Yeti Posts Fourth-Quarter Loss On Massive Recall Charges

Yeti reported a loss in the fourth quarter as it absorbed $128.9 million in write-offs related to the recall of several magnet-lined products. Sales were up 1 percent in the fourth quarter but would have risen 10 percent, excluding the recalled products. Yeti also warned that 2023 profitability and sales would be impacted by the recall, with growth planned at 3-to-5 percent.

The company said that adjusted, to exclude the impact of the recall, fourth-quarter results were in line with guidance.

In a regulatory filing on February 8, Yeti said it had implemented a global stop sale of its Hopper M20 Soft Backpack Cooler, the Hopper M30 Soft Cooler and the SideKick Dry Gear Case. Yeti identified that the magnetic closure on the products could fail and release magnets, posing injury or death if ingested. Yeti said in an SEC filing that it was not aware of reported injuries.

Matt Reintjes, president and chief executive officer, commented, “On top of a remarkable 29 percent increase in 2021, Yeti delivered strong sales growth in 2022 with 13 percent reported sales growth and 16 percent adjusted sales growth. Our results reflect the impact of the proposed voluntary recalls we recognized during the fourth quarter. We believe these recalls are the right decision for our customers and our brand and are consistent with our commitment to durability, performance, quality, and design.

“Excluding the impact of the voluntary recalls, our fourth quarter results were in line with our expectations, driven by the strength of our direct-to-consumer channel and the momentum of our international business. In the wholesale channel, while we generated positive sell-through for the quarter, later-than-planned consumer demand impacted order volume and flow. In what was a dynamic environment in the fourth quarter, we remained focused on the premium positioning of our brand while driving growth through new innovation, robust digital customer engagement, and by executing against strong consumer demand across our omnichannel.”

Reintjes continued, “On an adjusted basis, the profitability of our business remained strong in 2022 despite the significant impact of lingering supply chain costs. Importantly, gross margin headwinds began easing during the fourth quarter, as we expected, with year-over-year levels expected to turn positive and gain momentum as we move into the upcoming quarters. Finally, we finished the year with a very strong balance sheet and are in a position to generate high levels of cash flow going forward, which will further support our continued global growth.”

Fourth Quarter 2022 Results
Sales increased by one percent to $448.0 million, compared to $443.1 million during the same period last year. Sales include a $38.4 million unfavorable impact related to the voluntary recalls, which impacted certain products in Coolers & Equipment. Adjusted sales, which exclude the impact of the voluntary recalls, increased 10 percent to $486.4 million.

DTC channel sales increased 17 percent to $309.5 million, compared to $263.9 million in the prior year quarter, due to strong performance in Drinkware and Coolers & Equipment, partially offset by a $6.2 million unfavorable impact related to the voluntary recalls. Excluding the impact of the voluntary recalls, DTC channel-adjusted sales increased 20 percent to $315.7 million.

Wholesale channel sales decreased 23 percent to $138.5 million, compared to $179.2 million in the same period last year, primarily due to a $32.2 million unfavorable impact related to voluntary recalls. Excluding the impact of the voluntary recalls, wholesale channel-adjusted sales decreased 5 percent to $170.7 million.

Drinkware sales increased 8 percent to $308.2 million, compared to $285.6 million in the prior year’s quarter, primarily driven by the continued expansion of our Drinkware product offerings, including the introduction of new colorways and sizes, and strong demand for customization.

Coolers & Equipment sales decreased 14 percent to $130.5 million, compared to $151.6 million in the same period last year. Excluding the $38.4 million unfavorable impact related to the voluntary recalls, Coolers & Equipment adjusted sales increased 11 percent to $168.9 million due to strong performance in bags and hard coolers.

Gross profit decreased 34 percent to $167.0 million, or 37.3 percent of sales, compared to $254.8 million, or 57.5 percent of sales, in the fourth quarter of 2021. Gross profit included a $97.0 million, or 1,700 basis points, unfavorable impact related to the voluntary recalls. Gross profit was also negatively impacted by higher inbound freight, higher product costs, and the unfavorable impact of foreign currency exchange rates, partially offset by a favorable channel mix and the price increases implemented in the first quarter of 2022.

Adjusted gross profit, which excludes the unfavorable impact related to the voluntary recalls, increased $9.2 million to $264.0 million, or 54.3 percent of adjusted sales, compared to $254.8 million, or 57.5 percent of adjusted sales, in the fourth quarter of 2021.

SG&A expenses increased 31 percent to $210.8 million, compared to $161.1 million in the fourth quarter of 2021. SG&A expense included a $31.9 million unfavorable impact related to the voluntary recalls. As a percentage of sales, SG&A expense increased 1,070 basis points to 47.0 percent from 36.3 percent in the prior year period.

Adjusted SG&A expenses increased 13 percent to $174.9 million, compared to $155.0 million in the fourth quarter of 2021. As a percentage of adjusted sales, adjusted SG&A expenses increased 100 basis points to 36.0 percent from 35.0 percent in the prior year period.

Operating loss was $43.7 million, or 9.8 percent of sales, compared to operating income of $93.7 million, or 21.2 percent of sales during the prior-year’s quarter, primarily due to the $128.9 million unfavorable impact from the voluntary recalls.

Adjusted operating income decreased 11 percent to $89.1 million, or 18.3 percent of adjusted sales, compared to $99.8 million, or 22.5 percent of adjusted sales during the same period last year.

Other income of $6.5 million increased from other expenses of $0.7 million in the fourth quarter of 2021, primarily due to foreign currency gains related to intercompany balances.

Net loss, which includes the unfavorable impact of the voluntary recalls, was $27.7 million, or 6.2 percent of sales, compared to net income of $72.9 million, or 16.4 percent of sales in the prior year quarter; Net loss per diluted share was $0.32, compared to net income per diluted share of $0.82 in the prior-year’s quarter.

Adjusted net income decreased 13 percent to $67.7 million, or 13.9 percent of adjusted sales, compared to $78.0 million, or 17.6 percent of adjusted sales in the prior year quarter; Adjusted net income per diluted share decreased 11 percent to $0.78, compared to $0.88 per diluted share in the prior year’s quarter.

Full Year 2022 Results
Sales increased 13 percent to $1,595.2 million, compared to $1,411.0 million in the prior year. Sales include a $38.4 million unfavorable impact related to the voluntary recalls, which impacted certain products in Coolers & Equipment. Adjusted sales, which exclude the impact of the voluntary recalls, increased 16 percent to $1,633.6 million.

DTC channel sales increased 17 percent to $917.7 million, compared to $784.7 million in the prior year period, driven by both Drinkware and Coolers & Equipment, partially offset by a $6.2 million unfavorable impact related to the voluntary recalls. Excluding the impact of the voluntary recalls, DTC channel-adjusted sales increased 18 percent to $923.9 million.

Wholesale channel sales increased 8 percent to $677.5 million, compared to $626.3 million in the same period last year, primarily driven by Coolers & Equipment, partially offset by a $32.2 million unfavorable impact related to the voluntary recalls. Excluding the impact of the voluntary recalls, wholesale channel-adjusted sales increased 13 percent to $709.8 million.

Drinkware sales increased 14 percent to $947.2 million, compared to $832.4 million in the prior year period, due to the continued expansion of our Drinkware product offerings, including the introduction of new colorways and sizes, and strong demand for customization.

Coolers & Equipment sales increased 11 percent to $612.5 million, compared to $551.9 million in the same period last year. Excluding the $38.4 million unfavorable impact related to the voluntary recalls, Coolers & Equipment channel adjusted sales increased 18 percent to $650.9 million due to strong performance in bags, soft coolers, and hard coolers.

Gross profit decreased 6 percent to $763.4 million, or 47.9 percent of sales, compared to $816.1 million, or 57.8 percent of sales in the prior year. Gross profit included a $97.0 million, or 480 basis points, unfavorable impact related to the voluntary recalls. Gross profit was also negatively impacted by higher inbound freight, higher product costs and the unfavorable impact of foreign currency exchange rates, partially offset by the price increases implemented in the first quarter of 2022.

Adjusted gross profit, which excludes the unfavorable impact related to the voluntary recalls, increased $44.3 million to $860.4 million, or 52.7 percent of adjusted sales, compared to $816.1 million, or 57.8 percent of adjusted sales, in the prior year.

SG&A expenses increased 18 percent to $637.0 million, compared to $541.2 million in the prior year. SG&A expense included a $31.9 million unfavorable impact related to the voluntary recalls. As a percentage of sales, SG&A expense increased 150 basis points to 39.9 percent from 38.4 percent in the prior year period.

Adjusted SG&A expenses increased 12 percent to $586.1 million, compared to $521.0 million in the prior year. As a percentage of adjusted sales, adjusted SG&A expenses decreased 100 basis points to 35.9 percent from 36.9 percent in the prior year period.

Operating income decreased 54 percent to $126.4 million, or 7.9 percent of sales, compared to $274.9 million, or 19.5 percent of sales during the prior year, and included the $128.9 million unfavorable impact from the voluntary recalls.

Adjusted operating income decreased 7 percent to $274.3 million, or 16.8 percent of adjusted sales, compared to $295.1 million, or 20.9 percent of adjusted sales during the same period last year.

Other expenses increased to $5.7 million compared to $3.2 million in the prior year, primarily due to foreign currency losses related to intercompany balances.

Net income, which includes the unfavorable impact of the voluntary recalls, decreased 58 percent to $89.7 million, or 5.6 percent of sales, compared to $212.6 million, or 15.1 percent of sales in the prior year; Net income per diluted share decreased 57 percent to $1.03, compared to $2.40 per diluted share in the prior year.

Adjusted net income decreased 11 percent to $205.7 million, or 12.6 percent of adjusted sales, compared to $230.3 million, or 16.3 percent of adjusted sales in the prior year period; Adjusted net income per diluted share decreased 9 percent to $2.36, compared to $2.60 per diluted share in the same period last year.

Balance Sheet And Other Highlights
Cash decreased to $234.7 million, compared to $312.2 million at the end of Fiscal 2021. During the first quarter of 2022, Yeti initiated and completed its previously announced $100.0 million share repurchase program by repurchasing 1.7 million shares.

Inventory increased 16 percent to $371.4 million, compared to $318.9 million at the end of Fiscal 2021, and included a $34.1 million inventory write-off related to the voluntary recalls. Excluding the impact of the voluntary recalls, inventory was down $33.9 million on a sequential basis, making this the second consecutive quarter with a sequential decline in our inventory balance.

Total debt, excluding finance leases and unamortized deferred financing fees, was $90.0 million, compared to $112.5 million at the end of Fiscal 2021. During Fiscal 2022, Yeti made mandatory debt payments of $22.5 million.

Proposed Voluntary Recalls
Yeti said in its statement, “As previously disclosed in our Form 8-K dated February 6, 2023, in January 2023 we notified the CPSC of a potential safety concern regarding the magnet-lined closures of our Hopper M30 Soft Cooler, Hopper M20 Soft Backpack Cooler and SideKick Dry gear case. We also disclosed that we were implementing a global stop sale of the affected products and would be working with the CPSC and other relevant global regulatory authorities on appropriate next steps.

Subsequently, we proposed a voluntary recall of the affected products to the CPSC and other relevant global regulatory authorities, which we refer to herein as the “voluntary recall” unless otherwise indicated. In conjunction with the stop sale, we determined that the affected products inventory held by us, our suppliers and our wholesale partners to be unsalable. As a result, we recorded an inventory write-off of $34.1 million in the fourth quarter of 2022 for the unsalable inventory on hand and established a reserve of $94.8 million for estimated future product refunds, cost of recall remedies for consumers with affected products, recall-related logistics costs, and other recall-related costs as of December 31, 2022. The total unfavorable impact of the voluntary recalls on our operating income was $128.9 million for the year ended December 31, 2022. The ultimate impact from the approved voluntary recalls could differ materially from these estimates.

“We are working in cooperation with the CPSC and other relevant global regulatory authorities on the corrective action plan and hope to begin implementing the voluntary recalls in the coming weeks. We are also working on solutions to address the potential safety concern of the affected products and intend to resume the sale of the redesigned products in the fourth quarter of 2023.”

Fiscal 2023 Outlook
Reintjes concluded, “We will remain on offense in 2023, by driving top-line growth, delivering gross margin expansion, continuing to invest behind our brand and innovation, and driving strong cash flow generation. We expect that our DTC and international businesses will continue to deliver strong results and that we will continue to generate positive sell-through at wholesale. The timing of revenue growth reflects wholesale order flow caution during the first half of the year, an estimated 500 basis point unfavorable impact from the current stop sale on products impacted by the proposed voluntary recalls, and the affected products’ expected re-introduction in the fourth quarter. As a result, we expect to see limited sales growth throughout the first three quarters of the year before returning to double-digit growth in the fourth quarter, in line with our long-term targets.

Gross margin tailwinds are expected to ramp throughout the year, as lower freight costs work through our inventory and flow through our income statement. We expect our operating expenses to increase this year as a percentage of sales, in support of our international and DTC businesses and as we continue to strategically invest in our long-term growth. In conjunction with the timing of planned sales growth, we expect to drive strong margin expansion and bottom-line growth in the fourth quarter.

When combined with the strength of our balance sheet and cash flow potential, we are confident that we can come out of 2023 in a position to maintain our long-term growth aspirations.”

For Fiscal 2023, Yeti expects:

  • Adjusted sales to increase between 3 percent and 5 percent with adjusted sales growth weighted to the second half of the year, inclusive of an approximate 500 basis points unfavorable impact on our growth rate from the stop sale of the affected products by the voluntary recalls;
  • Adjusted operating income as a percentage of adjusted sales between 15 percent and 15.5 percent and adjusted operating income to decrease between 3 percent and 8 percent. While the adjusted gross margin is expected to expand during the year, this benefit is expected to be more than offset by increases in adjusted SG&A expense due to strategic investments and the unfavorable topline impact from the stop sale of the affected products by the voluntary recalls;
  • An effective tax rate of approximately 24.9 percent, compared to 22.8 percent in the prior year period;
  • Adjusted net income per diluted share between $2.12 and $2.23, reflecting a 5 percent to 10 percent decrease, with earnings growth starting in the fourth quarter of the year;
  • Diluted weighted average shares outstanding of approximately 87.2 million; and
  • Capital expenditures of approximately $60 million primarily to support investments in technology and new product innovation and launches.