Chit Chat Stocks - Yeti (YETI) | Not So Deep Dive

Episode Date: August 9, 2022

Yeti designs and markets products for outdoor and recreational purposes. The company sells various products ranging from mugs to cargo bags. Yeti was founded in 2006 in Austin, Texas. Listen closely as Brett and Ryan go through the history, financials, and future prospects of Yeti. Enjoy the show! Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Contact us: [e-mail] Timestamps Company Background | (1:29) Industry | (9:47) Management & Ownership | (12:44) Earnings | (16:26) Balance Sheet | (20:50) Valuation | (22:28) Our Analysis | (24:53) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. Welcome in. This is the Tuesday Not So Deep Dive episode on Chit Chat Money. This show is only for CCM Plus subscribers. And today we're talking Yeti holdings. So if you're listening to this,

thank you for signing up. Some of the early members joining. I think this is our third episode. And today, oh, I just mentioned it, we're going to be talking Yeti. But if you are on Apple Podcasts, quick side note, please, if you want access to the Substack and Google Drive, send us your email at the email linked in the show notes. It is chitchatmoneypodcasts at gmail.com. I'll say that again, chitchatmoneypodcasts at gmail.com. You're already paying, so get access to that. Basically, well, not for free, but for the stuff you're already paying for already. It is perfect to have this as a conjunction with listening to the show and the written research all right we're talking yeti holdings today the maker of hard coolers and drinkware although it is a bit more

exciting than that first intro so ryan why don't you introduce the company and give a background to their history yeah yeti designs and distributes a bunch of popular outdoor products that it sells through a few channels, but basically direct to consumers. So either online on their own store or through literal physical stores that they have. That's part of their new strategy is they're building out some Yeti stores and then wholesale channels.

They have tons of wholesale partners. You can buy Yeti stuff on Amazon. You can also buy- I would note that they classify Amazon as D2C, just for anyone listening. Other ones include REI. i believe there's some at walmart basically yeah tons of different places um but yet if yeti classifies each item into one of three product categories so the first one is coolers

and equipment this segment includes hard coolers soft coolers cargo bags and tons of other outdoor living accessories so it's really i'm not gonna be able to go through all the products but if you just go to yeti.com you can see everything they have it's a pretty diverse set of products they have like dog bowls dog beds it really is sort of an outdoor lifestyle brand that spans tons of different product categories yeah what's their tagline innovative outdoor products so that's kind of they're they're coolers and drinkware right now but i guess they're if you kind of want to they're teasing that they want to do a lot more than just that yeah and the items are sold at a premium price i don't have the exact um premium over peers but if you think about like

coleman or igloo those kind of cooler competitors um and i mean cooler in the sense of like a physical cooler not like they are cooler but uh those competitors are typically at big discounts relative to yeti so yeti let's their biggest hard cooler sells for 375 dollars you're not gonna be able to get um like a coleman or an igloo you're gonna get much cheaper but it's also much more durable and the coolers and equipment segment overall accounts for just under 40 percent of sales or it did last year also all these items or most of them are all customizable so you'll get a lot of like corporate orders that want to customize with their company logo or people that you know want like their favorite college sports team or something on

their mug just different colors for a lot of the stuff too right and so then the second one's the drinkware segment this consists of a bunch of different drinking products that are made with stainless steel and they're designed for in quotes no sweat basically um there's no condensation on the outside of the bottle so it includes tumblers bottles mugs big jugs sorry jugs and um uh like bar barware i guess you could call it um so like there's little wine cups um that are in yeti's brand or stainless steel cups. And then drinkware as a category accounted for just under 60% of sales. So drinkware is slightly larger than coolers and equipment. Were you surprised about that? Yeah, but I think it can fluctuate and I'm pretty sure coolers and equipment had a harder

time replenishing inventory than drinkware last year, which has been a point of pain or a pain point for yeti um let me give you yeah let me uh some numbers here that uh we'll talk about we already mentioned the sub stack and the drive this will be available in chart form in the google drive the percent that cooler and equipment was 43 in 2018 and now it's down to 39 and drinker was 54 in 2018 and it was up to 59 in 2021 so there has been that trend and for whatever reason And people love buying the drinkware stuff, even though it's a single product. And we'll talk about it. Sometimes it's supposed to be a single, you know, you buy once and you don't need one for five years.

Yeah, I think a lot of people are collectors of them too. They have a whole bunch of different colors, different styles. And then the last segment is their other segment. So it encompasses a variety of Yeti branded gear. So it includes shirts, hats, bottle openers. They have like ice substitutes for some of their coolers. there's a bunch of different accessory products and this only accounted for two percent of sales in 2021 so pretty small but it just gives people that want you know that are big yeti aficionados

or big fans it's probably just better it's like marketing stuff right really get the the brand out there yeah name on the hat and the shirts and all that good stuff yeah essentially and then Yeti's marketing and product development teams work together to identify and design new products. And then once items have been verified for go-to-market, Yeti partners with third-party manufacturing and logistics partners to build and distribute their products. So it's not just one manufacturer. They've got a diverse set of different manufacturers located all around the globe. There's some in the U.S., I believe one in Canada, lots throughout Asia. And in terms of just geographic reach right now, they are in the U.S., Canada, Europe, I believe in Germany and the U.K.

I might be missing some countries over there, Australia, New Zealand and Japan. Those are the current markets. But I think that touches all the basics of the business. As for the history, Yeti was founded in 2006 by two brothers, Ryan and Roy Siders, who were both born and raised in Austin, Texas. They both attended college in their home state, worked briefly at companies that manufactured outdoor goods. And then they grew up as sort of avid outdoorsmen and they were really big fishermen. And so apparently the genesis for the idea was Ryan and Roy spent a lot of time fishing

and they were frustrated that they couldn't stand on their coolers to cast a line. And so they were like, basically their goal was we're going to build, let's try to build the world's most durable cooler. And the hard side cooler ended up being a huge success despite what was a lofty price point. And it's kind of been like that product itself became a big staple in hiking and fishing culture. Well, maybe not hiking because it's a little tough to carry those, but. Yeah, well, the soft coolers as well. Camping and fishing culture.

Yeah, just that was kind of their push into the outdoors market. And then from there, they expanded the reach of their cooler business throughout the country. And then in 2013 was their first drinkware product. This gave basically a different customer cohort, a lower price point introduction to the brand. And that to me seems a little more of like a commoditized product, but people love it and they stick with it and they buy a lot more. And it's become the leading driver of sales, which is pretty impressive over the last, I think it must be nine years now.

And then the company brought in Matthew Rentjes. I believe I'm saying that right, hopefully. Yeah, tough spelling there. He was brought in as CEO in 2015 to take over from Roy Siders. I think this was an effort to sort of professionalize the operation. Roy, I believe, moved to chairman of the board. I think he's out now. But they were planning to go public in 2016. They cited poor market conditions and delayed until 2018. That's when they officially debuted the stocks about a triple since its IPO price. So Citi's pretty solid returns.

The only other thing that's maybe notable is 2019, they started building their own stores. So kind of adding to that direct-to-consumer channel. And they are spending money to kind of build that out. I believe they're at 13 total stores now across the U.S. Okay. Well, that's three just in the last quarter then. Yeah, I think that they for sure added one in California. I'm forgetting, but I know on the conference call, they said they were at about 13 total stores. All right. Well, we'll get to the stores more later and some of the later section, but let's hit industry and competition. They've self-described themselves as, quote, innovative outdoor products as what they're trying to go after. So I'm going to look at the entire outdoor products market to see sort of what their

long-term potential could be. And then I'll look at the individual products for both equipment, coolers, and drinkware. So the total outdoor industry was estimated to be at about $54.1 billion and third-party estimates expected to grow to $82.6 million by 2028. You should take this with a grain of salt because almost all of these studies claim an industry is going to grow. So is the outdoor industry going to grow? Is spending on the outdoor industry going to grow by 2028?

Who knows? But in general, it has grown over the year and there has been an increase in spending, at least in some of the Western markets and Australia, excuse me, Australia and New Zealand. However, Yeti is really only operating in a subsection of these markets right now. And even some of the drinkware isn't outdoor products. I mean, a lot of them can be used in an outdoor setting, but I guess that's just- A lot of people use it in a corporate setting. Exactly.

The corporate sales are not all outdoor sales, although they do claim that that's their market opportunity. So for coolers, the global camping cooler market is estimated to be only around $1 billion a year. So fairly small. And when Ryan goes through the numbers, you'll see that they actually have a fairly decent market share there because maybe not on unit sales, but on dollar sales. And then on drinkware, the reusable water bottle industry was valued at north of $8 billion a year.

Now, I'm not sure if this encompasses all of Yeti's drinkware products, but that kind of shows that I think the drinkware market just has more spent each year. Now, if we go into competitors, Ryan already mentioned some. With coolers, there's Igloo, Coleman, Pelican, I think Otterbox, although I'm actually confused if Otterbox is coolers. or i think it's definitely uh coolers i'm pretty sure otterbox also has phone cases yeah that could be a different company but otterbox they were the popular phone cases like 10 years ago and then with drinkware there's uh the well-known stuff with hydro flask and camelback now they're generally like competing for middle class and above people in western markets and maybe japan as well to upgrade to premium coolers and drinkware uh because this wasn't really a thing 20 or 30

years ago it's kind of a new thing for people spending more on these type of products and yeah it's tough to value the tan here because i think it's sort of important well generally we don't focus on it because they're sort of building out their own market opportunity but when you look at how much money people are willing to spend on cool or are spending on coolers right now or are spending on drinkware and stuff it's it's not that large at least compared to the revenue they're bringing in all right let's hit management and compensation and ownership as ryan mentioned the ceo is matt renches um hope i'm saying that right again he was appointed in 2015 and he has had previous experience at danaher for a decade which is nice

to see danaher really you know hunter beggar stock with a strong culture um so that's good to see Kaizen, yes. That's their whole thing is they're trying to perpetually improve. And I mean, they have. And they're one of probably the best, I'm just kind of a guess, but probably one of the best performing manufacturing stocks of all time. Yeah. And we don't need to go into a Danaher deep dive today, but yeah, one of the best performing

conglomerates of all time. So it's a positive note, I think, that Renche is coming from that. He kind of learned his way because he's only 46 years old. So I think a lot of his corporate training was at Danaher, which I just like to see that. Chairman of the board is Robert Scheer. So it's not one of the founders anymore. I think I didn't see really much of them at all on the proxy statement. Scheer is a longtime executive at VF Corporation, and they own North Face, Timberland, and Ultra.

Ultra are just outdoor shoes, kind of like Hoka's. I like to see that. It seems like there's good alignment there. Yeti's trying to build himself into, I mean, I don't know if they're going to start acquiring companies. We might talk about that later, but they're trying to build themselves into sort of a similar type of brand as maybe North Face was or Timberland kind of is. You want those premium products. So Shear, if he has that experience, it's probably nice to have him on the board.

Executives are paid, if we want to go into compensation here, their short-term incentives are based on sales and adjusted operating income targets. Sales, I guess, is fine. Adjusted operating income, you know, not the best. long-term stock awards are extremely convoluted uh i had i don't think we need to go through all the details here i don't think it's entirely relevant we just need to get the basics but they're generally based on three-year free cash flow numbers total shareholder returns and a few other things um and then some of the long-term awards are granted with no requirements except keeping your job so they're just the ones that they're going to grant to everyone no matter what

if you're an executive. The adjusted operating income, and I think this is an important note, it was kind of a highlight for me. The adjusted operating income and sales growth targets were 19% in 2021. That is higher than you see at a lot of companies, which I was very pleased to see that total board compensation was only $1.27 million in 2021, or only 0.16% of total gross profit. That's just kind of a checkbox there to make sure they're not egregiously paying their board compared to how much money they're actually bringing in. Then if we look at executive officer compensation in 2021, it was $16.1 million or basically 2% of total gross profit.

So pretty fair there. Again, they're not egregiously paying their executive team versus the gross profit they're bringing in. Yellow flag, and this is only a small one, they hire a compensation consultant. That is just a little bit, it's just a negative indicator to me that they're willing to spend on things

that might, you know, they might not have that frugality at the general administrative expenses level. And then green flag, they prohibit the repricing of stock options, which I thought was a nice note. We look at their cap or just ownership table, nothing too important to note. I mean, Ren Shays owns about 0.5% of the stock, which is okay. It's fine. And then you have Black Rock Capital World Investors and Vanguard Group at about 6% to 8% each of ownership. So pretty standard no no founders really holding a big stake um yeah do you want to hit earnings ryan pretty pretty normal ownership and cap table there yeah it's worth mentioning that the management team has done really well since taking over they may have had a new cfo come in but great

yeah great renches has done really well um and i think executive compensation didn't look too egregious uh as a percentage of the overall business as for the earnings uh if you're listening to this soon after it's released, they will have just reported. And so I'll contextualize it with the last 12 months numbers first, and then trying to get into the most recent quarter because the stock dropped pretty significantly after the quarter. But last 12 months, they've done about a billion and a half of sales. That was up 19% compared to the 12 months prior. They have 55% gross margins. I think that's really impressive for a company that's literally selling drinkware and coolers, kind of a testament to the brand, what people are willing to pay.

And then 17% operating margins. During the last couple of months, cashflow has been pretty diminished because they are replenishing their inventory. And the wholesale channels in particular were, they were having a hard time fulfilling the demand from the wholesale channels. And they just kind of got, they're trying to recover on that front and they've done so, which means inventory balance has shot up, which has really hurt cashflow because it's all tied in their inventory. That kind of leads into the most recent quarter, which was the theme of the quarter. But as for the top line numbers, $420 million in revenue, up 17% year over year, came in a little under what they were guiding for.

And they highlighted some of the online as a week part of the quarter that they're having a hard time generating online sales like they would have thought. So direct-to-consumer sales grew 14% year-over-year, whereas wholesale grew 21%. Direct-to-consumer is still a little bit larger, but they're not that far away from each other. And then they mentioned, as I said, inventory levels were understocked at a lot of the wholesale places. So that may have elevated the sales for this quarter in particular and led to the higher growth rate. And then their gross margins were down pretty significantly from last year. So 52% versus 58%.

They said fuel and freight costs were really high, there was higher product costs, and then foreign exchange also impacted. So kind of a whammy on all those. But they said it was improving throughout the current quarter, and they were seeing some positives there. As for other notes, they had negative $75 million in operating cash flow this year. Inventory levels increased by 121%. I believe inventory as a percentage of their revenue is still below their pre-COVID levels. During COVID, they were really pretty much out of a lot of their items. I was actually shopping on there and there's a lot of the items that you basically just couldn't get. And so they're trying to replenish those. And so cashflow was elevated last year and, or maybe two years ago, and now it's reverting where it should hopefully stabilize over time. Yeah, let me get a, I made it since that was very important.

I made a chart for the drive and the sub stack of conversion from free operating income to free cashflow, which is kind of a good metric of how much of their profits they're converting to converting to cashflow for shareholders. And if we look for 2018 through 2021, so those four years, their conversion changed kind of sporadically each year, but the average actually came out to 102%. So over the last four years, they've converted almost all their operating income to free cashflow, but some years look way worse than others. And right now it's not looking as good. And for reference, their operating margins have tended to fluctuate between 15% and 20%. So pretty solid operating margins there, especially for a manufacturing business.

The last thing I'll mention, they spent $26 million on capital expenditures. Part of that is recurring where they're going to constantly be building out new products and trying and testing stuff. But then they're also building out those new stores, which is costly as well. So pay attention to free cash flow over time because that is a big part of the business. And they also, there's maintenance CapEx involved in there as well with upkeep on existing product lines. And then last thing, I guess, balance sheet and liquidity, pretty simple balance sheet. They have $91 million in cash and equivalents, $108 million in total debt, 25 million is

due in the next 12 months. But given how much they've typically generated in cash on an annual basis, debt is really not a concern here at all. And that's something they actually, throughout COVID, when they were fortunate to be generating tons of cash, they paid a lot of that debt down early. And then the only other note on that inventory, apparently year over year, their inventory units grew by 70%. So part of the increase in inventory is also the pricing of the items. So they did raise prices recently. If you're raising prices, it's going to increase the nominal value of your inventory.

What they're marking their inventory at, yeah. And then they also mentioned that most of the inventory growth in units came from coolers and equipment, which was apparently constrained relative to historical levels. And they did say, there's a quote in the conference call, they said, we're actively managing our purchase orders with our suppliers to reflect updated demand expectations. That was a little bit concerning, and I think that's kind of – the whole inventory situation, I imagine, is what's really leading to the sell-off in the stock that they've seen over the last two days as of us recording this. It's going to make the cash flow multiple look higher than it probably is or higher than it should be in the future relative – I guess they are generating way less cash than they should on an annual basis typically from here on out. So just keep that in mind. That leads right into the valuation. So when we're recording this, the valuation is based on a stock price of $44.47.

It's been pretty volatile. So we have a dynamic valuation that just upstates for you. And that'll be on the, again, I'll be a broken record here in the sub stack in the Google Drive. So reference that, I guess, when you're going over any of the show notes. But as of this recording, the enterprise value is approximately $3.8 billion. dollars. And if you look on the 2021 financials, which I think is fine to use here for a company like this, the difference isn't going to be that great. Their enterprise value to operating income is approximately 14. And their enterprise value to free cash flow on trailing numbers is

approximately 42.5. So again, like Ryan mentioned, the cash flow looks a lot worse than the operating income right now. But over time, historically, they've converted a lot of that operating income to free cash flow. So I think if you're an investor in this or looking at this company, that's an important metric to track. Is there a difference between operating income or net income or whatever and free cash flow? If there is, how big of a difference is it? Is the trend moving in the wrong direction? Is it all based on inventory? Lots of questions there, but definitely something important. Lastly, on valuation, let's look at share dilution. Potentially, dilutive securities are about 1.5 million versus 86 million shares outstanding today. This ratio has been going down

for the past few years. So they've gotten better on the SBC front and it looks like they still been able to retain employees. They actually have less than a thousand employees, which is really nice to see a company that seemed to have the right amount of employees versus the size of the company, if you kind of get what I mean there, Ryan. And last note, oh gosh, I'm forgetting, the buyback. We didn't mention that. They had a small buyback that they exhausted, took down the share count a decent amount. And without the heavy SBC, they said they're going to probably do that in the future, but they didn't do that last quarter. They finished that in Q1. Yeah, it was $100 million. So relative to their market cap, which I think is around $4

billion not yet yeah a decent amount um and i think they initiated it and exhausted it in the same quarter so yeah there's the liquidity there and if they start generating cash again you'd likely see them doing that because they're paying down all their debt um and it's kind of going away all right let's move to anecdotal evidence ryan this will i guess be a it's an important one for this stock um what are your thoughts on yeti i really like the brand um i'm a little indifferent on the drinkware category um i think i i use a hydro flask um and the two products feel very similar to me i see with those plastic bottles not to shame don't plastic shame me on the podcast the uh i i use it at home the the hydro flask um it doesn't really make a difference to me

on the drinkware but i do like the brand and i do think it actually has a bit of this outdoorsy vibe um 100 makes you feel i guess i don't know like like an outdoors person even though maybe i'm not the most outdoorsy person in the world as someone that's more in the outdoor it's not an industry just realm i guess i don't know what word to say there people love yeti i They're getting Yeti coolers or the people that copy Yeti coolers, but can't charge as much. Yeah. I mean,

I, the only item I've gone on there and considered buying myself where I've gotten some stuff as gifts was t-shirts like clothing. So they're like Patagonia. Everyone. Oh yeah. Almost like Patagonia in a sense. It just kind of,

it does actually, you know, everyone says brand send a message. I do think in this case, it's very true. what about you uh yeah sorry i thought you were saying something there i i think i generally agree here i if i was looking to buy a cooler um if i was looking to buy well i guess i'm not really looking to buy the drink where i kind of agree with you there but even those bags that

came out with that really aren't really well known among consumers right now but it's only been a couple of years i would definitely go to them first because i know the product quality is i know it would last for like 10 years and they have that they've captured for myself that distinction as the premium brand within these niches which is tough to build and tough to compete against and it's kind of their historical operating margins um i think are you know they it's just an example of that where like we we have this you know idea in our head about the brand right and sometimes that doesn't translate into what the financials look like but that idea of the elevated brand that we have for yeti actually translates to higher operating

margins yeah all right let's move to future growth opportunities ryan i see you took the cliche but it works here that we're not supposed to use but it actually has been a really strong highlight for the company so yeah and i'll say that i i try to think of as many other ones as possible, but there's pretty much two new initiatives that they're pouring money into aside from like the typical, like they're looking at new products and they're constantly testing new initiatives, but, or maybe trying different marketing channels. But the two that they're really allocating money to are the new stores, which you're going to talk about and the international growth. So far, Yeti has expanded its presence, as I mentioned,

into Canada, Australia, New Zealand, Japan, and Europe. Last year, international revenue The international revenue accounted for just under 10% of sales, but it was growing by triple digits. So the blueprint here is to get connected with the biggest wholesalers in the countries. And then they haven't done this yet. Establish your own store. So before they get their own stores in these places, I think it's good to get the brands and popular wholesalers to kind of get those new customers affiliated or... or, um, and drive people to their website as well. Right. And so, um, they've seen good growth there. I would think without having been to Australia or New Zealand that it fits the

outdoorsy culture. Um, yeah, for sure. Europe, a little bit less Canada to Canada, Australia, New Zealand, if this feels like a perfect brand for that. Yeah. So I guess the other benefit of international growth is that so brands consumer sentiment on brand brands can change really quickly which is like i guess foreshadowing that's my low light but um having a diverse having diverse geographies limits the risk of one country ruining the brand entirely so like if you have really bad so but in 2016 if this would have happened earlier it would have been of problem. But in 2016, they were very popular with like hunting and fishing culture. And they had a dispute with the NRA. If America was their only market and that was a lot of their customers,

it could have potentially been sort of detrimental to the brand. Now at that point, it really didn't have that big of an influence and they had diversified product enough from just that specific cohort that they were fine. But I think geography, if you lose one geography in this case and you have a whole bunch of different presences elsewhere, you're going to be fine. Yeah, I agree with all that. All right. Mine is flagship stores. They currently have, and correct me if you said 13, because I was going off the Q1 numbers

because during some of the research, it's kind of bad timing when they're about to report right before. They have 13 of these flagship stores open, right? Confirm for me while I'm talking here. It may be 13 by the end of the year. Gotcha. Okay. Well, generally, they don't have very many open, but they're in the South Texas and the

southwest united states um i don't again we haven't been because we're from the pacific northwest but they seem to be fairly large they seem to also have a bar slash restaurant concept to keep people in and they seem to be more of a i don't want to say apple because apple is not really the best comparison here we taught and rh isn't also the best comparison here because it's definitely different but maybe yeah it's honestly though maybe like almost a william sonoma type like they're trying to make it fairly big not like they couldn't be in every city in america they may only have a market opportunity of doing 100 of these or something like that because they need to be in a big market but they want to be big i drove by a store once in florida and it looked

pretty popular but that's my only anecdotal evidence oh well here's some more uh they have great reviews i was kind of perusing google maps and uh here's here it is here's the quote so rare to see brands behave like this literally sell mugs and coolers but i was all caps dying to spend because of the perfect story being told throughout the store as a consumer yet he hit my whole story even down to my dog that's i mean you can't get any better than that really so it seems like the stores are doing great there's a large opportunity for them to increase their capex spend here i would think any city with over 500 000 people it could work in maybe maybe a million something like that um and it can work in you know a lot of international markets as well

so pretty pretty big uh growth opportunity there all right highlights and lowlights ryan what did you like and dislike about yeti i really like their marketing strategy and i think it's different than uh the typical company because they focus on that storytelling aspect that we've really talked about and like that review talked about kind of like a nike model um and that often means But, you know, you read through the conference call and you see all the money that they're spending on marketing ski competitions, initiatives where it's stuff that is hard to like specifically track the return on ad spend, but you know, it's actually helping. So one example, this quarter, there was a viral user generated content series, I think on TikTok primarily, where customers posted videos of Yeti products surviving like crazy conditions. so i think it was like a cooler and a fire and it like yeah and it like held the ice like the ice stayed cold right there like yeah um you don't know how much sales that event specifically

drove to yeti but you know it's good for the brand and so they're doing stuff that's really sort of grassroots they have a lot of brand ambassadors um they are trying to be that outdoors lifestyle and so often that means doing stuff that isn't just google adsense or uh what is it you know google search yeah google search for facebook ads or instagram ads although instagram probably organically is fairly important for them because people like taking pictures with their yeti cooler it's kind of a signaler they're popular they're popular on social media apps for sure oh i guess other yeah other ones uh they successfully transitioned to the direct to consumer model um so they've really seen a lot of good growth especially during covid on the

website i think that's a testament to um how much people love the brand they aren't it shows that they aren't looking for coolers they're looking for yeti coolers or they're you know they're looking for yeti mugs yeti shirts it's not just oh i went to a wholesale channel it's not the shirts the other category it's tiny whatever but the the point is people are going to the website specifically as opposed to just seeing it in a wholesale or like a big store like an rei and say no that's kind of cool like people are actively seeking it out and then low lights um i really only have one and i don't it's that i don't like brand driven moats um unless it's something that's been around for a long time multiple decades or it's something that sells an unhealthy addiction

like uh caffeine nicotine sugar salt we talked about this or or healthy addiction but something where there's some sort of quite addictive yeah habitual stuff um in in other areas consumer sentiment can really change fast and i think that's still a realistic risk for yeti today that they do something to jeopardize the brand yeah it requires a lot of brand management yeah I was going to say delicate nurturing, which is probably the same thing for management. All right. My highlights. Biggest highlight to me.

Well, I guess the brand is also a huge highlight. But the biggest highlight I like, management. I know it's tough to get a full grasp when we're just looking at a stock for a week here. But there are some things I really liked. And here's a list. They're including longish tenure. So six years isn't that long. But branches has been there a while.

Seems like he's going to be there for a long while. Dana, her pedigrees from two executives. So you have the CEO plus, I believe, the chief sales officer. Another thing, reasonable compensation and SBC expenses, reasonable employee count and expense structure, share repurchase strategy seems sound, although it doesn't look great right now with the stock tanking. And then lastly, solid operating targets for yearly bonuses. I get sick of seeing 6% target growth for huge bonuses.

And this was rat, you know, it seemed really rational for aligning all the value for aligning all shareholder interest. Now, second highlight here, the brand quality, it's very strong. Like Ryan mentioned, they seem to have learned from other top American brands like Apple and Nike with their advertising strategy. And I think if slash when more stores open up, brand awareness and quality should only grow. For example, if there's one in the Seattle area, I'm not sure what part of the city would

work best in but it would definitely help especially if say they're rolling out their bag product you get a lot more people in the store they're like oh i didn't even know yeti had these 300 bags they look cool they have super great durability i can take them on outdoors trips and as you know luggage i'm gonna get those as well it's yeah i mean it's almost uh it'd be similar to warby parker lululemon where having a store helps increased online sales because you build a little more trust for the brand. Yeah. And we don't need to say virtuous cycle, because that's probably overrated in that regard. But again, it can help. They all can work in tandem. Then lastly, the international expansion has been incredibly strong. Let me confirm the

number here. Again, this will be sent out with the Substack and Google Drive. But since 2018, international revenue has compounded at 99% a year. So I mean, just phenomenal numbers on international. I'll be up from a low base. A low base of only $16 million, but still. All right. Lowlights for me, we talked about inventory, cash conversion and inventory are going to be concerned here. It's just the type of business they're in. And a quality business, in my opinion, consistently turns profits into cashflow. Yeti hasn't proven it can do that yet. It's not necessarily something that would keep me entirely out of the business, but I think it means they deserve a lower multiple, I think in general, all else equal. And the pandemic may

have made things difficult for these inventory things, but it's still a concern, something to watch out for and not something I like. Lastly, other concern is, and it kind of tails into what Ryan was talking about, about habitual and addicting products. It's how low recurring a customer purchases products from Yeti. Maybe someone that's wealthier might purchase like one thing a year. Some people can be really spendy, but both the drinkware, coolers, and even the bags are meant to be purchased probably like as a pitch once every five years that's kind of their thing you know it's durable stuff like that um that's fine you know with everything costs 300 but and the customer comes back again but it just makes compared to maybe an apparel

company um and especially uh you know food or or nicotine type they are an apparel company yeah all right ryan let's talk we don't need to bring up the shirts again but it just makes the business just because of the market they're in lower quality in my opinion it's just harder to uh it's just generally harder with your strategy when you're not selling something and maybe that's just a testament to someone someone like apple you know because they're only selling something like once a year yeti's even less it takes a lot of brand management they're doing it but they're just in a harder spot than say a starbucks who has made a lot more missteps than yeti and yet their business is absolutely

ginormous. Alright, bold case. Ryan, what do you think here? The bold case for me is that a combination of two things. They continue to roll out new products and then iterate on existing products, which helps keep sales

growth relatively high in the domestic market, so the US. And then international, they find the same sort of brand love in those markets. It's hard to say what the ceiling is going to be for the international. I really have no idea. But if those two things occur, I imagine that they will have at least 10% revenue growth. And at the current price, if they get to 10% revenue growth, let's say a year for the next five years, and then

they can get cashflow margins into that 15 to 20% range, right around operating margins where they can convert their operating income into cash, how they have historically, you're going to have good returns to the shareholder from here. Yeah. I had similar stuff. Given their solid expense structure, really rational on the employee counts and what they're spending on R&D as a percentage of revenue, advertising as a percentage of revenue and still being able to grow, I wouldn't be surprised if this business can achieve 22% to 23% operating margins when shipping costs come back down to earth. Like we talked about in the recent earnings, gross margins have taken quite the hit recently. And if inflation continues and stuff like that, maybe gross margins

don't expand back up to closer to 60%. But at the current enterprise value operating income of 14, which is based on the 2021 numbers, the expectations aren't that high here. If revenue growth at 10 plus a year and management buys back stock i mean we don't need to go any more complicated than that all right you're right bear case ryan what could go wrong here i think we're gonna have fairly simple ones but you know still concerned yeah it's with something like yeti it's a little difficult to quantify what the bearish scenario looks like but if something happens where they lose their spot as the premier outdoor lifestyle brand, momentum totally kicks in into reverse where sales compress.

When sales compress, you're going to have margins compress and probably your pricing power is going to go away if you're not the premier brand. So margins will kind of double compress. And then, I don't know, it's just with retail, that momentum can really bite you in the ass on the way back if you're not able to maintain that brand reputation. so i don't know it looks like i think the bear scenario is they end up like under armor yeah

you would have the same pitch from under armor 10 years ago from the bull case yeah so i don't know there's just always that there's always that risk with brand driven moats yep and management i guess that makes management super important here all right my bear case um i think these are well I guess they're slightly different, but I do agree with your bear case. I have two here that could just kind of maybe just limit their overall cashflow generation. And that's margin deterioration for input costs. They have both commodity inputs, plastics made out of oil, all that good stuff, and steel and stuff like that. And then shipping. So shipping costs have been up. They've fluctuated a lot, but we'll see. And then I also have a little bit of a concern of the size of the

addressable market. Yeti has really shown no signs of slowing down on their revenue growth. So maybe this is unwarranted, but I believe if they want to graduate, what are they on pace for this year? Like a billion in revenue or no, probably less. If they want to graduate to maybe a multi-billion dollar a year revenue company, let's just put it that way. They did a billion and a half over the last 12 months. Oh, okay. Sorry. Sorry. Okay. They want to graduate to say a $5 billion. dollars. Um, so they do a billion and a half. Now let's say they're wanting to graduate to that level. They're going to need to go into new product categories and it's harder to win

when you're going to these new product categories. It's just requires, um, I don't know, requires just, uh, you know what, like for example, it's unpredictable. Yeah. And the bags, it's just going to require a lot of marketing, a lot of convincing among people to know that these things even exist um here's a question should they start acquiring other outdoor brands i can think of a lot of products that i see at rei that could fit within their portfolio you know they i feel like i think they've done really well keeping everything in house like keeping everything maybe separate i mean you know but it's just i mean part of the benefit of a yeti product is It's a Yeti product.

Exactly, but they could own other ones. What, like Newell? Okay, Coleman is owned by Newell Brands? I'm not talking about cooler or drinkware competitors. I'm saying if they want to get into other outdoor categories, I'm thinking of Anemo, the premier company in tents. They've done a good job doing it themselves. Yeah, but if they were going to compete with Anemo,

and this is really not that relevant it's kind of a sidebar but if they're going to compete with a nemo they would have a tough time because the same thing if nemo came out with a cooler because everyone for tents and uh and sleeping pads and stuff like that the premier ones kind of the nemo's like the similar ones i think there's just a lot of stuff but in the outdoor category that fits into their kind of premier stuff and they keep the brand separate but it's just a way to allocate capital and i think get a good return on that investment with you know durable products that probably have good margins yeah i just don't know if it would be that much more of a like obviously you're gonna have to pay a premium probably to acquire them we'll see of

course and you know like the the the brands being acquired know that it's going to be harder for them to do it in-house because they have to pour all that money into marketing so i just don't know if it's huge benefit and they don't have any like there's no benefit for a nemo to be under the yeti brand that i can think of uh yeah fair they're already all at rei and stuff so it's fair all right more or less interested right more i don't it's it's so tough because there's always the risk that it goes the way of like an underarmor or maybe a gopro fair that's a fair point although gopro there's been some good bull cases on gopro recently but yeah the business has changed a bit but i don't know i am more

interested because i really like the brand and i do think this is a kind of company that should trade at a discount just because you're taking the risk that the brand sustains over time but it has come down the valuation has come down a lot over the last year or so if you're if if this is trading at let's say let's say they convert all their operating income to cash like they have historically kind of evened out over the next 10 years this is a good price yeah but i just it feels like a big risk and i just tend to stay away from retail yeah it's harder it's harder for sure yeah i guess i'm really in the exact same boat i'm sorry for the listeners that we have no not any major disagreements on this one but yeah i do like the price i have like a

20-year threshold for come for retail companies like you have had 20 year 10 they need a 20-year tenure yeah like you have to have been around for 20 years and people liked you for 20 years and you withstood multiple like uh changing risks to the business yeah we talked about that power hour sometimes trends change people like wearing short shorts and long shorts sometimes people might like a different type of cooler who knows and yeah it's it's unpredictable um but i'm more interested it could be one that we watched ten bag and it would be very disappointing because we we kind of saw the bull case here but i think there are definite risks here it's on my watch list for sure um i think i don't know i would want to buy the big enough discount but i don't

know what that discount is yeah yeah it's hard it could be now it could be right now it could be right now i mean you can see there's an easy path to good shareholder returns here if they keep executing all right stock for next week which is actually not next week next week is disney with Brad Freeman. And actually tomorrow, there will be a release of the first Arch Capital episode on why we own Spotify, kind of doing a breakdown on that stock and an update on the company. We're going to be doing one of those each month. But for two weeks from now, Ryan, what is your choice for the listeners? I'll let you pick between two audio companies so kind of tailoring off the spotify episode serious xm or iheart media oh i heard

public they are wow i'll have to look that up right after uh what would be good to do in order i think serious would be good to do first and then we can do iron at like whatever in in september so let's do serious xm similar businesses actually they've kind of got the saddle satellite radio So core business, and then they're investing in new audio initiatives. So all right, little tease. Little tease there. All right, that's going to do it. Thank you all for listening.

I guess we don't have to give much disclosure on, well, we should do the standard disclosure. Thank you all for subscribing. Again, we took a big risk to launch CCM Plus, and so far, you know, you're the ones that have joined. So really hope you'll stick around and listen to an episode each week. All right. Remember, we are not financial advisors. Anything we say on the show is not formal advice or recommendation.

We are general partners at Arch Capital. Clients may hold securities discussed in this podcast. Thank you all for listening. We'll see you next time.