COLUMBIA SPORTSWEAR CO (COLM) FY 2022 MD&A

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Special Note Regarding Forward-Looking Statements", Part I, Item 1 and Item 1A of this Annual Report on Form 10-K. In addition, refer to Part II, Item 7 in our Annual Report on Form 10-K for the year ended December 31, 2021 for our discussion and analysis comparing financial condition and results of operations from 2021 to 2020.

OVERVIEW

We connect active people with their passions. We are a global leader in designing, developing, marketing, and distributing outdoor, active and lifestyle products. We manage these products in two categories: apparel, accessories, and equipment products and footwear products. We provide our products through our four well-known brands: Columbia, SOREL, Mountain Hardwear, and prAna. Apparel, accessories, and equipment products are provided by our Columbia, Mountain Hardwear and prAna brands. Footwear products are provided by our Columbia and SOREL brands. We sell our products in approximately 90 countries and operate in four geographic segments: U.S., LAAP, EMEA, and Canada.

We are investing in our strategic priorities to:

•accelerate profitable growth;

•create iconic products that are differentiated, functional and innovative;

•drive brand engagement through increased, focused demand creation investments;

•enhance consumer experiences by investing in capabilities to delight and retain consumers;

•amplify marketplace excellence, with digitally-led, omni-channel, global distribution; and

•empower talent that is driven by our core values through a diverse and inclusive workplace.

Ultimately, we expect our investments to enable market share capture across our brand portfolio, expand gross margin, improve selling, general and administrative expense efficiency, and drive improved operating margin over the long-term.

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Business Environment and Trends

Economic Environment Impacting Consumer Spending Ability and Preferences | In 2022, we believe inflationary pressures, rising interest rates and recessionary fears began to impact wholesale customer behavior. We expect consumer discretionary spending to be under pressure in 2023 and are preparing for the potential of a mild recession in the second half of 2023.

Elevated Inflationary Pressures | Inflationary pressures, including inbound and outbound freight, raw materials, labor, and product input costs, impacted our 2022 results. We implemented product price increases for our Spring 2022 season and, to a greater extent, for our Fall 2022 and Spring 2023 seasons. Price increases varied by market and product category. In the U.S., on average, we increased pricing by a mid-single digit percent for our Spring 2022 product line, by a high-single to low-double-digit percent for our Fall 2022 product line, and by a high-single to low double-digit percent for our Spring 2023 product line. Although price increases were not expected to fully offset gross margin pressure in 2022, in the fourth quarter of 2022, we began to experience lower inbound freight costs which we expect will benefit gross margin beginning in 2023. We do not expect to implement meaningful product price increases as we begin to see the benefit of these lower costs.

Strengthening U.S. Dollar | The rapid strengthening of the U.S. dollar relative to major foreign currencies unfavorably impacted our results in 2022. The impact of unfavorable foreign currency translation is anticipated to continue to unfavorably impact net sales and profitability through at least the first half of 2023 before shifting to a favorable impact in the second half of 2023.

Heightened Geopolitical Environment | Geopolitical tensions throughout the globe escalated in 2022 as a result of the invasion of Ukraine by Russia and other actions. We believe these geopolitical tensions will remain elevated and have the potential to manifest themselves in certain regions where we directly operate.

Increased Freight Charges | In the first nine months of 2022, we experienced elevated ocean freight costs as a result of price increases stemming from an imbalance of supply and demand for steamship and ocean container capacity. As a result, these costs have had a substantially unfavorable impact on our gross margin. In the fourth quarter of 2022, we experienced significant declines in ocean freight prices. We anticipate these lower ocean freight prices to persist into 2023.

Later Inventory Receipts | During the third quarter of 2021, several weeks of government mandated factory closures in Vietnam disrupted our manufacturing partners' operations and impacted production of product. As a result of these and other supply chain disruptions that impacted the market, we received Fall 2021, Spring 2022 and Fall 2022 inventory later than expected and realized much higher than normal cancellations of Spring 2022 and Fall 2022 orders from our wholesale customers.

Spring 2023 inventory production and logistics transit times are improving markedly and are expected to be more in-line with our historical experience, assuming no material downturn in port and railroad labor relations.

COVID-19 Impacts in China | Throughout 2022, the efforts to control the spread of COVID-19 in China severely impacted the operations of our business in China. For most of the second quarter of 2022, government efforts to control the spread of COVID-19 in China disrupted our distribution center's operations, which resulted in an inability to fulfill e-commerce, wholesale and owned DTC stores orders in China. In the third and fourth quarter of 2022, similar restrictions impacted various aspects of our business, including the operation of DTC stores in China, as well as stores operated by our wholesale customers. Upon the change in China's zero-COVID policy in early December 2022, increased COVID-19 infections negatively impacted business performance. However, these impacts eased quickly and our business in China is rebounding.

Elevated Inventories | Strong consumer demand in 2021 and the first quarter of 2022 coupled with ongoing supply chain constraints resulted in a shortage of inventory in the marketplace. By the end of the second quarter of 2022, the arrival of long-delayed orders at retailers and a slowing of consumer demand resulted in excess inventory in the marketplace. With higher marketplace inventories and a rapidly changing economic environment, retailers rationalized their inventory needs and demonstrated a more conservative approach to inventory management. As a result of the foregoing and the later inventory receipts previously discussed, we experienced increased order cancellations for Spring 2022 and Fall 2022 orders. Due to our elevated inventory positions, we have adjusted future inventory purchases and are utilizing our outlet stores to profitability sell a portion of our excess inventory. We expect our inventory position to normalize in the latter half of 2023.

Increased U.S. Distribution Center Capacity Pressure | Elevated inventory levels combined with uneven flow of inventory receipts and shipments are resulting in storage and process capacity pressures within our U.S. distribution centers and third-party logistics operations. We began to experience these pressures as we received Fall 2022 inventory and expect this trend to continue well into 2023. We expect to incur

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additional inventory carrying costs in 2023 as a result of additional costs for outside storage, and other inventory related holding costs, as we look to normalize our inventory position.

Talent Market and Wage Rate Pressures | Labor costs have risen in an effort to retain and compete for employees. We have made certain wage adjustments in an effort to be more competitive in the current environment. However, we anticipate rising costs to continue into 2023 resulting from the continued competition for talent.

Changes in Promotional Environment | In the first half of 2022, we operated in a low promotional environment and experienced fewer sales returns and customer accommodations than we have historically. Near the end of the third quarter of 2022, an increase in promotional activity began to unfavorably impact our DTC product margins compared to the same period in the prior year in which promotions were exceptionally low. With elevated marketplace inventory, we anticipate the promotional environment and less favorable trading terms to continue into 2023.

Increased Outdoor Participation by Consumers | The COVID-19 pandemic drew a record number of individuals in the United States to spend an increased amount of time outside, including participating in outdoor recreational activities. While outdoor participation rates may not be maintained, we believe that our addressable consumer base worldwide has been expanded and expect outdoor participation to remain elevated in comparison to pre-pandemic levels.

Changing Consumer Expectations | Consumer behavior continues to fluctuate. Consumer expectations and the related competitive pressures have increased and continue to increase relative to various aspects of our e-commerce business, including speed of product delivery, shipping charges, return privileges and other evolving expectations. We maintain and continue to make substantial investments in information systems, processes and personnel to support our ongoing demand planning efforts to provide forecasting of optimal inventory to meet customer and consumer demands.

Seasonality | Our business is affected by the general seasonal trends common to the industry, including seasonal weather and discretionary consumer shopping and spending patterns. Our products are marketed on a seasonal basis, and our sales are weighted substantially toward the third and fourth quarters, while our operating costs are more equally distributed throughout the year. In 2022, over 60% of our net sales and over 75% of our operating income were realized in the second half of the year.

RESULTS OF OPERATIONS

The following discussion of our results of operations and liquidity and capital resources should be read in conjunction with Part II, Item 8 of this Annual Report on Form 10-K.

Non-GAAP Financial Measure

To supplement financial information reported in accordance with accounting principles generally accepted in the United States ("GAAP"), we disclose constant-currency net sales information, which is a non-GAAP financial measure, to provide a framework to assess how the business performed excluding the effects of changes in foreign currency exchange rates against the United States dollar between comparable reporting periods. We calculate constant-currency net sales by translating net sales in foreign currencies for the current period into United States dollars at the exchange rates that were in effect during the comparable period of the prior year. Management believes that this non-GAAP financial measure reflects an additional and useful way of viewing an aspect of our operations that, when viewed in conjunction with our GAAP results, provides a more comprehensive understanding of our business and operations. In particular, investors may find the non-GAAP measure useful by reviewing our net sales results without the volatility in foreign currency exchange rates. This non-GAAP financial measure also facilitates management's internal comparisons to our historical net sales results and comparisons to competitors' net sales results. Constant-currency financial measures should be viewed in addition to, and not in lieu of or superior to, our financial measures calculated in accordance with GAAP.

The following discussion includes references to constant-currency net sales, and we provide a reconciliation of this non-GAAP measure to the most directly comparable financial measure calculated in accordance with GAAP below.

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Results of Operations — Consolidated

The following table presents the items in our Consolidated Statements of Operations, both in dollars and as a percentage of net sales:

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

Net Sales. Net sales by brand, product category and channel are summarized in the following table:

(1) Constant-currency net sales is a non-GAAP financial measure. See "Non-GAAP Financial Measure" above for further information.

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Overall, our global net sales increase reflected higher shipments of Spring 2022 and Fall 2022 wholesale orders and higher consumer demand in our DTC business. Retailers generally exited 2021 with lower than optimal inventory levels which contributed to the increased Spring 2022 and Fall 2022 wholesale demand to replenish inventory and fulfill anticipated consumer demand. In addition, consumer demand in our DTC business remained healthy throughout the year as consumer traffic levels recovered in our DTC stores and positive e-commerce trends were sustained. In 2022, our global DTC e-commerce net sales grew 8% and represented 18% of our global net sales. In 2021, DTC e-commerce net sales grew 20% and represented 18% of our global net sales.

Columbia and SOREL brand net sales benefited from favorable late season cold weather product sales in the first quarter of 2022. Columbia brand net sales continued to experience broad-based growth across all channels, product categories, and regions. In the fourth quarter of 2022, SOREL, Mountain Hardwear and prAna net sales were unfavorably impacted from wholesale order cancellations resulting from supply chain disruptions and retailer cautiousness, as well as lower consumer demand.

Our global net sales increase was tempered by unfavorable impacts from changes in foreign currency exchange rates.

Gross Profit. Gross profit is summarized in the following table:

Gross margin contracted primarily due to the following factors:

•an approximate 180 bps decrease related to elevated inbound freight costs; and

•unfavorable channel and regional net sales shifts primarily due to a higher mix of wholesale sales which typically carry a lower margin compared to DTC sales.

Selling, General and Administrative Expenses. SG&A expenses is summarized in the following table:

SG&A expense growth reflects expenses to support the growth of our business, inflationary pressures, and investments to drive our brand-led consumer-focused strategies.

SG&A expenses increased primarily due to the following factors:

•higher personnel expenses of $39.8 million, reflecting increased headcount to support business growth, as well as annual merit and other wage rate increases;

•increased demand creation spending of $21.0 million, including higher spending aligned with sales growth;

•higher global retail expenses associated with sales growth and the impact of new stores;

•higher information technology related expenses; and

•higher outside storage and third-party logistics expenses; partially offset by

•lower incentive compensation expense.

Impairment of Goodwill and Intangible Assets. For the year ended December 31, 2022, we recognized $35.6 million of impairment charges related to the prAna brand as a result of our annual fourth quarter impairment testing. These charges consisted of an $18.7 million impairment charge related to prAna's trademark, an indefinite-lived intangible asset, and a $16.9 million impairment charge related to the goodwill attributable to the prAna business. For the year ended December 31, 2021, there were no impairment charges recorded for goodwill and intangible assets with indefinite lives.

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Refer to our Critical Accounting Policies and Estimates below for further information regarding impairments.

Income Tax Expense. Income tax expense and the related effective income tax rate are summarized in the following table:

Our effective income tax rates for the years ended December 31, 2022 and 2021 were impacted by discrete tax items, which lowered the effective income tax rate in each period. For the year ended December 31, 2022, our effective income tax rate was primarily impacted by a non-recurring benefit related to the finalization of U.S. and foreign tax audits, a non-recurring benefit related to a decrease in accrued foreign withholding taxes and a non-recurring benefit related to a foreign currency loss resulting from an intercompany transaction. For the year ended December 31, 2021, our effective income tax rate was primarily impacted by a decrease in accrued foreign withholding taxes and a non-recurring benefit related to common stock benefits.

Results of Operations — Segment

Segment operating income includes net sales, cost of sales, SG&A expenses, and net licensing income for each of our four reportable geographic segments. Operating income as a percentage of net sales in the U.S. is typically higher than the other segments primarily due to scale efficiencies associated with the larger base of net sales in the U.S. and, to a lesser extent, incremental licensing income.

We anticipate this trend to continue until other segments achieve scale efficiencies from higher levels of net sales volume relative to the fixed cost structure necessary to operate the business.

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

Net sales by geographic segment are summarized in the following table:

(1) Constant-currency net sales is a non-GAAP financial measure. See "Non-GAAP Financial Measure" above for further information.

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Operating income for each reportable segment and unallocated corporate expenses are summarized in the following table:

U.S.

U.S. operating income decreased $16.7 million to $519.8 million, or 22.6% of net sales, in 2022 from $536.5 million, or 26.0% of net sales, in 2021. The decrease was driven primarily by increased net sales, more than offset by decreased gross margin. U.S. net sales increased $241.9 million, or 12%, in 2022, compared to 2021. U.S. net sales increased across all channels, product categories, and most brands, led by increased net sales for our Columbia and SOREL brands. Increased U.S. wholesale net sales were driven by increased consumer demand and shipment of higher Spring 2022 and Fall 2022 orders compared to shipment of 2021 season orders in the prior year, partially offset by increased order cancellations in the second half of 2022. U.S. DTC net sales increased from sales growth generated from our retail stores and e-commerce business. U.S. gross margin decreased primarily due to elevated inbound freight costs. As of December 31, 2022, our U.S. business operated 156 retail stores, compared to 142 stores as of December 31, 2021. SG&A expenses increased as a percentage of net sales to 27.7% in 2022 compared to 26.7% for 2021.

LAAP

LAAP operating income increased $5.0 million to $47.0 million, or 9.9% of net sales, in 2022 from $42.0 million, or 9.0% of net sales, in 2021. The increase was driven primarily by increased net sales. LAAP net sales increased $8.4 million, or 2% (13% constant-currency), in 2022, compared to 2021, primarily in our LAAP distributor business. LAAP net sales increased due to higher shipment of Fall 2022 orders compared to shipment of Fall 2021 orders, earlier shipment of Spring 2023 orders compared to shipment of Spring 2022 orders, and higher consumer demand as we lapped prior year restrictions to prevent the spread of COVID-19 in Japan. These increases were partially offset by unfavorable impacts from changes in foreign currency exchange rates and government efforts to control the spread of COVID-19 in China. LAAP SG&A expenses decreased as a percentage of net sales to 46.0% in 2022 compared to 48.3% in 2021.

EMEA

EMEA operating income increased $14.7 million to $80.2 million, or 18.3% of net sales, in 2022 from $65.5 million, or 17.1% of net sales, in 2021. The increase was driven primarily by increased net sales. EMEA net sales increased $56.5 million, or 15% (26% constant-currency), in 2022, compared to 2021, driven by increased net sales in our Europe-direct and EMEA distributor businesses. Europe-direct net sales increased primarily due to higher consumer demand, partially offset by unfavorable impacts from changes in foreign currency exchange rates. EMEA distributor net sales increased primarily due to higher shipments of Fall 2022 orders compared to shipment of Fall 2021 orders and earlier shipment of Spring 2023 orders compared to shipment of Spring 2022 orders. EMEA SG&A expenses decreased as a percentage of net sales to 26.1% in 2022 compared to 28.0% in 2021.

Canada

Canada operating income increased $0.3 million to $53.0 million, or 21.2% of net sales, in 2022 from $52.7 million, or 24.1% of net sales in 2021. The increase primarily resulted from increased net sales. Canada net sales increased $31.0 million, or 14% (19% constant-currency), in 2022, compared to 2021, primarily driven by increased net sales in our Canada DTC and wholesale businesses. Canada SG&A expenses increased as a percentage of net sales to 25.0% in 2022, compared to 24.0% in 2021.

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Unallocated Corporate Expenses

Unallocated corporate expenses increased by $60.7 million to $306.9 million in 2022 from $246.2 million in 2021, largely driven by prAna impairment charges of $35.6 million, higher personnel expenses and technology related expenses, partially offset by lower incentive compensation.

LIQUIDITY AND CAPITAL RESOURCES

Including cash, cash equivalents, short-term investments and available committed credit lines, we had approximately $935 million in total liquidity as of December 31, 2022. Our liquidity may be affected by the general seasonal trends common to the industry. Our products are marketed on a seasonal basis and our sales are weighted substantially toward the third and fourth quarters, while our operating costs are more equally distributed throughout the year. Our cash and cash equivalents and short-term investments balances generally are at their lowest level just prior to the start of the U.S. holiday season and increase during the fourth quarter from collection of wholesale business receivables and fourth quarter DTC sales. This trough cash position is impacted by the amount of product we order from our contract manufacturers in anticipation of customer demand and is more heavily impacted in advance of periods of expected high demand.

Cash Flow Activities

Cash flows are summarized in the following table:

The change in cash flows used in operating activities was driven by a $388.1 million increase in cash used in changes in assets and liabilities, partially offset by a $8.5 million increase in cash provided by net income and non-cash adjustments. The most significant comparative changes in assets and liabilities included Inventories, and to a lesser extent, Accrued liabilities, Accounts payable, Accounts receivable, net, and Operating lease assets and liabilities. The $299.6 million increase in cash used in Inventories was driven by an increase in inventory purchases in anticipation of sales growth, temporary store closures due to government efforts to control the spread of COVID-19 in China, supply chain disruptions, and higher than initially planned wholesale order cancellations. The $45.8 million decrease in cash provided by Accrued liabilities was primarily driven by changes in accruals for incentive compensation. The $35.1 million decrease in cash provided by Accounts payable primarily resulting from the effects of reduced in-transit inventory compared to 2021. The $32.9 million increase in cash used in Accounts receivable, net was primarily driven by growth in wholesale sales, partially offset by an increase in collections. These amounts were partially offset by the $22.4 million decrease in cash used in Operating lease assets and liabilities, which was primarily due to payment of non-recurring deferred rents and lease termination fees in 2021.

Net cash provided by investing activities was $72.7 million for 2022, compared to net cash used in investing activities of $163.8 million for 2021. For 2022, net cash provided by investing activities consisted of $131.2 million in net sales and maturities of short-term investments, partially offset by $58.5 million in cash used for capital expenditures. For 2021, net cash used in investing activities consisted of $129.1 million in net purchases of short-term investments and $34.7 million for capital expenditures.

Net cash used in financing activities was $360.8 million for 2022 compared to $210.9 million for 2021. For 2022, net cash used in financing activities primarily consisted of repurchases of common stock of $287.4 million and dividend payments to our shareholders of $75.1 million. For 2021, net cash used in financing activities primarily consisted of repurchases of common stock of $165.4 million and dividend payments to our shareholders of $68.6 million, partially offset by net proceeds from the issuance of common stock related to share-based compensation of $23.0 million.

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Sources of Liquidity

Cash and cash equivalents and short-term investments

As of December 31, 2022, we had cash and cash equivalents of $430.2 million and short-term investments of $0.7 million, compared to $763.4 million and $131.1 million, respectively, as of December 31, 2021.

Domestic Credit Facility

Refer to Note 7 in Part II, Item 8 of this Annual Report on Form 10-K for further information regarding the domestic credit facility.

As of December 31, 2022, we had available an unsecured, committed revolving credit facility, which provides for borrowings up to $500.0 million. We were in compliance with all associated covenants and there was no balance outstanding under the facility.

International Credit Facility

As of December 31, 2022, our European subsidiary had available an unsecured, committed line of credit, which is guaranteed by the Company and provides for borrowings up to €4.4 million (approximately US$4.7 million). There was no balance outstanding under the facility.

Other Sources

As of December 31, 2022, collectively, our international subsidiaries had unsecured, uncommitted lines of credit, credit facilities and overdraft facilities, providing for borrowings up to approximately US$106.1 million. There was no balance outstanding under these facilities.

Capital Requirements

Our expected short-term and long-term cash needs are primarily for working capital and capital expenditures. We expect to meet these short-term and long-term cash needs primarily with cash flows from operations and, if needed, borrowings from our existing credit facilities.

Our working capital management goals include maintaining an optimal level of inventory necessary to deliver goods on time to our customers and our retail stores to satisfy end consumer demand, alleviating manufacturing capacity constraints, and driving efficiencies to minimize the cycle time from the purchase of inventory from our suppliers to the collection of accounts receivable balances from our customers. Inventory balances may be elevated in advance of periods of expected high demand. As of December 31, 2022, our inventory balance increased to $1,028.5 million, compared to $645.4 million as of December 31, 2021. Unrealized projected sales growth for Fall 2022 and earlier receipts of Spring 2023 product resulted in higher inventory levels. We believe older season inventories represent a manageable portion of our total inventory mix. To align inventory levels more closely with anticipated demand, we have adjusted future inventory purchases and we are leveraging our outlet stores to sell excess merchandise. We expect inventory to remain elevated into the second half of 2023 as we carry forward inventory into future seasons, balancing reducing inventory levels with maintaining profitability.

We have planned 2023 capital expenditures of approximately $70 to $90 million. This includes investments in our DTC operations, including new stores, U.S. distribution projects to increase efficiency and expand storage, and digital and supply chain capabilities to support our strategic priorities. Our actual capital expenditures may differ from the planned amounts depending on factors such as the timing of system implementations and new store openings and related construction as well as the availability of capital assets from suppliers.

Our long-term goal is to maintain a strong balance sheet and a disciplined approach to capital allocation. Dependent upon market conditions and our strategic priorities, our capital allocation approach includes:

•investing in organic growth opportunities to drive long-term profitable growth;

•returning at least 40% of free cash flow to shareholders through dividends and share repurchases; and

•considering opportunistic mergers and acquisitions.

Free cash flow is a non-GAAP financial measure. Free cash flow is calculated by reducing net cash flow from operating activities by capital expenditures. Management believes free cash flow provides investors with an important perspective on the cash available for shareholders and acquisitions after making the capital investments required to support ongoing business operations and long-term value creation. Free cash flow does not represent the residual cash flow available for discretionary expenditures since it excludes certain mandatory expenditures. Management uses free cash flow as a measure to assess both business performance and overall liquidity.

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Other cash commitments

Our non-current Income taxes payable on the Consolidated Balance Sheet as of December 31, 2022 includes approximately $9.3 million of net unrecognized tax benefits. We are uncertain about whether or when these amounts may be settled. Refer to Note 10 in Part II, Item 8 of this Annual Report on Form 10-K for additional information.

The following table presents our estimated significant contractual commitments that will require use of funds:

(1) Refer to Operating Leases in Note 9 in Part II, Item 8 of this Annual Report on Form 10-K.

(2) Refer to Income Taxes in Note 10 in Part II, Item 8 of this Annual Report on Form 10-K.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management's discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make various estimates and judgments that affect reported amounts of assets, liabilities, sales, cost of sales, and expenses and related disclosure of contingent assets and liabilities. Refer to Note 2 in Part II, Item 8 of this Annual Report on Form 10-K for additional information regarding the significant accounting policies and methods used in the preparation of our consolidated financial statements.

We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential effect on our financial statements, so we consider these to be our critical accounting policies and estimates. Because of the uncertainty inherent in these matters, actual results may differ from the estimates we use in applying these critical accounting policies and estimates. We base our ongoing estimates on historical experience and other assumptions that we believe to be reasonable in the circumstances. Our critical accounting policies and estimates relate to sales reserves, allowance for uncollectible accounts receivable, excess, close-out and slow-moving inventory, impairment of long-lived assets, intangible assets and goodwill, and income taxes.

Management regularly discusses with our audit committee each of our critical accounting estimates, the development and selection of these accounting estimates, and the disclosure about each estimate in this Annual Report on Form 10-K. These discussions typically occur at our quarterly audit committee meetings and include the basis and methodology used in developing and selecting these estimates, the trends in and amounts of these estimates, specific matters affecting the amount of and changes in these estimates, and any other relevant matters related to these estimates, including significant issues concerning accounting principles and financial statement presentation.

Sales Reserves

The amount of consideration we receive and recognize as Net sales across both wholesale and DTC channels varies with changes in sales returns and other accommodations and incentives we offer to our customers. When we give our customers the right to return products or provide other accommodations such as chargebacks and markdowns, we estimate the expected sales returns and miscellaneous claims from customers and record sales reserves to reduce Net sales. As of December 31, 2022, our sales-related reserves were $115.4 million compared to $99.0 million as of December 31, 2021. The most significant variable affecting these reserve balances is net sales levels. As a percentage of Net sales, the sales reserves balances were 3.3% as of December 31, 2022 compared to 3.2% as of December 31, 2021. The reserve for returns from customers or consumers is the most susceptible component of our sales related to reserves to estimation uncertainty. These estimates are based on 1) historical rates of product returns and claims; and 2) events and circumstances that indicate changes to such historical rates, such as our customers' net inventory positions and their anticipated sell-through rates. However, actual returns and claims in any future period are inherently uncertain and thus may differ from our estimates. As a result, we adjust our estimates of revenue at the earlier of when the most likely amount of consideration we expect to receive changes or when the amount of consideration becomes fixed. If actual or expected future returns and claims are significantly different than the sales reserves established, we record an adjustment to Net sales in the period in which such determination was made.

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Allowance for Uncollectible Accounts Receivable

We make ongoing estimates of the collectability of our accounts receivable and maintain an allowance for estimated credit losses resulting from the inability of our customers to make required payments. The allowance represents our current estimate of lifetime expected credit losses over the remaining duration of existing accounts receivable considering current market conditions and supportable forecasts when appropriate. In determining the amount of the allowance, we consider our historical level of credit losses, as well as our judgments about the creditworthiness of customers based on ongoing credit evaluations. We analyze specific customer accounts, including aged receivables, customer concentrations, credit insurance coverage, standby letters of credit, and other forms of collateral, current economic trends, and changes in customer payment terms.

Our allowance for uncollectible accounts receivable decreased to $5.4 million as of December 31, 2022 compared to $8.9 million as of December 31, 2021. Because future changes in the financial stability of our customers is difficult to estimate, actual future losses from uncollectible accounts may differ from our estimates and may have a material effect on our financial position, results of operations or cash flows. If the financial condition of our customers deteriorates and results in their inability to make payments, a larger allowance may be required. If we determine that a smaller or larger allowance is appropriate, we will record an adjustment to SG&A expenses in the period in which we make such a determination.

Excess, Close-Out and Slow-Moving Inventory

We make ongoing estimates of potential excess, close-out or slow-moving inventory. We evaluate our inventory on hand to identify excess, close-out or slow-moving inventory by contemplating our 1) purchasing plans; 2) sales forecasts; 3) historical liquidation experience; and 4) the level and composition of inventory from current and prior seasons that remains unsold and establish provisions as necessary to properly reflect inventory value at the lower of cost or net realizable value. Provisions are established when necessary in the period in which we make such a determination. As of December 31, 2022, our inventory provisions reduced gross inventory by $29.4 million compared to $19.9 million as of December 31, 2021. The level of estimated excess inventory as of December 31, 2022 increased reflecting both higher total inventory and unsold inventory levels partially offset by an improvement in the aging of unsold inventory.

Impairment of Long-Lived Assets, Intangible Assets and Goodwill

Long-lived assets, which include property, plant and equipment, lease right-of-use ("ROU") assets, capitalized implementation costs for cloud computing arrangements, and intangible assets with finite lives are measured for impairment only when events or circumstances indicate the carrying value may not be recoverable. Our retail fleet long‐lived assets are evaluated at the retail location level. Events that result in an impairment review of a retail location include plans to close a retail location or a significant decrease in the operating results of the retail location. When such an indicator occurs, we evaluate retail location long‐lived assets for impairment by comparing the undiscounted future cash flow expected to be generated by the location to the location long‐lived asset’s carrying amount. If the carrying amount of an asset exceeds the estimated undiscounted future cash flow, an analysis is performed to estimate the fair value of the asset. An impairment is recorded if the fair value of the retail location long‐lived asset is less than the carrying amount.

During 2022 we tested certain long-lived assets consisting of property, plant, and equipment and lease ROU assets for impairment at certain underperforming retail locations. For the years ended December 31, 2022 and 2021, impairment charges from underperforming retail stores were not material. Further declines in projected future performance may adversely affect the recovery of retail locations assets.

We review and test our intangible assets with indefinite lives and goodwill for impairment in the fourth quarter of each year and when events or changes in circumstances indicate that it is more likely than not that the fair value of the asset or reporting unit is less than its carrying amount. Our intangible assets with indefinite lives consist of trademarks and trade names (collectively "trademarks"). Substantially all of our goodwill is recorded in the U.S. segment and impairment testing for goodwill is performed at the reporting unit level. Key assumptions used in the discounted cash flow models are cash flow projections and the discount rate. Cash flow projections are developed in part from our annual planning process. The discount rate is based on the estimated weighted-average costs of capital of the reporting unit from a market-participant perspective. When we include market-based valuation methods to estimate fair value of our reporting units as part of the goodwill impairment testing, we utilize market multiples for guideline public companies.

In the impairment tests for trademarks, we compare the estimated fair value of each asset to its carrying amount. The fair values of trademarks are estimated using a relief from royalty method under the income approach. If the carrying amount of a trademark exceeds its estimated fair value, we calculate impairment as the excess of carrying amount over the estimate of fair value. In our 2022 impairment test, we determined that the prAna brand’s trademark was impaired and we recognized an $18.7 million impairment charge for the year ended December 31, 2022 reducing the carrying value to $51.8 million. The decline in estimated fair value from the fourth-quarter 2021 impairment

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test reflects a decline in forecasted revenue, a lower estimated royalty rate, and a slightly higher discount rate. As part of our 2020 annual impairment test, we previously recognized a $17.5 million impairment of prAna’s trademark.

In the impairment test for goodwill, we compare the estimated fair value of the reporting unit with the carrying amount of that reporting unit. If the carrying amount of the reporting unit exceeds its estimated fair value, we calculate an impairment as the excess of carrying amount over the estimate of fair value. We estimate the fair value of our reporting units using a combination of discounted cash flow analysis and market-based valuation methods, as appropriate. In our 2022 impairment test, we determined that prAna goodwill was impaired and we recognized a $16.9 million impairment charge for the year ended December 31, 2022, reducing the carrying value of prAna's goodwill to $37.3 million. The decline in estimated fair value from the fourth quarter 2021 impairment test reflects lower assumed revenue and operating income levels, while the weighted average costs of capital used in the discounted cash flow model remained relatively unchanged.

Our impairment tests and related fair value estimates are based on a number of factors, including assumptions and estimates for projected sales, income, cash flows, discount rates, market-based multiples, and other operating performance measures. Changes in estimates or the application of alternative assumptions could produce significantly different results. These assumptions and estimates may change in the future due to changes in economic conditions, changes in our ability to meet sales and profitability objectives or changes in our business operations or strategic direction.

Income Taxes

We make assumptions, judgments and estimates to determine our current provision for income taxes, our deferred tax assets and liabilities and our uncertain tax positions. Our judgments, assumptions and estimates relative to the current provision for income tax take into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Changes in tax law or our interpretation of tax laws and the resolution of current and future tax audits could significantly affect the amounts provided for Income tax expense in our Consolidated Statements of Operations.

Our assumptions, judgments and estimates relative to the value of a deferred tax asset take into account predictions of the amount and category of future taxable income. Actual operating results and the underlying amount and category of income in future years could cause our current assumptions, judgments and estimates of recoverable net deferred tax assets to be inaccurate. Changes in any of the assumptions, judgments and estimates mentioned above could cause our actual income tax obligations to differ from our estimates, which could materially affect our financial position, results of operations or cash flows.

Our assumptions, judgement and estimates relative to uncertain tax positions take into account whether a tax position is more likely than not to be sustained upon examination by the relevant taxing authority based on the technical merits of the position and the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant taxing authority. Changes in tax law or our interpretation of tax laws and the resolution of current and future tax audits could significantly affect the amounts provided for Income tax expense in our Consolidated Statements of Operations.

Our tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. As the calendar year progresses, we periodically refine our estimate based on actual events and earnings by jurisdiction. This ongoing estimation process can result in changes to our expected effective tax rate for the full calendar year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs so that our year-to-date provision equals our expected annual effective tax rate.

RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note 2 in Part II, Item 8 of this Annual Report on Form 10-K.

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