YETI: Wall Street’s Latest Over-Hyped IPO
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realize significant gains in the event that the prices of either equity or debt
securities of YETI decline.
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We hold a short position in YETI Holdings (NASDAQ: YETI).
Wall Street’s ability to craft a narrative to sell
overpriced stock to investors is as old as the stock market itself. YETI is unanimously recommended by Sell Side
analysts who tout YETI as a powerful brand with significant growth
potential. But these rosy projections,
in our opinion, ignore the fundamental reality of YETI’s business. Our findings
include:
·
YETI’s Controlling Investor Has Been
Attempting to Exit for Years. YETI
was saddled with a large debt load to pay private investors a $451 million dividend
before a 2016 IPO attempt that was later aborted when sales began to decline. We
calculate that one publicly traded Business Development Company valued their
YETI shares at a mere $4.94 per share as recently as June 2018. But the
combination of exuberant markets and Wall Street promotion finally allowed
YETI’s private equity backers to cash out to the tune of approximately $229
million in a JOBS Act IPO (which requires less disclosure) completed in
October.
·
YETI’s Brand is Still Struggling to Regain
its Popularity. Although Sell Side analysts tout YETI’s brand strength,
evidence suggests that consumer excitement about YETI products has faded since reaching
a peak in 2016. Missteps by management
have also recently alienated core customers.
·
YETI Faces Increased Competition and Product
Saturation. With limited barriers to
entry, numerous competitors and retailers have saturated the market with
product alternatives to the company’s expensive coolers and stainless-steel
mugs. Commentary from publicly traded companies
in the industry signal problems for YETI moving forward, while competitive products
such as HydroFlask have gained market share at YETI’s expense
·
Claims of YETI’s “White Space” Growth
Potential Ring Hollow. Although Sell
Side analysts project straight line double growth potential well into the
future, YETI’s purportedly “innovative” new products are in commoditized
categories such as dog bowls, wine tumblers, backpacks, duffel bags, chairs,
blankets, and bottle openers. We also are not sanguine about YETI’s foray into
opening retail stores or its prospects in Europe or China.
Investors who bought into the hype surrounding recent IPOs
such as Go-Pro (GPRO), FitBit (FITB) and Blue Apron (APRN), have been left with
massive losses. At a valuation of 2.5x
EV/Sales, we see similar risk embedded in YETI shares.
Especially with roughly $400 Million in debt and aggressive spending plans, which
leave YETI little room to navigate should fundamentals deteriorate.
While we are skeptical about YETI long term, we believe this
is a particularly timely and attractive short because YETI’s trading patterns
suggest the stock price has likely been supported by underwriters exercising
their GreenShoe option (which allows them to purchase 2.4 million shares in the
open market to stabilize the price). But now that the 30-day GreenShoe period has
expired, the underwriters are no longer able to support the stock price in this
manner. Furthermore, only around 19% of YETI’s shares are freely tradeable, leaving
approximately 65 million shares becoming eligible for sale sometime after the
lockup expires this coming April.
---
YETI’s controlling investor, private equity firm Cortec
Group, appears to have been eager to exit its YETI investment for the last several
years. First, YETI took on $490 million
in debt during 2016 to pay a $451 million special dividend in May 2016, of
which Cortec received $312 million in proceeds. Then near the peak of consumer excitement
for the company’s products, Cortec attempted to sell YETI shares through an IPO
originally filed in July 2016. YETI was reportedly
seeking a hefty $5 Billion valuation that would have yielded Cortec a 50x
return on its 2012 investment. But the
IPO was later aborted “due to market conditions”, which the sell side has spun as
a purportedly “prudent and tactical decision”.
The company’s investor relations has subsequently explained that a large
customer cancelled an order and, according to a former employee, the failed IPO
caused unrest among senior YETI lieutenants, leading to elevated employee
turnover. Although Sell Side analysts tout
purported operational improvements in finance, IT, and logistics made since
2016, we note that YETI’s S-1 specifically
discloses material weaknesses relating to IT and inventory
valuation.
After YETI’s sales declined 22% in 2017, YETI capitalized on
exuberant markets to come public at a $1.6 Billion valuation this October. But
YETI’s IPO still didn’t come easy. The
IPO priced at $18 per share, below the original range of $19-21, and YETI also
had to downsize the offering, selling 16 million shares versus the 20 million
expected. The IPO primarily benefited
Cortec and insiders, who received 87.5% of the proceeds, with only $45 million going
to the company, which also had to eat $16.6 million in IPO expenses.
The fact that investment bankers found enough investors
willing to purchase YETI shares anywhere near the IPO price, in our opinion, is
a credit to the promotional power of Wall Street’s sales machine. Months prior
to the IPO, we calculate that Oaktree Specialty Lending Corporation (NASDAQ:
OCSL, which prior to 2017 was named Fifth Street Finance and run by different
management), valued its YETI shares at only
$4.94 per split-adjusted share or 73%
less than the IPO price. OCSL originally
acquired YETI common shares in conjunction with its 2012 financing of Cortec’s
acquisition. We calculate that OCSL’s fair
value of YETI peaked at $29.56 per share in late 2016 but declined throughout
2017, according to it SEC filings. OCSL
even sold 1 million of its YETI shares in the March 2018 quarter at the $4.94
price.
Source: OCSL SEC
Filings. Note: Our calculation reflects the 0.397-for-1 pre-IPO
reverse split disclosed in YETI’s S-1 states
YETI was founded by two brothers a decade ago selling high
end coolers to hunters and fisherman that retail for as much as $1,300 each. After
first gaining traction in America’s South East as a niche supplier to serious outdoor
enthusiasts, the brand began to attract a much broader following as a luxury
some fans call the “Redneck Rolex”. Sales caught fire during 2015 and 2016 as a
mass market phenomenon that went viral amongst boaters, beachgoers, tailgaters,
and millennials, including an Instagram trend of bikini-clad women posing on
top of YETI coolers. YETI made its way into country music lexicon while its
stainless-steel mugs and cups became a popular holiday gift.
Sell Side analysts tout the strength of YETI’s brand which
they claim is gaining popularity. But evidence suggests that consumer
excitement about YETI products has faded since 2016 and the brand is still struggling
to regain its prior popularity. After
YETI’ sales grew 74% in 2016, they declined sharply in 2017. YETI’s S-1
explains that retailers and distributors “overbought” in 2016 and when demand
failed to materialize in 2017, unsold goods backed up in the channel. Although sales grew 34% during the first six
months of 2018, YETI’s preliminary Q3 sales show growth decelerated to 7% in
the quarter. In November 2017, an executive from outdoor products manufacturer Vista
Outdoor (NYSE: VSTO) specifically named YETI as part of a “stainless steel
bubble” that “really cooled off” and “is largely behind us”:
“The
only part we've really been disappointed in CamelBak is we missed the stainless
steel bubble, which really occurred in that certain companies like YETI and
Hydro Flask and others managed to take advantage of, that for a variety
reasons, we don't have time to go into here, we really missed that bubble.”
“That
part of the market has really cooled off, so there was an opportunity there
we missed. But that bubble is largely behind us. We do have stainless offerings
out there, and we are getting a fair share of the market, but we missed the
real excitement, where tumblers were selling for $45 and $50 apiece. We missed
that peak part of the market.”
– Stephen Nolan, CFO VSTO
conference presentation, November 30, 2017:
Sell Side analysts roll out a variety of statistics lacking
context to suggest YETI’s brand has strengthened. But Google Trends data, which
shows consumer search activity over time, indicates that overall consumer
interest has waned significantly since reaching a peak in 2016. For example,
the search term “yeti coolers” is down substantially from prior levels. Consumer search interest for other YETI
products including “YETI Mugs”, “YETI Tumblers”, and “YETI Rambler” have also
failed to recapture their 2016 highs.
Source: Google Trends
The Sell Side also claims that “YETI is revered among its
core outdoor enthusiast customers”. But this ignores recent missteps by
management that appear to have recently alienated many of these core
customers. In April 2018, the National
Rifle Association sent out an email to members alerting them that YETI had abruptly
cut ties with it (which YETI describes as a misunderstanding). This
triggered calls for boycotts and led some previously loyal customers to blow
up their YETI coolers in YouTube videos.
In February 2018, YETI moved to cut ties with hundreds of
small specialty distributors and retailers.
An industry article
questioned if YETI was “abandoning
specialty retailers who gave footing to the brand’s success”. One business owner opined that YETI is “leaving the core competence of the business
that got them to the dance”. Another
said that after receiving a termination letter from YETI, he “thought it was funny” because “his store stocked YETI when they first
started out, but stopped selling the brand when sales decreased”. He explained that “YETI was a specialty brand, then it was suddenly in the hardware store
and pharmacy down the block…you open up to everybody in the world and you go
from premium to not so premium”.
Sell Side analysts also seem to ignore the reality that after
YETI’s initial successes, the market has become increasingly competitive and
extremely saturated with alternatives to YETI’s products. YETI has limited barriers to entry and established
cooler manufacturers such as Coleman and Igloo have rolled out new models with
similar features at lower prices. YETI
also faces direct competition from new rivals such as RTIC and Orca, which have
taken market share by rolling out similar product portfolios. Private label
alternatives such as KODI Coolers replicate YETI coolers (see here, here).
Anecdotal evidence, including this “Ice Challenge”
posted by a consumer on YouTube, suggests YETI performs no better than cheaper
coolers made by competitors (Below).
Source: YouTube
Meanwhile in drinkware, mass-market retailers including
Walmart and Costco are selling stainless steel substitutes of YETI Ramblers at
significant discount. A Sportsman’s
Warehouse executive stated in 2017 that GoPro and Yeti “were very strong year
one type products” but “there’s been a lot of knock-offs to both of those
companies since then”.
Source:
Sportsman’s Warehouse, January 2017 Presentation.
High quality alternatives such as the Hydro
Flask have recently gained significant popularity and taken market
share at YETI’s expense. As shown below,
Google search activity for “YETI Rambler” peaked in 2016, and consumer interest
in Hydro Flask now far surpasses it:
Source: Google Trends
Sell Side analysts also claim that YETI’s margins will expand
significantly over the coming years. But
the parade of competition creates pressures for YETI to cut prices to induce
sales and compete with lower priced competition. Unsurprisingly, YETI cut
prices and provided discounts on certain products in June 2018. We believe this trend is likely to exacerbate
the pressures on YETI’s gross margins over time, which have already fallen to
46% from 50% in 2016.
Another reason we are skeptical of YETI’s ability to sustain
the kind of sales growth bulls anticipate is because the business has limited
amounts of recurring revenue. YETI
coolers are well-made and long lasting, which means that customers who have
already purchased an expensive YETI cooler strike us as being unlikely to buy
another one from the company. This means that YETI must continuously attract
new customers to grow sales, which is especially difficult in light of the
challenges facing the brand. YETI is
also vulnerable to an economic downturn, as consumers could easily cut
discretionary spending on expensive coolers and mugs without blinking an eye.
Hibbet Sports (NASDAQ: HIBB), a sporting goods chain in
YETI’s core market of the southeastern United States, signaled problems for
YETI in a May 2018 conference call with investors. Sales of YETI goods had previously boosted Hibbet’s
sales last year, but management confirmed that sales of YETI goods have slowed
significantly this year and “it’s been an impact for us, certainly”:
Source: Hibbet Sports, May 2018 Earnings Call
The Sell Side touts “white space” growth from new products, with
one analyst claiming that “through exceptional innovation, YETI creates its own
markets versus simply entering existing markets”. But YETI’s new products are
in product categories such as dog bowls, wine tumblers, backpacks, duffel bags,
chairs, blankets, and bottle openers. Are
investors really supposed to believe that YETI is “creating new markets” with these
kinds of commoditized goods in crowded categories?
We also are not sanguine about management’s plans to spend
at least $35 million in capital expenditures next year to increase staff and
finance projects including the opening of YETI branded retail stores, bringing
the company into another difficult arena.
YETI also vaguely refers to expansion into China and Europe, but the
notion that foreign consumers will purchase expensive coolers that went viral
amongst millennials in America’s South East several years ago strikes us as fanciful,
at best.
Conclusion
Wall Street’s promotion of YETI reminds us of previous IPOs
such as GoPro, FitBit, and Blue Apron. In
each of these cases, investors were sold shares based on hype that failed to
materialize.
At 2.5x Enterprise Value / Sales, we see similar risks embedded in YETI’s valuation. Especially with
$400 Million in debt and aggressive spending plans, which leaves YETI little
room to navigate should fundamentals deteriorate. Even if growth comes in better than we
expect, YETI will have to use a substantial portion of its cash flow to pay
down debt for years to come. This is inherently problematic for a company attempting
to grow in such a highly competitive industry.
While we are skeptical about YETI long term, we believe this
is a particularly timely and attractive short because YETI’s stock price has
likely been supported by underwriters exercising their GreenShoe option (which
allows them to purchase 2.4 million shares in the open market to stabilize the
price). Although the company has not
disclosed if underwriters have exercised their options, Post IPO trading
activity involved large bids at fixed prices for extended periods of time,
which is a trading pattern we find suggestive of underwriters supporting the
stock price (example below). But now that the 30-day Greenshoe period has
expired, the underwriters are no longer able to support the stock price in this
manner.
Furthermore, only about 19% of YETI’s total outstanding
shares are currently freely tradeable.
The majority of these shares are held by private equity investors,
leaving approximately 65 million shares becoming eligible for sale sometime
after the lockup expires this coming April.
