Yeti Holdings Inc

NYSE:YETI

Earnings Call Transcript 2020-Q1

[Operator]

Greetings. Welcome to YETI First Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded.

I will now turn the conference over to Tom Shaw, Vice President of Investor Relations. Thank you. You may begin.

[Thomas Shaw, executive]

Good morning, and thanks for joining us to discuss YETI Holdings first quarter 2020 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 related to the impact of the COVID-19 outbreak 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 regarding these forward-looking statements, please refer to the risks and uncertainties detailed in this morning's press release as well as the risk factors discussed in our Form 10-Q for the quarter ended March 28, 2020, filed with the SEC earlier this morning.

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 YETI's adjusted EBITDA and certain other 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 as well as in the supplemental reconciliation, both of which are available in the Investor Relations section of the YETI website.

We use non-GAAP measures as a lead in some of our financial discussions as we believe they are -- 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 up for your questions.

With that, I'll turn the call over to Matt.

[Matthew Reintjes, executive]

Thanks, Tom. Good morning, everyone. We appreciate you joining us. I'd like to start by speaking directly to our employees, their families, our customers, partners and vendors to say thank you for all you have and continue to do for YETI. We will be here for you as the world gets back outside and back to chasing new adventures.

In this time of incredible uncertainty, our full focus remains steadfast on addressing the things we can control, acting with the same tenacity, adaptability and resilience that has been the hallmark of YETI since our inception. Regardless of the external threats, we believe what matters most are a powerful, innovative and lasting brand, financial strength and flexibility and making a positive impact on our customers in the YETI community. That's our focus.

But let me first step back and give you a little perspective on the first quarter. We entered 2020 with incredible momentum and a clear operating plan. Through mid-March, quarter-to-date sales were up 21% year-over-year with low double-digit gains in wholesale and 31% growth in direct-to-consumer.

Even with the disruption that began in March, YETI ended Q1 with 12% top line growth and D2C at plus 29%. In mid-March, as the COVID-19 pandemic began to significantly and directly impact consumer behavior and business operations, we quickly turned to executing a number of discrete and impactful decisions to position YETI for this new and uncertain environment and ensure we are playing for the long run.

To actively address unknowns in demand, we started tightening our cost structure. After we closed our retail locations on March 16 and saw the potential extent of the closures, we furloughed a portion of retail staff and reallocated the balance of our retail to support customers in our growing e-commerce business.

We aggressively tightened operating costs and CapEx, reducing noncritical spend but also continued investment in demand creation, product innovation in our e-commerce and digital technology. In a moment, Paul will discuss our cost efforts in more detail, including the withdrawal of our 2020 outlook and additional proactive moves we have taken to support our liquidity position through this period.

Today, we also announced that YETI's senior leadership team and its Board of Directors have agreed to voluntary compensation reductions to support the company's plans through this period of disruption. In addition, following a thorough review of our organizational structure, we've also made several moves to adapt to the near-term realities and to build the structure to position YETI for the future. We have stopped all noncritical hiring, and as part of this transformation, taken the difficult decision to eliminate certain positions through all levels in the company. These are very tough calls to make, and I cannot thank those YETI employees impacted by these changes enough for all their contributions.

Through these changes, we are transforming many parts of YETI's organization allowing us to put heavy focus on our continued digital transition, expanding our innovation pipeline and driving thoughtful global expansion. We unequivocally believe this mindset and focus on the future will allow us to emerge strong from the current global crisis with full alignment behind our growth trajectory as we move into 2021.

As part of this hyper-focus on executing against what we can control, starting in March, we pivoted our brand, marketing and product launches to fully digital in a work-from-home world. We believe the investment we are making in talent and capabilities, resulting in powerful digital engagement and meaningful connections with our customers, will continue the acceleration of our digital transformation.

When the pandemic hit, for the first time, we knew exactly where our entire audience was, home. And we knew they were looking for a positive distraction. Online content has become more important and relevant than ever. So we went to work with our internal digital and creative teams and key partners to win digitally. What was a well-curated social channel rapidly shifted into a media house almost overnight.

We began releasing multiple unique pieces of content through our digital channels and have continued to do so over the past 10 weeks. First, we released 15 classic YETI presents films over 15 days. We translated our former in-person events into unique digital experiences for our fans and followers. Included was a series of lunch and learns and how-tos with our ambassadors, allowing them to share their passions and pursuits virtually.

On social and yeti.com, we introduced a free YETI streaming service of actual streams to offer serenity and levity during a chaotic time, plus to provide a small taste of the outdoors to our fans, while we're all stuck inside. We continued highlighting product stories and gave our YETI community a voice and a way to express through user-generated content, launching #yetiwfh. We house all this new content within our social channel and in the process have seen a roughly eightfold increase in video views when comparing the 6 weeks prior to mid-March and the 6 weeks post as well as an approximately 50% increase in impressions.

Our blend of depth within our communities and breadth with our storytelling is a unique and powerful combination that has allowed us to engage and entertain our fans, impact the communities who have given so much to us and allowed us to successfully introduce new products throughout the COVID-19 crisis.

Outside of providing a welcome distraction during these very uncertain times, we also asked ourselves, how do we help? YETI has always provided product as relief during natural disasters. From hurricanes to fires, we've donated thousands of coolers to support communities when basic needs were unmet.

Our breakthrough point for this pandemic was when we received a heartfelt direct message from an exhausted nurse in Boston who wanted to simply thank us for making a product that kept her coffee warm. We saw this as our inspiration to support those on the front lines. So we began asking the heroes who sent us messages to tell us who else needed a pick-me-up. To date, we have donated roughly 25,000 bottles and tumblers directly to health care workers, first responders and others impacted directly by this pandemic.

We also know there are a lot of food and beverage workers who are in need of direct support. Our food, beverage, barbecue and beer partners at a time when they themselves are under duress, have made the effort to do what they do best, provide a free hot meal and a little reprieve. We have stood with a number of these incredibly talented people by helping support meal outreach efforts in their communities in the U.S. and in Canada. Today and into the future, we will continue to find ways to make a meaningful and broad contribution to the people that are central to who we are as a brand.

Before providing additional detail on our 4 strategic drivers, I wanted to provide a few thoughts on the current quarter. While we expect overall results in the second quarter to be significantly below the prior year due to wholesale and corporate sales disruption, we are seeing very strong quarter-to-date traction with our online businesses. This includes extraordinary year-over-year growth on yeti.com in Coolers & Equipment and Drinkware so far in the quarter as well as positive year-on-year trends on our Amazon Marketplace and sell-through via our wholesale partner's e-commerce.

The momentum we are seeing from our brand efforts, excellent new product receptivity and this outstanding e-commerce performance gives us confidence about the opportunity that will be there as the wholesale and corporate market dislocation corrects. Paul will discuss in more detail the trend we saw through the end of March and the extension into April.

Now turning to our strategic drivers. Keeping hyper-focused on our customers has never been more important. As I alluded to earlier, we began to shift more of our resources and focus to digital in March, as we positioned our social platform to be a positive distraction for consumers. Of note, we launched VELA, a 4-part series highlighting surfer and sailor John John Florence in his transpacific voyage, and short films such as Canary of the Prairie, showcasing Dale Robbins' mission to protect the future of bobwhite quail in West Texas. I would be remiss not to mention one of our films, Navajo Son, featuring ambassador Derrick Begay, is up for 2 brand film awards at tonight's virtual event in New York City.

We also developed a series of showcases of our ambassadors on topics from fly fishing setups to life at home to sustainability practices at Carter Country Meats. Driving this connectivity within our community has never been more relevant as we highlighted how these pros, pros were adjusting to quarantine life.

Enhancing our breadth and depth strategy, we remain proud of our diverse portfolio of ambassadors and partnerships. As highlighted in our most recent YETI Dispatch magalog, we partnered with Keith Rose-Innes, one of the world's most respected and high-profile fisherman and his Alphonse Fishing Company out of the Seychelles islands. We also added to our ambassador roster with Jose Vitor Leme, a PBR rider currently ranked #1 in the world. We added 2 fantastic female ambassadors to our team with Alex Brittingham, a Texas-based professional dog trainer; and Jessie Young, a hunting guide in the Yukon.

On the product side, let me first recap how early 2020 introductions are resonating before providing a framework of how we are adapting our rollout cadence to help maximize the success of our category expansions. In Q1, we successfully executed 2 key product evolutions with our Rambler bottles and Colster can cooler, both performing very well. We introduced 3 new colors with Coral, Chartreuse and Pacific Blue, and we also debuted a great new portable chair with our Trailhead Camp Chair.

Our second quarter product plans are largely unchanged, highlighted by the end-of-life of our Roadie 20 Hard Cooler and the introduction of the Roadie 24 Cooler. We took our best-in-class, best-selling Roadie 20 and made it even better. The 24 is 10% lighter, 20% more capacity and 30% better thermal performance.

In late April, we also introduced our Rambler Elements collection, which adds a new coating process to create a premium brush metal finish to our Drinkware portfolio. As we look at the demand unknowns for the balance of the year, we are laser-focused on building the brand and driving the success of key products. This includes a strong product and color assortment in the second half as well as shifting certain product expansions into 2021. We do believe the alignment of new category expansion opportunities and optimal customer receptivity will be stronger as we move further from the current environment.

From an investment and innovation standpoint, we are not slowing down. Nurturing the power of the YETI brand and the connection with customers holds firm. A great example of this came last month when YETI was named the 2020 Harris Poll EquiTrend Cooler Brand of the Year and Insulated Drinkware Brand of the Year. For the past 32 years, this poll measures and compares brand equity, consumer connection, brand momentum and other indicators across a multitude of brands and categories. We're proud our customers provide us with such trust and confidence.

As we think about distribution, some of our near-term focus will naturally shift to winning where consumers can access the brand. With direct-to-consumer becoming more important than ever, we've seen incredible work behind our social, digital and e-commerce teams around brand, product and the customer. This will serve us well as we emerge from this time.

As part of our changes, we have increased the frequency of our customer communications, balancing storytelling and product. With the importance around moms, grads and dads time frame, we've introduced focus, creative and product stories for each. At Wholesale, the disruptions in business have created unprecedented challenges. Many have endured reduced operations, low-foot traffic and extended store closures. Our focus will remain on supporting these retailers with the right product for both their online and brick-and-mortar strategies today and as the business begins to return.

Clearly, our YETI retail efforts have been stalled with store closures commencing on March 16. We were able to hold a soft opening of our new Fort Lauderdale location, though our decision to close all of our store's limited operations there to just 2 days. Construction of our Denver location is complete, awaiting final permitting and when we deem ready to open. Given current conditions, we have paused further retail expansion in 2020, and we'll focus on optimizing our existing stores as each reopens.

For the first quarter, international sales increased just over 40%. But like the U.S., the business was not immune to the pandemic. While the crisis is having varying degrees of impact to our existing international markets, we continue to make meaningful progress, particularly in e-commerce in Canada, Australia and the U.K. Looking ahead, we will be thoughtful and disciplined in how we approach future international opportunities and pacing. We believe this approach allows for optimal brand control, relevant distribution choices and localized customer engagement, which is more important than ever right now as the world adjusts and recovers from this pandemic.

YETI has always been a brand that focuses on people and pursuits. While we're faced with the near-term uncertainty, we are certain that the innate desire to come together, whether in the backyard or the back country, will return as important and cherished as ever as we emerge from this moment. By making decisions now with a focus on our customers and on the future of our brand and innovation, we are positioning YETI to be there as strong as ever.

I would now like to turn the call over to Paul.

[Paul Carbone, executive]

Thanks, Matt, and good morning, everyone. To start, I would like to add my sincere thanks to the entire YETI team. As we have learned to adapt in these unprecedented times, I'm incredibly proud of the resiliency, energy and dedication that I've seen across the organization over the past 2 months.

Given the importance of our action plan in response to the COVID-19 pandemic, I'd like to prioritize the time this morning by first covering how we are planning our business in this constantly evolving environment and then review the details of our first quarter results. We'll then open the call up for your questions.

Coming off a strong 2019 and ongoing momentum into early 2020, the challenge we now face is the unpredictability of the shape and speed of the reopening of physical retail across our wholesale channel. Utilizing a range of scenarios, we have had to ascertain, challenge and implement a level of expense discipline that gives us the financial flexibility and liquidity to not only support the near-term reality, but also allows us to continue to invest in our brand. To accomplish these financial objectives, we announced several expense initiatives today across executive compensation, other compensation areas and cost-management initiatives. In addition, we provided an update on our liquidity position.

Starting with executive compensation. Matt has agreed to reduce his base salary by 50%, while each of the Senior Vice Presidents have agreed to reduce his or her base salary by up to 25%. In addition, our Board of Directors have agreed to waive any cash compensation beginning at this month's Annual Meeting of Shareholders. Our other compensation actions come following a thorough review of our employee base. This includes furloughing certain employees beginning on April 4, primarily from our retail and customization operations. We have also suspended all noncritical hiring and eliminated select roles across all levels in the organization.

Other cost initiatives include the aggressive management of discretionary operating cost, capital expenditures and working capital. This includes having ongoing dialogue with our manufacturing partners to calibrate supply with anticipated demand. Our working capital efforts will also focus on balancing the extension of terms anticipated across both payables and receivables.

With our liquidity measures, we have substantially improved our overall position over the past 2 years as measured by our leverage ratio improving from 4x in the first quarter of 2018 to just 1.3x in the first quarter of 2020.

Inclusive of our precautionary decision to draw down $50 million of our $150 million revolving line of credit in March, we ended the quarter with a strong cash position of $118 million. As a reminder, we expanded our line of credit last December, while also extending the maturity to December 2024. With the flexibility of having $100 million undrawn on our revolver and factoring in our combined expense and working capital initiatives, we expect to be well positioned to remain in compliance with our debt covenants for the remainder of the year. Additionally, we have no near-term debt maturities.

These difficult but prudent actions have been thoughtfully developed by our leadership team with Board counsel. We'll continue to diligently monitor changes in the environment that will continue to inform how we evolve our thinking in both near and long term. However, the high degree of uncertainty remaining in the months and quarters ahead have informed our decision to withdraw our previous full year fiscal 2020 outlook provided in our last earnings call.

Now shifting over to our first quarter results. Let me first remind you that we have updated our definition of certain non-GAAP financial measures starting this quarter. This includes the elimination of the following add backs that are now included in our consolidated non-GAAP results; investments in new retail locations in international market expansion, expenses related to the transition to the ongoing senior management team and expenses related to transitioning to a public company. Historical information from 2019 has been updated to provide directly comparable results.

First quarter net sales increased 12% to $174.4 million compared to $155.4 million in the year ago period. Performance was highly bifurcated with quarter-to-date trends through March 15, up a strong 21%, with the remainder of the quarter through March 28 down 25%.

By channel, Wholesale net sales for the quarter increased 1% to $94.8 million compared to $93.6 million last year. Results were up 13% through mid-March, then down 43% thereafter as wholesale partners closed retail locations and order flow was interrupted.

Direct-to-consumer net sales for the first quarter increased 29% to $79.6 million compared to $61.7 million in the same period last year. Results were up 31% through mid-March and then up 15% thereafter.

Channel performance for the quarter was led by our Drinkware category, and we continue to like the balanced growth we are seeing across our DTC businesses. Overall, DTC reached 46% of net sales for the period.

By category, first quarter Drinkware net sales increased 24% to $112.6 million compared to $91 million in the prior year quarter. Strength was broad-based with subcategory growth across bottles, tumblers and mugs.

Coolers & Equipment net sales were relatively flat at $59.5 million compared to $59.7 million during the same period last year. We had another strong quarter in soft coolers, led by our lineup of Hopper Flips as well as an outdoor living supported by the launch of our new Trailhead chair. Offsetting these gains, we saw lower hard cooler sales and lower bag sales, primarily given the introduction of the Camino Carryall into the Wholesale channel last year.

Gross profit increased 21% to $92.5 million, or 53% of net sales, compared to $76.6 million, or 49.3% of net sales, during the same period last year. The 370 basis point year-over-year gross margin expansion was primarily driven by the following favorable impacts: 170 basis points from cost improvements, 80 basis points from channel mix, 70 basis points from lower inbound freight and other impacts and 50 basis points from lower inventory reserves.

Adjusted SG&A expenses for the first quarter were $74.4 million, or 42.7% of net sales, as compared to $63.7 million, or 41% of net sales, in the same period last year. Variable SG&A expenses deleveraged 180 basis points, primarily driven by higher sales-related expenses tied to our faster growing direct-to-consumer business, including online marketplace fees and outbound freight. Nonvariable SG&A expenses leveraged 10 basis points with lower marketing expenses, offsetting increases in nonvariable third-party logistic fees, wages and benefits, and depreciation and amortization.

Adjusted operating income increased 40% to $18 million, or 10.3% of net sales, compared to $12.9 million or 8.3% of net sales, during the same period last year. Our effective tax rate was 24.4% during the quarter compared to 22.1% in last year's first quarter.

Adjusted net income grew to $9.9 million or $0.11 per diluted share compared to $5.3 million last year or $0.06 per diluted share.

Adjusted EBITDA increased 22% to $23.8 million, or 13.7% of net sales, compared to $19.5 million, or 12.5% of net sales, in the same quarter last year.

Now turning to our balance sheet. As of March 28, 2020, we had cash and cash equivalents of $118 million compared to $19 million in the year ago period. As mentioned, this includes a $50 million drawdown on our revolver. We ended the quarter with $202 million in inventory compared to $164.3 million last year. Inventory growth of 23% was in line with our expectations and down from 28% growth in the prior year quarter.

While sales characteristics are significantly different than originally planned, the composition of this inventory remains strong with products that are nonseasonal in nature as well as the buildup to support new product introductions. With the extended life of our product styles, we are now focusing on managing the flow of forward inventory.

We ended the quarter with total debt, excluding unamortized deferred financing fees and finance leases, of $346.3 million compared to $321.8 million in last year's first quarter. The year-over-year increase was driven by the $50 million revolver drawdown during the quarter. Including our cash balance, the ratio of total net debt-to-adjusted EBITDA for the trailing 12 months improved to 1.3x compared to 2x in the prior year quarter.

While we are not providing a full year outlook, we believe it is important to provide some visibility into our top line performance registered for April as well as where we stand from an operational standpoint. For the 5-week period ending May 2, sales decreased further relative to the 25% year-over-year decline experienced during the last 2 weeks of the first quarter, driven by continued store closures and limited operations in the Wholesale channel. While historically, a relatively small part of the Wholesale business, it was a sharp increase in our retail partners' e-commerce sales in the month of April which we believe is continued validation of the demand for the brand.

Within our direct-to-consumer channel, our online businesses have contributed strong, positive year-over-year growth due to product innovation and digital performance led by yeti.com and the Amazon Marketplace with particular strength in the Coolers & Equipment category. However, these gains have been somewhat tempered by the year-over-year declines in our corporate sales business.

As for where we stand with our current operations today, our corporate employees continue to work from home, all necessary supply chain and logistic partners are open and functioning and a significant portion of our customization capacity continues to operate with the remaining local capacity expected to reopen later this month. Our retail stores currently remain closed and we will continue to monitor each individual location in conjunction with local opening mandates.

In summary, our focus has evolved and sharpened as we navigate through these uncharted waters. As we always strive to do, we are making decisions that we believe are in the best interest of the long-term health of our brand. In the near term, this means looking at the YETI opportunity through a different lens than we envisioned at the beginning of the year. But we firmly believe in the power of the brand and our ability to manage the business during this time will allow us to reemerge stronger than ever.

And with that, we will now open the call for questions.

[Operator]

[Operator Instructions] Our first question is from Robby Ohmes with Bank of America Merrill Lynch.

[Robert Ohmes, analyst]

A couple of questions, maybe Matt. I don't know if there's a whole lot of recession history for YETI, but I would love to hear your thoughts on how you think the brand can perform in a kind of recessionary environment? And also, if you could give us some color, Lowe's, obviously, has remained open. Any kind of color on how YETI has been performing in that channel relative to your expectations? Any signs you're seeing in terms of acquiring new customers online, maybe just some thoughts on what you're seeing right now that might give us some help on how to think about how you could perform if things stay challenging?

[Matthew Reintjes, executive]

Thanks, Robby. Let me hit those in the order you gave. As far as recession history, as we've talked about in the past, YETI, during the last recession was in -- continued through a growth mode, is a much smaller business than it is today. But as we think about disruptions we've seen and we think about the last 8 to 10 weeks and how the business has performed, what we have really liked about what we've seen is that our products and our brand remains in demand. We believe our price points, albeit we are premium in categories, are very accessible. When you think about our average Drinkware product is between $25 and $30, our average consumer coolers, $200 to $250, we think even in tougher environments, those are really accessible price points. And they set us up between a combination of brand, premium and also the gifting nature of the product. And what we've seen through April, as we've led into the front end of what we call moms, grads and dads, we really like what we're seeing from the business so far.

On Lowe's, we've been very encouraged with the Lowe's relationship, continue to enjoy the strength of that partnership. We're about 500 doors rolled out in Lowe's. And as you said, many of those doors were deemed essential. What we have continued to see is building week-over-week strength in Lowe's. And the other piece I would add is, as we've gone back and studied across the market, we believe that the Lowe's business is largely incremental to the rest of the business. So feel good about where Lowe's is positioned and how it fits into our omnichannel strategy, which leads into the third point around direct-to-consumer and e-commerce.

Our e-commerce business has been -- as we started in 2016, really focusing on it, has been a really bright spot in the business and something we focused heavily on people and technology and capabilities, and that's really shown through during this time. We've had a really fantastic April in our e-commerce business as people are at home, and we're seeing strong new customer acquisition. We're seeing really strong engagement through some of the changes we've done in our brand and marketing. So we're really encouraged. And as we said in our remarks, it's an area we're going to continue to focus heavily on, while also balancing this omnichannel strategy that we've laid out.

[Robert Ohmes, analyst]

That's really helpful. And just a quick follow-up and maybe, Paul, you may jump in here as well. On -- you mentioned managing the flow of forward inventory. I mean just some thoughts on inventory. First of all, how do you -- what does that mean managing the flow? How are you doing that? How easy is it for you to do that? And how should we think about potential inventory clearance in this environment? Would you open up new distribution channels for that? Or what should we expect to see there?

[Paul Carbone, executive]

Yes. Thanks, Robby. So I'd start by saying the overall inventory growth at plus 23% during Q1 has continued to moderate after we built up Drinkware and in line with what we were expecting. Really, as we look at the inventory position today and our ability to manage that, the great thing about inventory is the longer shelf life of the assortment. And we just don't have the obsolescence risk of missing a month or a quarter of a season, so -- particularly when many of our SKUs go longer than a year. So really, what we look at is, as we're working with our supply partners of how do we modify POs or future deliveries, and that's really what we're working on. So as we continue to drive sales scenarios here internally, and we know what we want on the balance sheet, how do we use that lever of purchases. And it's everything from them building for Drinkware stainless and then coloring at the last moment before it's shipped. So I can make that last minute call. So we have a few levers and really feel good about our operations team, our supply chain team and how we can react to different levels of business.

[Operator]

[Operator Instructions] Our next question is from Peter Benedict with Baird.

[Peter Benedict, analyst]

I guess my first question, just looking at the Wholesale channel, trying to understand the health of those partners outside some of the major ones. I mean it looks like in the first quarter, it was probably one of your main partners was the reason for the declines there at the end of the quarter. How are the -- what percentage, I guess, of your Wholesale business are the doors still open? Is there a way you can kind of frame that? And maybe how the sell-through is in those stores? That's my first question.

[Matthew Reintjes, executive]

Yes, Peter, Matt, thanks. The -- obviously, it's a moving thing as far as who's open and frankly, the definition of what open really means, open curbside allowing people into stores or consumers coming into it. But at the height of the last 8 weeks, we think -- we believe that the majority of our Wholesale was significantly disrupted. And even if they were open, the foot traffic was, as you've seen in other places, materially impacted. What I would say is we're seeing, as you're hearing in the news, more and more stores open up. We're seeing more and more states open up. And as local governments open up, we're seeing some foot traffic return.

What I would say from a sell-through perspective that we've seen -- that's been very positive is those who have e-commerce businesses seem to have performed very well and even those who are building their e-commerce businesses. And we like the way our brand is performing in relation to the rest of their fleet of their e-commerce business. And at the stores that remained open and essential, a number of our hardware stores from independents all the way up to the national accounts have remained open. And we've seen good sell-through there. And it's evolved a bit in what that mix is early in the March and early April period. We saw a lot of large coolers going out. As you can imagine, people were preparing for what may come. And we've seen what were the builds week-over-week since then. We really like it and give us a lot of positive confidence in how the new products are resonating, how the existing portfolio is resonating and how the brand is doing.

[Peter Benedict, analyst]

That's helpful. And then just can you clarify the product introduction plans you have for the year? You kind of mentioned that some things -- some were being slid to next year. I mean are you planning to the extensions of existing lines or the build-outs of existing lines that's still going to happen, but I guess, when we think about maybe a new product, those are going to be pushed? Just a little more color on that would be helpful.

[Matthew Reintjes, executive]

Yes, Peter, great question. And yes, that's about -- you've got it kind of nailed down. We'll continue -- from a product line extension, from a color ways, all of those plans remain largely unchanged. You've seen some of it happening in the first half and that will continue into the second half. When we think about bigger category expansions, what we did, and this started in the middle of March when there were more unknowns than maybe there are today. We started to look at strategically what do we have coming in the second half of 2020? What do we have planned for the first half and second half of 2021? And we took the opportunity to optimize, bringing some collections and some things together that we think will allow us when those product expansions come to market -- to come to market in a more fulsome -- from an assortment way, but also a chance to put the marketing support and marketing focus behind it. So we feel good about what we have coming in the second half of this year. And by definition, I think we're incredibly excited about what we have coming in the first half of 2021.

[Operator]

Our next question is from Camilo Lyon with BTIG.

[Camilo Lyon, analyst]

Nice performance in a tough environment. Paul, you mentioned and you gave some great detail on the expense reduction and mitigation efforts that you guys are undertaking. I was hoping if you could maybe provide some kind of all-in expectations on how we should think about the expense line unfolding this year, maybe from a growth perspective or even from some sort of commentary around what you might expect from a leverage perspective?

[Paul Carbone, executive]

Yes. Thanks for the question. So I'd say with the fluid nature of the business environment, we're not providing specific expense targets. It reflects -- part of this is to reflect the flexibility we'd like to preserve should we see an opportunity to go more on the offensive, I mean what the back half of the year looks like. So we're balancing prudent expense management. We're keeping an eye on the future. If I think of the lines though, COGS, as we've talked about, is primarily tied to product cost and would say that that is relatively variable, about 80% of COGS is truly variable. And on the SG&A side, we break it down into variable and nonvariable. The variable will move with business and as we've talked about in the month of April, we had a very strong -- our e-com properties were very strong and that impacts the SG&A line. On the nonvariable piece of it, some of the actions that we announced this morning through executive compensation changes, the furloughing of people here, our retail staff, and things of that nature. So while we don't have -- we are not sharing specific expense targets, we are laser-focused on managing the P&L, driving high quality -- so I'm going to start at the top, driving high quality sales down through gross margin and laser-focused on the expense piece. But also focused on driving the business and ensuring that when we get on the other side of this, we've set up the innovation, the product and things of that nature.

[Camilo Lyon, analyst]

Got it. And then Matt, you talked about, in your prepared remarks, how you've seen -- how you've diverted a lot of demand-creation dollars more towards the digital engagement and you've seen great success there. I was hoping if you could provide a little bit more color on maybe the direct linkage that you're seeing in the response to those digital campaigns and outreach programs as you would tie it to online -- your online sales as well as if you're able to determine the relative engagement of new customers versus existing customers as a result of those efforts?

[Matthew Reintjes, executive]

Yes. I'll add a little bit there. The -- one of the things that we did when we talk about shifting demand creation, shifting to digital was we basically took our online and off-line playbook and digitized the entire thing. So we took the things that we thought worked really well off-line, events, consumer activations, and we looked for ways to leverage our resources, our content, our creative and kind of replicate that in a fully digital world. What we've seen is across our medium, social, e-mail, incredibly high engagement and improving engagement of levels that we liked before this all started to play out. We've seen continued strength in our conversion rates, significant increases in traffic to our dot-com properties around the world or our e-com properties around the world, which has led to significant conversion and led to the strength that we're seeing in that e-commerce channel.

When we look at new versus existing, we've also seen an increase in new customers and first-time buyers on our dot-com properties, which is a trend we had been seeing, but has been accelerated by this. So it gives us a lot of confidence that the playbook -- the digital playbook we're running now both is brand valuable, it also -- from a content and engagement and from a product introduction is kind of firing on all those cylinders. So we feel good about what our team in a very short period of time shifted and leveraged internal resources, internal content and has put out what we think some really, really high-quality work.

[Camilo Lyon, analyst]

Does that create a sense of urgency in terms of permanently shifting some of those investment dollars to this category? And do you have the infrastructure to support accelerated growth in your digital business?

[Matthew Reintjes, executive]

Yes. I think the -- in some of the comments I made in my prepared remarks, that continued digital evolution is something we've been -- we stated as one of our strategic priorities. It's something we've been doing for the last 5 years. And we feel great about the infrastructure we have. We feel great about the technology investments that we're continuing to make, and we're not slowing down on. We're continuing to invest in capabilities and talent in these areas to take advantage of it. We've said all along, we're an omnichannel business. We want to be where the consumer wants to shop. We value our wholesale partners. We value our corporate sales partners, but we know that the direct-to-consumer business is the fastest growing and a large opportunity. So we're going to lean heavily into it.

[Operator]

[Operator Instructions] Our next question is from Randy Konik with Jefferies.

[Randal Konik, analyst]

I guess, Paul, can you just again repeat the components of gross margin change in the quarter? And then when you think about those components, maybe just high level, how we should think about those components go forward?

[Paul Carbone, executive]

Sure. So we had a great quarter in the gross margin expansion, expanding 370 basis points, really 4 drivers: Number one was cost improvements, which was 170 basis points; the channel mix to DTC was 80 basis points; inbound freight and all other impacts was 70 basis points; and then lower inventory reserves were 50 basis points. And as I think forward, Randy, and we haven't -- we've withdrawn our outlook and we haven't given a new outlook. So I won't talk to specifics on gross margin. But for -- we would continue to see and believe we will continue to see benefits from cost improvements, benefits from a channel mix, and then tariffs will continue to be, and it's really in the back 3 quarters and really the second half, tariffs continue to be expected to be a tailwind in 2020. So we feel really good about our gross margin expansion in the first quarter, and we feel very good about the overall thesis of expanding gross margins for the company.

[Randal Konik, analyst]

That was super helpful. Next question I want to -- the last question, I guess, I would say here is have you guys done any analysis around looking through the trends around DTC by either specific states or heritage versus your non-heritage markets? And anything you're seeing either that's really telling from what they're buying or the demand, i.e. are you seeing like, let's say, in, I don't know, South Dakota, not ravaged by COVID-19, that the demand profile looks kind of normalized or has not changed that much? Just any kind of flavor that you're seeing or can give us in the DTC numbers by geography and anything that tells you would be super helpful.

[Matthew Reintjes, executive]

Yes, Randy, let me -- I'll preface all this a little bit by saying highly unusual times, and we're talking about things that wouldn't normally be intra-quarter kind of updates, but we feel like it's valuable now to give a window into where the business is. And so I'll preface my remarks is saying, these are, what I would call, quarter-to-date Q2, April-type color because we think that's the relevant period for right now. Interestingly, and not surprising to us, what we're seeing is we look across our e-commerce and Amazon platform is we're seeing largely consistent growth across all regions. And so we're not seeing big variability region to region. Our -- what we used to refer to as our heritage regions are growing as well as our non-heritage regions. Our heritage regions represent significantly less than 50% and closer to 40% of our sales. And so we're seeing all the things that we've been talking about for years, which is growth in the growth of your regions, broad-based consistent growth across the market. We've -- we have an e-commerce business right now that's posting triple-digit growth. And that is, I think, a sign of the strength of the brand, a sign of the strength of the product launches and that the consumer is still out there and active. So not without the broad omnichannel disruption or not ignoring the broad omnichannel disruption, we see a lot of things that give us confidence as we continue forward.

[Operator]

Our next question is from Sharon Zackfia with William Blair.

[Sharon Zackfia, analyst]

Just 1 clarification on the corporate sales. Could you give us any kind of guidelines as to how we should think about that offsetting that triple-digit DTC growth you're seeing right now? I don't think you provided in the past kind of what percent of the mix that is?

And then secondarily, as we think about the Wholesale channel and obviously the disruption there, what is your line of sight on inventory that's currently in that channel? And I guess, trying to get out as business resumes in a more normal way in brick-and-mortar, how long of a gap do you think there is between the current environment and retailers starting to reorder product, if that makes sense?

[Matthew Reintjes, executive]

Yes, Sharon, one thing to clarify, as I said in my prepared remarks, we, on yeti.com, are seeing extraordinary growth quarter to date. And so when I said that triple digit, that's a yeti.com comment. We also are seeing, as I said in the prepared marks, very strong growth on Amazon also, but I want to make sure I was clear about that because our D2C has a number of components, one of which was related to your question in corporate sales, and I'll let Paul handle that.

[Paul Carbone, executive]

Yes, Sharon. So we haven't, to your point, other than at the IPO, talked about the percent of corporate sales that we've seen. I think at that point, it was about 20% of our total DTC business. And you can gather through the commentary, it was -- that momentum was really strong through Q1 of '20, even the last 2 weeks because those orders were in the queue. But as many businesses have shifted operations remotely and taken actions to cancel conferences, events and things of that nature, it has been impacted. We haven't dimensionalized that impact but it has been impacted in offsetting. It is negative for the month and offsetting those gains as Matt's talked about, both in yeti.com and then the overall web property. Also inside DTC, our stores remain close, a small piece of it, but our stores remain closed.

On your second question on inventory in the channel. So what I would say there is the channel inventory reflects the overall impact of closures of those stores. We feel good about their ability to work through that. And there's a couple of things that give me confidence in that. The first is the long -- the nonseasonal nature of that inventory is number one. And then the second is, if you think about when those closures occurred, and call it, mid-March, and as those stores reopen, call it, mid-May into June, we are entering our busy season. So we're coming into grads -- Mother's Day, grads and Father's Day. So we feel really confident with what's in the channel, and it's not a bubble of inventory. And again, we're entering the busy season. So we feel good about the -- as we look and we model this, the potential sell-in and then really importantly the sell-through at the wholesale to retailers level.

[Operator]

Our next question is from Peter Keith with Piper Sandler.

[Peter Keith, analyst]

Nice comments today. It seems like you're managing the environment well. Paul, just a follow-up on that -- the question about wholesale inventory. I think there's some investor concern that as stores reopen, there might be some markdowns on YETI, just with some panic selling. And I guess it would be helpful if you guys could refresh us on sort of your protocol and policies with retailer discounts and if you work with anyone to help provide some sell-through with some level of markdown support?

[Paul Carbone, executive]

So let me -- thanks, Peter. Let me start, and I'm going to start where -- on your last part of the question. What has been our practice and continues to be our practice of, we do not support markdowns at the wholesale level at their retail stores. I think as stores reopen, you'll see a few things. And the big piece is, you've seen this from us as we've introduced new products. So our best-selling Roadie 20, which now has become end of life, and we've introduced the Roadie 24. You see that in yeti.com. We have it at 20% off. And that's, again, normal cadence as items go to end of life. So you will see, and it's up to the wholesale retail partners. If they match that and if they want to reduce the price, some have, some have not. Again, it's all on their income statement.

And then as we go into Father's Day, what you've traditionally seen at the retail level, they continue to adhere to MAP. If they do a closed channel offer to like a membership, I think of REI in their anniversary sale of their membership, they can include YETI. Most of it happens in cart. So it can't be on the front of the website or something like that. It has to be in cart or closed at point of sale. So nothing has changed with our MAP policies. Nothing has changed as we think about going into the Father's Day. And nothing has changed, most importantly, I think for this conversation of us burdening or shouldering any of those discounts if they do occur.

[Peter Keith, analyst]

Okay. That's helpful. And I wanted to then ask a separate question on the margin balance between your DTC and wholesale channels today. Obviously, there's quite a massive shift occurring right now. There's probably a more permanent shift towards DTC that's going to continue. So the heart of the question is, where do we stand today from kind of an EBIT margin flow-through between those 2 channels? Is DTC higher or they're about the same? And also on a similar manner, what does it mean for operating profit dollars?

[Paul Carbone, executive]

So we do see this. We continue to see the shift in the quarter. The DTC business was 46% mix, which we're really happy with. We've talked about gross margins being about 1,000 to 1,500 basis points higher in our DTC channel versus the wholesale channel. And then that is somewhat offset by, as you look at adjusted SG&A, and we talk about this, we delevered about 180 basis points due to variables. So the faster growing DTC, and that's from online marketplace fees, outbound freight, 3PL, bank fees, things of that nature. So it comes with some SG&A. Overall, from a contribution margin, and we don't allocate corporate resources between the channels. On a contribution dollar and margin, the DTC channel continues to drop incremental dollars to the bottom line, and why we like that channel shift. So it is a profitable channel for us. And I agree with you, I do think with this, as we come out of this pandemic, I do think there is even a faster shift to our DTC properties.

[Operator]

Our next question is from Alexandra Walvis with Goldman Sachs.

[Brooke Roach, analyst]

This is Brooke Roach on for Alex. For my first question, I was wondering if we could dig into the components of the acceleration that you're observing at DTC digital and specifically the inflection that you've seen in some of the categories from 1Q trends. Can you comment on performance between new and existing products in Drinkware and Coolers & Equipment? And also, the impact of the Roadie cooler price point repositioning on your growth rate so far this quarter?

[Matthew Reintjes, executive]

Let me address broadly. We don't break it down to that level, but I can provide some color on what we're seeing, which is, as we said in our prepared remarks, broad-based growth between Coolers & Equipment and Drinkware. And really, with strength in Coolers & Equipment and what we really like and what we're seeing in Coolers & Equipment is the contribution from new products and products that are retiring. So things like the way our bags, our soft coolers, our new Roadie 24 performing in conjunction with our end-of-life Roadie 20. So I would generally say it's broad-based growth across Coolers & Equipment and Drinkware with a particular strength in Coolers & Equipment and some really positive receptivity to our new innovation and some of the oldies but goodies continuing to deliver growth for us. So across the board, we feel good.

[Operator]

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Matt for closing remarks.

[Matthew Reintjes, executive]

Thank you all for joining us today. I guess, the last thing we would say from YETI is that we hope everyone stays safe and healthy as we all continue to work through this unprecedented time. So thanks for your time this morning, and best of luck.

[Operator]

This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.