# Deckers Outdoor Corp: Form 10-Q for the period ended Dec 31, 2018

- Company: [Deckers Outdoor Corp](/companies/deck.md) (CIK 910521)
- Form: 10-Q
- Filed: 2019-02-07
- Accepted by EDGAR: Feb 7, 2019, 15:14 ET
- Period: 2018-12-31
- Accession: 0000910521-19-000003
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/910521/000091052119000003/deck1231201810-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/910521/000091052119000003/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-12-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-10-01 to 2018-12-31 | $873.8m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2018-04-01 to 2018-12-31 | $1.63bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2018-10-01 to 2018-12-31 | $403.7m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2018-04-01 to 2018-12-31 | $789.4m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2018-10-01 to 2018-12-31 | $470.1m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2018-04-01 to 2018-12-31 | $836.9m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2018-10-01 to 2018-12-31 | $225.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2018-04-01 to 2018-12-31 | $541.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2018-10-01 to 2018-12-31 | $244.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2018-04-01 to 2018-12-31 | $295.7m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2018-10-01 to 2018-12-31 | $48.3m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2018-04-01 to 2018-12-31 | $55.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-10-01 to 2018-12-31 | $196.4m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2018-04-01 to 2018-12-31 | $240.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-10-01 to 2018-12-31 | $6.68 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2018-04-01 to 2018-12-31 | $7.99 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-10-01 to 2018-12-31 | $6.74 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2018-04-01 to 2018-12-31 | $8.06 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-10-01 to 2018-12-31 | 29,397,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2018-04-01 to 2018-12-31 | 30,063,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2018-04-01 to 2018-12-31 | $279.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2018-04-01 to 2018-12-31 | $21.8m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2018-04-01 to 2018-12-31 | $161.4m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2018-12-31 | $515.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-12-31 | $1.21bn | us-gaap:AssetsCurrent |
| Total assets | at 2018-12-31 | $1.54bn | us-gaap:Assets |
| Current liabilities | at 2018-12-31 | $394.4m | us-gaap:LiabilitiesCurrent |
| Short-term borrowings | at 2018-12-31 | $600.0k | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2018-12-31 | $1.02bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 58,072 characters.

The following discussion of our financial condition and results of operations should be read together with our condensed consolidated financial statements included in Part I, Item 1 within this Quarterly Report and the audited consolidated financial statements in our 2018 Annual Report. This section contains forward-looking statements that are based on our current expectations and reflect our plans, estimates, and anticipated future financial performance. These statements involve numerous risks and uncertainties. Our actual results may differ materially from those expressed or implied by these forward-looking statements as a result of many factors, including those set forth in the sections entitled “Risk Factors” in Part II, Item 1A, and “Cautionary Note Regarding Forward-Looking Statements” within this Quarterly Report.

### Overview

We are a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyle use and high performance activities. We market our products primarily under our proprietary UGG, Koolaburra, HOKA, Teva, and Sanuk brands. We sell our products through domestic and international retailers, international distributors, and directly to our global consumers through our DTC business, which is comprised of our retail stores and E-Commerce websites. Independent third party contractors manufacture all of our products.

### Recent Developments

***Restructuring Plan.*** In February 2016, we announced the implementation of a multi-year restructuring plan which is designed to realign our brands, optimize our retail store fleet, and consolidate our management and operations. As part of this restructuring plan, we realigned our brands across two groups: Fashion Lifestyle and Performance Lifestyle. The Fashion Lifestyle group includes the UGG and Koolaburra brands. The Performance Lifestyle group includes the HOKA, Teva, and Sanuk brands. In general, the intent of our restructuring plan is to streamline brand operations, reduce overhead costs, create operating efficiencies, and improve collaboration across brands.

Management continues to seek to optimize our worldwide owned retail store footprint and we may achieve additional SG&A expense savings as a result. Our decision to open or close retail store locations is evaluated based on the operating results of each store and our retail store fleet optimization strategies in line with our long-term objectives. In connection with our restructuring plan, we closed 43 retail stores as of December 31, 2018, including conversions to partner retail stores, and consolidated our brand operations and corporate headquarters.

Through December 31, 2018, we had incurred cumulative restructuring charges by category, as follows:

|  | Cumulative Restructuring Charges |
| --- | ---: |
| Lease terminations | $18,282 |
| Retail store fixed asset impairment | 9,372 |
| Severance costs | 9,776 |
| Software and office fixed asset impairment | 6,987 |
| Other\* | 11,202 |
| **Total** | **$55,619** |

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

During the nine months ended December 31, 2018 and 2017, we incurred $295 and $1,667 of restructuring charges, respectively, which were recorded in SG&A expenses in the condensed consolidated statements of comprehensive income. During the nine months ended December 31, 2018 and 2017, these restructuring charges were recorded in SG&A expenses in the DTC reportable operating segment ($295 and $149, respectively) and unallocated overhead costs ($1,518 for the nine months ended December 31, 2017). We currently do not anticipate incurring material restructuring charges in future periods.

The cumulative annualized SG&A expense savings by applicable reportable operating segment, realized as of December 31, 2018, were approximately as follows:

|  | Cumulative Annualized SG&A Expense Savings |
| --- | ---: |
| UGG brand wholesale | $1,000 |
| Sanuk brand wholesale | 1,000 |
| Other brands wholesale | 1,000 |
| Direct-to-Consumer | 41,000 |
| Unallocated overhead costs | 17,000 |
| **Total** | **$61,000** |

Refer to Note 1, "General," under the section entitled "Restructuring" of our condensed consolidated financial statements in Part I, Item 1 within this Quarterly Report for further information regarding our restructuring plan.

***Operating Profit Improvement Plan.*** In February 2017, we announced that, in addition to continuing to execute on our restructuring plan, we would implement various business transformation initiatives designed to further reduce expenses and improve gross margins, the projected combined impact of which was expected to be approximately $100,000 of net annualized operating profit improvement by the end of the fiscal year ending March 31, 2020. As of December 31, 2018, we have achieved in excess of $100,000 of net annualized operating profit improvement as a result of the successful implementation of these plans and initiatives. Consistent with our strategy, the principal drivers of the net annualized operating profit improvement include: SG&A expense savings resulting from our restructuring plan, primarily driven by retail store closures and office consolidations; additional SG&A expense savings resulting from lower corporate infrastructure costs and process improvement efficiencies; and costs of goods sold improvements resulting from lower input costs and improved supply chain management. We may experience additional SG&A expense savings and cost of goods sold improvements, although both the amount and timing of these impacts are uncertain and based upon numerous factors, including, but not limited to, retail store optimization decisions and the related costs, the timing and success of certain supply chain management and inventory control improvements, the costs associated with improving manufacturing operations, and the net impact of certain costs savings initiatives on our operating profit.

***Stock Repurchase Programs.*** In October 2017, our Board of Directors approved a stock repurchase program which, together with a stock repurchase program approved in 2015 (2015 Repurchase Program), authorized us to repurchase a total of up to $400,294 of our common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, and other factors (2017 Repurchase Program). As of December 31, 2018, the aggregate remaining approved amount under the 2017 Repurchase Program was $89,212. The full amount originally authorized under the 2015 Repurchase Program has been repurchased and the 2015 Repurchase Program has been completed.

In January 2019, our Board of Directors approved a new $261,000 stock repurchase program (2019 Repurchase Program), increasing our aggregate remaining approved amount under the 2017 Repurchase Program and 2019 Repurchase Program (Stock Repurchase Programs) to $350,212. Our Stock Repurchase Programs do not obligate us to acquire any particular amount of common stock and may be suspended at any time at our discretion. Refer to the section entitled "Unregistered Sales of Equity Securities and Use of Proceeds," in Part II, Item 2, within this Quarterly Report for further information on our Stock Repurchase Programs.

***Cash Repatriation.*** As a result of the enactment of the Tax Reform Act on December 22, 2017, our accumulated foreign earnings as of December 31, 2017 were subject to a one-time mandatory deemed repatriation tax in transition to a territorial tax regime. In response to the new legislation, we repatriated $250,000 of cash and cash equivalents during the fourth quarter of the fiscal year ended March 31, 2018. We continue to evaluate our cash repatriation strategy and we anticipate repatriating current and future unremitted earnings of non-US subsidiaries, to the extent they will be subject to US tax, as long as such cash is not required to fund ongoing foreign operations. For further details on the impacts of the Tax Reform Act during the fiscal year ended March 31, 2018, refer to our 2018 Annual Report and Note 5, "Income Taxes," of our condensed consolidated financial statements in Part I, Item 1 within this Quarterly Report. Refer to the section entitled "Liquidity and Capital Resources" within this Part I, Item 2 for further information on the impacts of the Tax Reform Act on our liquidity and cash management strategy.

### Trends Impacting our Overall Business

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

- Sales of our products are highly seasonal and are sensitive to weather conditions, which are unpredictable and beyond our control. To address seasonality, we are continuing to drive our strategy of introducing counter-seasonal products through category expansion, including the UGG brand’s spring and summer products, and the active lifestyle products of the HOKA brand. Even though we continue to expand our product lines with the goal of creating more year-round styles for our brands to drive sales and offset the impact of weather conditions, the effect of favorable or unfavorable weather on our aggregate sales and operating results may continue to be significant.
- We believe there has been a meaningful shift in the way consumers shop for products and make purchasing decisions. In particular, brick and mortar retail stores are experiencing significant and prolonged decreases in consumer traffic as customers continue to migrate to shopping online. This shift is impacting the performance of our DTC business and our wholesale customers, and is transforming the way we approach our digital marketing efforts.
- In light of the shift in consumer shopping behavior, we are seeking to optimize our retail store footprint. We currently do not anticipate incurring material incremental retail store closure costs, primarily because any store closures we may pursue are expected to occur as retail store leases expire to avoid incurring potentially significant lease termination costs, as well as through conversions to partner retail stores.
- We expect our E-Commerce business will continue to be a driver of long-term growth, although we expect the year-over-year growth rate will decline over time as the size of our E-Commerce business increases.
- During fall 2018, we implemented an allocation and segmentation strategy for the UGG brand's core Classics franchise in the US wholesale channel. We plan to continue this strategic management of the wholesale channel in future seasons.
- We believe consumers are buying product closer to the particular wearing occasion ("buy now, wear now"), which tends to shorten the purchasing windows for weather-dependent product. Not only does this trend impact our DTC business, we believe it is also impacting the purchasing behavior of our large wholesale customers. In particular, these customers appear to be shortening their purchasing windows to address the evolving behavior of retail consumers and to manage their own product-related inventories.
- Foreign currency exchange rate fluctuations have the potential to cause variations in our operating results. While we seek to hedge some of the risks associated with foreign currency exchange rate fluctuations, these changes are largely outside of our control. We expect these changes will continue to impact the future purchasing patterns of our customers, as well as our operating results.

### Segment Overview

We perform an annual assessment of the appropriateness of our reportable operating segments during the third quarter of our fiscal year. However, due to known circumstances arising during the three months ended June 30, 2018, management performed this assessment during Q1 2019. These circumstances included quantitative factors, such as the actual and forecasted sales and operating income of the wholesale operations of the HOKA brand compared to our other reportable operating segments, as well as qualitative factors such as the ongoing growth of, and our increased investment in, the wholesale operations of the HOKA brand. As a result, beginning in Q1 2019, we added a sixth reportable operating segment to separately report the wholesale operations of the HOKA brand. The wholesale operations of the HOKA brand are no longer presented under the Other brands wholesale reportable operating segment. However, the DTC operations of the HOKA brand continue to be reported under the DTC reportable operating segment. Prior periods presented were reclassified to reflect this change. Our six reportable operating segments now include the worldwide wholesale operations of the UGG brand, HOKA brand, Teva brand, Sanuk brand, and Other brands, as well as DTC. Information reported to the CODM, who is our Principal Executive Officer, is organized into these reportable operating segments and is consistent with how the CODM evaluates our performance and allocates resources.

***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 market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, apparel, and accessories with expanded product offerings and a growing global audience that attracts women, men, and children.

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

- High consumer brand loyalty due to consistently delivering quality and luxuriously comfortable footwear, apparel, and accessories.
- Diversification of our product lines, including women's spring and summer, men's, and lifestyle offerings. Our strategy of product diversification aims to decrease our reliance on sheepskin and mitigate the impacts of seasonality.
- Continued enhancement of our Omni-Channel and digital marketing capabilities to enable us to better engage existing and prospective consumers and expose them to our brands.

***HOKA Brand.*** The HOKA brand is a premium line of performance footwear and apparel that offers enhanced cushioning and inherent stability with minimal weight, designed for ultra-runners and athletes of all capacities. The HOKA brand is quickly becoming a top brand in the domestic run specialty channel and has received strong word-of-mouth marketing that has fueled both domestic and international sales growth.

***Teva Brand.*** The Teva brand pioneered the sport sandal category in 1984 and is a leader within the sport sandal and modern outdoor lifestyle categories by fueling the expression of freedom.

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

***Other Brands.*** Consists of the Koolaburra brand, a casual footwear fashion line using sheepskin and other plush materials, sold through our wholesale channel and intended to complement our UGG brand offering, as well as other discontinued brands in the prior period presented.

***Direct-to-Consumer.*** Our DTC business is comprised of our retail stores and E-Commerce websites. As a result of our evolving Omni-Channel strategy, we believe our retail stores and websites are intertwined and interdependent. We believe many consumers interact with both our brick and mortar stores and our websites before making purchasing decisions.

Our retail store fleet is made up of UGG brand concept stores and UGG brand outlet stores. Through our outlet stores, we sell some of our discontinued styles from prior seasons, full price in-line products, as well as products made specifically for the outlet stores. At December 31, 2018, we had a total of 157 retail stores worldwide, which includes 91 concept stores and 66 outlet stores. During the nine months ended December 31, 2018, we opened four concept stores, closed one outlet store, and closed 11 concept stores, including conversions of Company-owned concept stores to partner retail stores. Included in the total count of retail stores worldwide are concession stores, defined as concept stores that are operated by us within a department or other store, which we lease from the store owner by paying a percentage of concession store sales. In certain international markets, such as China, we rely on partner retail stores, which are branded stores that are wholly-owned and operated by third parties and not included in the total count of worldwide Company-owned retail stores. When a partner retail store is opened or a store is converted into a partner retail store, the store becomes wholly-owned and operated by third parties and related sales are recorded in our UGG brand or Sanuk brand wholesale reportable operating segments.

Our E-Commerce business provides us with an opportunity to communicate a consistent brand message to consumers that is in line with our brands' promises, drives awareness of key brand initiatives, offers targeted information to specific consumer demographics, and drives consumers to our retail stores. As of December 31, 2018, we operated our E-Commerce business through an aggregate of 22 Company-owned websites in nine different countries.

### Use of Non-GAAP Measures

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

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

### Three Months Ended December 31, 2018 Compared to Three Months Ended December 31, 2017

The following table summarizes our results of operations:

|  | Three Months Ended December 31, 2018 Amount% |  | 2017 Amount% |  | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $873,800 | 100.0% | $810,478 | 100.0% | $63,322 | 7.8% |
| Cost of sales | 403,707 | 46.2 | 387,007 | 47.8 | (16,700) | (4.3) |
| Gross profit | 470,093 | 53.8 | 423,471 | 52.2 | 46,622 | 11.0 |
| Selling, general and administrative expenses | 225,375 | 25.8 | 230,280 | 28.4 | 4,905 | 2.1 |
| Income from operations | 244,718 | 28.0 | 193,191 | 23.8 | 51,527 | 26.7 |
| Other expense, net | 51 | — | 138 | — | 87 | 63.0 |
| Income before income taxes | 244,667 | 28.0 | 193,053 | 23.8 | 51,614 | 26.7 |
| Income tax expense | 48,293 | 5.5 | 106,712 | 13.2 | 58,419 | 54.7 |
| Net income | $196,374 | 22.5% | $86,341 | 10.7% | $110,033 | 127.4% |

***Net Sales.*** The following table summarizes our net sales by location and our net sales by brand and channel:

| Net sales by location | Three Months Ended December 31, 2018 Amount | 2017 Amount | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| US | $573,015 | $501,650 | $71,365 | 14.2% |
| International | 300,785 | 308,828 | (8,043) | (2.6) |
| **Total** | **$873,800** | **$810,478** | **$63,322** | **7.8%** |

33

| Net sales by brand and channel UGG brand | Three Months Ended December 31, 2018 Amount | 2017 Amount | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Wholesale | $388,039 | $365,734 | $22,305 | 6.1% |
| Direct-to-Consumer | 373,008 | 368,921 | 4,087 | 1.1 |
| Total | 761,047 | 734,655 | 26,392 | 3.6 |
| HOKA brand |  |  |  |  |
| Wholesale | 46,243 | 26,233 | 20,010 | 76.3 |
| Direct-to-Consumer | 10,676 | 5,534 | 5,142 | 92.9 |
| Total | 56,919 | 31,767 | 25,152 | 79.2 |
| Teva brand |  |  |  |  |
| Wholesale | 20,087 | 16,389 | 3,698 | 22.6 |
| Direct-to-Consumer | 2,839 | 3,116 | (277) | (8.9) |
| Total | 22,926 | 19,505 | 3,421 | 17.5 |
| Sanuk brand |  |  |  |  |
| Wholesale | 9,172 | 10,366 | (1,194) | (11.5) |
| Direct-to-Consumer | 3,739 | 3,514 | 225 | 6.4 |
| Total | 12,911 | 13,880 | (969) | (7.0) |
| Other brands |  |  |  |  |
| Wholesale | 18,703 | 10,033 | 8,670 | 86.4 |
| Direct-to-Consumer | 1,294 | 638 | 656 | 102.8 |
| Total | 19,997 | 10,671 | 9,326 | 87.4 |
| **Total** | **$873,800** | **$810,478** | **$63,322** | **7.8%** |
| Total Wholesale | $482,244 | $428,755 | $53,489 | 12.5% |
| Total Direct-to-Consumer | 391,556 | 381,723 | 9,833 | 2.6 |
| **Total** | **$873,800** | **$810,478** | **$63,322** | **7.8%** |

Consolidated net sales increased primarily due to higher UGG, HOKA and Other brand wholesale sales, as well as total DTC sales. Further, we experienced an increase in total volume of pairs sold of 13.0% to 12,200 compared to 10,800 during the prior period. On a constant currency basis, net sales increased 7.7%, compared to the prior period. Drivers for significant changes in net sales were as follows:

- Wholesale net sales of our UGG brand increased primarily due to a higher volume of pairs sold, partially offset by a lower weighted-average selling price per pair (WASPP), driven by growth in our UGG Men's business and non-Classic styles in UGG Women's and a shift in product mix as a result of our UGG Classics franchise allocation. On a constant currency basis, wholesale net sales of our UGG brand increased 4.8%, compared to the prior period.
- Wholesale net sales of our HOKA brand increased due to a higher volume of pairs sold driven by its continued global growth, primarily in the US and Europe, as well as additional sales generated by updates to key franchises, and a higher WASPP driven by higher international full-priced selling.
- Wholesale net sales of our Teva brand increased due to a higher WASPP, primarily driven by higher prices on fewer closeouts.
- Wholesale net sales of our Other brands increased due to a higher volume of pairs sold driven by continued growth in the US family value channel for the Koolaburra brand, partially offset by a lower WASPP due to product and customer mix.
- DTC net sales increased 2.6% primarily due to a higher WASPP, partially offset by a lower volume of pairs sold, driven by fewer promotions throughout the holiday season and fewer retail stores. Comparable DTC net sales for the 13 weeks ended December 30, 2018 increased 1.4% compared to the same period during fiscal year 2018. The increase in comparable DTC net sales was due to growth in our E-Commerce business primarily for the UGG and HOKA brands, partially offset by lower sales for the UGG brand in Asia and Europe. In addition, we experienced a lower deferral of in transit sales as part of a change in accounting policy for adoption of the new revenue standard (refer to the section entitled "Critical Accounting Policies and Estimates" within this Part I, Item 2, for further information).
- International sales, which are included in the reportable operating segment sales presented above, decreased by 2.6% compared to the prior period. International sales represented 34.4% and 38.1% of total net sales for the three months ended December 31, 2018 and 2017, respectively. The decrease was primarily due to lower sales for the UGG brand in Asia and Europe, partially offset by higher sales for the HOKA brand in Europe and Asia.

***Gross Profit.*** Gross margin increased to 53.8% from 52.2% in the prior period due to fewer closeout sales driving higher full-priced selling, as well as lower input costs as we execute our supply chain initiatives as part of our operating profit improvement plan.

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

- decreased professional and consulting service costs of $10,731, primarily driven by lower costs associated with our proxy contest and related legal matters incurred during the prior period, as well as a one-time legal credit recognized during the current quarter;
- decreased impairment and depreciation charges of $2,084, primarily due to lower retail store-related impairments and depreciation for retail store closures completed in prior periods; and
- increased variable advertising, promotion and other operating expenses of $7,954, primarily due to higher marketing investment to drive sales for the HOKA and UGG brands, as well as higher variable related costs for our DTC operations.

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

| Income (loss) from operations | Three Months Ended December 31, 2018 Amount | 2017 Amount | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| UGG brand wholesale | $141,080 | $125,381 | $15,699 | 12.5% |
| HOKA brand wholesale | 8,791 | 176 | 8,615 | 4,894.9 |
| Teva brand wholesale | 1,685 | 762 | 923 | 121.1 |
| Sanuk brand wholesale | (635) | (350) | (285) | (81.4) |
| Other brands wholesale | 4,513 | 1,672 | 2,841 | 169.9 |
| Direct-to-Consumer | 155,333 | 136,034 | 19,299 | 14.2 |
| Unallocated overhead costs | (66,049) | (70,484) | 4,435 | 6.3 |
| **Total** | **$244,718** | **$193,191** | **$51,527** | **26.7%** |

The increase in total income from operations, compared to the prior period, was driven by higher sales at higher gross margins, as well as lower overall SG&A expenses. Drivers for significant changes in income from operations were as follows:

- The increase in income from operations of UGG and HOKA brand wholesale was due to higher sales at higher gross margins, partially offset by higher SG&A expenses, primarily driven by higher variable marketing expenses.
- The increase in income from operations of Other brands wholesale was due to higher sales at higher gross margins.
- The increase in income from operations of DTC was primarily due to higher sales at higher gross margins, as well as lower overall retail store operating costs driven by store closures completed in prior periods, including related impairments and depreciation costs, partially offset by higher warehouse expenses driven by higher sales.
- The decrease in unallocated overhead costs was primarily due to lower professional and consulting service costs associated with our proxy contest and related legal matters incurred during the prior period, as well as a one-time legal credit recognized during the current quarter, partially offset by changes in foreign currency exchange rates for Canadian, European, and Asian currencies, higher variable performance-based compensation, and higher warehouse-related expenses associated with the Moreno Valley warehouse and distribution center expansion.

***Other Expense, Net.*** The decrease in total other expense, net, compared to the prior period, was primarily due to a decrease in interest expense due to lower average debt balances and an increase in interest income driven by higher interest rate yields on higher average invested cash balances.

***Income Taxes.*** Income tax expense and our effective income tax rate were as follows:

|  | Three Months Ended December 31, 2018 | 2017 |
| --- | ---: | ---: |
| Income tax expense | $48,293 | $106,712 |
| Effective income tax rate | 19.7% | 55.3% |

The decrease in our effective income tax rate was due to the impacts of the enactment of the Tax Reform Act on December 22, 2017, as well as a change in the jurisdictional mix of worldwide income before income taxes forecasted for the fiscal year ending March 31, 2019, further reduced by $2,218 net discrete tax benefits related to vesting of stock compensation awards, tax adjustments resulting from the filing of prior fiscal year tax returns, and release of income tax reserves.

Foreign income before income taxes was $83,386 and $95,053 and worldwide income before income taxes was $244,667 and $193,053 during the three months ended December 31, 2018 and 2017, respectively. The decrease in foreign income before income taxes, as a percentage of worldwide income before income taxes, was primarily due to decreased foreign gross margin relative to worldwide gross margin improvement compared to the prior period, as well as increased foreign operating expense as a percentage of sales relative to decreased worldwide operating expense as a percentage of sales compared to the prior period.

Refer to the section entitled "Nine Months Ended December 31, 2018 Compared to Nine Months Ended December 31, 2017" within this Part I, Item 2, for further details on our pre-tax earnings, effective tax rate for the fiscal year ending March 31, 2019, and the reduction to the US federal income tax rate. For further details on the impacts of the Tax Reform Act, refer to Note 5, "Income Taxes," of our condensed consolidated financial statements in Part I, Item 1 within this Quarterly Report.

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

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

### Nine Months Ended December 31, 2018 Compared to Nine Months Ended December 31, 2017

The following table summarizes our results of operations:

|  | Nine Months Ended December 31, 2018 Amount% |  | 2017 Amount% |  | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $1,626,307 | 100.0% | $1,502,655 | 100.0% | $123,652 | 8.2% |
| Cost of sales | 789,362 | 48.5 | 763,442 | 50.8 | (25,920) | (3.4) |
| Gross profit | 836,945 | 51.5 | 739,213 | 49.2 | 97,732 | 13.2 |
| Selling, general and administrative expenses | 541,229 | 33.3 | 534,923 | 35.6 | (6,306) | (1.2) |
| Income from operations | 295,716 | 18.2 | 204,290 | 13.6 | 91,426 | 44.8 |
| Other expense, net | 325 |  | 1,503 | 0.1 | 1,178 | 78.4 |
| Income before income taxes | 295,391 | 18.2 | 202,787 | 13.5 | 92,604 | 45.7 |
| Income tax expense | 55,052 | 3.4 | 109,008 | 7.3 | 53,956 | 49.5 |
| Net income | $240,339 | 14.8% | $93,779 | 6.2% | $146,560 | 156.3% |

***Net Sales.*** The following table summarizes our net sales by location and our net sales by brand and channel:

| Net sales by location | Nine Months Ended December 31, 2018 Amount | 2017 Amount | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| US | $1,026,315 | $925,040 | $101,275 | 10.9% |
| International | 599,992 | 577,615 | 22,377 | 3.9 |
| **Total** | **$1,626,307** | **$1,502,655** | **$123,652** | **8.2%** |
| **Net sales by brand and channel** |  |  |  |  |
| UGG brand |  |  |  |  |
| Wholesale | $788,981 | $751,057 | $37,924 | 5.0% |
| Direct-to-Consumer | 504,871 | 498,697 | 6,174 | 1.2 |
| Total | 1,293,852 | 1,249,754 | 44,098 | 3.5 |
| HOKA brand |  |  |  |  |
| Wholesale | 129,758 | 88,470 | 41,288 | 46.7 |
| Direct-to-Consumer | 26,259 | 14,588 | 11,671 | 80.0 |
| Total | 156,017 | 103,058 | 52,959 | 51.4 |
| Teva brand |  |  |  |  |
| Wholesale | 69,161 | 65,006 | 4,155 | 6.4 |
| Direct-to-Consumer | 15,315 | 13,588 | 1,727 | 12.7 |
| Total | 84,476 | 78,594 | 5,882 | 7.5 |
| Sanuk brand |  |  |  |  |
| Wholesale | 40,608 | 44,673 | (4,065) | (9.1) |
| Direct-to-Consumer | 10,537 | 10,605 | (68) | (0.6) |
| Total | 51,145 | 55,278 | (4,133) | (7.5) |
| Other brands |  |  |  |  |
| Wholesale | 39,404 | 15,282 | 24,122 | 157.8 |
| Direct-to-Consumer | 1,413 | 689 | 724 | 105.1 |
| Total | 40,817 | 15,971 | 24,846 | 155.6 |
| **Total** | **$1,626,307** | **$1,502,655** | **$123,652** | **8.2%** |

37

|  | Nine Months Ended December 31, 2018 Amount | 2017 Amount | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Total Wholesale | $1,067,912 | $964,488 | $103,424 | 10.7% |
| Total Direct-to-Consumer | 558,395 | 538,167 | 20,228 | 3.8 |
| **Total** | **$1,626,307** | **$1,502,655** | **$123,652** | **8.2%** |

Consolidated net sales increased primarily due to higher UGG, HOKA, and Other brand wholesale sales. Further, we experienced an increase in total volume of pairs sold of 12.6% to 26,800 compared to 23,800 during the prior period. On a constant currency basis, net sales increased 7.6%, compared to the prior period. Drivers for significant changes in net sales were as follows:

- Wholesale net sales of our UGG brand increased due to a higher volume of pairs sold, partially offset by a lower WASPP, driven by growth in our UGG Men's business and non-Classic styles in UGG Women's, a shift in product mix as a result of our UGG Classics franchise allocation, as well as selling of our summer and spring product lines. On a constant currency basis, wholesale net sales of our UGG brand increased 3.9% compared to the prior period.
- Wholesale net sales of our HOKA brand increased due to a higher volume of pairs sold driven by its continued global growth, primarily in the US and Europe, as well as additional sales generated by updates to key franchises, compared to the prior period.
- Wholesale net sales of our Teva brand increased due to a higher volume of pairs sold driven by product mix and a higher WASPP, primarily driven by higher prices on fewer closeouts.
- Wholesale net sales of our Sanuk brand decreased due to a lower WASPP, as well as a lower volume of pairs sold, primarily driven by lower performance in the domestic surf specialty channel and lower international sales in connection with our strategic focus on US markets.
- Wholesale net sales of our Other brands increased due to a higher volume of pairs sold driven by continued growth in the US family value channel for the Koolaburra brand, partially offset by a lower WASPP due to product and customer mix.
- DTC net sales increased 3.8% primarily due to a higher volume of pairs sold, primarily driven by the HOKA, Teva and Other brands, compared to the prior period. Comparable DTC net sales for the 39 weeks ended December 30, 2018 increased 2.6% compared to the same period during fiscal year 2018. The increase in comparable DTC net sales was due to growth in our E-Commerce business primarily for the UGG and HOKA brands. In addition, we experienced a lower deferral of in transit sales as part of a change in accounting policy for the adoption of the new revenue standard (refer to the section entitled "Critical Accounting Policies and Estimates" within this Part I, Item 2, for further information).
- International sales, which are included in the reportable operating segment sales presented above, increased by 3.9% compared to the prior period. International sales represented 36.9% and 38.4% of total net sales for the nine months ended December 31, 2018 and 2017, respectively. The increase was primarily due to higher sales for the HOKA and Teva brands in Europe and Asia.

***Gross Profit.*** Gross margin increased to 51.5% from 49.2% in the prior period due to lower input costs as we execute our supply chain initiatives as part of our operating profit improvement plan, lower air-freight costs for our domestic wholesale business, fewer closeout sales driving higher full-priced selling, and favorable foreign currency exchange rate fluctuations.

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

- increased variable advertising, promotion and other operating expenses of $10,155, primarily due to higher marketing investment to drive sales for the HOKA and UGG brands, as well as higher variable related costs for our DTC operations;
- increased foreign currency-related losses of $6,782 driven by changes in foreign currency exchange rates for Canadian, Asian, and European currencies;
- increased compensation costs of $6,762, primarily due to higher accruals for variable performance-based compensation and higher global headcount, partially offset by consulting costs related to the strategic review process in the prior period;
- decreased professional and consulting service costs of $12,427, primarily driven by lower costs associated with our proxy contest and related legal matters incurred during the prior period, as well as a one-time legal credit recognized during the current quarter; and
- decreased impairment and depreciation charges of approximately $5,067, primarily due to lower retail store-related impairments and depreciation for retail store closures completed in prior periods.

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

| Income (loss) from operations | Nine Months Ended December 31, 2018 Amount | 2017 Amount | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| UGG brand wholesale | $280,978 | $241,578 | $39,400 | 16.3% |
| HOKA brand wholesale | 22,689 | 8,984 | 13,705 | 152.5 |
| Teva brand wholesale | 11,596 | 7,621 | 3,975 | 52.2 |
| Sanuk brand wholesale | 3,856 | 5,295 | (1,439) | (27.2) |
| Other brands wholesale | 10,150 | 1,933 | 8,217 | 425.1 |
| Direct-to-Consumer | 150,884 | 120,529 | 30,355 | 25.2 |
| Unallocated overhead costs | (184,437) | (181,650) | (2,787) | (1.5) |
| **Total** | **$295,716** | **$204,290** | **$91,426** | **44.8%** |

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

- The increase in income from operations of UGG, HOKA, Other and Teva brand wholesale was due to higher sales at higher gross margins, partially offset by higher SG&A expenses, primarily driven by higher marketing and selling expenses.
- The decrease in income from operations of Sanuk brand wholesale was primarily due to lower sales, partially offset by higher gross margins.
- The increase in income from operations of DTC was primarily due to higher sales at higher gross margins, as well as lower overall retail store operating costs driven by store closures completed in prior periods, including related impairments and depreciation costs, partially offset by higher warehouse expenses driven by higher sales.
- The increase in unallocated overhead costs was primarily due to changes in foreign currency exchange rates for Canadian, Asian, and European currencies, higher variable performance-based compensation, and higher warehouse-related expenses associated with the Moreno Valley warehouse and distribution center expansion, partially offset by lower professional and consulting service costs associated with

our proxy contest and related legal matters incurred during the prior period, as well as a one-time legal credit recognized in the current quarter.

***Other Expense, Net.*** The decrease in total other expense, net, compared to the prior period, was primarily due to an increase in interest income driven by higher interest rate yields and higher average invested cash balances, partially offset by the write-off of unamortized debt issuance costs associated with the refinancing of our Prior Credit Agreement.

***Income Taxes.*** Income tax expense and our effective income tax rate were as follows:

|  | Nine Months Ended December 31, 2018 | 2017 |
| --- | ---: | ---: |
| Income tax expense | $55,052 | $109,008 |
| Effective income tax rate | 18.6% | 53.8% |

The decrease in our effective income tax rate was due to the impacts of the enactment of the Tax Reform Act on December 22, 2017, as well as a change in the jurisdictional mix of worldwide income before income taxes forecasted for the fiscal year ending March 31, 2019, further reduced by $5,861 net discrete tax benefits related to vesting of stock compensation awards, tax adjustments resulting from the filing of prior fiscal year tax returns, and release of income tax reserves. The Tax Reform Act reduced the US federal income tax rate from 35.0% to 21.0% and our foreign earnings are now subject to US taxation as they are considered global intangible low-taxed income.

Foreign income before income taxes was $130,867 and $133,826 and worldwide income before income taxes was $295,391 and $202,787 during the nine months ended December 31, 2018 and 2017, respectively. The decrease in foreign income before income taxes, as a percentage of worldwide income before income taxes, was primarily due to flat foreign gross margin improvement relative to higher worldwide gross margin compared to the prior period, as well as increased foreign operating expense as a percentage of sales relative to decreased worldwide operating expense as a percentage of sales compared to the prior period.

For the nine months ended December 31, 2018 and 2017, we did not generate significant pre-tax earnings from any countries which do not impose a corporate income tax. As of December 31, 2018, we had $304,855 of cash and cash equivalents outside the US, a portion of which may be subject to additional foreign withholding taxes if it were to be repatriated. Due to the effective date of certain provisions under the Tax Reform Act, we have not recognized the one-time mandatory deemed repatriation tax with respect to a small portion of our unremitted earnings of non-US subsidiaries, as a result of which such earnings are currently expected to be reinvested outside of the US indefinitely. Such earnings would become taxable upon repatriation by means of the remittance of taxable dividends or upon the sale or liquidation of these subsidiaries.

We expect our foreign income or loss before income taxes, as well as our effective tax rate, will continue to fluctuate from period to period based on several factors, including the outcome of our retail store and fleet optimization, the impact of our cost savings initiatives, the impact of our global product sourcing organization, our actual financial and operating results from sales generated in domestic and foreign markets, and changes in domestic and foreign tax laws (or in the application or interpretation of those laws). In particular, we believe the continuing evolution and expansion of our brands, our continuing strategy of enhancing product diversification, and the expected growth from our international DTC business will result in increases in foreign income or loss before income taxes both in absolute terms and as a percentage of worldwide income or loss before income taxes. In addition, we believe our effective tax rate will continue to be impacted by our actual foreign income or loss before income taxes relative to our actual worldwide income or loss before income taxes. For further information on the impacts of the Tax Reform Act, refer to Note 5, "Income Taxes," of our condensed consolidated financial statements in Part I, Item 1 within this Quarterly Report.

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

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

### Liquidity

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

We repatriated $250,000 of cash and cash equivalents during the fiscal year ended March 31, 2018. As of December 31, 2018, we had $304,855 of cash and cash equivalents outside the US, a portion of which may be subject to additional foreign withholding taxes if it were to be repatriated. We anticipate repatriating current and future unremitted earnings of non-US subsidiaries, to the extent they will be subject to US tax, as long as such cash is not required to fund ongoing foreign operations.

We continue to evaluate our capital allocation strategy and consider further opportunities to put global cash to use in a way that will profitably grow our business and drive stockholder value, including by repurchasing our stock. Our Board of Directors has authorized Stock Repurchase Programs pursuant to which we have the authority to repurchase our common stock. Most recently, in January 2019, our Board of Directors approved a new $261,000 stock repurchase program, increasing our aggregate remaining approved amount under our Stock Repurchase Programs to $350,212. Our Stock Repurchase Programs do not obligate us to acquire any particular amount of common stock and may be suspended at any time at our discretion. Refer to the section entitled "Unregistered Sales of Equity Securities and Use of Proceeds," in Part II, Item 2, within this Quarterly Report for further information on our stock repurchase programs.

Our cash repatriation strategy, and by extension, our liquidity, may be impacted by a number of additional considerations, which include clarifications of or changes to the Tax Reform Act, including the issuance of final regulations, timing and amount of any additional tax liabilities relating to the Tax Reform Act, additional accounting or regulatory guidance, our ongoing analysis, which may result in changes to various assumptions underlying the estimates, and our actual earnings for current and future fiscal periods. Our liquidity may be further impacted by additional factors, including our operating results, brand perception, unexpected weather conditions, our ability to respond to changes in consumer preferences, collect our receivables in a timely manner and effectively manage our inventories. Furthermore, we may require additional cash resources due to changing business conditions, economic recession, changes in share repurchase strategy, or other future developments, including any investments or acquisitions we may decide to pursue, although we do not have any present commitments with respect to any acquisitions.

If our existing sources of liquidity are insufficient to satisfy our working capital requirements, we may seek to borrow under our existing borrowing arrangements, seek new borrowing arrangements, or sell additional debt or equity securities. The sale of convertible debt or equity securities could result in additional dilution to our stockholders, and equity securities may have rights or preferences that are superior to those of our existing stockholders. The incurrence of additional indebtedness would result in additional debt service obligations that could result in operating and financial covenants that would restrict our operations and could further encumber our assets. In addition, there can be no assurance that any additional financing will be available on acceptable terms, if at all.

### Capital Resources

***Primary Credit Facility.*** In September 2018, we refinanced our Prior Credit Agreement and entered into a new Credit Agreement which provides for a five-year, $400,000 unsecured revolving credit facility, and contains a $25,000 sublimit for the issuance of letters of credit. As of December 31, 2018 and through February 1, 2019, we had no outstanding balance, outstanding letters of credit of $549, and available borrowings of $399,451 under our Primary Credit Facility.

***China Credit Facility.*** Our China Credit Facility is an uncommitted revolving line of credit of up to CNY 300,000, or $43,613. As of December 31, 2018 and through February 1, 2019, we had no outstanding balance and available borrowings of $43,613 under our China Credit Facility.

***Japan Credit Facility.*** Our Japan Credit Facility is an uncommitted revolving line of credit of up to JPY 5,500,000, or $49,988. As of December 31, 2018 and through February 1, 2019, we had no outstanding balance and available borrowings of $49,988 under our Japan Credit Facility.

***Mortgage.*** As of December 31, 2018, we had an outstanding principal balance under the mortgage secured by our corporate headquarters property of $31,656. The loan will mature and require a balloon payment in the amount of $23,700, in addition to any then-outstanding balance, on July 1, 2029.

***Debt Covenants.*** As of December 31, 2018, we were in compliance with all debt covenants under our revolving credit facilities and our mortgage.

Refer to Note 6, "Revolving Credit Facilities and Mortgage Payable," of our condensed consolidated financial statements in Part I, Item 1 within this Quarterly Report for further information on the refinancing and related terms of our Primary Credit Facility, as well as our other revolving credit facilities and mortgage.

### Cash Flows

The following table summarizes our cash flows:

|  | Nine Months Ended December 31, 2018 Amount | 2017 Amount | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Net cash provided by operating activities | $279,740 | $253,096 | $26,644 | 10.5% |
| Net cash used in investing activities | (21,764) | (21,402) | (362) | (1.7) |
| Net cash used in financing activities | (167,158) | (32,592) | (134,566) | (412.9) |

***Operating Activities.*** Our primary source of liquidity is net cash provided by operating activities, which is primarily driven by our net income or loss, other cash receipts and expenditure adjustments and changes in working capital.

The increase in net cash provided by operating activities during the nine months ended December 31, 2018, compared to the prior period, was due to the positive net change in net income after non-cash adjustments of $131,376, partially offset by a net negative change in operating assets and liabilities of $104,732. The changes in operating assets and liabilities were primarily due to net negative impacts for long-term liabilities, accrued expenses and trade accounts receivable, partially offset by inventories.

***Investing Activities.*** Net cash used in investing activities was relatively flat during the nine months ended December 31, 2018, compared to the prior period. For the remainder of the fiscal year ending March 31, 2019, we estimate capital expenditures will range from approximately $8,000 to $10,000. We anticipate these expenditures will primarily relate to the build-out of our distribution facilities, IT infrastructure, and system improvement costs, as well as fixtures and upgrade costs for certain retail stores in the US and Asia. However, the actual amount of our future capital expenditures may differ significantly from this estimate depending on the timing of facility build-outs, as well as unforeseen needs to replace existing assets, and the timing of other unanticipated expenditures.

***Financing Activities.*** The increase in net cash used in financing activities during the nine months ended December 31, 2018 was primarily due to higher stock repurchases of $136,708 compared to the prior period. Refer to Note 10, "Stockholders' Equity," of our condensed consolidated financial statements in Part I, Item 1 within this Quarterly Report for further information on our stock repurchase programs.

### Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

### Contractual Obligations

During the nine months ended December 31, 2018, there were no material changes to the obligations reported in our 2018 Annual Report with respect to (1) operating lease commitments, (2) purchase obligations for product, (3) purchase obligations for raw materials, and (4) future capital expenditures, commitments under service contracts, or contractual requirements to pay promotional expenses.

### Critical Accounting Policies and Estimates

Management must make certain estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements, based upon historical experience, existing and known circumstances, authoritative accounting pronouncements and other factors that management believes to be reasonable, but actual results could differ materially from these estimates.

There have been no material changes to our critical accounting policies since those reported in our 2018 Annual Report, with the exception of the adoption of the new revenue standard beginning April 1, 2018. The new revenue standard was adopted using the modified retrospective transition method, which is effectively a prospective change in accounting policy, and the comparative condensed consolidated financial statements have not been adjusted and continue to be reported under legacy US GAAP. The changes in our accounting policy for the adoption of the new revenue standard and the impacts on our condensed consolidated financial statements are as follows:

- *Deferral of In Transit Net Sales.* Prior to adoption of the new revenue standard, we deferred recognition of revenue for certain wholesale and E-Commerce sales arrangements until the product was delivered. However, we now recognize revenue for these arrangements upon shipment of product, rather than delivery. As a result, on adoption of the new revenue standard, we recorded a cumulative effect adjustment net after tax increase to opening retained earnings of approximately $1,000 in our condensed consolidated balance sheets. In addition, this change in accounting policy significantly impacted the comparative reporting periods for the three and nine months ended December 31, 2017. Net sales recorded for the three and nine months ended December 31, 2017 reflect a deferral of in transit net sales of approximately $12,000, primarily in our DTC reportable operating segment, for which we did not recognize a deferral for in transit net sales during the three and nine months ended December 31, 2018, in accordance with this change in accounting policy. However, we did adjust the prior reporting period to conform to the current fiscal year presentation and accounting policy change for our Non-GAAP measure for comparable DTC sales, as discussed in the "Non-GAAP Measures" section within this Part I, Item 2.
- *Allowance for Sales Returns.* We historically recorded a trade accounts receivable allowance for sales returns (allowance for sales returns) related to our wholesale channel sales, and the cost of sales for the product-related inventory was recorded in inventories, net of reserves, in our condensed consolidated balance sheets. As of March 31, 2018, we recorded an allowance for sales returns for the wholesale channel of $20,848 and product-related inventory for all channels of $11,251 in our condensed consolidated balance sheets. On adoption of the new revenue standard, we reclassified the allowance for sales returns for the wholesale channel to other accrued expenses and the product-related inventory for all channels to other current assets in our condensed consolidated balance sheets. For the DTC channel, the allowance for sales returns was recorded in other accrued expenses, which is consistent with the prior period presented.

Refer to the section entitled "Recent Accounting Pronouncements" within Note 1, "General," and Note 2, "Revenue Recognition," of our condensed consolidated financial statements in Part I, Item 1 within this Quarterly Report for further information.

## Market risk

As filed, 4,536 characters.

### Commodity Price Risk

We purchase certain materials that are affected by commodity prices, the most significant of which are leather, sheepskin, and wool. The supply of these materials, which are used in certain of our products, are in high demand and we need to be able to identify suppliers that meet our expectations for the quantity and quality required. There have historically been changes in the prices of these materials, including significant changes in the price of sheepskin which has stabilized in recent years. We fix prices for all of our materials with firm pricing agreements on a seasonal basis. For sheepskin and leather, we use purchasing contracts and refundable deposits to attempt to manage price volatility as an alternative to hedging commodity prices. The purchasing contracts and any pricing arrangements we now use for sheepskin and leather, or may use for other materials in the future, may result in purchase obligations which are not reflected in our condensed consolidated balance sheets. With respect to sheepskin and leather, in the event of significant commodity price increases, we will likely not be able to adjust our selling prices sufficiently to eliminate the impact of such increases on our operating margins.

### Foreign Currency Exchange Rate Risk

Fluctuations in currency exchange rates, primarily between the US dollar and the currencies of Europe, Asia, Canada, and Latin America where we operate, may affect our results of operations, financial position and cash flows. We face market risk to the extent that foreign currency exchange rate fluctuations affect our foreign assets, liabilities, revenues, and expenses. Although the majority of our sales and inventory purchases are denominated in US currency, these sales and inventory purchases may be impacted by fluctuations in the exchange rates between the US dollar and local currencies in the international markets where our products are sold and manufactured. We are exposed to financial statement transaction gains and losses as a result of re-measuring the financial positions held in foreign currencies into US dollars for subsidiaries that are US dollar functional and those held in US dollars and foreign currencies into the functional currency of subsidiaries that are non-US dollar functional. We re-measure monetary assets and liabilities denominated in foreign currencies into US dollars using the exchange rate as of the end of the reporting period. Gains and losses resulting from translating assets and liabilities from our subsidiaries' functional currencies to US dollars are recognized in other comprehensive income or loss. Foreign currency exchange rate fluctuations affect our reported profits and can distort comparisons from year to year.

We hedge certain foreign currency exchange rate risk from existing assets and liabilities. As our international operations grow and we increase purchases and sales in foreign currencies, we will continue to evaluate our hedging policy and may utilize additional derivative instruments, as needed, to hedge our foreign currency exchange rate risk. We do not use foreign currency exchange rate forward contracts for trading purposes. As of December 31, 2018, a hypothetical 10.0% foreign currency exchange rate fluctuation would have caused the fair value of our derivative instruments to increase or decrease by approximately $1,000. Sensitivity analyses do not consider the actions we may take to mitigate our exposure to fluctuations, nor do they consider the effect such hypothetical fluctuations may have on overall economic activity.

During the nine months ended December 31, 2018 and at February 1, 2019, there were no factors that we would expect to result in a material change in the general nature of our primary market risk exposure, including the categories of market risk to which we are exposed and the particular markets that present the primary risk of loss.

### Interest Rate Risk

Our market risk exposure with respect to our revolving credit facilities is tied to changes in applicable interest rates, including ABR, the federal funds effective rate, currency specific LIBOR, and CDOR for our Primary Credit Facility, PBOC market rate for our China Credit Facility, and TIBOR for our Japan Credit Facility. A hypothetical 1.0% increase in interest rates for borrowings made under our Primary Credit Facility and China Credit Facility would have resulted in an aggregate increase to interest expense of $179 during the nine months ended December 31, 2018.

## Controls and procedures

As filed, 3,576 characters.

### a) Disclosure Controls and Procedures

We maintain a system of disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act), which are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours is designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Under the supervision and with the participation of management, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2018. Based on that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2018.

### b) Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the nine months ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

### c) Principal Executive Officer and Principal Financial and Accounting Officer Certifications

The certifications of our Principal Executive Officer and Principal Financial and Accounting Officer required by Rule 13a-14(a) of the Exchange Act are filed herewith as Exhibit 31.1 and Exhibit 31.2, and furnished as Exhibit 32, to this Quarterly Report. This Part I, Item 4, should be read in conjunction with such certifications for a more complete understanding of the topics presented.

### PART II. OTHER INFORMATION

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

Unless otherwise indicated, all dollar amounts herein are expressed in thousands, except per share data.

## Risk factors

As filed, 6,651 characters.

An investment in our common stock involves risks. Before making an investment decision, you should carefully consider all of the information within this Quarterly Report, including Part I, Item 1 in the section entitled “Cautionary Note Regarding Forward-Looking Statements,” of our unaudited condensed consolidated financial statements and accompanying notes thereto and Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. In addition, you should carefully consider the risks and uncertainties described in the section entitled “Risk Factors” in Part I, Item 1A of our 2018 Annual Report on Form 10-K (2018 Annual Report), as well as in our other public filings with the Securities and Exchange Commission. If any of the identified risks are realized, our business, financial condition, operating results, and prospects could be materially and adversely affected. In that case, the trading price of our common stock may decline, and you could lose all or part of your investment. In addition, other risks of which we are currently unaware, or which we do not currently view as material, could have a material adverse effect on our business, financial condition, operating results, and prospects.

During the nine months ended December 31, 2018, there were no material changes to the risks and uncertainties disclosed in our 2018 Annual Report, but we have expanded on the below risk factor due to recent macro-economic developments.

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

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

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

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

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

Trade relations between our sourcing venues (particularly China) and the US has created uncertainty for all US businesses that source or market in China. Since March 2018, the US has imposed import duties ranging from 5% to 25% on imports from China, which has caused China to retaliate with additional tariffs on US exports. Thus far, the footwear products we source in China have not been included in any of the US tariff lists, however, the President of the US has threatened another list which would include all remaining imports from China, including all footwear, apparel and accessories that we import from China. Whether that threatened list will be issued, and if so, what tariff would be assigned is unknown. However, any additional tariff could increase the cost of sourcing in China, our own margins, and possibly the price of our products to consumers. Previously, we had begun transitioning our sourcing of footwear from China to Vietnam as part of our supplier optimization strategy. If we are unable to source our products from the countries where we wish to purchase them, either because of such regulatory changes or for any other reason, or if the cost of doing so increases, it could have a material adverse effect on our business, financial condition and results of operations.

Transportation and distribution costs may be adversely impacted by ongoing economic changes, and new regulations. The International Maritime Organization has announced a mandate, effective January 1, 2020, requiring ocean-going container vessels of the type typically used to carry our imports to utilize “low sulfur” fuel, in order to reduce emissions and address climate change. This mandate will increase the cost of ocean transport globally, with surcharges already announced by the carriers, including on routes bringing our products from our source venues to consumer markets. Mergers of international ocean carriers may lead to increased freight rates. A number of size, capacity, and shortage issues at marine ports continue to contribute to congestion at the terminals. In the US, trucking costs have risen dramatically due to increased demand, driver shortages and wage escalation, as well as new federal and state safety, environmental and labor regulations. This in turn can disrupt our supply chain and may cause delay and significant additional costs.

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

Filed Feb 7, 2019.
Source: SEC EDGAR, the filing index for accession 0000910521-19-000003. Last ingested by Listed: Oct 29, 2026, 13:00 ET. No prices; not investment advice.