DECKERS OUTDOOR CORPORATION The following discussion of our financial condition and results of operations should be read together with our condensed consolidated financial statements and the related notes, included in Part I, Item 1, "Financial Statements," within this Quarterly Report, and the audited consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data," of our 2022 Annual Report. Certain statements made in this section constitute "forward-looking statements," which are subject to numerous risks and uncertainties, including those described in this section. Our actual results of operations 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 section entitled "Cautionary Note Regarding Forward-Looking Statements" and Part II, Item 1A, "Risk Factors," within this Quarterly Report.
Overview
We are a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyles 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 to a broad demographic. 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 e-commerce websites and retail stores. 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.
Financial Highlights
Consolidated financial performance highlights for the six months ended
•Net sales increased 21.5% to$1,490,075 . •Channel ?Wholesale channel net sales increased 19.8% to$1,065,907 . ?DTC channel net sales increased 25.8% to$424,168 . •Geography ?Domestic net sales increased 17.8% to$1,002,224 . ?International net sales increased 29.8% to$487,851 . •Gross margin decreased 310 basis points to 48.1%. •Income from operations decreased 3.1% to$184,172 . •Diluted earnings per share increased by$0.09 per share to$5.46 per share.
Trends and Uncertainties Impacting Our Business and Industry
We expect our business and the industry in which we operate will continue to be impacted by several important trends and uncertainties, including the following:
Supply Chain
•Similar to other companies in our industry, we continue to experience supply
chain delays related to container shortages and port congestion causing the
timing of container arrivals to be difficult to predict. However, we are
beginning to see improvements in transit lead times, which has led to lower
rates of inventory in transit as a percentage of total inventory, compared to
the prior period. While container costs have improved fiscal year to date, we
continued to incur higher ocean freight rates embedded within inventory sold,
compared to the prior period, which is expected to negatively impact our gross
margins throughout the second half of the current fiscal year.
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•We have reduced the need to airfreight product, compared to the prior period,
and expect to no longer use a material amount of airfreight during the second
half of our current fiscal year due to active management of product availability
in all channels through the earlier procurement of inventory in the country of
sale combined with the improvement of in transit lead times.
•With the strength of our brands and our ability to move through promotional
inventory during the three months ended September 30, 2022 , we have experienced
a lower rate of inventory growth, compared to the prior period when inventories
were below normal operating levels. However, we expect to see inventory growth
outpace sales growth in future periods to support increasing demand for our
brands and mitigate the potential effects of future supply chain disruptions.
•We continue to be flexible in adapting to the fluid logistics environment,
including implementing additional measures to mitigate the effects of supply
chain disruptions. This includes expanding our warehousing, overland
transportation and distribution services through our Company-owned warehouses
and DCs and global 3PL arrangements, as well as diversifying and increasing the
number of our third-party manufacturers. However, we continue to encounter
headwinds transitioning to our new European 3PL as that provider refines its
system and delivery levels.
Brand and Omni-Channel Strategy
•We remain focused on accelerating consumer adoption of the HOKA brand with all geographic regions and distribution channels experiencing significant year-round growth, which has positively impacted our financial results and seasonality trends. Our efforts to drive HOKA brand performance are primarily focused on distribution management, launching innovative product offerings and global marketing campaigns to drive brand awareness, and further expanding the HOKA brand presence through select Company-owned and operated retail stores. Fiscal year to date, we have opened seven HOKA brand retail stores inChina and are planning to open additional retail stores in future periods in other regions. Additionally, we plan to open our first US HOKA brand permanent location inNew York City during the second quarter of our next fiscal year, with an elevated store design fit for our premier performance brand. •Our marketplace strategies inEurope andAsia (international reset strategies) have continued to drive UGG brand awareness and consumer acquisition by building a foundation of diversified and counter-seasonal product acceptance through localized marketing investments. However, we expect to continue to experience mitigating impacts on both net sales and gross margin on UGG brand international growth due to unfavorable foreign currency exchange rates.
•We continue to adopt selective price increases as appropriate by brand and product, which we believe can help mitigate gross margin pressures.
Refer to Part I, Item 1A, "Risk Factors," of our 2022 Annual Report, for detailed information on the risks and uncertainties that have the potential to cause our actual results to differ materially from our expectations.
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 CODM, who is our CEO, President, and 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 a broad demographic.
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HOKA Brand. The HOKA brand is an authentic premium line of year-round
performance footwear that offers enhanced cushioning and inherent stability with
minimal weight, apparel, and accessories. Originally designed for ultra-runners,
the brand now appeals to world champions, taste makers, and everyday athletes.
Strong marketing has fueled both domestic and international sales growth of the
HOKA brand, which has quickly become a leading brand within run and outdoor
specialty wholesale accounts and is rapidly growing within selective key
accounts. As a result, the HOKA brand is bolstering its net sales, which
continue to increase as a percentage of our aggregate net sales.
Teva Brand . The Teva brand created the very first sport sandal when it was
founded in the Grand Canyon in 1984. Since then, the Teva brand has grown into a
multi-category modern outdoor lifestyle brand offering a range of performance,
casual, and trail lifestyle products, and has emerged as a leader in footwear
sustainability observed through recent growth fueled by young and diverse
consumers passionate for the outdoors and the planet.
Sanuk Brand. The Sanuk brand originated in Southern California surf culture and
has emerged into a lifestyle brand with a presence in the relaxed casual shoe
and sandal categories with a focus on innovation in comfort and sustainability.
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 consist primarily of the Koolaburra brand. The
Koolaburra brand is a casual footwear fashion line using plush materials and is
intended to target the value-oriented consumer in order to complement the UGG
brand offering.
Refer to the "Reportable Operating Segment Overview," in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our 2022 Annual Report for further discussion of our outlook on consumer demand drivers for our UGG, HOKA, Teva, Sanuk, and Other brands products.
Direct-to-Consumer. Our DTC business encompasses all our brands and is comprised of our e-commerce websites and retail stores that are intertwined and interdependent in an omni-channel marketplace.
•E-Commerce Business. Our global e-commerce business provides us with an opportunity to directly engage with and communicate a consistent brand message to consumers that is in line with our brands' promises, encourages awareness of key brand initiatives, offers targeted information to specific consumer demographics, and drives consumers to our retail stores. •Retail Business. Our global Company-owned retail stores are predominantly UGG brand concept stores and UGG brand outlet stores, as well as new openings for HOKA brand stores. •Flagship Stores. Primarily located in major tourist locations, these are lead stores in prominent locations designed to showcase UGG and HOKA brand products in mono branded stores that are typically larger than our general concept stores with broader product offerings and greater traffic that enhance our interaction with our consumers and increase brand loyalty. •Shop-in-Shop Stores (SIS). 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. •Partner Retail Stores. Represent UGG and HOKA mono branded stores which are wholly owned and operated by third parties and not included in the total count of our global Company-owned retail stores.
Our net sales related to the businesses and stores above are recorded in our DTC reportable operating segment, except for the net sales for partner retail stores, which are recorded in each respective brand's wholesale reportable operating segment, as applicable.
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Use of Non-GAAP Financial Measures
Throughout this Quarterly Report we provide certain financial information on a
constant currency basis, excluding the effect of foreign currency exchange rate
fluctuations, which we disclose in addition to certain financial measures
calculated and presented in accordance with US GAAP. We provide these non-GAAP
financial measures to provide information that may assist investors in
understanding our results of operations, and assessing our prospects for future
performance. However, the information presented on a constant currency basis, as
we present such information, may not necessarily be comparable to similarly
titled information, presented by other companies, and may not be appropriate
measures for comparing our performance relative to other companies. 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 in the condensed
consolidated financial statements. 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.
These non-GAAP financial measures are not intended to represent and should not
be considered to be more meaningful measures than, or alternatives to, measures
of operating performance as determined in accordance with US GAAP. 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 results of operations and are
largely outside of our control.
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 historically significantly exceeded our aggregate net sales in the quarters endingMarch 31st andJune 30th . However, as we continue to take steps to diversify and expand our product offerings by creating more year-round styles, and as net sales of the HOKA brand continue to increase as a percentage of our aggregate net sales, we expect the impact from seasonality to continue to decrease over time. However, our seasonality has recently been impacted by supply chain challenges and the impact of these challenges on future periods is uncertain. 24 -------------------------------------------------------------------------------- Table of Contents Results of Operations
Three Months Ended
Three Months Ended September 30,
2022 2021 Change
Amount % Amount % Amount %
Net sales $ 875,614 100.0 % $ 721,902 100.0 % $ 153,712 21.3 %
Cost of sales 453,693 51.8 354,814 49.1 (98,879) (27.9)
Gross profit 421,921 48.2 367,088 50.9 54,833 14.9
Selling, general, and
administrative expenses 294,090 33.6 238,907 33.1 (55,183) (23.1)
Income from operations 127,831 14.6 128,181 17.8 (350) (0.3)
Total other (income) expense,
net (1,087) (0.1) 501 0.1 1,588 317.0
Income before income taxes 128,918 14.7 127,680 17.7 1,238 1.0
Income tax expense 27,394 3.1 25,617 3.6 (1,777) (6.9)
Net income 101,524 11.6 102,063 14.1 (539) (0.5)
Total other comprehensive
(loss), net of tax (12,441) (1.4) (1,504) (0.2) (10,937) (727.2)
Comprehensive income $ 89,083 10.2 % $ 100,559 13.9 % $ (11,476) (11.4) %
Net income per share
Basic $ 3.83 $ 3.69 $ 0.14
Diluted $ 3.80 $ 3.66 $ 0.14
Three Months Ended September 30,
2022 2021 Change
Amount Amount Amount %
Net sales by location
Domestic $ 617,709 $ 514,635 $ 103,074 20.0 %
International 257,905 207,267 50,638 24.4
Total $ 875,614 $ 721,902 $ 153,712 21.3 %Net sales by brand and channel
UGG brand
Wholesale $ 361,305 $ 348,776 $ 12,529 3.6 %
Direct-to-Consumer 115,210 99,639 15,571 15.6
Total 476,515 448,415 28,100 6.3
HOKA brand
Wholesale 223,035 146,980 76,055 51.7
Direct-to-Consumer 109,981 63,443 46,538 73.4
Total 333,016 210,423 122,593 58.3
Teva brand
Wholesale 19,587 19,211 376 2.0
Direct-to-Consumer 10,463 9,610 853 8.9
Total 30,050 28,821 1,229 4.3
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Three Months Ended September 30,
2022 2021 Change
Amount Amount Amount %
Sanuk brand
Wholesale 5,060 7,020 (1,960) (27.9)
Direct-to-Consumer 2,468 3,045 (577) (18.9)
Total 7,528 10,065 (2,537) (25.2)
Other brands
Wholesale 27,559 23,253 4,306 18.5
Direct-to-Consumer 946 925 21 2.3
Total 28,505 24,178 4,327 17.9
Total $ 875,614 $ 721,902 $ 153,712 21.3 %
Total Wholesale $ 636,546 $ 545,240 $ 91,306 16.7 %
Total Direct-to-Consumer 239,068 176,662
62,406 35.3
Total $ 875,614 $ 721,902 $ 153,712 21.3 %
Total net sales increased primarily due to increased HOKA brand wholesale, DTC
channel sales, and UGG brand international wholesale. Further, we experienced an
increase of 19.5% in total volume of pairs sold to 14,700 from 12,300, compared
to the prior period. On a constant currency basis, net sales increased by 24.8%,
compared to the prior period. Drivers of significant changes in net sales,
compared to the prior period, were as follows:
•Wholesale net sales of the HOKA brand increased globally, resulting primarily
from gaining market share with existing customer accounts along with door
expansion within select strategic accounts, driven by higher demand across an
assortment of franchise road running updates as well as trail and hiking
categories.
•DTC net sales increased primarily due to higher global net sales for the HOKA
brand, driven by consumer acquisition and retention through higher demand across
an assortment of franchise road running updates. Our DTC channel also had higher
global net sales for the UGG brand, primarily due to higher demand for our
Classics franchise derivatives, as well as hybrid products such as the Tasman
style. Comparable DTC net sales for the 13 weeks ended October 2, 2022 increased
by 38.2%, compared to the prior period.
•Wholesale net sales of the UGG brand increased due to higher international
sales growth, including as a result of our international reset strategies,
driven by higher demand for our Classics franchise derivatives, as well as
hybrid products and lapping disrupted international shipments in the prior
period. These effects were partially offset by domestic sales lapping heightened
replenishment shipments for depleted wholesale customer inventories in the prior
period, as well as unfavorable impacts from the strengthening of the US dollar
on foreign sales.
•International net sales, which are included in the reportable operating segment
sales presented above, increased by 24.4% and represented 29.5% and 28.7% of
total net sales for the three months ended September 30, 2022 and 2021,
respectively. These increases were primarily driven by higher sales for the UGG
brand in Europe in the wholesale channel and in Asia in all channels, as well as
higher sales for the HOKA brand in Asia in the wholesale channel. These effects
were partially offset by unfavorable impacts from the strengthening of the US
dollar on foreign sales.
Gross Profit. Gross margin decreased to 48.2% from 50.9%, compared to the prior
period, primarily due to a return to more normalized domestic promotional
activity for the UGG brand, unfavorable changes in foreign currency exchange
rates, and higher ocean freight rates embedded within inventory sold. These
unfavorable margin pressures were partially offset by a decrease in airfreight
usage, favorable HOKA brand domestic price increases and a favorable brand mix
shift with increased HOKA brand penetration, and a favorable channel mix shift
to DTC.
26
--------------------------------------------------------------------------------Selling, General and Administrative Expenses. The net increase in SG&A expenses, compared to the prior period, was primarily the result of:
•Increased variable advertising and promotion expenses of approximately$16,900 , primarily due to higher promotional marketing expenses for the HOKA brand to drive global brand awareness and market share gains, highlight new product categories, and provide localized marketing.
•Increased payroll and related costs of approximately
•Increased other variable net selling expenses of approximately
•Increased net foreign currency-related losses of
•Increased other operating expenses of approximately
•Increased allowances for trade accounts receivable of approximately
Income from Operations. Income (loss) from operations by reportable operating
segment was as follows:
Three Months Ended September 30,
2022 2021 Change
Amount Amount Amount %Income (loss) from operations
UGG brand wholesale $ 112,083 $ 121,701 $ (9,618) (7.9) %
HOKA brand wholesale 63,576 43,294 20,282 46.8
Teva brand wholesale 2,737 4,908 (2,171) (44.2)
Sanuk brand wholesale 350 1,523 (1,173) (77.0)
Other brands wholesale 5,837 8,158 (2,321) (28.5)
Direct-to-Consumer 59,936 38,734 21,202 54.7
Unallocated overhead costs (116,688) (90,137)
(26,551) (29.5)
Total $ 127,831 $ 128,181 $ (350) (0.3) %
The decrease in total income from operations, compared to the prior period, was
primarily due to lower gross margins and higher SG&A expenses as percentage of
net sales, partially offset by higher net sales.
Drivers of significant net changes in total income from operations, compared to the prior period, were as follows:
•The increase in income from operations of the DTC channel was primarily due to higher domestic net sales for the HOKA brand, as well as lower DTC SG&A expenses as a percentage of net sales, partially offset by lower gross margins. •The increase in income from operations of HOKA brand wholesale was due to higher net sales, partially offset by higher SG&A expenses as a percentage of net sales, primarily related to advertising and promotion costs.
•The decrease in income from operations of UGG brand wholesale was due to lower gross margins, partially offset by higher international net sales.
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--------------------------------------------------------------------------------•The increase in unallocated overhead costs was primarily due to higher warehousing payroll costs, foreign currency related losses, warehousing fees, travel and entertainment expenses, and depreciation expenses.
Total Other (Income) Expense, Net. Total other income, net, compared to the prior period, increased primarily due to higher interest income on invested cash balances driven by higher average interest rates.
Income Tax Expense. Income tax expense and our effective income tax rate were as
follows:
Three Months Ended September 30,
2022 2021
Income tax expense $ 27,394 $ 25,617
Effective income tax rate 21.2 % 20.1 %
The net increase in our effective income tax rate, compared to the prior period, was primarily due to changes in jurisdictional mix of worldwide income before income taxes as well as reduced net discrete tax benefits, primarily due to deductions for stock-based compensation. Foreign income before income taxes was$28,473 and$37,393 and worldwide income before income taxes was$128,918 and$127,680 during the three months endedSeptember 30, 2022 and 2021, 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 lower foreign gross profit as a percentage of foreign net sales compared to domestic gross profit as a percentage of domestic net sales. Net Income. The decrease in net income, compared to the prior period, was due to lower gross margins on higher net sales, combined with higher SG&A expenses as percentage of net sales. Net income per share increased, compared to the prior period, primarily due to lower weighted-average common shares outstanding driven by further stock repurchases. Total Other Comprehensive (Loss) Income, Net of Tax. The increase in total other comprehensive loss, net of tax, compared to the prior period, was due to higher foreign currency translation losses relating to changes to our net asset position for unfavorable Asian and European foreign currency exchange rates against the US dollar. 28
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Six Months Ended
Six Months Ended September 30,
2022 2021 Change
Amount % Amount % Amount %
Net sales $ 1,490,075 100.0 % $ 1,226,580 100.0 % $ 263,495 21.5 %
Cost of sales 773,402 51.9 598,989 48.8 (174,413) (29.1)
Gross profit 716,673 48.1 627,591 51.2 89,082 14.2
Selling, general, and
administrative expenses 532,501 35.7 437,578 35.7 (94,923) (21.7)
Income from operations 184,172 12.4 190,013 15.5 (5,841) (3.1)
Total other (income)
expense, net (1,748) (0.1) 682 0.1 2,430 356.3
Income before income taxes 185,920 12.5 189,331 15.4 (3,411) (1.8)
Income tax expense 39,547 2.7 39,144 3.2 (403) (1.0)
Net income 146,373 9.8 150,187 12.2 (3,814) (2.5)
Total other comprehensive
(loss) income, net of tax (27,407) (1.8) 1,847 0.2 (29,254) (1,583.9)
Comprehensive income $ 118,966 8.0 % $ 152,034 12.4 % $ (33,068) (21.8) %
Net income per share
Basic $ 5.49 $ 5.42 $ 0.07
Diluted $ 5.46 $ 5.37 $ 0.09
Six Months Ended September 30,
2022 2021 Change
Amount Amount Amount %
Net sales by location
Domestic $ 1,002,224 $ 850,694 $ 151,530 17.8 %
International 487,851 375,886 111,965 29.8
Total $ 1,490,075 $ 1,226,580 $ 263,495 21.5 %Net sales by brand and channel
UGG brand
Wholesale $ 499,167 $ 483,832 $ 15,335 3.2 %
Direct-to-Consumer 185,269 177,625 7,644 4.3
Total 684,436 661,457 22,979 3.5
HOKA brand
Wholesale 454,920 298,127 156,793 52.6
Direct-to-Consumer 208,122 125,409 82,713 66.0
Total 663,042 423,536 239,506 56.5
Teva brand
Wholesale 66,482 62,570 3,912 6.3
Direct-to-Consumer 23,188 24,728 (1,540) (6.2)
Total 89,670 87,298 2,372 2.7
Sanuk brand
Wholesale 15,786 17,402 (1,616) (9.3)
Direct-to-Consumer 5,899 7,709 (1,810) (23.5)
Total 21,685 25,111 (3,426) (13.6)
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Six Months Ended September 30,
2022 2021 Change
Amount Amount Amount %
Other brands
Wholesale 29,552 27,559 1,993 7.2
Direct-to-Consumer 1,690 1,619 71 4.4
Total 31,242 29,178 2,064 7.1
Total $ 1,490,075 $ 1,226,580 $ 263,495 21.5 %
Total Wholesale $ 1,065,907 $ 889,490 $ 176,417 19.8 %
Total Direct-to-Consumer 424,168 337,090 87,078 25.8
Total $ 1,490,075 $ 1,226,580 $ 263,495 21.5 %
Total net sales increased primarily due to increased HOKA brand wholesale, DTC
channel sales, and UGG brand international wholesale. Further, we experienced an
increase of 19.8% in total volume of pairs sold to 26,600 from 22,200 compared
to the prior period. On a constant currency basis, net sales increased by 24.2%
compared to the prior period. Drivers of significant changes in net sales,
compared to the prior period, were as follows:
•Wholesale net sales of the HOKA brand increased globally, resulting primarily from gaining market share with existing customer accounts along with door expansion with select strategic accounts, driven by higher demand across an assortment of franchise road running updates as well as trail and hiking categories.
•DTC net sales increased primarily due to higher global net sales for the HOKA brand, driven by consumer acquisition and retention through higher demand across an assortment of franchise road running updates. Our DTC channel also had an increase in global sales for the UGG brand, primarily due to higher demand for our Classics franchise derivatives, as well as hybrid products such as theTasman style. Comparable DTC net sales for the 26 weeks endedOctober 2, 2022 , increased by 27.3%, compared to the prior period. •Wholesale net sales of the UGG brand increased due to higher international sales growth, including as a result of our international reset strategies, driven by higher demand for our Classics franchise derivatives, as well as hybrid products and lapping disrupted international shipments in the prior period. These effects were partially offset by domestic sales lapping heightened replenishment shipments for depleted wholesale customer inventories in the prior period, as well as unfavorable impacts from the strengthening of the US dollar on foreign sales. •International net sales, which are included in the reportable operating segment net sales presented above, increased by 29.8% and represented 32.7% and 30.6% of total net sales for the six months endedSeptember 30, 2022 , and 2021, respectively. These increases were primarily driven by higher sales for the HOKA brand inEurope in the wholesale channel, which includes earlier distributor shipments, andAsia in all channels, as well as an increase in the UGG brand inEurope in the wholesale channel andAsia in all channels. These effects were partially offset by unfavorable impacts from the strengthening of the US dollar on foreign sales. Gross Profit. Gross margin decreased to 48.1% from 51.2%, compared to the prior period, primarily due to unfavorable product mix shift and a return to more normalized domestic promotional activity for the UGG brand, higher ocean freight rates embedded in the inventory sold, and unfavorable changes in foreign currency exchange rates. These unfavorable margin pressures were partially offset by favorable HOKA brand domestic price increases and a favorable brand mix shift with increased HOKA brand penetration.
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 payroll and related costs of approximately$21,900 , primarily due to higher headcount, including for warehouse teams, and partially offset by lower performance-based compensation and stock-based compensation. 30
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•Increased other variable net selling expenses of approximately
•Increased variable advertising and promotion expenses of approximately$18,800 , primarily due to higher promotional marketing expenses for the HOKA brand to drive global brand awareness and market share gains, highlight new product categories, and provide localized marketing.
•Increased net foreign currency-related losses of
•Increased other operating expenses of approximately$11,500 , primarily due to higher travel and entertainment expenses, higher depreciation and IT expenses for our warehouses, and sample expenses. •Increased allowances for trade accounts receivable of approximately$4,500 , primarily due to an increase in bad debt expense to account for higher open accounts receivable balances on higher UGG brand and HOKA brand wholesale net sales.
•Increased impairments of operating lease and other long-lived assets of
approximately
Income from Operations. Income (loss) from operations by reportable operating
segment was as follows:
Six Months Ended September 30,
2022 2021 Change
Amount Amount Amount %Income (loss) from operations
UGG brand wholesale $ 142,748 $ 157,539 $ (14,791) (9.4) %
HOKA brand wholesale 133,192 89,657 43,535 48.6
Teva brand wholesale 15,230 19,411 (4,181) (21.5)
Sanuk brand wholesale 2,816 4,927 (2,111) (42.8)
Other brands wholesale 5,368 10,865 (5,497) (50.6)
Direct-to-Consumer 101,156 78,417 22,739 29.0
Unallocated overhead costs (216,338) (170,803) (45,535) (26.7)
Total $ 184,172 $ 190,013 $ (5,841) (3.1) %
The decrease in total income from operations, compared to the prior period, was primarily due to lower gross margins, partially offset by higher net sales.
Drivers of significant net changes in total income from operations, compared to the prior period, were as follows:
•The increase in income from operations of HOKA brand wholesale was due to higher net sales and lower SG&A expenses as a percentage of net sales, partially offset by lower gross margins.
•The increase in income from operations of the DTC channel was primarily due to the higher domestic net sales for the HOKA brand, as well as lower DTC SG&A expenses as a percentage of net sales, partially offset by lower gross margins.
•The decrease in income from operations of UGG brand wholesale was due to lower gross margins, partially offset by higher international net sales.
•The increase in unallocated overhead costs was primarily due to higher foreign
currency related losses, warehousing payroll costs, warehousing fees, travel and
entertainment expenses, and depreciation expenses.
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Total Other (Income) Expense, Net. Total other income, net, compared to the
prior period, increased primarily due to higher interest income on invested cash
balances driven by higher average interest rates.
Income Tax Expense. Income tax expense and our effective income tax rate were as
follows:
Six Months Ended September 30,
2022 2021
Income tax expense $ 39,547 $39,144
Effective income tax rate 21.3 % 20.7 %
The increase in our effective income tax rate, compared to the prior period, was
primarily due to changes in jurisdictional mix of worldwide income before income
taxes, partially offset by increased net discrete tax benefits, primarily due to
foreign return to provision adjustments and deductions for stock-based
compensation.
Foreign income before income taxes was $61,496 and $58,571 and worldwide income
before income taxes was $185,920 and $189,331 during the six months ended
September 30, 2022 , and 2021, respectively. The increase 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 lower rate of decline for
foreign gross profit as a percentage of worldwide sales compared to domestic
gross profit, as well as lower foreign operating expenses as a percentage of
worldwide sales.
Net Income. The decrease in net income, compared to the prior period, was
primarily due to lower gross margins on higher net sales. Net income per share
increased, compared to the prior period, primarily due to lower weighted-average
common shares outstanding driven by further stock repurchases.
Total Other Comprehensive (Loss) Income, Net of Tax. The increase in total other
comprehensive loss, net of tax, compared to the prior period, was due to higher
foreign currency translation losses relating to changes to our net asset
position for unfavorable Asian and European foreign currency exchange rates
against the US dollar.
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 utilize available cash to build inventory levels during certain quarters in our fiscal year to support higher selling seasons. While the impact of seasonality has been mitigated to some extent, we expect our working capital requirements will continue to fluctuate from period to period. As ofSeptember 30, 2022 , our cash and cash equivalents are$419,259 . While we are subject to uncertainty surrounding the pandemic and related macroeconomic factors, we believe our cash and cash equivalents balances, cash provided from ongoing operating activities, and available borrowings under our revolving credit facilities, will provide sufficient liquidity to enable us to meet our working capital requirements and contractual obligations for at least the next 12 months. Our liquidity may be 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 receivables in a timely manner and effectively manage our inventories, including estimating inventory requirements that require earlier purchasing windows to manage supply chain constraints, our ability to respond to the impacts and disruptions caused by the pandemic, and our ability to respond to economic, political, and legislative developments. Furthermore, we may require additional cash resources due to changes in business conditions, strategic initiatives, or stock repurchase strategy, a national or global economic recession, 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. 32 -------------------------------------------------------------------------------- Table of Contents If there are unexpected material impacts on our business in future periods from the pandemic and we need to raise or conserve additional cash to fund our operations, 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 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. Although we believe we have adequate sources of liquidity over the long term, a prolonged or more severe economic recession, inflationary pressure, or a slow recovery could adversely affect our business and liquidity. Repatriation of Cash. Our cash repatriation strategy, and by extension, our liquidity, may be impacted by several additional considerations, which include clarifications of, future changes to, or interpretations of global tax law and regulations, and our actual earnings for current and future periods. During the six months endedSeptember 30, 2022 , and 2021, no cash and cash equivalents were repatriated. As ofSeptember 30, 2022 , andMarch 31, 2022 , we have$93,860 and$133,053 , respectively, of cash and cash equivalents held by foreign subsidiaries, a portion of which may be subject to additional foreign withholding taxes if it were to be repatriated. Beginning with the tax year endedMarch 31, 2018 , pursuant to the Tax Reform Act, an installment election was made to pay the one-time transition tax on the deemed repatriation of foreign subsidiaries' earnings over eight years. The cumulative remaining balance as ofSeptember 30, 2022 , is$33,761 . We continue to evaluate our cash repatriation strategy and we currently anticipate repatriating current and future unremitted earnings of non-US subsidiaries only to the extent they already have been subject to US tax, if such cash is not required to fund ongoing foreign operations. Refer to Note 5, "Income Taxes," of our consolidated financial statements in Part IV of our 2022 Annual Report for further information on the impacts of the recent Tax Reform Act. Stock Repurchase Program. 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. The stock repurchase program does not obligate us to acquire any amount of common stock and may be suspended at any time at our discretion. OnJuly 27, 2022 , our Board of Directors approved an increase of$1,200,000 to our stock repurchase authorization. As ofSeptember 30, 2022 , the aggregate remaining approved amount under our stock repurchase program is$1,503,767 . Capital Resources Revolving Credit Facilities. During the six months endedSeptember 30, 2022 , we made no borrowings or repayments under our revolving credit facilities. As ofSeptember 30, 2022 , we have no outstanding balances, outstanding letters of credit of$926 , outstanding bank guarantees of$28 , and available borrowings of$461,948 for all revolving credit facilities. There were no amendments to the terms and borrowing availability under our revolving credit facilities during the six months endedSeptember 30, 2022 .
Refer to Note 6, "Revolving Credit Facilities and Mortgage Payable," of our consolidated financial statements in Part IV of our 2022 Annual Report for further information on our revolving credit facilities.
Debt Covenants. As of
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Cash Flows
The following table summarizes the major components of our condensed consolidated statements of cash flows for the periods presented:
Six Months Ended September 30,
2022 2021 Change
Amount Amount Amount %
Net cash used in operating activities
2,465 9.2
Net cash used in financing activities (152,466) (144,270)
(8,196) (5.7) Effect of foreign currency exchange rates on cash and cash equivalents (10,702) 513
(11,215) (2,186.2)
Net change in cash and cash equivalents
Operating Activities. Our primary source of liquidity is net cash provided by operating activities, which is primarily driven by our net income after non-cash adjustments and changes in working capital. The increase in net cash used in operating activities during the six months endedSeptember 30, 2022 , compared to the prior period, was primarily due to$71,987 of unfavorable changes in operating assets and liabilities, partially offset by$7,815 of favorable net income after non-cash adjustments resulting from changes in bad debt expense, deferred tax expense, and depreciation, amortization, and accretion. The changes in operating assets and liabilities were due to net unfavorable changes in trade accounts payable, inventories, prepaid expenses and other current assets, net operating lease assets and liabilities, and long-term liabilities, partially offset by net favorable changes in income tax payable, other assets, other accrued expenses, and trade accounts receivable, net. Significant impacts to working capital compared to the prior period were primarily due to changes in (1) net trade accounts payable due to timing of payments, (2) purchases of inventories to support higher demand for the HOKA brand and to maintain global service levels to mitigate the impacts of supply chain disruptions, and (3) a higher rate of collections for trade accounts receivable, net, on higher net sales, partially offset by higher trade accounts receivable allowances. Investing Activities. The decrease in net cash used in investing activities during the six months endedSeptember 30, 2022 , compared to the prior period, was primarily due to lower capital expenditures for our warehouses and DC's, partially offset by higher capital expenditures for IT infrastructure, system, and other technology costs and refreshes of existing and new retail stores.
Financing Activities. The increase in net cash used in financing activities
during the six months ended
Contractual Obligations
As previously disclosed in our 2022 Annual Report as a subsequent event, during the six months endedSeptember 30, 2022 , we signed a lease for additional space, which we expect to be operational in the third quarter of our next fiscal year, at our US warehouse and DC inMooresville, Indiana with an initial lease term of ten years for a minimum commitment of approximately$46,000 .
Except as described above, there were no material changes outside the ordinary
course of business during the six months ended
Refer to the section "Contractual Obligations" in Part II, Item 7, within our
2022 Annual Report for further information on our contractual obligations and
other commitments.
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Critical Accounting Policies and Estimates
Management must make certain estimates and assumptions that affect the amounts
reported in the condensed 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. The full impact of
the ongoing pandemic and related macroeconomic factors, including inflation,
rising interest rates, and recessionary pressures, are unknown and cannot be
reasonably estimated for certain 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 condensed consolidated financial statements may be
materially affected.
Refer to the section "Use of Estimates" within Note 1, "General," of our condensed consolidated financial statements in Part I, Item 1 within this Quarterly Report, for a summary of applicable key estimates and assumptions.
There have been no material changes to the critical accounting policies and key estimates and assumptions disclosed in the section "Critical Accounting Policies and Estimates" in Part II, Item 7, within our 2022 Annual Report.
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