# DECKERS OUTDOOR CORP (DECK) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from DECKERS OUTDOOR CORP's 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/910521/000091052124000017/deck-20240331.htm
Accession: 0000910521-24-000017
Filing date: 2024-05-24
Report date: 2024-03-31
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/fy2023/ (FY 2023)
Next year: /company/DECK/mda/fy2025/ (FY 2025)

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 six proprietary brands: UGG, HOKA, Teva, Sanuk, Koolaburra, and AHNU. 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 Company-owned e-commerce websites and retail stores. We seek to differentiate our brands and products by offering diverse lines that emphasize fashion, authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. Independent third-party contractors manufacture all of our products.

FINANCIAL HIGHLIGHTS

Consolidated financial performance highlights for fiscal year 2024 compared to fiscal year 2023, were as follows:

•Net sales increased 18.2% to $4,287,763.

◦Channel

▪Wholesale channel net sales increased 12.6% to $2,432,307.

▪DTC channel net sales increased 26.5% to $1,855,456.

◦Geography

▪Domestic net sales increased 16.8% to $2,863,674.

▪International net sales increased 21.1% to $1,424,089.

•Gross margin increased 530 basis points to 55.6%.

•Income from operations increased 42.1% to $927,514.

•Diluted earnings per share increased 50.5% to $29.16 per share.

RECENT DEVELOPMENTS

On February 1, 2024, Dave Powers announced his intention to retire from his position as CEO and President of the Company, effective August 1, 2024. Following this date, we expect Mr. Powers will continue to serve as a member of our Board of Directors. Also on February 1, 2024, we announced that Stefano Caroti, our Chief Commercial Officer, will be appointed as CEO and President, effective August 1, 2024. Refer to Part I, Item 1A, “Risk Factors,” within this Annual Report for further discussion on executive officer leadership transition risks.

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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:

Brand and Omni-Channel Strategy

•We remain focused on increasing global consumer awareness and adoption of our brands, which has continued to positively impact our financial results. Our efforts to drive brand adoption is focused on building brand acceptance and heat through continued launches of innovative product offerings, coupled with marketing investments across multiple geographic markets and channels of distribution.

•We remain focused on our marketplace inventory management strategy for our brands through segmentation and differentiation. During fiscal year 2024, we experienced alignment on product assortments that resulted in higher full-price sell through. This, combined with selective price increases, has benefited our gross margins during fiscal year 2024 across all channels of distribution. While gross margins continue to be an area of strategic focus, we expect a more normalized promotional environment for our results of operations during our next fiscal year ending March 31, 2025 (next fiscal year).

•Our long-term strategy remains focused on building our DTC channel to represent an increased portion of our total net sales, which includes differentiating the consumer experience from the wholesale channel to drive increases in acquisition and retention to sustain strong market positions and a high level of demand for our brands. We expect increased sales in the DTC channel will continue to positively impact our gross margins.

•We continue to implement our international growth strategies for the HOKA and UGG brands. We have expanded our HOKA brand presence within our DTC channel through targeted investments in certain regions that provide influential market presence to drive brand awareness, and we expect to continue making these investments, including in our next fiscal year. We continue to emphasize elevating the customer experience for the UGG brand through localized marketing investments.

•In alignment with effective resource allocation and the execution of our long-term objectives, we intend to divest the Sanuk brand. During the fourth quarter of fiscal year 2024, we recorded an impairment on the Sanuk definite-lived intangible asset. Please refer to the section “Critical Accounting Policies” below for further information.

Supply Chain

•To support our growing business, we continue to expand our network of global warehouses, DCs, and 3PLs. We also are diversifying the number of third-party manufacturers with whom we engage and the regions in which they operate. We expect to continue to invest in and build upon these infrastructure capabilities to continue meeting customer and consumer demand, which may result in higher costs in future periods.

Macroeconomic and Geopolitical Factors

•Macroeconomic factors, including inflationary pressures, increased interest rates, fluctuations in foreign currency exchange rates, the lapsing of government stimulus, increased consumer debt levels, decreased savings rates, resumption of student loan repayments, geopolitical unrest, escalating global conflicts and their potential impact on logistic lead times and freight costs, and increased risks of a recession, continue to create a complex and challenging environment for our business. While these macroeconomic factors did not materially impact our business or results of operations during fiscal year 2024, the impact of these macroeconomic factors is difficult to quantify and could negatively impact our business and results of operations during our next fiscal year.

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REPORTABLE OPERATING SEGMENT OVERVIEW

Our six reportable operating segments include the worldwide wholesale operations of the UGG brand, HOKA brand, Teva brand, Sanuk brand, and Other brands, as well as DTC. Information reported to the Chief Operating Decision Maker (CODM), who is our 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 footwear 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 that appeal to a growing global audience and a broad demographic.

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

•Successful acquisition of a diverse global consumer base, and in particular focusing on key markets, through strategic marketing activations and collaborations that resonate with a fashionable consumer.

•High consumer brand loyalty due to elevated brand experiences and 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 such as the slip on shoe and sneaker category, and more iconic fashion product for our Classics line, including reimagining existing iconic styles into new categories.

•Thoughtful expansion of our apparel and accessories businesses.

HOKA Brand. The HOKA brand is an authentic premium line of year-round performance footwear, which offers enhanced cushioning and inherent stability with minimal weight. Originally designed for ultra-runners, the brand now appeals to world champions, taste makers, and everyday athletes. Expanded marketing and strategic marketplace presence have 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 across its ecosystem of access points. The HOKA brand’s product line includes running, trail, hiking, fitness and lifestyle footwear offerings, as well as select apparel and accessories.

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, born in the depths of the Grand Canyon, has long been a favored brand among outdoor adventurers across the globe. Today, building on its foundation as a leader in sport sandals and its authentic outdoor heritage, the Teva brand’s thoughtfully designed, and accessible products are built for a range of outdoor pursuits, connecting with a vibrant, diverse audience passionate about exploration. The Teva brand’s collection includes a variety of footwear options, from classic sandals and shoes to boots; all crafted for the demands of the outdoors.

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.

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•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 as 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 construction, combined with its fun and playful branding, are key elements of the brand’s identity.

Other Brands. Other brands consist primarily of the Koolaburra brand, as well as the AHNU brand we launched in March 2024. The Koolaburra brand is a casual footwear fashion line that uses plush materials and is intended to target the value-oriented consumer in order to complement the UGG brand offering. The AHNU brand’s footwear products fuse high-performance technology with timeless style crafted for everyday wear.

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

Our net sales related to the businesses and stores outlined below are recorded in our DTC reportable operating segment, except for net sales from our partner retail stores, which are recorded in our brands’ respective wholesale reportable operating segments.

E-Commerce Websites. Our global e-commerce operations provides us with an opportunity to directly engage and connect with our consumers and communicate a consistent message that promotes awareness of our brands’ promises and key initiatives, offers targeted information to specific consumer demographics, and drives consumers to our retail stores. As of March 31, 2024, we operate Company-owned e-commerce websites in 56 different countries.

Retail Stores. Our global Company-owned mono-branded retail stores are predominantly UGG brand concept and outlet stores, as well as HOKA brand concept stores, which we continue to launch in strategic locations. Through our outlet stores, we sell some of our discontinued styles from prior seasons, full price in-line products, as well as products made specifically for the outlet stores. As of March 31, 2024, we have a total of 164 global retail stores (including 26 HOKA brand retail stores), which includes 83 concept stores and 81 outlet stores. We will continue to evaluate our retail store fleet strategy in response to changes in brand strategy, consumer behavior, and retail store traffic patterns.

Flagship Stores. Global concept stores include nine flagship stores, which are primarily located in major tourist locations. These are premium mono-branded stores in key global 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.

Shop-in-Shop (SIS) Stores. Included in the total count of global concept stores are 23 SIS stores that are operated by us or non-employees within a department store, which we lease from the store owner by paying a percentage of store sales and for which we own the inventory.

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.

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USE OF NON-GAAP FINANCIAL MEASURES

We disclose financial measures calculated and presented in accordance with generally accepted accounting principles in the United States (US GAAP); however, throughout this Annual Report we provide certain financial information on a non-GAAP basis (non-GAAP financial measures). We provide non-GAAP financial measures to provide information that may assist investors in understanding our results of operations and assessing our prospects for future performance, which consist of constant currency measures. 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. However, our non-GAAP financial measures are not intended to represent and should not be considered more meaningful measures than, or alternatives to, measures of financial or operating performance as determined in accordance with US GAAP.

We calculate our constant currency non-GAAP financial measures for current period financial information, such as total net sales 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. We also 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. 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. 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.

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 net sales of the HOKA brand continue to increase as a percentage of our aggregate net sales, we expect to continue to see the impact from seasonality decrease over time.

Refer to Note 15, “Quarterly Summary of Information (Unaudited),” of our consolidated financial statements in Part IV within this Annual Report for further information on our results of operations by quarterly period.

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RESULTS OF OPERATIONS

Year Ended March 31, 2024, Compared to Year Ended March 31, 2023. Results of operations were as follows:

[[GREPCENT_TABLE]]
[["","Years Ended March 31,"],["","2024","","2023","","Change"],["","Amount","","%","","Amount","","%","","Amount","","%"],["Net sales","$","4,287,763","","","100.0","%","","$","3,627,286","","","100.0","%","","$","660,477","","","18.2","%"],["Cost of sales","1,902,275","","","44.4","","","1,801,916","","","49.7","","","(100,359)","","","(5.6)"],["Gross profit","2,385,488","","","55.6","","","1,825,370","","","50.3","","","560,118","","","30.7"],["Selling, general, and administrative expenses","1,457,974","","","34.0","","","1,172,619","","","32.3","","","(285,355)","","","(24.3)"],["Income from operations","927,514","","","21.6","","","652,751","","","18.0","","","274,763","","","42.1"],["Total other income, net","(51,427)","","","(1.2)","","","(13,331)","","","(0.4)","","","38,096","","","285.8"],["Income before income taxes","978,941","","","22.8","","","666,082","","","18.4","","","312,859","","","47.0"],["Income tax expense","219,378","","","5.1","","","149,260","","","4.1","","","(70,118)","","","(47.0)"],["Net income","759,563","","","17.7","","","516,822","","","14.3","","","242,741","","","47.0"],["Total other comprehensive loss, net of tax","(11,698)","","","(0.3)","","","(14,080)","","","(0.4)","","","2,382","","","16.9"],["Comprehensive income","$","747,865","","","17.4","%","","$","502,742","","","13.9","%","","$","245,123","","","48.8","%"],["Net income per share"],["Basic","$","29.36","","","","","$","19.50","","","","","$","9.86","","","50.6","%"],["Diluted","$","29.16","","","","","$","19.37","","","","","$","9.79","","","50.5","%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","Years Ended March 31,"],["","2024","","2023","","Change"],["","Amount","","Amount","","Amount","","%"],["Net sales by location"],["Domestic","$","2,863,674","","","$","2,451,497","","","$","412,177","","","16.8","%"],["International","1,424,089","","","1,175,789","","","248,300","","","21.1"],["Total","$","4,287,763","","","$","3,627,286","","","$","660,477","","","18.2","%"],["Net sales by brand and channel"],["UGG brand"],["Wholesale","$","1,115,241","","","$","1,004,356","","","$","110,885","","","11.0","%"],["Direct-to-Consumer","1,123,891","","","924,855","","","199,036","","","21.5"],["Total","2,239,132","","","1,929,211","","","309,921","","","16.1"],["HOKA brand"],["Wholesale","1,126,126","","","925,877","","","200,249","","","21.6"],["Direct-to-Consumer","680,614","","","487,039","","","193,575","","","39.7"],["Total","1,806,740","","","1,412,916","","","393,824","","","27.9"],["Teva brand"],["Wholesale","113,739","","","149,111","","","(35,372)","","","(23.7)"],["Direct-to-Consumer","34,780","","","33,950","","","830","","","2.4"],["Total","148,519","","","183,061","","","(34,542)","","","(18.9)"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","Years Ended March 31,"],["","2024","","2023","","Change"],["","Amount","","Amount","","Amount","","%"],["Sanuk brand"],["Wholesale","17,175","","","27,678","","","(10,503)","","","(37.9)"],["Direct-to-Consumer","8,274","","","10,288","","","(2,014)","","","(19.6)"],["Total","25,449","","","37,966","","","(12,517)","","","(33.0)"],["Other brands"],["Wholesale","60,026","","","53,653","","","6,373","","","11.9"],["Direct-to-Consumer","7,897","","","10,479","","","(2,582)","","","(24.6)"],["Total","67,923","","","64,132","","","3,791","","","5.9"],["Total","$","4,287,763","","","$","3,627,286","","","$","660,477","","","18.2","%"],["Total Wholesale","$","2,432,307","","","$","2,160,675","","","$","271,632","","","12.6","%"],["Total Direct-to-Consumer","1,855,456","","","1,466,611","","","388,845","","","26.5"],["Total","$","4,287,763","","","$","3,627,286","","","$","660,477","","","18.2","%"]]
[[/GREPCENT_TABLE]]

Total net sales increased primarily due to higher DTC and wholesale channel sales for the HOKA and UGG brands, partially offset by lower Teva brand and Sanuk brand wholesale channel sales.

On a constant currency basis, net sales increased by 17.9%, compared to the prior period. Further, we experienced an increase of 2.8% in the total volume of units sold to 65,300 from 63,500, compared to the prior period. Units sold represents all units related to the total net sales presented, inclusive of all categories such as footwear, apparel, accessories, home goods, and care kits. The prior period total volume of units sold for only footwear has been modified to conform to the current period presentation.

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 UGG and HOKA brands, driven primarily by consumer acquisition and retention online as we experienced increased demand for both brands, as well as the UGG brand net sales benefiting from a higher level of full-price selling and selective price increases on popular styles. Comparable DTC channel net sales for the 52 weeks ended March 31, 2024, increased by 25.4% compared to the prior period.

•Wholesale net sales of the HOKA brand increased domestically and in Asia driven by higher consumer demand across an assortment of performance products. These effects were partially offset by lower net sales in Europe, primarily due to the timing of certain distributor shipments.

•Wholesale net sales of the UGG brand increased globally resulting from strong brand heat and strong adoption of key product franchises driving a higher level of full-price selling and benefits from selective price increases on popular styles.

•Wholesale net sales of the Teva brand decreased globally primarily by lower demand in the value-oriented consumer channel for the sandal category, partially related to macroeconomic factors, as well as shipping timing differences, compared to the prior period.

•Wholesale net sales of the Sanuk brand decreased domestically driven primarily by lower consumer demand, partially related to macroeconomic factors, and elevated marketplace inventory levels.

•International net sales, which are included in the reportable operating segment net sales presented above, increased by 21.1% and represented 33.2% and 32.4% of total net sales for the years ended March 31, 2024, and 2023, respectively. These changes were primarily driven by higher net sales for the DTC and wholesale channels for the UGG and HOKA brands, partially offset by lower wholesale channel net sales for the Teva brand.

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Gross Profit. Gross margin increased to 55.6% from 50.3%, compared to the prior period, primarily due to favorable full-price selling for the UGG brand, favorable changes in freight costs, favorable HOKA brand mix and UGG brand product mix shifts, including benefits from selective price increases, and favorable mix of sales into the DTC channel.

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

•Increased payroll and related costs of approximately $107,500, primarily due to higher employee headcount and performance-based compensation.

•Increased variable advertising and promotion expenses of approximately $78,900, primarily due to higher promotional marketing expenses for the HOKA and UGG brands to drive global brand awareness and market share gains, highlight new product categories, and provide localized marketing.

•Increased other variable net selling expenses of approximately $46,300, primarily due to higher rent and occupancy expenses and credit card fees.

•Increased other operating expenses of approximately $55,500, primarily due to higher infrastructure investments and related depreciation, including for IT expenses for programming and software costs, as well as higher travel costs, impairments, and contract and legal expenses.

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

[[GREPCENT_TABLE]]
[["","Years Ended March 31,"],["","2024","","2023","","Change"],["","Amount","","Amount","","Amount","","%"],["Income (loss) from operations"],["UGG brand wholesale","$","349,509","","","$","267,013","","","$","82,496","","","30.9","%"],["HOKA brand wholesale","376,286","","","285,257","","","91,029","","","31.9"],["Teva brand wholesale","18,685","","","32,595","","","(13,910)","","","(42.7)"],["Sanuk brand wholesale","(12,836)","","","2,891","","","(15,727)","","","(544.0)"],["Other brands wholesale","4,722","","","(1,678)","","","6,400","","","381.4"],["Direct-to-Consumer","748,656","","","508,948","","","239,708","","","47.1"],["Unallocated overhead costs","(557,508)","","","(442,275)","","","(115,233)","","","(26.1)"],["Total","$","927,514","","","$","652,751","","","$","274,763","","","42.1","%"]]
[[/GREPCENT_TABLE]]

The increase in total income from operations, compared to the prior period, was primarily due to higher net sales at higher gross margins, partially offset by higher SG&A expenses as a percentage of net sales.

Drivers of significant net changes in total income from operations, compared to the prior period, were as follows:

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

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

•The increase in income from operations of UGG brand wholesale was due to higher net sales at higher gross margins, partially offset by higher SG&A expenses as a percentage of net sales.

•The decrease in income from operations of Teva brand wholesale was due to lower net sales at lower gross margins, as well as higher SG&A expenses as a percentage of net sales.

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•The decrease in income from operations of Sanuk brand wholesale was due to lower net sales at lower gross margins, as well as higher SG&A expenses as a percentage of net sales, primarily due to the Sanuk brand definite-lived intangible asset impairment.

•The increase in unallocated overhead costs was due to higher payroll costs related to higher headcount and performance-based compensation, as well as higher IT programming and software costs, depreciation, legal, rent and occupancy, and warehouse expenses.

Total Other Income, Net. The increase in total other income, net, compared to the prior period, was due to higher interest income from higher invested cash balances and average interest rates.

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

[[GREPCENT_TABLE]]
[["","Years Ended March 31,"],["","2024","","2023"],["Income tax expense","$","219,378","","$","149,260"],["Effective income tax rate","22.4","%","","22.4","%"]]
[[/GREPCENT_TABLE]]

Our effective income tax rate was flat compared to the prior period. The current year income tax rate is primarily driven by US domestic taxes resulting from an increase in US domestic pre-tax income, offset by the foreign rate differential. The prior year rate was primarily driven by the impact on the foreign rate differential of nonrecurring income tax benefits related to foreign tax-exempt income, offset by an increase in income tax expense for lower unrealized tax benefits related to foreign tax authority assessments.

For the years ended March 31, 2024, and 2023, 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 subsection titled “Repatriation of Cash” under the “Liquidity” section below for further information.

Net Income. The increase in net income, compared to the prior period, was primarily due to higher net sales, operating margins, and interest income. 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 decrease in total other comprehensive loss, net of tax, compared to the prior period, was primarily due to lower foreign currency translation losses relating to changes in the net asset position against European foreign currency exchange rates.

LIQUIDITY

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 macroeconomic, political and legislative developments, and various other risks and uncertainties described in Part I, Item 1A, “Risk Factors,” within this Annual Report. Furthermore, we may require additional cash resources due to changes in business conditions, strategic initiatives, or stock repurchase strategy, a national or global economic recession, or other future developments, including any investments or acquisitions we may decide to pursue, although we do not have any present commitments with respect to any such investments or acquisitions.

If there are unexpected material impacts on our business in future periods and we need to raise or conserve additional cash to fund our operations or pursue our business strategy, 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

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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 changes in consumer preferences or tastes, prolonged or severe economic recession or inflationary pressure could adversely affect our business and liquidity.

Sources of Liquidity. We finance our working capital and operating requirements using a combination of cash and cash equivalents balances, including cash from our repatriation strategy, cash provided from ongoing operating activities and, to a lesser extent, available borrowing capacity under our revolving credit facilities. Refer to the “Cash Flows” section below for further discussion on cash flows from ongoing operating activities.

Cash and cash equivalents. As of March 31, 2024, our cash and cash equivalents are $1,502,051, the majority of which is held in highly rated money market funds and interest-bearing bank deposit accounts with established national financial institutions. We believe our cash and cash equivalents balances, cash provided by operating activities, and available borrowing capacity 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 and will be sufficient to meet the requirements of our business strategies and plans. However, there can be no assurance that sufficient capital will continue to be available or that it will be available on terms acceptable to us.

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, 2024, we repatriated $250,000 of cash and cash equivalents, compared to no cash and cash equivalents repatriated during the year ended March 31, 2023. As of March 31, 2024, and 2023, we have $263,820 and $299,114, 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 currently anticipate repatriating current and future unremitted earnings of non-US subsidiaries to the extent they have been subject to US income 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 regarding our cash repatriation strategy.

Revolving Credit Facilities. Information about the revolving credit facilities available as of March 31, 2024, is as follows:

•Primary Credit Facility. We have a five-year unsecured revolving credit facility, which provides for borrowings up to $400,000, of which $399,046 remains available and contains a $25,000 sublimit for the issuance of letters of credit, of which $954 is outstanding (Primary Credit Facility).

•China Credit Facility. We have an uncommitted revolving line of credit of up to CNY300,000, or $41,522, with an overdraft facility sublimit of CNY100,000, or $13,841 (China Credit Facility). As of March 31, 2024, there is no outstanding balance, available borrowings are $41,494, and outstanding bank guarantees are $28 under the China Credit Facility.

•Debt Covenants. As of March 31, 2024, 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 terms of our revolving credit facilities.

Material Cash Requirements. Our material cash requirements include uses for working capital, payments to fulfill contractual obligations, capital expenditures, and stock repurchases. 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 our 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.

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Contractual Obligations. The following table summarizes our significant contractual obligations as of March 31, 2024, 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)","$","303,914","","","$","59,556","","","$","108,904","","","$","71,318","","","$","64,136"],["Purchase obligations for product (2)","868,282","","","868,282","","","\u2014","","","\u2014","","","\u2014"],["Purchase obligations for commodities (3)","119,332","","","56,384","","","62,948","","","\u2014","","","\u2014"],["Other purchase obligations (4)","222,412","","","106,163","","","106,248","","","10,001","","","\u2014"],["Net unrecognized tax benefits (5)","24,460","","","3,158","","","21,302","","","\u2014","","","\u2014"],["Total","$","1,538,400","","","$","1,093,543","","","$","299,402","","","$","81,319","","","$","64,136"]]
[[/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 the lease agreements. In addition to the above operating lease commitments outstanding and excluded from operating lease liabilities recorded in our consolidated financial statements as of March 31, 2024, there is an aggregate of $12,696 of undiscounted minimum lease payments due pursuant to leases signed but not yet commenced, primarily for the expansion of an existing office that we expect will open in the fourth quarter of our next fiscal year.

(2) Our purchase obligations for product consist mostly of open purchase orders that we expect to fulfill in the ordinary course of business. Outstanding purchase orders are primarily issued to our independent 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.

(3) Our purchase obligations for commodities include sheepskin, UGGplush, and sugarcane-derived 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, 2024, 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 any remaining deposits are expected to become fully refundable or to be reflected as a credit against purchases.

(4) Our other purchase obligations consist of non-cancellable minimum commitments for 3PL provider arrangements, sales management services, supply chain services, IT services, promotional expenses, and other commitments under service contracts. These amounts exclude capital expenditures expected to be made in the next fiscal year, which are further discussed below.

(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, 2024, the timing of future cash outflows is highly uncertain related to expirations of statute of limitations of $19,885 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, and other contractual obligations and commitments.

Capital Expenditures. We estimate capital expenditures that will be made before the end of our next fiscal year will range from approximately $115,000 to $125,000. We anticipate these expenditures will primarily relate to the upgrades to our existing warehouse and DCs, opening HOKA brand retail stores and refreshing our retail store fleet, IT infrastructure and system improvements, and upgrades to our existing 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 and retail store openings, as well as unforeseen needs to replace or refresh existing assets.

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Stock Repurchase Program. We continue to evaluate our capital allocation strategy, and consider further opportunities to utilize our global cash resources in a way that will profitably grow our business, meet our strategic objectives, and drive stockholder value, including by potentially repurchasing additional shares of our common stock. As of March 31, 2024, the aggregate remaining approved amount under our stock repurchase program is $941,704. Our stock repurchase program does not obligate us to acquire any amount of common stock and may be suspended at any time at our discretion.

Refer to Note 10, “Stockholders’ Equity,” of our consolidated financial statements in Part IV within this Annual Report for further information regarding our stock repurchase program and capital allocation strategy.

CASH FLOWS

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

[[GREPCENT_TABLE]]
[["","Years Ended March 31,"],["","2024","","2023","","Change"],["","Amount","","Amount","","Amount","","%"],["Net cash provided by operating activities","$","1,033,184","","","$","537,422","","","$","495,762","","","92.2","%"],["Net cash used in investing activities","(89,331)","","","(81,013)","","","(8,318)","","","(10.3)"],["Net cash used in financing activities","(417,675)","","","(309,031)","","","(108,644)","","","(35.2)"],["Effect of foreign currency exchange rates on cash and cash equivalents","(5,922)","","","(9,110)","","","3,188","","","35.0"],["Net change in cash and cash equivalents","$","520,256","","","$","138,268","","","$","381,988","","","276.3","%"]]
[[/GREPCENT_TABLE]]

Operating Activities. Our primary source of liquidity is net cash provided by operating activities, which is 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, 2024, compared to the prior period, was due to $273,654 of favorable net income after non-cash adjustments and $222,108 of favorable changes in operating assets and liabilities. The favorable changes in operating assets and liabilities were primarily due to timing of receipt of goods and services and payments on trade accounts payable, as well as more tightly managed brand inventories and higher sell-through of products, partially offset by unfavorable changes in income tax receivables.

Investing Activities. The increase in net cash used in investing activities during the year ended March 31, 2024, compared to the prior period, was primarily due to higher capital expenditures for refreshes of existing and new retail stores and leasehold improvements for our warehouses and DCs, partially offset by reductions in IT infrastructure and other technology costs.

Financing Activities. The increase in net cash used in financing activities during the year ended March 31, 2024, compared to the prior period, was primarily due to a higher dollar value of stock repurchases.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Preparation of our consolidated financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the amounts reported. Management bases these estimates and assumptions upon 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. In addition, management has considered the potential impact of macroeconomic factors, including inflation, foreign currency exchange rate volatility, changes in interest rates, changes in commodity pricing, changes in consumer discretionary spending, and recessionary concerns, on our business and operations. Although the full impact of these factors is unknown, management believes it has made appropriate accounting estimates and assumptions based on the facts and circumstances available as of the reporting date. However, 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.

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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.

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,"],["","2024","","2023"],["","Amount","","% of Gross Trade Accounts Receivable","","Amount","","% of Gross Trade Accounts Receivable"],["Gross trade accounts receivable","$","323,896","","","100.0","%","","$","334,015","","","100.0","%"],["Allowance for doubtful accounts","(9,109)","","","(2.8)","","","(10,576)","","","(3.2)"],["Allowance for sales discounts","(3,840)","","","(1.2)","","","(5,656)","","","(1.7)"],["Allowance for chargebacks","(14,382)","","","(4.4)","","","(16,272)","","","(4.8)"],["Trade accounts receivable, net","$","296,565","","","91.6","%","","$","301,511","","","90.3","%"]]
[[/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.

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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.

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,"],["","2024","","2023"],["","Amount","","% of Net Sales","","Amount","","% of Net Sales"],["Net Sales"],["Wholesale","$","544,551","","","56.7","%","","$","448,425","","","56.7","%"],["Direct-to-Consumer","415,207","","","43.3","","","343,146","","","43.3"],["Total","$","959,758","","","100.0","%","","$","791,571","","","100.0","%"],["","As of March 31,"],["","2024","","2023"],["","Amount","","% of Net Sales","","Amount","","% of Net Sales"],["Sales Return Liability"],["Wholesale","$","(37,458)","","","(6.9)","%","","$","(33,764)","","","(7.5)","%"],["Direct-to-Consumer","(17,869)","","","(4.3)","","","(11,558)","","","(3.4)"],["Total","$","(55,327)","","","(5.8)","%","","$","(45,322)","","","(5.7)","%"]]
[[/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,"],["","2024","","2023"],["","Amount","","% of Gross Inventory","","Amount","","% of Gross Inventory"],["Gross Inventories","$","518,585","","","100.0","%","","$","566,778","","","100.0","%"],["Write-down of inventories","(44,274)","","","(8.5)","","","(33,926)","","","(6.0)"],["Inventories","$","474,311","","","91.5","%","","$","532,852","","","94.0","%"]]
[[/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 and remaining minimum operating lease commitments.

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.

During the fourth fiscal quarter for the year ended March 31, 2024, we recorded an impairment loss of $8,164 in SG&A expenses in the consolidated statements of comprehensive income for the Sanuk brand definite-lived trademark, driven by lower-than-expected results of operations for the wholesale channel that resulted in the carrying value exceeding the estimated fair value, which was determined based on an estimate of the future discounted cash flows. We did not identify any definite-lived intangible asset triggering events during the year ended March 31, 2023.

During the years ended March 31, 2024, and 2023, we recorded impairment charges of $1,015 and $2,817, 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, including our accounting policies and carrying values.

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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.