Yeti Holdings Inc

NYSE:YETI

Earnings Call Transcript 2022-Q1

[Operator]

Greetings and welcome to YETI Holdings 1Q 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn this conference over to your host, Mr. Tom Shaw, Vice President of Investor Relations. Thank you sir, you may begin your presentation.

[Thomas Shaw, Vice President, Investor Relations]

Good morning, and thanks for joining us to discuss YETI Holdings first quarter 2022 results. Before we begin, we'd 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 Form 10-Q, and the Form 8-K filed with the SEC today. 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 this morning's press release. 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, and Paul Carbone, CFO. Following our prepared remarks, we'll open the call for your questions.

And now I'd like to turn the call over to Matt.

[Matthew Reintjes, President and Chief Executive Officer]

Thanks, Tom, and good morning. YETI's first quarter results highlight the strong, resilient consumer demand that has been an consistent hallmark of our brand, as well as showing you outstanding execution by our team. We are particularly encouraged with the all around performance of the business amidst the ongoing challenges and unpredictability of the current environment.

This success continues to display our ability to quickly adapt and remain nimble without losing sight of our near-term execution and long-term growth. This balance of execution and action is why we are on track to deliver another strong year of growth and profitability. As we navigate both the opportunities and challenges in 2022, the core of our diverse growth strategy remains strong.

The combination of our direct, wholesale, corporate and global channels to market gives us unique and varied ways to stoke consumer demand. As we look towards the second quarter and back half of 2022, we are focused on delivering brand and product innovation to our customers, building deep brand engagement with new and existing customers as we expand our powerful depth and breadth marketing efforts, accelerating our unique omni channel strategy including a comprehensive data-driven approach to build strong engagement from acquisition through retention, and finally exploiting untapped international growth by capitalizing on the momentum we have created outside the United States.

Looking at our first quarter financial highlights, our net revenues increased 19% continuing a consistent trend of strong top line growth since 2019, delivering a three-year compounded annual growth rate of 24%. Included in this quarter's performance, we drove double-digit growth in both our product categories and across both our channels, while our international business reached a record high of nearly 13% of overall sales.

As anticipated, adjusted operating margin was in line with expectations even against higher gross margin headwinds due to persistent and elevated supply chain costs. Paul will cover this in more detail shortly. Even with this headwind, we continued to expect improving margins and profitability as we progressed through fiscal 2022.

Before sharing the progress against our strategic growth priorities, I wanted to cover three additional areas that pertain to our business in the first quarter and for the full year. First, even as we rolled over strong demand last year that benefited from both a product transition and a timing of new product introductions, we outperformed our expectations for the first quarter. We expect similar growth in the current quarter to be supported by the broader release of our first half product launches, combined with the higher demand periods associated with the approach of active outdoor summer activities and the moms, dads, and grads gift giving occasions.

Second, Paul will outline a nonrecurring inbound freight costs that materialized during the period. While in isolation this is an incremental headwind for the year, we are seeing some offsets including early signs of improving freight rates and stronger pricing contribution. As we look forward, we have reiterated both our full year gross margin target of approximately 55% and our full year adjusted operating margin target of approximately 20%.

Finally, we have completed the $100 million share buyback that we announced shortly after our fourth quarter earnings call in February. Adjusting for lower share count, we have raised our full year adjusted EPS outlook.

Now shifting to update across our strategic priorities. As we look at the incredibly strong execution driven by the YETI brand, we are focused on our diverse network of ambassadors in a range of passion-driven activities, pursuits and organizations with growing international appeal. A great example of this strategy continues to play out in our ski and snowboarding communities. Our partnership with the Natural Selection Snowboarding series, which began during its inaugural year in 2021, has since expanded this year to include serving as the title sponsor for both the Jackson Hole and Alaska Wilderness stops. Both events got global exposure with linear and connected TV coverage, in addition to an active digital footprint.

In March, we officially partnered with the Freeride World Tour, a pinnacle worldwide snowboarding circuit that hosted five international competitions earlier this year. During our recent brand activation in Verbier, Switzerland, we were able to celebrate our new French Ambassador, Victor De Le Rue, who took home the grand finale win in men's snowboarding. As in-person activation reopens around the globe, we are making sure YETI is front and center in a real way in the communities that are core to our brand.

We continue to do great things in the world of surfing, where we've added to our roster of ambassadors while simultaneously supporting the resurgence of big event competitions. Our latest ambassador in this community, Australian seven time world champion pro surfer, Stephanie Gilmore, recently partnered with John John Florence and our YETI Australia team to host the first stop on the resurgent YETI Film Tour held at Bells Beach during the Rip Curl Pro competition.

Turning our attention to the U.S., we celebrated the return of two YETI brand activations that have been disrupted during the pandemic. As a part of South by Southwest, we hosted a YETI Music Showcase featuring 12 live acts at our flagship store in Downtown Austin, a great reminder of how we engage the communities where our stores are located, and use these as both places of commerce and brand platforms. We also announced the return of the U.S. leg of the YETI Film Tour, which commenced last week in California as part of a 12-stop run. Highlighted by Ambassador appearances and epic storytelling, we're excited to share seven new films focused on the incredible stories about people and places.

Our expansive brand building works in direct conjunction with our rhythm of new products introductions. For the first quarter, this included our seasonal color launches, the extension of our bags with the Camino tote family expansion, and fantastic innovation in our soft cooler family. Our color strategy remains rooted in real life inspiration, giving our colors meaning and purpose which allows for robust product marketing, both Offshore Blue and Bimini Pink performed well and showcased our unique ability to drive customer excitement through authentic storytelling.

Our third color this spring was Alpine Yellow, which was accompanied by stories from Chamonix in the French Alps. We partnered with our Ambassador Conrad Anker to bring the story to life, celebrating the birthplace of modern Alpinism. As we thoughtfully pace and execute the build out of our bags business, we recently expanded our original Camino tote with two new sizes, a more compact Camino 20 and the enlarged Camino 50. This products family is driving substantial year-over-year gains and remains a fantastic multi use bag for adventure and every day.

As we move into the months ahead, two additional developments will support our broader category efforts. We are refreshing our Panga line of waterproof duffels and backpacks for the first time since the original 2017 introduction by offering a new tan colorway. In addition, we will begin to test select wholesale distribution for our bag line later this quarter.

One consistent observation from our YETI retail stores has been the strong level of engagement and performance across our bags assortment, as these moments provide incredible opportunities of discovery about the quality of our bags. We believe a thoughtful introduction of YETI bags within select wholesale partners will help inform our future channel expansion opportunity.

We also introduced our next generation of soft coolers with the launch of the Hopper M30 and the Hopper M20 backpack. The new M30 showcases our drive for continuous improvement of products, taking a great core product and improving it. The M20 backpack leverages the same magnetic closure system to offer both easy access and a streamlined product profile while also leveraging our growing expertise in bags to offer great ergonomic fit.

Playing off of wear your cooler out tagline, we supported the product launch across a series of key televised sports events including during the NCAA March Madness. Overall, the early response to these products has been above expectations and we are excited to broaden distribution to wholesale ahead of late spring and early summer buying. We plan more cooler innovation to come as we progress through the year.

Looking at our omni-channel distribution strategy, both DTC and wholesale posted strong growth at 23% and 14% respectively. Supporting this growth, we have made ongoing progress in our efforts to drive strong customer engagement at our direct channels and deliver consistent, high quality experiences across our wholesale accounts. In our YETI e-commerce business, great growth has been supported by our strategic focus on attracting, acquiring and retaining high quality customers.

As we have aligned the work of our data, e-commerce and marketing functions, we've become more surgical in deploying our tools and tactics to drive customer connections. Examples of our progress here include improved reactivation of older customer cohorts, as well as driving both a deeper and broader purchase basket within and across product categories.

Our latest step here came in early April with the unveiling of our redesigned yeti.com platform with a mobile-first experience. Early customer responses have been positive as measured by improved conversion, but we know that bigger opportunities to drive impactful individual personalized experiences remain ahead of us.

On the corporate sales side, we continue to see success in driving this overall business, including strong repeat purchases across our business verticals. This helps create a more predictable pipeline of orders. YETI retail stores continue to perform ahead of expectations and are delivering both a great brand platform, but also strong financial results. We have converted our two remaining temporary store locations in Dallas and Fort Lauderdale to longer-term leases during the first quarter based upon the strong performance and traffic we're seeing out of the stores. In addition, we recently opened our tenth store in San Antonio, and remain on track to open at least two additional locations in 2022.

Finally, Amazon growth improved sequentially as we continued to make progress in reloading inventory into their network. We expect ongoing service improvements will better match up to customer demand as we move through the year.

On the wholesale side of the business, the execution of our focus and optimization strategy is beginning to contribute to healthier, more consistent in stocks across the channel, spanning from our national accounts to our independent partners. At the same time, we continue to look for ways to elevate our overall in-store merchandising as we drive better alignment across all points of distribution. Sell through in the channel remained positive for the quarter, and we're on track to deliver low double-digit growth for the year.

Looking at our international business, we remain incredibly bullish on the brand's ability to elicit a similar level of passion and engagement that we see with our domestic customers. As our key international markets open up and once again host events, we're able to more fully engage with customers across a range of locally relevant pursuits. This allows us to build upon the existing momentum and to expose new audiences to the brand.

In Canada the fans from our on ice partnership with the Toronto Maple Leafs to the return of 60,000 plus visitors to the Toronto Sportsmen's Show. In Australia we are activating at legendary surf competitions, as well as the country's largest barbecue festival. And in Europe, our efforts were highlighted by the previously mentioned mountain based activities at Verbier and Chamonix, as well as driving targeted PR events across the region.

We are making very strong growth progress with international revenues up 45% year-over-year and up more than 3x from the first quarter of 2020. This performance pushes our international mix to nearly 13%, a new high for YETI even as our domestic business continued to comp mid teens growth.

Looking at specific markets, our Canadian business remained strong and primed for success as we move towards summer and COVID restrictions give way to the return of live events. As we mentioned last quarter, we launched our redesigned web platform on yeti.ca. delivering a mobile first experience and early results are yielding improved conversion rates.

Performance in Australia remained outstanding with strength in both e-commerce and wholesale supported by strong brand activations at local events with our Australian ambassadors. We are making distribution inroads in urban markets as we began to expand with our first national account in Australia.

Even with a challenging and fluid backdrop in Europe our objectives this year are unchanged and reflect our conviction in utilizing our successful playbook for global market development. Specifically, we are focused on leading with e-commerce establishing localized go to market wholesale strategies and investing in heightened brand building activities in Europe as we establish the brand and product to prepare for future scale and growth.

As I hand the call over to Paul to review our financials, I want to first thank our YETI team, our partners, and all those that support our brand. You continue to deliver outstanding results amidst a multitude of pressures, disruptions and distractions. You all have kept our priorities in sight, and continue to be instrumental in driving our success. I would also like to emphasize how incredibly excited I am about the opportunities ahead for the brand. This includes the near-term where customers return to seasonal activities and YETI gifts giving accelerates for moms, dads and grads.

We have incredible product which rolls with our customer from their daily life to extreme pursuits, and importantly as a catalyst for the human to human advocation that is a hallmark of YETI. This provides a platform to foster exceptional brand experiences, utilizing incredible content about people, products and places, while leveraging a unique and differentiated network of ambassadors, direct channels and wholesale partners. This is what enables us to drive YETI's long-term consistent results.

With that, I would now like to turn the call over to Paul.

[Paul Carbone]

Thanks, Matt. YETI delivered first quarter results that were slightly above expectations as we continued to drive strong demand for the brand while managing the ongoing cost pressures in the market.

Let me start by reviewing the details from the quarter, followed by our updated outlook and then open the call for your questions. First quarter sales increased 19% to $293.6 million compared to $247.6 million in the prior year period. Growth was above plan and was particularly impressive against the 42% growth experienced in the year ago period.

Direct-to-consumer sales grew 23% to $156 million, compared to $126.8 million in the same period last year. Direct-to-consumer performance was led by our drinkware category and strength across our own YETI properties. Overall direct-to-consumer mix increased to 53% of sales for the period compared to 51% last year.

Wholesale sales increased 14% to $137.7 million compared to $120.8 million last year. Our wholesale performance was balanced across both coolers and equipment and drinkware. By category drinkware sales increased 24% to $184 million, compared to $148.9 million last year. New colors continue to generate category excitement, and we continue to see traction with our 2021 introductions, including our travel mugs and our 26 ounce straw cup. In addition, customization continues to amplify the entire category, with strong demand from both yeti.com customers and across corporate sales.

Coolers and equipment sales increased 10% to $103 million, compared to $93.5 million during the same period last year. Demand was strong for most of the broader category, including hard coolers. As Matt mentioned, early receptivity to new products, like our soft coolers and Camino totes has been strong as we have ramped up marketing support and are now moving more fully into the wholesale channel.

Internationally, sales grew 45% to 37.4 million, compared to $25.8 million in the prior year quarter, and now represents approximately 13% of total sales. Of note, international sales have been updated to now include Amazon Canada, and some international customers were YETI does not have a physical presence, which were previously recorded domestically. Full details of these changes, which can be found in the appendix of our Investor Relations deck would have resulted in an approximate $10 million increase to fiscal 2021 International revenue.

Looking at performance, once again we saw strong contributions across Canada, Australia and Europe. Gross profit increased 7% to $154.9 million or 52.7% of sales, compared to $145.2 million or 58.6% of sales in the same period last year. The 590 basis points year-over-year contraction was primarily driven by a 680 basis point impact from higher inbound freight. In addition to planned freight inflation, we also received some late trailing invoices from our main freight forwarder which resulted in a true up that should have flowed through our P&L in the fourth quarter of fiscal 2021. This contributed to an additional$6.4 million of freight expense or 220 basis points during the quarter.

In addition to inbound freight, other unfavorable factors included 60 basis points from higher duties related to the exploration of the GSP program, 50 basis points from other impacts, and 30 basis points from higher product costs. These headwinds were partially offset by 140 basis points from pricing and 90 basis points from channel and sales mix.

Adjusted SG&A expenses for the quarter increased 15% to $116.8 million or 39.8% of sales compared to $101.4 million or 41% of sales in the same period last year. The 120 basis points decrease as a percentage of sales was driven by non-variable expenses leveraging by 180 basis points and variable expenses increasing as a percentage of sales by 60 basis points, mainly driven by DTC sales mix. Adjusted operating income decreased 13% to $38 million or 13% of sales, compared to $43.8 million or 17.7% of sales during the same period last year.

Our effective tax rate was 23.2% during the quarter, compared to 21.5% in last year's first quarter, with the higher rate reflecting a discrete income tax benefit in the prior year period. Adjusted net income decreased 12% to $29.2 million or $0.33 cents per diluted share, compared to $33.3 million or $0.38 per diluted share in the prior year period.

During the quarter, we repurchased approximately 1.7 million shares of our stock for $100 million, and an average price of $59.66. The share buyback did not have a material impact in the quarter.

Now turning to our balance sheet, we ended the first quarter with $100.3 million in cash compared to $190.3 million in the year ago period. The lower cash position primarily reflects the completion of the share repurchase during the period, as well as ongoing investments in working capital.

Inventory increased 125% to $413 million, compared to $183.9 million during the same quarter last year. Similar to last quarter, nearly two thirds of the inventory growth for the period reflects the combination of higher in transit inventory, given the extended lead times and the impact of higher inbound freight costs. Looking solely at product inventory, which includes the impact of freight, roughly 40% of our product inventory was in transit at quarter end, which we believe highlights the quality of our overall inventory position. As we compare back to a more normalized level from Q1 of 2019 product inventory has grown at a 29% compounded growth rate compared to sales growth of 24%.

Total debt excluding unamortized deferred financing fees in finance leases was $106.9 million compared to $129.4 million at the end of last year's first quarter. During the quarter, we made principal payments of $5.6 million.

Now turning to our fiscal 2022 outlook, we continue to expect full year sales to increase between 18% and 20% compared to fiscal 2021. The inputs to this outlook are consistent, including coolers and equipment growing faster than drinkware, the direct-to-consumer channel growing in the mid 20% range, and ahead of wholesale channel growing low double digits and pricing actions adding approximately 200 basis points of growth. From a cadence standpoint, we expect growth in each of the next three quarters to be generally in line with the 18% to 20% full year range.

On the margin side, we continue to expect gross margins of approximately 55% for the year, down from the 57.8% last year, but still trending well above pre-COVID rate of 52% in 2019. The biggest headwind for the year remains inbound freight costs. While the first quarter adjustment was incremental to our initial full year outlook, calling for 280 basis points of inbound freight pressure, we have seen early signs of slightly improved rates in both the spot and contract market, which we believe will benefit mainly into next year if they continue. Helping offset this incremental freight, we now expect a slightly greater benefit from our pricing action, which we initially planned to drive 125 basis points of margin improvement for the year.

Outside of freight and pricing, we generally expect other margin drivers to be largely consistent with our original outlook. Looking at cadence, we continue to expect less year-over-year headwinds as we move through the balance of the year. Though from a magnitude perspective, the second quarter is still playing down slightly more than 450 basis points year-over-year.

With gross margin pressures remaining elevated, we will remain disciplined in prioritizing our SG&A expenses. We still expect to leverage adjusted SG&A by approximately 190 basis points to approximately 35% of net sales, which equates to double-digit dollar growth as we support our overall strategic initiatives. We expect year-over-year expense leverage to continue for the balance of the year.

Combined, we are maintaining our adjusted operating margin rate of approximately 20% for the year. Below the operating line, we continue to expect an effective tax rate of approximately 24% for fiscal 2022, above the prior year's 20.8% rate that benefited from discrete income tax benefits each quarter. We now expect full year diluted shares outstanding of approximately $87.4 million inclusive of the approximately $1.7 million shares repurchased during the first quarter.

Supported by this lower share count, we now expect adjusted earnings per diluted share to grow 11% to 13% to between $2.86 and $2.91 compared to $2.57 in fiscal 2021. This incorporates approximately flat second quarter earnings compared to $0.68 in the year ago period, followed by strong growth in both the third and fourth quarters primarily as gross margin comparisons, continue to ease.

For capital expenditures we continue to expect approximately $60 million of spending with roughly two thirds of these expenditures focused on investments in new innovation and expanding capacity of existing products. In summary, we are optimistic with the solid start to the year and are well positioned to take advantage of customer demand across our channels. As always we remain agile in an ever changing global environment as we continue to execute against our growth strategy.

And with that I would now like to turn the call back over to the operator to take your questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Peter Benedict with Baird. You may proceed with your question.

[Peter Benedict, Robert W. Baird]

Hi guys, good morning. Thanks for taking the question. I have two, the first just can you talk about, maybe give some color about your ability to get drinkware and other products out of China right now, obviously a lot of disruption there? And then Paul, maybe how the uptick in stainless steel prices may be impacted to your view on product margins, it doesn’t sound like this year there's any impact, but I don’t know if there's any thoughts on maybe 2023, but just curious on that?

[Matthew Reintjes, President and Chief Executive Officer]

Thanks Peter. When we think about the drinkware coming out of China as you heard in our prepared remarks and Paul's comments, we feel great about the inventory flow you have and the relationship we have with our factories and so with disruptions have been talked about recently, we haven’t seen any impact to our drinkware suppliers and continue to have a good flow of inventory both per what we've brought in, in the beginning of this year and what we continue to flow for the rest of the year.

[Paul Carbone]

And then good morning peter and following on to Matt's comments with that relationship, with our suppliers, we really and we've talked about this in the past, we leverage our volume and really help with product costs. So as we look out, we have incorporated product costs headwinds into this year and don’t see anything incremental even from when we spoke in February.

[Peter Benedict, Robert W. Baird]

Okay and that's all from that. Excuse me, Just a followup and what are you guys seeing from a demand elasticity standpoint? It doesn't sound like there's much, but as you maybe go through the portfolio or the regions and obviously there's a lot of talk about consumers starting to bulk at maybe some higher ticket stuff, so maybe talk a little bit about that, have you seen anything and is your view for this year just that you're not going to see any or do you have a little bit baked in and you just think you can offset in other areas? Thank you.

[Matthew Reintjes, President and Chief Executive Officer]

Peter, yes this is a great question. I think as we think about the business, one of the things that we've consistently talked about in the past and in Q1 would be no exception is that we're continuing to see good growth across our regions domestically. We obviously have the international growth, which continues to perform very well and in those markets, and some of those newer markets is providing some great growth and great foundation for the business.

As we think about across the channels, one of the benefits of the diversity of our channels to market between our direct-to- consumer, which is inclusive of our corporate sales, our Amazon Marketplace, our yeti.com, and then you add in the diversity of wholesale partners, incredible wholesale partners that we have, that gives us access to a lot of different purchase occasions with consumers, we feel good about the demand creation opportunity we have across that spectrum.

And in total, they're performing very well and across those individual pieces, they're performing well. And as we look through the rest of the year, like we do every year, if there's certain areas that are underperforming, we have other areas that that can outperform. And so, we look at it as a portfolio approach to our channels to market. We look across our product portfolio, and I would say, as you see in these numbers, coolers, equipment and drink will both continue to perform in the quarter, and we expect that through the rest of the year.

Okay, great. Thanks so much guys, good luck.

[Operator]

Our next question comes from the line of Brooke Roach with Goldman Sachs. You may proceed with your question.

[Brooke Roach, Goldman Sachs]

Good morning and thank you so much for taking our question. Matt, I'd love to hear a little bit about how you're thinking about the competitive backdrop for YETI and YETI products in each of your key categories. Where do you believe YETI has the most opportunity to gain market share or mindshare among your consumers this year and into 2023?

[Matthew Reintjes, President and Chief Executive Officer]

Thanks, Brooke. We think about the markets in which we operate, and this goes all the way back to 2006 when YETI started. We think more about growing markets than a game of share. And the reality is, I think over 15 plus years, we've shown that that we actually can expand consumer consideration. We can draw people in based on the premium durable nature of our products. And so when I think about the portfolio, the growth, the continued growth opportunity, we have strong Q1 in hard coolers, you know, 15 plus years into selling high end premium, durable hard coolers.

As we talked about, during our remarks it continued to drive innovation in our soft coolers, which we think is an incredible opportunity, both domestically and internationally as we expand into new markets. And then you think about the evolution of our drinkware portfolio and moving through different occasions and in different uses and penetrating deeper into consumers lives and how they use it from morning coffee to evening cocktails and hydration in between. So we like we like what's going on in our tumbler business.

We like -- we really like the opportunity within bottles and the continued kind of focus on individual personal consumption and hydration. So, I think there's things from our perspective as we think about market growth and attracting new consumers and retaining consumers that we'd like about the portfolio we have today.

[Brooke Roach, Goldman Sachs]

Great, and then maybe a followup for Paul, on the gross margin, you mentioned that pricing actions are now anticipated to be a little bit better than what we had discussed a few months ago. Can you discuss the drivers of your improved confidence on pricing contribution to margin this year?

[Paul Carbone]

Yes, good morning. So part of it is what we're seeing in the first quarter. So the impact was about 140 basis points and we had two of the three months of the price increase. And this is one of those, it's a little tricky of elasticity. So we know we had an estimate in there. It was a little bit better on the pricing. So originally we said about 125 basis points for the full year. We got 140 in the quarter after two months. So it's really, this is while we don't change prices a lot we've put, we put out an estimate and it came in a little bit better than expected.

[Brooke Roach, Goldman Sachs]

Great, thank you so much. I'll pass it on.

[Operator]

Our next question comes from the line of Randy Konik with Jefferies. You may proceed with your question.

[Randy Konik, Jefferies]

Yes, thanks a lot. I guess some questions for Paul. Can you just, Paul can you just go back over the supply chain costs and the freight rates, you talked, can you be a little more specific on what you're seeing on the spot and contract trends in the market there? Can you just give us some perspective there just curious? Thanks.

[Paul Carbone]

Yes, so Randy, I won't give you a lot of specifics, but what I will say is, coming out of last year's when, in February we said we kind of held rates and we expected them not to get any better or any worse. As we've gone through the first quarter and looked at contract rates and spot rates, we are seeing some lower rates, I was going to say softness, but lower rates, which is a good sign now to my prepared comments, that will take a while to work through the -- come through the balance sheet and into the P&L. So that's really Q4 and into next year, but we are seeing some opportunity to lock in some rates and the spot market is -- has ticked down a little bit, which is good.

[Randy Konik, Jefferies]

Got you. And then I just, I guess, on you mentioned balance sheet, I wanted to ask about thoughts on balance sheet cash flow, because you guys produce a ton of cash flow. And when I look at the CapEx guidance for the year, I think around $60 million, if you look at the last few years, the average has been, I think, around $30 million. So just curious on where we are in your kind of CapEx cycle and with the sales growing, the margin staying firm, the amount of free cash flow is going to be -- is super impressive. So just wanted to understand how you're thinking about the remaining debt on the balance sheet? What you're going to pay down or not pay down? Where do you think let's you feel comfortable with leverage? You just completed a share buyback, just wanted to get your thoughts on where we are in the CapEx cycle and how you are kind of thinking about deploying free cash over the next few years? Thanks, guys.

[Paul Carbone]

Yes, thanks Randy. So on CapEx, this year we have reiterated the outlook of about $60 million. Last year, we were about $56 million and then in 2020 we were significantly lower because of everything that was going on. You know, I would say, if you think about our CapEx, about two thirds of it goes to technology and product innovation and that product innovation is both for new products and increasing capacity. So I like where we are in that $60 million range. We do produce a lot of cash to your point. We expect to produce about $125 million of free cash flow this year. Again, our cash, capital allocation hasn't changed. You know, we've talked about we're using it for working capital, rebuilding inventory, investing in the business, select M&A that Matt has talked about several times and then we did on an opportunistic basis do the share buyback this year.

[Randy Konik, Jefferies]

Great. Thanks, guys.

[Paul Carbone]

Thanks, Randy.

[Operator]

Our next question comes from the line of Robby Ohmes with Bank of America. You may proceed with your question.

[Robby Ohmes, Bank of America]

Well, good morning. Thanks for taking my question. I wanted to follow up on wholesale. I think Paul, you mentioned soft coolers and Camino totes. Moving more fully into wholesale can you can you talk about the strategy there? Maybe Matt could chime in on that. And also we would be, just be curious, any color you can give us on what wholesale customers are doing different in this environment? If anything, are they looking for anything different from YETI, given the inflation or anything like that? And also, I think you guys mentioned the hard coolers strength in the first quarter. Any color on sort of wholesale shipping versus sell through, so is this strength in sell through or is it somewhat shipping because you guys were -- the channel was so short on your hard coolers?

[Paul Carbone]

Hey, Robby, thanks. I'll take the first question and then I'll touch on the last one and the middle one on wholesale customers, I'll hand over to Matt. So on soft coolers and Caminos and bags and the wholesale, so we had planned the transition of the two soft coolers and the addition of the two sizes of Caminos in Q1 and as we came through the end of last year you remember the Vietnam shutdown, what that did on soft coolers is it limited my Gen 1, so before the new units came out, it limited the number of Gen 1 that I had. So as I came into this year the wholesale channel, even my direct-to-consumer channel was very low on inventory. My newer releases, I released in direct-to-consumer first and then as I built inventory, they just started moving really at the end of the quarter and into second quarter into the wholesale channel. So that were filled throughout the year. But a lot of that was kind of back last summer when Vietnam shutdown and that kind of tail.

On hard coolers, we have seen for the company, we were plus 10%, we've seen great sell through. Coolers and equipment was plus 10%. We've seen great sell through and some selling of reloading the channel. But it was a strong quarter for hard coolers in particular and we wanted to parse that out with the soft cooler dynamic going on.

[Matthew Reintjes, President and Chief Executive Officer]

Robby, and then to the conversations we're having with our wholesale channel, I would say they've been very good, and it's the continuation of the strategy we talked about last year, which was looking to continue to optimize the partnerships, make sure we have strong representation and strong merchandising. So I would say the dominant topics of the conversation are getting inventory back to levels pre-2020 so that we can merchandise the shelves and display the breadth of the portfolio.

And I would say our wholesale partners continue to be really innovative with us on how we get the brand represented and how we get the assortment put out there. So I would say they are really, have been very, very positive conversations about how we think about taking advantage of this year, particularly in those gift giving seasons in Q2 and Q4 and then making sure that we're well merchandised through the rest of the year.

[Robby Ohmes, Bank of America]

That's great color. Thank you so much.

[Operator]

Our next question comes from the line of Sharon Zackfia with William Blair & Company. You may proceed with your question.

[Sharon Zackfia, William Blair & Company]

Hi, good morning. On the movement of bags into wholesale and the tests that you're doing there in the second quarter, can you talk about what partners you're using, and whether that's designed to reach incremental targeted demographics or just generally raise awareness? And I'm also curious now that we've got kind of more normal consumer mobility, how you feel about your own stores as brand amplifiers, and how that strategy is likely to unfold maybe over the next two to three years?

[Matthew Reintjes, President and Chief Executive Officer]

Thanks, Sharon. On the bags what we've decided to do to kind of tie your two questions together, it actually ties into the second question around the stores. What we've seen in our stores, and I mentioned this in my remarks is that consumer selection and consumer discovery and ultimately consumer transaction, the basket is slightly different in our stores than we see in even our dot.com and then our wholesale. And bags is one of those things that what we saw was that when consumers get a chance to interact with the product, to feel the durability and quality, to see the ergonomic design, to understand the product that it performs differently, although they perform very well on dot.com, we see it rank higher or rank differently.

And so what we decided to do was, we identified a select number of national accounts and independents to go do a small test of, do we see that same dynamic continue to play out in the wholesale channel. And so it's a small test of what we consider very high quality doors from the national accounts to the independents. So yes, it gives reach, yes, it gives awareness, yes it brings some diversity of exposure. It's as much to inform what future rollouts could look like. So we feel great about using that. We also feel great that this was a learning that we had from having a select number of our own YETI retail stores.

And as I mentioned, they continue to perform as great brand beacons and in the consumer engagement and the flow and using those, as I mentioned, places of commerce where we see really, really positive transactions, really positive discovery. And we also get the opportunity to use them as exposure moments to the brand. So I mentioned South by Southwest. In Austin, we do activations and as the world continues to open up and mobility opens up, we'll have the opportunity to use our stores more and more as brand activation moments combined with commerce.

[Operator]

Our next question comes from the line of Camilo Lyon with BTIG. You may proceed with your question.

[Camilo Lyon, BTIG]

Thank you. Good morning, everyone. I have two questions, Paul, number one just on your gross margin comment and pricing as it pertains to Q2. So if I'm thinking about this correctly, I think you guided the Q2 margins down 400 and change basis points. And that's worse than the Q1 margin decline when we strip out that incremental freight invoice, yet you have a full quarter of pricing benefits that have come in a little bit stronger than you anticipate. So if you could just help me understand why Q2 margins should be worse than the normalized Q1 margins when excluding the freight component? And then I have a follow up.

[Paul Carbone]

Yes, so a couple of things and the main one is those, the freight piece that we talked about that related to last year, the 220 basis points. There was also some impact, those were late trailing invoices, some of it related to Q4 of last year, some of those went on to the balance sheet and will go off in the balance of the year, and mainly impacts Q2. So freight also got worse in Q2, overall. So our perspective on freight for the year is more headwind above and beyond the non-reoccurring charge, and that is offset by some better pricing outlook and everything else is pretty much in line.

[Camilo Lyon, BTIG]

Okay, got it. Thanks for that clarification. And then my second question goes to the health of the consumer. And maybe if you can, maybe Matt, if you could just share more about your customers purchasing behavior and how that's actually evolved over time, as you've expanded nationally? And within that, have you seen a change in the composition of basket size or any sort of indication that there's a trade down or some sort of reflection of potential deceleration in the way that consumers are purchasing because of external inflationary pressures?

[Matthew Reintjes, President and Chief Executive Officer]

Yes, Camilo, I'd say a couple of things. We actually are seeing a dynamic play out, which is an increasing quality of our customers. One of the benefits of the investment we made really early in the pandemic was this investment behind our advanced analytics team. And so, the ability to actually quickly discern and understand what's happening as it relates to customer acquisition, customer retention, the value of those customers, and the dynamic we've continued to see is really, really high quality and increasing value in our customer acquisition and in our retention, strong growth and really good ability to reactivate older cohorts.

So I think that not just the intelligence to be able to actually see those results, but that we're actually able to use that and then affect the way we deploy our performance marketing and our demand creation behind specific groups. And so, I would say, sitting here through the through the first quarter and from the momentum we had last year, we continue to see a really high quality consumer for YETI.

[Camilo Lyon, BTIG]

Hey, thanks for the color. Good luck.

[Operator]

Our next question comes from the line of John Kernan with Cowen. You may proceed with your question.

[John Kernan, Cowen]

Excellent, thanks for taking my question. Good morning. Matt, prior question, I think went into some market share commentary, wondering if you could follow up on that? And just if you have any metrics on household penetration and brand awareness in the heritage and non-heritage markets and how that's changed as you've scaled to pushing $1.7 billion in revenue this year?

[Matthew Reintjes, President and Chief Executive Officer]

We use and publish this every -- we have this published in our investor deck which shows our unaided awareness and how that's progressed through time. That's obviously an area of focus as we're building the brand halo above the performance marketing that ultimately drives the transaction or the consideration to the transaction. So, we like the pacing with which we've seen and it's particularly in the U.S. market where we have the best data today, where we've seen the penetration of awareness. And then ultimately, as I had just mentioned, the ability to once we take someone from awareness to consideration to the purchase, to reengage them, and bring those existing cohorts back from a retention perspective.

As we look at the dynamics that we've seen play out in the U.S., outside the U.S., we're still very early in that. So that is a significant opportunity for driving awareness, driving growth with a portfolio that over the last five years being active in Canada, Australia, we've shown is relevant, and can be a growth driver beyond the strong growth we continue to deliver in the U.S. As we think about penetration, one of the things that we look at is, are we penetrating deeper with our consumers and deeper into their lifestyle?

And so if you look at the evolution of our drinkware business, it's really been about how do we find more opportunities to be with a consumer throughout their day and create more occasions for them to engage with YETI with the same promise of the durability, performance, design of our products. And so when we look at the opportunity, that's when I talk about expanding markets, not -- we're not operating in finite markets and we're playing a share game, we're actually blowing the parameters of the market and trying to really drive deeper into the consumers lifestyle, and we take that same philosophy across our product range.

[John Kernan, Cowen]

Very helpful, thank you. And then maybe a follow up for Paul. International, if it continues its current run rate is going to be pushing $200 million a year, and I'm just curious how we should think about International and the scaling of the International business as we get into 2023 and beyond?

[Paul Carbone]

Yes, so we've talked a lot about International and what we've said is, there's no reason International in this business over the long-term shouldn't be north of 20% of our business, and we really like the growth that we're seeing in our International business. So I won't lay out what 23 looks like, but we're really happy with it. And we've also said from a mix perspective, it will continue to grow. Our U.S. business is still growing very, very nicely as well, and if anything that holds down the mix, but we're really happy with the International business and continue to see it as a strategic pillar, and a growth driver of the company.

[John Kernan, Cowen]

Thanks, Paul.

[Paul Carbone]

Thank you.

[Operator]

Our next question comes to the line of Brian Harper with Morgan Stanley. You may proceed with your question.

[Brian Harper, Morgan Stanley]

Yes, hey, good morning, guys. This was touched on, but maybe I'll just ask it a slightly different way, on kind of the better pricing impact that you're seeing, is that just kind of based on, I assume gross pricing and the number of items you took price on was the same and nothing changed there, so is this really just based on kind of the customer response that you predicted after that pricing was taken?

[Matthew Reintjes, President and Chief Executive Officer]

Absolutely, yes. And I say that, and I'm happy to say it, we don't take pricing. So it's not something and we were a little conservative of what the impact was going to be. But yes, it is. The items that we've taken price did not change from when we talked and the magnitude of that price was all known when we talked to you in February, so it is just a little bit better performance than we had planned.

[Brian Harper, Morgan Stanley]

Okay, great. And second question, maybe the comments on kind of the wholesale channel conversations were helpful. Where specifically do you think you are in kind of inventory in the wholesale channel, in kind of optimizing merchandising and stuff like that? Or if I were to quantify it in some way kind of number of doors you think are where you want them to be, how would you kind of characterize that?

[Matthew Reintjes, President and Chief Executive Officer]

Yes, I would kind of a broad characterization, I would say we from an inline colorway from a drinkware perspective, we're getting better inventoried. There are specific things within our drinkware business where we continue to see opportunities for growth and continuously opportunities to fill in that inventory. Hard coolers is one that we continue to build that inventory position in both inline colors and then seasonal colors because we have, when you think about capacity, we make decisions between inline colors and seasonal colors when we're building up capacity. And as Paul mentioned, went through a soft cooler transition in Q1 and we transitioned two significant skews out and replaced them with two skews we're really excited about or two master skews we're excited about.

So those are flowing into the channel right now. So I would say we aren't complete, but we're starting to build that up where, as I mentioned earlier, the conversations with our wholesale partners are, how do we want to set up the space? How do we want to merchandise it? How do we take advantage of going into this Q2 buying season, the beginning of summer? And this outdoor trend which continues with people being active and we want to be ready, want to be ready for the summer that we will be ready going into the back half of the year and the holiday in Q4.

[Brian Harper, Morgan Stanley]

Thank you.

[Operator]

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Matt Reintjes for closing remarks.

[Matthew Reintjes, President and Chief Executive Officer]

Thank you. We look forward to speaking with everyone when we discuss our second quarter results. Have a wonderful day.

[Operator]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.