We’re adding YETI Short Side – initially to our Short Bias list, but definitely a solid Best Idea candidate given the violent re-rating we expect to see on a moderating growth and return profile. We think YETI just completed its peak sales growth and margin year, and beginning in 2021 will begin a sharp decline lower as it relates to growth and profitability characteristics. We’re likely to see 2020 EPS come in at about $1.75, on pandemic fueled 20% top line growth (despite a -2% 2Q) and a nearly 1,000bp improvement in EBIT margins to about 19%. That’s the good news. It’s drinkware business went from nearly zero five years ago to about $630mm today – or about 58% of the company. Hats off to the company on innovating in this context. It definitely makes a quality product, and did so at the precise time there was a dramatic shift towards drinking at home, which turbo charged growth in this high-margin segment.
The bad news is that aside from the company’s success drawing similar product from competitors like Hydroflask, and even private branded product on Amazon (which after Dick’s at 15% of sales, is the second largest customer at 13%) we’re got earnings clocking in below $2.00 per share for each of the next five years. That happens as the company sees a top line slowdown, and we see competitive pricing pressure compress EBIT margin closer to a low-teens rate, which is something we’d expect from a hardgoods company like YETI over the long term – especially one that is building an expensive DTC business including retail stores around what should be a predominantly wholesale model.
Let’s acknowledge the elephant in the room…this is a cooler company that has a $6.5bn EV and trades at a ~7x sales. It trades at a superior multiple to Amazon. Can someone explain that to me? Why is this worth a Nike-esque 25x cash flow multiple? Looking at a TAIL duration, given slower growth, eroding margins, and annuitized EPS sub $2.00, this name is likely to trade at a low-mid teens p/e multiple – which equates to a violent re-rating. That’s a $20-$30 stock vs its current price of ~$70 – or 60-70% downside.
The timing might not be ideal to short this name, as the fourth quarter is tracking well, and it likely has another positive report ahead of it. But the stock is hardly hated, nor is it overly shorted with only 8% of the float held short. We like the idea of building a position now and adding on strength around the current quarter. This is likely a big alpha generator short side over a TAIL duration.
-- McGough
