# DECKERS OUTDOOR CORP (DECK) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from DECKERS OUTDOOR CORP's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/910521/000091052123000016/deck-20230331.htm
Accession: 0000910521-23-000016
Filing date: 2023-05-26
Report date: 2023-03-31
Extracted from a substantive MD&A body after the formal Item 7 span was a TOC or reference stub.
Confidence: high

Company profile: /company/DECK/
All MD&A years: /company/DECK/mda/
Previous year: /company/DECK/mda/fy2022/ (FY 2022)
Next year: /company/DECK/mda/fy2024/ (FY 2024)

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 our products are distinctive and appeal to a broad demographic. We sell our products through quality domestic and international retailers, international distributors, and directly to our global consumers through our DTC business, which is comprised of our e-commerce websites and retail stores. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. All of our products are manufactured by independent manufacturers.

Financial Highlights

Consolidated financial performance highlights for fiscal year 2023 compared to fiscal year 2022, are as follows:

•Net sales increased 15.1% to $3,627,286.

◦Channel

▪Wholesale channel net sales increased 11.6% to $2,160,675.

▪DTC channel net sales increased 20.8% to $1,466,611.

◦Geography

▪Domestic net sales increased 13.1% to $2,451,497.

▪International net sales increased 19.7% to $1,175,789.

•Gross margin decreased 70 basis points to 50.3%.

•Income from operations increased 15.6% to $652,751.

•Diluted earnings per share increased 19.1% to $19.37 per share.

Trends and Uncertainties Impacting Our Business and Industry

We expect our business and industry will continue to be impacted by several important trends and uncertainties, including the following:

Supply Chain

•Similar to other companies in our industry, we continue to monitor pressures on the global supply chain, which have shifted the timing of shipments across our brands compared to the prior period, resulting in inventory levels outpacing sales growth. However, we have seen improvements in transit lead times and related freight costs compared to the prior period, which has had a positive impact on results of operations through fiscal year 2023.

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•We continue to be flexible in adapting to the fluid logistics environment by implementing additional measures to mitigate the effects of supply chain disruptions, which has resulted in and may continue to result in higher costs. Our efforts include expanding our global warehouses and DCs, as well as our 3PL arrangements, and diversifying and increasing the number of our third-party manufacturers.

Brand and Omni-Channel Strategy

•We remain focused on increasing consumer adoption of the HOKA brand with all geographic regions and distribution channels experiencing significant year-round growth, which has positively impacted our financial results and seasonality trends. Our efforts to drive HOKA brand performance are primarily focused on distribution management, launching innovative product offerings and global marketing campaigns to drive brand awareness, and further expanding the HOKA brand presence through our DTC channel.

•Our marketplace strategies in Europe and Asia (international reset strategies) have continued to drive UGG brand awareness and consumer acquisition by building brand acceptance through localized marketing investments. However, unfavorable foreign currency exchange rates have partially offset international growth of the UGG brand during fiscal year 2023.

•Our long-term growth strategy remains focused on building our DTC channel to represent an increased portion of our total net sales, and prioritizing consumer acquisition and experience to sustain strong demand and market positions for our brands.

•We continue to adopt selective price increases as appropriate by brand and product, which we believe can help mitigate increased costs.

Reportable Operating Segment Overview

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

UGG Brand. The UGG brand is one of the most iconic and recognized brands in our industry, which highlights our successful track record of building niche brands into lifestyle and fashion market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, apparel, and accessories with expanded product offerings and a growing global audience that appeals to a broad demographic.

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

•Successful acquisition of a diverse consumer base that resonates globally and with key markets, including for a younger, fashionable consumer, through strategic marketing activations and collaborations.

•High consumer brand loyalty due to consistent delivery of crafted; purposefully built and luxuriously comfortable footwear, apparel, and accessories.

•Diversification of our footwear product offerings, such as our spring and summer lines, as well as expanded category offerings for Men's products, and more iconic fashion product for our Classics line.

•Thoughtful expansion of our apparel and accessories businesses.

HOKA Brand. The HOKA brand is an authentic premium line of year-round performance footwear that offers enhanced cushioning and inherent stability with minimal weight, apparel, and accessories. Originally designed for ultra-runners, the brand now appeals to world champions, taste makers, and everyday athletes. Strong marketing has fueled both domestic and international sales growth of the HOKA brand, which has quickly become a leading brand within run and outdoor specialty wholesale accounts and is growing within selective key accounts. As a result, the HOKA brand is bolstering its net sales, which continue to increase as a percentage of our aggregate net sales.

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

•Leading performance product innovation, category extensions, and key franchise management, including higher frequency product drop rates and improving accessibility to all athletes.

•Increased global brand awareness and new consumer adoption through enhanced global marketing activations and online consumer acquisition, including building a more diverse outdoor community through digital and in-person event sponsorship.

•Thoughtful and strategic wholesale distribution choices, allowing the HOKA brand access and introduction to a broader, more diverse, consumer base.

•Category extensions in authentic performance footwear offerings such as lifestyle, trail, and hiking categories.

Teva Brand. The Teva brand created the very first sport sandal when it was founded in the Grand Canyon in 1984. Since then, the Teva brand has grown into a multi-category modern outdoor lifestyle brand offering a range of performance, casual, and trail lifestyle products, and has emerged as a leader in footwear sustainability observed through recent growth fueled by young and diverse consumers passionate for the outdoors and the planet.

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

•Authentic outdoor heritage and a reputation for quality, comfort, sustainability, and performance in any terrain.

•Increasing brand awareness in key major global markets due to outdoor lifestyle participation among younger consumers.

•Category extensions in performance hike footwear, including key franchises, as well as year-round product.

Sanuk Brand. The Sanuk brand originated in Southern California surf culture and has emerged into a lifestyle brand with a presence in the relaxed casual shoe and sandal categories with a focus on innovation in comfort and sustainability. The Sanuk brand’s use of unexpected materials and unconventional constructions, combined with its fun and playful branding, are key elements of the brand's identity.

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

•Introducing a broader and more premium range of comfortable and easy slip-on product, including through category extensions in comfort casual footwear for the younger consumer and establishing a year-round product offering, from sandals to slippers to winterized casual comfort.

Other Brands. Other brands consist primarily of the Koolaburra brand. The Koolaburra brand is a casual footwear fashion line using plush materials and is intended to target the value-oriented consumer in order to complement the UGG brand offering.

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

•Increasing brand awareness with fashion focused consumers.

•Evolution of key franchises and purpose-built expansion in fashion casual boots, slippers, and sandals.

Direct-to-Consumer. Our DTC business encompasses all our brands and is comprised of our e-commerce business and retail stores that are intertwined and interdependent in an omni-channel marketplace. We believe many of our consumers interact with both our retail stores and websites before making purchasing decisions in store and online.

E-Commerce Business. Our global e-commerce business provides us with an opportunity to directly engage with and communicate a consistent brand message to consumers that is in line with our brands’ promises, promotes awareness of key brand initiatives, offers targeted information to specific consumer demographics, and drives consumers to our retail stores. As of March 31, 2023, we operate our e-commerce business through Company-owned websites and mobile platforms in 57 different countries.

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Retail Business. Our global Company-owned mono branded retail stores are predominantly UGG brand concept stores and UGG brand outlet stores, as well as new openings of HOKA brand 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. We continue to open outlet stores in key markets to further grow our brand presence and appeal to a broader consumer base.

As of March 31, 2023, we have a total of 164 global retail stores (including 18 HOKA brand stores), which includes 81 concept stores and 83 outlet stores. While we generally open retail store locations during our second or third fiscal quarters and consider closures of retail stores during our fourth fiscal quarter, the timing of such openings and closures may vary. We will continue to evaluate our retail store fleet strategy in response to brand strategy changes in consumer demand and retail store traffic patterns.

Flagship Stores. Included in the total count of global concept stores are seven flagship stores, which are primarily located in major tourist locations. These are premium mono branded stores in key markets designed to showcase UGG and HOKA brand products. Flagship stores provide broader product offerings and generate greater traffic that enhance our interaction with consumers and increase brand loyalty. We anticipate opening four additional flagship stores in Europe and Asia during our next fiscal year.

Shop-in-Shop Stores. Included in the total count of global concept stores are 29 shop-in-shop (SIS) stores, for which we own the inventory and that are operated by us or non-employees within a department store, which we lease from the store owner by paying a percentage of SIS store sales.

Partner Retail Stores. Represent UGG and HOKA mono branded stores which are wholly owned and operated by third parties and not included in the total count of our global Company-owned retail stores.

Our net sales related to the e-commerce business and retail stores discussed above are recorded in our DTC reportable operating segment, except for net sales generated by partner retail stores, which are recorded in each respective brand's wholesale reportable operating segment, as applicable.

Use of Non-GAAP Financial Measures

Throughout this Annual Report we provide certain financial information on a constant currency basis, excluding the effect of foreign currency exchange rate fluctuations, which we disclose in addition to certain financial measures calculated and presented in accordance with generally accepted accounting principles in the United States (US GAAP). We provide these non-GAAP financial measures to provide information that may assist investors in understanding our results of operations and assessing our prospects for future performance. However, the information presented on a constant currency basis, as we present such information, may not necessarily be comparable to similarly titled information presented by other companies, and may not be appropriate measures for comparing our performance relative to other companies. For example, in order to calculate our constant currency information, we calculate the current period financial information using the foreign currency exchange rates that were in effect during the previous comparable period, excluding the effects of foreign currency exchange rate hedges and remeasurements in the consolidated financial statements. Further, we report comparable DTC sales on a constant currency basis for DTC operations that were open throughout the current and prior reporting periods, and we may adjust prior reporting periods to conform to current year accounting policies.

These non-GAAP financial measures are not intended to represent and should not be considered to be more meaningful measures than, or alternatives to, measures of financial or operating performance as determined in accordance with US GAAP. Constant currency measures should not be considered in isolation as an alternative to US dollar measures that reflect current period foreign currency exchange rates or to other financial or operating measures presented in accordance with US GAAP. We believe evaluating certain financial and operating measures on a constant currency basis is important as it excludes the impact of foreign currency exchange rate fluctuations that are not indicative of our core results of operations and are largely outside of our control.

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Seasonality

Our business is seasonal, with the highest percentage of UGG and Koolaburra 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. Net sales for the HOKA brand occur more evenly throughout the year, reflecting the brand's year-round performance product offerings. Due to the magnitude of the UGG brand relative to our other brands, our aggregate net sales in the quarters ending September 30th and December 31st have historically significantly exceeded our aggregate net sales in the quarters ending March 31st and June 30th. However, as we continue to take steps to diversify and expand our product offerings by creating more year-round styles, and as net sales of the HOKA brand continue to increase as a percentage of our aggregate net sales, we have seen and expect to continue to see the impact from seasonality decrease over time. However, our seasonality has been impacted by supply chain challenges and it is unclear whether these impacts will be minimized or exaggerated in future periods as a result of these disruptions. Refer to Note 14, "Quarterly Summary of Information (Unaudited)," of our consolidated financial statements in Part IV within this Annual Report for further information on our results of operations by quarterly period.

Result of Operations

Year Ended March 31, 2023, Compared to Year Ended March 31, 2022. Results of operations were as follows:

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Net Sales. Net sales by geographic location, and by brand and distribution channel were as follows:

[[GREPCENT_TABLE]]
[["","Years Ended March 31,"],["","2023","","2022","","Change"],["","Amount","","Amount","","Amount","","%"],["Net sales by location"],["Domestic","$","2,451,497","","","$","2,167,793","","","$","283,704","","","13.1","%"],["International","1,175,789","","","982,546","","","193,243","","","19.7"],["Total","$","3,627,286","","","$","3,150,339","","","$","476,947","","","15.1","%"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","Years Ended March 31,"],["","2023","","2022","","Change"],["","Amount","","Amount","","Amount","","%"],["Net sales by brand and channel"],["UGG brand"],["Wholesale","$","1,004,356","","","$","1,088,082","","","$","(83,726)","","","(7.7)","%"],["Direct-to-Consumer","924,855","","","893,887","","","30,968","","","3.5"],["Total","1,929,211","","","1,981,969","","","(52,758)","","","(2.7)"],["HOKA brand"],["Wholesale","925,877","","","628,674","","","297,203","","","47.3"],["Direct-to-Consumer","487,039","","","262,920","","","224,119","","","85.2"],["Total","1,412,916","","","891,594","","","521,322","","","58.5"],["Teva brand"],["Wholesale","149,111","","","129,094","","","20,017","","","15.5"],["Direct-to-Consumer","33,950","","","33,643","","","307","","","0.9"],["Total","183,061","","","162,737","","","20,324","","","12.5"],["Sanuk brand"],["Wholesale","27,678","","","30,316","","","(2,638)","","","(8.7)"],["Direct-to-Consumer","10,288","","","12,779","","","(2,491)","","","(19.5)"],["Total","37,966","","","43,095","","","(5,129)","","","(11.9)"],["Other brands"],["Wholesale","53,653","","","60,573","","","(6,920)","","","(11.4)"],["Direct-to-Consumer","10,479","","","10,371","","","108","","","1.0"],["Total","64,132","","","70,944","","","(6,812)","","","(9.6)"],["Total","$","3,627,286","","","$","3,150,339","","","$","476,947","","","15.1","%"],["Total Wholesale","$","2,160,675","","","$","1,936,739","","","$","223,936","","","11.6","%"],["Total Direct-to-Consumer","1,466,611","","","1,213,600","","","253,011","","","20.8"],["Total","$","3,627,286","","","$","3,150,339","","","$","476,947","","","15.1","%"]]
[[/GREPCENT_TABLE]]

Total net sales increased primarily due to higher DTC channel net sales for the HOKA and UGG brands, as well as higher wholesale channel net sales for the HOKA and Teva brands, partially offset by lower UGG brand domestic wholesale net sales. Further, we experienced an increase of 15.4% in the total volume of pairs sold to 59,100 from 51,200 compared to the prior period. These results include unfavorable impacts from the strengthening of the US dollar on foreign sales. On a constant currency basis, net sales increased by 18.4% compared to the prior period. Drivers of significant changes in net sales, compared to the prior period, were as follows:

•DTC net sales increased primarily due to higher global net sales for the HOKA and UGG brands, primarily driven by consumer acquisition and retention online through higher demand across an assortment of franchise road running updates as well as trail, hiking, and fitness categories for the HOKA brand, and across our Classics franchise derivatives and multi-use hybrid products for the UGG brand. Comparable DTC net sales for the 52 weeks ended April 2, 2023, increased by 23.1% compared to the prior year period.

•Wholesale net sales of the HOKA brand increased globally from gaining market share with existing customer accounts along with increasing volume shipped for select incremental door expansion within strategic accounts, driven by higher demand across an assortment of franchise road running updates, as well as trail and hiking categories.

•Wholesale net sales of the UGG brand decreased due to lower domestic net sales, primarily driven by lapping the benefit of managing and refilling existing marketplace inventory levels caused by supply chain and pandemic related disruptions in the prior period. These results include unfavorable impacts from the strengthening of the US dollar on foreign sales.

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•Wholesale net sales of the Teva brand increased globally primarily driven by higher international distributor shipments, as well as higher domestic demand for the sport sandal category. These results include lapping benefits from supply chain disruptions in the prior period.

•International net sales, which are included in the reportable operating segment net sales presented above, increased by 19.7% and represented 32.4% and 31.2% of total net sales for the years ended March 31, 2023, and 2022, respectively. These changes were primarily driven by higher net sales for the HOKA and UGG brands, across international regions and channels, and higher net sales for the Teva brand in the wholesale channel. These results include unfavorable impacts from the strengthening of the US dollar on foreign sales, primarily for the UGG HOKA, and Teva brands.

Gross Profit. Gross margin decreased to 50.3% from 51.0%, compared to the prior period, primarily due to unfavorable changes in foreign currency exchange rates, domestic promotional and closeout activity, and higher ocean freight rates embedded in inventory sold. These unfavorable margin pressures were partially offset by a decrease in air freight usage relative to the prior period, favorable HOKA brand mix shift that reflects domestic price increases, and favorable channel mix shift to DTC.

Selling, General, and Administrative Expenses. While we had lower SG&A expenses as a percentage of net sales, the net dollar increase in SG&A expenses, compared to the prior period, was primarily the result of the following:

•Increased payroll and related costs of approximately $52,000, including for outside services, partially offset by lower performance-based compensation.

•Increased other variable net selling expenses of approximately $38,100, primarily due to higher rent and occupancy expenses, materials and supplies costs, credit card fees, sales commissions, and warehousing fees.

•Increased other operating expenses of approximately $20,100, primarily due to higher travel expenses, IT expenses for programming and software costs, depreciation expenses, and sample expenses, partially offset by lower legal fees and net insurance premiums.

•Increased variable advertising and promotion expenses of approximately $15,700, primarily due to higher marketing expenses for the HOKA brand to drive global brand awareness and market share gains, highlight new product categories, and provide localized marketing, partially offset by lower advertising and promotion expenses for the UGG brand.

•Increased allowances for trade accounts receivable of approximately $2,800, primarily due to an increase in bad debt expense to account for higher open accounts receivable balances.

•Increased net foreign currency-related losses of $1,400, primarily driven by remeasurements with unfavorable changes in Canadian and Asian exchange rates against the US dollar.

Income from Operations. Income (loss) from operations by reportable operating segment was as follows:

[[GREPCENT_TABLE]]
[["","Years Ended March 31,"],["","2023","","2022","","Change"],["","Amount","","Amount","","Amount","","%"],["Income (loss) from operations"],["UGG brand wholesale","$","267,013","","","$","315,240","","","$","(48,227)","","","(15.3)","%"],["HOKA brand wholesale","285,257","","","155,344","","","129,913","","","83.6"],["Teva brand wholesale","32,595","","","33,294","","","(699)","","","(2.1)"],["Sanuk brand wholesale","2,891","","","6,463","","","(3,572)","","","(55.3)"],["Other brands wholesale","(1,678)","","","14,028","","","(15,706)","","","(112.0)"],["Direct-to-Consumer","508,948","","","435,414","","","73,534","","","16.9"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","Years Ended March 31,"],["","2023","","2022","","Change"],["","Amount","","Amount","","Amount","","%"],["Unallocated overhead costs","(442,275)","","","(395,076)","","","(47,199)","","","(11.9)"],["Total","$","652,751","","","$","564,707","","","$","88,044","","","15.6","%"]]
[[/GREPCENT_TABLE]]

The increase in total income from operations, compared to the prior period, was primarily due to higher net sales and lower SG&A expenses as a percentage of net sales, partially offset by lower gross margins. Drivers of significant net changes in total income from operations, compared to the prior period, were as follows:

•The increase in income from operations of HOKA brand wholesale was due to higher global net sales at higher gross margins, combined with lower SG&A expenses as a percentage of net sales.

•The increase in income from operations of the DTC channel was due to higher global net sales, primarily for the HOKA and UGG brands, at lower gross margins, as well as lower DTC SG&A expenses as a percentage of net sales.

•The decrease in income from operations of UGG brand wholesale was due to lower domestic and European net sales at lower gross margins, combined with higher SG&A expenses as a percentage of net sales.

•The decrease in income from operations of Other brands wholesale was due to lower Koolaburra brand domestic net sales at lower gross margins, combined with higher SG&A expenses as a percentage of net sales. These effects were further impacted by a write-off of inventory for other brands.

•The increase in unallocated overhead costs was due to higher payroll costs, higher other variable net selling expenses, including materials and supplies costs and warehousing fees, and higher other operating expenses, including depreciation, IT, and travel expenses.

Total Other (Income) Expense, Net. Total other income, net, compared to the prior period, increased due to higher interest income on invested cash balances driven by higher average interest rates.

Income Tax Expense. Income tax expense and our effective income tax rate were as follows:

[[GREPCENT_TABLE]]
[["","Years Ended March 31,"],["","2023","","2022"],["Income tax expense","$","149,260","","$","112,689"],["Effective income tax rate","22.4","%","","20.0","%"]]
[[/GREPCENT_TABLE]]

The net increase in our effective income tax rate compared to the prior period was primarily driven by higher income from operations, including changes in jurisdictional mix of worldwide income before income taxes, as well as higher reserves for uncertain tax positions for foreign audits, partially offset by higher net discrete tax benefits.

Foreign income before income taxes was $198,851 and $168,270 and worldwide income before income taxes was $666,082 and $564,638 during the years ended March 31, 2023, and 2022, respectively. The slight net increase in foreign income before income taxes as a percentage of worldwide income before income taxes, compared to the prior period, was primarily due to lower foreign operating expenses as a percentage of worldwide sales, partially offset by lower foreign gross profit as a percentage of foreign net sales.

For the years ended March 31, 2023, and 2022, we did not generate significant pre-tax earnings from any countries which do not impose a corporate income tax. A small portion of our unremitted accumulated earnings of non-US subsidiaries, for which no US federal or state income tax have been provided, are currently expected to be reinvested outside of the US indefinitely. Such earnings would become taxable upon the sale or liquidation of these subsidiaries. Refer to the section titled “Liquidity” below for further information.

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Net Income. The increase in net income, compared to the prior period, was primarily due to higher net sales and lower SG&A expense as a percentage of net sales, partially offset by lower gross margins. Net income per share increased, compared to the prior period, due to higher net income and lower weighted-average common shares outstanding driven by stock repurchases.

Total Other Comprehensive Loss, Net of Tax. The increase in total other comprehensive loss, net of tax, compared to the prior period, was primarily due to higher foreign currency translation losses relating to changes to our net asset position for unfavorable Asian foreign currency exchange rates, partially offset by favorable European foreign currency exchange rates.

Liquidity

We finance our working capital and operating requirements using a combination of cash and cash equivalents balances, cash provided from ongoing operating activities and, to a lesser extent, available borrowings under our revolving credit facilities. Our working capital requirements begin when we purchase raw and other materials and inventories and continue until we ultimately collect the resulting trade accounts receivable. Given the historical seasonality of our business, our working capital requirements fluctuate significantly throughout the fiscal year, and we utilize available cash to build inventory levels during certain quarters in our fiscal year to support higher selling seasons. While the impact of seasonality has been mitigated to some extent, we expect our working capital requirements will continue to fluctuate from period to period.

As of March 31, 2023, our cash and cash equivalents are $981,795. We believe our cash and cash equivalents balances, cash provided from ongoing operating activities, and available borrowings under our revolving credit facilities, will provide sufficient liquidity to enable us to meet our working capital requirements and contractual obligations for at least the next 12 months.

Our liquidity may be impacted by a number of factors, including our results of operations, the strength of our brands and market acceptance of our products, impacts of seasonality and weather conditions, our ability to respond to changes in consumer preferences and tastes, the timing of capital expenditures and lease payments, our ability to collect our trade accounts receivables in a timely manner and effectively manage our inventories, our ability to manage supply chain constraints, our ability to respond to the impacts and disruptions caused by the pandemic, and our ability to respond to macroeconomic, political and legislative developments. We may require additional cash resources due to changes in business conditions, strategic initiatives, or stock repurchase strategy, a national or global economic recession, or other future developments, including any investments or acquisitions we may decide to pursue, although we do not have any present commitments with respect to any such investments or acquisitions.

If there are unexpected material impacts on our business in future periods and we need to raise or conserve additional cash to fund our operations, we may seek to borrow under our revolving credit facilities, seek new or modified borrowing arrangements, or sell additional debt or equity securities. The sale of convertible debt or equity securities could result in additional dilution to our stockholders, and equity securities may have rights or preferences that are superior to those of our existing stockholders. The incurrence of additional indebtedness would result in additional debt service obligations, as well as covenants that would restrict our operations and further encumber our assets. In addition, there can be no assurance that any additional financing will be available on acceptable terms, if at all. Although we believe we have adequate sources of liquidity over the long term, factors such as a prolonged or severe economic recession, inflationary pressure, or significant supply chain disruptions could adversely affect our business and liquidity.

Repatriation of Cash. Our cash repatriation strategy, and by extension, our liquidity, may be impacted by several additional considerations, which include future changes to or interpretations of global tax law and regulations, and our actual earnings in future periods. During the year ended March 31, 2023, no cash and cash equivalents were repatriated, however, during the year ended March 31, 2022, $120,000 of cash was repatriated. As of March 31, 2023, and 2022, we have $299,114 and $133,053, respectively, of cash and cash equivalents held by foreign subsidiaries, a portion of which may be subject to additional foreign withholding taxes if it were to be repatriated. We continue to evaluate our cash repatriation strategy and we currently anticipate repatriating current and future unremitted earnings of non-US subsidiaries only to the extent they have already been subject to US tax, if such cash is not required to fund ongoing foreign operations. Refer to Note 5, "Income Taxes," of our consolidated financial statements in Part IV within this Annual Report for further information.

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Stock Repurchase Program. We continue to evaluate our capital allocation strategy, and to consider further opportunities to utilize our global cash resources in a way that will profitably grow our business, meet our strategic objectives, and drive stockholder value, including by potentially repurchasing additional shares of our common stock. On July 27, 2022, our Board of Directors approved an increase of $1,200,000 to our stock repurchase authorization. As of March 31, 2023, the aggregate remaining approved amount under our stock repurchase program is $1,356,635. The stock repurchase program does not obligate us to acquire any amount of common stock and may be suspended at any time at our discretion. Refer to Note 10, "Stockholders' Equity," of our consolidated financial statements in Part IV within this Annual Report for further information.

Capital Resources

Primary Credit Facility. We maintain bank credit facilities for working capital and general corporate purposes. In December 2022, we refinanced in full and terminated our prior credit agreement originally entered into in September 2018. The refinanced revolving credit facility agreement is with Citibank, N.A. (Citibank), as administrative agent, Comerica Bank, as sole syndication agent, and the lenders party thereto (Credit Agreement).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 December 19, 2027, subject to extension on early termination as described in the Credit Agreement. As of March 31, 2023, we have no outstanding balance, outstanding letters of credit of $958, and available borrowings of $399,042 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 CNY300,000, or $43,672. As of March 31, 2023, we have no outstanding balance, outstanding bank guarantees of $29, and available borrowings of $43,643 under our China Credit Facility.

Japan Credit Facility. Our revolving credit facility in Japan (Japan Credit Facility) expired on January 31, 2023, and we cancelled the parent guarantee. If borrowing needs arise, Deckers Japan is able to borrow from one or more of our subsidiaries through intercompany loans as permitted under the Primary Credit Facility.

Debt Covenants. As of March 31, 2023, we are in compliance with all financial covenants under our Primary Credit Facility and China Credit Facility.

Refer to Note 6, "Revolving Credit Facilities," of our consolidated financial statements in Part IV within this Annual Report for further information on our capital resources.

Cash Flows

The following table summarizes the major components our consolidated statements of cash flows for the periods presented:

[[GREPCENT_TABLE]]
[["","Years Ended March 31,"],["","2023","","2022","","Change"],["","Amount","","Amount","","Amount","","%"],["Net cash provided by operating activities","$","537,422","","","$","172,353","","","$","365,069","","","211.8","%"],["Net cash used in investing activities","(81,013)","","","(51,009)","","","(30,004)","","","(58.8)"],["Net cash used in financing activities","(309,031)","","","(367,482)","","","58,451","","","15.9"],["Effect of foreign currency exchange rates on cash and cash equivalents","(9,110)","","","304","","","(9,414)","","","(3,096.7)"],["Net change in cash and cash equivalents","$","138,268","","","$","(245,834)","","","$","384,102","","","156.2","%"]]
[[/GREPCENT_TABLE]]

Operating Activities. Our primary source of liquidity is net cash provided by operating activities, which is primarily driven by our net income after non-cash adjustments and changes in working capital. The increase in net cash provided by operating activities during the year ended March 31, 2023, compared to the prior period, was primarily due to $271,694 of favorable changes in operating assets and liabilities as well as $93,375 of favorable net income after non-cash adjustments, including from favorable changes in deferred tax expense, and depreciation, amortization, and accretion. The favorable changes in operating assets and liabilities were primarily due to net favorable changes in inventories, trade accounts receivable, net, other accrued expenses, income tax payable, and income tax receivable, partially offset by net unfavorable changes in trade accounts payable and other assets.

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Significant impacts to working capital compared to the prior period were primarily due to changes in the following:

(1) timing of purchases of inventories to support higher demand for the HOKA brand and maintain global service levels to mitigate the impacts of supply chain disruption;

(2) a higher rate of collections for trade accounts receivable, net, on higher net sales, partially offset by higher trade accounts receivable allowances; and

(3) lower net trade accounts payable due to timing of payments and lower freight costs.

Investing Activities. The increase in net cash used in investing activities during the year ended March 31, 2023, compared to the prior period, was primarily due to higher leasehold improvements for our warehouses and DCs, capital expenditures for IT infrastructure and other technology costs, and refreshes of existing and new retail stores.

Financing Activities. The decrease in net cash used in financing activities during the year ended March 31, 2023, compared to the prior period, was primarily due to lower stock repurchases at a lower price per share.

Contractual Obligations

The following table summarizes our significant contractual obligations as of March 31, 2023, and the effects of such obligations in future periods:

[[GREPCENT_TABLE]]
[["","Payments Due by Period"],["","Total","","Less than 1 Year","","1-3 Years","","3-5 Years","","More than 5 Years"],["Operating lease obligations (1)","$","277,175","","","$","54,948","","","$","87,251","","","$","72,617","","","$","62,359"],["Purchase obligations for product (2)","668,388","","","668,388","","","\u2014","","","\u2014","","","\u2014"],["Purchase obligations for commodities (3)","175,099","","","80,462","","","94,637","","","\u2014","","","\u2014"],["Other purchase obligations (4)","234,837","","","83,760","","","140,426","","","10,651","","","\u2014"],["Net unrecognized tax benefits (5)","24,663","","","1,829","","","22,834","","","\u2014","","","\u2014"],["Total","$","1,380,162","","","$","889,387","","","$","345,148","","","$","83,268","","","$","62,359"]]
[[/GREPCENT_TABLE]]

(1)    Our operating lease commitments consist primarily of building leases for our retail locations, warehouse and DCs, and regional offices, and include the undiscounted cash lease payments owed under the terms of our operating lease agreements. In addition to the above operating lease commitments outstanding, there is $19,506 of legally binding minimum lease payments due pursuant to various retail store leases signed but not yet commenced which are not recorded in our consolidated financial statements as of March 31, 2023.

(2) Our purchase obligations for product consist mostly of open purchase orders issued that we expect to fulfill in the ordinary course of business. Outstanding purchase orders are primarily issued to our third-party manufacturers and are expected to be paid in less than a year. We can cancel a significant portion of the purchase obligations under certain circumstances; however, the occurrence of such circumstances is generally limited. As a result, the amount does not necessarily reflect the dollar amount of our binding commitments or minimum purchase obligations, and instead reflects an estimate of our future payment commitments based on information currently available. During fiscal year 2023, we experienced lower logistics lead times and transit times from origin to destination for our inventory, which resulted in reduced reliance on advance purchase commitments for product, compared to the prior period.

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(3) Our purchase obligations for commodities include sheepskin, wool (primarily for UGGpure), leather, and sugarcane derived resin or EVA, and represent remaining commitments under existing supply agreements, which are subject to minimum volume commitments (collectively, commodity contracts). We expect purchases under commodity contracts in the ordinary course of business will eventually exceed the minimum commitment levels. There are $16,243 of deposits included in the amount above that have not been fully consumed as of March 31, 2023, which are recorded in other assets in the consolidated balance sheets. This amount reflects remaining minimum commitments we expect will be consumed in future periods in the ordinary course of business, and that any remaining deposits are expected to become fully refundable or will be reflected as a credit against purchases.

(4) Our other purchase obligations consist of non-cancellable minimum commitments for 3PL provider arrangements, e-commerce supply chain services, IT services, promotional expenses, sales management services, and other commitments under service contracts, which are required to be paid during our fiscal years ending March 31, 2024, through 2028. Amounts excluded from these other purchase obligations include any capital expenditures that will be made before the end of our next fiscal year, which we estimate will range from approximately $110,000 to $120,000. We anticipate these expenditures will primarily relate to the build-out of a third US DC as well as upgrades to our existing warehouse and DCs, expanding our global retail store fleet (including for the HOKA brand), IT infrastructure and system upgrades, and upgrades to our existing global office facilities. However, the actual amount of our future capital expenditures may differ significantly from this estimate depending on numerous factors, including the timing of facility openings, as well as unforeseen needs to replace or refresh existing assets.

(5) Net unrecognized tax benefits are gross unrecognized tax benefits, less federal benefit for state income taxes, related to uncertain tax positions taken in our income tax return that would impact our effective tax rate, if recognized. As of March 31, 2023, the timing of future cash outflows is highly uncertain related to expirations of statute of limitations of $18,856 and, since we are unable to make a reasonable estimate of the period of cash settlement, it is excluded from the table above. Refer to Note 5, "Income Taxes," of our consolidated financial statements in Part IV within this Annual Report for further information on our uncertain tax positions.

Refer to Note 7, "Commitments and Contingencies," of our consolidated financial statements in Part IV within this Annual Report for further information on our operating leases, purchase obligations, capital expenditures, and other contractual obligations and commitments.

Critical Accounting Policies and Estimates

Management must make certain estimates and assumptions that affect the amounts reported in the consolidated financial statements, based on historical experience, existing and known circumstances, authoritative accounting pronouncements, and other factors that we believe to be reasonable, but actual results could differ materially from these estimates. The full impact of macroeconomic factors on our business and operations, including inflationary pressures, foreign currency exchange rate volatility, changes in interest rates, changes in commodity pricing, and recessionary concerns, is unknown and cannot be reasonably estimated. However, management believes it has made appropriate accounting estimates in accordance with US GAAP based on the facts and circumstances available as of the reporting date, and actual results could differ materially from these estimates and assumptions, which may result in material effects on our financial condition, results of operations and liquidity.

Refer to Note 1, "General," of our consolidated financial statements in Part IV within this Annual Report for a discussion of our significant accounting policies and use of estimates, as well as the impact of recent accounting pronouncements.

Revenue Recognition. Revenue is recognized when a performance obligation is completed at a point in time and when the customer has obtained control. Control passes to the customer when they have the ability to direct the use of, and obtain substantially all the remaining benefits from, the goods transferred. The amount of revenue recognized is based on the transaction price, which represents the invoiced amount less known actual amounts or estimates of variable consideration. We recognize revenue and measure the transaction price net of taxes, including sales taxes, use taxes, value-added taxes, and some types of excise taxes, collected from customers and remitted to governmental authorities. We present revenue gross of fees and sales commissions. Sales commissions are expensed as incurred and are recorded in SG&A expenses in the consolidated statements of comprehensive income.

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Wholesale and international distributor revenue are each recognized either when products are shipped or when delivered, depending on the applicable contract terms. Retail store and e-commerce revenue are recognized at the point of sale and upon shipment, respectively. Shipping and handling costs paid to third-party shipping companies are recorded as cost of sales in the consolidated statements of comprehensive income. Shipping and handling costs are a fulfillment service, and, for certain wholesale and all e-commerce transactions, revenue is recognized when the customer is deemed to obtain control upon the date of shipment.

Accounts Receivable Allowances. The following table summarizes critical accounting estimates for accounts receivable allowances and reserves:

[[GREPCENT_TABLE]]
[["","As of March 31,"],["","2023","","2022"],["","Amount","","% of Gross Trade Accounts Receivable","","Amount","","% of Gross Trade Accounts Receivable"],["Gross trade accounts receivable","$","334,015","","","100.0","%","","$","333,279","","","100.0","%"],["Allowance for doubtful accounts","(10,576)","","","(3.2)","","","(9,044)","","","(2.7)"],["Allowance for sales discounts","(5,656)","","","(1.7)","","","(2,831)","","","(0.9)"],["Allowance for chargebacks","(16,272)","","","(4.8)","","","(18,716)","","","(5.6)"],["Trade accounts receivable, net","$","301,511","","","90.3","%","","$","302,688","","","90.8","%"]]
[[/GREPCENT_TABLE]]

Allowance for Doubtful Accounts. We provide an allowance against trade accounts receivable for estimated losses that may result from customers’ inability to pay. We determine the amount of the allowance by analyzing known uncollectible accounts, aged trade accounts receivable, economic conditions and forecasts, historical experience, and the customers’ creditworthiness. Trade accounts receivable that are subsequently determined to be uncollectible are charged or written off against this allowance. The allowance includes specific allowances for trade accounts, of which all or a portion are identified as potentially uncollectible based on known or anticipated losses. Additions to the allowance represent bad debt expense estimates which are recorded in SG&A expenses in the consolidated statements of comprehensive income.

Allowance for Sales Discounts. We provide a trade accounts receivable allowance for sales discounts for wholesale channel sales, which reflects a discount that customers may take, generally based on meeting certain order, shipment or prompt payment terms. We use the amount of the discounts that are available to be taken against the period end trade accounts receivable to estimate and record a corresponding reserve for sales discounts. Additions to the allowance are recorded against gross sales in the consolidated statements of comprehensive income.

Allowance for Chargebacks. We provide a trade accounts receivable allowance for chargebacks and markdowns for wholesale channel sales. When customers pay their invoices, they may take deductions against their invoices that can include chargebacks for price differences, markdowns, short shipments, and other reasons. Therefore, we record an allowance primarily for known circumstances as well as unknown circumstances based on historical trends related to the timing and amount of chargebacks taken against customer invoices. Additions to the allowance are recorded against gross sales or SG&A expenses in the consolidated statements of comprehensive income.

Refer to Note 2, "Revenue Recognition," of our consolidated financial statements in Part IV within this Annual Report for further information regarding the components of variable consideration, including allowances for doubtful accounts, sales discounts, and chargebacks.

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Sales Return Liability. The following tables summarize estimates for our sales return liability as a percentage of the most recent quarterly net sales by channel:

[[GREPCENT_TABLE]]
[["","Three Months Ended March 31,"],["","2023","","2022"],["","Amount","","% of Net Sales","","Amount","","% of Net Sales"],["Net Sales"],["Wholesale","$","448,425","","","56.7","%","","$","448,848","","","61.0","%"],["Direct-to-Consumer","343,146","","","43.3","","","287,159","","","39.0"],["Total","$","791,571","","","100.0","%","","$","736,007","","","100.0","%"],["","As of March 31,"],["","2023","","2022"],["","Amount","","% of Net Sales","","Amount","","% of Net Sales"],["Sales Return Liability"],["Wholesale","$","(33,764)","","","(7.5)","%","","$","(31,082)","","","(6.9)","%"],["Direct-to-Consumer","(11,558)","","","(3.4)","","","(8,785)","","","(3.1)"],["Total","$","(45,322)","","","(5.7)","%","","$","(39,867)","","","(5.4)","%"]]
[[/GREPCENT_TABLE]]

Reserves are recorded for anticipated future returns of goods shipped prior to the end of the reporting period. In general, we accept returns for damaged or defective products for up to one year. We also have a policy whereby returns are generally accepted from customers and end consumers between 30 to 90 days from the point of sale for cash or credit. Sales returns are a refund asset for the right to recover the inventory and a refund liability for the stand-ready right of return. Changes to the refund asset for the right to recover the inventory are recorded against cost of sales and changes to the refund liability are recorded against gross sales in the consolidated statements of comprehensive income. The refund asset for the right to recover the inventory is recorded in other current assets and the related refund liability is recorded in other accrued expenses in the consolidated balance sheets.

The amounts of these reserves are determined based on several factors, including known and actual returns, historical returns, and any recent events that could result in a change from historical return rates. For our wholesale channel, we base our estimate of sales returns on any approved customer requests for returns, historical returns experience, and any recent events that could result in a change from historical returns rates, among other factors. For our DTC channel and reportable operating segment, we estimate sales returns using a lag compared to the same prior period and consider historical returns experience and any recent events that could result in a change from historical returns, among other factors.

Inventories. The following tables summarize estimates for our inventories:

[[GREPCENT_TABLE]]
[["","As of March 31,"],["","2023","","2022"],["","Amount","","% of Gross Inventory","","Amount","","% of Gross Inventory"],["Gross Inventories","$","566,778","","","100.0","%","","$","527,531","","","100.0","%"],["Write-down of inventories","(33,926)","","","(6.0)","","","(20,735)","","","(3.9)"],["Inventories","$","532,852","","","94.0","%","","$","506,796","","","96.1","%"]]
[[/GREPCENT_TABLE]]

Inventories, which are principally comprised of finished goods on hand and in transit, are stated at the lower of cost (weighted average) or net realizable value at each financial statement date. Cost includes sourcing as well as inventory procurement costs, including freight, duty, and handling fees which are subsequently expensed to cost of sales. We review inventory on a regular basis for excess, obsolete, and impaired inventory to evaluate write-downs to the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs to sell.

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Operating Lease Assets and Lease Liabilities. We recognize operating lease assets and lease liabilities in the consolidated balance sheets on the lease commencement date, based on the present value of the outstanding lease payments over the reasonably certain lease term. The lease term includes the non-cancelable period at the lease commencement date, plus any additional periods covered by an option to extend (or not to terminate) the lease that is reasonably certain to be exercised, or an option to extend (or not to terminate) a lease that is controlled by the lessor.

We discount unpaid lease payments using the interest rate implicit in the lease or, if the rate cannot be readily determined, our incremental borrowing rate (IBR). We cannot determine the interest rate implicit in the lease because we do not have access to the lessor's estimated residual value or the amount of the lessor's deferred initial direct costs. Therefore, we derive a discount rate at the lease commencement date by utilizing our IBR, which is based on what we would have to pay on a collateralized basis to borrow an amount equal to our lease payments under similar terms. Because we do not currently borrow on a collateralized basis under our revolving credit facilities, we use the interest rate we pay on our non-collateralized borrowings under our Primary Credit Facility as an input for deriving an appropriate IBR, adjusted for the amount of the lease payments, the lease term, and the effect on that rate of designating specific collateral with a value equal to the unpaid lease payments for that lease.

Refer to Note 7, "Commitments and Contingencies," of our consolidated financial statements in Part IV within this Annual Report for further information, including more details of our accounting policy elections and disclosures.

Definite-Lived Intangible and Other Long-Lived Assets. Definite-lived intangible and other long-lived assets, including definite-lived trademarks, machinery and equipment, internal-use software, operating lease assets and related leasehold improvements, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. At least quarterly, we evaluate factors that would necessitate an impairment assessment, which include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset, or a significant decline in the observable market value of an asset, among others.

When an impairment-triggering event has occurred, we test for recoverability of the asset group’s carrying value using estimates of undiscounted future cash flows based on the existing service potential of the applicable asset group. In determining the service potential of a long-lived asset group, we consider the remaining useful life, cash-flow generating capacity, and physical output capacity. These estimates include the undiscounted future cash flows associated with future expenditures necessary to maintain the existing service potential. These assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If impaired, the asset or asset group is written down to fair value based on either discounted future cash flows or appraised values. An impairment loss, if any, would only reduce the carrying amount of long-lived assets in the group based on the fair value of the asset group.

We did not identify any definite-lived intangible asset triggering events during the years ended March 31, 2023, and 2022.

During the years ended March 31, 2023, and 2022, we recorded impairment charges of $2,817 and $3,186, respectively, within our DTC reportable operating segment in SG&A expenses in the consolidated statements of comprehensive income for retail store-related operating lease and other long-lived assets. These impairment charges were due to the underperformance of certain retail stores that resulted in the carrying value exceeding the estimated fair value, which is determined based on an estimate of future discounted cash flows.

Refer to Note 1, "General," and Note 3, "Goodwill and Other Intangible Assets," of our consolidated financial statements in Part IV within this Annual Report for further information on our definite-lived intangible and other long-lived assets.

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Income Taxes. Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will be in effect for the years in which those tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. We believe it is more likely than not that forecasted income, together with future reversals of existing taxable temporary differences, will be sufficient to recover our deferred tax assets. In the event that we determine all, or part of our net deferred tax assets are not realizable in the future, we will record an adjustment to the valuation allowance and a corresponding charge to earnings in the period such determination is made.

The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of US GAAP and complex tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our financial condition and results of operations. We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recorded in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

We determine on a regular basis the amount of undistributed earnings that will be indefinitely reinvested in our non-US operations. This assessment is based on the cash flow projections and operational and fiscal objectives of each of our US and foreign subsidiaries. We have not changed our indefinite reinvestment assertion of foreign earnings other than previously taxed earnings and profits.

Refer to Note 5, "Income Taxes," of our consolidated financial statements in Part IV within this Annual Report for further information on our income taxes and tax strategy.