DECKERS OUTDOOR CORPORATION The following discussion of our financial condition and results of operations should be read together with our condensed consolidated financial statements, included in Part I, Item 1 in this Quarterly Report, and the audited consolidated financial statements included within our 2019 Annual Report. This section contains forward-looking statements that are based on our current expectations and reflect our plans, estimates, and anticipated future financial performance. These statements involve numerous risks and uncertainties. Our actual results may differ materially from those expressed or implied by these forward-looking statements as a result of many factors, including those set forth in the sections entitled "Risk Factors," in Part II, Item 1A, and "Cautionary Note Regarding Forward-Looking Statements" in this Quarterly Report.
Overview
We are a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyle use and high-performance activities. We market our products primarily under our five proprietary brands: UGG, HOKA, Teva, Sanuk, and Koolaburra. We believe our products are distinctive and appeal broadly to women, men, and children. We sell our products through quality domestic and international retailers, international distributors, and directly to our global consumers through our DTC business, which is comprised of our retail stores and E-Commerce websites. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort, and by offering products tailored to a variety of activities, seasons, and demographic groups. All our products are currently manufactured by independent third-party contractors.
Trends Impacting our Overall Business
Our business and the industry in which we operate continue to be impacted by several important trends:
• The overall scope and shape of our brand portfolio is
evolving,
especially as we continue to experience a high rate of net sales
growth within the HOKA brand and as net sales within this brand
continue to comprise a greater proportion of our aggregate net sales.
Within the UGG brand, we have achieved a strategic reduction in our
reliance on sales of products within the core Classicsfranchise, as
we have experienced increased sales across other UGG brand product
offerings, including non-core Women's spring and summer lines, as
well as Men's lines. We expect each of these trends willcontinue in
the future, which will have a corresponding impact on the diversity
and reach of our brands.
• Sales of our products within our brand portfolio are highly seasonal
and are sensitive to weather conditions, which are largely
unpredictable and beyond our control. In an ongoing and strategic
effort to reduce the impact of seasonality on our results of
operations, we continue to introduce counter-seasonal products across
our brands. In particular, the significant growth of the HOKA brand's
year-round performance product offerings as a percentage of our
aggregate net sales has had a meaningful positive impact on our
seasonality trends. In addition, the UGG brand continues to
experience success through the introduction of products within the
Women's spring and summer lines. However, while we willcontinue to
focus on reducing the impact of seasonality through innovation and
the expansion of our product offerings, and by continuing to adjust
product mix within our brand portfolios, given the historical and
projected magnitude of net sales within the UGG brand relative to our
other brands, the effect of favorable or unfavorable weather on our
aggregate net sales and operating results may continue to be
significant.
• There has been a meaningful shift in the way consumers shop for
products and make purchasing decisions, and these consumertrends and
behaviors continue to evolve. For example, the traditional retail
industry is experiencing prolonged decreases in consumertraffic as
customers continue to migrate to online shopping that is being fueled
by technology, resulting in a shrinking retail footprint. This shift
is positively impacting the performance of our E-Commercebusiness,
while creating challenges and headwinds for our traditional retail
business and the businesses of our key customers. As a result, we
expect our E-Commerce business will continue to be a driver of
long-term growth, although we expect the year-over-yearpercentage
growth rate will decline over time as the size of our E-Commerce
business increases. Further, we believe that our traditional retail
business will continue to be an important component of our DTC
business and we expect to continue to seek opportunities to optimize
our retail store fleet, which may cause our operating expenses to
fluctuate from period to period.
27--------------------------------------------------------------------------------
• As a result of changes in consumer purchasing behavior, we continue
to focus on the enhancement of our Omni-Channel strategy to enable us
to better engage existing and prospective consumers and expose them
to our brands. Our strategy is transforming the way we approach
marketing, including through a sustained focus on our targeted
digital marketing efforts, as well as marketing activations and
product seeding to drive global brand heat. For example, we have
begun applying these transformation efforts in Europe to drive UGG
brand heat as we work to differentiate consumer experiences across
various consumer touch points as part of our marketplace reset
strategy. We have also started to apply this marketing strategy shift
in Asia .
• During the fiscal year ended March 31, 2019 , we implemented a product
segmentation strategy, as well as an allocation strategy for the UGG
brand's core Classics franchise in the US wholesalemarketplace.
These strategies are designed to assist us in controlling product
inventory, reducing the impact of discounts and close-outs on our
sales and gross margins, and increasing full-priced selling across
our product offerings. We plan to continue this strategicmanagement
of the US marketplace in future seasons. Similarly, we are currently
implementing a multi-year marketplace reset strategy in Europe to
drive UGG brand heat.
• We continue to strategically assess our distributionpositioning
across our entire brand portfolio. For example, we regularly review
the UGG brand distribution channels globally and are in the early
stages of a strategic marketplace reset in Europe . We also recently
announced our decision to exit the warehouse channel for the Sanuk
brand. We will continue to assess the impact that ourdistribution
channels have on the overall strength and financial performance of
our brands.
• We believe consumers are increasingly buying brands that advance
sustainable business practices and deliver quality products while
striving for minimal environmental impact with socially conscious
operations. Through our Corporate Responsibility andSustainability
Program, we expect to continue to advance our sustainable business
initiatives with the goal of consistently delivering brand promises
that meet consumer expectations.
Reportable Operating Segment Overview
Our six reportable operating segments include the worldwide wholesale operations for each of the UGG brand, HOKA brand, Teva brand, Sanuk brand, and Other brands, as well as DTC. Information reported to the CODM, who is our PEO, is organized into these reportable operating segments and is consistent with how the CODM evaluates our performance and allocates resources. UGG Brand. The UGG brand is one of the most iconic and recognized brands in our industry which highlights our successful track record of building niche brands into lifestyle and fashion market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, apparel, and accessories with expanded product offerings and a growing global audience that appeals to women, men, and children.
We believe demand for UGG brand products will continue to be driven by the following:
• High consumer brand loyalty due to consistently delivering quality
and luxuriously comfortable footwear, apparel, and accessories; and
• Diversification of our footwear product offerings, such as Women's
spring and summer lines, as well as expanded category offerings for
Men's, apparel, and accessories.
HOKA Brand. The HOKA brand is an authentic premium line of year-round
performance footwear and apparel that offers enhanced cushioning and inherent
stability with minimal weight. While the HOKA products were originally designed
for ultra-runners, we believe they now appeal to athletes around the world,
regardless of activity. The HOKA brand is quickly becoming a leading brand
within run specialty wholesale accounts, with strong marketing fueling both
domestic and international sales growth. We continue to build product extensions
in trail and fitness.
We believe demand for HOKA brand products will continue to be driven by the following:
• Leading product innovation and key franchise management;
28
--------------------------------------------------------------------------------• Increased brand awareness through enhanced marketing activations; and
• Category extensions in authentic performance footwear offerings.
Teva Brand . The Teva brand, which pioneered the sport sandal category, is born from the outdoors and rooted in adventure. The Teva brand is a global leader within the sport sandal and modern outdoor lifestyle categories by fueling the expression of freedom. The Teva brand's product offerings include sandals, shoes, and boots. Sanuk Brand. The Sanuk brand originated inSouthern California surf culture and has emerged into a lifestyle brand with a presence in the relaxed casual shoe and sandal categories. The Sanuk brand's use of unexpected materials and unconventional constructions, combined with its fun and playful branding, are key elements of the brand's identity. Other Brands. Other brands currently consist of the Koolaburra by UGG brand and a discontinued brand during the prior period presented. The Koolaburra brand is a casual footwear fashion line using sheepskin and other plush materials and is intended to target the value-oriented consumer in order to complement the UGG brand offering. Direct-to-Consumer. Our DTC business for all our brands is comprised of our retail stores and E-Commerce websites which, in an Omni-Channel marketplace, are intertwined and interdependent. We believe many of our consumers interact with both our retail stores and websites before making purchasing decisions.
Our retail stores are predominantly UGG brand concept stores and UGG brand outlet stores. Through our outlet stores, we sell some of our discontinued styles from prior seasons, full price in-line products, as well as products made specifically for the outlet stores.
As ofDecember 31, 2019 , we had a total of 154 global retail stores, which includes 84 concept stores and 70 outlet stores. Generally, we open retail store locations during the second or third quarters of each fiscal year and consider closures of retail stores during the third or fourth quarters of each fiscal year. We evaluate retail store closures based on store performance and timing of lease expirations and options. While we expect to identify additional stores for closure, we may simultaneously identify opportunities to open new stores in the future to further enhance our overall DTC business. We currently do not anticipate incurring material incremental retail store closure costs, primarily because any store closures we may pursue are expected to occur as retail store leases expire to avoid incurring potentially significant lease termination costs, as well as through conversions to partner retail stores, further discussed below. Flagship Stores. Included in the total count of global concept stores are nine UGG brand flagship stores, which are lead concept stores in certain key markets and prominent locations designed to showcase the UGG brand products. Primarily located in major tourist locations, these stores are typically larger with broader product offerings and greater traffic than our general concept stores. The net sales for these stores are recorded in our DTC reportable operating segment. Concession Stores. Included in the total count of global concept stores are ten concession stores, defined as concept stores that are operated by us within a department or other store, which we lease from the store owner by paying a percentage of concession store sales. The net sales for these stores are recorded in our DTC reportable operating segment. Partner Retail Stores. We rely on partner retail stores for the UGG brand and Sanuk brand in certain markets. Partner retail stores are branded stores that are wholly-owned and operated by third-parties and not included in the total count of global retail stores. When a partner retail store is opened, or a store is converted into a partner retail store, the related net sales are recorded in either the UGG brand or Sanuk brand wholesale reportable operating segments, as applicable. Our E-Commerce business provides us with an opportunity to communicate a consistent brand message to consumers that is in line with our brands' promises, drives awareness of key brand initiatives, offers targeted information to specific consumer demographics, and drives consumers to our retail stores. As ofDecember 31, 2019 , we operated our E-Commerce business through an aggregate of 28 company-owned websites and mobile platforms in ten different countries. 29 --------------------------------------------------------------------------------
Use of Non-GAAP Financial Measures
In order to provide a framework for assessing how our underlying businesses performed during the relevant periods, excluding the effect of foreign currency exchange rate fluctuations, throughout this Quarterly Report we provide certain financial information on a constant currency basis, which we disclose in addition to the financial measures calculated and presented in accordance with US GAAP. For example, in order to calculate our constant currency information, we calculate the current period financial information using the foreign currency exchange rates that were in effect during the previous comparable period, excluding the effects of foreign currency exchange rate hedges and remeasurements. Further, we report comparable DTC sales on a constant currency basis for DTC operations that were open throughout the current and prior reporting periods, and we may adjust prior reporting periods to conform to current year accounting policies. As a result, information included in this Quarterly Report regarding these financial measures, as we calculate them, may not be directly comparable to similar data of other companies, and may not be appropriate measures for comparing the performance of other companies relative to us. Constant currency measures should not be considered in isolation as an alternative to US dollar measures that reflect current period foreign currency exchange rates or to other financial measures presented in accordance with US GAAP. We believe evaluating certain financial and operating measures on a constant currency basis is important as it excludes the impact of foreign currency exchange rate fluctuations that are not indicative of our core operating results and are largely outside of our control.
Seasonality
Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters endingSeptember 30th andDecember 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters endingMarch 31st andJune 30th . Net sales for the HOKA brand occur more evenly throughout the year reflecting the brand's year-round performance product offerings. Due to the magnitude of net sales within the UGG brand relative to our other brands, our aggregate net sales in the quarters endingSeptember 30th andDecember 31st have significantly exceeded our aggregate net sales in the quarters endingMarch 31st andJune 30th . As we continue to take steps to diversify and expand our product offerings by creating more year-round styles and grow the year-round net sales of the HOKA brand as a percentage of our aggregate net sales, we expect the seasonality trends that have resulted in significant variations in our aggregate net sales from quarter to quarter to decrease over time. Results of Operations
Three Months Ended
Three Months Ended December 31,
2019 2018 Change
Amount % Amount % Amount %
Net sales $ 938,735 100.0 % $ 873,800 100.0 % $ 64,935 7.4 %
Cost of sales 431,103 45.9 403,707 46.2 (27,396 ) (6.8 )
Gross profit 507,632 54.1 470,093 53.8 37,539 8.0
Selling, general and
administrative expenses 251,866 26.9 225,375 25.8 (26,491 ) (11.8 )
Income from operations 255,766 27.2 244,718 28.0 11,048 4.5
Other (income) expense,
net (837 ) (0.1 ) 51 - 888 1,741.2
Income before income
taxes 256,603 27.3 244,667 28.0 11,936 4.9
Income tax expense 55,010 5.8 48,293 5.5 (6,717 ) (13.9 )
Net income $ 201,593 21.5 % $ 196,374 22.5 % $ 5,219 2.7 %
Net income per share
Basic $ 7.21 $ 6.74 $ 0.47
Diluted $ 7.14 $ 6.68 $ 0.46
30--------------------------------------------------------------------------------Net Sales . The following table summarizes our net sales by location, and by brand and channel: Three Months Ended December 31, 2019 2018 Change Amount Amount Amount % Net sales by location US$ 645,653 $ 573,015 $ 72,638 12.7 % International 293,082 300,785 (7,703 ) (2.6 ) Total$ 938,735 $ 873,800 $ 64,935 7.4 % Net sales by brand and channel UGG brand Wholesale$ 396,649 $ 388,039 $ 8,610 2.2 % Direct-to-Consumer 384,490 373,008 11,482 3.1 Total 781,139 761,047 20,092 2.6 HOKA brand Wholesale 71,927 46,243 25,684 55.5 Direct-to-Consumer 21,176 10,676 10,500 98.4 Total 93,103 56,919 36,184 63.6 Teva brand Wholesale 14,406 20,087 (5,681 ) (28.3 ) Direct-to-Consumer 2,765 2,839 (74 ) (2.6 ) Total 17,171 22,926 (5,755 ) (25.1 ) Sanuk brand Wholesale 5,286 9,172 (3,886 ) (42.4 ) Direct-to-Consumer 3,176 3,739 (563 ) (15.1 ) Total 8,462 12,911 (4,449 ) (34.5 ) Other brands Wholesale 36,799 18,703 18,096 96.8 Direct-to-Consumer 2,061 1,294 767 59.3 Total 38,860 19,997 18,863 94.3 Total$ 938,735 $ 873,800 $ 64,935 7.4 % Total Wholesale$ 525,067 $ 482,244 $ 42,823 8.9 % Total Direct-to-Consumer 413,668 391,556 22,112 5.6 Total$ 938,735 $ 873,800 $ 64,935 7.4 % Total net sales increased primarily due to higher HOKA, UGG, and Other brands wholesale net sales, as well as total DTC net sales. Further, we experienced an increase of 12.3% in total volume of pairs sold to 13,700 from 12,200 compared to the prior period. On a constant currency basis, net sales increased by 8.4% compared to the prior period. Drivers for significant changes in net sales are set forth below. • Wholesale net sales of the HOKA brand increased due to continued global growth through new customer acquisitions, as well as higher sales driven by key franchise updates and new product launches. • Wholesale net sales of the UGG brand increased primarily due to domestic growth driven by sell-in of fall and winter products, primarily for Men's and Kids' products, partially offset by lower international sales driven by European macroeconomic factors and a multi-year marketplace reset in that region. On a constant currency basis, wholesale net sales of the UGG brand increased by 3.9%, compared to the prior period. 31
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• Wholesale net sales of the Other brands increased primarily due to
continued sales growth and customer penetration in US family value
wholesale accounts for the Koolaburra brand.
• Comparable DTC net sales for the 13 weeks ended December 29, 2019
increased by 4.7%, compared to the same prior period, primarily due
to growth in the E-Commerce business globally for the HOKA brand and
domestically for the UGG brand.
• International sales, which are included in the reportable operating
segment sales presented above, decreased by 2.6%, compared to the
prior period. International sales represented 31.2% and 34.4% of
total net sales for the three months ended December 31, 2019 and
2018, respectively. The decrease in international sales was primarily
due to lower sales for the UGG brand in Europe , partially offset by
higher sales for the HOKA brand in Europe and Asia .
Gross Profit. Gross profit as a percentage of net sales, or gross margin,
increased to 54.1% from 53.8% compared to the prior period, due to favorable
brand mix and rate expansion for the HOKA brand, partially offset by lower
product margins on lower closeouts, as well as unfavorable changes in foreign
currency exchange rates.
Selling, General and Administrative Expenses. The net increase in SG&A expenses, compared to the prior period, was primarily the result of:
• increased operating expenses of approximately$19,000 ,
primarily due
to higher payroll costs, as well as professional, consulting, and
travel expenses;
• increased variable advertising and promotion expenses of
approximately $9,100 , primarily due to higher marketing costs to
drive sales for the HOKA and UGG brands;
• increased other variable selling expenses of approximately $4,700 ,
including transaction fees and warehousing costs, primarily due to
higher E-Commerce sales;
• increased expenses for allowances for trade accountsreceivable of
approximately $1,300 ;
• decreased foreign currency-related losses of approximately $2,700 ,
primarily driven by favorable changes in foreign currency exchange
rates for Asian and European currencies;
• decreased rent and occupancy expenses of approximately $2,300 ,
primarily due to lower percentage rent and the completion of the
consolidation of our warehouses, partially offset by retail
store-related operating lease asset impairment charges in the current
period; and
• decreased depreciation and amortization expenses ofapproximately
$2,100 , due to certain property and equipment and intangible assets being fully amortized during the current period. Income from Operations. Income from operations by reportable operating segment were as follows: Three Months Ended December 31, 2019 2018 Change Amount Amount Amount % Income (loss) from operations UGG brand wholesale$ 147,189 $ 141,080 $ 6,109 4.3 % HOKA brand wholesale 15,110 8,791 6,319 71.9 Teva brand wholesale 1,128 1,685 (557 ) (33.1 ) Sanuk brand wholesale (745 ) (635 ) (110 ) (17.3 ) Other brands wholesale 8,192 4,513 3,679 81.5 Direct-to-Consumer 158,705 155,333 3,372 2.2 Unallocated overhead costs (73,813 ) (66,049 ) (7,764 ) (11.8 ) Total$ 255,766 $ 244,718 $ 11,048 4.5 % 32
-------------------------------------------------------------------------------- The increase in income from operations, compared to the prior period, was due to higher net sales at higher gross margins, partially offset by higher SG&A expenses as a percentage of net sales. Drivers for significant net changes in income from operations, compared to the prior period, are set forth below. • The increase in income from operations of HOKA brand
wholesale was
due to higher net sales at higher gross margins.
• The increase in income from operations of UGG brand wholesale was due
to higher net sales at higher gross margins, partially offset by
higher SG&A expenses as a percentage of net sales, primarily driven
by higher variable marketing and selling expenses.
• The increase in income from operations of Other brandswholesale was
due to higher net sales, partially offset by lower gross margins.
• The increase in income from operations of DTC was primarily due to
higher DTC comparable net sales, as discussed above, partially offset
by lower gross margins and retail store-related asset impairment
charges in the current period.
• The increase in unallocated overhead costs was primarily due to
higher operating expenses, including for payroll, professional, and
consulting expenses, partially offset by lower foreign
currency-related losses driven by favorable changes in foreign
currency exchange rates for Asian and European currencies, as well as
lower rent and occupancy expenses for our warehouse due the
consolidation of our distribution centers.
Other (Income) Expense, Net. The increase in total other (income) expense, net, compared to the prior period, was primarily due to a decrease in interest expense driven by the release of reserves for penalties and interest on uncertain tax positions.
Income Tax Expense. Income tax expense and our effective income tax rate were as
follows:
Three Months Ended December 31,
2019 2018
Income tax expense $ 55,010 $ 48,293
Effective income tax rate 21.4 % 19.7 %
The increase in our effective income tax rate, compared to the prior period, was
due to changes in the jurisdictional mix of worldwide income before income taxes
forecasted for the fiscal year ending March 31, 2020 , as well as higher discrete
tax expenses, primarily driven by additional reserves for uncertain tax
positions and unfavorable return to provision differences, partially offset by a
discrete tax benefit for the release of tax reserves recognized during the
current period.
Foreign income before income taxes was $75,666 and $83,386 and worldwide income
before income taxes was $256,603 and $244,667 during the three months ended
December 31, 2019 and 2018, respectively. The decrease in foreign income before
income taxes, as a percentage of worldwide income before income taxes, compared
to the prior period, was primarily due to a decrease in foreign sales as a
percentage of worldwide sales.
Refer to the section entitled "Nine Months Ended December 31, 2019 Compared to
Nine Months Ended December 31, 2018 " within this Part I, Item 2, for further
details on our pre-tax earnings and effective income tax rate for the fiscal
year ending March 31, 2020 .
Net Income. Net income increased, compared to the prior period, primarily due to
higher net sales at higher gross margins, partially offset by higher SG&A
expenses. Net income per share increased, compared to the prior period, due to
higher net income, as well as a reduction in weighted-average common shares
outstanding, resulting from stock repurchases in prior quarters.
Other Comprehensive Income. Other comprehensive income increased, compared to
the prior period, primarily due to lower unrealized losses on cash flow hedges
and higher foreign currency translation gains for changes in our net asset
position, driven by favorable Asian and European foreign currency exchange
rates.
33
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Nine Months Ended
Nine Months Ended December 31,
2019 2018 Change
Amount % Amount % Amount %
Net sales $ 1,757,779 100.0 % $ 1,626,307 100.0 % $ 131,472 8.1 %
Cost of sales 847,104 48.2 789,362 48.5 (57,742 ) (7.3 )
Gross profit 910,675 51.8 836,945 51.5 73,730 8.8
Selling, general and
administrative expenses 589,195 33.5 541,229 33.3 (47,966 ) (8.9 )
Income from operations 321,480 18.3 295,716 18.2 25,764 8.7
Other (income) expense,
net (2,741 ) (0.1 ) 325 - 3,066 943.4
Income before income
taxes 324,221 18.4 295,391 18.2 28,830 9.8
Income tax expense 64,169 3.6 55,052 3.4 (9,117 ) (16.6 )
Net income $ 260,052 14.8 % $ 240,339 14.8 % $ 19,713 8.2 %
Net income per share
Basic $ 9.12 $ 8.06 $ 1.06
Diluted $ 9.02 $ 7.99 $ 1.03
Net Sales . The following table summarizes our net sales by location, and by
brand and channel:
Nine Months Ended December 31,
2019 2018 Change
Amount Amount Amount %
Net sales by location
US $ 1,170,919 $ 1,026,315 $ 144,604 14.1 %
International 586,860 599,992 (13,132 ) (2.2 )
Total $ 1,757,779 $ 1,626,307 $ 131,472 8.1 %
Net sales by brand and channel
UGG brand
Wholesale $ 814,069 $ 788,981 $ 25,088 3.2 %
Direct-to-Consumer 510,476 504,871 5,605 1.1
Total 1,324,545 1,293,852 30,693 2.4
HOKA brand
Wholesale 196,892 129,758 67,134 51.7
Direct-to-Consumer 53,844 26,259 27,585 105.0
Total 250,736 156,017 94,719 60.7
Teva brand
Wholesale 62,328 69,161 (6,833 ) (9.9 )
Direct-to-Consumer 16,125 15,315 810 5.3
Total 78,453 84,476 (6,023 ) (7.1 )
Sanuk brand
Wholesale 28,059 40,608 (12,549 ) (30.9 )
Direct-to-Consumer 9,805 10,537 (732 ) (6.9 )
Total 37,864 51,145 (13,281 ) (26.0 )
34--------------------------------------------------------------------------------
Nine Months Ended December 31,
2019 2018 Change
Amount Amount Amount %
Other brands
Wholesale 63,808 39,404 24,404 61.9
Direct-to-Consumer 2,373 1,413 960 67.9
Total 66,181 40,817 25,364 62.1
Total $ 1,757,779 $ 1,626,307 $ 131,472 8.1 %
Total Wholesale
$ 1,757,779 $ 1,626,307 $ 131,472 8.1 % Total net sales increased primarily due to higher HOKA, UGG, and Other brands wholesale sales, as well as higher DTC sales, partially offset by lower Sanuk brand wholesale sales. Further, we experienced an increase of 8.2% in total volume of pairs sold to 29,000 from 26,800 compared to the prior period. On a constant currency basis, net sales increased by 9.2%, compared to the prior period. Drivers for significant changes in net sales are set forth below. • Wholesale net sales of the HOKA brand increased due to continued global growth through new customer acquisitions, as well as higher sales driven by key franchise updates and new product launches. • Wholesale net sales of the UGG brand increased primarily due to domestic growth driven by continued growth of the Fluff Yeah collection as well as by sell-in of fall and winter products, primarily for Men's and Kid's product lines, partially offset by lower international sales driven by European macroeconomic factors and a multi-year marketplace reset in that region. On a constant currency basis, wholesale net sales of the UGG brand increased by 4.9%, compared to the prior period. • Wholesale net sales of the Other brands increased primarily due to continued customer penetration in US family value wholesale accounts for the Koolaburra brand. • Wholesale net sales of the Sanuk brand decreased due to lower performance within US surf specialty wholesale accounts and lower international sales resulting from our continued strategic focus on US markets. • Comparable DTC net sales for the 39 weeks ended December 29, 2019 increased by 6.9%, compared to the same prior period, primarily due to growth in the E-Commerce business globally for the HOKA brand and domestically for the UGG brand. • International net sales, which are included in the reportable operating segment net sales presented above, decreased by 2.2%, compared to the prior period. International net sales
represented
33.4% and 36.9% of total net sales for the nine months ended December
31, 2019 and 2018, respectively. The decrease was primarily due to
lower net sales for the UGG brand in Europe and Asia as well as for
the Teva brand in Europe , partially offset by higher net sales for
the HOKA brand in the same regions.
Gross Profit. Gross profit as a percentage of net sales, or gross margin,
increased to 51.8% from 51.5%, compared to the prior period, primarily due to
favorable brand mix and rate expansion for the HOKA brand and fewer closeout
sales at higher product margins, partially offset by unfavorable changes in
foreign currency exchange rates and a higher wholesale channel mix as a
percentage of total sales.
Selling, General and Administrative Expenses. The net increase in SG&A expenses, compared to the prior period, was primarily the result of:
• increased operating expenses of approximately$26,200 ,
primarily due
to higher net payroll and variable performance-based compensation, as
well as professional, consulting, and travel expenses;
• increased variable advertising and promotion expenses of
approximately $22,100 , primarily due to higher marketing costs to
drive sales for the HOKA and UGG brands;
35--------------------------------------------------------------------------------
• increased other variable selling expenses of approximately$6,500 , including transaction fees and warehousing costs, primarily due to higher E-Commerce sales; • increased expenses for allowances for trade accounts
receivable of
approximately $2,300 ;
• decreased depreciation and amortization expenses ofapproximately
$3,600 , primarily due to certain property and equipment and intangible assets being fully amortized during the current period; • decreased rent and occupancy expenses of approximately$3,500 , primarily due to lower percentage rent and the completion of the consolidation of our warehouses, partially offset by retail store-related operating lease asset impairment charges in the current period; and • decreased foreign currency-related losses of approximately$2,700 , primarily driven by favorable changes in foreign currency exchange rates for Asian and European currencies. Income from Operations. Income from operations by reportable operating segment were as follows: Nine Months Ended December 31, 2019 2018 Change Amount Amount Amount % Income (loss) from operations UGG brand wholesale$ 292,293 $ 280,978 $ 11,315 4.0 % HOKA brand wholesale 40,522 22,689 17,833 78.6 Teva brand wholesale 12,967 11,596 1,371 11.8 Sanuk brand wholesale 1,428 3,856 (2,428 ) (63.0 ) Other brands wholesale 15,282 10,150 5,132 50.6 Direct-to-Consumer 157,068 150,884 6,184 4.1 Unallocated overhead costs (198,080 ) (184,437 ) (13,643 ) (7.4 ) Total$ 321,480 $ 295,716 $ 25,764 8.7 % The increase in total income from operations, compared to the prior period, was due to higher net sales at higher gross margins, partially offset by higher SG&A expenses as a percentage of net sales. Drivers for significant net changes in income from operations, compared to the prior period, are set forth below. • The increase in income from operations of HOKA brand
wholesale was
due to higher net sales at higher gross margins, as well as lower
SG&A expenses as a percentage of net sales.
• The increase in income from operations of UGG brand wholesale was due
to higher net sales at higher gross margins, partially offset by
higher SG&A expenses as a percentage of net sales, primarily driven
by higher variable marketing and selling expenses.
• The increase in income from operations of DTC was due to higher DTC
comparable net sales, as discussed above, partially offset by lower
gross margins, as well as lower SG&A expenses as percentage of net
sales, primarily driven by lower overall retail store operating costs
due to prior period store closures, partially offset by retail
store-related asset impairment charges in the current period.
• The increase in income from operations of Other brandswholesale was
due to higher net sales, partially offset by higher SG&Aexpenses as
a percentage of net sales, primarily driven by higher expenses for
allowances for trade accounts receivable.
• The decrease in income from operations of Sanuk brandwholesale was
primarily due to lower net sales at lower gross margins,partially
offset by lower SG&A expenses, driven by lower variable
marketing and
selling expenses.
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• The increase in unallocated overhead costs was primarily due to
higher operating expenses, including for payroll, professional,
consulting, and other variable warehousing costs, partiallyoffset by
lower foreign currency-related losses driven by favorablechanges in
foreign currency exchange rates for Asian and European currencies, as
well as lower rent and occupancy expenses for our warehouse due the
consolidation of our distribution centers.
Other (Income) Expense, Net. The increase in total other (income) expense, net,
compared to the prior period, was primarily due to an increase in interest
income driven by higher interest rate yields on higher average invested cash
balances, as well as lower interest expense driven by the release of reserves
for penalties and interest on uncertain tax positions.
Income Tax Expense. Income tax expense and our effective income tax rate were as
follows:
Nine Months Ended December 31,
2019 2018
Income tax expense $ 64,169 $ 55,052
Effective income tax rate 19.8 % 18.6 %
The increase in our effective income tax rate, compared to the prior period, was
due to changes in the jurisdictional mix of worldwide income before income taxes
forecasted for the fiscal year ending March 31, 2020 , as well as higher net
discrete tax expenses, primarily driven by additional reserves for uncertain tax
positions and unfavorable return to provision adjustments, partially offset by
the favorable settlement of a state income tax audit completed during the
current period.
Foreign income before income taxes was $122,975 and $130,867 and worldwide
income before income taxes was $324,221 and $295,391 during the nine months
ended December 31, 2019 and 2018, respectively. The decrease in foreign income
before income taxes as a percentage of worldwide income before income taxes,
compared to the prior period, was primarily due to decreased foreign sales as a
percentage of worldwide sales.
For the nine months ended December 31, 2019 and 2018, we did not generate
significant pre-tax earnings from any countries which do not impose a corporate
income tax. We expect our foreign income or loss before income taxes, as well as
our effective income tax rate, will continue to fluctuate from period to period
based on several factors, including the impact of our global product sourcing
organization, our actual financial and operating results from sales generated in
domestic and foreign markets, and changes in domestic and foreign tax laws (or
in the application or interpretation of those laws). Over the long-term, we
believe the continuing evolution and expansion of our brands, our continuing
strategy of enhancing product diversification, and the expected growth from our
international DTC business will result in increases in foreign income or loss
before income taxes, both in absolute terms and as a percentage of worldwide
income or loss before income taxes. In addition, we believe our effective income
tax rate will continue to be impacted by our actual foreign income or loss
before income taxes relative to our actual worldwide income or loss before
income taxes.
Net Income. Net income increased, compared to the prior period, primarily due to
higher net sales at higher gross margins, partially offset by higher SG&A
expenses. Net income per share increased, compared to the prior period, due to
higher net income, combined with lower weighted-average common shares
outstanding, driven by stock repurchases during the period.
Other Comprehensive Loss. Other comprehensive loss decreased, compared to the
prior period, primarily due to lower foreign currency translation losses for
changes in our net asset position driven by favorable Asian and European foreign
currency exchange rates.
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Liquidity
We finance our working capital and operating requirements using a combination of our cash and cash equivalents balances, cash provided by ongoing operating activities and, to a lesser extent, available borrowings under our revolving credit facilities. Our working capital requirements begin when we purchase raw materials and inventories and continue until we ultimately collect the resulting trade accounts receivable. Given the seasonality of our business, our working capital requirements fluctuate significantly throughout the fiscal year, and we are required to utilize available cash to build inventory levels during certain quarters in our fiscal year to support higher selling seasons. We believe our cash and cash equivalents balances, cash provided by ongoing operating activities, and available borrowings under our revolving credit facilities (further described below under the heading "Capital Resources"), will provide sufficient liquidity to enable us to meet our working capital requirements for at least the next 12 months. We repatriated$130,000 of cash and cash equivalents during the nine months endedDecember 31, 2019 . As ofDecember 31, 2019 , we had$314,525 of cash and cash equivalents outside the US, a portion of which may be subject to additional foreign withholding taxes if it were to be repatriated. We continue to evaluate our cash repatriation strategy and we currently anticipate repatriating current and future unremitted earnings of non-US subsidiaries, to the extent they have been and will be subject to US tax, if such cash is not required to fund ongoing foreign operations. Our cash repatriation strategy, and by extension, our liquidity, may be impacted by several additional considerations, which include clarifications of or changes to the Tax Reform Act and our actual earnings for current and future fiscal periods. We continue to evaluate our capital allocation strategy, and to consider further opportunities to utilize our global cash resources in a way that will profitably grow our business, meet our strategic objectives and drive stockholder value, including by potentially repurchasing additional shares of our common stock. As ofDecember 31, 2019 , the aggregate remaining approved amount under our stock repurchase programs was$159,807 . Our stock repurchase programs do not obligate us to acquire any amount of common stock and may be suspended at any time at our discretion. Our liquidity may be further impacted by additional factors, including our operating results, the strength of our brands, impacts of seasonality and weather conditions, our ability to respond to changes in consumer preferences and tastes, the timing of capital expenditures and lease payments, our ability to collect our trade accounts receivable in a timely manner and effectively manage our inventories, and our ability to respond to economic, political and legislative developments. Furthermore, we may require additional cash resources due to changes in business conditions or strategic initiatives, economic recession, changes in stock repurchase strategy, or other future developments, including any investments or acquisitions we may decide to pursue, although we do not have any present commitments with respect to any such investments or acquisitions. If our existing sources of liquidity are insufficient to satisfy our working capital requirements, we may seek to borrow under our revolving credit facilities, seek new or modified borrowing arrangements, or sell additional debt or equity securities. The sale of convertible debt or equity securities could result in additional dilution to our stockholders, and equity securities may have rights or preferences that are superior to those of our existing stockholders. The incurrence of additional indebtedness would result in additional debt service obligations, as well as operating and financial covenants that would restrict our operations and further encumber our assets. In addition, there can be no assurance that any additional financing will be available on acceptable terms, if at all.
Capital Resources
Primary Credit Facility. Our Primary Credit Facility provides for a five-year,$400,000 unsecured revolving credit facility and contains a$25,000 sublimit for the issuance of letters of credit. As ofDecember 31, 2019 , we had no outstanding balance, outstanding letters of credit of$549 , and available borrowings of$399,451 under our Primary Credit Facility. China Credit Facility. Our China Credit Facility is an uncommitted revolving line of credit of up toCNY 300,000 , or$43,046 . As ofDecember 31, 2019 , we had an outstanding balance of$6,019 , outstanding bank guarantees of$28 , and available borrowings of$36,999 under our China Credit Facility. Subsequent toDecember 31, 2019 throughJanuary 29, 2020 , we made repayments of$6,019 , had no outstanding balance, outstanding bank guarantees of$28 , and had available borrowings of$43,018 under our China Credit Facility. 38 -------------------------------------------------------------------------------- Japan Credit Facility. Our Japan Credit Facility is an uncommitted revolving line of credit of up toJPY 5,500,000 , or$50,622 . As ofDecember 31, 2019 , we had no outstanding balance and had available borrowings of$50,622 under our Japan Credit Facility. Subsequent toDecember 31, 2019 , we renewed theJapan Credit Facility throughFebruary 1, 2021 for an uncommitted revolving line of credit of up toJPY 3,000,000 , or$27,612 , at the same interest rate. Mortgage. As ofDecember 31, 2019 , we had an outstanding principal balance under the mortgage, secured by the property on which our corporate headquarters is located, of$31,056 . The loan will mature and require a balloon payment in the amount of$23,695 , in addition to any then-outstanding balance, onJuly 1, 2029 .
Debt Covenants. As of
Refer to Note 6, "Revolving Credit Facilities and Mortgage Payable," of our condensed consolidated financial statements, included in Part I, Item 1 in this Quarterly Report, for further information on our revolving credit facilities and mortgage. Cash Flows
The following table summarizes our cash flows for the periods presented:
Nine Months Ended December 31,
2019 2018 Change
Amount Amount Amount %
Net cash provided by operating activities $ 238,725 $ 279,740 $ (41,015 ) (14.7 )%
Net cash used in investing activities (23,398 ) (21,764 ) (1,634 ) (7.5 )
Net cash used in financing activities (186,927 ) (167,157 ) (19,770 ) (11.8 )
Operating Activities. Our primary source of liquidity is net cash provided by
operating activities, which is primarily driven by our net income, other cash
receipts and expenditure adjustments, and changes in working capital. The
decrease in net cash provided by operating activities during the nine months
ended December 31, 2019 , compared to the prior period, was primarily due to a
net negative change in operating assets and liabilities of $51,068 , partially
offset by a positive net change in net income after non-cash adjustments of
$10,053 . The changes in operating assets and liabilities were primarily due to
net negative changes in inventories, net, trade accounts payable, other assets,
income tax receivable, and income taxes payable, partially offset by net
positive changes in trade accounts receivable, net, other accrued expenses and
long-term liabilities.
Investing Activities. The increase in net cash used in investing activities
during the nine months ended December 31, 2019 , compared to the prior period,
was primarily due to higher capital expenditures on information systems
hardware, software, and enhancements, mostly offset by lower expenditures for
warehouse improvements due to the completion of the Moreno Valley distribution
center during the prior period.
Financing Activities. The increase in net cash used in financing activities
during the nine months ended December 31, 2019 , compared to the prior period,
was primarily due to higher stock repurchases, partially offset by lower net
borrowings.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Contractual Obligations
During the nine months endedDecember 31, 2019 , there were no material changes outside the ordinary course of business to the contractual obligations and other commitments disclosed in our 2019 Annual Report. Refer to the section entitled "Leases" within Note 7, "Leases and Other Commitments," of our condensed consolidated financial statements, included in Part I, Item 1 in this Quarterly Report, for further information on our current lease commitments.
Critical Accounting Policies and Estimates
Management must make certain estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements, based upon historical experience, existing and known circumstances, authoritative accounting pronouncements, and other factors that management believes to be reasonable, but actual results could differ materially from these estimates. Refer to the section entitled "Use of Estimates" within Note 1, "General," of our condensed consolidated financial statements, included in Part I, Item 1 in this Quarterly Report, for a summary of applicable key estimates and judgments. There have been no material changes to the critical accounting policies disclosed in our 2019 Annual Report, except for the adoption of the new lease standard, beginningApril 1, 2019 . Refer to the section entitled "Recent Accounting Pronouncements" within Note 1, "General," and Note 7, "Leases and Other Commitments," of our condensed consolidated financial statements, included in Part I, Item 1 in this Quarterly Report, for further information for the impact on adoption of the new lease standard, as well as related disclosures. 39
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