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(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i7601 Southwest Parkway
iAustin, iTexasi78735
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code) (i512) i394-9384
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
iCommon
stock, par value $0.01
iYETI
iNew York Stock Exchange
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No ☐
Indicate by check mark whether the
registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ☒
There were i87,011,420
shares of Common Stock ($0.01 par value) outstanding as of July 31, 2020.
This Quarterly Report on Form 10-Q contains ‘‘forward-looking statements’’ within the meaning of the Private Securities Litigation
Reform Act of 1995. All statements other than statements of historical or current fact included in this Quarterly Report on Form 10-Q are forward-looking statements. Forward-looking statements include statements containing words such as “anticipate,”“assume,”“believe,”“can,”“have,”“contemplate,”“continue,”“could,”“design,”“due,”“estimate,”“expect,”“forecast,”“goal,”“intend,”“likely,”“may,”“might,”“objective,”“plan,”“predict,”“project,”“potential,”“seek,”“should,”“target,”“will,”“would,” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operational performance or other events. For example, all statements made relating to growth strategies, the estimated and projected costs, expenditures,
and growth rates, plans and objectives for future operations, growth, or initiatives, or strategies are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that are expected and, therefore, you should not unduly rely on such statements. The risks and uncertainties that could cause actual results to differ materially from those expressed or implied by these forward-looking statements include but are not limited to the risks and uncertainties listed under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q, as such risk factors may be amended, supplemented or superseded from time to time by other reports we file with the United States Securities and Exchange Commission.
These forward-looking statements are made based upon detailed assumptions
and reflect management’s current expectations and beliefs. While we believe that these assumptions underlying the forward-looking statements are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect actual results.
The forward-looking statements included herein are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events, or otherwise, except as required by law.
Common stock, par value $ii0.01/;
ii600,000/ shares authorized; ii87,004/
and ii86,774/ shares issued and outstanding
at June 27, 2020 and December 28, 2019, respectively
i870
i868
Preferred
stock, par value $ii0.01/; ii30,000/
shares authorized; iiiino///
shares issued or outstanding
i—
i—
Additional
paid-in capital
i315,405
i310,678
Accumulated
deficit
(i147,583)
(i189,545)
Accumulated
other comprehensive income
i337
i4
Total
stockholders’ equity
i169,029
i122,005
Total
liabilities and stockholders’ equity
$
i627,452
$
i629,539
See
Notes to Unaudited Condensed Consolidated Financial Statements
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. iORGANIZATION
AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Headquartered in Austin, Texas, YETI is a global designer, retailer, and distributor of innovative outdoor products. From coolers and drinkware to backpacks and bags, YETI products are built to meet the unique and varying needs of diverse outdoor pursuits, whether in the remote wilderness, at the beach, or anywhere life takes our customers. We sell our products through our wholesale channel, including independent retailers, national, and regional accounts across a wide variety of end user markets, as well as through our direct-to-consumer (“DTC”) channel, primarily on YETI.com, country and region-specific YETI websites, YETI Authorized on the
Amazon Marketplace, our corporate sales program, and our retail stores. We operate in the U.S., Canada, Australia, New Zealand, Europe, Hong Kong, China, Singapore, and Japan.
The terms “we,”“us,”“our,” and “the Company” as used herein and unless otherwise stated or indicated by context, refer to YETI Holdings, Inc. and its subsidiaries.
i
Basis
of Presentation and Principles of Consolidation
The unaudited condensed consolidated financial statements and the accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, our financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary for a fair presentation of our results of operations for the interim periods. Intercompany transactions are eliminated in consolidation. The preparation of consolidated financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses during the reporting period and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements. Estimates and assumptions about future events and their effects cannot be made with certainty. Estimates may change as new events occur, when additional information becomes available and if our operating environment changes. Actual results could differ from our estimates.
Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to applicable rules and regulations of the SEC. These interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 28, 2019.
We
have recast previously reported interim financial statements to conform with the adoption of the lease standard, as discussed further below.
We operate on a 52-to 53-week fiscal year ending on the Saturday closest in proximity to December 31, such that each quarterly period will be 13 weeks in length, except during a 53-week year when the fourth quarter will be 14 weeks. Fiscal year 2020 will be a 53-week period. Unless otherwise stated, references to particular years, quarters, months and periods refer to our fiscal years ended in December and the associated quarters, months, and periods of those fiscal years. The unaudited consolidated financial results represent the three and six months ended June 27, 2020 and June 29, 2019.
i
Accounts
Receivable
Accounts receivable are carried at original invoice amount less estimated credit losses. Upon initial recognition of a receivable, we estimate credit losses over the contractual term of the receivable and establish an allowance for credit losses based on historical experience, current available information, and expectations of future economic conditions. We mitigate credit loss risk from accounts receivable by assessing customers for credit worthiness, including ongoing credit evaluations and their payment trends. Credit risk is limited due to ongoing monitoring, high geographic customer distribution and low concentration of risk. As the risk of loss is determined to be similar based on the credit risk factors, we aggregate receivables on a collective basis when assessing credit losses. Accounts receivable are uncollateralized customer obligations due under normal trade terms
typically requiring payment within 30 to 90 days of sale. Receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded to income when received. For the three and six months ended June 27, 2020, our assessment also considered the current and potential future impacts caused by the COVID-19 pandemic. Our allowance for credit losses was $i1.1 million as of June 27, 2020 and nominal as of
December 28, 2019, respectively.
For
financial assets and liabilities recorded at fair value on a recurring or non-recurring basis, fair value is the price we would receive to sell an asset, or pay to transfer a liability, in an orderly transaction with a market participant at the measurement date. In the absence of such data, fair value is estimated using internal information consistent with what market participants would use in a hypothetical transaction. In determining fair value, observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions; preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:
Level 1: Quoted prices for identical instruments in active markets.
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical
or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3: Significant inputs to the valuation model are unobservable.
Our financial instruments consist principally of cash, accounts receivable, accounts payable, and bank indebtedness. The carrying amount of cash, accounts receivable, and accounts payable, approximates fair value due to the short-term maturity of these instruments. The carrying amount of our long-term bank indebtedness approximates fair value based on Level 2 inputs since the senior secured credit facility (“Credit Facility”) carries a variable interest rate that is based on London Interbank Offered Rate (“LIBOR”).
i
Recently
Adopted Accounting Guidance
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments, and also subsequently issued amendments to the initial guidance, in ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2020-02. ASU 2016-13 replaces the current incurred loss impairment method with a method that reflects expected credit losses on financial instruments. In November 2018, the FASB issued update ASU 2018-19, clarifying the scope of ASU 2016-13. In April 2019, the FASB issued updated ASU 2019-04, clarifying that equity instruments without readily determinable fair values for which an entity has elected the measurement alternative should be remeasured
to fair value as of the date that an observable transaction occurred. In May 2019, the FASB issued ASU 2019-05, which provides an option to irrevocably elect to measure certain individual financial assets at fair value instead of amortized cost. ASU 2020-02 provides updated guidance on how an entity should measure credit losses on financial instruments. We adopted this standard in the first quarter of fiscal year 2020. The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU removes Step 2 from the goodwill impairment test. We adopted this standard in the first quarter of fiscal year 2020. The adoption of this standard did not
have a material impact on our consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. We adopted this standard in the first quarter of fiscal year 2020. The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.
In
February 2016, the FASB issued Accounting Standards Codification (“ASC”) 842, Leases (“ASC 842”), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. As previously disclosed in our Annual Report on Form 10-K for the year ended December 28, 2019, we ceased to qualify as an emerging growth company and became a large accelerated filer at the end of the fiscal year 2019, and as such, ASC 842 became effective for us on December 30, 2018, the first day of fiscal year 2019. We adopted the standard using the modified retrospective transition method at our adoption date instead of at the earliest comparative period presented in our financial statements and, therefore, we recognized
and measured leases existing at December 30, 2018, but without retrospective application.
The impact of the adoption of ASC 842 on previously reported interim financial statements included the recognition of right-of-use (“ROU asset”) assets and lease liabilities for operating leases. The adoption of ASC 842 had no impact to previously reported results of operations for any interim period.
The
adjustments above do not have an impact on net cash used in operating activities; however, they do impact the changes in operating assets and liabilities for the related accounts within the disclosure of operating activities on our unaudited condensed consolidated statement of cash flows.
i
Recent Accounting Guidance Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848):
Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional expedient and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In response to the concerns about structural risks of interbank offered rates (“IBORs”) and, particularly, the risk of cessation of the LIBOR, regulators in several jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based and less susceptible to manipulation. The ASU provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued.
The ASU can be adopted no later than December 1, 2022 (fiscal year 2023) with early adoption permitted. We are evaluating the effect of adopting this new accounting guidance.
2. iIMPACT OF THE COVID-19 PANDEMIC
In March 2020, the World Health Organization declared the novel
strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures. Since then, extraordinary actions have been taken by international, federal, state, and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions throughout the world. The pandemic has significantly impacted global economies, resulting in workforce and travel restrictions, supply chain and production disruptions for certain companies and reduced demand and spending across many industries.
During March and April 2020, in response to the COVID-19 outbreak and business disruption resulting from quarantines, “stay-at-home” orders, and similar mandates, we prioritized the health and safety of our employees and temporarily closed our retail stores, our domestic customization operations, and offices, including our innovation
center, and implemented a remote work policy for all of our non-production employees. To date, we have experienced minimal supply chain disruptions related to the pandemic and have been able to meet our customers’ needs. Our supply chain, customization and logistics operations are all fully functioning. Our remote work arrangements remain in place for our non-production employees and have been designed to allow for continued operation of our business, including our financial reporting systems and internal controls. During the second quarter of 2020, our retail stores reopened in line with guidance from local authorities. Additionally, we have added safety and cleaning protocols at our stores, customization and logistics operations, and offices.
Our digital commerce remains open via YETI.com, country and region-specific YETI websites,
and YETI Authorized on the Amazon Marketplace, supported by third-party logistics providers and our employees working remotely.
On March 24, 2020, as a precautionary measure to enhance our liquidity position and to increase available cash on hand, we drew down $i50.0 million on our $i150.0 million
revolving credit facility maturing on December 17, 2024 (the “Revolving Credit Facility”). During the second quarter of 2020, we repaid in full the $i50.0 million borrowed under the Revolving Credit Facility. As of June 27, 2020, we had no outstanding borrowings and $i150.0 million
of availability under the Revolving Credit Facility.
In an effort to further enhance our liquidity position and provide additional financial flexibility in response to the impact of COVID-19, we have taken steps to preserve cash, including reductions in discretionary spending, lowering capital expenditures and investments, along with ongoing management of forward inventory receipts, and reducing payroll costs.
On May 7, 2020, we announced the withdrawal of our full year 2020 outlook.
We also announced the suspension of new hires, employee furloughs, workforce reductions, temporary reductions of our senior leadership team’s base salaries and our Board of Directors’ waiver of annual cash compensation. Concurrent with the reopening of our retail stores, we have begun to bring employees back from furlough. We will continue to monitor the impact of the COVID-19 pandemic and may adjust our action plans accordingly as the situation progresses. At this time, we do not intend to provide a full year 2020 outlook.
Given the novel and dynamic nature of this situation, we cannot reasonably estimate the full impact of the COVID-19 pandemic on YETI, its impact on our customers, retail partners, and suppliers, how quickly normal economic conditions will resume, or the related impact on our operations and demand for our products. Given the uncertainty of the situation, we believe
that the pandemic could have a material adverse impact on our future revenue growth, financial condition, and future results of operations depending on the duration and severity of the COVID-19 pandemic, measures by federal, state, and local authorities to prevent its spread and any worsening of the global economic conditions. We will continue to actively monitor the effects of COVID-19 on our business. A prolonged period of store closures, changes in customer behaviors, and reductions of consumer discretionary spending would require us re-evaluate our business assumptions and estimates. These conditions would likely result in lower future net sales, as well as, cash flow and supply chain disruptions, including manufacturing delays, product shortages, as well as product excesses if we are unable to appropriately manage our inventory levels.
Although the potential magnitude and duration
of the business and economic impacts of COVID-19 are uncertain, we believe that the actions taken to date, together with our current operating plan, our strong cash position, inventory on hand and availability under our Revolving Credit Facility, will provide sufficient liquidity to fund our operations for at least the next twelve months.
3. iREVENUE
Revenue
transactions associated with the sale of YETI branded coolers, equipment, drinkware, apparel and accessories comprise a single performance obligation, which consists of the sale of products to customers either through wholesale or DTC channels. Revenue is recognized when performance obligations are satisfied through the transfer of control of promised goods to the customers, based on the terms of sale. The transfer of control typically occurs at a point in time based on consideration of when the customer has an obligation to pay for the goods, and physical possession of, legal title to, and the risks and rewards of ownership of the goods has been transferred, and the customer has accepted the goods. Revenue from wholesale transactions is generally recognized at the time products are shipped based on contractual terms with the customer. Revenue from our DTC channel is generally recognized at the point of sale in our retail stores and at the time products are shipped for
e-commerce transactions and corporate sales based on contractual terms with the customer.
Revenue is recognized net of estimates of variable consideration, including product returns, customer discounts and allowances, sales incentive programs, and miscellaneous claims from customers. We determine these estimates based on contract terms, evaluations of historical experience, anticipated trends, and other factors. The actual amount of customer returns and customer allowances, which is inherently uncertain, may differ from our estimates.
The duration of contractual arrangements with our customers is typically less than ione
year. Payment terms with wholesale customers vary depending on creditworthiness and other considerations, with the most common being net i30 days. Payment is due at the time of sale for retail store transactions and at the time of shipment for e-commerce transactions.
Certain products that we sell include a limited warranty which does not meet the definition of a performance obligation within the context of the contract. Product
warranty costs are estimated based on historical and anticipated trends and are recorded as cost of goods sold at the time revenue is recognized.
Revenue from the sale of gift cards is initially deferred and recognized as a contract liability until the gift card is redeemed by the customer.
We elected to account for shipping and handling as fulfillment activities, and not as separate performance obligations. Shipping and handling fees billed to customers are included in net sales. All shipping and handling activity costs are recognized as selling, general and administrative expenses at the time the related revenue is recognized. Sales taxes collected from customers and remitted directly to government authorities
are excluded from net sales and cost of goods sold.
Accounts receivable represent an unconditional right to receive consideration from a customer and are recorded at net invoiced amounts, less an estimated allowance for credit losses.
Contract liabilities
are recorded when the customer pays consideration before the transfer of a good to the customer and thus represent our obligation to transfer the good to the customer at a future date. Our primary contract liabilities relate to payment advances for certain customized product transactions and gift cards. We recognize contract liabilities as revenue once all performance obligations have been satisfied.
i
The
following table provides information about accounts receivable and contract liabilities at the periods indicated (in thousands):
For
the three and six months ended June 27, 2020, we recognized $i0.2 million and $i4.1
million, respectively, of revenue that was previously included in the contract liability balance at the beginning of the period. The change in the contract liability balance primarily results from timing differences between the customer’s payment and our satisfaction of performance obligations.
Disaggregation of Revenue
i
The
following table disaggregates our net sales by channel, product category, and geography for the periods indicated (in thousands):
For
the three months and six months ended June 27, 2020, no single customer represented over 10% of gross sales. For the three and six months ended June 29, 2019, our largest single customer represented approximately i17% and i16%
of gross sales, respectively.
We
determine if an arrangement is or contains a lease at contract inception and determine its classification as an operating or finance lease at lease commencement. We lease certain retail locations, office space, distribution facilities, manufacturing space, and machinery and equipment. While the substantial majority of these leases are operating leases, certain machinery and equipment agreements are finance leases. As of June 27, 2020, the initial lease terms of the various leases range from one to i20
years. ROU lease assets and liabilities associated with leases with an initial term of twelve months or less are not recorded on the balance sheet.
Operating lease assets represent the right to use an underlying asset for the lease term, and operating lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are recognized based on the present value of future payments over the lease term at commencement date. We use our collateralized incremental borrowing rate based on the information available at commencement date, including lease term, in determining the present value of future payments. Our operating leases also typically require payment of real estate taxes, common area maintenance and insurance. These components compromise the majority of our variable lease cost and are excluded from the present value of our lease obligations.
In instances where they are fixed, they are included due to our election to combine lease and non-lease components, with the exception of our distribution facility asset class. Operating lease assets include prepaid lease payments and initial direct costs and are reduced by lease incentives.Our lease terms generally do not include options to extend or terminate the lease unless it is reasonably certain that the option will be exercised. Fixed payments may contain predetermined fixed rent escalations. We recognize the related rent expense on a straight-line basis from the commencement date to the end of the lease term.
i
The
following table presents the assets and liabilities related to operating and finance leases (in thousands):
Minimum lease payments have not been reduced by minimum sublease rentals of $i3.6
million due in the future under non-cancelable subleases. We received $ii0.2/
million in sublease income for both the three months ended June 27, 2020 and June 29, 2019, and $ii0.4/
million in sublease income for both the six months ended June 27, 2020 and June 29, 2019. iiThe
following table presents the minimum lease payment obligations of operating and finance lease liabilities (leases with terms in excess of one year) for the next five years and thereafter as of June 27, 2020 (in thousands): /
Operating Leases
Finance
Leases
Total
2020
$
i5,891
$
i125
$
i6,016
2021
i9,861
i249
i10,110
2022
i6,991
i249
i7,240
2023
i7,716
i249
i7,965
2024
i7,474
i330
i7,804
Thereafter
i20,048
i—
i20,048
Total
lease payments
i57,981
i1,202
i59,183
Less:
Effect of discounting to net present value
i11,306
i158
i11,464
Present
value of lease liabilities
$
i46,675
$
i1,044
$
i47,719
The
following table presents supplemental cash flow information related to our leases (in thousands):
Goodwill
and indefinite-lived intangible are recorded at cost, or at their estimated fair values at the date of acquisition. We review goodwill and indefinite-lived intangible assets for impairment annually during the fourth quarter of the fiscal year or an interim basis if circumstances indicate it is more likely than not that the fair value of our reporting unit is less than its carrying value.
As a result of the events and impacts surrounding the COVID-19 pandemic, including the sharp decline in sales beginning in mid-March 2020 and reduced cash flow forecasts during the beginning of the second quarter of 2020, we considered whether these conditions indicated that it was more likely than not that our goodwill of $i54.3
million and indefinite-lived intangible assets were impaired as of March 28, 2020. Based on the qualitative assessment of the facts and circumstances in existence as of March 28,2020 and the results of our annual impairment test performed during the fourth quarter of 2019, we determined that the fair values more than likely than not significantly exceed the carrying values of both our reporting unit and indefinite-lived intangible assets and therefore, an interim quantitative impairment test was not performed.
Although we believe our assumptions and estimates of fair value related to both our reporting unit and indefinite-lived intangible assets are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial
or other underlying assumptions could have a significant impact and future impairment charges could be required.
We
have a $i450.0 million senior secured credit facility (the “Credit Facility”). The Credit Facility provides for: (a) a $i150.0 million
Revolving Credit Facility maturing on December 17, 2024; and (b) a $i300.0 million Term Loan A maturing on December 17, 2024 (the “Term Loan A”). At June 27, 2020, we had $i292.5
million principal amount of indebtedness outstanding under our Term Loan A.
On March 24, 2020, we drew down $i50.0 million from our $i150.0 million
Revolving Credit Facility. This action was a precautionary measure to enhance our liquidity position and to increase available cash on hand in response to the COVID-19 pandemic. During the second quarter of 2020, we repaid in full the $i50.0 million borrowed under the Revolving Credit Facility. For further information, refer to Note 2 - Impact of the COVID-19 Pandemic. As of June 27, 2020, we had no outstanding borrowings and $i150.0 million
of availability under the Revolving Credit Facility.
The weighted average interest rates for borrowings under Term Loan A and the Revolving Credit Facility were i3.26% and i2.92%,
respectively, during the six months ended June 27, 2020, and i6.36% for the Term Loan A during the six months ended June 29, 2019.
Borrowings made under the Credit Facility bear interest at a variable rate based on the LIBOR plus an applicable margin. The applicable margin for LIBOR rate borrowings is determined by reference to a pricing grid, based on the ratio of our net leverage ratio, and ranges from i1.75%
to i2.75%. Additionally, a commitment fee of between i0.175% and i0.375%
also determined by reference to the pricing grid, is payable on the average daily unused amounts under the Revolving Credit Facility.
7. iINCOME TAXES
Income tax expense was $i11.3
million and $i7.1 million for the three months ended June 27, 2020 and June 29, 2019, respectively. The increase in income tax expense is due to higher income before income taxes. The effective tax rate for the three months ended June 27, 2020 was i25%,
compared to i24% for the three months ended June 29, 2019.
Income tax expense was $i14.0
million and $i7.7 million for the six months ended June 27, 2020 and June 29, 2019, respectively. The increase in income tax expense is due to higher income before income taxes. The effective tax rate for the six months ended June 27, 2020 was i25%,
compared to i24% for the six months ended June 29, 2019.
For interim periods, our income tax expense and resulting effective tax rate are based upon an estimated annual effective tax rate adjusted for the effects of items required to be treated as discrete to the period, including changes in tax laws, changes in estimated exposures for uncertain tax positions, and other items.
On
March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. We do not expect that any provision of the CARES Act will result in a material cash benefit to us or have a material impact on our financial statements.
8. iSTOCK-BASED
COMPENSATION
In October 2018, our Board of Directors adopted the 2018 Equity Incentive Plan (the “2018 Plan”) and ceased granting awards under the 2012 Equity and Performance Incentive Plan (the “2012 Plan”). The 2018 Plan became effective with the completion of our initial public offering (“IPO”) on October 24, 2018. Any remaining shares available for issuance under the 2012 Plan as of our IPO effectiveness date are not available for future issuance. However, shares subject to stock awards granted under the 2012 Plan (a) that expire or terminate without being exercised or (b) that are forfeited under an award, return to the 2018 Plan share reserve for future grant.
Subject to adjustments as described above, the 2018 Plan provides
for up to i4.8 million shares of authorized stock to be awarded as stock options, appreciation rights, restricted stock (“RSAs”), restricted stock units (“RSUs”), performance shares, performance units, cash incentive awards, and certain other awards based on or related to shares of our common stock. The 2012 Plan provided for up to i8.8 million
shares of authorized stock to be awarded as either stock options or RSUs.
We recognized non-cash stock-based compensation expense of $i2.2 million and $i4.3
million for the three months ended June 27, 2020 and June 29, 2019, respectively. For the six months ended June 27, 2020 and June 29, 2019, we recognized non-cash stock-based compensation expense of $i4.0 million and $i8.3
million, respectively. At June 27, 2020, total unrecognized non-cash stock-based compensation expense of $20.6 million for all stock-based compensation plans is expected to be recognized over a weighted-average period of 2.3 years.
During the three months ended June 27, 2020, we granted i12,965
RSUs to employees and i8,266 RSUs and i8,266
deferred stock units (“DSUs”) to our non-employee members of the Board of Directors. There were no RSAs or performance-based restricted stock awards (“PBRSs”) granted during the three months ended June 27, 2020.
During the six months ended June 27, 2020, we granted i153,590
RSUs, i193,636 RSAs, and i165,973
PBRSs to employees, and i9,237 RSUs and i8,965
DSUs to our non-employee members of the Board of Directors. No new stock options have been granted during 2020.
RSUs and RSAs generally have a iithree-year/
vesting period and vest in accordance with the following schedule: (a) one-third will vest on the first anniversary of the grant date, and (b) an additional one-sixth will vest on the first four six-month anniversaries of the initial vesting date. The vesting criteria for PBRSs are the attainment of certain predetermined performance goals throughout the three-year performance period and remaining employed by us throughout such three-year period. Depending on the estimated probability of attainment of those performance goals, the compensation expense recognized related to the awards could increase or decrease over the remaining vesting period. DSUs generally vest ione
year from the grant date. Stock options generally have a ithree-year vesting period and vest in accordance with the following schedule: (a) one-third will vest on the first anniversary of the grant date, and (b) an additional one-sixth will vest on the first four six-month anniversaries of the initial vesting date.
We measure compensation expense for all stock-based awards based on the estimated fair values on the date of the grant. The
fair value of stock options granted was estimated using the Black-Scholes option-pricing valuation model. The fair value of RSUs, RSAs, PBRSs, and DSUs are determined using the closing stock price of our common stock on the date of grant.
i
A summary of the balances of our stock-based compensation plans as of June 27, 2020, and changes during the six months ended June 27,
2020, is presented below (in thousands, except per share data):
Stock
Options
Performance-Based Restricted Stock Awards
Restricted Stock Units and Restricted Stock Awards
Basic income per share is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted income per share includes the additional effect of all potentially dilutive securities, which includes dilutive stock-based awards granted under stock-based compensation plans.
i
The
following table sets forth the calculation of earnings per share and weighted-average common shares outstanding at the dates indicated (in thousands, except per share data):
Weighted-average
common shares outstanding—diluted
i87,477
i86,227
i87,469
i86,042
Earnings
per share
Basic
$
i0.39
$
i0.26
$
i0.48
$
i0.29
Diluted
$
i0.38
$
i0.26
$
i0.48
$
i0.28
/
Effects
of potentially dilutive securities are presented only in periods in which they are dilutive. For the three months ended June 27, 2020 and June 29, 2019, outstanding stock-based awards representing i0.5 million and i0.5 million
shares, respectively, of common stock were excluded from the calculation of diluted earnings per share, because their effect would be anti-dilutive. For the six months ended June 27, 2020 and June 29, 2019, outstanding stock-based awards representing i0.2 million and i1.1
million shares, respectively, of common stock were excluded from the calculation of diluted earnings, because their effect would be anti-dilutive. In addition, ii1.3/ million
shares of performance-based RSUs were excluded from the calculations of diluted earnings per share for the three and six months ended June 29, 2019, because these units were not considered to be contingent outstanding shares.
10. iCOMMITMENTS AND CONTINGENCIES
Claims
and Legal Proceedings
We are involved in various claims and legal proceedings, some of which are covered by insurance. We believe that our existing claims and proceedings, and the potential losses relating to such contingencies, will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes to those statements included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those described in more detail in Part I “Item 1A. Risk Factors” included in this Quarterly Report on Form 10-Q. See also “Cautionary Statement Regarding Forward-Looking Statements” immediately prior to Part I, Item I in this Quarterly Report on Form 10-Q.
Overview
of Business
Headquartered in Austin, Texas, YETI is a global designer, retailer, and distributor of a variety innovative outdoor products. From coolers and drinkware to backpacks and bags, YETI products are built to meet the unique and varying needs of diverse outdoor pursuits, whether in the remote wilderness, at the beach, or anywhere life takes our customers. By consistently delivering high-performing, exceptional products, we have built a strong following of brand loyalists throughout the world, ranging from serious outdoor enthusiasts to individuals who simply value products of uncompromising quality and design. We have an unwavering commitment to outdoor and recreation communities, and we are relentless in our pursuit of building superior products for people to confidently enjoy life outdoors and beyond.
We
distribute our products through a balanced omni-channel platform, consisting of our wholesale and direct-to-consumer (“DTC”) channels. In our wholesale channel, we sell our products through select national and regional accounts and an assemblage of independent retail partners throughout the United States and, more recently, Australia, Canada, Japan, and Europe. We carefully evaluate and select retail partners that have an image and approach that are consistent with our premium brand and pricing. Our domestic national and regional specialty retailers include Dick’s Sporting Goods, REI, Academy Sports + Outdoors, Bass Pro Shops / Cabela’s, Ace Hardware, Williams Sonoma and Lowe’s. We sell our products in our DTC channel to customers on YETI.com, country and region specific YETI websites, and YETI Authorized on the Amazon Marketplace, as well as
customized products with licensed marks and original artwork through our website and corporate sales program. Additionally, we sell our full line of products in our retail stores in Austin and Dallas, Texas, Charleston, South Carolina, Chicago, Illinois, Denver, Colorado, and Fort Lauderdale, Florida.We may also open pop-up stores with initial lease terms of 24 months or less.
The terms “we,”“us,”“our,” and “the Company” as used herein and unless otherwise stated or indicated by context, refer to YETI Holdings, Inc. and its subsidiaries.
Recent
Developments
Impacts of the COVID-19 Pandemic
In March 2020, the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures. Since then, extraordinary actions have been taken by international, federal, state, and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions throughout the world. The pandemic has significantly impacted global economies, resulting in workforce and travel restrictions, supply chain and production disruptions for certain companies and reduced demand and spending across many industries. See Note 2 of the Notes to Unaudited Condensed Consolidated Financial Statements for further information.
Remote
Work Arrangements and Suspension of Operations
During March and April 2020, in response to the COVID-19 outbreak and business disruption resulting from quarantines, “stay-at-home” orders, and similar mandates, we prioritized the health and safety of our employees and temporarily closed our retail stores, domestic customization operations, and offices, including our innovation center, and implemented a remote work policy for all of our non-production employees. To date, we have experienced minimal supply-chain disruptions related to the pandemic and have been able to meet our customers’ needs. Our supply chain, customization and logistics operations are all fully functioning. Our remote work arrangements remain in place for our non-production employees and have been designed to allow for continued operation of our business, including financial reporting systems and internal controls.
During the second quarter of 2020, our retail stores reopened in line with guidance from local authorities. Additionally, we have added safety and cleaning protocols at our stores, customization and logistics operations, and offices.
Our digital commerce remains open via YETI.com, country and region-specific YETI websites, and YETI Authorized on the Amazon Marketplace, supported by third-party logistics providers and our employees working remotely.
Liquidity
and Outlook Actions
On March 24, 2020, as a precautionary measure to enhance our liquidity position and to increase available cash on hand, we drew down $50.0 million on our $150.0 million revolving credit facility maturing on December 17, 2024 (the “Revolving Credit Facility”). During the second quarter of 2020, we repaid in full the $50.0 million borrowed under the Revolving Credit Facility. As of June 27, 2020, we had no outstanding borrowings and $150.0 million of availability under the Revolving Credit Facility.
In an effort to further enhance our liquidity position and provide additional financial flexibility in response to the impact of COVID-19,
we have taken steps to preserve cash, including reductions in discretionary spending, lowering capital expenditures and investments, along with ongoing management of forward inventory receipts, and reducing payroll costs.
On May 7, 2020, we announced the withdrawal of our full year 2020 outlook. We also announced a temporary hiring suspension, employee furloughs, workforce reductions, temporary reductions of our senior leadership team’s base salaries and our Board of Directors’ waiver of annual cash compensation. Concurrent with the reopening of our retail stores, we have begun to bring employees back from furlough. We will continue to monitor the impact of the COVID-19 pandemic and may adjust our action plans accordingly as the situation progresses. At this time, we do not intend to provide a full year 2020 outlook.
Forward
Looking Information
Given the novel and dynamic nature of this situation, we cannot reasonably estimate the full impact of the COVID-19 pandemic on YETI, its impact on our customers, retail partners, and suppliers, how quickly normal economic conditions will resume, or the related impact on our operations and demand for our products. Given the uncertainty of the situation, we believe that the pandemic could have a material adverse impact on our future revenue growth, financial condition, and future results of operations depending on the duration and severity of the COVID-19 pandemic, measures by federal, state and local authorities to prevent its spread and any worsening of the global economic conditions. We will continue to actively monitor the effects COVID-19 on our business. A prolonged period of store closures, changes in customer behaviors, and reductions of consumer discretionary
spending would require us to re-evaluate our business assumptions and estimates. These conditions would likely result in lower future net sales, as well as, cash flow and supply chain disruptions, including manufacturing delays, product shortages, as well as product excesses if we are unable to appropriately manager our inventory levels.
Although the potential magnitude and duration of the business and economic impacts of COVID-19 are uncertain, we believe that the actions taken to date, together with our current operating plan, our strong cash position, including from cash generated from operations, inventory on hand and availability under our Revolving Credit Facility, will provide sufficient liquidity to fund our operations for at least the next twelve months.
For additional information on the impact
and potential impact of the COVID-19 pandemic on YETI, see Item 1A. Risk Factors on this Quarterly Report.
General
Components of Our Results of Operations
Net Sales. Net sales are comprised of wholesale channel sales to our retail partners and sales through our direct-to-consumer (“DTC”) channel. Net sales in both channels reflect the impact of product returns, as well as discounts for certain sales programs or promotions.
We discuss the net sales of our products in our two primary categories: Coolers & Equipment and Drinkware. Our Coolers
& Equipment category includes hard coolers, soft coolers, outdoor equipment and other products, as well as accessories and replacement parts for these products. Our Drinkware category includes our stainless-steel drinkware products and related accessories. In addition, our Other category is primarily comprised of ice substitutes, and YETI-branded gear, such as shirts, hats, and other miscellaneous products.
Gross profit. Gross profit reflects net sales less cost of goods sold, which primarily includes the purchase cost of our products from our third-party contract manufacturers, inbound freight and duties, product quality testing and inspection costs, depreciation expense of our molds and equipment, and the cost of customizing Drinkware products. We calculate gross margin
as gross profit divided by net sales. Gross margin in our DTC sales channel is generally higher than that on sales in our wholesale channel.
Selling, general, and administrative expenses. Selling, general, and administrative (“SG&A”) expenses consist primarily of marketing costs, employee compensation and benefits costs, costs of our outsourced warehousing and logistics operations, costs of operating on third party DTC marketplaces, professional fees and services, non-cash stock-based compensation, cost of product shipment to our customers, depreciation and amortization expense, and
general corporate infrastructure expenses.
Fiscal Year and Reporting Calendar. We operate on a 52-to 53-week fiscal year ending on the Saturday closest in proximity to December 31, such that each quarterly period will be 13 weeks in length, except during a 53-week year when the fourth quarter will be 14 weeks. Fiscal year 2020 will be a 53-week period. Unless otherwise stated, references to particular years, quarters, months and periods refer to our fiscal years ended in December and the associated quarters, months, and periods of those fiscal years. The unaudited consolidated financial results presented herein represent the three and six months ended June 27, 2020 and June 29, 2019.
Results
of Operations
The discussion below should be read in conjunction with the following table and our unaudited financial statements, and related notes. The following table sets forth selected statement of operations data, and their corresponding percentage of net sales, for the periods indicated (dollars in thousands).
Net sales increased $15.3 million, or 7%, to $246.9 million for the three months ended June 27, 2020, compared to $231.7 million for the three months ended June 29, 2019. This increase in net sales was primarily driven by growth in our DTC channel. DTC channel net sales increased $50.6 million, or 61%, to $133.0 million, compared to $82.5 million in the prior year quarter led by strong performance in both Coolers & Equipment and Drinkware. Net sales in our DTC channel were favorably impacted by a demand surge for outdoor recreation and leisure lifestyle products as the COVID-19 pandemic has significantly impacted consumers’ views towards how they spend their time experiencing nature and the outdoors, as well as more consumers shopping online while sheltering-in-place.
Net sales in our wholesale channel decreased $35.3 million, or 24%, to $113.9 million, compared to $149.2 million in the same period last year, driven by both Coolers & Equipment and Drinkware. While wholesale net sales trends turned positive at the end of the second quarter of 2020, the sharp decline in net sales during April 2020, as a result of temporary store closures, adversely impacted the performance of the wholesale channel.
Net sales in our two primary product categories were as follows:
•Drinkware
net sales decreased by $2.6 million, or 2%, to $114.3 million, compared to $117.0 million in the prior year quarter. Drinkware performance was driven by significant demand in the DTC channel that was more than offset by a decline in the wholesale channel.
•Coolers & Equipment net sales increased by $19.6 million, or 18%, to $128.6 million, compared to $109.1 million in the same period last year. The strong performance was driven by growth in soft coolers, hard coolers, and outdoor living products was partially offset by a decline in bags and cargo.
Gross Profit
Gross profit increased $21.2 million, or 18%, to $137.5 million, compared to $116.3 million in the prior year quarter. Gross margin increased 550 basis points to 55.7% from
50.2% in the prior year quarter. The increase in gross margin was primarily driven by:
•an increase in the mix of higher margin DTC channel net sales, which favorably impacted gross margin by approximately 430 basis points;
•product cost improvements across our product portfolio, particularly in our Drinkware category, which favorably impacted gross margin by approximately 120 basis points;
•decreased tariffs, which favorably impacted gross margin by 70 basis points; and
•lower inbound freight and other impacts, which favorably impacted gross margin by 20 basis points.
These factors,
which contributed to an increase in gross margin, were partially offset by an unfavorable impact due to increased inventory reserves, which unfavorably impacted gross margin by 90 basis points.
Selling, General, and Administrative Expenses
SG&A expenses increased by $9.7 million, or 12%, to $91.0 million for the three months ended June 27, 2020, compared to $81.3 million for the three months ended June 29, 2019. SG&A expenses as a percentage of net sales increased to 36.8% for the three months ended June 27, 2020 compared to 35.1% for the three months ended June 29, 2019. The increase in SG&A
expenses was primarily driven by:
•an increase in variable expenses of $10.8 million, or a 380 basis point increase, driven by:
–our faster growing DTC channel net sales, which grew to 54% of net sales during the period, including outbound freight, online marketplace fees, third-party logistics fees, and credit card processing fees; and
•a decrease in non-variable expenses of $1.1 million, or a 205 basis point decrease, comprised of:
–decreased professional fees;
–lower non-cash stock-based compensation expense;
–lower marketing
expenses;
–and COVID-19 related savings, including lower travel expense and other cost saving initiatives;
–increased personnel expenses to support long-term growth in our business;
–increased depreciation and amortization expense;
–increased insurance expenses; and
–increased facilities costs and other operating expenses.
Non-Operating Expenses
Interest
expense was $2.7 million for the three months ended June 27, 2020, compared to $5.7 million for the three months ended June 29, 2019. The decrease in interest expense was primarily due to lower interest rates and a lower average debt balance.
Income tax expense was $11.3 million for the three months ended June 27, 2020, compared to $7.1 million for the three months ended June 29, 2019. The increase in income tax expense is due to higher income before income taxes. The effective tax rate for the three months ended June 27, 2020 was 25%, compared to 24% for the three months ended June 29, 2019.
Net sales increased $34.3 million, or 9%, to $421.4 million for the six months ended June 27, 2020, compared to $387.0 million for the six months ended June 29, 2019. This increase in net sales was primarily driven by growth in our DTC channel. DTC channel net sales increased $68.4 million, or 47%, to $212.6 million, compared to $144.2 million in the prior year period, led by strong performance in both Coolers & Equipment and Drinkware categories. Net sales in our DTC channel were favorably impacted by the demand surge for outdoor recreation and leisure lifestyle products as the COVID-19 pandemic has significantly impacted consumers’ views towards how they spend their time experiencing nature and the outdoors as well as more consumers shopping online while sheltering-in-place.
Net sales in our wholesale channel decreased $34.1 million, or 14%, to $208.7 million, compared to $242.8 million in the same period last year, primarily driven by both Coolers & Equipment and Drinkware categories. While wholesale net sales trends returned to positive growth at the end of the second quarter of 2020, the sharp decline of net sales during March and April 2020, as a result of temporary store closures, adversely impacted the performance of the wholesale channel.
Net sales in our two primary product categories were as follows:
•Drinkware net sales increased by $19.0 million, or 9%, to $226.9 million, compared to $207.9 million in the prior year period, 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 net sales increased by $19.4 million, or 11%, to $188.1 million, compared to $168.7 million in the same period last year, primarily driven by the strong performance of soft coolers, hard coolers, and outdoor living products, partially offset by a decline in bags and cargo.
Gross Profit
Gross profit increased $37.1 million, or 19%, to $230.0 million compared to $192.9 million in the prior year period. Gross margin increased 470 basis points to 54.6% from 49.8% in the same period last year. The increase in gross margin was primarily driven by:
•an
increase in the mix of higher margin DTC channel net sales, which favorably impacted gross margin by approximately 290 basis points;
•product cost improvements across our product portfolio, particularly in our Drinkware category, which favorably impacted gross margin by approximately 140 basis points;
•decreased tariffs, which favorably impacted gross margin by 30 basis points; and
•lower inbound freight and other impacts, which favorably impacted gross margin by 60 basis points.
These factors, which contributed to an increase in gross margin, were partially offset by the unfavorable impact of an increase in inventory reserves, which unfavorably impacted gross margin by 50 basis points.
SG&A expenses increased by $18.2 million, or 12%, to $167.3 million for the six months ended June 27, 2020 compared to $149.1 million for the six months ended June 29, 2019. As a percentage of net sales, SG&A increased 120 basis points to 39.7% for the six months ended June 27, 2020. The increase in SG&A expenses was primarily driven by:
•an increase in variable expenses of $15.5 million, or a 300 basis point increase, driven by:
–our faster
growing DTC channel net sales, which grew to 50% of net sales during the period, including outbound freight, online marketplace fees, third-party logistics fees, and credit card processing fees; and
•a decrease in non-variable expenses of $2.7 million, or a 180 basis point decrease, comprised of:
–lower marketing expenses;
–lower non-cash stock-based compensation expense;
–decreased professional fees; and
–COVID-19 related savings; including lower travel expense and other cost saving initiatives;
–increased personnel expenses to support long-term growth in our business;
–increased depreciation and amortization expense; and
–increased facilities costs and other operating expenses.
Non-Operating Expenses
Interest expense was $5.8 million for the six months ended June 27, 2020, compared to $11.8 million for the six months ended June 29, 2019. The decrease in interest expense was primarily due to lower interest rates and a lower average debt balance.
Income
tax expense was $14.0 million for the six months ended June 27, 2020, compared to $7.7 million for the six months ended June 29, 2019. The increase in income tax expense is due to higher income before income taxes and a higher effective tax rate. The effective tax rate for the six months ended June 27, 2020 was 25%, compared to 24% for the six months ended June 29, 2019.
Our cash requirements have principally been for working capital purposes, long-term debt repayments, and capital expenditures. We fund our working capital, primarily inventory, accounts receivable, and capital investments from cash flows from operating activities, cash on hand, and borrowings available under our Revolving Credit Facility. As discussed in the Recent Developments section above, although the potential magnitude and duration of the business and economic impacts of COVID-19 are uncertain, we believe that the actions taken to date, together with our current operating plan, our strong cash position, including from cash generated from operations, inventory on hand and availability under our Revolving Credit Facility, will be sufficient to satisfy our liquidity needs and capital
expenditure requirements for at least the next twelve months.
Current Liquidity
As of June 27, 2020, we had $108.8 million of working capital (excluding cash), a cash balance of $127.5 million, and $150.0 million of availability under our Revolving Credit Facility.
Credit Facility
We have a $450.0 million senior secured credit facility (the “Credit Facility”) that provides for: (a) a $150.0 million Revolving Credit Facility maturing on December 17, 2024; and (b) a $300.0 million Term Loan A maturing on December 17,
2024 (the “Term Loan A”). In December 2019, we amended our existing Credit Facility to, among other changes, increase the remaining principal amount of Term Loan A from approximately $298.0 million to $300.0 million, increase the commitments under the Revolving Credit Facility from $100.0 million to $150.0 million, and extend the maturity date of both Term Loan A and the Revolving Credit Facility from May 19, 2021 to December 17, 2024.
At June 27, 2020, we had $292.5 million principal amount of indebtedness outstanding under our Term Loan A. At June 29, 2019, we had $309.1 million principal amount of indebtedness outstanding under our previous Term Loan A. The weighted average
interest rates for borrowings under Term Loan A and our outstanding balance under the Revolving Credit Facility until it was repaid in June 2020 were 3.26% and 2.92%, respectively, during the six months ended June 27, 2020, and 6.36% for the Term Loan A during the six months ended June 29, 2019.
The Credit Facility requires us to comply with certain covenants, including financial covenants regarding our total net leverage ratio and interest coverage ratio. Fluctuations in these ratios may increase our interest expense. Failure to comply with these covenants and certain other provisions of the Credit Facility, or the occurrence of a change of control, could result in an event of default and an acceleration of our obligations under the Credit Facility or other indebtedness that we may incur
in the future. At June 27, 2020, we were in compliance with all covenants under the Credit Facility, and we expect to remain in compliance throughout the remainder of 2020.
Net cash provided by operating activities was $72.4 million in the six months ended June 27, 2020 and was primarily driven by net income of $42.0 million, total non-cash items of $25.3 million,
and a decrease in net working capital items of $5.1 million. Non-cash items primarily consisted of depreciation and amortization of $15.4 million, non-cash stock-based compensation expense of $4.0 million, deferred income taxes of $3.5 million, other items of $1.2 million, primarily consisting of unrealized foreign currency transaction losses, impairment of long-lived assets of $0.6 million, and amortization of deferred financing fees of $0.5 million. The change in net working capital items was primarily due to a $46.7 million decrease in inventory,resulting from delayed purchase orders resulting from the precautionary measures to provide enhanced financial flexibility during the COVID-19 pandemic, as well as the unplanned nature of the demand surge in our DTC channel net sales, a $9.4 million increase in taxes payable, a $6.2 million decrease in other assets, partially offset by a $52.8 million decrease in accounts payable
and accrued expenses, resulting from delayed purchase orders as noted above, and a $4.4 million increase in accounts receivable.
Net cash provided by operating activities was $9.8 million in the six months ended June 29, 2019 and was driven by net income of $24.4 million and total non-cash items of $29.6 million, partially offset by an increase in net working capital items of $44.3 million. Non-cash items primarily consisted of depreciation and amortization of $13.8 million, non-cash stock-based compensation expense of $8.3 million, deferred income taxes of $6.3 million, the amortization of deferred financing fees of $1.1 million, and impairment of long-lived assets of $0.1 million. The change in net working capital items was primarily due to a $36.2 million increase in inventory, a $15.9 million increase in accounts receivable, a $5.5 million increase in other current assets
driven by prepaid information technology and marketing expenses, and a $4.7 million decrease in taxes payable, partially offset by a $16.5 million increase in accounts payable and accrued expenses related to trade payables and amounts owed to our third-party manufacturers, and a $1.6 million increase in other liabilities related to our adoption of the new lease standard, Accounting Standards Codification (“ASC”) 842 (see Note 1 of the Notes to the Unaudited Condensed Consolidated Financial Statements for further information on our adoption of ASC 842).
Investing Activities
Net cash used in investing activities of $10.9 million for the six months ended June 27, 2020 was primarily related to $7.2 million of purchases of property and equipment for production molds, facilities, tooling and equipment, and technology systems infrastructure,
and $3.8 million of purchases of intangibles such as trademark assets and patents.
Net cash used in investing activities of $30.0 million for the six months ended June 29, 2019 was primarily related to $16.8 million of purchases of property and equipment for technology systems infrastructure, production molds, tooling, equipment, and facilities, and $13.2 million of purchases of intangibles such as trademark assets and patents.
Financing Activities
Net cash used in financing activities was $6.9 million for the six months ended June 27, 2020 resulting from, $7.5 million of repayments of long-term debt, and $0.7 million of taxes paid related to the net share settlement of stock-based compensation, partially
offset by $1.4 million of proceeds from employee stock transactions.
Net cash used in financing activities was $21.7 million for the six months ended June 29, 2019 resulting from $23.8 million of repayments of long-term debt, partially offset by $2.1 million of proceeds from employee stock transactions.
For 2020, we expect capital expenditures for property and equipment to be between $25 million and $30 million, primarily related to new product development, technology systems infrastructure, opening of new retail stores, investments in production molds and tooling and equipment.
For a description of recently issued and adopted accounting pronouncements, including the respective dates of adoption and expected effects on our results of operations and financial condition, see “Recently Adopted Accounting Guidance” and “Recent Accounting Guidance Not Yet Adopted” in Note 1 of the Unaudited Condensed
Consolidated Financial Statements.
Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates. A discussion of the accounting policies that management considers critical in that they involve significant management
judgments and assumptions, require estimates about matters that are inherently uncertain and because they are important for understanding and evaluating our reported financial results is included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 28, 2019 filed with the U.S. Securities and Exchange Commission (“SEC”). Other than the adoption of recent accounting standards as discussed in Note 1 of our Unaudited Condensed Consolidated Financial Statements, there were no significant changes to our critical accounting policies.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to our market risk exposures
or management of market risk from those disclosed in Quantitative and Qualitative Disclosures About Market Risk included under Item 7A in our Annual Report on Form 10-K for the year ended December 28, 2019.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within
the time periods specified in the SEC’s rules and forms and to ensure that information required to be disclosed is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding disclosures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on the evaluation of our disclosure controls and procedures as of June 27, 2020, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of that date due to a material weakness in internal control over financial reporting related to ineffective information technology general controls (“ITGCs”)
that was disclosed in our Annual Report on Form 10-K for the year ended December 28, 2019 that has not been fully remediated.
Changes in Internal Control over Financial Reporting
During the quarter ended June 27, 2020, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Remediation Efforts to Address Previously Reported Material Weakness
As previously described in Part II, Item 9A of our Annual Report on Form
10-K for the year ended December 28, 2019, during 2019, we implemented our previously disclosed plan to remediate the material weakness in internal control over financial reporting related to ITGCs. The material weakness will not be considered remediated, however, until the applicable remedial controls operate for a sufficient period of time, and we have concluded, through testing, that these controls are operating effectively.
Our
management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures, or our internal controls, will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple
error or mistake or fraud. Additionally, controls can be circumvented by individuals or groups of persons or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements in our public reports due to error or fraud may occur and not be detected.
We are involved in various claims and legal proceedings, some of which are covered by insurance. We believe that our existing claims and proceedings, and the probability of losses relating to such contingencies, will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
Item 1A. Risk Factors
The risks and uncertainties discussed below update and supersede the risks and uncertainties previously disclosed in Part I, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 28, 2020,
which was filed with the SEC on May 7, 2020.
The risks discussed below are not the only ones facing our business but do represent those risks that we believe are material to us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also harm our business. Please read the cautionary notice regarding forward-looking statements under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Risks Related to Our Business and Industry
The COVID-19 pandemic could continue to adversely affect our business, sales, financial condition, results of operations and cash flows, and our
ability to access current or obtain new lending facilities.
Since being reported in December 2019, COVID-19 has spread globally, including to every state in the United States, and has been declared a pandemic by the World Health Organization. The COVID-19 pandemic and preventative measures taken to contain or mitigate such have caused, and are continuing to cause, business slowdown or shutdown in affected areas and significant disruption in the financial markets both globally and in the United States, which could lead to a decline in discretionary spending by consumers, and in turn impact, possibly materially, our business, sales, financial condition and results of operations. The impacts include, but are not limited to:
•the possibility of renewed retail store closures or reduced
operating hours and/or decreased retail traffic;
•disruption to our distribution centers and our third-party manufacturing partners and other vendors, including the effects of facility closures as a result of outbreaks of COVID-19 or measures taken by federal, state or local governments to reduce its spread, reductions in operating hours, labor shortages, and real time changes in operating procedures, including for additional cleaning and disinfection procedures; and
•significant disruption of global financial markets, which could have a negative impact on our ability to access capital in the future.
The further spread of COVID-19, and the requirements to take action to help limit the spread of the illness, could impact our ability to carry out our business as
usual and may materially adversely impact global economic conditions, our business, results of operations, cash flows and financial condition. The extent of the impact of COVID-19 on our business and financial results will depend on future developments, including the duration and spread of the outbreak within the markets in which we operate, the related impact on consumer confidence and spending, and the effect of governmental regulations imposed in response to the pandemic, all of which are highly uncertain and ever-changing. The sweeping nature of the COVID-19 pandemic makes it extremely difficult to predict how our business and operations will be affected in the longer run. However, the likely overall economic impact of the pandemic is viewed as highly negative to the general economy. Any of the foregoing factors, or other cascading effects of the coronavirus pandemic, could materially increase our costs, negatively impact our sales and damage our results of operations
and liquidity, possibly to a significant degree. The duration of any such impacts cannot be predicted.
Our business depends on maintaining and strengthening our brand to generate and maintain ongoing demand for our products, and a significant reduction in such demand could harm our results of operations.
The YETI name and premium brand image are integral to the growth of our business, as well as to the implementation of our strategies for expanding our business. Our success depends on the value and reputation of our brand, which, in turn, depends
on factors such as the quality, design, performance, functionality, and durability of our products, the image of our e-commerce platform and retail partner floor spaces, our communication activities, including advertising, social media, and public relations, and our management of the customer experience, including direct interfaces through customer service. Maintaining, promoting, and positioning our brand are important to expanding our customer base, and will depend largely on the success of our marketing and merchandising efforts and our ability to provide consistent, high-quality customer experiences. We intend to continue making investments in these areas in order to maintain and enhance our brand, and such investments may not be successful. Ineffective marketing, negative publicity, product diversion to unauthorized distribution channels, product or manufacturing defects, counterfeit products, unfair labor practices, and failure to protect the intellectual property
rights in our brand are some of the potential threats to the strength of our brand, and those and other factors could rapidly and severely diminish customer confidence in us. Furthermore, these factors could cause our customers to lose the personal connection they feel with the YETI brand. We believe that maintaining and enhancing our brand image in our current markets and in new markets where we have limited brand recognition is important to expanding our customer base. If we are unable to maintain or enhance our brand in current or new markets, our growth strategy and results of operations could be harmed.
If we are unable to successfully design, develop and market new products, our business may be harmed.
To maintain and increase sales, we must continue to introduce new products on a timely basis to
respond to new and evolving consumer preferences and improve or enhance our existing products. The success of our new and enhanced products depends on many factors, including anticipating consumer preferences, finding innovative solutions to consumer problems, differentiating our products from those of our competitors, and maintaining the strength of our brand. The design and development of our products is costly, and we typically have several products in development at the same time. Problems in the design or quality of our products, or delays in product introduction, may harm our brand, business, financial condition, and results of operations. Any new products that we develop and market may not generate sufficient revenues to recoup their development, production, marketing, selling and other costs.
Our business could be harmed if we continue to be unable to accurately forecast our
results of operations and growth rate.
We are not currently able to accurately forecast our results of operations and growth rate. Forecasts are particularly challenging as we expand into new markets and geographies, develop and market new products, and face further uncertainty related to the duration and impact of the rapidly evolving COVID-19 pandemic. Our historical sales, expense levels, and profitability may not be an appropriate basis for forecasting future results.
Failure to accurately forecast our results of operations and growth rate could cause us to make poor operating decisions and we may not be able to adjust in a timely manner. Consequently, actual results could be materially lower than anticipated. Even if the markets in which we compete expand, we cannot assure you that our business will
grow at similar rates, if at all. Furthermore, if we fail to accurately forecast our results of operations and growth rate, we may experience excess inventory levels or a shortage of product to deliver to our customers. Inventory levels in excess of customer demand may result in inventory write-downs or write-offs and the sale of excess inventory at discounted prices or in less preferred distribution channels, which could impair our brand image and harm our gross margin. In addition, if we underestimate our growth rate and the demand for our products, our manufacturers may not be able to produce products to meet our customer requirements, and this could result in delays in the shipment of our products and our ability to recognize revenue, lost sales, as well as damage to our reputation and retailer and distributor relationships. For more information regarding the inventory risk related to our inability to accurately forecast our results of operations, please see “Item
1A. Risk Factors — Risks Related to Our Business and Industry — Our results of operations could be materially harmed if we are unable to accurately forecast demand for our products.”
We may not be able to effectively manage our growth.
As we grow our business, slower growing or reduced demand for our products, increased competition, a decrease in the growth rate of our overall market, failure to develop and successfully market new products, or the maturation of our business or market could harm our business. We have made and expect to continue to make significant investments in our research and development and sales and marketing organizations, expand our operations and infrastructure both domestically and internationally, design and develop new products,
and enhance our existing products. In addition, in connection with operating as a public company, we will incur significant additional legal, accounting, and other expenses that we did not incur as a private company. If our sales do not increase at a sufficient rate to offset these increases in our operating expenses, our profitability may decline in future periods.
We have expanded our operations rapidly since our inception. Our employee headcount and the scope and complexity of our business have increased substantially over the past several years. We have only a limited history operating our business at its current scale. Our
management team does not have substantial tenure working together. Consequently, if our operations grow at a rapid pace in the future, we may experience difficulties in managing this growth and building the appropriate processes and controls. Future rapid growth may increase the strain on our resources, and we could experience operating difficulties, including difficulties in sourcing, logistics, recruiting, maintaining internal controls, marketing, designing innovative products, and meeting consumer needs. If we do not adapt to meet these evolving challenges, the strength of our brand may erode, the quality of our products may suffer, we may not be able to deliver products on a timely basis to our customers, and our corporate culture may be harmed.
Our marketing strategy of associating our brand and products with activities rooted in passion for the outdoors may not be successful with
existing and future customers.
We believe that we have been successful in marketing our products by associating our brand and products with activities rooted in passion for the outdoors. To sustain long-term growth, we must continue to successfully promote our products to consumers who identify with or aspire to these activities, as well as to individuals who simply value products of uncompromising quality and design. If we fail to continue to successfully market and sell our products to our existing customers or expand our customer base, our sales could decline, or we may be unable to grow our business.
If we fail to attract new customers, or fail to do so in a cost-effective manner, we may not be able to increase sales.
Our
success depends, in part, on our ability to attract customers in a cost-effective manner. In order to expand our customer base, we must appeal to and attract customers ranging from serious outdoor enthusiasts to individuals who simply value products of uncompromising quality and design. We have made, and we expect that we will continue to make, significant investments in attracting new customers, including through the use of corporate partnerships, YETI Ambassadors, traditional, digital, and social media, original YETI films, and participation in, and sponsorship of, community events. Marketing campaigns can be expensive and may not result in the cost-effective acquisition of customers. Further, as our brand becomes more widely known, future marketing campaigns may not attract new customers at the same rate as past campaigns. If we are unable to attract new customers, or fail to do so in a cost-effective manner, our growth could be slower than we expect and our business
will be harmed.
Our growth depends, in part, on expanding into additional consumer markets, and we may not be successful in doing so.
We believe that our future growth depends not only on continuing to reach our current core demographic, but also continuing to broaden our retail partner and customer bases. The growth of our business will depend, in part, on our ability to continue to expand our retail partner and customer bases in the United States, as well as in international markets, including Canada, Australia, Europe, and Japan. In these markets, we may face challenges that are different from those we currently encounter, including competitive, merchandising, distribution, hiring, and other difficulties. We may also encounter difficulties in attracting customers due to a lack of consumer familiarity
with or acceptance of our brand, or a resistance to paying for premium products, particularly in international markets. We continue to evaluate marketing efforts and other strategies to expand the customer base for our products. In addition, although we are investing in sales and marketing activities to further penetrate newer regions, including expansion of our dedicated sales force, we cannot assure you that we will be successful. If we are not successful, our business and results of operations may be harmed.
Our net sales and profits depend on the level of customer spending for our products, which is sensitive to
general economic conditions and other factors; during a downturn in the economy, consumer purchases of discretionary items are affected, which could materially harm our sales, profitability, and financial condition.
Our products are discretionary items for customers. Therefore, the success of our business depends significantly on economic factors and trends in consumer spending. There are a number of factors that influence consumer spending, including actual and perceived economic conditions, consumer confidence, disposable consumer income, consumer credit availability, unemployment, and tax rates in the markets where we sell our products. Consumers also have discretion as to where to spend their disposable income and may choose to purchase other items or services if we do not continue to provide authentic, compelling, and high-quality products at appropriate price points. As global economic
conditions continue to be volatile and economic uncertainty remains, trends in consumer discretionary spending also remain unpredictable and subject to declines. Any of these factors could harm discretionary consumer spending, resulting in a reduction in demand for our premium products, decreased prices, and harm to our business and results of operations. Moreover, consumer purchases of discretionary items, such as our products, tend to decline during recessionary periods when disposable income is lower or during other periods of economic instability or uncertainty, which may slow our growth more than we anticipate. A downturn in the economies in markets in which we sell our products, particularly in the United States, may materially harm our sales, profitability, and financial condition. For example, the adverse effects of COVID-19 across geographies could lead to a decline in discretionary spending by consumers, resulting in a reduction in demand for our products,
and in turn may materially impact our sales, profitability, and financial condition.
The markets in which we compete are highly competitive and include numerous other brands and retailers that offer a wide variety of products that compete with our products; if we fail to compete effectively, we could lose our market position.
The markets in which we compete are highly competitive, with low barriers to entry. Numerous other brands and retailers offer a wide variety of products that compete with our coolers, drinkware, and other products, including our bags, storage, and outdoor lifestyle products and accessories. Competition in these product markets is based on a number of factors including product quality, performance, durability, styling, brand image and recognition, and price. We believe that we are
one of the market leaders in both the U.S. premium cooler and U.S. premium stainless-steel drinkware markets. We believe that we have been able to compete successfully largely on the basis of our brand, superior design capabilities, and product development, as well as on the breadth of our independent retailers, national, and regional retail partners, and DTC channel. Our competitors may be able to develop and market higher quality products that compete with our products, sell their products for lower prices, adapt to changes in consumers’ needs and preferences more quickly, devote greater resources to the design, sourcing, distribution, marketing, and sale of their products, or generate greater brand recognition than us. In addition, as we expand into new product categories, we have faced, and will continue to face, different and, in some cases, more formidable competition. We believe many of our competitors and potential competitors have significant competitive advantages,
including longer operating histories, ability to leverage their sales efforts and marketing expenditures across a broader portfolio of products, global product distribution, larger and broader retailer bases, more established relationships with a larger number of suppliers and manufacturing partners, greater brand recognition, larger or more effective brand ambassador and endorsement relationships, greater financial strength, larger research and development teams, larger marketing budgets, and more distribution and other resources than we do. Some of our competitors may aggressively discount their products or offer other attractive sales terms in order to gain market share, which could result in pricing pressures, reduced profit margins, or lost market share. If we are not able to overcome these potential competitive challenges, effectively market our current and future products, and otherwise compete effectively against our current or potential competitors, our prospects,
results of operations, and financial condition could be harmed.
Competitors have attempted, and will likely continue to attempt to imitate, our products and technology. If we are unable to protect or preserve our brand image and proprietary rights, our business may be harmed.
As our business continues to expand, our competitors have imitated or attempted to imitate, and will likely continue to imitate or attempt to imitate, our product designs and branding, which could harm our business and results of operations. Only a portion of the
intellectual property used in the manufacture and design of our products is patented, and we therefore rely significantly on trade secrets, trade and service marks, trade dress, and the strength of our brand. We regard our patents, trade dress, trademarks, copyrights, trade secrets, and similar proprietary rights as critical to our success. We also rely on trade secret protection and confidentiality agreements with our employees, consultants, suppliers, manufacturers, and others to protect our proprietary rights. Nevertheless, the steps we take to protect our proprietary rights against infringement or other violation may be inadequate, and we may experience difficulty in effectively limiting the unauthorized use of our patents, trademarks, trade dress, and other intellectual property and proprietary rights worldwide. We also cannot guarantee that others will not independently develop technology with the same or similar function to any proprietary technology we rely on
to conduct our business and differentiate ourselves from our competitors. Because a significant portion of our products are manufactured overseas in countries where counterfeiting is more prevalent, and we intend to increase our sales overseas over the long term, we may experience increased counterfeiting of our products. Unauthorized use or invalidation of our patents, trademarks, copyrights, trade dress, trade secrets, or other intellectual property or proprietary rights may cause significant damage to our brand and harm our results of operations.
While we actively develop and protect our intellectual property rights, there can be no assurance that we will be adequately protected in all countries in which we conduct our business or that we will prevail when defending our patent, trademark, and proprietary rights. Additionally, we could incur significant costs and management distraction
in pursuing claims to enforce our intellectual property rights through litigation and defending any alleged counterclaims. If we are unable to protect or preserve the value of our patents, trade dress, trademarks, copyrights, or other intellectual property rights for any reason, or if we fail to maintain our brand image due to actual or perceived product or service quality issues, adverse publicity, governmental investigations or litigation, or other reasons, our brand and reputation could be damaged, and our business may be harmed.
We rely on third-party contract manufacturers and problems with, or loss of, our suppliers or an inability to obtain raw materials could harm our business and results of operations.
Our
products are produced by third-party contract manufacturers. We face the risk that these third-party contract manufacturers may not produce and deliver our products on a timely basis or at all. We have experienced, and will likely continue to experience, operational difficulties with our manufacturers. These difficulties include reductions in the availability of production capacity, errors in complying with product specifications and regulatory and customer requirements, insufficient quality control, failures to meet production deadlines, failure to achieve our product quality standards, increases in costs of materials, and manufacturing or other business interruptions. The ability of our manufacturers to effectively satisfy our production requirements could also be impacted by manufacturer
financial difficulty or damage to their operations caused by fire, terrorist attack, riots, natural disaster, public health issues such as the current COVID-19 pandemic (or other future pandemics or epidemics), or other events. The failure of any manufacturer to perform to our expectations could result in supply shortages or delays for certain products and harm our business. If we experience significantly increased demand, or if we need to replace an existing manufacturer due to lack of performance, we may be unable to supplement or replace our manufacturing capacity on a timely basis or on terms that are acceptable to us, which may increase our costs, reduce our margins, and harm our ability to deliver our products on time. For certain of our products, it may take a significant amount of time to identify and qualify a manufacturer that has the capability and resources to produce our products to our specifications in sufficient volume and satisfy our service and quality
control standards.
The capacity of our manufacturers to produce our products is also dependent upon the availability of raw materials. Our manufacturers may not be able to obtain sufficient supply of raw materials, which could result in delays in deliveries of our products by our manufacturers or increased costs. Any shortage of raw materials or inability of a manufacturer to produce or ship our products in a timely manner, or at all, could impair our ability to ship orders of our products in a cost-efficient, timely manner and could cause us to miss the delivery requirements of our customers. As a result, we could experience cancellations of orders, refusals to accept deliveries, or reductions in our prices and margins, any of which could harm our financial performance, reputation, and results of operations.
If
we fail to timely and effectively obtain shipments of products from our manufacturers and deliver products to our retail partners and customers, our business and results of operations could be harmed.
Our business depends on our ability to source and distribute products in a timely manner. However, we cannot control all of the factors that might affect the timely and effective procurement of our products from our third-party contract manufacturers and the delivery of our products to our retail partners and customers.
Our third-party contract manufacturers ship most of our products to our distribution centers in Dallas, Texas, and Salt Lake City, Utah. Our reliance on only two geographical locations for our distribution centers makes us more vulnerable to natural disasters, weather-related disruptions, accidents, system failures, public health issues such as the current COVID-19 pandemic (or other future pandemics or epidemics), or other unforeseen events that could delay or impair our ability to fulfill retailer orders and/or ship merchandise purchased on our website, which could harm our sales. We import our products, and we are also vulnerable to risks associated with products manufactured abroad, including,
among other things: (a) risks of damage, destruction, or confiscation of products while in transit to our distribution centers; and (b) transportation and other delays in shipments, including as a result of heightened security screening, port congestion, and inspection processes or other port-of-entry limitations or restrictions in the United States. In order to meet demand for a product, we have chosen in the past, and may choose in the future, to arrange for additional quantities of the product, if available, to be delivered through air freight, which is significantly more expensive than standard shipping by sea and, consequently, could harm our gross margins. Failure to procure our products from our third-party contract manufacturers and deliver merchandise to our retail partners and DTC channel in a timely, effective, and economically viable manner could reduce our sales and
gross margins, damage our brand, and harm our business.
We also rely on the timely and free flow of goods through open and operational ports from our suppliers and manufacturers. Labor disputes or disruptions at ports, our common carriers, or our suppliers or manufacturers could create significant risks for our business, particularly if these disputes result in work slowdowns, lockouts, strikes, or other disruptions during periods of significant importing or manufacturing, potentially resulting in delayed or canceled orders by customers, unanticipated inventory accumulation or shortages, and harm to our business, results of operations, and financial condition.
In addition, we rely upon independent land-based and air freight carriers for product shipments from our distribution centers to our retail partners and customers
who purchase through our DTC channel. We may not be able to obtain sufficient freight capacity on a timely basis or at favorable shipping rates and, therefore, may not be able to receive products from suppliers or deliver products to retail partners or customers in a timely and cost-effective manner.
Accordingly, we are subject to the risks, including labor disputes, union organizing activity, inclement weather, public health crises such as the current COVID-19 pandemic (or other future pandemics or epidemics), and increased transportation costs, associated with our third-party contract manufacturers’ and carriers’ ability to provide products and services to meet our requirements. In addition, if the cost of fuel rises, the cost to deliver products may rise, which could harm our profitability.
Our
business is subject to the risk of manufacturer concentrations.
We depend on a limited number of third-party contract manufacturers for the sourcing of our products. For our hard coolers, soft coolers, Drinkware, bags, and outdoor living and pet products, our two largest manufacturers comprised approximately 87%, 80%, 74%, 96%, and 92%, respectively, of our production volume during the first six months of 2020. For our cargo, two manufacturers accounted for all of the production of each product in the first six months of 2020. As a result of this concentration in our supply chain, our business and operations would be negatively affected if any of our key manufacturers were to experience significant disruption affecting the price, quality, availability, or timely delivery of products. Our manufacturers
could also be acquired by our competitors and may become our direct competitors, thus limiting or eliminating our access to manufacturing capacity. The partial or complete loss of our key manufacturers, or a significant adverse change in our relationship with any of these manufacturers, could result in lost sales, added costs, and distribution delays that could harm our business and customer relationships.
Our results of operations could be materially harmed if we are unable to accurately forecast demand for our products.
To ensure adequate inventory supply, we must forecast inventory needs and place orders with our manufacturers before firm orders are placed by our customers. If we fail to accurately forecast customer demand, we may experience excess inventory levels or a shortage of product to deliver
to our customers. Factors that could affect our ability to accurately forecast demand for our products include: (a) an increase or decrease in consumer demand for our products; (b) our failure to accurately forecast consumer acceptance for our products; (c) product introductions by competitors; (d) unanticipated changes in general market conditions or other factors, which may result in cancellations of advance orders or a reduction or increase in the rate of reorders or at-once orders placed by retailers; (e) the impact on consumer demand due to unseasonable weather conditions; (f) weakening of economic conditions or consumer confidence in future economic conditions, which could reduce demand for discretionary items, such as our products; and (g) terrorism or acts of war, or the threat thereof, political or labor instability or unrest, riots, public health crises such as the current COVID-19 pandemic (or other future pandemics or epidemics), or xenophobia resulting therefrom,
which could adversely affect consumer confidence and spending or interrupt production and distribution of product and raw materials.
Inventory levels in excess of customer demand may result in inventory write-downs or write-offs and the sale of excess inventory at discounted prices or in less preferred distribution channels, which could impair our brand image and harm our gross margin. In addition, if we underestimate the demand for our products, our manufacturers may not be able to produce products to meet our customer requirements, and this could result in delays in the shipment of our products and our ability to recognize revenue,
lost sales, as well as damage to our reputation and retailer and distributor relationships.
Difficulty in forecasting demand, which we are encountering as a result of the COVID-19 pandemic, also makes it difficult to estimate our future results of operations and financial condition from period to period. A failure to accurately predict the level of demand for our products could adversely impact our profitability or cause us not to achieve our expected financial results.
Our business could be harmed if we fail to execute our internal plans to transition our supply chain and certain other business processes to a global scale.
We are in the process of re-engineering certain of our supply chain management processes, as well as certain
other business processes, to support our expanding scale. This expansion to a global scale requires significant investment of capital and human resources, the re-engineering of many business processes, and the attention of many managers and other employees who would otherwise be focused on other aspects of our business. If our globalization efforts fail to produce planned efficiencies, or the transition is not managed effectively, we may experience excess inventories, inventory shortage, late deliveries, lost sales, or increased costs. Any business disruption arising from our globalization efforts, or our failure to effectively execute our internal plans for globalization, could harm our results of operations and financial condition.
Our profitability may decline as a result of increasing pressure on pricing.
Our
industry is subject to significant pricing pressure caused by many factors, including intense competition, consolidation in the retail industry, pressure from retailers to reduce the costs of products, and changes in consumer demand. These factors may cause us to reduce our prices to retailers and customers or engage in more promotional activity than we anticipate, which could negatively impact our margins and cause our profitability to decline if we are unable to offset price reductions with comparable reductions in our operating costs. This could materially harm our results of operations and financial condition. In addition, ongoing and sustained promotional activities could harm our brand image.
We rely on a series of purchase orders with our manufacturers. Some of these relationships are not exclusive, which means that these manufacturers could produce similar products for our competitors.
We
rely on a series of purchase orders with our manufacturers. With all of our manufacturers, we face the risk that they may fail to produce and deliver our products on a timely basis, or at all, or comply with our quality standards. In addition, our manufacturers may raise prices in the future, which would increase our costs and harm our margins. Even those manufacturers with whom we have purchase orders may breach these agreements, and we may not be able to enforce our rights under these agreements or may incur significant costs attempting to do so. As a result, we cannot predict with certainty our ability to obtain finished products in adequate quantities, of required quality and at acceptable prices from our manufacturers in the future. Any one of these risks could harm our ability to deliver our products on time, or at all, damage our reputation and our relationships with our retail partners and customers, and increase our product costs thereby reducing our margins.
In
addition, except in some of the situations where we have a supply contract, our arrangements with our manufacturers are not exclusive. As a result, our manufacturers could produce similar products for our competitors, some of which could potentially purchase products in significantly greater volume. Further, while certain of our long-term contracts stipulate contractual exclusivity, those manufacturers could choose to breach our agreements and work with our competitors. Our competitors could enter into restrictive or exclusive arrangements with our manufacturers that could impair or eliminate our access to manufacturing capacity or supplies.
Fluctuations in the cost and availability of raw materials, equipment, labor, and transportation could cause manufacturing delays or increase our costs.
The price and availability of key components used to manufacture our products, including polyethylene, polyurethane foam, stainless-steel, polyester fabric, zippers, and other plastic materials and coatings, as well as manufacturing equipment and molds, may fluctuate significantly. In addition, the cost of labor at our third-party contract manufacturers could increase significantly. For example, manufacturers in China have experienced increased costs in recent years due to shortages of labor and fluctuations of the Chinese yuan in relation to the U.S. dollar. Additionally, the cost
of logistics and transportation fluctuates in large part due to the price of oil. Any fluctuations in the cost and availability of any of our raw materials or other sourcing or transportation costs related to our raw materials or products could harm our gross margins and our ability to meet customer demand. If we are unable to successfully mitigate a significant portion of these product cost increases or fluctuations, our results of operations could be harmed.
Many of our products are manufactured by third parties outside of the United States, and our business may be harmed by legal, regulatory, economic, political and public health risks associated with international trade and those markets.
Many of our core products are manufactured in China, the Philippines, Vietnam, and Taiwan. In addition, we have third-party
manufacturing partners in Mexico and Italy. Our reliance on suppliers and manufacturers in foreign markets creates risks inherent in doing business in foreign jurisdictions, including: (a) the burdens of complying with a variety of foreign laws and regulations, including trade and labor restrictions and laws relating to the importation and taxation of goods; (b) weaker protection for intellectual property and other legal rights than in the United States, and practical difficulties in enforcing intellectual property and other rights outside of the United States; (c) compliance with U.S. and foreign laws relating to foreign operations, including the U.S. Foreign Corrupt Practices Act (“FCPA”), the UK Bribery Act 2010 (“Bribery Act”), regulations of the U.S. Office of Foreign Assets Controls
(“OFAC”), and U.S. anti-money laundering regulations, which respectively prohibit U.S. companies from making improper payments to foreign officials for the purpose of obtaining or retaining business, operating in certain countries, or maintaining business relationships with certain restricted parties as well as engaging in other corrupt and illegal practices; (d) economic and political instability and acts of terrorism in the countries where our suppliers are located; (e) public health crises, such as the current COVID-19 pandemic (or other future pandemics or epidemics), in the countries where our suppliers and manufacturers are located; (f) transportation interruptions or increases in transportation costs; and (g) the imposition of tariffs or non-tariff barriers on components and products that we import into the United States or other markets. For example, the ongoing COVID-19
outbreak has resulted in increased travel restrictions and extended shutdown of certain businesses around the globe. This public health crises or any further political developments or health concerns in markets in which our products are manufactured could result in social, economic and labor instability, adversely affecting the supply of our products and, in turn, our business, financial condition, and results of operations. Further, we cannot assure you that our directors, officers, employees, representatives, manufacturers, or suppliers have not engaged and will not engage in conduct for which we may be held responsible, nor can we assure you that our manufacturers, suppliers, or other business partners have not engaged and will not engage in conduct that could materially harm their ability to perform their contractual obligations to us or even result in our being held liable for such conduct. Violations of the FCPA, the Bribery Act, OFAC restrictions, or other export
control, anti-corruption, anti-money laundering, and anti-terrorism laws or regulations may result in severe criminal or civil penalties, and we may be subject to other related liabilities, which could harm our business, financial condition, cash flows, and results of operations.
As current tariffs are implemented, or if additional tariffs or other restrictions are placed on foreign imports or any related counter-measures are taken by other countries, our business and results of operations could be harmed.
The Trump Administration has put into place tariffs and other trade restrictions and signaled that it may additionally alter trade agreements and terms between the United States and China, the European Union, Canada, and Mexico, among others, including limiting trade and/or imposing tariffs on imports
from such countries. In addition, China, the European Union, Canada, and Mexico, among others, have either threatened or put into place retaliatory tariffs of their own. As announced tariffs are implemented, or additional tariffs or other restrictions are placed on foreign imports, including on any of our products manufactured overseas for sale in the United States, or any related counter-measures are taken by other countries, our business and results of operations may be materially harmed.
Current and additional tariffs have the potential to significantly raise the cost of our products, particularly our Drinkware. In such a case, there can be no assurance that we will be able to shift manufacturing and supply agreements to non-impacted countries, including the United States, to reduce the effects of the tariffs. As a result, we may suffer margin erosion or be required to raise our prices, which
may result in the loss of customers, negatively impact our results of operations, or otherwise harm our business. In addition, the imposition of tariffs on products that we export to international markets could make such products more expensive compared to those of our competitors if we pass related additional costs on to our customers, which may also result in the loss of customers, negatively impact our results of operations, or otherwise harm our business.
A significant portion of our sales are to independent retail partners.
Eighteen
percent of our gross sales for 2019 and 15% of our gross sales for the six months ended June 27, 2020, were made to independent retail partners. These retail partners may decide to emphasize products from our competitors, to redeploy their retail floor space to other product categories, or to take other actions that reduce their purchases of our products. We do not receive long-term purchase commitments from our independent retail partners, and orders received from our independent retail partners are cancellable. Factors that could affect our ability to maintain or expand our sales to these independent retail partners include: (a) failure to accurately identify the needs of our customers; (b) a lack of customer acceptance of new products or product expansions; (c) unwillingness of our independent retail partners and customers to attribute premium value to our new or existing products or product expansions relative to
competing products; (d) failure to obtain shelf space from our retail partners; (e) new, well-received product introductions by competitors; (f) damage to our relationships with independent retail partners due to brand or reputational harm; (g) delays or defaults on our retail partners’ payment obligations to us; and (h) store closures, decreased foot traffic, recession or other adverse effects resulting from public health crises such as the current COVID-19 pandemic (or other future pandemics or epidemics).
We cannot assure you that our independent retail partners will continue to carry our current products or carry any new products that we develop. If these risks occur, they could harm our brand as well as our results of operations and financial condition. In addition, store closures, decreased foot traffic and recession resulting from the COVID-19 pandemic will adversely
affect the performance and will likely adversely affect the financial condition of many of these customers. The foregoing are expected to have a material adverse effect on our business and financial condition.
We depend on our retail partners to display and present our products to customers, and our failure to maintain and further develop our relationships with our retail partners could harm our business.
We sell a significant amount of our products through knowledgeable national, regional, and independent retail partners. Our retail partners service customers by stocking and displaying our products, explaining our product attributes, and sharing our brand story. Our relationships with these retail partners are important to the authenticity of our brand and the marketing programs
we continue to deploy. Our failure to maintain these relationships with our retail partners or financial difficulties experienced by these retail partners could harm our business.
We have key relationships with national retail partners. For both 2018 and 2019, one national retail partner accounted for approximately 16% and 15% of our gross sales, respectively. If we lose any of our key retail partners or any key retail partner reduces its purchases of our existing or new products or its number of stores or operations or promotes products of our competitors over ours, our sales would be harmed. Because we are a premium brand, our sales depend, in part, on retail partners effectively displaying our products, including providing attractive space and point of purchase displays in their stores, and training their sales personnel to sell our products. If our retail partners reduce or terminate those activities,
we may experience reduced sales of our products, resulting in lower gross margins, which would harm our results of operations.
If our plans to increase sales through our DTC channel are not successful, our business and results of operations could be harmed.
For 2019 and the six months ended June 27, 2020, our DTC channel accounted for 42% and 50% of our net sales, respectively. Part of our growth strategy involves increasing sales through our DTC channel. However, we have limited operating experience executing the retail component of this strategy. The level of customer traffic and volume of customer purchases through our country and region-specific YETI websites
or other e-commerce initiatives are substantially dependent on our ability to provide a content-rich and user-friendly website, a hassle-free customer experience, sufficient product availability, and reliable, timely delivery of our products. If we are unable to maintain and increase customers’ use of our website, allocate sufficient product to our website, and increase any sales through our website, our business, and results of operations could be harmed.
We
currently have a limited number of country and region-specific YETI websites and are planning to expand our e-commerce platform to others. These countries may impose different and evolving laws governing the operation and marketing of e-commerce websites, as well as the collection, storage, and use of information on customers interacting with those websites. We may incur additional costs and operational challenges in complying with these laws, and differences in these laws may cause us to operate our business differently, and less effectively, in different territories. If so, we may incur additional costs and may not
fully realize the investment in our international expansion.
If we do not successfully implement our future retail store expansion, our growth and profitability could be harmed.
We have and may continue to expand our existing DTC channel by opening new retail and pop-up stores. We opened retail stores in Charleston, South Carolina, Chicago, Illinois, and Denver, Colorado, in June 2019, September 2019 and June 2020, respectively. We also opened a pop-up store in each of Austin, Texas, Dallas, Texas, and Ft. Lauderdale, Florida, in October 2019,
November 2019 and March 2020, respectively, and we plan to open an additional pop-up store in West Palm Beach, Florida, in August 2020. Our ability to open new retail stores in a timely manner and operate them profitably depends on a number of factors, many of which are beyond our control, including:
•our ability to manage the financial and operational aspects of our retail growth strategy, including making appropriate investments in our software systems, information technology, and operational infrastructure;
•our ability to identify suitable locations, including our ability to gather and assess demographic and marketing data to accurately determine customer demand for our products in the locations we select;
•our ability to negotiate
favorable lease agreements;
•our ability to properly assess the potential profitability and payback period of potential new retail store locations;
•the availability of financing on favorable terms;
•our ability to secure required governmental permits and approvals and our ability to effectively comply with state and local employment and labor laws, rules, and regulations;
•our ability to hire and train skilled store operating personnel, especially management personnel;
•the availability of construction materials and labor and the absence of significant construction delays or cost overruns;
•our
ability to provide a satisfactory mix of merchandise that is responsive to the needs of our customers living in the areas where new retail stores are established;
•our ability to establish a supplier and distribution network able to supply new retail stores with inventory in a timely manner;
•our competitors, or our retail partners, building or leasing stores near our retail stores or in locations we have identified as targets for a new retail store;
•customer demand for our products;
•governmental orders requiring adherence to social distancing practices, temporary store closures, or reduced hours; and
•general economic and business
conditions affecting consumer confidence and spending and the overall strength of our business.
We have limited experience in opening retail stores and may not be able to successfully address the risks that they entail. For example, due to the current COVID-19 pandemic, which resulted in widespread government mandated temporary store closures or reduced hours during the second quarter of Fiscal 2020 that may be re-imposed by governmental authorities in certain geographies to reduce the spread of COVID-19, our ability to implement our full retail store strategy, achieve desired net sales growth and maintain consistent levels of profitability in our retail stores has been, and continues to be, disrupted. In order to pursue our retail store strategy, we will be required to expend significant cash resources prior to generating any sales in these stores. We may not generate sufficient sales
from these stores to justify these expenses, which could harm our business and profitability. The substantial management time and resources that may be required to execute retail store expansion in the future could also result in disruption to our existing business operations, which may decrease our net sales and profitability.
Insolvency, credit problems or other financial difficulties that could confront our retail partners could expose us to financial risk.
We sell to the large majority of our retail partners on open account terms and do not require collateral or a security interest in the inventory we sell them. Consequently, our accounts receivable with our retail partners are unsecured. Insolvency, credit problems, or other financial difficulties confronting our retail partners could expose us
to financial risk. These actions could expose us to risks if they delay or are unable to pay for the products they purchase from us. Financial difficulties of our retail partners could also cause them to reduce their sales staff, use of attractive displays, number or size of stores, and the amount of floor space dedicated to our products. For example, the COVID-19 pandemic has caused public health officials to recommend precautions to mitigate the spread of the virus that has resulted in widespread temporary store closures or reduced store hours for our retail partners. There is significant uncertainty surrounding the ultimate duration of these actions and consumer willingness to visit retail stores during the COVID-19 pandemic and in the future, which may lead to a material reduction in sales of our products by our retail partners. Any reduction in sales by, or loss of, our current retail partners or customer demand, or credit risks associated with our retail partners,
could harm our business, results of operations, and financial condition.
If our independent suppliers and manufacturing partners do not comply with ethical business practices or with applicable laws and regulations, our reputation, business, and results of operations could be harmed.
Our reputation and our customers’ willingness to purchase our products depend in part on our suppliers’, manufacturers’, and retail partners’ compliance with ethical employment practices, such as with respect to child labor, wages and benefits, forced labor, discrimination,
safe and healthy working conditions, and with all legal and regulatory requirements relating to the conduct of their businesses. We do not exercise control over our suppliers, manufacturers, and retail partners and cannot guarantee their compliance with ethical and lawful business practices. If our suppliers, manufacturers, or retail partners fail to comply with applicable laws, regulations, safety codes, employment practices, human rights standards, quality standards, environmental standards, production practices, or other obligations, norms, or ethical standards, our reputation and brand image could be harmed, and we could be exposed to litigation and additional costs that would harm our business, reputation, and results of operations.
We are subject to payment-related risks.
For our DTC sales, as well
as for sales to certain retail partners, we accept a variety of payment methods, including credit cards, debit cards, electronic funds transfers, electronic payment systems, and gift cards. Accordingly, we are, and will continue to be, subject to significant and evolving regulations and compliance requirements, including obligations to implement enhanced authentication processes that could result in increased costs and liability, and reduce the ease of use of certain payment methods. For certain payment methods, including credit and debit cards, as well as electronic payment systems, we pay interchange and other fees, which may increase over time. We rely on independent service providers for payment processing, including credit and debit cards. If these independent service providers become unwilling or unable to provide these services to us, or if the cost of using these providers increases, our business could be harmed. We are also subject to payment card association
operating rules and agreements, including data security rules and agreements, certification requirements, and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, or if our data security systems are breached or compromised, we may be liable for losses incurred by card issuing banks or customers, subject to fines and higher transaction fees, lose our ability to accept credit or debit card payments from our customers, or process electronic fund transfers or facilitate other types of payments. Any failure to comply could significantly harm our brand, reputation, business, and results of operations.
Our future success depends on the continuing efforts of our management and key employees, and on our ability to attract and retain highly skilled personnel
and senior management.
We depend on the talents and continued efforts of our senior management and key employees. The loss of members of our management or key employees may disrupt our business and harm our results of operations. Furthermore, our ability to manage further expansion will require us to continue to attract, motivate, and retain additional qualified personnel. Competition for this type of personnel is intense, and we may not be successful in attracting, integrating, and retaining the personnel required to grow and operate our business effectively. There can be no assurance that our current management team or any new members of our management team will be able to successfully execute our business and operating strategies.
Our plans for international expansion may not be successful; our limited operating experience and limited brand recognition in new markets may make it more difficult to execute our expansion strategy and cause our business and growth to suffer.
Continued expansion into markets outside the United States, including Canada, Australia, Europe and Japan, is one of our key long-term strategies for the future growth of our business. There are, however, significant costs and risks inherent in selling our products in international markets, including: (a) failure to effectively translate and establish our core brand identity, particularly in markets with a less-established heritage of outdoor and recreational activities; (b) time and difficulty in building a widespread network of retail partners; (c) increased shipping and distribution
costs, which could increase our expenses and reduce our margins; (d) potentially lower margins in some regions; (e) longer collection cycles in some regions; (f) increased competition from local providers of similar products; (g) compliance with foreign laws and regulations, including taxes and duties, enhanced privacy laws, rules, and regulations, and product liability laws, rules, and regulations, particularly in the European Union; (h) establishing and maintaining effective internal controls at foreign locations and the associated increased costs; (i) increased counterfeiting and the uncertainty of protection for intellectual property rights in some countries and practical difficulties of enforcing rights abroad; (j) compliance with anti-bribery, anti-corruption, sanctions, and anti-money laundering laws, such as the FCPA, the Bribery Act, and OFAC regulations, by us, our employees, and our business partners; (k) currency exchange rate fluctuations and related effects
on our results of operations; (l) economic weakness, including inflation, or political instability in foreign economies and markets; (m) compliance with tax, employment, immigration, and labor laws for employees living or traveling abroad; (n) workforce uncertainty in countries where labor unrest is more common than in the United States; (o) business interruptions resulting from geopolitical actions, including war and terrorism, riots, natural disasters, including earthquakes, typhoons, floods, and fires, public health issues, including the outbreak of a pandemic or contagious disease, such as COVID-19, or xenophobia resulting therefrom; (p) the imposition of tariffs on products that we import into international markets that could make such products more expensive compared to those of our competitors; (q) that our ability to expand internationally could be impacted by the intellectual property rights of third parties that conflict with or are superior to ours; and (r)
other costs and risks of doing business internationally.
These and other factors could harm our international operations and, consequently, harm our business, results of operations, and financial condition. Further, we may incur significant operating expenses as a result of our planned international expansion, and it may not be successful. We have limited experience with regulatory environments and market practices internationally, and we may not be able to penetrate or successfully operate in new markets. We also have limited operating experience outside of the United States and in our expansion efforts we may encounter obstacles we did not face in the United States, including cultural and linguistic differences, differences in regulatory environments, labor practices and market practices, difficulties in keeping abreast of market, business and technical developments, and preferences
of foreign customers. Consumer demand and behavior, as well as tastes and purchasing trends, may differ internationally, and, as a result, sales of our products may not be successful, or the margins on those sales may not be in line with those we anticipate. We may also encounter difficulty expanding into international markets because of limited brand recognition, leading to delayed or limited acceptance of our products by customers in these markets and increased marketing and customer acquisition costs to establish our brand. Accordingly, if we are unable to successfully expand internationally or manage the complexity of our global operations, we may not achieve the expected benefits of this expansion and our financial condition and results of operations could be harmed.
Our financial results and future growth could be harmed by currency exchange rate fluctuations.
As
our international business grows, our results of operations could be adversely impacted by changes in foreign currency exchange rates. Revenues and certain expenses in markets outside of the United States are recognized in local foreign currencies, and we are exposed to potential gains or losses from the translation of those amounts into U.S. dollars for consolidation into our financial statements. Similarly, we are exposed to gains and losses resulting from currency exchange rate fluctuations on transactions generated by our foreign subsidiaries in currencies other than their local currencies. In addition, the business of our independent manufacturers may also be disrupted by currency exchange rate fluctuations by making their purchases of raw materials more expensive and more difficult to finance. As a result, foreign currency exchange rate fluctuations may adversely impact
our results of operations.
Our current and future products may experience quality problems from time to time that can result in negative publicity, litigation, product recalls, and warranty claims, which could result in decreased sales and operating margin, and harm to our brand.
Although we extensively and rigorously test new and enhanced products, there can be no assurance we will be able to detect, prevent, or fix all defects. Defects in materials or components can unexpectedly interfere with the products’ intended use and safety and damage our reputation.
Failure to detect, prevent, or fix defects could result in a variety of consequences, including a greater number of product returns than expected from customers and our retail partners, litigation, product recalls, and credit claims, among others, which could harm our sales and results of operations. The occurrence of real or perceived quality problems or material defects in our current and future products could expose us to product recalls, warranty, or other claims. In addition, any negative publicity or lawsuits filed against us related to the perceived quality and safety of our products could also harm our brand and decrease demand for our products.
Our business is subject to the risk of earthquakes, fire, power outages, floods, and other catastrophic events, and to interruption by problems such as terrorism, public health crises, cyberattacks, or failure of key information technology
systems.
Our business is vulnerable to damage or interruption from earthquakes, fires, floods, power losses, telecommunications failures, terrorist attacks, acts of war, riots, public health crises, human errors, criminal acts, and similar events. For example, a significant natural disaster, such as an earthquake, fire, or flood, could harm our business, results of operations, and financial condition, and our insurance coverage may be insufficient to compensate us for losses that may occur. Our corporate offices, one of our distribution centers, and one of our data center facilities are located in Texas, a state that frequently experiences floods and storms. In addition, the facilities of our suppliers and where our manufacturers produce our products are located in parts of Asia that frequently experience typhoons and earthquakes. Acts of terrorism and public
health crises, such as the current COVID-19 pandemic (or other future pandemics or epidemics), could also cause disruptions in our or our suppliers’, manufacturers’, and logistics providers’ businesses or the economy as a whole. While the main elements of our supply chain have not yet been materially impacted by the COVID-19 pandemic, we were forced to temporarily close our domestic customization operations, and the likely overall impact of the pandemic is viewed as highly negative to the general economy. We may not have sufficient protection or recovery plans in some circumstances, such as natural disasters affecting Texas or other locations where we have operations or store significant inventory. Our servers may also be vulnerable to computer viruses, criminal acts, denial-of-service attacks, ransomware, and similar disruptions from unauthorized tampering with our computer systems, which could lead to interruptions, delays, or loss of critical data. As we rely heavily
on our information technology and communications systems and the Internet to conduct our business and provide high-quality customer service, these disruptions could harm our ability to run our business and either directly or indirectly disrupt our suppliers’ or manufacturers’ businesses, which could harm our business, results of operations, and financial condition.
We rely significantly on information technology and any failure, inadequacy or interruption of that technology could harm our ability to effectively operate our business.
Our business relies on information technology. Our ability to effectively manage and maintain our inventory and internal reports, and to ship products to customers and invoice them on a timely basis, depends significantly on our enterprise resource planning, warehouse management,
and other information systems. We also heavily rely on information systems to process financial and accounting information for financial reporting purposes. Any of these information systems could fail or experience a service interruption for a number of reasons, including computer viruses, programming errors, hacking or other unlawful activities, disasters or our failure to properly maintain system redundancy or protect, repair, maintain or upgrade our systems. The failure of our information systems to operate effectively or to integrate with other systems, or a breach in security of these systems, could cause delays in product fulfillment and reduced efficiency of our operations, which could negatively impact our financial results. If we experienced any significant disruption to our financial information systems that we are unable to mitigate, our ability to timely report our financial results could be impacted, which could negatively impact our stock price. We also
communicate electronically throughout the world with our employees and with third parties, such as customers, suppliers, vendors and consumers. A service interruption or shutdown could have a materially adverse impact on our operating activities. Remediation and repair of any failure, problem or breach of our key information systems could require significant capital investments.
We collect, store, process, and use personal and payment information and other customer data, which subjects us to regulation and other legal obligations related to privacy, information security, and data protection.
We collect, store, process, and use personal and payment information and other customer data, and we rely on third parties that are not directly under our control to manage certain of these operations. Our customers’
personal information may include names, addresses, phone numbers, email addresses, payment card data, and payment account information, as well as other information. Due to the volume and sensitivity of the personal information and data we manage, the security features of our information systems are critical.
If our security measures, some of which are managed by third parties, are breached or fail, unauthorized persons may be able to access sensitive customer data, including payment card data. Hackers and data thieves are increasingly sophisticated and operate large-scale and complex automated attacks. Threats to information
technology security can take a variety of forms. Individual and groups of hackers and sophisticated organizations, including state-sponsored organizations or nation-states, continuously undertake attacks that may pose threats to our customers and our information technology systems. These actors may use a wide variety of methods, which may include developing and deploying malicious software or exploiting vulnerabilities in hardware, software, or other infrastructure in order to attack our information technology systems or gain access to our systems, using social engineering techniques to induce our employees, users, partners, or customers to disclose passwords or other sensitive information, or take other actions to gain access to our data or our customers’ data, impersonating authorized users, or acting in a coordinated manner to launch distributed denial of service or other coordinated attacks. Although we have taken steps to protect the security of our information
systems and the data maintained in those systems, we have, from time to time, experienced threats to our data and systems, including malware and computer virus attacks and it is possible that in the future our safety and security measures will not prevent the systems’ improper functioning or damage, or the improper access or disclosure of personally identifiable information such as in the event of cyber-attacks. For example, system administrators may fail to timely remove employee account access when no longer appropriate. Employees or third parties may intentionally compromise our security or systems, or reveal confidential information. There have been initial media reports regarding increased cyber-security threats and potential breaches because of the increase in numbers of individuals working from home as a result of the COVID-19 pandemic. Cyberthreats are constantly evolving, increasing the difficulty of detecting and successfully defending against them.
Any
breach of our data security or that of our service providers could result in an unauthorized release or transfer of customer, consumer, user or employee information, or the loss of valuable business data or cause a disruption in our business. These events could give rise to unwanted media attention, damage our reputation, damage our customer, consumer, employee, or user relationships and result in lost sales, fines or lawsuits. We may also be required to expend significant capital and other resources to protect against or respond to or alleviate problems caused by a security breach, which could harm our results of operations. If we or our independent service providers or business partners experience a breach of systems compromising our customers' sensitive data, our brand could be harmed, sales of our products could decrease, and we could be exposed to losses, litigation, or regulatory proceedings. Depending on the nature of the information compromised, we may also have
obligations to notify users, law enforcement, or payment companies about the incident and may need to provide some form of remedy, such as refunds, for the individuals affected by the incident.
In addition, privacy laws, rules, and regulations are constantly evolving in the United States and abroad and may be inconsistent from one jurisdiction to another. For example, in June 2018, the State of California enacted the California Consumer Privacy Act, or CCPA, which became effective on January 1, 2020, and created new individual privacy rights for California consumers and place increased privacy and security obligations on entities handling certain personal data. Further, as we expand internationally, we are subject to additional privacy rules, such as the European Union’s General Data Protection Regulation, many of which are significantly
more stringent than those in the United States. Complying with these evolving obligations is costly, and any failure to comply could give rise to unwanted media attention and other negative publicity, damage our customer and consumer relationships and reputation, and result in lost sales, fines, or lawsuits, and may harm our business and results of operations.
Any material disruption or breach of our information technology systems or those of third-party partners could materially damage our customer and business partner relationships, and subject us to significant reputational, financial, legal, and operational consequences.
We depend on our information technology systems, as well as those of third parties, to design and develop new products, operate our website,
host and manage our services, store data, process transactions, respond to user inquiries, and manage inventory and our supply chain as well as to conduct and manage other activities. Any material disruption or slowdown of our systems or those of third parties that we depend upon, including a disruption or slowdown caused by our or their failure to successfully manage significant increases in user volume or successfully upgrade our or their systems, system failures, viruses, ransomware, security breaches, or other causes, could cause information, including data related to orders, to be lost or delayed, which could result in delays in the delivery of products to retailers and customers or lost sales, which could reduce demand for our products, harm our brand and reputation, and cause our sales to decline. If changes in technology cause our information systems, or those of third parties that we depend upon, to become obsolete, or if our or their information systems are
inadequate to handle our growth, particularly as we increase sales through our DTC channel, we could damage our customer and business partner relationships and our business and results of operations could be harmed.
We interact with many of our consumers through our e-commerce platforms, and these systems face similar risks of interruption or attack. Consumers increasingly utilize these services to purchase our products and to engage with our brand. If we are unable to continue to provide consumers a user-friendly experience and evolve our platform to satisfy consumer preferences, the growth of our e-commerce business and our net
revenues may be negatively impacted. If this software contains errors, bugs or other vulnerabilities which impede or halt service, this could result in damage to our reputation and brand, loss of users, or loss of revenue.
We depend on cash generated from our operations to support our growth, and we may need to raise additional capital, which may not be available on terms acceptable to us or at all.
We primarily rely on cash flow generated from our sales to fund our current operations and our growth initiatives. As we expand our business, we will need significant cash from operations to purchase inventory, increase our product development, expand our manufacturer and supplier relationships, pay personnel, pay for the increased costs associated with operating as a public company, expand internationally,
and further invest in our sales and marketing efforts. If our business does not generate sufficient cash flow from operations to fund these activities and sufficient funds are not otherwise available from our current or future credit facility, we may need additional equity or debt financing. If such financing is not available to us on satisfactory terms, our ability to operate and expand our business or to respond to competitive pressures could be harmed. Moreover, if we raise additional capital by issuing equity securities or securities convertible into equity securities, the ownership of our existing stockholders may be diluted. The holders of new securities may also have rights, preferences or privileges which are senior to those of existing holders of common stock. In addition, any indebtedness we incur may subject us to covenants that restrict our operations and will require interest and principal payments that could create additional cash demands and financial
risk for us.
Our indebtedness may limit our ability to invest in the ongoing needs of our business and if we are unable to comply with the covenants in our current Credit Facility, our liquidity and results of operations could be harmed.
As of June 27, 2020, we had $292.5 million principal amount of indebtedness outstanding under the Credit Facility (as defined in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” of this Report). The Credit Facility is jointly and severally guaranteed by certain of our wholly-owned material subsidiaries, including YETI Coolers, LLC, which
we refer to as YETI Coolers, and YETI Custom Drinkware LLC, which we refer to as YCD, and any of our future subsidiaries that become guarantors, together, which we refer to as the Guarantors, and is also secured by a first-priority lien on substantially all of our assets and the assets of the Guarantors, in each case subject to certain customary exceptions. We may, from time to time, incur additional indebtedness under the Credit Facility.
The Credit Facility places certain conditions on us, including, subject to certain conditions, reductions and exceptions, requiring us to utilize a portion of our cash flow from operations to make payments on our indebtedness, reducing the availability of our cash flow to fund working capital, capital expenditures, development activity, return capital to our
stockholders, and other general corporate purposes. Our compliance with this condition may limit our ability to invest in the ongoing needs of our business. For example, complying with this condition:
•increases our vulnerability to adverse economic or industry conditions;
•limits our flexibility in planning for, or reacting to, changes in our business or markets;
•makes us more vulnerable to increases in interest rates, as borrowings under the Credit Facility bear interest at variable rates;
•limits our ability to obtain additional financing in the future for working capital or other purposes; and
•potentially
places us at a competitive disadvantage compared to our competitors that have less indebtedness.
The Credit Facility places certain limitations on our ability to incur additional indebtedness. However, subject to the qualifications and exceptions in the Credit Facility, we may incur substantial additional indebtedness under that facility. The Credit Facility also places certain limitations on our ability to enter into certain types of transactions, financing arrangements and investments, to make certain changes to our capital structure, and to guarantee certain indebtedness, among other things. The Credit Facility also places certain restrictions on the payment of dividends and distributions and certain management fees. These restrictions limit or prohibit, among other things, and in each case, subject to certain customary exceptions, our ability to: (a) pay dividends on, redeem or repurchase
our stock, or make other distributions; (b) incur or guarantee additional indebtedness; (c) sell stock in our subsidiaries; (d) create or incur liens; (e) make acquisitions or investments; (f) transfer or sell certain assets or merge or consolidate with or into other companies; (g) make certain payments or prepayments of indebtedness subordinated to our obligations under the Credit Facility; and (h) enter into certain transactions with our affiliates.
The Credit Facility requires us to comply with certain covenants, including financial covenants regarding our total net leverage ratio and interest coverage ratio. Fluctuations in these ratios may increase our interest expense. Failure to comply with these covenants and certain other provisions of the Credit Facility, or the occurrence of a change of control,
could result in an event of default and an acceleration of our obligations under the Credit Facility or other indebtedness that we may incur in the future.
If such an event of default and acceleration of our obligations occurs, the lenders under the Credit Facility would have the right to proceed against the collateral we granted to them to secure such indebtedness, which consists of substantially all of our assets. If the debt under the Credit Facility were to be accelerated, we may not have sufficient cash or be able to sell sufficient collateral to repay this debt, which would immediately and materially harm our business, results
of operations, and financial condition. The threat of our debt being accelerated in connection with a change of control could make it more difficult for us to attract potential buyers or to consummate a change of control transaction that would otherwise be beneficial to our stockholders.
In connection with our preparation of our consolidated financial statements, we identified material weaknesses in our internal control over financial reporting. Our failure to maintain effective internal control over financial reporting could harm us.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). Under standards established by the Public Company Accounting Oversight Board (“PCAOB”), a deficiency in internal control over financial reporting exists when the design or operation of a control does not allow management or personnel, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. The PCAOB defines a material weakness as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented, or detected and corrected, on a timely basis. The PCAOB defines
a significant deficiency as a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of a registrant’s financial reporting.
During the preparation of our consolidated financial statements for the year ended December 30, 2017, we identified certain material weaknesses in our internal control over financial reporting. The material weaknesses related to (i) ineffective information technology general controls (“ITGCs”) in the areas of user access and program-change management over certain information technology systems that support our financial reporting process; and (ii) failure to properly
detect and analyze issues in the accounting system related to inventory valuation. During the year ended December 29, 2018, we implemented controls related to inventory valuation and concluded that our remediation efforts were successful and that the previously-identified material weakness relating to inventory has been remediated. During 2019, we also implemented our remediation plan with respect to our ITGCs that included: (i) hiring a new Chief Information Officer and an IT Compliance Manager in July 2019 to continue to improve our information technology systems, including the enhancement of related policies and procedures and the development and documentation of our ongoing ITGC improvement initiatives; and (ii) implementing remediation activities that were completed during the fourth quarter of 2019 within our SAP environment and across our other information technology systems that support our financial reporting
process. The material weakness will not be considered remediated, however, until the applicable remedial controls operate for a sufficient period of time, and we have concluded, through testing, that these controls are designed and operating effectively. Until the material weakness is fully remediated, business process automated and manual controls that are dependent on the affected ITGCs may be ineffective.
As a result of the material weakness related to ITGCs, we were unable to assert in our Annual Report on Form 10-K for the year ended December 28, 2019 that our internal control over financial reporting was effective as of such date, and our independent registered public accounting firm issued a report that our internal control over financial reporting was not effective as of such date. Furthermore, we cannot assure you that the measures we
have taken will be sufficient to remediate the control deficiencies that led to the material weakness in our internal control over financial reporting or that other material weaknesses and control deficiencies will not be discovered in the future. Our failure to maintain effective disclosure controls and internal control over financial reporting, our inability to assert that our internal control over financial reporting was effective as of the end of fiscal year 2019, or the adverse internal control attestation report from our independent registered public accounting firm issued in connection with our Annual Report on Form 10-K for the year ended December 28, 2019, could have an adverse effect on our business and could cause investors to lose confidence in our financial statements, which could cause a decline in the price of our common stock, and we may be unable to maintain compliance with the NYSE listing standards.
Our
results of operations are subject to seasonal and quarterly variations, which could cause the price of our common stock to decline.
We believe that our sales include a seasonal component. We expect our net sales to be highest in our second and fourth quarters, with the first quarter generating the lowest sales. To date, however, it has been difficult to accurately analyze this seasonality due to fluctuations in our sales. In addition, due to our more recent, and therefore more limited experience, with bags, storage, and outdoor lifestyle products and accessories, we are continuing to analyze the seasonality of these products. We expect that this seasonality will continue to be a factor in our results of operations and sales.
Our annual and quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including, among other things, the timing of the introduction of and advertising for our new products and those of our competitors and changes in our product mix. Variations in weather conditions may also harm our quarterly results of operations. In addition, we may not be able to adjust our spending in a timely manner to compensate for any unexpected shortfall in our sales. As a result of these seasonal and quarterly fluctuations, we believe that comparisons of our results of operations between different quarters within a single fiscal year, or across different fiscal years, are not necessarily meaningful and that these comparisons cannot be relied upon as indicators of our future performance. In the event that any seasonal or quarterly fluctuations in
our net sales and results of operations result in our failure to meet our forecasts or the forecasts of the research analysts that may cover us in the future, the market price of our common stock could fluctuate or decline.
If our goodwill, other intangible assets, or fixed assets become impaired, we may be required to record a charge to our earnings.
We may be required to record future impairments of goodwill, other intangible assets, or fixed assets to the extent the fair value of these assets falls below their book value. Our estimates of fair value are based on assumptions regarding future cash flows, gross margins, expenses, discount rates applied to these cash flows, and current market estimates of value. Estimates used for future sales growth rates, gross profit performance, and other assumptions used to
estimate fair value could cause us to record material non-cash impairment charges, which could harm our results of operations and financial condition.
If our estimates or judgments relating to our critical accounting policies prove to be incorrect or change significantly, our results of operations could be harmed.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets, liabilities, and equity and the amount of sales and expenses
that are not readily apparent from other sources. Our results of operations may be harmed if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors and could result in a decline in our stock price.
We may become involved in legal or regulatory proceedings and audits.
Our business requires compliance with many laws and regulations, including labor and employment, sales and other taxes, customs, and consumer protection laws and ordinances that regulate retailers generally and/or govern the importation, promotion, and sale of merchandise, and the operation of stores and warehouse facilities. Failure to comply with these laws and regulations could subject us to lawsuits and
other proceedings, and could also lead to damage awards, fines, and penalties. We may become involved in a number of legal proceedings and audits, including government and agency investigations, and consumer, employment, tort, and other litigation. The outcome of some of these legal proceedings, audits, and other contingencies could require us to take, or refrain from taking, actions that could harm our operations or require us to pay substantial amounts of money, harming our financial condition and results of operations. Additionally, defending against these lawsuits and proceedings may be necessary, which could result in substantial costs and diversion of management’s attention and resources, harming our business, financial condition, and results of operations. Any pending or future legal or regulatory proceedings and audits could harm our business, financial condition, and results of operations.
Our
business involves the potential for product recalls, product liability, and other claims against us, which could affect our earnings and financial condition.
As a designer, marketer, retailer, and distributor of consumer products, we are subject to the United States Consumer Products Safety Act of 1972, as amended by the Consumer Product Safety Improvement Act of 2008, which empowers the Consumer Products Safety Commission to exclude from the market products that are found to be unsafe or hazardous, and similar laws under foreign jurisdictions. Under certain circumstances, the Consumer Products Safety Commission or comparable foreign agency could require us to repurchase or recall one or more of our products. Additionally, laws regulating consumer products exist in states and some cities, as well as other countries in which we sell our products, and more restrictive laws and regulations
may be adopted in the future. Any repurchase or recall of our products, monetary judgment, fine or other penalty could be costly and damaging to our reputation. If we were required to remove, or we voluntarily removed, our products from the market, our reputation could be tarnished and we may have large quantities of finished products that we could not sell.
We also face exposure to product liability claims and unusual or significant litigation in the event that one of our products is alleged to have resulted in bodily injury, property damage, or other adverse effects. In addition to the risk of monetary judgments or other penalties
that may result from product liability claims, such claims could result in negative publicity that could harm our reputation in the marketplace, adversely impact our brand, or result in an increase in the cost of producing our products. As a result, these types of claims could have a material adverse effect on our business, results of operations, and financial condition.
We may be subject to liability if we infringe upon the intellectual property rights of third parties.
Third parties may sue us for alleged infringement of their proprietary rights. The party claiming infringement might have greater resources than we do to pursue its claims, and we could be forced to incur substantial costs and devote significant management resources to defend against such litigation, even if the claims are meritless and
even if we ultimately prevail. If the party claiming infringement were to prevail, we could be forced to modify or discontinue our products, pay significant damages, or enter into expensive royalty or licensing arrangements with the prevailing party. In addition, any payments we are required to make, and any injunction we are required to comply with as a result of such infringement, could harm our reputation and financial results.
We may acquire or invest in other companies, which could divert our management’s attention, result in dilution to our stockholders, and otherwise disrupt our operations and harm our results of operations.
In the future, we may acquire or invest in businesses, products, or technologies that we believe could complement or expand our business, enhance our capabilities, or otherwise
offer growth opportunities. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various costs and expenses in identifying, investigating, and pursuing suitable acquisitions, whether or not they are consummated.
In any future acquisitions, we may not be able to successfully integrate acquired personnel, operations, and technologies, or effectively manage the combined business following the acquisition. We also may not achieve the anticipated benefits from future acquisitions due to a number of factors, including: (a) an inability to integrate or benefit from acquisitions in a profitable manner; (b) unanticipated costs or liabilities associated with the acquisition; (c) the incurrence of acquisition-related costs; (d) the diversion of management’s attention from other business concerns; (e) the loss of our or the acquired business’ key employees; or (f)
the issuance of dilutive equity securities, the incurrence of debt, or the use of cash to fund such acquisitions.
In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill and other intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our results of operations based on this impairment assessment process, which could harm our results of operations.
We may be the target of strategic transactions.
Other companies may seek to acquire us or enter into other strategic transactions. We will consider, discuss, and negotiate such transactions
as we deem appropriate. The consideration of such transactions, even if not consummated, could divert management’s attention from other business matters, result in adverse publicity or information leaks, and could increase our expenses.
We are subject to many hazards and operational risks that can disrupt our business, some of which may not be insured or fully covered by insurance.
Our operations are subject to many hazards and operational risks inherent to our business, including: (a) general business risks; (b) product liability; (c) product recall; and (d) damage to third parties, our infrastructure, or properties caused by fires, floods and other natural disasters, power losses, telecommunications failures, terrorist attacks, riots, public health crises such as the current COVID-19 pandemic (and other
future pandemics or epidemics), human errors, and similar events.
Our insurance coverage may be inadequate to cover our liabilities related to such hazards or operational risks. For example, our insurance coverage does not cover us for business interruptions as they related to the COVID-19 pandemic. In addition, we may not be able to maintain adequate insurance in the future at rates we consider reasonable and commercially justifiable, and insurance may not continue to be available on terms as favorable as our current arrangements. The occurrence of a significant uninsured claim or a claim in excess of the insurance coverage limits maintained by us could harm our business, results of operations, and financial condition.
Changes in tax laws or unanticipated tax liabilities could adversely affect our effective income tax rate and profitability.
We are subject to income taxes in the United States (federal and state) and various foreign jurisdictions. Our effective income tax rate could be adversely affected in the future by a number of factors, including changes in the valuation of deferred tax assets and liabilities, changes in tax laws and regulations or their interpretations and application, and the outcome of income tax audits in various jurisdictions around the world.
The United States enacted the Tax Cuts and Jobs Act (the “Tax Act”) on December
22, 2017, which had a significant impact to our provision for income taxes for fiscal 2017 and 2018.
The Tax Act requires complex computations to be performed that were not previously required under U.S. tax law, significant judgments to be made in interpretation of the provisions of the Tax Act and significant estimates in calculations, and the preparation and analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the Internal Revenue Service, and other standard-setting governmental bodies could interpret the provisions of the Tax Act or issue related administrative guidance contrary to our interpretation.
As part of Congress’ response to the COVID-19 pandemic, the Families First Coronavirus Response Act, or FFCR Act, was enacted on March
18, 2020, and the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was enacted on March 27, 2020. Both contain numerous tax provisions. In particular, the CARES Act retroactively and temporarily (for taxable years beginning before January 1, 2021) suspends application of the 80%-of-income limitation on the use of net operating losses, which was enacted as part of the Tax Act. It also provides that net operating losses arising in any taxable year beginning after December 31, 2017, and before January 1, 2021 are generally eligible to be carried back up to five years. The CARES Act also temporarily (for taxable years beginning in 2019 or 2020) relaxes the limitation of the tax deductibility for net interest expense by increasing the limitation from 30 to
50% of adjusted taxable income.
Regulatory guidance under the Tax Act, the FFCR Act and the CARES Act is and continues to be forthcoming, and such guidance could ultimately increase or lessen impact of these laws on our business and financial condition. It is also likely that Congress will enact additional legislation in connection with the COVID-19 pandemic, some of which could have an impact on our company. In addition, it is uncertain if and to what extent various states will conform to the Tax Act, the FFCR Act or the CARES Act. We regularly assess all of these matters to determine the adequacy of our income tax provision, which is subject to significant judgment.
The uncertainty regarding the potential phase-out of LIBOR may negatively
impact our operating results.
LIBOR, the London interbank offered rate, is the interest rate benchmark used as a reference rate on our variable rate debt, including our Credit Facility.On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. It is unclear if at that time LIBOR will cease to exist or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. At this time, no consensus exists as to what rate or rates will become accepted alternatives to LIBOR, although the U.S. Federal Reserve, in connection with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR
with the Secured Overnight Financing Rate (“SOFR”). SOFR is calculated based on short-term repurchase agreements, backed by Treasury securities. SOFR is observed and backward looking, which stands in contrast with LIBOR under the current methodology, which is an estimated forward-looking rate and relies, to some degree, on the expert judgment of submitting panel members. Given the inherent differences between LIBOR and SOFR or any other alternative benchmark rate that may be established, there are many uncertainties regarding a transition from LIBOR, including but not limited to the need to amend all debt instruments with LIBOR as the referenced rate and how this will impact our cost of variable rate debt. We will also need to consider any new contracts and if they should reference an alternative benchmark rate or include suggested fallback language, as published by the
Alternative Reference Rates Committee. The consequences of these developments with respect to LIBOR cannot be entirely predicted and span multiple future periods but could result in an increase in the cost of our variable rate debt which may be detrimental to our financial position or operating results.
We are exposed to credit risk primarily on our accounts receivable. We provide credit to our retail partners in the ordinary course of our business and perform ongoing credit evaluations. While we believe that our exposure to
concentrations of credit risk with respect to trade receivables is mitigated by our large retail partner base, and we make allowances for expected credit losses, we nevertheless run the risk of our retail partners not being able to meet their payment obligations, particularly in a future economic downturn. If a material number of our retail partners were not able to meet their payment obligations, our results of operations could be harmed.
Risks Related to Ownership of Our Common Stock
Our stock price may be volatile or may decline, including due to factors beyond our control, resulting in substantial losses for investors.
The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond
our control, including:
•actual or anticipated fluctuations in our results of operations;
•the financial projections we may provide to the public, any changes in these projections, or our failure to meet these projections;
•failure of securities analysts to maintain coverage of the Company, changes in financial estimates by any securities analysts who follow the Company, or our failure to meet these estimates or the expectations of investors;
•ratings changes by any securities analysts who
follow the Company;
•sales or potential sales of shares by our stockholders, or the filing of a registration statement for these sales;
•announcement of new, or the implementation of previously announced, tariffs or changes in tariffs by the U.S. or foreign governments;
•adverse market reaction to any indebtedness we may incur or equity we may issue in the future;
•announcements by us or our competitors of significant innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;
•publication of adverse research reports
about us, our industry, or individual companies within our industry;
•publicity related to problems in our manufacturing or the real or perceived quality of our products, as well as the failure to timely launch new products that gain market acceptance;
•changes in operating performance and stock market valuations of our competitors;
•price and volume fluctuations in the overall stock market, including as a result of trends in the United States or global economy;
•any major change in our Board of Directors or management;
•lawsuits threatened or filed against us or negative results of any lawsuits;
•security
breaches or cyberattacks;
•legislation or regulation of our business;
•loss of key personnel;
•new products introduced by us or our competitors;
•the perceived or real impact of events that harm our direct competitors;
•developments with respect to our trademarks, patents, or proprietary rights;
•general market conditions; and
•other events or factors, including those resulting from war, incidents of terrorism, riots, natural disasters, and public health crises such as the current COVID-19 pandemic
(or other future pandemics or epidemics), or responses to these events, which could be unrelated to us or outside of our control.
In addition, stock markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies in our industry, as well as those of newly public companies. In the past, stockholders of other public companies have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and harm our business, results of operations, financial condition, reputation, and cash flows.
Our directors, executive officers, and significant stockholders have substantial control over us and could delay or prevent a change in corporate control.
Our directors, executive officers, and other holders of more than 5% of our common stock, together with their affiliates, own, in the aggregate, approximately 22% of our outstanding common stock as of the date of this Report. As a result, these stockholders have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of our assets. In addition, these stockholders have the ability to control the management and affairs of our company. Accordingly,
this concentration of ownership might decrease the market price of our common stock by:
•delaying, deferring, or preventing a change in control of the Company;
•impeding a merger, consolidation, takeover, or other business combination involving us; or
•discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company.
Substantial future sales, or the perception or anticipation of future sales, of shares of our common stock
could cause our stock price to decline.
Our stock price could decline as a result of substantial sales of our common stock or the perception or anticipation that such sales could occur, particularly sales by our directors, executive officers, and significant stockholders, a large number of shares of our common stock becoming available for sale, or the perception in the market that holders of a large number of shares intend to sell their shares. As of June 27, 2020, we had 87,004,268 shares of our common stock outstanding.
Under the Registration Rights Agreement, dated as of October 24, 2018, by and among the
Company, Cortec Group Fund V, L.P. and its affiliates (collectively, “Cortec”), our Founders, certain of their respective affiliates, and certain other stockholders (as amended, the "Registration Rights Agreement"), certain of the parties thereto have demand registration rights in respect of the shares of common stock they hold, subject to certain conditions. In addition, in the event that we register additional shares of common stock for sale to the public, we are required to give notice of the registration to the parties to the Registration Rights Agreement and, subject to certain limitations, include shares of common stock held by them in the registration. In addition, certain of our stockholders have adopted trading plans established under Rule 10b5-1 of the Exchange Act,
pursuant to which they each sell, subject to the terms of such trading plans, a significant portion of their remaining shares of common stock. If our existing stockholders register or sell substantial amounts of our common stock, this could harm the market price of our common stock, even if there is no relationship between the registration or sales and the performance of our business. In addition, as restrictions on resale end, the market price of our shares of common stock could drop if the holders of these shares sell them or are perceived by the markets as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of our shares of common stock or other securities.
We have also registered shares of common stock that we may issue under our equity compensation plans, which are able to be sold freely in the public market upon
issuance, subject to volume limitations applicable to affiliates.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of the Company more difficult, limit attempts by our stockholders to replace or remove our current management, and limit the market price of our common stock.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change in control or changes in our management. Our amended and restated certificate
of incorporation and amended and restated bylaws:
•provide that our Board of Directors is classified into three classes of directors;
•prohibit stockholders from taking action by written consent from and after the date that Cortec beneficially owns less than 35% of our outstanding shares of common stock;
•provide that stockholders may remove directors only for cause after the date that Cortec beneficially owns less than 35% of our outstanding common stock and only with the approval of holders of at least 66 2/3% of our then outstanding common stock;
•provide that the authorized
number of directors may be changed only by resolution of the Board of Directors;
•provide that all vacancies, including newly created directorships, may, except as otherwise required by law or as set forth in the Stockholders Agreement be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum;
•provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must provide notice in writing in a timely manner, and also specify
requirements as to the form and content of a stockholder’s notice;
•restrict the forum for certain litigation against us to Delaware;
•do not provide for cumulative voting rights (therefore allowing the holders of a majority of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election);
•provide that special meetings of our stockholders may be called only by the Chairman of the Board of Directors, our CEO, or the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors;
•provide that stockholders will be permitted to amend our Amended and Restated Bylaws
only upon receiving at least 66 2/3% of the votes entitled to be cast by holders of all outstanding shares then entitled to vote generally in the election of directors, voting together as a single class; and
•provide that certain provisions of our amended and restated certificate of incorporation may only be amended upon receiving at least 66 2/3% of the votes entitled to be cast by holders of all outstanding shares then entitled to vote, voting together as a single class.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board of Directors, which is responsible for appointing the members of
our management. In addition, we have opted out of the provisions of Section 203 of the General Corporation Law of the State of Delaware, (the “DGCL”), which generally prohibit a Delaware corporation from engaging in any of a broad range of business combinations with any interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder. However, our amended and restated certificate of incorporation provides substantially the same limitations as are set forth in Section 203 but also provides that Cortec and its affiliates and any of their direct or indirect transferees and any group as to which such persons are a party do not constitute “interested stockholders” for purposes of this provision.
Our Amended and Restated Certificate
of Incorporation provides that the Court of Chancery of the State of Delaware is the sole and exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.
Our Amended and Restated Certificate of Incorporation provides that, unless we consent to the selection of an alternative forum, the Court of Chancery of the State of Delaware is the sole and exclusive forum for: (a) any derivative action or proceeding brought on our behalf; (b) any action asserting a claim of breach of fiduciary duty owed by any of our stockholders, directors, officers, or other employees to us or to our stockholders; (c) any action asserting a claim arising pursuant to the
DGCL; or (d) any action asserting a claim governed by the internal affairs doctrine. The choice of forum provision does not apply to any actions arising under the Securities Act of 1933, as amended (the "Securities Act"), or the Exchange Act, or any other claim for which the federal courts have exclusive jurisdiction. The exclusive forum provision in the Amended and Restated Certificate of Incorporation will not relieve us of our duties to comply with the federal securities laws and the rules and regulations thereunder, and stockholders of YETI will not be deemed to have waived our compliance with these laws, rules and regulations. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage such lawsuits against us and
our directors, officers, and other employees. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, results of operations, and financial condition.
YETI Holdings, Inc. is a holding company with no operations of its own and, as such, it depends on its subsidiaries for cash to fund its operations and expenses, including future dividend payments, if any.
As a holding company,
our principal source of cash flow is distributions from our subsidiaries. Therefore, our ability to fund and conduct our business, service our debt, and pay dividends, if any, depends on the ability of our subsidiaries to generate sufficient cash flow to make upstream cash distributions to us. Our subsidiaries are separate legal entities, and although they are wholly owned and controlled by us, they have no obligation to make any funds available to us, whether in the form of loans, dividends, or otherwise. The ability of our subsidiaries to distribute cash to us is also subject to, among other things, restrictions
that may be contained in our subsidiary agreements (as entered into from time to time), availability of sufficient funds in such subsidiaries and applicable laws and regulatory restrictions. Claims of any creditors of our subsidiaries generally will have priority as to the assets of such subsidiaries over our claims and claims of our creditors and stockholders. To the extent the ability of our subsidiaries to distribute dividends or other payments to us is limited in any way, our ability to fund and conduct our business, service our debt, and pay dividends, if any, could be harmed.
The following unaudited financial statements from YETI Holdings, Inc.’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 29, 2019, formatted in Inline eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statements of Equity, (v) Consolidated Statements of Cash Flows, and (v) Notes to the Unaudited Condensed Consolidated Financial Statements
104*
Cover
Page Interactive Data File (embedded within the Exhibit 101 Inline XBRL document)
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
