Engaged Capital and Yeti reach a key agreement – Three ways to create value

Business: Yeti is a designer, retailer, and distributor of outdoor products. The company’s product portfolio consists of three categories: Coolers & Equipment, Drinkware and Other.

Stock Market Value: ~$2.5B ($30.15 per share)

Ownership: 1.87%

Average Cost: n/a

Activist Commentary: Engaged Capital was founded by Glenn W. Welling, a former principal and managing director at Relational Investors. Engaged is an experienced and successful small cap investor and makes investments with a two-to-five-year investment horizon. Its style is holding managements and boards accountable behind closed doors. Of the firm’s 37 past activist campaigns, 10 have been at companies in the consumer discretionary sector, at which it had an average return of 35.13% versus 21.88% for the Russell 2000.

On March 14, Engaged and Yeti entered into a cooperation agreement, pursuant to which the company agreed to increase the size of the board to 10 directors and appoint Arne Arens (former CEO of Boardriders and global brand president of The North Face) and J. Magnus Welander (former CEO of Thule Group AB) as directors. Additionally, both directors will be appointed to one of the audit, compensation or nominating and governance committees of the board, no later than May 1. Engaged agreed to withdraw its director nomination notice and to abide by certain voting and standstill restrictions.

Yeti is a global designer, retailer and distributor of premium outdoor products. Well-known for its high-quality insulated coolers and tumblers, the company also sells cargo, bags and other outdoor apparel and gear. In 2024, net sales of Drinkware, Coolers & Equipment, and Other (apparel and gear) represented 60%, 38% and 2% of net sales, respectively. Yeti does not manufacture its products in-house, instead specializing in design and marketing through a diverse omnichannel strategy selling both direct to consumers and through large outdoor retailers including Dick’s Sporting Goods, Bass Pro Shop, REI and Ace Hardware. Yeti’s focus on innovative design and premium quality — excelling in temperature retention and moisture protection — drives its competitive edge and strong consumer loyalty.

Yeti had its initial public offering in October 2018, priced at $18 per share. It had an impressive track record of growth, delivering annual growth of 17% to 29% between 2018 and 2021. Along with that growth came excellent shareholder return, peaking at $108 per share in November 2021. Since then, growth has slowed to 3.98% in 2023, and the stock went right down: It closed at $30.15 on Friday. Trading at eight-times earnings before interest, taxes, depreciation, and amortization today versus over 20-times historically, Yeti is viewed as a stable drinkware and cooler company with no real prospects for growth. Nothing could be further from the truth. There are three real opportunities for value creation at Yeti. First, the company could massively ramp up growth from the mid-single digits to double digits by pursuing expansion both geographically and in different product categories. Geographically, the company has had success expanding into Canada and Australia, but there remains a tremendous opportunity to grow in Europe and Asia. The other growth driver can come from product category expansion. Again, this is a drinkware and cooler company with a competitive advantage in insulation and moisture protection, making it a natural fit for growth in other categories such as luggage, bags and camping equipment. It has begun to make inroads here, developing some of these products, but diversification efforts should be continually made considering the brand loyalty the company has developed through its quality focus.

Second, Yeti cannot keep these plans and opportunities a secret. The company has a great brand and excellent products, but now is the time for decisive execution and communications to get the stock moving again. Yeti has never had an investor day, and it hasn’t put out mid-term targets. Management rarely goes on the road or to conferences, and they have not communicated a clear product roadmap, despite having one. Look at SharkNinja, a strong brand originally known for quality in vacuum and blender technologies: It has successfully expanded into several verticals across home and kitchen appliances many of which capitalize on its original product excellence such as air fryers, ice cream makers, hair styling tools, fans and mops. Not to mention, SharkNinja regularly attends conferences and puts out investor presentations. As a result, SharkNinja has grown adjusted net sales at a three-year compound annual growth rate of 23.6% and trades at a premium valuation of 16-times enterprise value/EBITDA.

Finally, with $280 million of net cash and nearly $300 million of EBITDA, Yeti should be creating shareholder value through capital allocation. At eight-times EBITDA, as low of a multiple as the company has traded at, management should be buying back stock here ahead of value creating changes. With the cash on hand and free cash flow it will generate, Yeti could buy back up to 50% of its current market cap over the next five years.

On March 14, Engaged and Yeti entered into a cooperation agreement, pursuant to which the company agreed to increase the size of the board to 10 directors and appoint Arne Arens (former CEO of Boardriders and global brand president of The North Face) and J. Magnus Welander (former CEO of Thule Group AB) as directors. Engaged and Yeti have agreed to expand the board with two experienced directors with strong backgrounds in product and international expansion, especially into Europe. Thule, well known for its automobile roof and bike racks, successfully expanded into other verticals like strollers, bags, and tents under the CEO tenure of Welander from 2010-2023 delivering a return of over 430% versus 230% for the Russell 2000. Arens, the global brand president of The North Face from 2017 to 2021, also oversaw double-digit growth under his watch and VF Corp’s stock price appreciated by 77% versus 60% for the Russell 2000. The North Face is a great comp for Yeti with excellent products, strong brand loyalty, and a solid opportunity for expansion from niche products for outdoorsy consumers to the masses.

Considering the amicable settlement and lack of noise regarding the discussions with the company, we expect that this is a very friendly and constructive working relationship. Management of Yeti is in fact quite good. They just might be a little complacent regarding speed of growth. It does not help things that 75% of Yeti CEO Matt Reintjes’ long-term incentive plan is comprised of performance-based restricted stock units, which are tied to free-cash-flow generation – something that could be hindered in the short term as money is invested into long-term growth and could make management somewhat risk averse. Now, he has two directors who could help mitigate risks associated with growing into new markets and countries and give management more confidence to be aggressive in their growth initiatives. Moreover, just because Engaged did not get a board seat for an Engaged principal, does not mean the firm is going away. In situations like this, the firm often becomes vocal and constructive shareholders working with management, usually after signing a non-disclosure agreement. We expect Engaged will do that here and help with investor communications.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. Yeti Holdings is owned in the fund.