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Section 1: 10-K (DECK 3 31 2019 10-K)

Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the Fiscal Year Ended March 31, 2019

Commission File Number: 001-36436

DECKERS OUTDOOR CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
95-3015862
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

250 Coromar Drive, Goleta, California 93117
(Address of principal executive offices)
 
(805) 967-7611
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
DECK
New York Stock Exchange
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No ý

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No o
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
 
 
Non-accelerated filer o
Smaller reporting company o
 
 
 
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No ý

At September 30, 2018, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting stock held by the non-affiliates of the registrant was approximately $3,468,302,000, based on the number of shares held by non-affiliates of the registrant as of that date, and the last reported sale price of the registrant’s common stock on the New York Stock Exchange on that date, which was $118.58. This calculation does not reflect a determination that persons are affiliates for any other purposes.

As of the close of business on May 17, 2019, the number of outstanding shares of the registrant’s common stock, par value $0.01 per share, was 29,142,002.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement on Schedule 14A relating to the registrant’s 2019 annual meeting of stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, are incorporated by reference in Part III within this Annual Report on Form 10-K. With the exception of the portions of the Proxy Statement specifically incorporated herein by reference, the Proxy Statement and related proxy solicitation materials are not deemed to be filed as part of this Annual Report on Form 10-K.
 




DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
For the Fiscal Year Ended March 31, 2019
TABLE OF CONTENTS
 
 
Page
 
 
Item 1B.
Unresolved Staff Comments
*
Item 4.
Mine Safety Disclosures
*
 
 
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
*
Item 9B.
Other Information
*
 
 
 
 
 
 
Item 16.
Form 10-K Summary
*
 
 
 
*Not applicable.
 


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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K for our fiscal year ended March 31, 2019 (Annual Report), and the information and documents incorporated by reference into this Annual Report, contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), which statements are subject to considerable risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements other than statements of historical fact contained in, or incorporated by reference into, this Annual Report. We have attempted to identify forward-looking statements by using words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” “will,” or “would,” and similar expressions or the negative of these expressions. Specifically, this Annual Report, and the information and documents incorporated by reference into this Annual Report, contain forward-looking statements relating to, among other things:

our business, operating, investing, capital allocation, marketing and financing strategies;
the impacts of our restructuring and operating profit improvement plans;
the impacts of our ongoing operational system upgrades;
the expansion of our brands and product offerings, and changes to the geographic mix of our products;
changes to our product distribution channels, including the implementation of our product segmentation strategy;
changes in consumer tastes and preferences with respect to our brands and products in particular, and the fashion industry in general;
trends impacting the purchasing behavior of wholesale customers and retail consumers, including those impacting retail and E-commerce businesses;
the impact of seasonality and weather on consumer behavior and our results of operations;
the impact of our efforts to continue to advance sustainable and socially conscious business operations;
expectations relating to the expansion of Direct-to-Consumer capabilities;
our plans to consolidate certain distribution center operations;
availability of raw materials and manufacturing capacity, and reliability of overseas production and storage;
commitments and contingencies, including purchase obligations for product and raw materials;
the impacts of new or proposed legislation, tariffs, regulatory enforcement actions or legal proceedings;
the value of goodwill and other intangible assets, and potential write-downs or impairment charges;
changes impacting our tax liability and effective tax rates;
completed and expected repatriation of earnings of non-United States subsidiaries and any related tax impacts;
the impact of recent accounting pronouncements; and
overall global economic trends, including foreign currency exchange rate fluctuations, increased interest rates and increased fuel costs.

Forward-looking statements represent management’s current expectations and predictions about trends affecting our business and industry and are based on information available at the time such statements are made. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy or completeness. Forward-looking statements involve numerous known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements predicted, assumed or implied by the forward-looking statements. Some of the risks and uncertainties that may cause our actual results to materially differ from those expressed or implied by these forward-looking statements are described in Part I, Item 1A, “Risk Factors,” and Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report, as well as in our other filings with the Securities and Exchange Commission (SEC). You should read this Annual Report, including the information and documents incorporated by reference herein, in its entirety and with the understanding that our actual future results may be materially different from the results expressed or implied by these forward-looking statements. Moreover, new risks and uncertainties emerge from time to time and it is not possible for management to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause our actual future results to be materially different from any results expressed or implied by any forward-looking statements. Except as required by applicable law or the listing rules of the New York Stock Exchange (NYSE), we expressly disclaim any intent or obligation to update any forward-looking statements. We qualify all of our forward-looking statements with these cautionary statements.

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PART I

References within this Annual Report to “Deckers,” “we,” “our,” “us,” or the “Company” refer to Deckers Outdoor Corporation, together with its consolidated subsidiaries. UGG® (UGG), Teva® (Teva), Sanuk® (Sanuk), HOKA One One® (HOKA), Koolaburra® (Koolaburra), Ahnu® (Ahnu) and UGGpureTM (UGGpure) are some of our trademarks. Other trademarks or trade names appearing elsewhere in this Annual Report are the property of their respective owners. Solely for convenience, the trademarks and trade names within this Annual Report are referred to without the ® and™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto.

Unless otherwise specifically indicated, all dollar amounts in Items 1, 1A, 2, and 3 herein are expressed in thousands, except for per share, hours, or pairs data. The defined periods for the fiscal years ended March 31, 2019, 2018, and 2017 are stated herein as “year ended” or “years ended”.

Item 1. Business

General

Deckers Outdoor Corporation was incorporated in 1975 under the laws of the State of California and, in 1993, reincorporated under the laws of the State of Delaware. We are a global leader in designing, marketing, and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high-performance activities. We market our products primarily under five proprietary brands: UGG, HOKA, Teva, Sanuk and Koolaburra. We believe that our products are distinctive and appeal broadly to women, men and children. We sell our products through quality domestic and international retailers, international distributors, and directly to our consumers both domestically and internationally through our Direct-to-Consumer (DTC) business, which is comprised of our retail stores and E-Commerce websites. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. All of our products are currently manufactured by independent manufacturers.

Recent Developments

Restructuring Plan. During February 2016, we announced the implementation of a multi-year restructuring plan which was designed to realign our brands across our Fashion Lifestyle and Performance Lifestyle groups, optimize our worldwide owned retail store fleet, and consolidate our management and operations. The Fashion Lifestyle group includes the UGG and Koolaburra brands. The Performance Lifestyle group includes the HOKA, Teva, and Sanuk brands. In general, the intent of our restructuring plan was to reduce overhead costs and create operating efficiencies while improving collaboration across brands.

As of March 31, 2019, we have completed our restructuring plan and achieved cumulative selling, general and administrative (SG&A) expense savings to date along with cumulative restructuring charges. We currently do not anticipate incurring additional restructuring charges in connection with this restructuring plan.

Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and Note 1, “General,” under the heading “Restructuring Plan” of our consolidated financial statements in Part IV within this Annual Report for further information on our restructuring efforts and its impact on our results of operations and reportable operating segments.

Operating Profit Improvement Plan. During February 2017, we announced that, in addition to continuing to execute on our restructuring plan, we would implement various business transformation initiatives to further reduce expenses and improve gross margins, the projected combined impact of which was expected to be approximately $100,000 of net annualized operating profit improvement by the end of the fiscal year ending March 31, 2020. As of March 31, 2019, we have successfully completed our plan and achieved in excess of $100,000 of net annualized operating profit improvement under both our restructuring and operating profit improvement plans. We will continue to apply the lessons learned in our completed plans by pursuing opportunities to optimize profitability and seeking to enhance operating results throughout our business.

Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further information on our operating profit improvement plan and its impact on our results of operation and reportable operating segments.

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Products and Brands

We currently market our products primarily under five propriety brands, composed of our four primary brands and our Other brands. Collectively, our brands compete across the fashion and casual lifestyle, performance, running and outdoor markets.

UGG. 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 attracts women, men and children. We intend to continue diversifying the UGG brand to drive year-round product sales, including expansion of women’s spring and summer footwear, men’s products, apparel, home goods and accessories. The UGG brand is sold both domestically and internationally in key markets including the United States (US), Europe, Asia-Pacific, Canada and Latin America.

HOKA. 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, and now appeals to athletes around the world, regardless of activity. The HOKA brand is quickly becoming a leading brand within the specialty community with strong marketing fueling both domestic and international sales growth. We intend to leverage our domestic specialty strategy to expand and invest in international sales growth. The HOKA brand is sold both domestically and internationally in key markets, including the US, Canada, Europe, and Asia-Pacific.

Teva. The Teva brand, which pioneered the sport sandal category, is born from the outdoors and rooted in adventure. The Teva brand is a global leader within the sport sandal and modern outdoor lifestyle categories by fueling the expression of freedom. The Teva brand’s product line includes sandals, shoes, and boots.

Sanuk. 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. The Sanuk brand’s use of unexpected materials and unconventional constructions, combined with its fun and playful branding, are key elements of the brand’s identity.

Other Brands. Other Brands currently consists of the Koolaburra by UGG brand, as well as other discontinued brands during the periods presented. The Koolaburra brand is a casual footwear fashion line using sheepskin and other plush materials, sold primarily through our wholesale channel and is intended to target the value-oriented consumer in order to complement our UGG brand offering.

Sales and Distribution

US Distribution. In our wholesale channel, we distribute our products in the US through sales representatives, who are organized by account type or geographically and by brand. In addition to our wholesale channel, we also sell products directly to consumers through our DTC business.

Currently, our sales force is typically separated by brand, as each brand generally has certain specialty consumers that expect a dedicated sales team with specialized knowledge of our brands’ product offerings. However, there is some overlap between the sales teams and customers, and we have aligned our brands’ sales forces to position them for the future success of each of our brands.

We distribute products sold in the US through our distribution centers in Moreno Valley and Camarillo, California, as well as through a third-party logistics provider (3PL) in Pennsylvania. Our distribution centers feature a warehouse management system that enables us to efficiently pick and pack products for direct shipment to customers.

While we continue to operate our distribution center in Camarillo, we are currently working to move all of our Camarillo distribution operations to our Moreno Valley location. Once the migration of our distribution center operations from Camarillo to our Moreno Valley location is complete, we will be closing our Camarillo distribution center. We anticipate this closure to be completed in the first half of fiscal year 2020.

Refer to Item 2, “Properties,” and Note 7, “Commitments and Contingencies,” of our consolidated financial statements in Part IV within this Annual Report for further disclosure and discussion.


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International Distribution. Internationally, in our wholesale channel, we distribute our products through independent distributors and wholly-owned subsidiaries in many regions and countries, including Europe, Asia-Pacific, Latin America, and Canada, among others. We also sell products internationally, particularly in China, through partner retail stores, which are branded stores that are wholly-owned and operated by third parties. In addition, in certain countries we sell products through our DTC business. For our wholesale and DTC businesses, we distribute our products through a number of distribution centers managed by 3PLs in certain international locations.

UGG Wholesale. We sell our UGG brand products primarily through domestic higher-end department stores such as Nordstrom, Dillard’s, and Macy’s, as well as lifestyle retailers such as Journeys, and online retailers such as Amazon.com, Zappos.com, and Zalando.com. As the retail marketplace continues to evolve to reflect changing consumer preferences, we continually review and evaluate our UGG wholesale distribution and product segmentation approach.

HOKA Wholesale. We sell select HOKA brand footwear primarily through full-service domestic specialty retailers and select online retailers, including Fleet Feet, Road Runner Sports, Running Specialty Group, REI, Zappos.com, Amazon.com, and Running Warehouse. We expect to expand our HOKA brand wholesale distribution into international markets, including through strategic partners such as Intersport and Sport 2000 in Europe and Xebio Group in Japan.

Teva Wholesale. We sell our Teva brand footwear primarily through specialty outdoor retailers, sporting goods and department stores, including REI, Famous Footwear, DSW, Urban Outfitters, Free People, and online retailers such as Amazon.com and Zappos.com.

Sanuk Wholesale. We sell our Sanuk brand footwear primarily through domestic independent action sports and outdoor specialty footwear retailers, larger national retail chains, and online retailers, including Journeys, Dillard’s, DSW, REI, and online retailers such as Amazon.com and Zappos.com.

Other Brands Wholesale. We sell our other brands’ footwear primarily through department stores and online retailers. Key accounts of the Koolaburra brand include Kohl’s, DSW, QVC, and Rack Room Shoes.

Direct-to-Consumer. Our DTC business is comprised of our retail stores and E-Commerce websites. Our retail stores and websites are largely intertwined and interdependent. In an Omni-Channel marketplace, we believe many of our consumers interact with both our retail stores and our websites before making purchasing decisions. For example, consumers may feel or try on products in our retail stores and then place an order online later. Conversely, they may initially research products online, and then view inventory availability by store location and make a purchase in store. Some examples that demonstrate the extent to which the sales channels are combined, which are designed to engender brand loyalty while increasing product sales and improving our inventory productivity, include the following:

“UGG Rewards”: We have implemented a consumer loyalty program under which points and awards are earned across the DTC business.

“Infinite UGG”: We provide online shopping access inside retail stores for all SKUs available on our E-Commerce websites.

“Ship from Store”: Inventory that is available in our stores but is out of stock online can be shipped from our stores. We expect future advancements in this capability will use algorithms to select the optimal fulfillment source.

“UGG Closet”: A limited E-Commerce outlet channel that offers an online portal designed to provide an efficient way to closeout inventory through direct sales to consumers.

“Buy Online / Return in-Store”: Our consumers can buy online and return products to our retail stores.

“Click and Collect”: Our consumers can buy online and have products delivered to certain retail stores for pick-up.

“Retail Inventory Online”: Our consumers can view specific store location inventory online before visiting the store.


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Our retail stores enable us to expose consumers to a greater selection of products, directly impact our consumers’ experience with our brands, and sell our products at retail prices thereby generating larger gross margins. 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 of March 31, 2019, we had a total of 156 company-owned global retail stores, which includes 88 concept stores and 68 outlet stores. Included in the total count of retail stores worldwide are nine UGG brand flagship stores, which are lead concept stores in our retail channel. In certain key markets and prominent locations, we have opened flagship stores to showcase our UGG brand products. These stores are typically larger and have broader product offerings and greater traffic than our general concept stores as they are primarily located in major tourist areas. Included in the total count of retail stores worldwide are concession stores, which are concept stores that are operated by us within a department or other store, which we lease from the store owner by paying a percentage of concession store sales. Partner retail stores are excluded from the total count of worldwide company-owned retail stores.

Refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report for further disclosure and discussion.

Product Design and Development

The design and development functions for all of our brands are performed by a combination of internal design and development staff and outside freelance designers. Our design and development staff work closely with brand management to develop new styles for our product lines. Throughout the development process, we have multiple design and development reviews, which we then coordinate with our independent manufacturers. To ensure quality, consistency, and efficiency in our product design and development process, we continually evaluate the availability and cost of raw materials, the capabilities and capacity of our independent manufacturers, and the target retail price of new products.

Manufacturing and Supply Chain

We outsource the production of our products to independent manufacturers, which are primarily located in Asia. We generally purchase products from our manufacturers on the basis of individual purchase orders or short-term purchase commitments, rather than maintaining long-term purchase commitments, which provides us greater flexibility to adapt to changing consumer preferences, changes in international trade relations, and manage our inventory. However, we do have long-standing relationships with most of these independent manufacturers, and we may not be able to identify substitute alternative manufacturers to satisfy our desire for such flexibility. We require our independent manufacturers and designated suppliers to adopt our Ethical Supply Chain Supplier Code of Conduct, which specifies that they comply with all local laws and regulations governing human rights, working conditions, and environmental compliance before we are willing to conduct business with them. We also require our manufacturing partners and licensees to comply with our Restricted Substances Policy, Anti-Corruption Policy and Conflict Minerals Policy, as well as other compliance policies and procedures, as a condition to conducting business with us.

Production by our independent manufacturers is performed in accordance with our detailed product specifications and rigorous quality control standards. We maintain a buying office in Hong Kong, as well as on-site supervisory offices in China and Vietnam, which collectively serve as a strong link to our independent manufacturers. We believe our strong regional presence enhances our manufacturing processes by providing predictability of material availability, compliance with laws and regulations, and adherence to quality control standards and final design specifications. In addition, we have instituted pre-production, in-line, and post-production inspections to meet or exceed our product quality requirements, as well as the expectations of our consumers. Our quality assurance program includes our own employee on-site inspectors at our independent manufacturers, who oversee the production process and perform quality assurance inspections. We also routinely inspect our products upon arrival at our distribution centers.

The majority of the materials and components used in the production of our products by these independent manufacturers are purchased from independent suppliers that we designate. At our direction, our manufacturers currently purchase the majority of the sheepskin used in our products from two tanneries in China, which source their sheepskin primarily from Australia and the United Kingdom (UK). We maintain routine communication with the tanneries to closely monitor the supply of sufficiently high-quality sheepskin for our projected UGG brand production. To ensure an adequate supply of sheepskin, we forecast our expected usage in advance at a forward price. We also enter into purchasing contracts and other pricing arrangements with certain sheepskin and leather suppliers to manage the supply

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of sheepskin. We believe current supplies are sufficient to meet our current and anticipated demand, but we continually monitor our supply chain and investigate options to accommodate our expected growth, as well as unexpected supply chain issues. Refer to Note 7, “Commitments and Contingencies,” of our consolidated financial statements in Part IV within this Annual Report for further information on our minimum purchase commitments.

In an effort to partially reduce our dependency on sheepskin, we use a proprietary raw material, UGGpure, which is a re-purposed wool woven into a durable backing, in some of our UGG brand products. In addition, as part of an ongoing effort to eliminate waste as part of our corporate sustainability efforts, most of the wool in UGGpure is sheared from the hides we are already using in our products. In addition, we are continuing to drive our strategy of introducing counter-seasonal products through category expansion, including the UGG brand’s spring and summer products, as well as the year-round performance footwear product offering of the HOKA brand, which we believe will help further reduce our dependency on sheepskin and UGGpure. Excluding sheepskin and UGGpure, we believe that substantially all raw materials and components used to manufacture our products, including wool, rubber, leather, and nylon webbing, are generally available from multiple sources at competitive prices.

Inventory Management and Product Returns

We have an extended design and manufacturing process, which involves the initial design of our products, the purchase of raw materials, the accumulation of inventories, the subsequent sale of the inventories, and the collection of the resulting accounts receivable. This production cycle results in significant liquidity requirements and working capital fluctuations throughout our fiscal year. Because our production cycle typically involves long lead times, which requires us to make manufacturing decisions several months in advance of an anticipated purchasing decision by the consumer, it is challenging for us to estimate and manage our inventory and working capital requirements.

We seek to manage our inventory levels by considering existing customer orders, forecasted sales and budgets, and the delivery requirements of our customers. As part of our operating profit improvement plan, we have implemented systems and processes designed to improve our product forecasting, inventory control and supply chain management capabilities. In addition, added discipline around product purchasing decisions, the reduction of production lead times, and the sale of excess inventory through our liquidation channels, are key areas of focus that we expect will further enhance inventory performance.

Our practice, and the general practice in our industry, is to offer retail customers the right to return defective or improperly shipped merchandise.

Backlog

We encourage our wholesale and distributor customers to place a significant portion of orders as pre-season orders, which are typically placed up to 12 months prior to the anticipated shipment date, as well as in-season fill-in orders that can be shipped immediately. We work with our customers through pre-season programs to enable us to better plan our production schedule, inventory and shipping requirements.

We have historically defined backlog as unfilled customer orders from our wholesale customers and distributors as of any particular date, which represent orders scheduled to be shipped at a future date, some of which are subject to cancellation prior to shipment. Our calculation of backlog also includes bulk orders, which generally comprise larger volume orders from significant customer accounts. These types of orders typically have terms that allow customers to vary the location and timing of shipments.

As of March 31, 2019, our backlog was $978,200, which represents a 14.4% annual increase over our backlog as of March 31, 2018. The backlog increase primarily relates to timing where certain top customers placed orders earlier versus the prior comparative period rather than an indication of an expected significant increase in sales.
 
We believe backlog is an imprecise indicator of our actual product shipments and future operating results and is not material to an overall understanding of our business, especially given that backlog excludes sales within our DTC segment, as well as in-season orders. The backlog as of a particular date is affected by a number of factors, including seasonality, the timing of customer orders, the timing of product shipments, the potential that certain orders may be cancelled, and our manufacturing schedule. As a result, comparisons of backlog from period-to-period are not necessarily indicative of our future operating results.


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Our People and our Culture

Employees. As of March 31, 2019, we employed approximately 3,500 employees in North America, Europe, and Asia. This includes approximately 1,600 employees in our retail stores worldwide, which includes part-time and seasonal employees. For a variety of reasons, including those discussed below, we believe that our relationship with our employees is favorable.

Encouraging Diversity. We strive to create a culture of inclusion where employees are able to freely contribute equally regardless of gender, age, race, disability or sexual orientation. Our Code of Ethics, which all employees are trained on bi-annually, codifies these values. Our employee-led initiative, VOICES, is an avenue that elevates employee issues and celebrates our uniqueness.

Corporate Responsibility and Sustainability

As a global leader in designing, marketing and distributing innovative footwear, apparel and accessories, our worldwide scope and impact is significant. Equally significant is the responsibility we believe we have to our stakeholders, including our consumers, employees, shareholders, and the communities we serve to employ socially conscious operations and sustainable business practices, with the goal of continuing to deliver quality products to our consumers and sound financial performance to our shareholders, while minimizing the environmental impact of our business footprint. Achieving measurable sustainability success is key to our future economic and business growth, and we constantly work to establish sustainable development goals (SDGs) that we believe will make the most significant impact for our business, our shareholders and our communities. Our sustainability policies and strategies are aligned with, and informed by, our ongoing efforts with multi-stakeholder initiatives, which involve our employees, our suppliers and our customers, as well as other brands and non-governmental organizations.
 
In 2010, we launched our Corporate Responsibility Program, and in October 2016 we announced our participation in the United Nations Global Compact (UNGC), which is the world’s largest voluntary corporate citizenship initiative. Our Compliance Officer is tasked with identifying specific SDGs set forth in the UNGC, which guide our supply chain and brand business teams’ efforts to address environmental and social challenges, while the three independent members of the Corporate Governance Committee will oversee our corporate responsibility and sustainability efforts. Our internal audit team provides periodic targeted reviews of our policies and procedures to the Audit Committee to help us remain focused on our approach to our SDG’s and to ensure appropriate leadership involvement.

We assess risks related to environmental, social and governance issues annually as part of our overall enterprise risk management approach. This assessment informs the annual targets established for our SDGs, which are currently focused on seven categories where we believe we can make the most impact, namely, materials; waste; water; gender equality and quality education; chemicals; climate and clean energy; and human rights. We have been recognized by Barron’s as one of the Top 100 most sustainable US companies in calendar year 2019. We encourage our key manufacturing partners and suppliers to adopt sustainable business practices, which are intended to minimize adverse impact on the environment. We also have an Ethical Supply Chain Supplier Code of Conduct and Animal Welfare Policy which guides our partners to act responsibly when sourcing materials on our behalf. We also audit our operations, and the operations of key partners within our supply chain, to ensure workers are treated with dignity and respect.

The following is a brief overview of our current SDGs and fiscal year 2019 related achievements:

Materials: We sourced 97% of our leather supplies from Leather Working Group-certified tanneries, which promote sustainable and environmentally friendly business practices within the leather industry.
Materials: We continue to seek sustainable alternatives for key product materials, with a goal to source at least 90% of materials from suppliers certified by third-party benchmarking organizations.
Water: We have reduced our water usage through manufacturing process improvements and have encouraged our manufacturing partners and suppliers to do the same by measuring their water output. Our sustainable development goal mandates that at least 90% of our core factory partners and suppliers apply industry best practices regarding water treatment and usage.
Chemicals: We seek to achieve environmentally sound management of chemicals and reduce the discharge of hazardous substances among our key business partners. We are on track to eliminate PFCs from our supply chain by calendar year 2020.
Climate and Clean Energy: We strive to increase our year-over-year solar power usage at our headquarters and distribution centers, as well as to integrate climate change measures into our policies

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and planning. We measure energy usage by certain of our partners to encourage reduced energy consumption.
Gender Equality and Quality Education: We promote diversity, gender equality, female empowerment, and inclusion through our annual Women’s Leadership Summit, our partnership with the HERproject, and our initiation of the EDGE Certification process, the leading global assessment and business certification for gender equality.
Human Rights: We have established robust ethical supply chain criteria based on International Labor Organization standards and audit our supply chain pursuant to such criteria on an ongoing basis. Audit results are included on performance scorecards for regular review by executive management.

Our fiscal year 2019 Corporate Responsibility Report will provide more information on our achievements this year.

Charitable Giving and Volunteering. Our charitable contributions, product donations, and employee volunteer efforts are an essential part of our culture. During fiscal year 2019, we have dedicated out strategic giving and engagement efforts to categories related to our SDGs, our business and our communities because we believe that is where we can make the most impact, including arts and culture, human services, education, international affairs, environment and animal welfare, and health and society. During fiscal year 2019, we donated over $1,300 to various non-profit organizations. Since 2006, we have donated over 900,000 pairs of shoes to Soles4Souls and Good360, non-profit organizations that distribute shoes to those in need. We encourage our employees to volunteer by compensating them for up to 24 hours of volunteer time each year.

Reportable Operating Segments and Geographic Areas

Our six reportable operating segments include the strategic business units responsible for the worldwide operations of the wholesale divisions of our brands (UGG, HOKA, Teva, Sanuk, and Other brands), as well as our DTC business. Refer to Note 12, “Reportable Operating Segments,” for further discussion of our reportable operating segments and to Note 13, “Concentration of Business,” of our consolidated financial statements in Part IV within this Annual Report for financial information about geographic areas and concentration of related business risks.

Seasonality

Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th. Due to the size of the UGG brand relative to our other brands, our aggregate net sales in the quarters ending September 30th and December 31st have significantly exceeded net sales in the quarters ending March 31st and June 30th. While we have taken steps to diversify our product offerings, both by creating more year-round styles and expanding product offerings within our existing brands, and by acquiring and developing new brands, we expect this trend to continue for the foreseeable future.

For further discussion of the factors that may cause our actual results to differ materially from our expectations, as well as factors that may impact our future results of operations, refer to Item 1A, “Risk Factors,” and Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” within this Annual Report.

Competition

The markets in which we operate are highly competitive. Our competitors include athletic and footwear companies, branded apparel companies and retailers with their own private labels. Although the footwear industry is fragmented to a certain degree, many of our competitors are larger and have substantially greater resources than us, several of which compete directly with some of our products. In addition, access to offshore manufacturing and the growth of E-Commerce has made it easier for new companies to enter the markets in which we compete, further increasing competition in the footwear, apparel and accessories industry. In particular, and in part due to the popularity of our UGG brand and HOKA brand products, we face increasing competition from a significant number of domestic and international competitors selling products designed to compete directly or indirectly with our products. We believe that our ability to successfully compete depends on numerous factors, including our ability to assess and respond quickly to changing consumer tastes and preferences, produce appealing products that meet expectations for product quality and technical performance, maintain and enhance the image and strength of our brands, price our products competitively, and adjust to changing legal and social standards, among others.


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In addition, we believe that our key customers face intense competition from other department stores, sporting goods stores, retail specialty stores, and online retailers, among others, which could negatively impact the financial stability of their businesses and their ability to conduct business with us.

Refer to Item 1A, “Risk Factors,” within this Annual Report for further discussion of the potential impact of competition on our business and results of operations.

Patents and Trademarks

We utilize trademarks for virtually all of our products and believe that having distinctive marks that are readily identifiable is an important factor in creating a market for our products, promoting our brands, and distinguishing our products from the products of others. We currently hold trademark registrations for “UGG,” “Teva,” “Sanuk,” “HOKA One One,” “Koolaburra,” “Ahnu,” “UGGpure,” and other marks in the US, and for certain of the marks in many other countries, including Canada, China, the UK, various countries in the European Union, Japan and Korea. As of March 31, 2019, we hold 182 designs and inventions with corresponding design or utility patent registrations, plus ten designs and inventions which are currently pending registration. These patents expire at various times. We regard our proprietary rights as valuable assets and vigorously protect such rights against infringement by third parties.
 
Government Regulation

Compliance with federal, state, and local environmental regulations has not had, and it is not expected to have, any material effect on our business, results of operations, financial condition, or competitive position based on information and circumstances known to us at this time.

Available Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and information statements (and any amendments or supplements to the foregoing) filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge on our website at www.deckers.com. Such documents and information are available as soon as reasonably practicable after they are filed with or furnished to the SEC. The SEC also maintains a website at www.sec.gov that contains reports, proxy statements, information statements and other information regarding issuers that file with the SEC.

We also make the following corporate governance documents available through our website: Audit Committee Charter, Compensation Committee Charter, Corporate Governance Committee Charter, Code of Ethics, Corporate Responsibility Report, Restricted Substance Policy, Ethical Supply Chain Supplier Code of Conduct, Accounting and Finance Code of Conduct, Corporate Governance Guidelines, and Conflict Minerals Policy.

The information contained on or accessed through our website does not constitute part of this Annual Report, and references to our website address within this Annual Report are inactive textual references only.

Item 1A. Risk Factors

Our short and long-term success is subject to numerous risks and uncertainties, many of which involve factors that are difficult to predict or beyond our control. As a result, investing in our common stock involves substantial risk. Before deciding to purchase, hold or sell our common stock, stockholders and potential stockholders should carefully consider the risks and uncertainties described below, in addition to the other information contained in or incorporated by reference into this Annual Report, as well as the other information we file with the SEC. If any of these risks are realized, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that case, the value of our common stock could decline, and stockholders may lose all or part of their investment. Furthermore, additional risks and uncertainties of which we are currently unaware, or which we currently consider to be immaterial, could have a material adverse effect on our business.

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.


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Many of our products are inherently seasonal, and the sales of our products are highly sensitive to weather conditions, which makes it difficult to anticipate consumer demand for our products, manage our expenses, and forecast our financial results.

Due to the nature of many of our product offerings, sales of our products are inherently seasonal. Historically, the highest percentage of UGG brand net sales have occurred in the fall and winter months (our second and third fiscal quarters), and the highest percentage of Teva brand and Sanuk brand net sales have occurred in the spring and summer months (our first and fourth fiscal quarters). Due to the size of the UGG brand relative to our other brands, this trend has resulted in our net sales for the second and third fiscal quarters significantly exceeding our net sales in the first and fourth fiscal quarters. While we have taken steps to diversify our product offerings, both by creating more year-round styles and expanding product offerings within our existing brands, and by acquiring and developing new brands, we expect this trend to continue for the foreseeable future.

In particular, sales of our products are highly sensitive to weather conditions, which are difficult to predict and beyond our control. For example, extended periods of unseasonably warm weather during the fall or winter months may significantly reduce demand for our UGG brand products. Unfavorable or unexpected weather patterns may have a material, negative impact on our business, financial condition, results of operations and prospects. In addition, the unpredictability of weather conditions makes it more difficult for us to accurately forecast our financial results and to meet the expectations of analysts and investors.

As a result of the relative concentration of our sales in certain months of the year, factors which specifically impact consumer spending patterns in those months, such as unexpected weather patterns, declines in consumer confidence, changing consumer preferences, or uncertain economic conditions, will have a disproportionate impact on our business and could result in our failure to achieve financial performance that is in line with our expectations or the expectations of market participants. In addition, significant fluctuations in our financial performance from period to period as a result of these or other factors could increase the volatility of our stock price, which could cause our stock price to decline.
 
The footwear, apparel and accessories industry is subject to rapid changes in consumer preferences, and if we do not accurately anticipate and promptly respond to consumer demand, we could lose sales, our relationships with customers could be harmed, and our brand loyalty could be diminished.

The footwear, apparel and accessories industry is subject to rapid changes in consumer preferences and tastes, which make it difficult to anticipate demand for our products and forecast our financial results. We believe there are many factors that may affect the demand for our products, including:
 
seasonality, including the impact of anticipated and unanticipated weather conditions;
consumer acceptance of our existing products and acceptance of our new products, including our ability to develop new products that address the needs and preferences of new consumers;
consumer demand for products of our competitors;
the implementation of our segmentation approach to the distribution of certain of our products;
consumer perceptions of and preferences for our products and brands, including as a result of evolving ethical or social standards;
the extent to which consumers view certain of our products as substitutes for other products we manufacture;
publicity, including social media, related to us, our products, our brands, our marketing campaigns and our celebrity endorsers;
the life cycle of our products and consumer replenishment behavior;
evolving fashion and lifestyle trends, and the extent to which our products reflect these trends;
brand loyalty;
changes in consumer confidence and buying patterns, and other factors that impact discretionary income and spending;
legislation restricting our ability to use certain materials in our products; and
changes in general economic, political and market conditions.

Consumer demand for our products depends in part on the continued strength of our brands, which in turn depends on our ability to anticipate, understand and promptly respond to the rapidly changing preferences and fashion tastes of footwear, apparel and accessories consumers. As our brands and product offerings continue to evolve, it is necessary for our products to appeal to an even broader range of consumers whose preferences cannot be predicted with certainty. For example, many UGG brand products include a fashion element and could go out of style at any time. Furthermore,

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we are dependent on consumer receptivity to our new products and to the marketing strategies we employ to promote those products. Consumers may not purchase new models and styles of footwear, apparel and accessories in the quantities projected or at all. If we fail to predict or react appropriately to changes in consumer preferences and fashion trends, consumers may consider our brands and products to be outdated or associate our brands and products with styles that are no longer popular, which may adversely affect our overall financial performance.

Our success is driven to some extent by brand loyalty, and there can be no assurance that consumers will continue to prefer our brands. The value of our brands is largely based on evolving consumer perceptions, and concerns with respect to factors such as product quality, product design, technical performance, product components or materials, or customer service, could result in negative perceptions and a corresponding loss of brand loyalty and value. In addition, negative claims or publicity regarding us, our products, our brands, our marketing campaigns or our celebrity endorsers, could adversely affect our reputation and sales regardless of whether such claims are accurate. Social media, which accelerates the dissemination of information, can increase the challenges of containing any such negative claims. If consumers begin to have negative perceptions of our brands, whether or not warranted, our brand image would become tarnished and our products would become less desirable, which could have a material adverse effect on our business.

If we are unable to sustain the cost reductions and profitability improvements achieved from the implementation of our restructuring and operating profit improvement plans, we may not achieve operating results in line with our expectations, which could cause our stock price to decline.

We implemented a restructuring plan designed to reduce overhead costs and create operating efficiencies while improving collaboration across our brands. We also implemented an operating profit improvement plan designed to improve profitability by enhancing product development cycle times, optimizing material yields, consolidating our factory base, and relocating product manufacturing and distribution facilities. However, we may not be able to sustain the cost reductions, profitability improvements or other expected benefits of these plans in future periods. If we fail to sustain or expand operating profit improvements in line with our expectations, or with the expectations of research analysts or other market participants, it could have a material adverse impact on our financial performance, which could cause our stock price to decline. Further, our attempts to sustain or expand operating profit improvements may require additional investments and divert management’s time and resources, which may impede our ability to achieve our other strategic objectives.

We face intense competition from both established companies and newer entrants into the market, and our failure to compete effectively could cause our market share to decline, which could harm our reputation and have a material adverse impact on our financial condition and results of operations.

The footwear, apparel and accessories industry is highly competitive, and subject to changing consumer preferences and tastes, we expect to continue to face intense competitive pressures. We believe we compete on the basis of a number of factors, including our ability to:

predict and respond to changing consumer preferences and tastes in a timely manner;
continue to market current products, and develop new products, that appeal to consumers;
produce products that meet our requirements and consumer expectations for quality and technical performance;
accurately predict and forecast consumer demand;
ensure product availability;
manage the impact of seasonality, including unexpected changes in weather conditions;
maintain and enhance brand loyalty;
price our products in a competitive manner;
ensure availability of raw materials and production capacity;
implement our Omni-Channel strategy, including providing a unique customer service experience;
respond to new or proposed legislation impacting our products; and
manage the impact of the rapidly changing retail environment, including with respect to rising competition within the E-Commerce business, especially from online retailers such as Amazon.com.

Our inability to compete effectively with respect to one or more of these factors could cause our market share to decline, which could harm our reputation and have a material adverse impact on our financial condition and results of operations.


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Our competitors include athletic and footwear companies, branded apparel and accessories companies, home goods and sporting goods companies, and specialty retailers with their own private labels. In addition, these competitors include both established companies, as well as newer entrants into the market. In particular, we believe that, as a result of the growth of the UGG brand, certain competitors have entered the marketplace specifically in response to the success of our brands, and that other competitors may do so in the future. A number of our larger competitors have significantly greater financial, technological, engineering, manufacturing, marketing, and distribution resources than we do, as well as greater brand awareness in the footwear, apparel and accessories markets among consumers and other market participants. Our competitors’ greater resources and capabilities in these areas may enable them to more effectively compete on the basis of price and production, develop new products more quickly, develop products with superior technical capabilities, market their products and brands more successfully, identify or influence consumer preferences, withstand the impacts of seasonality, and manage periodic downturns in the footwear, apparel and accessories industry or in economic conditions generally. With respect to newer entrants into the market, we believe that factors such as access to offshore manufacturing and changes in technology will make it easier and more cost effective for these companies to compete with us.

As a result of the competitive environment in which we operate, we have faced, and expect to continue to face, intense pricing pressure. For example, efforts by our competitors to dispose of their excess inventories may significantly reduce prices of competitive products, which may put pressure on us to reduce the pricing of our products in order to compete, or cause consumers to shift their purchasing decisions away from our products entirely. We have also faced, and expect to continue to face, intense pressure with respect to competition for key customer accounts and distribution channels. Further, we believe that our key customers face intense competition from other department stores, sporting goods stores, retail specialty stores, and online retailers, among others, which could negatively impact the financial stability of their businesses and their ability to conduct business with us.

If we fail to compete effectively in the future, our sales could decline, and our margins could be impacted, either of which could have a negative impact on our financial condition and results of operations.

We use sheepskin to manufacture a significant portion of our products, and if we are unable to obtain a sufficient quantity of sheepskin at acceptable prices that meets our quality expectations, or if there are legal or social impediments to our ability to use sheepskin, it could have a material adverse impact on our business.

For the manufacturing of our products, we purchase certain raw materials that are affected by commodity prices, the most significant of which is sheepskin. The supply of sheepskin, which is used to manufacture a significant portion of our UGG brand products, is in high demand and there are a limited number of suppliers that are able to meet our expectations for the quantity and quality of sheepskin that we require. In addition, our unique product design and animal welfare standards require sheepskin that may only be found in limited geographic locations. We presently rely on only two tanneries to provide the majority of our sheepskin. If the sheepskin provided by these tanneries and the resulting products we deliver to consumers do not conform to our quality specifications or fail to meet consumer expectations, we could experience reduced consumer demand for our products, a higher rate of customer returns and negative impacts to the image of our brands, any of which could have a material adverse impact on our business.

Similarly, if the tanneries we rely upon are not able to deliver sheepskin in the quantities required, this would limit our ability to meet customer demand for our products and lead to inventory shortages, which would result in a loss of sales, strain our relationships with our customers and harm our reputation. In addition, any factors that negatively impact the business of these tanneries, or the businesses of the suppliers that warehouse their inventories, such as loss of customers, financial instability or bankruptcy, loss or destruction of equipment or facilities, work stoppages, political instability, acts of terrorism or other catastrophic events, could prevent the tanneries from delivering sheepskin to us in the quantities expected and result in shortages in our supply of sheepskin.

While we have experienced fairly stable pricing in recent years, historically there have been significant fluctuations in the price of sheepskin as the demand for this commodity from our consumers and our competitors has changed. We believe the significant factors affecting the price of sheepskin include weather patterns, harvesting decisions, incidence of disease, the price of other commodities, such as wool and leather, the demand for our products and the products of our competitors, and global economic conditions. Most of these factors are not considered predictable or within our control. Any factors that increase the demand for, or decrease the supply of, sheepskin could cause significant increases in the price of sheepskin, which would increase our manufacturing costs and reduce our gross profits. In an effort to partially reduce our dependency on sheepskin, we began using UGGpure, which is a wool woven into a durable backing, in some of our UGG brand products. In addition, we use purchasing contracts and other pricing arrangements to attempt to reduce the potential impact of fluctuations in sheepskin prices on our results of operations. However, in

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the event of a prolonged increase in sheepskin prices such as what we have experienced in the past, these strategies may not be sufficient to offset the negative impact on our results of operations. In that event, it is unlikely we would be able to adjust our product prices sufficiently to eliminate the impact on our gross profits and our financial results may suffer.

Further, our industry is characterized by rapidly changing fashion trends and consumer preferences. We believe there is a growing trend within the fashion industry towards eliminating the use of certain animal products, most notably fur. For example, legislation has been passed in the US banning the sale of fur in certain cities, and similar legislation is being considered in other geographic locations, including New York City. While the use of leather goods and sheepskin has typically not been subject to this type of legislation, it is possible that future legislation could have the impact of restricting or eliminating our ability to use sheepskin in the products we sell in certain geographic locations. In addition, notwithstanding whether specific legislation is passed, it is possible that consumer preferences and tastes may change based on evolving ethical or social standards, such that our products may potentially become less desirable to certain consumers. Because sheepskin is currently used to manufacture a significant portion of our UGG brand products, any legal or social impediments to the sale of products that include sheepskin, especially within our large target markets, could have a material adverse impact on our business, financial condition and results of operations.

If we are unsuccessful at improving our operational systems and our efforts do not result in the anticipated benefits to us or result in unanticipated disruption to our business, our financial condition and operating results could be adversely affected, and our business may become less competitive.
We continually strive to improve, automate and streamline our operational systems, processes and infrastructure as part of our ongoing effort to improve the overall efficiency and competitiveness of our business. While these efforts have resulted in some improvements to our operational systems, we expect to continue to incur expenses to implement additional improvements and upgrades to our systems. Many of these expenditures have been, and may continue to be, incurred in advance of the realization of any direct benefits to our business. We cannot guarantee that we will be successful at improving our operational systems, or that our efforts will result in the anticipated benefits to us. If our operational system upgrades and improvements are not successful, our financial condition and operating results could be adversely affected, and our business may become less competitive.

In addition, our operational system upgrades have the potential to be disruptive to our existing business operations as our managers and employees attempt to learn new software programs and control systems, and adapt to new operating requirements, while continuing to manage and operate our business. If we are unable to successfully manage any disruption to our business caused by our operational systems upgrades, we could incur unanticipated expenses, loss of customers and harm to our reputation, any of which would harm our business.

If we are unsuccessful at managing product manufacturing decisions, which are required to be made months in advance of the purchase of our products, we may be unable to accurately forecast our inventory and working capital requirements, which may have a material adverse impact on our financial condition and operating results.

Like other companies in the footwear, apparel and accessories industry, we have an extended design and manufacturing process, which involves the initial design of our products, the purchase of raw materials, the accumulation of inventories, the subsequent sale of the inventories, and the collection of the resulting accounts receivable. This production cycle requires us to incur significant expenses relating to the design, manufacturing and marketing of our products, including product development costs for new products, in advance of the realization of any revenue from the sale of our products, and results in significant liquidity requirements and working capital fluctuations throughout our fiscal year. Because the production cycle typically involves long lead times, which requires us to make manufacturing decisions several months in advance of an anticipated purchasing decision by the consumer, it is challenging for us to estimate and manage our inventory and working capital requirements.

Once manufacturing decisions are made, it is difficult for our management to predict and timely adjust expenses in reaction to various factors, including the following:

unfavorable weather patterns and their potential impacts on consumer spending patterns and the demand for our products;
changes in consumer preferences and tastes, as well as prevailing fashion trends;
market acceptance of our current products and new products, as well as market acceptance of competitive products;

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future sales demand from our wholesale customers;
the competitive environment, including pricing pressure resulting from reduced pricing of competitive products, which may cause consumers to shift their purchasing decisions away from our products; and
uncertain macroeconomic and political conditions.

The evolution and expansion of our brands and product offerings has made our inventory management activities more challenging. For example, if we overestimate demand for any products or styles, we may be forced to incur significant markdowns or sell excess inventories at reduced prices, which would result in lower revenues and reduced gross margins. On the other hand, if we underestimate demand, or if our independent manufacturing facilities are unable to supply products in sufficient quantities, we may experience inventory shortages that may prevent us from fulfilling customer orders or result in us delaying shipments to customers. If that occurred, we could lose sales, our relationships with customers could be harmed, and our brand loyalty could be diminished. In either event, these factors could have a material adverse impact on our financial condition and operating results.

It may be difficult to identify new retail store locations that meet our requirements, and any new retail stores may not realize returns on our investments.

While we expect to identify additional retail stores for closure as part of our ongoing retail store fleet optimization efforts, we may simultaneously identify opportunities to open new retail stores in the future. Global store openings involve substantial investments, including those relating to leasehold improvements, furniture and fixtures, equipment, information systems, inventory, and personnel. In addition, since a certain amount of our retail store costs are fixed, if we have insufficient sales at a new store location, we may be unable to reduce expenses in order to avoid losses or negative cash flows. As we have experienced in the past, due to the high fixed cost structure associated with the retail business, the closure of a retail store can result in a significant negative financial impact, including lost sales, write-offs of retail store assets and inventory, lease termination costs, and severance costs. In light of the significant costs and impairments that can be incurred upon the closure of a retail location, we expect to conduct a thorough diligence process and apply stringent financial parameters when assessing whether to open a new retail store location. However, there can be no assurance that any new retail location that we may identify will ultimately generate a positive return on our investment or that our investment in a retail store will increase our sales.

Furthermore, we license the right to operate retail stores for our brands to third parties through our partner retail program. We expect to increase both the number of third parties we engage within our partner retail program and the number of stores that they operate. We currently plan for most of the partner retail stores to be operated in international markets, with the largest increase anticipated to be in China. We provide training to support these stores and set and monitor operational standards. However, the quality of these store operations may decline due to the failure of these third parties to operate the stores in a manner consistent with our standards or our failure to adequately monitor these third parties, which could result in reduced sales and cause our overall brand image to suffer.

Our financial success is influenced by the success of our customers, and the loss of a key customer could have a material adverse effect on our financial condition and results of operations.

Much of our financial success is directly related to the ability of our retailer and distributor partners to successfully market and sell our brands directly to consumers. If a retailer or distributor partner fails to satisfy contractual obligations or to otherwise meet our expectations, it may be difficult to locate an acceptable substitute partner. If we determine that it is necessary to make a change, we may experience increased costs, loss of customers, or increased credit or inventory risk. In addition, there is no guarantee that any replacement retailer or distributor partner will generate results that are more favorable than the terminated party.

We currently do not have long-term contracts with any of our retailers. We do have contracts with our distributors with terms ranging up to five years, however, while these contracts may have annual purchase minimums which must be met in order to retain the distribution rights, the distributors are not otherwise obligated to purchase our products. Sales to our retailers and distributors are generally on an order-by-order basis and are subject to rights of cancellation and rescheduling by our wholesale customers. We use the timing of delivery dates for our wholesale customer orders as a key factor in forecasting our sales and earnings for future periods. If any of our major customers experience a significant downturn in business or fail to remain committed to our products or brands, these customers could postpone, reduce, or discontinue purchases from us, which could result in us failing to meet our forecasted results. These risks have been exacerbated recently as our key retail customers are operating within a retail industry that continues to undergo significant structural changes fueled by technology and the internet, changes in consumer purchasing behavior and a shrinking retail footprint. We may lose key retail and wholesale customers if they fail to manage the impact of

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the rapidly changing retail environment. Any loss of one of these key customers, the financial collapse or bankruptcy of one of these customers, or a significant reduction in purchases from one of these customers could result in a significant decline in sales, write-downs of excess inventory, or increased discounts to our customers, any of which could have a material adverse effect on our financial condition or results of operations.

Failure to adequately protect our intellectual property rights, to prevent counterfeiting of our products, or to defend claims against us related to our intellectual property rights, could reduce sales and adversely affect the value of our brands.

Our business could be significantly harmed if we are not able to protect our intellectual property rights. We believe our competitive position is largely attributable to the value of our trademarks, patents, trade dress, trade names, trade secrets, copyrights and other intellectual property rights. Although we are aggressive in legal and other actions in pursuing those who infringe on our intellectual property rights, we cannot guarantee that the actions we have taken will be adequate to protect our brands in the future, especially because some countries’ laws do not protect intellectual property rights to the same extent as US laws. If we fail to adequately protect our intellectual property rights, it would allow our competitors to sell products that are similar to and directly competitive with our products, which could reduce sales of our products. In addition, any intellectual property lawsuits in which we are involved could cost a significant amount of time and money and distract management’s attention from operating our business, which may negatively impact our business and operating results.

The success of our brands has also made us the target of counterfeiting and product imitation strategies. We continue to be vulnerable to such infringements despite our dedication of significant resources to the registration and protection of our intellectual property and to anti-counterfeiting efforts worldwide. If we fail to prevent counterfeiting or imitation of our products, we could lose opportunities to sell our products to consumers who may instead purchase a counterfeit or imitation product. In addition, if our products are associated with inferior products due to infringement by others of our intellectual property, it could adversely affect the value of our brands.

In addition to fighting intellectual property infringement, we may need to defend claims against us related to our intellectual property rights. For example, we have faced claims that the word “ugg” is a generic term. Such a claim was successful in Australia, but similar claims have been rejected by courts in the US, China, Turkey and the Netherlands. Any court decision or settlement that prevents trademark protection of our brands, that allows a third-party to continue to sell products similar to our products, or that allows a manufacturer or distributer to continue to sell counterfeit products, could lead to intensified competition and a material reduction in our sales.

We may not succeed in implementing our growth strategies, in which case we may not be able to take advantage of certain market opportunities and may become less competitive.

As part of our overall growth strategy, we are continually seeking out opportunities to enhance the positioning of our brands, diversify our product offerings, extend our brands into complementary product categories and markets, expand geographically, optimize our retail presence both in stores and online, and improve our financial performance and operational efficiency. For example, we are considering expanding our partner retail program in certain markets based on our analysis of the market opportunity and business efficiencies. In addition, as part of our international growth strategy, we may continue to transition from a third-party distribution model to a direct distribution model for certain brands. However, we may shift from a direct distribution model to a third-party distribution model for certain brands. Further, we are exploring relationships with third parties for the expansion of the UGG brand into different product categories, including licensee and sourcing agent arrangements. We anticipate that substantial further expansion will be required to realize our growth potential and take advantage of new market opportunities. Failure to effectively implement our growth strategy could negatively impact our revenues and rate of growth and result in our business becoming less competitive. In addition, taking steps to implement our growth initiatives could have a number of negative effects, including increasing our working capital needs, causing us to incur costs without any corresponding benefits, and diverting management time and resources away from our existing business.

We depend on qualified personnel and, if we are unable to retain or hire executive officers, key employees and skilled personnel, we may not be able to achieve our strategic objectives and our operating results may suffer.

To execute our growth plan, we must continue to attract and retain highly qualified personnel, including executive officers and key employees. Further, in order to continue to develop new products and successfully operate and grow

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our key business processes, it is important for us to continue hiring highly skilled footwear, apparel and accessories designers and information technology specialists.

Competition for executive officers, key employees and skilled personnel is intense within our industry and there continues to be upward pressure on the compensation paid to these professionals. Many of the companies with which we compete for experienced personnel have greater name recognition and financial resources than we have. If we hire employees from competitors or other companies, their former employers may attempt to assert that we or these employees have breached their legal obligations, resulting in a diversion of our time and resources. In addition, prospective and existing employees often consider the value of the stock-based compensation they receive in connection with their employment when deciding whether to take a job. If the perceived value of our stock-based compensation declines, or if the price of our stock experiences significant volatility, it may adversely affect our ability to recruit, retain and motivate qualified personnel. Further, our headquarters are located in Goleta, California, which is not generally recognized as a prominent commercial center, and it is difficult to attract qualified professionals due to our geographic location. If we are unable to attract and retain the personnel necessary to execute our growth plan, we may be unable to achieve our strategic objectives, our operating results may suffer, and we may be unable to compete in the market.

The continued service of our executive officers and key employees is particularly important, and the hiring or departure of such personnel from time to time may disrupt our business or result in the depletion of significant institutional knowledge. Our executive officers and other key employees are generally employed on an at-will basis, which means that such personnel could terminate their employment with us at any time. The loss of one or more of our executive officers or other key employees or significant turnover in our senior management, and the often-extensive process of identifying and hiring other personnel who will work effectively with our employees to fill those key positions, could have a material adverse effect on our business.

Additionally, our European headquarters is currently based in the UK. There is significant uncertainty regarding the potential future impact of Brexit on the legal and commercial relationships between the UK and countries within the European Union (EU). In particular, we could face difficulties attracting and retaining key employees in the UK, which could have a material adverse impact on our European operations.

We rely upon a number of warehouse and distribution facilities to operate our business, and any damage to one of these facilities, or any disruptions caused by incorporating new facilities into our operations, could have a material adverse impact on our business.

We rely upon a broad network of warehouse and distribution facilities in order to store, sort, package and distribute our products both domestically and internationally. In the US, we distribute products primarily through self-managed distribution centers in Moreno Valley and Camarillo, California. While we continue to operate our distribution center in Camarillo, we are currently working to move all of our Camarillo distribution operations to our Moreno Valley location. Once the migration of our distribution center operations is complete, we will be closing our Camarillo distribution center. We anticipate this closure to be completed in the first half of fiscal year 2020. These distribution centers feature a complex warehouse management system that enables us to efficiently pack products for direct shipment to customers. However, we could face a significant disruption in our domestic distribution center operations if our warehouse management system does not perform as anticipated or ceases to function for an extended period of time, which could occur as a result of damage to the facility, failure of software or equipment, cyber-security incidents, power outages or similar problems. If our domestic distribution center operations are impeded for any reason, it could result in shipment delays or the inability to deliver product at all, which would result in lost sales, strain our relationships with customers, and cause harm to our reputation, any of which could have a material adverse impact on our business.

Internationally, we distribute our products through a number of distribution centers managed by 3PLs in Canada, China, Japan, the Netherlands, and the UK. We also distribute our products through a domestic 3PL, located in Pennsylvania. We depend on these 3PLs to manage the operation of their distribution centers as necessary to meet our business needs. If the 3PLs fail to manage these responsibilities, our international distribution operations could face significant disruptions. For example, we could face disruptions in these operations as a result of ongoing uncertainty around Brexit. The loss of or disruption to the operations of any one or more of these facilities could materially adversely impact our sales, business performance and operating results. Although we believe we possess adequate insurance to cover the potential impact of a disruption to the operations of these facilities, such insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all.


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We rely on independent manufacturers for most of our production needs, and the failure of these manufacturers to manage these responsibilities would prevent us filling customer orders, which would result in loss of sales and harm our relationships with customers.

We rely on independent manufacturers and their respective material suppliers for most of our production needs, although we do not have direct control over the manufacturers or their suppliers. We depend on these independent manufacturers for a number of functions that are critical to our operations, including financing the production of goods ordered, maintaining manufacturing capacity, complying with our restricted substances policy and storing finished goods in a safe location pending shipment. If the independent manufacturers fail to manage these responsibilities, we may be unable to ensure timely delivery of products, products may not be delivered in sufficient quantities, and products may fail to meet our quality standards. If any of these events were to occur, we may not be able to fill customer orders or product may be inadvertently delivered that does not meet our quality standards, which would result in lost sales and harm to our relationships with customers.

We do not currently have long-term contracts with these independent manufacturers, and so are not assured of a long-term, uninterrupted supply of products from them. While we do have long-standing relationships with most of these independent manufacturers, any of them may unilaterally terminate their relationship with us at any time, seek to increase the prices they charge, or extract other concessions from us. In the event of a termination of an existing relationship with a manufacturer, we may not be able to substitute alternative manufacturers that are capable of providing products of a comparable quality, in a sufficient quantity, at an acceptable price, or on a timely basis. If we are required to find alternative manufacturers, we could experience a delay in the manufacturing of our products, increased manufacturing costs, as well as substantial disruption to our business, any of which could negatively impact our operating results.

Interruptions in the supply of our products can also result from adverse events that impair the operations of our manufacturers. For example, we keep proprietary materials that are required for the production of our products, such as shoe molds and raw materials, under the custody of our independent manufacturers. If these independent manufacturers were to experience loss or damage to these proprietary materials, whether as a result of natural disasters, outbreak of hostilities or other adverse events, we cannot be assured that the manufacturers would have adequate insurance to cover such loss or damage, and, in any event, the replacement of such materials would likely result in significant delays in the production of our products, which could result in a loss of sales and earnings.

Most of our independent manufacturers are located outside of the US, where we are subject to the risks associated with international commerce.

Most of our independent manufacturers are located in Asia. Foreign manufacturing is subject to numerous risks and uncertainties, including the following:

tariffs, import and export controls, and other non-tariff barriers such as quotas and local content rules on raw materials and finished products;
increasing transportation costs, delays and interruptions, and a limited supply of international shipping capacity;
delays during shipping, at the port of entry or at the port of departure;
increasing labor costs and labor disruptions;
poor infrastructure and shortages of equipment, which can disrupt transportation and utilities;
restrictions on the transfer of funds from foreign jurisdictions;
changing economic and market conditions;
changes in governmental policies and regulations, including with respect to intellectual property, labor, safety, and environmental regulations;
refusal to adopt or comply with our Ethical Supply Chain Supplier Code of Conduct, Conflict Minerals Policy and Restricted Substances Policy;
customary business traditions in certain countries such as local holidays, which are traditionally accompanied by high levels of turnover in the factories;
decreased scrutiny by custom officials for counterfeit products;
practices involving corruption, extortion, bribery, pay-offs, theft and other fraudulent activity;
social unrest and political instability, including acts of war and other external factors;
heightened terrorism security concerns, which could subject imported or exported products to more frequent or more lengthy inspections;
use of unauthorized or prohibited materials or reclassification of materials;

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disease epidemics and health-related concerns that could result in a reduced workforce or scarcity of raw materials;
disruptions caused by natural or other disasters; and
adverse changes in consumer perception of goods sourced from certain countries.

These risks and uncertainties, or others of which we are currently unaware, could interfere with the manufacture or shipment of our products by our independent manufacturers. This could make it more difficult to obtain adequate supplies of quality products when we need them, which could negatively impact our sales and earnings.

While we require that our independent manufacturers adhere to environmental, labor, ethical, health, safety, and other standard business practices and applicable local laws, and while we periodically visit and audit their operations, we do not control their business practices. If we discover non-compliant manufacturers or suppliers that cannot or will not become compliant, we would cease conducting business with them, which could increase our costs and cause us to suffer an interruption in our product supply chain. In addition, the manufacturers’ violations of applicable laws and business standards could result in negative publicity, which could damage our reputation and the value of our brands.

Our sales in international markets are subject to a variety of legal, regulatory, political, cultural and economic risks that may adversely impact our operating results in certain regions.

Our ability to capitalize on growth in new international markets and to maintain the current level of operation in our existing international markets is subject to risks associated with international operations that could adversely affect our sales and operating results. These risks include:

foreign currency exchange rates fluctuations, which impact the prices at which products are sold to international consumers;
limitations on our ability to move currency out of international markets;
burdens of complying with a variety of foreign laws and regulations, which may change unexpectedly, and the interpretation and application of such laws and regulations;
legal costs and penalties related to defending allegations of non-compliance with foreign government policies, laws and regulations;
inability to import products into a foreign country;
changes in US and foreign tax laws;
complications due to lack of familiarity with local customs;
difficulties associated with promoting and marketing products in unfamiliar cultures;
political or economic uncertainty or instability, including as a result of ongoing negotiations around Brexit or any similar referendums that may be held;
anti-American sentiment in international markets in which we operate;
changes in diplomatic and trade relationships between the US and other countries; and
general economic fluctuations in specific countries or markets.

We conduct business outside the US, which exposes us to foreign currency exchange rate risk, and could have a negative impact on our financial results.

We operate on a global basis, with 36.7% of our net sales for the year ended March 31, 2019 from operations outside the US. As we continue to increase our international operations, our sales and expenditures in foreign currencies are expected to become more material and subject to greater foreign currency exchange rate fluctuations. A significant portion of our international operating expenses are paid in local currencies. Also, our foreign distributors typically sell our products in local currency, which impacts the price to foreign consumers. Many of our subsidiaries operate with their local currency as their functional currency. Future foreign currency exchange rate fluctuations and global credit markets may cause changes in the US dollar value of our purchases or sales and materially affect our sales, profit margins, and results of operations, when converted to US dollars. Changes in the value of the US dollar relative to other currencies could result in material foreign currency exchange rate fluctuations and, as a result, our net earnings could be materially adversely affected.

We routinely utilize foreign currency exchange rate forward contracts or other derivative instruments for the amounts we expect to purchase and sell in foreign currencies to mitigate exposure to foreign currency exchange rate fluctuations. As we continue to expand international operations and increase purchases and sales in foreign currencies, we may utilize additional derivative instruments, as needed, to hedge our foreign currency exchange rate risk. Our hedging strategies depend on our forecasts of sales, expenses, and cash flows, which are inherently subject to

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inaccuracies. Foreign currency exchange rate hedges, transactions, re-measurements or translations could materially impact our consolidated financial statements.

Our corporate culture has contributed to our success and, if we cannot maintain this culture as we grow, we could lose the passion, creativity, teamwork, focus and innovation fostered by our culture.

We believe that our culture has been and will continue to be a key contributor to our success. If we do not continue to develop our corporate culture or maintain our culture and core values over time, we may be unable to foster the passion, creativity, teamwork, focus and innovation that we believe have contributed to the growth and success of our business. Any failure to preserve our culture could negatively affect our ability to recruit and retain personnel and to effectively focus on and pursue our strategic objectives. As we continue to pursue our goals and implement new strategies, we may find it difficult to maintain our corporate culture.

Labor disruptions could negatively impact our results of operations and financial position.

Our business depends on our ability to source and distribute products in a timely manner. Labor disputes that affect the operations of our independent manufacturers, tanneries, transportation carriers, retail stores or distribution centers create significant risks for our business, particularly if these disputes result in work slowdowns, lockouts, strikes or similar disruptions. For example, in recent years, labor disputes at US shipping ports have impacted the delivery of our products. In addition, there is the potential for labor disruptions in the UK as a result of ongoing uncertainty around Brexit. Any such disruptions may have a material adverse effect on our business by potentially resulting in cancelled orders by customers, unanticipated inventory accumulation, and increased transportation and labor costs, each of which may negatively impact our results of operations and financial position.

International trade and import regulations may impose unexpected duty costs, the revision of current trade agreements may require us to alter current practices, changes in trade relations may result in tariffs, and transportation challenges and security procedures may cause significant delays and additional costs.

Products manufactured overseas and imported into the US and other countries are subject to import duties. While we have implemented internal measures to comply with applicable customs regulations and to properly calculate the import duties applicable to imported products, customs authorities may disagree with our claimed tariff treatment for certain products, resulting in unexpected costs that may not have been factored into the sales price of such products and our forecasted gross margins.

In addition, we cannot predict whether future domestic and foreign laws, regulations or specific or broad trade remedy actions, or international agreements may impose additional duties or other restrictions on the importation of products from one or more of our sourcing venues.

In the US and globally, international trade policy is undergoing review and revision, introducing significant uncertainty with respect to future trade regulations and existing international trade agreements. These major revisions include the renegotiation of the North America Free Trade Agreement, now entitled the US-Mexico-Canada Trade Agreement (commonly referred to as “USMCA”), which has not yet been ratified by Congress. Brexit in Europe is undergoing a lengthy and contentious negotiation between the EU and the UK. Changes in tax policy, such as the Tax Cuts and Jobs Act (Tax Reform Act), or trade regulations could cause us to encounter new customs duties, which in turn may require us to implement new supply chains, withdraw from certain restricted markets or change our business methods, could make it difficult to obtain products of our customary quality at a competitive price and could lead to an increase in the cost of our products.

The continued negotiation of bilateral and multilateral free trade agreements with countries other than our principal sourcing venues may stimulate competition for manufacturers. Manufacturers in these locations may seek to export footwear, apparel and accessories to our target markets at preferred rates of duty which may negatively impact our sales and operations.

Trade relations between our sourcing venues (particularly China) and the US has created uncertainty for all US businesses that source or market in China. Since March 2018, the US has imposed import duties ranging from 5% to 25% on imports from China, which has caused China to retaliate with additional tariffs on US exports. To date, the US has, in stages, imposed tariffs on $250 billion of imports from China on top of existing tariff rates. Thus far, the footwear products we source in China have not been subjected to such increased tariffs. However, in May 2019, the US Trade Representative announced that all remaining US imports from China could be subject to punitive duties between 10%

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to 25% of import duties, including all footwear, apparel and accessories that we import from China. Whether those threatened tariffs will be issued, and if so, what tariff would be assigned is unknown. However, any additional tariff could increase the cost of sourcing in China, our own margins, and possibly the price of our products to consumers. Previously, we had begun transitioning our sourcing of footwear from China to Vietnam as part of our supplier optimization strategy. If we are unable to source our products from the countries where we wish to purchase them, either because of such regulatory changes or for any other reason, or if the cost of doing so increases, it could have a material adverse effect on our business, financial condition and results of operations.

Transportation and distribution costs may be adversely impacted by a number of factors, including new regulations, increased demand, increased fuel and labor costs, ongoing ocean carrier consolidation and reduced capacity, congestion at major international gateways and other economic factors. For example, new mandates to reduce the use of “low sulfur” fuel in certain container vessels will increase the cost of ocean transport globally, with surcharges already announced by the carriers. In addition, in the US, trucking costs have risen dramatically due to driver shortages and increased labor costs, as well as new federal and state safety, environmental and labor regulations. These changes may disrupt our supply chain, which may result in a delay in the shipment of our products and cause us to incur significant additional costs.

Additionally, the increased threat of terrorist activity, and law enforcement responses to this threat, have required greater levels of inspection of imported goods and have caused delays in bringing imported goods to market. Any tightening of security procedures, for example, in the aftermath of a terrorist incident, could worsen these delays and increase our costs.

We face risks associated with pursuing strategic acquisitions, and our failure to successfully integrate any acquired business or products could have a material adverse effect on our results of operations and financial position.

As part of our overall strategy, we may periodically consider strategic acquisitions in order to expand our brands into complementary product categories and markets, or to acquire new brands, technologies, intellectual property or other assets. Our ability to do so depends on our ability to identify and successfully pursue suitable acquisition opportunities. Acquisitions of businesses and assets involve numerous risks, challenges and uncertainties, including the potential to:

expose us to risks inherent in entering into a new market or geographic region;
lose significant customers or key personnel of the acquired business;
encounter difficulties managing and implementing acquired assets, including new brands, products, technologies and intellectual property assets;
encounter difficulties marketing to new consumers or managing geographically-remote operations;
divert management’s time and attention away from other aspects of our business operations; and
incur costs relating to a potential acquisition that we fail to consummate, which we may not be able to recover.

Additionally, we may not be able to successfully integrate the assets or operations of any acquired businesses into our operations, or to achieve the expected benefits of any acquisitions. Following an acquisition, we may also face cannibalization of existing product sales by our newly-acquired products, unless we adequately integrate new products with our existing products, aggressively target different consumers for our newly-acquired products and increase our overall market share. The failure to successfully integrate any acquired business or products in the future could have a material adverse effect on our results of operations and financial position.

Further, we may be required to issue equity securities to finance an acquisition, which would be dilutive to our stockholders, and the equity securities may have rights or preferences senior to those of our existing stockholders. If we incur indebtedness to finance an acquisition, it would result in debt service costs, and we may be subject to covenants restricting our operations or liens encumbering our assets.


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A security breach or other disruption to our information technology systems could result in the loss, theft, misuse, unauthorized disclosure, or unauthorized access of customer, supplier, or sensitive company information or could disrupt our operations, which could damage our relationships with customers, suppliers or employees, expose us to litigation or regulatory proceedings, or harm our reputation, any of which could materially adversely affect our business, financial condition or results of operations.
Our business involves the storage and transmission of a significant amount of personal, confidential, or sensitive information, including the personal information of our customers, credit card information, the personal information of our employees, information relating to customer preferences, and our proprietary financial, operational and strategic information. The protection of this information is vitally important to us as the loss, theft, misuse, unauthorized disclosure, or unauthorized access of such information could lead to significant reputational or competitive harm, result in litigation involving us or our business partners, expose us to regulatory proceedings, and cause us to incur substantial liabilities, fines, penalties or expenses. As a result, we believe our future success and growth depends, in part, on the ability of our key business processes and systems, including our information technology and global communication systems, to prevent the theft, loss, misuse, unauthorized disclosure, or unauthorized access of this personal, confidential, and sensitive information, and to respond quickly and effectively if data security incidents do occur. As with many businesses, we are subject to numerous data privacy and security risks, which may prevent us from maintaining the privacy of this information, result in the disruption of our business, and require us to expend significant resources attempting to secure and protect such information and respond to incidents, any of which could materially adversely affect our business, financial condition or results of operations.
As has been well documented in the media, the frequency, intensity, and sophistication of cyber-attacks, ransom-ware attacks, and other data security incidents has significantly increased in recent years. As with many other businesses, we have experienced, and are continually at risk of being subject to attacks and incidents. Due to the increased risk of these types of attacks and incidents, we expend significant resources on information technology and data security tools, measures, and processes designed to protect our information technology systems, as well as the personal, confidential or sensitive information stored on or transmitted through those systems, and to ensure an effective response to any cyber-attack or data security incident. Whether or not these measures are ultimately successful, these expenditures could have an adverse impact on our financial condition and results of operations, and divert management’s attention from pursuing our strategic objectives.
In addition, although we take the security of our information technology systems seriously, there can be no assurance that the security measures we employ will effectively prevent unauthorized persons from obtaining access to our systems and information. Despite the implementation of reasonable security measures by us and our third-party providers, our systems and information may be susceptible to cyber-attacks or data security incidents. In addition, because the techniques used to obtain unauthorized access to information technology systems are constantly evolving and becoming more sophisticated, we may be unable to anticipate these techniques or implement adequate preventive measures in response. Cyber-attacks or data incidents could remain undetected for some period, which could potentially result in significant harm to our systems, as well as unauthorized access to the information stored on and transmitted by our systems. Further, despite our security efforts and training, our employees may purposefully or inadvertently cause security breaches that could harm our systems or result in the unauthorized disclosure of or access to information. Any measures we do take to prevent security breaches, whether caused by employees or third parties, have the potential to limit our ability to complete sales or ship products to our customers, harm relationships with our suppliers, or restrict our ability to meet our customers' expectations with respect to their online or retail shopping experience.
A cyber-attack or other data security incident could result in the significant and protracted disruption of our business such that:
critical business systems become inoperable or require a significant amount of time or cost to restore;
key personnel are unable to perform their duties, communicate with employees, customers or third-party partners;
it results in the loss, theft, misuse, unauthorized disclosure, or unauthorized access of customer, supplier, or company information;
we are prevented from accessing information necessary to conduct our business;
we are required to make unanticipated investments in equipment, technology or security measures;
key wholesale and distributor customers cannot place or receive orders, and we are unable to ship orders on a timely basis or at all;

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customers cannot access our E-Commerce websites, and customer orders may not be received or fulfilled; or
we become subject to other unanticipated liabilities, costs, or claims.

If any of these events were to occur, it could have a material adverse effect on our financial condition and results of operations, and result in harm to our reputation.
In addition, if a cyber-attack or other data incident results in the loss, theft, misuse, unauthorized disclosure, or unauthorized access of personal, confidential, or sensitive information belonging to our customers, suppliers or employees, it could put us at a competitive disadvantage, result in the deterioration of our customers’ confidence in our brands, cause our suppliers to reconsider their relationship with our company or impose more onerous contractual provisions, and subject us to potential litigation, liability, fines and penalties. For example, we could be subject to regulatory or other actions pursuant to domestic and international privacy laws, including newer regulations such as the Action on the Protection of Personal Information in Japan and the General Data Protection Regulation (known as “GDPR”) in the EU. This could result in costly investigations and litigation, civil or criminal penalties, operational changes and negative publicity that could adversely affect our reputation, as well as our results of operations and financial condition.
We are also subject to payment card association rules and obligations under our contracts with payment card processors. Under these rules and obligations, if payment card information is stolen or otherwise compromised, we could be liable to payment card issuers for associated expenses and penalties. In addition, if we fail to follow payment card industry security standards, even if customer information is never compromised, we could incur significant fines or experience a significant increase in payment card transaction costs.
While we maintain insurance coverage that may, subject to policy terms and conditions, cover certain aspects of the losses and costs associated with cyber-attacks and data incidents, such insurance coverage may be insufficient to cover all losses and would not, in any event, remedy damage to our reputation. In addition, we may face difficulties in recovering any losses from our provider and any losses we recover may be lower than we initially expect.
Key business processes, including our information technology and global communications systems, could be interrupted and such interruption could adversely affect our business and result in lost sales and harm to our business reputation.
Our future success and growth depend in part on the continued operation of our key business processes, including our information technology and global communications systems. Our key processes and systems could be interrupted by failures due to weather, natural disasters, power loss, software or equipment, telecommunication systems, information technology infrastructure, sabotage, terrorism, computer viruses, cyber-security attacks or similar events. Any interruptions to key business processes and systems could have a material adverse effect on our business and operations and result in lost sales and harm to our business reputation.
Furthermore, we rely on certain information technology management systems to prepare sales forecasts, track our financial and operating results, and otherwise manage and operate our business. As our business grows and we expand our brands and products into additional distribution channels and geographic regions, these systems may require expansion. We may experience difficulties expanding these systems, or transitioning to new or upgraded systems, which may result in loss of data, decreases in productivity, and increased costs associated with the implementation of the new or upgraded systems. If we are unable to modify our systems to respond to changes in our business needs, or if we experience a failure or interruption in these systems, our ability to accurately forecast sales, report our financial and operating results, or otherwise manage and operate our business could be adversely affected.
Our revolving credit facility agreements expose us to certain risks.

From time to time, we have financed our liquidity needs in part from borrowings made under our revolving credit facilities. Our revolving credit facility agreements contain a number of customary financial covenants and restrictions, which may limit our ability to engage in transactions that would otherwise be in our best interests. Failure to comply with any of the covenants could result in a default. A default under any of our revolving credit facility agreements could allow our lenders to accelerate the timing of payments and exercise their liens on our assets, which could have a material adverse effect on our business, operations, financial condition and liquidity.


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In addition, certain of our revolving credit facility agreements bear interest at a rate that varies depending on the London Interbank Offered Rate (LIBOR). Any increases in the interest rates applicable to borrowings under our credit facilities would increase our cost of borrowing, which would result in a decline in our net income and liquidity. Further, the UK’s Financial Conduct Authority, which regulates LIBOR, has announced its intention to phase out LIBOR by the end of 2021. It is unclear if LIBOR will cease to exist at that time or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. If LIBOR ceases to exist, we may need to renegotiate certain of our revolving credit facility agreements, which could have an adverse effect on our financing costs.

The tax laws applicable to our business are very complex and changes in tax laws could increase our worldwide tax rate and materially affect our financial position and results of operations.

We are subject to changes in tax laws, regulations and treaties in and between the jurisdictions in which we operate. Our tax expense is based on our interpretation of the tax laws in effect in various countries at the time that the expense was incurred. A change in these tax laws, treaties or regulations, or in their interpretation, could result in a materially higher tax expense or a higher effective tax rate on our worldwide earnings. In addition, the enactment of the Tax Reform Act resulted in changes to the existing US tax laws that have and will continue to affect us. Additional changes in tax laws or proposed regulations, clarifications, interpretations and other changes to the Tax Reform Act may ultimately be enacted in a future period, which could increase our income tax liability or adversely affect our net income and long-term effective tax rates.

Certain additional provisions of the Tax Reform Act, such as the tax on global intangible low-taxed income, will continue to apply to us and, as a result, could impact our effective tax rate. Taxes due over a period of time as a result of the Tax Reform Act, including the one-time, mandatory deemed repatriation tax on certain foreign earnings, could be accelerated upon various triggering events, including failure to pay such taxes when due. The Tax Reform Act made broad and complex changes to the US tax code and we expect to see future regulatory, administrative or legislative guidance periodically issued. If we determine the guidance differs from our preliminary interpretation of the law, it could have a material effect on our financial position and results of operations.

In addition, many countries in the EU and around the globe have adopted or proposed changes to current tax laws. Further, organizations such as the Organization for Economic Cooperation and Development have published action plans that, if adopted by countries where we do business, could increase our tax obligations in these countries. Due to the large scale of our US and international business activities, many of these enacted and proposed changes could increase our worldwide effective tax rate and harm our financial position and results of operations.

We may be subject to additional tax liabilities as a result of audits by various taxing authorities.

We conduct our operations through subsidiaries in several countries and foreign territories, including the US, the UK, Japan, China, Hong Kong, Macau, the Netherlands, France, Germany, Canada, Austria, Belgium and Switzerland. As a result, we are subject to tax laws and regulations in each of those jurisdictions, and to tax treaties between these countries. These tax laws are highly complex, and significant judgment and specialized expertise is required in evaluating and estimating our worldwide provision for income taxes.

We are subject to tax audits in each of the various jurisdictions where we conduct business, and any of these jurisdictions may assess additional taxes against us as a result of these audits. Although we believe our tax estimates are reasonable, and we undertake to prepare our tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audits, and any related litigation, could be materially different from our estimates or from our historical tax provisions and accruals. The results of a tax audit or other tax proceeding could have a material adverse effect on our operating results or cash flows in the periods for which that determination is made, and may require a restatement of prior financial reports. In addition, future period earnings may be adversely impacted by litigation costs, settlement payments, or interest or penalty assessments.

We may incur disruption, expense, and potential liability associated with existing and future litigation.

We are involved in various claims, litigation and other legal and regulatory proceedings and governmental investigations that arise from time to time in the ordinary course of our business. Due to the inherent uncertainties of litigation and other such proceedings and investigations, we cannot predict with accuracy the ultimate outcome of any such matters. An unfavorable outcome could have a material adverse impact on our business, financial position, and results of operations. The amount of insurance coverage we maintain to address such matters may be inadequate to cover these or other claims. In addition, any significant litigation, investigation, or proceeding, regardless of its merits,

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could divert financial and management resources that would otherwise be used to benefit our operations or could negatively impact our reputation in the marketplace.

Our common stock price has been volatile, which could result in substantial losses for stockholders.

Our common stock is traded on the NYSE under the symbol DECK. The trading price of our common stock has been and may continue to be volatile. The trading price of our common stock could be affected by a number of factors, including, but not limited to the following:

changes in expectations of our future financial performance and operating results, whether realized or perceived;
changes in estimates of our performance by securities analysts and other market participants, or our failure to meet such estimates;
changes in our stockholder base or public actions taken by investors;
market research and opinions published by securities analysts and other market participants, and the response to such publications;
quarterly fluctuations in our sales, margins, expenses, and other financial and operating results;
the financial stability of our customers, manufacturers and suppliers;
legal proceedings, regulatory actions and legislative changes;
announcements regarding the potential repurchase of our common stock, and our actual share repurchase activity;
the declaration of stock or cash dividends;
consumer confidence and discretionary spending levels;
broad market fluctuations in volume and price;
general market, political and economic conditions; and
a variety of risk factors, including the ones described elsewhere within this Annual Report and in our other filings with the SEC.

In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of individual companies. Accordingly, the price of our common stock is volatile and any investment in our stock is subject to risk of loss. These broad market and industry factors and other general macroeconomic conditions unrelated to our financial performance may also affect our common stock price.

Changes in economic conditions may adversely affect our financial condition and results of operations.

Volatile economic conditions and general changes in the market have affected, and will likely continue to affect, consumer spending generally and the buying habits and preferences of consumers. A significant portion of the products we sell, especially those sold under the UGG brand, are considered to be luxury retail products. The purchase of these products by consumers is largely discretionary, and is therefore highly dependent upon the level of consumer spending, particularly among affluent consumers. Sales of these products may be adversely affected by factors such as uncertain or worsening economic conditions, increases in consumer debt levels, or a decline in consumer confidence. During an actual or perceived economic downturn, fewer consumers may shop for our products, and those who do shop may limit the amount of their purchases or substitute less costly products for our products. As a result, we could be required to reduce the price we can charge for our products or increase our marketing and promotional expenses to generate additional demand for our products. In either case, these changes could reduce our sales and gross margins, which could have a material adverse effect on our financial condition and results of operations.

We sell a large portion of our products through higher-end specialty and department store retailers. The businesses of these retailer customers may be impacted by factors such as changes in economic conditions, reduced customer demand for luxury products, decreases in available credit and increased competition. If these or other factors result in financial difficulties or insolvency for our retail customers, such pressures would have an adverse impact on our estimated allowances and reserves, and potentially result in us losing key customers.

Furthermore, economic factors such as fuel or transportation costs, inflation, labor costs, tariffs, and insurance and healthcare costs may increase our cost of sales and our operating expenses.


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Anti-takeover provisions contained in our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws, as well as provisions of Delaware law, could impair a takeover attempt.

Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws contain provisions that could have the effect of rendering more difficult hostile takeovers, change-in-control transactions or changes in our Board of Directors or management. Among other things, these provisions:

authorize the issuance of preferred stock with powers, preferences and rights that may be senior to our common stock, which can be created and issued by our Board of Directors without prior stockholder approval;
provide that the number of directors will be fixed by the affirmative vote of a majority of the whole Board of Directors;
provide that board vacancies can only be filled by directors;
prohibit stockholders from acting by written consent without holding a meeting of stockholders;
require the vote of holders of not less than 66 2/3% of the voting stock then outstanding to approve amendments to our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws; and
require advance written notice of stockholder proposals and director nominations.

As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which may delay, deter or prevent a change-in-control transaction. Section 203 imposes certain restrictions on mergers, business combinations and other transactions between us and holders of 15% or more of our common stock.

Any provision of Delaware law, our Amended and Restated Certificate of Incorporation, or our Amended and Restated Bylaws, that has the effect of rendering more difficult, delaying, deterring or preventing a change-in-control transaction could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

Our business could be negatively affected as a result of the actions of activist stockholders.

Responding to the actions of activist stockholders can be costly and time-consuming, disruptive to our operations, and result in the diversion of the attention of management and our employees. For example, we were previously involved in a proxy contest with a hedge fund, which required us to incur significant legal fees and proxy solicitation expenses and required significant time and attention by management and our Board of Directors. Any perceived uncertainties as to the impact of the activities of activist stockholders, or of our future strategic direction, could also affect the market price and volatility of our common stock.

We do not expect to declare any dividends in the foreseeable future.

We have never declared or paid any cash dividends on our existing common stock. We do not anticipate declaring or paying any cash dividends to holders of our common stock in the foreseeable future and intend to retain all future earnings for the growth of our business. Consequently, investors may need to rely on sales of our common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors should not purchase our common stock with the expectation of receiving cash dividends.

Our reported financial results may be adversely affected by changes in US GAAP.

Generally accepted accounting principles in the US (US GAAP) are subject to interpretation by the Financial Accounting Standards Board, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant impact on our reported financial results and could affect the reporting of transactions completed before the announcement of a change.


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Item 2. Properties

Our corporate headquarters is located in Goleta, California. The construction of our 14-acre corporate headquarters in Goleta, California was substantially completed in January 2014.

We have one primary US distribution center, which is located in Moreno Valley, California. We began operating this warehouse and distribution center in the fourth quarter of fiscal year 2015 and, since June 2017, have expanded our operations at this location. While we continue to operate our distribution center in Camarillo, we are currently working to move all of our Camarillo distribution operations to our Moreno Valley location. Once the migration of our distribution center operations is complete, we will be closing our Camarillo distribution center. We anticipate this closure to be completed in the first half of fiscal year 2020.

Our international distribution centers are managed by 3PLs and are located in Canada, China, Japan, the Netherlands, and the UK. We also have a domestic distribution center managed by a 3PL, located in Pennsylvania.

We also have offices in China, Hong Kong, Vietnam, Japan, France, Germany, the Netherlands, Switzerland, and the UK for which some oversee the quality and manufacturing standards of our products, and others are for regional sales, operations and administration. We also have offices in Macau and Hong Kong to coordinate logistics and facilitate procurement.

As of March 31, 2019, we had 54 retail stores in the US ranging from approximately 1,000 to 7,000 square feet. Internationally, we had 102 retail stores in Austria, Belgium, Canada, China, France, Germany, Japan, the Netherlands, Switzerland and the UK.

We have no manufacturing facilities, as all of our products are manufactured by independent third-party contractors.

Other than our corporate headquarters, we lease our facilities, retail stores and other office spaces from unrelated parties. With the exception of our DTC business facilities, our facilities are attributable to multiple reportable operating segments and are not allocated to our reportable operating segments.

We believe our space is adequate for our current needs and that suitable additional or substitute space will be available to accommodate the foreseeable expansion of our business and operations.

The following table provides details regarding our significant physical properties as of March 31, 2019:
Facility Location
 
Description
 
Lease or Own
 
Facility Size (Square Footage)
Moreno Valley, California
 
Warehouse and Distribution Center
 
Lease
 
1,530,944

Camarillo, California
 
Warehouse and Distribution Center
 
Lease
 
423,106

Goleta, California
 
Corporate Headquarters
 
Own
 
185,000



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Item 3. Legal Proceedings

As part of our global policing program to protect our intellectual property rights, from time to time, we file lawsuits in various jurisdictions asserting claims for alleged acts of trademark counterfeiting, trademark infringement, patent infringement, trade dress infringement and trademark dilution. We generally have multiple actions such as these pending at any given point in time. These actions may result in seizure of counterfeit merchandise, out of court settlements with defendants or other outcomes. In addition, from time to time, we are subject to claims in which opposing parties will raise, either as affirmative defenses or as counterclaims, the invalidity or unenforceability of certain of our intellectual property rights, including allegations that our UGG brand trademark registrations and design patents are invalid or unenforceable. Furthermore, we are aware of many instances throughout the world in which a third-party is using our UGG trademarks within its internet domain name, and we have discovered and are investigating several manufacturers and distributors of counterfeit UGG brand products.

On May 10, 2019, a jury for the US District Court for the Northern District of Illinois Eastern Division ruled in our favor in our willful trademark infringement and counterfeiting lawsuit against Australian Leather. Australian Leather’s affirmative defense is still outstanding pending a ruling from the court. While we believe there is no basis for a judgment finding the UGG trademark unenforceable, such a ruling would have a material adverse effect on our business. Following entry of a final judgment, the court rulings are subject to appeal.

Although we are subject to other routine legal proceedings from time to time in the ordinary course of business, including employment, intellectual property and product liability claims, we believe the outcome of all pending legal proceedings in the aggregate will not have a material adverse effect on our business, operating results, financial condition, or cash flows. However, regardless of the outcome, litigation can have an adverse impact on us because of legal costs, diversion of management’s time and resources, and other factors.


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PART II

References within this Annual Report to “Deckers,” “we,” “our,” “us,” or the “Company” refer to Deckers Outdoor Corporation, together with its consolidated subsidiaries. UGG® (UGG), Teva® (Teva), Sanuk® (Sanuk), HOKA One One® (HOKA), Koolaburra® (Koolaburra), Ahnu® (Ahnu) and UGGpureTM (UGGpure) are some of our trademarks. Other trademarks or trade names appearing elsewhere in this Annual Report are the property of their respective owners. Solely for convenience, the trademarks and trade names within this Annual Report are referred to without the ® and™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto.

Certain reclassifications were made for all prior periods presented including the fiscal years ended March 31, 2018, 2017, 2016, and 2015, to conform to the current period presentation.

Unless otherwise specifically indicated, all dollar amounts in Items 5, 6, 7 and 7A herein are expressed in thousands, except for per share data. The defined periods for the fiscal years ended March 31, 2019, 2018, and 2017 are stated herein as “year ended” or “years ended”.

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock has traded under the symbol DECK on the NYSE since May 2014 and was traded on the NASDAQ Global Select Market prior to that date.

As of May 17, 2019, we had 41 stockholders of record based on the records of our transfer agent, which does not include beneficial owners of our common stock whose shares are held in the names of various securities brokers, dealers and registered clearing agencies.

We did not sell any equity securities during the year ended March 31, 2019 that were not registered under the Securities Act.

Stock Performance Graph

Below is a graph comparing the percentage change in the cumulative total return on our common stock against the cumulative total return of the S&P 500 Apparel, Accessories & Luxury Goods Index and the NYSE Composite Index for the five-fiscal year periods commencing April 1, 2014 and ending March 31, 2019. Total return assumes reinvestment of dividends, though we have not declared or paid any cash dividends on our common stock since our inception. The data represented in the graph below assumes one hundred dollars invested in our common stock, the S&P 500 Apparel, Accessories & Luxury Goods Index and the NYSE Composite Index on April 1, 2014.
 
April 1,
 
Years Ended March 31,
 
2014
 
2015
 
2016
 
2017
 
2018
 
2019
Deckers Outdoor Corporation
$
100.0

 
$
86.3

 
$
70.9

 
$
70.7

 
$
106.6

 
$
174.0

S&P 500 Apparel, Accessories & Luxury Goods Index
100.0

 
95.5

 
84.8

 
67.4

 
86.4

 
83.7

The NYSE Composite Index
100.0

 
109.7

 
105.6

 
122.1

 
135.8

 
142.3



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398139640_chart-d40fa398f197592799fa03.jpg
The stock performance graph and related information shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report into any filing under the Securities Act, or under the Exchange Act, except to the extent that we specifically incorporate this information by reference and shall not otherwise be deemed filed under the Securities Act or the Exchange Act.

Dividend Policy

We have not declared or paid any cash dividends on our common stock since our inception. We currently do not anticipate declaring or paying any cash dividends in the foreseeable future. Our current revolving credit agreements allow us to declare and pay cash dividends, as long as we do not exceed certain leverage ratios and no event of default has occurred.

Stock Repurchase Programs

In October 2017, our Board of Directors approved a stock repurchase program which, together with a stock repurchase program approved in 2015, authorized us to repurchase a total of up to $400,294 of our common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, and other factors (2017 Repurchase Program).

In January 2019, our Board of Directors approved the 2019 Repurchase Program, which authorizes us to repurchase up to $261,000 of our common stock. As of March 31, 2019, the aggregate remaining approved amount under the 2017 Repurchase Program and 2019 Repurchase Program (collectively, our “Stock Repurchase Programs”) was $350,212.

Our Stock Repurchase Programs do not obligate us to acquire any particular amount of common stock and may be suspended at any time at our discretion. Our current revolving credit agreements allow us to make share repurchases under these programs, as long as we do not exceed certain leverage ratios and no event of default has occurred under these arrangements. As of March 31, 2019, we were in compliance with these arrangements.


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During the fourth quarter of the year ended March 31, 2019, we did not repurchase any shares of our common stock and had an aggregate remaining approved amount under our Stock Repurchase Programs of $350,212 as of March 31, 2019.

Refer to Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Liquidity and Capital Resources” and Note 10, “Stockholders' Equity,” of our consolidated financial statements and accompanying notes thereto (referred to herein as the “consolidated financial statements”) in Part IV within this Annual Report for further information on repurchases of our common stock.

Item 6. Selected Financial Data

The following tables present our selected consolidated financial data and should be read in conjunction with Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and Part IV, Item 15, “Exhibits and Financial Statement Schedule,” within this Annual Report.
 
Years Ended March 31,
 
2019
 
2018
 
2017
 
2016
 
2015
Income Statement Data
 
 
 
 
 
 
 
 
 
Net sales
 
 
 
 
 
 
 
 
 
UGG brand wholesale
$
888,347

 
$
841,893

 
$
826,355

 
$
918,102

 
$
903,926

HOKA brand wholesale
185,057

 
132,688

 
93,064

 
74,937

 
47,614

Teva brand wholesale
119,390

 
117,478

 
103,694

 
143,280

 
136,028

Sanuk brand wholesale
69,791

 
78,283

 
77,552

 
90,719

 
102,690

Other brands wholesale
42,818

 
17,273

 
23,142

 
3,842

 
9,441

Direct-to-Consumer
715,034

 
715,724

 
666,340

 
644,317

 
617,358

Total net sales
2,020,437

 
1,903,339

 
1,790,147

 
1,875,197

 
1,817,057

Cost of sales
980,187

 
971,697

 
954,912

 
1,028,529

 
938,949

Gross profit
1,040,250

 
931,642

 
835,235

 
846,668

 
878,108

Selling, general and administrative expenses
712,930

 
709,058

 
837,154

 
684,541

 
653,689

Income (loss) from operations
327,320

 
222,584

 
(1,919
)
 
162,127

 
224,419

Other (income) expense, net
(1,614
)
 
1,888

 
5,067

 
5,242

 
3,280

Income (loss) before income taxes
328,934

 
220,696

 
(6,986
)
 
156,885

 
221,139

Income tax expense (benefit)
64,626

 
106,302

 
(12,696
)
 
34,620

 
59,359

Net income
264,308

 
114,394

 
5,710

 
122,265

 
161,780

Total other comprehensive (loss) income
(9,671
)
 
13,468

 
(5,894
)
 
(89
)
 
(18,425
)
Comprehensive income (loss)
$
254,637

 
$
127,862

 
$
(184
)
 
$
122,176

 
$
143,355

 
 
 
 
 
 
 
 
 
 
Net income per share
 
 
 
 
 
 
 
 
 
Basic
$
8.92

 
$
3.60

 
$
0.18

 
$
3.76

 
$
4.70

Diluted
$
8.84

 
$
3.58

 
$
0.18

 
$
3.70

 
$
4.66

Weighted-average common shares outstanding
 
 
 
 
 
 
 
 
 
Basic
29,641

 
31,758

 
32,000

 
32,556

 
34,433

Diluted
29,903

 
31,996

 
32,355

 
33,039

 
34,733

 
As of March 31,
 
2019
 
2018
 
2017
 
2016
 
2015
Balance Sheet Data
Cash and cash equivalents
$
589,692

 
$
429,970

 
$
291,764

 
$
245,956

 
$
225,143

Working capital
844,881

 
721,524

 
661,770

 
547,267

 
519,051

Total assets
1,427,206

 
1,264,379

 
1,191,780

 
1,278,068

 
1,169,933

Long-term liabilities
131,552

 
134,434

 
78,474

 
72,099

 
65,379

Stockholders' equity
1,045,130

 
940,779

 
954,255

 
967,471

 
937,012



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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

Overview

We are a global leader in designing, marketing, and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high-performance activities. We market our products primarily under five proprietary brands: UGG, HOKA, Teva, Sanuk and Koolaburra. We believe that our products are distinctive and appeal broadly to women, men and children. We sell our products through quality domestic and international retailers, international distributors, and directly to our consumers both domestically and internationally through our Direct-to-Consumer (DTC) business, which is comprised of our retail stores and E-Commerce websites. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. All of our products are currently manufactured by independent manufacturers.

Recent Developments

Restructuring Plan. During February 2016, we announced the implementation of a multi-year restructuring plan which was designed to realign our brands across our Fashion Lifestyle and Performance Lifestyle groups, optimize our worldwide owned retail store fleet, and consolidate our management and operations. In general, the intent of this restructuring plan was to reduce overhead costs and create operating efficiencies while improving collaboration across brands.

In connection with our restructuring plan, we closed 46 company-owned global retail stores as of March 31, 2019, including conversions to partner retail stores, and consolidated our brand operations and corporate headquarters. Our decision to open or close retail store locations was evaluated based on the operating results of each store through at least two peak selling seasons, as well as our retail store fleet optimization strategies and long-term strategic objectives.

The cumulative annualized selling, general, and administrative (SG&A) expense savings by applicable reportable operating segment, realized as of March 31, 2019, are approximately as follows:
 
Amount
UGG brand wholesale
$
1,000

Sanuk brand wholesale
1,000

Other brands wholesale
1,000

Direct-to-Consumer
43,000

Unallocated overhead costs
17,000

Total
$
63,000


The cumulative restructuring charges incurred by category as of March 31, 2019, are as follows:
 
Amount
Lease terminations
$
18,282

Retail store fixed asset impairment
9,372

Severance costs
9,776

Software and office fixed asset impairment
6,987

Other*
11,202

Total
$
55,619


*Includes costs related to office consolidations and termination of contracts and services.


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The cumulative restructuring charges by applicable reportable operating segment are as follows:
 
Years Ended March 31,
 
Cumulative Restructuring Charges**
 
2019
 
2018
 
2017
 
UGG brand wholesale
$

 
$

 
$
2,238

 
$
2,238

Sanuk brand wholesale

 

 
20

 
3,068

Other brands wholesale

 

 
102

 
2,263

Direct-to-Consumer

 
149

 
12,771

 
23,454

Unallocated overhead costs
295

 
1,518

 
13,853

 
24,596

Total
$
295

 
$
1,667

 
$
28,984

 
$
55,619


**Cumulative restructuring charges include restructuring charges of $24,673, which were incurred during the fiscal year ended March 31, 2016.

During the years ended March 31, 2019, 2018, and 2017, total restructuring charges incurred and stated above were recorded in SG&A expenses in the consolidated statements of comprehensive income (loss).

As of March 31, 2019, we have completed our restructuring plan and achieved cumulative SG&A expense savings to date along with cumulative restructuring charges. We currently do not anticipate incurring additional restructuring charges in connection with this restructuring plan.

Refer to Note 1, “General,” under the heading “Restructuring Plan” of our consolidated financial statements in Part IV within this Annual Report for further information on our remaining accrued liabilities under our restructuring plan.

Operating Profit Improvement Plan. During February 2017, we announced that, in addition to continuing to execute on our restructuring plan, we would implement various business transformation initiatives to further reduce expenses and improve gross margins, the projected combined impact of which was expected to be approximately $100,000 of net annualized operating profit improvement by the end of the fiscal year ending March 31, 2020. As of March 31, 2019, we have successfully completed our plan and achieved in excess of $100,000 of net annualized operating profit improvement under both our restructuring and operating profit improvement plans. Consistent with our strategy, the principal drivers of the net annualized operating profit improvement achieved were costs of goods sold improvements, resulting from lower input costs and improved supply chain management, and SG&A expense savings, primarily driven by retail store closures, office consolidations, lower corporate infrastructure costs and process improvement efficiencies. We will continue to apply the lessons learned in our completed plans by pursuing opportunities to optimize profitability and seeking to enhance operating results throughout our business.

Trends Impacting our Overall Business

Our business and the industry in which we operate continue to be impacted by several important trends:

Sales of our products are highly seasonal and are sensitive to weather conditions, which are unpredictable and beyond our control. To address seasonality, we continue to drive our strategy of introducing counter-seasonal products through category expansion, including the UGG brand’s spring and summer products, as well as the year-round performance product offering of the HOKA brand. Even though we continue to expand our product lines with the goal of creating more year-round styles for our brands to drive sales and offset the impact of weather conditions, the effect of favorable or unfavorable weather on our aggregate sales and operating results may continue to be significant.

We believe there has been a meaningful shift in the way consumers shop for products and make purchasing decisions. The retail industry continues to undergo significant structural changes fueled by technology and the internet, changes in consumer purchasing behavior and a shrinking retail footprint. In particular, retail stores are experiencing significant and prolonged decreases in consumer traffic as customers continue to migrate to shopping online. This shift is positively impacting the performance of our E-Commerce business, while creating challenges and headwinds for our retail business as well as the business of our key customers. It is also transforming the way we approach marketing, including our focus on digital marketing efforts.

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In light of the shift in consumer shopping behavior, and our ongoing efforts to enhance our operating results, we are seeking to optimize our retail store footprint. While we expect to identify additional retail stores for closure, we may simultaneously identify opportunities to open new retail stores in the future. We currently do not anticipate incurring material incremental retail store closure costs, primarily because any store closures we may pursue are expected to occur as retail store leases expire to avoid incurring potentially significant lease termination costs, as well as through conversions to partner retail stores.

As a result of changes in consumer purchasing behavior, we expect our E-Commerce business will continue to be a driver of long-term growth, although we expect the year-over-year growth rate will decline over time as the size of our E-Commerce business increases.

Starting in the second half of 2018, we implemented a product segmentation strategy, as well as an allocation strategy for the UGG brand’s core Classics franchise in the United States (US) wholesale marketplace. We plan to continue this strategic management of the US marketplace in future seasons and expect to implement similar strategies internationally during fiscal year 2020.

We believe consumers are buying product closer to the particular wearing occasion (“buy now, wear now”), which tends to shorten the purchasing windows for weather-dependent product. Not only does this trend impact our DTC business, we believe it is also impacting the purchasing behavior of our large wholesale customers. In particular, these customers appear to be shortening their purchasing windows to address the evolving behavior of retail consumers and to manage their own product-related inventories.

Foreign currency exchange rate fluctuations have the potential to cause variations in our operating results. While we seek to hedge some of the risks associated with foreign currency exchange rate fluctuations, these changes are largely outside of our control. We expect these changes will continue to impact the future purchasing patterns of our customers, as well as our operating results.

We believe consumers are increasingly buying brands which advance sustainable business practices and deliver quality products while striving for minimal environmental impact with socially conscious operations. Through our Corporate Responsibility Program, we expect to continue to advance our sustainable business initiatives.

Reportable Operating Segment Overview

We perform an annual assessment of the appropriateness of our reportable operating segments during the third quarter of our fiscal year. However, due to known circumstances arising during the first quarter of the fiscal year ending March 31, 2019 (Q1 2019), management performed this assessment at that time. These circumstances included an assessment of quantitative factors, such as the actual and forecasted sales and operating income of the wholesale operations of the HOKA brand compared to our other reportable operating segments, as well as an assessment of qualitative factors, such as the ongoing growth of, and our increased investment in, the wholesale operations of the HOKA brand. As a result, beginning in Q1 2019, we added a sixth reportable operating segment to separately report the wholesale operations of the HOKA brand. The wholesale operations of the HOKA brand are no longer presented under the Other brands wholesale reportable operating segment. However, the DTC operations of the HOKA brand continue to be reported under the DTC reportable operating segment. Prior periods presented were reclassified to reflect this change.

Our six reportable operating segments now include the worldwide wholesale operations of the UGG brand, HOKA brand, Teva brand, Sanuk brand, and Other brands, as well as DTC. Information reported to the Chief Operating Decision Maker (CODM), who is our Principal Executive Officer, is organized into these reportable operating segments and is consistent with how the CODM evaluates our performance and allocates resources.

During calendar year 2017, we began to leverage elements, including particular styles, of the Ahnu brand under the Teva brand. Effective April 1, 2017, the operations for the Ahnu brand were discontinued and certain remaining styles are sold under the Teva brand. Results of wholesale operations for the former Ahnu brand are now reported in the Teva brand wholesale reportable operating segment instead of the Other brands wholesale reportable operating segment, as presented for the year ended March 31, 2017.


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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 attracts women, men, and children.

We believe demand for UGG brand products will continue to be driven by the following:

High consumer brand loyalty due to consistently delivering quality and luxuriously comfortable footwear, apparel, and accessories.

Diversification of our product lines, including women’s spring and summer, men’s, and lifestyle offerings. Our strategy of product diversification aims to mitigate the impacts of seasonality and decrease our reliance on sheepskin.

Continued enhancement of our Omni-Channel and digital marketing capabilities to enable us to better engage existing and prospective consumers and expose them to our brands.

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, and now appeals to athletes around the world, regardless of activity. The HOKA brand is quickly becoming a leading brand within the specialty community with strong marketing fueling both domestic and international sales growth.

Teva Brand. The Teva brand, which pioneered the sport sandal category, is born from the outdoors and rooted in adventure. The Teva brand is a global leader within the sport sandal and modern outdoor lifestyle categories by fueling the expression of freedom. The Teva brand’s product line includes sandals, shoes, and boots.

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. The Sanuk brand’s use of unexpected materials and unconventional constructions, combined with its fun and playful branding, are key elements of the brand’s identity.

Other Brands. Other brands currently consists of the Koolaburra by UGG brand, as well as other discontinued brands during the prior periods presented. The Koolaburra brand is a casual footwear fashion line using sheepskin and other plush materials, sold through our wholesale channel and is intended to target the value-oriented consumer in order to complement our UGG brand offering.

Direct-to-Consumer. Our DTC business 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 our websites before making purchasing decisions.

Our retail stores are predominantly UGG brand concept stores and UGG brand outlet stores. Through our outlet stores, we sell some of our discontinued styles from prior seasons, full price in-line products, as well as products made specifically for the outlet stores.

As of March 31, 2019, we had a total of 156 company-owned global retail stores, which includes 88 concept stores and 68 outlet stores. Generally, we open retail store locations during the second or third quarters of each fiscal year and consider closures of retail stores during the third or fourth quarter of each fiscal year.

Flagship stores. Included in the total count of retail stores worldwide are nine UGG brand flagship stores, which are lead concept stores in our retail channel. In certain key markets and prominent locations, we have opened flagship stores to showcase our UGG brand products. These stores are typically larger and have broader product offerings and greater traffic than our general concept stores as they are primarily located in major tourist areas. The net sales for these stores are recorded in our DTC reportable operating segment.

Concession stores. Included in the total count of retail stores worldwide are concession stores, defined as concept stores that are operated by us within a department or other store, which we lease from the store owner by paying a percentage of concession store sales. The net sales for these stores are recorded in our DTC reportable operating segment.


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Partner Retail stores. In certain international markets, such as China, we rely on partner retail stores, which are branded stores that are wholly-owned and operated by third parties and not included in the total count of worldwide company-owned retail stores. When a partner retail store is opened, or a store is converted into a partner retail store, the store becomes wholly-owned and operated by third parties and related net sales are recorded in our UGG brand or Sanuk brand wholesale reportable operating segments, as applicable.

Our E-Commerce business provides us with an opportunity to communicate a consistent brand message to consumers that is in line with our brands’ promises, drives awareness of key brand initiatives, offers targeted information to specific consumer demographics, and drives consumers to our retail stores. As of March 31, 2019, we operated our E-Commerce business through an aggregate of 22 company-owned websites in nine different countries.

Use of Non-GAAP Measures

In order to provide a framework for assessing how our underlying businesses performed during the relevant periods, excluding the effect of foreign currency exchange rate fluctuations, throughout this Annual Report we provide certain financial information on a “constant currency basis,” which is in addition to the financial measures calculated and presented in accordance with principles generally accepted in the United States (US GAAP). 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 re-measurements. We believe evaluating certain financial and operating measures on a constant currency basis is important as it facilitates comparison of our current financial performance to our historical financial performance, excluding the impact of foreign currency exchange rate fluctuations that are not indicative of our core operating results and are largely outside of our control. Constant currency measures should not be considered in isolation as an alternative to US dollar measures that reflect current period exchange rates or to other financial measures presented in accordance with US GAAP.

We report comparable DTC sales on a constant currency basis for combined DTC operations that were open throughout the current and prior reporting period and have adjusted the prior reporting period to conform to the current fiscal year presentation and accounting policy change for the adoption of the new revenue standard. There may be variations in the way that we calculate comparable DTC sales as compared to some of our competitors and other retailers. As a result, information included within this Annual Report regarding our comparable DTC sales may not be directly comparable to similar data made available by our competitors or other retailers.

Seasonality

Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th. Due to the size of the UGG brand relative to our other brands, our aggregate net sales in the quarters ending September 30th and December 31st have significantly exceeded net sales in the quarters ending March 31st and June 30th. While we have taken steps to diversify our product offerings, both by creating more year-round styles and expanding product offerings within our existing brands, and by acquiring and developing new brands, we expect this trend to continue for the foreseeable future. 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.


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Result of Operations

Year Ended March 31, 2019 Compared to Year Ended March 31, 2018

The following table summarizes our results of operations for the periods presented:
 
Years Ended March 31,
 
2019
 
2018
 
Change
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
Net sales
$
2,020,437

 
100.0
 %
 
$
1,903,339

 
100.0
%
 
$
117,098

 
6.2
 %
Cost of sales
980,187

 
48.5

 
971,697

 
51.1

 
(8,490
)
 
(0.9
)
Gross profit
1,040,250

 
51.5

 
931,642

 
48.9

 
108,608

 
11.7

Selling, general and administrative expenses
712,930

 
35.3

 
709,058

 
37.3

 
(3,872
)
 
(0.5
)
Income from operations
327,320

 
16.2

 
222,584

 
11.7

 
104,736

 
47.1

Other (income) expense, net
(1,614
)
 
(0.1
)
 
1,888

 
0.1

 
3,502

 
185.5

Income before income taxes
328,934

 
16.3

 
220,696

 
11.6

 
108,238

 
49.0

Income tax expense
64,626

 
3.2

 
106,302

 
5.6

 
41,676

 
39.2

Net income
$
264,308

 
13.1
 %
 
$
114,394

 
6.0
%
 
$
149,914

 
131.1
 %
 
 
 
 
 
 
 
 
 
 
 
 
Net income per share
 
 
 
 
 
 
 
 
 
 
 
Basic
$
8.92

 
 
 
$
3.60

 
 
 
$
5.32

 


Diluted
$
8.84

 
 
 
$
3.58

 
 
 
$
5.26

 



Net Sales. The following table summarizes our net sales by location, and by brand and channel, for the periods presented:
 
Years Ended March 31,
 
2019
 
2018
 
Change
 
Amount
 
Amount
 
Amount
 
%
Net sales by location
 
 
 
 
 
 
 
US
$
1,278,358

 
$
1,174,061

 
$
104,297

 
8.9
 %
International
742,079

 
729,278

 
12,801

 
1.8

Total
$
2,020,437

 
$
1,903,339

 
$
117,098

 
6.2
 %
 
 
 
 
 
 
 
 
Net sales by brand and channel
 
 
 
 
 

 
 

UGG brand
 
 
 
 
 

 
 

Wholesale
$
888,347

 
$
841,893

 
$
46,454

 
5.5
 %
Direct-to-Consumer
644,520

 
665,354

 
(20,834
)
 
(3.1
)
Total
1,532,867

 
1,507,247

 
25,620

 
1.7

HOKA brand
 
 
 
 
 
 
 
Wholesale
185,057

 
132,688

 
52,369

 
39.5

Direct-to-Consumer
38,092

 
20,772

 
17,320

 
83.4

Total
223,149

 
153,460

 
69,689

 
45.4

Teva brand
 
 
 
 
 

 
 

Wholesale
119,390

 
117,478

 
1,912

 
1.6

Direct-to-Consumer
18,022

 
16,116

 
1,906

 
11.8

Total
137,412

 
133,594

 
3,818

 
2.9


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Table of Contents

 
Years Ended March 31,
 
2019
 
2018
 
Change
 
Amount
 
Amount
 
Amount
 
%
Sanuk brand
 
 
 
 
 

 
 

Wholesale
69,791

 
78,283

 
(8,492
)
 
(10.8
)
Direct-to-Consumer
12,822

 
12,639

 
183

 
1.4

Total
82,613

 
90,922

 
(8,309
)
 
(9.1
)
Other brands
 
 
 
 
 

 
 

Wholesale
42,818

 
17,273

 
25,545

 
147.9

Direct-to-Consumer
1,578

 
843

 
735

 
87.2

Total
44,396

 
18,116

 
26,280

 
145.1

Total
$
2,020,437

 
$
1,903,339

 
$
117,098

 
6.2
 %
 
 
 
 
 
 
 
 
Total Wholesale
$
1,305,403

 
$
1,187,615

 
$
117,788

 
9.9
 %
Total Direct-to-Consumer
715,034

 
715,724

 
(690
)
 
(0.1
)
Total
$
2,020,437

 
$
1,903,339

 
$
117,098

 
6.2
 %

Consolidated net sales increased primarily due to higher HOKA, UGG, and Other brand wholesale sales. Further, we experienced an increase in total volume of pairs sold of 9.5% to 35,800 compared to 32,700 during the prior period. On a constant currency basis, net sales increased 5.8% compared to the prior period. Key drivers of the change in net sales were as follows:

Wholesale net sales of our UGG brand increased due to a higher volume of pairs sold, partially offset by a lower weighted-average selling price per pair (WASPP). These net impacts were driven by earlier full-priced selling compared to the prior period, as well as growth in our UGG Men’s business and non-Classic styles in UGG Women’s, complimented by our US domestic wholesale UGG Core-Classics product allocation strategy. On a constant currency basis, wholesale net sales of our UGG brand increased 4.3% compared to the prior period.

Wholesale net sales of our HOKA brand increased due to a higher volume of pairs sold driven by continued global growth of the brand, primarily in the US and Europe, as well as additional sales generated by updates to key franchises, including Clifton and Bondi, compared to the prior period.

Wholesale net sales of our Teva brand primarily increased due to Japan growth driven by premium fashion collaborations.

Wholesale net sales of our Sanuk brand decreased due to a lower WASPP, as well as a lower volume of pairs sold, primarily driven by lower performance in the domestic surf specialty channel and lower international sales resulting from our strategic focus on US markets.

Wholesale net sales of our Other brands increased due to a higher volume of pairs sold driven by continued growth in the US family value channel for the Koolaburra brand, partially offset by a lower WASPP due to product and customer mix.

DTC net sales remained relatively flat, primarily due to lower WASPP driven by product mix, mostly offset by a higher volume of pairs sold for the HOKA, Teva and Other brands compared to the prior period.

Comparable DTC net sales for the 52 weeks ended March 31, 2019 increased 1.9% compared to the same period during fiscal year 2018. The increase was due to growth in our E-Commerce business primarily for the UGG and HOKA brands.

International net sales, which are included in the reportable operating segment net sales presented above, increased by 1.8% compared to the prior period. International net sales represented 36.7% and 38.3% of total net sales for the years ended March 31, 2019 and 2018, respectively. The increase was primarily due to higher net sales for the HOKA and Teva brands in Europe and Asia.

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Table of Contents


Gross Profit. Gross profit, as a percentage of net sales, or gross margin, increased to 51.5% from 48.9% during the prior period due to higher-full priced selling driven by less discounting and promotional activity, higher margin on products sold through our closeout channel due to more efficient inventory management, lower air-freight costs for our domestic wholesale business, and lower input costs as we executed our supply chain initiatives as part of our operating profit improvement plan.

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, promotion and other operating expenses of $7,086, primarily due to higher marketing investment to drive sales for the HOKA and UGG brands, as well as higher variable related costs for our DTC operations;

increased foreign currency-related losses of $8,627 driven by changes in foreign currency exchange rates for Canadian, Asian, and European currencies;

increased compensation costs of $6,697, primarily due to higher payroll-related costs, partially offset by consulting costs related to the strategic review process during the prior period, as well as higher accruals for variable performance-based compensation as a result of our financial performance during the current period;

decreased professional service costs of $12,868, primarily driven by lower costs associated with our proxy contest and related legal matters incurred during the prior period, as well as a one-time legal credit recognized during the current fiscal year; and

decreased impairment and depreciation charges of $5,880, primarily due to lower retail store-related impairments and depreciation for retail store closures completed in prior periods.

Income from Operations. Income (loss) from operations by reportable operating segment for the periods presented were as follows:
 
Years Ended March 31,
 
2019
 
2018
 
Change
 
Amount
 
Amount
 
Amount
 
%
Income (loss) from operations
 
 
 
 
 
 
 
UGG brand wholesale
$
300,761

 
$
247,826

 
$
52,935

 
21.4
 %
HOKA brand wholesale
35,717

 
20,954

 
14,763

 
70.5

Teva brand wholesale
27,939

 
20,400

 
7,539

 
37.0

Sanuk brand wholesale
12,781

 
14,474

 
(1,693
)
 
(11.7
)
Other brands wholesale
10,411

 
1,304

 
9,107

 
698.4

Direct-to-Consumer
185,449

 
156,896

 
28,553

 
18.2

Unallocated overhead costs
(245,738
)
 
(239,270
)
 
(6,468
)
 
(2.7
)
Total
$
327,320

 
$
222,584

 
$
104,736

 
47.1
 %

The increase in total income from operations, compared to the prior period, was due to higher sales at higher gross margins, partially offset by higher overall SG&A expenses, primarily driven by higher variable costs. Key drivers of the change in income from operations were as follows:

The increase in income from operations of UGG, HOKA, Other and Teva brand wholesale was due to higher sales at higher gross margins, partially offset by higher SG&A expenses, primarily driven by higher marketing and selling expenses.

The decrease in income from operations of Sanuk brand wholesale was primarily due to lower sales, partially offset by higher gross margins and lower SG&A expenses, driven by lower marketing and selling expenses.

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Table of Contents


The increase in income from operations of DTC was primarily due to higher gross margins, as well as lower overall retail store operating costs driven by store closures completed in prior periods, including related impairments and depreciation costs, partially offset by higher warehouse expenses.

The increase in unallocated overhead costs was primarily due to changes in foreign currency exchange rates for Canadian, Asian, and European currencies and higher warehouse-related expenses associated with the Moreno Valley warehouse and distribution center expansion, partially offset by lower professional and consulting service costs associated with our proxy contest and related legal matters incurred during the prior period, as well as a one-time legal credit recognized in the current fiscal year.

Other (Income) Expense, Net. The increase in total other income, net, compared to the prior period, was primarily due to an increase in interest income driven by higher interest rate yields and higher average invested cash balances, as well as an increase driven by changes in penalties and interest.

Income Taxes. Income tax expense and our effective income tax rate for the periods presented were as follows:
 
Years Ended March 31,
 
2019
 
2018
Income tax expense
$
64,626

 
$
106,302

Effective income tax rate
19.6
%
 
48.2
%

The decrease in our effective income tax rate was due to the impacts of the Tax Cuts and Jobs Act (Tax Reform Act) which were effective on or after January 1, 2018, as well as a change in the jurisdictional mix of worldwide income before income taxes for the year ended March 31, 2019. The Tax Reform Act reduced the US federal income tax rate and our foreign earnings are now subject to US taxation as they are considered global intangible low-taxed income. The prior period included additional income tax expense for the remeasurement of deferred tax assets to the lower enacted US federal tax rate and the one-time mandatory deemed repatriation of foreign earnings.

Foreign income before income taxes was $147,204 and $149,214, and worldwide income before income taxes was $328,934 and $220,696, during the years ended March 31, 2019 and 2018, respectively. The decrease in foreign income before income taxes, as a percentage of worldwide income before income taxes, was primarily due to higher growth reported in domestic net sales as compared to growth from foreign net sales.

For the years ended March 31, 2019 and 2018, we did not generate significant pre-tax earnings from any countries which do not impose a corporate income tax. As of March 31, 2019, we had $214,876 of cash and cash equivalents outside the US, a portion of which may be subject to additional foreign withholding taxes if it were to be repatriated. A small portion of our unremitted accumulated earnings of non-US subsidiaries, for which no US federal or state income tax have been provided, are currently expected to be reinvested outside of the US indefinitely. Such earnings would become taxable upon repatriation by means of the remittance of taxable dividends or upon the sale or liquidation of these subsidiaries.

We expect our foreign income or loss before income taxes, as well as our effective tax rate, will continue to fluctuate from period to period based on several factors, including the impact of our global product sourcing organization, our actual financial and operating results from sales generated in domestic and foreign markets, and changes in domestic and foreign tax laws (or in the application or interpretation of those laws). In particular, we believe the continuing evolution and expansion of our brands, our continuing strategy of enhancing product diversification, and the expected growth from our international DTC business will result in increases in foreign income or loss before income taxes both in absolute terms and as a percentage of worldwide income or loss before income taxes. In addition, we believe our effective tax rate will continue to be impacted by our actual foreign income or loss before income taxes relative to our actual worldwide income or loss before income taxes. For further information on the impacts of the Tax Reform Act, refer to Note 5, “Income Taxes,” of our consolidated financial statements in Part IV within this Annual Report.

Net Income. Net income increased, compared to the prior period, primarily due to higher net sales at higher gross margins, partially offset by higher SG&A expenses. Net income per share increased, compared to the prior period, due to higher net income, combined with lower weighted average common shares outstanding due to stock repurchases.


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Table of Contents

Other Comprehensive Loss. Other comprehensive loss increased, compared to the prior period, primarily due to higher foreign currency translation losses driven by changes in our net asset position and European and Asian foreign currency exchange rates.

Year Ended March 31, 2018 Compared to Year Ended March 31, 2017

The following table summarizes our results of operations for the periods presented:
 
Years Ended March 31,
 
2018
 
2017
 
Change
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
Net sales
$
1,903,339

 
100.0
%
 
$
1,790,147

 
100.0
 %
 
$
113,192

 
6.3
 %
Cost of sales
971,697

 
51.1

 
954,912

 
53.3

 
(16,785
)
 
(1.8
)
Gross profit
931,642

 
48.9

 
835,235

 
46.7

 
96,407

 
11.5

Selling, general and administrative expenses
709,058

 
37.3

 
837,154

 
46.8

 
128,096

 
15.3

Income (loss) from operations
222,584

 
11.7

 
(1,919
)
 
(0.1
)
 
224,503

 
11,699.0

Other expense, net
1,888

 
0.1

 
5,067

 
0.3

 
3,179

 
62.7

Income (loss) before income taxes
220,696

 
11.6

 
(6,986
)
 
(0.4
)
 
227,682

 
3,259.1

Income tax expense (benefit)
106,302

 
5.6

 
(12,696
)
 
(0.7
)
 
(118,998
)
 
(937.3
)
Net income
$
114,394

 
6.0
%
 
$
5,710

 
0.3
 %
 
$
108,684

 
1,903.4
 %
 
 
 
 
 
 
 
 
 
 
 
 
Net income per share
 
 
 
 
 
 
 
 
 
 
 
Basic
$
3.60

 
 
 
$
0.18

 
 
 
$
3.42

 


Diluted
$
3.58

 
 
 
$
0.18

 
 
 
$
3.40

 



Net Sales. The following table summarizes our net sales by location, and by brand and channel, for the periods presented:
 
Years Ended March 31,
 
2018
 
2017
 
Change
 
Amount
 
Amount
 
Amount
 
%
Net sales by location
 
 
 
 
 
 
 
US
$
1,174,061

 
$
1,141,303

 
$
32,758

 
2.9
 %
International
729,278

 
648,844

 
80,434

 
12.4

Total
$
1,903,339

 
$
1,790,147

 
$
113,192

 
6.3
 %
 
 
 
 
 
 
 
 
Net sales by brand and channel
 
 
 
 
 

 
 

UGG brand
 
 
 
 
 

 
 

Wholesale
$
841,893

 
$
826,355

 
$
15,538

 
1.9
 %
Direct-to-Consumer
665,354

 
624,682

 
40,672

 
6.5

Total
1,507,247

 
1,451,037

 
56,210

 
3.9

HOKA brand
 
 
 
 
 
 
 
Wholesale
132,688

 
93,064

 
39,624

 
42.6

Direct-to-Consumer
20,772

 
11,518

 
9,254

 
80.3

Total
153,460

 
104,582

 
48,878

 
46.7

Teva brand
 
 
 
 
 

 
 

Wholesale
117,478

 
103,694

 
13,784

 
13.3

Direct-to-Consumer
16,116

 
14,021

 
2,095

 
14.9

Total
133,594

 
117,715

 
15,879

 
13.5


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Table of Contents

 
Years Ended March 31,
 
2018
 
2017
 
Change
 
Amount
 
Amount
 
Amount
 
%
Sanuk brand
 
 
 
 
 

 
 

Wholesale
78,283

 
77,552

 
731

 
0.9

Direct-to-Consumer
12,639

 
14,214

 
(1,575
)
 
(11.1
)
Total
90,922

 
91,766

 
(844
)
 
(0.9
)
Other brands
 
 
 
 
 

 
 

Wholesale
17,273

 
23,142

 
(5,869
)
 
(25.4
)
Direct-to-Consumer
843

 
1,905

 
(1,062
)
 
(55.7
)
Total
18,116

 
25,047

 
(6,931
)
 
(27.7
)
Total
$
1,903,339

 
$
1,790,147

 
$
113,192

 
6.3
 %
 
 
 
 
 
 
 
 
Total Wholesale
$
1,187,615

 
$
1,123,807

 
$
63,808

 
5.7
 %
Total Direct-to-Consumer
715,724

 
666,340

 
49,384

 
7.4

Total
$
1,903,339

 
$
1,790,147

 
$
113,192

 
6.3
 %

Consolidated net sales increased primarily due to higher HOKA, UGG, and Teva wholesale sales and overall DTC sales. Further, we experienced an increase in pairs sold of 4.1% to 32,700 compared to 31,400 during the prior period. On a constant currency basis, net sales increased 6.1% compared to the prior period. Key drivers for the change in net sales were as follows:

Wholesale net sales of our UGG brand increased primarily due to an increase in WASPP, as well as an increase in apparel and home goods sales. The increase in WASPP was driven by fewer closeout sales. On a constant currency basis, wholesale net sales of our UGG brand increased 2.3% compared to the prior period.

Wholesale net sales of our HOKA brand increased due to a higher volume of pairs sold due to its continued global growth, primarily in the US and Europe.

Wholesale net sales of our Teva brand increased due to a higher WASPP, primarily attributable to changes in product mix and fewer closeout sales.

Wholesale net sales of our Sanuk brand remained relatively flat with a slight increase in volume of pairs sold.

Wholesale net sales of our Other brands decreased due to a lower volume of pairs sold, partially offset by a higher WASPP primarily driven by the change in presentation for the results of wholesale operations of the Ahnu brand to the Teva brand wholesale reportable operating segment.

DTC net sales increased 7.4% compared to the prior period, largely due to growth in our E-Commerce business. The increase in total DTC net sales was primarily due to a higher volume of pairs sold, partially offset by a decrease in WASPP. The decrease in WASPP was due to higher discounted sales through UGG Closet, our limited E-Commerce outlet offering, as well as changes in product mix in our retail stores. Further, we experienced an increase in UGG brand apparel and home goods sales compared to the prior period. On a constant currency basis, DTC net sales increased 6.2% during the year ended March 31, 2018 compared to the prior period.

Comparable DTC net sales for the 52 weeks ended April 1, 2018 increased 7.0% on a constant currency basis compared to the same period during fiscal year 2017. The increase in comparable DTC net sales was due to growth in E-Commerce, partially offset by a decline in net sales at our retail stores.

International net sales, which are included in the reportable operating segment net sales presented above, increased by 12.4% compared to the prior period. International net sales represented 38.3% and 36.2% of total net sales for the years ended March 31, 2018 and 2017, respectively. The increase was primarily due to higher net sales for the UGG and HOKA brands in Europe and Asia.


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Table of Contents

Gross Profit. Gross profit, as a percentage of net sales, or gross margin, increased to 48.9% from 46.7% during the prior period primarily driven by lower input costs as we executed our supply chain initiatives through our operating profit improvement plan, a higher proportion of full-priced selling partly due to favorable weather conditions, as well as favorable foreign currency exchange rate fluctuations compared to the prior period.

Selling, General and Administrative Expenses. The net decrease in SG&A expenses, compared to the prior period, was primarily the result of:

significantly decreased impairment and depreciation charges of $138,235, primarily due to the impairment charge for the Sanuk brand wholesale reportable operating segment goodwill and patent in the amount of approximately $118,000, as well as retail store and other long-lived asset impairment charges incurred during the prior period;

increased compensation costs of $38,030, primarily due to approximately $35,000 driven by higher performance-based compensation and time-based stock awards, as well as other costs incurred for our in-house converted sales team;

decreased commission expenses of $22,988, primarily due to the conversion of sales agent agreements to an in-house sales team during the prior period, partially offset by the increased compensation costs discussed above;

increased costs associated with our proxy contest of $8,969;

decreased foreign currency losses of $8,348, due to favorable exchange rates for European and Asian currencies in the current period, partially offset by higher realized losses on hedging instruments on foreign currency exchange rate forward contracts compared to the prior period;

decreased professional and consulting service costs of $7,502, primarily driven by costs savings initiatives, as well as lower restructuring charges related to corporate reorganization cost compared to the prior period;

increased warehouse-related expenses of $5,985, primarily due to new North American third-party logistic provider (3PL) costs and higher warehouse costs in Europe in the current period;

decreased rent and occupancy expenses of $6,737, primarily due to fewer retail stores and related costs, including restructuring charges for lease termination costs incurred during the prior period;

increased advertising, promotion, and other operating expenses of $2,911, primarily due to increased international investment compared to the prior period; and

increased bad debt expense of $1,321, primarily due to recent payment history on an unsettled customer account in the current period.

Income (Loss) from Operations. Income (loss) from operations by reportable operating segment for the periods presented were as follows:
 
Years Ended March 31,
 
2018
 
2017
 
Change
 
Amount
 
Amount
 
Amount
 
%
UGG brand wholesale
$
247,826

 
$
213,407

 
$
34,419

 
16.1
 %
HOKA brand wholesale
20,954

 
2,556

 
18,398

 
719.8

Teva brand wholesale
20,400

 
10,045

 
10,355

 
103.1

Sanuk brand wholesale
14,474

 
(110,582
)
 
125,056

 
113.1

Other brands wholesale
1,304

 
(985
)
 
2,289

 
232.4

Direct-to-Consumer
156,896

 
109,802

 
47,094

 
42.9


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Table of Contents

 
Years Ended March 31,
 
2018
 
2017
 
Change
 
Amount
 
Amount
 
Amount
 
%
Unallocated overhead costs
(239,270
)
 
(226,162
)
 
(13,108
)
 
(5.8
)
Total
$
222,584

 
$
(1,919
)
 
$
224,503

 
11,699.0
 %

The increase in total income from operations, compared to the prior period, was due to higher sales at higher gross margins, as well as lower overall SG&A expenses, primarily driven by impairment charges of $138,235 incurred during the prior period, as described above. Key drivers for the changes in income from operations were as follows:

The increase in income from operations of UGG brand wholesale was due to higher sales at higher gross margins.

The increase in income from operations of HOKA brand wholesale was due to higher sales at higher gross margins, partially offset by higher SG&A expenses, primarily driven by higher marketing and selling expenses.

The increase in income from operations of Teva brand wholesale was due to higher sales at higher gross margins.

The increase in income from operations of Sanuk brand wholesale was primarily due to impairment charges for goodwill and long-lived assets incurred during the prior period, as well as higher sales at higher gross margins in the current period.

The increase in income from operations of Other brands wholesale was due to higher gross margins and lower marketing and selling expenses.

The increase in income from operations of DTC was primarily due to overall higher sales in our E-Commerce business and lower SG&A expenses, primarily driven by lower restructuring charges for retail stores, compared to the prior period, as well as net realized cost savings due to our operating profit improvement plan.

The increase in unallocated overhead costs was primarily due to higher performance-based compensation and warehouse and 3PL costs, net of cost savings realized from our operating profit improvement plan, partially offset by favorable fluctuations in European and Asian exchange rates. The increase in performance-based compensation of approximately $17,000, compared to the prior period, is due to performance criteria associated with certain compensatory awards being achieved in the current period. The increase in warehouse costs of approximately $10,000, compared to the prior period, was driven by the re-allocation of European warehouse costs from the wholesale channel to unallocated overhead costs based on a determination that the warehouses support multiple reportable operating segments, as well as a new North American 3PL.

Other Expense, Net. The decrease in total other expense, net, compared to the prior period, was primarily due to a decrease in interest expense as a result of lower average balances outstanding under our revolving credit facilities.

Income Taxes. Income tax expense and our effective income tax rate for the periods presented were as follows:
 
Years Ended March 31,
 
2018
 
2017
Income tax expense (benefit)
$
106,302

 
$
(12,696
)
Effective income tax rate
48.2
%
 
181.7
%

The decrease in our effective income tax rate was primarily due to the impacts from the enactment of the Tax Reform Act during the year ended March 31, 2018, partially offset by the impact of non-recurring restructuring charges and non-cash impairment charges recognized during the year ended March 31, 2017. Of the total income tax expense recorded during the year ended March 31, 2018, $14,395 was recorded for the re-measurement of our deferred tax assets to the lower enacted US federal tax rates in the consolidated statements of comprehensive income (loss).

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Table of Contents

Additionally, we recorded provisional US federal and state tax estimates for the one-time mandatory deemed repatriation of foreign earnings of $59,114, including discrete tax impacts of $46,405 related to foreign earnings and profits generated prior to April 1, 2017. These provisional estimates were offset by a benefit of $2,502 due to the reduction of the US federal income tax rate from 35.0% to 31.5%.

Foreign income before income taxes was $149,214 and $63,011 and worldwide income (loss) before income taxes was $220,696 and $(6,986) during the years ended March 31, 2018 and 2017, respectively. The increase in foreign income before income taxes, as a percentage of worldwide income (loss) before income taxes, was primarily due to a larger proportionate increase in foreign sales and a reduction of foreign operating expenses during the year ended March 31, 2018 compared to the prior period. The increase in foreign income before income taxes as a percentage of worldwide income before income taxes was primarily due to the impact of the Sanuk brand goodwill and patent impairment charges to domestic and worldwide income recorded during the prior period.

Net Income. Net income increased, compared to the prior period, primarily due to higher sales at higher gross margins, as well as lower SG&A expenses largely driven by lower impairment and restructuring charges, described above, partially offset by higher income tax expense driven by the enactment of the Tax Reform Act. Net income per share increased due to higher net income, combined with lower weighted average common shares outstanding due to stock repurchases.

Other Comprehensive Income. Other comprehensive income increased, compared to the prior period, primarily due to higher foreign currency translation gains driven by changes in our net asset position and European and Asian foreign currency exchange rates.

Liquidity

We finance our working capital and operating needs using a combination of our cash and cash equivalents balances, cash provided by ongoing operating activities, and available borrowings under our revolving credit facilities, as needed. Our working capital requirements begin when we purchase raw materials and inventories and continue until we ultimately collect the resulting trade accounts receivable. Given the seasonality of our business, our working capital requirements fluctuate significantly throughout the fiscal year. The seasonality of our business also requires us to utilize available cash to build inventory levels during certain quarters in our fiscal year to support higher selling seasons. We believe our cash and cash equivalents balances, cash provided by ongoing operating activities, and available borrowings under our revolving credit facilities (described below under the heading “Capital Resources”), will provide sufficient liquidity to enable us to meet our working capital requirements for at least the next 12 months.

As a result of the Tax Reform Act and the transition of the US tax regime from a worldwide tax system to a territorial tax system, we repatriated $250,000 of cash and cash equivalents during the year ended March 31, 2018. As of March 31, 2019, we had $214,876 of cash and cash equivalents outside the US, of which we repatriated $130,000 during April 2019. A portion of the remaining cash and cash equivalents outside the US may be subject to additional foreign withholding taxes if it were to be repatriated. We continue to evaluate our cash repatriation strategy and we currently anticipate repatriating current and future unremitted earnings of non-US subsidiaries, to the extent they have been and will be subject to US tax, as long as such cash is not required to fund ongoing foreign operations. For further information on the impacts of the Tax Reform Act during the years ended March 31, 2019 and 2018, refer to Note 5, “Income Taxes,” of our consolidated financial statements in Part IV within this Annual Report.

We also continue to evaluate our capital allocation strategy and consider further opportunities to put global cash to use in a way that will profitably grow our business and drive stockholder value, including by repurchasing our stock. In January 2019, our Board of Directors approved the 2019 Repurchase Program, which authorizes us to repurchase up to $261,000 of our common stock. As of March 31, 2019, the aggregate remaining approved amount under the 2017 Repurchase Program and 2019 Repurchase Program (collectively, our “Stock Repurchase Programs”) was $350,212. Our Stock Repurchase Programs do not obligate us to acquire any particular amount of common stock and may be suspended at any time at our discretion.

Our cash repatriation strategy, and by extension, our liquidity, may be impacted by a number of additional considerations, which include clarifications of or changes to the Tax Reform Act and our actual earnings for current and future fiscal periods.

Our liquidity may be further impacted by additional factors, including our operating results, the strength of our brands, unexpected weather conditions, our ability to respond to changes in consumer preferences and tastes, our

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ability to collect our receivables in a timely manner and effectively manage our inventories, and our ability to respond to legislative developments. Furthermore, we may require additional cash resources due to changes in business conditions or strategic initiatives, economic recession, changes in share repurchase strategy, or other future developments, including any investments or acquisitions we may decide to pursue, although we do not have any present commitments with respect to any acquisitions.

If our existing sources of liquidity are insufficient to satisfy our working capital requirements, we may seek to borrow under our existing borrowing arrangements, seek new 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 that could result in operating and financial covenants that would restrict our operations and could 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. In September 2018, we refinanced in full and terminated our Second Amended and Restated Credit Agreement dated as of November 13, 2014, as amended (Prior Credit Agreement). The refinanced revolving credit facility agreement (Credit Agreement) is with JPMorgan Chase Bank, N.A. (JPMorgan), as the administrative agent, Citibank, N.A., Comerica Bank (Comerica) and HSBC Bank USA, N.A., as co-syndication agents, MUFG Bank, Ltd. and U.S. 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 on September 20, 2023.

As of March 31, 2019, and through May 17, 2019, we had no outstanding balance, outstanding letters of credit of $549, and available borrowings of $399,451 under our Primary Credit Facility.

China Credit Facility. Our revolving credit facility in China (China Credit Facility) is an uncommitted revolving line of credit of up to CNY 300,000, or $44,692. As of March 31, 2019, and through May 17, 2019, we had no outstanding balance and available borrowings of $44,692 under our China Credit Facility.

Japan Credit Facility. Our revolving credit facility in Japan (Japan Credit Facility) is an uncommitted revolving line of credit of up to JPY 5,500,000, or $49,595. As of March 31, 2019, and through May 17, 2019, we had no outstanding balance and available borrowings of $49,595 under our Japan Credit Facility. We have renewed the Japan Credit Facility through January 31, 2020 under the terms of the original agreement.

Mortgage. As of March 31, 2019, we had an outstanding principal balance under the mortgage secured by our corporate headquarters property of $31,504. The loan will mature and require a balloon payment in the amount of $23,695, in addition to any then-outstanding balance, on July 1, 2029.

Debt Covenants. As of March 31, 2019, and through May 17, 2019, we were in compliance with all debt covenants under our revolving credit facilities and our mortgage.

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 the refinancing and related terms of our Primary Credit Facility, as well as our other revolving credit facilities and mortgage.

Cash Flows

The following table summarizes our cash flows for the periods presented:
 
Years Ended March 31,
 
2019
 
2018
 
2017
Net cash provided by operating activities
$
359,505

 
$
327,355

 
$
199,330

Net cash used in investing activities
(29,018
)
 
(34,697
)
 
(44,499
)
Net cash used in financing activities
(167,194
)
 
(157,715
)
 
(103,757
)


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