Participants

Matthew Reintjes; President, Chief Executive Officer, Director; Yeti Holdings Inc

Michael Mcmullen; Chief Financial Officer, Senior Vice President, Treasurer; Yeti Holdings Inc

Tom Shaw; Vice President, Investor Relations; Yeti Holdings Inc

Peter Benedict; Analyst; Robert W. Baird & Co

Peter Keith; Managing Director, Senior Research Analyst; Piper Sandler

Randal Konik; Analyst; Jefferies Group LLC

Phillip Blee; Analyst; William Blair

Megan Alexander; Analyst; Morgan Stanley

Joseph Altobello; Analyst; Raymond James

Jim Duffy; Analyst; Stifel Nicolaus and Company, Inc

Brooke Roach; Analyst; Goldman Sachs

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the YETI Holdings Third Quarter 2024 earnings conference call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question-and-answer session. This call is being recorded on Thursday, November seventh, 2024. I would now like to turn the conference over to Maria, Investor Relations for YETI. Please go ahead.

Good morning and thank you for joining us to depress YETI Holdings. Third quarter is for 2024 volt.
Leading the call today will be Matt Reintjes, President and CEO; and Mike McMullen, CFO. Following our prepared remarks, we'll open the call for your questions.
Before we begin, we'd like to remind you that some of the statements we make today on this call may be considered forward-looking and such forward-looking statements are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements.
For more information, please refer to the risk factors detailed in our most recent filed Form 10 K. We undertook make no obligation to revise or update any forward-looking statements made today as a result of new information, future events or otherwise, except as required by law.
Unless otherwise stated, all financial measures discussed on this call will be on a non-GAAP basis. We use non-GAAP measures as we believe they more accurately represent the true operational performance and underlying results purposes. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the press release or in the presentation posted this morning to the Investor Relations section of our website at ucbi.com. I'd now like to turn the call over to Matt.

Matthew Reintjes

Thanks, Maria, and good morning. Jody wrapped another strong quarter with growing brand engagement performance across our broadening product portfolio, but outstanding growth in our international business, all driven by the consistent successful execution of our strategic priorities. Our net sales were up 10% in the quarter with growth across all channels. On the product side, innovation continues to be a catalyst with Drinkware, deliberate, several highly anticipated launches in bar and tableware, underscoring the expansion opportunities we see inclusion equipment. We saw good performance from both legacy and newer product, including several newly launched accessories that complement our existing lineup. On the international front, we saw a fourth consecutive quarter of over 30% growth outside of the US, while also delivering solid growth in a more challenging US market, where we continue to see high quality but more disciplined buyers. Taken together, YETI brand strength, strong product innovation, Cadence and global growth position us to remain on track to deliver on our full year top and bottom line outlook. As a reminder, our top line outlook takes into consideration in expectation of more intentional consumer buying in Q4 as we closely watch spending in the shortened holiday season. So relates to our global supply chain expansion programs. Our previously announced efforts remain solidly on track. As a reminder, approximately 40% of our total cost of goods has historically been tied to product sourced from China, primarily related to our Drinkware portfolio. This supply chain initiative gives us the opportunity to support greater global scale target end markets for cost and service optimization and evolve our supply base. Notably, we commenced production at our second Drinkware facility outside of China during the quarter, and we are on pace for a third facility. We have great partners in this effort and are encouraged by the process and automation improvements over the past few years to enable the successful moves. All in all, we are pleased with the performance of this initiative. And as a result, we remain confident that by the end of this year, approximately 20% of our global Drinkware capacity will be located outside of China. And by the end of 2025, 50% of our Drinkware capacity will be outside of China. This initiative is a key priority for YETI, and we'll be actively manage to ensure we are supporting our growing global business and positioning for long-term success. We continue to have confidence in the long-term opportunity in front of YETI across geographies, channels and product expansion in the near term, our demand drivers heading into the holiday season are underpinning the reiteration of our outlook and supporting our continued delivery of high-quality growth, strong profitability and a very sound balance sheet. Our long-term growth strategy, continued to prioritize the expansion of brand reach and engagement, greater product diversification, expansion of our omnichannel approach and international. Turning to brand. In third quarter, our team did a terrific job extending our global reach and access to consumers. He showed up at over 100 events around the globe, spending our broad and growing enthusiast communities from the first annual YETI open bass fishing tournament in Missouri to the outdoor enthusiasts gained share in the United Kingdom, a multi-day event attracted over 125,000 attendees. Notably the game. There was also are higher sales volume of event globally in 2024. Just another point that underscores the effectiveness of our playbook as we bridge to global audiences and create brand and product residents showing our reach and range. We also hosted and participated in exciting events across hospitality and sports. Culinary was highlighted with activations and investor engagement at a number of live fire cooking events around the globe. With a notably stronger presence in Europe, including the world barbecue Championship in Stuttgart, the big grill and Dublin and Netopia in London, our entry into the culinary space was further displayed in either stepping off the line in September, featuring YETI produced content from the underground cooking and in-season series. On the sports side, YETI hosted skateboarding strip in the Pacific Northwest with the group is skaters, five of whom are brand ambassadors. On the back of this event, iconic industry magazine thresher published at 25 plus page spread in their December issues featuring the experience and serve. We had the US Open of Surfing and Huntington each as well as the World Surf League finals in Sacramento were two of our investors, John John Florence and Katie Cymer's both OneWorld titles. With the exciting momentum we are seeing in the search community, we published our fifth YETI presents coffee table book last month, titled ways which celebrates the intersection of the sport in nature. We are energized by the massive opportunities we see ahead of VOD to connect to new consumers and enthusiast groups and authentic and real ways supporting them in the pursuit of that care about and providing product relevant to their lives. As it relates to our sports partnerships, we entered tailgating season with 11 of the top college football program, selling YETI, customized Drinkware. These programs alongside our NFL and other sports league partnerships for YETI products into the hands of sports enthusiasts that span a broad spectrum of consumers. Beyond Drinkware. We've also leveraged the American football season to promote our hard and soft coolers during live sports moments, including linear and streaming placements during recent Thursday night and Monday night NFL football games, which collectively generated over tens of millions of impressions for the brand. Another high-profile medium on the quarter came out of our partnership with liquid depth, where we collaborate to create a one-of-a-kind functional cooler casket between a cult following of both brands and shared commitment to reducing single-use plastics, we saw significant social and earned media exposure after the campaign launch. The joint Instagram posts around the collaboration reached over $7 million people and the initial launch post alone was most videos of all time. Turning to product innovation, our team is designing and developing products for frequency and consistency of use in daily lives. Whether it be in the wild in the home for passion pursuits are simply for everyday routines. We continue to meaningfully increase our addressable market with the expansion of our existing categories, plus our entrance into newer large global markets such as banks and cookware and Drinkware. We continue to innovate seeing expansion opportunities, building out the portfolio and beverage and food offerings. During the quarter, we launched for highly anticipated products to pitchers as well as for the full release of our flask and shock losses, which Mark 18 new products launched over the last 12 months. In this category. Early performance and feedback on borrower has been extremely positive and fits with our tableware and Drinkware expansion. As we entered the gifting season. We are optimistic about the potential of these products. Hard coolers. Both innovation and legacy products have been key drivers with broad-based strength in our rhodium Tundra hardcore families. In soft coolers, we continue to see strength in our newer backpack format as well as our smaller sized thermal lifestyle bags. More recently, we launched several new accessories. The comp cement, our cooler equivalent portfolio, our load out buckets will see, which launched in September has been in high demand due to the range of use cases from garage to sideline to the field. And last month, our food organization and storage containers went live to complement the functionality and versatility of our hard and soft coolers and tied to our food expansion team beyond coolers and Drinkware backs performed well in the quarter, and we're on track to launch a new range of every day and all weather bags in 2025, inspired by YETI industry Ranch designs. Finally, what cookware as our newest family, the initial performance and feedback we received around our cast-iron skill, it is extremely encouraged. Okay. Showcasing our product strategy as we bridge the natural connection of our offerings from live fire for cooking food storage to coolers to serving to eating how we build out the YETI product ecosystem. The introduction of cast iron received to the potential from key taste makers and culinary media, namely either in food and wine, where they highlighted quality and performance of our products. As we continue to expand our product portfolio, we're leveraging our strong and diverse omnichannel. We performed well across channels in the quarter, delivering growth in wholesale and DTC in our wholesale channel. Our release cadence and innovation strategy has supported healthy cell and with our partners are wetlands. Collection saw exceptional demand during the quarter with partners such as Bass Pro Shops, Cadomin sports and our independent doors, doing an excellent job job leaning into merchandising around this collection and attracting that loyal enthusiast shoppers channel inventory remained in good shape as we manage product distribution and new innovation launches. Wholesale plays an incredibly significant role for YETI as we want to be where consumers shop and intersect with them during buying occasions, whether those are impulse or intentional in DTC., while we continue to see some weaker traffic trends, the quality and value of customers that are shopping with us as higher suggesting more deliberate, loyal purchasing to support those who shop directly with us, we're building new ways to connect. During the quarter, we launched our YETI ID program with a more unique and personalized experience exclusive to account holders on yeti.com. This includes a preference center product registration and gear locker experience as we engage more deeply with our customers. The Amazon Marketplace showed strong demand in the quarter and a corporate sales. We saw growth across all regions with strength outside the US. In retail. We opened our 23rd store in the third quarter with our 24th coming this month, hitting our commitment of six store openings this year. Our newest location in Virginia at Tysons quarter has seen strong traffic. And across our fleet, we are seeing strong Drinkware performance. In general, we continue to see our stores have a positive impact on omnichannel performance in the markets where they are present, raising awareness of our brand and exposure to the full product portfolio. Turning to our international business, we continue to see momentum in growing awareness and non-US markets. Our brand playbook and go-to-market strategy is seeing traction in Europe is receiving strong reception for retail partners and consumers. We're on the front end of this significant opportunity, and we remain focused on continuing our brand expansion strategy as we scale our infrastructure and omnichannel approach. Our Kids and Teen brand and distribution are supporting our continued robust growth as we expand our reach, grow our wholesale partner footprint as customization ramps up in 2025. We expect strong performance across our European markets with particular focus in the UK and Germany. Australia continues to deliver exceptional growth across all channels, powered by our national wholesale partners and with good execution at our important smaller independent retailers in DTC. customization has been a real positive as we continue to scale capacity, and we see opportunity to continue driving this demand through e-commerce and corporate sales. Similarly, in Canada, we are scaling our custom business and expanding our corporate sales partnerships. On the wholesale front, while broader consumer headwinds and channel cautions persists, we are focused on strong merchandising and brand presence. On the DTC side, we see positive response to our enhanced customization offering. And our first Canadian YETI store, which opened in Calgary during the quarter has exceeded our early expectations. Before I turn the call over to Mike, I want to share a few thoughts as we look to wrap 2024 and why in my 10th year leading Getty. I'm so excited about the future, taking our updated outlook for 2024, combined with our historical quarter to quarter and year to year quality of execution. Since we went public in 2018, it is more than doubled revenue and triple DPS. I sit here today, more enthusiastic about where we are going that in any other point in our history, execution has been a hallmark of the business, and I expect the future to be no different for real excitement comes as I look towards the long term and what is in front of this brand, this product portfolio and this team innovation, expansion and execution. Our priorities are Drinkware business continues to evolve and grow its addressable market, but we see proof points of the growth in relevance from our innovation, not only deeper into Drinkware, but also broader into the food space. This evolution has led to food storage and premium Copler collectively represent a large global TAM. We track to be over 10 billion underlying our enthusiasm around this expansion of the global macro trends around hydration, health and wellness and being active outdoors. All themes, we believe strongly benefit yet in long term across product families. Additionally, our relevance and expansion and cruisers, not only with our current hard and soft cooler of solutions, but also the opportunity and broader daily use such a smaller format thermal bags fit within the macro themes and expand how yet the enables daily life with YETI continuing to extend the market opportunity and Drinkware and Coolers. I'm equally excited and enthusiastic about the expansion and growth opportunity in premium bags, packs and luggage. As I look across the landscape of everyday travel hike, Con sport, all weather and water-based pack, it's bags and luggage. I believe that we have the right brand, DNA designs and capabilities to sustainably build out and address another large and expansive tend to have any products is growing and varied with multiple avenues for expansion beyond what we've already publicly disclosed. Importantly, we I remain committed to and connected by the ethos of product rooted in premium durability, performance and design and underlying. All of it is a powerful and vibrant outdoor inspired in lifestyle oriented brand that we cultivate through real relationships that expansive global audiences. While near-term dynamics in markets can be unpredictable and had an influence on the business, the consistent long-term opportunity in front of us is rich in achievable. As I've seen in my time at YETI, recognizing the current market environment remains choppy, we are focused on managing through the unknowns heading into Q4 and 2025 to deliver on our 24 full year outlook and our long-term potential. To that end, I would like to thank our team for their unwavering commitment to building our brand and innovation, supporting our customers and driving our profitable growth. Now I will turn the call over to Mike.

Michael Mcmullen

Thanks, Matt, and good morning, everyone. I'll start by providing a brief overview of items contained in our third quarter GAAP numbers that affected both the year ago and current period results. I'll then provide a review of our third quarter performance, followed by an update on our outlook for the full year. We will then open it up for your questions. There were two items of note that impacted our GAAP results. First, the prior year quarter's results included a $0.8 million benefit to cost of goods sold related to our product recalls. There were no adjustments made to our recall reserve in the current period. Second, similar to our two prior quarters, our GAAP results include costs associated with the acquisitions that we made earlier this year. These include the impact of purchase accounting on gross margins as well as other minor transition costs within our operating expenses for our standard reporting practices. The impact of these and other nonrecurring items are excluded from non-GAAP results. All results presented on today's call will be on a non-GAAP basis in order to better focus on the operating performance of the business during the quarter. Now turning to our third quarter results. Sales increased 10% in the quarter to $478 million. This was in line with our expectation and was driven by growth across all categories, channels and geographies. This quarter's year-over-year growth includes an approximately 100 basis point net headwind from gift card redemptions related to our product recall, our results this quarter include $2.7 million in gift card redemptions compared to $6.3 million in gift card redemptions in the prior year quarter. On a year-to-date basis, sales are up 10% versus the comparable period last year, again across all of our categories, channels and geographies. We believe this demonstrates the continued momentum and growth potential of the brand and product portfolio with more growth available for us to go capture in new communities, new categories and new geographies. Now moving on to our sales by product category, Coolers & Equipment sales increased 12% to $193 million. We have been very pleased with the performance of see any of this year as this was the third quarter in a row with double-digit growth in the category. Hard coolers had a strong quarter supported by our recent innovation. In particular, we are thrilled with the customer feedback and sales performance of the new royalty, 15 hard cooler and believe that this product is in position to have a very successful holiday season. Soft coolers benefited from continued good demand for our line of backpack coolers and our data at lunch products also performed well, particularly during the key back-to-school shopping periods, but then equipment. Our bags category had a great quarter, exceeding our expectations with continued strong performance in our Sidekick, Camino and paying a product lines. Finally, Mr. Randy branded products continued to perform in line with our expectations, and we are excited about what the future hold as we near the launch of our YETI branded backpacks that leverage the premium design carry and performance tenants of mystery Ranch Drinkware sales increased 9% to $275 million, supported by our broad and diverse portfolio of products. Our continued innovation and our global growth opportunity. As Matt mentioned, this quarter, we continued our expansion into bar where and tableware the launch of our picture in two sizes as well as the full release of our flash and shock losses. Following the very successful limited release in Q2 as we can to expand our portfolio, we are seeing some really encouraging consumer behavior as we launch more and more products that are intended for group sharing. Like our beverage bucket line, chiller, French press and Pitcher. We are seeing a nice lift in other parts of our portfolio, such as our lineup of stackable come apps in six different sizes. We believe that this dynamic will only build as the awareness of our full portfolio continues to grow. one final point on Drinkware that we believe is often overlooked. We see a tremendous growth opportunity in Drinkware outside the United States, led by our expanding brand awareness and retail partner footprint. Moving on to our performance by channel. Wholesale sales were $198 million in the third quarter of 14% versus the same period last year. In the U.S., we continue to benefit from the strength and diversity of our wholesale channel diversity in terms of size, pursuits and location. We think this positions us well to capture the demand that is in the market regardless of macro economic conditions longer term, we also believe that this puts us in a great position to grow our shelf space with our wholesale partners as we expand our product portfolio outside the U.S. wholesale dealer growth remains a focal point of our strategy, and we continue to see plenty of opportunity for new partnerships around the globe. Finally, inventory in the channel remains healthy and is well positioned to support demand as we enter the holiday season. Direct to consumer sales grew 8% to $281 million, driven by good growth in both Sydney and Drinkware. Similar to the last quarter, all of our D2C channels posted growth in the quarter, led again by our Amazon business. Excluding the headwind from gift cards, total DTC growth was approximately 10%. Turning now to our international business. Outside the US, sales grew 30% to $88 million, driven by exceptional growth in Europe and Australia. We are encouraged by the momentum and brand awareness. We are staying in new markets, and we will continue to invest in building our presence in scaling our infrastructure and omnichannel capabilities in these geographies. one example of those capabilities is within Drinkware customization. We are now offering customers in Australia and Canada, both consumer and corporate sales, the ability to customize and personalize their YETI products that has been a driver of our growth so far this year, and we believe it will be a successful offering for us this holiday season. As it relates to margins, gross profit increased 11% to $278 million or 58.2% of sales, compared to 57.8% ever at roughly 40 basis point increase in gross margins during the third quarter. Included lower inbound freight and lower product costs had stable. It will impact of 160 basis points and 80 basis points, respectively. These gains were offset by 40 basis points from higher customization costs, 40 basis points from supplier and product transition costs. 30 basis points from the strategic price decreases uncertain hard coolers that we implemented during the first quarter and 90 basis points from a combination of other smaller impacts. Sg&a expenses for the quarter increased 11% to $199 million or 41.7% of sales, compared to 41.3% in the same period last year. Non-variable expenses increased 170 basis points as a percent of sales, primarily driven by higher employee costs and higher marketing expenses as we continue to spend into growing brand awareness and in building out our global teams to support the growth opportunity that we see looking forward. Variable expenses decreased by 130 basis points as a percent of sales due to a higher mix of wholesale sales as well as strong AOVs across our DTC channels. Operating income increased 11% to $79 million or 16.6% of sales, an increase of 10 basis points over the prior year period. Net income increased 14% to $60 million, and earnings per diluted share was $0.71 compared to $0.6 in the prior year period, an increase of 18%. Year to date, our earnings per diluted share of $1.74 percent is up nearly 30% versus the same period last year. Turning to our balance sheet, we ended the quarter with $280 million in cash, which was relatively flat on a year-over-year basis. Despite our $100 million share repurchase and our two acquisitions that were all completed in the first half of this year. Inventory increased 8% year over year to $370 million. As we look forward, we expect year end inventory to be approximately flat versus the prior year as we continue to drive efficiencies in our global inventory planning. Total debt, excluding unamortized deferred financing fees and finance leases, was approximately $79 million compared to approximately $83 million at the end of last year's third quarter. Now turning to our fiscal 2020 full year outlook, we now expect full year sales to increase approximately 9% compared to fiscal 2020 threes adjusted net sales, which is the midpoint of our prior range of 8% to 10%. We continue to take a prudently conservative approach in our demand planning for the remainder of the year. As Matt said, we believe this is the right approach given the current macroeconomic backdrop as well as the shorter shopping period between Thanksgiving and Christmas holidays. This year. The components of our full year sales outlook remain largely consistent. We continue to expect slightly higher performance from our wholesale channel versus D to C, given our current momentum in wholesale by category, we continue to expect coolers and equipment to outpace Drinkware, supported by strong performance in hard coolers and bags. Finally, we expect international growth to remain in the 30% range with domestic growth in the mid single digits. Moving down the P&L, our 2020 for gross margin target remains at approximately 58.5% versus 56.9% last year. This 160 basis point expansion for the year has not only been driven by lower inbound freight costs, but also the efforts of our teams to drive savings in other areas such as product costs. As we mentioned last quarter, we did see elevated surcharges on inbound freight shipments through much of the third quarter, which we manage well within our P & L. Those surcharges have started to come down, but we would expect the year-over-year benefit to our gross margins from lower inbound freight to be smaller in Q4 than in queue. And three. When combined with the impact of our hard cooler price decreases and an unfavorable impact to margins from sales mix, we continue to expect Q4 gross margins to be relatively flat on a year-over-year basis. Moving on to SG&A, we continue to expect full year SG&A growth to be slightly above full year sales growth. As we have consistently said this year, we are investing a portion of the increase in gross margin that we will see in 2024 back into SG&A in order to drive future growth. Our expectations for adjusted operating margins also have not changed. We continue to expect operating margins of 16.5%, 90 basis points higher than the 15.6% that we delivered in fiscal 2023. This represents operating profit dollar growth of approximately 15% below the operating line. We now expect an effective tax rate of approximately 24.8% for fiscal 2024, in line with the prior year, and we continue to expect full year diluted shares outstanding of approximately $86 million. As a result, we now expect adjusted earnings per diluted share of approximately $0.265, which is the high end of our prior range and represents year over year growth of approximately 18%. As for cash, we now expect full year capital expenditures of $50 million and our outlook for free cash flow remains consistent at between $130million and $200 million dollars. We will remain opportunistic with our capital allocation approach going forward, bound both M&A opportunities and the remaining $200 million on our share repurchase authorization. All in all, we are proud of our third quarter performance and the broad strength we saw across our businesses. Our top and bottom-line execution in the first nine months of this year gives us confidence we can achieve our full year guidance while also continuing to drive our strategic priorities forward. Our growing cash position gives us the opportunity to further invest in the business while also opportunistically pursuing a comp donation of strategic acquisitions and share repurchases. As we move into our year end, we continue to focus on strengthening the brand, expanding our product portfolio, driving omnichannel and international growth. Now I'd like to turn the call back over to the operator to take your questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star button followed by the number one on your touch-tone phone. You will hear a pump indicating your hand has been raised. Each participant is limited to one question and one follow-up to allow for time for others. Should you wish to decline from the polling process, please press zero, followed by the number two. You are using a speakerphone, please lift the handset before pressing any keys. one moment, please, for your first question. Your first question comes from the line of Peter Benedict of Robert W. Baird & Co. Please go ahead.

Question and Answer Session

Peter Benedict

Good morning, guys. Thanks for taking the question on. First one was just you kind of around the Voltaire question, um, you know, appreciate the efforts you're making to diversify our sourcing outside of outside of China. I'm curious how the international supply chain works at this point in the months on how much of the China source Drinkware Can you just shipped directly to other international markets and not bring to the United States? Is that is that a nuance that we should be aware of our thinking of as we tried that pencil out potential tariff of cost impacts on the business? That's my first question of the day .

Michael Mcmullen

Peter, it's Mike. Thanks. Thanks for the question. Yes. So from Absolutely. So as we as we go through this, any product made in China have got can go directly to the region. So Europe, Canada, Australia. So what are the things we've talked about as we've gone through, this is obviously currently primarily a US dynamic, which we feel as our international business grows sort of helps on offset some of the the potential cost risk that is out there.

Peter Benedict

So that's helpful. On another question, Mike cannabis, how do we think about the pace of SG&A growth and really more of the nonvariable side? As we look at your obviously, you mentioned you've been investing to support the U.S. or international growth. But as we kind of look out beyond this year and maybe have some gross margin tailwinds that maybe moderate or just how do you think about your ability to manage the SG&A line in the event that the gross margin isn't as much of a tailwind as it has been? Tom, Tom, for the last year, too.

Michael Mcmullen

Yes. So I'd say from our comments have been pretty consistent here. And I'd say that everything that we've done this year has largely been intentional. So coming into the year, we knew we were going to have some gross margin tailwinds. And we are we viewed it as that is an opportunity for us to invest some of that back into the business this and still allow operating margins to expand. So year to date, gross margins are up 240 basis points. We've taken 70 basis points of that and still expanded operating margins, 170 basis points for the year where the outlook that we put out today would imply gross margin expansion of 160 basis points, again in SG&A expense on investing 70 basis points of that back into SG&A and allowing for 90 basis points of operating margin expansion. That's all intentional. So as we go into next year, we're going to come very, very thoughtful about how we approach that. So we've been pretty consistent that we do is our intention to manage gross margin and operating margins together to drive operating margins up over time. And we're obviously not giving specific guidance on 2025 today, but but we've been for consistent with that. That is our intention as we go into next year.

Peter Benedict

All right. Great. That's helpful. Thanks so much. Thanks, Peter.

Operator

Thank you for your next question comes from the line of Peter Keith of Piper Sandler. Please go ahead.

Peter Keith

Hi, I'm Alexia Morgan on for Peter. Keith from taking our question and maybe more on the parent compound. And here again, I think China exposure within Drinkware and it's great. And how should we think about gross margin impact there? I mean, the facility is expected to be relatively smooth in terms of margin impact. It has proven platform?

Michael Mcmullen

Yes, thanks for the question. So obviously, there's been a lot of focus on the potential impact of tariffs. But I think it's really important to remember at the present time, there are a lot of unknowns. So the amount of the tariffs, the specific products, the timing, etcetera, there's just too much that we don't know trying to quantify it beyond what we talked about last quarter and then reiterated today in terms of what we're doing. So I think that's where we'd like to focus is here's what we are doing. The plan that we laid out last quarter and every year and that we reiterated today is on track. Number one. Number two. We're working very closely with our suppliers who have strong. We have strong long-standing relationships with. We're working with them on a solution and also assessing potential new partners. And third, if we will have to see as we go through this. But I think we would look at a price potentially as a as an option to to offset any potential tariff risk. So basically, we're focused on the things that we can control. And the other thing that I would lay out that as just as a reminder, we have been through this before in 2018, 2019 timeframe with soft goods. And we navigated that successfully. And we believe the plan that we have in place today were allow it allows us to do that again. But again, there are there's just a lot of unknowns right now to lay out a specific number.

Peter Keith

Okay, helpful. Thank you. Then one more just on and on wholesale sell-in to sales were really turning the corner in the Untied mental health counseling already. But could you know more into detail on that? Will sales fell through dynamic, what you find two three and then maybe have a comparator early on here.

Michael Mcmullen

Yes. So here's what I'd say. We've been very pleased with our sell-in in our sell through this year. As you look this year in the U.S. Now one thing I do want to make sure is clear is that when we talk comparing sell-in and sell-through from when we talk sell through, that's primarily a US dynamic. And so whereas the wholesale reported number is global on. And so when you look at just the USL. S & P's, they're reasonably aligned by across both CNE and Drinkware. And we've been really pleased with what our sell through has performed this year. And I think as we go into the holidays, we think we're in a really, really good inventory position and some to have a successful Q4.

Peter Keith

Okay. Thank you. That's it for me.

Operator

Your next question comes from the line of Randal Konik of Jefferies Group LLC. Please go ahead.

Randal Konik

Good morning. I guess maybe Matt, for you are considering the international business has continued to power ahead here, maybe frame up for us. Where are we today with Tom bodies in the different regions in terms of employees, just infrastructure, the way everything set up. And we think about additional growth in areas like Europe and Asia, just trying to frame it out for us in terms of where we've been where we and where we're going in those markets. I had. Thanks.

Michael Mcmullen

Thanks, Randy, and good morning. I would say a couple of things on is we've talked in the past we've kind of built these pillars of international growth through time. And we've said before, Canada and Australia, those two markets from our team infrastructure really are built out and there and the scale mode we called out in particular, we cut out of Australia today and share that the strong growth and execution that that incredible team have done under continues to deliver. Europe was a couple of years behind that in its build out some. But with the team that we put together in Europe, focused on Continental Europe and focused on the UK, we feel really good about the infrastructure that we have built some there's still some more investment in front in front of that as we continue to kind of go up the scale. But I would say we're still in we knew the relative size of that market in Europe, and that's why we continue to call out even specifically Germany and UK. We think the opportunities extraordinary, the reception has been outstanding on the playbooks working, and it's really powering is meaningful growth for us now. And it's got to news we reported today. That's that's part of what the what you're seeing that result is is the strong execution of Europe and the UK. But I would say even more exciting is how early we are in that opportunity. Asia's Asia's further back in that investment. We're very early in the startup in Asia and building out our go-to-market strategy and our resourcing there. So I think I think the Asia North Asia, Japan, Korea will be a story over the years to come. I think Europe in the UK will be talking more and more about in the near term as we can take the foundation we've built and really scale off of it.

Randal Konik

Thanks. And then I guess lastly, maybe give us to further unpack how you're thinking about product evolution ahead and innovation. You talked a lot about the excitement around bar where you also kind of give us some good perspective on the investments in on smart chip you've been giving on the culinary side of the different audit, another audience that you're targeting or maybe just give us some perspective of how you're thinking about going forward, how we should be seen talking about innovation around other categories or other areas are produced strong, any brand to go into I had.

Michael Mcmullen

Thanks, guys. Yes. What I say here, Randy, is if you look back, I think our historical evolution, some sort of laid all the all the foundations for for what we're talking about today and really are the setup for where we're going in the future. I don't expect that has never been a hallmark of YETI to go to bed, just scattershot the brand and scattershot the product portfolio. And we really want to have thoughtfully build it out. So it all connects. And so what you're seeing, and I think 2020 fours, really an example of that. And I think you'll see us continue into 2025 and beyond is as we build out Drinkware and we can we connect more into food and culinary. And as we build out our coolers and really expand the use cases there, it as our bags portfolio continues to evolve. And as we continue to fall of all of our our storage cargo protective case business, you're going to see those all fit together within the IT ecosystem. And so what we're really ultimately trying to do is around the consumer with more you use cases in their daily lives, make the brand more present the brand more relevant because we know we have the brand guaranteed. We know we have the right product DSOs, and we feel those opportunities to grow at were incredibly excited about what's in front of us and bags. We think that is in a massive global market that is right for YETI. I think that combination of Drinkware moving market moving from being very tough focused to being very solution oriented. And that's the bar where sort of where our tabletop Nexion to cooking and culinary. And we're really excited about 19 over the next kind of near and midterm, you're going to see us aggressively build that out. But I think you're going to look at it say that all really makes sense underneath the umbrella.

Randal Konik

Great. Thanks, guys.

Operator

The next question comes from the line of Phillip Blee of William Blair. Please go ahead.

Phillip Blee

Thanks. Good morning, guys. Can you talk a little bit more about your expectations for the upcoming holiday, maybe what you're seeing quarter-to-date trends? And then any level of conservatism built in ahead of peak season ability to chase and then any impact of a potentially more promotional competitive environment?

Matthew Reintjes

Thanks. I feel I feel like I've said a couple of things, and I'll reiterate a little bit of what the what I said in Mike said, Q4 is always big for us yet. He has always been an incredible for gifting solution and gifting product and the highly desirable one in De Beers, you for your wind mine when buying starts kind of wind, the wind season falls. So we closely monitor those. We feel great about how we're positioned for the holidays. We have incredible plans with our wholesale partners domestically and globally at to address the consumer when they when they shop. So this year, there is a shortened run between the goalpost of the traditionally defined through a holiday buying season. And so we're well primes, well primed for that. We're excited about the innovation we put into the market this year that still undiscovered that still has opportunity to be a great, a great holiday, great gifting solution. And it is our history has been we always have some things that we have we have for the holidays to stoke energy and demand and drive traffic and interest. So I think it's I think we're early in the quarter as it relates to the holidays. And I think as we go forward and get into this into the shortened season, we're ready to react to to what the market to what the market gives. And I would say as it relates to the promotional environment, we haven't seen anything outstanding and unusual in the quarter to date. And as we have always done, our promotional cadence is continuing to be consistent and similar to what we've done in the past.

Phillip Blee

Great. Excellent. Very helpful. And then on gross margin outside of any potential impact of tariffs, you talk about what you are in for some of your gross margin improvements may be between kind of normalizing transportation costs that are more macro versus some of your internal initiatives, uncontrollable and product costs. Just to kind of trying to give us some sort of gauge on a go-forward rate.

Michael Mcmullen

Thanks. Yes. Hey, Philip. So difficult to put an inning on it because I'd say this is a continual process that we have internally to manage our COGS to manage our gross margins. And there's things that happened every year in terms of things going on in the business, things going on in the market that can that we need to react to as well. Obviously, we've been really pleased with our gross margins in 2020 for the expansion that we've had. The out in the outlook that we put out was essentially holding to the 58.5%, which was nice expansion year over year. On the outlook, what it implies for Q4 is essentially a flat gross margin in Q4 like we talked about. But there's some things driving that that we believe are specific to this time period on that won't necessarily continues. We go into next year, we'll lap the hard cooler price decreases, sales mix. What the faster growing wholesale is growing faster than D to CCD. is growing faster than Drinkware. Those are both somewhat dilutive to gross margins is our intention to sort of grow the categories together. It's our intention to grow due to see faster than than wholesale. So we think that also can provide some benefit going forward. And then lastly, Group one thing that's going to impact in Q4, as we've talked about these freight surcharges that we've seen, we did a nice job of managing those. We believe that the benefit that we'll get in Q4 from freight year over year is going to be lower than what we saw in Q2 three. And because a lot of the surcharges are going to flow through our our RP. and L. in Q4. So but we said all along, we think those are transitory, and we are starting to see those come down. So again, not giving specific guidance on 2025, but other than to say, we're going to continue to do what we've been doing, which is manage our product cost manager, inbound freight costs and continue to drive growth and operating margins up over time. The only thing I would just add to what Mike said is and what we have strong gross margins and we have strong operating margins and we continue to work both and see opportunity. And I think when you have a situation where drive top line growth, you have strong gross margins, you have strong operating margins. We had really good things will continue to happen in our P&L and will continue to strengthen what we think is already an incredibly strong balance sheet. Okay, excellent.

Phillip Blee

Thanks. Best of luck on holiday. Thanks, Bill.

Operator

Your next question comes from the line of Megan Alexander of Morgan Stanley. Please go ahead.

Megan Alexander

Hi, good morning. Thanks very much for taking my question. I wanted to just ask kind of big picture yet. You're talking down mid single digit growth in the US this year. There's obviously been a lot of noise in our year over year as it relates to gift cards as an acquisition. So I guess when you think about kind of a go forward, is it mid-single digit growth in the US the right level? And is that in our category up low single digits and UK gaining some share on? And if not, maybe how do you think about that kind of growth and the last going forward?

Michael Mcmullen

Megan, thanks. Thanks for the question. I would see that while we're not sitting here and kind of our Q3 call and in Q4 updating any any version of our long term outlook, what I would reiterate is the signs we're seeing in the brand potential and what the market opportunity is for the brand. The expansion opportunities we're seeing in the product portfolio as we continue to build it out just opens more and more new doors that the growth opportunity domestically that we see. As we think about that, that product expansion gets us incredibly excited without giving a specific number on it are pegging to a number. I think that quarter to quarter year to year, there can be some some changes based on background market backdrop, strong, weaker and how our product cadence in our product expansion comes out. I think when you step back from it all to your to your point on the on the bigger picture, we're incredibly bullish on the brand. We're incredibly bullish on on the product expansion and where we can go the consumer receptivity from the partners we have today to get to market and address those consumers domestically. And that's before you get to the very early days of what we think are a really long run international growth. So I think come as we go through our our annual guidance. We'll talk more about that. But I think when you think about you step back and thinking about potential and you think about relevance and you think about connection product and consumer, we feel great about where we are. Okay.

Megan Alexander

That's helpful. Maybe I'm sorry to ask another question on tariffs that maybe a little bit different on your balance sheet is in a really great side. And how do you think about perhaps the ability to take on some some debt and increased leverage to in our games ourselves a little bit more flexibility on the bottom line or in our there? Are there investments and capacity that you gain to her at that you will be it will they get 50% outside of China by the end of 2025? But is there anything you can do from a capital standpoint to perhaps accelerate that further on? But just the right kind of hear a lot of them are how you're thinking about the ability to leverage the balance sheet to offset some of it's maybe short term headwinds.

Michael Mcmullen

Yes, Megan, thanks for the thanks for that question. You know, I would say, um, we do have an incredibly strong balance sheet. We feel great about it. We feel great about our free cash flow generation and what that says about the business operationally. And when we think about our supply chain alongside all of our other strategic initiatives, we continue to look for ways to get to the answer faster and get to the to the right answer with them. More thoughtful approaches, leveraging the people, capabilities and capacity we have the capital we have. So I think as we get deeper into this and we understand, as it specifically relates to tariffs, what we're dealing with them, those kind of flexibility, conversations, those kind of an investment conversations we absolutely look at. And as Mike said, we'll look at everything as it relates to tariffs, look at everything from consumer pricing to how we manage and operationalize the business to investments we make in the continued evolution of our supply chain. So all of that is all that is active on the table discussions in some of it being actioned right now.

Megan Alexander

Great. Thanks so much. Best of luck. Thank you.

Operator

Your next question comes from the line of Joseph Altobello of Raymond James. Please go ahead.

Joseph Altobello

Good morning. This is Martin on for Joe. I just want to touch on four Q again on EPS. This quarter is up 18%. And if we've done the math right, you sort of implying flat for next quarter. I know you mentioned the shoulder combined series, and you've touched a little bit our margins. But just wondering if there's any pull forward or the other dynamics that hadn't been mentioned yet.

Michael Mcmullen

No, I think we've I mean, it's largely the consistent story. So when you think about Q4, I think there's there's a couple of components to Q4 related to sales, gross margin, operating expenses. And I think we've touched on a lot of those in terms of the the environment that Matt talked about, some of the dynamics in gross margin that we believe are specific to this quarter and then from our decision to continue to invest into the business using some of the upside in gross margin we've had this year. But I think everything needs to be looked at in terms of context of the year, both of our results year to date and then the as well as our outlook on. And so we are very pleased with the year that that we've had so far in the year that we're about to post both on the top line basis and a bottom-line basis. There's some unique dynamics in Q4 that that we talked about. I think the other thing is that when we put out an outlook as we obviously want to make sure that we we feel good about that, and that's what we've done to date. So nothing beyond what we've talked about.

Joseph Altobello

Okay. Understood. Can you just update us on the competitive landscape and how your market share is holding up, but altogether, the couple of things on the competitive landscape, we haven't seen largely any significant changes in the competitive landscape.

Matthew Reintjes

I think when you look at our results and how we continue to deliver quarter to quarter on the partnerships we have the shelf space, we continue to maintain and grow domestically. The opportunity that we're seeing globally, I think markets are markets are competitive and you have market alternatives that come and go and some common stay for a bit. But I think the the residual kind of strength of YETI and the strength of the brand that we're building and the diversification and growth their product portfolio. So I think they're all are all signs of kind of how we whether whether the market. And so I feel good feel good about where we are. I wouldn't say we've seen any a principle or material change in the market.

Joseph Altobello

Okay. Great. Appreciate it, guys. Thank you.

Operator

Your next question comes from the line of Jim Duffy of Stifel. Please go ahead.

Jim Duffy

Hi, this is Peter Mechel's conference. Jim. Thanks for taking our questions on. Just first thinking is the composition of the 30% year over year international revenue growth. Can you provide some insight to the contribution of new dealer growth and gains within existing customers?

Matthew Reintjes

So this quarter. And then as we look forward, how should we expect that to evolve sequentially as we look forward over the mid term IP or we haven't historically given kind of a resolution down into those into those markets at that level of specificity? But what I would say to you is if you kind of follow how we've talked about Canada and Australia, in those those markets largely built out the infrastructure, establish the omnichannel and the things that we point out customization, strong wholesale partnerships, our e-commerce businesses that would that would lead you believe that it's evolving a lot like the US. And when we talk about the playbook we run, we are traditionally a opened new door negative comp door type brand. That's that's not been the stuff in the the approach we've taken and we've taken that and exported to the globe. Europe Europe obviously had we been adding some wholesale doors, but that is we've called out in the past, has been a really strong e-commerce business. We have a growing Amazon Marketplace. We've got a growing corporate sales customer business. And the other dynamic in Europe is there are large and the kind of pan European multinational retailers like you'd see in the U.S. and Australia and Canada. And so it tends to be more picking the right doors. And so it's a much more methodical process as it relates to wholesale buildout, which would lead you to Scott to the conclusion that the business that we have is performing.

Jim Duffy

Well. Thank you. And then just thinking about Drinkware specifically and holiday yet he is giftable staple already. Can you share any figures underpinning the fourth quarter outlook as it relates to wholesale shelf space, reorder and new products or Inc? National contribution?

Michael Mcmullen

Yes, thanks for the question. I mean, here's what I'd say we didn't give specific. We will begin to look for the year and we talked about sort of we expect the channel category and international dynamics to sort of continue that we've seen this year wholesale growing faster than D to C C and a growing faster than than Drinkware. And that's I would expect Q4 to looks similar to that. We think we've got for Drinkware specifically talked about this. I mean the number of products that we've released in the last 12 months that we think are highly giftable items at Haile, giftable price points and we think could could set us up for a really strong holiday season. But I think Q4 as it relates to the relationships between channels and categories and International will look pretty similar to how we've looked all year long.

Jim Duffy

Okay, very helpful. Thank you.

Operator

For your last question, you have Brooke Roach of Goldman Sachs. Please go ahead.

Brooke Roach

Hi, good morning, Mississippi and hammer on from Procrit. Thank you so much for taking the question. In your prepared remarks, you mentioned a lot of excitement around the expanded bags launch plan for next year. Should we think about a similar value proposition rebalancing tiered system bags impacts business out of the launch, similar to the changes you've made with their hard cooler expansion earlier this here? If so, how should we think about the breadth and depth of this price changes? Thank you.

Michael Mcmullen

Yes, hi, Savannah. Thanks for. Thanks for the question. We are excited not only about the literal lots of those bags, but actually what it starts coming from a from an expansion in growth. And what we see is the frankly, the long-term potential and backs as I as I laid out on the call that that run from everyday travel, sport hike, Hahn, water-based things, All Weather back. I mean, all those all those we have got incredible sort of a natural growth extensions for YETI in this backpacks and luggage space. Because I think about the q. one, the bags that we are bringing out in kind of the first half of next year, really our expansionary and additive to what the what we have today. So, there is some interplay between the bags that we have in the market.

Tom Shaw

And this is Tom, but I wouldn't expect I wouldn't expect anything meaningfully. I kind of meaningful transition lies between between. Those is really we're looking to expand and create more choices for consumers in our bags impacts.Thank you. I'd now like to turn the call back over to Matt trainees for final closing remark.

Matthew Reintjes

Thanks, everybody, for joining us, and we look forward to speaking to you on our Q4 and full year call. Have a wonderful rest of your month.

Operator

Ladies and gentlemen, this concludes your conference call for today. Thank you for participating and ask that you please disconnect your lines. Thanks. Thanks. Thanks. Okay.