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 the years endedMarch 31, 2021 and 2020 and year-over-year comparisons between those periods. For year-over-year comparisons between the years endedMarch 31, 2020 and 2019, 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, 2020 filed with theSEC onJune 1, 2020 . Certain statements made in this section constitute "forward-looking statements," which are subject to numerous risks and uncertainties including those described in this section. Refer to the section entitled "Cautionary Note Regarding Forward-Looking Statements" within this Annual Report for additional information.
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 to a broad demographic. We sell our products through quality domestic and international retailers, international distributors, and directly to our global consumers through our Direct-to-Consumer (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 third-party manufacturers.
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, as follows:
COVID-19 Pandemic
• Throughout fiscal year 2021, the COVID-19 pandemic (referred to herein as the pandemic) spread globally, including throughout the geographic regions in which we operate our business, and in which our wholesale customers, retail stores, manufacturers, and suppliers are located. • The overall impacts of the pandemic on our business, and the businesses of our wholesale customers and partners, continue to be highly uncertain and subject to change, especially in light of the significant recent increases in the number of positive COVID-19 cases in certain geographic regions. However, we believe that the actions we have taken to respond to the pandemic, combined with our strong brands, diversified product portfolio, and favorable liquidity position, have resulted in strong operational performance throughout the pandemic, and position us to emerge from the pandemic poised for continued long-term growth.
Retail Environment
•As a result of various government orders and restrictions imposed in connection with the pandemic, as well as changes in consumer behavior in response, we closed many of our Company-owned-and-operated stores at various times during fiscal year 2021. The largest impact on our retail business was from disruption at tourism-dependent locations, including both limited capacity and closure requirements that impacted store traffic. However, approximately 77% of our global retail stores were open for our entire fourth fiscal quarter, although in most cases with limited capacity. We expect temporary retail store closures in certain geographies to continue for at least a portion of our first fiscal quarter endingJune 30, 2021 , and that there is risk of ongoing or additional retail stores closures and operating limitations based on expert agency guidance and local authority mandates. 32 -------------------------------------------------------------------------------- Table of Contents •We expect the scope of allowable retail activities and retail consumer traffic patterns to vary by geographic region due to the continued impact of the pandemic, including those associated with governmental restrictions and consumer responses. In an attempt to mitigate the impact of operating our retail stores at limited capacity, we have continued expanding the use of technology at these locations. However, we could continue to experience decreased demand or capacity threshold constraints at our retail stores.
•We believe that many of our wholesale customers and retail partners have experienced temporary retail store closures similar to those impacting our Company-owned retail stores. Although many of our customers have reopened their retail stores, we believe that many of these stores continue to operate at limited capacity.
E-Commerce Environment
•We have observed a prolonged and meaningful shift in the way consumers shop for products and make purchasing decisions, evidenced by decreases in consumer retail store activity as consumers accelerated their migration to online shopping. These trends, which have been exacerbated by the impacts of the pandemic, have been positively impacting the performance of our e-commerce business, while creating 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 and experienced increased consumer traffic throughout the pandemic. We continue to look for ways to expand consumer access to and improve ease of use of our e-commerce platforms, which has contributed to increased consumer traffic. •During fiscal year 2021, we observed strong demand for all of our brands within our e-commerce business. Many of our wholesale customers also experienced strong demand trends for our brands, which have consistently experienced strong sell-through on our wholesale partners' e-commerce platforms. However, we do not expect that the growth rate that our e-commerce business experienced during fiscal year 2021 will continue in future periods.
Brand Strategy
•Within the UGG brand, we have experienced strong sell-through in all channels of certain product lines, such as the slipper category, as consumers seek out luxurious comfort in the current work-from-home environment. In addition, the UGG brand continues to experience success with counter-seasonal products, such as spring and summer collections for Women's, Men's, and Kids' categories. The brand is attracting new and younger, more diverse consumers, including through strategic fashion collaborations and design innovation. However, the brand continues to experience softness internationally within the wholesale channel. We expect to see continued UGG brand progress during fiscal year endingMarch 31, 2022 inEurope due to our marketplace reset strategy, as well as inAsia due to our localized marketing activations. •As the UGG brand continues to amplify its audience with younger, more diverse consumers, it has been critical to continue our development of the brand's e-commerce channel and expanding its digital marketing presence. The UGG brand's e-commerce platform has continued to evolve as part of our overall digital transformation and has become a strategic driver of our product development process through the launch of exclusive products. •Within the HOKA brand, we continue to see strong demand across our product offerings through both wholesale and DTC channels, which we believe is being fueled by an emphasis on running and outdoor exercise and introducing innovative products that resonate globally with younger, more diverse consumers. Further, the HOKA brand's performance was driven by balanced growth across the brand's ecosystem of access points. For example, the HOKA brand's optimized digital marketing increased online consumer acquisition and retention rates, which we believe will collectively continue to drive DTC channel revenues as a percentage of total brand revenue. 33 -------------------------------------------------------------------------------- Table of Contents Supply Chain •We maintain a network of strategic sourcing partners which includes material vendors and third-party manufacturers. We experienced certain capacity constraints within our sourcing network during fiscal year 2021. While we have mitigated the effects of these disruptions, it is possible that we will experience additional disruptions to our supply chain, including from shipping delays and container shortages from congestion at port facilities, which has been exacerbated by the pandemic. Congestion atUnited States (US) and international ports could affect the capacity at ports to receive deliveries of products or the loading of shipments on to vessels. In anticipation of this, we are evaluating mitigation strategies. •Our warehouse and DC inMoreno Valley, California , as well as our global third-party logistics providers (3PLs) and third-party carriers, remain open although they continue to operate at reduced capacity. We are experiencing certain operational and logistical challenges as a result of limited and modified operations. This includes challenges associated with shipping higher quantities of product through our e-commerce channel compared to prior periods in parallel with increased nationwide demand placed on delivery companies, which has been exacerbated by the pandemic. These impacts may continue to have an adverse effect on our ability to fulfill orders through our e-commerce platform. •We continue to recognize the need for additional infrastructure investments to support our scaling business, including investments in and upgrades to our end-to-end planning systems as well as our global distribution and logistics capabilities. For example, we are currently in the early stages of opening a new US DC located inMooresville, Indiana that is intended to expand our logistical capabilities. At the same time, we are encountering challenges in attracting and retaining quality candidates to staff our DC operations in the US as we increasingly compete with other companies with growing e-commerce operations.
Omni-Channel Strategy
•We have implemented a channel and product segmentation strategy, as well as franchise management for key product allocation strategies for the UGG brand's core Classics franchise, in the US wholesale marketplace. These strategies are designed to assist us in controlling product inventory, reducing the impact of discounts and closeouts on our sales and gross margins, and increasing full-priced selling across our product offerings. Similarly, we have implemented a multi-year marketplace reset strategy inEurope andAsia to drive UGG brand demand and build a foundation of diversified product acceptance, which is driving a healthier product mix and reducing the need for promotional activity. •As a result of changes in consumer purchasing behavior, we continue to enhance our omni-channel strategy to bolster our e-commerce capabilities and enable us to better engage with consumers and expose them to our brands. Our strategy is transforming the way we approach marketing, including through a sustained focus on digital marketing efforts, as well as localized marketing activations and authentic collaborations to drive global brand demand. We have also enhanced our focus on adaptive 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.
Operating Expenses
•To mitigate the adverse impacts the pandemic has had on our business and operations, we implemented a number of temporary measures to reduce our operating expenses. As we return to a more normal business environment, we expect to make significant investments related to our infrastructure and other strategic initiatives to support opportunities to further scale our business.
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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 (collectively, our reportable operating segments). Information reported to the Chief Operating Decision Maker (CODM), who is our Chief Executive Officer, President, and 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 a broad demographic.
We believe demand for UGG brand products will continue to be driven by the following:
•High consumer brand loyalty due to 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 products. •Expanding apparel, home goods, and accessories business.
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 world champions, taste makers, and everyday athletes. The HOKA brand is quickly becoming a leading brand within run specialty wholesale accounts, with strong marketing fueling both domestic and international sales growth, driving the brand's net sales to continue to increase as a percentage of our aggregate net sales. 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 and adoption through enhanced global marketing activations and online customer acquisition, including building a more diverse outdoor community. •Category extensions in authentic performance footwear offerings such as lifestyle acceleration through the trail and hiking categories.Teva Brand . The Teva brand created the very first sport sandal when it was founded in theGrand 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. We believe demand for Teva brand products will continue to be driven by the following: •Authentic outdoor heritage and a reputation for quality, comfort, sustainability, and performance in any terrain. •Increasing brand awareness due to outdoor lifestyle participation amongst younger consumers. •Category extensions in performance hike footwear. 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 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 by UGG brand. 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. 35 -------------------------------------------------------------------------------- Table of Contents 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. 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, 2021 , we operated our e-commerce business through Company-owned websites and mobile platforms in 58 different countries, for which the net sales are recorded in our DTC reportable operating segment. 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, 2021 , we had a total of 140 global retail stores, which includes 71 concept stores and 69 outlet stores. Generally, we open retail store locations during our second or third fiscal quarters and consider closures of retail stores during our fourth fiscal quarter; however, the timing of such openings and closures may vary. We evaluate potential retail store closures based on historic and anticipated 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, or near to when, 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 seven 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. We anticipate operating a curated fleet of flagship stores to enhance the interaction with our consumers and increase brand loyalty. For example, inNovember 2020 we opened a flagship store inNew York City , which highlights the expansive collection of the brand's product offerings while showcasing the breadth and depth of UGG as a lifestyle brand. 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 26 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 HOKA brand. 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 each respective brand wholesale reportable operating segments, as applicable.
Use of Non-GAAP Financial Measures
Throughout this Annual 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 the financial measures calculated and presented in accordance with generally accepted accounting principles inthe United States (US GAAP). We provide these non-GAAP financial measures to provide information that may assist investors in understanding our financial results and assessing our prospects for future performance. However, the information included within this Annual Report that is 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 the performance of other companies relative to us. 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 consolidated financial statements. 36
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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 still significantly exceed 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 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, 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 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,
2021 2020 Change
Amount % Amount % Amount %
Net sales $ 2,545,641 100.0 % $ 2,132,689 100.0 % $ 412,952 19.4 %
Cost of sales 1,171,551 46.0 1,029,016 48.2 (142,535) (13.9)
Gross profit 1,374,090 54.0 1,103,673 51.8 270,417 24.5
Selling, general, and
administrative expenses 869,885 34.2 765,538 35.9 (104,347) (13.6)
Income from operations 504,205 19.8 338,135 15.9 166,070 49.1
Other expense (income), net 2,691 0.1 (2,731) (0.1) (5,422) (198.5)
Income before income taxes 501,514 19.7 340,866 16.0 160,648 47.1
Income tax expense 118,939 4.7 64,724 3.1 (54,215) (83.8)
Net income 382,575 15.0 276,142 12.9 106,433 38.5
Total other comprehensive
income (loss), net of tax 8,816 0.3 (2,905) (0.1) 11,721 403.5
Comprehensive income $ 391,391 15.3 % $ 273,237 12.8 % $ 118,154 43.2 %
Net income per share
Basic $ 13.64 $ 9.73 $ 3.91
Diluted $ 13.47 $ 9.62 $ 3.85
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Table of ContentsNet Sales . The following table summarizes our net sales by location, and by brand and channel: Years Ended March 31, 2021 2020 Change Amount Amount Amount %
Net sales by location
US $ 1,761,477 $ 1,401,692 $ 359,785 25.7 %
International 784,164 730,997 53,167 7.3
Total $ 2,545,641 $ 2,132,689 $ 412,952 19.4 %
Net sales by brand and channel
UGG brand
Wholesale $ 871,799 $ 892,990 $ (21,191) (2.4) %
Direct-to-Consumer 845,283 627,817 217,466 34.6
Total 1,717,082 1,520,807 196,275 12.9
HOKA brand
Wholesale 405,243 277,097 128,146 46.2
Direct-to-Consumer 165,997 75,527 90,470 119.8
Total 571,240 352,624 218,616 62.0
Teva brand
Wholesale 105,928 119,108 (13,180) (11.1)
Direct-to-Consumer 32,860 18,897 13,963 73.9
Total 138,788 138,005 783 0.6
Sanuk brand
Wholesale 26,566 39,463 (12,897) (32.7)
Direct-to-Consumer 15,274 11,696 3,578 30.6
Total 41,840 51,159 (9,319) (18.2)
Other brands
Wholesale 69,375 67,175 2,200 3.3
Direct-to-Consumer 7,316 2,919 4,397 150.6
Total 76,691 70,094 6,597 9.4
Total $ 2,545,641 $ 2,132,689 $ 412,952 19.4 %
Total Wholesale $ 1,478,911 $ 1,395,833 $ 83,078 6.0 %
Total Direct-to-Consumer 1,066,730 736,856
329,874 44.8
Total $ 2,545,641 $ 2,132,689 $ 412,952 19.4 %
Total net sales increased primarily due to higher DTC sales as well as higher
HOKA brand wholesale sales, partially offset by lower UGG brand, Teva brand, and
Sanuk brand wholesale sales. Further, we experienced an increase of 13.9% in
total volume of pairs sold to 41,900 from 36,800 compared to the prior period.
On a constant currency basis, net sales increased by 18.4%, compared to the
prior period. Drivers of significant changes in net sales, compared to the prior
period, were as follows:
•DTC net sales increased due to higher e-commerce net sales across all brands,
partially offset by lower retail sales attributed to lower tourism traffic and
store closures related to the pandemic. Due to the meaningful disruption of our
retail store base for closures, we are not reporting a comparable DTC net sales
metric for the year ended March 31, 2021 .
•Wholesale net sales of the HOKA brand increased primarily due to global expansion of market share, including reaching new customers, driven by increased brand awareness combined with key franchise updates.
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•Wholesale net sales of the UGG brand decreased primarily due to lower
international sales, partially offset by strong domestic sales. The global
wholesale channel was impacted by lower global sell-in of product, driven by
pandemic related sales losses resulting from decreased store traffic and more
conservative purchasing from our global wholesale partners. International
wholesale sales were also lower due to the near-term impact of the marketplace
reset strategies in Europe and Asia .
•Wholesale net sales of the Teva brand and Sanuk brand decreased primarily due
to the pandemic related sales losses during our first fiscal quarter caused by
decreased store traffic for our wholesale customers during the respective
brands' peak sell-in period.
•International net sales, which are included in the reportable operating segment
net sales presented above, represented 30.8% and 34.3% of total net sales for
the years ended March 31, 2021 and 2020, respectively. International net sales
increased by 7.3%, compared to the prior period, primarily due to higher net
sales for the HOKA brand across all channels in Europe and Asia , partially
offset by lower net sales in both these regions in the wholesale and retail
channels for the UGG brand. The decrease in international net sales as a
percentage of total sales was driven by higher domestic sales growth, primarily
due to higher e-commerce sales.
Gross Profit. Gross profit as a percentage of net sales, or gross margin, increased to 54.0% from 51.8%, compared to the prior period, primarily due to favorable channel mix resulting from increased penetration of DTC, higher full-priced selling, favorable brand mix, and favorable changes in foreign currency exchange rates, partially offset by higher freight costs.
Selling, General, and Administrative Expenses. The net increase in selling, general, and administrative (SG&A) expenses, compared to the prior period, was primarily the result of the following:
•Increased payroll costs of approximately
•Increased variable advertising and promotion expenses of approximately$44,000 , primarily due to higher digital marketing and advertising for the UGG brand and HOKA brand to drive brand demand and awareness.
•Increased other variable net selling expenses of approximately
•Increased impairments of operating lease and long-lived assets of approximately$16,300 due to flagship retail store impairments driven by lower traffic and strategic changes in the fleet, as well as lower retail sales and early store closures, and an impairment loss for international intangible assets for the Sanuk brand.
•Increased depreciation expense of approximately
•Increased bank fees of approximately
•Decreased variable operating expenses of approximately
•Decreased rent and occupancy expenses of approximately$8,500 , primarily due to lower retail store operating costs, including due to Company-owned retail store closures related to the pandemic and lower Company-owned retail store count.
•Decreased foreign currency-related losses of
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Income from Operations. Income from operations by reportable operating segment
was as follows:
Years Ended March 31,
2021 2020 Change
Amount Amount Amount %Income (loss) from operations
UGG brand wholesale $ 292,718 $ 303,908 $(11,190) (3.7) %
HOKA brand wholesale 111,208 61,860 49,348 79.8
Teva brand wholesale 27,120 30,736 (3,616) (11.8)
Sanuk brand wholesale (162) 3,212 (3,374) (105.0)
Other brands wholesale 21,573 16,087 5,486 34.1
Direct-to-Consumer 349,465 182,548 166,917 91.4
Unallocated overhead costs (297,717) (260,216) (37,501) (14.4)
Total $ 504,205 $ 338,135 $ 166,070 49.1 %
The increase in total income from operations, compared to the prior period, was
primarily due to higher net sales at higher gross margins, primarily driven by
DTC and HOKA brand wholesale, partially offset by higher SG&A expenses. 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 DTC was due to higher net sales at
higher gross margins, as well as lower Company-owned retail store operating
costs, partially offset by higher variable marketing and selling expenses, as
well as higher e-commerce expenses.
•The increase in income from operations of HOKA brand wholesale was primarily due to higher net sales, partially offset by higher variable marketing expenses.
•The decrease in income from operations of UGG brand wholesale was due to lower
net sales at lower gross margins as well as higher marketing expenses, partially
offset by lower variable selling expenses.
•The increase in income from operations of Other brands wholesale was due to
higher net sales at higher gross margins, partially offset by higher variable
marketing expenses.
•The decrease in income from operations of Teva brand wholesale was due to lower
net sales at lower gross margins, partially offset by lower variable selling
expenses.
•The increase in loss from operations of Sanuk brand wholesale was primarily due
the impairment of a definite-lived international trademark, as well as lower net
sales at lower gross margins, partially offset by lower variable selling and
marketing expenses.
•The increase in unallocated overhead costs was primarily due to higher
performance-based compensation, as well as warehousing expenses, including for
payroll and outside services, in addition to higher information technology
expenses, and higher depreciation expenses, partially offset by lower foreign
currency-related losses driven by favorable changes in foreign currency exchange
rates, insurance recovery proceeds, and lower travel related expenses.
Other Expense (Income), Net. The increase in total other expense, net, compared
to the prior period, was primarily due to a decrease in interest income driven
by lower average interest rates, partially offset by higher average invested
cash balances.
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Income Tax Expense. Income tax expense and our effective income tax rate were as
follows:
Years Ended March 31,
2021 2020
Income tax expense $ 118,939 $ 64,724
Effective income tax rate 23.7 % 19.0 %
The increase in our effective income tax rate, compared to the prior period, was
primarily due to changes in the geographic mix of worldwide income before income
taxes for the year ended March 31, 2021 in jurisdictions with higher effective
tax rates, higher non-deductible executive compensation, as well as less
favorable settlement of tax audits, partially offset by higher employee share
based compensation excess tax benefits.
Foreign income before income taxes was $133,186 and $134,755 and worldwide
income before income taxes was $501,514 and $340,866 during the years ended
March 31, 2021 and 2020, 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 higher domestic sales and higher
foreign operating expenses as a percentage of worldwide sales.
For the years ended March 31, 2021 and 2020, we did not generate significant
pre-tax earnings from any countries which do not impose a corporate income tax.
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 the sale or liquidation of these subsidiaries. Refer to the
section titled "Liquidity" below for further information.
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). Foreign income before income taxes
will continue to grow in the long-term, in both absolute terms and as a
percentage of worldwide income before income taxes, as we focus on the global
composition of our business, localized strategies for international markets, and
investments in international regions. In addition, we believe our effective
income tax rate will 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. The increase in net income, compared to the prior period, was 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 in prior periods.
Total Other Comprehensive Income, Net of Tax. The increase in total other comprehensive income, net of tax, compared to the prior period, was due to higher foreign currency translation gains relating to changes to our net asset position for favorable Asian 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 we are subject to uncertainty surrounding the pandemic, 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 timely service our debt obligations for at least the next 12
months.
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We repatriated$175,000 and$150,000 of cash and cash equivalents during the years endedMarch 31, 2021 and 2020, respectively. As ofMarch 31, 2021 , we had$180,951 of cash and cash equivalents outside the US and held by all foreign subsidiaries, a portion of which may be subject to additional foreign withholding taxes if it were to be repatriated. AtMarch 31, 2019 , we completed the calculation of the one-time transition tax on the deemed repatriation of foreign subsidiaries' earnings pursuant to the Tax Reform Act and previously recorded a net cumulative tax expense of$57,895 , net of foreign tax credits. Beginning with the tax year endedMarch 31, 2018 , an installment election was made to pay these taxes over eight years with 40% paid in equal installments over the first five years and the remaining 60% to be paid in installments of 15%, 20% and 25% in years six, seven and eight, respectively. The cumulative remaining balance as ofMarch 31, 2021 is$41,452 . We continue to evaluate our cash repatriation strategy and we currently anticipate repatriating current and future unremitted earnings of non-US subsidiaries, to the extent they have been and will be subject to US tax, if such cash is not required to fund ongoing foreign operations. Our cash repatriation strategy, and by extension, our liquidity, may be impacted by several additional considerations, which include clarifications of or changes to the Tax Reform Act and our actual earnings for current and future 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, 2021 , the aggregate remaining approved amount under our stock repurchase program was$60,660 . Our Board of Directors approved an additional authorization of$750,000 duringApril 2021 to repurchase our common stock under the same conditions as the prior stock repurchase program. Subsequent toMarch 31, 2021 throughMay 13, 2021 , we repurchased 70,881 shares for$23,466 at an average price of$331.06 per share, and had$787,194 remaining authorized under the stock repurchase program. Our stock repurchase program does not obligate us to acquire any amount of common stock and may be suspended at any time at our discretion. Our liquidity may be further impacted by additional factors, including our 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, 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. 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 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
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China Credit Facility. Our revolving credit facility in China (China Credit
Facility) is an uncommitted revolving line of credit of up to CNY 300,000 , or
$45,736 .
As of
Japan Credit Facility. Our revolving credit facility in
As of
Mortgage. As ofMarch 31, 2021 , there is no outstanding balance under the mortgage, previously secured by the property on which our corporate headquarters is located. During the year endedMarch 31, 2021 , we repaid in full the outstanding principal balance, accrued interest, as well as prepayment penalties under the mortgage totaling$31,578 .
Debt Covenants. As of
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 capital resources.
Cash Flows
The following table summarizes our cash flows for the periods presented:
Years Ended March 31,
2021 2020 Change
Amount Amount Amount %
Net cash provided by operating activities
Net cash used in investing activities (32,169) (31,964)
(205) (0.6)
Net cash used in financing activities (129,581) (192,114)
62,533 32.5
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 increase in net cash provided by operating activities during the year endedMarch 31, 2021 , compared to the prior period, was primarily due to a net positive change in operating assets and liabilities of$185,994 and net income after non-cash adjustments of$123,889 . The changes in operating assets and liabilities were primarily due to net positive changes in inventories, net, accrued expenses, trade accounts payable, income taxes payable, and income tax receivable, partially offset by net negative changes in prepaid expenses and other current assets, and trade accounts receivable, net. The positive change in inventories, net, made up a majority of the net positive change in operating assets and liabilities, which was driven by higher net sales and lower inventory on-hand due to more disciplined purchasing that focused on key products in response to the pandemic, as well as the positive change in accrued expenses, primarily driven by higher payroll related accruals. Investing Activities. The net cash used in investing activities during the year endedMarch 31, 2021 , was consistent with the prior period, and was primarily comprised of capital expenditures for improvements to our warehouse and DC, the build-out or refreshes made to our retail store locations, as well as information technology.
Financing Activities. The decrease in net cash used in financing activities
during the year ended
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Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Contractual Obligations
The following table summarizes our contractual obligations as of
Payments Due by Period
Less than More than
Total 1 Year 1-3 Years 3-5 Years 5 Years
Operating lease obligations (1)
Purchase obligations for product
(2) 566,820 566,820 - - - Purchase obligations for commodities (3) 150,594 114,342 36,252 - -
Other purchase obligations (4) 102,317 30,630 45,300
26,387 -
Net unrecognized tax benefits
(5) 6,359 1,038 5,321 - - Total$ 1,071,508 $ 762,358 $ 169,106 $ 83,094 $ 56,950 (1)Our operating lease commitments consist primarily of building leases for our retail locations, our warehouse and DC, and regional offices, and include the undiscounted cash lease payments owed under the terms of our operating lease agreements. In addition to the above operating lease commitments outstanding, there is$20,284 of legally binding minimum lease payments due pursuant to a lease signed but not yet commenced, nor recorded in our consolidated financial statements, as ofMarch 31, 2021 for a new US distribution center. 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 lease assets and liabilities. (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 are expected to be paid within one year. We can cancel a significant portion of the purchase obligations under certain circumstances; however, the occurrence of such circumstances is generally limited. 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 increased demand for certain products combined with the impacts of the pandemic that may result in supply chain disruptions, we are currently expecting that our inventory purchases with our third-party manufacturers will be significantly higher for the fiscal year endingMarch 31, 2022 compared to prior fiscal years. (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. During the year endedMarch 31, 2021 , we experienced a shift in product mix that used less of a certain sheepskin grade. As a result, we negotiated a deferral of additional deposit payments, which represent remaining minimum commitments under certain expired sheepskin supply agreements. As ofMarch 31, 2021 , the remaining minimum purchase commitment under these expired agreements was approximately$28,000 . Subsequent toMarch 31, 2021 throughMay 13, 2021 , this deposit was paid. (4)Our other purchase obligations consist of non-cancellable minimum commitments for logistics arrangements, an IT agreement for a new inventory planning system, requirements to pay promotional expenses, and other commitments under service contracts, which are due during fiscal years 2022 through 2026. Amounts excluded from other purchase obligations above include any capital expenditures that will be purchased before the end of the fiscal year endingMarch 31, 2022 , which we estimate will range from approximately$65,000 to$70,000 . We anticipate these expenditures will primarily relate to the build-out of our new US DC, IT infrastructure and system 44 -------------------------------------------------------------------------------- Table of Contents upgrades, and refreshes to our global retail store fleet including new retail stores. Other anticipated expenditures include upgrades to our existing warehouse and DC as well as our global office facilities. 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, and the timing of other expenditures. (5)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 ofMarch 31, 2021 , the timing of future cash outflows is highly uncertain related to statute of limitations liabilities of$17,524 , therefore we are unable to make a reasonable estimate of the period of cash settlement. Refer to Note 5, "Income Taxes," of our consolidated financial statements 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 positive impact
on the year 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 ongoing 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.
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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 regarding the
components of variable consideration, including allowances for sales discounts,
chargebacks, and our sales return liability.
Accounts Receivable Allowances. The following table summarizes critical accounting estimates for accounts receivable allowances and reserves:
As of March 31,
2021 2020
% of Gross % of Gross
Trade Accounts Trade Accounts
Amount Receivable Amount Receivable
Gross trade accounts receivable $ 242,234 100.0 % $ 206,742 100.0 %
Allowance for doubtful accounts (9,730) (4.0) (6,989) (3.4)
Allowance for sales discounts (3,016) (1.2) (1,030) (0.5)
Allowance for chargebacks (13,770) (5.8) (13,127) (6.3)
Trade accounts receivable, net $ 215,718 89.1 % $ 185,596 89.8 %
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,
2021 by approximately $1,800 .
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,
2021 2020
Amount % of Net Sales Amount % of Net Sales
Net Sales
Wholesale $ 326,106 58.1 % $ 230,677 61.5 %
Direct-to-Consumer 235,082 41.9 144,233 38.5
Total $ 561,188 100.0 % $ 374,910 100.0 %
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As of March 31,
2021 2020
Amount % of Net Sales Amount % of Net Sales
Sales Return Liability
Wholesale $ (23,987) (7.4) % $ (21,846) (9.5) %
Direct-to-Consumer (13,730) (5.8) (3,821) (2.6)
Total $ (37,717) (6.7) % $ (25,667) (6.8) %
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
generally accepted from customers between 30 to 90 days from the 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 an asset for the right to
recover the inventory and a refund liability for the stand-ready right of
return. Changes to the refund liability are recorded against gross sales and
changes to the asset for the right to recover the inventory are recorded against
cost of sales. 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 sales return liability as of
March 31, 2021 by approximately $5,000 .
Inventory Reserves. The following tables summarize estimates for our inventory
reserves:
As of March 31,
2021 2020
% of Gross % of Gross
Amount Inventory Amount Inventory
Gross Inventories $ 297,874 100.0 % $ 323,847 100.0 %
Write-down of inventories (19,632) (6.6) (12,227) (3.8)
Inventories, net $ 278,242 93.4 % $ 311,620 96.2 %
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
of March 31, 2021 by approximately $1,600 .
Operating Lease Assets and Lease Liabilities. Key accounting policy elections
for the new lease standard applied to our consolidated financial statements are
as follows:
•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 be exercised, 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 cannot determine 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 a collateralized 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 non-collateralized borrowings
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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 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 disclosures.
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, discount rates, 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 customer 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 endedMarch 31, 2021 and 2020, we performed our annual impairment assessment and evaluated the UGG and HOKA brands' wholesale reportable operating segment goodwill as ofDecember 31st and evaluated our Teva indefinite-lived trademarks as ofOctober 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. 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 on our goodwill and indefinite-lived intangible assets and annual impairment assessment results. 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.
During the year ended
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During the years ended March 31, 2021 and 2020, 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 $14,084 and $1,365 , 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 on our definite-lived intangible and other long-lived
assets.
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 predetermined 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 increased approximately $28,300 during
the year ended March 31, 2021 compared to the year ended March 31, 2020 . The
primary reason for this increase was the achievement of the maximum performance
criteria for the 2020 and 2019 long-term incentive plan restricted stock units
as well as the over achievement of the performance criteria governing our cash
bonuses compared to the prior period. Performance-based compensation expense is
primarily recorded in SG&A expenses, with cash bonuses for certain employees
recorded in cost of goods sold 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.
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.
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Table of Contents 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 our US and foreign subsidiaries. A cash distribution of income from foreign subsidiaries that was previously taxed earnings and profits (PTEP) 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 PTEP. Refer to Note 5, "Income Taxes," of our consolidated financial statements in Part IV within this Annual Report for further information on our income taxes and tax strategy.
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