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)

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 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…