Yeti Holdings (NYSE:YETI) reports Q3 2019 earnings Oct. 31 before the markets open. If Yeti earnings are as good as fiscal 2019’s two previous quarterly reports, shareholders can expect Yeti stock to continue its fabulous climb.
In the past three fiscal years, Yeti’s free cash flow has grown from $31.4 million in 2016, $105.6 million in 2017, and $144.2 million in 2018. Through the first six months of 2019, Yeti’s got negative free cash flow of $7.0 million, down significantly from $76.5 million in the first six months of 2018.
Bad news? Not really.
When you’re growing as fast as this designer of outdoor and recreational products is, you’re going to be putting out more cash for inventory than you would have in past quarters.
In the second quarter ended June 29, Yeti’s inventory increased 21% to $181.4 million. This increase was due to the company’s expansion of its drinkware business combined with a proactive inventory buildup ahead of potential new tariffs.
As a result, it sent $36.2 million out the door for additional inventory, a complete reversal from a year earlier when it reduced inventory outflow by $25.7 million.
One thing you look at when inventory levels are rising is the growth of sales in the same period. You generally like to see sales growing faster than inventories. Excluding the Drinkware buildup, inventory growth was in-line with expectations and below its reported sales growth of 12% during the quarter.
This suggests management is strategically thinking ahead, actively managing and controlling its growth. That’s a big plus.
Direct-to-Consumer Biz and Yeti Stock
While Yeti’s not about to abandon its retail partners, the company’s direct-to-consumer (DTC) business, which includes several online eCommerce websites and two retail stores with plans for two more in Chicago and Denver in the second half of 2019, is growing by leaps and bounds.
In the second quarter, DTC sales grew by 43.5% to $82.5 million. Over the first six months of the year, DTC revenues grew by 36.3% to $144.2 million. They now account for 37% of the company’s overall revenue, up from 31% a year earlier.
With the opening of an additional brick and mortar stores along with e-commerce sites in additional countries beyond the U.S., Canada, Australia, Japan, UK, and Europe, Yeti should be able to continue to grow its sales at a pace similar to the growth in the second quarter.
Remember, DTC only accounted for 8% of the company’s 2015 revenue. Over the latest 12 months through the end of June, DTC sales accounted for 40% overall. With higher DTC sales come higher profits.
In Q2 2019, the company’s overall gross margin increased by 140 basis points to 50.2%. That’s a direct result of higher DTC sales in the quarter, which come with higher gross margins than its wholesale business.
Like Canada Goose (NYSE:GOOS) or any fast-growing lifestyle brand, getting the balance right between wholesale, online, and brick and mortar is a difficult task. As more physical stores open, investors will learn more about what kind of job management’s done creating a three-legged revenue and profit stool.
Take a look at that balance on Oct. 31.
Analyst Expectations for Yeti Stock
In June, CNBC Mad Money host Jim Cramer thought Yeti stock was a screaming buy.
“I like Yeti very much. I think it’s terrific and undervalued and I think it’s a long-time hold. That’s how I like that stock. And I’d like to have them on [the show], too, by the way,” Cramer stated on June 11.
Yeti stock has gained 21% in four months since.
However, analysts still think it’s safe to own with 9 rating it a buy, two give it an overweight rating, and just two think it’s a hold. None think it’s a sell.
As for target price, it’s got a high of $46, a low of $32, and an average price of $37.75, providing investors with a 20% potential upside over the next 12 months.
For the third quarter, Yahoo Finance suggests earnings per share will be $0.26, two cents higher than a year ago, on $222.1 million in revenue, 13% higher than a year earlier.
Given Yeti earnings have surprised for each of the last four quarters, it’s unlikely to disappoint when it announces October 31.
Yeti’s not been on my radar. As it moves to be America’s next billion-dollar brand, it sure will be.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.