DECKERS OUTDOOR CORPORATION The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements in Part IV within this Annual Report. This discussion includes an analysis of our financial condition and results of operations for fiscal year 2020 and fiscal year 2019 and year-over-year comparisons between those periods. For year-over-year comparisons between fiscal year 2019 and fiscal year 2018, refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2019 filed with theSEC onMay 30, 2019 . 35
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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 five proprietary brands: UGG, HOKA, Teva, Sanuk and Koolaburra. We believe that 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 consumers both domestically and internationally 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 products tailored to a variety of activities, seasons, and demographic groups. All of our products are currently manufactured by independent manufacturers.
Trends and Uncertainties Impacting Our Business
During early calendar year 2020, the COVID-19 pandemic (referred to herein as
COVID-19 or the COVID-19 pandemic) spread globally, including throughout the
geographic regions in which we operate our business, and where our wholesale
customers, retail stores, manufacturers, and suppliers are located.
In response to the pandemic, many federal, state, local, and foreign governments
have put in place, and others in the future may put in place, travel
restrictions, "shelter-in-place" orders, and similar government orders and
restrictions in an attempt to control the spread and mitigate the impact of the
disease. Such restrictions or orders have resulted in the mandatory closure of
"non-essential" businesses (including retail stores), increased unemployment
rates, "social distancing" restrictions, reduced tourist activity,
work-from-home policies, and other changes that have led to significant
disruptions to businesses and global financial markets. The overall impact of
the pandemic on our business and future results of operations is highly
uncertain and subject to change, and we are not able to accurately predict the
magnitude or scope of such impacts at this time.
Our business and the industry in which we operate continue to be impacted by
several important trends and uncertainties, including as a result of the
COVID-19 pandemic. We have experienced a number of material impacts, and
identified a number of material trends, within our business as follows:
Retail Environment
• In connection with the "shelter-in-place" orders discussed above,
all of our Company-owned and operated stores, and nearly all of the
retail stores of our wholesale customers and retail partners, were
closed for a portion of our fourth fiscal quarter ended March 31,
2020 (fourth fiscal quarter), and largely remain closed during the
first part of our first fiscal quarter ending June 30, 2020 . The
closure of these retail stores had a negative impact on our results
of operations during the fourth fiscal quarter as weexperienced
delays in shipment and acceptance of scheduled order shipments,
which we attribute to the retail store closures and other
uncertainties caused by the COVID-19 pandemic.
• The retail stores that we and our partners operate have begun to
reopen at a measured pace. We will continue to reopen our retail
stores as we determine appropriate and in line with guidance
provided by health officials, expert agencies and localauthorities.
Our decision regarding the appropriate timing to reopen our retail
stores will depend on a number of factors, including the safety of
our customers and employees, our ability to comply with government
orders and restrictions, and our ability to deliver products to our
customers. We expect the scope of allowable retail activities, as
well as retail consumer traffic patterns, to vary by geographic
region, including ongoing restrictions imposed by localgovernmental
authorities, the demand for our products within the region, and the
actual and expected impact of the COVID-19 pandemic on the region.
E-Commerce Business
• Even prior to mandatory retail store closures resulting from the
COVID-19 pandemic, we observed a meaningful shift in the way
consumers shop for products and make purchasing decisions, evidenced
by significant and prolonged decreases in consumer retail activity
as customers continue to migrate to online shopping. These trends
have been positively impacting the performance of our e-commerce
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business, while creating challenges and headwinds for our traditional retail
business, as well as the retail businesses of our wholesale customers and retail
partners.
• We operate our e-commerce business through various websites and
platforms, which have remained operational throughout the COVID-19
pandemic, and we expect they will continue to remain operational.
• During our fourth fiscal quarter, as well as our first fiscal
quarter ending June 30, 2020 , we observed strong demand across our
brands within our e-commerce business, especially for the UGG and
HOKA brands. We expect our wholesale customers that have an
established e-commerce presence will experience similar strong
demand trends as those we have experienced, although the trends may
vary from customer to customer. We continue to see demand for our
products, especially within the UGG and HOKA brands, from a number
of these wholesale customers, which we believe reflects strong
sell-through of our products within our partners' e-commerce
platforms. We expect our wholesale customers that have a greater
reliance on their retail store presence may experience more
significant adverse impacts from the COVID-19 pandemic.
• We expect our e-commerce business will continue to be a driver of
long-term growth, although the growth rate will beunpredictable and
may not be in line with our historical experience. We believe the
key factors impacting the growth rate will include consumer demand
for our products, our ability to fulfill orders through our limited
distribution center operations, the scope and duration of the
COVID-19 pandemic, and the impact of the COVID-19 pandemic on
consumer confidence and discretionary spending. However, we do not
expect the increased demand within our e-commerce businesses to
fully offset the negative pressure we are experiencing within our
wholesale and retail businesses due to the current retail
environment, especially as we move into the second and third fiscal
quarters.
Brand Strategy
• We are exercising discipline by focusing on key products that have
achieved sustained success with consumers, reducing the number and
types of products offered, delaying product launches and
consolidating seasonal collections.
• Our ongoing and strategic efforts to reduce the impact of
seasonality on our results of operations have had a meaningful
positive impact on the year-round performance of the HOKA and UGG
brands. While we expect to continue to focus on reducing the impact
of seasonality through innovation and the expansion of our product
offerings over the long-term, given the magnitude of the UGG brand
relative to our other brands, the effect of seasonality on our
aggregate net sales and results of operations may continue to be
significant. However, it is unclear whether seasonal impacts will be
minimized or exaggerated in future periods as a result of the
disruptions and uncertainties caused by the COVID-19 pandemic. This
uncertainty makes it more difficult for us to predict future demand
for our products and manage our manufacturing and inventory,
especially as we approach the typical high-selling season for the
UGG brand.
• Within the UGG brand, we have experienced strongsell-through of
certain product lines, including the slipper category in general, as
we believe consumers are seeking out luxurious comfort in the
current work-from-home environment. In addition, the UGG brand
continues to experience success through the introduction of
year-round products, improving the UGG brand's overallyear-round
performance. However, we are experiencing softness within the UGG
wholesale channel, especially within geographies impacted by
extensive retail store closures.
• Within the HOKA brand, we continue to see strong demandacross our
product offerings, which we believe is being fueled in part by an
even greater emphasis on running and outdoor exercise as consumers
seek to find healthy outlets in response to the COVID-19 pandemic.
The significant growth of the HOKA brand's year-roundperformance
product offerings as a percentage of our aggregate net sales has had
a meaningful positive impact on our seasonality trends, as well as
our overall financial results. However, despite the recent growth
and success of the HOKA brand, the impacts of the pandemic may cause
the growth rate of HOKA brand sales to decline.
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• The Sanuk and Teva brands are experiencing a
disproportionate
negative impact from the pandemic as the highest percentage of net
sales for these brands typically occur during our fourth fiscal
quarter and first fiscal quarter. We are actively monitoring the
cost structures associated with these brands.
Supply Chain
• We experienced certain disruptions to sourcing with our third-party
manufacturers during the fourth fiscal quarter. While these
disruptions have since been mitigated, it is possible there will be
disruptions in the future.
• Our Moreno Valley, California , distribution center, as well as our
global third-party logistics providers (3PLs), remain open and are
operating at reduced capacity and with limited and modified
operations. In order to promote the health and safety of our
distribution center employees, we have implemented enhanced safety
measures and protocols at our distribution center, including strict
social distancing requirements and heightened cleaning of the
facility in accordance with Center for Disease Control and
Prevention guidelines. Due to the social distancingrequirements we
have implemented, we are limiting the number of employees on-site
relative to our typical personnel capacity. We are experiencing, and
our 3PLs are experiencing, certain operational and logistical
challenges as a result of limited and modified operations, including
some delays in the shipments of our products. We are working to
mitigate the impact of limited and modified operations on our peak
selling periods, but we may not be successful in these efforts.
• We are encountering challenges attracting and retaining quality
candidates to staff our distribution center operations as we
increasingly compete with other companies with growing e-commerce
operations. For example, during the past two fiscal years, we have
significantly increased certain distribution center employee wages
in an effort to attract and retain talent. Although growing
unemployment rates resulting from the COVID-19 pandemic may result
in a larger short-term candidate pool, we may face ongoing
challenges with recruiting employees as our competitors grow their
e-commerce channels and require additional warehouse and
distribution center staff.
Omni-Channel Strategy
• We have implemented a product segmentation strategy, as well
as an
allocation strategy for the UGG brand's core Classicsfranchise in
the US wholesale marketplace. 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.
Similarly, we are implementing a multi-year marketplace reset
strategy in Europe and Asia to drive UGG brand heat. We expect the
COVID-19 pandemic will delay or mitigate the benefits we may receive
from these strategies.
• 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 .
• In response to the COVID-19 pandemic, we have enhanced our focus on
digital marketing as we seek to target consumers within the
work-from-home environment and promote products that are desirable
based on current consumer preferences, working conditions and
lifestyle choices.
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Liquidity
• We believe we are in a strong financial position to respond to the
disruptions and uncertainties caused by the COVID-19 pandemic. As of
March 31, 2020 , our cash and cash equivalents balance was
In addition, we had available borrowings of $469,473 under our
existing revolving credit facilities, providing a liquidity position
of over $1,000,000 as of March 31, 2020 . For additionalinformation,
see the sections entitled "Liquidity" and "Capital Resources" below.
• We are temporarily pausing repurchases under our StockRepurchase
Programs due to the disruption and uncertainty caused by the
COVID-19 pandemic and our focus on liquidity and cash management.
• We are working closely with our wholesale customers, as well as our
manufacturers and suppliers, to manage accounts receivable and
accounts payable to maximize the availability of workingcapital. Operating Expenses
• To mitigate the adverse impact the COVID-19 pandemic may have on our
business and operations, we have implemented a number of temporary
measures to reduce operating expenses, including:
• restricting employee travel;
• canceling or postponing certain events, trainings, and conferences;
• converting meetings with current and prospective
customers to
a virtual platform;
• suspending hiring of certain non-essential employees and
annual salary increases;
• eliminating or deferring discretionary expenditures;
• seeking payment accommodations or deferrals; and
• furloughing certain retail employees while stores are closed.
• We also believe the significant changes we implemented in connection
with our previously completed restructuring and operating profit
improvement plans will help mitigate any potential negative impacts
on our gross margins resulting from the COVID-19 pandemic.
Completed Restructuring Plan
DuringFebruary 2016 , we announced the implementation of a multi-year restructuring plan designed to realign our brands across our Fashion Lifestyle and Performance Lifestyle groups, optimize our worldwide owned retail store fleet, and consolidate our management and operations that was designed to reduce overhead costs and create operating efficiencies while improving collaboration across brands. As ofMarch 31, 2019 , we completed our restructuring plan and incurred cumulative restructuring charges of$55,619 against selling, general, and administrative (SG&A) expense. In addition, the cumulative annualized SG&A savings realized as ofMarch 31, 2019 by reportable operating segment were, approximately, as follows: Amount UGG brand wholesale$ 1,000 Sanuk brand wholesale 1,000 Other brands wholesale 1,000 Direct-to-Consumer 43,000 Unallocated overhead costs 17,000 Total$ 63,000
We currently do not anticipate incurring additional restructuring charges in connection with this restructuring plan.
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Completed Operating Profit Improvement Plan
DuringFebruary 2017 , we announced that we would implement an operating profit improvement plan to execute various business transformation initiatives to further reduce expenses and improve gross margins. As ofMarch 31, 2019 , we successfully completed our plan and achieved in excess of$100,000 of combined net annualized operating profit improvement under our restructuring and operating profit improvement plans. We will continue to apply the lessons learned in our completed plans by pursuing opportunities to further optimize profitability and seeking to enhance results of operations throughout our business.
Reportable Operating Segment Overview
Our six reportable operating segments include the worldwide wholesale operations of the UGG brand, HOKA brand, Teva brand, Sanuk brand, and Other brands, as well as DTC. Information reported to the Chief Operating Decision Maker (CODM), who is our Principal Executive Officer, 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 the consistent delivery of quality
and luxuriously comfortable footwear, apparel, and accessories.
• 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. Originally designed for ultra-runners, the brand
now appeals 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.
• Increased brand awareness through enhanced marketing activations.
• 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. 40
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Retail Business. 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 ofMarch 31, 2020 , we had a total of 145 global retail stores, which includes 76 concept stores and 69 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. We will continue to evaluate our retail store fleet strategy in response to changes in consumer demand and retail store traffic patterns. 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. Shop-in-Shop Stores. Included in the total count of global concept stores are 21 shop-in-shop (SIS) stores, defined as concept stores for which we own the inventory and that are operated by us or non-employees within a department store, which we lease from the store owner by paying a percentage of SIS 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. E-Commerce Business. 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 ofMarch 31, 2020 , we operated our e-commerce business through an aggregate of 28 Company-owned websites and mobile platforms in ten different countries.
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 Annual 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 accounting principles generally accepted inthe United States (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 Annual 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 toUnited States (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 results of operations and are largely outside of our control. 41
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Seasonality
Our business is seasonal, with the highest percentage of UGG and Koolaburra 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 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 growing 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. However, it is unclear whether seasonal impacts will be minimized or exaggerated in future periods as a result of the disruptions and uncertainties caused by the COVID-19 pandemic.
Refer to Note 14, "Quarterly Summary of Information (Unaudited)," of our consolidated financial statements in Part IV within this Annual Report for further information on our results of operations by quarterly period.
Result of Operations
Year Ended
Years Ended March 31,
2020 2019 Change
Amount % Amount % Amount %
Net sales $ 2,132,689 100.0 % $ 2,020,437 100.0 % $ 112,252 5.6 %
Cost of sales 1,029,016 48.2 980,187 48.5 (48,829 ) (5.0 )
Gross profit 1,103,673 51.8 1,040,250 51.5 63,423 6.1
Selling, general and
administrative expenses 765,538 35.9 712,930 35.3 (52,608 ) (7.4 )
Income from operations 338,135 15.9 327,320 16.2 10,815 3.3
Other income, net (2,731 ) (0.1 ) (1,614 ) (0.1 ) 1,117 69.2
Income before income taxes 340,866 16.0 328,934 16.3 11,932 3.6
Income tax expense 64,724 3.1 64,626 3.2 (98 ) (0.2 )
Net income 276,142 12.9 264,308 13.1 11,834 4.5
Total other comprehensive
loss, net of tax (2,905 ) (0.1 ) (9,671 ) (0.5 ) 6,766 (70.0 )
Comprehensive income $ 273,237 12.8 % $ 254,637 12.6 % $ 18,600 7.3 %
Net income per share
Basic $ 9.73 $ 8.92 $ 0.81
Diluted $ 9.62 $ 8.84 $ 0.78
Years Ended March 31,
2020 2019 Change
Amount Amount Amount %
Net sales by location
US $ 1,401,692 $ 1,278,358 $ 123,334 9.6 %
International 730,997 742,079 (11,082 ) (1.5 )
Total $ 2,132,689 $ 2,020,437 $ 112,252 5.6 %
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Years Ended March 31,
2020 2019 Change
Amount Amount Amount %
Net sales by brand and channel
UGG brand
Wholesale $ 892,990 $ 888,347 $ 4,643 0.5 %
Direct-to-Consumer 627,817 644,520 (16,703 ) (2.6 )
Total 1,520,807 1,532,867 (12,060 ) (0.8 )
HOKA brand
Wholesale 277,097 185,057 92,040 49.7
Direct-to-Consumer 75,527 38,092 37,435 98.3
Total 352,624 223,149 129,475 58.0
Teva brand
Wholesale 119,108 119,390 (282 ) (0.2 )
Direct-to-Consumer 18,897 18,022 875 4.9
Total 138,005 137,412 593 0.4
Sanuk brand
Wholesale 39,463 69,791 (30,328 ) (43.5 )
Direct-to-Consumer 11,696 12,822 (1,126 ) (8.8 )
Total 51,159 82,613 (31,454 ) (38.1 )
Other brands
Wholesale 67,175 42,818 24,357 56.9
Direct-to-Consumer 2,919 1,578 1,341 85.0
Total 70,094 44,396 25,698 57.9
Total $ 2,132,689 $ 2,020,437 $ 112,252 5.6 %
Total Wholesale $ 1,395,833 $ 1,305,403 $ 90,430 6.9 %
Total Direct-to-Consumer 736,856 715,034 21,822 3.1
Total $ 2,132,689 $ 2,020,437 $ 112,252 5.6 %
Despite the negative impact of the COVID-19 pandemic on net sales during our
fourth fiscal quarter, total net sales for the full fiscal year increased
primarily due to higher HOKA 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 2.8% in total volume of pairs sold to 36,800 from
35,800 compared to the prior period. On a constant currency basis, net sales
increased by 6.5%, compared to the prior period. Drivers of significant changes
in net sales are as follows:
• 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 Other brands increased primarily due to
continued customer penetration in US family value wholesale accounts
for the Koolaburra brand.
• Wholesale net sales of the UGG brand increased due to higher domestic
net sales driven by the slipper collection and the sell-in of fall
and winter products, primarily for men's and kid's product lines,
partially offset by lower international sales driven by a multi-year
marketplace reset in Europe and European macroeconomic factors, as
well as COVID-19 related sales losses in the fourth fiscal quarter.
On a constant currency basis, wholesale net sales of the UGG brand
increased by 2.1%, compared to the prior period.
• Wholesale net sales of the Sanuk brand decreased due to the strategic
decision to exit the warehouse channel, lower performance within US
surf specialty wholesale accounts, as well as COVID-19 related sales
losses in the fourth fiscal quarter during the Sanuk brands' peak
selling season.
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• Comparable DTC net sales for the 52 weeks endedMarch 29 ,
2020
increased by 5.0%, 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. DTC net sales were negatively
impacted by the retail store closures during the fourth fiscal
quarter compared to the prior period due to COVID-19.
• International net sales, which are included in the reportable
operating segment net sales presented above, decreased by 1.5%,
compared to the prior period. International net salesrepresented
34.3% and 36.7% of total net sales for the years ended March 31, 2020
and 2019, respectively. The decrease was primarily due to lower net
sales for the UGG brand in Europe and Asia and the COVID-19 related
sales losses in the fourth fiscal quarter, partially offset by higher
net sales for the HOKA brand in our international markets and higher
sales for the Teva brand in Asia .
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, partially offset by unfavorable changes in foreign currency exchange
rates and higher promotions in Europe and Asia .
Selling, General and Administrative Expenses. The net increase in SG&A expenses, compared to the prior period, was primarily the result of the following:
• Increased variable advertising and promotion expenses of
approximately $26,500 , primarily due to higher marketing costs to
drive sales for the HOKA and UGG brands.
• Increased operating expenses of approximately $14,500 ,primarily due
to higher professional, consulting, and travel expenses.
• Increased other variable selling expenses of approximately
including transaction fees, warehousing and shipping costs, primarily
due to higher e-commerce sales and commissions.
• Increased payroll costs of approximately $8,200 , primarily due to
higher net payroll, including warehousing, partially offset by lower
performance-based compensation for cash bonuses.
• Increased expenses for allowances for trade accountsreceivable of
approximately $2,100 .
• Decreased depreciation and amortization expenses ofapproximately
$6,200 , primarily due to certain property and equipment and intangible assets being fully amortized during the current period. • Decreased rent and occupancy expenses of approximately$5,300 , primarily due to lower percentage rent and lower store count, as well as the completion of the consolidation of our warehouses
resulting in
the closure of our Camarillo distribution center, partially offset by
retail store-related operating lease asset impairment charges in the
current period.
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Income from Operations. Income from operations by reportable operating segment
was as follows:
Years Ended March 31,
2020 2019 Change
Amount Amount Amount %
Income (loss) from operations
UGG brand wholesale $ 303,908 $ 300,761 $ 3,147 1.0 %
HOKA brand wholesale 61,860 35,717 26,143 73.2
Teva brand wholesale 30,736 27,939 2,797 10.0
Sanuk brand wholesale 3,212 12,781 (9,569 ) (74.9 )
Other brands wholesale 16,087 10,411 5,676 54.5
Direct-to-Consumer 182,548 185,449 (2,901 ) (1.6 )
Unallocated overhead costs (260,216 ) (245,738 ) (14,478 ) (5.9 )
Total $ 338,135 $ 327,320 $ 10,815 3.3 %
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 slightly
higher SG&A expenses as a percentage of net sales. Drivers of significant net
changes in income from operations, compared to the prior period, are as follows:
• 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 Other brandswholesale was
due to higher net sales, partially offset by higher SG&A expenses,
primarily driven by higher variable marketing and selling expenses.
• 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 expenses.
• 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 variablemarketing and
selling expenses.
• The decrease in income from operations of DTC was primarily due to
higher SG&A expenses as a percentage of net sales, primarily driven
by higher variable marketing and selling expenses and retail
store-related asset impairment charges in the current period, as well
as lower gross margins, partially offset by lower overall retail
store operating costs due to prior period store closures.
• The increase in unallocated overhead costs was primarily due to
higher operating expenses, including for payroll, professional,
consulting, and other variable warehousing costs, as well as higher
foreign currency-related losses, partially offset by lower rent and
occupancy expenses for our warehouse due to the consolidation of our
distribution centers and lower depreciation expense for our corporate
headquarters.
Other Income, Net. The increase in total other income, net, compared to the prior period, was primarily due to an increase in interest income driven by higher average invested cash balances, partially offset by higher reserves for penalties and interest on uncertain tax positions.
Income Tax Expense. Income tax expense and our effective income tax rate were as
follows:
Years Ended March 31,
2020 2019
Income tax expense $ 64,724 $ 64,626
Effective income tax rate 19.0 % 19.6 %
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The decrease 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 for the year endedMarch 31, 2020 , as well as higher net tax benefits, primarily driven by the favorable settlement of a state income tax audit and net return-to-provision tax benefits completed during the current period, partially offset by additional reserves for uncertain tax positions. Foreign income before income taxes was$134,755 and$147,204 and worldwide income before income taxes was$340,866 and$328,934 during the years endedMarch 31, 2020 and 2019, 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 years endedMarch 31, 2020 and 2019, we did not generate significant pre-tax earnings from any countries which do not impose a corporate income tax. As ofMarch 31, 2020 , we had$177,229 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. A small portion of our unremitted accumulated earnings of non-US subsidiaries, for which no US federal or state income tax have been provided, are currently expected to be reinvested outside of the US indefinitely. Such earnings would become taxable upon repatriation by means of the remittance of taxable dividends or upon the sale or liquidation of these subsidiaries. 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 results of operations 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. For further information on the impacts of the Tax Cuts and Jobs Act (Tax Reform Act), refer to Note 5, "Income Taxes," of our consolidated financial statements in Part IV within this Annual Report. 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. Total Other Comprehensive Loss, Net of Tax. 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 Chinese and European foreign currency exchange rates.
Liquidity
We finance our working capital and operating requirements using a combination of our cash and cash equivalents balances, cash provided from 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 historical 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. While subject to the uncertainty surrounding the COVID-19 pandemic, we believe our cash and cash equivalents balances, cash provided from 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. As a result of the Tax Reform Act and the transition of the US tax regime from a worldwide tax system to a territorial tax system, we repatriated$150,000 and$130,000 of cash and cash equivalents during the years endedMarch 31, 2020 and 2019, respectively. As ofMarch 31, 2020 , we had$177,229 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 46
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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. For further information on the impacts of the Tax Reform Act, refer to Note 5, "Income Taxes," of our consolidated financial statements in Part IV within this Annual Report. 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 ofMarch 31, 2020 , 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. We are temporarily pausing repurchases under our Stock Repurchase Programs due to the disruption and uncertainty caused by the COVID-19 pandemic and our focus on liquidity and cash management, although we retain the discretion to commence repurchases in future periods. Our liquidity may be further impacted by additional factors, including our results of operations, 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. InSeptember 2018 , we refinanced in full and terminated our Second Amended and Restated Credit Agreement dated as ofNovember 13, 2014 , as amended. The refinanced revolving credit facility agreement (Credit Agreement) is withJPMorgan Chase Bank, N.A . (JPMorgan), as the administrative agent,Citibank, N.A .,Comerica Bank (Comerica) andHSBC Bank USA, N.A. , as co-syndication agents,MUFG Bank, Ltd. andUS Bank National Association as co-documentation agents, and the lenders party thereto, with JPMorgan and Comerica acting as joint lead arrangers and joint bookrunners. The Credit Agreement provides for a five-year,$400,000 unsecured revolving credit facility (Primary Credit Facility), contains a$25,000 sublimit for the issuance of letters of credit, and matures onSeptember 20, 2023 .
As of
China Credit Facility. Our revolving credit facility in
As of
Japan Credit Facility. We have renewed the Japan Credit Facility throughJanuary 31, 2021 substantially under the terms of the original agreement. Our revolving credit facility inJapan (Japan Credit Facility) is an uncommitted revolving line of credit of up toJPY 3,000,000 , or$27,746 .
As of
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Mortgage. As ofMarch 31, 2020 , we had an outstanding principal balance under the mortgage, secured by the property on which our corporate headquarters is located, of$30,901 . 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 consolidated financial statements included in Part IV within this Annual Report for further information on our revolving credit facilities and our mortgage.
Cash Flows
The following table summarizes our cash flows for the periods presented:
Years Ended March 31,
2020 2019 Change
Amount Amount Amount %
Net cash provided by operating activities $ 286,334 $ 359,505 $ (73,171 ) (20.4 )%
Net cash used in investing activities (31,964 ) (29,018 ) (2,946 ) (10.2 )
Net cash used in financing activities (192,114 ) (167,193 ) (24,921 ) (14.9 )
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 year ended
March 31, 2020 , compared to the prior period, was primarily due to a net
negative change in operating assets and liabilities of $74,075 , partially offset
by a positive net change in net income after non-cash adjustments of $904 . The
changes in operating assets and liabilities were primarily due to net negative
changes in inventories, net, income taxes payable, other assets, other accrued
expenses, and income tax receivable, partially offset by net positive changes in
trade accounts receivable, net.
Investing Activities. The increase in net cash used in investing activities
during the year ended March 31, 2020 , compared to the prior period, was
primarily due to higher capital expenditures on information systems, hardware,
and software, partially offset by lower expenditures for warehouse improvements
due to the completion of the Moreno Valley, California distribution center
during the prior period.
Financing Activities. The increase in net cash used in financing activities
during the year ended
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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Contractual Obligations
The following table summarizes our contractual obligations as of
Payments Due by Period
Less than More than
Total 1 Year 1-3 Years 3-5 Years 5 Years
Operating lease obligations (1) $ 296,738 $ 53,212 $ 93,456 $ 68,218 $ 81,852
Purchase obligations for product
(2) 361,881 361,881 - - -
Purchase obligations for
commodities (3) 185,969 105,665 80,304 - -Other purchase obligations (4) 46,059 28,613 17,446
- -
Mortgage obligation (5) 43,748 2,168 4,336 4,336 32,908
Net unrecognized tax benefits
(6) 5,317 - 5,317 - -
Total $ 939,712 $ 551,539 $ 200,859 $ 72,554 $ 114,760
(1) Our operating lease commitments consist primarily of building leases
for our retail locations, distribution centers, and regional offices,
and include the undiscounted cash lease payments owed under the terms
of our operating lease agreements.
(2) Our purchase obligations for product consist mostly of open purchase
orders issued in the ordinary course of business. Outstanding purchase
orders are primarily issued to our third-party manufacturers and most
are expected to be paid within one year. We can cancel asignificant
portion of the purchase obligations under certain circumstances;
however, the occurrence of such circumstances is generallylimited. As
a result, the amount does not necessarily reflect the dollar amount of
our binding commitments or minimum purchase obligations, and instead
reflects an estimate of our future payment obligations based on
information currently available. Due to the impacts of theCOVID-19
pandemic on the retail environment and consumer spending patterns, we
are currently reviewing our inventory purchase obligations with our
third-party manufacturers and may delay or cancel certain product
orders that could result in changes to the currently reported amount.
(3) Our purchase obligations for commodities include sheepskin and
leather, and represent remaining commitments under existing supply
agreements, which are subject to minimum volume commitments. We expect
that purchases made by us under these agreements in the ordinary
course of business will eventually exceed the minimum commitment
levels.
(4) Our other purchase obligations generally consist of non-cancellable
minimum commitments for capital expenditures, obligations under
service contracts, and requirements to pay promotional expenses, which
are due periodically during fiscal years 2021 through 2024.
As of March 31, 2020 , we had $9,676 of commitments for future capital
expenditures, primarily related to retail store build-out of leasehold
improvements for a new flagship store location that is currently expected to
replace an existing flagship store during the third quarter of the fiscal year
ending March 31, 2021 , as well as continued investments in our warehouse and
distribution center located in Moreno Valley, California .
We estimate that the capital expenditures for the fiscal year ending March 31,
2021 , including the aforementioned commitments, will range from approximately
$45,000 to $50,000 . We anticipate these expenditures will primarily relate to
continued investment in our primary warehouse and distribution center, as well
as IT infrastructure, system upgrade costs, and the build-out of a new flagship
retail store, as well as other fixtures and upgrades for our global retail
stores. However, the actual amount of our future capital expenditures may differ
significantly from this estimate depending on numerous factors, including the
timing of facility openings, as well as unforeseen needs to replace existing
assets, the impacts of the COVID-19 pandemic, and the timing of other
expenditures.
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(5) Our mortgage obligation consists of a mortgage secured by our
corporate headquarters property. Payments represent principal and
interest amounts. Refer to Note 6, "Revolving Credit Facilities and
Mortgage Payable," of our consolidated financial statements in Part IV
within this Annual Report for further information on our mortgage
obligation and payments.
(6) Net unrecognized tax benefits are defined as gross unrecognized tax
benefits, less federal benefit for state income taxes, related to
uncertain tax positions taken in our income tax return that would
impact our effective tax rate, if recognized. As of March 31, 2020 ,
the timing of future cash outflows is highly uncertain related to
statute of limitations liabilities of $11,368 , therefore we are unable
to make a reasonable estimate of the period of cash settlement. Refer
to Note 5, "Income Taxes," of our consolidated financialstatements in
Part IV within this Annual Report for further information on our
uncertain tax positions.
Refer to Note 7, "Leases and Other Commitments," of our consolidated financial
statements in Part IV within this Annual Report for further information on our
operating leases, purchase obligations, capital expenditures, and other
contractual obligations and commitments.
Impact of Foreign Currency Exchange Rate Fluctuations
Foreign currency exchange rate fluctuations had an incremental negative impact
on the years ended
Refer to "Results of Operations," above within this Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," the consolidated statements of comprehensive income, and Note 9, "Derivative Instruments," of our consolidated financial statements in Part IV within this Annual Report for further information on the impact of foreign currency exchange rate fluctuations on our results of operations.
Critical Accounting Policies and Estimates
Management must make certain estimates and assumptions that affect the amounts reported in the consolidated financial statements, based on 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. Management believes the following critical accounting estimates are most significantly affected by judgments and estimates used in the preparation of our consolidated financial statements: allowances for doubtful accounts; estimated returns liability; sales discounts and customer chargebacks; inventory valuations; valuation of goodwill, intangible and other long-lived assets; and performance-based stock compensation. The full impact of the COVID-19 pandemic is unknown and cannot be reasonably estimated for these key estimates. However, we made appropriate accounting estimates based on the facts and circumstances available as of the reporting date. To the extent there are differences between these estimates and actual results, our consolidated financial statements may be materially affected.
Refer to Note 1, "General," of our consolidated financial statements in Part IV within this Annual Report for a discussion of our significant accounting policies and use of estimates, as well as the impact of recent accounting pronouncements.
Revenue Recognition. Revenue is recognized when a performance obligation is
completed at a point in time and when the customer has obtained control. Control
passes to the customer when they have the ability to direct the use of, and
obtain substantially all the remaining benefits from, the goods transferred. The
amount of revenue recognized is based on the transaction price, which represents
the invoiced amount less known actual amounts or estimates of variable
consideration. We recognize revenue and measure the transaction price net of
taxes, including sales taxes, use taxes, value-added taxes, and some types of
excise taxes, collected from customers and remitted to governmental authorities.
We present revenue gross of fees and sales commissions. Sales commissions are
expensed as incurred and are recorded in SG&A expenses in the consolidated
statements of comprehensive income.
Wholesale and international distributor revenue are each recognized either when
products are shipped or when delivered, depending on the applicable contract
terms. Retail store and e-commerce revenue are recognized at the point of sale
and upon shipment, respectively. Shipping and handling costs paid to third-party
shipping companies are recorded as cost of sales in the consolidated statements
of comprehensive income. Shipping and handling costs are a fulfillment service,
and, for certain wholesale and all e-commerce transactions, revenue is
recognized when the customer is deemed to obtain control upon the date of
shipment. Refer to Note 2, "Revenue Recognition," of our consolidated financial
statements in Part IV within this Annual Report for further information.
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Accounts Receivable Allowances. The following table summarizes critical accounting estimates for accounts receivable allowances and reserves:
As of March 31,
2020 2019
% of Gross % of Gross
Trade Accounts Trade Accounts
Amount Receivable Amount Receivable
Gross trade accounts receivable $ 206,742 100.0 % $ 197,426 100.0 %
Allowance for doubtful accounts (6,989 ) (3.4 ) (5,073 ) (2.6 )
Allowance for sales discounts (1,030 ) (0.5 ) (710 ) (0.4 )
Allowance for chargebacks (13,127 ) (6.3 ) (13,041 ) (6.6 )
Trade accounts receivable, net $ 185,596 89.8 % $ 178,602 90.5 %
Allowance for Doubtful Accounts. We provide an allowance against trade accounts
receivable for estimated losses that may result from customers' inability to
pay. We determine the amount of the allowance by analyzing known uncollectible
accounts, aged trade accounts receivable, economic conditions and forecasts,
historical experience, and the customers' creditworthiness. Trade accounts
receivable that are subsequently determined to be uncollectible are charged or
written off against this allowance. The allowance includes specific allowances
for trade accounts, of which all or a portion are identified as potentially
uncollectible based on known or anticipated losses. Our use of different
estimates and assumptions could produce different financial results. For
example, a 1.0% change in the rate used to estimate the reserve for accounts
which we consider having credit risk and are not specifically identified as
uncollectible would change the allowance for doubtful accounts as of March 31,
2020 by approximately $1,600 .
Allowance for Sales Discounts. We provide a trade accounts receivable allowance
for sales discounts for our wholesale channel sales, which reflects a discount
that our customers may take, generally based on meeting certain order, shipment
or prompt payment terms. We use the amount of the discounts that are available
to be taken against the period end trade accounts receivable to estimate and
record a corresponding reserve for sales discounts.
Allowance for Chargebacks. We provide a trade accounts receivable allowance for
chargebacks and markdowns from wholesale customers. When customers pay their
invoices, they may take deductions against their invoices that can include
chargebacks for price differences, markdowns, short shipments, and other
reasons. Therefore, we record an allowance for known or unknown circumstances
based on historical trends related to the timing and amount of chargebacks taken
against wholesale channel customer invoices.
Sales Return Liability. The following tables summarize estimates for our sales
return liability as a percentage of the most recent quarterly net sales by
channel:
Three Months Ended March 31,
2020 2019
Amount % of Net Sales Amount % of Net Sales
Net Sales
Wholesale $ 230,677 61.5 % $ 237,491 60.3 %
Direct-to-Consumer 144,233 38.5 156,639 39.7
Total $ 374,910 100.0 % $ 394,130 100.0 %
As of March 31,
2020 2019
Amount % of Net Sales Amount* % of Net Sales
Sales Return Liability
Wholesale $ 21,846 9.5 % $ 21,538 9.1 %
Direct-to-Consumer 3,821 2.6 3,249 2.1
Total $ 25,667 6.8 % $ 24,787 6.3 %
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Reserves are recorded for anticipated future returns of goods shipped prior to the end of the reporting period. In general, we accept returns for damaged or defective products for up to one year. We also have a policy whereby returns are accepted from DTC customers for up to 30 days from point of sale for cash or credit. Amounts of these reserves are based on known and actual returns, historical returns, and any recent events that could result in a change from historical return rates. Sales returns are a contract asset for the right to recover product-related inventory and a contract liability for advance consideration obtained prior to satisfying a performance obligation. Changes to the sales return liability are recorded against gross sales for the contract liability and cost of sales for the contract asset. For our wholesale channel, we base our estimate of sales returns on any approved customer requests for returns, historical returns experience, and any recent events that could result in a change from historical returns rates, among other factors. For our DTC channel and reportable operating segment, we estimate sales returns using a lag compared to the same prior period and consider historical returns experience and any recent events that could result in a change from historical returns, among other factors. Our use of different estimates and assumptions could produce different financial results. For example, a 1.0% change in the rate used to estimate the percentage of sales expected to ultimately be returned would change the liability for total returns as ofMarch 31, 2020 by approximately$3,000 . Inventory Reserves. The following tables summarize estimates for our inventory reserves: As of March 31, 2020 2019 % of Gross % of Gross Amount Inventory Amount Inventory Gross Inventories$ 323,847 100.0 %$ 288,565 100.0 % Write-down of inventories (12,227 ) (3.8 ) (9,723 ) (3.4 ) Inventories, net$ 311,620 96.2 %$ 278,842 96.6 % We review inventory on a regular basis for excess, obsolete, and impaired inventory to evaluate write-downs to the lower of cost or net realizable value. Our use of different estimates and assumptions could produce different financial results. For example, a 10.0% change in the estimated selling prices of our potentially obsolete inventory would change the inventory write-down reserve as ofMarch 31, 2020 by approximately$1,900 . Operating Lease Assets and Lease Liabilities. BeginningApril 1, 2019 , we adopted the new lease standard on a modified retrospective basis, as set forth in Accounting Standards Update No. 2016-02, Leases, as amended. Accordingly, the comparative consolidated financial statements have not been adjusted and continue to be reported under legacy US GAAP. As a result, as ofApril 1, 2019 , we recognized the following in our consolidated financial statements: • A$230,048 increase to total assets due to the recognition
of
right-of-use (ROU) assets, net of prior legacy US GAAPlease-related
balances for deferred rent obligations and tenant allowances of
$27,895 , as previously recorded in other accrued expenses, deferred
rent obligations, and other long-term liabilities, in the
consolidated balance sheets. In addition, we recorded a
corresponding $254,538 increase to total liabilities due to the
recognition of lease liabilities, net of a prior legacy US GAAP
lease-related balance for prepaid rent of $4,846 , as previously
recorded in prepaid expenses, in the consolidated balance sheets.
ROU assets and lease liabilities include lease obligations for
operating leases for retail stores, showrooms, offices, and
distribution facilities. ROU assets and related lease liabilities
are presented as operating lease assets and operating lease
liabilities in the consolidated balance sheets.
• A net cumulative effect after-tax decrease to opening retained
earnings of $1,068 in the consolidated balance sheets due to
the impairment of select operating lease assets related to retail
stores whose fixed assets had been previously impaired and for which
the initial carrying value of the operating lease assets were
determined to be above fair market value on adoption.
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• No material effect on the consolidated statements of
comprehensive
income as the classification and recognition of lease cost did not
materially change from legacy US GAAP. Similarly, it did not have a
material impact on our liquidity or on its debt covenantcompliance
under current agreements including its borrowing strategy subject to
leverage ratios. However, it did result in additionaldisclosures
and presentation changes to the consolidated statements of cash
flows in the current period, including supplemental cash flow
disclosure, as well as expanded disclosures on existing and new
lease commitments.
The adoption of the new lease standard had the following impact on our accounting policies applied to our consolidated financial statements:
• We recognize operating lease assets and lease liabilities in the
consolidated balance sheets on the lease commencement date, based on
the present value of the outstanding lease payments over the
reasonably certain lease term. The lease term includes the
non-cancelable period at the lease commencement date, plus any
additional periods covered by our options to extend (or not to
terminate) the lease that are reasonably certain to beexercised, or
an option to extend (or not to terminate) a lease that is controlled
by the lessor.
• We discount unpaid lease payments using the interest rate implicit
in the lease or, if the rate cannot be readily determined, its
incremental borrowing rate (IBR). Generally, we cannotdetermine the
interest rate implicit in the lease because we do not have access to
the lessor's estimated residual value or the amount of the lessor's
deferred initial direct costs. Therefore, we generally derive a
discount rate at the lease commencement date by utilizing our IBR,
which is based on what we would have to pay on acollateralized
basis to borrow an amount equal to our lease payments under similar
terms. Because we do not currently borrow on a collateralized basis
under our revolving credit facilities, we use the interest rate we
pay on our noncollateralized borrowings under our Primary Credit
Facility as an input for deriving an appropriate IBR, adjusted for
the amount of the lease payments, the lease term, and the effect on
that rate of designating specific collateral with a value equal to
the unpaid lease payments for that lease.
Refer to Note 1, "General," and Note 7, "Leases and Other Commitments," of our
consolidated financial statements in Part IV within this Annual Report for
further information, including more details of our accounting policy elections
and expanded disclosures required under the new lease standard.
Goodwill and Indefinite-Lived Intangible Assets. We do not amortize goodwill and
indefinite-lived intangible assets but instead test for impairment annually, or
when an event occurs or changes in circumstances indicate the carrying value may
not be recoverable at the reporting unit level. First, we determine if, based on
qualitative factors, it is more likely than not that an impairment exists.
Qualitative factors considered include significant or adverse changes in
customer demand, historical financial performance, changes in management or key
personnel, macroeconomic and industry conditions, and the legal and regulatory
environment. If the qualitative assessment indicates that it is more likely than
not that an impairment exists, then a quantitative assessment is performed. The
quantitative assessment requires an analysis of several best estimates and
assumptions, including future sales and results of operations, and other factors
that could affect fair value or otherwise indicate potential impairment. We also
consider the reporting units' projected ability to generate income from
operations and positive cash flow in future periods, as well as perceived
changes in consumer demand and acceptance of products, or factors impacting the
industry generally. The fair value assessment could change materially if
different estimates and assumptions were used.
During the years ended March 31, 2020 and 2019, we performed our annual
impairment assessment and evaluated the UGG and HOKA brands' wholesale
reportable operating segment goodwill as of December 31st and evaluated our Teva
indefinite-lived trademarks as of October 31st . Based on the carrying amounts of
the UGG and HOKA brands' goodwill and Teva brand indefinite-lived trademarks,
each of the brands' actual fiscal year sales and results of operations, and the
brands' long-term forecasts of sales and results of operations as of their
evaluation dates, we concluded that these assets were not impaired.
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Definite-Lived Intangible and Other Long-Lived Assets. Definite-lived intangible and other long-lived assets, including definite-lived trademarks, machinery and equipment, internal-use software, operating lease assets, and leasehold improvements, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. At least quarterly, we evaluate factors that would necessitate an impairment assessment, which include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the observable market value of an asset, among others. When an impairment-triggering event has occurred, we test for recoverability of the asset group's carrying value using estimates of undiscounted future cash flows based on the existing service potential of the applicable asset group. In determining the service potential of a long-lived asset group, we consider the remaining useful life, cash-flow generating capacity, and physical output capacity. These estimates include the undiscounted future cash flows associated with future expenditures necessary to maintain the existing service potential. These assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If impaired, the asset or asset group is written down to fair value based on either discounted future cash flows or appraised values. An impairment loss, if any, would only reduce the carrying amount of long-lived assets in the group based on the fair value of the asset group.
We did not identify any definite-lived intangible asset impairments during the
years ended
During the years endedMarch 31, 2020 and 2019, we recorded impairment losses for other long-lived assets, primarily for certain retail store operating lease assets and related leasehold improvements due to performance or store closures of$1,365 and$180 , respectively, within our DTC reportable operating segment in SG&A expenses in the consolidated statements of comprehensive income. Refer to Note 1, "General," and Note 3, "Goodwill and Other Intangible Assets," of our consolidated financial statements in Part IV within this Annual Report for further information. Performance-Based Compensation. In accordance with applicable accounting guidance, we recognize performance-based compensation expense, including performance-based stock compensation and annual cash bonus compensation, when it is deemed probable that the applicable performance criteria will be met. Performance-based compensation does not include time-based awards subject only to service-based conditions. We evaluate the probability of achieving the applicable performance criteria on a quarterly basis. Our probability assessment can fluctuate from quarter to quarter as we assess our projected results against performance criteria. As a result, the related performance-based compensation expense we recognize may also fluctuate from period to period. At the beginning of each fiscal year, our Compensation Committee reviews our results of operations from the prior fiscal year, as well as the financial and strategic plan for future fiscal years. Our Compensation Committee then establishes specific annual financial and strategic goals for each executive. Vesting of performance-based stock compensation or recognition of cash bonus compensation is based on our achievement of certain targets for annual revenue, operating income, pre-tax income, and earnings per share, as well as achievement of pre-determined individual financial performance criteria that is tailored to individual employees based on their roles and responsibilities with us. The performance criteria, as well as our annual targets, differ each fiscal year and are based on many factors, including our current business stage and strategies, our recent financial and operating performance, expected growth rates over the prior fiscal year's performance, business and general economic conditions and market and peer group analysis. Performance-based compensation expense decreased$14,883 during the year endedMarch 31, 2020 compared to the year endedMarch 31, 2019 . The primary reason for this decrease was the partial achievement of the performance criteria governing our cash bonuses compared to an over achievement in the prior period. Performance-based compensation expense is recorded in SG&A expenses in the consolidated statements of comprehensive income.
Refer to Note 8, "Stock-Based Compensation," of our consolidated financial statements in Part IV within this Annual Report for further information on our performance-based stock compensation.
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Income Taxes. Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will be in effect for the years in which those tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. We believe it is more likely than not that forecasted income, together with future reversals of existing taxable temporary differences, will be sufficient to recover our deferred tax assets. In the event that we determine all or part of our net deferred tax assets are not realizable in the future, we will record an adjustment to the valuation allowance and a corresponding charge to earnings in the period such determination is made. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of US GAAP and complex tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our financial condition and results of operations. We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recorded in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. We determine on a regular basis the amount of undistributed earnings that will be indefinitely reinvested in our non-US operations. This assessment is based on the cash flow projections and operational and fiscal objectives of each of ourU.S and foreign subsidiaries. A cash distribution of income from foreign subsidiaries that was previously taxed income (PTI) by the US Internal Revenue Service does not require recognition of a deferred tax liability as the liability has already been recognized under the Tax Reform Act. We have not changed our indefinite reinvestment assertion of foreign earnings other than PTI. In accordance with theSEC Staff Accounting Bulletin No. 118 (SAB 118) issuedDecember 22, 2017 , we completed our accounting for the effects of the Tax Reform Act during the quarter endedDecember 31, 2018 . This includes provisions of the Tax Reform Act which were effective on or afterJanuary 1, 2018 , which include but are not limited to, US taxation of foreign earnings considered global intangible low-taxed income (commonly referred to as GILTI), minimum tax on base erosion anti-abuse, and limitations on the deductibility of interest expense and executive compensation.SAB 118 provided guidance on accounting for the impact of the Tax Reform Act.SAB 118 provided a measurement period, which should not extend beyond one year from the enactment date, during which we completed the accounting for the impacts of the Tax Reform Act under US GAAP. We continue to analyze the additional guidance from such standard setting and regulatory bodies as the US Internal Revenue Service,US Treasury Department , and theFinancial Accounting Standards Board , among others.
Refer to Note 5, "Income Taxes," of our consolidated financial statements in Part IV within this Annual Report for further information.
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