Description

Many of you are likely familiar with YETI, so I will forego an in depth intro to the business. Bluewater12 wrote up a great pitch mid 2019 that has started to play out (while initial timing was a little early, it turned into a great call with their later recommendation on timing). https://valueinvestorsclub.com/idea/YETI_HOLDINGS_INC/8228203237

We believe YETI is a timely short into 2024 given the following:

1. Big ticket discretionary has been the first to crack this year, however we are seeing early signs that we will see a trickle-down effect and increasing trade down behavior. This is compounded by the fact that YETI is losing mindshare and wallet share to the Gen Z favorite Stanley Tumbler. 

2. YETI’s underlying growth has meaningfully deteriorated while management has obfuscated the fundamentals of the business through aggressive gift card accounting. Despite this, consensus estimates imply an acceleration beginning in 2H23 through 2024+.

3. We believe that long-term, YETI’s brand “competitive advantage” is unsustainable. It appears likely that YETI will go the way of Kodak, RCA, Zenith, Blockbuster, Nokia, Polaroid, and many other companies that had "durable brand moats." We believe there is a high likelihood that YETI has impaired terminal value and will prove to be a melting ice cube. Our industry work and analysis of customer cohort data supports our view. 

Assuming current underlying sales trends don’t reverse, but share doesn’t deteriorate further, we see FY24 EPS of ~$2.20, ~20% below consensus $2.77. If we were to assume category share of wallet, and YETI share of category continue to deteriorate consistent with current trend, we think slightly below $2 is possible (despite some meaningful Gross Margin tailwinds). In the last month YETI has already derated from ~18x to ~16x forward EPS, we believe partially off the gift card issue & competition becoming more widely understood. However, it appears investors are still underestimating the magnitude of the impact from the aforementioned 3 key investment factors. We believe a 13-14x multiple is more appropriate for a secular loser who is ceding share amidst consistent earnings misses and negative revisions. 13-14x our $1.95-$2.20 estimate implies $25-31, or -27% to -40% downside from current prices.

Thesis Detail

Over the last ~3 months we have seen a significant slowdown in big ticket discretionary spending, with broader consumer weakness in the lower-income demographic. 

Brief summary of what we heard in the last few months:

• AAP attributed weakness to low-income consumers

• BBY noted consumers trading down, specifically lower income households

• BIG called out lower income spending pressure, noting they were in the early stages of trade down

• BJ saw a bit of a pullback from lower income consumers

• CASY noted beginnings of trade down behavior

• DG & DLTR both noted an increase in trade down activity

• DRI noted weakness was largely seen in lower income households (<$50k)

• GPS saw weakness from the low income consumer

• HD & LOW both saw pronounced weakness in big ticket discretionary

• WMT saw continued trade down behavior

However, during 2Q YETI seemed to be insulated. The rationale was that sports centers were still talking to minimal or no trade down behavior, specifically DKS & ASO, 2 of YETI’s largest retail partners. And YETI management touts the “fact” that their target demo is a higher income consumer. While there is some truth to the 2nd point, our work suggests it is not as insulated as management implies. 

Now that said, we have been hearing early signs of both factors reversing. ASO just spoke to an increase in trade down behavior and softness creeping up into their middle income demo. Second, we are beginning to hear more consumer softness at the ~$100-150k level from sporting goods retail industry conversations. 

Of note, OLLI shared mid last month: “we're seeing that trade down of the higher income consumer, for us, that's over $75,000 in household income…we definitely saw an acceleration in that $75,000 to $150,000 range or $100,000 to $150,000 income range.”

This dynamic is something we are seeing reflected in the data. We ran an language scrape of all company transcripts in consumer discretionary (excl. auto, auto related, housing, and housing related companies) and found a material increase in mentions. I won’t go into too much detail of what is entailed in the query, but it effectively searches transcripts for comments related to “trade down” (excluding positive comments such as “we see no trade down behavior) and/or incremental weakness at higher income cohorts. 

YETI has been masking this deterioration in demand by aggressive gift card accounting. In 4Q22 YETI had a product recall in their cooler segment of the business and as part of the recall, YETI offered customers the option to get a gift card refund (among other options). YETI then wrote off the affected inventory & took a reserve. However, YETI kept gift card redemptions in revenue despite issuing them for free. And a substantial portion of their customers opted for the gift cards. While this obfuscation has become better understood over the last month, it appears investors are still underestimating the impact. We also believe management’s expectations for the soft cooler reintroduction are overly optimistic. 

Given YETI has successfully fended off new competition before (like S’well & Hydro Flask), it appears bulls have become complacent. The Stanley tumbler, a relatively new entrant that started as a Gen Z favorite, is often dismissed as niche & as a temporary fad. Our industry conversations and 3P data lead us to believe that Stanley is taking significant share and is a very real threat. For example, Stanley is selling approximately ~500-600% more of its most popular tumbler compared to YETI’s. And Stanley’s target customer demo has expanded significantly over the last ~6 months. Similar to above, this dynamic is reflected in our industry work and 3rd party data. 

In our view YETI is a low moat business whose returns will be eroded by incremental competition over time. Additionally, we believe YETI is structurally disadvantaged in that they sell durable products with a very long replacement cycle. As illustrated in the cohort retention graph below, less than 10% of customers return to buy another item after a year, and YETI has less than 5% 3-year customer retention. Given extremely low purchase frequency (these cups & coolers last for a very long time), a trend toward commoditization, and increasing trade down behavior, we believe YETI will have to pay perpetual customer acquisition cost to re-acquire users as its brand advantage deteriorates. 

For those of you not familiar with looking at cohort charts, such as the one below, for a good or improving company you want to see retention improve in each cohort (each column). I.e., cohorts of customers continue to improve over time as illustrated by increasing retention rates when looking at each column top-to-bottom. Instead, what is illustrated in YETI’s retention chart below is cohort retention that improved up through the pandemic but has deteriorated since. And it has sharply deteriorated over the last year. At a high level, you would want to see the shading getting darker or stay the same as you move down each column. What you don’t want to see is a dark cluster at the top left, which then gets lighter as you move down (excluding quarter 1 / column 1).

Another way to look at customer cohort behavior is cumulative spend per customer by cohort, as illustrated in the chart below. These two charts taken together roughly illustrate the direction that LTV is trending (i.e. getting better or worse). For those not familiar with the below chart, for a good/improving business, you want to see each new cohort (represented by a line) improve compared to those that came before. In this chart, the better performing the cohort, the lighter the color of the line. So, in this case, improving cohort behavior would be illustrated by the longer lines being a darker shade than the shorter lines. However, we see the opposite for YETI: the newer cohorts (as represented by the shorter lines) are darker in color. This means that newer customers consistently perform worse than older customers. Or said another way, YETI’s incremental customer is getting less valuable with time. 

I apologize for the lengthy explanation to all those that are familiar with cohort charts. And for those who still don’t get it, this is a long-winded way of saying that YETI’s customer lifetime value (LTV) is getting worse over time. 

These charts are even more relevant when taken in context with recent strategic “drift” by YETI management. YETI recently launched a plastic water bottle called Yonder (November 2022), a divergence from their high-quality core metal offering. This suggests to us that management is trying to shorten their product lifespan / increase their customer repeat rate and/or it is a signal that YETI’s core market is more saturated than widely believed. 

Valuation / Number Trajectory

YETI is trading at 15.7x forward consensus EPS, down from ~18x in September, but up from its low of ~11x last October. Note this is a substantially below the ~25-40x range it traded between since coming public in late 2018. The multiple has come down as some of the earlier points have become better understood. However, as I mentioned above, given management’s obfuscation of numbers & deteriorating competitive and macro backdrop, we believe there is still significant downside to consensus expectations for 2024-2025 (and arguably into perpetuity). 

Assuming current underlying sales trends don’t reverse, but share doesn’t deteriorate further, we see FY24 EPS of ~$2.20, ~20% below consensus $2.77. If we were to assume category share of wallet, and YETI share of category continue to deteriorate consistent with current trend, we think slightly below $2 is possible (despite some meaningful Gross Margin tailwinds). We believe a 13-14x multiple is more appropriate for a secular loser who is ceding share amidst consistent earnings misses and negative revisions. 13-14x our $1.95-$2.20 estimate implies $25-31, or -27% to -40% downside from current prices.

Quick note regarding timing: 3Q has the potential to beat given 1) strength in the Pink collection (helped by Barbie) & 2) wholesale sell-in of its relaunched coolers. This combined with elevated short interest, which is at 1-year highs (~15% short interest & ~7 days-to-cover), could drive a meaningful squeeze during 3Q results. We think that would present an attractive entry point as underlying demand trends continue to deteriorate, and despite the GM tailwinds bulls will be quick to point out. 

Risks

• Demand deteriorates at a slower bleed and can be completely offset by margin expansion (as briefly touched on, YETI could enjoy meaningful GM tailwinds if macro and/or competition doesn’t force their hand to become more defensive)

• YETI’s core customer remains insulated from macro challenges longer than expected

• Stanley adoption stalls and it turns out to be another short-lived trend. However, we believe it’s a matter of when, not if, YETI’s brand advantage is eroded

• YETI’s Pink line & relaunch of its coolers may have longer legs than expected

• Stock is down ~18% in the last month, in large part due to sell-side catching up on the gift card obfuscation. Short interest is at 1-year highs at 15% of float w/ 7 days to cover. It appears very possible 3Q will beat and we might see a painful squeeze. Depending on duration and pain tolerance, it may be better to wait and see following 3Q. As mentioned above, we believe this is a melting ice cube and will likely present several opportunities as a compelling short over the next several years

Catalyst

Earnings