Greetings, welcome to the YETI 2Q 2020 earnings conference call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Tom Shaw, Vice President of Investor Relations. Thank you, Mr. Shaw. You may begin.
Good morning, everyone. Thanks for joining us to discuss YETI Holdings' second quarter 2020 results. Before we begin, we would like to remind you that some of the statements that we make today on this call, including those statements relating to the impact of the COVID-19 pandemic on our business, 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 regarding these forward-looking statements, please refer to the risks and uncertainties detailed in this morning's press release, as well as the risk factors discussed in our Form 10-Q for the quarter ended July 27th, 2020, filed with the SEC earlier this morning. We undertake 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.
During our call today, we'll be discussing YETI's adjusted EBITDA and certain other non-GAAP measures pertaining to completed fiscal periods. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the press release issued this morning, as well as in the supplemental reconciliation, both of which are available in the investor relations section of the YETI website. We use non-GAAP measures as a lead in some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business. Today's call will be led by Matt Reintjes, President and CEO of YETI, and Paul Carbone, CFO. Following our prepared remarks, we'll open the call for your questions. We're also working remotely and connecting with you from different locations today, so please bear with us should we experience any delays during the call.
With that, I'll turn the call over to Matt.
Thanks, Tom. Good morning, everyone. YETI had a remarkable second quarter, driven first and foremost by the agility and perseverance of our employees, our customers, and our partners. As we consider our evolution over the past few months, amidst all the challenges, I'm tremendously proud of how we responded and how well the brand has resonated. We were incredibly pleased to see the resilience of demand for YETI through this unprecedented period, driven by people's interest in being outside, be it near home or in the backyard. YETI's product performance, durability, and versatility are key as customers rely on and invest in brands that help them enjoy outdoor activities.
For our second quarter results, revenues increased 7% year- over- year while showing substantial growth recovery throughout the period, improving each month off an April decline in the high 20%s, primarily driven by the impact to our wholesale and our corporate sales businesses. The inter-quarter growth trend reflects strong, sustained e-commerce growth, improving wholesale as stores reopened, rebounding corporate sales, and a successful execution of Mother's Day through Father's Day. We were particularly pleased to see both our U.S. wholesale and corporate sales businesses return to growth in June, significant feats given the impact felt on these businesses at the beginning of the quarter. YETI generated a 550 basis point improvement in gross margins for the period, benefiting from the ongoing mix shift to e-commerce, strong price point integrity, as well as continued product cost improvements.
Overall adjusted operating margins also expanded 300 basis points, absorbing the cost of servicing our e-commerce business and benefiting from our cost management efforts that we outlined last quarter. With our improving operating performance, we also repaid the $50 million we drew down on our revolver last quarter, underscoring the financial strength of our business. Before I provide an update on our four strategic priorities, it is important to understand how we're approaching the opportunities and challenges for the second half of the year and investing for the future. We continue to actively build out our talent to address the needs of an evolving YETI, particularly within creative, digital, product development, and ESG. We're excited by the progress of our talent acquisition through the quarter, even with the pandemic and work from home. Within our supply chain, we're actively tracking near-term demand and aligning our supply.
As you can imagine, the visibility and forecast has changed substantially over the course of the last four months, shifting from very stringent working capital management to driving supply chain flexibility to fulfill demand. This will remain active work for the balance of the year as we watch the demand signals. Financial discipline, operational excellence, and a focus on growth will continue to guide us as we navigate the uncertainties related to the COVID-19 pandemic. While these uncertainties continue to inform our decision to withhold financial guidance, as Paul will discuss, we do see the opportunity to return to our long-term sales target range of 10%-15% for the balance of the year. On to our strategic priorities, starting with brand.
Early in the pandemic, we shifted our marketing strategy to digitally engage our customers while they adapted to the new normal of social distancing, working from home, and establishing their own backyard base camps. Sustaining our heightened efforts to drive positive distractions for our customers, in May, we continued to provide original digital content through efforts such as The Midnight Hour, a three-part film series hosted by Academy Award-winning singer-songwriter and brand friend Ryan Bingham. The films follow Bingham as he explores the past and the truth behind the music of fellow artists Jack Johnson, Margo Price, and Terry Allen. To further drive reach of the films, we partnered with Rolling Stone magazine on their first live Instagram virtual event.
In conjunction with National Barbecue Month in May, we joined several of our culinary ambassadors and friends of the brand as they shared their own tips from the pits, including Heath Riles' Baby Back Ribs episode, which garnered the most views of any YETI Instagram video to date, with nearly 190,000 views. One of our biggest successes we had this quarter was the effectiveness of our multi-pronged strategy to drive a strong customer experience leading up to Mother's and Father's Day. Spanning more than three weeks, we created a gift-giving journey that showcased the brand in a consistent and impactful way for these important occasions. At the start of each holiday period, we highlighted a range of gift ideas, including our customization capabilities.
We further displayed the breadth of our brand by offering a targeted gift with purchase that created exposure to products such as the GoBox with our stackable pints, driving deeper interest and awareness across our product portfolio. During the final week of each holiday, we offered guaranteed delivery. Our final touch included a spotlight on mom-and-pop shops, promoting a last-minute gift destination to support our incredible retail partners. In support of these initiatives, earned media impressions for Mother's Day increased from $100 million last year to nearly $400 million this year, while Father's Day increased from $500 million to over $900 million. We believe this demonstrates the relevancy, reach, and strength of the brand for new and existing customers. From a community marketing perspective, we expanded our surfing lineup by adding Australian Mick Fanning to our ambassador roster. Fanning is a three-time Association of Surfing Professionals World Tour champion.
In mid-July, we began promoting our new Major League Baseball customization program. This licensing deal now connects YETI Drinkware and coolers with all 30 MLB teams. This week, we introduced our One For The Roadies give back campaign. In partnership with Crew Nation, the charitable arm of Live Nation, we've joined with 37 artists such as Leon Bridges, The Avett Brothers, and the Zac Brown Band, to auction off signed and customized Roadie 24 coolers to benefit the out-of-work touring and venue crews. You can see more about this on YETI's Instagram page. Shifting to innovation. A highlight of our product story during the second quarter was our Coolers & Equipment business. Demand across the Coolers & Equipment family was up 18% year-over-year as customers looked to YETI to support their focus on outdoor pursuits.
In the quarter, we brought our next generation Roadie 24 hard cooler to market. The Roadie 24 has performed ahead of expectations even before marketing support and joined the balance of our hard cooler and soft coolers with strong and consistent performance through the quarter. Enhancing demand, the brand was once again highlighted prominently in the media. In June, Condé Nast ranked three YETI coolers on its list of 12 coolers you can take anywhere, including best for leisurely family road trips with the Hopper Flip 12, best for hot summer days at the beach with the Tundra Haul, and best of camping out in your backyard with the YETI V Series. Magnifying our own Father's Day efforts, Gear Patrol recommended the Hopper M30 soft cooler as one of its 20 best Father's Day gifts for outdoorsy dads.
Fast Company selected the YETI V Series as one of the seven most well-designed Father's Day gifts of 2020. Rounding out the Coolers & Equipment side of the business, we saw strong early demand for our new Trailhead camp chair. Forbes magazine reviewed the beach chair category in late spring, naming the Trailhead as the best heavy-duty chair. On the Drinkware side, results were modestly negative for the quarter, reflecting the early quarter disruption of wholesale and corporate sales. However, the category demand remained very robust in our own e-commerce channel, and overall results were strong in May and June. Our new Slim Can Colster has been a great early success for us.
As we look at our product lineup for the second half of the year, our priority is to continue extending the energy and excitement from our first half launches, particularly with the limited customer access across our wholesale channel for much of the second quarter and given the late quarter wholesale debut of the Roadie 24 and the Elements colorway Drinkware. This quarter, we are also focused on executing new colors and several new form factors in our coolers and Drinkware business. We recently launched Sagebrush Green in our hard and soft coolers and Northwoods Green in select Drinkware, both new colors inspired by adventures in the wild. We also debuted the Rambler 10 oz tumbler with a caffeine and cocktails launch campaign, which adds to our new Drinkware lineup with a great size for both our domestic and international customers. Expect additional innovation as we move deeper into the second half.
As demand continues to evolve and increasingly focuses on digital engagement, we continue to invest in a balanced omni-channel strategy. The impact of our commitment to a digital future over the past five years has never been more evident as the second quarter challenges drove a true digital acceleration. This supports our continued investment in our own digital capabilities, how we continue to optimize our wholesale network, and how we support the rapidly ramping omni capabilities of our retail partners. Our YETI direct-to-consumer business grew 61% and reached 54% of total sales this period, reflecting the sustainability of triple-digit yeti.com growth throughout the quarter, strong Amazon marketplace growth after a disruptive April, sequential monthly improvements in our corporate sales business, the emergence of our non-U.S. e-commerce, and the reopening of YETI retail late in the quarter.
On yeti.com, we continue to see strong traffic and conversion and a healthy balance of new and existing customers on the site. Importantly, the triple-digit growth trajectory in this channel held true as our wholesale partners steadily reopened throughout the quarter. In corporate sales, with many businesses focused on remote operations, we quickly shifted our focus early in the quarter towards building a funnel of business that helped revenue later in the quarter. We also kicked off a sustainability outreach program in June, seeing strong wins even with the work-from-home environment. Starting in late May, we reopened six YETI retail stores, followed by the debut of our Denver store in early June. We also implemented reserve online, pickup in-store functionality during the quarter. While already on our roadmap, this is a great example of our ability to emerge from the pandemic even stronger.
Despite little initial awareness of the initiative, ROPOS has been well-received with growing utilization and sets us up for future capabilities expansion. Looking at wholesale, from our independents to our large national accounts, we have seen our partners in this channel adapt with nimbleness and grit. We saw growth with our dealers that were deemed essential and remained open through the quarter to support local communities. We also saw our large national partners quickly implement their own omni capabilities, including curbside, which has shifted to a mainstay retail offering. We look at the overall international business, despite recording a year-over-year sales decline in the quarter that was driven by the outsized impact of our Canadian wholesale shutdown, we continue to see strength in our international e-commerce business.
With a much more conservative and restrictive reopening cadence than what we saw domestically, the Canadian wholesale business was down nearly 70% for the quarter as key markets such as Toronto remained in phase one through most of June, allowing curbside pickup only for non-essential retailers. Nonetheless, appetite for YETI is strong where the customers can access the brand. With yeti.ca now just hitting its one-year anniversary, the local site has significantly outperformed expectations. Outside of Canada, Australia had a phenomenal performance driven by strong customer demand, supported by both wholesale and e-commerce. We are continuing to develop our footprint in the U.K. and Europe, where we initially led with our own digital efforts last year, but are now supported by retail partners in nine countries.
While the cumulative numbers here are small, we're excited to begin accelerating the process of bringing the YETI brand to more global customers with authentic local partners. Before Paul discusses our results in more detail, I wanted to provide a few thoughts on how our organization is evolving. As you saw earlier in the second quarter, our private equity sponsor wound down their ownership to 1 million shares, representing just over 1% of total shares outstanding. Cortec's support through my five years with YETI has been steadfast and is greatly appreciated. This change has also meant a continued evolution of our board of directors, with directors affiliated with Cortec now only holding two of nine seats. We also appointed Tracey Brown, the current CEO of the American Diabetes Association and former SVP of operations and Chief Experience Officer of Sam's Club, to the board in May.
I've personally known Tracey for 20 years, and I'm excited for her experience and perspective on the consumer as we continue to build the depth of our customer relationships and broaden the reach of our brand. In addition to the evolution of our board, we also hired our first Vice President of ESG in June. This is an important role that will be integral to our long-term success and will tether ESG to our brand story and our evolution, including our work in diversity, equity, and inclusion. We will continue to nurture a powerful, innovative, and lasting brand and make a positive impact on our customers in the YETI community. We're proud of the progress we've made during this fluid and challenging time, and we'll work to remain financially strong, innovative, and positioned for long-term sustainable growth. Now let me turn it over to Paul to run through the financials.
Thanks, Matt. Good morning, everyone. I'll begin with a review of our second quarter results, followed by some high-level thoughts as we look at the business in the back half of the year. I would also like to echo Matt's comments on both the continued strength of demand for the brand, as well as the incredible resilience of our team. Their collective efforts in this ongoing work from home environment have been instrumental in supporting the strong results we are reporting today. For the second quarter, net sales increased 7% to $246.9 million, compared to $231.7 million in the prior year period. While not our normal go-forward practice, we will again provide some select intra-quarter trends during my commentary. As we mentioned on our Q1 earnings call, total net sales were down high 20% range in April. Net sales turned positive in May and sequentially improved in June.
This incredible progression in part represents a shift in consumer behavior towards outdoor leisure activities and related products, areas that YETI excels at and that will remain a core focus as we go forward. By channel, direct-to-consumer net sales surged 61% to $133 million, compared to $82.5 million in the same period last year, driven by strength in both Coolers & Equipment and Drinkware. The overall channel benefited from the broader outdoor leisure trend, as well as a shift to online spending, given the sheltering in place. Total DTC reached 54% of net sales for the period, compared to 36% in last year's period. yeti.com led the DTC channel with triple-digit growth in each month of the quarter, even while the wholesale channel steadily reopened. The Amazon marketplace had growth across all months, with particular strength in May and June as the platform's focus on essential items normalized.
Unsurprisingly, corporate sales declined for the period, given the disruptions in the corporate workplace and events calendar. However, our focused efforts helped drive a return to positive growth in the month of June. In YETI Retail, sales were down as most stores were effectively open only one month of the quarter. Lastly, international DTC is becoming a more meaningful channel for us, helping offset some of the international wholesale softness that was heavily impacted by the significant store closures in our Canadian business. Wholesale net sales decreased 24% to $113.9 million, compared to $149.2 million last year. Declines were registered in both our Coolers & Equipment and Drinkware categories, with the former performing relatively better during the period. With wholesale doors steadily reopening and strong overall customer demand for the brand, results improved significantly throughout the quarter, including positive growth in June.
In addition, based on point of sale reporting that we received, sell-through was positive for the quarter, and channel inventories exited the quarter down double digits year-over-year. By category, Coolers & Equipment net sales increased 18% to $128.6 million, compared to $109.1 million during the same period last year. Contributing to our largest Coolers & Equipment quarter, we saw strong growth across our major products in both hard and soft coolers, as well as strength in our outdoor living category. Drinkware net sales decreased 2% to $114.3 million, compared to $117 million last year. We saw a greater negative impact to this business at the onset of the pandemic, but performance returned to positive growth in the last two months of the quarter. Results were also impacted by the sales decline in corporate sales, which is heavily weighted to this category.
On the positive side, we saw strength with our expanded Colster lineup and updated bottles with Chug Cap, demonstrating our ongoing ability to penetrate deeper into our customers' cabinets. Gross profit increased 18% to $137.5 million, or 55.7% of net sales, compared to $116.3 million, or 50.2% of net sales during the same period last year. The 550 basis point year-over-year improvement was primarily driven by the following favorable impacts. 430 basis points from channel mix, 120 basis points from product cost improvement, particularly in Drinkware, 70 basis points from lower tariffs, and 20 basis points for lower inbound freight and other costs. These gains were partially offset by a 90 basis point increase in inventory reserves related to non-core samples and product.
Adjusted SG&A expenses for the second quarter were $88.2 million, or 35.7% of net sales, as compared to $77 million, or 33.2% of net sales in the same period last year. Variable SG&A expenses delevered 380 basis points, driven by the mix of our faster-growing DTC channel, including online marketplace fees and outbound freight. Non-variable SG&A expenses leveraged 135 basis points, driven by decreased professional fees, lower marketing expenses, and overall cost savings initiatives, partially offset by higher non-variable third-party logistics fees. Adjusted operating income increased 26% to $49.3 million, or 20% of net sales, compared to $39.3 million, or 17% of net sales during the same period last year. Our effective tax rate was 25.2% during the quarter, compared to 24.3% in last year's second quarter.
Adjusted net income grew 40% to $35.6 million, or $0.41 per diluted share, compared to $25.5 million or $0.30 per diluted share during the prior year period. Adjusted EBITDA increased 24% to $57.9 million, or 23.5% of net sales, compared to $46.6 million, or 20.1% of net sales in the same quarter last year. Turning to our balance sheet. As of June 27, 2020, we had cash and cash equivalents of $127.5 million compared to $38 million in the year ago period. During the quarter, we repaid the $50 million outstanding balance on the revolver that we drew down in the first quarter and ended the second quarter with no borrowings on the revolver. We ended the quarter with $138.8 million in inventory compared to $181.4 million during the same quarter last year.
Inventory declined 23%, driven by our actions to reduce purchase orders early in the second quarter to provide enhanced financial flexibility in the midst of the pandemic. In addition, inventory levels were also impacted by the demand surge we experienced, led by our DTC business as we moved throughout the quarter. As a result, we began to work with our suppliers to chase inventory mid-quarter, a process which we expect will continue throughout the third quarter. Total debt, excluding unamortized deferred financing fees and finance leases, was $292.5 million compared to $309.1 million in last year's second quarter. Including our cash balance, the ratio of total net debt to adjusted EBITDA for the trailing 12 months improved to 0.9x compared to 1.7x in the prior year quarter.
While we had a great quarter, particularly given our prudently conservative planning early in the pandemic, we continue to balance our own optimism for the remainder of the year with the broader uncertainties facing the economy and the consumer landscape. The rapid changes experienced in just the past few months underscore the challenges in planning and forecasting the business, and we remain diligent as we navigate the unpredictability of the balance of the year. With a multitude of factors at play, we will continue to withhold a detailed full-year outlook, though it is important to share how we were thinking about the business trajectory exclusive of the potential impact of another significant COVID disruption.
We do see the opportunity to return to our long-term sales target range of 10%-15% in the second half of the year, led by strength in our DTC channel and better stability across our wholesale channel. Understand a larger range of outcomes and month-to-month volatility may persist during the balance of the year. Before turning the call over for Q&A, I want to reinforce three themes we see in the business currently. First, demand for the brand and products remain incredibly strong, underscored by the heightened outdoor leisure participation, which we believe is a sustainable trend for the foreseeable future. Second, our powerful omni-channel approach is working, fortified by the customer shift to online shopping and our expanded content creation to drive highly relevant digital engagement. Finally, we remain highly focused on managing the business with discipline to continue fueling growth during the pandemic.
We would now like to open the call for your questions. Operator?
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Please restrict to one question and one follow-up per participant. If you have more questions, please join the queue again. We have a first question from the lineup. Randy Konik from Jefferies, please go ahead.
Yeah, thanks. Good morning, everybody. Quick question. I guess, Matt, can you elaborate a little bit more on the perspective you gave in the direct-to- consumer channel, new versus existing customer growth and any differences in buying behavior by product category within those two buckets of customer sets in the quarter? Thanks, guys.
Good morning, Randy. As we mentioned on the call, we really like the strength that we saw both from new and existing customers through our D2C channel and continued to see that through the quarter. We saw a little strength from our existing customers coming back and buying more in our new innovation, I would call it marginally different between new and existing. Both were really tracking well and driving that elevated growth, which continues a trend that we've been seeing quarter-over-quarter. From a mix perspective, our mix, obviously we had a very strong quarter in C&E broadly and a good quarter in Drinkware, albeit a little slower, as we said. Held back a bit by the corporate sales disruption and the wholesale disruption. In our D2C channel, we feel very good about the strength and performance across both C&E and Drinkware.
How about in terms of thinking through, you said, I think it sounded like you got really nice demand for the products in the quarter despite you're turning on some of the marketing. Why don't you give us a little bit more of an elaboration on what you're seeing there? It sounds like, I guess, the theme is awareness, the brand is picking up dramatically. Maybe give us some perspective on where awareness sits today. As you think about marketing strategies for the back half of the year and into next year, how should we be thinking about those marketing strategies? I think they're going to be more digital. Any changes in your product launch patterns that we should be thinking of for the next six quarters? Thanks, guys.
A couple things on that. One of the things we mentioned on our last call and continued through the quarter was our marketing strategy, with the disruption and the work from home, and really, the full kind of digital acceleration, is we really turned our efforts towards driving digital engagement, both from a product marketing perspective and also from a brand marketing perspective. Early in the quarter, that was leveraging a lot of assets that we had. It was being thoughtful about our OpEx and how we spent into that unknown early period in the first half of the quarter. As the quarter started to, and continued to accelerate, we continued to lean into both the product marketing and the brand marketing.
One of the muscles that I think we had been building and really got to flex in the second quarter, that you'll continue to see us flex into the future is, driving original content and digital engagement, both around existing products, but also new products, and then as we drive broader brand awareness. We have a program, as we mentioned on the call, out right now, One For The Roadies, which was a really nice way of driving give back in a community that's highly disrupted right now in the music and venue space. We're also combining it with one of our new products. You're seeing those things, and when we mentioned investment in creative and digital, a lot of those results are from the investments we've made in people and in technology within our business. You'll continue to see us do that.
Awareness, we believe, continues to rise. We haven't reported our latest awareness numbers, and we'll update those in future calls. We like the balance that we're seeing of growth in our longest-standing markets and the growth we're seeing in the geographic distribution in the U.S., and as we mentioned on the call, the e-commerce and digital acceleration we're seeing around the world. From a product launch perspective, I'd refer back to our last call where we said we've made certain decisions on products that may have come in the back half of 2020 that we would move out into 2021. We think the time and the environment will be better suited for those product expansions. That's a dynamic process that we do all the time. We gauge where the market is, we gauge how product receptivity is, and as we ramp into new product launches.
Really helpful. Thanks, guys.
Thank you. We have next question from the line of Sharon Zackfia from William Blair. Please go ahead.
Hi, good morning. Congratulations on the nice rebound in trends. I guess one thing that really stood out on the balance sheet was just your inventory levels, and Paul, you mentioned you'll be chasing inventory, but can you give us any idea of where you might be constrained relative to demand here in the third quarter, and kind of how quickly you expect inventory to be, I guess, back where it should be to meet that demand? I just wanted to ask a question, too, on DTC. It sounds like it's maintained a very healthy level. I just want to confirm if it's been consistent kind of at that 60% level as the wholesale channel has reopened.
Good morning, Sharon. Thanks. I'd say, we are actively and aggressively, but thoughtfully ramping to meet demand. As we talked about in our prepared remarks, we took a defensive position ahead of the tariffs earlier, which let us leverage during the early supply chain disruptions. We managed inventory closely during the late part of Q1 and the early part of Q2. Really what we're doing now is flexing capacity to meet demand throughout the balance of the year. We will continue to flex capacity to meet that demand. Your question about, is there one area in particular, if we think about hard coolers and soft coolers, and if you look at our website, you see sporadic outages by color as we have new merchandise coming in. That's really where we are flexing capacity to bring in more product.
On inventory levels through the balance of the year, we will continue to increase inventory levels, but now expect to end the year down year-over-year versus previously, we thought we would be up slightly. We will continue to build even into 2021.
Sharon, this is Matt. I'll take the D2C question. As I said in our prepared remarks, one of the things that we saw, and w e reported this in the last call, was early in the quarter, really strong growth in our e-commerce business. One of the things we were most pleased with is as the world started to settle out, as wholesale started to reopen, that business and that trend continued. We feel good about the strength that we saw in our e-commerce business and the continuity of it.
Thank you.
Thank you. We have next question from the lineup, John Kernan from Cowen. Please go ahead.
Hey, good morning, guys. Congrats on a phenomenal quarter.
Thanks, John.
Paul, obviously very impressive to be able to return to the long-term targets, 10%-15% top line growth. As we think about that for the back half of the year, how should we think about the margin profile of business between gross margin and SG&A? I have a follow-up question. Thank you.
Sure. Thanks. We will continue to see gross margin expansion really driven by mix shift as we saw in the second quarter. We expect gross margin to expand. On the SG&A piece of it and the OpEx, we think about that in two buckets the way we report it. With DTC growing faster than the balance of the company, we would expect variable costs to continue to deleverage due to mix. We will continue to spend into the non-variable part. We haven't cut back on, as we look in the back half of the year, we're going to invest in marketing, we're going to invest in things like that. Of course, something like T&E, we will see reductions in T&E just because of travel restrictions.
Long and short, I'd say we expect gross margin to see expansion in the back half of the year with the top line and the mix shift to DTC. Variable expenses will delever, and we will continue to spend to drive the business in the variable piece. That's kind of how we think about the back half.
That's helpful. Thanks. Maybe just a quick follow-up. Drinkware obviously faced a lot of exposure on the corporate side of things. How do we think about the mix of Coolers & Equipment and Drinkware in the back half of the year as you return to those robust top-line targets?
I would say, as we talk about Drinkware, and in my comments, we returned to positive Drinkware growth in May and June. It was really April with the disruption of wholesale and then the corporate sales. In corporate sales, we talked about then being positive, exiting the quarter positive in the month of June. As we look forward, I see growth in that top line 10%- 15% in the back half of the year. We see growth across both categories.
Excellent. Thanks, guys. Best of luck.
Great. Thanks, John.
Thank you. We have next question from the line of Peter Benedict from Baird. Please go ahead.
Hey, guys. Thanks for taking the question. First, I guess, Paul, with respect to the 10%-15% top line over the second half of the year, is there anything within the inventory situation that would have either of the quarters at this point envisioned to be below that range? Are you thinking you can have them both there even given the tight inventory?
I would say both should be in that range is what we're looking at today.
Okay. Then just, I know you don't have the guidance for this year, but given the shifts you've seen in the channel mix, how are you thinking kind of longer term about how the structural profitability of YETI has maybe been impacted by what's been going on here? I know there's a lot of uncertainty still out there, but maybe just talk about how you guys thought about the profitability opportunity pre-COVID, then maybe what are the key things that may or may not stick as we try to compare what you're seeing today to what might be out there a couple of years from now.
Peter, what I would say is the profitability makeup of the company and the shift to DTC is where we were expecting it, but for it just accelerated. We like where it is going. We like where it's transitioning, and it's just going faster. The DTC piece continues to be very gross margin accretive. It has higher variable costs, and then as we come down, it is operating income positive. It's really just an acceleration versus significantly different than where we were thinking the business was moving to.
Okay. No, that's fair. My last question would just be around the international expansion and supply chain plans that you guys had kind of coming into this year, and maybe how has that evolved as you look out over the next couple of years? What are kind of the key, I guess, entry points and supply chain opportunities that you have to go after in order to grow that business over the next couple of years? Thanks.
I think when we look towards international, we're going to continue developing that supply chain. Right now, in the U.S., we added a node in Salt Lake City, for instance. Looking at international, we will continue to expand shipping directly from manufacturer to those locations, our international locations. Just as the international business increases, we will continue to build the supply chain muscle and processes to support that growth.
Okay. Thanks a lot, guys. Good luck.
Thanks, Peter.
Thank you. We have next question from the line of Camilo Lyon from BTIG. Please go ahead.
Thank you. Good morning, guys. Great job on the quarter. Wanted to get your thoughts on what you're seeing from the competitive landscape during the volatility of the pandemic. Have you seen competitors start to pull back or subside, or become more promotional?
Hey, Camilo, this is Matt. Thanks for the question. What we would say, largely, our focus in Q2 was on delivering the demand that we were seeing from YETI with, as we talked about on the call, a high level of price integrity. We haven't seen any significant shifts in the competitive landscape, either new entrants or any behaviors that I would say haven't been historically consistent in those channels. We continue to like the strength in the doors where we're open or the doors that are open, the strength we're seeing in consumer demand, the strength we're seeing in our retail partners' e-tail or e-commerce business, and then through our own D2C. We feel really good about where we're positioned, and I would say largely, we haven't seen significant shifts in the overall competitive landscape.
Got it. Thanks. Paul, for you, would you be able to share how your July momentum has progressed? It seems like business has accelerated, certainly on the wholesale side, throughout the quarter. Has that continued into July, and does the strength from a category perspective, should that change as we go through the balance of the year? coolers obviously getting the benefit from a lot of the outdoor activity surge that you've talked about. How should we just think about the components of those two category trends into the third and fourth quarter?
Thanks for the question. This will be an unsatisfying answer. We are going to return to our practice of not commenting on inter-quarter results in the quarter that we're in. I will say for us to, at this point, to be able to say in the back half of the year that we're going to return to the 10%-15% growth. With all the caveats of another disruption or something else that may happen. As we're looking at the business today, we feel good about returning to that 10%-15% growth, and then both categories growing as well in the back half of the year as we had answered earlier. I can't give you any color on July.
The components of that long-term growth, DTC and wholesale, I think was 20%- 25% DTC and wholesale, if I remember correctly. That's how we should think about the normalization of the channel growth?
Yeah, I wouldn't go down to we toggle back to the 10%-15% of long-term growth to give you all a way of thinking about how or share the way we're thinking about the back half of the year. I think below that, I think it's going to be the variability of what could happen, and it's going to change month-to-month. I would say we toggled, or we anchored to that 10%-15% to get everyone back to kind of how we're thinking about the business in the back half of the year. Certainly the DTC business and the mix between DTC and wholesale, it was significantly different in the second quarter, obviously. I wouldn't look into anything below top line from our outlook.
Got it. Okay. Basically, the strength that you've been seeing, maybe said a different way, the April performance of the weaker parts of the business, Drinkware and wholesale, the continuation of that, the improvement of that throughout the quarter, no reason to believe that that's changed going forward, and you want to keep the high level 10%-15% intact despite the fact that DTC is up 60% and wholesale is on an improving trajectory.
Correct. As we said on the Drinkware, it really was driven by April, and then it did turn positive in May and June. Yes.
Yeah. Got it. Okay, perfect. Good luck with the balance of the year. Continue success. Thanks.
Thanks.
Thank you. We have next question from the line of Robbie Ohmes from Bank of America Merrill Lynch. Please go ahead.
Oh, hey guys, Matt, Paul. Nice quarter, great execution. Paul, I love the three themes. Maybe a bit of a follow-up on Camilo's question. You guys called out the demand surge for outdoor recreation. I know you're not giving guidance on the back half, but what activities correlate the most with YETI in Drinkware and coolers, and how would you tell us to think about the activities in the kind of fall/winter season that might be driving a similar surge? How do we think about YETI in the back-to-school periods historically, and what might be different in this environment?
Robbie, this is Matt. I'll take that one. There's a few dynamics at play, one of the things that we've talked thematically about YETI and YETI products from the very early days is our products are pursuit agnostic, meaning they get used in all kinds of different environments, in all kinds of different use cases. One of the things we like about the flexibility we have with the business is if large group gatherings are disrupted, that same cooler you'd use in a large group gathering is used in a small backyard gathering. We're seeing, as broadly reported in the market, a lot of more near-in activities, people getting out to parks, looking for open spaces, taking near-cations, versus going to the airport and flying places. We think that lends really well to our Drinkware. It lends really well to our Coolers & Equipment.
It lends well to our emerging bags category. There's a lot of dynamics we really like. With things like back to school, in-person school, still up in the air in much of the country, there are still dynamics at play there that we like around Drinkware. We just recently wrapped up a short run awareness campaign around individual single Drinkware with a customization message on getting ready for school, not necessarily needing to be physically in person. We have a lot of flexibility in how we continue to keep our product and our brand in front of the consumer, whether that's on bigger adventures like going off on a fishing trip or being in your local park or your local neighborhood.
There's a lot of flexibility there from a messaging perspective, from a product relevance perspective, from a keeping consumers as they continue to stay close to home. This is also an evolution of a trend that we had seen well before the pandemic, which is that interest and focus around being active and outdoors and from a fitness and a lifestyle perspective. We think this, much like the digital acceleration, this has been a little bit of an acceleration in people getting out and adventuring, and so we like both the near-term and long-term dynamics that it's creating.
That sounds great. Just a quick follow-up: when you look at your larger wholesale partners, how are they thinking about YETI percent of business they're gonna do going forward digitally versus in their stores, and does that change any dynamics for you guys? Are you seeing more demand for inventory on your wholesale partners' websites, and how does that kind of change how you guys think about the business?
Yeah, I think as we said on the call, I think for our wholesale partners, the acceleration they've seen in their e-commerce business has created some new opportunity for them and also some evolutionary opportunity. One of our tenets of our omni-channel strategy is to help them evolve and partner closely with them, much like we did at retail as we think about things like point of sale and merchandising. It's the same in the digital space for them. We continue to like that trend. I think that they're training consumers in a different way of buying. We mentioned on the call, and it's obviously talked widely about curbside. Also just that idea of when there is an affinity or a loyalty for a wholesale partner and their e-commerce site, we want to be there and make sure that YETI shows up and supports them in that.
Great. Thanks so much.
Thanks, Robbie.
Thank you. We have next question from the lineup, Joe Altobello from Raymond James. Please go ahead.
Thanks. Hey, guys. Good morning. You mentioned you saw strength in both existing and new YETI customers in the quarter, but I was curious if you noticed any perceptible shift in the demographics of your customers during the pandemic. Are they skewing younger or more female? Anything noteworthy from a geographic standpoint as well? Thanks.
Thanks, Joe. A couple of things. Geographically, we like the continued strength and evolution that we've seen over the last four or five years, which is that evolution from being a well-known brand in the South and Southeast to being a national and emerging international brand. That trend continues, and it's a positive one, and we like both the repeat purchase we're getting broadly geographically and from existing customers and also the new customer acquisition. I would say from a demographic perspective, the period we've just gone through and the period, in many ways, we're still in, we're still measuring that. We are seeing some trends we like as we kind of touch other age groups and as we expand geographically, we've always really been positive on our demographics. I would say the things that we're seeing only continue to strengthen that.
That's all from Matt. Thanks. Secondly, on the corporate side, you said you delivered growth later in the quarter. Curious what helped to drive that? I think working from home is still pretty prevalent at this point.
There's a couple of dynamics when you think about in the middle of March, most businesses had their snow globe shaken pretty hard and had to learn what all of a sudden running a remote workforce is. Things that were in progress all of a sudden were thrown in the air, you had to get that part of running a business settled. We all experienced it, get your business settled and get back on track. What we like about the corporate sales business is the focus around sustainability, the focus around elimination of single use hasn't changed. What we see is opportunity to continue to use our corporate sales business for companies that have a remote workforce, and as a way for them to stay engaged with that remote workforce.
The near term dynamic, we continue to be very positive on that business, and we think the long term thesis and long term dynamic for corporate sales growth remains intact.
Got it. Okay. Thank you, guys.
Thank you. We have next question from the line of Jim Duffy from Stifel. Please go ahead.
Thank you. Good morning, guys. Terrific execution. Congratulations on the team effort to adapt so quickly. We understand you're chasing inventory. Can you speak to lead times on different product types? If I'm interpreting you correctly, your comments seem to suggest you're planning inventories to be back in balance with demand by the end of 3Q. Is that correct?
Let me take that, Jim. I'm gonna start on the second one.
Okay.
We are flexing capacity to meet demand throughout the balance of the year. I would expect to see inventory levels down year-over-year throughout the back half of this year. To your question of will I get back to meeting demand, we've said sales 10%-15% in the back half, but we're expecting inventory to be down. I don't think I, in that sense, catch up. From a lead time perspective, we are working with our suppliers to flex capacity and we have some options. There's actually faster boats. Air is still very, very expensive. We have the option of faster boats to get product here faster. We have deliveries coming in obviously daily. That's why as you look at yeti.com, one day the Navy Tundra 65 may be out, and then two days later it's back in.
What we're also doing is we're thoughtfully allocating inventory across our omni-channel, right? That's both our channels, our wholesale channels, to meet that consumer demand. It is something that we work on a daily basis, to meet that demand and do the best we can to meet that demand. We will be working at this all through the second half of the year.
Understood. Matt, I had a question on the digital marketing. The step up in digital engagement was really impressive. I'm curious how much of that was in the works entering the quarter versus accelerated and a pivot from previous plans. Did you pull forward some campaigns and, given the backdrop of the pandemic, are you able to produce content at such a pace that you have a pipeline to sustain into the back half of the year?
Great question, Jim. I would say we didn't pull forward campaigns that were ready to go in the natural sense of you pull something forward, then you got to go back to it. A lot of the content you saw was truly some of the exceptional efforts of our team to go create content from pieces or elements of things we had in our digital library, films that we had shot, and they found ways to put those to work. It was leaning back into our library of content and putting it back out in front of the consumer.
Really things like this One For The Roadies campaign we have going right now, some of our new color campaigns that you're seeing right now, those things were all created in the midst of this pandemic and shows the power and the commitment we have to investing in our in-house creative and in partnering with content makers outside of YETI to make really engaging both brand storytelling and product storytelling. I expect our team to continue to produce incredibly high quality, high production value work and continue to push the edge of what brand marketing and what product storytelling is.
Very helpful answers. Thank you, guys.
Thank you. We will take our last question from the line of Kimberly Greenberger from Morgan Stanley. Please go ahead.
Oh, great. Thank you so much. Matt, I wanted to ask you about distribution. How's the Lowe's partnership coming along, and are you looking at any new distribution? I just had two follow-up questions for Paul.
Thanks, Kimberly. From a distribution perspective, obviously we started the Lowe's partnership late 2019 and continued that expansion in early 2020. I would say the partnership continues to go very well. As we said from the very beginning, even before the disruption, we're gonna be really thoughtful with how we roll out Lowe's, how we partner with them. They have been very engaged and a good partner as all of our wholesale has during an incredibly unprecedented time. Lowe's was deemed in many, if not all of their stores, largely essential, and so they remained open through this period. We feel good about the balance and strength of our omni-channel.
As far as opening additional wholesale, obviously with what we've seen for the last four months, with a newer partnership in Lowe's, and with the continued great relationships we have with the rest of our wholesale partners, we really like the omni-channel base we have today, and we'll continue to kind of evolve and drive. As I've said in the past, we look at new wholesale if it delivers really one of three things: it's a new customer to YETI, a new buying occasion, or augments and supports our existing wholesale. We'll continue to have that mindset and mantra as we move forward.
Great. Perfect. Then, Paul, I just wanted to follow up on SG&A. Is there a way for us to think about, if we look back to 2019, what percentage of your SG&A was variable with sales and what percentage was fixed? I assume that ratio sort of changed a lot in the second quarter with the surge in DTC. If you could just help us understand how those percentages may have looked kind of in the second quarter, that would be super helpful.
Yeah. Thanks, Kimberly. I'd say in the second quarter with the DTC surge variable and with our cost initiatives, which obviously were focused on non-variable, our variable became a bigger % than historical, both because of the DTC surge and as the beginning of the quarter where we took some cost containment. I think from a percent of sales, and if you go back, you can kind of do the math of what piece of our total SG&A is variable from our filings. As a percent of sales, I would expect that to continue to be relatively flat as a percent of DTC sales. It is really about where we're getting the de-leverages, and I'll use second quarter as an example. The enterprise is growing at 7%, and DTC is growing at 61%.
I'm de-leveraging at the enterprise level, but inside of our direct-to-consumer, that variable is relatively flat as a percent of sales.
Great. Thanks, Paul.
Thanks, Kimberly.
Thank you. That was the last question. I would like to turn the floor back over to Matt Reintjes for closing comments. Over to you, sir.
Thank you. Thanks everyone for joining us today. We look forward to updating you as we come back together for our Q3 results.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.