UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant To Section 13 or 15(d)
of the Securities Exchange Act of 1934
For The Fiscal Year Ended March 31, 2017
Commission File Number: 001-36436
DECKERS OUTDOOR CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 95-3015862 |
(State of incorporation) | (I.R.S. Employer Identification No.) |
250 Coromar Drive, Goleta, California 93117
(Address of principal executive offices)
(805) 967-7611
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | New York Stock Exchange |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o No ý
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x | Accelerated filer o |
Non-accelerated filer o | (Do not check if a smaller reporting company) |
Smaller reporting company o | |
Emerging growth company o | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
At September 30, 2016, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting stock held by the non-affiliates of the registrant was approximately $1,897,849,329, based on the number of shares held by non-affiliates of the registrant as of that date, and the last reported sale price of the registrant's common stock on the New York Stock Exchange on that date, which was $59.55. This calculation does not reflect a determination that persons are affiliates for any other purposes.
The number of shares of the registrant's Common Stock outstanding as of close of business on May 12, 2017 was 31,990,065.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement on Schedule 14A relating to the registrant's 2017 annual meeting of stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, are incorporated by reference in Part III of this Annual Report on Form 10-K. With the exception of the portions of the Proxy Statement specifically incorporated herein by reference, the Proxy Statement and related proxy solicitation materials are not deemed to be filed as part of this Annual Report on Form 10-K.
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
For The Fiscal Year Ended March 31, 2017
TABLE OF CONTENTS
Page | ||
Item 1B. | Unresolved Staff Comments | * |
Item 4. | Mine Safety Disclosures | * |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | * |
Item 9B. | Other Information | * |
*Not applicable.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, filed with the Securities and Exchange Commission (SEC) on May 30, 2017 (Annual Report on Form 10-K), and the information and documents incorporated by reference in this Annual Report on Form 10-K, contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which statements are subject to considerable risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements other than statements of historical fact contained in, or incorporated by reference into, this Annual Report on Form 10-K, including statements regarding our future or assumed condition, results of operations, business plans and strategies, competitive position and market opportunities. We have attempted to identify forward-looking statements by using words such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “predict”, “project”, “should”, “will”, or “would”, and similar expressions or the negative of these expressions. Specifically, this Annual Report on Form 10-K, and the information and documents incorporated by reference in this Annual Report on Form 10-K, contains forward-looking statements relating to, among other things:
• | the results of and costs associated with our Savings Plan (as defined herein) and ongoing restructuring plan, including our retail store fleet optimization and office consolidations; |
• | our global business, growth, operating, investing, and financing strategies; |
• | our product offerings, distribution channels, and geographic mix; |
• | consumer preferences with respect to new brands and products; |
• | the purchasing behavior and buying patterns of retail consumers; |
• | the impact of seasonality and weather on our operations; |
• | our review of a broad range of strategic alternatives; |
• | expectations regarding our net sales and earnings growth and other financial metrics; |
• | our development of worldwide distribution channels; |
• | purchasing behavior of wholesale customers, including the timing of orders and management of inventory; |
• | trends affecting our financial condition, results of operations, liquidity or cash flows; |
• | our expectations for expansion of our Direct-to-Consumer capabilities, primarily in our E-Commerce business; |
• | overall global economic trends, including foreign currency exchange rate fluctuations; |
• | reliability of overseas factory production and storage; |
• | the availability and cost of raw materials; |
• | the value of goodwill and other intangible assets, and future write-downs or impairment charges; |
• | changes impacting our tax liability and effective tax rates, including as a result of changes in tax laws or treaties, foreign income or loss, and the realization of net deferred tax assets; |
• | potential impacts of our ongoing operational systems upgrades and costs associated with our business transformation project implementation; |
• | commitments and contingencies, including purchase obligations for product and sheepskin; and |
• | the impact of recent accounting pronouncements. |
Forward-looking statements represent our management's current expectations and predictions about trends affecting our business and industry and are based on information available at the time such statements are made. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy or completeness. Forward-looking statements involve numerous known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements predicted, assumed or implied by the forward-looking statements. Some of the risks and uncertainties that may cause our actual results to materially differ from those expressed or implied by these forward-looking statements are described in Part I, Item 1A, "Risk Factors" and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", in this Annual Report on Form 10-K, as well as in our other filings with the SEC. You should read this Annual Report on Form 10-K, including the information and documents incorporated by reference herein, in its entirety and with the understanding that our actual future results may be materially different from the results expressed or implied by these forward-looking statements. Moreover, we operate in an evolving environment. New risks and uncertainties emerge from time to time and it is not possible for our management to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause our actual future results to be materially different from any results expressed or implied by any forward-looking statements. Except as required by applicable law or the listing rules of the New York Stock Exchange, we expressly disclaim any intent or obligation
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to update any forward-looking statements. We qualify all of our forward-looking statements with these cautionary statements.
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PART I
References in this Annual Report on Form 10-K to "Deckers", "we", "our", "us", or the "Company" refer to Deckers Outdoor Corporation, together with its consolidated subsidiaries. UGG® (UGG), Teva® (Teva), Sanuk® (Sanuk), Hoka One One® (Hoka), Koolaburra® by UGG (Koolaburra), Ahnu® (Ahnu) and UGGpureTM (UGGpure) are some of our trademarks. Other trademarks or trade names appearing elsewhere in this report are the property of their respective owners. Solely for convenience, the trademarks and trade names in this Annual Report on Form 10-K are referred to without the ® and™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto.
Unless otherwise specifically indicated, all amounts in Items 1, 1A, 2, and 3 herein are expressed in thousands, except for employees, store and country counts and share data. The defined periods for the fiscal years ended March 31, 2017, 2016, and 2015 are stated herein as "year ended" or "years ended".
Item 1. Business
General
Deckers Outdoor Corporation was incorporated in 1975 under the laws of the State of California and, in 1993, reincorporated under the laws of the State of Delaware. We are a global leader in designing, marketing and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high performance activities. We market our products primarily under five proprietary brands: UGG, Koolaburra, Hoka, Teva and Sanuk. We believe that our footwear is distinctive and appeals broadly to women, men and children. We sell our products through quality domestic and international retailers, international distributors, and directly to our end-user consumers both domestically and internationally through our Direct-to-Consumer (DTC) business, which is comprised of our retail stores and E-Commerce websites. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. All of our products are currently manufactured by independent manufacturers primarily in Asia. Our growth will depend on our ability to diversify our product offerings, increase the appeal of our products to consumers, optimize domestic and international distribution, drive sales to consumers, and develop or acquire new brands.
Recent Developments
Restructuring. In February 2016, we announced the implementation of a restructuring plan, which included a retail store fleet optimization and office consolidations, including the closure of facilities and relocation of employees to realign our brands across our Fashion Lifestyle and Performance Lifestyle groups. This restructuring plan is intended to streamline brand operations, reduce overhead costs, create operating efficiencies and improve collaboration.
In connection with these restructuring efforts, we incurred total restructuring charges of approximately $29,100 and $24,800 during fiscal year 2017 and 2016, respectively, with a total of $29,100 and $22,800 recognized in selling, general and administrative (SG&A) expenses and approximately $0 and $2,000 in cost of sales, respectively. Related to these charges, we closed 25 retail stores, including five retail stores during fiscal year 2016 and 20 retail stores during fiscal year 2017, and consolidated several offices as of March 31, 2017. In fiscal year 2016, we relocated our Sanuk brand operations in Irvine, California to our corporate headquarters in Goleta, California and closed our Ahnu brand operations in Richmond, California, as well as consolidated our European offices.
As part of our continuing evaluation of our retail store fleet, we identified additional stores for closure during the year ended March 31, 2017. During fiscal year 2017, we recognized approximately $3,600 in restructuring charges in SG&A expenses related to non-cash impairment charges for retail store assets for 12 of these stores. In May 2017, we announced that we expect to further reduce our global brick and mortar footprint by 30 to 40 stores compared to our store count at March 31, 2017, discussed below, which includes a combination of store closures and conversion of owned stores to partner retail stores. We are targeting a worldwide store count of approximately 125 stores by the end of fiscal year 2020.
Refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", and Note 2, "Restructuring", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on our restructuring efforts, and the impact to our results of operations and our reportable operating segments.
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Savings Plan. In February 2017, we announced a plan to implement significant cost savings, excluding reinvestment (Savings Plan). The Savings Plan includes a combination of both cost of sales improvements and SG&A expense savings. Cost of sales improvements are expected to come from reducing product development cycle times, optimizing material yields, consolidating our factory base and continuing to move production outside of China. SG&A expense savings are expected to come from further retail store consolidations, process improvement efficiencies and lower unallocated indirect spend. In May 2017, we provided an update that the goal of the Savings Plan is to drive approximately $100,000 in operating profit improvement by the end of fiscal year 2020.
Review of Strategic Alternatives. In April 2017, we announced that our Board of Directors has initiated a process to review a broad range of strategic alternatives. This review process includes an exploration and evaluation of strategic alternatives to enhance stockholder value, which may include a sale or other transaction.
Products and Brands
We currently market our products primarily under five propriety brands, composed of our three primary brands and our other brands. Collectively, our brands compete across the fashion and casual lifestyle, outdoor, and running markets.
UGG. The UGG brand is one of the most iconic and recognized brands in footwear and highlights our successful track record of building niche brands into lifestyle market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, with expanded product offerings and a growing global audience that attracts women, men and children. We intend to continue diversifying the UGG brand by developing more year-round product that includes spring and summer footwear, as well as growing men's products and non-footwear. The UGG brand is sold both domestically and internationally in key markets including the US, UK, Germany, China, Japan, and Canada, among others.
Teva. Teva is a modern outdoor active lifestyle brand, born from the outdoors and rooted in adventure. As the originator of the sport sandal, the Teva brand's product line now includes sandals, shoes, and boots built for ultimate versatility.
Sanuk. Sanuk is a surf lifestyle footwear brand rooted in Southern California culture. The Sanuk brand is best known for its SIDEWALK SURFERS shoe, Yoga Mat and Beer Cozy sandal collections. The brand has a history of product invention, comfort, unexpected materials and clever branding.
Other Brands. Other brands consist of: Hoka, a line of running footwear that offers maximal cushioning with minimal weight and is designed for runners of all capacities; Koolaburra, a line of fashion casual footwear using sheepskin and other plush materials; and Ahnu, a line of performance outdoor footwear, which we have discontinued operating and have begun to leverage under the Teva brand umbrella.
Sales and Distribution
US Distribution. At the wholesale level, we distribute our products in the US through sales representatives, who are organized geographically and by brand. In addition to our wholesale business, we also sell products directly to end-user consumers through our DTC business.
Currently, our sales force is generally separated by brand, as each brand generally has certain specialty consumers. However, there is some overlap between the sales teams and customers, and we are aligning our brands' sales forces to position them for the future of the brands.
We distribute products sold in the US through our distribution centers in Camarillo and Moreno Valley, California. Our distribution centers feature a warehouse management system that enables us to efficiently pick and pack products for direct shipment to customers.
International Distribution. Internationally, we distribute our products through independent distributors and wholly-owned subsidiaries in many countries, including Europe, Asia-Pacific, and Canada, among others. In addition, in certain countries we sell products through DTC. We also sell products internationally, particularly in China, through partner retail stores, which are branded stores that are wholly owned and operated by third parties. Sales through partner retail stores are primarily attributed to the UGG and Sanuk brand wholesale reportable operating segments.
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For our wholesale and DTC businesses, we distribute our products through a number of distribution centers managed by third-party logistics providers (3PLs) in certain international locations.
UGG Wholesale. We sell the UGG brand primarily through domestic higher-end department stores such as Nordstrom and Dillard's, as well as lifestyle retailers such as Journeys, and online retailers such as Amazon and Zappos.com. As the retail marketplace continues to evolve and change to reflect changing consumer habits, we continually review and evaluate our UGG wholesale distribution approach and segmentation.
Teva Wholesale. We sell our Teva brand footwear primarily through specialty outdoor, sporting goods, department stores and family footwear, including retailers such as REI, Famous Footwear, DSW and online retailers such as Amazon and Zappos.com.
Sanuk Wholesale. We sell our Sanuk brand footwear primarily through domestic independent action sports retailers, outdoor retailers, specialty footwear retailers and larger national retail chains, including Journeys, Dillard's, DSW, REI and online retailers such as Amazon and Zappos.com.
Other Brands Wholesale. Our other brands are sold primarily at domestic specialty running stores, department stores, outdoor and independent specialty retailers, and with online retailers. Key accounts of the Hoka brand include Running Warehouse, Road Runner Sports, Running Specialty Group, REI and Zappos.com. Key accounts of the Koolaburra brand include Kohl's and Rack Room Shoes.
Direct-to-Consumer. Our DTC business is comprised of our retail stores and E-Commerce websites. As a result of our evolving Omni-Channel strategy, we believe that our retail stores and websites are largely intertwined and dependent on one another. We believe that in many cases consumers interact with both our brick and mortar stores and our websites before making purchase decisions. For example, consumers may feel or try on products in our retail stores and then place an order online later. Conversely, they may initially research products online, and then view inventory availability by store location and make a purchase in store. Some examples that demonstrate the extent to which the sales channels are combined and help improve our inventory productivity include the following:
• | “UGG Rewards”: We have implemented a consumer loyalty program under which points and awards are earned across the DTC business. |
• | “Infinite UGG”: We provide online shopping access inside retail stores for all SKUs available on our E-Commerce websites. |
• | "Ship from Store": Inventory that is available in our stores, but is out of stock online can be shipped from our stores. Future advancements in the capability will use algorithms to select the optimal fulfillment source. |
• | "UGG Closet": an online portal that functions similar to an outlet store in that it provides a way to closeout inventory directly to consumers. |
• | “Buy online / return in-store”: Our consumers can buy online and return products to the store. |
• | “Click and collect”: Our consumers can buy online and have products delivered to certain of our retail stores for pick-up. |
• | “Retail inventory online”: Our consumers can view specific store location inventory online before visiting the store. |
Our retail stores enable us to expose consumers to a greater breadth of product, directly impact our consumers' experiences, sell the products at retail prices and generate greater gross margins. Our retail stores are predominantly UGG brand concept and outlet stores. Through our outlet stores, depending on the location, we sell some of our discontinued styles from prior seasons, full price in-line products, as well as products made specifically for the outlet stores. At March 31, 2017, we had a total of 160 retail stores worldwide, which includes 96 concept stores and 64 outlet stores. During fiscal year 2017, we opened 17 new retail stores, reclassified 12 European concession stores as owned stores, converted two owned stores to partner retail stores, and closed 20 retail stores. Concession stores are considered concept stores that are operated by us within a department or other store, which we lease from the store
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owner by paying a percentage of concession store sales. Refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, for further disclosure and discussion.
Product Design and Development
The design and development functions for all of our brands are performed by a combination of internal design and development staff and outside freelance designers. Refer to Note 1, "The Company and Summary of Significant Accounting Policies", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for a discussion of the research and development costs we have incurred for the last three fiscal years.
In order to ensure quality, consistency, and efficiency in our design and product development process, we continually evaluate the availability and cost of raw materials, the capabilities and capacity of our independent manufacturers and the target retail price of new models and lines. The design and development staff works closely with brand management to develop new styles of footwear and accessories for our various product lines. Throughout the development process, we have multiple design and development reviews, which we then coordinate with our independent manufacturers.
Manufacturing and Supply Chain
We do not manufacture our products. We outsource the production of our brand footwear to independent manufacturers, primarily in Asia. We require our independent manufacturers and designated suppliers to adopt our Supplier Code of Conduct, which specifies that they comply with all local laws and regulations governing human rights, working conditions, and environmental compliance before we are willing to conduct business with them. We also require our manufacturing partners and licensees to comply with our Restricted Substances Policy, Anti-Corruption Policy and other compliance policies and procedures as a condition of doing business with us.
The production of footwear by our independent manufacturers is performed in accordance with our detailed specifications and is subject to our quality control standards. We maintain a buying office in Hong Kong and on-site supervisory offices in Pan Yu City, China and Hai Phong City, Vietnam, which together serve as a link to our independent manufacturers. We believe this regional presence provides predictability of material availability, product flow and adherence to final design specifications. The majority of the materials and components used in production of our products by these independent manufacturers are purchased from independent suppliers that we designate.
At our direction, our manufacturers currently purchase the majority of the sheepskin used in our products from two tanneries in China, which source their sheepskin for our products primarily from Australia and the UK. We maintain communication with the tanneries to monitor the available supply of sufficient high-quality sheepskin for our projected UGG brand production. To ensure adequate supplies for our manufacturers, we forecast our usage of sheepskin in advance at a forward price. We have also entered into purchase commitments with certain sheepskin suppliers. Refer to Note 7, "Commitments and Contingencies", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on our minimum purchase commitments. We believe current supplies are sufficient to meet our current and anticipated demand, but we continue to investigate our options to accommodate our expected growth or unexpected supply chain issues.
Beginning in 2013, in an effort to partially reduce our dependency on sheepskin, we began using a proprietary new raw material, UGGpure™, which is a wool woven into a durable backing, in some of our UGG brand products. Excluding sheepskin and UGGpure™, we believe that substantially all the various raw materials and components used to manufacture our footwear, including wool, rubber, leather, and nylon webbing are generally available from multiple sources at competitive prices. We generally outsource our manufacturing requirements on the basis of individual purchase orders or short-term purchase commitments rather than maintaining long-term purchase commitments with our independent manufacturers.
We have instituted pre-production, in-line, and post-production inspections to meet or exceed the high quality demanded by us and consumers of our products. Our quality assurance program includes our own employee on-site inspectors at our independent manufacturers, who oversee the production process and perform quality assurance inspections. We also routinely inspect our products upon arrival at our distribution centers.
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Patents and Trademarks
We utilize trademarks with virtually all of our products and believe that having distinctive marks that are readily identifiable is an important factor in creating a market for our products, promoting our brands, and distinguishing our products from the products of others. We currently hold trademark registrations for "UGG", "Teva", "Sanuk", "Hoka One One", "Koolaburra", "Ahnu", "UGGpure", and other marks in the US and for certain of the marks in many other countries, including Canada, China, the UK, various countries in the European Union, Japan, and Korea. As of March 31, 2017, we hold 176 designs and inventions with corresponding design or utility patent registrations, plus 14 designs and inventions which are currently pending registration. These patents expire at various times. We regard our proprietary rights as valuable assets and vigorously protect such rights against infringement by third parties.
Seasonality
Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th. Due to the size of the UGG brand relative to our other brands, our aggregate net sales in the quarters ending September 30th and December 31st have significantly exceeded net sales in the quarters ending March 31st and June 30th. For further discussion, including regarding the factors that may cause actual results to differ materially from our expectations, refer to Part I, Item 1A, "Risk Factors", and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations".
Inventory Management
We manage our inventory levels based on existing orders, anticipated sales and the rapid-delivery requirements of our customers. We have put in place systems and processes designed to improve our forecasting and supply planning capabilities. In addition, we believe that added discipline around the purchasing of product, production lead time reduction, and better planning and execution in selling of excess inventory through our outlet stores and other liquidation channels are key areas of focus that will enhance inventory performance.
Our practice, and the general practice in the footwear and accessory industries, is to offer retail customers the right to return defective or improperly shipped merchandise. As it relates to new product introductions, which can often require large initial launch shipments, we commence production before receiving orders for those products from time to time. This can affect our inventory levels as we build pre-launch quantities.
Backlog
Historically, we have encouraged our wholesale and distributor customers to place, and we have received, a significant portion of orders as pre-season orders, generally four to eight months prior to the anticipated shipment date. We work with our wholesale customers through pre-season programs to enable us to better plan our production schedule, and inventory and shipping needs. We refer to backlog as unfilled customer orders from our wholesale customers and distributors as of any date, which represent orders scheduled to be shipped at a future date, some of which can be cancelled prior to shipment. As such, these orders may not be indicative of actual future shipments. Therefore, we believe backlog is an imprecise indicator and is not material for understanding the business in its entirety, especially since backlog excludes sales in our DTC business.
As of March 31, 2017, our backlog was approximately $649,000. The backlog as of a particular date is affected by a number of factors, including seasonality, manufacturing schedule, and the timing of product shipments, as well as variations in when wholesale customers and distributors place orders. As a result, comparisons of the backlog from period-to-period may not provide an accurate indication of future results.
Competition
The footwear markets that we operate in are highly competitive. Our competitors include athletic and footwear companies, branded apparel companies and retailers with their own private labels. Although the footwear industry is fragmented to a certain degree, many of our competitors are larger and have substantially greater resources than us, including athletic shoe companies, several of which compete directly with some of our products. In addition, access to offshore manufacturing and the growth of E-Commerce has made it easier for new companies to enter the markets in which we compete, further increasing competition in the footwear and accessory industries. In particular, and in part due to the popularity of our UGG brand products, we face increasing competition from a significant number of domestic
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and international competitors selling products designed to compete directly or indirectly with our UGG brand products. We believe that our ability to successfully compete depends on numerous factors, including responding to consumer preferences, producing appealing product, and pricing products competitively, among others. For a discussion on how we compete, refer to Part 1, Item 1A, "Risk Factors".
Employees
At March 31, 2017, we employed approximately 3,300 employees in the US, Europe, and Asia, none of whom were represented by a union. This figure includes approximately 1,800 employees in our retail stores worldwide, which includes part-time and seasonal employees.
Financial Information about Reportable Operating Segments and Geographic Areas
Our five reportable operating segments include the strategic business units responsible for the worldwide operations of our brands' (UGG, Teva, Sanuk and other brands) wholesale divisions, as well as our DTC business. The majority of our sales and long-lived assets are in the US. Refer to Note 12, "Reportable Operating Segments", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further discussion of our reportable operating segments. Refer to Note 13, "Concentration of Business, Significant Customers and Credit Risk", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for financial information about geographic areas and concentration of related business risks.
Government Regulation
Compliance with federal, state, and local environmental regulations has not had, and it is not expected to have, any material effect on our capital expenditures, earnings, or competitive position based on information and circumstances known to us at this time.
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website at www.deckers.com. Such documents are available as soon as reasonably practicable after they are filed with or furnished to the Securities and Exchange Commission (SEC). Our filings may also be read and copied at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
We also make available through our website the following corporate governance documents: Audit Committee Charter, Compensation Committee Charter, Corporate Governance Charter, Code of Ethics, Accounting and Finance Code of Conduct, Corporate Governance Guidelines, and Conflict Minerals Policy.
The information contained on or accessed through our website does not constitute part of this Annual Report on Form 10-K, and references to our website address in this Annual Report on Form 10-K are inactive textual references only.
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Item 1A. Risk Factors
Our short and long-term success is subject to numerous risks and uncertainties, many of which involve factors that are difficult to predict or beyond our control. Investing in our common stock involves substantial risk. Before making a decision to invest in, hold or sell our common stock, stockholders and potential stockholders should carefully consider the risks and uncertainties described below, in addition to the other information contained in or incorporated by reference into this Annual Report on Form 10-K, as well as the other information we file with the SEC. If any of the following risks are realized, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that case, the value of our common stock could decline and stockholders may lose all or part of their investment. Furthermore, additional risks and uncertainties of which we are currently unaware, or which we currently consider to be immaterial, could have a material adverse effect on our business. Refer to the section entitled "Cautionary Note Regarding Forward-Looking Statements" on page 2 of this Annual Report on Form 10-K.
Many of our products are inherently seasonal, and the sales of our products are highly sensitive to weather conditions, which makes it difficult to anticipate consumer demand for our products, manage our expenses, and forecast our financial results.
Due to the nature of many of our product offerings, sales of our products are inherently seasonal. Historically, the highest percentage of UGG brand net sales have occurred in the fall and winter months (our second and third fiscal quarters), and the highest percentage of Teva and Sanuk brand net sales have occurred in the spring and summer months (our first and fourth fiscal quarters). Due to the size of the UGG brand relative to our other brands, this trend has resulted in our aggregate net sales for the second and third fiscal quarters significantly exceeding our net sales in the first and fourth fiscal quarters. While we have taken steps to diversify our product offerings, both by creating more year-round styles within our existing brands, and by acquiring and developing new brands, we expect this trend to continue for the foreseeable future. As a result of the relative concentration of our sales in certain months of the year, factors which specifically impact consumer spending patterns in those months, such as unexpected weather patterns, declines in consumer confidence or worsening economic conditions, will have a disproportionate impact on our business, and could result in our failure to achieve financial performance that is in line with our expectations.
In particular, sales of our products are highly sensitive to weather conditions, which are difficult to predict and beyond our control. For example, extended periods of unseasonably warm weather during the fall or winter months may significantly reduce demand for our UGG products. Unanticipated weather conditions may continue to have a material, negative impact on our financial condition and results of operations. In addition, the unpredictability of weather conditions makes it more difficult for us to accurately forecast our financial results and to meet the expectations of analysts and investors.
We use sheepskin to manufacture a significant portion of our products, and if we are unable to obtain a sufficient quantity of sheepskin that meets our quality expectations, it could have a material adverse impact on our business.
For the manufacturing of our products, we purchase certain raw materials that are affected by commodity prices, the most significant of which is sheepskin. The supply of sheepskin, which is used to manufacture a significant portion of our UGG products, is in high demand and there are a limited number of suppliers that are able to meet our expectations for the quantity and quality of sheepskin that we require. In addition, our unique product design and animal welfare standards require sheepskin that may only be found in limited geographic locations. We presently rely on only two tanneries to provide the majority of our sheepskin. If the sheepskin provided by these tanneries and the resulting products we deliver to consumers, do not conform to our quality specifications or fail to meet consumer expectations, we could experience a higher rate of customer returns, which would reduce our net sales and harm our reputation. Similarly, if the tanneries are not able to deliver sheepskin in the quantities required this would negatively impact our manufacturing process and lead to inventory shortages, which would result in a loss of sales and strain our relationships with our customers.
In addition, any factors that negatively impact the business of these tanneries, such as loss of customers, financial instability or bankruptcy, could prevent them from delivering sheepskin to us in the quantities expected or at all. Our sheepskin suppliers currently warehouse their inventory at a limited number of facilities in China. The loss, destruction, or disruption of work at any of these facilities would likely result in shortages in our supply of sheepskin. These events are unpredictable and not within our control. If any of these events were to occur, it would likely result in interruptions in our manufacturing process, the loss of sales and harm to our reputation.
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In some, but not all recent years, there have been significant fluctuations in the price of sheepskin as the demand for this commodity from our customers and our competitors has changed. We believe the significant factors affecting the price of sheepskin include weather patterns, harvesting decisions, incidence of disease, the price of other commodities such as wool, the demand for our products and the products of our competitors, and global economic conditions. Most of these factors are not considered predictable or within our control. For example, if the price of wool increases, sheep herders may choose not to harvest their sheep and instead choose to shear their sheep for wool, thus decreasing the supply of sheepskin. Similarly, sheepskin is a by-product of the food industry, and the demand for sheep meat has generally been decreasing, thus leading to an overall reduction in the number of sheep available. Any factors that increase the demand for, or decrease the supply of, sheepskin could cause significant increases in the price of sheepskin, which would increase our manufacturing costs and reduce our gross margins.
Beginning in 2013, in an effort to partially reduce our dependency on sheepskin, we began using a proprietary raw material, UGGpure, which is a wool woven into a durable backing, in some of our UGG brand products. In addition, we use purchasing contracts and other pricing arrangements to attempt to reduce the impact of fluctuations in sheepskin prices. However, in the event of a prolonged increase in sheepskin prices such as what we experienced in the past, which at times has been significant, these strategies may not be sufficient to fully offset the impact on our financial results from the increased prices. In that event, it is unlikely we would be able to adjust our product prices sufficiently to eliminate the impact on our gross margins and our financial results may suffer.
The footwear and fashion industry is subject to rapid changes in consumer preferences, and if we do not accurately anticipate and promptly respond to consumer demand, including through effective marketing, we could lose sales, our relationships with customers could be harmed and our brand loyalty could be diminished.
The footwear and fashion industry is subject to rapid changes in consumer preferences and tastes, which make it difficult to anticipate demand for our products and forecast our financial results. We believe there are many factors that may affect the demand for our products, including:
• | seasonality, including the impact of anticipated and unanticipated weather conditions; |
• | continued consumer acceptance of our existing products and acceptance of our new products; |
• | consumer demand for products of our competitors; |
• | consumer perception and preference for our brands; |
• | the extent to which consumers view certain of our products as substitutes for other products we manufacture; |
• | publicity, including social media, related to us, products, brands, and marketing campaigns; |
• | the life cycle of our products and consumer replenishment behavior; |
• | evolving fashion and lifestyle trends, and the extent to which our products reflect these trends; |
• | brand loyalty; |
• | changes in consumer confidence and buying patterns, and other factors that impact discretionary income and spending; and |
• | changes in general economic and market conditions. |
Consumer demand for our products depends in part on the continued strength of our brands, which in turn depends on our ability to anticipate, understand and promptly respond to the rapidly changing preferences and fashion tastes of footwear and apparel consumers. As our brands and product offerings continue to evolve, it is necessary for our products to appeal to an even broader range of consumers whose preferences cannot be predicted with certainty. For example, many UGG products include a fashion element and could go out of style at any time. Furthermore, we are dependent on consumer receptivity to our new products and to the marketing strategies we employ to promote those products. Consumers may not purchase new models and styles of footwear or accessories in the quantities projected or at all. If we fail to react appropriately to changes in consumer preferences and fashion trends, consumers may consider our brands and products to be outdated or associate our brands and products with styles that are no longer popular, which may adversely affect our overall financial performance.
Our success is driven to some extent by brand loyalty, and there can be no assurance that consumers will continue to prefer our brands. The value of our brands is largely based on evolving consumer perceptions, and one or more missteps with respect to factors such as product quality, product design or customer service, could result in negative perceptions and a corresponding loss of brand loyalty and value. In addition, negative claims or publicity regarding us, our products, our brands, our marketing campaigns or our celebrity endorsers, could adversely affect our reputation and sales regardless of whether such claims are accurate. Social media, which accelerates the dissemination of information, can increase the challenges of containing any such negative claims. If consumers begin to have negative
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perceptions of our brands, whether or not warranted, our brand image would become tarnished and our products would become less desirable, which could have a material adverse effect on our business.
If we are unsuccessful in implementing our ongoing restructuring plan and our Savings Plan, we may incur significant charges and costs without any corresponding benefits to our business, in which case our financial condition and operating results may be adversely affected.
We are in the ongoing process of restructuring our business in order to streamline brand operations, reduce overhead costs, create operating efficiencies and improve collaboration. This includes a retail store fleet optimization and office consolidations, including the closure of facilities and relocation of employees to realign our brands across our Fashion Lifestyle and Performance Lifestyle groups. Key components to executing this plan include organizational changes, continued retail store closures, and conversion of owned stores to partner retail stores, among others.
As part of our ongoing restructuring plan, we have incurred, and expect to continue to incur, significant restructuring charges and other costs, which have and may continue to include SG&A expenses related to the write-off of retail store related assets, the early termination of retail store leases, employee severance costs, termination of various contracts, and the disposal of equipment and software impairments, among others. There can be no assurance that the benefits from these restructuring efforts, including from any potential reduction in overhead costs or improvement in operating efficiencies, will be sufficient to offset the restructuring charges and other costs that we have already incurred and that we expect to incur in the future. If we fail to realize the anticipated benefits from these measures, or if we incur charges or costs in amounts that are greater than our estimates, our financial condition and operating results may be adversely affected.
We have also begun implementing our Savings Plan with the goal of driving operating profit improvement through a combination of both cost of sales improvements and SG&A expense savings. However, there can be no assurance that we will be successful in realizing cost of sales improvements, especially if we fail to reduce product development cycle times, optimize material yields, consolidate our factory base, or move production outside of China. Further, if we fail to execute on our plans with respect to further retail store consolidations, process improvement efficiencies, and lower unallocated indirect spend, we may not achieve the SG&A expense savings which are a key component of the Savings Plan. If we are unable to realize cost of sales improvements and SG&A expense savings, then we may not be able to achieve the estimated profitability improvements or other expected benefits of the Savings Plan. Further, the implementation of our Savings Plan may require additional investments and divert management’s time and resources, which may impede our ability to achieve our goal of driving operating profit improvement.
It may be difficult to identify new retail store locations that meet our requirements, and any new retail stores may not realize returns on our investments.
While we expect to close or relocate a number of retail stores, we may identify opportunities to open new retail stores in the future. Global store openings involve substantial investments, including those relating to leasehold improvements, furniture and fixtures, equipment, information systems, inventory, and personnel. In addition, since a certain amount of our retail store costs are fixed, if we have insufficient sales, we may be unable to reduce expenses in order to avoid losses or negative cash flows. As we have experienced in the past, due to the high fixed cost structure associated with the retail business, the closure of a retail store can result in a significant negative financial impact, including write-offs of retail store assets and inventory, lease termination costs, and severance costs. As a result of our ongoing retail store fleet optimization plans, and in light of the significant costs and impairments that can be incurred upon the closure of a retail location, we expect to conduct a thorough diligence process and apply stringent financial parameters when assessing whether to open a new retail store location. However, there can be no assurance that any new retail location that we may identify will ultimately generate a positive return on our investment.
Furthermore, we license the right to operate retail stores for our brands to third parties through our partner retail program. We expect to increase both the number of third parties we engage within our partner retail program and the number of stores that they operate. We currently plan for most of the partner retail stores to be operated in international markets, with the largest increase anticipated to be in China. We provide training to support these stores, and set and monitor operational standards. However, the quality of these store operations may decline due to the failure of these third parties to operate the stores in a manner consistent with our standards or our failure to adequately monitor these third parties, which could result in reduced sales and cause our overall brand image to suffer.
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We face intense competition from both established companies and newer entrants into the market, and our failure to compete effectively could cause our market share to decline, which would harm our financial condition and results of operations.
The footwear industry is highly competitive and we expect to continue to face intense competitive pressures. We believe that we compete on the basis of a number of factors, including our ability to:
• | predict and respond to changing consumer preferences and tastes in a timely manner; |
• | produce products that appeal to consumers; |
• | produce products that meet our requirements and consumer expectations for quality; |
• | accurately predict and forecast consumer demand; |
• | ensure product availability; |
• | manage the impact of seasonality, including unexpected changes in weather conditions; |
• | maintain brand loyalty and authenticity; |
• | price our products in a competitive manner; |
• | implement our Omni-Channel strategy, including providing a unique customer service experience; and |
• | manage the impact of the rapidly changing retail environment on our business. |
Our inability to compete effectively with respect to one or more of these factors could cause our market share to decline, which would harm our financial condition and results of operations.
Our competitors include athletic and footwear companies, branded apparel companies, and retailers with their own private labels. In addition, these competitors include both established companies, as well as newer entrants into the market. In particular, we believe that, as a result of the growth of the UGG brand, certain competitors have entered into the marketplace specifically in response to the success of our brands, and that other competitors may do so in the future. A number of our larger competitors have significantly greater financial, technological, engineering, manufacturing, marketing, and distribution resources than we do, as well as greater brand awareness in the footwear and apparel markets. Our competitors’ greater capabilities in these areas may enable them to more effectively compete on the basis of price and production, develop new products more quickly, identify or influence consumer preferences, and withstand periodic downturns in the footwear industry or in economic conditions generally. With respect to newer entrants into the market, we believe that access to offshore manufacturing and changes in technology will continue to make it easier and more cost effective for these companies to compete with us.
As a result of the competitive environment in which we operate, we have faced, and expect to continue to face, intense pricing pressure. For example, efforts by our competitors to dispose of their excess inventories may significantly reduce prices of competitive products, which may require us to reduce the pricing of our products in order to compete, or cause consumers to shift their purchasing decisions away from our products entirely. We have also faced, and expect to continue to face, intense pressure with respect to competition for key customer accounts and distribution channels. If we fail to compete effectively in the future, our sales could decline and our margins could be impacted, either of which could have a negative impact on our financial condition and results of operations.
If we are unsuccessful at improving our operational systems and our efforts do not result in the anticipated benefits to us or result in unanticipated disruption to our business, our financial condition and operating results could be adversely affected and our business may become less competitive.
We strive to improve, automate and streamline our operational systems, processes, infrastructure and management as part of our ongoing effort to improve the overall efficiency and competitiveness of our business. We recently completed our business transformation project implementation, which included upgrading our Enterprise Resource Planning (ERP) systems, and inventory management and control systems. While we believe that this and other improvements to our operational systems have the potential to reduce our expenses, increase our efficiency and enhance our ability to be competitive in the long term, we expect to continue to incur expenses to implement operational systems upgrades. Many of these expenditures have been, and may continue to be, incurred in advance of the realization of any direct benefits to our business. We cannot guarantee that we will be successful at improving our operational systems, or that our efforts will result in the anticipated benefits to us. If our operational systems upgrades are not successful, our financial condition and operating results could be adversely affected and our business may become less competitive.
In addition, our operational systems upgrades have the potential to be disruptive to our existing business operations as our managers and employees attempt to learn new software programs and control systems, and adapt to new
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operating requirements, while continuing to manage and operate our business. If we are unable to successfully manage any disruption to our business caused by our operational systems upgrades, we could incur unanticipated expenses, loss of customers and harm to our reputation, any of which would harm our business.
If we are unsuccessful at managing production decisions, which are required to be made months in advance of the purchase of our products, we may inaccurately forecast our inventory requirements, which may adversely affect the image of our brands, and result in sales below our expectations.
Like other companies in the footwear industry, we have an extended design and manufacturing process, which involves the initial design of our products, the purchase of raw materials, the accumulation of inventories, the subsequent sale of the inventories, and the collection of the resulting accounts receivable. This production cycle requires us to incur significant expenses relating to the manufacturing and marketing of our products, including product development costs for new products, in advance of the realization of any revenue from the sale of our products, and results in significant liquidity requirements and working capital fluctuations throughout our fiscal year. Because the production cycle typically involves long lead times, which requires us to make manufacturing decisions several months in advance of a purchasing decision by the consumer, it may be challenging for us to estimate and manage our inventory requirements.
At the time manufacturing decisions are made, it is difficult for our management to predict and to timely adjust expenses in reaction to the following factors, which may result in order cancellations and weak consumer demand:
• | unfavorable weather patterns and their potential impacts on consumer spending patterns generally, and the demand for our products in particular; |
• | changes in consumer preferences and fashion trends; |
• | market acceptance of new products; |
• | future sales and trends with our wholesale customers; |
• | changing general economic conditions; and |
• | the competitive environment, including pricing pressure resulting from reduced pricing of competitive products, which may cause consumers to shift their purchasing decisions away from our products. |
The evolution of our product offerings has made these activities more challenging. If we overestimate demand for any products or styles, we may be forced to incur significant markdowns or sell excess inventories at reduced prices, which would result in lower revenues and reduced gross margins. On the other hand, if we underestimate demand for certain products or styles, or if our independent manufacturing facilities are unable to supply products in sufficient quantities, we may experience inventory shortages that may prevent us from fulfilling customer orders or result in us delaying shipments to customers. If that occurred, we could lose sales, our relationships with customers could be harmed, and our brand loyalty could be diminished.
Our financial success is influenced by the success of our customers, and the loss of a key customer could have a material adverse effect on our financial condition and results of operations.
Much of our financial success is directly related to the ability of our retailer and distributor partners to successfully market and sell our brands through to consumers. If a retailer fails to meet annual sales goals, it may be difficult to locate an acceptable substitute retailer. If a distributor fails to meet annual sales goals, it may be difficult and costly to either locate an acceptable substitute distributor or convert to a wholesale direct model. If we determine that it is necessary to make a change, we may experience increased costs, loss of customers, increased credit risk, and increased inventory risk. In addition, there is no guarantee that any replacement retailer or distributor will generate results that are more favorable than the terminated party.
We currently do not have long-term contracts with any of our retailers. We do have contracts with our distributors with terms ranging up to five years, however, while these contracts may have annual purchase minimums which must be met in order to retain the distribution rights, the distributors are not otherwise obligated to purchase our products. Sales to our retailers and distributors are generally on an order-by-order basis and are subject to rights of cancellation and rescheduling by our wholesale customers. We use the timing of delivery dates in our wholesale customer orders to forecast our sales and earnings for future periods. If any of our major customers, experience a significant downturn in business or fail to remain committed to our products or brands, these customers could postpone, reduce, or discontinue purchases from us. These risks have been exacerbated recently as our retail customers face a retail industry that continues to undergo significant structural changes fueled by technology that is altering consumer behavior.
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As a result, we could experience a significant decline in sales, write-downs of excess inventory, or increased discounts to our customers, any of which could have a material adverse effect on our financial condition or results of operations.
Our five largest customers accounted for approximately 20.3% of worldwide net sales for the year ended March 31, 2017 and 21.9% of worldwide net sales for the year ended March 31, 2016. Any loss of a key customer, the financial collapse or bankruptcy of a key customer, or a significant reduction in purchases from a key customer could have a material adverse effect on our financial condition and results of operations.
Failure to adequately protect our intellectual property rights, to prevent counterfeiting of our products, or to defend claims against us related to our intellectual property rights, could reduce sales and adversely affect the value of our brands.
Our business could be significantly harmed if we are not able to protect our intellectual property rights. We believe our competitive position is largely attributable to the value of our trademarks, patents, trade dress, trade names, trade secrets, copyrights and other intellectual property rights. Although we are aggressive in legal and other actions in pursuing those who infringe on our intellectual property rights, we cannot guarantee that the actions we have taken will be adequate to protect our brands in the future, especially because some countries’ laws do not protect intellectual property rights to the same extent as US laws. If we fail to adequately protect our intellectual property rights, it would allow our competitors to sell products that are similar to and directly competitive with our products, which could reduce sales of our products. In addition, any intellectual property lawsuits in which we are involved could cost a significant amount of time and money and distract management’s attention from operating our business, which may negatively impact our performance.
The success of our brands has also made us the target of counterfeiting and product imitation strategies. We continue to be vulnerable to such infringements despite our dedication of significant resources to the registration and protection of our intellectual property and to anti-counterfeiting efforts worldwide. If we fail to prevent counterfeiting or imitation of our products, we could lose opportunities to sell our products to consumers who may instead purchase a counterfeit or imitation product. In addition, if our products are associated with inferior products due to infringement by others of our intellectual property, it could adversely affect the value of our brands.
In addition to fighting intellectual property infringement, we may need to defend claims against us related to our intellectual property rights. We have faced claims that the word "ugg" is a generic term. Such a claim was successful in Australia, but similar claims have been rejected by courts in the US, China, Turkey and the Netherlands. We have also faced claims that “UGG Australia” is geographically deceptive. For example, in response to an infringement lawsuit that we filed in March 2016 against Australian Leather Pty Ltd. (Australian Leather), Australian Leather raised a number of affirmative defenses and counterclaims, including seeking declaratory judgment that the UGG brand trademark is invalid and unenforceable in the US, cancellation of certain of our US UGG brand trademark registrations, false designation of origin and declaratory judgment that certain of our US design patents are invalid and unenforceable. Any court decision or settlement of such matters that prevents trademark protection of our brands, that allows a third-party to continue to sell products similar to our products, or that allows a manufacturer or distributer to continue to sell counterfeit products, could lead to intensified competition and a material reduction in our sales.
We may not succeed in implementing our growth strategies, in which case we may not be able to take advantage of certain market opportunities and may become less competitive.
As part of our overall growth strategy, we are continually seeking out opportunities to enhance the positioning of our brands, diversify our product offerings, extend our brands into complementary product categories and markets, expand geographically, optimize our retail presence, and improve our financial performance and operational efficiency. For example, we are considering expanding our partner retail program in certain markets based on our analysis of the market opportunity and business efficiencies. In addition, as part of our international growth strategy, we may continue to transition from a third-party distribution model to a direct distribution model. Further, we are exploring relationships with third parties for the expansion of the UGG brand into different product categories, including licensee and sourcing agent arrangements. We anticipate that substantial further expansion will be required to realize our growth potential and take advantage of new market opportunities. Failure to effectively implement our growth strategy could negatively impact our revenues and rate of growth, and result in our business becoming less competitive. In addition, taking steps to implement our growth initiatives could have a number of negative effects, including increasing our working capital needs, causing us to incur costs without any corresponding benefits, and diverting management time and resources away from our existing business.
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We face risks associated with pursuing strategic acquisitions, and our failure to successfully integrate any acquired business or products could have a material adverse effect on our results of operations and financial position.
As part of our overall strategy, we may periodically consider strategic acquisitions in order to extend our brands into complementary product categories and markets. For example, in April 2015 we acquired substantially all the assets related to the Koolaburra brand. Our ability to continue this practice depends on our ability to identify and successfully pursue suitable acquisition candidates. Acquisitions involve numerous risks, challenges and uncertainties, including the potential to:
• | expose us to risks inherent in entering a new market or geographic region; |
• | lose significant customers or key personnel of the acquired business; |
• | encounter difficulties managing geographically-remote operations; |
• | divert management’s time and attention away from other aspects of our business operations; |
• | issue equity securities to finance the acquisition, which would be dilutive to our existing stockholders; |
• | incur indebtedness to finance the acquisition, which would result in debt service costs and potentially include covenants restricting our operations; and |
• | incur costs relating to a potential acquisition that we fail to consummate, which we may not be able to recover. |
Additionally, we may not be able to successfully integrate the operations of any acquired businesses into our operations, or to achieve the expected benefits of any acquisitions. Following an acquisition, we may also face cannibalization of existing product sales by our newly-acquired products, unless we adequately integrate new brands and products with our existing products, aggressively target different consumers for our newly-acquired products, and increase our overall market share. The failure to successfully integrate any acquired business or products in the future could have a material adverse effect on our results of operations and financial position.
We depend on qualified personnel and, if we are unable to retain or hire executive officers, key employees and skilled personnel, we may not be able to achieve our strategic objectives and our operating results may suffer.
To execute our growth plan, we must continue to attract and retain highly qualified personnel, including executive officers and key employees. Further, in order to continue to develop new products and successfully operate and grow our key business processes, it is important for us to continue hiring highly skilled footwear and accessory designers and information technology specialists.
Competition for executive officers, key employees and skilled personnel is intense within our industry and there continues to be upward pressure on the compensation paid to these professionals. Many of the companies with which we compete for experienced personnel have greater name recognition and financial resources than we have. If we hire employees from competitors or other companies, their former employers may attempt to assert that we or these employees have breached their legal obligations, resulting in a diversion of our time and resources. In addition, prospective and existing employees often consider the value of the stock-based compensation they receive in connection with their employment when deciding whether to take a job. If the perceived value of our stock-based compensation declines, or if the price of our stock experiences significant volatility, it may adversely affect our ability to recruit and retain qualified personnel. If we fail to attract new personnel or to retain and motivate our current personnel, our future growth prospects could be adversely affected and our business could be harmed. Further, our headquarters are located in Goleta, California, which is not generally recognized as a prominent commercial center, and it is difficult to attract qualified professionals due to our geographic location. As a result, we may have difficulty hiring and retaining qualified personnel with the skills to expand our business. If we are unable to attract and retain the personnel necessary to execute our growth plan, we may be unable to achieve our strategic objectives, our operating results may suffer and we may be unable to compete in the market.
The continued service of our executive officers and key employees is particularly important, and the hiring or departure of such personnel from time to time may disrupt our business. Our executive officers and other key employees are generally employed on an at-will basis, which means that such personnel could terminate their employment with us at any time. The loss of one or more of our executive officers or other key employees, and the often extensive process of identifying and hiring other personnel who will work effectively with our employees and lead our company to fill those key positions, could have a material adverse effect on our business.
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Additionally, as part of our efforts to improve overall efficiency and competitiveness of our business, we have added new leadership both within our brands and to our Omni-Channel platform, including the President of Fashion Lifestyle and the President of Performance Lifestyle, as well as streamlining and restructuring our existing personnel and brand management. If we fail to effectively implement these management and personnel changes, we may be unable to achieve our strategic objectives and operating efficiencies.
Our corporate culture has contributed to our success and, if we cannot maintain this culture as we grow, we could lose the passion, creativity, teamwork, focus and innovation fostered by our culture.
We believe that our culture has been and will continue to be a key contributor to our success. If we do not continue to develop our corporate culture or maintain our culture and core values over time, we may be unable to foster the passion, creativity, teamwork, focus and innovation that we believe have contributed to the growth and success of our business. Any failure to preserve our culture could negatively affect our ability to recruit and retain personnel and to effectively focus on and pursue our strategic objectives. As we continue to pursue our goals and implement new strategies, we may find it difficult to maintain our corporate culture.
We rely upon a number of warehouse and distribution facilities to operate our business, and any damage to one of these facilities, or any disruptions caused by incorporating new facilities into our operations, could have a material adverse impact on our business.
We rely upon a broad network of warehouse and distribution facilities in order to store, sort, package and distribute our products both domestically and internationally. In the US, we distribute products through self-managed distribution centers in Camarillo and Moreno Valley, California. These distribution centers feature a complex warehouse management system that enables us to efficiently pack products for direct shipment to customers. However, we could face a significant disruption in our domestic distribution center operations if our warehouse management system does not perform as anticipated or ceases to function for an extended period of time, which could occur as a result of damage to the facility, failure of certain equipment, power outages or software problems. If our domestic distribution center operations are impeded for any reason, it could result in shipment delays or the inability to deliver product at all, which would result in lost sales, strain our relationships with customers, and cause harm to our reputation, any of which could have a material adverse impact on our business.
Internationally, we distribute our products through a number of distribution centers managed by 3PLs. We depend on these 3PLs to manage the operation of their distribution centers as necessary to meet our business needs. If the 3PLs fail to manage these responsibilities, our international distribution operations could face significant disruptions. For example, in the second quarter of fiscal year 2017, we experienced a delay in shipments from our European 3PL that impacted sales. The loss of, or disruption to the operations of, any one or more of these facilities, whether due to natural disasters, the outbreak of hostilities, work stoppages, or other adverse events, could materially adversely impact our sales, business performance and operating results.
We rely on independent manufacturers for most of our production needs, and the failure of these manufacturers to manage these responsibilities would prevent us filling customer orders, which would result in loss of sales and harm our relationships with customers.
We rely on independent manufacturers and their respective material suppliers for most of our production needs, although we do not have direct control over the manufacturers or their suppliers. We depend on these independent manufacturers for a number of functions that are critical to our operations, including financing the production of goods ordered, maintaining manufacturing capacity, complying with our restricted substances policy and storing finished goods in a safe location pending shipment. If the independent manufacturers fail to manage these responsibilities, we may be unable to obtain timely delivery of products in sufficient quantities that meet our quality standards. In that event, we may not be able to fill customer orders, which would result in lost sales and harm to our relationships with customers.
We do not currently have long-term contracts with these independent manufacturers, and so are not assured of a long-term, uninterrupted supply of acceptable quality and competitively-priced products from them. While we do have long-standing relationships with most of these independent manufacturers, any of them may unilaterally terminate their relationship with us at any time, seek to increase the prices they charge us, or extract other concessions from us. In the event of a termination of an existing relationship with a manufacturer, we may not be able to substitute alternative manufacturers that are capable of providing products or services of a comparable quality, at an acceptable price, or on a timely basis. If we must find alternative manufacturers, we would likely experience increased costs, as well as substantial disruption to our business, which could result in a loss of sales and earnings.
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Interruptions in the supply of our products can also result from adverse events that impair the operations of our manufacturers. We keep proprietary materials that are required for the production of our products, such as shoe molds, knives, and raw materials, under the custody of our independent manufacturers. If these independent manufacturers were to experience loss or damage to these proprietary materials, whether as a result of natural disasters, outbreak of hostilities or other adverse events, we cannot be assured that the manufacturers would have adequate insurance to cover such loss or damage, and, in any event, the replacement of such materials would likely result in significant delays in the production of our products, which could result in a loss of sales and earnings.
Most of our independent manufacturers are located outside of the US, where we are subject to the risks associated with international commerce.
Most of our independent manufacturers are in Asia. Foreign manufacturing is subject to numerous risks and uncertainties, including the following:
• | tariffs, import and export controls, and other non-tariff barriers such as quotas and local content rules on raw materials and finished products; |
• | increasing transportation costs and a limited supply of international shipping capacity; |
• | delays during shipping, at the port of entry or at the port of departure; |
• | increasing labor costs and labor disruptions; |
• | poor infrastructure and shortages of equipment, which can disrupt transportation and utilities; |
• | restrictions on the transfer of funds from foreign jurisdictions; |
• | changing economic and market conditions; |
• | changes in governmental policies and regulations including intellectual property, labor, safety, and environmental regulations; |
• | refusal to adopt or comply with our Supplier Code of Conduct, Conflict Minerals Policy and Restricted Substances Policy; |
• | customary business traditions in China and Vietnam such as local holidays, which are traditionally accompanied by high levels of turnover in the factories; |
• | decreased scrutiny by custom officials for counterfeit products; |
• | political instability, which can interrupt commerce, including acts of war and other external factors, over which we have no control; |
• | heightened terrorism security concerns, which could subject imported or exported products to more frequent or more lengthy inspections; |
• | use of unauthorized or prohibited materials or reclassification of materials; |
• | disease epidemics and health-related concerns that could result in a reduced workforce or scarcity of raw materials; |
• | disruptions at manufacturing or distribution facilities caused by natural or other disasters; and |
• | adverse changes in consumer perception of goods, trade, or political relations with China or Vietnam. |
These risks and uncertainties, or others of which we are currently unaware, could interfere with the manufacture or shipment of our products by our independent manufacturers. This could make it more difficult to obtain adequate supplies of quality products when we need them, which could negatively impact our sales and earnings.
While we require that our independent manufacturers adhere to environmental, labor, ethical, health, safety, and other standard business practices and applicable local laws, and while we periodically visit and audit their operations, we do not control their business practices. If we discovered non-compliant manufacturers or suppliers that cannot or will not become compliant, we would cease dealing with them, which could increase our costs and cause us to suffer an interruption in our product supply chain. In addition, the manufacturers’ violations of such standards and laws could result in negative publicity, which could damage our reputation and the value of our brands.
We conduct business outside the US, which exposes us to foreign currency exchange rate risk, and could have a negative impact on our financial results.
We operate on a global basis, with approximately 36.2% of our net sales for the year ended March 31, 2017 from operations outside the US. As we continue to increase our international operations, our sales and expenditures in foreign currencies become more material and subject to foreign currency exchange rate fluctuations. A significant portion of our international operating expenses are paid in local currencies. Also, our foreign distributors sell in local currency, which impacts the price to foreign consumers. Many of our subsidiaries operate with their local currency as
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their functional currency. Future foreign currency exchange rate fluctuations and global credit markets may cause changes in the US dollar value of our purchases or sales and materially affect our sales, profit margins, or results of operations, when converted to US dollars. Changes in the value of the US dollar relative to other currencies could result in material foreign currency exchange rate fluctuations or the US dollar value of transactions and, as a result, our net earnings could be materially adversely affected.
We currently utilize foreign currency exchange rate contracts or other derivative instruments for the amounts we expect to purchase and sell in foreign currencies to mitigate exposure to foreign currency exchange rate fluctuations. As we continue to expand international operations and increase purchases and sales in foreign currencies, we will evaluate and may utilize additional derivative instruments, as needed, to hedge our foreign currency exchange rate risk. Our hedging strategies depend on our forecasts of sales, expenses, and cash flows, which are inherently subject to inaccuracies. Therefore, our hedging strategies may be ineffective. In addition, the failure of financial institutions that underwrite our foreign currency exchange rate contracts may negate our efforts to hedge our foreign currency exchange rate risk and result in material foreign currency exchange rate or hedge contract losses. Foreign currency exchange rate hedges, transactions, re-measurements or translations could materially impact our consolidated financial statements.
Labor disruptions could negatively impact our results of operations and financial position.
Our business depends on our ability to source and distribute products in a timely manner. Labor disputes that affect the operations of our independent manufacturers, tanneries, transportation carriers, retail stores or distribution centers create significant risks for our business, particularly if these disputes result in work slowdowns, lockouts, strikes or similar disruptions. For example, in recent years, labor disputes at US shipping ports have impacted the delivery of our products. Any such disruptions may have a material adverse effect on our business by potentially resulting in cancelled orders by customers, unanticipated inventory accumulation, and increased transportation and labor costs, each of which may negatively impact our results of operations and financial position.
Our sales in international markets are subject to a variety of legal, regulatory, political, cultural and economic risks that may adversely impact our operating results in certain regions.
Our ability to capitalize on growth in new international markets and to maintain the current level of operation in our existing international markets is subject to risks associated with international operations that could adversely affect our sales and operating results. These risks include:
• | foreign currency exchange rates fluctuations, which impact the prices at which products are sold to international consumers; |
• | limitations on our ability to move currency out of international markets; |
• | burdens of complying with a variety of foreign laws and regulations, which may change unexpectedly, and the interpretation and application of which are uncertain; |
• | legal costs and penalties related to defending allegations of non-compliance with foreign government policies, laws and regulations; |
• | inability to import products into a foreign country; |
• | changes in US and foreign tax laws; |
• | complications due to lack of familiarity with local customs; |
• | difficulties associated with promoting and marketing products in unfamiliar cultures; |
• | political instability; |
• | changes in diplomatic and trade relationships between the US and other countries; and |
• | general economic fluctuations in specific countries or markets. |
International trade and import regulations may impose unexpected duty costs or other non-tariff barriers to markets while the increasing number of free trade agreements has the potential to stimulate increased competition; security procedures may cause significant delays.
Products manufactured overseas and imported into the US and other countries are subject to import duties. While we have implemented internal measures to comply with applicable customs regulations and to properly calculate the import duties applicable to imported products, customs authorities may disagree with our claimed tariff treatment for certain products, resulting in unexpected costs that may not have been factored into the sales price of such products and our forecasted gross margins.
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We cannot predict whether future domestic laws, regulations or trade remedy actions or international agreements may impose additional duties or other restrictions on the importation of products from one or more of our sourcing venues. Such changes could increase the cost of our products, require us to withdraw from certain restricted markets, or change our business methods and could make it difficult to obtain products of our customary quality at a competitive price. Meanwhile, the continued negotiation of bilateral and multilateral free trade agreements by the US and our other market countries with countries other than our principal sourcing venues may stimulate competition from manufacturers in these other sourcing venues, which now export, or may seek to export, footwear and accessories to our target markets at preferred rates of duty, which may have an effect on our sales and operations.
Additionally, the increased threat of terrorist activity, and law enforcement responses to this threat, have required greater levels of inspection of imported goods and have caused delays in bringing imported goods to market. Any tightening of security procedures, for example, in the aftermath of a terrorist incident, could worsen these delays and increase our costs.
Key business processes and supporting information systems could be interrupted and such interruption could adversely affect our business.
Our future success and growth depend on the continued operation of our key business processes, including information systems, global communications, the internet, and key personnel. Hackers and computer viruses have disrupted operations at many major companies. We may be vulnerable to similar acts of sabotage. Key processes could also be interrupted by a failure due to weather, natural disaster, power loss, telecommunications failure, failure of our computer systems, sabotage, terrorism, or similar event such that:
• | critical business systems become inoperable or require significant costs to restore; |
• | key personnel are unable to perform their duties, communicate, or access information systems; |
• | significant quantities of merchandise are damaged or destroyed; |
• | we are required to make unanticipated investment in state-of-the-art technologies and security measures; |
• | key wholesale and distributor customers cannot place or receive orders; |
• | E-Commerce customer orders may not be received or fulfilled; |
• | confidential information about our customers may be misappropriated or lost damaging our reputation and customer relationships; |
• | we are exposed to unanticipated liabilities; or |
• | carriers cannot ship or unload shipments. |
Interruptions to key business processes could have a material adverse effect on our business and operations and result in lost sales and reduced earnings.
Furthermore, we rely on certain information technology management and ERP systems to prepare sales forecasts, track our financial and operating results, and otherwise operate our business. As our business grows and we expand into additional distribution channels and geographic regions, these systems may require expansion or modification. We may experience difficulties expanding these information technology and resource planning systems or transitioning to new or upgraded systems, which may result in loss of data or unreliable data, decreases in productivity as our personnel become familiar with and adapt to the new systems, and increased costs for the implementation of the new or upgraded systems. If we are unable to modify our information technology or resource planning systems to respond to changes in our business needs, or if we experience a failure or interruption in these systems, our ability to accurately forecast sales, report our financial and operating results, or otherwise operate our business could be adversely affected.
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The loss, theft or misuse of sensitive customer or our related information, could damage our relationships with customers, harm our reputation, expose us to litigation and adversely affect our business.
Our business involves the storage and transmission of sensitive information, including the personal information of our customers, credit card information, employee information, data relating to customer preferences, and our proprietary financial and strategic data. The protection of our customer, employee and our data is vitally important to us as the loss, theft or misuse of such information could lead to significant reputation or competitive harm, litigation and potential liability. As a result, we believe that our future success and growth depends, in part, on the ability of our key business processes, including our information and global communication systems, to prevent the theft, loss or misuse of this sensitive information. However, as with many businesses, we are subject to numerous security and cybersecurity risks which may prevent us from maintaining the privacy of sensitive information and require us to expend significant resources attempting to secure such information.
As has been well documented in the media, hackers and computer viruses have disrupted operations at many major companies, and we may be vulnerable to similar security breaches. While we have expended, and will continue to expend, resources to protect our customers and ourselves against these breaches and to ensure an effective response to a security or cybersecurity breach, we cannot be certain that we will be able to adequately defend against any such breach. Techniques used to obtain unauthorized access to attack systems are constantly evolving and, in some cases, becoming more sophisticated and harder to detect. Despite our efforts, we may be unable to anticipate these techniques or implement adequate preventive measures in response, and any breaches that we do not detect may remain undetected for some period. In addition, measures that we do take to prevent risks of fraud and security breaches have the potential to harm relationships with our customers or suppliers, or decrease activity on our websites by making them more difficult to use or restricting the ability to meet our customers' expectations in terms of their online shopping experience.
Any failure to maintain the security of our customers’ sensitive information, or data belonging to our suppliers, could put us at a competitive disadvantage, result in deterioration of our customers’ confidence in our brands, and subject us to potential litigation, liability, fines and penalties. While we maintain insurance coverage that may, subject to policy terms and conditions, cover certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses and would not remedy damage to our reputation. In addition, employees may intentionally or inadvertently cause data or security breaches that result in unauthorized release of personal or confidential information. In such circumstances, we could be held liable to our customers, suppliers, employees or other parties, or be subject to regulatory or other actions for breaching privacy laws or failing to adequately protect such information or respond to a breach. This could result in costly investigations and litigation, civil or criminal penalties, operational changes and negative publicity that could adversely affect our reputation and our results of operations and financial condition.
We are also subject to payment card association rules and obligations under our contracts with payment card processors. Under these rules and obligations, if information is compromised, we could be liable to payment card issuers for associated expenses and penalties. In addition, if we fail to follow payment card industry security standards, even if customer information is never compromised, we could incur significant fines or experience a significant increase in payment card transaction costs.
Our revolving credit facility agreements expose us to certain risks.
From time to time, we have financed our liquidity needs in part from borrowings made under our revolving credit facilities. Our revolving credit facility agreements also contain a number of customary financial covenants and restrictions, which may restrict our ability to engage in transactions that would otherwise be in our best interests. Failure to comply with any of the covenants could result in a default. A default under any of our revolving credit facility agreements could cause the lenders party thereto to accelerate the timing of payments and exercise their liens on our assets, which would have a material adverse effect on our business, operations, financial condition and liquidity. In addition, we do not currently anticipate hedging against borrowings under the revolving credit facilities because the facilities bear interest at variable interest rates. Any increases in interest rates would increase our cost of borrowing, resulting in a decline in our net income and cash flow.
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We have a revolving credit facility agreement with JPMorgan Chase Bank, National Association as the administrative agent, Comerica and HSBC as co-syndication agents, and the lenders party hereto (as amended, Domestic Credit Facility), which provides for a committed revolving line of credit of up to an aggregate of $400,000. Our obligations under our Domestic Credit Facility are guaranteed by our existing and future wholly-owned domestic subsidiaries (subject to certain exceptions) and are secured by a first-priority security interest in substantially all of our and those subsidiaries' assets, including all or a portion of the equity interests of certain of our domestic and first-tier foreign subsidiaries. As of March 31, 2017, we had no outstanding borrowings under our Domestic Credit Facility with debt capacity of $378,000 out of $400,000, due to limitations on consolidated worldwide borrowings under the terms of the Domestic Credit Facility.
In addition, we have a revolving credit facility in China (as amended, China Credit Facility), which provides for an uncommitted revolving line of credit of up to an aggregate of CNY 300,000, or approximately $44,000. As of March 31, 2017, we had no outstanding borrowings under our China Credit Facility.
In addition, we have a revolving credit facility in Japan (Japan Credit Facility), which provides for an uncommitted revolving line of credit of up to an aggregate of JPY 5,500,000, or approximately $49,000. As of March 31, 2017, we had no outstanding borrowings under our Japan Credit Facility.
The tax laws applicable to our business are very complex and we may be subject to additional tax liabilities as a result of audits by various taxing authorities or changes in tax laws applicable to our business.
We conduct our operations through subsidiaries in several countries, including, but not limited to, the US, the UK, Japan, China, Hong Kong, Macau, the Netherlands, Bermuda, France, Germany, and Canada. As a result, we are subject to tax laws and regulations in each of those jurisdictions, and to tax treaties between the US and those countries. These tax laws are highly complex, and significant judgment and specialized expertise is required in evaluating and estimating our worldwide provision for income taxes.
We are subject to audits in each of the various jurisdictions where we conduct business, and any of these jurisdictions may assess additional taxes against us as a result of these audits. Although we believe our tax estimates are reasonable, and we undertake to prepare our tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audits, and any related litigation, could be materially different from our estimates or from our historical tax provisions and accruals. The results of an audit or litigation could have a material adverse effect on our operating results or cash flows in the periods for which that determination is made, and may require a restatement of prior financial reports. In addition, future period earnings may be adversely impacted by litigation costs, settlement payments, or interest or penalty assessments.
We are also subject to constant changes in tax laws, regulations and treaties in and between the nations in which we operate. Our tax expense is based upon our interpretation of the tax laws in effect in various countries at the time that the expense was incurred. A change in these tax laws, treaties or regulations, or in the interpretation thereof, could result in a materially higher tax expense or a higher effective tax rate on our worldwide earnings. In addition, it is possible that tax proposals could result in changes to the existing US tax laws that affect us, although we are unable to predict whether any proposals will ultimately be enacted. Any changes in tax laws, treaties or regulations could increase our income tax liability and adversely affect our net income and long term effective tax rates.
We may incur disruption, expense, and potential liability associated with existing and future litigation.
We are involved in various claims, litigation and other legal and regulatory proceedings and governmental investigations that arise from time to time in the ordinary course of our business. Due to the inherent uncertainties of litigation and other such proceedings and investigations, we cannot predict with accuracy the ultimate outcome of any such matters. An unfavorable outcome could have a material adverse impact on our business, financial position, and results of operations. The amount of insurance coverage we maintain to address such matters may be inadequate to cover these or other claims. In addition, any significant litigation, investigation, or proceeding, regardless of its merits, could divert financial and management resources that would otherwise be used to benefit our operations or could negatively impact our reputation in the marketplace.
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Regulations related to "conflict minerals" may cause us to incur additional expenses and could limit the supply and increase the cost of certain metals used in manufacturing our products.
The SEC has adopted a rule requiring disclosures by public companies of specified minerals, known as conflict minerals, that are necessary to the functionality or production of products manufactured or contracted to be manufactured. The rule requires companies to perform a reasonable country of origin inquiry, and to annually report to the SEC whether or not such minerals originate from the Democratic Republic of Congo or an adjoining country. The rule could affect sourcing at competitive prices and availability in sufficient quantities of certain minerals used in the manufacture of our products. The number of suppliers who provide conflict-free minerals may be limited. In addition, there may be material costs associated with complying with the disclosure requirements, such as costs related to determining the source of certain minerals used in our products, as well as costs of possible changes to products, processes, or sources of supply as a consequence of such verification activities. Within our supply chain, we may not be able to sufficiently verify the origins of the relevant minerals used in our products through the due diligence procedures that we implement, which may harm our reputation. We file a Form SD, Specialized Disclosure Report, on or about May 31st each year.
Our common stock price has been volatile, which could result in substantial losses for stockholders.
Our common stock is traded on the New York Stock Exchange (NYSE) under the symbol “DECK”. The trading price of our common stock has been and may continue to be volatile. The closing prices of our common stock, as reported by the NYSE, have ranged from $44.99 to $68.57 for the 52-week period ended May 12, 2017. The trading price of our common stock could be affected by a number of factors, including, but not limited to the following:
• | changes in expectations of our future performance, whether realized or perceived; |
• | changes in estimates by securities analysts or failure to meet such estimates; |
• | changes in our stockholder base or public actions taken by investors; |
• | announcements related to our review of a broad range of strategic alternatives; |
• | published research and opinions by securities analysts and other market forecasters; |
• | quarterly fluctuations in our sales, margins, expenses, and financial results; |
• | the financial results and liquidity of our customers; |
• | claims brought against us by a regulatory agency or our stockholders; |
• | announcements to repurchase our common stock; |
• | the declaration of stock or cash dividends; |
• | general market and economic conditions; |
• | consumer confidence; |
• | broad market fluctuations in volume and price; and |
• | a variety of risk factors, including the ones described elsewhere in this Annual Report on Form 10-K and in our other filings with the SEC. |
In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of individual companies. Accordingly, the price of our common stock is volatile and any investment in our stock is subject to risk of loss. These broad market and industry factors and other general macroeconomic conditions unrelated to our financial performance may also affect our common stock price.
Changes in economic conditions may adversely affect our financial condition and results of operations.
Volatile economic conditions and general changes in the market have affected, and will likely continue to affect, consumer spending generally and the buying habits and preferences of consumers. A significant portion of the products we sell, especially those sold under the UGG brand, are considered to be luxury retail products. The purchase of these products by consumers is largely discretionary, and is therefore highly dependent upon the level of consumer spending, particularly among affluent consumers. Sales of these products may be adversely affected by factors such as uncertain or worsening economic conditions, increases in consumer debt levels, or a decline in consumer confidence. During an actual or perceived economic downturn, fewer consumers may shop for our products, and those who do shop may limit the amount of their purchases or substitute less costly products for our products. As a result, we could be required to reduce the price we can charge for our products or increase our marketing and promotional expenses to generate additional demand for our products. In either case, these changes could reduce our sales and gross margins, which could have a material adverse effect on our financial condition and results of operations.
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We sell a large portion of our products through higher-end specialty and department store retailers. The businesses of these retailer customers may be impacted by factors such as changes in economic conditions, reduced customer demand for luxury products, and decreases in available credit. If these or other factors result in financial difficulties or insolvency for our retail customers, such pressures would have an adverse impact on our estimated allowances and reserves, and potentially result in us losing key customers.
Furthermore, economic factors such as increased transportation costs, inflation, higher costs of labor, and higher insurance and healthcare costs may increase our cost of sales and our operating expenses.
Anti-takeover provisions contained in our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws, as well as provisions of Delaware law, could impair a takeover attempt.
Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws contain provisions that could have the effect of rendering more difficult hostile takeovers, change-in-control transactions or changes in our Board of Directors or management. Among other things, these provisions:
• | authorize the issuance of preferred stock with powers, preferences and rights that may be senior to our common stock, which can be created and issued by our Board of Directors without prior stockholder approval; |
• | provide that the number of directors will be fixed by the affirmative vote of a majority of the whole Board of Directors; |
• | provide that board vacancies can only be filled by directors; |
• | prohibit stockholders from acting by written consent without holding a meeting of stockholders; |
• | require the vote of holders of not less than 66 2/3% of the voting stock then outstanding to approve amendments to our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws; and |
• | require advance written notice of stockholder proposals and director nominations. |
As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which may delay, deter or prevent a change-in-control transaction. Section 203 imposes certain restrictions on mergers, business combinations and other transactions between us and holders of 15% or more of our common stock.
Any provision of Delaware law, our Amended and Restated Certificate of Incorporation, or our Amended and Restated Bylaws, that has the effect of rendering more difficult, delaying, deterring or preventing a change-in-control transaction could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.
We do not expect to declare any dividends in the foreseeable future.
We have never declared or paid any cash dividends on our existing common stock. We do not anticipate declaring or paying any cash dividends to holders of our common stock in the foreseeable future and intend to retain all future earnings for the growth of our business. Consequently, investors may need to rely on sales of our common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors should not purchase our common stock with the expectation of receiving cash dividends.
Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.
United States generally accepted accounting principles are subject to interpretation by the Financial Accounting Standards Board, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant impact on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change.
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Item 2. Properties
Our corporate headquarters are located in Goleta, California. The construction of our 14-acre corporate headquarters in Goleta, California was substantially completed in January 2014. In April 2016, we completed the acquisition of 3.7 acres of land adjacent to our corporate headquarters to accommodate future expansion.
We have two US distribution centers in California. We began operating our distribution center in Moreno Valley in the fourth quarter of fiscal year 2015 and continue to operate our distribution center in Camarillo. Our international distribution centers, located in Canada, China, Hong Kong, Japan, the Netherlands and the UK are managed by 3PLs.
We also have offices in China, Hong Kong and Vietnam to oversee the quality and manufacturing standards of our products, an office in Macau to coordinate logistics, offices in China, Hong Kong and Japan to coordinate sales and marketing efforts, and offices in France, Germany, the Netherlands and the UK to oversee European sales, operations and administration.
At March 31, 2017, we had 55 retail stores in the US ranging from approximately 1,000 to 9,000 square feet. Internationally, we had 105 retail stores in Austria, Belgium, Canada, China, France, Hong Kong, Germany, Japan, the Netherlands, Switzerland and the UK. Our E-Commerce operations are in the US, China, Japan, the UK and many other European countries. We have no manufacturing facilities, as all of our products are manufactured by independent third party contractors.
Other than our corporate headquarters, we lease our facilities from unrelated parties. With the exception of our DTC business facilities, our facilities are attributable to multiple reportable operating segments of our business and are not allocated to our reportable operating segments. We believe our space is adequate for our current needs and that suitable additional or substitute space will be available to accommodate the foreseeable expansion of our business and operations.
The following table provides details regarding our significant physical properties at March 31, 2017:
Facility Location | Description | Lease or Own | Facility Size (Square Footage) | ||||
Moreno Valley, California | Warehouse Facility | Lease | 794,000 | ||||
Camarillo, California | Warehouse Facility | Lease | 723,000 | ||||
Goleta, California | Corporate Offices | Own | 185,000 | ||||
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Item 3. Legal Proceedings
As part of our policing program for our intellectual property rights, from time to time, we file lawsuits in the US and abroad asserting claims for alleged acts of trademark counterfeiting, trademark infringement, patent infringement, trade dress infringement and trademark dilution, under applicable laws. At any given point in time, we may have a number of such actions pending. These actions often result in seizure of counterfeit merchandise or out of court settlements with defendants or both. From time to time, we are subject to claims where opposing parties will raise, either as affirmative defenses or as counterclaims, the invalidity or unenforceability of certain of our intellectual property rights, including allegations that our UGG brand trademark registrations and design patents are invalid or unenforceable. We also are aware of many instances throughout the world in which a third-party is using our UGG trademarks within its internet domain name, and we have discovered and are investigating several manufacturers and distributors of counterfeit UGG brand products.
On March 28, 2016, we filed a lawsuit alleging trademark infringement, patent infringement, unfair competition and violation of deceptive trade practices in the United States District Court for the Northern District of Illinois Eastern Division against Australian Leather. In response, Australian Leather raised a number of affirmative defenses and counterclaims, including seeking declaratory judgment that the UGG brand trademark is invalid and unenforceable in the US, cancellation of certain of our US UGG brand trademark registrations, false designation of origin and declaratory judgment that certain of our US design patents are invalid and unenforceable. The counterclaims seek declaratory judgment, an injunction, cancellation of certain of our US trademark registrations, compensatory damages, attorneys' fees and other relief. We believe the counterclaims are without merit and intend to defend the counterclaims vigorously. While we believe there is no legal basis for liability, a judgment invalidating the UGG brand trademark would have a material adverse effect on our business. Further, due to uncertainty surrounding the litigation process, we are unable to reasonably estimate a range of loss, if any, at this time.
Although we are subject to other routine legal proceedings from time to time in the ordinary course of business, including employment, intellectual property and product liability claims, we believe that the outcome of all pending legal proceedings in the aggregate will not have a material adverse effect on our business or our consolidated financial statements.
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PART II
References in this Annual Report on Form 10-K to "Deckers", "we", "our", "us", or the "Company" refer to Deckers Outdoor Corporation, together with its consolidated subsidiaries.
Certain reclassifications were made for all prior periods presented including the years ended March 31, 2016 and 2015, the quarter ended March 31, 2014 (transition period) and the years ended December 31, 2013 and 2012, to conform to the current period presentation.
Unless otherwise specifically indicated, all amounts in Items 5, 6, 7 and 7A herein are expressed in thousands, except for share data and store count. The defined periods for the fiscal years ended March 31, 2017, 2016 and 2015 are stated herein as "year ended" or "years ended".
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the New York Stock Exchange (NYSE) under the symbol "DECK". Prior to May 5, 2014, our common stock was traded on the NASDAQ Global Select Market under the symbol "DECK".
The following table shows the range of low and high closing sale prices per share of our common stock, based on the last daily sale, for the periods indicated.
Common Stock Price Per Share | |||||||
Low | High | ||||||
Year Ended March 31, 2017 | |||||||
Fourth Quarter | $ | 44.99 | $ | 60.98 | |||
Third Quarter | 50.76 | 64.80 | |||||
Second Quarter | 56.99 | 68.57 | |||||
First Quarter | 48.89 | 59.25 | |||||
Year Ended March 31, 2016 | |||||||
Fourth Quarter | $ | 42.27 | $ | 60.55 | |||
Third Quarter | 46.30 | 62.16 | |||||
Second Quarter | 56.75 | 74.37 | |||||
First Quarter | 68.15 | 76.58 | |||||
At May 12, 2017, we had approximately 48 stockholders of record based upon the records of our transfer agent, which does not include beneficial owners of our common stock whose shares are held in the names of various securities brokers, dealers and registered clearing agencies.
We did not sell any equity securities during the year ended March 31, 2017 that were not registered under the Securities Act of 1933, as amended (Securities Act).
Stock Performance Graph
Below is a graph comparing the percentage change in the cumulative total stockholder return on our common stock against the cumulative total return of the NYSE Composite Index, and the S&P 500 Apparel, Accessories & Luxury Goods Index for the five-year period commencing December 31, 2011 and ending March 31, 2017, excluding the transition period for the quarter ended March 31, 2014. The data represented below assumes one hundred dollars invested in each share of our common stock, the NYSE Composite Index and the S&P 500 Apparel, Accessories & Luxury Goods Index on January 1, 2012.
The stock performance graph shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act, or under the Securities Exchange Act of 1934, as amended (Exchange Act), except to the extent that we specifically incorporate this information by reference, and shall not otherwise be deemed filed under either of the Securities Act or Exchange
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Act. Total return assumes reinvestment of dividends, of which we have not declared or paid any cash dividends on our common stock since our inception.
The following table assumes $100 invested on January 1, 2012 and assumes dividends are reinvested.
Years Ended December 31, | Years Ended March 31, | ||||||||||||||||||||||
2011 | 2012 | 2013 | 2015 | 2016 | 2017 | ||||||||||||||||||
Deckers Outdoor Corporation | $ | 100.0 | $ | 53.3 | $ | 111.8 | $ | 96.4 | $ | 79.3 | $ | 79.0 | |||||||||||
S&P 500 Apparel, Accessories & Luxury Goods Index | 100.0 | 102.6 | 128.2 | 122.4 | 108.7 | 86.3 | |||||||||||||||||
The NYSE Composite Index* | 100.0 | 116.3 | 147.0 | 161.3 | 155.2 | 179.4 | |||||||||||||||||
*The NYSE Composite Index is an index that measures the performance of all stocks listed on the NYSE.
Dividend Policy
We have not declared or paid any cash dividends on our common stock since our inception. We currently do not anticipate declaring or paying any cash dividends in the foreseeable future. Our current revolving credit agreements allows us to make cash dividends, provided that no event of default has occurred or is continuing, and provided that our total adjusted leverage ratio does not exceed 2.75 to 1.00 on a pro-forma basis. At March 31, 2017, we were in compliance with this provision and we remain in compliance as of May 30, 2017.
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Stock Repurchase Program
In June 2012, we approved a stock repurchase program to repurchase up to $200,000 of our common stock in the open market or in privately-negotiated transactions, subject to market conditions, applicable legal requirements, and other factors. The program did not obligate us to acquire any particular amount of common stock and the program may have been suspended at any time at our discretion. At February 28, 2015, we had repurchased the full $200,000 amount authorized under the program through the repurchase of approximately 3,823,000 shares, at an average price of $52.31 per share.
In January 2015, we approved a new stock repurchase program to repurchase up to $200,000 of our common stock, which included the same stipulations as the purchase program approved in June 2012, as described above. Since inception through March 31, 2017, we had repurchased approximately 2,020,000 shares under this program for approximately $134,706, or an average price of $66.69 per share, leaving the remaining approved amount at approximately $65,294. Refer to Note 8, "Stockholders' Equity", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on repurchases of our common stock.
The following table summarizes the activity under our January 2015 stock repurchase program during the year ended March 31, 2017:
Total number of shares purchased* (in thousands) | Average price paid per share | Approximate dollar value of shares added/(purchased) | Approximate dollar value of shares that may yet be purchased | |||||||||||
November 1, 2016 — November 30, 2016 | 222 | $ | 56.51 | $ | (12,572 | ) | $ | 65,294 | ||||||
*All shares were repurchased as part of a publicly-announced program in open-market transactions. The shares repurchased in November 2016 were the only shares repurchased during fiscal year 2017.
Item 6. Selected Financial Data
We derived the following selected consolidated financial data from our consolidated financial statements.
The financial data are derived from, and qualified by reference to, the following audited consolidated financial statements not included in this Annual Report on Form 10-K:
• | Consolidated statements of comprehensive income (loss) for the quarter ended March 31, 2014 (transition period), and the calendar years ended December 31, 2013 and 2012. |
•Consolidated balance sheets as of March 31, 2015 and March 31, 2014 (transition period).
The financial data are further derived from, and qualified by reference to, the following consolidated financial statements in Part IV of this Annual Report on Form 10-K:
• | Consolidated statements of comprehensive income (loss) for the years ended March 31, 2017, 2016 and 2015. |
•Consolidated balance sheets as of March 31, 2017 and 2016.
Historical results are not necessarily indicative of the results to be expected in the future. You should read the following consolidated financial information together with our consolidated financial statements in Part IV of this Annual Report on Form 10-K and the accompanying notes thereto and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations".
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Change in Fiscal Year
In February 2014, our Board of Directors approved a change in our fiscal year end from December 31st to March 31st. The change was intended to better align our planning, financial and reporting functions with the seasonality of our business. The 2017, 2016 and 2015 years presented relate to the fiscal years ended March 31, 2017, 2016 and 2015, respectively. The 2014 transition period relates to the quarter ended March 31, 2014, to coincide with the change in our fiscal year end. The 2013 and 2012 years presented relate to the calendar years ended December 31, 2013 and 2012.
Years Ended March 31, | Quarter Ended March 31,(transition period) | Years Ended December 31, | |||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||||
Income Statement Data: | |||||||||||||||||||||||
Net sales: | |||||||||||||||||||||||
UGG brand wholesale | $ | 826,355 | $ | 918,102 | $ | 903,926 | $ | 83,271 | $ | 818,377 | $ | 819,256 | |||||||||||
Teva brand wholesale | 103,694 | 121,239 | 116,931 | 45,283 | 109,334 | 108,591 | |||||||||||||||||
Sanuk brand wholesale | 77,552 | 90,719 | 102,690 | 28,793 | 94,420 | 89,804 | |||||||||||||||||
Other brands wholesale | 116,206 | 100,820 | 76,152 | 18,662 | 38,276 | 20,194 | |||||||||||||||||
Direct-to-Consumer | 666,340 | 644,317 | 617,358 | 118,707 | 496,211 | 376,553 | |||||||||||||||||
Total net sales | 1,790,147 | 1,875,197 | 1,817,057 | 294,716 | 1,556,618 | 1,414,398 | |||||||||||||||||
Cost of sales | 954,912 | 1,028,529 | 938,949 | 150,456 | 820,135 | 782,244 | |||||||||||||||||
Gross profit | 835,235 | 846,668 | 878,108 | 144,260 | 736,483 | 632,154 | |||||||||||||||||
Selling, general and administrative expenses | 837,154 | 684,541 | 653,689 | 144,668 | 528,586 | 445,206 | |||||||||||||||||
(Loss) income from operations | (1,919 | ) | 162,127 | 224,419 | (408 | ) | 207,897 | 186,948 | |||||||||||||||
Other expense, net | 5,067 | 5,242 | 3,280 | 334 | 2,340 | 2,830 | |||||||||||||||||
(Loss) income before income taxes | (6,986 | ) | 156,885 | 221,139 | (742 | ) | 205,557 | 184,118 | |||||||||||||||
Income tax (benefit) expense | (12,696 | ) | 34,620 | 59,359 | 1,943 | 59,868 | 55,104 | ||||||||||||||||
Net income (loss) | 5,710 | 122,265 | 161,780 | (2,685 | ) | 145,689 | 129,014 | ||||||||||||||||
Total other comprehensive (loss) income | (5,894 | ) | (89 | ) | (18,425 | ) | 600 | (1,243 | ) | 330 | |||||||||||||
Comprehensive (loss) income | $ | (184 | ) | $ | 122,176 | $ | 143,355 | $ | (2,085 | ) | $ | 144,446 | $ | 129,344 | |||||||||
Net income (loss) attributable to: | |||||||||||||||||||||||
Deckers Outdoor Corporation | $ | 5,710 | $ | 122,265 | $ | 161,780 | $ | (2,685 | ) | $ | 145,689 | $ | 129,014 | ||||||||||
Non-controlling interest | — | — | — | — | — | (148 | ) | ||||||||||||||||
Net income (loss), excluding non-controlling interest | $ | 5,710 | $ | 122,265 | $ | 161,780 | $ | (2,685 | ) | $ | 145,689 | $ | 128,866 | ||||||||||
Net income (loss) per share attributable to Deckers Outdoor Corporation common stockholders: | |||||||||||||||||||||||
Basic | $ | 0.18 | $ | 3.76 | $ | 4.70 | $ | (0.08 | ) | $ | 4.23 | $ | 3.49 | ||||||||||
Diluted | $ | 0.18 | $ | 3.70 | $ | 4.66 | $ | (0.08 | ) | $ | 4.18 | $ | 3.45 | ||||||||||
Weighted-average common shares outstanding: | |||||||||||||||||||||||
Basic | 32,000 | 32,556 | 34,433 | 34,621 | 34,473 | 36,879 | |||||||||||||||||
Diluted | 32,355 | 33,039 | 34,733 | 34,621 | 34,829 | 37,334 | |||||||||||||||||
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As of March 31, | As of March 31, (transition period) | As of December 31, | |||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||||
Balance Sheet Data: | |||||||||||||||||||||||
Cash and cash equivalents | $ | 291,764 | $ | 245,956 | $ | 225,143 | $ | 245,088 | $ | 237,125 | $ | 110,247 | |||||||||||
Working capital | 661,770 | 547,267 | 519,051 | 501,647 | 508,786 | 424,569 | |||||||||||||||||
Total assets | 1,191,780 | 1,278,068 | 1,169,933 | 1,064,204 | 1,259,729 | 1,068,064 | |||||||||||||||||
Long-term liabilities | 78,474 | 72,099 | 65,379 | 53,140 | 51,092 | 62,246 | |||||||||||||||||
Stockholders' equity | 954,255 | 967,471 | 937,012 | 888,849 | 888,119 | 738,801 | |||||||||||||||||
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation
The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements and the accompanying notes thereto included in Part IV of this Annual Report on Form 10-K.
Overview
We are a global leader in designing, marketing and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high performance activities. We market our products primarily under five proprietary brands: UGG, Koolaburra, Hoka, Teva, and Sanuk.
We sell our products through quality domestic and international retailers, international distributors and directly to our end-user consumers both domestically and internationally through our Direct-to-Consumer (DTC) business, which is comprised of our retail stores and E-Commerce websites. Independent third parties manufacture all of our products.
Recent Developments
Restructuring. In February 2016, we announced the implementation of a restructuring plan, which includes a retail store fleet optimization and office consolidations, including the closure of facilities and relocation of employees to realign our brands across our Fashion Lifestyle and Performance Lifestyle groups. This restructuring plan is intended to streamline brand operations, reduce overhead costs, create operating efficiencies and improve collaboration.
In connection with these restructuring efforts, we incurred total restructuring charges of approximately $29,100 and $24,800 during fiscal year 2017 and 2016, respectively, with a total of approximately $29,100 and $22,800 recognized in selling, general and administrative (SG&A) expenses and approximately $0 and $2,000 recognized in cost of sales, respectively. The following table summarizes these restructuring charges by category:
Years Ended March 31, | |||||||
2017 | 2016 | ||||||
Lease termination costs | $ | 9,000 | $ | 8,900 | |||
Retail store fixed asset impairments | 3,600 | 5,800 | |||||
Severance costs | 5,800 | 4,000 | |||||
Software and office fixed asset impairments | 3,200 | 3,800 | |||||
Termination of various contracts and other services | 7,500 | 2,300 | |||||
Total restructuring charges | $ | 29,100 | $ | 24,800 | |||
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The following table summarizes these restructuring charges by reportable operating segment:
Years Ended March 31, | |||||||
2017 | 2016 | ||||||
UGG brand wholesale | $ | 2,100 | $ | — | |||
Teva brand wholesale | — | — | |||||
Sanuk brand wholesale | 100 | 3,000 | |||||
Other brands wholesale | 100 | 2,500 | |||||
Direct-to-Consumer | 12,900 | 10,500 | |||||
Unallocated overhead costs | 13,900 | 8,800 | |||||
Total restructuring charges | $ | 29,100 | $ | 24,800 | |||
Of the total amount incurred in fiscal year 2017, $11,100 is accrued as of March 31, 2017 and is expected to be paid during fiscal year 2018. Refer to Note 2, "Restructuring", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on the remaining liability related to these restructuring charges as of March 31, 2017.
Related to these charges, we closed 25 retail stores, including five stores during fiscal year 2016 and 20 stores during fiscal year 2017, and consolidated several offices as of March 31, 2017. We believe our retail stores remain an important component of our Omni-Channel strategy; however, in light of the recent and continuing changes in the retail environment, we also believe it is prudent to further reduce our global brick and mortar footprint. Accordingly, we anticipate generating future costs savings through further retail store closures and the conversion of owned stores to partner retail stores. We also realigned our brands across two groups as part of our Omni-Channel platform: Fashion Lifestyle and Performance Lifestyle. The Fashion Lifestyle group includes the UGG and Koolaburra brands. The Performance Lifestyle group includes the Teva, Sanuk and Hoka brands. As part of this realignment, during fiscal year 2016, we relocated our Sanuk brand operations in Irvine, California to our corporate headquarters in Goleta, California and closed our Ahnu brand operations office in Richmond, California, as well as consolidated our European offices.
As part of our continuing evaluation of our retail store fleet, we identified additional stores for closure during the year ended March 31, 2017. During fiscal year 2017, we recognized approximately $3,600 in restructuring charges in SG&A expenses related to non-cash impairment charges for retail store assets for 12 of these stores. In May 2017, we announced that we expect to reduce our global owned brick and mortar footprint by 30 to 40 stores compared to our store count at March 31, 2017, discussed below, which includes a combination of store closures and conversion of owned stores to partner retail stores. We are targeting a worldwide store count of approximately 125 owned stores by the end of fiscal year 2020. It is anticipated that we will incur restructuring costs similar in nature to our historical activities in future fiscal years, primarily in connection with reaching our target store count.
Savings Plan. In February 2017, we announced a plan to implement significant cost savings, excluding reinvestment (Savings Plan). The Savings Plan includes a combination of both cost of sales improvements and SG&A expense savings. Cost of sales improvements are expected to come from reducing product development cycle times, optimizing material yields, consolidating our factory base and continuing to move production outside of China. SG&A expense savings are expected to come from further retail store consolidations, process improvement efficiencies and lower unallocated indirect spend. In May 2017, we provided an update that the goal of the Savings Plan is to drive approximately $100,000 in operating profit improvement by the end of fiscal year 2020.
Review of Strategic Alternatives. In April 2017, we announced that our Board of Directors has initiated a process to review a broad range of strategic alternatives. This review process includes an exploration and evaluation of strategic alternatives to enhance stockholder value, which may include a sale or other transaction.
Trends Impacting our Overall Business
Our overall business has been, and we expect that it will continue to be, impacted by several important trends:
• | Sales of our products are highly seasonal and are sensitive to weather conditions, which are beyond our control. Even though we continue to expand our product lines and create more year-round styles |
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for our brands, the effect of favorable or unfavorable weather on our aggregate sales and operating results has been, and is likely to continue to be, significant.
• | We believe there has been a meaningful shift in the way consumers shop for products and make purchasing decisions. In particular, across the industry, brick and mortar retail stores are experiencing significant and prolonged decreases in consumer traffic as consumers continue to migrate to shopping online. This shift is impacting the performance of our DTC business and of our wholesale customers. |
• | In light of the shift in consumer shopping behavior, we are optimizing our brick and mortar retail footprint. In connection with store closures, we have been impacted by costs to exit lease agreements, retail store fixed asset impairments and other closure costs. We expect this trend to continue as we further evaluate and optimize our retail fleet. |
• | We continue to expect that our E-Commerce business will be a driver of long-term growth, although we expect the year-over-year growth rate will decline over time as the size of our E-Commerce business increases. |
• | We believe consumers are buying product closer to the particular wearing occasion (buy now, wear now), which we believe tends to shorten the purchasing windows for weather-dependent product. Not only does this trend impact our DTC business, we believe it is also impacting the purchasing behavior of our large wholesale customers. In particular, these customers appear to be shortening their purchasing windows as a way to address the evolving behavior of retail consumers and to manage their own product inventory. |
• | Foreign currency exchange rate fluctuations have significantly increased the value of the US dollar compared to most major foreign currencies over the past couple of years. While we seek to hedge some of the risks associated with foreign currency exchange rate fluctuations, these changes are largely outside of our control. We expect these changes will continue to impact the demand for our products and our operating results. |
Use of Non-GAAP Measures
In order to provide a framework for assessing how our underlying businesses performed during the relevant periods, excluding the effect of foreign currency exchange rate fluctuations, throughout this Annual Report on Form 10-K we provide certain financial information on a “constant currency basis”, which is in addition to the financial measures calculated and presented in accordance with United States generally accepted accounting principles (US GAAP). In order to calculate our constant currency information, we calculate the current period financial information using the foreign currency exchange rates that were in effect during the previous comparable period, excluding the effects of foreign currency exchange rate hedges and re-measurements in the consolidated balance sheets. We believe that evaluating certain financial and operating measures, such as net sales reportable operating segment information on a constant currency basis is important, as it facilitates comparison of our current financial performance to our historical financial performance, excluding the impact of foreign currency exchange rate fluctuations that are not indicative of our core operating results and are largely outside of our control. However, constant currency measures should not be considered in isolation as an alternative to US dollar measures that reflect current period exchange rates, or to other financial measures calculated and presented in accordance with US GAAP.
Segment Overview
UGG Brand
The UGG brand has been one of the most iconic and recognized brands in the global footwear industry which highlights our successful track record of building niche brands into lifestyle market leaders. With loyal consumers around the world the UGG brand has proven to be a highly resilient line of premium footwear, with expanded product offerings and a growing global audience that attracts women, men and children.
We believe the continued demand for UGG brand products has been, and will continue to be, driven by the following:
• | High consumer brand loyalty, due to delivering quality and luxuriously comfortable UGG footwear. |
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• | Evolution of our Classics business through the introduction of products such as the Classic Slim, the Classic Luxe, the Classic Street, and the Classic II. |
• | Diversification of our UGG product lines, including women's spring and summer, men's product lines, and lifestyle product offerings. We believe that the evolution of the UGG brand and our strategy of product diversification will also help decrease our reliance on sheepskin. |
• | Continued enhancement of our Omni-Channel capabilities to enable us to increasingly engage existing and prospective consumers in a more connected environment and expose them to our brands. |
Teva Brand
For over 30 years, the Teva brand has fueled the expression of freedom. The Teva brand pioneered the sport sandal category in 1984, and now is a leader within the sport sandal and modern outdoor lifestyle category.
During calendar year 2017, we began to leverage elements, including particular styles, of the Ahnu brand under the umbrella of the Teva brand.
Sanuk Brand
The Sanuk brand was founded almost 20 years ago, and from its origins in the Southern California surf culture, has emerged into a brand with an expanding fan base and presence in the relaxed casual shoe and sandal categories. The Sanuk brand’s use of unexpected materials and unconventional constructions combined with its fun and playful branding has contributed to the brand’s identity and growth since its inception, and led to successful products such as the Yoga Mat™ sandal collection and the SIDEWALK SURFERS.
As part of our annual assessment of the Sanuk brand's wholesale reportable operating segment goodwill in the third quarter of fiscal year 2017, we determined that there was an indication of impairment of the Sanuk brand's wholesale reportable operating segment goodwill. Consistent with the applicable accounting guidance, we performed the two-step impairment assessment and, as a result of this assessment, we recorded an $113,944 non-cash impairment charge to the Sanuk brand's wholesale reportable segment goodwill. This conclusion was primarily the result of lower-than-forecasted sales for the Sanuk brand wholesale reportable segment, lower market multiples for non-athletic footwear and apparel, and a more limited view of international and domestic expansion opportunities for the brand given the changing retail environment. In connection with the Sanuk brand goodwill impairment, we evaluated the Sanuk brand's definite long-lived assets for indicators of impairment. Our analysis determined that the Sanuk brand's amortizable patent under the Sanuk wholesale reportable operating segment was fully impaired and we recorded a non-cash impairment charge to the patent of $4,086. Our analysis also determined that the Sanuk brand's other intangible assets were not impaired as of the date on which the impairment test was completed, as it was determined that the undiscounted future cash flows associated with those assets exceeded the carrying value. However, additional impairment charges could be incurred in future periods.
See Note 3, “Goodwill and Other Intangible Assets”, to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information.
While we now have a more limited view of the growth and expansion opportunities for the Sanuk brand, we continue to believe that the Sanuk brand is an important component of our overall brand portfolio, especially within the casual shoe and sandal markets. However, we cannot assure investors that our efforts will result in the Sanuk brand's growth.
Other Brands
Our other brands consist of the Hoka, Koolaburra, and Ahnu brands. These brands are sold through most of our distribution channels, and primarily through our wholesale channels.
The Hoka brand is a line of running footwear that offers maximal cushioning with minimal weight and is designed for runners of all capacities. The Hoka brand is quickly becoming a top brand in the domestic run specialty channel and has received strong word-of-mouth marketing that has fueled both domestic and international sales growth.
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The Koolaburra brand is a line of fashion casual footwear using sheepskin and other plush materials. The Ahnu brand is a line of performance outdoor footwear, which we have discontinued operating and have begun to leverage under the Teva brand umbrella, as described above.
Direct-to-Consumer
Our DTC business is comprised of our retail stores and E-Commerce websites. As a result of our evolving Omni-Channel strategy, we believe that our retail stores and websites are largely intertwined and dependent on one another. We believe that in many cases consumers interact with both our brick and mortar stores and our websites, before making purchase decisions. Our retail stores are predominantly UGG brand concept stores and UGG brand outlet stores. Through our outlet stores, we sell some of our discontinued styles from prior seasons, full price in-line products, as well as products made specifically for the outlet stores.
At March 31, 2017, we had a total of 160 retail stores worldwide, which includes 96 concept stores and 64 outlet stores. During fiscal year 2017, we opened 17 new stores, reclassified 12 European concession stores as owned stores, converted two owned stores to partner retail stores, and closed 20 stores. Concession stores are considered concept stores that are operated by us within a department or other store, which we lease from the store owner by paying a percentage of concession store sales. Partner retail stores are branded stores that are wholly owned and operated by third parties. Upon conversion or opening of new partner retail stores, each of these stores became wholly-owned and operated by third parties in China. Sales made to the partner retail stores are included primarily in our UGG brand wholesale reportable operating segment and not in our DTC reportable operating segment, as of the date of conversion.
Our E-Commerce business provides us with an opportunity to communicate a consistent brand message to customers that is in line with our brands' promises, drives awareness of key brand initiatives, offers targeted information to specific consumer demographics, and drives consumers to our retail stores. As of March 31, 2017, we operate our E-Commerce business through an aggregate of 22 Company-owned websites in nine different countries.
We report comparable DTC sales on a constant currency basis for combined retail stores and E-Commerce businesses that were open throughout the reporting period in both the current year and prior year. There may be variations in the way that we calculate comparable DTC sales as compared to some of our competitors and other apparel retailers. As a result, information included in this Annual Report on Form 10-K regarding our comparable DTC sales may not be comparable to similar data made available by our competitors or other apparel retailers.
Seasonality
Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th of each year. With the size of the UGG brand relative to our other brands, net sales in the quarters ending September 30th and December 31st have significantly exceeded net sales in the quarters ending March 31st and June 30th.
See Note 14, “Quarterly Summary of Information (Unaudited)”, to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information.
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Results of Operations
Year Ended March 31, 2017 Compared to Year Ended March 31, 2016
The following table summarizes our results of operations:
Years Ended March 31, | ||||||||||||||||||||
2017 | 2016 | Change | ||||||||||||||||||
Amount | % | Amount | % | Amount | % | |||||||||||||||
Net sales | $ | 1,790,147 | 100.0 | % | $ | 1,875,197 | 100.0 | % | $ | (85,050 | ) | (4.5 | )% | |||||||
Cost of sales | 954,912 | 53.3 | 1,028,529 | 54.8 | (73,617 | ) | (7.2 | ) | ||||||||||||
Gross profit | 835,235 | 46.7 | 846,668 | 45.2 | (11,433 | ) | (1.4 | ) | ||||||||||||
Selling, general and administrative expenses | 837,154 | 46.8 | 684,541 | 36.5 | 152,613 | 22.3 | ||||||||||||||
(Loss) income from operations | (1,919 | ) | (0.1 | ) | 162,127 | 8.7 | (164,046 | ) | (101.2 | ) | ||||||||||
Other expense, net | 5,067 | 0.3 | 5,242 | 0.3 | (175 | ) | (3.3 | ) | ||||||||||||
(Loss) income before income taxes | (6,986 | ) | (0.4 | ) | 156,885 | 8.4 | (163,871 | ) | (104.5 | ) | ||||||||||
Income tax (benefit) expense | (12,696 | ) | (0.7 | ) | 34,620 | 1.9 | (47,316 | ) | (136.7 | ) | ||||||||||
Net income (loss) | $ | 5,710 | 0.3 | % | $ | 122,265 | 6.5 | % | $ | (116,555 | ) | (95.3 | )% | |||||||
Net Sales. The following table summarizes our net sales by location and our net sales by brand and channel:
Years Ended March 31, | ||||||||||||||
2017 | 2016 | Change | ||||||||||||
Amount | Amount | Amount | % | |||||||||||
Net sales by location: | ||||||||||||||
US | $ | 1,141,303 | $ | 1,219,744 | $ | (78,441 | ) | (6.4 | )% | |||||
International | 648,844 | 655,453 | (6,609 | ) | (1.0 | ) | ||||||||
Total | $ | 1,790,147 | $ | 1,875,197 | $ | (85,050 | ) | (4.5 | )% | |||||
Net sales by brand and channel: | ||||||||||||||
UGG brand: | ||||||||||||||
Wholesale | $ | 826,355 | $ | 918,102 | $ | (91,747 | ) | (10.0 | )% | |||||
Direct-to-Consumer | 624,682 | 606,247 | 18,435 | 3.0 | ||||||||||
Total | 1,451,037 | 1,524,349 | (73,312 | ) | (4.8 | ) | ||||||||
Teva brand: | ||||||||||||||
Wholesale | 103,694 | 121,239 | (17,545 | ) | (14.5 | ) | ||||||||
Direct-to-Consumer | 14,021 | 11,810 | 2,211 | 18.7 | ||||||||||
Total | 117,715 | 133,049 | (15,334 | ) | (11.5 | ) | ||||||||
Sanuk brand: | ||||||||||||||
Wholesale | 77,552 | 90,719 | (13,167 | ) | (14.5 | ) | ||||||||
Direct-to-Consumer | 14,214 | 15,522 | (1,308 | ) | (8.4 | ) | ||||||||
Total | 91,766 | 106,241 | (14,475 | ) | (13.6 | ) | ||||||||
Other brands: | ||||||||||||||
Wholesale | 116,206 | 100,820 | 15,386 | 15.3 | ||||||||||
Direct-to-Consumer | 13,423 | 10,738 | 2,685 | 25.0 | ||||||||||
Total | 129,629 | 111,558 | 18,071 | 16.2 | ||||||||||
Total | $ | 1,790,147 | $ | 1,875,197 | $ | (85,050 | ) | (4.5 | )% | |||||
Total Wholesale | $ | 1,123,807 | $ | 1,230,880 | $ | (107,073 | ) | (8.7 | )% | |||||
Total Direct-to-Consumer | 666,340 | 644,317 | 22,023 | 3.4 | ||||||||||
Total | $ | 1,790,147 | $ | 1,875,197 | $ | (85,050 | ) | (4.5 | )% | |||||
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The decrease in overall net sales was largely due to lower UGG, Teva and Sanuk brand wholesale sales, which was partially offset by increased other brand wholesale and DTC sales. We experienced a decrease of 2.3% in overall weighted-average selling price per pair (WASPP), primarily driven by a decrease in WASPP for the UGG brand, which drove the overall decrease in wholesale sales. We also experienced a decrease in the number of pairs sold in our UGG, Teva, and Sanuk brands which contributed to an overall decrease in volume of footwear sold for all brands of 2.2% to approximately 31,400 pairs sold for the year ended March 31, 2017 from approximately 32,100 pairs for the year ended March 31, 2016. The decrease was largely attributable to lower North American UGG wholesale sales. In addition, we experienced reduced wholesale sales in Europe during the third quarter of fiscal year 2017 as a result of our transition to the new European third party logistics provider (3PL). On a constant currency basis, overall net sales decreased 4.1% to approximately $1,800,300 in fiscal year 2017 compared to fiscal year 2016.
Wholesale net sales of our UGG brand decreased due to a decline in WASPP and in the volume of pairs sold. The decrease in WASPP had an impact of approximately $75,000, and was primarily attributable to changes in product mix and a higher proportion of international closeout sales at lower prices relative to the prior period. The decrease in WASPP was slightly offset by a shift in channel mix to DTC. The decrease in the volume of pairs sold had an impact of approximately $31,000, primarily attributable to lower North American wholesale sales. These decreases were partially offset by positive impacts from lower sales reserves and chargebacks due to lower sales and less promotional activity compared to the prior period. On a constant currency basis, wholesale net sales of our UGG brand decreased 9.7% to approximately $829,800 in fiscal year 2017 compared to fiscal year 2016.
Wholesale net sales of our Teva brand decreased largely due to a decrease in the volume of pairs sold, partially offset by a slight net increase in WASPP. The decrease in the volume of pairs sold had an impact of approximately $17,000. The net increase in WASPP was primarily attributable to lower prices on closeout sales and a shift in product mix.
Wholesale net sales of our Sanuk brand decreased primarily due to a decrease in the volume of pairs sold and a decrease in WASPP. The decrease in the volume of pairs sold had an impact of approximately $9,000. The decrease in WASPP had an impact of approximately $4,200, which was primarily due to lower prices on closeout sales and a shift in product mix.
Wholesale net sales of our other brands increased primarily due to an increase in the volume of pairs sold, offset by a decrease in WASPP. The increase in volume of pairs sold had an impact of approximately $22,000 primarily driven by growth for the Hoka and Koolaburra brands, partially offset by a decrease in the discontinued brands' volume of pairs sold. The decrease in WASPP had an impact of approximately $5,000 due to a shift in product mix.
DTC net sales increased 3.4% to $666,340 primarily due to an increase in net sales from our E-Commerce business of approximately $29,200, offset by a decrease in net sales from our retail store business of approximately $7,200. The increase in total DTC net sales was largely due to an increase in the volume of pairs sold of approximately $78,500 due to growth in E-Commerce, offset by a decrease in WASPP with an impact of approximately $50,500. The decrease in WASPP was due to a shift in product mix. On a constant currency basis, DTC net sales increased 4.5% to approximately $673,800 in fiscal year 2017 compared to fiscal year 2016.
Comparable DTC net sales for the 52 weeks ended April 2, 2017 increased 2.6% on a constant currency basis to approximately $520,500 compared to the same period in fiscal year 2016. The increase in comparable DTC net sales was primarily due to improved growth in E-Commerce worldwide, partially offset by a decline in sales at our retail stores.
International sales, which are included in the reportable operating segment sales presented above, decreased by 1.0%. International sales represented 36.2% and 35.0% of worldwide net sales for the years ended March 31, 2017 and 2016, respectively. The decrease in international sales was due to lower wholesale sales for the UGG and Teva brands in Europe and the UGG and Sanuk brands in Asia. On a constant currency basis, international sales increased 1.6% to approximately $666,100 in fiscal year 2017 compared to fiscal year 2016.
Gross Profit. Gross margin was 46.7% for the year ended March 31, 2017 compared to 45.2% for the year ended March 31, 2016. The overall improvement in gross margin was driven by a higher proportion of DTC net sales and lower material costs, changes in product mix, decreased domestic promotional activity, and the lower impact of closeout sales compared to the prior period. This was slightly offset by the strengthening of the US dollar.
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Selling, General and Administrative Expenses. The change in SG&A expenses for the year ended March 31, 2017 compared to the year ended March 31, 2016 were primarily due to:
• | impairment charges for the Sanuk brand's wholesale reportable operating segment's goodwill and patent of approximately $118,000; |
• | increased other payroll expenses of approximately $7,300, primarily attributable to costs related to transitioning warehouse and customer service locations and less capitalization of labor costs associated with the business transformation project; |
• | increased commission expenses of approximately $6,300, largely driven by terminations of sales agent agreements; |
• | increased professional service costs of approximately $6,000, including restructuring charges for consulting services and other outside services; |
• | increased depreciation expenses for IT-related assets for our business transformation project of approximately $6,000; |
• | increased other operating expenses of approximately $4,600, primarily driven by innovation and design costs and outside services, as well as third party management fees for Asian operations in the E-Commerce channel; |
• | increased expenses of approximately $4,500 due to contingent consideration credits taken in fiscal year 2016 that are not recurring in fiscal year 2017; |
• | impairment charges for IT-related long-lived assets and related maintenance contract termination costs of approximately $3,400, included in restructuring charges; |
• | increased warehouse expenses of approximately $2,100, largely driven by costs related to closing and transitioning 3PL warehouses; |
• | decreased bad debt expense of approximately $2,500, due to a reduction in delinquent customer accounts in the current period; and |
• | decreased occupancy and rent expense of approximately $1,700 due to higher restructuring charges incurred for retail store closures and office consolidations in the prior period. |
(Loss) Income from Operations. The following table summarizes operating (loss) income by reportable operating segment:
Years Ended March 31, | ||||||||||||||
2017 | 2016 | Change | ||||||||||||
Amount | Amount | Amount | % | |||||||||||
UGG brand wholesale | $ | 213,407 | $ | 246,990 | $ | (33,583 | ) | (13.6 | )% | |||||
Teva brand wholesale | 10,045 | 17,692 | (7,647 | ) | (43.2 | ) | ||||||||
Sanuk brand wholesale | (110,582 | ) | 15,565 | (126,147 | ) | (810.5 | ) | |||||||
Other brands wholesale | 1,571 | (4,384 | ) | 5,955 | 135.8 | |||||||||
Direct-to-Consumer | 109,802 | 101,756 | 8,046 | 7.9 | ||||||||||
Unallocated overhead costs | (226,162 | ) | (215,492 | ) | (10,670 | ) | (5.0 | ) | ||||||
Total | $ | (1,919 | ) | $ | 162,127 | $ | (164,046 | ) | (101.2 | )% | ||||
The increase in loss from operations resulted from lower sales and higher overall SG&A expenses, primarily driven by the impairment and restructuring charges described above. These factors were partially offset by higher overall gross margins attributable to reduced material costs and changes in product mix, decreased promotional activity, and the lower impact of closeout sales compared to the prior period.
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The decrease in income from operations of UGG brand wholesale was primarily the result of lower sales.
The decrease in income from operations of Teva brand wholesale was due to lower sales.
The increase in loss from operations of Sanuk brand wholesale was primarily due to impairment charges for goodwill and long-lived assets of approximately $118,000, as described above, as well as lower sales and lower gross margins.
The increase in income from operations of other brands wholesale was due to higher sales and improved gross margins primarily attributable to the Hoka and Koolaburra brands, offset by higher SG&A expenses driven by higher selling and marketing costs.
The increase in income from operations of DTC was primarily due to higher sales and improved gross margins in our E-Commerce business, offset by higher SG&A expenses driven by impairment charges for retail store assets for stores that have been identified for closure, as described above.
Unallocated overhead costs increased due to restructuring charges, as described above, slightly offset by lower performance-based compensation expenses and fluctuations in various foreign currencies.
Refer to Note 12, "Reportable Operating Segments", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for a discussion of our reportable operating segments.
Other Expense, Net. The increase in total other expense, net was primarily due to an increase in interest expense as a result of the higher average balances outstanding under our revolving credit facilities compared to fiscal year 2016.
Income Taxes. Income tax (benefit) expense and the effective income tax rates were as follows:
Years Ended March 31, | |||||||
2017 | 2016 | ||||||
Income tax (benefit) expense | $ | (12,696 | ) | $ | 34,620 | ||
Effective income tax rate | 181.7 | % | 22.1 | % | |||
The change in the effective tax rate was primarily due to the domestic net operating loss generated during the year ended March 31, 2017, driven by the impact of domestic restructuring charges and non-cash impairment charges, as discussed above, as well as a decrease in domestic net sales, and a decrease in the compensation earned by our foreign-based global product sourcing organization.
Foreign income before income taxes was $49,319,000 and $105,938,000 and worldwide (loss) income before income taxes was $(6,986) and $156,885 for the years ended March 31, 2017 and 2016, respectively. The decrease in foreign income before income taxes was primarily due to an increase in foreign operating expenses related to restructuring charges and a decrease in compensation earned by our foreign-based global product sourcing organization during the year ended March 31, 2017 compared to the year ended March 31, 2016. Foreign income before income taxes, as a percentage of worldwide loss before taxes, increased primarily due to the recording of domestic non-cash impairment charges, as discussed above, as well as a decrease in domestic sales during the year ended March 31, 2017 compared to the year ended March 31, 2016.
We expect that our foreign income or loss before income taxes, as well as our effective tax rate, will continue to fluctuate from period to period based on several factors, including the outcome of optimizing our retail fleet, the impact of internal savings initiatives, the impact of our global product sourcing organization, our actual financial and operating results from sales generated in domestic and foreign markets, and changes in domestic and foreign tax laws (or in the application or interpretation of those laws). In particular, we believe that the continuing evolution and expansion of our brands, our continuing strategy of enhancing product diversification, and the expected growth from our international DTC business, will result in increases in foreign income before income taxes both in absolute terms and as a percentage of worldwide income before income taxes. In addition, we believe that our effective tax rate will continue to be impacted by our actual foreign income before income taxes relative to our actual worldwide income before income taxes. Notably, with respect to fiscal year 2017, the Sanuk brand's wholesale reportable operating segment impairment charges for goodwill and long-lived assets, as discussed above, had the effect of significantly reducing domestic and worldwide
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income before income taxes, which increased foreign income before income taxes as a percentage of worldwide income before income taxes.
For fiscal year 2017, we generated approximately $21,569 of our pre-tax earnings from a country which does not impose a corporate income tax compared to $35,402 during fiscal year 2016. Unremitted earnings of non-US subsidiaries are expected to be reinvested outside of the US indefinitely. Such earnings would become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of dividends. As of March 31, 2017, we had approximately $265,773,000 of cash and cash equivalents outside the US that would be subject to additional income taxes if it were to be repatriated.
Net Income. Our net income decreased primarily due to lower sales and higher SG&A expenses attributable to the impairment and restructuring charges discussed above, offset by higher gross margins. Our net income per share decreased due to lower net income, partially offset by a slightly lower number of weighted-average common shares outstanding.
Other Comprehensive Loss. Other comprehensive loss increased as a result of increased foreign currency translation losses driven by changes in exchange rates for Asian and European currencies during the year ended March 31, 2017 compared to the year ended March 31, 2016.
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Year Ended March 31, 2016 Compared to Year Ended March 31, 2015
The following table summarizes our results of operations:
Years Ended March 31, | ||||||||||||||||||||
2016 | 2015 | Change | ||||||||||||||||||
Amount | % | Amount | % | Amount | % | |||||||||||||||
Net sales | $ | 1,875,197 | 100.0 | % | $ | 1,817,057 | 100.0 | % | $ | 58,140 | 3.2 | % | ||||||||
Cost of sales | 1,028,529 | 54.8 | 938,949 | 51.7 | 89,580 | 9.5 | ||||||||||||||
Gross profit | 846,668 | 45.2 | 878,108 | 48.3 | (31,440 | ) | (3.6 | ) | ||||||||||||
Selling, general and administrative expenses | 684,541 | 36.5 | 653,689 | 36.0 | 30,852 | 4.7 | ||||||||||||||
Income from operations | 162,127 | 8.7 | 224,419 | 12.3 | (62,292 | ) | (27.8 | ) | ||||||||||||
Other expense, net | 5,242 | 0.3 | 3,280 | 0.2 | 1,962 | 59.8 | ||||||||||||||
Income before income taxes | 156,885 | 8.4 | 221,139 | 12.1 | (64,254 | ) | (29.1 | ) | ||||||||||||
Income tax expense | 34,620 | 1.9 | 59,359 | 3.2 | (24,739 | ) | (41.7 | ) | ||||||||||||
Net income | $ | 122,265 | 6.5 | % | $ | 161,780 | 8.9 | % | $ | (39,515 | ) | (24.4 | )% | |||||||
Net Sales. The following table summarizes our net sales by location and our net sales by brand and channel:
Years Ended March 31, | ||||||||||||||
2016 | 2015 | Change | ||||||||||||
Amount | Amount | Amount | % | |||||||||||
Net sales by location: | ||||||||||||||
US | $ | 1,219,744 | $ | 1,165,350 | $ | 54,394 | 4.7 | % | ||||||
International | 655,453 | 651,707 | 3,746 | 0.6 | ||||||||||
Total | $ | 1,875,197 | $ | 1,817,057 | $ | 58,140 | 3.2 | % | ||||||
Net sales by brand and channel: | ||||||||||||||
UGG brand: | ||||||||||||||
Wholesale | $ | 918,102 | $ | 903,926 | $ | 14,176 | 1.6 | % | ||||||
Direct-to-Consumer | 606,247 | 589,267 | 16,980 | 2.9 | ||||||||||
Total | 1,524,349 | 1,493,193 | 31,156 | 2.1 | ||||||||||
Teva brand: | ||||||||||||||
Wholesale | 121,239 | 116,931 | 4,308 | 3.7 | ||||||||||
Direct-to-Consumer | 11,810 | 9,812 | 1,998 | 20.4 | ||||||||||
Total | 133,049 | 126,743 | 6,306 | 5.0 | ||||||||||
Sanuk brand: | ||||||||||||||
Wholesale | 90,719 | 102,690 | (11,971 | ) | (11.7 | ) | ||||||||
Direct-to-Consumer | 15,522 | 12,021 | 3,501 | 29.1 | ||||||||||
Total | 106,241 | 114,711 | (8,470 | ) | (7.4 | ) | ||||||||
Other brands: | ||||||||||||||
Wholesale | 100,820 | 76,152 | 24,668 | 32.4 | ||||||||||
Direct-to-Consumer | 10,738 | 6,258 | 4,480 | 71.6 | ||||||||||
Total | 111,558 | 82,410 | 29,148 | 35.4 | ||||||||||
Total | $ | 1,875,197 | $ | 1,817,057 | $ | 58,140 | 3.2 | % | ||||||
Total Wholesale | $ | 1,230,880 | $ | 1,199,699 | $ | 31,181 | 2.6 | % | ||||||
Total Direct-to-Consumer | 644,317 | 617,358 | 26,959 | 4.4 | ||||||||||
Total | $ | 1,875,197 | $ | 1,817,057 | $ | 58,140 | 3.2 | % | ||||||
The increase in overall net sales was due to increases in total DTC net sales and other brands, UGG brand and Teva brand wholesale sales, partially offset by a decrease in Sanuk brand wholesale sales. We experienced an increase
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in the number of pairs sold in the UGG brand, other brands and Teva brand wholesale, as well as the DTC business, offset in part by a decrease in the number of pairs sold in the Sanuk brand wholesale. This resulted in an increase in the overall volume of footwear sold for all brands of 4.6% to approximately 32,100 pairs sold for the year ended March 31, 2016 from approximately 30,700 pairs for the year ended March 31, 2015. The mitigating impacts on overall net sales were increased promotional activity, which consisted of vendor-specific markdowns, price reductions, chargebacks, sales discounts, and sales reserves. On a constant currency basis, overall net sales increased 5.9% to approximately $1,925,000 in fiscal year 2016 compared to fiscal year 2015.
Wholesale net sales of our UGG brand were positively impacted by an increase in the volume of pairs sold in the amount of approximately $73,000. Wholesale net sales were negatively impacted by an increase in promotional activity of approximately $27,000 to promote sales that were slow due to warmer weather and to clear out inventory that will be obsolete in future seasons. Wholesale net sales were also negatively impacted by a decrease in WASPP of approximately $26,000 reflecting unfavorable foreign currency exchange rates and an increased impact of approximately $7,000 from closeout sales. On a constant currency basis, wholesale net sales of our UGG brand increased 4.5% to approximately $945,000 in fiscal year 2016 compared to fiscal year 2015.
Wholesale net sales of our Teva brand increased largely due to an increase in the volume of pairs sold and an increase in WASPP. The increase in the volume of pairs sold had an impact of approximately $1,000 and the increase in WASPP had an impact of approximately $2,000. The increase in WASPP was attributable to a decreased impact from closeout sales as compared to the prior period.
Wholesale net sales of our Sanuk brand decreased primarily due to a decrease in the volume of pairs sold, offset in part by an increase in WASPP. The decrease in the volume of pairs sold had an impact of approximately $13,000 and the increase in WASPP had an impact of approximately $1,000. The increase in WASPP was attributable to a decreased impact from closeout sales as compared to the prior period.
Wholesale net sales of our other brands increased due to an increase in the volume of pairs sold primarily for the Hoka brand and an increase in WASPP. The increase in volume of pairs sold had an impact of approximately $22,000 and the increase in WASPP had an impact of approximately $2,000. The increase in WASPP mainly reflects a shift in product mix.
DTC net sales increased 4.4% to approximately $644,000 primarily due to an increase in net sales from our E-Commerce business of approximately $32,000, partially offset by a decrease in net sales from our retail store business of approximately $5,000. The increase in total DTC net sales was primarily the result of an increase in the number of pairs sold with an impact of approximately $92,000 primarily due to the UGG and Teva brands. The increase in DTC net sales was primarily due to the number of stores opened since March 31, 2015, increased traffic to our websites and improved conversion rates in both E-Commerce and retail businesses due to improved product offerings and new promotions offered on Classic products, offset in part, by declining traffic trends in our retail stores worldwide. These increases were offset in part by a decrease in WASPP of approximately $66,000 and an increase in promotional activity of approximately $3,000 primarily related to the UGG brand. The decrease in WASPP was primarily due to a shift in store mix from concept to outlet, a shift in sales mix to lower priced product in the stores, increased offering of lower price point products for both businesses and the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, DTC net sales increased 7.4% to approximately $663,000 in fiscal year 2016 compared to fiscal year 2015.
Comparable DTC net sales for the 52 weeks ended March 27, 2016 on a constant currency basis decreased 1.0% to approximately $511,000 compared to the same period in fiscal year 2015 primarily as a result of a decrease in comparable retail store sales of approximately $42,000, largely offset by an increase in comparable sales from E-Commerce operations of approximately $37,000. The decrease in comparable DTC sales was primarily due to declining traffic trends in our retail stores worldwide, offset in part by increased website traffic, and improved conversion rates in both our E-Commerce and retail store businesses due to improved product offerings and new promotions offered on Classic products. The decrease in comparable DTC sales was primarily the result of a decrease in WASPP of approximately $41,000, largely offset by an increase in the number of pairs sold in the amount of $36,000. The decrease in the comparable DTC WASPP was primarily due to a shift in product mix.
International sales, which are included in the reportable operating segment sales presented above, increased 0.6%. International sales represented 35.0% and 35.9% of worldwide net sales for the years ended March 31, 2016 and 2015, respectively. The increase in international sales was due to increases of approximately $11,000 for other brand products, primarily the Hoka brand, and $7,000 for Teva brand products. The net sales increase was largely
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offset by sales decreases of approximately $11,000 and $3,000 in UGG and Sanuk brand products, respectively. On a constant currency basis, international sales increased 8.2% to approximately $705,000 during fiscal year 2016 compared to fiscal year 2015.
Gross Profit. Gross margin was 45.2% for fiscal year 2016 compared to 48.3% for fiscal year 2015. The overall decline in gross margin was driven by a negative impact from foreign currency exchange rate fluctuations of approximately $13,000 caused by the strengthening of the US dollar, greater promotional activity of approximately $13,000, restructuring and other charges of approximately $5,000, and greater closeouts of approximately $4,000, offset, in part, by improved sheepskin costs of approximately $4,000.
Selling, General and Administrative Expenses. The change in SG&A expenses for the year ended March 31, 2016 compared to the year ended March 31, 2015 were primarily due to:
• | increased salaries of approximately $19,000, largely attributable to transition and stabilization costs related to the move from Irvine to our new distribution center in Moreno Valley and a timing difference attributable to full operations commencing in the first quarter of fiscal year 2016 at Moreno Valley. Salaries were also impacted by $4,000 of severance related to restructuring charges for our retail store fleet optimization and office consolidations and $4,000 for new retail stores opened subsequent to March 31, 2015; |
• | increased occupancy and rent expense of approximately $16,000, largely driven by the $9,000 restructuring charges for early termination of office and store leases related to our retail store fleet optimization and office consolidations and new retail stores opened subsequent to March 31, 2015; |
• | increased impairment charges for retail stores of approximately $9,800 for which the fair values did not exceed their carrying values based on our retail store asset impairment analysis; |
• | increased expense of approximately $6,000 for store closure and lease termination costs related to our retail store fleet optimization and office consolidations; |
• | increased information technology costs of approximately $5,000, largely related to the restructuring charge of $4,000 for impairment of certain supply chain software related to the business transformation project implementation and the reorganization of our supply chain team causing older software to be obsolete; |
• | increased depreciation expense of approximately $4,000 related to operations commencing at our new distribution center in Moreno Valley in the first quarter of fiscal year 2016; |
• | an increase in our accounts receivable allowances of approximately $4,000, reflecting our ongoing assessments of credit risks for several customers whose recent payment history and financial condition necessitated an increase in the allowance; |
• | decreased recognition of performance-based stock compensation of approximately $18,000 because the threshold level of the performance criteria relating to fiscal year 2016 was not achieved as compared to the partial achievement of performance criteria in fiscal year 2015; |
• | decreased expenses of approximately $12,000 related to the impact of foreign currency exchange rate fluctuations in fiscal year 2016 compared to fiscal year 2015; and |
• | decreased amortization expense of approximately $3,000, primarily attributable to the acquisition of our UGG brand distributor that had been selling to retailers in Germany in fiscal year 2015 period that did not carry forward to fiscal year 2016. |
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Income from Operations. The following table summarizes operating income (loss) by reportable operating segment:
Years Ended March 31, | ||||||||||||||
2016 | 2015 | Change | ||||||||||||
Amount | Amount | Amount | % | |||||||||||
UGG brand wholesale | $ | 246,990 | $ | 269,489 | $ | (22,499 | ) | (8.3 | )% | |||||
Teva brand wholesale | 17,692 | 13,320 | 4,372 | 32.8 | ||||||||||
Sanuk brand wholesale | 15,565 | 21,914 | (6,349 | ) | (29.0 | ) | ||||||||
Other brands wholesale | (4,384 | ) | (9,838 | ) | 5,454 | 55.4 | ||||||||
Direct-to-Consumer | 101,756 | 150,320 | (48,564 | ) | (32.3 | ) | ||||||||
Unallocated overhead costs | (215,492 | ) | (220,786 | ) | 5,294 | 2.4 | ||||||||
Total | $ | 162,127 | $ | 224,419 | $ | (62,292 | ) | (27.8 | )% | |||||
The decrease in income from operations resulted from lower gross margins driven by the negative impact of foreign currency exchange rate fluctuations, increased promotional activity of approximately $29,000 and higher SG&A expenses primarily as a result of approximately $25,000 of restructuring and other charges.
The decrease in income from operations of UGG brand wholesale was the result of the increased promotional activity of approximately $27,000. These factors were partially offset by a decrease in operating expenses of approximately $3,000. The decrease in operating expenses is attributable to the decrease in amortization related to the conversion of our Germany distributor in fiscal year 2015 and a decrease in marketing and advertising, offset in part by an increase in accounts receivable allowances.
The increase in income from operations of Teva brand wholesale was primarily the result of a 2.6% increase in gross margin. The increase in gross margin was due to a decreased impact from closeout sales.
The decrease in income from operations of our Sanuk brand wholesale was primarily due to a decrease in sales and $3,000 of restructuring charges, partially offset by a decrease in operating expenses of approximately $3,000. The decrease in operating expenses was primarily attributable to lower marketing and advertising and lower sales and commission expenses.
The operating results of our other brands wholesale improved due to an increase in net sales and a 3.2% increase in gross margin, partially offset by an increase in operating expenses of approximately $5,000 reflecting $2,500 of restructuring charges. The increase in gross margin was primarily attributable to a shift to higher margin Hoka brand products. The increase in operating expenses was also attributable to marketing expenses for the Hoka brand.
The decrease in income from operations of DTC resulted from an increase in operating expenses of approximately $37,000, a decrease in gross profit and the increase in promotional activity of approximately $3,000. The increase in DTC operating expenses was largely attributable to restructuring charges of $10,500 related to our retail store fleet optimization, $9,800 of other impairment charges for retail stores during fiscal year 2016 and operating expenses for stores opened subsequent to March 31, 2015.
The decrease in unallocated overhead costs was primarily due to a lower unfavorable impact of foreign currency exchange rate fluctuations in fiscal year 2016 compared to fiscal year 2015 of approximately $22,000 and a reduction in performance-based stock compensation of approximately $12,000, partially offset by increased salaries of approximately $11,000 primarily for our Moreno Valley distribution center, increased depreciation expense of approximately $7,000 primarily for our Moreno Valley distribution center, increased information technology costs of approximately $3,000 largely related to supply chain software impairment charges and increased occupancy and rent expense of approximately $3,000 primarily for additional corporate office space and our Moreno Valley distribution center and increased general expenses of $4,000.
Refer to Note 12, "Reportable Operating Segments", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for a discussion of our reportable operating segments.
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Other Expense, Net. The increase in total other expense, net was primarily due to an increase in interest expense as a result of the higher average balances outstanding under our revolving credit facilities compared to fiscal year 2015.
Income Taxes. Income tax expense and effective income tax rates were as follows:
Years Ended March 31, | |||||||
2016 | 2015 | ||||||
Income tax expense | $ | 34,620 | $ | 59,359 | |||
Effective income tax rate | 22.1 | % | 26.8 | % | |||
The decrease in the effective tax rate was primarily due to a change in the jurisdictional mix of annual pre-tax income. The jurisdictional mix change was the result of greater promotional activity and restructuring charges reducing domestic profitability in combination with the strategic supply chain reorganization completed during the year ended March 31, 2015.
Foreign income before income taxes was $105,938,000 and $95,850,000 and worldwide income before income taxes was $156,885 and $221,139 for the years ended March 31, 2016 and 2015, respectively. The increase in foreign income before income taxes was primarily due to an increase in compensation earned by our foreign-based global product sourcing organization, which commenced operations on July 1, 2014 and lower foreign operating expenses as a result of amortization related to conversion of our Germany distributor in the prior period and expense reduction efforts.
For fiscal year 2016, we generated approximately $35,402 of our pre-tax earnings from a country which does not impose a corporate income tax compared to $54,588 for fiscal year 2015. Undistributed earnings of non-US subsidiaries are expected to be reinvested outside of the US indefinitely. Such earnings would become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of dividends. As of March 31, 2016, we had approximately $233,000 of cash and cash equivalents outside the US that would be subject to additional income taxes if it were to be repatriated.
For additional information about the factors that may impact our foreign income or loss before income taxes, as well as our effective tax rate, please see the discussion under the heading "Results of Operations - Year Ended March 31, 2017 Compared to Year Ended March 31, 2016 - Income Taxes" above.
Net Income. Our net income decreased as a result of the factors discussed above. Our net income per share decreased due to lower net income, offset in part by a reduction in the weighted-average common shares outstanding. The overall reduction in the weighted-average common shares outstanding was primarily the result of repurchases of our common stock made during the year ended March 31, 2016.
Other Comprehensive Loss. Other comprehensive loss decreased as a result of decreased net unrealized losses on foreign currency exchange rates as well as increased gains on foreign currency exchange rate hedges, largely attributable to unrealized gains on Asian currencies, partially offset by unrealized losses on Canadian currency exchange rates during the year ended March 31, 2016 compared to the year ended March 31, 2015.
Liquidity and Capital Resources
Liquidity
We finance our working capital and operating needs using a combination of our cash and cash equivalents balances, cash generated from operations, and as needed, the borrowings available under our credit agreements. In an economic recession or under other adverse economic conditions, our cash generated from operations may decline, and we may be unable to realize a return on our cash and cash equivalents, secure additional credit on favorable terms, or renew or access our existing lines of credit. These factors may impact our working capital reserves and have a material adverse effect on our business.
Our cash flow cycle includes the purchase of or deposits for raw materials, the purchase of inventories, the subsequent sale of the inventories, and the eventual collection of the resulting accounts receivable. As a result, our working capital requirements begin when we purchase, or make deposits on, raw materials and inventories and continue
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until we ultimately collect the resulting receivables. The seasonality of our UGG brand business requires us to build fall and winter inventories in the quarters ending June 30th and September 30th to support sales for the UGG brand’s major selling seasons, which historically occur during the quarters ending September 30th and December 31st; whereas, the Teva and Sanuk brands build inventory levels beginning in the quarters ending December 31st and March 31st in anticipation of the spring selling season that occurs in the quarters ending March 31st and June 30th. Given the seasonality of our business, our working capital requirements fluctuate significantly throughout the year. The cash required to fund these working capital fluctuations has historically been provided using internal cash balances, cash from ongoing operating activities and short-term borrowings under our credit agreements.
We believe that our cash and cash equivalents balances, cash generated from operations, and available borrowings under the revolving credit facility governed by our Second Amended and Restated Credit Agreement with JPMorgan Chase Bank, National Association (as amended, Domestic Credit Facility), our revolving credit facility in China (as amended, China Credit Facility), and our revolving credit facility in Japan (Japan Credit Facility) will provide sufficient liquidity to enable us to meet our working capital requirements for at least the next 12 months. However, risks and uncertainties that could impact our liquidity include our worldwide sales, our profit margin, the perception of our brands among retail consumers and wholesale customers, our ability to respond to changes in consumer preferences, our ability to collect our receivables in a timely manner, our ability to effectively manage our inventories, our ability to respond to ongoing changes in the retail environment, unexpected changes in weather conditions, and the timing and extent of restructuring charges, among others. Furthermore, we may require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our existing sources of liquidity are insufficient to satisfy our cash requirements, we may seek to borrow under our existing borrowing arrangements, seek new borrowing arrangements, or sell additional debt or equity securities. The sale of convertible debt or equity securities could result in additional dilution to our stockholders, and equity securities may have rights or preferences that are superior to those of our existing stockholders. The incurrence of additional indebtedness would result in additional debt service obligations, could result in operating and financial covenants that would restrict our operations, and could cause us to further encumber our assets. In addition, there can be no assurance that any additional financing will be available on acceptable terms, if at all. Although there are no other material present understandings, commitments or agreements with respect to the acquisition of any other businesses, we may evaluate acquisitions of other businesses or brands. Refer to Part I, Item 1A, "Risk Factors", for a discussion of additional factors that may affect our cash position and liquidity.
Capital Resources
Domestic Credit Facility
As of March 31, 2017, we had no outstanding balance and had outstanding letters of credit of approximately $549 under our Domestic Credit Facility. The Domestic Credit Facility is a five-year, $400,000 secured revolving credit facility. As of March 31, 2017, we had debt capacity of approximately $378,000 out of $400,000, due to limitations on consolidated worldwide borrowings under the terms of the Domestic Credit Facility. At May 30, 2017, we had no outstanding balance and available borrowings of approximately $378,000 under our Domestic Credit Facility.
China Credit Facility
As of March 31, 2017, we had no outstanding balance and available borrowings of approximately $44,000 under our China Credit Facility. In October 2016, we entered into a third amendment to our China Credit Facility to provide for an increase in our uncommitted revolving line of credit of up to CNY 300,000, or approximately $44,000. On March 31, 2017, we entered into a fourth amendment to our China Credit Facility which removed Deckers Footwear (Shanghai) Co., LTD, leaving Deckers (Beijing) Trading Co., LTD as the remaining borrower. At May 30, 2017, we had no outstanding balance and available borrowings of approximately $44,000 under our China Credit Facility.
Japan Credit Facility
As of March 31, 2017, we had no outstanding balance and available borrowings of approximately $49,000 under our Japan Credit Facility. The Japan Credit Facility renews annually, and is guaranteed by Deckers Outdoor Corporation. We have renewed the Japan Credit Facility through January 31, 2018 under the terms of the original agreement. At May 30, 2017, we had no outstanding balance and available borrowings of approximately $49,000 under our Japan Credit Facility.
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Mortgage
As of March 31, 2017, we had an outstanding principal balance under the mortgage on our corporate headquarters property of approximately $32,631. The loan will mature and have a balloon payment due on July 1, 2029 of approximately $23,700, in addition to any then-outstanding balance.
At March 31, 2017, we were in compliance with all debt covenants under our borrowing arrangements and we remain in compliance at May 30, 2017.
Refer to Note 6, "Revolving Credit Facilities and Mortgage Payable", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information about our borrowing arrangements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Contractual Obligations
The following table summarizes our contractual obligations at March 31, 2017 and the effects such obligations are expected to have on liquidity and cash flow in future periods.
Payments Due by Period | |||||||||||||||||||
Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | |||||||||||||||
Operating lease obligations (1) | $ | 311,470 | $ | 51,319 | $ | 90,301 | $ | 67,680 | $ | 102,170 | |||||||||
Purchase obligations for product (2) | 392,716 | 392,716 | — | — | — | ||||||||||||||
Purchase obligations for sheepskin (3) | 122,869 | 69,169 | 53,700 | — | — | ||||||||||||||
Other purchase obligations (4) | 18,942 | 10,814 | 8,128 | — | — | ||||||||||||||
Mortgage obligation (5) | 50,251 | 2,168 | 4,336 | 4,336 | 39,411 | ||||||||||||||
Unrecognized tax benefits (6) | 9,928 | 856 | 3,273 | 5,799 | — | ||||||||||||||
Total | $ | 906,176 | $ | 527,042 | $ | 159,738 | $ | 77,815 | $ | 141,581 | |||||||||
(1) | Our operating lease obligations consist primarily of building leases for our retail locations, distribution centers, and regional offices, and include the cash lease payments of deferred rents. |
(2) | Our purchase obligations for product consist mostly of open purchase orders. Outstanding purchase orders are primarily with our third-party manufacturers and most are expected to be paid within one year. We can cancel a significant portion of the purchase obligations under certain circumstances; however, the occurrence of such circumstances is generally limited. As a result, the amount does not necessarily reflect the dollar amount of our binding commitments or minimum purchase obligations, and instead reflects an estimate of our future payment obligations based on information currently available. |
(3) | Our purchase obligations for sheepskin represent remaining commitments under existing supply agreements for sheepskin, which are subject to minimum volume commitments. We expect that purchases made by us under these agreements in the ordinary course of business will eventually exceed the minimum commitment levels. |
(4) | Our other purchase obligations generally consist of non-cancellable minimum commitments for capital expenditures, obligations under service contracts and requirements to pay promotional expenses. Our promotional expenditures and service contracts are due periodically during fiscal years 2018 through 2020. |
As of March 31, 2017, we had approximately $3,400 of commitments for future capital expenditures primarily related to information technology upgrades at our distribution centers in California and tenant improvements for retail store space and facilities in the US. We estimate that the capital expenditures for fiscal year 2018, including the aforementioned commitments, will not exceed $45,000. We anticipate these expenditures will primarily relate to the build-out of our DTC business and facilities and purchases
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for IT infrastructure and system improvements. However, the actual amount of our future capital expenditures may differ significantly from this estimate depending on the timing of store openings or conversions from owned stores to partner retail stores, as well as unforeseen needs to replace existing assets and the timing of other expenditures.
(5) | Our mortgage obligation consists of a mortgage secured by our corporate headquarters property. The mortgage has a fixed interest rate of 4.928%. Payments represent principal payments in an amount that amortizes the principal balance over a 30-year period; however, the loan will mature and have a balloon payment due on July 1, 2029 of approximately $23,700, in addition to any then-outstanding balance. Refer to Note 6, "Revolving Credit Facilities and Mortgage Payable", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information regarding our mortgage obligation. |
(6) | The unrecognized tax benefits are related to uncertain tax positions taken in our income tax return that would impact the effective tax rate, if recognized. Refer to Note 5, "Income Taxes", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K. |
Refer to Note 7, "Commitments and Contingencies", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on purchase obligations and minimum commitments.
Cash Flows
The following table summarizes our cash flows:
Years Ended March 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Net cash provided by operating activities | $ | 198,677 | $ | 125,581 | $ | 169,654 | |||||
Net cash used in investing activities | (44,499 | ) | (67,221 | ) | (100,636 | ) | |||||
Net cash used in financing activities | (103,070 | ) | (36,340 | ) | (78,260 | ) | |||||
Operating Activities. Our primary source of liquidity is net cash provided by operating activities, which is driven by the level of net income, non-cash adjustments and changes in working capital.
The increase in net cash provided by operating activities in fiscal year 2017 compared to fiscal year 2016 was primarily due to: (1) lower net income compared to fiscal year 2016, (2) the net impact of changes in non-cash impairment charges and related deferred tax positions, as well as additional restructuring charges, and (3) positive changes in working capital compared to the prior period primarily for inventory and accounts receivable. The change in cash used for inventory was lower compared to the prior period due to lower sales offset by improved inventory management. The change in accounts receivable levels relates to lower accounts receivable balances compared to the prior period due to lower sales and timing differences for collections.
The reduction in net cash provided by operating activities in fiscal year 2016 compared to fiscal year 2015 was primarily due to: (1) changes in inventory levels and trade accounts receivable, (2) the net impact of changes in noncash adjustments, primarily related to depreciation, amortization and accretion and restructuring charges, and (3) a decrease in net income. The change in inventory levels relates to lower than anticipated sales. The change in trade accounts receivable relates to payment delays from customers as a result of slower sell-through primarily caused by warmer weather. These cash flows were offset in part by changes in trade accounts payable in fiscal year 2016 compared to fiscal year 2015. The change in payables relates to the change in inventory levels.
Wholesale accounts receivable turnover decreased to 6.0 times in the year ended March 31, 2017 compared to 6.8 times for the year ended March 31, 2016 due to lower wholesale sales and the impact of higher average accounts receivable balances.
Inventory turnover decreased to 2.2 times in the year ended March 31, 2017 compared to 2.7 times in the year ended March 31, 2016 due to the impact of higher average inventory levels and lower cost of sales.
Investing Activities. The reduction in net cash used in investing activities in fiscal year 2017 compared to fiscal year 2016 was primarily due to fewer capital expenditures for the business transformation project implementation and
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business acquisition costs compared to the prior period, as well as the winding down of the build out of our new retail stores and lower costs for purchases of computer hardware and equipment. This was partially offset by the purchase of land adjacent to our corporate headquarters campus during fiscal year 2017.
Net cash used in investing activities for fiscal year 2016 resulted primarily from the purchases of property and equipment and our acquisition of the Koolaburra brand, partially offset by proceeds from the sale of the assets of the MOZO and TSUBO brands. The capital expenditures were primarily related to our business transformation project implementation, the build-out of our distribution center and retail stores, and purchases of computer hardware and software
Net cash used in investing activities for fiscal year 2015 resulted primarily from the purchases of property and equipment and purchase of intangibles. The capital expenditures were primarily related to infrastructure improvements to support our Omni-Channel transformation and international expansion, the build-out of our distribution center and retail stores, and purchases of computer hardware and software. The purchase of intangibles and other assets, net was related to the acquisition of our UGG brand distributor that sold to retailers in Germany.
Financing Activities. The increase in net cash used in financing activities for fiscal year 2017 compared to fiscal year 2016 was primarily due to an increase in short-term borrowings under our revolving credit facilities, offset by repayments of short-term borrowings, as well as repurchases of our common stock and cash paid for contingent consideration related to the Sanuk brand acquisition.
Net cash used in financing activities for fiscal year 2016 resulted primarily from repayments of short-term borrowings and cash paid for repurchases of our common stock.
Net cash used in financing activities for fiscal year 2015 resulted primarily from repayments of short-term borrowings and cash paid for repurchases of our common stock. This was partially offset by short-term borrowings provided by our lines of credit and funding received from the mortgage obtained on our corporate headquarters property.
During fiscal years 2017, 2016 and 2015, we repurchased approximately 222,000, 1,420,000 and 1,436,000 shares, respectively, of our common stock. In fiscal years 2017, 2016 and 2015, the cost of these repurchases was approximately $12,572, $94,200, and $107,200, respectively, at an average price per share of $56.51, $66.32, and $74.68, respectively. At March 31, 2017, the remaining approved amount under the January 2015 program was approximately $65,294.
Refer to Note 8, "Stockholders' Equity", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on repurchases of our common stock.
Impact of Foreign Currency Exchange Rate Fluctuations
Foreign currency exchange rate fluctuations had an incremental negative impact on each of the years ended March 31, 2017, 2016 and 2015.
Refer to “Results of Operations”, above, the consolidated statements of comprehensive income (loss), Note 9, "Foreign Currency Exchange Rate Contracts and Hedging", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for further discussion of the impact of foreign currency exchange rate fluctuations.
Critical Accounting Policies and Estimates
Management must make certain estimates and assumptions that affect the amounts reported in the consolidated financial statements and notes, based upon historical experience, existing and known circumstances, authoritative accounting pronouncements and other factors that management believes to be reasonable, but actual results could differ materially from these estimates. Management believes the following critical accounting estimates are most significantly affected by judgments and estimates used in the preparation of our consolidated financial statements and notes thereto: allowances for doubtful accounts, estimated returns liability, sales discounts, and customer chargebacks; inventory valuations; valuation of goodwill, intangible and other long-lived assets; and performance-based stock compensation.
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Refer to Note 1, "The Company and Summary of Significant Accounting Policies", to our consolidated financial statements in Part IV of this Annual Report on Form 10-K for a discussion of our significant accounting policies and use of estimates, as well as the impact of recent accounting pronouncements.
Accounts Receivable Allowances and Reserves
The following table summarizes data related to the critical accounting estimates for accounts receivable allowances and reserves, which are discussed below:
As of March 31, | |||||||||||||
2017 | 2016 | ||||||||||||
Amount | |||||||||||||