10-Q 1 yeti-20211002.htm 10-Q yeti-20211002
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________________________
FORM 10-Q
____________________________________________________________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 02, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from           to           
Commission file number 001-38713
_____________________________________________________
YETI Holdings, Inc.
(Exact name of registrant as specified in its charter)
______________________________________________________
Delaware45-5297111
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
7601 Southwest Parkway
Austin, Texas 78735
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code) (512394-9384

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common stock, par value $0.01YETINew York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No 
There were 87,641,906 shares of Common Stock ($0.01 par value) outstanding as of October 28, 2021.



CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains ‘‘forward-looking statements’’ within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical or current fact included in this Quarterly Report on Form 10-Q are forward-looking statements. Forward-looking statements include statements containing words such as “anticipate,” “assume,” “believe,” “can,” “have,” “contemplate,” “continue,” “could,” “design,” “due,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “likely,” “may,” “might,” “objective,” “plan,” “predict,” “project,” “potential,” “seek,” “should,” “target,” “will,” “would,” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operational performance or other events. For example, all statements made relating to growth strategies, the estimated and projected costs, expenditures, and growth rates, plans and objectives for future operations, growth, or initiatives, or strategies are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that are expected and, therefore, you should not unduly rely on such statements. The risks and uncertainties that could cause actual results to differ materially from those expressed or implied by these forward-looking statements include but are not limited to the risks and uncertainties listed below under “Risk Factors Summary” and further described under the heading "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q, as such risk factors may be amended, supplemented or superseded from time to time by other reports we file with the United States Securities and Exchange Commission.

These forward-looking statements are made based upon detailed assumptions and reflect management’s current expectations and beliefs. While we believe that these assumptions underlying the forward-looking statements are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect actual results.

The forward-looking statements included herein are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events, or otherwise, except as required by law.




Risk Factors Summary

Investing in our securities involves a high degree of risk. The following is a summary of the principal factors that make an investment in our securities speculative or risky, all of which are more fully described below in the section titled “Risk Factors” in Part I, Item 1A of this Report. This summary should be read in conjunction with the “Risk Factors” section and should not be relied upon as an exhaustive summary of the material risks facing our business. In addition to the following summary, you should consider the information set forth in the “Risk Factors” section and the other information contained in this Report before investing in our securities.

Risks Related to Our Business, Operations and Industry
A significant reduction in demand for our products could harm our results of operations.
If we are unable to successfully design, develop and market new products, our business may be harmed.
Our business could be harmed if we are unable to accurately forecast our results of operations and growth rate.
We may not be able to effectively manage our growth.
Our marketing strategy may not be successful with existing and future customers.
If we fail to attract new customers, or fail to do so in a cost-effective manner, we may not be able to increase sales.
We may not be successful in expanding into additional markets.
If we fail to compete effectively, we could lose our market position.
If we are unable to protect or preserve our brand image and proprietary rights, our business may be harmed.
Problems with, or loss of, our suppliers or an inability to obtain raw materials could harm our business and results of operations.
If we fail to timely and effectively obtain shipments of products from our manufacturers and deliver products to our retail partners and customers, our business and results of operations could be harmed.
Our business is subject to the risk of manufacturer concentrations.
Our results of operations could be materially harmed if we are unable to accurately forecast demand for our products.
Our business could be harmed if we fail to execute our internal plans to transition our supply chain and certain other business processes to a global scale.
Our profitability may decline as a result of increasing pressure on pricing.
Some of our manufacturing relationships are not exclusive, which means that these manufacturers could produce similar products for our competitors.
Fluctuations in the cost and availability of raw materials, equipment, labor, and transportation could cause manufacturing delays or increase our costs.
Many of our products are manufactured by third parties outside of the United States, and our business may be harmed by legal, regulatory, economic, political and public health risks associated with international trade and those markets.
As current tariffs are implemented, or if additional tariffs or other restrictions are placed on foreign imports or any related counter-measures are taken by other countries, our business and results of operations could be harmed.
A significant portion of our sales are to independent retail partners, and if they cease to carry our current products or choose not to carry new products that we develop, our brand as well as our results of operations and financial condition could be harmed.
We depend on our retail partners to display and present our products to customers, and our failure to maintain and further develop our relationships with our retail partners could harm our business.
If our plans to increase sales through our direct-to-consumer channel are not successful, our business and results of operations could be harmed.
If we do not successfully implement our future retail store expansion, our growth and profitability could be harmed.
Insolvency, credit problems or other financial difficulties that could confront our retail partners could expose us to financial risk.
If our independent suppliers and manufacturing partners do not comply with ethical business practices or with applicable laws and regulations, our reputation, business, and results of operations could be harmed.
We are subject to payment-related risks that may result in higher operating costs or the inability to process payments, either of which could harm our business, financial condition and results of operations.
Our limited operating experience and limited brand recognition in new markets may make it more difficult to execute our international expansion plan and cause our business and growth to suffer.
Our financial results and future growth could be harmed by currency exchange rate fluctuations.
We may become involved in legal or regulatory proceedings and audits.
Our business involves the potential for product recalls, product liability, and other claims against us, which could adversely affect our reputation, earnings and financial condition.
Our business is subject to the risk of catastrophic events, and to interruption by problems such as terrorism, public health crises, cyberattacks, or failure of key information technology systems.


Our results of operations are subject to seasonal and quarterly variations, which could cause the price of our common stock to decline.
We are subject to many hazards and operational risks that can disrupt our business, some of which may not be insured or fully covered by insurance.

Risks Related to Market and Global Economic Conditions
The COVID-19 pandemic and its effects could result in declines in consumer discretionary spending or continue to adversely affect the global supply chain, which could negatively impact our business, sales, financial condition, results of operations and cash flows, and our ability to access current or obtain new lending facilities.
During a downturn in the economy, consumer purchases of discretionary items are affected, which could materially harm our sales, profitability, and financial condition.

Risks Related to Information Technology and Security
We rely significantly on information technology and any failure, inadequacy or interruption of that technology could harm our ability to effectively operate our business.
We collect, store, process, and use personal and payment information and other customer data, which subjects us to regulation and other legal obligations related to privacy, information security, and data protection.
Any material disruption or breach of our information technology systems or those of third-party partners could materially damage our customer and business partner relationships, and subject us to significant reputational, financial, legal, and operational consequences.

Risks Related to our Financial Condition and Tax Matters
We depend on cash generated from our operations to support our growth, and we may need to raise additional capital, which may not be available on terms acceptable to us or at all.
Our indebtedness may limit our ability to invest in the ongoing needs of our business and if we are unable to comply with the covenants in our current Credit Facility, our liquidity and results of operations could be harmed.
If our goodwill, other intangible assets, or fixed assets become impaired, we may be required to record a charge to our earnings.
Changes in tax laws or unanticipated tax liabilities could adversely affect our effective income tax rate and profitability.
The uncertainty regarding the phase-out of LIBOR may negatively impact our operating results.
Our results of operations could be harmed if a material number of our retail partners were not able to meet their payment obligations.

Risks Related to Ownership of Our Common Stock
Any future failure to maintain effective internal control over financial reporting could harm us.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of the Company more difficult, limit attempts by our stockholders to replace or remove our current management, and limit the market price of our common stock.
Our Amended and Restated Certificate of Incorporation provides that the Court of Chancery of the State of Delaware is the sole and exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.
YETI Holdings, Inc. is a holding company with no operations of its own and, as such, it depends on its subsidiaries for cash to fund its operations and expenses, including future dividend payments, if any.

General Risk Factors
Our future success depends on the continuing efforts of our management and key employees, and on our ability to attract and retain highly skilled personnel and senior management.
If our estimates or judgments relating to our critical accounting policies prove to be incorrect or change significantly, our results of operations could be harmed.
We may be the target of strategic transactions, which could divert our management's attention and otherwise disrupt our operations and adversely affect our business.
We may acquire or invest in other companies, which could divert our management’s attention, result in dilution to our stockholders, and otherwise disrupt our operations and harm our results of operations.
We may be subject to liability if we infringe upon the intellectual property rights of third parties.





PART I. FINANCIAL INFORMATION
Item 1.    Financial Statements.
YETI HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except per share data)    
October 2,
2021
January 2,
2021
ASSETS
Current assets
Cash$259,317 $253,283 
Accounts receivable, net83,267 65,417 
Inventory265,974 140,111 
Prepaid expenses and other current assets23,640 17,686 
Total current assets632,198 476,497 
Property and equipment, net108,739 78,075 
Operating lease right-of-use assets54,270 34,090 
Goodwill54,293 54,293 
Intangible assets, net94,074 92,078 
Other assets1,934 2,034 
Total assets$945,508 $737,067 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable$166,080 $123,621 
Accrued expenses and other current liabilities96,857 89,068 
Taxes payable6,869 18,316 
Accrued payroll and related costs24,513 25,810 
Current operating lease liabilities11,008 8,247 
Current maturities of long-term debt24,548 22,697 
Total current liabilities329,875 287,759 
Long-term debt, net of current portion101,723 111,017 
Operating lease liabilities, non-current54,043 36,546 
Other liabilities20,227 13,327 
Total liabilities505,868 448,649 
Commitments and contingencies (Note 8)
Stockholders’ Equity
Common stock, par value $0.01; 600,000 shares authorized; 87,598 and 87,128 shares issued and outstanding at October 2, 2021 and January 2, 2021, respectively
876 871 
Preferred stock, par value $0.01; 30,000 shares authorized; no shares issued or outstanding
  
Additional paid-in capital332,299 321,678 
Retained earnings (accumulated deficit)105,977 (33,744)
Accumulated other comprehensive income (loss)488 (387)
Total stockholders’ equity439,640 288,418 
Total liabilities and stockholders’ equity$945,508 $737,067 
See Notes to Unaudited Condensed Consolidated Financial Statements
1

YETI HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months EndedNine Months Ended
October 2,
2021
September 26,
2020
October 2,
2021
September 26,
2020
Net sales$362,643 $294,603 $967,864 $715,953 
Cost of goods sold155,640 120,627 406,560 311,994 
Gross profit207,003 173,976 561,304 403,959 
Selling, general, and administrative expenses138,274 103,864 380,101 271,152 
Operating income68,729 70,112 181,203 132,807 
Interest expense(833)(1,963)(2,519)(7,730)
Other expense(1,239)(82)(2,492)(1,020)
Income before income taxes66,657 68,067 176,192 124,057 
Income tax expense(13,690)(16,622)(36,471)(30,650)
Net income$52,967 $51,445 $139,721 $93,407 
Net income per share
Basic$0.61 $0.59 $1.60 $1.07 
Diluted$0.60 $0.58 $1.58 $1.07 
Weighted-average common shares outstanding
Basic87,526 87,032 87,343 86,933 
Diluted88,750 88,094 88,636 87,677 
See Notes to Unaudited Condensed Consolidated Financial Statements

2

YETI HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands)
Three Months EndedNine Months Ended
October 2,
2021
September 26,
2020
October 2,
2021
September 26,
2020
Net income$52,967 $51,445 $139,721 $93,407 
Other comprehensive income (loss)
Foreign currency translation adjustments(84)(433)875 (100)
Total comprehensive income$52,883 $51,012 $140,596 $93,307 
See Notes to Unaudited Condensed Consolidated Financial Statements
3

YETI HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands)
Three Months Ended October 2, 2021
Common StockAdditional
Paid-In
Capital
Retained Earnings Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders’
Equity
SharesAmount
Balance, July 3, 202187,441 $874 $329,638 $53,010 $572 $384,094 
Stock-based compensation— — 3,824 — — 3,824 
Common stock issued under employee benefit plans175 2 643 — — 645 
Common stock withheld related to net share settlement of stock-based compensation(18)— (1,806)— — (1,806)
Other comprehensive loss— — — — (84)(84)
Net income— — — 52,967 — 52,967 
Balance, October 2, 202187,598 $876 $332,299 $105,977 $488 $439,640 
Three Months Ended September 26, 2020
Common StockAdditional
Paid-In
Capital
Accumulated DeficitAccumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders’
Equity
SharesAmount
Balance, June 27, 202087,004 $870 $315,405 $(147,583)$337 $169,029 
Stock-based compensation— — 2,279 — — 2,279 
Common stock issued under employee benefit plans67 1 635 — — 636 
Common stock withheld related to net share settlement of stock-based compensation(7)— (323)— (323)
Other comprehensive loss— — — — (433)(433)
Net income— — — 51,445 — 51,445 
Balance, September 26, 202087,064 $871 $317,996 $(96,138)$(96)$222,633 
See Notes to Unaudited Condensed Consolidated Financial Statements


4

YETI HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands)
Nine Months Ended October 2, 2021
Common StockAdditional
Paid-In
Capital
Retained Earnings
(Accumulated Deficit)
Accumulated
Other
Comprehensive
 Income (Loss)
Total
Stockholders’
Equity
SharesAmount
Balance, January 2, 202187,128 $871 $321,678 $(33,744)$(387)$288,418 
Stock-based compensation— — 11,339 — — 11,339 
Common stock issued under employee benefit plans
512 5 2,788 — — 2,793 
Common stock withheld related to net share settlement of stock-based compensation(42)— (3,506)— — (3,506)
Other comprehensive income— — — — 875 875 
Net income— — — 139,721 — 139,721 
Balance, October 2, 202187,598 $876 $332,299 $105,977 $488 $439,640 
Nine Months Ended September 26, 2020
Common StockAdditional
Paid-In
Capital
Accumulated DeficitAccumulated
Other
Comprehensive
Income (loss)
Total
Stockholders’
Equity
SharesAmount
Balance, December 28, 201986,774 $868 $310,678 $(189,545)$4 $122,005 
Stock-based compensation— — 6,315 — — 6,315 
Common stock issued under employee benefit plans
319 3 2,030 — — 2,033 
Common stock withheld related to net share settlement of stock-based compensation(29)— (1,027)— (1,027)
Other comprehensive loss— — — — (100)(100)
Net income— — — 93,407 — 93,407 
Balance, September 26, 202087,064 $871 $317,996 $(96,138)$(96)$222,633 

See Notes to Unaudited Condensed Consolidated Financial Statements
5

YETI HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
October 2,
2021
September 26,
2020
Cash Flows from Operating Activities:
Net income$139,721 $93,407 
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization23,440 22,835 
Amortization of deferred financing fees516 712 
Stock-based compensation11,339 6,315 
Deferred income taxes3,764 732 
Impairment of long-lived assets2,331 632 
Other3,213 1,414 
Loss on prepayment of debt 418 
Changes in operating assets and liabilities:
Accounts receivable(18,769)10,236 
Inventory(126,381)50,943 
Other current assets(5,206)5,570 
Accounts payable and accrued expenses48,184 31,537 
Taxes payable(11,441)11,019 
Other2,488 3,329 
Net cash provided by operating activities73,199 239,099 
Cash Flows from Investing Activities:
Purchases of property and equipment(41,159)(10,904)
Additions of intangibles, net(6,749)(5,377)
Net cash used in investing activities(47,908)(16,281)
Cash Flows from Financing Activities:
Repayments of long-term debt(16,875)(61,250)
Taxes paid in connection with employee stock transactions(3,507)(1,027)
Proceeds from employee stock transactions2,794 2,033 
Finance lease principal payment(600)(138)
Borrowings under revolving credit facility 50,000 
Repayments under revolving credit facility (50,000)
Net cash used in financing activities(18,188)(60,382)
Effect of exchange rate changes on cash(1,069)(138)
Net increase in cash6,034 162,298 
Cash, beginning of period253,283 72,515 
Cash, end of period$259,317 $234,813 
See Notes to Unaudited Condensed Consolidated Financial Statements
6

YETI HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization and Business

Headquartered in Austin, Texas, YETI is a global designer, retailer, and distributor of innovative outdoor products. From coolers and drinkware to bags and apparel, YETI products are built to meet the unique and varying needs of diverse outdoor pursuits, whether in the remote wilderness, at the beach, or anywhere life takes you. We sell our products through our wholesale channel, including independent retailers, national, and regional accounts across a wide variety of end user markets, as well as through our direct-to-consumer (“DTC”) channel, primarily on YETI.com, country and region-specific YETI websites, YETI Authorized on the Amazon Marketplace, our corporate sales program, and our retail stores. We operate in the U.S., Canada, Australia, New Zealand, Europe, Hong Kong, China, Singapore, and Japan.

The terms “we,” “us,” “our,” and “the Company” as used herein and unless otherwise stated or indicated by context, refer to YETI Holdings, Inc. and its subsidiaries.

Basis of Presentation and Principles of Consolidation

The unaudited condensed consolidated financial statements and the accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, our financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary for a fair statement of our results of operations for the interim periods. Intercompany transactions are eliminated in consolidation. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to applicable rules and regulations of the SEC. The consolidated balance sheet as of January 2, 2021 is derived from the audited financial statements included in our Annual Report on Form 10-K filed with the SEC for the year ended January 2, 2021, which should be read in conjunction with these unaudited consolidated financial statements and notes thereto.

Reclassifications

Certain prior period amounts were reclassified to conform to the current period presentation. Deferred income taxes previously presented separately in Total assets in the consolidated balance sheets are now presented in Other assets.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses during the reporting period and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements. Estimates and assumptions about future events and their effects cannot be made with certainty, including the potential impacts and duration of the COVID-19 pandemic. Estimates may change as new events occur, when additional information becomes available and if our operating environment changes. Actual results could differ from our estimates.

Fiscal Year End

We have a 52-to 53-week fiscal year that ends on the Saturday closest in proximity to December 31, such that each quarterly period will be 13 weeks in length, except during a 53-week year when the fourth quarter will be 14 weeks. Our fiscal year ending January 1, 2022 (“fiscal year 2021”) is a 52-week period. The first quarter of our fiscal year 2021 ended on April 3, 2021, the second quarter ended on July 3, 2021, and the third quarter ended on October 2, 2021. Our fiscal year ended January 2, 2021 (“fiscal year 2020”) was a 53-week period. Unless otherwise stated, references to particular years, quarters, months and periods refer to our fiscal years and the associated quarters, months, and periods of those fiscal years. The unaudited condensed consolidated financial results presented herein represent the three and nine months ended October 2, 2021 and September 26, 2020.
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Accounts Receivable

Accounts receivable are carried at original invoice amount less estimated credit losses. Upon initial recognition of a receivable, we estimate credit losses over the contractual term of the receivable and establish an allowance for credit losses based on historical experience, current available information, and expectations of future economic conditions. We mitigate credit loss risk from accounts receivable by assessing customers for credit worthiness, including ongoing credit evaluations and their payment trends. Credit risk is limited due to ongoing monitoring, high geographic customer distribution and low concentration of risk. As the risk of loss is determined to be similar based on the credit risk factors, we aggregate receivables on a collective basis when assessing credit losses. Accounts receivable are uncollateralized customer obligations due under normal trade terms typically requiring payment within 30 to 90 days of sale. Receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded to income when received. For the nine months ended October 2, 2021, our assessment also considered the current and potential future impacts caused by the COVID-19 pandemic. Our allowance for credit losses was $2.0 million as of October 2, 2021 and $1.3 million as of January 2, 2021, respectively.

Inventory

Inventories are comprised primarily of finished goods and are carried at the lower of cost (weighted-average cost method) or market (net realizable value).

Fair Value of Financial Instruments

For financial assets and liabilities recorded at fair value on a recurring or non-recurring basis, fair value is the price we would receive to sell an asset, or pay to transfer a liability, in an orderly transaction with a market participant at the measurement date. In the absence of such data, fair value is estimated using internal information consistent with what market participants would use in a hypothetical transaction. In determining fair value, observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions; preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:

Level 1:    Quoted prices for identical instruments in active markets.
Level 2:    Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3:    Significant inputs to the valuation model are unobservable.

Our financial instruments consist principally of cash, accounts receivable, accounts payable, and bank indebtedness. The carrying amount of cash, accounts receivable, and accounts payable, approximates fair value due to the short-term maturity of these instruments. The carrying amount of our long-term bank indebtedness approximates fair value based on Level 2 inputs since the senior secured credit facility (“Credit Facility”) carries a variable interest rate that is based on London Interbank Offered Rate (“LIBOR”).

Recently Adopted Accounting Guidance

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 is intended to simplify various aspects related to the accounting for income taxes and removes certain exceptions to the general principles of Topic 740 and amends existing guidance to improve consistent application. We adopted this standard effective January 3, 2021 using the modified retrospective approach. The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.

Recent Accounting Guidance Not Yet Adopted

In March 2020, the FASB issued ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” which is intended to provide temporary optional expedients and exceptions for applying GAAP to contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. The optional guidance is provided to ease the potential burden of accounting for reference rate reform. The guidance is effective and can be applied anytime from the issuance date through December 31, 2022. The impact of this guidance on the Company's financial statements and related disclosures will continue to be evaluated by the Company through the application period, and is not expected to be significant.

No other new accounting pronouncements issued or effective as of October 2, 2021 have had, or are expected to have, a material impact on our consolidated financial statements.
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2. REVENUE

Contract Balances

Accounts receivable represent an unconditional right to receive consideration from a customer and are recorded at net invoiced amounts, less an estimated allowance for credit losses.

Contract liabilities are recorded when the customer pays consideration before the transfer of a good to the customer and thus represent our obligation to transfer the good to the customer at a future date. Our primary contract liabilities relate to payment advances for certain customized product transactions. We recognize contract liabilities as revenue once all performance obligations have been satisfied.

The following table provides information about accounts receivable and contract liabilities at the periods indicated (in thousands):

October 2, 2021January 2,
2021
Accounts receivable, net$83,267 $65,417 
Contract liabilities$(16,430)$(11,074)

For the nine months ended October 2, 2021, we recognized $11.1 million of revenue that was previously included in the contract liability balance at the beginning of the period.

Disaggregation of Revenue

The following table disaggregates our net sales by channel, product category, and geography (based on ship to destination) for the periods indicated (in thousands):
Three Months EndedNine Months Ended
October 2,
2021
September 26,
2020
October 2,
2021
September 26,
2020
Net Sales by Channel
Wholesale$165,504 $144,191 $447,068 $352,898 
Direct-to-consumer197,139 150,412 520,796 363,055 
Total net sales$362,643 $294,603 $967,864 $715,953 
Net Sales by Category
Coolers & Equipment$149,002 $124,155 $400,261 $312,259 
Drinkware205,035 165,934 546,796 392,877 
Other8,606 4,514 20,807 10,817 
Total net sales$362,643 $294,603 $967,864 $715,953 
Net Sales by Geographic Region
United States$328,545 $274,421 $877,577 $676,553 
International34,098 20,182 90,287 39,400 
Total net sales$362,643 $294,603 $967,864 $715,953 

For the three and nine months ended October 2, 2021, our largest single customer represented approximately 11% and 10% of gross sales, respectively. For the three and nine months ended September 26, 2020, no single customer represented over 10% of gross sales.

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3. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets include the following (in thousands):
October 2,
2021
January 2,
2021
Prepaid expenses$13,832 $12,174 
Prepaid taxes605 433 
Other9,203 5,079 
Total prepaid expenses and other current assets$23,640 $17,686 

4. LEASES
We determine if an arrangement with contractual terms longer than twelve months contains a lease at contract inception and determine its classification as an operating or finance lease at lease commencement. We lease certain retail locations, office space, distribution facilities, manufacturing space, and machinery and equipment. While the substantial majority of these leases are operating leases, certain machinery and equipment agreements are finance leases, which are those leases that allow us to substantially utilize or pay for the entire asset over its estimated life. Assets acquired under operating leases and finance leases are recorded in Operating lease right-of use assets and Property and equipment, net, respectively. As of October 2, 2021, the initial lease terms of the various leases range from one to 20 years.

Lease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are recognized based on the present value of future payments over the lease term at commencement date. To determine the present value of the future lease payments, we use our collateralized incremental borrowing rate based on the information available at commencement date, including lease term. Our operating leases also typically require payment of real estate taxes, common area maintenance and insurance. These components comprise the majority of our variable lease cost and are excluded from the present value of our lease obligations. In instances where they are fixed, they are included due to our election to combine lease and non-lease components, with the exception of our distribution facility asset class. Operating lease assets include prepaid lease payments and initial direct costs and are reduced by lease incentives. Our lease terms consider various factors such as market conditions and the terms of any renewal or termination options that may exist. We generally do not include options to extend or terminate the lease in the determination of lease term unless it is reasonably certain that the option will be exercised. Fixed payments may contain predetermined fixed rent escalations.

Costs associated with operating lease assets are recognized on a straight-line basis from the commencement date to the end of the lease term. Finance lease assets are amortized on a straight-line basis over the shorter of the estimated useful lives of the assets or the lease term. The interest component of a finance lease is included in interest expense and recognized using the effective interest method over the lease term.
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The following table presents the assets and liabilities related to operating and finance leases (in thousands):
Balance Sheet LocationOctober 2, 2021
Assets:
Operating lease assetsOperating lease right-of-use assets$54,270 
Finance lease assetsProperty and equipment9,843 
Total lease assets$64,113 
Liabilities:
Current
Operating lease liabilitiesOperating lease liabilities$11,008 
Finance lease liabilitiesCurrent maturities of long-term debt2,048 
Non-current
Operating lease liabilitiesOperating lease liabilities, non-current54,043 
Finance lease liabilitiesLong-term debt, net of current portion7,818 
Total lease liabilities$74,917 

The following table presents the components of lease costs (in thousands):
Three Months EndedNine Months Ended
October 2, 2021September 26,
2020
October 2, 2021September 26,
2020
Operating lease costs$3,571 $2,410 $8,647 $7,021 
Finance lease cost - amortization of right-of-use assets467 53 582 159 
Finance lease cost - interest on lease liabilities57 15 86 49 
Short-term lease cost113 36 268 140 
Variable lease cost946 838 2,794 2,492 
Sublease income(186)(186)(557)(557)
Total lease cost$4,968 $3,166 $11,820 $9,304 

The following table presents lease terms and discount rates:
October 2, 2021September 26,
2020
Weighted average remaining lease term:
Operating leases5.94 years6.39 years
Finance leases4.60 years3.93 years
Weighted average discount rate:
Operating leases4.87 %6.52 %
Finance leases2.25 %6.24 %

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Minimum lease payments have not been reduced by minimum sublease rentals of $2.5 million due in the future under non-cancelable subleases. We received $0.2 million in sublease income for both the three months ended October 2, 2021 and September 26, 2020, and $0.6 million in sublease income for both the nine months ended October 2, 2021 and September 26, 2020. The following table presents the minimum lease payment obligations of operating and finance lease liabilities (leases with terms in excess of one year) for the next five years and thereafter as of October 2, 2021 (in thousands):
Operating LeasesFinance LeasesTotal
2021$3,877 $561 $4,438 
202212,620 2,244 14,864 
202312,743 2,078 14,821 
202412,762 2,325 15,087 
202511,998 1,995 13,993 
Thereafter21,168 1,164 22,332 
Total lease payments75,168 10,367 85,535 
Less: Effect of discounting to net present value10,117 501 10,618 
Present value of lease liabilities$65,051 $9,866 $74,917 

The following table presents supplemental cash flow information related to our leases (in thousands):
Nine Months Ended October 2, 2021Nine Months Ended September 26, 2020
Cash paid for amounts included in measurement of liabilities:
Operating cash flows used in operating leases$9,236 $7,770 
Operating cash flows used in finance leases8649
Financing cash flows used in finance leases600138
Right-of-use assets obtained in exchange for new lease liabilities:
Finance leases$9,517 $ 
Operating leases26,6461,580

To support the continued growth of our business, we entered into a service agreement with a third-party logistics provider to operate a new distribution facility in Memphis, Tennessee with approximately 970 thousand square feet. The service agreement commenced at the end of the second quarter of 2021. The initial term of the agreement is 5 years. As of July 3, 2021, we recognized an operating lease right-of-use asset and a finance lease with corresponding operating and finance lease liabilities, respectively, for this distribution facility.
5. INCOME TAXES

Income tax expense was $13.7 million and $16.6 million for the three months ended October 2, 2021 and September 26, 2020, respectively. The effective tax rate for the three months ended October 2, 2021 was 21%, compared to 24% for the three months ended September 26, 2020. The impact of a discrete tax benefit related to stock compensation resulted in a decrease in income tax expense and a lower effective tax rate for the three months ended October 2, 2021.

Income tax expense was $36.5 million and $30.7 million for the nine months ended October 2, 2021 and September 26, 2020, respectively. The increase in income tax expense is due to higher income before income taxes, partially offset by higher discrete tax benefit related to stock compensation in the nine months ended October 2, 2021. The effective tax rate for the nine months ended October 2, 2021 was 21%, compared to 25% for the nine months ended September 26, 2020. The impact of a discrete tax benefit related to stock compensation resulted in a lower effective tax rate for the nine months ended October 2, 2021.

Deferred tax liabilities were $8.9 million as of October 2, 2021 and $5.2 million as of January 2, 2021, respectively, which is presented in other liabilities on our unaudited condensed consolidated balance sheet.

For interim periods, our income tax expense and resulting effective tax rate are based upon an estimated annual effective tax rate adjusted for the effects of items required to be treated as discrete to the period, including changes in tax laws, changes in estimated exposures for uncertain tax positions, and other items.
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6. STOCK-BASED COMPENSATION

We award stock-based compensation to employees and directors under the 2018 Equity Incentive Plan (the “2018 Plan”), which was adopted by our Board of Directors and became effective upon the completion of our initial public offering in October 2018. The 2018 Plan replaced the 2012 Equity and Performance Incentive Plan, as amended and restated on June 20, 2018 (the “2012 Plan”). Any remaining shares available for issuance under the 2012 Plan as of the date of our initial public offering in October 2018 are not available for future issuance. However, shares subject to stock awards granted under the 2012 Plan (a) that expire or terminate without being exercised or (b) that are forfeited under an award return to the 2018 Plan.

We recognized non-cash stock-based compensation expense of $3.8 million and $2.3 million for the three months ended October 2, 2021 and September 26, 2020, respectively. For the nine months ended October 2, 2021 and September 26, 2020, we recognized non-cash stock-based compensation expense of $11.3 million and $6.3 million, respectively. At October 2, 2021, total unrecognized non-cash stock-based compensation expense of $26.1 million for all stock-based compensation plans is expected to be recognized over a weighted-average period of 2.0 years.

Stock-based activity for the nine months ended October 2, 2021 is summarized below (in thousands, except per share data):

Stock OptionsPerformance-Based
Restricted Stock Awards
Restricted Stock Units, Restricted Stock Awards, and Deferred Stock Units
Number of OptionsWeighted
Average Exercise
Price
Number of PBRSsWeighted
Average Grant
Date Fair Value
Number of RSUs, RSAs, and DSUsWeighted
Average Grant Date
Fair Value
Balance, January 2, 20211,254 $16.79 146 $32.84 473 $30.99 
Granted  81 79.66 225 78.50 
Exercised/released(286)9.77   (226)30.28 
Forfeited/expired  (18)60.71 (47)50.71 
Balance, October 2, 2021968 $18.86 209 $48.59 425 $54.34 

7. EARNINGS PER SHARE
Basic income per share is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted income per share includes the additional effect of all potentially dilutive securities, which includes dilutive stock-based awards granted under stock-based compensation plans.
The following table sets forth the calculation of earnings per share and weighted-average common shares outstanding at the dates indicated (in thousands, except per share data):
Three Months EndedNine Months Ended
October 2,
2021
September 26,
2020
October 2,
2021
September 26,
2020
Net income$52,967 $51,445 $139,721 $93,407 
Weighted-average common shares outstanding—basic87,526 87,032 87,343 86,933 
Effect of dilutive securities1,224 1,062 1,293 744 
Weighted-average common shares outstanding—diluted88,750 88,094 88,636 87,677 
Earnings per share
Basic$0.61 $0.59 $1.60 $1.07 
Diluted$0.60 $0.58 $1.58 $1.07 
Effects of potentially dilutive securities are presented only in periods in which they are dilutive. No outstanding stock-based awards were excluded from the calculation of diluted earnings per share for the three months ended October 2, 2021. For the three months ended September 26, 2020, outstanding stock-based awards representing less than 0.1 million shares of common stock were excluded from the calculation of diluted earnings per share, because their effect would be anti-dilutive.
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For the nine months ended October 2, 2021 and September 26, 2020, outstanding stock-based awards representing less than 0.1 million and 0.2 million shares, respectively, of common stock were excluded from the calculation of diluted earnings, because their effect would be anti-dilutive.
8. COMMITMENTS AND CONTINGENCIES

Claims and Legal Proceedings

We are involved in various claims and legal proceedings, some of which are covered by insurance. We believe that our existing claims and proceedings, and the potential losses relating to such contingencies, will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Note Regarding Forward-Looking Statements

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes to those statements included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those described in more detail in Part I “Item 1A. Risk Factors” included in this Quarterly Report on Form 10-Q. See also “Cautionary Statement Regarding Forward-Looking Statements” immediately prior to Part I, Item I in this Quarterly Report on Form 10-Q.
Overview of Business

Headquartered in Austin, Texas, YETI is a global designer, retailer, and distributor of innovative outdoor products. From coolers and drinkware to bags and apparel, YETI products are built to meet the unique and varying needs of diverse outdoor pursuits, whether in the remote wilderness, at the beach, or anywhere life takes you. By consistently delivering high-performing, exceptional products, we have built a strong following of brand loyalists throughout the world, ranging from serious outdoor enthusiasts to individuals who simply value products of uncompromising quality and design. We have an unwavering commitment to outdoor and recreation communities, and we are relentless in our pursuit of building superior products for people to confidently enjoy life outdoors and beyond.

We distribute our products through a balanced omni-channel platform, consisting of our wholesale and direct-to-consumer (“DTC”) channels. In our wholesale channel, we sell our products through select national and regional accounts and an assemblage of independent retail partners throughout the United States, Canada, Australia, New Zealand, Europe, and Japan. We carefully evaluate and select retail partners that have an image and approach that are consistent with our premium brand and pricing. Our domestic national and regional specialty retailers include Dick’s Sporting Goods, Lowe’s Home Improvement, REI, Academy Sports + Outdoors, Bass Pro Shops, Ace Hardware, and Scheels. We sell our products in our DTC channel to customers on YETI.com, country and region specific YETI websites, and YETI Authorized on the Amazon Marketplace, as well as customized products with licensed marks and original artwork through our corporate sales program and at YETI.com. Our corporate sales program offers customized products to corporate customers for a wide-range of related events and activities, and in certain instances may also offer products to re-sell. Additionally, we sell our full line of products in our retail stores.

The terms “we,” “us,” “our,” and “the Company” as used herein and unless otherwise stated or indicated by context, refer to YETI Holdings, Inc. and its subsidiaries.
COVID-19 and Operational Update

The COVID-19 pandemic continues to significantly impact the global economy and cause disruption and volatility. We continue to monitor the situation and our focus remains to prioritize the health and safety of our employees and our consumers.

In the final weeks of the first quarter of 2020, our sales were adversely impacted due to the decrease in consumer spending and temporary store closures attributed to the COVID-19 pandemic. However, in the second quarter of 2020, we began to see increased demand for outdoor recreation and leisure lifestyle products and, to date, consumer demand for our products has remained robust.

The COVID-19 pandemic has impacted some of our manufacturing partners and logistics providers. During 2021, we began experiencing extended inventory transit times, primarily due to port congestion and transportation delays as well as labor and container shortages, which has negatively impacted product availability, most prominently in our wholesale channel. As a result, we remain inventory constrained and continue to work to replenish our distribution channels to meet customer demand.

The resurgence of COVID-19 lockdowns in key sourcing countries, particularly Vietnam, has also resulted in additional supply disruptions. Additionally, we have experienced higher inbound freight cost and certain product input costs as a result of this dynamic environment, which negatively impacted gross margin beginning in the second quarter of 2021. We expect inbound freight costs and certain product input costs will continue to be elevated throughout the remainder of the fiscal year.

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To date, the COVID-19 pandemic and its effects have not had a material adverse impact on our net sales or operations. We recognize that we are operating in a challenging and highly uncertain landscape and we believe we may continue to experience varying degrees of disruption and volatility. We are continuing to monitor and navigate these conditions, including disruptions to our supply chain and product availability, as well as costs, and potentially take additional actions to address and manage them. While we intend to focus on disciplined investments for future, long-term growth, in certain circumstances, there may be developments outside our control requiring us to adjust our operating plan. As such, given the dynamic nature of this situation, including resurgences of COVID-19 and, in particular, new and more contagious or vaccine resistant variants, as well as uncertainties about the magnitude and duration of global supply chain constraints, we cannot reasonably estimate the impacts that these conditions may have on our financial condition, results of operations or cash flows in the future. In addition, see Item 1A, “Risk Factors - Risks Related to Market and Global Economic Conditions,” included herein for updates to our risk factors regarding risks associated with the COVID-19 pandemic.

Recent Developments

New Distribution Facility

To support the continued growth of our business, we entered into a service agreement with a third-party logistics provider to operate a new distribution facility in Memphis, Tennessee with approximately 970 thousand square feet. The service agreement commenced at the end of the second quarter of 2021. The initial term of the agreement is 5 years. We began distributing from this facility in the third quarter of fiscal 2021, and we expect to exit our distribution facility in Dallas, Texas by the end of 2021.

General
Components of Our Results of Operations

Net Sales. Net sales are comprised of wholesale channel sales to our retail partners and sales through our direct-to-consumer (“DTC”) channel. Net sales in both channels reflect the impact of product returns, as well as discounts for certain sales programs or promotions.

We discuss the net sales of our products in our two primary categories: Coolers & Equipment and Drinkware. Our Coolers & Equipment category includes hard coolers, soft coolers, bags, outdoor equipment, and cargo, as well as accessories and replacement parts for these products. Our Drinkware category includes our stainless-steel drinkware products and related accessories. In addition, our Other category is primarily comprised of ice substitutes, and YETI-branded gear, such as shirts, hats, and other miscellaneous products.

Gross profit. Gross profit reflects net sales less cost of goods sold, which primarily includes the purchase cost of our products from our third-party contract manufacturers, inbound freight and duties, product quality testing and inspection costs, depreciation expense of our molds and equipment, and the cost of customizing Drinkware products. We calculate gross margin as gross profit divided by net sales. Our DTC channel generally generates higher gross margin than our wholesale channel due to differentiated pricing between these channels.

Selling, general, and administrative expenses. Selling, general, and administrative (“SG&A”) expenses consist primarily of marketing costs, employee compensation and benefits costs, costs of our outsourced warehousing and logistics operations, costs of operating on third party DTC marketplaces, professional fees and services, non-cash stock-based compensation, cost of product shipment to our customers, depreciation and amortization expense, and general corporate infrastructure expenses. Our variable expenses, including outbound freight, online marketplace fees, third-party logistics fees, and credit card processing fees, will vary as they are dependent on our sales volume and our channel mix. Our DTC channel SG&A costs are generally higher as a percentage of net sales than our wholesale channel distribution costs.

Fiscal Year. We have a 52-to 53-week fiscal year that ends on the Saturday closest in proximity to December 31, such that each quarterly period will be 13 weeks in length, except during a 53-week year when the fourth quarter will be 14 weeks. Our fiscal year ending January 1, 2022 (“fiscal year 2021”) is a 52-week period. The first quarter of our fiscal year 2021 ended on April 3, 2021, the second quarter ended on July 3, 2021, and the third quarter ended on October 2, 2021. Our fiscal year ended January 2, 2021 (“fiscal year 2020”) was a 53-week period. Unless otherwise stated, references to particular years, quarters, months and periods refer to our fiscal years ended in January and the associated quarters, months, and periods of those fiscal years. The unaudited condensed consolidated financial results presented herein represent the three and nine months ended October 2, 2021 and September 26, 2020.
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Results of Operations

The discussion below should be read in conjunction with the following table and our unaudited condensed consolidated financial statements, and related notes. The following table sets forth selected statement of operations data, and their corresponding percentage of net sales, for the periods indicated (dollars in thousands)

Three Months EndedNine Months Ended
October 2, 2021September 26, 2020October 2, 2021September 26, 2020
Statement of Operations
Net sales$362,643 100 %$294,603 100 %$967,864 100 %$715,953 100 %
Cost of goods sold155,640 43 %120,627 41 %406,560 42 %311,994 44 %
Gross profit207,003 57 %173,976 59 %561,304 58 %403,959 56 %
Selling, general, and administrative expenses138,274 38 %103,864 35 %380,101 39 %271,152 38 %
Operating income68,729 19 %70,112 24 %181,203 19 %132,807 19 %
Interest expense(833)— %(1,963)%(2,519)— %(7,730)%
Other expense(1,239)— %(82)— %(2,492)— %(1,020)— %
Income before income taxes66,657 18 %68,067 23 %176,192 18 %124,057 17 %
Income tax expense(13,690)%(16,622)%(36,471)%(30,650)%
Net income$52,967 15 %$51,445 17 %$139,721 14 %$93,407 13 %

Three Months Ended October 2, 2021 Compared to September 26, 2020
Three Months Ended
October 2,
2021
September 26,
2020
Change
(dollars in thousands)$%
Net sales$362,643 $294,603 $68,040 23 %
Gross profit$207,003 $173,976 $33,027 19 %
Gross margin (Gross profit as a % of net sales)57.1 %59.1 %
Selling, general, and administrative expenses$138,274 $103,864 $34,410 33 %
SG&A as a % of net sales38.1 %35.3 %

Net Sales

Net sales increased $68.0 million, or 23%, to $362.6 million for the three months ended October 2, 2021, compared to $294.6 million for the three months ended September 26, 2020. The increase in net sales was primarily driven by our faster growing DTC channel as well as growth in our wholesale channel. DTC channel net sales increased $46.7 million, or 31%, to $197.1 million, compared to $150.4 million in the prior year quarter, driven by both Drinkware and Coolers & Equipment categories. Net sales in our DTC channel continue to be favorably impacted by strong demand for outdoor recreation and leisure lifestyle products as well as a favorable shift to online shopping, resulting in an increase in sales volume compared to the same prior year period. As a result, our channel mix continued to shift towards our DTC channel from 51% in the third quarter of 2020 to 54% in the third quarter of 2021. Net sales in our wholesale channel increased $21.3 million, or 15%, to $165.5 million, compared to $144.2 million in the same period last year, primarily driven by both Drinkware and Coolers & Equipment categories.

Net sales in our two primary product categories were as follows:

Drinkware net sales increased by $39.1 million, or 24%, to $205.0 million, compared to $165.9 million in the prior year quarter, reflecting the continued expansion of our product offerings, including the introduction of new colorways and sizes, and strong demand for customization.
Coolers & Equipment net sales increased by $24.8 million, or 20%, to $149.0 million, compared to $124.2 million in the same period last year, driven by strong performance in bags, outdoor living products, soft coolers, and hard coolers.

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Gross Profit

Gross profit increased $33.0 million, or 19%, to $207.0 million, compared to $174.0 million in the prior year quarter. Gross margin decreased 200 basis points to 57.1% from 59.1% in the prior year quarter. The decrease in gross margin was primarily driven by:

higher inbound freight, which unfavorably impacted gross margin by 210 basis point;
the non-renewal of the Global System of Preferences (“GSP”), which impacted import duties primarily on our hard coolers, and unfavorably impacted gross margin by 110 basis points; and
other impacts, which unfavorably impacted gross margin by 70 basis points.

These decreases were partially offset by 140 basis points from lower inventory reserves as well as 50 basis points from the favorable impact of product cost improvements across our product portfolio.

Selling, General, and Administrative Expenses

SG&A expenses increased $34.4 million, or 33%, to $138.3 million for the three months ended October 2, 2021, compared to $103.9 million for the three months ended September 26, 2020. The 2020 period included the benefit of cost reduction initiatives implemented in response to the COVID-19 pandemic during that quarter. As a percentage of net sales, SG&A expenses increased approximately 280 basis points to 38.1% for the three months ended October 2, 2021 compared to 35.3% for the three months ended September 26, 2020. The increase in SG&A expenses was primarily driven by:

an increase in variable expenses of $7.8 million. Variable expenses remained flat as a percent of net sales, reflecting a more balanced channel mix in the quarter. The higher variable expenses were comprised of:
higher distribution costs including outbound freight, credit card processing fees, and third-party logistics fees, partially offset by a decrease in online marketplace fees; and
an increase in non-variable expenses of $26.6 million, resulting in a 280 basis point increase as a percent of net sales, comprised of:
an increase in marketing expenses, employee costs, non-variable distribution costs, information technology expenses, facilities costs, professional fees, and other operating expenses.

Non-Operating Expenses

Interest expense was $0.8 million for the three months ended October 2, 2021, compared to $2.0 million for the three months ended September 26, 2020. The decrease in interest expense was primarily due to decreased outstanding long-term debt under our Credit Facility (as defined below).

Income tax expense was $13.7 million for the three months ended October 2, 2021, compared to $16.6 million for the three months ended September 26, 2020. The effective tax rate for the three months ended October 2, 2021 was 21%, compared to 24% for the three months ended September 26, 2020. The impact of a discrete tax benefit related to stock compensation resulted in a decrease in income tax expense and a lower effective tax rate for the three months ended October 2, 2021.
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Nine Months Ended October 2, 2021 Compared to September 26, 2020
Nine Months EndedChange
October 2,
2021
September 26,
2020
(dollars in thousands)$%
Net sales$967,864 $715,953 $251,911 35 %
Gross profit$561,304 $403,959 $157,345 39 %
Gross margin (Gross profit as a % of net sales)58.0 %56.4 %    
Selling, general, and administrative expenses$380,101 $271,152 $108,949 40 %
SG&A as a % of net sales39.3 %37.9 %  

Net Sales

Net sales increased $251.9 million, or 35%, to $967.9 million for the nine months ended October 2, 2021, compared to $716.0 million for the nine months ended September 26, 2020. The increase in net sales was primarily driven by our faster growing DTC channel as well as growth in our wholesale channel. DTC channel net sales increased $157.7 million, or 43%, to $520.8 million, compared to $363.1 million in the prior year period, driven by both Drinkware and Coolers & Equipment categories. Net sales in our DTC channel continue to be favorably impacted by strong demand for outdoor recreation and leisure lifestyle products as well as a favorable shift to online shopping, resulting in an increase in sales volume during the period. As a result, our channel mix continued to shift towards our DTC channel from 51% in the first nine months of 2020 to 54% in the first nine months of 2021. Net sales in our wholesale channel increased $94.2 million, or 27%, to $447.1 million, compared to $352.9 million in the same period last year, primarily driven by both Drinkware and Coolers & Equipment. In the second quarter of 2020, wholesale channel net sales were adversely impacted by the temporary store closures due to the COVID-19 pandemic.

Net sales in our two primary product categories were as follows:

Drinkware net sales increased by $153.9 million, or 39%, to $546.8 million, compared to $392.9 million in the prior year period, reflecting the continued expansion of our Drinkware product offerings, including the introduction of new colorways and sizes, and strong demand for customization.
Coolers & Equipment net sales increased by $88.0 million, or 28%, to $400.3 million, compared to $312.3 million in the same period last year, primarily driven by growth in bags, outdoor living products, soft coolers, hard coolers, and cargo.

Gross Profit

Gross profit increased $157.3 million, or 39%, to $561.3 million compared to $404.0 million in the prior year period. Gross margin increased 160 basis points to 58.0% from 56.4% in the same period last year. The increase in gross margin was primarily driven by:

product cost improvements across our product portfolio, which favorably impacted gross margin by approximately 90 basis points;
lower inventory reserves, which favorably impacted gross margin by 80 basis points;
an increase in the mix of higher margin DTC channel net sales, which favorably impacted gross margin by approximately 80 basis points;
fewer promotions in our DTC channel, which favorably impacted gross margin by 20 basis points;
decreased tariffs, which favorably impacted gross margin by 10 basis points; and
all other impacts, which favorably impacted gross margin by 10 basis points.

These gains were partially offset by 80 basis points from the unfavorable impact of the non-renewal of the GSP which impacted import duties primarily on our hard coolers, as well as higher inbound freight, which unfavorably impacted gross margin by 50 basis points.



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Selling, General, and Administrative Expenses

SG&A expenses increased by $108.9 million, or 40%, to $380.1 million for the nine months ended October 2, 2021 compared to $271.2 million for the nine months ended September 26, 2020. The 2020 period included the benefit of cost reduction initiatives implemented in response to the COVID-19 pandemic. As a percentage of net sales, SG&A increased 140 basis points to 39.3% for the nine months ended October 2, 2021 compared to 37.9% for the nine months ended September 26, 2020. The increase in SG&A expenses was primarily driven by:

an increase in variable expenses of $30.6 million, resulting in a 10 basis point increase as a percent of net sales, driven by our faster growing and higher margin DTC channel, which grew to 54% of net sales during the period, comprised of:
higher distribution costs, including outbound freight, credit card processing fees, online marketplace fees, and third-party logistics fees; and
an increase in non-variable expenses of $78.3 million, resulting in a 130 basis point increase as a percent of net sales, comprised of:
an increase in marketing expenses, employee costs, information technology expenses, professional fees, non-variable distribution costs, higher facilities costs, and other operating expenses.

Non-Operating Expenses

Interest expense was $2.5 million for the nine months ended October 2, 2021, compared to $7.7 million for the nine months ended September 26, 2020. The decrease in interest expense was primarily due to decreased outstanding long-term debt under our Credit Facility (as defined below).

Income tax expense was $36.5 million for the nine months ended October 2, 2021, compared to $30.7 million for the nine months ended September 26, 2020. The increase in income tax expense is due to higher income before taxes partially offset by higher discrete tax benefit related to stock compensation in the nine months ended October 2, 2021. The effective tax rate for the nine months ended October 2, 2021 was 21%, compared to 25% for the nine months ended September 26, 2020. The impact of a discrete tax benefit related to stock compensation resulted in a lower effective tax rate for the nine months ended October 2, 2021.
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Liquidity and Capital Resources

Our cash requirements have principally been for working capital purposes, long-term debt repayments, and capital expenditures. We fund our working capital, primarily inventory, accounts receivable, accounts payable as well as capital investments from cash flows from operating activities, cash on hand, and borrowings available under our Revolving Credit Facility (as defined below). As discussed under “COVID-19 and Operational Update” above, although the potential magnitude and economic impacts of COVID-19 and its effects are highly uncertain, we believe that our current operating performance, operating plan, our strong cash position, including cash generated from operations and borrowings available under our Revolving Credit Facility, will be sufficient to satisfy our liquidity needs and capital expenditure requirements for at least the next twelve months.

As of October 2, 2021, we had a cash balance of $259.3 million and $43.0 million of working capital (excluding cash), and $150.0 million of borrowings available under the Revolving Credit Facility.

We are party to a senior secured credit agreement (the “Credit Facility”) that provides for a $150.0 million revolving credit facility maturing on December 17, 2024 (“Revolving Credit Facility”) and a $300.0 million Term Loan A maturing on December 17, 2024 (the “Term Loan A”). At October 2, 2021, we had $118.1 million principal amount of indebtedness outstanding related to Term Loan A under the Credit Facility and no amounts outstanding under the Revolving Credit Facility. The weighted average interest rates for borrowings under Term Loan A was 1.85% during the nine months ended October 2, 2021. At October 2, 2021, we were in compliance with all covenants and expect to remain in compliance with all covenants under the Credit Facility.

Cash Flows from Operating, Investing, and Financing Activities

The following table summarizes our cash flows from operating, investing and financing activities for the periods indicated (in thousands):
Nine Months Ended
October 2,
2021
September 26,
2020
Cash flows provided by (used in):
Operating activities$73,199 $239,099 
Investing activities(47,908)(16,281)
Financing activities(18,188)(60,382)
Operating Activities

Cash flows related to operating activities are dependent on net income, non-cash adjustments to net income, and changes in working capital. The decrease in cash provided by operating activities in the first nine months of fiscal 2021 compared to net cash provided by operating activities in the first nine months of fiscal 2020 is primarily due to an increase in net cash used for working capital, partially offset by an increase in net income, adjusted for non-cash items, for the periods compared. The increase in working capital was primarily due to an increase in inventory, partially offset by an increase in accounts payable.
Investing Activities
The increase in cash used in investing activities in the first nine months of fiscal 2021 primarily related to purchases for technology upgrades and enhancements, including the phased upgrade of our SAP enterprise resource planning (“ERP”) system and investment in data analytics, as well as production molds, tooling and equipment, and facilities.
Financing Activities

The decrease in cash used by financing activities in the first nine months of fiscal 2021 was primarily driven by higher repayments of long-term debt in the first nine months of fiscal 2020.

For 2021, we expect capital expenditures for property and equipment (excluding finance lease assets) to be between $55 million and $60 million, primarily to support our growing business with investments in technology, including the phased upgrade of our SAP ERP system and investments in data analytics, and production molds and tooling and equipment to support both new product innovation and to increase production capacity.
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Off-Balance Sheet Arrangements

At October 2, 2021 and January 2, 2021, we had no off-balance sheet debt or arrangements.
Recent Accounting Pronouncements

For a description of recently issued and adopted accounting pronouncements, including the respective dates of adoption and expected effects on our results of operations and financial condition, see “Recently Adopted Accounting Guidance” and “Recent Accounting Guidance Not Yet Adopted” in Note 1 of the Unaudited Condensed Consolidated Financial Statements.
Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates. A discussion of the accounting policies that management considers critical in that they involve significant management judgments and assumptions, require estimates about matters that are inherently uncertain and because they are important for understanding and evaluating our reported financial results is included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended January 2, 2021 filed with the U.S. Securities and Exchange Commission (“SEC”). Other than the adoption of recent accounting standards as discussed in Note 1 of our Unaudited Condensed Consolidated Financial Statements, there have been no significant changes to our critical accounting policies.
Item 3. Quantitative and Qualitative Disclosures About Market Risk 
There have been no material changes to our market risk exposures or management of market risk from those disclosed in Quantitative and Qualitative Disclosures About Market Risk included under Item 7A in our Annual Report on Form 10-K for the year ended January 2, 2021.
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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to ensure that information required to be disclosed is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding disclosures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of October 2, 2021.

Changes in Internal Control over Financial Reporting

During the quarter ended October 2, 2021, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations in Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures, or our internal controls, will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake or fraud. Additionally, controls can be circumvented by individuals or groups of persons or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements in our public reports due to error or fraud may occur and not be detected.


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PART II. OTHER INFORMATION
Item 1. Legal Proceedings

We are involved in various claims and legal proceedings, some of which are covered by insurance. We believe that our existing claims and proceedings, and the probability of losses relating to such contingencies, will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

Item 1A. Risk Factors

The risks and uncertainties discussed below update and supersede the risks and uncertainties previously disclosed in Part I, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended July 3, 2021, which was filed with the SEC on August 12, 2021. There have been no material changes to the risks and uncertainties previously disclosed in such Quarterly Report on Form 10-Q.

The risks discussed below are not the only ones facing our business but do represent those risks that we believe are material to us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also harm our business. Please read the cautionary notice regarding forward-looking statements under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Risks Related to Our Business, Operations and Industry

Our business depends on maintaining and strengthening our brand to generate and maintain ongoing demand for our products, and a significant reduction in such demand could harm our results of operations.

The YETI name and premium brand image are integral to the growth of our business, as well as to the implementation of our strategies for expanding our business. Our success depends on the value and reputation of our brand, which, in turn, depends on factors such as the quality, design, performance, functionality, and durability of our products, the image of our e-commerce platform and retail partner floor spaces, our communication activities, including advertising, social media, and public relations, and our management of the customer experience, including direct interfaces through customer service. Maintaining, promoting, and positioning our brand are important to expanding our customer base and will depend largely on the success of our marketing and merchandising efforts and our ability to provide consistent, high-quality customer experiences. We intend to continue making substantial investments in these areas in order to maintain and enhance our brand, and such investments may not be successful. Ineffective marketing, negative publicity, product diversion to unauthorized distribution channels, product or manufacturing defects, counterfeit products, unfair labor practices, and failure to protect the intellectual property rights in our brand are some of the potential threats to the strength of our brand, and those and other factors could rapidly and severely diminish customer confidence in us. Furthermore, these factors could cause our customers to lose the personal connection they feel with the YETI brand. We believe that maintaining and enhancing our brand image in our current markets and in new markets where we have limited brand recognition is important to expanding our customer base. If we are unable to maintain or enhance our brand in current or new markets, our growth strategy and results of operations could be harmed.

If we are unable to successfully design, develop and market new products, our business may be harmed.

The market for products in the outdoor and recreation products industry is characterized by new product introductions, frequent enhancements to existing products, and changing customer demands, needs and preferences. To maintain and increase sales, we must continue to introduce new products and improve or enhance our existing products on a timely basis to respond to new and evolving consumer preferences. The success of our new and enhanced products depends on many factors, including anticipating consumer preferences, finding innovative solutions to consumer problems, differentiating our products from those of our competitors, and maintaining the strength of our brand. The design and development of our products is costly, and we typically have several products in development at the same time. Problems in the design or quality of our products, or delays in product introduction, may harm our brand, business, financial condition, and results of operations. Any new products that we develop and market may not generate sufficient revenues to recoup their development, production, marketing, selling and other costs.

Our business could be harmed if we are unable to accurately forecast our results of operations and growth rate.

We may not be able to accurately forecast our results of operations and growth rate. Forecasts are particularly challenging as we expand into new markets and geographies, develop and market new products, and face further uncertainty related to the duration and impact of the rapidly evolving COVID-19 pandemic and its effects, including the impact of global supply chain constraints. Our historical sales, expense levels, and profitability may not be an appropriate basis for forecasting future results.

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Failure to accurately forecast our results of operations and growth rate could cause us to make poor operating decisions and we may not be able to adjust in a timely manner. Consequently, actual results could be materially lower than anticipated. Even if the markets in which we compete expand, we cannot assure you that our business will grow at similar rates, if at all. Furthermore, if we fail to accurately forecast our results of operations and growth rate, we may experience excess inventory levels or a shortage of product to deliver to our customers. Inventory levels in excess of customer demand may result in inventory write-downs or write-offs and the sale of excess inventory at discounted prices or in less preferred distribution channels, which could impair our brand image and harm our gross margin. In addition, if we underestimate our growth rate and the demand for our products, our manufacturers may not be able to produce products to meet our customer requirements, and this could result in delays in the shipment of our products and our ability to recognize revenue, lost sales, as well as damage to our reputation and retailer and distributor relationships. For more information regarding the inventory risk related to our potential inability to accurately forecast our results of operations, please see “— Our results of operations could be materially harmed if we are unable to accurately forecast demand for our products.”

We may not be able to effectively manage our growth.

As we grow our business, slower growing or reduced demand for our products, increased competition, a decrease in the growth rate of our overall market, failure to develop and successfully market new products, or the maturation of our business or market could harm our business. We have made and expect to continue to make significant investments in our research and development and sales and marketing organizations, expand our operations and infrastructure both domestically and internationally, design and develop new products, and enhance our existing products. In addition, in connection with operating as a public company, we will incur significant additional legal, accounting, and other expenses that we did not incur as a private company. If our sales do not increase at a sufficient rate to offset these increases in our operating expenses, our profitability may decline in future periods.

We have expanded our operations rapidly since our inception. Our employee headcount and the scope and complexity of our business have increased substantially over the past several years. We have only a limited history operating our business at its current scale. Our management team does not have substantial tenure working together. Consequently, if our operations continue to grow at a rapid pace, we may experience difficulties in managing this growth and building the appropriate processes and controls. Future rapid growth may increase the strain on our resources, and we could experience operating difficulties, including difficulties in sourcing, logistics, recruiting, maintaining internal controls, marketing, designing innovative products, and meeting consumer needs. If we do not adapt to meet these evolving challenges, the strength of our brand may erode, the quality of our products may suffer, we may not be able to deliver products on a timely basis to our customers, and our corporate culture may be harmed.

Our marketing strategy of associating our brand and products with activities rooted in passion for the outdoors may not be successful with existing and future customers.

We believe that we have been successful in marketing our products by associating our brand and products with activities rooted in passion for the outdoors. To sustain long-term growth, we must continue to successfully promote our products to consumers who identify with or aspire to these activities, as well as to individuals who simply value products of uncompromising quality and design. If we fail to continue to successfully market and sell our products to our existing customers or expand our customer base, our sales could decline, or we may be unable to grow our business.

If we fail to attract new customers, or fail to do so in a cost-effective manner, we may not be able to increase sales.

Our success depends, in part, on our ability to attract customers in a cost-effective manner. In order to expand our customer base, we must appeal to and attract customers ranging from serious outdoor enthusiasts to individuals who simply value products of uncompromising quality and design. We have made, and we expect that we will continue to make, significant investments in attracting new customers, including through the use of corporate partnerships, YETI Ambassadors, traditional, digital, and social media, original YETI films, and participation in, and sponsorship of, community events. Marketing campaigns can be expensive and may not result in the cost-effective acquisition of customers. Further, as our brand becomes more widely known, future marketing campaigns may not attract new customers at the same rate as past campaigns. If we are unable to attract new customers, or fail to do so in a cost-effective manner, our growth could be slower than we expect and our business will be harmed.

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Our growth depends, in part, on expanding into additional consumer markets, and we may not be successful in doing so.

We believe that our future growth depends not only on continuing to reach our current core demographic, but also continuing to broaden our retail partner and customer base. The growth of our business will depend, in part, on our ability to continue to expand our retail partner and customer bases in the United States, as well as in international markets, including Canada, Australia, Europe, and Japan. In these markets, we may face challenges that are different from those we currently encounter, including competitive, merchandising, distribution, hiring, and other difficulties. We may also encounter difficulties in attracting customers due to a lack of consumer familiarity with or acceptance of our brand, or a resistance to paying for premium products, particularly in international markets. We continue to evaluate marketing efforts and other strategies to expand the customer base for our products. In addition, although we are investing in sales and marketing activities to further penetrate newer regions, including expansion of our dedicated sales force, we cannot assure you that we will be successful. If we are not successful, our business and results of operations may be harmed.

The markets in which we compete are highly competitive and include numerous other brands and retailers that offer a wide variety of products that compete with our products; if we fail to compete effectively, we could lose our market position.

The markets in which we compete are highly competitive, with low barriers to entry. Numerous other brands and retailers offer a wide variety of products that compete with our coolers, drinkware, and other products, including our bags, storage, and outdoor lifestyle products and accessories. Competition in these product markets is based on a number of factors including product quality, performance, durability, styling, brand image and recognition, and price. We believe that we are one of the market leaders in both the U.S. premium cooler and U.S. premium stainless-steel drinkware markets. We believe that we have been able to compete successfully largely on the basis of our brand, superior design capabilities, and product development, as well as on the breadth of our independent retailers, national, and regional retail partners, and growing DTC channel. Our competitors may be able to develop and market higher quality products that compete with our products, sell their products for lower prices, adapt to changes in consumers’ needs and preferences more quickly, devote greater resources to the design, sourcing, distribution, marketing, and sale of their products, or generate greater brand recognition than us. In addition, as we expand into new product categories, we have faced, and will continue to face, different and, in some cases, more formidable competition. We believe many of our competitors and potential competitors have significant competitive advantages, including longer operating histories, ability to leverage their sales efforts and marketing expenditures across a broader portfolio of products, global product distribution,