Thank you for standing by. This is the conference operator. Welcome to the YETI Holdings Second Quarter 2021 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Tom Shaw, Vice President of Investor Relations. Please go ahead.

Good morning, everyone, and thanks for joining us to discuss YETI Holdings' Second Quarter 2021 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 relating to the impact of the COVID-19 pandemic 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, please refer to the risk factors detailed in our most recently filed quarterly report on Form 10-Q and the Form 8-K filed with the SEC earlier this morning along with the associated press release. 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 the press release issued this morning. 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 for your questions. And with that, I'll turn the call over to Matt.

Thanks, Tom, and good morning. YETI had a remarkable second quarter with sales increasing over 40% for the second straight quarter. This performance continues the trend of high demand for the brand during the start of summer and the gift-giving celebrations of moms, dads and grads. This Q2 was punctuated by the broader return to some pandemic-disrupted activities such as travel and the continued trend in people looking for active outdoor adventures. Several key elements continue to drive our results. It all starts with our unrelenting focus on designing products to deliver performance, durability and versatility to support new activities since the pandemic and for the activities disrupted during the pandemic. Great product comes alive through relevant and impactful brand and product storytelling. Our incredibly talented team of in-house creatives continues to find unique and meaningful ways to build connections with customers globally and across a wide range of outlets from digital to in-person experiences, amplifying the strength and heritage of the brand. And finally, in an increasingly digital-led world, we continue to make strategic investments in data analytics and our technology stack to better personalize the consumer journey and engagement with YETI. As we turn to the second quarter, our 45% net sales growth was ahead of our expectations with strength in the quarter across all our channels. Those channels most impacted by the prior year's COVID-19 disruptions as well as channels such as YETI.com that saw incredible strength in the year ago period delivered in the second quarter. In DTC, we posted 48% growth on top of last year's increase of 61%. This included strong performance through Mother's Day and Father's Day as we highlighted the range and relevance of our product portfolio while also earning impactful media placement across key outlets from The New York Times and…

Thanks, Matt, and good morning. YETI continued to see outstanding brand momentum and performance during the second quarter, and I'll add my sincere thanks to the incredible efforts of our team that are driving these results. I will start with a review of the quarter followed by thoughts on the balance of the year and our updated outlook. We will then open the call up for your questions. Net sales increased 45% and to $357.7 million compared to $246.9 million in the prior year period. While this growth compares against COVID-impacted results last year, it represents the fourth straight quarter we have generated a 2-year compounded annual growth rate in the low to mid-20% range. Direct-to-consumer net sales grew 48% to $196.9 million compared to $133 million in the same period last year. Direct-to-consumer performance was driven by strength in both our Drinkware and Coolers & Equipment categories. All direct-to-consumer channels grew in excess of 20% during the period. YETI.com drove another impressive quarter even against last year's triple-digit strength. And we experienced sharp recoveries in our corporate sales and YETI retail businesses. Overall, our direct-to-consumer mix increased slightly to 55% of net sales for the period compared to 54% last year. Wholesale net sales increased 41% to $160.8 million compared to $113.9 million last year. Wholesale performance was driven by both our Drinkware and Coolers & Equipment categories with particular strength in Drinkware. As Matt mentioned, channel demand remains strong, and we have made some replenishment progress. However, we have significant opportunity ahead with wholesale channel inventory still down year-over-year. By category, Drinkware net sales increased 69% to $192.9 million compared to $114.3 million last year. This strength reflects broad-based demand across our Drinkware lineup, improving product availability and the strong recovery of our corporate sales business. We continue…

[Operator Instructions]. Our first question comes from Robby Ohmes of Bank of America.

This is Alex [ph] on for Robby. Just first, can you talk to us a bit more about the channel inventory levels at your largest accounts? When would you sort of expect channel partners to be back at sort of appropriate inventory levels? It seems like maybe the replenishment has gotten pushed out a bit, so just trying to get a little more color there.

This is Paul. Thanks for the question. One of the biggest factors in reloading the channel is demand. So demand is very, very strong. As we talked about, we made a little bit of progress during the second quarter, although inventory levels in the channel still ended down year-over-year. I think it's going to normalize based on different categories. I think Drinkware will be the soonest, and hard coolers will be the longest. And I think it goes into -- we're looking into 2022 until we really fully restock the channel, but we're really happy with the demand and try to satisfy that demand in any channel that it comes to us.

Perfect. That's really helpful. And just my second question, can you just give us a bit more color on the supply chain disruption that you're seeing? I think you called out soft cooler bag production being impacted? Are you also seeing that in the hard cooler side as well? And what sort of mitigation strategies are you looking at to try to offset this? Are there opportunities to ramp production elsewhere?

Yes, it's a great question. So I'll start with the hard cooler. And just as a reminder, hard coolers, Philippines, Poland and North America, we are -- for hard cooler, it's really a capacity issue. And we are producing as many hard coolers as possible. And then the transportation, the timing of the elongated transportation, but it's really a capacity issue. But a country like the Philippines does have a low vaccination rate, so that's something that we watch. Specifically what Matt called out in Vietnam, you've read in the headlines there, we're in the third week of the government-mandated shutdown. One of the great things is our dual sourcing, so we're able to -- and that's really around hard coolers and bags in the Philippines -- and soft coolers and bags in the Philippines, excuse me. And we do have second sourcing, so we can make up some of it. But these are the unknowns and the continued things that we face as we go into the back half of the year.

Our next question comes from Sharon Zackfia of William Blair.

I guess a question on gross margin, Paul. So I think the implication is for something like 150 basis points like sequential degradation in the back half. Can you kind of break that down to the components because there's a lot of moving parts there? And I think previously, you had talked about flattish gross margin in the fourth quarter. Is that still the case? Are we going to see most of this kind of occur in the third quarter?

Yes. So thanks, Sharon. So our guidance implies about a 57% gross margin in the back half of the year, in the 2H. And we see that today, more -- the deceleration more evenly split between Q3 and Q4, so unlike prior. The pieces that go into that from what we talked about at the end of Q1, which was flat gross margin for the year; and today, we're a flat gross margin for the year. But what has changed is inbound freight and other costs have added about $8 million to the gross margin or the product cost. And then that's being offset to keep flat for the year with a little bit of overperformance in Q2 and then a little bit more of the fixed cost leverage as we raised the top line. From a component, we would expect to see DTC still being a slight tailwind as we go into the back half of the year. The cost improvement, still we are -- we're seeing cost increases or input cost increases. I think that will be less pronounced in the back half of the year and then certainly offset by GSP and inbound freight.

One follow-up, too. I guess, given the low inventory uplift that you have, are you able to kind of stock up at all on inventory? Do you have like more safety stock? It doesn't really sound like that's the case right now, but just curious if there's any opportunity there.

So we are buying as much as possible. So inventory was up 60%, but on a 2 year, it was only up 11%, 11% CAGR. Similar to Alex's question and my responses, we are doing everything we tend to build up inventory but for the strong demand. So we continue to believe that -- or we continue to expect inventory up significantly in the back half of the year rolling over significant negatives last year. And by product category, similar to the wholesale channel, Drinkware, soft coolers and hard coolers in when we'll get healthier through the product categories.

Our next question comes from Camilo Lyon of BTIG.

Congrats on a great quarter. I was curious if you could talk about what you're seeing either domestically or in your international markets with respect to the Delta virus -- Delta variant, has there been any sort of impact in demand that you've seen in any of these regions? Any sort of updated thoughts on that would be helpful.

Camilo, it's Matt. The -- as we look across our domestic regions and our global regions, one of the things that we learned from the disruption last year is how we shift channels based upon what's happening and what those dynamics are. Obviously, there are parts of the world, and we talked about Canada and Australia on the prepared remarks around continued disruption around wholesale openings and closings, different parts of those particular markets that are applying different rules around the COVID broadly, specifically to Delta variant being the driver. What we've seen is an ability, if wholesale is disrupted, how we manage it and push resource towards the direct-to-consumer and engaging the consumer. But as we said on the call, we've seen broad-based strength in demand across all regions in the U.S. and across our emerging but now more significant international regions. So we feel great about our ability to reach the consumer. We feel great about our ability to continue to stoke excitement for the brand and ultimately drive that demand.

That's great. And then my follow-up is -- 2-part follow-up actually. With respect to the channel replenishment that you talked about in wholesale, is there an ability -- I just want to confirm this. Is there an ability to start fulfilling demand for spring of '22? Are your wholesale partners trying to get ahead of this, and do you have any capacity to do so by starting to take spring receipts earlier, perhaps maybe in end of Q3 or Q4, where it typically might fall into Q1? Is there any thought of that? And can you do that given the supply constraints? And then just longer term on your sales outlook, you now averaged over 20% growth over the past 4 years. Brand momentum is solid both in the U.S. and abroad. What prevents you from keeping this 20% growth trajectory going?

I'll take the front-end question on the channel replan, and Paul can probably jump in on how we're thinking about what we feel has been a very strong run of very strong growth above 20%, as you point out. On the channel replan, obviously, our full focus right now is servicing the demand we see today, and that's working with our -- across our suppliers on capacity planning in the near term but also sort of looking further out with them on how we start to get ahead of 2022 demand and beyond. So I would say our near-term focus across hard coolers, soft coolers, Drinkware is to drive supply to support demand we're seeing in the market today. We don't have plans to get ahead of 2022 in 2021 because I think we're going to continue to stoke demand in the year, and we're going to continue to push supply into this year to help support that demand. We have an incredible supply chain team. Obviously, we've overrun what we thought the first half of the year was going to look like due to that great demand. So they're working on not only the in-the-moment replenishment but also as we build that supply back up into 2022, as Paul mentioned.

And then thinking about sales, while not giving any outlook for '22, I'd say broader or more macro thinking, we expect the outdoor leisure trends to continue. And we think that's certainly a great thing for YETI as life and commuting has come back, so in-person events, that's also a benefit. So is it -- does it continue with 20%? Does it not? That one I won't answer, but we think the macro trends are very positive for us.

Our next question comes from Peter Benedict of Baird.

So I guess my first question is just around any plans you have or how you think about using price as a lever to offset some of the rising cost pressures that are out there in the market.

Peter, obviously, we talked about this quite a bit through the tariff challenges of a couple of years ago, some of the supply disruptions in last year, where we had supply disruptions but obviously saw incredible strength in demand in 2020. We use price as a last lever. We think there's some real benefit to the consistency of our pricing in the market for our consumers and also for the consistency of how we tell the stories. Where we look at price very strategically is as we introduce new products, as we expand product families, we would selectively look at price. But we look at addressing the cost pressures across the range of opportunities in front of us. And some of those are working with our supply partners on price negotiations that offset some of the increases because of the volume we're driving. Some of it may be selectively as we introduce new products looking and bringing enhanced benefits and features to the product, we look at how we can bring price into it. But price as a broad-based lever is not something we've historically done. It's always something that's there, and we continue to watch how we manage and mitigate and contain the near term and cost pressures.

Okay. Got you. That makes sense. And then, Matt, you talked earlier in your prepared remarks about your customer retention efforts. It really sounds like those are starting to scale here. Maybe, I don't know, can you expand on it a little bit? Are there any metrics you could share on maybe progress to date where you stand today, where the opportunity lies in terms of driving this more personalized engagement with consumers and driving repeat orders, et cetera?

Yes, Peter, it's an incredibly exciting area for us. It's one that we've talked quite a bit about the investment we've made in people and in technology and in the process and really the thought of how we take the passion, enthusiasm for the YETI brand, engage the consumer in the way they want to be engaged with at the moment in time where they're in that consideration funnel and move them to conversion. While we aren't sharing specifics today, we did mention that what we're seeing from a consideration and a conversion and the size of the orders has been really positive. The team continues. The beautiful thing about this advanced analytics is we get smarter every day and every week. And we also have the ability to adjust, and we have the ability to test into things. And when we think about the 3 big things we're trying to do is, one, we wanted to drive the talent and the resource to be able to really take advantage of the digital evolution that continues. We want to use this data and this platform to understand the behaviors of our consumers and then really take a data-led approach to creating that digital engagement and that consumer experience. And a couple of things that we've done by leveraging our machine learning, one we've worked to optimize our customer outreach, which is the number of times we contact the customer, the types of information we put in front of them depending on where they are in the consideration process based upon our data and using propensity models to purchase. And so there's a lot of richness in there that we're really excited about and the data set we have and now the team we have to put that into play. And so you're going to -- you may not see it but -- because it won't be overt, but you'll start to feel more personalized, more directed communications with our customers. And then that will ultimately lead all the way back to our digital properties and how we take people on the YETI journey on our digital properties.

Our next question comes from Brooke Roach of Goldman Sachs.

A lot of ground has been covered, but Matt, maybe I wanted to follow up a little bit on the international momentum. Can you talk a little bit about the profile of your customer that you're seeing internationally maybe in the context of the data and analytics that you've been implementing? What are you seeing in the international customer base versus the U.S. in terms of awareness and bringing those customers up the adoption curve? And how are -- what progress have you made so far on building out the international ambassador program?

Great. A lot of good stuff in there. I would say, starting with the data analytics and our advanced analytics, the base of that is really primarily focused on our U.S. domestic customers. It's where we have the largest data set. So we're much more intelligent 15 years into this journey in the U.S. We're a little more nascent internationally. So what I would say what we know about that customer is it doesn't look fundamentally different than our U.S. consumer from what we've seen from interest areas in some of the demographics information we have internationally. We obviously have a lot lower awareness internationally than we do in the U.S. But what we're seeing from a behavior perspective is our early-adopting international customers are buying in a mix that looks quite a bit like what our early-adopting U.S. customers and, frankly, a little bit of how our U.S. mix looks today. We're seeing really strong adoption in coolers, particularly hard coolers, in Europe and Australia. Drinkware is performing very well. We're just starting the evolution in our marketing and how we talk to that consumer in a YETI-like voice but with some local market relevance. We just launched a colorway recently that we call Highlands, really inspired by the Scottish Highlands. It was our first sort of story around a product around color that we told internationally that works around the globe. And so it's -- we really like the progress. On the ambassador front, and we've said this in the past, we plan to run a very similar playbook internationally that we ran in the U.S. We've seen that successful over the last 3 years in Australia and in Canada. We're seeing the early stages of that success of running this depth and breadth marketing strategy in Europe. Our ambassador roster continues to grow internationally, but many of our original ambassadors have an international reputation and an international halo, whether that's John Florence in surfing, who recently completed in the Olympics; or Geoff Rowley, who is a global skate ambassador. So we're getting the benefit of the group we have today, and we're just adding to it and strengthening it.

And Paul, maybe to just follow up on some of the topics earlier regarding some of the supply chain, can you talk a little bit more about what you're seeing in terms of transportation and logistics and maybe how you -- how YETI is navigating those challenges given some of the factory closures in other regions of the world?

Yes. So we're seeing a couple of things from a transportation. So certainly, the elongated time from back to our manufacturer to our DCs, it hasn't gotten materially longer since the end of first quarter; but certainly year-over-year, it's significantly longer. So there's time challenges. The second challenge is -- and the most -- the one that we talked a lot about on calls like this is the cost and seeing transportation cost increasing. What we're focused on is obtaining containers -- obtaining space on ships to get product here. So those are the 2 biggest. And then from a manufacturer supplier, it's really about -- if we think about hard coolers, it's really about adding capacity because we are producing at full capacity. So it's really how do we add capacity and become even more efficient. On the other end, on the Drinkware, it's about increasing volume or increasing manufacturing. So they have the capacity, and it's just continuing to catch up with demand. And soft coolers are kind of in between that. So that's kind of how we think about it, and it is something that we're very focused on.

Our next question comes from Joe Altobello of Raymond James.

Just want to go back to the international business for a second. It sounds like the customer demographics and the usage occasions are similar to what you guys saw in the U.S. in the early days of the business. But can you talk about the competition that you're seeing internationally? How much does it differ by market? How does it differ from the competition that you see in the U.S.? Is that primarily at the lower end or the higher end of the category from a pricing standpoint?

Joe, great question. I would say, when we think about -- just to add to the front of that, the demographic and the use occasion, obviously, there are activities in pursuits globally that are more prevalent than they are in the U.S. and activities at more prevalent in the U.S. than globally. And that's a bit of how we're nuancing the positioning. But the base kind of idea of large active outdoor markets has really held true, and we've been able to address that even when we think about the variety of wholesale partners that have -- in Europe that have joined in with us. We're in everything from very well-regarded, long-established sporting goods and doing things in the culinary community, in retailers or even things like butcher shops in Germany. And so it's a really YETI-like approach to finding ways to be relevant to people in their lives and a lot of different variety. I would say, as we think about the growth and expansion, it's going to be highly targeted at people who can be that same reference and the excitement for what YETI is and drive the word-of-mouth reference and the passion for the brand. And we're doing that digitally through our e-commerce and our DTC first approach internationally and through these referential wholesale partners that we're signing up.

Got it. Okay. Just one follow-up on that in terms of how you're thinking about YETI from a growth standpoint. I think early in the year, the thinking was that cooler growth would slightly outpace Drinkware. Is that still the case?

So as you can appreciate, we don't give it to that level. Certainly, the very strong first half of C&E being up 34%, Drinkware is up 51% because of the strong second quarter. So I would say, as I think about this overall, as we've talked about between the 2 categories for the year, they're similar, as we've said in the past.

Our next question comes from Xian Siew of Exane BNP Paribas.

I think you talked about how nonvariable SG&A would maybe leverage, if not drive the marketing. Just thinking -- how are you thinking about marketing right now? Is it just leaning into the opportunity with demand so strong right now and should kind of normalize a bit? And maybe as you think about '22, is it maybe stepping down and normalizing as well? Or yes, if you could help us think about that.

Yes, it's a great question. And as a reminder, in Q2 last year, when the early dark days of COVID, we made some very quick decisions to make sure we thoughtfully created cost containment if the world wasn't going to resume in the way it did. We were fortunate, obviously, as we talked about in Q2 last year, that particularly in our digital channels, it resumed very quickly. And then our wholesale partners, they were deemed essential, which allowed us to deliver a strong Q2 2020 amidst that and then continuing on through the year. This year, what you see is a little bit of rebuild in that marketing. We haven't changed our marketing approach. We haven't loosened up anything around our expectations of how our marketing returns, whether that's our direct performance marketing through our digital channels or our brand-building efforts. But 15 years into our history, with the kind of growth we're producing, with the kind of new customers we're acquiring, we still consider ourselves in a brand awareness, growth mode, customer acquisition mode, but we want to do it in a highly profitable way. And so we use our marketing as an incredible asset and an incredible lever to do that. But I wouldn't say the quarter would show anything that we fundamentally changed about how we run a very disciplined brand-building marketing, performance marketing program.

And then from a numbers perspective, we have delevered marketing year-to-date based on what Matt said about us really clamping down at the end of Q1 last year, so the last couple of weeks in Q1, and then Q2. As we look forward, we would expect Q3 to also delever because we didn't really turn it fully back on until Q4. We expect Q4 to leverage because that's when we turned it on last year. And then overall, and we've talked about this broadly, we see marketing at around 8% of sales. We didn't get there last year. We'll get closer this year. It's really one of those, and I know our Head of Marketing will always take more, but the top line -- the strong top line will actually be one of the impediments to getting back to that 8%. So it's same target and really rolling over last year's actions.

Okay. Got it. That's very helpful. And maybe just as a follow-up on the flip side of expenses. I think you mentioned variable expenses leverage this quarter, typically with the DTC channel growing faster, it delevers. I think you said it was just more maybe a balanced growth between wholesale and DTC. I just want to make sure there's no maybe inflection point here where you're starting to see better efficiencies on the variable expenses.

No, it's really that more balanced growth and driving the variable to leverage slightly this quarter.

Okay. So I guess, longer term, are there opportunities to change that? Or how are we thinking about it?

I think if going back where we longer term expect DTC to grow faster than wholesale, that may still -- you may still come back to a world of deleveraging variable expenses, which we take all day long because of the higher gross margin of the DTC channel.

Our next question comes from Wendy Nicholson of Citi.

Just I think two kind of quick housekeeping items. First, just as you think about capital allocation, I know you want to invest obviously more in inventory and working capital to build up your safety stocks and all of that. But you're still building a lot of cash on the balance sheet. So what's the current thinking about either a dividend or a share repurchase program? And then second of all, any date on the timing of expanding luggage into wholesale beyond the Panga Duffel?

Wendy, it's Matt. Thanks for the questions. As we think about capital allocation, and it's a great question, one obviously this business is focused on, driving high-quality revenue that ultimately produces a strong cash position for the business. One of the things that we've said is, as we've worked with our Board on the best ways to think about returning value to our shareholders is that we're a growth-oriented company, and so first and foremost, as you said, investing in inventory, investing in capital expenses that we think, whether those are technology as we talked about advanced analytics or the innovation engine. The other thing that we've talked about is we would look at strategic M&A as an innovation accelerant and things that we think, whether it's technologies, materials, processes, things that we think help continue to drive what we believe is a very long growth story for YETI. As it relates specifically to expansion of bags and channel expansion, when we launched these products, we said one of the things we want to do is we want to make sure we ramp it the right way, we tell the right stories, we build the awareness in the channel, and that's really what we've done. And the pandemic has provided some additional challenges with ramping suppliers, in some cases, some new suppliers, from a remote perspective. And so that's what led us to the we're not betting on bags and luggage to carry the year for YETI. We're going to keep driving the productivity of our existing portfolio. We're going to launch it through our dot-com only. We're going to learn. We've had great consumer feedback on it. The receptivity has been strong, and we continue to learn. And I think as that portfolio expands, we believe that is a significant category opportunity for YETI. And then we'll look at channels as they present themselves and as they make sense for the product portfolio and then makes sense for the brand.

Fair enough. Okay. And obviously, one area where you could spend more capital is in company-owned retail doors. Can you just update us maybe for the next year or 2 with your thoughts in terms of how many new stores you want to open?

Yes, I'll take that one. We -- what we've said in the past is, coming out of or as we move through COVID, we're going to continue to take an approach of seeing what happens in physical retail. I will say this year, as we think about retail, we have a couple of our temporary sites going into permanent sites. So the one here in Austin, our second location here in Austin, and then also the one in Dallas and then our Fort Lauderdale next year will go into a permanent site. So start with this strategy of doing temp locations to test out the air and then go into permanent locations has worked well for us. We have a couple of additional stores that we're looking at, that may come online this year. But we're taking it slowly and really see what traffic returns. And I will say we are delighted with the performance in the retail stores, the 7 stores we have. They had a great quarter, really focusing on the operations, focusing on when a customer comes in, servicing that customer. So we're really happy with the stores and the way they're performing.

We have time for one final question from Peter Grom of UBS.

This is just a quick housekeeping one. But was there any impact from Prime Day in the quarter as we think about the better-than-expected growth versus your expectations? And then I -- maybe my broader question is, so we've heard from some of your Drinkware competitors that the initial read on back-to-school is very strong. And I know this is a bit of an accrued situation, and things can change rapidly. But I would love to understand what you're hearing from your customers around back-to-school and kind of how that informs your outlook for Q3 in the back of the year.

Thanks, Peter. The -- what I would say on Prime Day, the short answer is no. We wouldn't attribute a whole lot to the Prime Day. We didn't run a prime deal. We just kept running the business at full price. As we said in the past, our Amazon Marketplace presence is and always on full price channel. It's safe for those moments when we're transitioning products like we talked about with the Camino. But it's a full-price channel for us and is a key part of our DTC approach and continues to perform but nothing we would attribute to Prime Day. And then as it relates to back school, while we don't comment on intra-quarter things, when we look back at Q2, obviously, with the growth we had in our Drinkware business, our Drinkware business continues to be very relevant and vibrant. And we talked about that our bottles business had a really strong performance within that overall Drinkware portfolio.

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

Thank you, and thank you all for joining us today. We look forward to speaking on our third quarter call and wish everyone a wonderful week.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.