Q4 2019 Earnings Call
Greetings and welcome to the Yeti fourth quarter 2019 earnings Conference call.
At this time, all participants R&D listen only mode. A question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded I would now like turn the conference over to your host Mr., Tom Shaw Vice President of Investor Relations. Please go ahead Sir.
Good morning, and thanks for joining us to discuss Yeti holdings fourth quarter and full year 2019 result.
Before we began we 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 from these statements.
These statements are detailed in our risk factor discussions that can be found in this mornings press release as well as our filings with the FCC all of which can be found on our website at investors Dot Yeti dotcom.
We undertake no obligation to revise or update any forward looking statements or information.
During our call today, we'll be discussing getty's adjusted EBITDA and certain other non-GAAP measures pertaining to complete the fiscal periods and 2020 outlook.
Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the press release issued this morning as well as in the supplemental reconciliation both of which are available any investor or less relations section of the yeti website.
We use non-GAAP measures that is a lead at some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results for business.
Today's call will be led by my right, just president CEO of Yeti, and Paul Carbone <unk> CFO.
Following our prepared remarks, we'll open the call for your questions what that I'll turn the call over to Matt.
Thanks, Tom and good morning.
Pleased to report a great fourth quarter holiday season, and year for Yeti with exceptional revenue growth of 23% during the quarter and full year revenue growth of 17% customers continue to embrace the Getty brand and our innovation.
In the quarter, we show the strength of our omni channel efforts with a strong performance in each of our channels, including our wholesale partners.
In our direct channels, we delivered 35% growth, reaching 50% of our mix during the period highlighted by strengthening customer acquisition repeat purchase and with both consumer and corporate customization.
For the full year DDC grew 34% to reach 42% of total sales, marking a meaningful evolution from a 10% next three years ago.
Our national regional and specialty in a pet wholesale partners grew 14% for the quarter and 7% for full year capping another strong year in wholesale.
Both our product categories drove growth in the quarter and throughout 2019.
Drinkware grew 34% in the quarter and 24% during 2019, what coolers equipment delivered double digit sales growth of 12% for the quarter and 11% for the full year.
Along with tremendous topline momentum we continue to focus on high quality revenue as we delivered a record 54.5% gross margin for the quarter and 52% for the full year.
These results drove adjusted earnings per share growth of 29% and 32% for the quarter and year, respectively. Paul will discuss our results in more detail in his remarks.
The financial performance achieved in 2019 was the result of ongoing progress against our four strategic growth drivers consisting of expanding our customer base, introducing new products omni channel growth and international.
Conviction around these growth drivers remains high and we'll continue to lead with these initiatives as we progressed through 2020.
We've made significant progress expanding our brand reach over the past few years, leveraging our strong heritage while continuing to evolve many other ways, we engage consumers.
Our 2019 brand efforts culminated in a multi pronged marketing program during the quarter. This started with the distribution November of our Yeti dispatch Magna log to roughly 1.5 million U.S. homes, highlighting the range of the yeti product portfolio and giving a first look at our new Yeti V series hard cooler.
This is our fifth Magal log and we continue to be very pleased with the results, we are seeing from existing customers and prospects, including the trends and purchase mix of newer innovation and product families.
In the quarter. We also proactively messages are customization capabilities contributing to strong growth in Q4.
We debuted to product led AD campaigns on TV and digital the aired through the quarter and we delivered our holiday launch of for the places we call home National TV and digital campaign in December finally, we leveraged the elements a family friends and togetherness to drive our gather route holiday gift, giving campaign, highlighting the seasonal moments of gathering and show.
Sorry.
In addition to these brand awareness programs. We also had several notable call outs and our expanding ambassador roster and communities.
Recently added Pitmaster, Matt Horn was named a rising star shocked by the San Francisco Chronicle and they ended expected to open his hotly anticipated horn barbecue in West Oakland, California in spring 2020.
Also on the barbecue side Pitmaster Travis Clark with his Clark crew barbecue team won the Jack Daniels World Championship Invitational barbecue competition in October beating out a field of close to 100 international team landing the Grand champion title.
Surfing Ambassador John John Florence overcame his knee injury to compete in December and tight masters on the north shore of Wahoo, capturing and dramatic fashion a final spot on the inaugural U.S. Olympic surfing team as a sport makes its Olympic debut this summer in Tokyo.
The games will also include three disciplines and rock climbing and we're excited to have announced a broad partnership with USA climbing as their official sustainability partner and his title sponsor of the Bouldering Open National Championship showcased on U.S.P. in late January in early this month.
More recently, we added our first skate ambassador with the addition of renowned skater Jeff Rally.
Well its reputation the skate world is well known Jeff's off season passion as a hunting guide for desert Big aren't cheap is emblematic of the crossover connection we seek and our relationships and communities.
These ambassador and community relationships continue to be central to our brand evolution.
As we look at 2020 and think about brand reach will continue to balance how we connect to our heritage also pushing into new pursuits in geographies.
This approach was evident last month as we kicked off our 12 City 2020 Yeti International film Tour. Our first stop in Denver debuted to a sellout crowd of over 1600 and included seven previously unreleased films.
For the first time the tour all make to stop it internationally in Toronto, Canada in Melbourne, Australia.
Most importantly, the proceeds from the entire tour will go towards incredible organizations focused on conservation and disaster relief.
In addition earlier this week, we are proud to announce yet at the founding partner and official Jersey sponsor of the MLS is often FC.
We're also honored to serve as a presenting sponsor of Austin FC sustainability efforts.
Austin NFC is a 27 club and major League soccer and we're excited to have our branded the centerpiece of the black and Green kit starting in their inaugural 2021 season.
This was a unique chance to support the Austin community, which has met so much to us since our founding here in 2006.
This leads to our second growth driver introducing new products. The introduction of a number of new products in the fall of 2019, coupled with the ongoing momentum of key legacy products injected additional excitement into the 2019 holiday offering.
We advanced innovation and performance in hard coolers with a limited launch of the Eddie V's series.
Combining two yeti technologies and designs for the first time, the cold holding power of our Rambler drink where in our iconic tundra cooler. We we have matched unparallel performance with a classic stainless steel look the Eddie V's series was one of 16 products to make the gear junkie gear of the year list for 2019.
And we're excited to tell them more fulsome story around the product and technology as we move deeper in 2020.
Strategic color drops continued to be an important element of our playbook with our holiday black on Black collection for the Hopper flip 12, soft cooler and Camino carry all back.
We debuted our first yeti present book with Tarpon, an incredible 130 page coffee table book filled the photography and short essays to celebrate the pursuit and culture surrounding arguably the world's most inspiring game fish as we launched the book at our Yeti stores. We also raise money for one of our conservation partners captains for clean water continuing our passion.
To find unique and real ways of supporting the wild.
For 2020, while much of our lineup will be released as we move throughout the year, we unveiled a portion of our first half launches at the outdoor retailer show last month, including the broader debut of our Pinnacle V series cooler.
We showcased our latest example of continuous improvement in bottles.
We added a new easy to drink from chocolate at the standard feature on all our bottles.
We're transitioning our Rambler 18, 26, and 36 ounce bottles to this chocolate continuing our history of always innovating and delivering performance in our products.
This transition not only shows our willingness to make great products better but also further support the impact we can have on changing behavior towards reuse.
We also had our first refresh of our original culture can cooler transitioning to three new sizes to support the growing trend in aluminum cans shapes.
In January we introduced the second share offering and our outdoor living category with the trailhead chair maintaining the quality performance and design excellence from our original Hondo base camp folding chair and targeting a true premium void in the category, our new chair delivers performance in design with a packaway frame for on the go adventures.
And of course color will continue to play a big part in our assortment led by our three spring seasonal colors of coral Pacific Blue and Chartreuse.
Our strategy to wed all phases with an omnichannel and wholesale was on full display this quarter SDDC grew 35% and mixed reached 50% of the business for the first time with a strong contribution from each of our direct channels.
Importantly, the success of Yeti Dotcom yeti retail and the Amazon marketplace came through full price selling during the promotional holiday period, helping drive gross margin performance.
As we've mentioned, we're better positioned to service our D to C customer given the mid 2019 opening of our Salt Lake City, Threepl and through added customization capacity during the period.
Year over year strength that our customization business, particularly on the corporate sales side were evident even as we continued to ramp up capacity through the period.
As always we believe a great DDC strategy is balanced with a great lineup of wholesale partners that help impactfully represent yeti and relevant shopping destinations.
This includes focusing on our reach with our large national regional and key accounts optimizing our network a 4700 independent retailers.
Strategically, adding new distribution when it creates a new buying occasion reaches a new customer or augment the rig count enhances our existing portfolio.
2020 will entail driving growth across our existing distribution, including broader assortment and enhance merchandising while also supporting eddies expansion with newer partners.
Shifting to the retail strategy, our six store footprint continues to expand and we're pleased with both the reception to the store experience and the build up store traffic through the holiday season.
We helped fourth quarter openings of our pop up store at the domain and Austin, which we have recently extended another year as well as the opening of our store in the Knox Henderson area in Dallas.
The learnings from these new smaller format locations is helping inform our strategy relative to the large format offerings and Austin Charleston in Chicago.
Over the next two months, we're looking forward to the opening of our Denver store at a pop up store in Fort Lauderdale.
We continue to expect to open between four to six locations. This year looking at a range of footprint options and balance between heritage and not heritage markets.
The strong growth in DTC and wholesale we continue get sharper with our data analytics efforts spending much of 2019 building out the internal team and capabilities.
As we learn more from our product registration and our consumer purchases were positioned to develop customized targeted audiences better optimize our web site and manage the purchase journey of the customer.
For instance, our product recommendation engine Leverages online purchase history to inform what our existing customers are inclined to purchase next the ongoing development of these insights will help shape and optimize our customer targeting efforts across our marketing channels as we move further in 2020.
Before we talk about our international business I want to say our thoughts are with those affected by the Corona virus outbreak, we remain in very close contact with our local team and partners in China to monitor their safety and wellbeing.
While it remains a fluid situation with supply chain timelines and restarts we're tracking this daily.
Currently we do not expect impact to our first half outlook, but we are actioning multiple levers to help mitigate future risk of supply disruptions in the event. There is a prolonged delay due to factory and logistics startup.
Similar to our approach last year with tariffs were working a plan.
As previously disclosed our spring drink, where it was already received as early receipts of product in advance of potential list for be tariffs and ahead of the Chinese new year.
We're working closely with our suppliers as they work to come back online to that end, we will leverage existing work in progress inventory at our partners and look to direct production and scheduling to optimize our available assortment.
Finally, we anticipate the potential to expedite the shipping a specific product should we experienced protracted production delays.
Now turning to our international growth story international reach 5% of sales for the quarter and 4% for the full year.
Growth was highlighted by our largest international market in Canada, where we're driving localization efforts for the Canadian consumer.
This includes the ongoing adoption of our Yeti Dot CA website, our first fully integrated product and holiday campaign led by our new local PR agency and a ramping corporate sales function.
These are all important areas to build upon throughout 2020 and will be the thrust of our international growth story for the year.
We continue to make excellent progress in Australia, New Zealand.
We have watched the courageous efforts to contain the devastating wildfires in Australia, and we're working with our local partners to help assist with relief and recovery.
As previously mentioned the proceeds from our film tour stop in Melbourne, Australia will be going towards these relief and recovery efforts.
In Japan, our brand continues to be a highly Instagram of all must have for the outdoor lifestyle and we're focused on broadening our reach in 2020 with additional wholesale accounts and the introduction of it online presence.
In the UK in Europe, we like the initial response across the region and we'll continue to supplement our ecommerce business with a relevant retail footprint.
This includes the fourth quarter addition of partners such as the house of Brewer, Scotland's Premier independent country lifestyle retailer.
Expect broader wholesale distribution as we move deeper into 2020.
Our international strategy overall will continue to send around disciplined expansion. We're a foundation for successful ballots optimal control of our brand in each market relevant distribution choices that build upon the authenticity and trusted brand and localized customer engagement.
Before handing the call over to Paul to discuss the financial details and guidance I want to first thank our 700, plus you've got to since our ambassadors partners wholesalers and suppliers that have contributed to a remarkable year and who are providing invaluable dedication and support for yeti.
We set a high bar for the brand 2019, and we look forward to once again exceeding customer expectations in the new year.
And now I'll hand, the call over to Paul.
Thanks, Matt and good morning, everyone I'll begin with an overview of our fourth quarter in fiscal 2019 results followed by our fiscal 2020 outlook.
Yes fourth quarter net sales increased 23% to 297.6 million compared to 241.2 million in the year ago period.
This was our highest growth rate in the past six quarters and reflects strong momentum as we move into 2020.
For the full year net sales increased 17% to 913.7 million.
The full year results were above the high end of our previous outlook of 14.5% to 15% sales growth.
Well, we don't specifically discuss individual customer contributions to our growth Im proud to say that even excluding the impact of lows in the quarter. We would have still exceeded the high end of our full year 2019 net sales outlook.
Looking across our channels direct to consumer net sales for the quarter increased 35% to 149 million compared to 110.5 million in the same period last year.
This impressive growth was driven by momentum across yeti dot com Amazon marketplace and in particular corporate sales, where we were well positioned to capitalize on increased demand by expanding our capacity for customization during the quarter.
We also experienced strong demand in our two primary product categories with Drinkware, leading the way.
Full year DTC net sales increased 34% to 386.1 million, representing 42% of our overall sales mix.
Wholesale net sales for the quarter increased 14% to a 148.7 million compared to 130.7 million in the year ago period with strong performance delivered in both product categories.
Full year wholesale net sales increased 7% to.
To 527.6 million.
And as I mentioned earlier, our existing wholesale accounts drove the majority of the growth during the quarter end the year.
Internationally net sales rose, 124% for the quarter to reach 5% of total net sales led by strong momentum in Canada.
And for 2019 International net sales grew 135% to double its sales mix year over year, 4% of total net sales.
By category fourth quarter, Drinkware net sales grew 34% to 192 million compared to $143.5 million and the prior year quarter.
We continue to see impressive growth with both our legacy products and new product introductions highlighted by ongoing customer excitement with color.
And our expanded customization capacity.
Rambler bottle business remains robust with strong core product demand complemented by new 2019 introductions like our Rambler 12 ounce in Randall our junior bottles.
Overall Drinkware grew an impressive 24% for the full year to reach 526.2 million.
Who is an equipment net sales increased 12% to 102.3 million compared to 91.2 million during the year ago period.
Led by strong performance in soft coolers, including demand for our next generation Hopper and 30, and the Daytrip lunch bags that launched in the third quarter as well as new color auctions.
For the full year cooler than equipment net sales increased 11% to 368.9 million.
Gross profit increased 27% to 162.3 million or 54.5% of net sales compared to 127.8 million or 53% of net sales during the same period last year.
The 150 basis point year over year gross margin expansion was primarily driven by a 230 basis point favorable impact from cost improvements led bright drinkware category.
Favorable 90 basis point impact from channel mix.
And a favorable 80 basis point impact from lower inbound freight.
These margin expansions were partially offset by a 160 basis point unfavorable impact from higher warranty and inventory reserves.
And 70 basis point unfavorable impact from higher tariffs.
Full year gross profit increased 24%.
To 475.3 million.
Expanding 280 basis points to 52% of net sales.
Adjusted SGN, a expenses for the fourth quarter were $102.7 million.
34.5% of net sales.
As compared to 81.9 million with 34% of net sales in the same period last year.
Selling expenses de leveraged 80 basis points, primarily driven by higher variable expenses tied to our faster growing direct to consumer business, including online marketplace fees and outbound freight.
Partially offsetting these increases general and administrative expenses leveraged 30 basis points, given our strong topline performance.
Adjusted operating income increased 30% to 59.7 million or 20.1% of net sales compared to 45.9 million or 19% of net sales during the same period last year.
Notably these adjusted results exclude 41.9 million in noncash stock based compensation expense, mostly comprised of a onetime expense related to pre IPO performance based Rs use.
That vested and we're fully recognized in the fourth quarter as previously announced in conjunction with our November secondary offering.
For the full year adjusted operating income increased 27% to 158.1 million expanding 140 basis points year over year to 17.3% of net sales.
Our effective tax rate was 29.7% during the quarter compared to 15.7% in last year's fourth quarter.
Lightly ahead of our expectations due to the unfavorable tax impact on the aforementioned performance based RSU vesting.
Our effective tax rate was 25% for the year.
Fourth quarter adjusted net income grew 31% to 42.1 million or 48 cents per diluted share count.
Compared to adjusted net income of 32 million with 38 cents per diluted share last year.
Full year adjusted net income grew 37% to 103.4 million or $1.20 per diluted share exceeding the high end of our most recent outlook of $1.14.
Fourth quarter, adjusted EBITDA increased 29%.
To 67.5 million or 22.7% of net sales.
It's a 52.2 million or 21.7% of net sales in the same quarter last year.
Full year, adjusted EBITDA increased 25% to 187 million expanding 130 basis points to 20.5% of net sales.
Now, let me turn to our balance sheet.
To start with yet he no longer qualifying for emerging growth companies status, we have adopted new FC 842 leased standard using the modified retrospective approach.
Most notably this adoption impacted our balance sheet with the recognition of 37.8 million for operating lease right of use assets.
And a corresponding 50 million of operating lease liabilities as of year end.
This adoption had no material impact to fourth quarter results and no impact to previously reported interim results.
Our cash position was 72.5 million as of December 28, 2019, compared to 80.1 million at the end of fiscal 2018.
We ended the year with 185.7 million, an inventory compared to 145.4 million last year.
The 28% increase in inventory for the period reflects the strategic buildup of drink where inventory to mitigate the potential of list for be tariffs that were scheduled for December 2019 implementation.
This build up includes a combination of strong selling core items in new seasonal colors slated for the spring.
Excluding this strategic build up inventory growth remained below our reported sales growth for the fourth quarter and we remain very comfortable with the health of our overall inventory position to support our plans growth this year.
As we've discussed in the past, we expect inventory growth to normalize throughout 2020.
We ended the year with total debt, excluding unamortized deferred financing fees and finance leases of 300 million compared to 332.9 million in last year's fourth quarter.
During the quarter, we amended our credit facility and extended the maturity from May 2021 to December 2024, as well as reduced our interest rate by approximately 150 basis points.
We also upsized, our revolver to 150 million from 100 million.
Which remained undrawn at year end.
To provide added flexibility given the growth of our company since securing the original revolver.
Our ratio of total net debt to adjusted EBITDA for the trailing 12 months improved to 1.2 times compared to 1.7 times in the prior year quarter.
With a highly successful 2019 now behind us, let's shift to our outlook for 2020.
Following our initial year as a public company, we are updating our definition of certain non-GAAP financial measures going forward by eliminating several adjustments or add backs.
Beginning in the first quarter Twentytwenty. The following three expense categories will now be included in a consolidated non-GAAP results.
First investments in new retail locations and international market expansion.
Second expenses related to the transition to the ongoing senior management team.
And third expenses related to transitioning to a public company.
My forthcoming discussion of the 2020 outlook reflects these revised non-GAAP definitions.
2019 historical information has been updated to reflect these changes so the information is comparable.
We have posted a supplement and the Investor relations section of yet he's website with the updated 2019 quarterly financials as they relate to the non-GAAP definition changes.
Please also note that our fiscal year 2020 includes a 50 Threerd week ending January 2nd 2021.
Given the small size for yeti of this additional post holiday week.
We expect approximately 7 million in sales for the full year with no impact to earnings per share.
Now turning to our full year 2020 outlook.
We expect full year net sales to increase between 13% in 15% compared to fiscal 2019.
We expect growth across both channels with higher sales growth in the direct to consumer channel relative to the wholesale channel.
We expect balance category growth between coolers in equipment in Drinkware.
We also expect growth in the second half of 2020 to be moderately above growth in the first half of 2020.
On the margin side, we expect to GAAP operating margins between 15.3% in 15.6% of net sales.
Compared to 9.8% in 2019.
We expect adjusted operating margins of between 16.3% and 16.6% of net sales.
Reflecting margin expansion of 70 to 100 basis points.
This operating margin expansion reflects continued gross margin expansion driven primarily by the benefits of lower product costs and the favorable shift in channel mix to our direct to consumer business.
Partially offset by adjusted SGN, a de leverage driven by higher variable expenses related to our faster growing DTC channel.
Notably.
We currently expect a modest net gross margin benefit related to the current tariff environment.
With savings from the sourcing of substantially all of our soft goods outside of China in 2020.
Partially offset by continued tariffs on drinkware accessories, and the recent strengthening of the Chinese RMB.
We expect an effective tax rate of approximately 25% for fiscal 2020.
Based on full year diluted shares outstanding of approximately 88 million.
GAAP earnings per diluted share are expected to be between $1.24 and a $1.29.
Compared to 58 cents in fiscal 2019.
We expect adjusted earnings per diluted share to be between $1.34 and a $1.39.
Reflecting year over year growth of 26% to 30%.
Adjusted EBITDA is expected to be between 202.1 and 207.9 million.
Reflecting growth of 18% to 21% and margin expansion of 80 to 100 basis points.
Again, let me remind you that these adjusted growth rates are based on our revised non-GAAP metric definition.
We expect capital expenditures to be between 30 to 35 million.
Capital expenditure priorities in fiscal 2020.
Largely comparable to last year.
Including ongoing investments in molds in tooling to support both our sales growth and new product launches.
As well as the opening of four to six retail stores.
To summarize we had a fantastic 2019 and are well positioned and excited to execute against our strategic growth drivers.
To deliver both strong topline and bottom line results again and Twentytwenty.
And with that we will now open the call for questions.
Thank you.
At this time, we will be conducting a question and answer session.
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One moment, please while we pull for questions.
Your first question comes from the line of Peter Benedict with Robert W. Baird. Please proceed with your question.
Hi, guys. Thanks for taking my question I guess, thanks for the for the color.
I guess par or Matt maybe can you help us understand how maybe you're thinking about.
Lows either consent.
Wanted to Italy, or qualitatively in terms of how that plays into your your plan for 2020.
Clearly theres theres still there.
I'll be.
Incremental because there'll be some cannibalization, but just maybe help us understand what lowes is doing with respect to your 2020 plan. That's my first question.
Sure Peter Good morning, and let me let me start so it's to be fair, it's pretty early in the process with initial stores rolling out in late December.
And we're still a head of true spring buying that said, we remain excited to continue to work with lows.
As we talked about in the fourth quarter hour Overperformance in both wholesale and in total.
Was only part of it was lows so again as we look to 2020.
We will continue to see.
How the rollout goes how sell through goes we're very excited about it.
And you know as they continue to expand the assortment and drive merchandising excellence across.
All our product so.
It's up in that we continue to be very very excited about the only thing I would add Peter good morning. As the is we previously talked about we're going to be thoughtful and methodical and how this rollout happens and we previously communicated we expect it to stretch into 2021.
State stood in close partnership, but we're excited about the engagement the assortment how that how the rollout has gone to date.
Okay. That's helpful guys and I think Paul you mentioned, maybe the second half from revenue standpoint, it might grow faster than the first half can you maybe tease that out a little bit what's driving that.
Yes, so we do expect growth to be moderately higher in the second half versus the first half really three things.
So much driven by higher new product contribution right. So in the second half you have the first half products and the second half.
Higher planned wholesale new wholesale customer contribution and then thirdly, the impact of the 50 Threerd week. So those three items are driving the moderately higher.
Growth in the back half versus the first half.
Understood Great and my last question and I'll, let some other guys going on here should just how are you guys thinking longer term about gross margin me clearly.
The plan for 20, you kind of gets us beyond I think where are you guys were thinking.
A year ago, or 18 months ago, where the margin would go just what's your latest thinking about.
Gross margin any structural limits to that.
Where are you thinking that could go thanks, so much.
You're welcome thank you.
So we are particularly pleased with the continued expansion of gross Matt margin as we believe that's a true measure of strength when evaluating the health of the brand.
At our IPO, we provided a 50% to 52% long term range.
And we believe today, it's a bit early.
Six quarters into uptake that long term range that being said.
We do not necessarily see a margin.
Ceiling at 52%, which is evident in the 2020 guidance showing further gross margin expansion above and beyond the 2019 actual of 52%.
The opportunity to drive that I'm continues to be the same as it was in 2019, so higher direct.
Consumer mix in cost improvements across the portfolio.
We'll continue to drive that mix higher.
Okay. Thanks, Thanks, so much guys. Good luck.
Thanks Victor.
Your next question comes from the line of Peter Keith with Piper Sandler. Please proceed with your question.
Hey, good morning, guys its body greener on for Peter a nice quarter.
Onto a follow up on your tariff commentary can you just give a little more color as to.
On the cadence is valuable recoup that tire benefit I'm 2020, My first question. Thanks.
Yes sure so.
And 29 team.
And we talked about this riyadh.
Incremental tariffs of about $9 million gross tariffs about 10 million because we had some back in 18. So that's the difference between the incremental in the gross.
The what we're seeing the benefit going into 2020 as no longer having tariffs on our soft goods.
As we move that out of China. We continue to have Caris list three on drink wear accessories and a couple of small items, the chairs and blankets and then our list for a on one gallon jugs and dog beds is kind of what's still under tower. So of the gross number of.
Approximately 10 million of tariffs in 2019.
We get back about half of that with the move of the supply the soft goods supply chain odd of on China.
Hi, Thanks, I appreciate that a lot and then maybe just separately or something that free cash flow. So did.
Come down quite a bit in 2019 seems largely inventory Jim can you kind of let me speak to how you're thinking about.
Free cash flow Alan for 2000 try and.
The growth now that inventory growth.
Well less than 2019, thanks, Yeah sure. So yes, certainly 2018, we had significant free cash flow driven by the reduction of inventories vis-a-vis 2017, and 2019 as we used.
Pre positioning of inventory as a mitigating lever for tariffs.
Inventory and we talked about that inventory, we used cash flow for inventory and 2020, we see our free cash flow projection and around 60 to 70 million. So.
Certainly higher than 2019, as we as we talked about in my prepared remarks, as we normalize inventory throughout 2020.
All right great. Thanks, guys and good luck.
Thanks.
Your next question comes from the line of the Alex Wallace with Goldman Sachs. Please proceed with your question.
Good morning, guys. Thanks, so much for taking the question here My first questions on the customs and corporate business you called that out as a strong driver in the quarter and indeed for the year.
How big of those businesses today, and how much of that growth with a driving in 2019, and then perhaps the comment on the extent of growth expected from them and Twentytwenty.
Good morning, Alex.
So we don't breakout custom.
Specifically or corporate sales. So you know if we step back for the quarter.
Direct to consumer was 50% of the business in overall for the year was 42.
And then inside that as you know yeti dotcom, Amazon and then corporate sales corporate sales across all three platforms as I talked about in my prepared remarks, very strong results in the quarter in the year.
We really like to what we saw in customization certainly in the fourth quarter having.
Going deeper into the quarter.
And we still believe there is opportunity there. So you know and on the consumer side of the business.
Guaranteed shipment for holidays with Black Friday, now that not as you know Black Friday was a week later to so not only do we go deeper into the holiday season Black Friday was a week later, so it was certainly longer than last year, because we cut off before.
Black Friday weekend, so we really like what we saw in customization across both corporate sales and.
DTC and still think there's growth there in 2020.
Sometimes take thank you on the second question is on.
The introduction of some of these new products I believe that's been a little bit of discounting activity in advance of that can you talk about the strategy behind that whether there's any change.
From from previously I know Thats the way that you tend to prepare for new product introductions, but I'm just wondering about the extent.
Ill stop activity versus usual.
Hi, Alex Good morning. This is we think about these product transitions exactly as you said this is consistent with how we've transitioned.
As you know we're.
We've been very supportive of Matt pricing and as I said in my prepared remarks through the holidays in our DTC channels. We're we're very supportive of keeping the full price selling but when we go into these excuse me these product transitions.
One of things were very thoughtful about and we plan to advance and we plan with our wholesale partners is how to effectively make a transition generation to generation on a product. So exactly what you said what youre seeing today and we have already announced that there is a new product coming behind it. We go move moved the channel and get the channel to have.
The right inventory position.
So as we launch excuse me the new product.
The new product comes out and we have we have a clean channel to launch into it. So I think one of the patterns that we built is exactly this when you see yeti come off price, we'll be announcing.
New product coming behind or do you can expect something new coming behind it much like we're doing right now in bottles and coasters.
Okay. Thanks, Thanks, guys for all the color on all of Us.
Thanks, Alex.
Your next question comes from line of Randy Konik with Jefferies. Please proceed with your question.
Yes, Thanks, a lot hi, guys.
A couple of questions I guess, I guess first topic that would be very helpful.
This is getting some questions around how we should be thinking about.
The wholesale growth rate in general and how to think about it or.
Organically or like for like X.
The lows addition, w. super helpful. If we get a little bit more.
Granular or directional help on how we should be thinking about that segment of growth that channel distributions growth first thanks.
Good morning, Randy.
I would go back to our long term guidance, our long term outlook commentary and that hasn't changed from a topline 10% to 15% and then inside that what we've talked about is and again to your point X X any new customers coming in.
On a like for like basis, we would say wholesale should be mid single digits and we continue to expect wholesale tip reform mid single digits most of that.
From velocities are not new door additions, so sell through new product introductions things of that nature, but.
Again, we still expect that at mid single digits.
Very helpful and then.
When we think about the DTC channel.
As a margin accretion accretive channel you touched upon it reaching 50%, which I think is well in advance what Weve had originally thought years ago would get to this point.
So we're getting there quicker is there any kind of color you can give us with in the channel of how on the dynamic is playing out between.
The Amazon marketplace.
And yields Yeti dotcom itself, because obviously, we know that yeti dotcom is going to be higher margin than the Amazon marketplace. I'm, just kind of curious on what that dynamic is looking like how it's changed over the last 12 months and how we could expect it to change over the next one to two years.
Randy Matt it's it's.
We look across our DTC channels as Paul said and what has been consistent theme as we'd like to contributions were getting from each each plank of our direct to consumer business, including our.
Our small but growing retail presence, what we tend to see is.
Yes, the dot com continues to be our flagship in the DTC business, it's one that.
We can present, the best stories drive new new customer acquisition, we like the mix, we're seeing of new customers versus repeat buyers on yeti dot com.
The Amazon marketplace.
We believe tends to be a bit more of a transactional.
And in an ease of any the purchase place and also for for consumers that are at our train to start their search and the Amazon platform. It's a it's that's a very natural place for them to buy so we're we're cognizant of how we how we balance and how we drive drive those businesses, but we like the contribution we're seeing.
From every element of our direct to consumer business in the growth rates were seeing across them.
Got it and then I guess my last question is is there any perspective, you guys can give us on.
New product or new color way contribution as a percent of the revenue base.
And then give us a little maybe elaborate a little bit more and what you're seeing on the repeat purchase behavior as im just trying to get a sense of the story around product innovation driving demand and then you're getting a sense of.
Customer longevity story unfolding through any statistics, you can share around repeat purchase behavior. Thanks, guys.
Thanks, Randy couple of things.
When we think about color and we think about color on existing or legacy product. It continues to be.
A really nice part of the growth story, and so that we're taking a product that has been in the market for multiple seasons, adding a new color brings vitality and selection to it and Thats part of our strategy is continuing to leverage longstanding products and bringing bringing new life into them.
As we launch.
Wholly new excuse me product families.
That growth that growth is something that as we said in the past we don't we don't plan for.
Big replacement growth, so big ups in new product in Big Downs and legacy products, we really want to drive additive growth and Thats, what our expanded product portfolio portfolio has been doing.
We continue to like the repeat purchase statistics that we're seeing and particularly at our trackable.
Yes, he dot com and our Magal log as I mentioned in my prepared remarks are mag logs been a great indicator of.
The changing basket in the repeat purchase and what people buy and how you introduce them to a broader assortment and when they are introduced to a broader assortment how it changes buying pattern versus.
Versus our controls and so while we're not sharing specific statistics around that what I would say is we spent a lot of time in 2018 building out capabilities and team and we're very focused not only on driving repeat purchase from our longstanding customers in creating great products Forum, but also continue to attract.
Attract new consumers into the brand.
Helpful. Thanks, guys.
Thanks, Ryan Thanks, Randy.
Your next question comes from line of sharing decks fear with William Blair. Please proceed with your question.
Hi, good morning.
Just a clarifying question on the wholesale expectations I think you said mid single digit is that an expectation for 2020, including lows.
So we don't.
So thank you for the question, we don't give an outlook down to the channel level.
I would say that was our long term outlook acts.
Okay as Randy's question ex any new participants are acts lows.
But we don't guide our given outlook down to that level, but you can infer you can infer from my comments.
Okay. That's helpful and then secondarily on the reserves or the warranty.
Vision in the quarter can you give any commentary around that and what that occurred around.
Yes, so it was really a couple of.
A couple of things so.
It was.
Our warranty reserves so.
Our warranty reserves, our track to soft cooler sales in my.
Remarks, I said, we had a great soft cooler quarter, so just year over year with the growth in soft coolers.
Warranty reserve is higher in dollars I was number one the second to as we had some if you go back to last Q4, we had some favorability.
Of reversals of accruals, which didnt repeat this year so in essence that the negative.
And then the third piece as with our transition to chug inline that we announced at outdoor retailer.
We have.
Reserved as what we will do is when that is introduced any.
Existing inventory, we have in our warehouse for our direct to consumer channel, we will re work into the new led.
And there was a reserve for those old lives as we scrap those and recycle those old Leds.
So those is those are the three main buckets of the warranty flash inventory reserves.
That's very helpful. Thank you.
Thanks.
Your next question comes from line of Robby Ohmes with Bank of America. Please proceed with your question.
Good morning, guys.
I had a follow up on the DTC business can you.
Talk about if you just take the DTC business.
And look at the expense trends there is there any.
You know change in the variable expenses are you know is there any change for example in the in the cost of operating marketplace on Amazon and maybe work into that what you've seen so far in store performance.
And if theres been a lot of variability you know Chicago versus Dallas versus Austin versus Charleston in terms of.
Profitability, maybe help us understand is the when you isolate Adidas I know, it's it's going to be higher margin than you know wholesale but is it.
Is it is it changes the margin of D to C changing at all versus maybe what you would have thought a year ago.
Yes, So let me start with the DTC piece, so as we've talked about and you're absolutely right Robbie much significantly higher gross margin on a contribution margin in a dollar perspective.
It is.
DTC is still high on a on a dollar.
Per unit basis, as you think about it.
We havent seen significant changes and what I'm thinking about is the Amazon piece, we haven't seen significant changes.
In the cost structure there as.
As that business continues to grow you know the the online marketplace fees as I talked about will grow with that on our own.
[music].
DTC business outbound freight and things of that nature a threepl.
Our growing with the business overall on stores. It is early I can tell you in the Charleston store when we look at the Charleston markets.
The Maher and again its two quarters end right. If you think about Q3 in Q4 in that that store.
We like what it's done to the Charleston market relative to we look at the rest of South Carolina ex Charleston, So where we're taking more out of the market, which is which is actually and so we're growing the business.
Not impacting our wholesale business and things of that nature. It's early you know Q4 was a great quarter.
For all the stores, we saw a great ramp in the Dallas store in the second store here in Austin, Chicago really ramped up.
But it's early days and.
We're happy with that performance and and as we talked about planning on four to six stores in 2020, So we really like with the stores are doing.
That's helpful. And then separate question just the can you speak a little to the Jersey partnership you guys announced and maybe remind us apparel percentage sales and.
Does this signal.
What change in strategy doing a lot more in apparel going forward.
Yeah Robby work.
As you mentioned, we're incredibly excited about what we announced earlier this week with Austin SC and that deal was really.
Around two basic parameters one it was a chance to do something unique in the community here in Austin that was going to be come a national brand and any anything about soccer partnerships is.
When you do a jersey type deal our brand carries along with that kit and so in.
17, or so urban markets around the country, we'll have we'll have a moving a moving partnership playing on playing on the field than a fan base walking around with art without brand and if you go back to the very beginning it yeti in one of the founding stories was hats and T shirts or big part of Bill.
Adding the brand in introducing the brand to people so as they bought the original coolers and wearing it is is a point in side by side abroad. We also think that soccer community much like our early days in the fishing community and hunting and climbing and surfing the soccer communities a unique community both both on the pitching off the pitch and I think that.
That is what ultimately led us to it to being really excited about what this partnership can mean from a brand expansion in an authentic way to move into.
Move into a different passion based community, but also one that travels around travels around the country.
And then let me give you some color on your question on apparel, so you're talking about it and the other category, which apparel is a piece of that so for the year.
Other was 2% of sales so small and then inside of that or inside of channels. As you think about that Ravi I'd say that.
Apparel is.
The smallest in our holes as a percent in our wholesale business.
Then the next one in order of on size would be our yeti Dotcom site and then in our retail stores. So as you can imagine our retail stores apparel small.
Set or small amount of total revenue.
In the retail stores, but apparel is a much bigger piece then a 2% in the total company would be indicative but.
Got it Thats very helpful. Thank you.
Thanks Ravi.
Okay.
Your next question comes from line of Jim Duffy with Stifel. Please proceed with your question.
Jim Duffy Jim Duffy. Your line is now live are you on the line.
Yes, sorry for that.
Few questions from me guys. Good morning, Matt with respect to lows can you talk about the assortment. It's right for these stores in any early findings as to how lows consumers engaging with the brand.
Yes, so as we said we went in with a what I would call a representative assortment of what yet. He has there are there certain certain skews that that.
We didn't launch into lows right away, we went a little heavier and things like our buckets and our go boxes, but we have a representative collection of our salt colors hard coolers drinkware.
This this is something a store started rolling out in mid December and through through the end of the year. So.
Based on that timing its little early to make any any define conclusions around a short assortment shifts or changes but.
We like we'd like the partnership we like the engagement of lows, we are liking what we're seeing at retail.
Small month in January and up in a short stub period at the end of at the end of December.
But it's something we'll pay will pay close attention to as we said one of our thesis and going into lows and signing up that partnership was they brought to us a relatively unique consumer in a different buying occasion that we see in the rest of our wholesale channel, which is the pro piece of it and so we're we're paying a lot of attention to both how what we call the consumer transaction happens at Lowe's.
But also how the pro consumer reaction.
Helpful. Thanks, and then a question on getting often from clients is there something distinct about lows versus home depot that suggests home depot couldn't be an opportunity in coming years.
I would say we entered the lows partnership.
As we started the conversations with them and the level of engagement and enthusiasm and understanding of what our brands could do together the commitment to.
Multiple points of placement within their stores and and the idea of how we build how we build through a thoughtful ramp roll a lot of a lot of things that I would commend the lows leadership and the team that we worked with on on planning for.
As we continue to move forward, we're going to stick to what we said, which is we'll look at distribution. If it does one of three things if it brings a unique consumer relatively unique.
Buying occasion or it augments our supports our existing wholesale accounts. So we like the flexibility we have within that and we don't feel we don't feel held back from future opportunities.
But as you saw with Lowe's and how long it's been since we added a large national account, we're pretty thoughtful about when we bring them on board.
Very good thanks, and then Paul in presenting Drinkware was a strong driver and increased as a percentage mix I believe to the benefit of the margin should this mix shift in margin benefit continue in 2020.
Yes, so we see with our outlook.
Gross margins continuing to expand.
And that as both and we look at it channel wise, but it's also our product wise as well so in 2020.
Cost improvements will continue to drive gross margin expansion channel mix.
We will drive gross margin expansion.
The good news on tariffs.
The good news.
The step down in tariffs will be a gross margin expansion and then if you think about.
I also mentioned strengthening of.
Currency was potentially go against us but.
Both Drinkware slash DTC mix drives gross margin expansion.
Helpful. Thank you guys.
Thanks, operator, I want to be respectful of People's time does the top of the hour, let's take two more questions.
Absolutely. Your next question comes from the line of Kimberly Greenberger with Morgan Stanley. Please proceed with your question.
Great. Thank you so much I really appreciate it.
Wholesale grew 14% here in Q4, Paul and I'm wondering do you have a number excluding the low sell in that would be sort of an apples to apples growth rate.
And then.
The key advanced stocking of spring deliveries looks to be very fortuitous at this point given what we're seeing happening in China with with factory production I'm wondering.
If you've heard any word from your Drinkware factories are they back to work.
Do they have I sort of scheduled time to get back up and running and.
Roughly wet which months here over the next three to six months when do you need to start receiving goods again to make sure that.
Your sales trends are not disrupted by the.
Potential delays, let's say in now receiving product because of some of the factory shutdowns there.
Great. Thanks, Kimberly I'll, let me start and then I'll turn it over to Matt.
So it has been our practice not to comment on specific customers, even pre lows in dimensionalize any particular customer.
What I would say than I would refer back to my prepared remarks, and this will give you some gate post.
That even without our X lows, we would have exceeded the top end of our.
Full year Guide and then you can infer Q4 as you did when we gave it at the end of Q3, so 14.5% to 15% for the full year.
We finished at 17, we would have been above that 15% even ex lows. So it wasn't while you know, giving our guide without lows was the right thing to keep it apples to apples.
The takeaway is we would have beaten natural we would have yes, we would have beaten it even without lows coming into the picture.
And on the the.
Supply chain in China, a couple of things worth pointing out.
We have a team on the ground in China, we have a team that's working with them.
Daily in working with our partners as they come back online and you know is I'm sure you're hearing in the market there varying timelines for factories to come back online. We're we're optimistic about about the progress but this is early days and it's a very fluid.
Daily situation that our teams on top of that our team on the ground as monitoring and we're working not only with our tier one factories, but with their supply chain and looking at the transportation and logistics options as I mentioned in my prepared remarks, one of the one of the advantages in addition to having some inventory.
He is that we also have in product in work in progress in those factories, so factories aren't fully starting cold so when they as they come back online in workers workers returned to work, we'll see the ability while the rest of the supply chain in China comes back online. So it is something that we're managing very.
Very closely and paying attention to and we feel.
Based on what we know today and currently.
We don't we don't expect near term disruption, but it is something that is the year goes on we're going to stay stay close to and stay abreast of how it evolves.
And Matt did you say you could erin good potentially.
Yes, there are some delays or what sort of that to backup plan. If there's some delay in getting product out of the factories.
Yes, I would say two things if theres delays in.
Back to full capacity and how they would define full capacity. There's theres a few things that will will use one we'll take advantage of the inventory in the product that's already in process. So thats. The quickest to become finished good and then we would look at the range of expedited opportunities and it could be.
Those theres expedited opportunities on the water and there's expedited opportunities in the air and we as we as we build our plan we contemplate some of those contingencies.
Okay, great. Thank you.
Thanks Kimberly.
Your final question comes from line of Alex Morocco with Berenberg. Please proceed with your question.
Hey, good morning, guys. So I'm looking at the guidance here for interest expense and what you mentioned earlier on free cash flow and it makes it look like by the end of the year, you'll be at about half a turn on the leverage ratio I guess off of that point or my debt repayment assumptions in line and how should we think about your capital allocation priorities for the year.
Good morning, so from a.
Debt repayment.
Perspective, the new credit agreement in the amortization.
Required payments for the year will be approximately $15 million.
And then from a capital allocation standpoint.
You know, it's still we continue to.
Talk to the board about this the leverage ratio moves closer to one times and then to your point.
If you do the math slightly below.
Our near term focus as paying.
The mandatory payments of 15 million, which will give us de leverage and then.
You know, it's really all about as we've talked about is driving shareholder.
Value and shareholder returns whatever levers, we use across across our options.
Okay that makes sense and then just thinking about new stores for the sheer I've noticed Fort Lauderdale popping up as a potential opening soon in addition to the previously announced Denver. One can you just pinpoint any other markets that interest you guys at the moment.
I think as you can is you could.
I understand we survey quite a few markets and real estates, a matter of right market and right opportunity and so we have it we have a team that tracks multiple markets and we think would if the right opportunity came up.
Would be something we'd move and we're also cognizant of looking at what we would call heritage versus non heritage markets the balances of Chicago's versus the Charleston's and so we have a we have a pipeline of cities. We have a pipeline of opportunities and will act on them as as the right opportunities come up and as we learn more.
Now with six stores and soon to be eight rooftops, we'll we'll build will build more that muscle balancing longer term type opportunities and commitments versus versus shorter term and Fort Lauderdale. As example of one of the shorter term opportunities in a market that all of our other data points would say is a very strong market for.
So we think it was really natural place for us to two to put our next location.
Our that's great. Thanks, a lot.
Thanks, Alex.
With that I want to thank you thank everyone.
For for hanging in there a little bit little bit longer. Thank you very time, and we look forward to talking to you as we as we wrap up Q1.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.