10-Q 1 yeti-20221001.htm 10-Q yeti-20221001
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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 01, 2022
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 86,248,108 shares of Common Stock ($0.01 par value) outstanding as of October 27, 2022.



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 further 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.
If we cannot maintain prices or effectively implement price increases, our margins may decrease.
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, warranty liability, 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
Public health crises, including the COVID-19 pandemic, could negatively impact our business, sales, financial condition, results of operations and cash flows.
Adverse economic conditions, such as a downturn in the economy or inflationary conditions resulting in rising prices, could adversely affect consumer purchases of discretionary items, 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 phase-out of LIBOR may negatively impact our financial 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.
We cannot guarantee that our share repurchase program will enhance long-term stockholder value.
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 be the target of stockholder activism, an unsolicited takeover proposal or a proxy contest or short sellers, which could negatively impact 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 1,
2022
January 1,
2022
ASSETS
Current assets
Cash$77,763 $312,189 
Accounts receivable, net93,898 109,530 
Inventory439,443 318,864 
Prepaid expenses and other current assets33,564 29,584 
Total current assets644,668 770,167 
Property and equipment, net128,361 119,044 
Operating lease right-of-use assets55,348 54,971 
Goodwill54,293 54,293 
Intangible assets, net98,142 95,314 
Other assets2,414 2,575 
Total assets$983,226 $1,096,364 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable$122,813 $191,319 
Accrued expenses and other current liabilities107,003 132,309 
Taxes payable7,584 14,514 
Accrued payroll and related costs3,240 30,844 
Current operating lease liabilities10,580 10,167 
Current maturities of long-term debt24,411 24,560 
Total current liabilities275,631 403,713 
Long-term debt, net of current portion77,756 95,741 
Operating lease liabilities, non-current55,764 55,940 
Other liabilities23,414 23,147 
Total liabilities432,565 578,541 
Commitments and contingencies (Note 7)
Stockholders’ Equity
Common stock, par value $0.01; 600,000 shares authorized; 87,924 and 86,248 shares issued and outstanding at October 1, 2022, respectively, and 87,727 shares issued and outstanding at January 2, 2021, respectively
879 877 
Treasury stock, at cost; 1,677 shares at October 1, 2022
(100,025) 
Preferred stock, par value $0.01; 30,000 shares authorized; no shares issued or outstanding
  
Additional paid-in capital351,033 337,735 
Retained earnings296,289 178,858 
Accumulated other comprehensive income2,485 353 
Total stockholders’ equity550,661 517,823 
Total liabilities and stockholders’ equity$983,226 $1,096,364 
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 1,
2022
October 2,
2021
October 1,
2022
October 2,
2021
Net sales$433,556 $362,643 $1,147,226 $967,864 
Cost of goods sold211,149 155,640 550,860 406,560 
Gross profit222,407 207,003 596,366 561,304 
Selling, general, and administrative expenses153,940 138,274 426,263 380,101 
Operating income68,467 68,729 170,103 181,203 
Interest expense(1,495)(833)(3,221)(2,519)
Other expense(7,281)(1,239)(12,202)(2,492)
Income before income taxes59,691 66,657 154,680 176,192 
Income tax expense(14,171)(13,690)(37,249)(36,471)
Net income$45,520 $52,967 $117,431 $139,721 
Net income per share
Basic$0.53 $0.61 $1.36 $1.60 
Diluted$0.52 $0.60 $1.35 $1.58 
Weighted-average common shares outstanding
Basic86,208 87,526 86,580 87,343 
Diluted86,831 88,750 87,305 88,636 
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 1,
2022
October 2,
2021
October 1,
2022
October 2,
2021
Net income$45,520 $52,967 $117,431 $139,721 
Other comprehensive income (loss)
Foreign currency translation adjustments921 (84)2,132 875 
Total comprehensive income$46,441 $52,883 $119,563 $140,596 
See Notes to Unaudited Condensed Consolidated Financial Statements
3

YETI HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands)
Three Months Ended October 1, 2022
Common StockAdditional
Paid-In
Capital
Treasury StockRetained Earnings Accumulated
Other
Comprehensive
Income
Total
Stockholders’
Equity
SharesAmountSharesAmount
Balance, July 2, 202287,851 $878 $346,675 (1,677)$(100,025)$250,769 $1,564 $499,861 
Stock-based compensation— — 4,662 — — — — 4,662 
Common stock issued under employee benefit plans86 1 277 — — — — 278 
Common stock withheld related to net share settlement of stock-based compensation(13)— (581)— — — — (581)
Other comprehensive income— — — — — — 921 921 
Net income— — — — — 45,520 — 45,520 
Balance, October 1, 202287,924 $879 $351,033 (1,677)$(100,025)$296,289 $2,485 $550,661 
Three Months Ended October 2, 2021
Common StockAdditional
Paid-In
Capital
Treasury StockRetained EarningsAccumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders’
Equity
SharesAmountSharesAmount
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 
See Notes to Unaudited Condensed Consolidated Financial Statements


4

YETI HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands)
Nine Months Ended October 1, 2022
Common StockAdditional
Paid-In
Capital
Treasury StockRetained Earnings Accumulated
Other
Comprehensive
 Income
Total
Stockholders’
Equity
SharesAmountSharesAmount
Balance, January 1, 202287,727 $877 $337,735   $178,858 $353 $517,823 
Stock-based compensation— — 14,883 — — — — 14,883 
Common stock issued under employee benefit plans
229 2 276 — — — — 278 
Common stock withheld related to net share settlement of stock-based compensation(32)— (1,861)— — — — (1,861)
Repurchase of common stock— — — (1,677)(100,025)— — (100,025)
Other comprehensive income— — — — — — 2,132 2,132 
Net income— — — — — 117,431 — 117,431 
Balance, October 1, 202287,924 $879 $351,033 $— $(1,677)$— $(100,025)$296,289 $2,485 $550,661 
Nine Months Ended October 2, 2021
Common StockAdditional
Paid-In
Capital
Treasury Stock(Accumulated Deficit)
Retained
Earnings
Accumulated
Other
Comprehensive
(Loss) Income
Total
Stockholders’
Equity
SharesAmountSharesAmount
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 

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 1,
2022
October 2,
2021
Cash Flows from Operating Activities:
Net income$117,431 $139,721 
Adjustments to reconcile net income to cash (used in) provided by operating activities:
Depreciation and amortization28,504 23,440 
Amortization of deferred financing fees458 516 
Stock-based compensation14,883 11,339 
Deferred income taxes(1,138)3,764 
Impairment of long-lived assets181 2,331 
Other10,215 3,213 
Changes in operating assets and liabilities:
Accounts receivable14,679 (18,769)
Inventory(127,362)(126,381)
Other current assets(2,944)(5,206)
Accounts payable and accrued expenses(121,515)48,184 
Taxes payable(6,773)(11,441)
Other1,166 2,488 
Net cash (used in) provided by operating activities(72,215)73,199 
Cash Flows from Investing Activities:
Purchases of property and equipment(32,493)(41,159)
Additions of intangibles, net(7,924)(6,749)
Net cash used in investing activities(40,417)(47,908)
Cash Flows from Financing Activities:
Repayments of long-term debt(16,875)(16,875)
Taxes paid in connection with employee stock transactions(1,861)(3,507)
Proceeds from employee stock transactions278 2,794 
Finance lease principal payment(1,730)(600)
Repurchase of common stock(100,025) 
Net cash used in financing activities(120,213)(18,188)
Effect of exchange rate changes on cash(1,581)(1,069)
Net (decrease) increase in cash(234,426)6,034 
Cash, beginning of period312,189 253,283 
Cash, end of period$77,763 $259,317 
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 Holdings, Inc. 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. Certain prior period amounts have been reclassified to conform to the current period presentation. The consolidated balance sheet as of January 1, 2022 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 1, 2022, which should be read in conjunction with these unaudited consolidated financial statements and notes thereto.

Out-of-Period Adjustment

During the first quarter of 2022, we recognized $6.4 million in cost of goods sold for inbound freight expense recorded as an out-of-period adjustment. The adjustment was not considered material to the interim or annual consolidated financial statements for the year ended January 1, 2022 or the financial statements of any previously filed interim or annual periods.

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. 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 December 31, 2022 (“2022”) is a 52-week period. The first quarter of our fiscal year 2022 ended on April 2, 2022, the second quarter ended on July 2, 2022, and the third quarter ended on October 1, 2022. Our fiscal year ended January 1, 2022 (“2021”) was a 52-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 1, 2022 and October 2, 2021.
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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. Our allowance for credit losses was $1.0 million as of October 1, 2022 and $1.6 million as of January 1, 2022, 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 our senior secured credit facility (“Credit Facility”) carries a variable interest rate that is based on LIBOR, the London Interbank Offered Rate.

Recent Accounting Guidance Not Yet Adopted

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU is intended to ease the potential accounting and financial reporting burden of reference rate reform, including the expected market transition from the LIBOR and other interbank offered rates to alternative reference rates. The guidance provides optional expedients and scope exceptions for transactions if certain criteria are met. These transactions include contract modifications, hedge accounting, and the sale or transfer of debt securities classified as held-to-maturity. The ASU can be adopted no later than December 31, 2022 with early adoption permitted. We are evaluating the effect of adopting this new accounting guidance. The impact of this guidance on our financial statements and related disclosures will continue to be evaluated through the application period and is not expected to be material.

In September 2022, the FASB issued ASU 2022-04, Liabilities-Supplier Finance Programs (Topic 405-50) - Disclosure of Supplier Finance Program Obligations, which requires disclosures intended to enhance the transparency of supplier finance programs. The ASU requires buyers in a supplier finance program to disclose sufficient information about the program to allow a user of financial statements to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude. The ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. We are currently evaluating the impact of adopting this guidance on our disclosures.

8

No other new accounting pronouncements issued or effective as of October 1, 2022 have had, or are expected to have, a material impact on our consolidated financial statements.

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 doubtful accounts.

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 contract liabilities relate to advance cash deposits received from customers for certain customized product orders. As products are shipped and control transfers, we recognize contract liabilities as revenue.

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

October 1,
2022
January 1,
2022
Accounts receivable, net$93,898 $109,530 
Contract liabilities$(9,136)$(20,761)

For the nine months ended October 1, 2022, we recognized $20.8 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 end-consumer location) for the periods indicated (in thousands):
Three Months EndedNine Months Ended
October 1,
2022
October 2,
2021
October 1,
2022
October 2,
2021
Net Sales by Channel
Wholesale$206,153 $165,504 $539,014 $447,068 
Direct-to-consumer227,403 197,139 608,212 520,796 
Total net sales$433,556 $362,643 $1,147,226 $967,864 
Net Sales by Category
Coolers & Equipment$185,657 $149,002 $482,030 $400,261 
Drinkware238,987 205,035 639,055 546,796 
Other8,912 8,606 26,141 20,807 
Total net sales$433,556 $362,643 $1,147,226 $967,864 
Net Sales by Geographic Region(1)
United States$377,067 $327,413 $1,005,238 $871,194 
International56,489 35,230 141,988 96,670 
Total net sales$433,556 $362,643 $1,147,226 $967,864 
_________________________________
(1) Prior period net sales by geographic region have been reclassified to align with current year presentation which is based on end-consumer location.
For both the three and nine months ended October 1, 2022, our largest single customer represented approximately 12% of gross sales. For the three and nine months ended October 2, 2021, our largest single customer represented approximately 11% and 10% of gross sales, respectively. 
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3. INCOME TAXES

Income tax expense was $14.2 million and $13.7 million for the three months ended October 1, 2022 and October 2, 2021, respectively. The effective tax rate for the three months ended October 1, 2022 was 24%, compared to 21% for the three months ended October 2, 2021. The increase in both the income tax expense and the effective tax rate are primarily due to a lower tax benefit related to stock compensation in the three months ended October 1, 2022.

Income tax expense was $37.2 million and $36.5 million for the nine months ended October 1, 2022 and October 2, 2021, respectively. The effective tax rate for the nine months ended October 1, 2022 was 24%, compared to 21% for the nine months ended October 2, 2021. The increase in both the income tax expense and the effective tax rate are primarily due to a lower tax benefit related to stock compensation in the nine months ended October 1, 2022.

Deferred tax liabilities were $9.7 million as of October 1, 2022 and $10.9 million as of January 1, 2022, 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.
4. STOCK-BASED COMPENSATION

We award stock-based compensation to employees and directors under the 2018 Equity and Incentive Compensation Plan (“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 (“2012 Plan”), as amended and restated on June 20, 2018. Any remaining shares available for issuance under the 2012 Plan as 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 $4.7 million and $3.8 million for the three months ended October 1, 2022 and October 2, 2021, respectively. For the nine months ended October 1, 2022 and October 2, 2021, we recognized non-cash stock-based compensation expense of $14.9 million and $11.3 million, respectively. At October 1, 2022, total unrecognized non-cash stock-based compensation expense of $35.5 million for all stock-based compensation plans is expected to be recognized over a weighted-average period of 2.1 years.

Stock-based activity for the nine months ended October 1, 2022 is summarized below (in thousands, except per share data):

Stock Options
Performance-Based
Restricted Stock Awards and Units(1)
Restricted Stock Units, Restricted Stock Awards, and Deferred Stock Units
Number of OptionsWeighted
Average Exercise
Price
Number of PBRSs and PRSUsWeighted
Average Grant
Date Fair Value
Number of RSUs, RSAs, and DSUsWeighted
Average Grant Date
Fair Value
Balance, January 1, 2022846 $20.05 210 $48.64 433 $55.54 
Granted  113 64.48 469 54.44 
Exercised/released(12)22.84   (217)51.24 
Forfeited/expired(13)18.00 (30)57.50 (68)62.88 
Balance, October 1, 2022821 $20.04 293 $53.84 617 $55.41 
_________________________________
(1) Includes performance-based restricted unit awards (“PRSU”) granted during the nine months ended October 1, 2022. The PRSUs have the same terms as our performance-based restricted stock awards and are treated the same.

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5. EARNINGS PER SHARE
Basic income per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted income per share includes the effect of all potentially dilutive securities, which include dilutive stock options and other stock-based awards.
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 1,
2022
October 2,
2021
October 1,
2022
October 2,
2021
Net income$45,520 $52,967 $117,431 $139,721 
Weighted-average common shares outstanding—basic86,208 87,526 86,580 87,343 
Effect of dilutive securities623 1,224 725 1,293 
Weighted-average common shares outstanding—diluted86,831 88,750 87,305 88,636 
Earnings per share
Basic$0.53 $0.61 $1.36 $1.60 
Diluted$0.52 $0.60 $1.35 $1.58 
Effects of potentially dilutive securities are presented only in periods in which they are dilutive. For the three and nine months ended October 1, 2022, outstanding stock-based awards representing 0.5 million and 0.4 million shares of common stock, respectively, were excluded from the calculation of diluted earnings per share, because their effect would be anti-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 nine months ended October 2, 2021, outstanding stock-based awards representing less than 0.1 million shares of common stock were excluded from the calculation of diluted earnings, because their effect would be anti-dilutive.
6. STOCKHOLDERS’ EQUITY

On February 27, 2022, the Board of Directors authorized a common stock repurchase program of up to $100.0 million. During the three months ended April 2, 2022, we repurchased 1,676,551 shares for an aggregate purchase price of $100.0 million, including fees and commissions, at an average repurchase price of $59.66 per share. Following the repurchases, no shares remained available for future repurchases under the share repurchase program and all of the common stock repurchased is held as treasury stock.
7. 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.

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.
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, among others. 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, 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 in our retail stores. Additionally, we offer 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.

During the first quarter of 2022, our new product launches included the Hopper® M20 soft cooler, improved Hopper® M30 soft cooler, and two new sizes of the Camino™ Carryall as well as new seasonal colorways. In the first quarter and third quarter of 2022, we also strategically implemented price increases on certain hard coolers and tumblers.


We continue to experience challenges associated with the complex and uncertain macroeconomic environment in which we operate. Consistent across many industries, we have experienced, and expect to continue to experience, inflationary pressures and supply chain challenges, including port congestion, container and labor shortages, which have resulted in longer transit times, higher distribution, logistics, and product inputs costs. As a result, we have experienced, and may continue to experience, decreased profitability and delayed product availability for certain products.

Other macroeconomic trends, including rising fuel prices, higher inflation rates, higher interest rates, foreign exchange rate fluctuations, and other related global economic conditions, have led to uncertainty in the economic environment and their impacts remain unknown. While some of these conditions have negatively impacted consumer discretionary spending behavior, we continue to see strong demand for our products.

A continuation or worsening of these macroeconomic trends may continue to adversely impact our business, operations, and financial results. We will continue to monitor and mitigate the effects of the macroeconomic environment on our business.

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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 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, tooling, 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 December 31, 2022 (“2022”) is a 52-week period. The first quarter of our fiscal year 2022 ended on April 2, 2022, the second quarter ended on July 2, 2022, and the third quarter ended on October 1, 2022. Our fiscal year ended January 1, 2022 (“2021”) was a 52-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 1, 2022 and October 2, 2021.
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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 1, 2022October 2, 2021October 1, 2022October 2, 2021
Statement of Operations
Net sales$433,556 100 %$362,643 100 %$1,147,226 100 %$967,864 100 %
Cost of goods sold(1)
211,149 49 %155,640 43 %550,860 48 %406,560 42 %
Gross profit222,407 51 %207,003 57 %596,366 52 %561,304 58 %
Selling, general, and administrative expenses153,940 36 %138,274 38 %426,263 37 %380,101 39 %
Operating income68,467 16 %68,729 19 %170,103 15 %181,203 19 %
Interest expense(1,495)— %(833)— %(3,221)— %(2,519)— %
Other expense(7,281)%(1,239)— %(12,202)%(2,492)— %
Income before income taxes59,691 14 %66,657 18 %154,680 13 %176,192 18 %
Income tax expense(14,171)%(13,690)%(37,249)%(36,471)%
Net income$45,520 10 %$52,967 15 %$117,431 10 %$139,721 14 %
______________________________
(1) Includes $6.4 million of inbound freight expense related to an out-of-period adjustment for the nine months ended October 1, 2022. See Note 1 - Organization and Significant Accounting Policies of the Unaudited Condensed Consolidated Financial Statements for additional information.

Comparison of the Three Months Ended October 1, 2022 and October 2, 2021
Three Months Ended
October 1,
2022
October 2,
2021
Change
(dollars in thousands)$%
Net sales$433,556 $362,643 $70,913 20 %
Gross profit$222,407 $207,003 $15,404 %
Gross margin (Gross profit as a % of net sales)51.3 %57.1 %(580) basis points
Selling, general, and administrative expenses$153,940 $138,274 $15,666 11 %
SG&A as a % of net sales35.5 %38.1 %(260) basis points

Net Sales

Net sales increased $70.9 million, or 20%, to $433.6 million for the three months ended October 1, 2022, compared to $362.6 million for the three months ended October 2, 2021. The increase was mainly driven by volume growth in both our wholesale and DTC channels and the benefit of price increases implemented during the first quarter of 2022.

DTC channel net sales increased $30.3 million, or 15%, to $227.4 million, compared to $197.1 million in the prior year quarter, primarily driven by strong performance in Drinkware. DTC channel mix was 52% in the third quarter of 2022 compared to 54% in the third quarter of 2021. Net sales in our wholesale channel increased $40.6 million, or 25%, to $206.2 million, compared to $165.5 million in the same period last year, primarily driven by our Coolers & Equipment category.

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

Drinkware net sales increased by $34.0 million, or 17%, to $239.0 million, compared to $205.0 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 $36.7 million, or 25%, to $185.7 million, compared to $149.0 million in the same period last year, driven by strong performance in soft coolers, bags and hard coolers.



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Gross Profit

Gross profit increased $15.4 million, or 7%, to $222.4 million, compared to $207.0 million in the prior year quarter. Gross margin rate decreased 580 basis points to 51.3% from 57.1% in the prior year quarter. The decrease in gross margin rate was primarily driven by:

higher inbound freight rates, which unfavorably impacted gross margin by 490 basis points;
higher product costs, which unfavorably impacted gross margin by 150 basis points;
the unfavorable impact of foreign currency exchange rates, which negatively impacted gross margin by 70 basis points;
an unfavorable channel mix shift to wholesale channel net sales, which negatively impacted gross margin by 20 basis points; and
other impacts, which unfavorably impacted gross margin by 20 basis points.

These decreases were partially offset by 170 basis points from price increases.

Selling, General, and Administrative Expenses

SG&A expenses increased $15.7 million, or 11%, to $153.9 million for the three months ended October 1, 2022, compared to $138.3 million for the three months ended October 2, 2021. As a percentage of net sales, SG&A expenses decreased approximately 260 basis points to 35.5% for the three months ended October 1, 2022 from 38.1% for the three months ended October 2, 2021. The increase in SG&A expenses was primarily driven by:

an increase in variable expenses of $14.1 million (increasing SG&A as a percent of net sales by 140 basis points) comprised of:
higher distribution costs including outbound freight rates, online marketplace fees and third-party logistics fees; and
an increase in non-variable expenses of $1.6 million (decreasing SG&A as a percent of net sales by 400 basis points) comprised of:
an increase in non-variable distribution costs, information technology expenses and marketing expenses, partially offset by lower employee costs primarily driven by incentive compensation, and other operating expenses, including lower professional fees.

Non-Operating Expenses

Interest expense was $1.5 million for the three months ended October 1, 2022, compared to $0.8 million for the three months ended October 2, 2021. The increase in interest expense was primarily due to rising interest rates partially offset by decreased outstanding long-term debt.

Other expense was $7.3 million for the three months ended October 1, 2022, compared to $1.2 million for the three months ended October 2, 2021. The increase in other expense was due to foreign currency losses on intercompany balances.

Income tax expense was $14.2 million for the three months ended October 1, 2022, compared to $13.7 million for the three months ended October 2, 2021. The effective tax rate for the three months ended October 1, 2022 was 24%, compared to 21% for the three months ended October 2, 2021. The increase in both the income tax expense and the effective tax rate are primarily due to a lower tax benefit related to stock compensation in the three months ended October 1, 2022.
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Nine Months Ended October 1, 2022 Compared to October 2, 2021
Nine Months EndedChange
October 1,
2022
October 2,
2021
(dollars in thousands)$%
Net sales$1,147,226 $967,864 $179,362 19 %
Gross profit$596,366 $561,304 $35,062 %
Gross margin (Gross profit as a % of net sales)52.0 %58.0 %(600) basis points
Selling, general, and administrative expenses$426,263 $380,101 $46,162 12 %
SG&A as a % of net sales37.2 %39.3 %(210) basis points

Net Sales

Net sales increased $179.4 million, or 19%, to $1,147.2 million for the nine months ended October 1, 2022, compared to $967.9 million for the nine months ended October 2, 2021. The increase in net sales was driven by volume growth in both our DTC and wholesale channels and the benefit of price increases implemented during the first quarter of 2022.

DTC channel net sales increased $87.4 million, or 17%, to $608.2 million, compared to $520.8 million in the prior year period, primarily driven by growth in Drinkware. DTC channel mix was 53% in the first nine months of 2022 compared to 54% in the first nine months of 2021. Net sales in our wholesale channel increased $91.9 million, or 21%, to $539.0 million, compared to $447.1 million in the same period last year, primarily driven by growth in Drinkware.

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

Drinkware net sales increased by $92.3 million, or 17%, to $639.1 million, compared to $546.8 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 $81.8 million, or 20%, to $482.0 million, compared to $400.3 million in the same period last year, primarily driven by growth in bags, soft coolers, hard coolers and outdoor living products.

Gross Profit

Gross profit increased $35.1 million, or 6%, to $596.4 million compared to $561.3 million in the prior year period. Gross margin rate decreased 600 basis points to 52.0% from 58.0% in the same period last year. The decrease in gross margin rate was primarily driven by:

higher inbound freight rates, which unfavorably impacted gross margin by 590 basis points, inclusive of a 60 basis point impact due to an out-of-period adjustment (see Note 1 – Organization and Significant Accounting Policies for additional information);
higher product costs, which unfavorably impacted gross margin by 120 basis points;
the unfavorable impact of foreign currency exchange rates, which negatively impacted gross margin by 60 basis points; and
the non-renewal of the GSP, which impacted import duties and unfavorably impacted gross margin by 30 basis points.

These decreases were partially offset by 160 basis points from price increases and 40 basis points from other impacts.



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Selling, General, and Administrative Expenses

SG&A expenses increased by $46.2 million, or 12%, to $426.3 million for the nine months ended October 1, 2022 compared to $380.1 million for the nine months ended October 2, 2021. As a percentage of net sales, SG&A decreased 210 basis points to 37.2% for the nine months ended October 1, 2022 compared to 39.3% for the nine months ended October 2, 2021. The increase in SG&A expenses was primarily driven by:

an increase in variable expenses of $31.3 million (increasing SG&A as a percent of net sales by 90 basis points) comprised of:
higher distribution costs, including outbound freight rates, third-party logistics fees and online marketplace fees; and
an increase in non-variable expenses of $14.8 million (decreasing SG&A as a percent of net sales by 300 basis points) comprised of:
an increase in non-variable distribution costs, marketing expenses, and information technology expenses, partially offset by a decline in employee costs, primarily driven by incentive compensation, and other operating expenses, including lower professional fees.

Non-Operating Expenses

Interest expense was $3.2 million for the nine months ended October 1, 2022, compared to $2.5 million for the nine months ended October 2, 2021. The increase in interest expense was primarily due to rising interest rates partially offset by decreased outstanding long-term debt.

Other expense was $12.2 million for the nine months ended October 1, 2022, compared to $2.5 million for the nine months ended October 2, 2021. The increase in other expense was due to foreign currency losses on intercompany balances.

Income tax expense was $37.2 million for the nine months ended October 1, 2022, compared to $36.5 million for the nine months ended October 2, 2021. The effective tax rate for the nine months ended October 1, 2022 was 24%, compared to 21% for the nine months ended October 2, 2021. The increase in both the income tax expense and the effective tax rate are primarily due to a lower tax benefit related to stock compensation in the nine months ended October 1, 2022.
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Liquidity and Capital Resources

General

Our cash requirements have principally been for working capital purposes, long-term debt repayments, and capital expenditures. We fund our working capital, primarily inventory and accounts receivable, and 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 “—Overview of Business” above, although the potential magnitude and economic impacts of the current macroeconomic environment are highly uncertain, we believe that our current operating performance, operating plan, our strong cash position, and borrowings available under our Revolving Credit Facility, will be sufficient to satisfy our foreseeable liquidity needs and capital expenditure requirements for at least the next twelve months.

Current Liquidity

As of October 1, 2022, we had a cash balance of $77.8 million and $291.3 million of working capital (excluding cash), and $150.0 million of borrowings available under the Revolving Credit Facility.

Credit Facility

We are party to a senior secured credit agreement (“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 (“Term Loan A”). At October 1, 2022, we had $95.6 million principal amount of indebtedness outstanding related to Term Loan A under the Credit Facility and no outstanding borrowings under the Revolving Credit Facility. The weighted average interest rate for borrowings under Term Loan A was 3.02% during the nine months ended October 1, 2022.

The Credit Facility requires us to comply with certain covenants, including financial covenants regarding our total net leverage ratio and interest coverage ratio. Fluctuations in these ratios may increase our interest expense. Failure to comply with these covenants and certain other provisions of the Credit Facility, or the occurrence of a change of control, could result in an event of default and an acceleration of our obligations under the Credit Facility or other indebtedness that we may incur in the future. At October 1, 2022, we were in compliance with all covenants and expect to remain in compliance with all covenants under the Credit Facility.

Share Repurchase

On February 27, 2022, the Board of Directors authorized a common stock repurchase program of up to $100.0 million. During the three months ended April 2, 2022, we repurchased 1,676,551 shares for an aggregate purchase price of $100.0 million, including fees and commissions, at an average repurchase price of $59.66 per share. Following the repurchases, no shares remained available for future repurchases under the share repurchase program. See Note 6-Stockholders’ Equity of the Unaudited Condensed Consolidated Financial Statements for additional information about the share repurchase program.

Material Cash Requirements

There have been no material changes in our material cash requirements for contractual and other obligations, including capital expenditures, as disclosed under “Material Cash Requirements” included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended January 1, 2022 filed with the U.S. Securities and Exchange Commission (“SEC”).

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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 1,
2022
October 2,
2021
Cash flows provided by (used in):
Operating activities$(72,215)$73,199 
Investing activities(40,417)(47,908)
Financing activities(120,213)(18,188)
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 increase in cash used in operating activities during the nine months ended October 1, 2022 compared to cash provided by operating activities during the nine months ended October 2, 2021 is primarily due to an increase in net cash used for working capital and a decrease in net income, adjusted for non-cash items, for the periods compared. The increase in cash used for working capital was primarily due to a decrease in accounts payable, partially offset by a decrease in accounts receivable.
Investing Activities
The decrease in cash used in investing activities during the nine months ended October 1, 2022 was primarily related to lower purchases for technology upgrades and enhancements, as well as production molds, tooling and equipment, and facilities.
Financing Activities

The increase in cash used by financing activities during the nine months ended October 1, 2022 was primarily driven by repurchases of common stock.
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 “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 1, 2022 filed with the SEC. 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 1, 2022.
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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 (“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 1, 2022.

Changes in Internal Control over Financial Reporting

During the quarter ended October 1, 2022, 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 2, 2022, which was filed with the SEC on August 11, 2022. There have been no material changes to the risks and uncertainties previously disclosed in such Quarterly Report on Form 10-Q.

Our business, financial condition and operating results can be affected by a number of risks and uncertainties, whether currently known or unknown, any one or more of which could, directly or indirectly, cause our actual results of operations and financial condition to vary materially from past, or from anticipated future, results of operations and financial condition. 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 adversely affect our business, 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, ongoing and sustained promotional activities, 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.

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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 current market conditions, including the impact of the COVID-19 pandemic, and the impact of global supply chain constraints and uncertainty related to interest rates, inflation rates, and geopolitical events (including the ongoing conflict between Russia and Ukraine and its effects). Our historical sales, expense levels, and profitability may not be an appropriate basis for forecasting future results.

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. 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. Inflation and rising product costs may also affect our ability to provide products in a cost-effective manner and hinder us from attracting new customers. 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, cargo, 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, larger and broader retailer bases, more established relationships with a larger number of suppliers and manufacturing partners, greater brand recognition, larger or more effective brand ambassador and endorsement relationships, greater financial strength, larger research and development teams, larger marketing budgets, and more distribution and other resources than we do. Some of our competitors may aggressively discount their products or offer other attractive sales terms in order to gain market share, which could result in pricing pressures, reduced profit margins, or lost market share. If we are not able to overcome these potential competitive challenges, effectively market our current and future products, and otherwise compete effectively against our current or potential competitors, our prospects, results of operations, and financial condition could be harmed.
Competitors have imitated and attempted to imitate, and will likely continue to imitate or attempt to imitate, our products and technology. If we are unable to protect or preserve our brand image and proprietary rights, our business may be harmed.

As our business continues to expand, our competitors have imitated or attempted to imitate, and will likely continue to imitate or attempt to imitate, our product designs and branding, which could harm our business and results of operations. Only a portion of the intellectual property used in the manufacture and design of our products is patented, and we therefore rely significantly on trade secrets, trade and service marks, trade dress, and the strength of our brand. We regard our patents, trade dress, trademarks, copyrights, trade secrets, and similar proprietary rights as critical to our success. We also rely on trade secret protection and confidentiality agreements with our employees, consultants, suppliers, manufacturers, and others to protect our proprietary rights. Nevertheless, the steps we take to protect our proprietary rights against infringement or other violation may be inadequate, and we may experience difficulty in effectively limiting the unauthorized use of our patents, trademarks, trade dress, and other intellectual property and proprietary rights worldwide. We also cannot guarantee that others will not independently develop technology with the same or similar function to any proprietary technology we rely on to conduct our business and differentiate ourselves from our competitors. Because a significant portion of our products are manufactured overseas in countries where counterfeiting is more prevalent, and we intend to increase our sales overseas over the long term, we may experience increased counterfeiting of our products. Unauthorized use or invalidation of our patents, trademarks, copyrights, trade dress, trade secrets, or other intellectual property or proprietary rights may cause significant damage to our brand and harm our results of operations.

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While we actively develop and protect our intellectual property rights, there can be no assurance that we will be adequately protected in all countries in which we conduct our business or that we will prevail when defending our patent, trademark, and proprietary rights. Additionally, we could incur significant costs and management distraction in pursuing claims to enforce our intellectual property rights through litigation and defending any alleged counterclaims. If we are unable to protect or preserve the value of our patents, trade dress, trademarks, copyrights, or other intellectual property rights for any reason, or if we fail to maintain our brand image due to actual or perceived product or service quality issues, adverse publicity, governmental investigations or litigation, or other reasons, our brand and reputation could be damaged, and our business may be harmed.

We may be subject to liability if we infringe upon the intellectual property rights of third parties.

Third parties may sue us for alleged infringement of their proprietary rights. The party claiming infringement might have greater resources than we do to pursue its claims, and we could be forced to incur substantial costs and devote significant management resources to defend against such litigation, even if the claims are meritless and even if we ultimately prevail. If the party claiming infringement were to prevail, we could be forced to modify or discontinue our products, pay significant damages, or enter into expensive royalty or licensing arrangements with the prevailing party. In addition, any payments we are required to make, and any injunction we are required to comply with as a result of such infringement, could harm our reputation and financial results.

We rely on third-party contract manufacturers, and problems with, or loss of, our suppliers or an inability to obtain raw materials could harm our business and results of operations.

Our products are produced by third-party contract manufacturers. We face the risk that these third-party contract manufacturers may not produce and deliver our products on a timely basis or at all. We have experienced, and will likely continue to experience, operational difficulties with our manufacturers. These difficulties include reductions in the availability of production capacity, errors in complying with product specifications and regulatory and customer requirements, insufficient quality control, failures to meet production deadlines, failure to achieve our product quality standards, increases in costs of materials, and manufacturing or other business interruptions. The ability of our manufacturers to effectively satisfy our production requirements could also be impacted by manufacturer financial difficulty or damage to their operations caused by fire, terrorist attack, riots, natural disaster, public health issues such as the COVID-19 pandemic (or other future pandemics or epidemics), or other events. The failure of any manufacturer to perform to our expectations could result in supply shortages or delays for certain products and harm our business. If we experience significantly increased demand, or if we need to replace an existing manufacturer due to lack of performance, we may be unable to supplement or replace our manufacturing capacity on a timely basis or on terms that are acceptable to us, which may increase our costs, reduce our margins, and harm our ability to deliver our products on time. For certain of our products, it may take a significant amount of time to identify and qualify a manufacturer that has the capability and resources to produce our products to our specifications in sufficient volume and satisfy our service and quality control standards.

The capacity of our manufacturers to produce our products is also dependent upon the availability of raw materials. Our manufacturers may not be able to obtain sufficient supply of raw materials, which could result in delays in deliveries of our products by our manufacturers or increased costs. Any shortage of raw materials or inability of a manufacturer to produce or ship our products in a timely manner, or at all, could impair our ability to ship orders of our products in a cost-efficient, timely manner and could cause us to miss the delivery requirements of our customers. As a result, we could experience cancellations of orders, refusals to accept deliveries, or reductions in our prices and margins, any of which could harm our financial performance, reputation, 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 depends on our ability to source and distribute products in a timely manner. However, we cannot control all of the factors that might affect the timely and effective procurement of our products from our third-party contract manufacturers and the delivery of our products to our retail partners and customers.

Our third-party contract manufacturers ship most of our products to our distribution centers in Memphis, Tennessee, and Salt Lake City, Utah. Our reliance on only two geographical locations for our distribution centers makes us more vulnerable to natural disasters, weather-related disruptions, accidents, system failures, public health issues such as the COVID-19 pandemic (or other future pandemics or epidemics), or other unforeseen events that could delay or impair our ability to fulfill retailer orders and/or ship merchandise purchased on our website, which could harm our sales.

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We import our products, and we are also vulnerable to risks associated with products manufactured abroad, including, among other things: (a) risks of damage, destruction, or confiscation of products while in transit to our distribution centers; and (b) transportation and other delays in shipments, including as a result of heightened security screening, port congestion, container and labor shortages, and inspection processes or other port-of-entry limitations or restrictions in the United States. In order to meet demand for a product, we have chosen in the past, and may choose in the future, to arrange for additional quantities of the product, if available, to be delivered through air freight, which is significantly more expensive than standard shipping by sea and, consequently, adversely impacts our gross margins. Failure to procure our products from our third-party contract manufacturers and deliver merchandise to our retail partners and DTC channel in a timely, effective, and economically viable manner could reduce our sales and gross margins, damage our brand, and harm our business.

We also rely on the timely and free flow of goods through open and operational ports from our suppliers and manufacturers. Labor disputes or disruptions at ports, our common carriers, or our suppliers or manufacturers could create significant risks for our business, particularly if these disputes result in work slowdowns, lockouts, strikes, or other disruptions during periods of significant importing or manufacturing, potentially resulting in delayed or canceled orders by customers, unanticipated inventory accumulation or shortages, and harm to our business, results of operations, and financial condition.

In addition, we rely upon independent land-based and air freight carriers for product shipments from our distribution centers to our retail partners and customers who purchase through our DTC channel. We may not be able to obtain sufficient freight capacity on a timely basis or at favorable shipping rates and, therefore, may not be able to receive products from suppliers or deliver products to retail partners or customers in a timely and cost-effective manner.

Accordingly, we are subject to the risks, including labor disputes, union organizing activity, inclement weather, public health crises such as the COVID-19 pandemic (or other future pandemics or epidemics), and increased transportation costs, associated with our third-party contract manufacturers’ and carriers’ ability to provide products and services to meet our requirements. As a result of Russia’s invasion of Ukraine in March 2022, the United States and other governments have implemented coordinated sanctions, seizures of assets, and export-control measure packages. These measures, and the global response to the invasion, have resulted in increased fuel prices. Although we do not do business in Ukraine, downstream effects of the conflict have resulted in higher fuel costs, which has resulted in, and could continue to result in, higher costs to deliver products, which could harm our profitability.

Our business is subject to the risk of manufacturer concentrations.

We depend on a limited number of third-party contract manufacturers for the sourcing of our products. For hard coolers, soft coolers, Drinkware, bags, cargo, and outdoor living and pet products our two largest manufacturers comprised approximately 76%, 85%, 80%, 86%, 90% and 91% respectively, of our production volume during the nine months ended October 1, 2022. As a result of this concentration in our supply chain, our business and operations would be negatively affected if any of our key manufacturers were to experience significant disruption affecting the price, quality, availability, or timely delivery of products. Our manufacturers could also be acquired by our competitors and may become our direct competitors, thus limiting or eliminating our access to manufacturing capacity. The partial or complete loss of our key manufacturers, or a significant adverse change in our relationship with any of these manufacturers, could result in lost sales, added costs, and distribution delays that could harm our business and customer relationships.

Our results of operations could be materially harmed if we are unable to accurately forecast demand for our products.

To ensure adequate inventory supply, we must forecast inventory needs and place orders with our manufacturers before firm orders are placed by our customers. If we fail to accurately forecast customer demand, we may experience excess inventory levels or a shortage of product to deliver to our customers. Factors that could affect our ability to accurately forecast demand for our products include: (a) an increase or decrease in consumer demand for our products; (b) our failure to accurately forecast consumer acceptance for our new products; (c) product introductions by competitors; (d) unanticipated changes in general market conditions or other factors, which may result in cancellations of advance orders or a reduction or increase in the rate of reorders or at-once orders placed by retailers; (e) the impact on consumer demand due to unseasonable weather conditions; (f) weakening economic conditions or consumer confidence in future economic conditions or inflationary conditions resulting in rising prices, which could each reduce demand for discretionary items, such as our products; and (g) terrorism or acts of war, such as the invasion of and ongoing conflict in Ukraine, or the threat thereof, or political or labor instability or unrest, riots, or public health crises such as the COVID-19 pandemic (or other future pandemics or epidemics), which could adversely affect consumer confidence and spending or interrupt production and distribution of product and raw materials.

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 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.

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Difficulty in forecasting demand, which we have encountered as a result of global supply chain constraints, also makes it difficult to estimate our future results of operations and financial condition from period to period. A failure to accurately predict the level of demand for our products could adversely impact our profitability or cause us not to achieve our expected financial results.

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.

We are in the process of re-engineering certain of our supply chain management processes, as well as certain other business processes, to support our expanding scale. This expansion to a global scale requires significant investment of capital and human resources, the re-engineering of many business processes, and the attention of many managers and other employees who would otherwise be focused on other aspects of our business. If our globalization efforts fail to produce planned efficiencies, or the transition is not managed effectively, we may experience excess inventories, inventory shortage, late deliveries, lost sales, or increased costs. Any business disruption arising from our globalization efforts, or our failure to effectively execute our internal plans for globalization, could harm our results of operations and financial condition.

If we cannot maintain prices or effectively implement price increases, our margins may decrease.

Increasing demand, supply constraints, inflation, and other market conditions have resulted in increasing shortages and higher costs for the production of some of our products, leading us to implement a price increase for certain of our products effective in February 2022. Our ability to maintain prices or effectively implement price increases, including our recent price increase, may be affected by several factors, including pricing pressure due to intense competition in the retail industry, effectiveness of our marketing programs, the continuing growth of our brand, general economic conditions, and changes in consumer demand. During challenging economic times, consumers may be less willing or able to pay a price premium for our branded products and may shift purchases to lower-priced or other value offerings, making it more difficult for us to maintain prices and/or effectively implement price increases. In addition, our retail partners and distributors may pressure us to rescind price increases we have announced or already implemented, whether through a change in list price or increased promotional activity. If we cannot maintain prices or effectively implement price increases for our products, or must increase promotional activity, our margins may be adversely affected. Furthermore, price increases generally result in volume losses, as consumers purchase fewer units. If such losses are greater than expected or if we lose distribution due to a price increase, our business, financial condition and results of operations may be materially and adversely affected.

We rely on a series of purchase orders with our manufacturers. Some of these relationships are not exclusive, which means that these manufacturers could produce similar products for our competitors.

We rely on a series of purchase orders with our manufacturers. With all of our manufacturers, we face the risk that they may fail to produce and deliver our products on a timely basis, or at all, or comply with our quality standards. In addition, our manufacturers may raise prices in the future, which would increase our costs and harm our margins. Even those manufacturers with whom we have purchase orders may breach these agreements, and we may not be able to enforce our rights under these agreements or may incur significant costs attempting to do so. As a result, we cannot predict with certainty our ability to obtain finished products in adequate quantities, of required quality and at acceptable prices from our manufacturers in the future. Any one of these risks could harm our ability to deliver our products on time, or at all, damage our reputation and our relationships with our retail partners and customers, and increase our product costs thereby reducing our margins.

In addition, except in some of the situations where we have a supply contract, our arrangements with our manufacturers are not exclusive. As a result, our manufacturers could produce similar products for our competitors, some of which could potentially purchase products in significantly greater volume. Further, while certain of our long-term contracts stipulate contractual exclusivity, those manufacturers could choose to breach our agreements and work with our competitors. Our competitors could enter into restrictive or exclusive arrangements with our manufacturers that could impair or eliminate our access to manufacturing capacity or supplies.

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Fluctuations in the cost and availability of raw materials, equipment, labor, and transportation could cause manufacturing delays or increase our costs.

The price and availability of key components used to manufacture our products, including polyethylene, polyurethane foam, stainless-steel, polyester fabric, zippers, and other plastic materials and coatings, as well as manufacturing equipment and molds, may fluctuate significantly. Increasing demand, supply constraints, and inflation have resulted in shortages and higher costs for the production of some of our products. In addition, the cost of labor at our third-party contract manufacturers could increase significantly. For example, manufacturers in China have experienced increased costs in recent years due to shortages of labor and fluctuations of the Chinese yuan in relation to the U.S. dollar. Additionally, the cost of logistics and transportation fluctuates in large part due to the price of oil and available capacity. Any fluctuations in the cost and availability of any of our raw materials or other sourcing or transportation costs related to our raw materials or products could harm our gross margins and our ability to meet customer demand. As a result of Russia’s invasion of Ukraine in March 2022, the United States and other governments have implemented coordinated sanctions, seizures of assets, and export-control measure packages. These measures, and the global response to the invasion, have resulted in increased oil prices and logistics costs, and may negatively impact the prices of our raw materials we use to manufacture our products. If we are unable to successfully mitigate a significant portion of these product cost increases or fluctuations, our results of operations could be harmed.

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.

Many of our core products are manufactured in China, the Philippines, Vietnam, Taiwan, Poland, and Malaysia. In addition, we have third-party manufacturing partners in Mexico and Italy. Our reliance on suppliers and manufacturers in foreign markets creates risks inherent in doing business in foreign jurisdictions, including: (a) the burdens of complying with a variety of foreign laws and regulations, including trade and labor restrictions and laws relating to the importation and taxation of goods; (b) weaker protection for intellectual property and other legal rights than in the United States, and practical difficulties in enforcing intellectual property and other rights outside of the United States; (c) compliance with U.S. and foreign laws relating to foreign operations, including the U.S. Foreign Corrupt Practices Act (“FCPA”), the UK Bribery Act 2010 (“Bribery Act”), regulations of the U.S. Office of Foreign Assets Controls (“OFAC”), and U.S. anti-money laundering regulations, which respectively prohibit U.S. companies from making improper payments to foreign officials for the purpose of obtaining or retaining business, operating in certain countries, or maintaining business relationships with certain restricted parties as well as engaging in other corrupt and illegal practices; (d) economic and political instability and acts of terrorism in the countries where our suppliers are located; (e) public health crises, such as pandemics and epidemics, in the countries where our suppliers and manufacturers are located; (f) transportation interruptions or increases in transportation costs; and (g) the imposition of tariffs or non-tariff barriers on components and products that we import into the United States or other markets. For example, the COVID-19 pandemic resulted in increased travel restrictions, supply chain disruptions, and extended shutdown of certain businesses around the globe. In particular, YETI experienced an extended shutdown in its Vietnam manufacturing facility during the third quarter of 2021 which resulted in additional supply disruptions. Public health crises such as the COVID-19 pandemic or any further political developments or health concerns in markets in which our products are manufactured could result in social, economic and labor instability, adversely affecting the supply of our products and, in turn, our business, financial condition, and results of operations. Further, we cannot assure you that our directors, officers, employees, representatives, manufacturers, or suppliers have not engaged and will not engage in conduct for which we may be held responsible, nor can we assure you that our manufacturers, suppliers, or other business partners have not engaged and will not engage in conduct that could materially harm their ability to perform their contractual obligations to us or even result in our being held liable for such conduct. Violations of the FCPA, the Bribery Act, OFAC restrictions, or other export control, anti-corruption, anti-money laundering, and anti-terrorism laws or regulations may result in severe criminal or civil penalties, and we may be subject to other related liabilities, which could harm our business, financial condition, cash flows, and results of operations.

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.

Most of our imported products are subject to duties, indirect taxes, quotas and non-tariff trade barriers, any of which may limit the quantity of products that we may import into the U.S. and other countries or may impact the cost of such products. To maximize opportunities, we rely on free trade agreements and other supply chain initiatives, and, as a result, we are subject to government regulations and restrictions with respect to our cross-border activity. For example, we have historically received benefits from duty-free imports on certain products from certain countries pursuant to the Global System of Preferences (“GSP”) program. The GSP program expired on December 31, 2020, resulting in additional duties and negatively impacting gross margin. YETI is expecting the GSP program to be renewed and made retroactive; however if this does not occur, it will continue to have a negative impact on our expected results. Additionally, we are subject to government regulations relating to importation activities, including related to U.S. Customs and Border Protection (“CBP”) withhold release orders. The imposition of taxes, duties and quotas, the withdrawal from or material modification to trade agreements, and/or if CBP detains shipments of our goods pursuant to a withhold release order could have a material adverse effect on our business, results of operations and financial condition.
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The previous administration put into place tariffs and other trade restrictions between the United States and China. In response, China put into place tariffs of its own. It is unknown whether and to what extent new tariffs (or other new laws or regulations) will be adopted in the future, and, while the current administration has continued with tariffs put into place under the previous administration, it is unclear whether the current administration will work to reverse such measures in the future or pursue similar policy initiatives with China and other countries. If additional tariffs or other restrictions are placed on foreign imports, including on any of our products manufactured overseas for sale in the United States, or any related counter-measures are taken by other countries, our business and results of operations may be materially harmed.

Current and additional tariffs have the potential to significantly raise the cost of our products, particularly our Drinkware. In such a case, there can be no assurance that we will be able to shift manufacturing and supply agreements to non-impacted countries, including the United States, to reduce the effects of the tariffs. As a result, we may suffer margin erosion or be required to raise our prices, which may result in the loss of customers, negatively impact our results of operations, or otherwise harm our business. In addition, the imposition of tariffs on products that we export to international markets could make such products more expensive compared to those of our competitors if we pass related additional costs on to our customers, which may also result in the loss of customers, negatively impact our results of operations, or otherwise harm our business.

A significant portion of our sales are to independent retail partners. If these independent retail partners 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.

Twelve percent of our gross sales for 2021 and approximately 13% of our gross sales for the nine months ended October 1, 2022 were made to independent retail partners. These retail partners may decide to emphasize products from our competitors, to redeploy their retail floor space to other product categories, or to take other actions that reduce their purchases of our products. We do not receive long-term purchase commitments from our independent retail partners, and orders received from our independent retail partners are cancellable. Factors that could affect our ability to maintain or expand our sales to these independent retail partners include: (a) failure to accurately identify the needs of our customers; (b) a lack of customer acceptance of new products or product expansions; (c) unwillingness of our independent retail partners and customers to attribute premium value to our new or existing products or product expansions relative to competing products; (d) failure to obtain shelf space from our retail partners; (e) new, well-received product introductions by competitors; (f) damage to our relationships with independent retail partners due to brand or reputational harm; (g) delays or defaults on our retail partners' payment obligations to us; (h) store closures, decreased foot traffic, or other adverse effects resulting from public health crises such as the COVID-19 pandemic (or other future pandemics or epidemics); and (i) economic conditions, including levels of consumer discretionary spending, which may be impacted by rising inflation, unemployment and interest rates.

We cannot assure you that our independent retail partners will continue to carry our current products or carry any new products that we develop. If these risks occur, they could harm our brand as well as our results of operations and financial condition.

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.

We sell a significant amount of our products through knowledgeable national, regional, and independent retail partners. Our retail partners service customers by stocking and displaying our products, explaining our product attributes, and sharing our brand story. Our relationships with these retail partners are important to the authenticity of our brand and the marketing programs we continue to deploy. Our failure to maintain these relationships with our retail partners or financial difficulties experienced by these retail partners could harm our business.

We have key relationships with national retail partners. For both 2020 and 2021, one national retail partner accounted for approximately 9% and 10% of our gross sales, respectively. Our sales could be materially harmed if we lose any of our key retail partners or if any key retail partner reduces its purchases of our existing or new products or its number of stores or operations or promotes products of our competitors over ours. Because we are a premium brand, our sales depend, in part, on retail partners effectively displaying our products, including providing attractive space and point of purchase displays in their stores, and training their sales personnel to sell our products. If our retail partners reduce or terminate those activities, we may experience reduced sales of our products, resulting in lower gross margins, which would harm our results of operations.
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If our plans to increase sales through our DTC channel are not successful, our business and results of operations could be harmed.

For 2021, our DTC channel accounted for 56% of our net sales, and our sales through the Amazon Marketplace represented approximately 13% of our net sales. Part of our growth strategy involves increasing sales through our DTC channel. However, we have limited operating experience executing the retail component of this strategy. The level of customer traffic and volume of customer purchases through our country and region-specific YETI websites or other e-commerce initiatives are substantially dependent on our ability to provide a content-rich and user-friendly website, a hassle-free customer experience, sufficient product availability, and reliable, timely delivery of our products. If we are unable to maintain and increase customers’ use of our website, allocate sufficient product to our website, and increase any sales through our website, our continued DTC channel growth, our business, and results of operations could be harmed. Furthermore, any adverse change in our relationship with Amazon, including restrictions on the ability to offer products on the Amazon Marketplace or termination of the relationship, could adversely affect our continued DTC channel growth, our business, and results of operations.
We currently have a limited number of country and region-specific YETI websites and are planning to expand our e-commerce platform to others. These countries may impose different and evolving laws governing the operation and marketing of e-commerce websites, as well as the collection, storage, and use of information on customers interacting with those websites. We may incur additional costs and operational challenges in complying with these laws, and differences in these laws may cause us to operate our business differently, and less effectively, in different territories. If so, we may incur additional costs and may not fully realize the investment in our international expansion. 

If we do not successfully implement our future retail store expansion, our growth and profitability could be harmed.

We have and may continue to expand our existing DTC channel by opening new retail stores. We currently operate eleven retail stores across seven states. Our ability to open new retail stores in a timely manner and operate them profitably depends on a number of factors, many of which are beyond our control, including:

our ability to manage the financial and operational aspects of our retail growth strategy, including making appropriate investments in our software systems, information technology, and operational infrastructure;
our ability to identify suitable locations, including our ability to gather and assess demographic and marketing data to accurately determine customer demand for our products in the locations we select;
our ability to negotiate favorable lease agreements;
our ability to properly assess the potential profitability and payback period of potential new retail store locations;
the availability of financing on favorable terms;
our ability to secure required governmental permits and approvals and our ability to effectively comply with state and local employment and labor laws, rules, and regulations;
our ability to hire and train skilled store operating personnel, especially management personnel;
the availability of construction materials and labor and the absence of significant construction delays or cost overruns;
our ability to provide a satisfactory mix of merchandise that is responsive to the needs of our customers living in the areas where new retail stores are established;
our ability to establish a supplier and distribution network able to supply new retail stores with inventory in a timely manner;
our competitors, or our retail partners, building or leasing stores near our retail stores or in locations we have identified as targets for a new retail store;
customer demand for our products;
governmental orders requiring adherence to social distancing practices, temporary store closures, or reduced hours; and
general economic and business conditions affecting consumer confidence and spending and the overall strength of our business.

We have limited experience in opening retail stores and may not be able to successfully address the risks that they entail. In order to pursue our retail store strategy, we will be required to expend significant cash resources prior to generating any sales in these stores. We may not generate sufficient sales from these stores to justify these expenses, which could harm our business and profitability. The substantial management time and resources, which any future retail store expansion strategy may require, could also result in disruption to our existing business operations, which may decrease our net sales and profitability.

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Insolvency, credit problems or other financial difficulties that could confront our retail partners could expose us to financial risk.

We sell to the large majority of our retail partners on open account terms and do not require collateral or a security interest in the inventory we sell them. Consequently, our accounts receivable with our retail partners are unsecured. Insolvency, credit problems, or other financial difficulties confronting our retail partners could expose us to financial risk. These actions could expose us to risks if they are unable to pay for the products they purchase from us. Financial difficulties of our retail partners could also cause them to reduce their sales staff, use of attractive displays, number or size of stores, and the amount of floor space dedicated to our products. For example, the COVID-19 pandemic caused public health officials to recommend precautions to mitigate the spread of the virus that resulted in widespread temporary store closures or reduced store hours for our retail partners during the second quarter of 2020. These actions had a significant unfavorable impact on our wholesale business during the second quarter of 2020. Future public health crises may have a similar impact on our stores. Further, the current economic environment has resulted in severely diminished liquidity and credit availability, increases in inflation rates, rising interest rates, declines in consumer confidence, declines in economic growth, and uncertainty about economic stability, any of which may lead to a material reduction in sales of our products by our retail partners. Any reduction in sales by, or loss of, our current retail partners or customer demand, or credit risks associated with our retail partners, could harm our business, results of operations, and financial condition.

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.

Our reputation and our customers’ willingness to purchase our products depend in part on our suppliers’, manufacturers’, and retail partners’ compliance with ethical employment practices, such as with respect to child labor, wages and benefits, forced labor, discrimination, safe and healthy working conditions, and with all legal and regulatory requirements relating to the conduct of their businesses. We do not exercise control over our suppliers, manufacturers, and retail partners and cannot guarantee their compliance with ethical and lawful business practices. If our suppliers, manufacturers, or retail partners fail to comply with applicable laws, regulations, safety codes, employment practices, human rights standards, quality standards, environmental standards, production practices, or other obligations, norms, or ethical standards, our reputation and brand image could be harmed, and we could be exposed to litigation and additional costs that would harm our business, reputation, and results of operations.

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.

For our DTC sales, as well as for sales to certain retail partners, we accept a variety of payment methods, including credit cards, debit cards, electronic funds transfers, electronic payment systems, and gift cards. Accordingly, we are, and will continue to be, subject to significant and evolving regulations and compliance requirements, including obligations to implement enhanced authentication processes that could result in increased costs and liability, and reduce the ease of use of certain payment methods. For certain payment methods, including credit and debit cards, as well as electronic payment systems, we pay interchange and other fees, which may increase over time. We rely on independent service providers for payment processing, including credit and debit cards. If these independent service providers become unwilling or unable to provide these services to us, or if the cost of using these providers increases, our business could be harmed. We are also subject to payment card association operating rules and agreements, including data security rules and agreements, certification requirements, and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, or if our data security systems are breached or compromised, we may be liable for losses incurred by card issuing banks or customers, subject to fines and higher transaction fees, lose our ability to accept credit or debit card payments from our customers, or process electronic fund transfers or facilitate other types of payments. Any failure to comply could significantly harm our brand, reputation, business, financial condition and results of operations.

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Our plans for international expansion may not be successful; our limited operating experience and limited brand recognition in new markets may make it more difficult to execute our expansion strategy and cause our business and growth to suffer.

Continued expansion into markets outside the United States, including Canada, Australia, Europe and Japan, is one of our key long-term strategies for the future growth of our business. There are, however, significant costs and risks inherent in selling our products in international markets, including: (a) failure to effectively translate and establish our core brand identity, particularly in markets with a less-established heritage of outdoor and recreational activities; (b) time and difficulty in building a widespread network of retail partners; (c) increased shipping and distribution costs, which could increase our expenses and reduce our margins; (d) potentially lower margins in some regions; (e) longer collection cycles in some regions; (f) increased competition from local providers of similar products; (g) compliance with foreign laws and regulations, including taxes and duties, enhanced privacy laws, rules, and regulations, and product liability laws, rules, and regulations, particularly in the European Union and Japan; (h) establishing and maintaining effective internal controls at foreign locations and the associated increased costs; (i) increased counterfeiting and the uncertainty of protection for intellectual property rights in some countries and practical difficulties of enforcing rights abroad; (j) compliance with anti-bribery, anti-corruption, sanctions, and anti-money laundering laws, such as the FCPA, the Bribery Act, and OFAC regulations, by us, our employees, and our business partners; (k) currency exchange rate fluctuations and related effects on our results of operations; (l) economic weakness, including inflation, or political instability in foreign economies and markets; (m) compliance with tax, employment, immigration, and labor laws for employees living or traveling abroad; (n) workforce uncertainty in countries where labor unrest is more common than in the United States; (o) business interruptions resulting from geopolitical actions, including war and terrorism, such as the invasion of and ongoing conflict in Ukraine, natural disasters, including earthquakes, typhoons, floods, and fires, public health issues, including the outbreak of a pandemic or contagious disease, such as COVID-19, or xenophobia resulting therefrom; (p) the imposition of tariffs on products that we import into international markets that could make such products more expensive compared to those of our competitors; (q) that our ability to expand internationally could be impacted by the intellectual property rights of third parties that conflict with or are superior to ours; and (r) other costs and risks of doing business internationally.

These and other factors could harm our international operations and, consequently, harm our business, results of operations, and financial condition. Further, we may incur significant operating expenses as a result of our planned international expansion, and it may not be successful. We have limited experience with regulatory environments and market practices internationally, and we may not be able to penetrate or successfully operate in new markets. We also have limited operating experience outside of the United States and in our expansion efforts we may encounter obstacles we did not face in the United States, including cultural and linguistic differences, differences in regulatory environments, labor practices and market practices, difficulties in keeping abreast of market, business and technical developments, and preferences of foreign customers. Consumer demand and behavior, as well as tastes and purchasing trends, may differ internationally, and, as a result, sales of our products may not be successful, or the margins on those sales may not be in line with those we anticipate. We may also encounter difficulty expanding into international markets because of limited brand recognition, leading to delayed or limited acceptance of our products by customers in these markets and increased marketing and customer acquisition costs to establish our brand. Accordingly, if we are unable to successfully expand internationally or manage the complexity of our global operations, we may not achieve the expected benefits of this expansion and our financial condition and results of operations could be harmed.

Our financial results and future growth have been, and could in the future be, harmed by currency exchange rate fluctuations.

As our international business grows, our results of operations have been and could in the future be adversely impacted by changes in foreign currency exchange rates. Revenues and certain expenses in markets outside of the United States are recognized in local foreign currencies, and we are exposed to gains or losses from the translation of those amounts into U.S. dollars for consolidation into our financial statements. Similarly, we are exposed to gains and losses resulting from currency exchange rate fluctuations on transactions generated by our foreign subsidiaries in currencies other than their local currencies. In addition, the business of our independent manufacturers may also be disrupted by currency exchange rate fluctuations by making their purchases of raw materials more expensive and more difficult to finance. As a result, foreign currency exchange rate fluctuations may adversely impact our results of operations.

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We may become involved in legal or regulatory proceedings and audits.
Our business requires compliance with many laws and regulations, including labor and employment, sales and other taxes, customs, and consumer protection laws and ordinances that regulate retailers generally and/or govern the importation, promotion, and sale of merchandise, and the operation o