YETI Holdings, Inc. (YETI) Q2 2022 Earnings Call Transcript

Good morning and welcome to the 2Q FY 2022 Earnings Conference Call of YETI Holdings. All participants will be in listen-only mode. Please note, this event is being recorded. I would now like to turn this conference over to Mr. Tom Shaw. Thank you and over to you, sir.

Good morning, and thanks for joining us to discuss YETI Holdings' second quarter 2022 results. Before we begin, we'd like to remind you that some of the statements that we make today on this call 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, please refer to the risk factors detailed in our most recently filed Form 10-Q, and the Form 8-K filed with the SEC today. 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 certain non-GAAP measures pertaining to completed fiscal periods. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in this morning's press release as well as in the supplement reconciliation, both of which are available in the Investor Relations sections of our website at yeti.com. 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, and Paul Carbone, CFO. Following our prepared remarks, we'll open the call for your questions. And now, I'd like to turn the call over to Matt.

Thanks, Tom, and good morning. YETI posted a 17% sales increase for the period, strong growth in what continues to be a challenging and dynamic environment. While results fell slightly short of a high bar we continue to set, these results in a three-year compounded annual growth rate of 22% continue to show the durability of demand and the strength of the brand. On the bottom line, our near-term performance sought further pressure from several gross margin factors, including higher inbound freight costs, a shift in product and channel mix towards our lower gross margin coolers, and equipment and wholesale business as we continue to support the channel sell-through and build back of inventory. As we consider our execution for the balance of the year and set up for our growth in 2023 and beyond, it is important to understand and acknowledge what we are seeing in the marketplace. First, our brand remains strong and continues to support the domestic and global reach we have discussed over the past few years. Second, growth and demand are proving durable due to our product innovation and diversified channels to market within DTC, wholesale, and globally, even as the battle for digital traffic continues to escalate. Third, elevated supply chain costs continue to pressure margins, but we are seeing decreasing forward rates and heavily impacted inbound freight costs, which we believe has the potential to set up as a tailwind for 2023. Turning to our brand, the second quarter displayed the power of YETI as we return to connect with customers through in-person events, combined with incredible brand storytelling, product marketing, and digital brand awareness. From the GoPro Mountain Games in Vail, Colorado, to Jackson Hole Food & Wine, coupled with international ambassador activations with skateboarder Louie Lopez at the Copenhagen Open, and Chef Lee Tiernan in London, enthusiasm and engagement with customers is where we excel. With strong in-person activation combined with a broad reach of our Mother's Day, Father's Day, and Summer Central campaigns, we have a multifaceted and differentiated connection with consumers. Even in today's world where getting attention is a premium. As it relates to demand, our wholesale corporate sales and YETI retail performed very well in the quarter. While our own e-commerce and Amazon Marketplace were challenged by very high year-over-year comps, and importantly, an increasingly competitive market for digital traffic, including the broader digital slowdown being seen in the market. YETI's improved inventory position across key wholesale accounts is contributing to growth and sell-through in this channel. It also reinforces how important our full omnichannel approach continues to be. On the YETI e-commerce side, the investment to build out our analytics capabilities to target, convert, and retain customers is proving central to improve retention and conversion, while acquisition continues to remain a focus for the rest of this year. On the product side, we are executing breadth and depth across our portfolio. Year-to-date, we have introduced new products and soft coolers, hard coolers, bags, and new apparel. As we build awareness and full channel distribution of these new products, we believe this sets up well for both near and long-term growth. Even though we are starting to see heightened promotional activity in the market, including more aggressive performance marketing tactics and deeper and more sustained discounting, we are focused on conveying the power of our brands and product through innovative product marketing to cut through the market noise. Finally, we are staying nimble by taking appropriate actions across our supply chain and operational management of the business given the rapidly changing landscape. This started in the second quarter with active management of our inbound supply to match our global demand outlook for the rest of 2022 and into 2023. While we are starting to see some signs of cost relief, particularly in the transportation area, this is expected to have a more significant impact across our income statement and balance sheet as we move into the next fiscal year. In total, YETI is responding thoughtfully and realistically to balance the opportunity we see in the market and just as importantly, what we do not fully know in the quarters ahead. As Paul will discuss, we have prudently adjusted our full year outlook to both reflect some of these ongoing uncertainties and our commitment to making the right near, mid, and long-term decisions for the YETI growth story. While not a decision we take lightly, this revised outlook reflects both what we believe are the controllable and the unknowns in the back half of 2022. Now, to our strategic growth priorities. As I mentioned, driving brand relevance remains as important as ever. Consumers are making thoughtful decisions on a daily basis about where and what to buy, and it is our job to continue driving high consideration through great product and brand storytelling. This is a hallmark of our brand and integral to how we differentiate ourselves in the market. Let me give you three examples here. We recently wrapped up our 13th Stop YETI Presents Film Tour. These intimate celebrations of our human stories represent a unique approach and philosophy to brand building, and incorporate ambassador interaction, storytelling spanning the diversity of the wild, and support for conservation partners and organizations. We enjoyed the opportunity to host some of you during our Brooklyn Stop. In June, we highlighted a collection of YETI customer product experiences through a new user-generated content series that features video and content submitted by our fans and followers, showing YETI products surviving incredible moments. This included a Tundra that kept ice and drinks cold even after a raging boat fire, and a Rambler Jug retaining ice after a truck fire. These videos have been among our most successful and most engaged content to date. Finally, we continue to connect with a widening demographic through TikTok, and are seeing momentum both in our own content as well as that from the user community. One recent post highlighting a fan's vast collection has captured nearly 10 million views, and our response to the video received over 200,000 likes. We're still exploring opportunities on many social channels, but TikTok remains an important opportunity for the brand. Turning our focus to product innovation. The clear highlight of the quarter was soft coolers, launched on yeti.com in the first quarter. Our Hopper M30 and Hopper M20 Backpack expanded across wholesale in Q2 and have been an active part of our seasonal color strategy. The combination of innovation, portability, and color have proven to be a powerful proposition for the active on-the-go customer. Hard coolers also grew in the quarter despite uneven wholesale inventory and core colors and certain skews such as our original wheeled cooler, The Haul. Given the vitality in our cooler and equipment portfolio, which was up 23%, we are particularly excited to introduce our two new wheeled hard coolers, the Roadie 48 and Roadie 60, which offer all the performance you'd expect from YETI with enhanced mobility. These products debuted in July and will move more broadly across our channels in the months ahead corresponding with healthier in-stocks of other core hard cooler offerings. As indicated last quarter, we've begun testing select distribution for our bags portfolio. With this thoughtful rollout underway, we're planning to add additional doors to better capitalize on fall outdoor and back-to-school timing. Beyond these efforts with our Crossroads line, we also introduced a new tan colorway in our Panga bags last week, which was the first new color for this successful line since 2017. And drinkware second quarter growth was 12%, compared to 69% growth in the year-ago period and up 23% on a three-year CAGR basis. We continue to see good momentum with our travel mugs, the Rambler Straw Cap and across our inventory constrained bottle line. Finally, we're working on several additional product introductions as we move towards the holidays to both extend our product families and bring limited release products for year-end. Looking at our channel strategy, wholesale growth outpaced DTC growth and what was our largest wholesale quarter to date. Wholesale strength was supported by an improved inventory position off a heavily depleted level last year, as well as solid sell-through trends with our major partners. To reiterate, our inventory position is still below pre-COVID levels, which we continue to actively address with our focus and optimization efforts. In addition, we continue to see progress in our work to drive merchandising consistency across our accounts. We believe customers are increasingly intentional in these e-tail and physical store purchase occasions, and we remain encouraged by the positive sell-through rates we are capturing. At the same time, the battle for digital traffic and mindshare has intensified, which we believe underscores the importance of our advanced analytics efforts. As we look at YETI e-commerce, our analytics work is giving us greater clarity into the impact of our acquisition and retention efforts, which is increasingly critical in today's challenging environment. We continue to be very effective in our retention efforts, particularly as we reengage older cohorts and drive quality transactions. While our acquisition efforts resulted in roughly flat new customer growth year-over-year, after two years of significant acquisition growth, this will be an area of heightened focus as we deploy tools and strategies to drive the most relevant and targeted engagement. We also believe our new e-commerce platform launched in early Q2 will enable many of these efforts as we move forward. We saw strong results in our corporate sales business with excellent inbound demand as companies continue to look for ways to engage their employees and customers. YETI retail remains a bright spot, including the debut of our first West Coast store in Carlsbad, California. With enhancements to our merchandising and layouts of our legacy stores and the performance of newer locations, we believe this business is positioned to accelerate in the years ahead, providing not only a place of commerce, but a place of brand discovery and community. Later this year, we plan to open a store in South Lake, Texas, and we are working on one more potential opening later in the year, which would bring our total to 13 stores. Finally, the Amazon Marketplace remained a challenge, facing significant comps in the prior year period and reflecting some of the same online traffic and demand trends we are seeing broadly in the digital marketplace. With a healthier inventory position across the Fulfilled by Amazon distribution network, a strategic utilization of fulfilled by merchant, and significantly easier comparisons, we are optimistic this business is positioned to improve in the second half. Our international business grew 35% in the second quarter, quadrupling the size of the business from two years ago. Growth was balanced across our core markets of Canada, Australia, and Europe, and we remain bullish on our opportunities as we continue to execute our global playbook in both our existing markets and as we look to future expansion opportunities. Nonetheless, we are closely watching the global economic headwinds beyond the U.S. and the varying levels of impact across our three non-U.S. regions. Let me start with Canada. Our wholesale performance in the market remains solid. While e-commerce traffic has been a bit slower than planned, we remain optimistic about the growth opportunity of this channel in Canada. We are encouraged here as a country fully ramps back to in-person events, and we have a full slate of brand activations planned, including the most recent return of the widely attended 10-Day Calgary Stampede. Australia has proven very resilient with strong growth across wholesale and DTC following a challenging 2021 with closures in various states and cities. We continue to make progress with organic growth at our existing wholesale accounts and expansion with our first national account. This is a core strategy for the brand this year as we look at increasing penetration of the urban coastal markets. Finally, in Europe, the opportunity remains fast even amidst some of the most severe consumer headwinds in the markets in which we operate. While e-commerce has been the lead channel in the market, we remain laser-focused on opening excellent wholesale doors across Europe, with a particular focus on the U.K. and Germany. We are excited by our introduction of sports Schuster, a Munich institution in the world of mountaineering and outdoor activities. This six-week street front installation was a powerful way to educate customers on the brand. More recently, we also installed a six-city feature with Globetrotter, a German store group known for delivering premium products to outdoor enthusiasts. As we look at servicing our international customers, we are rounding out our product lineup with key third-quarter introductions. We'll be launching new drinkware and soft coolers in Europe in the third quarter, which we see as a significant opportunity to build the brand and show the versatility of our products and their use cases. Broadly, we expect our strategy will remain focused on driving a global and full assortment of our products across our distribution. But when needed, we'll take care to address high-value local customer nuances and preferences. As we continue to focus on our global growth and the digital evolution, I'm pleased to announce that Faiz Ahmad has joined YETI in the newly created role of Chief Commercial Officer. Faiz brings extensive global leadership experience through his most recent role as CEO of Direct-to-Consumer as part of UnitedHealthcare at Optum, formerly senior director and global head of Apple's online store and retail market development, and various digital and technology roles at Delta Airlines during their digital transformation. Faiz will drive strategic direction and execution across our international, direct-to-consumer and technology functions while partnering closely with our well-established wholesale sales organization. In closing, I'm thankful for the execution by our incredible team and the support from our customers in an environment that has presented constant challenges over the past two years. There has been nothing easy and certainly nothing taken for granted in the current operating environment. But we've been steadfast in our commitment to stoke demand for the brand, invest in strategies that execute in the short-term and support actions that will realize the long-term potential for YETI. With that, I would now like to turn the call over to Paul to review our financials and outlook.

Thanks, Matt. I will begin by discussing the details from the quarter, providing our updated outlook, and then I'll open the floor for your questions. Sales in the second quarter rose 17% to $420 million, up from $357.7 million in the comparable period last year. This growth follows a robust 45% increase in the same quarter last year, although it fell slightly short of our target for 18% to 20% full-year growth. Wholesale sales grew by 21%, reaching $195.2 million compared to $160.8 million last year, driven by strong sales in coolers and equipment, including soft and hard coolers and bags. Our improved inventory position allowed us to better meet channel demand. Direct-to-consumer sales climbed 14% to $224.8 million, compared to $196.9 million last year, bolstered by strong corporate sales and the performance of our drinkware category. The direct-to-consumer mix slightly declined to 54% of sales for the quarter from 55% last year. Coolers and equipment sales increased 23% to $193.4 million from $157.8 million a year ago, with our overall soft cooler business performing particularly well due to favorable consumer response to our new tote and backpack products. We also made steady progress in enhancing the availability of hard coolers, which will be further supported in the latter half of the year with the launch of our new wheeled Roadies. Our Camino totes and Crossroad backpacks also continued to contribute significantly to our bags segment. Drinkware sales rose by 12% to $216.1 million compared to $192.9 million last year, building on a remarkable 69% growth from the prior year's period. Notable items in this category include travel mugs, chug cap bottles, and 26-ounce straw caps. Customization remains a strong differentiator and a driver of growth for the company. International sales increased by 35% to $48.1 million from $35.6 million in the same quarter last year, now representing about 11.5% of total sales. The international growth was fairly balanced across Canada, Australia, and Europe. Gross profit grew by 5% to $219.1 million, or 52.2% of sales, from $209.1 million, or 58.5% of sales, in the same quarter last year. The margin rate was below our expectations mainly due to increased inbound freight costs, higher product costs, and unfavorable channel and product mixes. The year-over-year margin contraction was primarily affected by a 630 basis point rise in inbound freight costs, along with 150 basis points from higher product costs and 40 basis points due to the mix. These pressures were partially mitigated by a 170 basis point benefit from pricing and 20 basis points from other impacts. Adjusted SG&A expenses for the quarter grew by 10% to $145.3 million, which is 34.6% of sales, compared to $131.7 million or 36.8% of sales last year. Non-variable expenses decreased as a percentage of sales due to strong top-line growth and disciplined spending, while variable expenses rose reflecting higher distribution and logistics costs. Adjusted operating income fell by 5% to $73.8 million, or 17.6% of sales, from $77.4 million or 21.6% of sales a year ago. Our effective tax rate for the quarter was 24.9%, higher than 20.4% from last year's second quarter, partly due to a tax benefit in the prior year. Adjusted net income decreased by 10% to $54.8 million or $0.63 per diluted share versus $60.7 million or $0.68 per diluted share from the prior year. These adjusted bottom-line figures exclude other income and expenses, mainly foreign currency fluctuations on intercompany balances, which are primarily unrealized and do not impact cash. This change provides a clearer perspective on our underlying operational performance, and has been applied retroactively. A summary of the adjusted results is available on our Investor Relations website and in our quarterly deck. Regarding our balance sheet, we closed the second quarter with $92 million in cash, down from $233.8 million a year earlier, mainly due to share repurchases completed last quarter and consistent investments in working capital. Inventory rose 121% to $490 million from $221.7 million last year. Excluding capitalized freight, inventory increased about 90% to $370 million compared to the previous quarter, indicating around 70% growth in unit terms for our primary product categories. An analysis of our inventory shows that 44% consists of on-hand products, 30% is in-transit, and 25% reflects inbound freight costs. Although overall transit times have not improved, port-to-port durations are getting better, which is offset by delays at ports and during transfers to rail yards. Total debt, not including unamortized deferred financing fees and finance leases, stands at $101.3 million compared to $123.8 million at the end of last year's second quarter. During this quarter, we made principal payments of $5.6 million. Looking ahead to our fiscal 2022 outlook, we anticipate full-year sales growth of 15% to 17% compared to fiscal 2021. This range reflects cautious expectations for the second half of the year due to a more constrained spending environment. We still expect coolers and equipment growth to outperform drinkware, and we anticipate balanced channel growth between direct and wholesale sales. We foresee third-quarter growth modestly exceeding the fourth quarter while considering the uncertainty during our typically peak DTC sales period. For gross margins, we expect them to be between 52% and 53% for the full year, driven by our revised sales outlook, less favorable channel and product mix, and ongoing challenges with inbound freight costs. We now estimate the freight headwind to be slightly below a 500 basis point impact for the year, which will primarily contribute to the year-over-year decline. Our insights regarding input costs and GSP duties remain unchanged, predicting about a 160 basis point headwind, albeit with some recent stabilization in commodity prices. Other contributing factors, including sales and product mix, are expected to be a modest drag, influenced by our updated expectations for the DTC channel. Pricing strategies may provide a partial counterbalance to these headwinds by approximately 200 basis points. From a timing perspective, we foresee third-quarter margin contractions to be slightly less severe than what we experienced in the first half of the year, followed by fewer overall challenges in the fourth quarter. Our strategy of disciplined SG&A spending remains intact, and we expect low double-digit dollar growth in both the third and fourth quarters. Variable expenses are projected to rise faster than sales, reflecting increased distribution and logistics costs. However, we anticipate non-variable expenses to grow at a slower pace than sales despite ongoing strategic investments aimed at supporting long-term global opportunities. Consequently, we expect continued year-over-year expense leverage for the remainder of the year. We are revising our adjusted operating margin target to a range of 17% to 17.5% for the year. Regarding interest expenses, we now estimate them at approximately $4.6 million, reflecting the recent rises in market rates. Additionally, we project an effective tax rate of about 24.6% for fiscal 2022, which is higher than the previous year's 20.8% rate due to various discrete tax benefits. This rise in the tax rate will have an approximate $0.11 impact on adjusted EPS compared to last year. Based on full-year diluted shares outstanding of around 87.3 million, we now forecast adjusted earnings per diluted share to be between $2.34 and $2.46, compared to $2.60 in fiscal 2021. For capital expenditures, we continue to expect around $60 million in spending, with about two-thirds designated for investments in new innovation and expanding capacity for existing products. I also want to provide more insight into our inventory. We are confident that most of our inventory is high-quality with extended and flexible shelf lives. On a unit basis, which grew about 70%, we see a higher relative increase in coolers and equipment, especially in high-demand areas with significant new innovations this year. While we are satisfied with the structure and level of our inventory, we are actively managing our purchase orders to align with updated demand expectations. Hence, we anticipate that the second quarter was our peak inventory period in dollar terms, and we expect sequentially lower year-over-year growth beginning in the current quarter. In closing, we are adjusting our business, focusing on our strategies, and setting prudent expectations amidst various economic challenges. Although our outlook is not as strong as we had hoped, it's essential to note that achieving these results would still tell a compelling story relative to 2019. This includes an impressive three-year sales compound annual growth rate of over 20% and an expanded operating margin, despite facing total gross margin and SG&A pressures from cumulative logistics challenges across freight and distribution totaling 800 basis points over the past two years. We will keep striving through these short-term challenges while making smart decisions to protect the brand and establish a foundation for long-term success. I will now hand the call back to the operator to take your questions.

Thank you. We will now begin the question-and-answer session. The first question is from the line of Sharon Zackfia with William Blair. Please go ahead.

Hi, good morning. I guess a question with a follow-up. The digital landscape has obviously been challenging for a lot of brands lately. Can you talk about the kind of initiatives that you're going to use to combat that? Have you seen any success with those thus far? And whether there's kind of, I guess, increased volatilities in the digital business or whether you've seen that to stabilize kind of at a lower rate? And then it sounds as if you don't think you're seeing anything brand-specific, but I wanted to ask if you're seeing any price sensitivity or consumers kind of trading down within the YETI brand framework.

Thanks, Sharon. Good morning. Great questions. I would say that on several fronts, particularly regarding our brand, we continue to see encouraging results. Our studies, along with the sell-through performance in wholesale and the positive reactions from our YETI-owned stores, indicate that the brand and our product portfolio are resonating well. This confidence supports our forecast of 17% growth in the second quarter as we look toward the rest of the year. On the digital side, we’ve observed that casual shoppers have decreased, which is reflected in our traffic data. However, we are very satisfied with our retention efforts and the customer acquisition we've achieved over the past four or five years, especially as we've accelerated our D2C business in the last two years. The growth we’ve seen in customer retention and quality is promising. In uncertain times, having a strong customer base is incredibly valuable. This retention has been bolstered by our marketing initiatives, brand development, improvements in advanced analytics, and how performance marketing interacts with our acquisition and conversion strategies. We have noted a slowdown in acquiring new customers, which is a broader trend in the market regarding traffic and competition in performance marketing. Still, we feel very good about the brand's positioning and how our product portfolio is being received. Our omnichannel strategy is effective, enabling us to meet customers where they prefer to shop, which has been a core aspect of our approach. Moving forward in the digital space, we will continue to enhance our relevance, focusing on retaining our existing customer base while seeking ways to attract new customers and navigate these changes. We recognize that this evolving situation is different from what we anticipated entering Q2, and that has led us to cautiously reassess the year ahead, feeling confident in our strong growth projections and commitment to our omnichannel strategy.

Thank you.

Thank you. The next question is from the line of Camilo Lyon with BTIG. Please go ahead, sir.

Good morning and thank you. I wanted to follow up on how you expect the transition from wholesale to direct-to-consumer to unfold in the second half of the year. You've mentioned the slowdown in casual shoppers and the challenges in acquiring customers directly. On the wholesale side, are your partners feeling more hesitant about their orders? It's a unique situation for you since you've been dealing with low inventory in that channel for a while. Additionally, in your prepared remarks, you, Matt, mentioned the rise in promotions in the marketplace. Can you provide an update on your current stance regarding the likelihood of matching those promotional strategies that some competitors are using to attract traffic?

Thank you, Camilo. Good morning. I want to highlight a few key points about our strong wholesale partnerships and close relationships. We maintain regular communication about our inventory status, sales performance, and merchandising needs, which remains consistent. Reviewing our year-to-date performance, particularly in the wholesale segment and our stores, we feel very positive about our inventory positioning. In the wholesale channel, we see good opportunities for growth, although we are still below pre-pandemic inventory levels. We are focused on distributing the innovations launched in Q2 through the remainder of the year while maintaining our consumer engagement. Historically, during challenging times, our wholesale partners have supported brands that show strong turnover, so our focus is on driving demand and bringing innovative products to market alongside our valued partners. Regarding pricing and the promotional landscape, our prices have remained stable this year despite adjustments, and we are confident in those price changes. As for promotions for the rest of the year, we are strategic and deliberate in our approach, typically associating promotions with new product launches or specific seasonal campaigns aimed at boosting traffic and cutting through marketplace noise. Therefore, I wouldn't anticipate any significant changes in our promotion strategy from our historical practices.

Thanks very much. Good luck.

Thank you. The next question is from the line of Brooke Roach with Goldman Sachs. Please go ahead.

Good morning and thank you so much for taking our question. As you balance the strength of the brand and new innovation as well as the incremental wholesale sell-in that you have given light inventory levels in the channel with the macro headwinds that you're currently facing, can you help us frame the range of outcomes that you've embedded in your updated guidance? Specifically, in your DTC channel, how are you thinking about yeti.com and Amazon versus corporate and stores for the rest of the year with the updated DTC outlook for the year?

Good morning, Brooke. In our prepared remarks, I will begin by discussing the channels, noting that wholesale and direct-to-consumer will be balanced as we consider the full year with a projected topline growth of 15% to 17%. We have observed notable strength in corporate sales within the direct-to-consumer channel. While we don't disclose specific figures, we mentioned this strength in the corporate sales business during the second quarter and anticipate it will persist. Part of this is due to the comparison dynamics, particularly with Amazon, which faced a tough comparison in the first half but will see much lighter comparisons in the second half. We expect significant performance from this area in the latter part of the year, especially since we encountered challenges with product delivery to the FPA warehouses. On the retail front, we have added some new stores, which will contribute to growth. As previously stated, given the low starting point, retail growth will occur at a higher percentage due to these new openings. Overall, we anticipate balanced growth between wholesale and direct-to-consumer as we adjust our outlook to a topline increase of 15% to 17%.

Thank you, Paul. And then maybe a question for Matt. One of the key initiatives into the back half appears to be driving that new customer acquisition. Would love to hear a little bit more about how you're thinking about marketing spend, and any other pivots in your strategy to drive that as you think about the YETI brand relative to some of the other competitors in the back half?

Good morning, Brooke. That's a great question. I would highlight a few points. One of the advantages of having built a strong in-house creative and marketing team that works closely with our e-commerce and performance marketing group is that we can be quite flexible. Coupled with our investments in advanced analytics, we are able to test a variety of strategies from mid-funnel to top of funnel down to conversion. When I consider our marketing spend, we don't frame it as switching entirely from broad brand awareness to performance marketing; it's much more dynamic than that. For instance, our user-generated content has performed exceptionally well, driving both traffic and awareness. We also engage our ambassadors and run chips and learning initiatives while introducing new products. We are proactively exploring different channels to locate potential consumers and ensure we drive consideration. We've seen excellent performance from various social platforms, especially TikTok, among others. As a content-rich company, we generate engagement and awareness, attract attention, and guide consumers through the consideration and conversion process. This year differs from the past couple of years in that we have been more present in the market, attending events in the U.S. and around the globe. The response has been very positive when we interact with consumers in person, which helps us gauge product and brand resonance. Our team focuses on building the top of the funnel and guiding efforts through to conversion.

Thanks so much. I'll pass it on.

Thank you. The next question is from the line of Brian Harbour with Morgan Stanley. Please go ahead.

Hey, good morning, guys. You commented on kind of just the promotional environment. I think the question is just more specifically on kind of some of your competitors and whether there are certain categories where you think competitive pressure is playing more of a role or are you seeing them kind of promote just because they have too much product or they're lagging behind you? I'm curious just about kind of the competitive environment generally.

Good morning. In terms of the overall competitive landscape, particularly regarding non-branded search terms, we are observing an increase in competition. This indicates a heightened struggle for traffic in the market, with more companies targeting those search terms. This dynamic tends to favor established brands that are in demand and resonate well with consumers, which helps explain our positive customer retention rates and the value of clients acquired through our digital channels. On the other hand, while our customer acquisition is not meeting our initial expectations for the year, the conversion rates for the consumers we do acquire have been strong, leading to an increase in their value. As a result, we are seeing higher-quality and more considered purchases. Overall, there seems to be a widespread competition for consumer attention, which is impacting the costs associated with customer acquisition across the market.

Okay, great. And then just sell-through trends at some of your wholesale partners, were those materially different kinds of at the end of the quarter or even into July versus what you saw at the beginning of the quarter, do you think that they've kind of improved as some of your inventory levels have improved. What are you seeing just in kind of their sell-through trends?

Yes, I would say a couple of things. Historically, we don't comment on intra-quarter updates for July, but I can provide a bit of insight. We didn't observe any significant market changes in June or July. We are pleased with the sell-through performance we are seeing. As we moved through the holiday seasons like Mother's Day, Father's Day, and graduations in Q2, our outlook for the remainder of the year looks promising. Inventory levels in wholesale are improving, and we are closely collaborating with our key wholesale partners, ranging from independents to national accounts. Our priority is to ensure they receive the products, that they are well-merchandised, and that they continue to sell at a positive rate, irrespective of broader market conditions.

Thank you.

Thank you. The next question is from the line of Kaumil Gajrawala with Credit Suisse. Please go ahead.

Good morning, everyone. If we could take a moment to assess things at the broader group level, you've provided a lot of insight regarding the various factors influencing costs. Currently, the top-line growth is quite strong in the high teens, while the bottom-line operating profit seems to be declining in the mid-single digits. This creates a notable gap. It appears that some costs may be easing in terms of gross margin but perhaps countered by customer acquisition expenses. What strategies do you have in place to narrow this gap? The demand appears to be present, but translating that into profit seems to be the challenge. What can you manage to align these two aspects more closely?

Yes, let me begin by addressing the midpoint of our guidance this year compared to last year, which consists of two primary factors. The first is the gross margin pressures we have previously discussed, which have been somewhat balanced by operational cost leverage. The second factor is the increase in our tax rate, which we expect to rise from around 20.8% to 24.6%. Those are the two main areas to consider. Year-over-year, we are observing a decline in sales and profits, with a 16% drop in revenue at the midpoint and a reduction in earnings. In response to your question about what we can control, the tax rate is influenced by the benefits we experienced last year related to stock compensation, which ties directly to stock price. On the gross margin front, we are noticing improvements, particularly with container prices decreasing, which will provide a positive impact as we move into 2023. While we have some control over the situation, it's difficult to predict outcomes. We are seeing some stabilization and reductions in commodity prices in key categories, and we hope this trend continues. Additionally, as we look ahead to next year, the product and mix shifts that have been unfavorable for us are expected to stabilize, potentially giving us a positive push. This is an area where we have significant control. Furthermore, we are noticing a decrease in transportation costs and stabilization of product costs, while the shift in channels and products is not expected to pose a further challenge. Lastly, concerning SG&A, outbound freight costs have been impacted by fuel surcharges affecting the profit and loss statement, but we anticipate some moderation in this area as well. With the tax rate remaining steady next year, we do not foresee a continuation of the trend where sales grow while earnings decline.

The thing I would just add to the back of that, exactly what Paul said, is we do thoughtfully and will continue to thoughtfully manage our SG&A costs. We're also, as we've talked many times in the past, when we grow the top line in this business, good things happen in the rest of it. This is an interesting time where those costs effects that Paul is talking about. We believe we're seeing signs of the other side of those. So, as a growth-oriented company, as a mid- and long-term growth-oriented company with the demand that we're driving with consumers, we want to take advantage of some of these opportunities to keep growing the business while also thoughtfully managing the SG&A.

Okay, got it. And then on inventory quickly, you talked about being low on inventory at wholesale. You obviously have a bunch coming over the ocean, but you're managing where you expect demand to be. How long do you feel like you'll have inventory at wholesale at the level at which you like it to stay?

Yes. As Matt mentioned, our wholesale inventory is currently below 2019 levels, but we are working on rebuilding it. We introduced the M20 and M30 models, which started shipping to our wholesale partners in the second quarter. Additionally, we launched our new Roadie wheeled coolers, the 48 and the 60, which will enter the wholesale channel in the fourth quarter. We continue to rebuild our inventory, especially in coolers and equipment. While our bottles have been constrained even on our own online store, they have shown strong growth. We believe that by the end of this year, we will be in a much stronger inventory position in both our direct-to-consumer business and our wholesale operations.

Got it. Thank you.

Thank you. The next question is from the line of Robbie Ohmes with Bank of America. Please go ahead.

Good morning, everyone. Thank you for taking my question. I would like to clarify something regarding the guidance for the latter half of the year. What assumptions are you making about consumer demand? Is your outlook based on demand staying the same or do you expect some further decline? Additionally, regarding customer acquisition costs and the competition for digital traffic, do you believe those costs are peaking now, or do you foresee them worsening in the second half? Also, Paul, could you remind me why you expect the gross margin in the fourth quarter to be better than in the third quarter? Thank you.

Sure. I’ll begin with the first part of your question and then address your follow-up before passing it to Matt. Regarding the second half, we anticipate trends to remain within a range of 13% to 16%, aligning with the overall topline growth of 15% to 17%. This range allows for some flexibility if conditions change, but we're expecting consistent performance or a strong fourth quarter since it is a significant direct-to-consumer quarter for us. We do not expect improvements. In the first half, we saw an 18% increase while the comparison was up 44% in the second half, leading to an implied range of 13% to 16% against a comparison of about 20%. This reflects our cautious outlook in case conditions become more challenging. Regarding your question about gross margin in the fourth quarter, we do expect an overall decline, but it should be less severe as we move past last year’s impacts. For example, last year’s fourth quarter saw the most significant contraction due to inbound freight impacts, and as we roll over those effects, the gross margin contraction will ease in the fourth quarter compared to last year's figures.

Got it. That's helpful. And Matt, as we tackle this question even in less challenging environments, how should we consider new customer acquisition costs, especially since acquiring new customers is becoming a bit more difficult? How do we evaluate that in relation to potential customer saturation?

Let me share a few thoughts, Robbie. The aspect of new customer acquisition costs has been a dynamic we've not experienced in the same way before the second quarter. This is why I mention that all our data indicates it's not directly linked to our brand but is more of a broader market issue, particularly in unbranded segments. Thus, it's not solely a YETI problem; it reflects the wider market. We’re also hearing similar sentiments beyond our immediate market. Regarding concerns about saturation, I would highlight our customer retention, which is exceptionally strong and shows significant value growth. Once we acquire high-quality customers, our ability to keep them and expand their engagement is quite effective. This illustrates the strength of our brand, our portfolio, and our team's efforts to maintain customer engagement during and after purchases. In a landscape filled with distractions and various spending options, the challenge is to capture consumer attention. As we move into the latter part of the year, we plan to focus on leveraging our advanced analytics team, along with dynamic marketing and performance strategies to enhance acquisition while nurturing our highly valuable customer cohorts. We are approaching this from innovative angles that haven't fully materialized in the market yet. The second half of the year presents an easier comparison than the first half, especially in digital terms, based on how 2021 unfolded. Therefore, we have multiple strategies in play to ensure we remain prominent to consumers, especially as external factors may divert spending and impact newly acquired or potential customers.

Got it. Thanks so much.

Thank you. The next question is from the line of Xian Siew with BNP Paribas. Please go ahead.

Hi guys. Thanks for the question. Maybe two quick ones. One, wholesale is a little bit better than consensus expected. Were there any shifts to consider in terms of supply chain maybe you got some products in earlier than expected? And then on DTC, you talk about the slowing of the digital traffic. Maybe could you help us give some color on how that evolved through the quarter? Maybe the months and trends exiting the quarter?

Great. Let me start. There were no major shifts in the wholesale business. It performed well in the quarter, and we were pleased with the sell-through as well. It wasn't just about sell-in; we saw the product moving out of our retailers' doors, which made us really happy. We brought in the M20 and M30 into the wholesale channel that launched late in Q1 on DTC, and that started coming into the wholesale channel. We also launched Nordic, so there were no major changes.

Traditionally, obviously, we don't choose to do a month-by-month sort of talk. I would say in general, the traffic we saw was pretty consistent through the quarter, both the strength of the retained customer and the balance of the acquisition customer. I think the one thing, as we called out that we saw a softening in the quarter was in the Amazon Marketplace. And as we said in our prepared remarks and Paul alluded to earlier, that's a place where we expect to see improvement in the back half of the year. And that is a broad-based reach platform for us. And so you combine that broad-based reach with the very targeted brand experience of yeti.com combined with our retail stores, our wholesale accounts, and then our corporate sales. I think that's where you're really going to see and have seen this year that the power of the diversity of our channels to market really plays in YETI's favor, which allows us to drive high-teens growth in a market that I think could be qualifying as uncertain.

Great. Very helpful. Thank you guys.

Thank you. The last question is from the line of Peter Keith with Piper Sandler. Please go ahead.

Hi. This is Matt Egger on for Peter. Just one quick one from us. Can you help us understand why freight was so much more than you expected? And I guess what changed from Q1 that's so much more of a pressure in Q2?

Yes. So, I think one of the big things was product mix. So, as coolers and equipment were a bigger piece of the business than expected, that attaches a higher inbound freight. So, that was a piece of it. We talked in the first quarter about the catch-up of where we had these invoices. There's some of that trailing. So, those are the two main items that have impacted kind of to your point of where second quarter we expected it to come in and where it did come in compared to our expectations.

Okay. Thanks. And then maybe just one last one. Is there any updated expectations around GSP renewal?

We don't have any new information. It was included in a couple of bills but was removed from them. It's one of the few points of agreement between both parties. However, as they were hurrying to take a break in August, it got taken out. So, there's no update at this moment. We're optimistic about the second half of the year, possibly after the mid-term elections, but presently there's nothing new to report.

All right. Thanks. Appreciate you taking our questions.

Thanks, Matt.

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Matt Reintjes just for any closing remarks.

Thanks, everyone, for joining us this morning. We look forward to speaking with you with our Q3 results. Have a wonderful day.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.