A sign of a strong consumer products brand is pricing power. Top stocks like Apple and Nike share these qualities, selling their respective products at premium prices to their rabid fanbases. Cooler and drinkware brand Yeti (YETI -0.08%) is one of these businesses, selling its various outdoor-focused products at much higher prices than the competition. For example, it just launched a cast-iron skillet it plans to sell at $400. That is $400 for a single cooking pan.
Yet, Yeti stock has not performed well recently, possibly presenting a buying opportunity for long-term investors. Down 67% from all-time highs, is Yeti the next consumer products brand poised to help you retire a millionaire?
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Slow growth and declining margins in the first quarter
Yeti's pricing power showed up on the gross profit line in its Q1 earnings report. Gross margins were 53.5% in the period, up from 52.7% in the same period a year prior. Since its initial public offering (IPO) in 2018, Yeti has posted higher gross margins than Nike, putting it in rarified air when it comes to consumer products. That's what you get when you sell coolers for over $500 a pop.
YETI Gross Profit Margin data by YCharts.
So why is Yeti stock down? Two reasons. First, revenue growth has slowed in recent quarters as the company digests the bullwhip effects of the COVID-19 pandemic. Total sales grew only 3% year over year in the first quarter of this year, compared to 19% year-over-year growth in 2022. Underlying profitability is also deteriorating as Yeti spends more on marketing, research, and administrative costs. Q1 operating income was just $15 million, down from $33 million a year prior.
These two factors -- slowing growth and declining profits -- are a recipe for a poorly performing stock price. It is no surprise, then, to see Yeti shares well off all-time highs.
Opportunity in product expansion and international
A big question for Yeti is whether it can get back to growing revenue at a double-digit rate. Previously, it has put up some impressive financial growth, going from just over $600 million in annual revenue at the time of its IPO to $1.6 billion over the past 12 months.
To reinvigorate its revenue growth, Yeti plans to expand its product categories and invest in international markets. It has the aforementioned cast-iron skillet but, more importantly, has successfully moved into selling expensive backpacks and cargo bags. Internationally, Yeti is looking to target the Australian and European markets, which so far seems to be working well. Last quarter, international made up 16% of overall revenue, up from 13% a year ago.
There is also an opportunity with the company's direct-to-consumer retail outlets. It has now opened 14 stores across Texas, the Great Plains, and the southeast portion of the United States. These outlets can help establish new touchpoints with its top spenders and seem to be getting great reviews from shoppers. If they can expand this concept around the country, that could help revenue growth over the next few years.
Is Yeti stock cheap?
I think it is likely that Yeti will accelerate its revenue growth with the combination of new products, international growth, and the potential to invest in physical stores. But the big question is whether it can expand its bottom-line profitability. At a market cap of $3.1 billion, Yeti trades at around 30 times its trailing operating income of $108 million, which is well above the market average. Compared to $1.6 billion in trailing revenue, Yeti's operating margin has now slipped to below 10%, which feels a bit underwhelming for a company selling pans for $400.
The stock looks cheap if Yeti can significantly expand its margins and simultaneously grow sales. Its 15% operating margins on $2 billion in future revenue equates to $300 million in annual earnings -- or a cheap-looking 10 times earnings multiple. But bring those margins below 10% -- where they are today -- and shares start looking much more expensive.
Yeti stock has a lot of potential if it can become a Nike-esque brand for outdoor equipment, metallic drinkware, and other consumer products. But with inconsistent profits and a 30 times earnings multiple, the stock looks like a risky bet for investors at these prices.
