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DECKERS OUTDOOR CORP - Quarter Report: 2020 June (Form 10-Q)

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
☒
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended June 30, 2020
OR
☐
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number: 001-36436

DECKERS OUTDOOR CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
95-3015862
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

250 Coromar Drive, Goleta, California 93117
(Address of principal executive offices and zip code)
 
(805) 967-7611
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
DECK
New York Stock Exchange
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
 
Accelerated filer
☐
Non-accelerated filer
☐
 
Smaller reporting company
☐
 
 
 
Emerging growth company
☐
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of the close of business on July 30, 2020, the number of outstanding shares of the registrant's common stock, par value $0.01 per share, was 28,021,361.
 


DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
For the Three Months Ended June 30, 2020
TABLE OF CONTENTS
 
 
Page
 
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Defaults Upon Senior Securities
*
Item 4.
Mine Safety Disclosures
*
Item 5.
Other Information
*
Item 6.
 

*Not applicable.


1
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS


This Quarterly Report on Form 10-Q for our first fiscal quarter ended June 30, 2020 (Quarterly Report), and the information and documents incorporated by reference into this Quarterly Report, contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), 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 Quarterly Report. 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 Quarterly Report, and the information and documents incorporated by reference into this Quarterly Report, contain forward-looking statements relating to, among other things:

•
the impacts of the COVID-19 global pandemic (referred to herein as COVID-19, the COVID-19 pandemic, or the pandemic) on our business, financial condition and results of operations, and the business, financial condition and results of operations of our customers and business partners;
•
changes to our business resulting from changes in discretionary spending, consumer confidence, unemployment rates, retail store activity, tourist activity, or governmental restrictions;
•
our business, operating, investing, capital allocation, marketing, and financing plans and strategies;
•
the expansion of our brands and product offerings;
•
changes to the geographic and seasonal mix of our brands and products;
•
changes to our product distribution strategies, including the implementation of our product allocation and segmentation strategies and our decision to exit the warehouse channel for the Sanuk brand;
•
changes in consumer tastes and preferences impacting our brands and products, and the fashion industry generally;
•
trends impacting the purchasing behavior of wholesale customers and retail consumers, including those impacting retail and e-commerce businesses;
•
bankruptcies or other financial difficulties impacting our wholesale customers or other business partners;
•
the impact of seasonality and weather on consumer behavior, demand for our products, and our results of operations;
•
the impact of our efforts to continue to advance sustainable and socially conscious business operations;
•
expansion of and investments in our Direct-to-Consumer (DTC) capabilities, including our e-commerce platforms;
•
the operational challenges faced by our distribution center, and our global third-party logistics providers, and the related impacts on our ability to deliver products;
•
availability of raw materials and manufacturing capacity, and reliability of overseas production and storage;
•
commitments and contingencies, including with respect to operating leases, purchase obligations for product and raw materials, and legal or regulatory proceedings;
•
the impacts of new or proposed legislation, tariffs, regulatory enforcement actions, or legal proceedings;
•
the value of goodwill and other intangible assets, and potential write-downs or impairment charges;
•
changes impacting our tax liability and effective tax rates;
•
repatriation of earnings of non-United States subsidiaries and any related tax impacts;
•
the impact from adoption of recent accounting pronouncements; and
•
overall global economic and political trends, including foreign currency exchange rate fluctuations, changes in interest rates, and changes in commodity pricing.

Forward-looking statements represent 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 II, Item 1A, "Risk Factors," and Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in this Quarterly Report, as well as in our other filings with the Securities and Exchange Commission (SEC). You should read this Quarterly Report, 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, new risks and uncertainties emerge from time to time and it is not possible for 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 to update any forward-looking statements. We qualify all our forward-looking statements with these cautionary statements.

2

PART I. FINANCIAL INFORMATION

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

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


3

ITEM 1. FINANCIAL STATEMENTS

DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(dollar and share data amounts in thousands, except par value)
 
June 30, 2020

March 31, 2020
ASSETS
 
 
(AUDITED)
Cash and cash equivalents
$
661,941

 
$
649,436

Trade accounts receivable, net of allowances ($25,084 and $21,146 as of June 30, 2020 and March 31, 2020, respectively)
135,225

 
185,596

Inventories, net of reserves ($17,759 and $12,227 as of June 30, 2020 and March 31,2020, respectively)
434,974

 
311,620

Prepaid expenses
18,286

 
17,760

Other current assets
24,381

 
21,548

Income tax receivable
15,003

 
8,151

Total current assets
1,289,810

 
1,194,111

Property and equipment, net of accumulated depreciation ($237,898 and $242,138 as of June 30, 2020 and March 31, 2020, respectively)
209,074

 
209,037

Operating lease assets
230,578

 
243,522

Goodwill
13,990

 
13,990

Other intangible assets, net of accumulated amortization ($75,305 and $74,421 as of June 30, 2020 and March 31, 2020, respectively)
47,388

 
48,016

Deferred tax assets, net
28,243

 
28,233

Other assets
29,483

 
28,209

Total assets
$
1,848,566

 
$
1,765,118

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Short-term borrowings
$
646

 
$
638

Trade accounts payable
253,557

 
147,892

Accrued payroll
27,278

 
42,309

Operating lease liabilities
48,009

 
49,091

Other accrued expenses
49,247

 
46,281

Income taxes payable
12,662

 
11,104

Value added tax payable
3,599

 
3,631

Total current liabilities
394,998

 
300,946

Mortgage payable
30,101

 
30,263

Long-term operating lease liabilities
205,555

 
215,724

Income tax liability
64,918

 
63,547

Other long-term liabilities
16,066

 
14,518

Total long-term liabilities
316,640

 
324,052

Commitments and contingencies

 

Stockholders' equity
 
 
 
Common stock ($0.01 par value; 125,000 shares authorized; shares issued and outstanding of 28,005 and 27,999 as of June 30, 2020 and March 31, 2020, respectively)
280

 
280

Additional paid-in capital
195,226

 
191,451

Retained earnings
965,975

 
973,948

Accumulated other comprehensive loss
(24,553
)
 
(25,559
)
Total stockholders' equity
1,136,928

 
1,140,120

Total liabilities and stockholders' equity
$
1,848,566

 
$
1,765,118


See accompanying notes to the condensed consolidated financial statements.

4

DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
(dollar and share data amounts in thousands, except per share data)
 
Three Months Ended June 30,
 
2020
 
2019
Net sales
$
283,169

 
$
276,839

Cost of sales
140,603

 
146,820

Gross profit
142,566

 
130,019

Selling, general and administrative expenses
150,265

 
161,436

Loss from operations
(7,699
)
 
(31,417
)
 
 
 
 
Interest income
(674
)
 
(2,866
)
Interest expense
1,190

 
1,146

Other income, net
(143
)
 
(92
)
Total other expense (income), net
373

 
(1,812
)
Loss before income taxes
(8,072
)
 
(29,605
)
Income tax benefit
(99
)
 
(10,254
)
Net loss
(7,973
)
 
(19,351
)
 
 
 
 
Other comprehensive income (loss)
 
 
 
Unrealized gain (loss) on cash flow hedges, net of tax
353

 
(317
)
Foreign currency translation gain
653

 
68

Total other comprehensive income (loss)
1,006

 
(249
)
Comprehensive loss
$
(6,967
)
 
$
(19,600
)
 
 
 
 
Net loss per share
 
 
 
Basic
$
(0.28
)
 
$
(0.67
)
Diluted
$
(0.28
)
 
$
(0.67
)
Weighted-average common shares outstanding
 
 
 
Basic
28,001

 
29,089

Diluted
28,001

 
29,089


See accompanying notes to the condensed consolidated financial statements.

5

DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
(amounts in thousands)
 
Three Months Ended June 30, 2020
 
 
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total Stockholders'
Equity
 
Common Stock
 
 
 
 
 
Shares
 
Amount
 
 
 
 
Balance, March 31, 2020
27,999

 
$
280

 
$
191,451

 
$
973,948

 
$
(25,559
)
 
$
1,140,120

Stock-based compensation
1

 
—

 
3,618

 
—

 
—

 
3,618

Shares issued upon vesting
1

 
—

 
—

 
—

 
—

 
—

Exercise of stock options
4

 
—

 
247

 
—

 
—

 
247

Shares withheld for taxes
—

 
—

 
(90
)
 
—

 
—

 
(90
)
Net loss
—

 
—

 
—

 
(7,973
)
 
—

 
(7,973
)
Total other comprehensive income
—

 
—

 
—

 
—

 
1,006

 
1,006

Balance, June 30, 2020
28,005

 
$
280

 
$
195,226

 
$
965,975

 
$
(24,553
)
 
$
1,136,928

 
Three Months Ended June 30, 2019
 
 
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total Stockholders'
Equity
 
Common Stock
 
 
 
 
 
Shares
 
Amount
 
 
 
 
Balance, March 31, 2019
29,141

 
$
291

 
$
178,227

 
$
889,266

 
$
(22,654
)
 
$
1,045,130

Stock-based compensation
1

 
—

 
3,424

 
—

 
—

 
3,424

Shares issued upon vesting
4

 
—

 
—

 
—

 
—

 
—

Exercise of stock options
46

 
1

 
2,772

 
—

 
—

 
2,773

Cumulative adjustment from adoption of recent accounting pronouncements
—

 
—

 
—

 
(1,069
)
 
—

 
(1,069
)
Shares withheld for taxes
—

 
—

 
(374
)
 
—

 
—

 
(374
)
Repurchases of common stock
(227
)
 
(2
)
 
—

 
(35,003
)
 
—

 
(35,005
)
Net loss
—

 
—

 
—

 
(19,351
)
 
—

 
(19,351
)
Total other comprehensive loss
—

 
—

 
—

 
—

 
(249
)
 
(249
)
Balance, June 30, 2019
28,965

 
$
290

 
$
184,049

 
$
833,843

 
$
(22,903
)
 
$
995,279


See accompanying notes to the condensed consolidated financial statements.

6

DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(amounts in thousands)
 
Three Months Ended June 30,
 
2020
 
2019
OPERATING ACTIVITIES
 
 
 
Net loss
$
(7,973
)
 
$
(19,351
)
Reconciliation of net loss to net cash provided by (used in) operating activities:
Depreciation, amortization and accretion
9,276

 
10,345

Bad debt expense (benefit)
2,664

 
(937
)
Deferred tax benefit
(14
)
 
(1,646
)
Stock-based compensation
3,687

 
3,473

Excess tax benefit from stock-based compensation
(15
)
 
(580
)
(Gain) Loss on disposal of property and equipment
(22
)
 
59

Impairment of operating lease assets and other long-lived assets
2,680

 
—

Changes in operating assets and liabilities:
 
 
 
Trade accounts receivable, net
47,709

 
19,860

Inventories, net
(123,355
)
 
(194,552
)
Prepaid expenses and other current assets
(2,895
)
 
(7,172
)
Income tax receivable
(6,852
)
 
(1,499
)
Net operating lease assets and liabilities
(1,051
)
 
(1,033
)
Other assets
(1,273
)
 
(547
)
Trade accounts payable
106,203

 
175,129

Other accrued expenses
(12,091
)
 
(8,598
)
Income taxes payable
1,573

 
(18,625
)
Long-term liabilities
2,918

 
(955
)
Net cash provided by (used in) operating activities
21,169

 
(46,629
)
INVESTING ACTIVITIES
 
 
 
Purchases of property and equipment
(9,253
)
 
(7,393
)
Proceeds from sales of property and equipment
41

 
227

Net cash used in investing activities
(9,212
)
 
(7,166
)
FINANCING ACTIVITIES
 
 
 
Proceeds from exercise of stock options
247

 
2,773

Repurchases of common stock
—

 
(35,005
)
Cash paid for shares withheld for taxes
(90
)
 
(374
)
Repayments of mortgage principal
(154
)
 
(146
)
Net cash provided by (used in) financing activities
3

 
(32,752
)
Effect of foreign currency exchange rates on cash and cash equivalents
545

 
(519
)
Net change in cash and cash equivalents
12,505

 
(87,066
)
Cash and cash equivalents at beginning of period
649,436

 
589,692

Cash and cash equivalents at end of period
$
661,941

 
$
502,626




7

DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(amounts in thousands)
(continued)
 
Three Months Ended June 30,
 
2020
 
2019
SUPPLEMENTAL CASH FLOW DISCLOSURE
 
 
 
Cash paid during the period
 
 
 
Income taxes, net of refunds of $797 and $4,293, as of June 30, 2020 and 2019, respectively
$
4,216

 
$
11,833

Interest
756

 
563

Operating leases
14,185

 
15,265

Non-cash investing activities
 
 
 
Accrued for purchases of property and equipment
514

 
1,116


See accompanying notes to the condensed consolidated financial statements.

8
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended June 30, 2020 and 2019
(dollar amounts in thousands, except share and per share data)


Note 1. General

The Company

Deckers Outdoor Corporation and its wholly-owned subsidiaries (collectively, the Company) is a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyles use and high-performance activities. As part of its omni-channel platform, the Company's proprietary brands are aligned across its Fashion Lifestyle group, including the UGG and Koolaburra brands, and Performance Lifestyle group, including the HOKA, Teva, and Sanuk brands.

The Company sells its products through domestic and international retailers, international distributors, and directly to its global consumers through its DTC business, which is comprised of its retail stores and e‑commerce websites. Independent third-party contractors manufacture all of the Company's products. A significant part of the Company's business is seasonal, requiring it to build inventory levels during certain quarters in its fiscal year to support higher selling seasons, which contributes to the variation in its results from quarter to quarter.

Basis of Presentation

The unaudited condensed consolidated financial statements and accompanying notes thereto (referred to herein as condensed consolidated financial statements) as of June 30, 2020 and for the three months ended June 30, 2020 and 2019 were prepared in accordance with accounting principles generally accepted in the United States (US GAAP) for interim financial information pursuant to Rule 10-01 of Regulation S-X issued by the SEC. Accordingly, they do not include all the information and disclosures required by US GAAP for annual financial statements and accompanying notes thereto. The condensed consolidated balance sheet as of March 31, 2020 was derived from the Company's audited consolidated financial statements. In the opinion of management, the condensed consolidated financial statements include all normal and recurring entries necessary to fairly present the results of the interim periods presented but are not necessarily indicative of results to be achieved for full fiscal years or other interim periods. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2020, filed with the SEC on June 1, 2020 (2020 Annual Report).

Consolidation. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Reclassifications. Certain reclassifications were made for prior periods presented to conform to the current period
presentation.

Use of Estimates. The preparation of the Company's condensed consolidated financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the amounts reported. Management bases these estimates and assumptions upon historical experience, existing and known circumstances, authoritative accounting pronouncements, and other factors that management believes to be reasonable. Although the full impact of the COVID-19 pandemic is unknown and cannot be reasonably estimated, the Company has made appropriate accounting estimates based on the facts and circumstances available as of the reporting date. However, actual results could differ materially from these estimates as a result of a number of factors, including, without limitation, the severity and duration of the pandemic; the timing and extent of governmental actions taken to control the spread and mitigate the impact of the pandemic; the impact of the pandemic on discretionary spending, consumer confidence, unemployment rates and retail store security; and the impact of the pandemic on global economic conditions and financial markets.


9
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended June 30, 2020 and 2019
(dollar amounts in thousands, except share and per share data)

Significant areas requiring the use of management estimates relate to inventory write-downs, trade accounts receivable allowances, including variable consideration for net sales provided to customers, contract assets and liabilities, stock-based compensation, impairment assessments, goodwill and other intangible assets, depreciation and amortization, income tax receivables and liabilities, uncertain tax positions, the fair value of financial instruments, the reasonably certain lease term, lease classification, and the Company's incremental borrowing rate (IBR) utilized to discount its unpaid lease payments to measure its operating lease assets and liabilities.

Reportable Operating Segments

The Company's six reportable operating segments include the worldwide wholesale operations for each of the UGG brand, HOKA brand, Teva brand, Sanuk brand, and Other brands, as well as DTC (referred to herein as reportable operating segments). Refer to Note 12, “Reportable Operating Segments,” for further information on the Company's reportable operating segments.

Recent Accounting Pronouncements

Recently Adopted. The Financial Accounting Standards Board (FASB) has issued Accounting Standard Updates (ASUs) that have been adopted by the Company for its annual and interim reporting periods as stated below. The following is a summary of each standard and the impact on the Company:
Standard
 
Description
 
Impact on Adoption
ASU No. 2017-04, Goodwill and Other: Simplifying the Test for Goodwill Impairment (as amended by ASU 2019-06)
 
Requires annual and interim goodwill impairment tests be performed by comparing the fair value of a reporting unit with its carrying amount, effectively eliminating step two of the goodwill impairment test under legacy US GAAP. The amount by which the carrying amount exceeds the reporting unit’s fair value will continue to be recognized as an impairment charge.
 
The Company adopted this ASU beginning April 1, 2020 on a prospective basis, which did not have a material impact on its condensed consolidated financial statements.
ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (as amended by ASUs 2018-19, 2019-04, 2019-05, 2019-11, 2020-02, and 2020-03)
 
Replaces the incurred loss impairment methodology in legacy US GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.
 
The Company adopted this ASU beginning April 1, 2020 on a prospective basis, which did not have a material impact on its condensed consolidated financial statements.

Not Yet Adopted. The FASB has issued the following ASUs that have not yet been adopted by the Company. The following is a summary of each standard, planned period of adoption, and the expected impact on the Company:
Standard
 
Description
 
Planned Period of Adoption
 
Expected Impact on Adoption
ASU No. 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes
 
Removes certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation and calculating income taxes in interim periods, as well as reduces complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group.
 
Q1 FY 2022
 
The Company is currently evaluating the impact on adoption of this ASU; however, the Company does not expect that the adoption will have a material impact on its condensed consolidated financial statements.
ASU No. 2020-04, 
Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting

 
London Interbank Offered Rate (LIBOR) is a benchmark interest rate referenced in a variety of agreements that are used by all types of entities. At the end of 2021, banks will no longer be required to report information that is used to determine LIBOR. As a result, LIBOR could be discontinued. Other interest rates used globally could also be discontinued for similar reasons.

This ASU provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. Guidance is limited for adoption through December 31, 2022.
 
Q4 FY 2021
 
The Company is currently evaluating the impact of the adoption of this ASU on its consolidated financial statements.


10
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended June 30, 2020 and 2019
(dollar amounts in thousands, except share and per share data)

Note 2. Revenue Recognition

Revenue is recognized when a performance obligation is completed at a point in time and when the customer has obtained control. Control passes to the customer when it has the ability to direct the use of, and obtain substantially all the remaining benefits from, the goods transferred. The amount of revenue recognized is based on the transaction price, which represents the invoiced amount less known actual amounts or estimates of variable consideration. Components of variable consideration include estimated discounts, markdowns or chargebacks, and sales returns. Estimated variable consideration is included in the transaction price to the extent it is probable that a significant reversal of the cumulative revenue recognized will not occur in a future period.

The Company's customer contracts do not have a significant financing component due to their short durations, which are typically effective for one year or less and have payment terms that are generally 30-60 days.

Contract Assets and Liabilities

Contract assets represent the Company’s right to consideration subject to conditions other than the passage of time, such as additional performance obligations to be satisfied. Contract liabilities are performance obligations that the Company expects to satisfy or relieve within the next 12 months, advance consideration obtained prior to satisfying a performance obligation, or unconditional obligations to provide goods or services under non-cancelable contracts before the transfer of goods or services to the customer has occurred. Contract assets and liabilities are recorded in other current assets and other accrued expenses, respectively, in the condensed consolidated balance sheets.
Sales Returns. The following table provides activity during the three months ended June 30, 2020 related to estimated sales returns for the Company’s existing customer contracts for all channels:
 
Contract Asset
 
Contract Liability
Balance, March 31, 2020
$
9,663

 
$
(25,667
)
Net additions to sales return allowance*
8,553

 
(25,782
)
Actual returns
(7,801
)
 
23,573

Balance, June 30, 2020
$
10,415

 
$
(27,876
)


The following table provides activity during the three months ended June 30, 2019 related to estimated sales returns for the Company’s existing customer contracts for all channels:
 
Contract Asset
 
Contract Liability
Balance, March 31, 2019
$
10,441

 
$
(24,787
)
Net additions to sales return allowance*
3,776

 
(14,632
)
Actual returns
(8,713
)
 
24,447

Balance, June 30, 2019
$
5,504

 
$
(14,972
)

*Net additions to sales return allowance include provision for anticipated sales returns which consists of both contractual return rights and discretionary authorized returns.

Loyalty Programs. The Company has a customer loyalty program for the UGG brand in its DTC channel where customers earn rewards from qualifying purchases or activities. As of June 30, 2020 and March 31, 2020, the Company's contract liability for loyalty programs was $7,397 and $6,950, respectively.

Refer to Note 12, “Reportable Operating Segments,” for further information on the Company's disaggregation of revenue by reportable operating segment.


11
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended June 30, 2020 and 2019
(dollar amounts in thousands, except share and per share data)

Note 3. Goodwill and Other Intangible Assets

Goodwill and Other Intangible Assets

The Company's goodwill and other intangible assets are recorded in the condensed consolidated balance sheets, as follows:
 
June 30, 2020
 
March 31, 2020
Goodwill
 
 
 
UGG brand
$
6,101

 
$
6,101

HOKA brand
7,889

 
7,889

Total goodwill
13,990

 
13,990

Other intangible assets
 
 
 
Indefinite-lived intangible assets
 
 
 
Trademarks
15,454

 
15,454

Definite-lived intangible assets
 
 
 
Trademarks
55,245

 
55,245

Other
51,994

 
51,738

Total gross carrying amount
107,239

 
106,983

Accumulated amortization
(75,305
)
 
(74,421
)
Net definite-lived intangible assets
31,934

 
32,562

Total other intangible assets, net
47,388

 
48,016

Total
$
61,378

 
$
62,006



Amortization Expense

Aggregate amortization expense for definite-lived intangible assets during the three months ended June 30, 2020 and 2019 was $632 and $1,413, respectively. A reconciliation of the changes in total other intangible assets, net, recorded in the condensed consolidated balance sheets is as follows:
Balance, March 31, 2020
$
48,016

Amortization expense
(632
)
Foreign currency translation net gain
4

Balance, June 30, 2020
$
47,388



Note 4. Fair Value Measurements
The accounting standard for fair value measurements provides a framework for measuring fair value, which is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value hierarchy under this accounting standard requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required:

•
Level 1: Quoted prices in active markets for identical assets and liabilities.

•
Level 2: Observable inputs other than quoted prices in active markets for identical assets and liabilities.

•
Level 3: Unobservable inputs in which little or no market activity exists, therefore requiring the Company to develop its own assumptions.

12
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended June 30, 2020 and 2019
(dollar amounts in thousands, except share and per share data)


The carrying amount of the Company’s financial instruments, which principally include cash and cash equivalents, trade accounts receivable, net, trade accounts payable, accrued payroll, and other accrued expenses, approximates fair value due to their short-term nature. The carrying amount of the Company’s short-term borrowings and mortgage payable, which are considered Level 2 liabilities, approximates fair value based upon current rates and terms available to the Company for similar debt.

Assets and liabilities that are measured on a recurring basis at fair value in the condensed consolidated balance sheets were as follows:
 
 
 
Measured Using
 
June 30, 2020
Level 1
 
Level 2
 
Level 3
Non-qualified deferred compensation asset
$
7,362

 
$
7,362

 
$
—

 
$
—

Non-qualified deferred compensation liability
(5,191
)
 
(5,191
)
 
—

 
—

Designated Derivative Contracts asset
464

 
—

 
464

 
—

 
 
 
Measured Using
 
March 31, 2020
Level 1
 
Level 2
 
Level 3
Non-qualified deferred compensation asset
$
6,164

 
$
6,164

 
$
—

 
$
—

Non-qualified deferred compensation liability
(3,756
)
 
(3,756
)
 
—

 
—



The Company sponsors a non-qualified deferred compensation plan that permits a select group of management employees to defer earnings to a future date on a non-qualified basis. Deferred compensation is recognized based on the fair value of the participants' accounts. A rabbi trust was established as a reserve for benefits payable under this plan, with the assets invested in company-owned life insurance policies. As of June 30, 2020, the non-qualified deferred compensation asset of $7,362 was recorded in other assets in the condensed consolidated balance sheets. As of June 30, 2020, the non-qualified deferred compensation liability of $5,191 was recorded in the condensed consolidated balance sheets, with $668 in other accrued expenses and $4,523 in other long-term liabilities.

The Level 2 inputs consist of forward spot rates at the end of the applicable reporting period. The fair values of assets and liabilities associated with derivative instruments and hedging activities are recorded in other current assets and other accrued expenses, respectively, in the condensed consolidated balance sheets. Refer to Note 9, “Derivative Instruments,” for further information, including definitions of the terms Designated Derivative Contracts and Non-Designated Derivative Contracts.

Note 5. Income Taxes

Effective income tax rate

Income tax benefit and the effective income tax rate were as follows:
 
Three Months Ended June 30,
 
2020
 
2019
Income tax benefit
$
(99
)
 
$
(10,254
)
Effective income tax rate
1.2
%
 
34.6
%


The tax provisions for the three months ended June 30, 2020 and 2019 were computed using the estimated effective income tax rates applicable to each of the domestic and foreign taxable jurisdictions for the full fiscal year and were adjusted for discrete items that occurred within the periods presented.


13
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended June 30, 2020 and 2019
(dollar amounts in thousands, except share and per share data)

During the three months ended June 30, 2020, the decrease in the effective income tax rate, compared to the prior period, was due to a reduced tax benefit resulting from an unrecognized tax benefit recorded for a prior year tax position during the three months ended June 30, 2020, compared to the prior period, which recognized an increased tax benefit for the favorable settlement of a state income tax audit.

Unrecognized Tax Benefits

During the three months ended June 30, 2020, the amount of gross unrecognized tax benefits and associated penalties and interest increased by $1,038 to $18,676. This change is related to increases in prior year tax position reserves recorded in income tax liability in the condensed consolidated balance sheets.

Note 6. Revolving Credit Facilities and Mortgage Payable

Primary Credit Facility

In September 2018, the Company entered into a credit agreement that provides for a five-year, $400,000 unsecured revolving credit facility (Primary Credit Facility), contains a $25,000 sublimit for the issuance of letters of credit, and matures on September 20, 2023.

At the Company's election, interest under the Primary Credit Facility is tied to the adjusted London Interbank Offered Rate (LIBOR) or the Alternate Base Rate (ABR). Interest for borrowings made in foreign currencies is based on currency-specific LIBOR or the Canadian deposit offered rate (CDOR) if made in Canadian dollars. As of June 30, 2020, the effective interest rates for US dollar LIBOR and ABR were 1.29% and 3.38%, respectively.

During the three months ended June 30, 2020, the Company made no borrowings or repayments under the Primary Credit Facility. As of June 30, 2020, the Company had no outstanding balance under the Primary Credit Facility and had outstanding letters of credit of $549. As of June 30, 2020, available borrowings under the Primary Credit Facility were $399,451.
  
China Credit Facility

In August 2013, Deckers (Beijing) Trading Co., LTD, a wholly-owned subsidiary of the Company, entered into a credit agreement in China (as amended, the China Credit Facility) that provides for an uncommitted revolving line of credit of up to CNY 300,000, or $42,425, with an overdraft facility sublimit of CNY 100,000, or $14,142.

The China Credit Facility is payable on demand and subject to annual review with a defined aggregate period of borrowing of up to 12 months. The obligations under the China Credit Facility are guaranteed by the Company for 108.5% of the facility amount in US dollars. Interest is based on the People’s Bank of China (PBOC) market rate multiplied by a variable liquidity factor. As of June 30, 2020, the effective interest rate was 4.24%.

During the three months ended June 30, 2020, the Company made no borrowings or repayments under the China Credit Facility. As of June 30, 2020, the Company had no outstanding balance, outstanding bank guarantees of $28, and available borrowings of $42,397 under the China Credit Facility.

Japan Credit Facility

In March 2016, Deckers Japan, G.K., a wholly-owned subsidiary of the Company, entered into a credit agreement in Japan (as amended, the Japan Credit Facility) that provides for an uncommitted revolving line of credit of up to JPY 3,000,000, or $27,831, for a maximum term of six months for each draw on the facility. The Japan Credit Facility can be renewed annually and is guaranteed by the Company. Interest is based on the Tokyo Interbank Offered Rate (TIBOR) plus 0.40%. As of June 30, 2020, the effective interest rate was 0.44%.

14
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended June 30, 2020 and 2019
(dollar amounts in thousands, except share and per share data)


During the three months ended June 30, 2020, the Company made no borrowings or repayments under the Japan Credit Facility. As of June 30, 2020, the Company had no outstanding balance under the Japan Credit Facility and available borrowings of $27,831.

Mortgage

In July 2014, the Company obtained a mortgage secured by the property on which its corporate headquarters is located for $33,931. As of June 30, 2020, the outstanding principal balance under the mortgage was $30,747, which includes $646 in short-term borrowings and $30,101 in mortgage payable in the condensed consolidated balance sheets. The mortgage has a fixed interest rate of 4.928%. Payments include interest and principal in an amount that amortizes the principal balance over a 30-year period; however, the loan will mature and requires a balloon payment of $23,695, in addition to any then-outstanding balance, on July 1, 2029.

Debt Covenants

As of June 30, 2020, the Company was in compliance with all financial debt covenants under the revolving credit facilities and the mortgage.

Note 7. Leases

The Company primarily leases retail stores, showrooms, offices, and distribution facilities under operating lease contracts. Some of the Company's operating leases contain extension options of anywhere from one to 15 years. Historically, the Company has not entered into finance leases and its lease agreements generally do not contain residual value guarantees, options to purchase underlying assets, or material restrictive covenants.

Supplemental information for amounts presented in the condensed consolidated statements of cash flows related to operating leases is as follows:
 
Three Months Ended June 30,
 
2020
 
2019
Non-cash operating activities
 
 
 
Operating lease assets obtained in exchange for lease liabilities*
$
2,491

 
$
16,422

Reductions to operating lease assets for reductions to lease liabilities*
(1,937
)
 
(2,549
)

* Amounts disclosed include non-cash additions or reductions resulting from lease remeasurements.

Note 8. Stock-Based Compensation

From time to time, the Company grants various types of stock-based compensation under the 2015 Stock Incentive Plan, as amended (2015 SIP), including time-based restricted stock units (RSUs), performance-based restricted stock units (PSUs), stock appreciation rights, and non-qualified stock options (NQSOs). The Company typically makes annual grants of RSUs (Annual RSUs) and PSUs (Annual PSUs), as well as long-term incentive plan (LTIP) awards, to certain executive officers and other key employees. During the three months ended June 30, 2020, except for the grant activity summarized below, no awards were granted under the 2015 SIP. Refer to Note 8, “Stock-Based Compensation,” in our 2020 Annual Report for further information on previously granted awards under the 2015 SIP.


15
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended June 30, 2020 and 2019
(dollar amounts in thousands, except share and per share data)

Annual Awards

The Company granted Annual RSUs and Annual PSUs under the 2015 SIP, as summarized below:
 
 
Three Months Ended June 30,
 
 
2020
 
2019
 
 
Shares Granted
 
Weighted-average grant date fair value per share
 
Shares Granted
 
Weighted-average grant date fair value per share
Annual RSUs
 
33,895

 
$
200.71

 
11,334

 
$
173.77

Annual PSUs
 
—

 
—

 
10,764

 
173.69

Total
 
33,895

 
$
200.71

 
22,098

 
$
173.73



Stock-based compensation is recorded net of estimated forfeitures in SG&A expenses in the condensed consolidated statements of comprehensive loss. The Annual RSUs typically vest in equal annual installments over three years following the date of grant. The Annual PSUs are typically earned based on the achievement of pre-established Company performance criteria measured over the fiscal year during which they are granted and, to the extent the performance criteria are met, vest in equal annual installments over three years thereafter. Future unrecognized stock-based compensation expense for Annual RSUs and Annual PSUs outstanding as of June 30, 2020 was $13,877.

Note 9. Derivative Instruments

The Company may enter into foreign currency forward or option contracts (derivative contracts) to manage foreign currency risk on expected cash flows and certain existing assets and liabilities, primarily intercompany balances. Certain of these derivative contracts are designated as cash flow hedges of forecasted sales (Designated Derivative Contracts). The Company may also enter into derivative contracts that are not designated as cash flow hedges (Non-Designated Derivative Contracts), to offset a portion of anticipated gains and losses on certain intercompany balances until the expected time of repayment.

The after-tax unrealized gains or losses from changes in the fair value of Designated Derivative Contracts are recorded as a component of AOCL and are reclassified to net sales in the condensed consolidated statements of comprehensive loss in the same period or periods as the related sales are recognized. The Company includes all hedge components in its assessment of effectiveness for its derivative contracts. When it is probable that a forecasted transaction will not occur, the Company discontinues hedge accounting and the accumulated gains or losses in AOCL related to the hedging relationship are immediately recorded in other comprehensive income or loss (OCI) in the condensed consolidated statements of comprehensive loss.

Changes in the fair value of Non-Designated Derivative Contracts are recorded in SG&A expenses in the condensed consolidated statements of comprehensive loss. The changes in fair value for these contracts are generally offset by the remeasurement gains or losses associated with the underlying foreign currency-denominated intercompany balances, which are recorded in SG&A expenses in the condensed consolidated statements of comprehensive loss.

As of June 30, 2020, the Company had the following derivative contracts recorded at fair value in the condensed consolidated balance sheets:
 
Designated
Derivative Contracts
Notional value
$
42,183

Fair value recorded in other current assets
464




16
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended June 30, 2020 and 2019
(dollar amounts in thousands, except share and per share data)

As of June 30, 2020, the Company's outstanding derivative contracts were held by an aggregate of two counterparties, all with various maturity dates within the next nine months. As of March 31, 2020, the Company had no outstanding derivative contracts.

The following table summarizes the effect of Designated Derivative Contracts and the related income tax effects for unrealized gains or losses recorded in the condensed consolidated statements of comprehensive loss for changes in AOCL:
 
Three Months Ended June 30,
 
2020
 
2019
Gain (loss) recognized in OCI
$
464

 
$
(417
)
Income tax (expense) benefit in OCI
(111
)
 
100

Total
$
353

 
$
(317
)


The following table summarizes the effect of Non-Designated Derivative Contracts:
 
Three Months Ended June 30,
 
2020
 
2019
Loss recognized in SG&A expenses
$
—

 
$
(356
)


The non-performance risk of the Company and the counterparties did not have a material impact on the fair value of its derivative contracts. As of June 30, 2020, the amount of unrealized gains on derivative contracts recorded in AOCL is expected to be reclassified into net sales within the next twelve months. Refer to Note 10, “Stockholders' Equity,” for further information on the components of AOCL.

Note 10. Stockholders' Equity

Stock Repurchase Programs

The Company's Board of Directors has authorized various stock repurchase programs pursuant to which the Company may repurchase shares of its common stock. The Company's stock repurchase programs do not obligate it to acquire any amount of common stock and may be suspended at any time at the Company's discretion. During the three months ended June 30, 2020, there were no stock repurchases. As of June 30, 2020, the aggregate remaining approved amount under the Company's stock repurchase programs was $159,807.

Accumulated Other Comprehensive Loss

The components within AOCL recorded in the condensed consolidated balance sheets, were as follows:
 
June 30, 2020
 
March 31, 2020
Unrealized gain on cash flow hedges, net of tax
$
353

 
$
—

Cumulative foreign currency translation loss
(24,906
)
 
(25,559
)
Total
$
(24,553
)
 
$
(25,559
)



17
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended June 30, 2020 and 2019
(dollar amounts in thousands, except share and per share data)

Note 11. Basic and Diluted Shares

The reconciliation of basic to diluted weighted-average common shares outstanding was as follows:
 
Three Months Ended June 30,
 
2020
 
2019
Basic
28,001,000

 
29,089,000

Dilutive effect of equity awards
—

 
—

Diluted
28,001,000

 
29,089,000

 
 
 
 
Excluded*
 
 
 
Annual RSUs and Annual PSUs
194,000

 
245,000

LTIP PSUs
153,000

 
77,000

LTIP NQSOs
299,000

 
317,000

Deferred Non-Employee Director Equity Awards
5,000

 
7,000



* The equity awards excluded from the dilutive effect have been excluded due to one of the following: (1) the shares were anti-dilutive; (2) the necessary conditions had not been satisfied for the shares to be issuable based on the Company's performance for the relevant performance period; or (3) the Company recorded a net loss during the period presented (such that inclusion of these equity awards in the calculation would have been anti-dilutive). The number of shares stated for each of these excluded awards is the maximum number of shares issuable pursuant to these awards. For those awards with performance criteria, the actual number of shares to be issued pursuant to such awards will be based on Company performance in future periods, net of forfeitures, and may be materially lower than the number of shares presented. Refer to Note 8, “Stock-Based Compensation,” in our 2020 Annual Report for further information on previously granted awards under the Company's equity incentive plans.

Note 12. Reportable Operating Segments

Information reported to the Chief Operating Decision Maker (CODM), who is the Company's Principal Executive Officer (PEO), is organized into the Company's six reportable operating segments and is consistent with how the CODM evaluates performance and allocates resources. The Company does not consider international operations to be a separate reportable operating segment, and the CODM reviews such operations in the aggregate with the reportable operating segments.

The Company evaluates reportable operating segment performance primarily based on net sales and income (loss) from operations. The wholesale operations of each brand are generally managed separately because each requires different marketing, research and development, design, sourcing, and sales strategies. The income (loss) from operations of each of the reportable operating segments includes only those costs which are specifically related to each reportable operating segment, which consist primarily of cost of sales, research and development, design, sales and marketing, depreciation, amortization, and the direct costs of employees within those reportable operating segments. The Company does not allocate corporate overhead costs or non-operating income and expenses to reportable operating segments, which include unallocable overhead costs associated with distribution centers, certain executive and stock-based compensation, accounting, finance, legal, information technology, human resources, and facilities, among others. Inter-segment sales from the Company’s wholesale reportable operating segments to the DTC reportable operating segment are at the Company’s cost, and there is no inter-segment profit on these inter-segment sales, nor are they reflected in income (loss) from operations of the wholesale reportable operating segments.


18
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended June 30, 2020 and 2019
(dollar amounts in thousands, except share and per share data)

Reportable operating segment information, with a reconciliation to the condensed consolidated statements of comprehensive loss, was as follows:
 
Three Months Ended June 30,
 
2020
 
2019
Net sales
 
 
 
UGG brand wholesale
$
43,428

 
$
85,400

HOKA brand wholesale
70,619

 
64,006

Teva brand wholesale
21,411

 
30,831

Sanuk brand wholesale
7,228

 
14,607

Other brands wholesale
635

 
1,727

Direct-to-Consumer
139,848

 
80,268

Total
$
283,169

 
$
276,839


 
Three Months Ended June 30,
 
2020
 
2019
Income (loss) from operations
 
 
 
UGG brand wholesale
$
(3,735
)
 
$
9,441

HOKA brand wholesale
17,235

 
11,358

Teva brand wholesale
4,202

 
8,316

Sanuk brand wholesale
488

 
1,935

Other brands wholesale
(1,270
)
 
132

Direct-to-Consumer
31,027

 
(4,572
)
Unallocated overhead costs
(55,646
)
 
(58,027
)
Total
$
(7,699
)
 
$
(31,417
)


Assets allocated to each reportable operating segment include trade accounts receivable, net, inventories, net, property and equipment, net, operating lease assets, goodwill, other intangible assets, net, and certain other assets that are specifically identifiable for one of the Company's reportable operating segments. Unallocated assets are those assets not directly related to a specific reportable operating segment and generally include cash and cash equivalents, deferred tax assets, net, and various other corporate assets shared by the Company's reportable operating segments.


19
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended June 30, 2020 and 2019
(dollar amounts in thousands, except share and per share data)

Assets allocated to each reportable operating segment, with a reconciliation to the condensed consolidated balance sheets, were as follows:
 
June 30, 2020
 
March 31, 2020
Assets
 
 
 
UGG brand wholesale
$
328,583

 
$
245,239

HOKA brand wholesale
142,393

 
124,958

Teva brand wholesale
64,957

 
90,305

Sanuk brand wholesale
46,423

 
50,314

Other brands wholesale
24,145

 
21,535

Direct-to-Consumer
232,151

 
243,489

Total assets from reportable operating segments
838,652

 
775,840

Unallocated cash and cash equivalents
661,941

 
649,436

Unallocated deferred tax assets, net
28,243

 
28,233

Unallocated other corporate assets
319,730

 
311,609

Total
$
1,848,566

 
$
1,765,118



Note 13. Concentration of Business

Regions and Customers

The Company sells its products to customers throughout the US and to foreign customers in various countries, with concentrations that were as follows:
 
Three Months Ended June 30,
 
2020
 
2019
International net sales
$
98,869

 
$
109,544

% of net sales
34.9
%
 
39.6
%
Net sales in foreign currencies
$
55,683

 
$
59,358

% of net sales
19.7
%
 
21.4
%
Ten largest customers as % of net sales
22.1
%
 
27.2
%


For the three months ended June 30, 2020 and 2019, no single foreign country comprised 10.0% or more of the Company's total net sales. One single customer exceeded 10.0% of the Company's total net sales during the three months ended June 30, 2020, compared to no single customer during the three months ended June 30, 2019.

The Company sells its products to customers for trade accounts receivables and, as of June 30, 2020, had one single customer that exceeded 10.0% of trade accounts receivable, net, compared to no single customer that exceeded 10.0% of trade accounts receivable, net, as of March 31, 2020. Management performs regular evaluations concerning the ability of the Company’s customers to satisfy their obligations to the Company and recognizes an allowance for doubtful accounts based on these evaluations.

Suppliers

The Company's production is concentrated at a limited number of independent manufacturing factories, primarily in Asia. Sheepskin is the principal raw material for certain UGG brand products and most of the Company's sheepskin is purchased from two tanneries in China, which is sourced primarily from Australia and the United Kingdom. The supply of sheepskin can be adversely impacted by weather patterns, harvesting decisions, incidents of disease, and the price of other commodities, such as wool and leather. Furthermore, the price of sheepskin is impacted by numerous other factors, including demand for the Company's products, demand for sheepskin by competitors, use of substitute components or products, changes in consumer preferences, and changes in discretionary spending.


20
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended June 30, 2020 and 2019
(dollar amounts in thousands, except share and per share data)

Long-Lived Assets

Long-lived assets, which consist of property and equipment, net, recorded in the condensed consolidated balance sheets, were as follows:
 
June 30, 2020
 
March 31, 2020
US
$
195,023

 
$
194,679

Foreign*
14,051

 
14,358

Total
$
209,074

 
$
209,037


*No single foreign country’s property and equipment, net, represented 10.0% or more of the Company’s total property and equipment, net, as of June 30, 2020 and March 31, 2020.


21

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read together with our condensed consolidated financial statements and the related notes, included in Part I, Item 1 of this Quarterly Report, and the audited consolidated financial statements included in Part II, Item 8 of our 2020 Annual Report. This section contains forward-looking statements that are based on our current expectations and reflect our plans, estimates, and anticipated future financial performance. These statements involve numerous risks and uncertainties. Our actual results may differ materially from those expressed or implied by these forward-looking statements as a result of many factors, including those set forth in the sections entitled Part II, Item 1A, "Risk Factors," and “Cautionary Note Regarding Forward-Looking Statements” in this Quarterly Report.

Overview

We are a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyle use and high-performance activities. We market our products primarily under five proprietary brands: UGG, HOKA, Teva, Sanuk, and Koolaburra. We believe that our products are distinctive and appeal broadly to women, men, and children. We sell our products through quality domestic and international retailers, international distributors, and directly to our consumers both domestically and internationally through our 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.

Trends and Uncertainties Impacting Our Business

During early calendar year 2020, the COVID-19 pandemic spread globally, including throughout the geographic regions in which we operate our business, and where our wholesale customers, retail stores, manufacturers, and suppliers are located.

In response to the pandemic, many federal, state, local, and foreign governments have put in place, and others in the future may put in place, travel restrictions, “shelter-in-place” orders, and similar government orders and restrictions in an attempt to control the spread and mitigate the impact of the disease. Such restrictions or orders have resulted in the mandatory closure of “non-essential” businesses (including retail stores), increased unemployment rates, “social distancing” restrictions, reduced tourist activity, work-from-home policies, and other changes that have led to significant disruptions to businesses and global financial markets. The overall impact of the pandemic on our business and future results of operations is highly uncertain and subject to change, and we are not able to accurately predict the magnitude or scope of such impacts at this time. However, we believe that the actions we are taking to respond to the pandemic, combined with our strong liquidity position, have created an important foundation that will position us to emerge from this pandemic operationally sound and poised for continued long-term growth.
Our business and the industry in which we operate continue to be impacted by several important trends and uncertainties, including the COVID-19 pandemic, as follows:
Retail Environment

•
Primarily as a result of government orders and restrictions imposed in connection with the COVID-19 pandemic, many of our company-owned and operated stores were initially closed for the start of our first fiscal quarter ended June 30, 2020. Approximately 20% of our global retail stores were open for the entire fiscal quarter. The average company-owned retail store was open for roughly half of the fiscal quarter. Subsequent to June 30, 2020 and through July 30, 2020, approximately 95% of our global retail stores are open but, in most cases, with limited operations.

•
During the first fiscal quarter ended June 30, 2020, significant civil unrest, looting, and rioting in several major cities across the United States resulted in varying degrees of damage to certain of our retail stores, including some recently reopened stores. As a result, we temporarily closed some of these stores and identified three retail stores for permanent closure.


22

•
We are monitoring guidance provided by health officials, expert agencies, and local authorities to evaluate the current operation of our retail stores at limited capacity, as well as the reopening of our retail stores. Our decision regarding the appropriate timing to fully reopen our retail stores will depend on a number of factors, including the safety of our customers and employees, our ability to comply with government orders and restrictions, and our ability to deliver products to our customers. We expect the scope of allowable retail activities and retail consumer traffic patterns to vary by geographic region due to localized restrictions imposed by governmental authorities, the demand for our products varying between regions, and the actual and expected impact of the COVID-19 pandemic on each region. In an attempt to mitigate the impact of operating our retail stores at limited capacity, we are expanding the use of technology at these locations, including implementing mobile point-of-sales systems.

•
Given the ongoing COVID-19 pandemic conditions, including continued uncertainty around governmental responses to emerging trends, as well as changes in economic conditions and consumer sentiment, there is potential risk of additional closures or limitations as we approach our peak selling season.

•
Similar to our company-owned retail stores, many of the retail stores of our wholesale customers and retail partners were closed for part of the first fiscal quarter. While many of our wholesale customers have reopened their retail stores during the first fiscal quarter, we believe many of them have limited operations. We are working with our wholesale partners to identify areas of risk and make relevant adjustments to our order-book. However, given the uncertain conditions due to the COVID-19 pandemic, as well as the significant amount of business remaining for the fiscal year, we anticipate that our order-book cancellations will outweigh reorders with our wholesale partners.

E-Commerce Environment

•
Even prior to the mandatory retail store closures and limited retail store operations resulting from the COVID-19 pandemic, we observed a meaningful shift in the way consumers shop for products and make purchasing decisions, evidenced by significant and prolonged decreases in consumer retail store activity as customers accelerated their migration to online shopping. These trends have been positively impacting the performance of our e-commerce business, while creating challenges and headwinds for our traditional retail business, as well as the retail businesses of our wholesale customers and retail partners.

•
We operate our e-commerce business through various websites and platforms, which have remained operational throughout the COVID-19 pandemic, and we expect they will continue to remain operational.

•
During our first fiscal quarter ended June 30, 2020, we observed strong demand across our brands within our e-commerce business, especially for the UGG and HOKA brands. We also observed that our wholesale customers, which had an established e-commerce presence, experienced similarly strong demand trends as those we have experienced, although the trends vary from customer to customer. We continue to see demand for our products, especially within the UGG and HOKA brands, from a number of these wholesale customers as their sell-through of our products remains strong within our partners’ e-commerce platforms. We expect our wholesale customers that have a greater reliance on their retail store presence may experience more significant adverse impacts from the COVID-19 pandemic.

•
We expect our e-commerce business will continue to be a driver of long-term growth, although the growth rate will be unpredictable and may not be in line with our historical experience. Additionally, we do not expect that the growth rate of our e-commerce business experienced in the first fiscal quarter ended June 30, 2020 will continue throughout the fiscal year. We believe the key factors impacting the growth rate will include consumer demand for our products, our ability to fulfill orders through our limited distribution center operations, the scope and duration of the COVID-19 pandemic, and the impact of the COVID-19 pandemic on unemployment rates, consumer confidence, discretionary spending, and economic conditions.


23

•
In future periods, we do not expect the increased demand we experienced in the first fiscal quarter within our e-commerce businesses to be able to similarly offset peak season UGG brand sales within our wholesale and retail businesses. During our second fiscal quarter we would normally begin to ship higher volumes of product to meet peak demand but due to the current retail environment, we may experience softer than normal sales.

Brand Strategy
 
•
In response to the COVID-19 pandemic, we are exercising discipline by focusing on key products that have achieved sustained success with consumers, reducing the number and types of products offered, delaying product launches, and consolidating seasonal collections.

•
Our ongoing and strategic efforts to reduce the impact of seasonality on our results of operations have had a meaningful positive impact on the year-round performance of the HOKA and UGG brands. While we expect to continue to focus on reducing the impact of seasonality through innovation and the expansion of our product offerings over the long-term, and while HOKA brand net sales continue to increase as a percentage of our aggregate net sales, given the magnitude of the UGG brand relative to our other brands, the effect of seasonality on our aggregate net sales and results of operations may continue to be significant. However, it is unclear whether seasonal impacts will be minimized or exaggerated in future periods as a result of the disruptions and uncertainties caused by the COVID-19 pandemic. This uncertainty makes it more difficult for us to predict future demand for our products and manage our manufacturing and inventory, especially as we approach the typical peak season for the UGG brand.

•
Within the UGG brand, we have experienced strong sell-through of certain product lines, including the slipper category, as we believe consumers are seeking out luxurious comfort in the current work-from-home environment. In addition, the UGG brand continues to experience success through the introduction of counter-seasonal products, including the spring and summer collections, improving the UGG brand’s overall year-round performance. However, we are experiencing softness within the UGG wholesale channel, especially within geographies impacted by extensive retail store closures, and within international markets due to our marketplace reset strategy in Europe, and the UGG brand having a smaller e-commerce presence internationally.

•
Within the HOKA brand, we continue to see strong demand across our product offerings through both wholesale and DTC channels, which we believe is being fueled by consumer demand for our products and an even greater emphasis on running and outdoor exercise as consumers seek to find healthy outlets in response to the COVID-19 pandemic. The significant growth of the HOKA brand’s year-round performance product offerings as a percentage of our aggregate net sales has had a meaningful positive impact on our seasonality trends, as well as our overall financial results. However, despite the recent growth and success of the HOKA brand, the impacts of the pandemic may cause a lower growth rate of HOKA brand sales in future periods than we have experienced recently.

•
For the first fiscal quarter ended June 30, 2020, net sales for the HOKA brand increased relative to the net sales for the UGG brand and as a percentage of our aggregate net sales. However, we do not expect the level of penetration of HOKA brand sales mix observed in the first fiscal quarter to continue.

•
The Sanuk and Teva brands are experiencing a disproportionate negative impact from the pandemic as the highest percentage of net sales for these brands typically occur during our fourth fiscal quarter and first fiscal quarter. We are actively monitoring the cost structures associated with these brands.

Supply Chain

•
The Company maintains a network of strategic sourcing partners which includes material vendors and third-party manufacturers. The Company experienced certain capacity constraints within its sourcing network during the first fiscal quarter ended June 30, 2020, in addition to disruptions related to travel restrictions between country borders and production facilities. While the effects of these disruptions have been mitigated thus far, and we are not experiencing any major sourcing or manufacturing disruptions at this time, it is possible that there will be disruptions in the future.


24

•
Our Moreno Valley, California, distribution center (DC), as well as our global third-party logistics providers (3PLs), remains open and continues to operate at reduced capacity and with limited and modified operations due to increased safety measures. In order to promote the health and safety of our distribution center employees, we continue to adhere to enhanced safety measures and protocols at our distribution center, including strict social distancing requirements and heightened cleaning of the facility in accordance with Center for Disease Control and Prevention guidelines. Due to these requirements, we are limiting the number of employees on-site relative to our available personnel capacity. We are experiencing, and our 3PLs are experiencing, certain operational and logistical challenges as a result of limited and modified operations, including challenges associated with shipping higher levels of product through our e-commerce channel than in prior periods, and increasing volume of wholesale shipments as we approach the peak selling season for the UGG brand. We are also experiencing higher costs for DC employee safety and payroll costs, as well as some delays in the shipments of our products.

•
We are working to mitigate the anticipated impact of limited and modified operations on our peak selling season, including the potential for loss of sales and reputational harm with wholesale customers. These efforts include phasing some wholesale shipments earlier than in previous fiscal years, which could result in changes in the timing of the realization of net sales as compared to prior periods, as well as prioritizing and potentially limiting certain operations within our warehouse to accommodate social distancing measures. However, we may be unsuccessful in these efforts, which could have a negative impact on our results of operations in future periods.

•
We are encountering challenges attracting and retaining quality candidates to staff our DC operations as we increasingly compete with other companies with growing e-commerce operations. For example, during the past two fiscal years, we have significantly increased certain DC employee wages in an effort to attract and retain talent. Although growing unemployment rates resulting from the COVID-19 pandemic may result in a larger short-term candidate pool, we may face ongoing challenges with recruiting and training employees as our competitors grow their e-commerce channels and require additional warehouse and DC staff.

Omni-Channel Strategy

•
We have implemented a product segmentation strategy, as well as an allocation strategy for the UGG brand’s core Classics franchise in the US wholesale marketplace. These strategies are designed to assist us in controlling product inventory, reducing the impact of discounts and closeouts on our sales and gross margins, and increasing full-priced selling across our product offerings. Similarly, we are implementing a multi-year marketplace reset strategy in Europe to drive UGG brand heat. We expect the COVID-19 pandemic will delay or mitigate the benefits we may receive from these strategies. In addition, notwithstanding the implementation of these strategies, in light of the current marketplace environment, we are approaching the planning for the UGG brand's peak selling season with caution as we expect it may be highly competitive and feature increased levels of promotional activity relative to recent periods.

•
As a result of changes in consumer purchasing behavior, we continue to invest in and enhance our omni-channel strategy to bolster our e-commerce capabilities and enable us to better engage existing and prospective consumers and expose them to our brands. Our strategy is transforming the way we approach marketing, including through a sustained focus on our targeted digital marketing efforts, as well as marketing activations and product seeding to drive global brand heat. For example, we have begun applying these transformation efforts in Europe to drive UGG brand heat as we work to differentiate consumer experiences across various consumer touch points as part of our marketplace reset strategy. We have also started to apply this marketing strategy shift in Asia.

•
In response to the COVID-19 pandemic, we have enhanced our focus on adaptive digital marketing, including virtual events and programs, as we seek to target consumers within the work-from-home environment and promote products that are desirable based on current consumer preferences, working conditions, and lifestyle choices.

25

Liquidity

•
We believe we are in a strong financial position to respond to the disruptions and uncertainties caused by the COVID-19 pandemic. Notwithstanding the challenging environment, we experienced positive cash flow from operations for the first fiscal quarter ended June 30, 2020. In addition, as of June 30, 2020, our cash and cash equivalents balance was $661,941, and we had available borrowings of $469,679 under our revolving credit facilities, providing a strong liquidity position of over $1,100,000. We are currently in compliance with, and expect to remain in compliance, with all financial debt covenants under our revolving credit facilities and mortgage. For additional information, see the sections entitled “Liquidity” and “Capital Resources” below.

•
We did not repurchase any shares during the first fiscal quarter ended June 30, 2020. We are continuing the temporary pause of repurchases under our stock repurchase programs due to the disruption and uncertainty caused by the COVID-19 pandemic and our focus on liquidity and cash management, although we may recommence repurchase activity under our stock repurchase programs in future periods at our discretion.

•
We are working closely with our wholesale customers, as well as our manufacturers and suppliers, to manage accounts receivable and accounts payable to maximize the availability of working capital as well as leveraging government relief packages that provide certain payroll tax credits and deferrals.

Operating Expenses

•
To mitigate the adverse impact the COVID-19 pandemic may have on our business and operations, we expect to continue to manage expenses to preserve liquidity. In particular, we have implemented a number of temporary measures to reduce operating expenses, including:

◦
restricting employee travel;
◦
canceling or postponing certain events, trainings, and conferences;
◦
converting meetings with current and prospective customers to a virtual platform;
◦
suspending hiring of certain non-essential employees and annual salary increases;
◦
eliminating or deferring discretionary expenditures;
◦
seeking payment accommodations or deferrals; and
◦
furloughing certain retail employees while stores are closed.

•
We also believe the significant changes we implemented in connection with our previously completed restructuring and operating profit improvement plans will help mitigate potential negative impacts on our gross margins resulting from the COVID-19 pandemic.

Reportable Operating Segment Overview

Our six reportable operating segments include the worldwide wholesale operations of the UGG brand, HOKA brand, Teva brand, Sanuk brand, and Other brands, as well as DTC. Information reported to the CODM, who is our PEO, is organized into these reportable operating segments and is consistent with how the CODM evaluates our performance and allocates resources.

UGG Brand. The UGG brand is one of the most iconic and recognized brands in our industry, which highlights our successful track record of building niche brands into lifestyle and fashion market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, apparel, and accessories with expanded product offerings and a growing global audience that appeals to women, men, and children.

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

•
High consumer brand loyalty due to consistent delivery of quality and luxuriously comfortable footwear, apparel, and accessories.
•
Diversification of our footwear product offerings, such as women's spring and summer lines, as well as expanded category offerings for men's, apparel, and accessories.


26

HOKA Brand. The HOKA brand is an authentic premium line of year-round performance footwear and apparel that offers enhanced cushioning and inherent stability with minimal weight. Originally designed for ultra-runners, the brand now appeals to athletes around the world, regardless of activity. The HOKA brand is quickly becoming a leading brand within run specialty wholesale accounts, with strong marketing fueling both domestic and international sales growth. We continue to build product extensions in trail and fitness.

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

•
Leading product innovation and key franchise management.
•
Increased brand awareness through enhanced marketing activations.
•
Category extensions in authentic performance footwear offerings.

Teva Brand. The Teva brand, which pioneered the sport sandal category, is born from the outdoors and rooted in adventure. The Teva brand is a global leader within the sport sandal and modern outdoor lifestyle categories by fueling the expression of freedom. The Teva brand’s product offerings include sandals, shoes, and boots.

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

Other Brands. Other brands currently consist of the Koolaburra by UGG brand. The Koolaburra brand is a casual footwear fashion line using sheepskin and other plush materials and is intended to target the value-oriented consumer in order to complement the UGG brand offering.

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

Retail Business. 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.

As of June 30, 2020, we had a total of 137 global retail stores, which includes 67 concept stores and 70 outlet stores. Generally, we open retail store locations during the second or third fiscal quarters and consider closures of retail stores during the fourth fiscal quarter. We evaluate retail store closures based on store performance and timing of lease expirations and options. While we expect to identify additional stores for closure, we may simultaneously identify opportunities to open new stores in the future to further enhance our overall DTC business. We currently do not anticipate incurring material incremental retail store closure costs, primarily because any store closures we may pursue are expected to occur as retail store leases expire to avoid incurring potentially significant lease termination costs, as well as through conversions to partner retail stores, further discussed below. We will continue to evaluate our retail store fleet strategy in response to changes in consumer demand and retail store traffic patterns.

Flagship Stores. Included in the total count of global concept stores are eight UGG brand flagship stores, which are lead concept stores in certain key markets and prominent locations designed to showcase the UGG brand products. Primarily located in major tourist locations, these stores are typically larger with broader product offerings and greater traffic than our general concept stores. The net sales for these stores are recorded in our DTC reportable operating segment.

Shop-in-Shop Stores. Included in the total count of global concept stores are 21 shop-in-shop (SIS) stores, defined as concept stores for which we own the inventory and that are operated by us or non-employees within a department store, which we lease from the store owner by paying a percentage of SIS store sales. The net sales for these stores are recorded in our DTC reportable operating segment.

27

Partner Retail Stores. We rely on partner retail stores for the UGG brand and Sanuk brand in certain markets. Partner retail stores are branded stores that are wholly-owned and operated by third-parties and not included in the total count of global retail stores. When a partner retail store is opened, or a store is converted into a partner retail store, the related net sales are recorded in either the UGG brand or Sanuk brand wholesale reportable operating segments, as applicable.

E-Commerce Business. Our e-commerce business provides us with an opportunity to communicate a consistent brand message to consumers that is in line with our brands' promises, drives awareness of key brand initiatives, offers targeted information to specific consumer demographics, and drives consumers to our retail stores. As of June 30, 2020, we operated our e-commerce business through company-owned websites and mobile platforms in 40 different countries, which increased from ten different countries disclosed in our 2020 Annual Report due to expansions in Europe.

Use of Non-GAAP Financial Measures

Throughout this Quarterly Report, we provide certain financial information on a constant currency basis, excluding the effect of foreign currency exchange rate fluctuations, which we disclose in addition to the financial measures calculated and presented in accordance with US GAAP. We provide these non-GAAP financial measures to provide information that may assist investors in understanding our financial results and assessing our prospects for future performance. Constant currency measures should not be considered in isolation as an alternative to US dollar measures that reflect current period foreign currency exchange rates or to other financial measures presented in accordance with US GAAP. We believe evaluating certain financial and operating measures on a constant currency basis is important as it excludes the impact of foreign currency exchange rate fluctuations that are unrelated to, and may not be indicative of, our core results of operations. However, the information included in this Quarterly Report that is presented on a constant currency basis, as we present such information, may not necessarily be comparable to similarly titled information presented by other companies, and may not be appropriate measures for comparing the performance of other companies relative to us. For example, 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 condensed consolidated financial statements. Further, we report comparable DTC sales on a constant currency basis for DTC operations that were open throughout the current and prior reporting periods, and we may adjust prior reporting periods to conform to current year accounting policies. These non-GAAP financial measures are not intended to represent and should not be considered to be more meaningful measures than, or alternatives to, measures of operating performance as determined in accordance with US GAAP.

Seasonality

Our business is seasonal, with the highest percentage of UGG and Koolaburra brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th. Net sales for the HOKA brand occur more evenly throughout the year reflecting the brand's year-round performance product offerings. Due to the magnitude of the UGG brand relative to our other brands, our aggregate net sales in the quarters ending September 30th and December 31st have significantly exceeded our aggregate net sales in the quarters ending March 31st and June 30th. As we continue to take steps to diversify and expand our product offerings by creating more year-round styles, and as net sales of the HOKA brand continue to increase as a percentage of our aggregate net sales, we expect the seasonality impacts to decrease over time. However, it is unclear whether seasonal impacts will be minimized or exaggerated in future periods as a result of the disruptions and uncertainties caused by the COVID-19 pandemic.


28

Results of Operations

Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019. The following table summarizes our results of operations:
 
Three Months Ended June 30,
 
2020
 
2019
 
Change
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
Net sales
$
283,169

 
100.0
 %
 
$
276,839

 
100.0
 %
 
$
6,330

 
2.3
 %
Cost of sales
140,603

 
49.7

 
146,820

 
53.0

 
6,217

 
4.2

Gross profit
142,566

 
50.3

 
130,019

 
47.0

 
12,547

 
9.7

Selling, general and administrative expenses
150,265

 
53.0

 
161,436

 
58.3

 
11,171

 
6.9

Loss from operations
(7,699
)
 
(2.7
)
 
(31,417
)
 
(11.3
)
 
23,718

 
75.5

Other expense (income), net
373

 
0.2

 
(1,812
)
 
(0.6
)
 
(2,185
)
 
(120.6
)
Loss before income taxes
(8,072
)
 
(2.9
)
 
(29,605
)
 
(10.7
)
 
21,533

 
72.7

Income tax benefit
(99
)
 
(0.1
)
 
(10,254
)
 
(3.7
)
 
(10,155
)
 
(99.0
)
Net loss
(7,973
)
 
(2.8
)
 
(19,351
)
 
(7.0
)
 
11,378

 
58.8

Total other comprehensive income (loss), net of tax
1,006

 
0.3

 
(249
)
 
(0.1
)
 
1,255

 
504.0

Comprehensive loss
$
(6,967
)
 
(2.5
)%
 
$
(19,600
)
 
(7.1
)%
 
$
12,633

 
64.5
 %
 
 
 
 
 
 
 
 
 
 
 
 
Net loss per share
 
 
 
 
 
 
 
 
 
 
 
Basic
$
(0.28
)
 
 
 
$
(0.67
)
 
 
 
$
0.39

 
 
Diluted
$
(0.28
)
 
 
 
$
(0.67
)
 
 
 
$
0.39

 
 

Net Sales. The following table summarizes our net sales by location, and by brand and channel:
 
Three Months Ended June 30,
 
2020
 
2019
 
Change
 
Amount
 
Amount
 
Amount
 
%
Net sales by location
 
 
 
 
 
 
 
US
$
184,300

 
$
167,295

 
$
17,005

 
10.2
 %
International
98,869

 
109,544

 
(10,675
)
 
(9.7
)
Total
$
283,169

 
$
276,839

 
$
6,330

 
2.3
 %
 
 
 
 
 
 
 
 
Net sales by brand and channel
 
 
 
 
 

 
 

UGG brand
 
 
 
 
 

 
 

Wholesale
$
43,428

 
$
85,400

 
$
(41,972
)
 
(49.1
)%
Direct-to-Consumer
81,312

 
53,130

 
28,182

 
53.0

Total
124,740

 
138,530

 
(13,790
)
 
(10.0
)
HOKA brand
 
 
 
 
 
 
 
Wholesale
70,619

 
64,006

 
6,613

 
10.3

Direct-to-Consumer
38,399

 
15,518

 
22,881

 
147.4

Total
109,018

 
79,524

 
29,494

 
37.1

Teva brand
 
 
 
 
 

 
 

Wholesale
21,411

 
30,831

 
(9,420
)
 
(30.6
)
Direct-to-Consumer
13,833

 
7,453

 
6,380

 
85.6

Total
35,244

 
38,284

 
(3,040
)
 
(7.9
)

29

 
Three Months Ended June 30,
 
2020
 
2019
 
Change
 
Amount
 
Amount
 
Amount
 
%
Sanuk brand
 
 
 
 
 

 
 

Wholesale
7,228

 
14,607

 
(7,379
)
 
(50.5
)
Direct-to-Consumer
6,006

 
4,091

 
1,915

 
46.8

Total
13,234

 
18,698

 
(5,464
)
 
(29.2
)
Other brands
 
 
 
 
 

 
 

Wholesale
635

 
1,727

 
(1,092
)
 
(63.2
)
Direct-to-Consumer
298

 
76

 
222

 
292.1

Total
933

 
1,803

 
(870
)
 
(48.3
)
Total
$
283,169

 
$
276,839

 
$
6,330

 
2.3
 %
 
 
 
 
 
 
 
 
Total Wholesale
$
143,321

 
$
196,571

 
$
(53,250
)
 
(27.1
)%
Total Direct-to-Consumer
139,848

 
80,268

 
59,580

 
74.2

Total
$
283,169

 
$
276,839

 
$
6,330

 
2.3
 %

Total net sales increased primarily due to higher HOKA brand global sales and DTC sales across all brands, partially offset by lower wholesale sales. Further, we experienced a decrease of 9.8% in total volume of pairs sold to 5,500 from 6,100 compared to the prior period. On a constant currency basis, net sales increased by 2.8%, compared to the prior period. Drivers of significant changes in net sales were as follows:

•
Wholesale net sales of the UGG brand decreased primarily due to COVID-19 related sales losses due to store closures impacting our wholesale customers. On a constant currency basis, wholesale net sales of the UGG brand decreased by 48.5%, compared to the prior period.

•
Wholesale net sales of the HOKA brand increased due to the expansion of international distributor volume as well as continued sales growth driven by key franchise updates and new product launches.

•
Wholesale net sales of the Teva brand and the Sanuk brand decreased primarily due to COVID-19 related sales losses due to store closures impacting our wholesale customers.

•
DTC net sales increased due to higher e-commerce net sales, primarily for the UGG brand and HOKA brand, partially offset by negative impacts from company-owned retail store closures due to the COVID-19 pandemic. Due to the meaningful disruption of our retail store base throughout the quarter, we are not reporting a comparable DTC net sales metric for the first fiscal quarter.

•
International net sales, which are included in the reportable operating segment net sales presented above, decreased by 9.7%, compared to the prior period. International net sales represented 34.9% and 39.6% of total net sales for the three months ended June 30, 2020 and 2019, respectively. The decrease was primarily due to lower net sales in the wholesale channel for the UGG brand in Europe and Asia, including COVID-19 related sales losses, partially offset by higher net sales for the HOKA brand in our international markets, primarily in Europe.
Gross Profit. Gross profit as a percentage of net sales, or gross margin, increased to 50.3% from 47.0%, compared to the prior period, primarily due to a favorable shift in channel mix resulting from reduced wholesale volume, including lower closeout sales and increased penetration of DTC, as well as favorable brand mix for the HOKA brand, partially offset by higher freight costs.


30

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

•
Decreased variable operating expenses of approximately $8,100, primarily due to lower travel expenses and professional fees.

•
Decreased variable advertising and promotion expenses of approximately $3,300, primarily due to shifting the timing of regional marketing development costs.

•
Decreased rent and occupancy expenses of approximately $3,100, primarily due lower retail store operating costs.

•
Decreased payroll costs of approximately $2,300, primarily due to payroll tax credits, lower retail employee costs, and lower performance-based compensation for cash bonuses.

•
Decreased depreciation and amortization expenses of approximately $1,200, primarily due to certain property and equipment and intangible assets being fully amortized during the current period.

•
Increased expenses for allowances for trade accounts receivable of approximately $2,900, primarily due to an increase in bad debt expense to account for the higher risk of wholesale customer payment defaults resulting from the COVID-19 pandemic.

•
Increased impairments of operating lease and fixed assets of approximately $2,700 due to early store closures.

•
Increased other variable net selling expenses of approximately $1,200, including transaction fees and warehousing and shipping costs, primarily due to higher DTC sales and commissions.

Loss from Operations. Loss from operations by reportable operating segment was as follows:
 
Three Months Ended June 30,
 
2020
 
2019
 
Change
 
Amount
 
Amount
 
Amount
 
%
Income (loss) from operations
 
 
 
 
 
 
 
UGG brand wholesale
$
(3,735
)
 
$
9,441

 
$
(13,176
)
 
(139.6
)%
HOKA brand wholesale
17,235

 
11,358

 
5,877

 
51.7

Teva brand wholesale
4,202

 
8,316

 
(4,114
)
 
(49.5
)
Sanuk brand wholesale
488

 
1,935

 
(1,447
)
 
(74.8
)
Other brands wholesale
(1,270
)
 
132

 
(1,402
)
 
(1,062.1
)
Direct-to-Consumer
31,027

 
(4,572
)
 
35,599

 
778.6

Unallocated overhead costs
(55,646
)
 
(58,027
)
 
2,381

 
4.1

Total
$
(7,699
)
 
$
(31,417
)
 
$
23,718

 
75.5
 %
 
The decrease in total loss from operations, compared to the prior period, was due to higher net sales at higher gross margins and lower SG&A expenses as a percentage of net sales. Drivers of significant net changes in net loss from operations, compared to the prior period, were as follows:

•
The increase in income from our DTC business was primarily due to higher net sales at higher gross margins and lower SG&A expenses as a percentage of net sales, primarily driven by lower retail store operating costs due to closures related to the COVID-19 pandemic, partially offset by higher variable marketing and selling expenses and retail store-related asset impairment charges.

•
The increase in loss from operations of UGG brand wholesale was due to lower net sales at lower gross margins and higher SG&A expenses as a percentage of net sales due to lower wholesale sales driven by the COVID-19 pandemic, partially offset by lower variable marketing and selling expenses.


31

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

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

•
The decrease in unallocated overhead costs was primarily due to lower operating expenses, primarily for corporate travel expenses and professional costs.

Other Expense (Income), Net. The increase in total other expense, net, compared to the prior period, was primarily due to a decrease in interest income driven by lower average interest rates, partially offset by higher average invested cash balances.

Income Tax Benefit. Income tax benefit and our effective income tax rate were as follows:
 
Three Months Ended June 30,
 
2020
 
2019
Income tax benefit
$
(99
)
 
$
(10,254
)
Effective income tax rate
1.2
%
 
34.6
%

The decrease in our effective income tax rate, compared to the prior period, was due to a reduced tax benefit resulting from an unrecognized tax benefit recorded for a prior year tax position during the three months ended June 30, 2020, compared to the prior period, which recognized an increased tax benefit for the favorable settlement of a state income tax audit.

Foreign income before income taxes was $4 and $1,307 and worldwide loss before income taxes was $8,072 and $29,605 during the three months ended June 30, 2020 and 2019, respectively. The decrease in foreign income before income taxes as a percentage of worldwide loss before income taxes, compared to the prior period, was primarily due to lower foreign sales as a percentage of worldwide sales and lower gross margins. For the three months ended June 30, 2020 and 2019, we did not generate significant pre-tax earnings from any countries which do not impose a corporate income tax.

We expect our foreign income or loss before income taxes, as well as our effective income tax rate, will continue to fluctuate from period to period based on several factors, including the impact of our global product sourcing organization, our actual results of operations 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). Over the long-term, we believe the continuing evolution and expansion of our brands, our continuing strategy of enhancing product diversification, and the expected growth from our international DTC business will result in increases in foreign income or loss before income taxes, both in absolute terms and as a percentage of worldwide income or loss before income taxes. In addition, we believe our effective income tax rate will be impacted by our actual foreign income or loss before income taxes relative to our actual worldwide income or loss before income taxes in future periods.

Net Loss. Net loss decreased, compared to the prior period, primarily due to higher net sales at higher gross margins and lower SG&A expenses. Net loss per share decreased, compared to the prior period, due to a lower net loss.

Total Other Comprehensive Income, Net of Tax. Other comprehensive income increased, compared to the prior period, primarily due to unrealized gains on cash flow hedges as well as higher foreign currency translation gains relating to changes in our net asset position driven by Chinese and European foreign currency exchange rates.

Liquidity

We finance our working capital and operating requirements using a combination of our cash and cash equivalents balances, cash provided from ongoing operating activities and, to a lesser extent, available borrowings under our revolving credit facilities. Our working capital requirements begin when we purchase raw materials and inventories and continue until we ultimately collect the resulting trade accounts receivable. Given the historical seasonality of our business, our working capital requirements fluctuate significantly throughout the fiscal year, and we are required to utilize available cash to build inventory levels during certain quarters in our fiscal year to support higher selling seasons.

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While we are subject to uncertainty surrounding the COVID-19 pandemic, we believe our cash and cash equivalents balances, cash provided from ongoing operating activities, and available borrowings under our revolving credit facilities (further described below under the heading “Capital Resources”), will provide sufficient liquidity to enable us to meet our working capital requirements for at least the next 12 months.

During the three months ended June 30, 2020, no cash and cash equivalents were repatriated. As of June 30, 2020, we had $204,656 of cash and cash equivalents outside the US, a portion of which may be subject to additional foreign withholding taxes if it were to be repatriated. We continue to evaluate our cash repatriation strategy and we currently anticipate repatriating current and future unremitted earnings of non-US subsidiaries, to the extent they have been and will be subject to US tax, if such cash is not required to fund ongoing foreign operations. Our cash repatriation strategy, and by extension, our liquidity, may be impacted by several additional considerations, which include clarifications of or changes to the Tax Reform Act and our actual earnings for current and future fiscal periods.

We continue to evaluate our capital allocation strategy, and to consider further opportunities to utilize our global cash resources in a way that will profitably grow our business, meet our strategic objectives and drive stockholder value, including by potentially repurchasing additional shares of our common stock. As of June 30, 2020, the aggregate remaining approved amount under our stock repurchase programs was $159,807. Our stock repurchase programs do not obligate us to acquire any amount of common stock and may be suspended at any time at our discretion. Currently, we are temporarily pausing repurchases under our stock repurchase programs due to the disruption and uncertainty caused by the COVID-19 pandemic and our focus on liquidity and cash management, although we retain the discretion to recommence repurchases in future periods.

Our liquidity may be further impacted by additional factors, including our results of operations, the strength of our brands, impacts of seasonality and weather conditions, our ability to respond to changes in consumer preferences and tastes, the timing of capital expenditures and lease payments, our ability to collect our trade accounts receivables in a timely manner and effectively manage our inventories, and our ability to respond to economic, political, and legislative developments. Furthermore, we may require additional cash resources due to changes in business conditions or strategic initiatives, economic recession, changes in stock repurchase strategy, or other future developments, including any investments or acquisitions we may decide to pursue, although we do not have any present commitments with respect to any such investments or acquisitions.

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

Capital Resources

Primary Credit Facility. Our Primary Credit Facility provides for a five-year, $400,000 unsecured revolving credit facility and contains a $25,000 sublimit for the issuance of letters of credit. As of June 30, 2020, we had no outstanding balance, outstanding letters of credit of $549, and available borrowings of $399,451 under our Primary Credit Facility.

China Credit Facility. Our China Credit Facility is an uncommitted revolving line of credit of up to CNY 300,000, or $42,425. As of June 30, 2020, we had no outstanding balance, outstanding bank guarantees of $28, and available borrowings of $42,397 under our China Credit Facility.

Japan Credit Facility. Our Japan Credit Facility is an uncommitted revolving line of credit of up to JPY 3,000,000, or $27,831. As of June 30, 2020, we had no outstanding balance and had available borrowings of $27,831 under our Japan Credit Facility.

Mortgage. As of June 30, 2020, we had an outstanding principal balance under the mortgage, secured by the property on which our corporate headquarters is located, of $30,747. The loan will mature and require a balloon payment in the amount of $23,695, in addition to any then-outstanding balance, on July 1, 2029.


33

Debt Covenants. As of June 30, 2020, we were in compliance with all financial debt covenants under our revolving credit facilities and mortgage.

Refer to Note 6, “Revolving Credit Facilities and Mortgage Payable,” of our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report, for further information on our revolving credit facilities and our mortgage.

Cash Flows

The following table summarizes our cash flows for the periods presented:
 
Three Months Ended June 30,
 
2020
 
2019
 
Change
 
Amount
 
Amount
 
Amount
 
%
Net cash provided by (used in) operating activities
$
21,169

 
$
(46,629
)
 
$
67,798

 
145.4
 %
Net cash used in investing activities
(9,212
)
 
(7,166
)
 
(2,046
)
 
(28.6
)
Net cash provided by (used in) financing activities
3

 
(32,752
)
 
32,755

 
100.0


Operating Activities. Our primary source of liquidity is net cash provided by operating activities, which is primarily driven by our net income or loss, other cash receipts and expenditure adjustments, and changes in working capital. The increase in net cash provided by operating activities during the three months ended June 30, 2020, compared to the prior period, was primarily due to a net positive change in operating assets and liabilities of $48,878 and in net income after non-cash adjustments of $18,920. The changes in operating assets and liabilities were primarily due to net positive changes in inventories, net, trade accounts receivable, net, income taxes payable, and prepaid expenses and other current assets, partially offset by a net negative change in trade accounts payable and income tax receivable.

Investing Activities. The increase in net cash used in investing activities during the three months ended June 30, 2020, compared to the prior period, was primarily due to higher capital expenditures for warehouse improvements for the Moreno Valley distribution center, information system and hardware enhancements, and retail stores.

Financing Activities. The decrease in net cash used in financing activities during the three months ended June 30, 2020, compared to the prior period, was primarily due to no stock repurchases occurring in the current period.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Contractual Obligations

During the three months ended June 30, 2020, there were no material changes outside the ordinary course of business to the contractual obligations and other commitments disclosed in our 2020 Annual Report.
 
Critical Accounting Policies and Estimates

Management must make certain estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements, based on historical experience, existing and known circumstances, authoritative accounting pronouncements, and other factors that management believes to be reasonable. The full impact of the COVID-19 pandemic is unknown and cannot be reasonably estimated. However, we have made appropriate accounting estimates based on the facts and circumstances available as of the reporting date. To the extent there are differences between these estimates and our actual results, our condensed consolidated financial statements may be materially affected. Refer to the section entitled "Use of Estimates" within Note 1, “General,” of our condensed consolidated financial statements, in Part I, Item 1 of this Quarterly Report, for a summary of applicable key estimates and judgments. There have been no material changes to the critical accounting policies disclosed in our 2020 Annual Report.


34

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Commodity Price Risk

For the manufacturing of our products, we purchase certain raw materials that are affected by commodity prices, which include sheepskin, leather, and wool. The supply of sheepskin, which is used to manufacture a significant portion of the UGG brand products, is in high demand and there are a limited number of suppliers that can meet our expectations for the quantity and quality of sheepskin that we require. We presently rely on two tanneries to provide most of our sheepskin. While we have experienced fairly stable pricing in recent years, historically 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 significant factors affecting the price of sheepskin include weather patterns, harvesting decisions, incidence of disease, the price of other commodities such as wool and leather, the demand for our products and the products of our competitors, use of substitute products or components, and global economic conditions. Any factors that increase the demand for, or decrease the supply of, sheepskin could cause significant increases in the price of sheepskin.

We typically fix prices for all of our raw materials with firm pricing agreements on a seasonal basis. For sheepskin and leather, we use purchasing contracts and refundable deposits to attempt to manage price volatility as an alternative to hedging commodity prices. The purchasing contracts and other pricing arrangements we use for sheepskin and leather may result in purchase obligations which are not recorded in our condensed consolidated balance sheets. With respect to sheepskin and leather, in the event of significant price increases, we will likely not be able to adjust our selling prices sufficiently to eliminate the impact of such increases on our gross margins.

Foreign Currency Exchange Rate Risk

Fluctuations in currency exchange rates, primarily between the US dollar and the currencies of Europe, Asia, Canada, and Latin America where we operate, may affect our results of operations, financial position, and cash flows. We face market risk to the extent that foreign currency exchange rate fluctuations affect our foreign assets, liabilities, revenues, and expenses. Although most of our sales and inventory purchases are denominated in US dollars, these sales and inventory purchases may be impacted by fluctuations in the exchange rates between the US dollar and local currencies in the international markets where our products are sold and manufactured. We are exposed to financial statement transaction gains and losses as a result of remeasuring our monetary assets and liabilities that are denominated in currencies other than the subsidiaries’ functional currencies. We translate all assets and liabilities denominated in foreign currencies into US dollars using the exchange rate as of the end of the reporting period. Gains and losses resulting from translating assets and liabilities from our subsidiaries' functional currencies to US dollars are recorded in OCI. Foreign currency exchange rate fluctuations affect our reported profits and can make comparisons from year to year more difficult. 

We hedge certain foreign currency exchange rate risk from existing assets and liabilities, as well as forecasted sales. As our international operations grow and we increase purchases and sales in foreign currencies, we will continue to evaluate our hedging strategy and may utilize additional derivative instruments, as needed, to hedge our foreign currency exchange rate risk. We do not use foreign currency exchange rate forward contracts for trading purposes. As of June 30, 2020, a hypothetical 10.0% foreign currency exchange rate fluctuation would have caused the fair value of our financial instruments to increase or decrease by approximately $4,200. Refer to Note 9, “Derivative Instruments,” of our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report, for further information on our use of derivative contracts. As of June 30, 2020, there were no known factors that we would expect to result in a material change in the general nature of our foreign currency exchange rate risk exposure.

Interest Rate Risk

Our market risk exposure with respect to our revolving credit facilities is tied to changes in applicable interest rates, including ABR, the federal funds effective rate, currency-specific LIBOR, and CDOR for our Primary Credit Facility, PBOC market rate for our China Credit Facility, and TIBOR for our Japan Credit Facility. A hypothetical 1.0% increase in interest rates for borrowings made under our revolving credit facilities would have resulted in an immaterial aggregate change to interest expense recorded in our condensed consolidated statements of comprehensive loss during the three months ended June 30, 2020. Refer to Note 6, “Revolving Credit Facilities and Mortgage Payable,” of our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report, for further information on our revolving credit facilities.


35

Item 4. Controls and Procedures

a) Disclosure Controls and Procedures

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

Under the supervision and with the participation of management, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2020. Based on that evaluation, our PEO and Principal Financial and Accounting Officer (PFAO) concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2020.

b) Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the three months ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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

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

36

PART II. OTHER INFORMATION

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

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

Item 1. Legal Proceedings

As part of our global policing program to protect our intellectual property rights, from time to time, we file lawsuits in various jurisdictions asserting claims for alleged acts of trademark counterfeiting, trademark infringement, patent infringement, trade dress infringement, and trademark dilution. We generally have multiple actions such as these pending at any given point in time. These actions may result in seizure of counterfeit merchandise, out of court settlements with defendants, or other outcomes. In addition, from time to time, we are subject to claims in which 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 the UGG brand trademark registrations and design patents are invalid or unenforceable. Furthermore, we 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.

There have been no material changes in the status of legal proceedings and other disputes as compared to what was reported in our Annual Report for the fiscal year ended March 31, 2020, filed with the SEC on June 1, 2020 (2020 Annual Report).

Although we are subject to legal proceedings and other disputes from time to time in the ordinary course of business, including employment, intellectual property, and product liability claims, we believe the outcome of all pending legal proceedings and other disputes in the aggregate will not have a material adverse effect on our business, results of operations, financial condition, or cash flows. However, regardless of the outcome, resolving legal proceedings and other disputes can have an adverse impact on us because of legal costs, diversion of management's time and resources, and other factors.

Item 1A. Risk Factors

An investment in our common stock involves risks. Before making an investment decision, you should carefully consider all the information in this Quarterly Report, including the information contained in Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as in our condensed consolidated financial statements and the related notes contained in Part I, Item 1. In addition, you should carefully consider the risks and uncertainties described in Part I, Item 1A, “Risk Factors,” of our 2020 Annual Report, as well as in our other public filings with the SEC. If any of the identified risks are realized, our business, financial condition, results of operations, and prospects could be materially and adversely affected. In that case, the trading price of our common stock may decline, and you could lose all or part of your investment. In addition, other risks of which we are currently unaware, or which we do not currently view as material, could have a material adverse effect on our business, financial condition, results of operations, and prospects.

Certain information contained within Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Quarterly Report and Part I, Item 1A, “Risk Factors,” of our 2020 Annual Report constitute forward-looking statements. Refer to the "Cautionary Note Regarding Forward-Looking Statements" of this Quarterly Report.

During the three months ended June 30, 2020, there were no material changes to the risks and uncertainties described in Part I, Item 1A, “Risk Factors,” of our 2020 Annual Report.


37

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

None.

Use of Proceeds

Not applicable.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Our Board of Directors has authorized various stock repurchase programs pursuant to which we may repurchase shares of our common stock. Our current revolving credit agreements allow us to make stock repurchases under these programs, if we do not exceed certain leverage ratios and no event of default has occurred under these agreements. As of June 30, 2020, we were in compliance with these agreements.

Below is a summary of stock repurchase activity under our stock repurchase programs during the three months ended June 30, 2020:
 
 
Total number of shares repurchased*
 
Average price paid per share
 
Dollar value of shares repurchased
 
Dollar value of shares remaining for repurchase
April 1 - April 30, 2020
 
—

 
$
—

 
$
—

 
$
159,807

May 1 - May 31, 2020
 
—

 
—

 
—

 
159,807

June 1 - June 30, 2020
 
—

 
—

 
—

 
159,807


*Any share repurchases are made as part of publicly-announced programs in open-market transactions.

Our stock repurchase programs do not obligate us to acquire any amount of common stock and may be suspended at any time at our discretion. Currently, we are temporarily pausing repurchases under our stock repurchase programs due to the disruption and uncertainty caused by the COVID-19 pandemic and our focus on liquidity and cash management, although we retain the discretion to commence repurchases in future periods.




38

Item 6. Exhibits

EXHIBIT INDEX
Exhibit
Number
 
Description of Exhibit
*10.1
 
*10.2
 
*31.1
 
*31.2
 
**32
 
*101.INS
 
XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
*101.SCH
 
Inline XBRL Taxonomy Extension Schema Document
*101.CAL
 
Inline XBRL Taxonomy Extension Calculation Linkbase Document
*101.DEF
 
Inline XBRL Taxonomy Extension Definition Linkbase Document
*101.LAB
 
Inline XBRL Taxonomy Extension Label Linkbase Document
*101.PRE
 
Inline XBRL Taxonomy Extension Presentation Linkbase Document
*104
 
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* Filed herewith.
** Furnished herewith.



39

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DECKERS OUTDOOR CORPORATION
(Registrant)
/s/ STEVEN J. FASCHING

Steven J. Fasching
Chief Financial Officer
(Principal Financial and Accounting Officer)

Date: August 6, 2020



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