Crocs, Inc.: Form 10-Q for the period ended Jun 30, 2020

Business Overview

Crocs, Inc. and our consolidated subsidiaries (collectively the “Company,” “Crocs,” “we,” “us,” or “our”) are engaged in the design, development, worldwide marketing, distribution, and sale of casual lifestyle footwear and accessories for men, women, and children. We strive to be the world leader in innovative casual footwear for women, men, and children, combining comfort and style with a value that consumers want. The vast majority of shoes within our collection contain Croslite™ material, a proprietary, molded footwear technology, delivering extraordinary comfort with each step.

Known or Anticipated Trends

Based on our recent operating results and current perspectives on our operating environment, we anticipate certain trends will continue to impact our operating results:

• COVID-19 has impacted our business globally, including through store closures or reduced operating hours and decreased retail traffic. Most of the 360 company-operated stores were closed for some period during the second quarter, as well as many partner and wholesale stores. As of June 30, 2020, 98% of our company-operated stores were open. Additional detail on company-operated stores by region is below.
• Americas. Our company-operated stores closed in mid-March and started to reopen in mid-May. Currently, the majority of our stores in the United States are open.
• Asia. Outside of China and Korea, most of our company-operated stores were closed for the majority of the quarter.
• EMEA. Our company-operated stores in Western Europe closed in mid-April and reopened in mid-May, while stores in Russia closed in early April and reopened in early June.
• While many brick-and-mortar stores were closed, Crocs.com and other digital commerce remained open. We saw strong sales in e-commerce as well as strong sell-through in e-tail and wholesale partner sites, as consumers migrated to online shopping. These strong growth rates have recently started to temper, and while digital penetration materially accelerated due to the crisis, we do not yet know if the recent growth in digital sales will continue at the same level.
• To ensure the well-being of our employees and customers, our corporate offices, retail stores, and distribution centers have implemented various elevated safety protocols, in accordance with local guidelines and regulations, including temperature checks, mandatory mask policies, social distancing, access to hand sanitizer, and enhanced cleaning of the facilities. Our corporate offices have also actively managed attendance levels on any given day in accordance with local guidelines and regulations, and many of our corporate employees have continued to successfully conduct business virtually.
• We expect to be cash flow positive for the remainder of 2020, barring any material, unforeseen changes in the pandemic or economic environment. We have continued to manage inventories by constraining incoming supply and focusing on core product, and we have continued working closely with both our customers and vendors to manage accounts receivable and accounts payable. At June 30, 2020, there were $275.0 million of borrowings outstanding on our credit facility after net repayments of $75.0 million during the second quarter. In July 2020, we repaid an additional $50.0 million of our outstanding debt on this facility. We also entered into two separate credit agreements in Asia in the second quarter of 2020, which provide for revolving credit facilities of up to 30.0 million RMB, or $4.2 million, and up to an equivalent of $5.0 million, respectively, but did not draw on either of facility during the second quarter or through July 30, 2020. Our borrowings may continue to fluctuate as we manage our liquidity needs. Finally, our share repurchases have remained temporarily suspended to preserve maximum liquidity and flexibility.

Use of Non-GAAP Financial Measures

In addition to financial measures presented on the basis of accounting principles generally accepted in the United States of America (“U.S. GAAP”), we present certain information related to our results of operations through “constant currency,” which is a non-GAAP financial measure and should be viewed as a supplement to our results of operations and presentation of reportable segments under U.S. GAAP. Constant currency represents current period results that have been retranslated using prior year average foreign exchange rates for the comparative period to enhance the visibility of the underlying business trends excluding the impact of foreign currency exchange rates on reported amounts.

Management uses constant currency to assist in comparing business trends from period to period on a consistent basis in communications with the Board of Directors, stockholders, analysts, and investors concerning our financial performance. We believe constant currency is useful to investors and other users of our condensed consolidated financial statements as an additional tool to evaluate operating performance and trends. Investors should not consider constant currency in isolation from, or as a substitute for, financial information prepared in accordance with U.S. GAAP.

Second Quarter 2020 Financial and Operational Highlights

Revenues were $331.5 million for the second quarter of 2020, a 7.6% decrease compared to the second quarter of 2019. The decrease was due to the net effects of: (i) lower unit sales volumes, which decreased revenues by $47.2 million, or 13.2%, driven by the COVID-19 pandemic; (ii) higher average selling prices, driven by reduced promotions, higher pricing, shifts in channel mix, and increased sales of charms per shoe, increased revenues by $25.8 million, or 7.2%; and (iii) unfavorable changes in exchange rates, which decreased revenues by $5.9 million, or 1.6%.

The following were significant developments affecting our businesses and capital structure during the three months ended June 30, 2020:

• During the second quarter of 2020, we opened our new global headquarters in Broomfield, Colorado, less than 20 miles outside of downtown Denver, and entered into a lease, which we expect to commence in the third quarter of 2020, for a new distribution center adjacent to our existing facility in Dayton, Ohio, which will be dedicated to e-commerce fulfillment and will significantly increase our distribution capacity in our Americas segment.
• We sold 16.3 million pairs of shoes worldwide, a decrease from 19.0 million pairs in the second quarter of 2019.
• Global e-commerce revenue increased by 67.7%, with strong performance across all three operating segments.
• Gross margin was 54.3%, an increase of 150 basis points from last year’s second quarter, as a result of product mix, higher prices on certain product, and lower levels of promotions and discounts.
• SG&A was $123.3 million compared to $141.5 million in the second quarter of 2019. As a percent of revenues, SG&A decreased 220 basis points to 37.2% of revenues compared to 39.4% of revenues in the second quarter of 2019, as we reduced expenses during the pandemic. Despite these reductions, second quarter 2020 results included $13.0 million in charges resulting from COVID-19, including donations of inventory of $8.2 million, employee separation costs of $2.4 million, and bad debt expense of $1.7 million.
• Income from operations increased 18.3% to $56.6 million from $47.8 million in last year’s second quarter. Net income was $56.6 million, or $0.83 per diluted share, compared to $39.2 million, or $0.55 per diluted share, in last year’s second quarter.

Results of Operations

(in thousands, except per share, margin, and average selling price data)

(1) Changes for gross margin and operating margin are shown in basis points (“bp”).

Revenues By Channel

(in thousands)

(1) Reflects year over year change as if the current period results were in constant currency, which is a non-GAAP financial measure. See “Use of Non-GAAP Financial Measures” for more information.

The primary drivers of changes in revenue were:

(in thousands)

(1) The change due to price is based on the change in average selling price on a constant currency basis (“ASP”).

(in thousands)

(1) The change due to price is based on the change in ASP.

Revenues. The continued spread and presence of the COVID-19 pandemic in the three months ended June 30, 2020 led to global sales volumes decreases compared to the same period in 2019, as many retail locations, partner stores, and brick-and-mortar retailers remained closed for part of the quarter. Fluctuations in foreign currencies, most prominently in the Korean Won, Chinese Yuan, Euro, and Russian Ruble also contributed to decreased revenues. However, increased ASP contributed to revenue growth as a result of fewer promotions and discounts, higher pricing on certain products, channel mix, and increased sales of charms per shoe. Our continued success in the e-commerce channel, further bolstered by consumer migration to online shopping during the pandemic, also increased revenues with a 67.7% increase in the channel compared to the prior year.

In the six months ended June 30, 2020, revenue decreased as a result of lower volume, attributable to COVID-19, and negative currency changes, primarily in the Korean Won, Euro, Russian Ruble, and Brazilian Real. These decreases were offset in part by increases in ASP, primarily as a result of fewer promotions and discounts, price increases, and increased sales of charms per shoe.

Cost of sales. In the three months ended June 30, 2020, compared to the same period in 2019, cost of sales decreased due to lower volume of $17.8 million, or 10.5%, and negative foreign currency fluctuations of $2.7 million, or 1.6%, across all segments. Global average cost per unit on a constant currency basis (“AUC”) increased cost of sales by $2.6 million, or 1.5%, primarily as a result of an inventory write-off in our Asia Pacific segment in response to COVID-19.

In the six months ended June 30, 2020, compared to the same period in 2019, cost of sales decreased due to lower volume of $32.2 million, or 9.8%, and negative currency changes of $5.4 million, or 1.6%. Higher AUC partially offset these decreases by $8.3 million, or 2.5%, primarily due to higher costs as a result of changes in channel mix, purchasing power related to currency changes in our EMEA segment, and an inventory write-off in our Asia Pacific segment in response to COVID-19.

Gross profit. Gross margin in the three months ended June 30, 2020 was 54.3% compared to 52.8% in the same period in 2019, as a result of product mix, price increases, and fewer promotions and discounts. Gross profit decreased $9.4 million, or 5.0%, due to volume declines of $29.4 million, or 15.5%, and negative currency changes of $3.2 million, or 1.7%. Increases in ASP of $23.2 million, or 12.2%, partially offset these decreases.

Gross margin in the six months ended June 30, 2020 was 51.3% compared to 49.9% in 2019, due to product mix, price increases, and fewer promotions and discounts. Gross profit decreased $12.9 million, or 3.9%, as a result of lower volume of $43.0 million, or 13.1%, negative currency changes of $5.6 million, or 1.7%, while increases in ASP, partially offset by AUC, led to an increase in gross profit of $35.7 million, or 10.9%.

Selling, general and administrative expenses. SG&A decreased $18.2 million, or 12.9%, during the three months ended June 30, 2020 compared to the same period in 2019, primarily as a result of various cost savings measures taken in response to the COVID-19 pandemic. These included a reduction in compensation expense of $17.1 million, as a result of the temporary and permanent elimination of certain corporate and regional roles and a reduction in variable compensation, and a lower investment in marketing of $5.8 million. We also had decreased travel and related costs of $3.0 million as a result of the pandemic, decreased facilities costs of $2.8 million due to savings on variable rent at closed retail locations, and other net decreases in costs of $0.3 million. These decreases were partially offset by inventory donations to frontline healthcare workers and other organizations of $8.2 million and increases in bad debt expense of $2.6 million, primarily due to the impact of COVID-19 on distributors.

SG&A decreased $9.9 million, or 4.0%, during the six months ended June 30, 2020 compared to the same period in 2019, primarily as a result of various cost savings measures taken in response to COVID-19, including a reduction in compensation expense of $19.7 million due to the temporary and permanent elimination of certain roles and reduced variable compensation. We also had decreased facilities costs of $3.5 million, in part due to variable rent at closed retail stores, and decreased travel and related costs of $3.4 million, as a result of the pandemic. Partially offsetting these decreases were increases due to inventory donations of $9.9 million, bad debt expense of $5.5 million due to COVID-19 impacts on certain global distributors, and increases in other net costs of $1.3 million.

Foreign currency losses, net. Foreign currency losses, net, consist of realized and unrealized foreign currency gains and losses from the remeasurement and settlement of monetary assets and liabilities denominated in non-functional currencies as well as realized and unrealized gains and losses on foreign currency derivative instruments. During the three months ended June 30, 2020, we recognized realized and unrealized net foreign currency losses of $0.7 million, compared to losses of $0.3 million during the three months ended June 30, 2019. During the six months ended June 30, 2020, we recognized realized and unrealized net foreign currency losses of $0.9 million, compared to losses of $1.5 million during the six months ended June 30, 2019.

Income tax expense. During the three months ended June 30, 2020, income tax expense decreased $7.3 million compared to the same period in 2019. The effective tax rate for the three months ended June 30, 2020 was (3.4)% compared to an effective tax rate of 12.3% for the same period in 2019, a 15.7% decrease. The decrease in the effective rate was driven primarily by the utilization of deferred tax assets which were subject to a valuation allowance, tax expense recorded in profitable jurisdictions, and by operating losses in certain jurisdictions where we had determined that it is not more likely than not to realize the associated tax benefits. Our effective income tax rate, for each period presented, also differs from the federal U.S statutory rate primarily due to differences in income tax rates between U.S. and foreign jurisdictions, as well as utilization of deferred tax assets which were subject to a valuation allowance.

During the six months ended June 30, 2020, income tax expense decreased $5.3 million compared to the same period in 2019. The effective tax rate for the six months ended June 30, 2020 was 7.9% compared to an effective tax rate of 14.8% for the same period in 2019, a 6.9% decrease. This decrease in the effective rate was driven primarily by the utilization of deferred tax assets which were subject to a valuation allowance, tax expense recorded in profitable jurisdictions, and by operating losses in certain jurisdictions where we had determined that it is not more likely than not to realize the associated tax benefits. Our effective income tax rate, for each period presented, also differs from the federal U.S. statutory rate primarily due to differences in income tax rates between U.S. and foreign jurisdictions, as well as utilization of deferred tax assets which were subject to a valuation allowance.

Reportable Operating Segments

The following table sets forth information related to our reportable operating segments, including a comparison of revenues and operating income by segment:

(in thousands)

(1) Reflects year over year change as if the current period results were in constant currency, which is a non-GAAP financial measure. See “Use of Non-GAAP Financial Measures” for more information.

(2) Unallocated corporate and other includes corporate support and administrative functions, costs associated with share-based compensation, research and development, brand marketing, legal, and depreciation and amortization of corporate and other assets not allocated to operating segments.

The primary drivers of changes in revenues by operating segment were:

(in thousands)

(1) The change due to price for revenues is based on ASP, as defined earlier in this section.

(in thousands)

(1) The change due to price for revenues is based on ASP, as defined earlier in this section.

Americas Operating Segment

Revenues. The increase in Americas revenues in the three months ended June 30, 2020, compared to the same period in 2019, was primarily due to increased ASP in all channels, particularly as a result of less promotional activity, product mix, increased prices, and increased sales of charms per shoe, offset in part by decreased volume. Volume was down 53.8% in our retail channel, as our stores were closed for roughly half of the quarter as a result of the COVID-19 pandemic. Wholesale volume was down 14.3%, primarily driven by the closure of brick-and-mortar stores in South America as a result of COVID-19, offset in part by positive e-tailer growth. Increased e-commerce channel volume led to a 65.4% increase as our “A Free Pair for Healthcare” donation program drove online traffic and as customers continue to migrate shopping habits to digital commerce during the pandemic.

The increase in Americas revenues in the six months ended June 30, 2020, compared to the same period in 2019, was largely due to increased ASP from product mix, price increases, less promotional activity, and increased sales of charms per shoe, and increased volume in our e-commerce channel, offset in part by decreased volumes in our retail and wholesale channels and negative currency changes, primarily in the Brazilian Real.

Income from Operations. Income from operations for our Americas segment was $64.3 million for the three months ended June 30, 2020, an increase of $7.3 million, or 12.8%, compared to the same period in 2019. Gross profit increased $10.3 million, or 10.7%, in part due to an increase in ASP of $28.8 million, or 30.0%, due to less promotional activity, product mix, and increased prices, partially offset by an increase in distribution and logistics costs. Decreased volume of $18.2 million, or 19.0%, and negative currency changes of $0.3 million, or 0.3%, partially offset the increase in gross profit. The change in gross profit in our Americas segment is somewhat offset by higher unallocated distribution costs within ‘Other Businesses.’

SG&A for our Americas segment increased $3.0 million, or 7.6%, during the three months ended June 30, 2020 compared to the same period in 2019. This was primarily due to inventory donations to frontline healthcare workers associated with COVID-19 of $7.8 million, an increase in bad debt expense of $2.1 million, primarily due to the impact of COVID-19 on our distributors, and an increase of $2.7 million in marketing and information technology costs, primarily as a result of variable costs associated with the increase of revenues in our e-commerce channel. These increases were partially offset by a $7.1 million decrease in compensation expense, largely due to the temporary and permanent elimination of certain roles in response to COVID-19, and a $2.5 million decrease in other net costs.

Income from operations for our Americas segment was $110.9 million for the six months ended June 30, 2020, an increase of $20.4 million, or 22.5%, compared to the same period in 2019. Gross profit increased $25.6 million, or 15.7%, primarily due to increased ASP of $45.7 million, or 28.0%, due to less promotional activity, product mix, and increased prices, partially offset by an increase in distributions and logistics costs. Lower sales volumes of $19.4 million, or 11.9%, and a $0.7 million, or 0.4%, decrease as a result of negative currency changes somewhat offset the gross profit increase. The change in gross profit in our Americas segment is somewhat offset by higher unallocated distribution costs within ‘Other Businesses.’

SG&A for our Americas segment increased $5.2 million, or 7.2%, during the six months ended June 30, 2020 compared to the same period in 2019. This was primarily due to $8.3 million of inventory donations associated with COVID-19, an increase of $3.8 million in marketing and information technology costs, primarily as a result of variable costs associated with the increase of revenues in our e-commerce channel, and a $2.5 million increase in bad debt expense, primarily due to the impact of COVID-19 on our distributors. These increases were offset by a $6.5 million reduction in compensation expense, primarily due to the temporary and permanent elimination of certain roles in response to COVID-19, and other net cost reductions of $2.9 million.

Asia Pacific Operating Segment

Revenues. Asia Pacific revenues decreased in the three months ended June 30, 2020, compared to the same period in 2019. Sales volumes decreased as a result of the pandemic-related closure of partner and company-owned retail stores, which remained closed for the majority of the quarter. We also experienced a significant decline in our distributor markets, which are heavily reliant on tourism. Wholesale volume was down 48.8% and retail volume was down 21.0%. ASP decreased slightly, primarily due to lower e-commerce ASP as a result of increased promotional sales, mostly offset by increased sales of charms per shoe. These declines were offset in part by continued increases in e-commerce volume of 54.0% for the quarter due to an increase in online traffic as a result of the pandemic. The decrease was also driven by negative currency changes, primarily in the Korean Won and Chinese Yuan.

Asia Pacific revenues decreased in the six months ended June 30, 2020, compared to the same period in 2019, due to lower volumes in our wholesale channel of 39.6% and our retail channel of 22.2%, partially offset by higher volume in our e-commerce channel of 49.7%. Wholesale and retail volumes declined due to the pandemic-related closure of partner and company-owned retail stores, which remained closed for the majority of the second quarter outside of China and Korea, while e-commerce volume increased as a result of consumer shift to digital commerce during the pandemic. ASP decreased, primarily due to lower e-commerce ASP as a result of increased promotional sales, partially offset by increased sales of charms per shoe. Negative currency impacts also contributed to the decline in revenues.

Income from Operations. Income from operations for the Asia Pacific segment was $16.3 million for the three months ended June 30, 2020, a decrease of $11.8 million, or 41.9%, compared to the same period in 2019. Gross profit decreased by $14.7 million, or 22.7%, as a result of lower volumes of $7.5 million, or 11.7%, primarily in our wholesale and retail channels, partially offset by higher volume in e-commerce. Higher AUC as a result of higher distribution costs in Japan, higher freight rates in Japan and Korea, and an inventory write-off of $2.4 million as a result of the impact of COVID-19 contributed to a gross profit decrease of $5.6 million, or 8.6%, while currency continued to negatively impact gross margin by $1.6 million, or 2.4%.

SG&A for our Asia Pacific segment decreased $2.9 million, or 7.8%, during the three months ended June 30, 2020 compared to the same period in 2019, due to a $1.7 million decrease in facilities expense, primarily related to savings on variable rent at closed retail locations, a $1.0 million reduction in compensation expense due to the temporary and permanent elimination of certain roles in response to COVID-19, and other decreases in net costs of $0.2 million.

Income from operations for the Asia Pacific segment was $25.7 million for the six months ended June 30, 2020, a decrease of $29.0 million, or 53.0%, compared to the same period in 2019. Gross profit decreased by $29.0 million, or 26.0%, in part due to lower volume of $18.1 million, or 16.2%, as a result of store closures during the pandemic, and by $8.4 million, or 7.6%, due to higher AUC, partially offset by ASP, as a result of higher distribution and logistics costs, primarily in the second quarter of 2020 and an inventory write-off of $2.4 million as a result of the impact of COVID-19. Negative currency impacts decreased gross profit by $2.5 million, or 2.2%. The change in gross profit in our Asia Pacific segment is somewhat offset by decreased unallocated distribution costs within ‘Other Businesses.’

SG&A for our Asia Pacific segment was mostly flat in the six months ended June 30, 2020 compared to the same period in 2019. The increase in costs in the first quarter of 2020 were offset by the reduction in costs in the second quarter of 2020.

EMEA Operating Segment

Revenues. Revenues decreased in our EMEA segment in the three months ended June 30, 2020, compared to the same period in 2019, in part due to lower sales volumes of 67.1% in our retail channel, particularly in Russia where stores were closed until June as a result of the pandemic, and negative currency impacts, primarily in the Euro and Russian Ruble. These decreases were partially offset by increases of 48.6% in e-commerce volume, as customers continue to migrate shopping habits to digital commerce during the pandemic, and in ASP as a result of changes in product mix and fewer promotions and discounts.

During the six months ended June 30, 2020, EMEA revenues decreased compared to the same period in 2019 due to lower retail and wholesale sales volumes of 51.9% and 8.7%, respectively, partially offset by higher e-commerce volume of 37.2%. These decreases were driven by store closures during the pandemic, while e-commerce volume continued to increase due to continued customer migration to the channel. An increase in ASP resulted primarily from changes in product mix and fewer promotions and discounts. Currency negatively impacted revenues as a result of fluctuations in the Euro and Ruble.

Income from Operations. Income from operations for the EMEA segment was $20.4 million for the three months ended June 30, 2020, a decrease of $2.2 million, or 9.7%, compared to the same period in 2019. Gross profit decreased $3.8 million, or 10.4%, due to lower sales volumes of $2.6 million, or 7.0%, and negative currency impacts of $1.2 million, or 3.3%. The change in gross profit in our EMEA segment is mostly offset by decreased unallocated distribution costs within ‘Other Businesses.’

SG&A for our EMEA segment decreased $1.6 million, or 11.6%, during the three months ended June 30, 2020, compared to the same period in 2019. This was primarily due to a $1.0 million reduction in compensation expense and a $0.7 million reduction in facilities expense due to savings on variable rent at closed retail locations, partially offset by increases in other net costs of $0.1 million.

Income from operations for the EMEA segment was $38.0 million for the six months ended June 30, 2020, a decrease of $9.6 million, or 20.1%, compared to the same period in 2019. Gross profit decreased $10.6 million, or 14.3%, due to lower sales volumes of $6.7 million, or 9.1%, negative currency impacts of $2.2 million, or 3.0%, and higher AUC, partially offset by higher ASP of $1.7 million, or 2.2%, as a result of purchasing power from currency changes, primarily in the first quarter of 2020. The change in gross profit in our EMEA segment is somewhat offset by decreased unallocated distribution costs within ‘Other Businesses.’

SG&A for our EMEA segment decreased $1.0 million, or 3.8%, during the six months ended June 30, 2020, compared to the same period in 2019, primarily due to a $1.2 million reduction in compensation expense, offset in part by increases in other net costs of $0.2 million.

Other Businesses and Unallocated Corporate

During the three months ended June 30, 2020, total net costs within ‘Other Businesses’ and ‘Unallocated Corporate and Other’ decreased $15.4 million compared to the same period in 2019. This decrease was primarily as a result of various defensive measures taken in response to COVID-19, including a decrease in compensation expense of $8.1 million from the temporary and permanent elimination of certain roles and reduced variable compensation, as well as a lower investment in marketing of $7.3 million and other net cost decreases of $1.2 million. There were also net higher supply chain costs of $1.2 million, primarily as a result of higher unallocated distribution costs between ‘Other Businesses’ and the regions, offset in part by costs in 2019, that did not recur in 2020, when we opened our U.S. distribution center.

During the six months ended June 30, 2020, total net costs within ‘Other Businesses’ and ‘Unallocated Corporate and Other’ decreased $15.2 million compared to the same period in 2019. This decrease was primarily as a result of various defensive measures taken in response to COVID-19, including a decrease in compensation expense of $10.9 million due to the temporary and permanent elimination of certain roles and a reduction in variable compensation, as well as a lower investment in marketing of $4.5 million. There were also net lower supply chain costs of $1.1 million, primarily as a result of costs in 2019, that did not recur in 2020, when we opened our U.S. distribution center, offset in part by higher unallocated distribution costs between ‘Other Businesses’ and the regions. Other net cost increases of $1.3 million partially offset these decreases.

Store Locations and Comparable Store Sales

The tables below illustrate the overall change in the number of our company-operated retail locations by type of store and reportable operating segment for the three and six months ended June 30, 2020:

Digital sales, which includes sales through our company-owned website, third party marketplaces, and e-tailers (which are reported in our wholesale channel), as a percent of total revenues, by operating segment were:

29

Comparable retail store sales and direct-to-consumer store sales by operating segment are shown below. Consistent with our definition of comparable store sales described in a footnote to the below tables, these results include 94 comparable stores in April, 110 comparable stores in May, and 247 comparable stores in June.

(1) Reflects period over period change on a constant currency basis, which is a non-GAAP financial measure. See “Use of Non-GAAP Financial Measures” for more information.

(2) Comparable store status is determined on a monthly basis. Comparable store sales includes the revenues of stores that have been in operation for more than twelve months. Stores in which selling square footage has changed more than 15% as a result of a remodel, expansion, or reduction are excluded until the thirteenth month in which they have comparable prior year sales. Temporarily closed stores are excluded from the comparable store sales calculation during the month of closure. Location closures in excess of three months are excluded until the thirteenth month post re-opening. E-commerce revenues are based on same site sales period over period.

Financial Condition, Capital Resources, and Liquidity

Liquidity

Our liquidity position as of June 30, 2020 was:

(in thousands)

As of June 30, 2020, we had $151.4 million in cash and cash equivalents and up to $224.4 million of remaining borrowing availability under our Facility (as defined below), which was amended in March 2020 to provide additional flexibility and borrowing commitments as we continue to operate in a business landscape impacted by the COVID-19 pandemic. We also entered into two revolving credit facility agreements in Asia during the three months ended June 30, 2020, which are discussed in more detail under “Asia Revolving Credit Facilities” below. We have continued to take other defensive measures to maximize liquidity in response to COVID-19, including reducing expenses, primarily through the temporary and permanent elimination of certain corporate and regional roles and a reduced investment in marketing, extending payment terms with vendors, managing inventory levels by constraining incoming supply and focusing on core product, deferring discretionary capital expenditures, and suspending our share repurchase and foreign currency exchange derivative programs. Additionally, through June 30, 2020, we received rent concessions from landlords of $5.6 million, the majority of which are expected to be paid back by the end of 2020. We have also encountered payment term extension requests and, thus, delays in collections from our customers, and we have recognized bad debt write-offs of $1.7 million and $4.5 million in the three and six months ended June 30, 2020, respectively, associated with global distributors as a result of the COVID-19 pandemic.

Based on these actions, we believe that cash flows from operations, our cash and cash equivalents on hand, and available borrowings under our Facility will be sufficient to meet our ongoing liquidity needs and capital expenditure requirements for at least the next twelve months. Additional future financing may be necessary to fund our operations, and there can be no assurance that, if needed, we will be able to secure additional debt or equity financing on terms acceptable to us or at all, especially in light of the market volatility and uncertainty as a result of the COVID-19 outbreak. Although we believe we have adequate sources of liquidity over the long term, the success of our operations, the global economic outlook, and the pace of sustainable growth in our markets, in each case, in light of the market volatility and uncertainty as a result of the COVID-19 pandemic, among other factors, could impact our business and liquidity.

Seasonality

Due to the seasonal nature of our footwear, which is more heavily focused on styles suitable for warm weather, revenues generated during our fourth quarter, when the northern hemisphere is experiencing cooler weather, are typically less than revenues generated during our first three quarters. Accordingly, cash flows from operating activities during our first quarter are typically lower as we collect on the related fourth quarter customer receivables and as customer receivables and inventories rise in preparation for the Spring/Summer season. Cash flows from operating activities generated during our second and third quarters are generally higher, when the northern hemisphere is experiencing warmer weather. Accordingly, results of operations and cash flows for any one quarter are not necessarily indicative of expected results for any other quarter or for any other year.

Repatriation of Cash

As a global business, we have cash balances in various countries, and amounts are denominated in various currencies. Fluctuations in foreign currency exchange rates impact our results of operations and cash positions. Future fluctuations in foreign currencies may have a material impact on our cash flows and capital resources. Cash balances held in foreign countries may have additional restrictions and covenants associated with them which could adversely impact our liquidity and our ability to timely access and transfer cash balances between entities.

All of the cash held outside of the U.S. could be repatriated to the U.S. without incurring additional U.S. federal income taxes. As of June 30, 2020, we held $107.1 million of our total $151.4 million in cash in international locations. This cash is primarily used for the ongoing operations of the business in the locations in which the cash is held. None of the $107.1 million held in international locations is limited by local regulations. If the remaining $107.1 million were to be immediately repatriated to the U.S., no additional U.S. federal income tax expense would be incurred.

Senior Revolving Credit Facility

In July 2019, the Company and certain of our subsidiaries (the “Borrowers”) entered into a Second Amended and Restated Credit Agreement (as amended, the “Credit Agreement”), with the lenders named therein and PNC Bank, National Association, as a lender and administrative agent for the lenders, which provided for a revolving credit facility of $450.0 million. In March 2020, we amended the Credit Agreement to, among other things, increase the total commitments under the Credit Agreement by $50.0 million, resulting in total commitments of $500.0 million, which can be increased by an additional $100.0 million subject to certain conditions (the “Facility”). Borrowings under the Credit Agreement bear interest at a variable rate based on (A) a domestic base rate (defined as the highest of (i) the Federal Funds open rate, plus 0.25%, (ii) the Prime Rate, and (iii) the Daily LIBOR rate, plus 1.00%), plus an applicable margin ranging from 0.25% or 0.875% based on our leverage ratio, or (B) a LIBOR rate, plus an applicable margin ranging from 1.25% to 1.875% based on our leverage ratio. Borrowings under the Credit Agreement are secured by all of the assets of the Borrowers and guaranteed by certain other subsidiaries of the Borrowers.

The Credit Agreement requires us to maintain a minimum interest coverage ratio of 4.00 to 1.00, and a maximum leverage ratio of (i) 4.00 to 1.00 until September 30, 2020, (ii) 3.50 to 1.00 from December 31, 2020 to December 31, 2021, and (iii) 3.25 to 1.00 from March 31, 2022 and thereafter (subject to adjustment in certain circumstances). The Credit Agreement permits (i) stock repurchases subject to certain restrictions, including after giving effect to such stock repurchases, the maximum leverage ratio does not exceed certain levels; and (ii) certain acquisitions so long as there is borrowing availability under the Credit Agreement of at least $40.0 million. As of June 30, 2020, we were in compliance with all financial covenants under the Credit Agreement.

As of June 30, 2020, the total commitments available from the lenders under the Facility were $500.0 million. At June 30, 2020, we had $275.0 million in outstanding borrowings, which are due when the Facility matures in July 2024, and $0.6 million in outstanding letters of credit under the Facility, which reduces amounts available for borrowing under the Facility. As of June 30, 2020 and December 31, 2019, we had $224.4 million and $240.4 million, respectively, of available borrowing capacity under the Facility, and we have repaid an additional $50.0 million of our outstanding borrowings under the Facility subsequent to June 30, 2020. Our borrowings may continue to fluctuate as we manage our liquidity needs.

Asia Revolving Credit Facilities

In the three months ended June 30, 2020, we entered into two separate credit agreements in Asia, which provide for revolving credit facilities with China Merchants Bank Company Limited, Shanghai Branch (the "CMBC Facility") and Citibank (China) Company Limited, Shanghai Branch (the "Citibank Facility").

The CMBC Facility provides a revolving credit facility of up to 30.0 million RMB, or $4.2 million at current exchange rates, and matures in May 2021. For RMB loans under the CMBC Facility, interest is determined at the time of borrowing based on variable rates in effect at that time.

The Citibank Facility provides a revolving credit facility of up to an equivalent of $5.0 million and matures in June 2021. For RMB loans under the Citibank Facility, interest is based on a National Interbank Funding Center 1-year prime rate, plus 65 basis points. For USD loans under the Citibank Facility, interest is based on a LIBOR rate, plus 1.5%.

We had no borrowings under our Asia revolving facilities during the six months ended June 30, 2020 and year ended December 31, 2019 or borrowings outstanding at June 30, 2020 and December 31, 2019.

Cash Flows

(in thousands)

Operating Activities. Our primary source of liquidity is cash provided by operating activities, consisting of net income adjusted for noncash items and changes in working capital. Cash provided by operating activities increased $20.1 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, driven by higher net income, adjusted for non-cash items, of $22.4 million and by net decreases in operating assets and liabilities of $2.3 million. The change in operating assets and liabilities resulted primarily from decreased accounts payable, offset in part by decreased inventories, resulting from tightened inventory management as a result of COVID-19. Additionally, accrued expenses decreased as a result of annual payouts of variable compensation related to our performance in 2019. The change in operating assets and liabilities was further offset by decreased accounts receivable associated with lower revenues in the six months ended June 30, 2020, compared to the same period in 2019.

Investing Activities. The $5.5 million increase in cash used in investing activities for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily reflects expenditures related to the relocation of our Corporate headquarters in Broomfield and continued investment in our U.S. distribution center.

Financing Activities. Cash provided by financing activities increased by $47.0 million in the six months ended June 30, 2020 compared to the six months ended June 30, 2019. This increase was primarily driven by the decrease in repurchases of our common stock of $69.3 million, as part of our response to the COVID-19 outbreak, and a final payment of $3.0 million in 2019 related to the conversion of our Series A Convertible Preferred Stock that did not recur in the current year. Partially offsetting increases in cash provided by financing activities was a $25.0 million decrease in borrowings, net of repayments, on our Facility.

Contractual Obligations

In the three months ended June 30, 2020, we entered into a lease that has not yet commenced related to the expansion of our U.S. distribution center in Dayton, Ohio. The total contractual commitment related to this lease, with payments expected to begin August 2020 and continuing through September 2030, is approximately $26.2 million, as described in Note 4 — Leases in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements and Supplementary Data of this Quarterly Report on Form 10-Q.

There have been no other significant changes to the contractual obligations reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, other than borrowings on the Facility, as described above and in Note 7 — Revolving Credit Facilities and Bank Borrowings in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements and Supplementary Data of this Quarterly Report on Form 10-Q.

Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements as of June 30, 2020, other than certain purchase commitments, which are described in Note 13 — Commitments and Contingencies in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements and Supplementary Data of this Quarterly Report on Form 10-Q.

Critical Accounting Policies and Estimates

The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales, and expenses, and related disclosure of contingent assets and liabilities. We evaluate our assumptions and estimates on an on-going basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

For a complete discussion of our critical accounting policies, please refer to our Annual Report on Form 10-K for the year ended December 31, 2019 and Note 2 — Recent Accounting Pronouncements in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements and Supplementary Data of this Quarterly Report on Form 10-Q. There have been no other significant changes in our critical accounting policies or their application since December 31, 2019.

Recent Accounting Pronouncements

See Note 2 — Recent Accounting Pronouncements in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements and Supplementary Data of this Quarterly Report on Form 10-Q for a description of recently adopted accounting pronouncements and issued accounting pronouncements that we believe may have an impact on our condensed consolidated financial statements when adopted.

Interest Rate Risk

We centrally manage our debt and investment portfolios considering investment opportunities and risks, tax consequences, and overall financing strategies. Our exposure to market risk includes interest rate fluctuations in connection with our Facility and certain financial instruments.

Borrowings under our Facility bear interest at a variable rate and are therefore subject to risk based upon prevailing market interest rates. Interest rates fluctuate as a result of many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors that are beyond our control.

As of June 30, 2020, we had $275.0 million in outstanding borrowings and $0.6 million in outstanding letters of credit under our Facility. As of December 31, 2019, we had $205.0 million in outstanding borrowings and $4.6 million in outstanding letters of credit under our Facility.

A hypothetical increase of 1% in the interest rate on these borrowings would have increased interest expense by $0.7 million and $1.6 million for the three and six months ended June 30, 2020, respectively.

Foreign Currency Exchange Risk

Changes in exchange rates have a direct effect on our reported U.S. Dollar condensed consolidated financial statements because we translate the operating results and financial position of our international subsidiaries to U.S. Dollars using current period exchange rates. Specifically, we translate the statements of operations of our foreign subsidiaries into the U.S. Dollar reporting currency using exchange rates in effect during each reporting period. As a result, comparisons of reported results between reporting periods may be impacted significantly due to differences in the exchange rates in effect at the time such exchange rates are used to translate the operating results of our international subsidiaries.

An increase of 1% of the value of the U.S. Dollar relative to foreign currencies, excluding the impact on our purchasing power, would have decreased our income before taxes during the three and six months ended June 30, 2020 by $0.4 million and $0.5 million, respectively. The volatility of the exchange rates is dependent on many factors that cannot be forecasted with reliable accuracy.

We may enter into forward foreign exchange contracts to buy or sell various foreign currencies to selectively protect against volatility in the value of non-functional currency denominated monetary assets and liabilities. Changes in the fair value of these forward contracts are recognized in earnings in the period that the changes occur. To maximize liquidity and cash flow during the COVID-19 pandemic, we did not enter into any foreign currency exchange forward contracts in the three months ended June 30, 2020.

See Part I - Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report on Form 10-Q for a discussion of the impact of the change in foreign exchange rates on our U.S. Dollar condensed consolidated statements of operations for the six months ended June 30, 2020 and 2019.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures as such item is defined under Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2020, to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applies its judgment in assessing the costs and benefits of such controls and procedures that, by their nature, can only provide reasonable assurance regarding management’s control objectives.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the three months ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

You should carefully consider the factors discussed in Part I - Item 1A. Risk Factors in our Annual Report, which could materially affect our business, financial condition, cash flows, or future results. Except as set forth below, there have been no material changes in our risk factors included in our Annual Report.

The novel coronavirus (COVID-19) pandemic has had, and may continue to have, a material adverse impact on our business, operations, liquidity, financial condition and results of operations.

The COVID-19 pandemic continues to drive global uncertainty and disruption and has spread throughout the geographic regions in which we run our business and where our suppliers, third-party manufacturers, retail stores, wholesale customers, and consumers are located. The pandemic had a material impact on our retail and wholesale channel revenues in the first half of 2020, and the total impact of the pandemic on us will depend on developments outside of our control, including, among other factors, the duration and spread of the outbreak, actions that may be taken by governmental authorities to contain the outbreak or mitigate its impact, including related restrictions on movement and commercial activities, the economic or other impacts on our wholesale partners, the impact on and recovery time of our supply chain, consequential staffing shortages, manufacturing delays and the uncertainty with respect to the accessibility of additional liquidity or to the capital markets.

Additionally, many of our 360 company-operated stores, our partner stores, and wholesale partner stores globally were closed during much of the second quarter. While most of our company-operated stores were reopened by June 30, 2020, some may close again upon additional COVID-19 outbreaks. At this time, we cannot reasonably estimate the length of time the remaining or future closures will remain in effect, if further closures will occur, or if consumers will return to purchasing our products at historical levels in retail locations, and the inability to sell our products in our retail or wholesale channels has had and will continue to have a material adverse effect on our revenues and results of operations.

We also rely upon the facilities of our third-party manufacturers outside of the U.S. to support our business as well as to export our products throughout the world. As a result of COVID-19 and the measures designed to contain the spread of the virus, our third-party manufacturers may not have the materials, capacity, or capability to manufacture our products according to our schedule and specifications, which may negatively impact our ability to manage inventories. If our third-party manufacturers’ operations are curtailed, we may need to seek alternate manufacturing sources, which may be unavailable, more expensive, or face the same constraints. The duration of any production and supply chain disruption, and related financial impact, if any, cannot be estimated at this time. Should any production and distribution closures continue for an extended period of time, the impact on our global supply chain could have a material adverse effect on our results of operations and cash flows. See “We depend solely on third-party manufacturers located outside the U.S.” in Item 1A - Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019.

The effects of COVID-19 could affect our ability to successfully operate in many ways, including, but not limited to, the following factors:

• the impact of the pandemic on the economies and financial markets of the countries and regions in which we operate, including a potential global recession, a decline in consumer confidence and spending, or a further increase in unemployment levels, has resulted, and could continue to result, in consumers having less disposable income and, in turn, decreased sales of our products;
• “shelter in place” and other similar mandated or suggested isolation protocols, which have disrupted, and could continue to disrupt, our retail locations, partner stores, and brick-and-mortar retailers via store closures or reduced operating hours and decreased retail traffic;
• difficulty accessing debt and equity on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deterioration in credit and financing conditions may affect our ability to access capital necessary to operate our business;
• our success in attempting to reduce operating costs and conserve cash;
• our inability to obtain additional rent and other relief from our landlords if retail stores close in response to another outbreak, which may involve litigation or other disruptions;
• the failure of our wholesale customers, to whom we extend credit to pay amounts owed to us on time, or at all, particularly if such customers are significantly impacted by COVID-19;
• the risk that even after the pandemic has initially subsided, fear of COVID-19 re-occurrence could cause customers to avoid public places where our stores and those of our wholesale partners are located such as malls and outlets;
• the risk that the increase in digital commerce sales, which have recently started to temper, does not continue;
• we may be required to revise certain accounting estimates and judgments such as, but not limited to, those related to the valuation of long-lived assets and deferred tax assets, which could have a material adverse effect on our financial position and results of operations.

The rapid development and fluidity of the pandemic precludes any prediction as to the ultimate impact of COVID-19. The full extent of the impact and effects of COVID-19 on our business, operations, liquidity, financial condition, and results of operations remain uncertain at this time.