When a brand name is woven into popular country songs it's definitely made a mark. YETI Holdings (NYSE: $YETI) will be coming public this week (prices Wednesday) and promises to be one of the next public niche consumer brands like Duluth Holdings ($DLTH) and Canada Goose ($GOOS). In short, we expect the IPO do well as a deal and in after-market trading but believe there are substantial risks in their expansion plan. YETI avoided a "GoPro collapse" in 2016 by delaying their IPO despite a massive surge in revenue - they could see that the growth wasn't sustainable. This almost never happens but because the majority investor would have also been a bagholder they had a major self-interest in delaying the deal.
YETI was started in 2006 by a couple of brothers with their well-known rugged and high-performance coolers. In 2012 a PE-style funding group, Cortec, invested in the company and brought in more professional management and financial discipline to support profitable long-term growth. Post-IPO Cortec will still own 51% of the company. Cortec is selling most of the shares in the IPO and is focused on their own investment returns. In 2016 the company paid a "special dividend" of $451.3M, of which Cortec received $312.1M. So far Cortec stands to enjoy substantial continuing returns from their $67M investment.
Most investors see $YETI as the "next Canada Goose" $GOOS so we'll spend some time comparing the two and looking at valuation. There's little question the deal will do well based on growth and profitability. But there are some important differences to their growth strategies and competition that are worth considering.
YETI is driving two different growth strategies at the same time - 1) expand the product line from coolers to drinkware and a range of outdoor accessories and 2) drive geographic expansion, first in the US from the South East and then internationally.
YETI has expanded their product line significantly over the last few years as shown in the image below. We were surprised that drinkware represents 50% of revenues. This is the insulated type so it's still in the proven YETI theme of "keeping things cold." Many of the other categories are very small so the bulk of revenue still breaks down into coolers and drinkware. One wonders just how many additional models of coolers and drinkware are possible given the current line up. Chances are most of the growth in these two areas will depend on geographic expansion rather than more models.
YETI management made it clear they intend to add more product lines within the "$184.5B outdoor recreation industry market" but didn't elaborate enough for us to know which ones they might go after. The industry includes everything from off-roading, motorcycling and scuba diving. The YETI product line doesn't really map to specific outdoor categories. Coolers and insulated drinkware would be used frequently in a number of activities including camping, fishing, hunting, and some water sports.
Product line expansion into other areas of the outdoor recreation space represents one key difference from Canada Goose which continues to focus on one category (clothing) but broaden from just the winter season to include Fall and Spring. GOOS has been able to expand their product line within their existing distribution channel. This is a key distinction and one with a difference.
Outdoor recreation is a giant category with mostly specialized retail distribution. There are a few large format stores like Bass Pro Shops, Cabelas and to a lesser extent Dicks Sporting Goods but they are an exception and not common to all geographic areas. As YETI expands their products they will need to be "slotted" into retail distribution. It will be easy to add new products to the "YETI section" in a Bass Pro Shop but much harder to get YETI drinkware into a bike store, a tennis shop or a retailer like CVS or Whole Foods.
There's a substantial amount of competition in the cooler and insulated drinkware category. The most notable mainstream brand is Igloo which I'd say is nearly ubiquitous in mainstream retail channels. Igloo is best-known for their low-cost "Playmate" cooler line but they have copied many of the successful YETI designs and added them to their own lineup. They may lack the cachet of a YETI in certain circles but to many buyers, they represent a viable equivalent product in terms of appearance and function at a lower price. That makes it harder for a retailer to justify expanded shelf space to YETI in some instances. Coleman is also a well known and established competitor with a full line of coolers and insulated drinkware.
YETI management has a slide dedicated to how they plan to "protect their IP" in the market. But it turns out to be pretty easy to make a double walled stainless steel cup with some insulation between the layers of steel. For example, I personally pitted a YETI Rambler 30oz Tumbler against the nearly exact copy by Igloo. The build quality and performance was identical in every way except for the embossed YETI logo. The cost for the YETI was $35 compared to $8 for the Igloo.
Our model puts a $30 price on the stock. That compares favorably to the filing range but indications are investors may bid this one up. Despite 30%+ growth management puts their long-term model at a much lower rate. Where we see some compression in gross margin they are guiding even higher. In the face of these inconsistencies, we've moderated our growth rate down to 20% and given them the benefit of the doubt in terms of gross margin for now. Like many companies, they favor the "adjusted EBITDA" metric while we prefer real operating income.
If we look at $GOOS they are trading with a $5.2B market capitalization on about $500M in revenue. If we apply a 10x sales multiple to $YETI the shares would be $95/share! Yet consider Duluth Holdings ($DLTH) which has a market cap of $930M on a similar level of sales ($513M) - a mere 1.8x sales.
We also know that the majority shareholder remains an interested seller and will probably be adding to share supply once the lockup expires. They are willing to sell here at 2x sales so at 3-4x sales or higher they would likely do more of the same. As we've seen with some other deals the aftermarket trading can be a challenge. For example, Elastic ($ESTC) priced above the raised range and then doubled immediately to our full PFV estimate. We ended up being able to buy some much cheaper a few days later and it may get cheaper still before it has a real run.