Crocs, Inc.: Form 10-Q for the period ended Sep 30, 2023

Business Overview

Crocs, Inc. and our consolidated subsidiaries (collectively the “Company,” “we,” “us,” or “our”) are engaged in the design, development, worldwide marketing, distribution, and sale of casual lifestyle footwear and accessories for women, men, 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.

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:

• We are operating with greater uncertainty than when we started the year with persistent inflation, higher interest rates, and escalating geopolitical tensions across the globe, among other things. While consumer spending was resilient during the back-to-school season, we saw a pronounced shift during the last month of the quarter, and we are taking a cautious approach to the holiday season. We are focused on making the right decisions for the health of our brands, maintaining tight inventory control, and investing in initiatives to support durable long-term growth.
• The Crocs Brand continues to deliver strong revenue growth after building clog, sandal, and brand relevance across the globe over the last several years. Our strong product and marketing efforts continue to deliver newness and excitement to current brand fans. Asia, which is a strategic initiative for the Crocs Brand, continues to show growth, particularly in China.
• We acquired HEYDUDE in February 2022. Since the closing of the acquisition, we have acquired new customers, gained share in strategic wholesale accounts, and improved brand awareness. We have also started to expand the HEYDUDE Brand internationally, specifically in Europe, where we have begun testing in a few direct markets, including the United Kingdom, Germany, and the Netherlands, as well as a few distributor markets. While we still anticipate annual revenue growth for the brand on a reported basis compared to the prior year, we are seeing some headwinds from non-comparable sales due to rapid expansion to U.S. strategic customers in 2022 and more cautious order patterns from several of our wholesale partners in the current year based on the overall macro-economic outlook. Additionally, to prioritize long-term marketplace health, we made a conscious decision in September to stop price matching against grey market sellers on Amazon. While we expect this to have a negative impact on revenues initially, we believe this move will protect the brand and better position us in the market in 2024.
• We expect to move from our current corporate headquarters in the three months ended December 31, 2023. As of September 30, 2023, we have estimated impairment losses of up to a maximum of approximately $16 million to our right-of-use-asset and property and equipment associated with our current corporate headquarters to be recognized in the three months ended December 31, 2023. This estimate is subject to change in the near term.
• Our liquidity position remains strong with $127.3 million in cash and cash equivalents and $563.7 million in available borrowing capacity as of September 30, 2023. In the nine months ended September 30, 2023, we paid down $389.1 million of net borrowings, reducing total borrowings to $1.94 billion as of September 30, 2023. We also resumed our share repurchase program in July 2023, repurchasing $150.0 million of our common stock during the quarter.

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, 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.

Third Quarter 2023 Financial and Operational Highlights

Revenues were $1,045.7 million for the third quarter of 2023, a 6.2% increase compared to the third quarter of 2022. The increase was due to the net effects of: (i) higher average selling price on a constant currency basis (“ASP”), which increased revenues by $68.4 million, or 6.9%, driven primarily by product mix, less discounting and increased pricing, and channel mix for the Crocs Brand, partially offset by increased discounting for the HEYDUDE Brand; (ii) favorable changes in exchange rates, which increased revenues by $4.3 million, or 0.5%; and (iii) lower unit sales volume in both brands, which decreased revenues by $12.1 million, or 1.2%.

The following were significant developments affecting our businesses and capital structure during the three months ended September 30, 2023:

• We grew revenues in the Crocs Brand, in both the direct-to-consumer (“DTC”) channel and wholesale channel. Revenues also grew 14.6% in the DTC channel for the HEYDUDE Brand. For the Crocs Brand, the overall increase of 11.6% in revenues was led by our Asia Pacific segment, which grew revenues by 26.5%, or 28.6% on a constant currency basis. Our EMEALA segment also increased by 8.3%, or 2.7% on a constant currency basis, and our North America segment grew revenues by 8.0%, or 8.2% on a constant currency basis, compared to the third quarter of 2022. HEYDUDE Brand revenues decreased 8.3%, primarily driven by the impact of increased discounting in the DTC channel on revenues. Lower volume also contributed to the decrease in the HEYDUDE Brand revenues.
• We sold 29.0 million pairs of shoes for the Crocs Brand in the third quarter of 2023, a decrease of 4.3% from the third quarter of 2022. This decrease is due in large part to the termination of our relationship with a significant distributor in our EMEALA segment in the previous quarter. We sold 8.3 million pairs of shoes for the HEYDUDE Brand in the third quarter of 2023, a decrease of 10.7% compared to the third quarter of 2022. This decrease is described in further detail in the ‘HEYDUDE Brand’ section below.
• Gross margin was 55.6%, an increase of 70 basis points from last year’s third quarter. This was in part due to lower freight costs, partially due to higher air freight incurred in the prior year, and lower promotional activity for the Crocs Brand. This was offset by lower margins in the HEYDUDE Brand, driven by higher product costs, primarily due to distribution costs associated with the move to our new HEYDUDE distribution center in Las Vegas, Nevada.
• Selling, general and administrative expenses (“SG&A”) were $307.8 million compared to $277.2 million in the third quarter of 2022, as a result of an increase in marketing expense and investments in talent in both brands. As a percent of revenues, SG&A increased to 29.4% of revenues compared to 28.1% of revenues in the third quarter of 2022.
• Income from operations increased to $273.9 million from $264.1 million in last year’s third quarter. Net income was $177.0 million, or $2.87 per diluted share, compared to $169.3 million, or $2.72 per diluted share, in last year’s third 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”).

(2) Average footwear selling price is calculated as footwear and charms revenues divided by footwear units, as applicable.

(3) We acquired HEYDUDE on February 17, 2022 and, as a result, added the HEYDUDE Brand as a new operating segment. Therefore, the amounts shown above for the nine months ended September 30, 2022 represent results during the Partial Period, as defined below. Additionally, ‘Footwear unit sales’ and ‘Average footwear selling price - nominal basis’ for the HEYDUDE Brand have been revised by an immaterial amount in the three and nine months ended September 30, 2022 as a result of a calculation update.

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” above for more information.

(2) We acquired HEYDUDE on February 17, 2022 and, as a result, added the HEYDUDE Brand as a new operating segment. Therefore, the amounts shown above for the nine months ended September 30, 2022 represent results during the Partial Period.

The primary drivers of changes in revenue were:

(in thousands)

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

(in thousands)

(1) We acquired HEYDUDE on February 17, 2022 and, as a result, added the HEYDUDE Brand as a new operating segment. Therefore, the amounts shown above for total revenues include a comparison of HEYDUDE results for the nine months ended September 30, 2023 to results during the Partial Period in 2022.

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

Revenues. In the three months ended September 30, 2023, revenues increased compared to the same period in 2022. This was primarily due to higher ASP in the Crocs Brand, largely due to a combination of product mix, less discounting and increased pricing, and channel mix, partially offset by lower ASP in the HEYDUDE Brand as a result of more discounting than prior year. While our HEYDUDE Brand ASP of $29.68, as shown in the table above, increased 2.7% over the third quarter of 2022, this is a basic average and is not adjusted for channel dynamics. Looking at channel dynamics, pricing pressure was the largest contributor to the brand’s revenue decline. Favorable foreign currency fluctuations, most significantly in the Euro, also increased revenues. The overall increase was offset in part by lower volume in both brands. For the Crocs Brand, volume decreased in our distributor markets due in large part to the termination of our relationship with a significant distributor in our EMEALA segment in the previous quarter after finding evidence of product diversion to the gray market outside of its approved territories. For the HEYDUDE Brand, volume decreased due to higher volumes in the prior year as a result of rapid expansion to strategic wholesale customers and more cautious order patterns from several of our wholesale partners in the current year.

Revenues also increased in the nine months ended September 30, 2023, primarily due to higher volume. The higher volume was driven in part by greater demand for the Crocs Brand and in part by operating HEYDUDE for a full nine months in 2023 compared to the partial period from the acquisition date of February 17, 2022 through September 30, 2022 (the “Partial Period”). Higher ASP in the Crocs Brand, primarily due to increased pricing, was partially offset by lower ASP in the HEYDUDE Brand as a result of increased promotions and discounting. Unfavorable foreign currency fluctuations, most significantly the Chinese Yuan and Korean Won, also decreased revenues.

Cost of sales. In the three months ended September 30, 2023, compared to the same period in 2022, cost of sales increased $20.3 million, or 4.6%. This was primarily driven by higher average cost per unit on a constant currency basis (“AUC”) of $34.6 million, or 7.8%, primarily due to increased distribution costs associated with the move to our new HEYDUDE distribution center in Las Vegas, Nevada and increased product costs for the HEYDUDE Brand. This increase was partially offset by lower volume of $9.1 million, or 2.0%, and favorable foreign currency fluctuations of $5.2 million, or 1.2%. In the three months ended September 30, 2023 and 2022, respectively, cost of sales includes $148.1 million and $103.3 million of distribution expenses primarily related to receiving, inspecting, warehousing, and packaging product in owned and third-party warehouses, combined with transportation costs associated with delivering products from distribution centers to wholesale partners, retail stores and end customers.

In the nine months ended September 30, 2023, compared to the same period in 2022, cost of sales increased $77.1 million, or 6.2%, due to higher volume of $148.3 million, or 11.9%. This increase was offset in part due to lower AUC of $49.4 million, or 4.0%, primarily due to prior year adjustments of $62.2 million to the fair value of inventory costs upon close of the acquisition of HEYDUDE, partially offset by increased distribution costs associated with the move to our new HEYDUDE distribution center in Las Vegas, Nevada. Favorable foreign currency fluctuations decreased cost of sales by $21.9 million, or 1.7%. In the nine months ended September 30, 2023 and 2022, respectively, cost of sales includes $376.0 million and $326.0 million of distribution expenses primarily related to receiving, inspecting, warehousing, and packaging product in owned and third-party warehouses, combined with transportation costs associated with delivering products from distribution centers to wholesale partners, retail stores and end customers.

Gross profit. Gross margin increased in the three months ended September 30, 2023 to 55.6% compared to 54.9% in the same period in 2022. This was primarily due to lower freight costs, partially due to higher air freight incurred in the prior year, and lower promotional activity for the Crocs Brand, offset in part by higher distribution costs and product cost for the HEYDUDE Brand.

Gross profit increased $40.3 million, or 7.5%, in the three months ended September 30, 2023 compared to the same period in 2022, due to the net impact of higher ASP and higher AUC, as described above, of $33.9 million, or 6.3%, favorable foreign currency changes of $9.5 million, or 1.8%. Lower volume of $3.1 million, or 0.6% slightly decreased gross profit.

Gross margin in the nine months ended September 30, 2023 was 55.9% compared to 52.3% in 2022. This was due in part to higher air freight incurred in the prior year as well as 240 basis points from adjustments in the prior year related to the fair value of inventory costs upon close of the acquisition of HEYDUDE.

Gross profit increased $315.4 million, or 23.1%, in the nine months ended September 30, 2023 compared to the same period in 2022, primarily as a result of higher volume of $175.4 million, or 12.9%, and the net impact of higher ASP and lower AUC, as described above, of $137.2 million, or 10.0%. Favorable foreign currency changes of $2.8 million, or 0.2%, also contributed to the increase in gross profit.

Selling, general and administrative expenses. SG&A increased $30.5 million, or 11.0%, in the three months ended September 30, 2023 compared to the same period in 2022. This is in part due to higher compensation expense of $16.7 million primarily associated with an investment in talent. There was also an increase in marketing expenses of $9.1 million and an increase in facilities of $5.0 million. Additionally, there was a $5.9 million increase in other costs, including variable costs associated with higher revenues. The overall increase was partially offset by $6.2 million of lower costs in 2023, primarily associated with the prior year HEYDUDE integration.

SG&A expenses increased $118.8 million, or 16.2%, during the nine months ended September 30, 2023 compared to the same period in 2022. There were higher compensation costs of $46.7 million, primarily associated with an investment in talent. There were also higher marketing costs of $41.7 million as we continue to invest in marketing to fuel growth, mostly associated with the HEYDUDE Brand. Various other costs, including variable costs associated with higher revenues and information technology costs, also increased SG&A by $61.6 million. These increases were offset in part by $31.2 million of lower costs in 2023 associated with the prior year HEYDUDE acquisition and integration.

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 September 30, 2023, we recognized realized and unrealized net foreign currency losses of $1.8 million compared to losses of $0.4 million during the three months ended September 30, 2022.

During the nine months ended September 30, 2023, we recognized realized and unrealized net foreign currency losses of $1.6 million compared to losses of $1.1 million during the nine months ended September 30, 2022.

Income tax expense. During the three months ended September 30, 2023, income tax expense decreased $3.8 million compared to the same period in 2022. The effective tax rate for the three months ended September 30, 2023 was 24.2% compared to an effective tax rate of 26.2% for the same period in 2022, a 2.0% decrease. This decrease in the effective tax rate was primarily driven by a shift in the mix of the Company's domestic and foreign earnings. Our effective income tax rate, for each period presented, also differs from the federal U.S. statutory rate due to differences in income tax rates between U.S. and foreign jurisdictions.

During the nine months ended September 30, 2023, income tax expense increased $22.9 million compared to the same period in 2022. The effective tax rate for the nine months ended September 30, 2023 was 23.3% compared to an effective tax rate of 25.9% for the same period in 2022, a 2.6% decrease. This decrease in the effective tax rate was primarily driven by a shift in the mix of the Company's domestic and foreign earnings. Our effective income tax rate for each period presented also differs from the federal U.S. statutory rate due differences in income tax rates between U.S. and foreign jurisdictions.

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) We acquired HEYDUDE on February 17, 2022 and, as a result, added the HEYDUDE Brand as a new operating segment. Therefore, the amounts shown above for the nine months ended September 30, 2022 represent results during the Partial Period.

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.

(2) We acquired HEYDUDE on February 17, 2022 and, as a result, added the HEYDUDE Brand as a new operating segment. Therefore, the amounts shown above for the nine months ended September 30, 2022 represent results during the Partial Period.

Crocs Brand

North America Operating Segment

Revenues. Despite a declining U.S. footwear market, North America revenues increased in the three months ended September 30, 2023 compared to the same period in 2022. This was due primarily to higher ASP as a result of product mix, a decrease in discounting, and channel mix. Increases in volume in our DTC channel were partially offset by decreases in volume in our wholesale channel as a result of strategic shifts in our distribution model with Amazon.

The increase in North America revenues in the nine months ended September 30, 2023 compared to the same period in 2022 is primarily due to an increase in volume, driven by both channels, and higher ASP primarily as a result of product mix, a decrease in promotional activity, and channel mix.

Income from Operations. Income from operations for our North America segment was $218.0 million for the three months ended September 30, 2023, an increase of $26.6 million, or 13.9%, compared to the same period in 2022. Gross profit increased by $41.0 million, or 15.2%, compared to prior year, mostly as a result of higher ASP. Higher volume, particularly in the DTC channel, also contributed to the increase in gross profit.

SG&A for our North America segment increased $14.4 million, or 18.2%, during the three months ended September 30, 2023 compared to the same period in 2022. This increase was primarily due to higher compensation costs as a result of higher wages for hourly employees and higher variable expenses related to higher revenues in the DTC channel.

During the nine months ended September 30, 2023, income from operations for our North America segment was $560.4 million, an increase of $61.9 million, or 12.4%, compared to the same period in 2022. Gross profit increased $93.1 million, or 13.0%, primarily due to higher volume and lower AUC, primarily as a result of lower freight costs, partially due to higher air freight incurred in the prior year.

SG&A for our North America segment increased $31.2 million, or 14.5%, during the nine months ended September 30, 2023 compared to the same period in 2022, primarily due to higher compensation costs as a result of higher wages for hourly employees and higher variable expenses related to higher revenues in the DTC channel.

Asia Pacific Operating Segment

Revenues. Revenues in our Asia Pacific segment increased 26.5% in the three months ended September 30, 2023 compared to the same period in 2022, and was up in most countries in the region, driven by growth in Australia and China, in part as a result of the relaxation of COVID-19 restrictions in China. Additionally, there was notable growth in South Korea and Southeast Asia. The increase in revenues is largely due to higher ASP, primarily as a result of increased pricing, less discounting, and an increased share of charms compared to the prior year. The overall increase was partially offset by unfavorable foreign currency changes, most significantly in the Chinese Yuan.

Revenues in our Asia Pacific segment increased in the nine months ended September 30, 2023 compared to the same period in 2022, as a result of ASP increases, as a result of less discounting and increased pricing, and volume increases due to increased consumer demand. Unfavorable foreign currency fluctuations in most currencies, but most significantly the Chinese Yuan and Korean Won, partially offset ASP and volume increases.

Income from Operations. Income from operations for the Asia Pacific segment was $69.8 million for the three months ended September 30, 2023, an increase of $29.5 million, or 73.2%, compared to the same period in 2022. Gross profit increased by $35.8 million, or 43.1%, as a result of higher ASP, as described above. Higher volume and favorable foreign currency changes also contributed to the increase in gross profit.

SG&A for our Asia Pacific segment increased $6.3 million, or 14.8%, during the three months ended September 30, 2023 compared to the same period in 2022, primarily due to increased variable expenses associated with higher revenues.

Income from operations for the Asia Pacific segment was $203.2 million for the nine months ended September 30, 2023, an increase of $81.4 million, or 66.8%, compared to the same period in 2022. Gross profit increased by $105.8 million, or 45.4%, primarily due to higher ASP, as described above, offset partially by higher AUC. Higher volume also increased gross profit, while changes in foreign currency slightly offset these increases.

SG&A for our Asia Pacific segment increased $24.4 million, or 21.9%, in the nine months ended September 30, 2023 compared to the same period in 2022, mostly due to increased variable expenses associated with higher revenues and investments in marketing.

EMEALA Operating Segment

Revenues. Revenues increased in the EMEALA segment in the three months ended September 30, 2023 compared to the same period in 2022, primarily as a result of higher ASPs, favorable foreign currency changes, primarily in the Euro, largely offset by decreased volume. Both the increased ASP and lower volume are due in part to the termination of a relationship with a significant distributor in Africa after finding evidence of product diversion to the gray market outside of its approved territories.

During the nine months ended September 30, 2023, EMEALA revenues increased compared to the same period in 2022, due to higher ASP, favorable foreign currency changes, primarily in the Euro, offset by decreased volume. Both the increased ASP and lower volume are due in part to the termination of a relationship with a significant distributor in Africa, as described above.

Income from Operations. Income from operations for the EMEALA segment was $49.9 million for the three months ended September 30, 2023, an increase of $9.4 million, or 23.3%, compared to the same period in 2022. Gross profit increased $14.3 million, or 23.4%, mostly as a result of higher ASP, as described above, offset partially by higher AUC driven by product mix. Favorable foreign currency fluctuations, mainly in the Euro, also increased gross profit. These increases were offset in part by decreased volume.

SG&A for our EMEALA segment increased $4.9 million, or 23.6%, during the three months ended September 30, 2023 compared to the same period in 2022, primarily due to an investment in marketing.

Income from operations for the EMEALA segment was $176.8 million for the nine months ended September 30, 2023, an increase of $48.0 million, or 37.3%, compared to the same period in 2022. Gross profit increased $55.4 million, or 28.3%, primarily due to higher ASPs. Favorable foreign currency changes also increased gross profit while lower volume partially offset the overall increase.

SG&A for our EMEALA segment increased $7.4 million, or 11.1%, during the nine months ended September 30, 2023 compared to the same period in 2022. This was primarily due to an increase in marketing costs and variable costs associated with higher revenues, partially offset by various costs associated with the prior year shutdown of our direct operations in Russia that did not recur in the current year.

Crocs Brand Corporate

During the three months ended September 30, 2023, total net costs within ‘Brand corporate’ increased $3.4 million, or 9.1%, compared to the same period in 2022.

During the nine months ended September 30, 2023, total net costs within ‘Brand corporate’ increased $11.4 million, or 11.9%, compared to the same period in 2022, due in part to investments in brand marketing.

HEYDUDE Brand

Revenues. For the three months ended September 30, 2023, revenues decreased compared to 2022. The decrease was primarily related to lower ASP, driven by increased discounting in the DTC channel. While our ASP of $29.68, as shown in the table within the ‘Results of Operations’ section above, increased 2.7% over the third quarter of 2022, this is a basic average and is not adjusted for channel dynamics. Looking at channel dynamics, pricing pressure was the largest contributor to the brand’s revenue decline. The decrease in revenues was also driven by a decrease in volume due to higher volumes in the prior year as a result of rapid expansion to strategic wholesale customers and more cautious order patterns from several of our wholesale partners in the current year.

During the nine months ended September 30, 2023, revenues increased compared to the Partial Period in 2022, primarily due to higher volume, driven in part by operating HEYDUDE for a full nine months in 2023 compared to 2022. Partially offsetting this increase was lower ASP driven by increased promotions, primarily in our DTC channel.

Income from Operations. Income from operations for the HEYDUDE segment was $31.8 million for the three months ended September 30, 2023, a decrease of $47.3 million, or 59.8%, compared to 2022. Gross profit decreased $43.5 million, or 33.1%, due primarily to higher AUC, primarily due to lower ASP, as described above, increased distribution costs associated with the move to our new HEYDUDE distribution center in Las Vegas, Nevada and increased product costs.

SG&A for the HEYDUDE Brand segment increased $3.8 million, or 7.2%, during the three months ended September 30, 2023 compared to the same period in 2022. This increase was primarily due to investments in talent made over the past year since the acquisition in February 2022.

Income from operations for the HEYDUDE segment was $173.9 million for the nine months ended September 30, 2023, an increase of $37.5 million, or 27.5%, compared to the Partial Period in 2022. Gross profit increased $81.0 million, or 34.3%, primarily due to higher volume, as described above. This increase was offset in part due to lower ASP, as described above, which was partially offset by lower AUC, primarily driven by prior year adjustments to the fair value of inventory costs upon close of the acquisition that did not recur in the current year.

SG&A for the HEYDUDE Brand segment increased $43.5 million, or 43.5%, during the nine months ended September 30, 2023 compared to the Partial Period in 2022. This is primarily due to investments in marketing and talent made over the past year since the acquisition in February 2022 as well as an increase in store-related costs as a result of launching outlet retail stores in the current year.

Enterprise Corporate

During the three months ended September 30, 2023, total net costs within ‘Enterprise corporate’ increased $5.1 million, or 10.0%, compared to the same period in 2022. This increase was primarily due to increases in compensation costs from a larger investment in talent, offset in part by prior year statutory costs associated with the HEYDUDE acquisition.

During the nine months ended September 30, 2023, total net costs within ‘Enterprise corporate’ increased $20.9 million, or 13.2%, compared to the same period in 2022. This was primarily due to increases in compensation costs, professional services costs, information technology costs, and building costs. These increases were offset in part by lower costs in 2023 associated with the prior year HEYDUDE acquisition and integration.

Store Locations and Digital Sales Percentage

The tables below illustrate the overall change in the number of our company-operated retail locations by reportable operating segment for the three and nine months ended September 30, 2023:

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

(1) We acquired HEYDUDE on February 17, 2022 and, as a result, added the HEYDUDE Brand as a new operating segment. Therefore, the amounts shown above for the nine months ended September 30, 2022 represent results during the Partial Period.

Direct-to-consumer (“DTC”) comparable sales were as follows:

(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, as included in the DTC comparable sales figures above, is determined on a monthly basis. Comparable store sales include 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 and in the same month in the following year. Location closures in excess of three months are excluded until the thirteenth month post re-opening. E-commerce comparable revenues are based on same site sales period over period. E-commerce sites that are temporarily offline or unable to transact or fulfill orders (“site disruption”) are excluded from the comparable sales calculation during the month of site disruption and in the same month in the following year. E-commerce site disruptions in excess of three months are excluded until the thirteenth month after the site has re-opened.

(3) We acquired HEYDUDE on February 17, 2022 and, as a result, added the HEYDUDE Brand as a new operating segment. As such, in the three and nine months ended September 30, 2022, we did not disclose DTC comparable sales for the HEYDUDE Brand.

Financial Condition, Capital Resources, and Liquidity

Liquidity

Our liquidity position as of September 30, 2023 was:

(in thousands)

As of September 30, 2023, we had $127.3 million in cash and cash equivalents and up to $563.7 million of available borrowings, including $548.7 million of remaining borrowing availability under the Revolving Facility (as defined below) and $15.0 million of remaining borrowing availability under the Asia revolving facilities. As of September 30, 2023, the Term Loan B Facility (as defined below) was fully drawn and there was no available borrowing capacity. We believe that cash flows from operations, our cash and cash equivalents on hand, and available borrowings under our Revolving Facility will be sufficient to meet our ongoing liquidity needs and capital expenditure requirements for at least the next twelve months.

In July 2023, we resumed our share repurchase program. Our capital allocation priorities will remain flexible between debt repayment and share repurchases as we approach our long-term net leverage targets.

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. Although we believe we have adequate sources of liquidity over the long term, the success of our operations, global economic conditions, and the pace of sustainable growth in our markets, among other things, could each impact our business and liquidity.

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. as of September 30, 2023 without incurring additional U.S. federal income taxes. In some countries, repatriation of certain foreign balances is restricted by local laws. These limitations may affect our ability to fully utilize our cash resources for needs in the U.S. or other countries and could adversely affect our liquidity. As of September 30, 2023, we held $72.5 million of our total $127.3 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. Of the $72.5 million, $3.0 million could potentially be restricted by local laws.

Senior Revolving Credit Facility

In July 2019, the Company and certain of its 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. Since that time, we have amended the Credit Agreement, which, as amended to date, provides for a revolving credit facility of $750.0 million, which can be increased by an additional $250.0 million subject to certain conditions (the “Revolving Facility”). Borrowings under the Credit Agreement bear interest at a variable interest rate based on (A) a Base Rate (defined as the highest of (i) the Overnight Bank Funding Rate (as defined in the Credit Agreement), plus 0.25%, (ii) the Prime Rate (as defined in the Credit Agreement), and (iii) the Daily Simple SOFR (as defined in the Credit Agreement), plus 1.00%), plus an applicable margin ranging from 0.25% to 0.875% based on our leverage ratio or 1.35% to 1.975% for the Daily Simple SOFR based on the leverage ratio, or (B) the Term SOFR Rate (as defined in the Credit Agreement), plus an applicable margin ranging from 1.35% to 1.975% based on our leverage ratio for one-month interest periods and 1.40% to 2.025% based on our leverage ratio for three month interest periods. 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 3.00 to 1.00, and a maximum leverage ratio of (i) 4.00 to 1.00 from the quarter ended March 31, 2022 through, and including, the quarter ending December 31, 2023, (ii) 3.75 to 1.00 for the quarter ending March 31, 2024, (iii) 3.50 to 1.00 for the quarter ending June 30, 2024, and (iv) 3.25 to 1.00 for the quarter ending September 30, 2024 and thereafter (subject to adjustment in certain circumstances). The Credit Agreement permits, among other things, (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 September 30, 2023, we were in compliance with all financial covenants under the Credit Agreement.

As of September 30, 2023, the total commitments available from the lenders under the Revolving Facility were $750.0 million. At September 30, 2023, we had $200.0 million in outstanding borrowings and $1.3 million in outstanding letters of credit under the Revolving Facility, which reduces amounts available for borrowing under the Revolving Facility. As of September 30, 2023 and December 31, 2022, we had $548.7 million and $748.7 million, respectively, of available borrowing capacity under the Revolving Facility, which matures November 2027.

Term Loan B Facility

On February 17, 2022, the Company entered into a credit agreement (the “Original Term Loan B Credit Agreement”) with Citibank, N.A., as administrative agent and lender, to among other things, finance a portion of the cash consideration for the Acquisition, which was amended (the "Amendment") on August 8, 2023 (the Original Term Loan B Credit Agreement, as amended by the Amendment, the “Term Loan B Credit Agreement”).

The Original Term Loan B Credit Agreement provided for an aggregate term loan B facility in the principal amount of $2.0 billion. Among other things, the Amendment provided for a new $1.18 billion tranche of term loans (the “2023 Refinancing Term Loans” and, such facility, the "Term Loan B Facility"), which is secured by substantially all of the Company’s and each subsidiary guarantor’s assets on a pari passu basis with their obligations arising from the Credit Agreement and is scheduled to mature on February 17, 2029, subject to certain exceptions set forth in the Term Loan B Credit Agreement. Additionally, subject to certain conditions, including, without limitation, satisfying certain leverage ratios, the Company may, at any time, on one or more occasions, add one or more new classes of term facilities and/or increase the principal amount of the loans of any existing class by requesting one or more incremental term facilities.

Pursuant to the reduced interest rate margins applicable to the 2023 Refinancing Term Loans, each term loan borrowing which is an alternate base rate borrowing bears interest at a rate per annum equal to the Alternate Base Rate (as defined in the Term Loan B Credit Agreement), plus 2.00%. Each term loan borrowing which is a term benchmark borrowing bears interest at a rate per annum equal to the Adjusted Term SOFR Rate (as defined in the Term Loan B Credit Agreement) plus 3.00%.

Outstanding principal under the Term Loan B Facility is payable on the last business day of each March, June, September and December, in a quarterly aggregate principal amount of $5.0 million. Quarterly aggregate principal payments began on June 30, 2022, with the remaining principal amount due on February 17, 2029, the maturity date. The 2023 Refinancing Term Loans replaced and refinanced all outstanding term loans under the Original Term Loan B Credit Agreement. As of September 30, 2023, we had $1,090.0 million in outstanding principal and the Term Loan B Facility was fully drawn with no remaining borrowing capacity.

The Term Loan B Credit Agreement also contains customary affirmative and negative covenants, incurrence financial covenants, representations and warranties, events of default and other provisions. As of September 30, 2023, we were in compliance with all financial covenants under the Term Loan B Credit Agreement.

Asia Revolving Credit Facilities

During the nine months ended September 30, 2023, we had two revolving credit facilities in Asia, the revolving credit facility with China Merchants Bank Company Limited, Shanghai Branch (the “CMBC Facility”), which matured in January 2023 and provided up to 10.0 million RMB, or $1.5 million using current exchange rates as of January 2023, and the revolving credit facility with Citibank (China) Company Limited, Shanghai Branch (the “Citibank Facility”), which, as amended, provides up to an equivalent of $15.0 million.

As of September 30, 2023, we had no borrowings outstanding on the Citibank Facility. As of December 31, 2022, we had no outstanding borrowings on the CMBC Facility, and we had borrowings outstanding of $4.3 million on the Citibank Facility.

Senior Notes Issuances

In March 2021, the Company completed the issuance and sale of $350.0 million aggregate principal amount of 4.250% Senior Notes due March 15, 2029 (the “2029 Notes”), pursuant to the indenture related thereto (as amended and/or supplemented to date, the “2029 Notes Indenture”). Additionally, in August 2021, the Company completed the issuance and sale of $350.0 million aggregate principal amount of 4.125% Senior Notes due August 15, 2031 (the “2031 Notes”), pursuant to the indenture related thereto (as amended and/or supplemented to date, “the 2031 Notes Indenture” and, together with the 2029 Notes Indenture, the “Indentures” and, each, an “Indenture”). Interest on each of the 2029 Notes and the 2031 Notes (collectively, the “Notes”) is payable semi-annually.

The Company will have the option to redeem all or any portion of the 2029 Notes, at once or over time, at any time on or after March 15, 2024, at a redemption price equal to 100% of the principal amount thereof, plus a premium declining ratably on an annual basis to par and accrued and unpaid interest, if any, to, but excluding, the date of redemption. The Company will also have the option to redeem some or all of the 2029 Notes at any time before March 15, 2024 at a redemption price of 100% of the principal amount to be redeemed, plus a “make-whole” premium and accrued and unpaid interest, if any, to, but excluding, the date of redemption. In addition, at any time before March 15, 2024, the Company may redeem up to 40% of the aggregate principal amount of the 2029 Notes at a redemption price of 104.250% of the principal amount with the proceeds from certain equity issuances, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption.

The Company will have the option to redeem all or any portion of the 2031 Notes, at once or over time, at any time on or after August 15, 2026, at a redemption price equal to 100% of the principal amount thereof, plus a premium declining ratably on an annual basis to par and accrued and unpaid interest, if any, to, but excluding, the date of redemption. The Company will also have the option to redeem some or all of the 2031 Notes at any time before August 15, 2026 at a redemption price of 100% of the principal amount to be redeemed, plus a “make-whole” premium and accrued and unpaid interest, if any, to, but excluding, the date of redemption. In addition, at any time before August 15, 2024, the Company may redeem up to 40% of the aggregate principal amount of the 2031 Notes at a redemption price of 104.125% of the principal amount with the proceeds from certain equity issuances, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption.

The Notes rank pari passu in right of payment with all of the Company’s existing and future senior debt, including the Credit Agreement, and are senior in right of payment to any of the Company’s future debt that is, by its term, expressly subordinated in right of payment to the Notes. The Notes are unconditionally guaranteed by each of the Company’s restricted subsidiaries that is a borrower or guarantor under the Credit Agreement and by each of the Company’s wholly-owned restricted subsidiaries that guarantees any debt of the Company or any guarantor under any syndicated credit facility or capital markets debt in an aggregate principal amount in excess of $25.0 million.

The Indentures contain covenants that, among other things, limit the ability of the Company and its restricted subsidiaries to incur additional debt or issue certain preferred stock; pay dividends or repurchase or redeem capital stock or make other restricted payments; declare or pay dividends or other payments; incur liens; enter into certain types of transactions with the Company’s affiliates; and consolidate or merge with or into other companies. As of September 30, 2023, we were in compliance with all financial covenants under the Notes.

Cash Flows

(in thousands)

Operating Activities. Cash provided by operating activities consists of net income adjusted for noncash items and changes in working capital. Cash provided by operating activities increased $334.0 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, driven by higher net income, adjusted for non-cash items, of $152.4 million and increases in operating assets and liabilities of $181.6 million, primarily due to lower inventories.

Investing Activities. There was a $2,050.0 million decrease in cash used in investing activities for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The decrease is primarily due to the cash paid for the acquisition, net of cash acquired, in the nine months ended September 30, 2022 that did not recur in the current year. Refer to Note 15 — Acquisition of HEYDUDE in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements of this Quarterly Report on Form 10-Q.

Financing Activities. Cash provided by financing activities decreased by $2,385.5 million in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The decrease was primarily due to a decrease of $2,026.1 million in proceeds from borrowings, which includes borrowings under the Term Loan B Facility of $2.0 billion used to fund the acquisition of HEYDUDE in part during the nine months ended September 30, 2022 that did not recur in the current year. Additionally, there was an increase of $253.4 million in repayments of borrowings, an increase of $150.0 million in repurchases of common stock, an increase of $5.6 million in repurchases of common stock for tax withholding, and a decrease in cash provided by financing activities of $0.1 million. The overall decrease was offset by a $49.7 million decrease in deferred debt issuance costs.

Contractual Obligations

There have been no significant changes to the contractual obligations reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, other than borrowings and repayments on the Term Loan B Facility, Revolving Facility, and Asia revolving credit facilities.

Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements as of September 30, 2023, 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 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 and estimates, please refer to our Annual Report on Form 10-K for the year ended December 31, 2022 and Note 2 — Recent Accounting Pronouncements in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements 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, 2022.

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 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 Revolving Facility and certain financial instruments.

Borrowings under our Term Loan B Facility and Revolving 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 September 30, 2023, we had borrowings with a face value of $1,990.0 million, comprised of the Notes, which carry a fixed rate, the Term Loan B Facility, and borrowings under our Revolving Facility. We also had $1.3 million in outstanding letters of credit under our Revolving Facility as of September 30, 2023. As of December 31, 2022, we had long-term borrowings with a face value of $2,379.3 million and $1.3 million in outstanding letters of credit under our Revolving Facility.

A hypothetical increase of 1% in the interest rate on the variable rate borrowings under our Term Loan B Facility and Revolving Facility would have increased interest expense by $3.4 million and $11.6 million for the three and nine months ended September 30, 2023, 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 income 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 when translating our financial results would have decreased our revenues and income before taxes during the three months ended September 30, 2023 by $5.9 million and $1.1 million, respectively. During the nine months ended September 30, 2023, an increase of 1% of the value of the U.S. Dollar relative to foreign currencies would have decreased our revenues and income before taxes by $17.7 million and $4.2 million, respectively. This analysis does not account for transactional fluctuations in accounts, such as those driven by purchasing power, which is defined as purchasing foreign goods in the U.S. Dollar but recognizing the cost in foreign currencies. The volatility of the exchange rates is dependent on many factors that cannot be forecasted with reliable accuracy.

In order to manage exposure to fluctuations in foreign currency and to reduce the volatility in earnings caused by fluctuations in foreign exchange rates, we may enter into forward foreign exchange contracts to buy or sell various foreign currencies. Changes in the fair value of these forward contracts are recognized in earnings in the period that the changes occur or in the period in which the hedged transaction affects earnings for derivatives classified as non-hedged or hedged, respectively, as defined in Note 7 — Derivative Financial Instruments in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements of this Quarterly Report on Form 10-Q. As of September 30, 2023, the U.S. Dollar notional value of our outstanding foreign currency forward exchange contracts was approximately $165.3 million. The fair value of these contracts at September 30, 2023 was an insignificant liability.

We perform a sensitivity analysis to determine the effects that market risk exposures may have on the fair values of our foreign currency forward exchange contracts. To perform the sensitivity analysis, we assess the risk of changes in fair values from the effect of hypothetical changes in foreign currency exchange rates. This analysis assumes a like movement by the foreign currencies in our hedge portfolio against the U.S. Dollar. As of September 30, 2023, a 10% appreciation in the value of the U.S. Dollar would result in a net decrease in the fair value of our derivative portfolio of approximately $1.1 million.

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 income for the nine months ended September 30, 2023 and 2022.

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”) as of September 30, 2023. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2023, 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 SEC’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

In the three months ended March 31, 2022, we closed the Acquisition, as discussed in Note 15 — Acquisition of HEYDUDE, and as such, internal controls over the HEYDUDE financial processes have been integrated and will be included in Management’s Evaluation of Disclosure Controls and Procedures for the year ending December 31, 2023. There were no other changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the three months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes to the risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2022.