Greetings. Welcome to YETI First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to Tom Shaw, Vice President of Investor Relations. Thank you. You may begin.

Good morning, and thanks for joining us to discuss YETI Holdings first quarter 2020 results. Before we begin, we would like to remind you that some of the statements that we make today on this call, including those statements related to the impact of the COVID-19 outbreak on our business, may be considered forward-looking, and such forward-looking statements are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. For more information regarding these forward-looking statements, please refer to the risks and uncertainties detailed in this morning's press release as well as the risk factors discussed in our Form 10-Q for the quarter ended March 28, 2020, filed with the SEC earlier this morning. We undertake no obligation to revise or update any forward-looking statements made today as a result of new information, future events or otherwise, except as required by law. During our call today, we'll be discussing YETI's adjusted EBITDA and certain other non-GAAP measures pertaining to completed fiscal periods. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the press release issued this morning as well as in the supplemental reconciliation, both of which are available in the Investor Relations section of the YETI website. We use non-GAAP measures as a lead in some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business. Today's call will be led by Matt Reintjes, President and CEO of YETI; and Paul Carbone, CFO. Following our prepared remarks, we'll open the call up for your questions. With that, I'll turn the call over to Matt.

Thanks, Tom. Good morning, everyone. We appreciate you joining us. I'd like to start by speaking directly to our employees, their families, our customers, partners, and vendors to say thank you for all you have and continue to do for YETI. We will be here for you as the world gets back outside and back to chasing new adventures. In this time of incredible uncertainty, our full focus remains steadfast on addressing the things we can control, acting with the same tenacity, adaptability, and resilience that has been the hallmark of YETI since our inception. Regardless of the external threats, we believe what matters most are a powerful, innovative, and lasting brand, financial strength and flexibility, and making a positive impact on our customers in the YETI community. That's our focus. But let me first step back and give you a little perspective on the first quarter. We entered 2020 with incredible momentum and a clear operating plan. Through mid-March, quarter-to-date sales were up 21% year-over-year with low double-digit gains in wholesale and 31% growth in direct-to-consumer. Even with the disruption that began in March, YETI ended Q1 with 12% top line growth and direct-to-consumer at plus 29%. In mid-March, as the COVID-19 pandemic began to significantly and directly impact consumer behavior and business operations, we quickly turned to executing a number of discrete and impactful decisions to position YETI for this new and uncertain environment and ensure we are playing for the long run. To actively address unknowns in demand, we started tightening our cost structure. After we closed our retail locations on March 16 and saw the potential extent of the closures, we furloughed a portion of retail staff and reallocated the balance of our retail to support customers in our growing e-commerce business. We aggressively tightened operating costs and capital expenditures, reducing noncritical spend but also continued investment in demand creation, product innovation in our e-commerce and digital technology. In a moment, Paul will discuss our cost efforts in more detail, including the withdrawal of our 2020 outlook and additional proactive moves we have taken to support our liquidity position through this period. Today, we also announced that YETI's senior leadership team and its Board of Directors have agreed to voluntary compensation reductions to support the company's plans through this period of disruption. In addition, following a thorough review of our organizational structure, we've also made several moves to adapt to the near-term realities and to build the structure to position YETI for the future. We have stopped all noncritical hiring, and as part of this transformation, taken the difficult decision to eliminate certain positions through all levels in the company. These are very tough calls to make, and I cannot thank those YETI employees impacted by these changes enough for all their contributions. Through these changes, we are transforming many parts of YETI's organization allowing us to put heavy focus on our continued digital transition, expanding our innovation pipeline, and driving thoughtful global expansion. We unequivocally believe this mindset and focus on the future will allow us to emerge strong from the current global crisis with full alignment behind our growth trajectory as we move into 2021. As part of this hyper-focus on executing against what we can control, starting in March, we pivoted our brand, marketing, and product launches to fully digital in a work-from-home world. We believe the investment we are making in talent and capabilities, resulting in powerful digital engagement and meaningful connections with our customers, will continue the acceleration of our digital transformation. When the pandemic hit, for the first time, we knew exactly where our entire audience was, home. And we knew they were looking for a positive distraction. Online content has become more important and relevant than ever. So we went to work with our internal digital and creative teams and key partners to win digitally. What was a well-curated social channel rapidly shifted into a media house almost overnight. We began releasing multiple unique pieces of content through our digital channels and have continued to do so over the past 10 weeks. First, we released 15 classic YETI Presents films over 15 days. We translated our former in-person events into unique digital experiences for our fans and followers. Included was a series of lunch and learns and how-tos with our ambassadors, allowing them to share their passions and pursuits virtually. On social and yeti.com, we introduced a free YETI streaming service of actual streams to offer serenity and levity during a chaotic time, plus to provide a small taste of the outdoors to our fans, while we're all stuck inside. We continued highlighting product stories and gave our YETI community a voice and a way to express things through user-generated content, launching hashtag YETIWFH. We house all this new content within our social channel and in the process have seen a roughly eightfold increase in video views when comparing the 6 weeks prior to mid-March and the 6 weeks post as well as an approximately 50% increase in impressions. Our blend of depth within our communities and breadth with our storytelling is a unique and powerful combination that has allowed us to engage and entertain our fans, impact the communities who have given so much to us, and allowed us to successfully introduce new products throughout the COVID-19 crisis. Outside of providing a welcome distraction during these very uncertain times, we also asked ourselves, how do we help? YETI has always provided product as relief during natural disasters. From hurricanes to fires, we've donated thousands of coolers to support communities when basic needs were unmet. Our breakthrough point for this pandemic was when we received a heartfelt direct message from an exhausted nurse in Boston who wanted to simply thank us for making a product that kept her coffee warm. We saw this as our inspiration to support those on the front lines. So we began asking the heroes who sent us messages to tell us who else needed a pick-me-up. To date, we have donated roughly 25,000 bottles and tumblers directly to healthcare workers, first responders, and others impacted directly by this pandemic. We also know there are a lot of food and beverage workers who are in need of direct support. Our food, beverage, barbecue, and beer partners, at a time when they themselves are under duress, have made the effort to do what they do best: provide a free hot meal and a little reprieve. We have stood with a number of these incredibly talented people by helping support meal outreach efforts in their communities in the U.S. and in Canada. Today and into the future, we will continue to find ways to make a meaningful and broad contribution to the people that are central to who we are as a brand. Before providing additional detail on our four strategic drivers, I wanted to provide a few thoughts on the current quarter. While we expect overall results in the second quarter to be significantly below the prior year due to wholesale and corporate sales disruption, we are seeing very strong quarter-to-date traction with our online businesses. This includes extraordinary year-over-year growth on yeti.com in coolers & equipment and drinkware so far in the quarter as well as positive year-on-year trends on our Amazon Marketplace and sell-through via our wholesale partners' e-commerce. The momentum we are seeing from our brand efforts, excellent new product receptivity and this outstanding e-commerce performance gives us confidence about the opportunity that will be there as the wholesale and corporate market dislocation corrects. Paul will discuss in more detail the trends we saw through the end of March and the extension into April. Now turning to our strategic drivers. Keeping hyper-focused on our customers has never been more important. As I alluded to earlier, we began to shift more of our resources and focus to digital in March, as we positioned our social platform to be a positive distraction for consumers. Of note, we launched VELA, a four-part series highlighting surfer and sailor John John Florence in his transpacific voyage, and short films such as Canary of the Prairie, showcasing Dale Robbins' mission to protect the future of bobwhite quail in West Texas. I would be remiss not to mention one of our films, Navajo Son, featuring ambassador Derrick Begay, is up for two brand film awards at tonight's virtual event in New York City. We also developed a series of showcases of our ambassadors on topics from fly fishing setups to life at home to sustainability practices at Carter Country Meats. Driving this connectivity within our community has never been more relevant as we highlighted how these pros were adjusting to quarantine life. Enhancing our breadth and depth strategy, we remain proud of our diverse portfolio of ambassadors and partnerships. As highlighted in our most recent YETI Dispatch magalog, we partnered with Keith Rose-Innes, one of the world's most respected and high-profile fishermen and his Alphonse Fishing Company out of the Seychelles islands. We also added to our ambassador roster with Jose Vitor Leme, a PBR rider currently ranked number one in the world. We added two fantastic female ambassadors to our team with Alex Brittingham, a Texas-based professional dog trainer, and Jessie Young, a hunting guide in the Yukon. On the product side, let me first recap how early 2020 introductions are resonating before providing a framework of how we are adapting our rollout cadence to help maximize the success of our category expansions. In Q1, we successfully executed two key product evolutions with our Rambler bottles and Colster can cooler, both performing very well. We introduced three new colors with Coral, Chartreuse, and Pacific Blue. We also debuted a great new portable chair with our Trailhead Camp Chair. Our second quarter product plans are largely unchanged, highlighted by the end-of-life of our Roadie 20 Hard Cooler and the introduction of the Roadie 24 Cooler. We took our best-in-class, best-selling Roadie 20 and made it even better. The 24 is 10% lighter, 20% more capacity, and 30% better thermal performance. In late April, we also introduced our Rambler Elements collection, which adds a new coating process to create a premium brushed metal finish to our drinkware portfolio. As we look at the demand unknowns for the balance of the year, we are laser-focused on building the brand and driving the success of key products. This includes a strong product and color assortment in the second half as well as shifting certain product expansions into 2021. We do believe the alignment of new category expansion opportunities and optimal customer receptivity will be stronger as we move further from the current environment. From an investment and innovation standpoint, we are not slowing down. Nurturing the power of the YETI brand and the connection with customers holds firm. A great example of this came last month when YETI was named the 2020 Harris Poll EquiTrend Cooler Brand of the Year and Insulated Drinkware Brand of the Year. For the past 32 years, this poll measures and compares brand equity, consumer connection, brand momentum, and other indicators across a multitude of brands and categories. We're proud our customers provide us with such trust and confidence. As we think about distribution, some of our near-term focus will naturally shift to winning where consumers can access the brand. With direct-to-consumer becoming more important than ever, we've seen incredible work behind our social, digital, and e-commerce teams around brand, product, and the customer. This will serve us well as we emerge from this time. As part of our changes, we have increased the frequency of our customer communications, balancing storytelling and product. With the importance around moms, grads, and dads' time frame, we've introduced focused, creative, and product stories for each. At Wholesale, the disruptions in business have created unprecedented challenges. Many have endured reduced operations, low foot traffic, and extended store closures. Our focus will remain on supporting these retailers with the right product for both their online and brick-and-mortar strategies today and as the business begins to return. Clearly, our YETI retail efforts have been stalled with store closures commencing on March 16. We were able to hold a soft opening of our new Fort Lauderdale location, though our decision to close all of our stores limited operations there to just two days. Construction of our Denver location is complete, awaiting final permitting and when we deem ready to open. Given current conditions, we have paused further retail expansion in 2020, and we'll focus on optimizing our existing stores as each reopens. For the first quarter, international sales increased just over 40%. But like the U.S., the business was not immune to the pandemic. While the crisis is having varying degrees of impact on our existing international markets, we continue to make meaningful progress, particularly in e-commerce in Canada, Australia, and the U.K. Looking ahead, we will be thoughtful and disciplined in how we approach future international opportunities and pacing. We believe this approach allows for optimal brand control, relevant distribution choices, and localized customer engagement, which is more important than ever right now as the world adjusts and recovers from this pandemic. YETI has always been a brand that focuses on people and pursuits. While we're faced with the near-term uncertainty, we are certain that the innate desire to come together, whether in the backyard or the backcountry, will return as important and cherished as ever as we emerge from this moment. By making decisions now with a focus on our customers and on the future of our brand and innovation, we are positioning YETI to be there as strong as ever. I would now like to turn the call over to Paul.

Thanks, Matt, and good morning, everyone. To start, I would like to add my sincere thanks to the entire YETI team. As we have learned to adapt in these unprecedented times, I'm incredibly proud of the resiliency, energy, and dedication that I've seen across the organization over the past two months. Given the importance of our action plan in response to the COVID-19 pandemic, I'd like to prioritize the time this morning by first covering how we are planning our business in this constantly evolving environment and then review the details of our first-quarter results. Coming off a strong 2019 and ongoing momentum into early 2020, the challenge we now face is the unpredictability of the shape and speed of the reopening of physical retail across our wholesale channel. Utilizing a range of scenarios, we have had to ascertain, challenge, and implement a level of expense discipline that gives us the financial flexibility and liquidity to not only support the near-term reality but also allows us to continue to invest in our brand. To accomplish these financial objectives, we announced several expense initiatives today across executive compensation, other compensation areas, and cost-management initiatives. In addition, we provided an update on our liquidity position. Starting with executive compensation. Matt has agreed to reduce his base salary by 50%, while each of the Senior Vice Presidents have agreed to reduce his or her base salary by up to 25%. In addition, our Board of Directors have agreed to waive any cash compensation beginning at this month's Annual Meeting of Shareholders. Our other compensation actions come following a thorough review of our employee base. This includes furloughing certain employees beginning on April 4, primarily from our retail and customization operations. We have also suspended all noncritical hiring and eliminated select roles across all levels in the organization. Other cost initiatives include the aggressive management of discretionary operating costs, capital expenditures, and working capital. This includes having ongoing dialogue with our manufacturing partners to calibrate supply with anticipated demand. Our working capital efforts will also focus on balancing the extension of terms anticipated across both payables and receivables. With our liquidity measures, we have substantially improved our overall position over the past two years as measured by our leverage ratio improving from 4x in the first quarter of 2018 to just 1.3x in the first quarter of 2020. Inclusive of our precautionary decision to draw down $50 million of our $150 million revolving line of credit in March, we ended the quarter with a strong cash position of $118 million. As a reminder, we expanded our line of credit last December, while also extending the maturity to December 2024. With the flexibility of having $100 million undrawn on our revolver and factoring in our combined expense and working capital initiatives, we expect to be well-positioned to remain in compliance with our debt covenants for the remainder of the year. Additionally, we have no near-term debt maturities. These difficult but prudent actions have been thoughtfully developed by our leadership team with Board Council. We'll continue to diligently monitor changes in the environment that will continue to inform how we evolve our thinking in both near and long term. However, the high degree of uncertainty remaining in the months and quarters ahead have informed our decision to withdraw our previous full-year fiscal 2020 outlook provided in our last earnings call. Now shifting over to our first-quarter results. Let me first remind you that we have updated our definition of certain non-GAAP financial measures starting this quarter. This includes the elimination of the following add-backs that are now included in our consolidated non-GAAP results: investments in new retail locations, international market expansion, expenses related to the transition to the ongoing senior management team, and expenses related to transitioning to a public company. Historical information from 2019 has been updated to provide directly comparable results. First-quarter net sales increased 12% to $174.4 million compared to $155.4 million in the year-ago period. Performance was highly bifurcated with quarter-to-date trends through March 15, up a strong 21%, with the remainder of the quarter through March 28 down 25%. By channel, wholesale net sales for the quarter increased 1% to $94.8 million compared to $93.6 million last year. Results were up 13% through mid-March, then down 43% thereafter as wholesale partners closed retail locations and order flow was interrupted. Direct-to-consumer net sales for the first quarter increased 29% to $79.6 million compared to $61.7 million in the same period last year. Results were up 31% through mid-March and then up 15% thereafter. Channel performance for the quarter was led by our Drinkware category, and we continue to like the balanced growth we are seeing across our direct-to-consumer businesses. Overall, direct-to-consumer reached 46% of net sales for the period. By category, first-quarter Drinkware net sales increased 24% to $112.6 million compared to $91 million in the prior year quarter. Strength was broad-based with subcategory growth across bottles, tumblers, and mugs. Coolers & Equipment net sales were relatively flat at $59.5 million compared to $59.7 million during the same period last year. We had another strong quarter in soft coolers, led by our lineup of Hopper Flips as well as outdoor living supported by the launch of our new Trailhead chair. Offsetting these gains, we saw lower hard cooler sales and lower bag sales, primarily given the introduction of the Camino Carryall into the wholesale channel last year. Gross profit increased 21% to $92.5 million, or 53% of net sales, compared to $76.6 million, or 49.3% of net sales, during the same period last year. The 370 basis point year-over-year gross margin expansion was primarily driven by the following favorable impacts: 170 basis points from cost improvements, 80 basis points from channel mix, 70 basis points from lower inbound freight and other impacts, and 50 basis points from lower inventory reserves. Adjusted SG&A expenses for the first quarter were $74.4 million, or 42.7% of net sales, as compared to $63.7 million, or 41% of net sales, in the same period last year. Variable SG&A expenses deleveraged 180 basis points, primarily driven by higher sales-related expenses tied to our faster-growing direct-to-consumer business, including online marketplace fees and outbound freight. Nonvariable SG&A expenses leveraged 10 basis points, with lower marketing expenses offsetting increases in nonvariable third-party logistic fees, wages and benefits, and depreciation and amortization. Adjusted operating income increased 40% to $18 million, or 10.3% of net sales, compared to $12.9 million or 8.3% of net sales, during the same period last year. Our effective tax rate was 24.4% during the quarter compared to 22.1% in last year's first quarter. Adjusted net income grew to $9.9 million or $0.11 per diluted share compared to $5.3 million last year or $0.06 per diluted share. Adjusted EBITDA increased 22% to $23.8 million, or 13.7% of net sales, compared to $19.5 million, or 12.5% of net sales, in the same quarter last year. Now turning to our balance sheet. As of March 28, 2020, we had cash and cash equivalents of $118 million compared to $19 million in the year-ago period. As mentioned, this includes a $50 million drawdown on our revolver. We ended the quarter with $202 million in inventory compared to $164.3 million last year. Inventory growth of 23% was in line with our expectations and down from 28% growth in the prior year quarter. While sales characteristics are significantly different than originally planned, the composition of this inventory remains strong with products that are nonseasonal in nature as well as the buildup to support new product introductions. With the extended life of our product styles, we are now focusing on managing the flow of forward inventory. We ended the quarter with total debt, excluding unamortized deferred financing fees and finance leases, of $346.3 million compared to $321.8 million in last year's first quarter. The year-over-year increase was driven by the $50 million revolver drawdown during the quarter. Including our cash balance, the ratio of total net debt to adjusted EBITDA for the trailing 12 months improved to 1.3 times compared to 2 times in the prior year quarter. While we are not providing a full-year outlook, we believe it is important to provide some visibility into our top line performance registered for April as well as where we stand from an operational standpoint. For the 5-week period ending May 2, sales decreased further relative to the 25% year-over-year decline experienced during the last 2 weeks of the first quarter, driven by continued store closures and limited operations in the wholesale channel. While historically, a relatively small part of the wholesale business, it was a sharp increase in our retail partners' e-commerce sales in the month of April which we believe is continued validation of the demand for the brand. Within our direct-to-consumer channel, our online businesses have contributed strong, positive year-over-year growth due to product innovation and digital performance led by yeti.com and the Amazon Marketplace with particular strength in the Coolers & Equipment category. However, these gains have been somewhat tempered by the year-over-year declines in our corporate sales business. As for where we stand with our current operations today, our corporate employees continue to work from home, all necessary supply chain and logistic partners are open and functioning and a significant portion of our customization capacity continues to operate with the remaining local capacity expected to reopen later this month. Our retail stores currently remain closed, and we will continue to monitor each individual location in conjunction with local opening mandates. In summary, our focus has evolved and sharpened as we navigate through these uncharted waters. As we always strive to do, we are making decisions that we believe are in the best interest of the long-term health of our brand. In the near term, this means looking at the YETI opportunity through a different lens than we envisioned at the beginning of the year. But we firmly believe in the power of the brand and our ability to manage the business during this time will allow us to reemerge stronger than ever.

Our first question is from Robby Ohmes with Bank of America Merrill Lynch.

A couple of questions, maybe Matt. I don't know if there's a whole lot of recession history for YETI, but I would love to hear your thoughts on how you think the brand can perform in a kind of recessionary environment? And also, if you could give us some color, Lowe's, obviously, has remained open. Any kind of color on how YETI has been performing in that channel relative to your expectations? Any signs you're seeing in terms of acquiring new customers online, maybe just some thoughts on what you're seeing right now that might help us think about how you could perform if things stay challenging?

Thanks, Robby. Let me hit those in the order you gave. As far as recession history, as we've talked about in the past, YETI, during the last recession was in a growth mode, is a much smaller business than it is today. But as we think about disruptions we've seen and we think about the last 8 to 10 weeks and how the business has performed, what we have really liked about what we've seen is that our products and our brand remain in demand. We believe our price points, albeit we are premium in categories, are very accessible. When you think about our average drinkware product being between $25 and $30, and our average consumer coolers being $200 to $250, we think even in tougher environments, those are really accessible price points. And they set us up between a combination of brand, premium, and also the gifting nature of the product. And what we've seen through April, as we've led into the front end of what we call moms, grads, and dads, we really like what we're seeing from the business so far. On Lowe's, we've been very encouraged with the Lowe's relationship, continue to enjoy the strength of that partnership. We're about 500 doors rolled out in Lowe's. And as you said, many of those doors were deemed essential. What we have continued to see is building week-over-week strength in Lowe's. And the other piece I would add is, as we've gone back and studied across the market, we believe that the Lowe's business is largely incremental to the rest of the business. So we feel good about where Lowe's is positioned and how it fits into our omnichannel strategy, which leads into the third point around direct-to-consumer and e-commerce. Our e-commerce business has been, as we started in 2016 really focusing on it, a bright spot in the business and something we have focused heavily on in terms of people and technology and capabilities, and that's really shown through during this time. We've had a really fantastic April in our e-commerce business as people are at home, and we're seeing strong new customer acquisition. We're seeing really strong engagement through some of the changes we've made in our brand and marketing. So we're really encouraged. As we said in our remarks, it's an area we're going to continue to focus heavily on while also balancing this omnichannel strategy that we've laid out.

That's really helpful. Just a quick follow-up, maybe Paul can jump in here as well. You mentioned managing the flow of forward inventory. Can you share some thoughts on what that means? How are you managing it and how easy is it for you? How should we consider potential inventory clearance in this environment? Will you open new distribution channels for that, or what can we expect?

Yes. Thanks, Robby. So I'd start by saying the overall inventory growth at plus 23% during Q1 has continued to moderate after we built up drinkware and in line with what we were expecting. Really, as we look at the inventory position today and our ability to manage that, the great thing about inventory is the longer shelf life of the assortment. And we just don't have the obsolescence risk of missing a month or a quarter of a season, particularly when many of our SKUs go longer than a year. So really, what we look at is, as we're working with our supply partners on how do we modify purchase orders or future deliveries, and that's really what we're working on. So as we continue to drive sales scenarios here internally, we know what we want on the balance sheet, how do we use that lever of purchases? And it's everything from them building for drinkware stainless and then coloring it at the last moment before it's shipped. So I can make that last minute call. So we have a few levers and really feel good about our operations team, our supply chain team, and how we can react to different levels of business.

Our next question is from Peter Benedict with Baird.

My first question is about the Wholesale channel and understanding the health of your partners, especially those outside of the major ones. It seems that one of your main partners contributed to the declines at the end of the first quarter. What percentage of your wholesale business still has doors open? Can you provide some context on that? Additionally, how is the sell-through in those stores?

Yes, Peter, Matt, thank you. The situation is fluid regarding which stores are open and what being "open" truly means—whether that's curbside pickup, store access, or customers visiting. Over the past eight weeks, we believe that most of our wholesale operations faced significant disruptions. Even stores that remained open experienced noticeably reduced foot traffic, similar to trends observed elsewhere. However, as you've likely seen in the news, an increasing number of stores and states are beginning to reopen, leading to some recovery in foot traffic. From a sell-through perspective, we've observed a positive trend, particularly among those with established e-commerce platforms, as well as those enhancing their online sales. Additionally, we are pleased with how our brand is performing compared to the overall e-commerce landscape. For those stores that stayed open, including many hardware stores ranging from independent businesses to national accounts, we have experienced strong sell-through. The dynamics of our sales mix have shifted since early March and into April, with a notable demand for large coolers as people prepared for upcoming challenges. Week-over-week sales have shown favorable trends, which boost our confidence regarding how well new products are being received, the existing portfolio's performance, and the overall strength of our brand.

That's helpful. Can you clarify your product introduction plans for the year? You mentioned that some items are being pushed to next year. Are you still planning to extend or build out existing lines? I assume new product launches will be delayed. A bit more detail on this would be appreciated.

Yes, Peter, great question. You’re right. We will continue with product line extensions and colorways, and those plans remain largely unchanged. You’ve seen some of this in the first half, and it will continue into the second half. When we consider larger category expansions, we started looking at what we have planned for the second half of 2020 and for both halves of 2021 back in mid-March when there were more uncertainties. We took the opportunity to optimize by merging some collections, which we believe will enhance our product launches and allow for better marketing support. We're optimistic about what we have planned for the second half of this year, and we're very excited about what lies ahead in the first half of 2021.

Our next question is from Camilo Lyon with BTIG.

Nice performance in a tough environment. Paul, you mentioned and you gave some great detail on the expense reduction and mitigation efforts that you guys are undertaking. I was hoping if you could maybe provide some kind of all-in expectations on how we should think about the expense line unfolding this year, maybe from a growth perspective or even from some sort of commentary around what you might expect from a leverage perspective?

Thank you for your question. Given the changing nature of the business environment, we are not setting specific expense targets. This approach allows us the flexibility to take advantage of any opportunities that may arise in the latter half of the year. We are focused on careful expense management while looking ahead. As we mentioned, cost of goods sold (COGS) is mainly linked to product costs, and about 80% of COGS is variable. In terms of selling, general, and administrative expenses (SG&A), we categorize it into variable and non-variable expenses. The variable expenses will fluctuate with our business performance, and in April, our e-commerce operations performed exceptionally well, impacting the SG&A line. On the non-variable side, we made some announcements this morning regarding executive compensation changes and furloughs, especially for our retail staff. While we are not providing specific expense targets, we remain focused on managing the profit and loss statement, driving high-quality sales through gross margin, and keeping a close watch on expenses, all while ensuring we are prepared for future business innovation and product development.

Got it. Matt, in your remarks, you mentioned that you've shifted a significant amount of demand-creation funds towards digital engagement and have seen great success there. Can you elaborate on the direct connection you’re noticing between those digital campaigns and your online sales? Also, are you able to assess the level of engagement from new customers compared to existing customers due to those efforts?

Yes. I'll add a little bit there. One of the things we did when we shifted our demand creation focus to digital was to digitize our entire online and offline playbook. We identified effective offline strategies, such as events and consumer activations, and sought to replicate those in a fully digital environment using our resources, content, and creativity. The engagement we've observed across our channels such as social media and email has been exceptionally high, and the improvement in engagement levels has been notable compared to before this shift began. We have also maintained strong conversion rates and observed significant increases in traffic to our e-commerce sites globally, which has contributed to the remarkable performance in that channel. Furthermore, we've seen a rise in new customers and first-time buyers on our websites, a trend that has accelerated. This gives us confidence that our digital playbook is effective in enhancing brand value, content engagement, and product introductions. Overall, we're pleased with how quickly our team adapted, utilizing internal resources and producing high-quality work.

Does that create a sense of urgency in terms of permanently shifting some of those investment dollars to this category? And do you have the infrastructure to support accelerated growth in your digital business?

Yes. I think in some of the comments I made in my prepared remarks, the continued digital evolution is something we've stated as one of our strategic priorities. It's something we've been doing for the last five years, and we feel great about the infrastructure we have. We feel great about the technology investments that we're continuing to make, and we're not slowing down on. We're continuing to invest in capabilities and talent in these areas to take advantage of it. We've said all along, we're an omnichannel business. We want to be where the consumer wants to shop. We value our wholesale partners and our corporate sales partners, but we know that the direct-to-consumer business is the fastest-growing segment and presents a large opportunity. So we're going to lean heavily into it.

Our next question is from Randy Konik with Jefferies.

I guess, Paul, can you just again repeat the components of gross margin change in the quarter? And then when you think about those components, maybe just high level, how we should think about those components going forward?

We had a strong quarter with gross margin expansion of 370 basis points, driven by four main factors: cost improvements contributed 170 basis points, the shift to direct-to-consumer added 80 basis points, inbound freight and other impacts accounted for 70 basis points, and lower inventory reserves resulted in 50 basis points. Looking ahead, while we have withdrawn our previous outlook and won't provide specific guidance on gross margin, we expect to continue seeing benefits from cost improvements, the channel mix, and tariffs as a positive factor in 2020. We are optimistic about our gross margin expansion in the first quarter and the overall potential for increasing gross margins for the company.

That was very helpful. The next question I have is whether you have conducted any analysis on the trends in direct-to-consumer sales by specific states or by heritage versus non-heritage markets. I am interested in whether you are observing any notable insights regarding consumer purchasing behavior or demand. For example, in a state like South Dakota, which hasn't been heavily impacted by COVID-19, does the demand profile appear to be normalized or relatively unchanged? Any insights you can provide on DTC performance by geography would be greatly appreciated.

Yes, Randy, I want to start by saying these are unusual times, and we're discussing updates that typically wouldn't occur within a quarter. However, we believe it's important to provide insight into the current state of the business. So, my comments will focus on what we have seen so far in the second quarter, particularly in April, as that seems relevant right now. Not surprisingly, we are observing consistent growth across our e-commerce and Amazon platform in all regions. There is no significant variability from one region to another. Our heritage regions are experiencing growth alongside our non-heritage regions, and our heritage regions now account for less than 50%, closer to 40%, of our sales. This aligns with what we've discussed for years—broad-based growth across the market and in our growing regions. Our e-commerce business is currently achieving triple-digit growth, reflecting the strength of our brand and product launches, and indicating that consumers remain active and engaged. Despite the widespread disruption in omnichannel retail, we see many encouraging signs as we move forward.

Our next question is from Sharon Zackfia with William Blair.

Just one clarification on the corporate sales. Could you give us any kind of guidelines as to how we should think about that offsetting that triple-digit DTC growth you're seeing right now? I don't think you provided in the past kind of what percent of the mix that is? And then secondarily, as we think about the wholesale channel and obviously the disruption there, what is your line of sight on inventory that's currently in that channel? And I guess, trying to get out as business resumes in a more normal way in brick-and-mortar, how long of a gap do you think there is between the current environment and retailers starting to reorder product, if that makes sense?

Yes, Sharon, one thing to clarify, as I said in my prepared remarks, we, on yeti.com, are seeing extraordinary growth quarter to date. And so when I said that triple-digit, that's a yeti.com comment. We also are seeing, as I said in the prepared remarks, very strong growth on Amazon also, but I want to make sure I was clear about that because our direct-to-consumer has a number of components, one of which was related to your question in corporate sales, and I'll let Paul handle that.

Yes, Sharon. We haven't discussed the percentage of corporate sales since the IPO, which was around 20% of our total direct-to-consumer business. The momentum was very strong through the first quarter of 2020, even in the last two weeks due to orders that were already placed. However, like many businesses, we have had to shift operations remotely and cancel conferences and events, which has affected us. We haven't quantified that impact, but it has negatively impacted our month-to-month results, offsetting those gains that Matt mentioned for yeti.com and our overall web presence. Additionally, our stores remain closed, which is a minor part of the business, but it still contributes to the overall situation. Regarding your second question about inventory in the channel, the channel inventory reflects the impact of store closures. We are confident in the ability to manage that inventory for a couple of reasons. Firstly, it is largely nonseasonal, and secondly, considering that the closures began in mid-March and stores are beginning to reopen around mid-May to June, we are entering our busy season with events like Mother's Day, graduations, and Father's Day approaching. Therefore, we feel optimistic about the inventory in the channel; it's not excessive, and as we approach this busy period, we are also confident in the potential sell-in and especially the sell-through at the wholesale level with retailers.

Our next question is from Peter Keith with Piper Sandler.

Nice comments today. It seems like you're managing the environment well. Paul, just a follow-up on the question about wholesale inventory. I think there's some investor concern that as stores reopen, there might be some markdowns on YETI due to panic selling. It would be helpful if you could refresh us on your protocol and policies regarding retailer discounts, and if you collaborate with anyone to assist in sell-through with some level of markdown support.

Thank you, Peter. I will address your last question first. Our practice, which remains unchanged, is that we do not support markdowns at the wholesale level in retail stores. As stores reopen, you'll notice a few things, particularly regarding our new product introductions. For example, our well-received Roadie 20 has reached its end of life, and we've launched the Roadie 24. You can find it on yeti.com at a 20% discount, which is typical as products reach the end of their life cycle. The decision to match this discount or to reduce prices rests with our wholesale retail partners; some have opted to do so while others have not. This ultimately affects their income statement. As we approach Father's Day, retail partners continue to adhere to our Minimum Advertised Price (MAP) policy. If they decide to offer a special deal, such as through a membership promotion, it typically includes YETI but must occur in the shopping cart, not prominently on their website. Our MAP policies remain unchanged, and we are not responsible for any discounts that might happen.

Okay. That's helpful. And I wanted to then ask a separate question on the margin balance between your DTC and wholesale channels today. Obviously, there's quite a massive shift occurring right now. There's probably a more permanent shift towards DTC that's going to continue. So the heart of the question is, where do we stand today from kind of an EBIT margin flow-through between those two channels? Is DTC higher, or they're about the same? And also on a similar manner, what does it mean for operating profit dollars?

So we do see this. We continue to see the shift in the quarter. The DTC business was 46% mix, which we're really happy with. We've talked about gross margins being about 1,000 to 1,500 basis points higher in our DTC channel than the wholesale channel. And then that is somewhat offset by, as you look at adjusted SG&A, and we talk about this, we delevered about 180 basis points due to variables. So the faster-growing DTC, and that's from online marketplace fees, outbound freight, third-party logistics, bank fees, things of that nature. So it comes with some SG&A. Overall, from a contribution margin, we don't allocate corporate resources between the channels. On a contribution dollar and margin, the DTC channel continues to drop incremental dollars to the bottom line, and why we like that channel shift. So it is a profitable channel for us. And I agree with you, I do think with this, as we come out of this pandemic, I do think there is even a faster shift to our DTC properties.

Our next question is from Alexandra Walvis with Goldman Sachs.

This is Brooke Roach on for Alex. For my first question, I was wondering if we could dig into the components of the acceleration that you're observing at DTC digital and specifically the inflection that you've seen in some of the categories from 1Q trends. Can you comment on performance between new and existing products in Drinkware and Coolers & Equipment? And also, the impact of the Roadie cooler price point repositioning on your growth rate so far this quarter?

Let me address broadly. We don't break it down to that level, but I can provide some color on what we're seeing, which is, as we said in our prepared remarks, broad-based growth between coolers & equipment and drinkware. And really, with strength in coolers & equipment and what we really like and what we're seeing in coolers & equipment is the contribution from new products and products that are retiring. So things like the way our bags, our soft coolers, our new Roadie 24 performing in conjunction with our end-of-life Roadie 20. So I would generally say it's broad-based growth across coolers & equipment and drinkware with a particular strength in coolers & equipment and some really positive receptivity to our new innovation and some of the oldies but goodies continuing to deliver growth for us. So across the board, we feel good.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Matt for closing remarks.

Thank you all for joining us today. I guess the last thing we would say from YETI is that we hope everyone stays safe and healthy as we all continue to work through this unprecedented time. So thanks for your time this morning, and best of luck.

This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.