortment that doesn't mean everything goes to everybody and that doesn't mean that aren't specific things underneath those categories that may be more relevant in one type of door versus.
As we think about.
The additional wholesale doors, all I'll point back to my comments in the prepared remarks over the last three years, we've eliminated 1400 accounts and roughly 3000 rooftops net of net of the additions.
Prior to the announcement of low this morning, and that's that's early the other thing I would say is that when we think about full rollout of the national partner the last national partner that we fully rolled out was in 2012. So seven years seven years ago was the last.
Full rollout of national partner, and I think the takeaway from that as we show incredibly disciplined incredible disciplined and we take time to make sure it's going to work for our partners and for us and for the composition of our wholesale account and then I think what you would expect from US from from Lowes is that we're going to take that same measured and paced approach and.
They've been they've been a great a great early early partners Weve as we plan to us.
Okay, great. Thank you guys.
Thanks, Keith we have reached the end of ask question answer session and I will now turn the call I have a too much for closing remarks.
Thank you ill wrap with a quick we're very pleased with our first year as a public company. Thank you for joining US today once again happy Halloween, we look forward to speaking during our fourth quarter call.
This concludes today's conference.