Q2 2022 Yeti Holdings Inc Earnings Call
Good morning, and welcome to the Q2 FY 'twenty two earnings conference call.
<unk> holdings.
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I would now like to turn the conference over to Mr. Tom Shaw. Thank you I know what you yourself.
Good morning, and thanks for joining us to discuss Yeti Holdings' second quarter 2022 results.
Before we begin I'd like to remind you that some of the statements that we make today on this call maybe considered forward looking.
And such forward looking statements are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements.
For more information please refer to the risk factors detailed in our most recently filed Form 10-Q, and the form 8-K filed with the SEC today.
We undertake no obligation to revise or update any forward looking statements made today as a result of new information future events or otherwise except as required by law.
During our call today, we'll be discussing certain non-GAAP measures pertaining to complete fiscal periods.
A conciliation of each non-GAAP measures to the most directly comparable GAAP measures are included in this morning's press release.
As well as in the supplemental reconciliation both of which are available in the Investor Relations section of our website <unk> Dot com.
We use non-GAAP measures as a lead in some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business.
Today's call will be led by Matt Righteous, President and CEO and Paul Carbone CFO .
Following our prepared remarks, we'll open the call for your questions.
And now I'd like to turn the call over to Matt.
Thanks, Tom and good morning, Yeti posted a 17% sales increase for the period strong growth in what continues to be a challenging and dynamic environment walbridge.
While results fell slightly short of our high bar, we continue to set these results in a three year compounded annual growth rate of 22% continue to show the durability of demand and the strength of the brand.
On the bottom line, our near term performance saw further pressure from several gross margin factors, including higher inbound freight costs, a shift in product and channel mix towards our lower gross margin coolers and equipment and wholesale business as we continue to support the channel sell through and build back of inventory.
Yeah.
As we consider our execution for the balance of the year and set up for our growth in 2023 and beyond it is important to understand and acknowledge what we're seeing in the marketplace.
First our brand remains strong and continues to support the domestic and global reach we have discussed over the past few years.
Second growth in demand are proving durable due to our product innovation and diversified channels to market within DTC wholesale and globally, even as the battle for digital traffic continues to escalate.
Third elevated supply chain costs continued to pressure margins, but we are seeing decreasing forward rates that are heavily impacted inbound freight cost, which we believe has potential to set up as a tailwind for 2023.
Turning to our brand the second quarter displayed the power of Yeti as we returned to connecting with customers through in person events combined with incredible brand storytelling product marketing and digital brand awareness.
From the Gopro Mountain games in Vail, Colorado to Jackson hole, food and wine, coupled with international Ambassador Activations with Skateboarder Louie Lopez at the Copenhagen Open and chef Li Chairman in London enthusiasm and engagement with customers is where we excel.
With strong in person activation combined with a broad reach of our mother's day father's day and summer central campaigns, we have a multifaceted and differentiated connection with consumers even in today's world. We're getting attention is at a premium.
As it relates to demand our wholesale corporate sales and yeti retail performed very well in the quarter, while our owned E Commerce and Amazon marketplace. We're challenged by very high year over year comps and importantly, an increasingly competitive market for digital traffic, including the broader digital slowdown being seen in the market.
Yeah. These improved inventory position across key wholesale accounts is contributing to growth in sell through in this channel.
It also reinforces how important our full omnichannel approach continues to be.
On the yeti ecommerce side, the investment to build out our analytics capabilities to target convert and retain customers is proving central to improved retention and conversion while acquisition continues to remain a focus for the rest of this year.
On the product side, we are executing breadth and depth across our portfolio.
Year to date, we have introduced new products in soft coolers hard coolers bags and new apparel.
As we build awareness and full channel distribution of these new products. We believe this sets up well for both near and long term growth.
Even though we're starting to see heightened promotional activity in the market, including more aggressive performance marketing tactics and deeper and more sustained discounting. We are focused on conveying the power of our brand and product through innovative product marketing to cut through the market noise.
Finally, we are staying nimble by taking appropriate actions across our supply chain and operational management of the business given the rapidly changing landscape.
This started in the second quarter with active management of our inbound supply to match, our global demand outlook for the rest of 2022 and into 2020 three.
While we are starting to see some signs of cost relief, particularly in the transportation area. This is expected to have a more significant impact across our income statement and balance sheet as we move into the next fiscal year.
In total yet he is responding thoughtfully and realistically to balance the opportunity we see in the market and just as importantly, what we did not fully know in the quarters ahead.
As Paul will discuss we have prudently adjusted our full year outlook to both reflect some of these ongoing uncertainties and our commitment to making the right near mid and long term decisions for the yeti growth story.
While not a decision we take lightly this revised outlook reflects both what we believe are the controllable and the unknowns in the back half of 2022.
Now to our strategic growth priorities.
As I mentioned driving brand relevance remains as important as ever consumers are making thoughtful decisions on daily basis about where and what to buy and it is our job to continue driving high consideration through great product and brand storytelling.
This is a hallmark of our brand in integral to how we differentiate ourselves in the market.
Let me give you three examples here.
We recently wrapped up our 13th stop Yeti presents film tour. These intimate celebrations of our human stories represent a unique approach and philosophy to brand building and incorporate ambassador interaction story spanning the diversity of the wild and support for conservation partners and organizations.
We enjoyed the opportunity to host some of you during our Brooklyn stop.
In June we highlighted a collection of yeti customer product experiences through a new user generated content series that features video and content submitted by our fans and followers.
Showing yeti products surviving incredible moments.
This included a tundra kept ice and drinks cold even after a raging boat fire and our Rambler jog retaining ice after a truck fire. These.
These videos have been among our most successful and most engaged content today.
Finally, we continue to connect with a widening demographic through tick tock and are seeing momentum both on our own content as well as that from the user community.
One recent post highlighting our fans vast collection is captured nearly 10 million views and our response to the video received over 200000 likes.
We're still exploring opportunities on many social channels, but tictoc remains an important opportunity for the brand.
Turning our focus to product innovation.
Clear highlight of the quarter was soft coolers launched on Yeti dot com in the first quarter, our Hopper M 30, and Hopper M 20, backpack expanded across wholesale in Q2 and have been an active part of our seasonal color strategy.
The combination of innovation portability in color have proven to be a powerful proposition for the active on the go customer.
Hard coolers also grew in the quarter, despite uneven wholesale inventory in core colors and certain skus such as our original wheeled cooler at the hall.
Given the vitality of our cooler and equipment portfolio, which was up 23%. We are particularly excited to introduce our two new wheeled hard coolers. The roadie 48, and <unk> 60 offer all the performance you would expect from yeti with enhanced mobility.
These products debuted in July and it will move more broadly across our channels in the months ahead corresponding with healthier in stocks of other core hard cooler offerings.
As indicated last quarter, we have begun testing select distribution for our bags portfolio with.
With this thoughtful rollout underway, we're planning to add additional doors to better capitalize on fall outdoor and back to school timing.
Beyond these efforts with our Crossroads line. We've also introduced a new Tan color way in our panga bags last week, which was the first new color for this successful line since 2017.
And drink, where second quarter growth was 12% comping, 69% growth in the year ago period, and up 23% on a three year CAGR basis.
We continue to see good momentum with our travel mugs, the rambler straw cap and across our inventory constrained bottle line.
Finally, we're working on several additional product introductions as we move towards the holidays to both extend our product families and bring limited release products for year end.
Looking at our channel strategy wholesale growth outpaced DTC growth and what was our largest wholesale quarter to date.
Wholesale strength was supported by an improved inventory position of a heavily depleted level last year.
As well as solid sell through trends with our major partners.
To reiterate our inventory position is still below pre COVID-19 levels, which we continue to actively address with our focus and optimization efforts.
In addition, we continued to see progress in our work to drive merchandising consistency across our accounts.
We believe customers are increasingly intentional and these E tail and physical store purchase occasions, and we remain encouraged by the positive sell through rates we are capturing.
At the same time, the battle for digital traffic and Mindshare has intensified, which we believe underscores the importance of our advanced analytics efforts as we look at Yeti E. Commerce, our analytics work is giving us greater clarity into the impact of our acquisition and retention efforts, which is increasingly critical in today's challenging environment.
We continue to be very effective in our retention efforts, particularly as we reengage older cohorts and drive quality transactions.
While our acquisition effort resulted in roughly flat new customer growth year over year. After two years of significant acquisition growth. This will be an area of heightened focus as we deploy tools and strategies to drive the most relevant and targeted engagement.
We also believe our new ecommerce platform launched in early Q2 will enable many of these efforts as we move forward.
We saw strong results in our corporate sales business with excellent inbound demand as companies continue to look for ways to engage their employees and customers.
Yeti retail remains a bright spot, including the debut of our first West Coast store in Carlsbad, California.
With enhancements to our merchandising and layouts of our legacy stores and the performance of newer locations. We believe this business is positioned to accelerate in the years ahead, providing not only a place of commerce, but a place of brand discovery and community.
Later this year, we plan to open a store in Southlake, Texas, and we are working on one more potential opening later in the year, which would bring our total to 13 stores.
Finally, the Amazon marketplace remained a challenge facing significant comps in the prior year period, and reflecting some of the same online traffic and demand trends, we are seeing broadly in the digital marketplace.
With a healthier inventory position across our fulfilled by Amazon distribution network are strategic utilization of fulfilled by merchant and significantly easier comparisons. We are optimistic this business is positioned to improve in the second half.
Our international business grew 35% in the second quarter quadrupling the size of the business from two years ago.
Growth was balanced across our core markets of Canada, Australia, and Europe , and we remain bullish on our opportunities as we continue to execute our global playbook in both our existing markets and as we look to future expansion opportunities.
Nonetheless, we are closely watching the global economic headwinds beyond the U S and the varying levels of impact across our three non U S regions.
Let me start with Canada, our wholesale performance in the market remains solid.
E Commerce traffic has been a bit slower than planned we remain optimistic about the growth opportunity This channel in Canada.
We are encouraged here as the country fully ramps back to in person events and we have a full slate of brand Activations planned, including the most recent return of the widely attended 10 day Calgary Stampede.
Australia has proven very resilient with strong growth across wholesale and DTC. Following a challenging 2021 with closures in various states and cities. We continue to make progress with organic growth at our existing wholesale accounts and expansion with our first national account.
This is a core strategy for the brand this year as we look at increasing penetration of the urban coastal markets.
Finally in Europe , the opportunity remains vast even amidst some of the most severe consumer headwinds in the markets in which we operate.
While E Commerce has been the lead channel of the market. We remain laser focused on opening excellent wholesale doors across Europe with a particular focus on the U K and Germany.
We were excited by our introduction of sports Schuster Munich institution in the world of mountaineering and outdoor activities. This six week Street front installation with a powerful way to educate customers on the brand.
More recently, we also installed a six city feature with Globetrotter, a German store group known for delivering premium products to the outdoor enthusiasts.
As we look at servicing our international customers, we are rounding out our product lineup with key third quarter introductions, we'd be launching new drink wear and soft coolers in Europe in the third quarter, which we see as a significant opportunity to build the brand and show the versatility of our products and their use cases.
Broadly we expect our strategy will remain focused on driving our global and full assortment of our products across our distribution, but when needed we will take care to address high value local customer nuances and preferences.
As we continue to focus on our global growth in the digital evolution I'm pleased to announce that says Ahmed has joined yeti in the newly created role of Chief Commercial officer.
<unk> brings extensive global leadership experience through his most recent role as CEO of direct to consumer as part of Unitedhealthcare and Optum.
Formerly senior director and global head of Apple's online store and retail market development and various digital and technology roles at Delta Airlines during their digital transformation.
We will drive strategic direction and execution across our international direct to consumer and technology functions, while partnering closely with our well established wholesale sales organization.
In closing.
I'm thankful for the execution by our incredible team and the support from our customers in an environment that is presented constant challenges over the past two years.
There's been nothing easy and certainly nothing taken for granted and the current operating environment, but we've been steadfast in our commitment to Stoke demand for the brand invest in strategies that execute in the short term and support actions that we'll realize the long term potential for yeti.
With that I would now like to turn the call over to Paul to review, our financials and outlook.
Thanks, Matt let me start by reviewing the details from the quarter followed by our updated outlook and then open the call for your questions.
Second quarter sales increased 17% to $420 million compared to $357 7 million in the prior year period.
This growth comes on top of the impressive 45% growth in last year's second period or.
Although performance was just shy of our planned to perform within the 18% to 20% full year growth range.
Looking at channels wholesale sales increased 21% to $195 2 million compared to $168 million last year.
Our wholesale performance was driven by strong results in coolers and equipment, including soft coolers hard coolers in bags as our inventory position has improved and we were better able to satisfy channel demand.
Direct to consumer sales grew 14% to $224 8 million compared to $196 9 million in the same period last year.
Direct to consumer performance, including particular strength in corporate sales and was led by our drink wear category.
Overall direct to consumer mixed ease slightly to 54% of sales for the period compared to 55% last year.
By category crews and equipment sales increased 23% to $193 4 million compared to $157 8 million during the same period last year.
Our overall soft cooler business led the way.
Supported by strong consumer reception of our new total backpack offerings across both sales channels.
In addition, we steadily made progress throughout the quarter and improving availability of hard coolers, which will further be supported in the back half of the year with the rollout of our new wheeled royalties.
Finally, our Camino totes and crossroad backpacks continued to drive strong growth in our bags business.
Drink, where sales increased 12% to $216 1 million compared to $192 9 million last year.
This growth comes on top of the impressive 16, 9% growth in last year's period.
Our travel mugs.
Chug capped bottle offerings.
26 ounce straw com remains standouts in the category.
Overall customization in the category continues to be a strong differentiator and growth driver for the company.
Internationally sales grew 35% to $48 1 million compared to $35 6 million in the prior year quarter rough.
Representing approximately 11, 5% of total sales.
International growth was relatively balanced for the period across Canada, Australia and Europe .
Gross profit increased 5% to $219 1 million or 52, 2% of sales compared to $209 1 million or 58, 5% of sales in the same period last year.
The margin rate came in below our outlook, primarily given the magnitude of higher inbound freight hi.
Higher product cost and the negative impact of channel and product mix.
Looking at the specific margin drivers.
The year over year contraction was primarily driven by a 630 basis point impact from higher inbound freight.
Additional headwinds included 150 basis points from higher product cost and.
And 40 basis points for an unfavorable channel and product mix.
These headwinds were partially offset by 170 basis points from pricing.
And 20 basis points from all other impacts.
Adjusted SG&A expenses for the quarter increased 10% to $145 3 million.
With 34, 6% of sales.
Compared to $131 7 million or 36, 8% of sales in the same period last year.
Non variable expenses decreased 280 basis points as a percent of sales primarily driven by the strong top line growth and disciplined spending.
Variable expenses increased 60 basis points as a percent of sales.
Not really reflecting higher distribution and logistics costs.
Adjusted operating income decreased 5% to.
To $73 8 million or 17, 6% of sales.
Compared to 77 4 million or 21, 6% of sales during the same period last year.
Our effective tax rate was 24, 9% during the quarter compared to 24% in last year's second quarter with a higher rate, reflecting a discrete income tax benefit in the prior year period.
Adjusted net income decreased 10% to $54 8 million or <unk> 63 per diluted share compared to $60 7 million or <unk> 68 per diluted share in the prior year period.
Of note. These adjusted bottom line figures now exclude other income and other expenses.
Which substantially consist of foreign currency gains and losses on intercompany balances.
The vast majority of these gains and losses are unrealized with no impact to cash.
We believe this change provides better clarity and focus on the underlying operating performance of our business.
These changes have been applied retrospectively.
And a summary of the recast results can be found in the supplemental information section of our Investor Relations website.
As well as our quarterly Investor relations deck.
Turning to our balance sheet.
We ended the second quarter with $92 million in cash compared to $233 8 million in the year ago period.
The lower cash position, primarily reflects the completion of the share repurchase during the prior quarter as well as ongoing investments in working capital.
Inventory increased to 121% to $490 million compared to $221 7 million during the same quarter last year.
Excluding capitalized freight <unk>.
Inventory grew approximately 90% to $370 million compared to the prior quarter.
Representing approximately 70% growth on a unit basis for our two main product categories.
A closer look at our inventory position shows 44% of total is on hand product inventory.
30% is in transit inventory and 25% is inbound freight cost.
While we have not seen overall transit times improve.
We are seeing improving port to Port times, though this is being offset by increased times, while at the ports and transfer it to rail yards.
Total debt, excluding unamortized deferred financing fees and finance leases.
It was $101 3 million.
Impaired to a $123 8 million at the end of last year's second quarter.
During the quarter, we made principal payments of $5 6 million.
Now turning to our fiscal 2022 outlook.
We now expect full year sales to increase between 15, and 17% compared to fiscal 2021.
This range reflects prudent expectations for the back half of the year.
As we factor in the impacts of a more constrained spending environment.
We continue to expect coolers and equipment growth to outpace drink ware.
While we now expects balanced channel growth between DTC and wholesale.
By quarter, we currently plan for third quarter growth to modestly outpaced the fourth quarter.
Incorporating greater overall uncertainty into our historically highest DTC mix period.
On gross margins, we now expect a full year to be in the range of 52% to 53%.
Several factors are contributing to this new outlook, mainly driven by the impact of our revised sales outlook.
Less favorable channel and product mix.
In the near term challenges with inbound freight cost.
Looking at margin components. The overall freight headwind is now expected to be slightly less than 500 basis points impact for the year.
Driving the majority of the overall year over year decline.
Well now a larger near term challenge.
We remain encouraged that the ongoing signs of softening ocean rates can be a positive gross margin driver as we look ahead to 2023.
Our expectations have not changed regarding input costs in GSP duties. This year totaling approximately 160 basis points of headwind.
Which includes some recent stabilization in commodity cost.
Other impacts, including sales and product mix and now expect it to be a modest drag primarily factoring in the revised expectations of our DTC channel.
Finally, we see our pricing work, providing a partial offset to these headwinds of approximately 200 basis points.
From a cadence standpoint, we expect third quarter margin contraction to be slightly less than what we experienced during the first half of the year.
Followed by less overall headwinds in the fourth quarter.
Our overall approach to disciplined SG&A spending is unchanged.
And we still expect low double digit dollar growth in both the third and fourth quarters.
We expect variable expenses to grow faster than sales now, reflecting higher distribution and logistics costs.
We also continue to expect non variable expenses to grow below sales.
Even as we continued to make strategic investments to support our long term global opportunities.
Overall, we expect year over year expense leverage to continue for the balance of the year.
Together, we are updating our adjusted operating margin rate to between 17, and 17 and a half of the year.
Below the operating line, we now expect interest expense of approximately $4 $6 million.
Reflecting the recent increases in rates in the market.
In addition, we now expect an effective tax rate of approximately 24, 6% for fiscal 2022.
Above the prior year's 28% rate that.
Benefited from discrete income tax benefits each quarter.
This increased tax rate is in and of itself an approximate 11 cent impact to adjusted EPS versus the prior year period.
Based on full year diluted shares outstanding of approximately $87 3 million.
We now expect adjusted earnings per diluted share between $2 34, and $2 46 <unk>.
Compared to $2 60 and.
In fiscal 2021.
For capital expenditures, we continue to expect approximately $60 million of spending with roughly two thirds of these expenditures focused on investments in new innovation and expanding capacity for existing products.
I also wanted to provide some additional color on inventory.
We continue to believe that the vast majority of our inventory consist of high quality goods with extended even flexible shelf lives.
On a unit basis, which grew approximately 70%.
We see higher relative growth in coolers and equipment.
Including areas that had been the most inventory constrained and which have a higher rate of new innovation. This year.
While we are comfortable with the makeup and level of inventory we are actively managing our purchase orders with our suppliers to reflect updated demand expectations.
Thus, we expect the second quarter will be our peak inventory period in dollars and we expect sequentially lower year over year growth starting in the current quarter.
In summary, we are adapting our business.
Focusing on our strategies and providing prudent expectations in the face of many challenges in the economy.
While our outlook is clearly not where we plan to be.
We think it is important to highlight that achieving these results with.
I would still support a compelling story.
Compared to 2019.
This includes an impressive three year sales CAGR of 20% plus.
And an expansion of operating margins.
Importantly this.
This performance comes despite 800 basis points of total gross margin and SG&A headwinds in just the past two years from cumulative logistic pressures across freight and distribution.
We will continue to work diligently through the near term pressures makes.
Make smart decisions to protect the brand and.
And set the company up to succeed over the long term.
I would now like to turn the call back over to the operator to take your questions.
Right.
Thank you.
I will begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
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At this time, we will pause.
That's momentarily to assemble our road show.
The first question is from the line of Sharon Zackfia with William.
William Blair. Please go ahead.
Hi, good morning.
I guess the question with a follow up you know the digital landscape has obviously been challenging for a lot of brands lately can you talk about you know the.
Is that the kind of initiatives that youre getting used to come out that have you seen any success with the thus far and whether there is kind of.
I guess, the increased volatility and the digital business or whether you've seen that just stabilize kind of at a lower rate and then it sounds as that you don't think you are seeing anything brand specific but I wanted to ask if you're seeing any price sensitivity are consumers kind of trading down.
Within the Yeti brand framework.
Thanks, Sharon good morning.
Great questions I would say on a couple of fronts at all I'll touch on the second part the brand piece.
We continue through our brand studies are owner studies are the sell through performance, we're seeing in wholesale the reaction we're getting in our yeti owned stores.
To continue to see the brand and the product portfolio really resonate and that's that's kind of continues to give us the encouragement of delivering 17% growth in the second quarter and our outlook as we go into the rest of the year.
It ties into the digital side of the business.
What we have seen is that.
The more kind of casual shopper is the one that really is.
It has fallen off and we've seen it through traffic when we look at where the strength is we're incredibly pleased with our retention efforts and you think about the acquisition we've done over the last.
Four five years as we've grown our D to C business and really accelerated over the last two years.
We're really pleased with the growth we've seen in the retention and the quality of that customer so when.
When you think about in uncertain times the strength of your base is is it really powerful powerful tool and that retention has really been driven by the marketing efforts. The brand building efforts the enhancements in our advanced analytics the way our marketing inner plays with our performance marketing and are pleased with our acquisition of <unk>.
Inversion I think the area, where we've seen as we mentioned on our call a slowdown is on the acquisition side, the new customer acquisition side and that we're seeing broad based in the market as we look at the breadth of the market and what's happening around traffic and the competition in the performance marketing world. So.
So we feel we feel good about very good about where the brands position, we feel very good about how the product portfolios resonating.
Feel great about our omni channel strategy, and our ability to to be where the customer shops, and we've said that's been a hallmark of our strategy and when we think about on the digital side, we're going to continue to drive the relevance that drives the retention with our installed base and we're continue to look at ways to stay in front of those new consumers and drive that acquisition.
And work our way through this through this time so.
It's coming in in a different way than we anticipated as we went into Q2 and Thats why we prudently looked at the rest of this year and said.
We feel strong with a strong high teens growth business.
And continue to drive that.
On the channel strategy.
Thank you.
Thank you.
The next question is from the line of Kevin noted Leon with BD.
<unk>. Please go ahead.
Good morning, and thank you.
You just kind of following up on on.
Maybe how youre thinking about the wholesale to DTC back half unfolds.
Okay.
Is there is there a clear are you talking about that the deceleration in that casual shopper and the tougher.
Acquisition efforts on the DTC side, but on the wholesale side have you seen your your wholesale partners become a little bit more skittish with orders that they have placed them. It's a little bit of a unique situation for you in the sense that you've been under inventoried in that channel for quite some time.
And then secondarily.
Secondarily to that.
You talked about.
I heard remarks, I think Matt you mentioned that the.
The increased promotion allergy in the marketplace can you just update.
Update us on your current thinking on what your propensity is to follow suit along those promotional.
Ah the promotional triggers that some of your competitors may be using more to drive traffic.
Thanks, Kevin and good morning, the I would say a couple of things as you think about we talked in the past consistently about the incredible wholesale partnerships. We have in a very close relationship we have.
So those are those are daily weekly understandings of where our inventories positioned what's selling through what needs. They have where they are from a merchandising and a product perspective and that hasnt changed and when we look at the year to date performance, particularly on our wholesale business in our own stores.
As I mentioned.
I think that we feel good about very good about where the inventory is positioned in the wholesale channel and we feel good about the opportunities to continue to fill that in as we said, we're still below pre pandemic levels from an inventory position in the channel and.
As we continue.
Distribute innovation that we launched in Q2 through the channel for the rest of the year and could you just stay in front of the consumer what I think happens and what we've seen in the past happens is in and more challenging times.
Have found that our wholesale partners' skipped behind brands that brand that churn and things that flow in.
Our jobs to Stoke demand for the brand our jobs to bring innovation to the market and have great partners that can present that to the consumers.
The well on pricing and the promotional environment I think that's just a reality we've seen those we've seen those before our <unk>.
Prices have held up this this year, even with some of the changes that we've made and we feel good about the price changes as we talked about is no regrets price changes that would work and this time than any other moment.
As we think about what the promotional environment.
Look like for the rest of this year.
Our philosophy is.
It has always been.
We're very thoughtful about how we use promotion were very purposeful in how we do it traditionally it's related to new product transitions or particular times of year, where we're trying to drive or working to drive traffic and kind of rise above rise above the noise. So I wouldn't expect anything from us that would be markedly.
And then the way we have historically very tactically and very strategically used a promotion so no changes in philosophy around that.
Got it thanks very much good luck.
Thank you.
The next question is from the line of Brooke Roach.
Goldman Sachs. Please go ahead.
Good morning, and thank you so much for taking our question.
As you balance the strength of the brand and new innovation.
As well as the incremental wholesale selling that you have given inventory levels in the channel.
With the macro headwinds that you are currently facing can you help us frame the range of outcomes that you've embedded in your updated guidance.
Specifically in your DTC channel, how are you thinking about yeti dot com and Amazon versus corporate.
Stores for the rest of the year with the updated DTC outlook for the year. Thank you.
Yes, good morning Brook.
So what we've said in the prepared remarks, I'll start high level on the channels that wholesale and DTC will be balanced as we look to for the full year based on the 15% to 17% top line.
We have seen strength in corporate sales so inside of the DTC channel, while we don't break out the exact numbers.
We have seen strength in the corporate sales business as we talked about in the second quarter and expect that to continue.
And some of this is the story of compare so Amazon where that business had a very hard to compare in one H.
Face much lighter compares in two weeks so we expect.
Significant performance out of it in the second half based on the easier compares in the struggles we had with getting product into the.
The FBA warehouses on the retail side.
We have open some additional stores. So you know we expect retail to grow again, and we've said this in the past off a small base its going to grow at a much higher percentage because of the new stores, but.
We do expect growth there as well.
And again I'll finish with where I started a balanced growth between wholesale and DTC as we look to the our updated outlook of 15% to 17% for the top line.
Thank you Paul and then maybe a question for Matt.
One of the key initiatives into the back half of the parents to be driving that new customer acquisition.
Would love to hear a little bit more about how youre thinking about marketing spend and.
And any other pivots in the in your strategy to drive that.
You think about the yeti brand relative to some of the other competitors in the back half. Thank you.
Morning Brook, Great question, I'd say, a couple of things one of the one of the benefits we have of having created an incredible in house creative and marketing team that is sits closely with our E Commerce and our performance marketing group is that we can be pretty dynamic and you couple that.
With our advanced analytics investments we.
Test a lot a lot of different things from the mid funnel at the top of funnel all the way down to conversion and so that would I think about our marketing spend we don't talk about it and we're going to go away from broad based brand awareness ago, all in to performance marketing, it's really a more dynamic than that.
You know when you look at things that we did with our UGC and some of our highest performing UGC that drives traffic and drives awareness and then all the way to.
Things, where we activate our ambassadors and we do chips.
Chips and learning and then we have new product introduction tucked in there. So I think we are being.
More proactive across a lot of different channels to go out and find where those consumer.
Consumers are and make sure that we're driving driving a consideration we mentioned the <unk>.
Utilization of a number of social platforms, they've been they've been performing very well, we called out chip talk but there are a number of other social platforms continue to perform very well for us and where our content rich company. So we create the engagement we create the awareness get the eyeballs and then work through work that the consideration and the conversion funnel. So.
The thing that's different this year than over the last couple of years.
Is that we've been out in the market more on the ground running events, whether it's attending.
Events in the United States or attending events around the world that we're seeing really good reaction when we have consumers live again, and so I think the it gives us a good pulse of the product residents the brand residents and.
The acquisition and filling the top of the funnel that our team will then work work through the funnel to conversion.
Thanks, So much I'll pass it on.
Thank you.
The next question is from the line of Brian <unk> with Morgan Stanley . Please go ahead.
Hey, good morning, guys.
You know your comments around kind of the just the promotional environment. I think the question is just more specifically on kind of some of your competitors and whether there are <unk>.
Certain categories, where you think competitive pressure is playing more of a role or you know.
Are you seeing them kind of promote just because they have too much product or they are lagging behind you I'm curious about kind of the competitive environment generally.
Good morning, Brian what I would say on the broad environment inclusive of the competitive environment, what we were seeing and we see this and I mentioned in our prepared remarks, we see this in the competitiveness for search terms non branded search terms in particular.
There is a more competitive environment for non branded search terms what that tells US is that there is a bigger battle for traffic out broadly in the market and we're seeing more people go after those search terms, which I think ultimately benefits.
Stablish brands it benefits brands that are in demand benefits brands that resonate with consumers.
Market backdrop like that I think that's why we are seeing.
The retention levels that we're seeing in the value of the customers.
We retain that we're seeing through our digital channels, the other side of that as well.
<unk> acquisition is not where we planned it to be on the year. We are seeing really good conversion of the consumers that we are acquiring and we're seeing really good value increase on those consumer so we're getting high quality highly considered purchases.
I don't know that there is a.
Category or I think there is a broad based.
Market Battle for attention right now and I think we're seeing that flow through in the cost of.
The cost of customer acquisition broadly in the market.
Okay, Great and then just.
Sell through trends at some of your wholesale partners.
Are those materially different kind of at the end of the quarter or even into July versus what you saw at the beginning of the quarter do you think that they've kind of improved as some of your inventory levels have improved.
Well you know what what are you seeing just in kind of their sell through trends.
I would say a couple of things.
It's been our history to not kind of comment intra quarter on July , but maybe a little bit of color. We haven't seen in July or June excuse me didn't see a.
The market changed through through the quarter, we like the performance that we continue to see in sell through as we went through those moms.
Moms Dads grads type type holiday seasons that we get are buying seasons that we get it in Q2.
I think that as we look towards the rest of the year as the inventory continues to improve and wholesale the tight the relationships and the planning that were doing very closely with our.
Key wholesale partners from the independents to just some of our wonderful national accounts I think that our focus is making sure we get them the product that it gets merchandised and that it continues to sell through at a positive rate regardless of what the rest of the market or environment does.
Thank you.
Thank you.
The next question is from the line of.
Goldman Hi, Giovanna with credit Suisse. Please go ahead.
Hey, guys good morning.
If we could take maybe a step back or maybe look at things at the group level you gave a lot of details on the.
The puts and takes on cost, but when we think about it the topline is growing.
Quite nicely in the high teens bottom line or operating profit is declining maybe mid city are expected to decline maybe mid single digits, that's quite a significant spread it looks like some of the cost might be abating.
From a gross margin perspective, and then maybe offset by consumer customer acquisition costs, but what's in your control to try to bring those two closer together because the demand does seem to be there, but getting delivering that down to the profit line is this.
Maybe where the issue is what can you control to get those to be closer.
Yeah. So let me start with if I look at the midpoint of our guide this year versus last year.
There are two main pieces there. The first is the gross margin pressures that we've talked about.
And then the second year over year, and then offset by some opex leverage and then the second is.
The tax rate.
And going up from approximately 20% or 28% to 24, 6% as our current outlook. So those are the two big buckets, if I look at year over year.
Sales down to profit that our topline.
Top line at the midpoint at 16% and Bottomline seeing earnings go down then to your question of what we can control obviously the tax rate is driven by the benefit we saw last year on the benefit we get with stock comp and that's directly related to the price of the stock on the gross margin so coming back up to the opera.
<unk> of the business on the gross margin.
We're seeing signs certainly in container prices.
Coming down which will be you know a tailwind benefit of as we go into 'twenty. Three so that is something we can control we are well.
Well will impact us in what we can control it.
Input pricing, we're seeing commodities stabilize.
Stabilizing come down some in some key categories. So you know we're hopeful on the input pricing.
To get a little bit of benefit there and then as we go into next year, where this year the mix shift and product shift has worked against us that that neutralizes and gives us a little bit of a tailwind. So that's probably the last one is probably the one we control the most but we do see signs.
Looking into next year and again the way. It will you know as you know has to come through the balance sheet, we do see signs of lower inbound transportation.
Product cost of commodity cost stabilizing.
Channel shift.
Not being channel and product shift not being such a drag.
And then the last one in the SG&A is on outbound freight as all companies are seeing.
Fuel surcharges are really hitting the P&L and if that moderates going into next year. So we see some signs of.
Moderation and then with the tax rate not increasing next year, the dynamic of sales growing and earnings declining.
We don't expect to continue.
I think I would just add to the back of that exactly what Paul said is.
We do thoughtfully and will continue to thoughtfully manage our SG&A costs.
We're also as we've talked many times in the past when we grow top line in this business are good things happen in the rest of it. This is an interesting time, where those costs.
Facts that Paul was talking about.
We believe we're seeing we're seeing signs of the other the other side of those so as a growth oriented company as of mid and long term growth oriented company with the demand that we're driving with consumers. We want to take advantage of some of these opportunities to keep to keep growing the business. While also thoughtfully managing the SG&A.
Okay got it and then on the inventory quickly.
You talked about being low on inventory at wholesale.
You, obviously have a bunch coming over the ocean, but you're managing where you expect demand to be how long do you feel like youll have inventory at wholesale.
At the level at which you'd like it to make it to stay.
Yeah. So.
What Matt was saying in his is either questioners prepared remarks of wholesale inventory today is below 2019.
But we are building back the inventory.
And as we bring in these new products that we launched the <unk> 20, <unk> 30, those started going into wholesale in the second quarter.
Sure you have seen we launched the new.
Roadie wheeled cooler the $48 60, those will make its way into the wholesale channel into the fourth quarter. So we continually build back.
We like where the channel is but we are you know again rebuilding in the coolers and equipment bottles overall, even on our own dot com have been constrained it's been a great grower and we feel like we'll be in a better position inventory position as we go through the back half.
For the year in both my DTC business and in our wholesale business.
Got it thank you.
Thank you.
The next question is from the line of Robbie Holmes.
The Bank of America. Please go ahead.
Good morning, guys. Thanks for taking my question I was hoping to clarify just for the back half guidance.
What is the assumption for the consumer or your customer is.
Is sort of the back half based on demand remaining sort of where it is now or are you baking in some further deterioration and I think also same thing on the.
Customer acquisition costs in that battle for digital traffic is the assumption that it's kind of peaking now or.
Is that something where do you sort of plan for that to get.
Worse in the back half and then.
Just one more.
Paul maybe can.
Can you can you remind me why I D.
The fourth quarter gross margin.
It's going to be.
You know better than the third quarter gross margin. Thanks.
Sure So I'm going to start on the first one and then I'll, let you follow up and then turn it over to Matt So.
What does the second half look like like what are we expecting and I would say Robbie we are expecting.
Current trends with in the range of the back half is.
You know third 13 to 16 call. It just in the back half of the 15% to 17% top line gives us some.
Range of if things step down, but we are expecting things to be similar or we have a big fourth quarter, which is a big DTC quarter for us.
We are not expecting them to get better.
And if you look at the first half we were plus 18 in the compare was plus 44 in the second half again that implied range of 13% to 16%.
On a compare of about 20%.
So those are that's kind of how we're thinking about it I'd say similar to you know given ourself being prudent on if things get a little bit tougher and then on your question on gross margin in the fourth quarter.
It will so we expect gross margin to decline overall, so still have contraction in the fourth quarter.
It will be less just as we rollover the impacts from last year. So for instance, last fourth quarter was our most contraction from inbound freight.
So we're rolling over that so.
Gross margin contraction gets better in the fourth quarter because compares ease because they had some of that contraction in last year's fourth quarter.
Gotcha Thats helpful.
And Matt maybe because we get this question even less challenging environments for this so when you talk about.
New customer acquisition costs.
New customer acquisition being a little more challenging like how should we think about that versus you know potential saturation of the customer.
I'd say a couple of things Ravi, it's the new customer.
Our acquisition cost piece is really a dynamic that we hadn't seen in.
In the same way before Q2, and it's why I make the comment that.
All of our data points too, it's not acutely related to our brand that it is a broad market thing because we're really seeing that.
A large portion of that is an unbranded.
It's not a not necessarily directly a yeti thing, it's always a broad broader market and we're hearing it outside of our outside of our universe I think when we think about things like saturation I think I'd point to our that concern I'd point to things like our customer retention, which is was extraordinarily strong and saw.
Fantastic value increase so when we get high quality customers into the fold.
Our ability to retain them and grow them is very good and I think that shows the power of the brand. It shows the power of the portfolio through the power of what our team is doing to keep customers engaged during purchase and in between purchase I think when you're in an environment, where there is a lot of a lot of distractions and a lot of different ways to spend.
The game becomes how do you drive attention as we go into the back half of the year. Our expectation is that we're going to continue to focus heavily on deploying our advanced analytics team and our dynamic marketing and performance marketing to go after acquisition, while also taken care of that.
<unk>.
Credibly valuable incredibly powerful cohorts of customers that we've that we've retained I.
I think we.
We're hitting it from innovation that still hasn't fully played out into the market that we're going into a back half of the year that is.
An easier compare than the front half of the year, particularly on the on the digital side and the way 2021 laid out. So we've got a lot of different levers that we're pulling to make sure that we stay in front of the consumer as the world at large.
Probably distract spending and kind of tugs at tugs at the consumer in particular, the newly acquired or or potential consumer.
Got it thanks, so much.
Okay.
Thank you. The next question is from the line of Xeon <unk> with BNP Paribas. Please go ahead.
Hi, guys. Thanks for the question.
Two quick ones, one on wholesale a little bit better than consensus.
As expected.
Were there any shifts to consider in terms of supply chain, maybe you got some product in.
Earlier than expected and then on DTC you talk about the slope of the digital traffic maybe could you help us.
I'll give some color on how that evolved through the quarter.
Maybe five months or any trends exiting the quarter.
Great Let me start.
No major shifts.
In the wholesale business it did perform well to your point it did perform well in the quarter.
We also as I think to answer a question earlier, we also like to what we saw in sell through as well. So it wasn't just sell in it was the product moving out of our retailers doors.
So we're really happy with that but no major shifts.
We brought in the <unk> into the wholesale channels launched late in Q1 on DTC that started coming into.
The wholesale channel we launched Nordic.
So no major changes.
Traditionally obviously, we don't do.
A month by month start talk I would say in general the traffic, we saw pretty consistent through through the quarter both the the.
The strength of the retained customer and the balance of the of the acquisition customer.
The one the one thing as we called out.
We saw a softening in the quarter was in the Amazon marketplace and as we said in our prepared remarks, and Paul alluded to earlier, that's a place where we expect.
To see improvement in the back half of the year.
That does that as well.
Our broad based reach platform for us and so you combine that broad based reach with the very targeted brand experience of yeti Dot com combined with our retail stores, our wholesale accounts and then our corporate sales and I think that's where you're really going to see the end.
<unk> seen this year the power of the diversity of our channels to market really plays in plays and yet he's favorite which allows us to drive.
High teens growth in a market that I think could be could qualify as uncertain.
Great very helpful. Thank you guys.
Yeah.
Thank you.
The last question is from the line of Peter Keith with Piper Sandler. Please go ahead Sir.
Hi, Yeah. This is Matt Matt Akers on for Peter.
One quick one for months can you help us understand why freight was so much more than you expected and I guess what changed from Q1.
So much more of a pressure in Q2.
Okay.
Yeah. So I think one of the big things was Prada.
Product mix.
<unk>.
As coolers and equipment were a bigger piece of the business day unexpected.
That has that attaches a higher inbound freight so that was a that was a piece of it we talked in the first quarter about the catch up of where we had these missed invoices.
Some of that trailing so those are the two main items that.
Have impacted kind of to your point of where second quarter, we expected it to come in and where it did come in.
Compared to our expectations.
Okay. Thanks, and then maybe just one last one is there any updated expectations around GSP renewal.
So nothing.
Nothing that we know it has been it was in a couple of bills.
It was stripped out of those bills. So one of the few things that both sides and I feel like we've said the same story one of the few things both sides agreed on.
But it was stripped out of the bills as they were racing to an August recess, So no update.
You know were hopeful in the back half of the year, maybe after the mid terms.
But unfortunately, no update sitting here today.
Hi, Thanks, I appreciate you taking our questions.
Thanks, Matt.
Thank you.
This concludes our question and answer session.
I would like to turn the conference back over to Matt Ryan just for any closing remarks.
Thanks, everyone for joining us. This morning, we look forward to speaking with you with our Q3 results have a wonderful day.
Yeah.
Thank you.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.