Phillip Blee
William Blair & Company L.L.C.
All right. Good morning, everyone. We're going to go ahead and get started. My name is Phillip Blee. I'm the consumer analyst here at William Blair covering YETI. Before we get started, I just wanted to remind you for a full list of disclosures, please visit our website.
So with that out of the way, I'm excited that we have CFO, Mike McMullen here from YETI. It's been a fun story to watch. They've developed a fiercely loyal consumer across different communities. They're changing a lot of different things. There's a lot of innovative and exciting products in the pipeline. International is still very much in early days. So just a lot of different avenues for growth.
Phillip Blee
William Blair & Company L.L.C.
So Mike, I want to start, you've been with YETI for almost 10 years now. Can you talk about -- give a little background on the brand, how the brand has evolved over the past 10 years? And then how you kind of see that changing over the next 10 years for growth?
Michael McMullen
Senior VP, CFO & Treasurer
Much of that is from 2 countries from Canada and Australia. We have a presence in the U.K. and Europe, but it's smaller, but it's growing very rapidly. And we're really excited about what that can be given the size of the markets in the U.K. and Germany specifically and that the way that the brand is resonating there.
And then finally, we'll start shipments in Japan this quarter. We've decided that in large markets, we want to go direct, and Japan is the first step in doing that in Asia. And we're really excited about the initial conversations that we're having there. So we're a very different company, certainly from when I started, but from even in 2018 when we went public, we're much bigger, more profitable. But the core of what the brand is in those original communities has not changed.
Phillip Blee
William Blair & Company L.L.C.
Excellent. You talked about this a little bit, but I want to dive a little bit deeper. There's been a lot of new products that you've been coming out with that I think are pretty exciting. Earlier this year, you launched new design of backpacks from the Mystery Ranch acquisition. You've gotten then into outdoor cooking, insulated bowls, food storage. Next year, you considered that are powered cooler, which I think is pretty exciting.
So can you kind of talk about what the growth contribution of those type of new products are? And then maybe how we should think about category expansion or top line diversification going forward?
Michael McMullen
Senior VP, CFO & Treasurer
Yes. So I mean you hit on a lot of them. I mean if you look at some of our -- what you would call our core categories, coolers and Drinkware, I mean, coolers had a great quarter in Q1. We've been in the cooler business since the day that YETI was started in 2006, but yet we still continue to drive growth in that category through innovation. Much of that has come from the 2 latest products that we've introduced, the Roadie 15 and the Roadie 32 that are smaller, more personal, bring mobility, things that consumers really, really value.
On the soft cooler side, we just came out with a line of thermal bags, the Daytrip line, 4 new products that we think really hit a need in the market that's still a place in our portfolio with a range of prices where we didn't have -- we had nice soft coolers. These kind of fit in that $50 to $150 price point line. So we feel really good about the growth opportunity of those as well.
In Drinkware, you've seen us continue to expand. We use the term drinkware, but it's more -- it's broader than that. Like you said, we're moving into food and food storage. The first step was the introduction of premium cast iron cookware, but we started to move closer to -- more into food and food storage that fits with the rest of our cooler portfolio. So we continue to find ways to drive innovation in those core categories.
Bags is something we're super excited about. Like you said, we acquired Mystery Ranch in Q1 of 2024. We had an existing line of bags when we did that. But you're going to see us start to take some of that -- the great line of products that they had and start to rebrand as YETI and relaunch. The first wave of that was in Q1 with the Ranchero. We followed that up with the Cayo launch earlier this quarter. And that's going to be a continual thing that you see us do.
We've hired a gentleman, the former CEO of Osprey to -- Layne Rigney to run that business for us. We've announced that we have a bags design and development center in Denver that we've launched. So we feel like we've got the right leader, the right team with the right capabilities that allow us to be successful in what we believe is a significant category that will allow us to continue to grow.
Phillip Blee
William Blair & Company L.L.C.
Okay. Great. Out of maybe some of those, are there any that you think could be particularly impactful that you're very excited about or maybe some that could serve as stepping stones into categories with even larger TAMs, kind of building your credibility there? And then any hint into what the powered cooler looks like?
Michael McMullen
Senior VP, CFO & Treasurer
Yes. So I'm particularly excited about bags. I just think -- I think it's a natural place for YETI. I think it's a category that values the things that YETI brings from a product perspective and design, durability, performance. And I also think it's a significant category with a lot of room for growth.
I think in terms of things that are stepping stones, I think what you're seeing us do in what I would call the food categories, I think we will continue to move into areas that allow us -- you saw it, the campaign was around the outdoor kitchen. And I think there's a -- it's a natural fit for us. Our products are often used around the outdoor patio, the grill, the outdoor kitchen.
And so I think that's a natural extension for us where we can come in and bring some innovation to meet consumer needs. And so to me, that's super exciting.
The powered cooler, we've gotten a lot of questions about that. Well we announced was we 0acquired the IP and the capabilities around a powered cooler platform. Essentially, what that means is a cooler that doesn't need ice, one that can run off power. There are a lot of parts of the world where access to ice is not as easy as it is here in the United States. And we think there is an opportunity. There are some products in the market, and we think there's an opportunity for that to be -- for some innovation in that category, and we think it will resonate, particularly with a global customer.
Phillip Blee
William Blair & Company L.L.C.
Yes, absolutely. Great. And then I want to talk a little bit about marketing because I think that's one of the more compelling aspects of this brand. You have a very nuanced approach to marketing. It has almost grassroots, very localized feel to it. And it also attracts a very diverse set of customers, right? Like I'm sure very many people here in this room own YETI products. You also have a big presence with ranchers and fisherman.
So I mean can you talk about maybe the broader demographics of your consumer and then how you kind of continue to evolve your marketing strategy to attract new sets of customers without eroding the brand, especially as you go into more of these product categories that you talked about?
Michael McMullen
Senior VP, CFO & Treasurer
Yes. So first, I appreciate all the YETI consumers in the room and listening online. Yes, you're right. I mean we -- I personally think that our marketing team is the absolute best in the business at what they do. They do a phenomenal job of as we have grown, as we have moved into new communities, as we have grown internationally to make sure that the core of the brand stands true to what it is but still resonates in new areas, in new geographies, in new communities. And it comes down to -- when we expand internationally, we really focus on localizing the brand and making sure that it feels -- it's still got the core of what the brand stands for, but also resonates with that -- the consumer in that market.
Nothing makes our marketing team feel better than when someone says, "Hey, I thought YETI was actually an Australian brand", which we've heard before. And so we'll continue to do that as we expand into new markets.
New communities. I mean, like I said at the beginning, I mean, I think they have -- our marketing team has done an incredible job of making sure that as we've expanded that we've stayed true to our roots in those original 2 communities of hunt and fish. And they run a very similar playbook. We focus a lot on what we call community marketing, where we're going in. We're building relationships with ambassadors and trusted sources in those communities. We're telling stories with them. We are -- we establish relationships through sponsorships and partnerships. And that's how we build relevance in those communities, and we'll continue to do that.
In terms of our consumer, when I -- like I said, when I first joined the company, we were primarily a -- what I would say, our consumer was primarily male. We're much more balanced male, female now. I would say we are much more balanced in terms of the type -- the pursuits that our consumers participate in. And I would say that we're not just a brand that is focused on the high-end consumer. We have price points that range from $20 all the way up to $1,500. And so we have a range of price points that can meet the need.
We're a big gifting brand. And so we think it's important to have a very wide range of pricing, and we've focused quite a bit on that. So it all kind of comes back to the same -- what I've talked about is we have evolved as a brand, but we've stayed true to who we are.
Phillip Blee
William Blair & Company L.L.C.
Okay. Great. And then since you have such a wide consumer base, can you talk maybe just a little bit about what you're seeing in the overall consumer environment right now? Obviously, there's a lot of different things going on, to put it lightly.
And then you recently brought down your full year guide. Can you talk about how much of that is maybe pressure in discretionary spend from the consumer versus maybe some of the more strategic sourcing decisions and inventory constraints?
Michael McMullen
Senior VP, CFO & Treasurer
Yes. So in -- when we gave our initial guidance for the year in February, we called for revenue growth of 5% to 7% this year. When we announced in May, we updated that to 1% to 4%. The biggest piece of that is we said we expected about 300 basis points of lower growth due to supply chain disruption. When the significant tariffs were announced in April, we were already undergoing a process to move our supply chain, Drinkware manufacturing out of China and into other countries. That was already underway. But when the higher levels of tariffs were announced in early April, we accelerated that.
We believe that by the end of this year, we will largely be out of China. Only 5% of our SKUs -- or 5% of our COGS will be exposed to products that are made in China and imported into the U.S. by the end of this year. And we're very proud of the work that the teams are doing there to accelerate that. But it is coming at somewhat of a cost. As we're moving the production, we are going to be constrained on new and existing products as we ramp down the production in China and ramp up the production in other countries.
Also, there are a number of new products that we have decided to either push out to 2026 or we would launch just outside the U.S. and not in the U.S. And we know we're going to be constrained on new products as well as we ramp that supply. So that's coming at about a 300 basis point impact to our growth this year. But it's the right thing to do for the -- not only long term, but from a cost perspective.
The other thing is we did start to see some signs of softness in the consumer level earlier this quarter. We've seen some caution from our wholesale partners. And so we felt it was prudent to widen our guidance a bit to account for that. And so we're seeing signs of strength in parts of our business. Our Amazon business has done very well. Our corporate sales business has done well. Outside the U.S., we continue to grow. But we felt it was prudent just because we do believe that there are some signs of the consumer being a little more discerning of wholesale partners being a little more cautious to go ahead and account for that in our guidance.
Phillip Blee
William Blair & Company L.L.C.
Okay. Makes sense. And then what about -- just there's been some discussion about outdoor being a little bit more pressured this year, the category just in general, ahead of peak season. Kind of any color there? Have you seen similar weakness or expectations for the category this year?
Michael McMullen
Senior VP, CFO & Treasurer
Phillip Blee
William Blair & Company L.L.C.
Michael McMullen
Senior VP, CFO & Treasurer
No. I mean not any different than what I mentioned earlier. I mean like I said, we -- our products resonate across a range of pursuits and communities. But I wouldn't say that outdoor for us is -- it's all part of the guidance that we issued in May.
Phillip Blee
William Blair & Company L.L.C.
Great. And then I want to take a little bit of a deeper dive into Drinkware. Drinkware has been a very strong category over the past few years. I think it's grown at a 15% CAGR. Recently, you've seen a little bit more softness there in the U.S. Sales have declined over the past few quarters. Can you talk a little bit more about the drivers there? Is it more fatigue in the category after such a quick ramp? Or are there other kind of factors to consider?
Michael McMullen
Senior VP, CFO & Treasurer
Yes. I mean you're right. I mean if you go look at -- when we went public in 2018, Drinkware was around a $400 million business. Last year, we did around $1.1 billion, so over 2.5x the size and more profitable in 2024.
Drinkware over the last few years, the category itself has seen a significant run-up and we have continued to grow through that. I think it's fair to say that, that growth was driven by a few competitors entering really focused on a narrow set of solutions or a narrow set of products, more of a product growth as opposed to brand growth or category growth. Our focus has been different. Our focus has been we want to play there, but we also want to really offer a range of solutions and a broad set of solutions. We've grown our category, our Drinkware business to over 60 SKUs, and we're going to continue to push that up further.
We believe that right now, there is some settling going on in the drink bird category that's the other side of that significant growth in the U.S. specifically. But we believe over time, the brands that are going to win are the ones that have a range of solutions that offer a wide, a broad portfolio that meet a range of consumer needs that have a history of innovation in launching new products to reach new consumers, to come out with new products that meet consumer needs as they change because the underlying drivers of the category haven't changed. There's still a focus on hydration. There's still a focus on people moving away from single-use plastic.
Phillip Blee
William Blair & Company L.L.C.
Okay. Great. And then have retailers pulled back at all and just in Drinkware for the category, maybe more broadly? And what do you think the consumer needs to really see from the category or maybe from your brand in order to get more excited about it again?
Michael McMullen
Senior VP, CFO & Treasurer
Yes. I mean there is some -- like I said earlier, there's some just general caution at the wholesale level right now. I will say -- I obviously can only speak to our brand and what we're seeing. We have not seen instances of us shelf space going down from a YETI perspective with our wholesale partners. We feel really good about where our wholesale inventory is in the channel right now. We've got a very broad diversified wholesale footprint across -- from a regional perspective, from a pursuit perspective between hardware to sporting goods to outdoor. And we have really, really tight relationships with our wholesale partners. So we feel really good over the long term about where that business is and where that business can go.
In terms of the consumer getting excited again, I mean, like I said, nothing in my mind has changed or in our mind has changed in terms of the drivers of the category. We think those are going -- those are here and those are going to stay. I do just believe there's some settling after a significant run-up in the category. And we'll start to lap that later this year. And coupled with some of the new innovation that we have coming later this year, that's why we feel good about the growth as we enter the second half.
Phillip Blee
William Blair & Company L.L.C.
Great. And then maybe just switching gears to coolers. The category has remained resilient. You posted great growth in the first quarter. Can you talk about the ongoing opportunity in that category? How much juice is left to squeeze there? And then how do you hold off competitors kind of creeping in? There's a lot of kind of YETI lookalikes maybe. How do you prevent them from coming in and trying to undercut you on price?
Michael McMullen
Senior VP, CFO & Treasurer
Yes. Yes. Like I said, we've been in the cooler business since we started in 2006. And we had a great -- we had a good year last year, and we had a great Q1 in coolers. Hard coolers, our longest-standing category was one of our fastest growing in Q1. And we did that by coming out with new innovation, new products that give consumers a reason to come back to the brand. It also helps us reach new consumers that may not be interested in the big Tundra 65 that they can put in the back of their truck. And so we're going to continue to do that. And I think the powered cooler innovation that you mentioned earlier, I think, will be the next step of that.
In soft coolers. Soft coolers continue to grow. We still maintain -- we think soft coolers can be bigger than hard coolers on a global basis. They're not today. And we just came out in the last week or so with a new line of sort of portable individual thermal bags, which we think can be a nice piece of our soft cooler business. And so we continue to be really excited about what we can do in coolers.
We think the brands that are going to win -- we think when you couple a great brand that is trusted by consumers with great product, we will continue to hold -- maintain our position in that category. And we've had competitors in coolers since the day we've started in this business. It's not anything that's new or recent, but we're going to continue to do what we have done, which is maintain the brand, come out with new product and continue to grow.
Phillip Blee
William Blair & Company L.L.C.
Great. So then I want to talk a little bit then now about international. Still very early days here. I think a lot of people can appreciate the long runway you have there. Just announced entry into Asia through Japan this year. How should we think about growth in this segment going forward?
Michael McMullen
Senior VP, CFO & Treasurer
Yes. So like I said in the introduction, we'll do $400 million or so of business outside the U.S. in 2025. That's primarily in Canada and Australia. We've been in those markets since 2017. And so those markets are -- will start to be less of a contributor to growth, but the growth will come from other places.
We are really starting to see a lot of momentum in the U.K. and the rest of Europe. When you look at the market size in the U.K. and Germany, it's a multiple size bigger than either Canada or Australia, our business is nowhere near as big in those markets as it is in Canada and Australia. So when you look at where we are from a -- the size in our Germany, we think there's tremendous amount of growth opportunity ahead of us. And we think the brand is resonating.
We were on an NDR through Europe a few years ago, and we went to an outdoor cooking festival outside of London. And it felt -- that YETI sponsored. It felt as I could have been in Houston or Chicago or Brooklyn. It felt as authentic. The brand felt as authentic there as it does anywhere in the U.S. And so we're going to continue to do things like that to make sure that people get exposed to the brand. Our awareness is what is just low right now in Europe. And we're just getting started in Asia.
We'll start shipments this quarter. This year is about establishing wholesale relationships. It's about signing up a 3PL, putting in an ERP, building a team. But we had a sales event in January that a number of members of our senior team, including Matt, attended. And the excitement was really, really cool to see. They appreciate premium products. They have a love of the outdoors. It's a natural fit for us. But Japan is just the first step. We'll then move into other parts of Asia that we think can be equally as exciting.
Phillip Blee
William Blair & Company L.L.C.
Great. All right. Well, then let's get into everyone's favorite topic, tariffs. On the earnings call back in May, you talked about $100 million EBIT headwind gross before any mitigation efforts. You expected to delay some product innovation. You talked about that earlier. Just a few days after you reported, found out that temporarily, Chinese tariffs were coming down at 30%. So how have these changes kind of impacted your outlook? And maybe how quickly were you able to react from a supply chain standpoint?
Michael McMullen
Senior VP, CFO & Treasurer
Yes. So I mean just to reiterate what Phillip said. So we announced -- when we announced our Q1 results, we said we'd have about $100 million of cost -- gross impact to cost of goods due to tariffs in 2025 and about 450 basis points impact on our gross margin after mitigation. So that's about $80 million. That was assuming what was in place at that time on May 8. On May 10 or the next week, tariffs in China went from 145% to 30%. So clearly, that provides a -- some lower cost as we look out for the year.
We haven't updated our outlook, obviously, and other than to say there is some favorability now. And the reason we're cautious is that it could change at any time. And so -- but if you look out at that $20 million of mitigation should stay even in a lower tariff scenario, the -- it's not perfectly linear in terms of knowing throughout the year in terms of taking it down from 145% to 30% and then using a time factor, but it can give you an approximation.
The wildcard is how long these lower tariffs last. And so that's something that we're -- we didn't want to try to speculate and predict. We wanted to put out guidance that -- of what was in place at that time. The priority, though, this year is getting out of China and moving to other parts of the world. The 90% of that $100 million that we called out was from China. So I think the most important factor through all this is largely a 2025 issue for us. By the end of this year, on a go-forward basis in terms of what we're buying, we will have very limited exposure to goods sourced from China and imported into the U.S., which means as we go forward, we will be able to recapture much of that 450 basis points of lost gross margin in 2025. And I think that's the most important point.
Phillip Blee
William Blair & Company L.L.C.
Absolutely. All right. And then lastly, I just want to talk about balance sheet and cash flow. You're expecting to have over $100 million of free cash flow this year, very little debt. You've been increasingly active in M&A and share repurchases over the past year. So can you just talk about a little bit about your capital allocation strategy and then maybe any kind of near-term, long-term nuances given all the craziness in the current environment?
Michael McMullen
Senior VP, CFO & Treasurer
Yes. So we ended Q1 with $260 million of cash. We have just under $80 million of debt. We originally thought we'd do north of $200 million of free cash flow with what's going on with tariffs, that's going to come down, but we still will do $100 million to $150 million of free cash flow this year. So we feel really good about our balance sheet, and we feel really good about our ability to generate cash.
Last year, we did $200 million of buybacks. We did $75 million of M&A across 3 acquisitions. We're going to continue to do that going forward. We haven't put a number on the buybacks that we will do this year other than to say we do expect them to be part of our capital allocation strategy this year.
M&A, obviously, a little harder to predict. But we view M&A -- our strategy has been, it's a way to accelerate innovation. We do not -- we have said consistently that we do not believe that building a house of brands is in -- is our focus. Our focus is on using M&A to accelerate product innovation and to fill out the portfolio. So nothing has changed there. But we believe we can do all that and reinvest in the business while also maintaining a really strong liquidity position given our current balance sheet and given our ability to generate cash.
Phillip Blee
William Blair & Company L.L.C.
All right. Excellent. Thank you very much, Mike. And then we will be in a breakout room for [ Adler ] right after this. Thank you, guys.
