# YETI Holdings, Inc. (YETI) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from YETI Holdings, Inc.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1670592/000167059224000007/yeti-20231230.htm
Accession: 0001670592-24-000007
Filing date: 2024-02-26
Report date: 2023-12-30
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/YETI/
All MD&A years: /company/YETI/mda/
Previous year: /company/YETI/mda/fy2022/ (FY 2022)
Next year: /company/YETI/mda/fy2024/ (FY 2024)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis contains forward-looking statements within the meaning of the federal securities laws, and should be read in conjunction with the disclosures we make concerning risks and other factors that may affect our business and operating results, including those set forth in Part I, Item 1A, “Risk Factors” of this Report. The information contained in this section should also be read in conjunction with our consolidated financial statements and related notes and the information contained elsewhere in this Report. See also “Forward-Looking Statements” immediately prior to Part I, Item 1, “Business” in this Report. A discussion of our results of operations for the year ended December 31, 2022 compared to the year ended January 1, 2022 is included in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the year ended December 31, 2022, which was filed with the SEC on February 27, 2023.

Business Overview

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, Scheels, and Tractor Supply Company. 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 trademarks and original artwork through our corporate sales program, at YETI.com and certain country-specific YETI websites. Our corporate sales program offers customized products to corporate customers for a wide-range of events and activities, and in certain instances may also offer products to re-sell.

Product Introductions and Updates

During the first quarter of 2023, we expanded our cargo offerings with the launch of the new LoadOut GoBox in three sizes, introduced the new stackable Rambler Lowball, built new customization capabilities for our Yonder bottles, and introduced new seasonal colorways.

During the second quarter of 2023, we expanded our drinkware offerings with the launch of the new Rambler beverage bucket, introduced new color-matched straw lid Rambler bottles and our first ever cast iron skillet, and continued to expand our seasonal colorways.

During the fourth quarter of 2023, we introduced our redesigned and improved SideKick Dry gear case as well as our Hopper M30 Soft Cooler and Hopper M20 Soft Backpack Cooler, and also launched two new sizes with the Hopper M15 Soft Cooler and the Hopper M12 Soft Backpack Cooler (collectively, the “Hopper M Series Soft Cooler line”). We believe the improved design of the SideKick Dry gear case and Hopper M Series Soft Cooler line adequately addresses the potential safety concerns caused by the magnet-lined closures of the previous-generation products, which were affected by the product recalls discussed below.

We also continued the expansion of our drinkware offerings with the launch of specialty coffee Rambler cups and mugs, introduced a third size of our Rambler Straw Mugs, a new stackable Rambler mug, and our first ever wine chiller and cocktail shaker as part of our tabletop solutions.

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2024 Acquisitions

During the first quarter of 2024, we completed the acquisitions of Mystery Ranch, Ltd. (“Mystery Ranch”), a designer and manufacturer of durable load-bearing backpacks, bags, and pack accessories, and Butter Pat Industries, LLC (“Butter Pat”), a designer and manufacturer of cast iron cookware. We plan to integrate Mystery Ranch and Butter Pat operations and products into our business to further expand our capabilities in the cookware and bags categories. See Note 14—Subsequent Events of the Notes to Consolidated Financial Statements included herein for additional information about these acquisitions.

Credit Facility Amendment

On March 31, 2023, we amended our senior secured credit agreement (the “Credit Facility”), leaving the material terms of the Credit Facility substantially unchanged, with the exception of certain changes to implement the replacement of LIBOR with SOFR.

On June 22, 2023, we amended our Credit Facility to, among other matters, extend its maturity to June 22, 2028 and increase the commitments under the revolving credit facility (the “Revolving Credit Facility”) from $150.0 million to $300.0 million. For additional information on the Credit Facility, see “Liquidity and Capital Resources - Credit Facility” below.

Product Recall Update

In January 2023, we notified the Consumer Products Safety Commission (“CPSC”) of a potential safety concern regarding the magnet-lined closures of our Hopper M30 Soft Cooler, Hopper M20 Soft Backpack Cooler, and SideKick Dry gear case (the “affected products”) and initiated a global stop sale of the affected products. In February 2023, we proposed a voluntary recall of the affected products to the CPSC and other relevant global regulatory authorities. Accordingly, we established reserves for unsalable inventory on-hand, as well as expected future returns and the estimated cost of recall remedies for consumers with affected products as of December 31, 2022.

For the year ended December 31, 2022, we recorded a reduction to net sales for estimated future returns and recall remedies of $38.4 million; recorded costs in cost of goods sold of $58.6 million primarily related to an inventory write-off of $34.1 million for our unsalable inventory on-hand as well as estimated costs of future product replacement remedies and logistics costs; and recorded $31.9 million associated with estimated recall-related costs in selling, general, and administrative expenses. As a result, the total unfavorable impact of the proposed voluntary recalls to operating income was $128.9 million for the year ended December 31, 2022.

In March 2023, we announced separate, voluntary recalls of the affected products in collaboration with the CPSC. During the second quarter of 2023, we began processing recall returns and claims and based on such experience and trends, we reevaluated our assumptions and adjusted our estimated recall expense reserve. These trends included higher than anticipated elections by consumers to receive gift cards in lieu of product replacement remedies, lower than anticipated consumer recall participation rates, variations in individual product participation rates, and lower logistics costs than previously estimated. As a result, we updated our recall reserve assumptions throughout 2023, which increased the estimated recall expense reserve by $3.6 million in 2023.

As a result of the net unfavorable recall reserve adjustments and other incurred costs, for the year ended December 30, 2023, we recorded a reduction to net sales of $21.7 million primarily related to higher estimated future recall-related gift card elections; recorded a benefit in cost of goods sold of $8.4 million primarily related to lower estimated costs of future product replacement remedy elections and logistics costs, and lower recall-related costs; and recorded a benefit in SG&A expenses primarily related to lower estimated other recall-related costs of $11.4 million. The total unfavorable impact to operating income related to the recalls was $1.9 million in 2023.

As of December 30, 2023 and December 31, 2022, our reserve for estimated recall expenses was $13.1 million and $94.8 million, respectively.

The ultimate impact from the recalls may differ materially from our estimates, and may harm our business, financial condition and results of operations. See Part I, Item 1A “Risk Factors - Risks Related to Our Business, Operations and Industry.”

In addition, our 2023 sales were materially adversely impacted by the stop sale of the affected products. We have developed solutions to address the potential safety concern of the affected products. In the fourth quarter of 2023, we introduced our redesigned and improved versions of the affected products.

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Macroeconomic Conditions

During 2021 and 2022, we experienced challenges associated with the complex and uncertain macroeconomic environment in which we operate. Consistent across many industries, we experienced inflationary pressures and supply chain challenges, including port congestion, container and labor shortages, which resulted in longer transit times, higher distribution, logistics, and product input costs. As a result, we experienced decreased profitability and delayed product availability for certain products in 2022. However, in the second half of 2022, these inflationary pressures and supply chain challenges, including inbound freight rates, began improving. In 2023, freight rates stabilized at near pre-pandemic levels. The reduction in freight rates resulted in an improvement to our gross margin during 2023 compared to 2022.

There is significant uncertainty regarding how macroeconomic trends, including sustained high levels of inflation and higher interest rates, will impact consumer demand. While some of these conditions have negatively impacted consumer discretionary spending behavior, we continue to see strong consumer demand for our products.

In addition to the trends discussed above, foreign exchange rate fluctuations and geopolitical issues add to significant uncertainty in the macroeconomic environment. The recent conflict in the Red Sea has disrupted shipping routes, which has caused us to begin experiencing shipping delays and increased freight costs. Although such effects have not materially impacted our business to date, such conditions could worsen.

A worsening of any of the macroeconomic trends discussed herein may adversely impact our business, operations, and financial results in the future. We will continue to monitor and, if necessary, mitigate the effects of the macroeconomic environment on our business.

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 is primarily composed of 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 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 variable SG&A costs are generally higher as a percentage of net sales than our wholesale channel distribution costs.

Fiscal Year. We have a 52- or 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 years 2023, 2022 and 2021 ended on December 30, 2023, December 31, 2022 and January 1, 2022, respectively, and were 52 weeks each. Unless otherwise stated, references to particular years, quarters, months and periods refer to our fiscal years ended in December and the associated quarters, months, and periods of those fiscal years.

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Results of Operations

The discussion below should be read in conjunction with the following table and our consolidated financial statements and related notes contained elsewhere in this Report. The following table sets forth selected statement of operations data, and their corresponding percentage of net sales, for the periods indicated (dollars in thousands):

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended"],["","December 30, 2023","","December 31, 2022"],["Statement of Operations"],["Net sales","$","1,658,713","","","100","%","","$","1,595,222","","","100","%"],["Cost of goods sold(1)","715,527","","","43","%","","831,821","","","52","%"],["Gross profit","943,186","","","57","%","","763,401","","","48","%"],["Selling, general, and administrative expenses","717,728","","","43","%","","637,040","","","40","%"],["Operating income","225,458","","","14","%","","126,361","","","8","%"],["Interest expense","(942)","","","\u2014","%","","(4,466)","","","\u2014","%"],["Other income (expense), net","1,430","","","\u2014","%","","(5,718)","","","\u2014","%"],["Income before income taxes","225,946","","","14","%","","116,177","","","7","%"],["Income tax expense","(56,061)","","","3","%","","(26,484)","","","2","%"],["Net income","$","169,885","","","10","%","","$","89,693","","","6","%"]]
[[/GREPCENT_TABLE]]

______________________________

(1) Includes $6.4 million of inbound freight expense related to an out-of-period adjustment for year ended December 31, 2022. See Note 1 - Organization and Significant Accounting Policies of the Unaudited Condensed Consolidated Financial Statements for additional information.

Year Ended December 30, 2023 Compared to Year Ended December 31, 2022

[[GREPCENT_TABLE]]
[["","","Fiscal Year Ended"],["","","December 30, 2023","","December 31, 2022","","Change"],["(dollars in thousands)","","","","$","","%"],["Net sales","","$","1,658,713","","","$","1,595,222","","","$","63,491","","","4","%"],["Gross profit","","943,186","","","763,401","","","179,785","","","24","%"],["Gross margin (gross profit as a % of net sales)","","56.9","%","","47.9","%","","900 basis points"],["Selling, general, and administrative expenses","","$","717,728","","","$","637,040","","","$","80,688","","","13","%"],["SG&A as a % of net sales","","43.3","%","","39.9","%","","340 basis points"]]
[[/GREPCENT_TABLE]]

Net Sales

Net sales increased $63.5 million, or 4%, to $1,658.7 million in 2023 from $1,595.2 million in 2022. Net sales included an unfavorable impact of $21.7 million in 2023 primarily related to recall reserve adjustments, and an unfavorable impact of $38.4 million in 2022 in connection with the initial recognition of the recall reserves, as discussed above. Excluding these recall-related impacts, sales increased 3% primarily due to volume growth in our DTC channel.

Net sales for 2023 were materially adversely impacted by the stop sale of the soft coolers included in the recalls initiated during the first quarter of 2023. In addition, net sales for 2023 include $25.3 million of sales related to gift card redemptions in connection with recall remedies.

Net sales in our channels were as follows:

•DTC channel net sales increased $80.0 million, or 9%, to $997.7 million in 2023 from $917.7 million in 2022, driven by both Drinkware and Coolers & Equipment categories. DTC channel net sales included an unfavorable impact of $7.3 million in 2023 primarily related to recall reserve adjustments, and an unfavorable impact of $6.2 million in 2022 in connection with the initial recognition of the recall reserves. Our DTC channel represented 60% and 58% of total net sales in 2023 and 2022, respectively.

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•Net sales in our wholesale channel decreased $16.5 million, or 2%, to $661.0 million in 2023 from $677.5 million in 2022. Wholesale channel net sales included an unfavorable impact of $14.4 million in 2023 primarily related to recall reserve adjustments, and an unfavorable impact of $32.2 million in 2022 in connection with the initial recognition of the recall reserves. The decrease in our wholesale channel sales was primarily due to a decline in Coolers & Equipment, partially offset by growth in Drinkware and a favorable impact of $17.9 million related to the recall reserves. Our wholesale channel represented 40% and 42% of total net sales in 2023 and 2022, respectively.

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

•Drinkware net sales increased $75.8 million, or 8%, to $1,023.0 million in 2023 from $947.2 million in 2022, primarily driven by strong demand for the continued expansion and innovation of our Drinkware product offerings, including Rambler straw lid mugs, Rambler and Yonder bottles, specialty coffee cups and tabletop solutions, as well as new seasonal colorways.

•Coolers & Equipment net sales decreased $15.0 million, or 2%, to $597.5 million in 2023 from $612.5 million in 2022. Coolers & Equipment net sales included an unfavorable impact of $21.7 million in 2023 primarily related to recall reserve adjustments, and an unfavorable impact of $38.4 million in 2022 in connection with the initial recognition of the recall reserves. The decrease in Coolers & Equipment net sales was primarily due to the stop sale of the products affected by the recalls, partially offset by the introduction of our new Hopper M12 Soft Backpack Cooler and M15 Soft Cooler, and strong performance in our Hopper Flip soft cooler line, cargo, and bags. Coolers & Equipment net sales were also favorably impacted by $16.7 million due to lower recall reserves in 2023.

Gross Profit

Gross profit increased $179.8 million, or 24%, to $943.2 million in 2023 from $763.4 million in 2022. Gross margin increased 900 basis points to 56.9% in 2023 from 47.9% in 2022. Gross profit included an unfavorable impact of $13.3 million in 2023 primarily related to recall reserve adjustments, and an unfavorable impact of $97.0 million in 2022 in connection with the initial recognition of the recall reserves, as discussed above. The increase in gross margin was primarily driven by:

•the lower impact of the recall reserves, which favorably impacted gross margin by 480 basis points;

•lower inbound freight, including lower rates, which favorably impacted gross margin by 370 basis points;

•lower product costs, which favorably impacted gross margin by 110 basis points; and

•an increase in the mix of DTC channel net sales, including our growing Amazon Marketplace business, which favorably impacted gross margin by 50 basis points.

These were partially offset by:

•higher promotions in our DTC channel, including Amazon Prime Day promotions, which unfavorably impacted gross margin by 30 basis points;

•the unfavorable impact of foreign currency exchange rates, which unfavorably impacted gross margin by 20 basis points; and

•other impacts, including higher depreciation and amortization expense and customization costs, which unfavorably impacted gross margin by 60 basis points.

Selling, General, and Administrative Expenses

SG&A expenses increased by $80.7 million, or 13%, to $717.7 million in 2023 from $637.0 million in 2022. As a percentage of net sales, SG&A expenses increased 340 basis points to 43.3% in 2023 from 39.9% in 2022. SG&A expenses included a favorable impact of $11.4 million in 2023 primarily related to recall reserve adjustments, and an unfavorable impact of $31.9 million in 2022 in connection with the initial recognition of the recall reserves, as discussed above. The increase in SG&A expenses resulted from:

•an increase in variable expenses of $39.7 million (increasing SG&A as a percent of sales by 190 basis points) primarily associated with higher DTC channel sales, and comprised of higher distribution costs including higher outbound freight rates, online marketplace fees, third-party logistics fees, and credit card processing fees;

•an increase in non-variable expenses of $84.3 million (increasing SG&A as a percent of sales by 420 basis points) comprised of higher employee costs, mainly due to incentive compensation, investments in headcount to support future growth, and non-cash stock-based compensation expense, as well as investments in marketing expenses, warehousing costs, facility costs, and other operating expenses; which were partially offset by

•the lower impact of the recall reserves, which favorably impacted SG&A expenses by $43.3 million (decreasing SG&A as a percent of sales by 270 basis points).

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Non-Operating Expenses

Interest expense was $0.9 million in 2023, compared to $4.5 million in 2022. The decrease was primarily driven by higher interest income, partially offset by an increase in interest expense due to higher interest rates on our outstanding long-term debt.

Other income, net was $1.4 million in 2023, compared to other expense of $5.7 million in 2022. The increase in other income, net was due to foreign currency gains on intercompany balances.

Income tax expense was $56.1 million in 2023, compared to $26.5 million in 2022. Our effective tax rate for 2023 was 25% compared to 23% for 2022. The increase in income tax expense was primarily due to an increase in earnings before taxes in 2023. The increase in the effective tax rate was primarily due to a lower tax benefit from our export sales deductions and an unfavorable tax impact related to stock-based compensation in 2023.

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, which primarily consists of inventory and accounts receivable, and our capital investments from cash flows from operating activities, cash on hand, and borrowings available under our Revolving Credit Facility. Pursuant to our new share repurchase plan described below, we also plan to use cash to repurchase shares of our common stock. 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, including for at least the next twelve months.

Current Liquidity

As of December 30, 2023, we had a cash balance of $439.0 million, $77.1 million of working capital (excluding cash), and $300.0 million of borrowings available under the Revolving Credit Facility.

Credit Facility

Our Credit Facility provides for a $300.0 million Revolving Credit Facility and an $84.4 million term loan (“Term Loan A”).

On March 31, 2023, we amended the Credit Facility, leaving the material terms of the Credit Facility substantially unchanged, with the exception of certain changes to implement the replacement of London Interbank Offered Rate (“LIBOR”) with the Secured Overnight Financing Rate (“SOFR”) as the reference rate therein.

On June 22, 2023, we further amended the Credit Facility, which extended the maturity date of both the Term Loan A and the Revolving Credit Facility from December 17, 2024 to June 22, 2028; refinanced and replaced the existing Term Loan A in full with a new $84.4 million Term Loan A; and increased the commitments under the Revolving Credit Facility from $150.0 million to $300.0 million. As a result of the amendment, we recognized a $0.3 million loss on modification and extinguishment of debt and we capitalized $2.8 million of new lender and third-party fees in the second quarter of 2023.

At December 30, 2023, we had $82.3 million principal amount of indebtedness outstanding under the Term Loan A and no outstanding borrowings under the Revolving Credit Facility. The weighted average interest rate for borrowings under Term Loan A was 6.83% during the year ended December 30, 2023.

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 December 30, 2023, we were in compliance with all covenants and expect to remain in compliance with all covenants under the Credit Facility.

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Share Repurchase Program

On February 1, 2024, our Board of Directors authorized the repurchase of up to $300 million (exclusive of fees and commissions) of YETI’s common stock. The common stock may be repurchased from time to time at prevailing prices in the open market, through various methods, including, but not limited to, open market, privately negotiated, or accelerated share repurchase transactions. Repurchases under the share repurchase program may also be made pursuant to a plan adopted under Rule 10b5-1 promulgated under the Exchange Act. The timing, manner, price, and actual amount of share repurchases will be determined by management based on various factors, including, but not limited to, stock price, economic and market conditions, other capital allocation needs and opportunities, and corporate and regulatory considerations. YETI has no obligation to repurchase any amount of our common stock, and such repurchases may be suspended or discontinued at any time.

Material Cash Requirements

For 2024, we expect capital expenditures for property and equipment to be approximately $60 million, primarily to support investments in technology, new product innovation, expansion of our custom portfolio and capacity, and retail stores investments.

The following table summarizes current and long-term material cash requirements for contractual and other obligations as of December 30, 2023 (in thousands):

[[GREPCENT_TABLE]]
[["","Material Cash Requirements"],["","Total","","2024","","2025","","2026","","2027","","2028","","Thereafter"],["Long-term debt principal payment","$","82,266","","","$","4,219","","","$","4,219","","","$","4,219","","","$","4,219","","","$","65,390","","","$","\u2014"],["Interest","$","26,783","","","6,520","","","6,187","","","5,896","","","5,582","","","2,598","","","\u2014"],["Operating lease obligations","$","107,279","","","18,571","","","21,236","","","17,612","","","13,280","","","9,427","","","27,153"],["Finance leases","$","6,003","","","2,300","","","2,360","","","1,011","","","176","","","156","","","\u2014"],["Other non-cancellable agreements (1)","$","154,013","","","73,867","","","50,515","","","21,900","","","6,198","","","1,533","","","\u2014"],["Total","$","376,344","","","$","105,477","","","$","84,517","","","$","50,638","","","$","29,455","","","$","79,104","","","$","27,153"]]
[[/GREPCENT_TABLE]]

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(1)We have entered into commitments for service and maintenance agreements related to our management information systems, distribution contracts, advertising, sponsorships, and licensing agreements.

The table of our material cash requirements above excludes unrecognized tax benefits as we are unable to reasonably predict the timing of settlement of liabilities, if any, related to unrecognized tax benefits. As of December 30, 2023, we had unrecognized tax benefits of $17.6 million.

As of December 30, 2023, our reserve for estimated recall expenses, including the expected cost of returns, was $13.1 million. The ultimate costs from the approved voluntary recalls could differ materially from this estimate, and as such, changes in the estimate may have a material impact on our financial condition, results of operations, and cash flows.

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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):

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended"],["","December 30, 2023","","December 31, 2022"],["Cash flows provided by (used in):"],["Operating activities","$","285,942","","","$","100,894"],["Investing activities","(72,824)","","","(56,910)"],["Financing activities","(13,596)","","","(122,628)"]]
[[/GREPCENT_TABLE]]

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 provided by operating activities in 2023 was primarily due to an increase in cash received for working capital, and to a smaller extent, net income, adjusted for non-cash items, including the impact of our voluntary recalls, for the periods compared. The increase in cash received for working capital was primarily due to a decrease in inventory and an increase in accounts payable and other accrued expenses, partially offset by an increase in accounts receivable.

Investing Activities

The increase in cash used in investing activities in 2023 compared to 2022 was primarily related to increased purchases of intangible assets.

Financing Activities

The decrease in cash used in financing activities in 2023 compared to 2022 was primarily driven by repurchases of common stock in the prior year period.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. In preparing the consolidated financial statements, we make estimates and judgments that affect the reported amounts of assets, liabilities, sales, expenses, and related disclosure of contingent assets and liabilities. We re-evaluate our estimates on an on-going basis. Our estimates are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Because of the uncertainty inherent in these matters, actual results may differ from these estimates and could differ based upon other assumptions or conditions.

See Note 1 of the Notes to Consolidated Financial Statements for our significant accounting policies. The following describes significant judgments and estimates used in the application of these policies. Within the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported. 

Revenue Recognition

Revenue transactions associated with the sale of YETI branded coolers, equipment, drinkware, apparel and accessories comprise a single performance obligation, which consists of the sale of products to customers either through our wholesale or DTC channels. Revenue is recognized when performance obligations are satisfied through the transfer of control of promised goods to the customers, based on the terms of sale. The transfer of control typically occurs at a point in time based on consideration of when the customer has an obligation to pay for the goods, and physical possession of, legal title to, and the risks and rewards of ownership of the goods has been transferred, and the customer has accepted the goods. Revenue from wholesale transactions is generally recognized at the time products are shipped based on contractual terms with the customer. Revenue from our DTC channel is generally recognized at the point of sale in our retail stores and at the time products are shipped for e-commerce transactions and corporate sales based on contractual terms with the customer.

Revenue is recognized net of estimates of variable consideration, including product returns, customer discounts and allowances, sales incentive programs, and miscellaneous claims from customers. We determine these estimates based on contract terms, evaluations of historical experience, anticipated trends, and other factors. The actual amount of customer returns and customer allowances, which is inherently uncertain, may differ from our estimates.

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The duration of contractual arrangements with our customers is typically less than 1 year. Payment terms with wholesale customers vary depending on creditworthiness and other considerations, with the most common being net 30 days. Payment is due at the time of sale for retail store transactions and at the time of shipment for e-commerce transactions.

Certain products that we sell include a limited warranty which does not meet the definition of a performance obligation within the context of the contract. Product warranty costs are estimated based on historical and anticipated trends and are recorded as cost of goods sold at the time revenue is recognized.

We elected to account for shipping and handling as fulfillment activities, and not as separate performance obligations. Shipping and handling fees billed to customers are included in net sales. All shipping and handling activity costs are recognized as selling, general and administrative expenses at the time the related revenue is recognized. Sales taxes collected from customers and remitted directly to government authorities are excluded from net sales and cost of goods sold.

Our terms of sale provide limited return rights. We may accept, and have at times accepted, returns outside our terms of sale at our sole discretion. We may also, at our sole discretion, provide our retail partners with sales discounts and allowances. We record estimated sales returns, discounts, and miscellaneous customer claims as reductions to net sales at the time revenues are recorded. We base our estimates upon historical experience and trends, and upon approval of specific returns or discounts. Actual returns and discounts in any future period are inherently uncertain and thus may differ from our estimates. If actual or expected future returns and discounts were significantly greater or lower than the reserves we had established, we would record a reduction or increase to net sales in the period in which we made such determination. A 10% change in our estimated reserve for sales returns, discounts, and miscellaneous claims for 2023 would have impacted net sales by $1.2 million.

Product Recall Reserves

As described in Note 11 of the Notes to Consolidated Financial Statements, in January 2023, we notified the CPSC of a potential safety concern regarding the magnet-lined closures of our Hopper M30 Soft Cooler, Hopper M20 Soft Backpack Cooler, and SideKick Dry gear case (the “affected products”) and initiated a global stop sale of the affected products. In February 2023, we proposed a voluntary recall of the affected products to the CPSC, and other relevant global regulatory authorities, which we refer to as the “voluntary recalls” herein unless otherwise indicated. In conjunction with the stop sale, we determined that the affected products inventory held by us, our suppliers and our wholesale customers was unsalable, and notified our wholesale customers to return the affected products. In March 2023, we announced separate, voluntary recalls of the affected products in collaboration with the CPSC and subsequently began processing recall claims and returns.

We establish reserves for the estimated costs of a product recall when circumstances giving rise to the recall become known and when such costs are probable and estimable. As a result of the voluntary recalls, we established a reserve for expected future returns and the estimated cost of recall remedies for consumers with affected products. Estimating the cost of recall remedies required significant judgment and is primarily based on i) expected consumer participation rates; and ii) the estimated costs of the consumer’s elected remedy in the proposed voluntary recall, including estimated cost of offered product replacements, logistics costs and other recall-related costs. We will reevaluate these assumptions each period, and the related reserves may be adjusted when factors indicate that the reserve is either not sufficient to cover or exceeds the estimated product recall expenses. The ultimate impact from the approved voluntary recalls could differ materially from these estimates. The reserve for the estimated product recall expenses of $13.1 million and $94.8 million is included within accrued expenses and other current liabilities on our consolidated balance sheet as of December 30, 2023 and December 31, 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). We make ongoing estimates relating to the net realizable value of inventories based upon our assumptions about future demand and market conditions. If the estimated net realizable value is less than cost, we reflect the lower value of that inventory. This methodology recognizes inventory exposures at the time such losses are identified rather than at the time the inventory is actually sold. Due to customer demand and inventory constraints, we have not historically taken material adjustments to the carrying value of our inventory.

Our inventory valuation reflects adjustments for anticipated inventory losses that have occurred since the last physical inventory. We estimate inventory shrinkage based on historical trends from physical inventory counts and cycle counts. We perform physical inventory counts and cycle counts throughout the year and adjust the shrink provision accordingly. Historically, physical inventory shrinkage has not been significant.

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Valuation of Goodwill and Indefinite-Lived Intangible Assets

Goodwill and intangible assets are recorded at cost, or at their estimated fair values at the date of acquisition. We review goodwill and indefinite-lived intangible assets for impairment annually or whenever events or changes in circumstances indicate the carrying amount may be impaired. In conducting our annual impairment test, we first review qualitative factors to determine whether it is more likely than not that the fair value of the asset, or reporting units, is less than its carrying amount. If factors indicate that the fair value is less than its carrying amount, we perform a quantitative assessment, analyzing the expected present value of future cash flows to quantify the amount of impairment, if any. Based on our qualitative assessment performed during the fourth quarter of 2023, we determined that it is not more likely than not that the fair value of each reporting unit is lower than its carrying value; therefore, the quantitative impairment test was not required. We did not record any goodwill or indefinite-lived intangible assets impairment charges during the years ended December 30, 2023, December 31, 2022 and January 1, 2022.

Valuation of Long-Lived Assets

We assess the recoverability of our long-lived assets, which include property and equipment, operating lease right-of-use-assets, and definite-lived intangible assets, for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. An impairment loss on our long-lived assets exists when the estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. If the carrying amount exceeds the sum of the undiscounted cash flows, an impairment charge is recognized based on the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or estimated fair value less costs to sell.

Income Taxes

We are subject to taxation in the United States, as well as various state and foreign jurisdictions. The determination of our provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. On an interim basis, we estimate our effective tax rate for the full fiscal year. This estimated annual effective tax rate is then applied to the year-to-date income before income taxes, excluding infrequently occurring or unusual items, to determine the year-to-date income tax expense. The income tax effects of infrequent or unusual items are recognized in the interim period in which they occur. As the fiscal year progresses, we continually refine our estimate based upon actual events and earnings by jurisdiction during the year. This continual estimation process periodically results in a change to our expected effective tax rate for the fiscal year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs.

Tax filing positions are evaluated, and we recognize the largest amount of tax benefit that is more likely than not to be sustained upon examination by the taxing authorities based on the technical merits of the tax position. On a quarterly basis, we evaluate the probability that a tax position will be effectively sustained and the appropriateness of the amount recognized for uncertain tax positions based on factors including changes in facts or circumstances, changes in tax law, and audit activity. Changes in our assessment may result in the recognition of a tax benefit or an additional charge to the tax provision in the period our assessment changes. We recognize interest and penalties related to unrecognized tax benefits in the provision for income taxes in the consolidated statements of operations.

Recent Accounting Pronouncements 

For a description of recent accounting pronouncements, see “Recently Adopted Accounting Pronouncements” and “Recent Accounting Guidance Not Yet Adopted” in Note 1 of the Notes to Consolidated Financial Statements included herein.