Item 7. 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 consolidated financial statements in Part IV within this Annual 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 Direct-to-Consumer (DTC) business, which is comprised of our retail stores and E-Commerce websites. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. All of our products are currently manufactured by independent manufacturers.

Recent Developments

Restructuring Plan. During February 2016, we announced the implementation of a multi-year restructuring plan which was designed to realign our brands across our Fashion Lifestyle and Performance Lifestyle groups, optimize our worldwide owned retail store fleet, and consolidate our management and operations. In general, the intent of this restructuring plan was to reduce overhead costs and create operating efficiencies while improving collaboration across brands.

In connection with our restructuring plan, we closed 46 company-owned global retail stores as of March 31, 2019, including conversions to partner retail stores, and consolidated our brand operations and corporate headquarters. Our decision to open or close retail store locations was evaluated based on the operating results of each store through at least two peak selling seasons, as well as our retail store fleet optimization strategies and long-term strategic objectives.

The cumulative annualized selling, general, and administrative (SG&A) expense savings by applicable reportable operating segment, realized as of March 31, 2019, are approximately as follows:

	Amount
UGG brand wholesale	$	1,000
Sanuk brand wholesale	1,000
Other brands wholesale	1,000
Direct-to-Consumer	43,000
Unallocated overhead costs	17,000
Total	$	63,000

The cumulative restructuring charges incurred by category as of March 31, 2019, are as follows:

	Amount
Lease terminations	$	18,282
Retail store fixed asset impairment	9,372
Severance costs	9,776
Software and office fixed asset impairment	6,987
Other*	11,202
Total	$	55,619

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

The cumulative restructuring charges by applicable reportable operating segment are as follows:

	Years Ended March 31,												Cumulative Restructuring Charges**
	2019				2018				2017
UGG brand wholesale	$	—			$	—			$	2,238			$	2,238
Sanuk brand wholesale	—				—				20				3,068
Other brands wholesale	—				—				102				2,263
Direct-to-Consumer	—				149				12,771				23,454
Unallocated overhead costs	295				1,518				13,853				24,596
Total	$	295			$	1,667			$	28,984			$	55,619

**Cumulative restructuring charges include restructuring charges of $24,673, which were incurred during the fiscal year ended March 31, 2016.

During the years ended March 31, 2019, 2018, and 2017, total restructuring charges incurred and stated above were recorded in SG&A expenses in the consolidated statements of comprehensive income (loss).

As of March 31, 2019, we have completed our restructuring plan and achieved cumulative SG&A expense savings to date along with cumulative restructuring charges. We currently do not anticipate incurring additional restructuring charges in connection with this restructuring plan.

Refer to Note 1, “General,” under the heading “Restructuring Plan” of our consolidated financial statements in Part IV within this Annual Report for further information on our remaining accrued liabilities under our restructuring plan.

Operating Profit Improvement Plan. During February 2017, we announced that, in addition to continuing to execute on our restructuring plan, we would implement various business transformation initiatives to further reduce expenses and improve gross margins, the projected combined impact of which was expected to be approximately $100,000 of net annualized operating profit improvement by the end of the fiscal year ending March 31, 2020. As of March 31, 2019, we have successfully completed our plan and achieved in excess of $100,000 of net annualized operating profit improvement under both our restructuring and operating profit improvement plans. Consistent with our strategy, the principal drivers of the net annualized operating profit improvement achieved were costs of goods sold improvements, resulting from lower input costs and improved supply chain management, and SG&A expense savings, primarily driven by retail store closures, office consolidations, lower corporate infrastructure costs and process improvement efficiencies. We will continue to apply the lessons learned in our completed plans by pursuing opportunities to optimize profitability and seeking to enhance operating results throughout our business.

Trends Impacting our Overall Business

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

•

Sales of our products are highly seasonal and are sensitive to weather conditions, which are unpredictable and beyond our control. To address seasonality, we continue to drive our strategy of introducing counter-seasonal products through category expansion, including the UGG brand’s spring and summer products, as well as the year-round performance product offering of the HOKA brand. Even though we continue to expand our product lines with the goal of creating more year-round styles for our brands to drive sales and offset the impact of weather conditions, the effect of favorable or unfavorable weather on our aggregate sales and operating results may continue to be significant.

•

We believe there has been a meaningful shift in the way consumers shop for products and make purchasing decisions. The retail industry continues to undergo significant structural changes fueled by technology and the internet, changes in consumer purchasing behavior and a shrinking retail footprint. In particular, retail stores are experiencing significant and prolonged decreases in consumer traffic as customers continue to migrate to shopping online. This shift is positively impacting the performance of our E-Commerce business, while creating challenges and headwinds for our retail business as well as the business of our key customers. It is also transforming the way we approach marketing, including our focus on digital marketing efforts.

•

In light of the shift in consumer shopping behavior, and our ongoing efforts to enhance our operating results, we are seeking to optimize our retail store footprint. While we expect to identify additional retail stores for closure, we may simultaneously identify opportunities to open new retail stores in the future. 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.

•	As a result of changes in consumer purchasing behavior, we expect our E-Commerce business will continue to be a driver of long-term growth, although we expect the year-over-year growth rate will decline over time as the size of our E-Commerce business increases.

•	Starting in the second half of 2018, we implemented a product segmentation strategy, as well as an allocation strategy for the UGG brand’s core Classics franchise in the United States (US) wholesale marketplace. We plan to continue this strategic management of the US marketplace in future seasons and expect to implement similar strategies internationally during fiscal year 2020.

•

We believe consumers are buying product closer to the particular wearing occasion (“buy now, wear now”), which tends to shorten the purchasing windows for weather-dependent product. Not only does this trend impact our DTC business, we believe it is also impacting the purchasing behavior of our large wholesale customers. In particular, these customers appear to be shortening their purchasing windows to address the evolving behavior of retail consumers and to manage their own product-related inventories.

•	Foreign currency exchange rate fluctuations have the potential to cause variations in our operating results. While we seek to hedge some of the risks associated with foreign currency exchange rate fluctuations, these changes are largely outside of our control. We expect these changes will continue to impact the future purchasing patterns of our customers, as well as our operating results.

•	We believe consumers are increasingly buying brands which advance sustainable business practices and deliver quality products while striving for minimal environmental impact with socially conscious operations. Through our Corporate Responsibility Program, we expect to continue to advance our sustainable business initiatives.

Reportable Operating Segment Overview

We perform an annual assessment of the appropriateness of our reportable operating segments during the third quarter of our fiscal year. However, due to known circumstances arising during the first quarter of the fiscal year ending March 31, 2019 (Q1 2019), management performed this assessment at that time. These circumstances included an assessment of quantitative factors, such as the actual and forecasted sales and operating income of the wholesale operations of the HOKA brand compared to our other reportable operating segments, as well as an assessment of qualitative factors, such as the ongoing growth of, and our increased investment in, the wholesale operations of the HOKA brand. As a result, beginning in Q1 2019, we added a sixth reportable operating segment to separately report the wholesale operations of the HOKA brand. The wholesale operations of the HOKA brand are no longer presented under the Other brands wholesale reportable operating segment. However, the DTC operations of the HOKA brand continue to be reported under the DTC reportable operating segment. Prior periods presented were reclassified to reflect this change.

Our six reportable operating segments now include the worldwide wholesale operations of the UGG brand, HOKA brand, Teva brand, Sanuk brand, and Other brands, as well as DTC. Information reported to the Chief Operating Decision Maker (CODM), who is our Principal Executive Officer, is organized into these reportable operating segments and is consistent with how the CODM evaluates our performance and allocates resources.

During calendar year 2017, we began to leverage elements, including particular styles, of the Ahnu brand under the Teva brand. Effective April 1, 2017, the operations for the Ahnu brand were discontinued and certain remaining styles are sold under the Teva brand. Results of wholesale operations for the former Ahnu brand are now reported in the Teva brand wholesale reportable operating segment instead of the Other brands wholesale reportable operating segment, as presented for the year ended March 31, 2017.

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 attracts women, men, and children.

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

•	High consumer brand loyalty due to consistently delivering quality and luxuriously comfortable footwear, apparel, and accessories.

•	Diversification of our product lines, including women’s spring and summer, men’s, and lifestyle offerings. Our strategy of product diversification aims to mitigate the impacts of seasonality and decrease our reliance on sheepskin.

•	Continued enhancement of our Omni-Channel and digital marketing capabilities to enable us to better engage existing and prospective consumers and expose them to our brands.

HOKA Brand. The HOKA brand is 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, and now appeals to athletes around the world, regardless of activity. The HOKA brand is quickly becoming a leading brand within the specialty community with strong marketing fueling both domestic and international sales growth.

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 line includes 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 consists of the Koolaburra by UGG brand, as well as other discontinued brands during the prior periods presented. The Koolaburra brand is a casual footwear fashion line using sheepskin and other plush materials, sold through our wholesale channel and is intended to target the value-oriented consumer in order to complement our UGG brand offering.

Direct-to-Consumer. Our DTC business 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 our websites before making purchasing decisions.

Our retail stores are predominantly UGG brand concept stores and UGG brand outlet stores. Through our outlet stores, we sell some of our discontinued styles from prior seasons, full price in-line products, as well as products made specifically for the outlet stores.

As of March 31, 2019, we had a total of 156 company-owned global retail stores, which includes 88 concept stores and 68 outlet stores. Generally, we open retail store locations during the second or third quarters of each fiscal year and consider closures of retail stores during the third or fourth quarter of each fiscal year.

Flagship stores. Included in the total count of retail stores worldwide are nine UGG brand flagship stores, which are lead concept stores in our retail channel. In certain key markets and prominent locations, we have opened flagship stores to showcase our UGG brand products. These stores are typically larger and have broader product offerings and greater traffic than our general concept stores as they are primarily located in major tourist areas. The net sales for these stores are recorded in our DTC reportable operating segment.

Concession stores. Included in the total count of retail stores worldwide are concession stores, defined as concept stores that are operated by us within a department or other store, which we lease from the store owner by paying a percentage of concession store sales. The net sales for these stores are recorded in our DTC reportable operating segment.

Partner Retail stores. In certain international markets, such as China, we rely on partner retail stores, which are branded stores that are wholly-owned and operated by third parties and not included in the total count of worldwide company-owned retail stores. When a partner retail store is opened, or a store is converted into a partner retail store, the store becomes wholly-owned and operated by third parties and related net sales are recorded in our UGG brand or Sanuk brand wholesale reportable operating segments, as applicable.

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 March 31, 2019, we operated our E-Commerce business through an aggregate of 22 company-owned websites in nine different countries.

Use of Non-GAAP Measures

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

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

Seasonality

Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters ending September 30th and December 31st and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31st and June 30th. Due to the size of the UGG brand relative to our other brands, our aggregate net sales in the quarters ending September 30th and December 31st have significantly exceeded net sales in the quarters ending March 31st and June 30th. While we have taken steps to diversify our product offerings, both by creating more year-round styles and expanding product offerings within our existing brands, and by acquiring and developing new brands, we expect this trend to continue for the foreseeable future. Refer to Note 14, “Quarterly Summary of Information (Unaudited),” of our consolidated financial statements in Part IV within this Annual Report for further information on our results of operations by quarterly period.

Result of Operations

Year Ended March 31, 2019 Compared to Year Ended March 31, 2018

The following table summarizes our results of operations for the periods presented:

	Years Ended March 31,
	2019							2018							Change
	Amount				%			Amount				%			Amount				%
Net sales	$	2,020,437			100.0	%		$	1,903,339			100.0	%		$	117,098			6.2	%
Cost of sales	980,187				48.5			971,697				51.1			(8,490		)		(0.9	)
Gross profit	1,040,250				51.5			931,642				48.9			108,608				11.7
Selling, general and administrative expenses	712,930				35.3			709,058				37.3			(3,872		)		(0.5	)
Income from operations	327,320				16.2			222,584				11.7			104,736				47.1
Other (income) expense, net	(1,614		)		(0.1	)		1,888				0.1			3,502				185.5
Income before income taxes	328,934				16.3			220,696				11.6			108,238				49.0
Income tax expense	64,626				3.2			106,302				5.6			41,676				39.2
Net income	$	264,308			13.1	%		$	114,394			6.0	%		$	149,914			131.1	%
Net income per share
Basic	$	8.92						$	3.60						$	5.32
Diluted	$	8.84						$	3.58						$	5.26

Net Sales. The following table summarizes our net sales by location, and by brand and channel, for the periods presented:

	Years Ended March 31,
	2019				2018				Change
	Amount				Amount				Amount				%
Net sales by location
US	$	1,278,358			$	1,174,061			$	104,297			8.9	%
International	742,079				729,278				12,801				1.8
Total	$	2,020,437			$	1,903,339			$	117,098			6.2	%
Net sales by brand and channel
UGG brand
Wholesale	$	888,347			$	841,893			$	46,454			5.5	%
Direct-to-Consumer	644,520				665,354				(20,834		)		(3.1	)
Total	1,532,867				1,507,247				25,620				1.7
HOKA brand
Wholesale	185,057				132,688				52,369				39.5
Direct-to-Consumer	38,092				20,772				17,320				83.4
Total	223,149				153,460				69,689				45.4
Teva brand
Wholesale	119,390				117,478				1,912				1.6
Direct-to-Consumer	18,022				16,116				1,906				11.8
Total	137,412				133,594				3,818				2.9

	Years Ended March 31,
	2019				2018				Change
	Amount				Amount				Amount				%
Sanuk brand
Wholesale	69,791				78,283				(8,492		)		(10.8	)
Direct-to-Consumer	12,822				12,639				183				1.4
Total	82,613				90,922				(8,309		)		(9.1	)
Other brands
Wholesale	42,818				17,273				25,545				147.9
Direct-to-Consumer	1,578				843				735				87.2
Total	44,396				18,116				26,280				145.1
Total	$	2,020,437			$	1,903,339			$	117,098			6.2	%
Total Wholesale	$	1,305,403			$	1,187,615			$	117,788			9.9	%
Total Direct-to-Consumer	715,034				715,724				(690		)		(0.1	)
Total	$	2,020,437			$	1,903,339			$	117,098			6.2	%

Consolidated net sales increased primarily due to higher HOKA, UGG, and Other brand wholesale sales. Further, we experienced an increase in total volume of pairs sold of 9.5% to 35,800 compared to 32,700 during the prior period. On a constant currency basis, net sales increased 5.8% compared to the prior period. Key drivers of the change in net sales were as follows:

•

Wholesale net sales of our UGG brand increased due to a higher volume of pairs sold, partially offset by a lower weighted-average selling price per pair (WASPP). These net impacts were driven by earlier full-priced selling compared to the prior period, as well as growth in our UGG Men’s business and non-Classic styles in UGG Women’s, complimented by our US domestic wholesale UGG Core-Classics product allocation strategy. On a constant currency basis, wholesale net sales of our UGG brand increased 4.3% compared to the prior period.

•	Wholesale net sales of our HOKA brand increased due to a higher volume of pairs sold driven by continued global growth of the brand, primarily in the US and Europe, as well as additional sales generated by updates to key franchises, including Clifton and Bondi, compared to the prior period.

•	Wholesale net sales of our Teva brand primarily increased due to Japan growth driven by premium fashion collaborations.

•	Wholesale net sales of our Sanuk brand decreased due to a lower WASPP, as well as a lower volume of pairs sold, primarily driven by lower performance in the domestic surf specialty channel and lower international sales resulting from our strategic focus on US markets.

•	Wholesale net sales of our Other brands increased due to a higher volume of pairs sold driven by continued growth in the US family value channel for the Koolaburra brand, partially offset by a lower WASPP due to product and customer mix.

•	DTC net sales remained relatively flat, primarily due to lower WASPP driven by product mix, mostly offset by a higher volume of pairs sold for the HOKA, Teva and Other brands compared to the prior period.

Comparable DTC net sales for the 52 weeks ended March 31, 2019 increased 1.9% compared to the same period during fiscal year 2018. The increase was due to growth in our E-Commerce business primarily for the UGG and HOKA brands.

•	International net sales, which are included in the reportable operating segment net sales presented above, increased by 1.8% compared to the prior period. International net sales represented 36.7% and 38.3% of total net sales for the years ended March 31, 2019 and 2018, respectively. The increase was primarily due to higher net sales for the HOKA and Teva brands in Europe and Asia.

Gross Profit. Gross profit, as a percentage of net sales, or gross margin, increased to 51.5% from 48.9% during the prior period due to higher-full priced selling driven by less discounting and promotional activity, higher margin on products sold through our closeout channel due to more efficient inventory management, lower air-freight costs for our domestic wholesale business, and lower input costs as we executed our supply chain initiatives as part of our operating profit improvement plan.

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

•	increased variable advertising, promotion and other operating expenses of $7,086, primarily due to higher marketing investment to drive sales for the HOKA and UGG brands, as well as higher variable related costs for our DTC operations;

•	increased foreign currency-related losses of $8,627 driven by changes in foreign currency exchange rates for Canadian, Asian, and European currencies;

•	increased compensation costs of $6,697, primarily due to higher payroll-related costs, partially offset by consulting costs related to the strategic review process during the prior period, as well as higher accruals for variable performance-based compensation as a result of our financial performance during the current period;

•	decreased professional service costs of $12,868, primarily driven by lower costs associated with our proxy contest and related legal matters incurred during the prior period, as well as a one-time legal credit recognized during the current fiscal year; and

•	decreased impairment and depreciation charges of $5,880, primarily due to lower retail store-related impairments and depreciation for retail store closures completed in prior periods.

Income from Operations. Income (loss) from operations by reportable operating segment for the periods presented were as follows:

	Years Ended March 31,
	2019				2018				Change
	Amount				Amount				Amount				%
Income (loss) from operations
UGG brand wholesale	$	300,761			$	247,826			$	52,935			21.4	%
HOKA brand wholesale	35,717				20,954				14,763				70.5
Teva brand wholesale	27,939				20,400				7,539				37.0
Sanuk brand wholesale	12,781				14,474				(1,693		)		(11.7	)
Other brands wholesale	10,411				1,304				9,107				698.4
Direct-to-Consumer	185,449				156,896				28,553				18.2
Unallocated overhead costs	(245,738		)		(239,270		)		(6,468		)		(2.7	)
Total	$	327,320			$	222,584			$	104,736			47.1	%

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

•	The increase in income from operations of UGG, HOKA, Other and Teva brand wholesale was due to higher sales at higher gross margins, partially offset by higher SG&A expenses, primarily driven by higher marketing and selling expenses.

•	The decrease in income from operations of Sanuk brand wholesale was primarily due to lower sales, partially offset by higher gross margins and lower SG&A expenses, driven by lower marketing and selling expenses.

•	The increase in income from operations of DTC was primarily due to higher gross margins, as well as lower overall retail store operating costs driven by store closures completed in prior periods, including related impairments and depreciation costs, partially offset by higher warehouse expenses.

•

The increase in unallocated overhead costs was primarily due to changes in foreign currency exchange rates for Canadian, Asian, and European currencies and higher warehouse-related expenses associated with the Moreno Valley warehouse and distribution center expansion, partially offset by lower professional and consulting service costs associated with our proxy contest and related legal matters incurred during the prior period, as well as a one-time legal credit recognized in the current fiscal year.

Other (Income) Expense, Net. The increase in total other income, net, compared to the prior period, was primarily due to an increase in interest income driven by higher interest rate yields and higher average invested cash balances, as well as an increase driven by changes in penalties and interest.

Income Taxes. Income tax expense and our effective income tax rate for the periods presented were as follows:

	Years Ended March 31,
	2019				2018
Income tax expense	$	64,626			$	106,302
Effective income tax rate	19.6		%		48.2		%

The decrease in our effective income tax rate was due to the impacts of the Tax Cuts and Jobs Act (Tax Reform Act) which were effective on or after January 1, 2018, as well as a change in the jurisdictional mix of worldwide income before income taxes for the year ended March 31, 2019. The Tax Reform Act reduced the US federal income tax rate and our foreign earnings are now subject to US taxation as they are considered global intangible low-taxed income. The prior period included additional income tax expense for the remeasurement of deferred tax assets to the lower enacted US federal tax rate and the one-time mandatory deemed repatriation of foreign earnings.

Foreign income before income taxes was $147,204 and $149,214, and worldwide income before income taxes was $328,934 and $220,696, during the years ended March 31, 2019 and 2018, respectively. The decrease in foreign income before income taxes, as a percentage of worldwide income before income taxes, was primarily due to higher growth reported in domestic net sales as compared to growth from foreign net sales.

For the years ended March 31, 2019 and 2018, we did not generate significant pre-tax earnings from any countries which do not impose a corporate income tax. As of March 31, 2019, we had $214,876 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. A small portion of our unremitted accumulated earnings of non-US subsidiaries, for which no US federal or state income tax have been provided, are currently expected to be reinvested outside of the US indefinitely. Such earnings would become taxable upon repatriation by means of the remittance of taxable dividends or upon the sale or liquidation of these subsidiaries.

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

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

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

Year Ended March 31, 2018 Compared to Year Ended March 31, 2017

The following table summarizes our results of operations for the periods presented:

	Years Ended March 31,
	2018							2017							Change
	Amount				%			Amount				%			Amount				%
Net sales	$	1,903,339			100.0	%		$	1,790,147			100.0	%		$	113,192			6.3	%
Cost of sales	971,697				51.1			954,912				53.3			(16,785		)		(1.8	)
Gross profit	931,642				48.9			835,235				46.7			96,407				11.5
Selling, general and administrative expenses	709,058				37.3			837,154				46.8			128,096				15.3
Income (loss) from operations	222,584				11.7			(1,919		)		(0.1	)		224,503				11,699.0
Other expense, net	1,888				0.1			5,067				0.3			3,179				62.7
Income (loss) before income taxes	220,696				11.6			(6,986		)		(0.4	)		227,682				3,259.1
Income tax expense (benefit)	106,302				5.6			(12,696		)		(0.7	)		(118,998		)		(937.3	)
Net income	$	114,394			6.0	%		$	5,710			0.3	%		$	108,684			1,903.4	%
Net income per share
Basic	$	3.60						$	0.18						$	3.42
Diluted	$	3.58						$	0.18						$	3.40

Net Sales. The following table summarizes our net sales by location, and by brand and channel, for the periods presented:

	Years Ended March 31,
	2018				2017				Change
	Amount				Amount				Amount				%
Net sales by location
US	$	1,174,061			$	1,141,303			$	32,758			2.9	%
International	729,278				648,844				80,434				12.4
Total	$	1,903,339			$	1,790,147			$	113,192			6.3	%
Net sales by brand and channel
UGG brand
Wholesale	$	841,893			$	826,355			$	15,538			1.9	%
Direct-to-Consumer	665,354				624,682				40,672				6.5
Total	1,507,247				1,451,037				56,210				3.9
HOKA brand
Wholesale	132,688				93,064				39,624				42.6
Direct-to-Consumer	20,772				11,518				9,254				80.3
Total	153,460				104,582				48,878				46.7
Teva brand
Wholesale	117,478				103,694				13,784				13.3
Direct-to-Consumer	16,116				14,021				2,095				14.9
Total	133,594				117,715				15,879				13.5

	Years Ended March 31,
	2018				2017				Change
	Amount				Amount				Amount				%
Sanuk brand
Wholesale	78,283				77,552				731				0.9
Direct-to-Consumer	12,639				14,214				(1,575		)		(11.1	)
Total	90,922				91,766				(844		)		(0.9	)
Other brands
Wholesale	17,273				23,142				(5,869		)		(25.4	)
Direct-to-Consumer	843				1,905				(1,062		)		(55.7	)
Total	18,116				25,047				(6,931		)		(27.7	)
Total	$	1,903,339			$	1,790,147			$	113,192			6.3	%
Total Wholesale	$	1,187,615			$	1,123,807			$	63,808			5.7	%
Total Direct-to-Consumer	715,724				666,340				49,384				7.4
Total	$	1,903,339			$	1,790,147			$	113,192			6.3	%

Consolidated net sales increased primarily due to higher HOKA, UGG, and Teva wholesale sales and overall DTC sales. Further, we experienced an increase in pairs sold of 4.1% to 32,700 compared to 31,400 during the prior period. On a constant currency basis, net sales increased 6.1% compared to the prior period. Key drivers for the change in net sales were as follows:

•	Wholesale net sales of our UGG brand increased primarily due to an increase in WASPP, as well as an increase in apparel and home goods sales. The increase in WASPP was driven by fewer closeout sales. On a constant currency basis, wholesale net sales of our UGG brand increased 2.3% compared to the prior period.

•	Wholesale net sales of our HOKA brand increased due to a higher volume of pairs sold due to its continued global growth, primarily in the US and Europe.

•	Wholesale net sales of our Teva brand increased due to a higher WASPP, primarily attributable to changes in product mix and fewer closeout sales.

•	Wholesale net sales of our Sanuk brand remained relatively flat with a slight increase in volume of pairs sold.

•	Wholesale net sales of our Other brands decreased due to a lower volume of pairs sold, partially offset by a higher WASPP primarily driven by the change in presentation for the results of wholesale operations of the Ahnu brand to the Teva brand wholesale reportable operating segment.

•

DTC net sales increased 7.4% compared to the prior period, largely due to growth in our E-Commerce business. The increase in total DTC net sales was primarily due to a higher volume of pairs sold, partially offset by a decrease in WASPP. The decrease in WASPP was due to higher discounted sales through UGG Closet, our limited E-Commerce outlet offering, as well as changes in product mix in our retail stores. Further, we experienced an increase in UGG brand apparel and home goods sales compared to the prior period. On a constant currency basis, DTC net sales increased 6.2% during the year ended March 31, 2018 compared to the prior period.

Comparable DTC net sales for the 52 weeks ended April 1, 2018 increased 7.0% on a constant currency basis compared to the same period during fiscal year 2017. The increase in comparable DTC net sales was due to growth in E-Commerce, partially offset by a decline in net sales at our retail stores.

•	International net sales, which are included in the reportable operating segment net sales presented above, increased by 12.4% compared to the prior period. International net sales represented 38.3% and 36.2% of total net sales for the years ended March 31, 2018 and 2017, respectively. The increase was primarily due to higher net sales for the UGG and HOKA brands in Europe and Asia.

Gross Profit. Gross profit, as a percentage of net sales, or gross margin, increased to 48.9% from 46.7% during the prior period primarily driven by lower input costs as we executed our supply chain initiatives through our operating profit improvement plan, a higher proportion of full-priced selling partly due to favorable weather conditions, as well as favorable foreign currency exchange rate fluctuations compared to the prior period.

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

•	significantly decreased impairment and depreciation charges of $138,235, primarily due to the impairment charge for the Sanuk brand wholesale reportable operating segment goodwill and patent in the amount of approximately $118,000, as well as retail store and other long-lived asset impairment charges incurred during the prior period;

•	increased compensation costs of $38,030, primarily due to approximately $35,000 driven by higher performance-based compensation and time-based stock awards, as well as other costs incurred for our in-house converted sales team;

•	decreased commission expenses of $22,988, primarily due to the conversion of sales agent agreements to an in-house sales team during the prior period, partially offset by the increased compensation costs discussed above;

•	increased costs associated with our proxy contest of $8,969;

•	decreased foreign currency losses of $8,348, due to favorable exchange rates for European and Asian currencies in the current period, partially offset by higher realized losses on hedging instruments on foreign currency exchange rate forward contracts compared to the prior period;

•	decreased professional and consulting service costs of $7,502, primarily driven by costs savings initiatives, as well as lower restructuring charges related to corporate reorganization cost compared to the prior period;

•	increased warehouse-related expenses of $5,985, primarily due to new North American third-party logistic provider (3PL) costs and higher warehouse costs in Europe in the current period;

•	decreased rent and occupancy expenses of $6,737, primarily due to fewer retail stores and related costs, including restructuring charges for lease termination costs incurred during the prior period;

•	increased advertising, promotion, and other operating expenses of $2,911, primarily due to increased international investment compared to the prior period; and

•	increased bad debt expense of $1,321, primarily due to recent payment history on an unsettled customer account in the current period.

Income (Loss) from Operations. Income (loss) from operations by reportable operating segment for the periods presented were as follows:

	Years Ended March 31,
	2018				2017				Change
	Amount				Amount				Amount				%
UGG brand wholesale	$	247,826			$	213,407			$	34,419			16.1	%
HOKA brand wholesale	20,954				2,556				18,398				719.8
Teva brand wholesale	20,400				10,045				10,355				103.1
Sanuk brand wholesale	14,474				(110,582		)		125,056				113.1
Other brands wholesale	1,304				(985		)		2,289				232.4
Direct-to-Consumer	156,896				109,802				47,094				42.9

	Years Ended March 31,
	2018				2017				Change
	Amount				Amount				Amount				%
Unallocated overhead costs	(239,270		)		(226,162		)		(13,108		)		(5.8	)
Total	$	222,584			$	(1,919	)		$	224,503			11,699.0	%

The increase in total income from operations, compared to the prior period, was due to higher sales at higher gross margins, as well as lower overall SG&A expenses, primarily driven by impairment charges of $138,235 incurred during the prior period, as described above. Key drivers for the changes in income from operations were as follows:

•	The increase in income from operations of UGG brand wholesale was due to higher sales at higher gross margins.

•	The increase in income from operations of HOKA brand wholesale was due to higher sales at higher gross margins, partially offset by higher SG&A expenses, primarily driven by higher marketing and selling expenses.

•	The increase in income from operations of Teva brand wholesale was due to higher sales at higher gross margins.

•	The increase in income from operations of Sanuk brand wholesale was primarily due to impairment charges for goodwill and long-lived assets incurred during the prior period, as well as higher sales at higher gross margins in the current period.

•	The increase in income from operations of Other brands wholesale was due to higher gross margins and lower marketing and selling expenses.

•	The increase in income from operations of DTC was primarily due to overall higher sales in our E-Commerce business and lower SG&A expenses, primarily driven by lower restructuring charges for retail stores, compared to the prior period, as well as net realized cost savings due to our operating profit improvement plan.

•

The increase in unallocated overhead costs was primarily due to higher performance-based compensation and warehouse and 3PL costs, net of cost savings realized from our operating profit improvement plan, partially offset by favorable fluctuations in European and Asian exchange rates. The increase in performance-based compensation of approximately $17,000, compared to the prior period, is due to performance criteria associated with certain compensatory awards being achieved in the current period. The increase in warehouse costs of approximately $10,000, compared to the prior period, was driven by the re-allocation of European warehouse costs from the wholesale channel to unallocated overhead costs based on a determination that the warehouses support multiple reportable operating segments, as well as a new North American 3PL.

Other Expense, Net. The decrease in total other expense, net, compared to the prior period, was primarily due to a decrease in interest expense as a result of lower average balances outstanding under our revolving credit facilities.

Income Taxes. Income tax expense and our effective income tax rate for the periods presented were as follows:

	Years Ended March 31,
	2018				2017
Income tax expense (benefit)	$	106,302			$	(12,696	)
Effective income tax rate	48.2		%		181.7		%

The decrease in our effective income tax rate was primarily due to the impacts from the enactment of the Tax Reform Act during the year ended March 31, 2018, partially offset by the impact of non-recurring restructuring charges and non-cash impairment charges recognized during the year ended March 31, 2017. Of the total income tax expense recorded during the year ended March 31, 2018, $14,395 was recorded for the re-measurement of our deferred tax assets to the lower enacted US federal tax rates in the consolidated statements of comprehensive income (loss).

Additionally, we recorded provisional US federal and state tax estimates for the one-time mandatory deemed repatriation of foreign earnings of $59,114, including discrete tax impacts of $46,405 related to foreign earnings and profits generated prior to April 1, 2017. These provisional estimates were offset by a benefit of $2,502 due to the reduction of the US federal income tax rate from 35.0% to 31.5%.

Foreign income before income taxes was $149,214 and $63,011 and worldwide income (loss) before income taxes was $220,696 and $(6,986) during the years ended March 31, 2018 and 2017, respectively. The increase in foreign income before income taxes, as a percentage of worldwide income (loss) before income taxes, was primarily due to a larger proportionate increase in foreign sales and a reduction of foreign operating expenses during the year ended March 31, 2018 compared to the prior period. The increase in foreign income before income taxes as a percentage of worldwide income before income taxes was primarily due to the impact of the Sanuk brand goodwill and patent impairment charges to domestic and worldwide income recorded during the prior period.

Net Income. Net income increased, compared to the prior period, primarily due to higher sales at higher gross margins, as well as lower SG&A expenses largely driven by lower impairment and restructuring charges, described above, partially offset by higher income tax expense driven by the enactment of the Tax Reform Act. Net income per share increased due to higher net income, combined with lower weighted average common shares outstanding due to stock repurchases.

Other Comprehensive Income. Other comprehensive income increased, compared to the prior period, primarily due to higher foreign currency translation gains driven by changes in our net asset position and European and Asian foreign currency exchange rates.

Liquidity

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

As a result of the Tax Reform Act and the transition of the US tax regime from a worldwide tax system to a territorial tax system, we repatriated $250,000 of cash and cash equivalents during the year ended March 31, 2018. As of March 31, 2019, we had $214,876 of cash and cash equivalents outside the US, of which we repatriated $130,000 during April 2019. A portion of the remaining cash and cash equivalents outside the US 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, as long as such cash is not required to fund ongoing foreign operations. For further information on the impacts of the Tax Reform Act during the years ended March 31, 2019 and 2018, refer to Note 5, “Income Taxes,” of our consolidated financial statements in Part IV within this Annual Report.

We also continue to evaluate our capital allocation strategy and consider further opportunities to put global cash to use in a way that will profitably grow our business and drive stockholder value, including by repurchasing our stock. In January 2019, our Board of Directors approved the 2019 Repurchase Program, which authorizes us to repurchase up to $261,000 of our common stock. As of March 31, 2019, the aggregate remaining approved amount under the 2017 Repurchase Program and 2019 Repurchase Program (collectively, our “Stock Repurchase Programs”) was $350,212. Our Stock Repurchase Programs do not obligate us to acquire any particular amount of common stock and may be suspended at any time at our discretion.

Our cash repatriation strategy, and by extension, our liquidity, may be impacted by a number of additional considerations, which include clarifications of or changes to the Tax Reform Act and our actual earnings for current and future fiscal periods.

Our liquidity may be further impacted by additional factors, including our operating results, the strength of our brands, unexpected weather conditions, our ability to respond to changes in consumer preferences and tastes, our

ability to collect our receivables in a timely manner and effectively manage our inventories, and our ability to respond to legislative developments. Furthermore, we may require additional cash resources due to changes in business conditions or strategic initiatives, economic recession, changes in share repurchase strategy, or other future developments, including any investments or acquisitions we may decide to pursue, although we do not have any present commitments with respect to any acquisitions.

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

Capital Resources

Primary Credit Facility. In September 2018, we refinanced in full and terminated our Second Amended and Restated Credit Agreement dated as of November 13, 2014, as amended (Prior Credit Agreement). The refinanced revolving credit facility agreement (Credit Agreement) is with JPMorgan Chase Bank, N.A. (JPMorgan), as the administrative agent, Citibank, N.A., Comerica Bank (Comerica) and HSBC Bank USA, N.A., as co-syndication agents, MUFG Bank, Ltd. and U.S. Bank National Association as co-documentation agents, and the lenders party thereto, with JPMorgan and Comerica acting as joint lead arrangers and joint bookrunners. The Credit Agreement 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.

As of March 31, 2019, and through May 17, 2019, we had no outstanding balance, outstanding letters of credit of $549, and available borrowings of $399,451 under our Primary Credit Facility.

China Credit Facility. Our revolving credit facility in China (China Credit Facility) is an uncommitted revolving line of credit of up to CNY 300,000, or $44,692. As of March 31, 2019, and through May 17, 2019, we had no outstanding balance and available borrowings of $44,692 under our China Credit Facility.

Japan Credit Facility. Our revolving credit facility in Japan (Japan Credit Facility) is an uncommitted revolving line of credit of up to JPY 5,500,000, or $49,595. As of March 31, 2019, and through May 17, 2019, we had no outstanding balance and available borrowings of $49,595 under our Japan Credit Facility. We have renewed the Japan Credit Facility through January 31, 2020 under the terms of the original agreement.

Mortgage. As of March 31, 2019, we had an outstanding principal balance under the mortgage secured by our corporate headquarters property of $31,504. 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.

Debt Covenants. As of March 31, 2019, and through May 17, 2019, we were in compliance with all debt covenants under our revolving credit facilities and our mortgage.

Refer to Note 6, “Revolving Credit Facilities and Mortgage Payable,” of our consolidated financial statements in Part IV within this Annual Report for further information on the refinancing and related terms of our Primary Credit Facility, as well as our other revolving credit facilities and mortgage.

Cash Flows

The following table summarizes our cash flows for the periods presented:

	Years Ended March 31,
	2019				2018				2017
Net cash provided by operating activities	$	359,505			$	327,355			$	199,330
Net cash used in investing activities	(29,018		)		(34,697		)		(44,499		)
Net cash used in financing activities	(167,194		)		(157,715		)		(103,757		)

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

The increase in net cash provided by operating activities during the year ended March 31, 2019, compared to the year ended March 31, 2018, was due to the positive net change in net income after non-cash adjustments of $140,871, partially offset by a net negative change in operating assets and liabilities of $108,721. The changes in operating assets and liabilities were primarily due to net negative impacts for long-term liabilities, accrued expenses, income tax receivable, trade accounts receivable, and prepaid expenses and other current assets partially offset by a net positive change in trade accounts payable.

The increase in net cash provided by operating activities during the year ended March 31, 2018, compared to the year ended March 31, 2017, was primarily due to a net positive change in operating assets and liabilities of $133,528, partially offset by a net negative change in net income after non-cash adjustments of $5,503. The changes in operating assets and liabilities were primarily due net positive impacts for long-term liabilities, accrued expenses, income tax receivable, and trade accounts receivable.

Investing Activities. The decrease in net cash used in investing activities during the year ended March 31, 2019, compared to the year ended March 31, 2018, was primarily due to lower capital expenditures for property and equipment primarily driven by fewer retail store and warehouse build-out costs.

The decrease in net cash used in investing activities during the year ended March 31, 2018, compared to the year ended March 31, 2017, was due to lower capital expenditures for property and equipment primarily driven by lower expenditures on real property acquisitions, retail stores and showrooms, as well as IT infrastructure and improvements, partially offset by higher warehouse build-out costs associated with the expansion of our warehouse and distribution center located in Moreno Valley, California.

Financing Activities. The increase in net cash used in financing activities during the year ended March 31, 2019, compared to the year ended March 31, 2018, was primarily due to higher stock repurchases.

The increase in net cash used in financing activities during the year ended March 31, 2018, compared to the year ended March 31, 2017, was primarily due to higher stock repurchases, partially offset by lower net borrowings and repayments of short-term borrowings and the final Sanuk brand contingent consideration payment being made during the year ended March 31, 2017.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Contractual Obligations

The following table summarizes our contractual obligations as of March 31, 2019 and the effects of such obligations in future periods:

	Payments Due by Period
	Total				Less than 1 Year				1-3 Years				3-5 Years				More than 5 Years
Operating lease obligations (1)	$	290,437			$	53,015			$	88,432			$	67,244			$	81,746
Purchase obligations for product (2)	424,274				424,274				—				—				—
Purchase obligations for commodities (3)	208,577				54,607				153,970				—				—
Other purchase obligations (4)	52,302				30,583				13,984				7,735				—
Mortgage obligation (5)	45,915				2,168				4,336				4,336				35,075
Net unrecognized tax benefits (6)	2,258				8				2,250				—				—
Total	$	1,023,763			$	564,655			$	262,972			$	79,315			$	116,821

(1)	Our operating lease commitments consist primarily of building leases for our retail locations, distribution centers, and regional offices, and include the cash lease payments of deferred rents.

(2)

Our purchase obligations for product consist mostly of open purchase orders issued in the ordinary course of business. Outstanding purchase orders are primarily issued to our third-party manufacturers and most are expected to be paid within one year. We can cancel a significant portion of the purchase obligations under certain circumstances; however, the occurrence of such circumstances is generally limited. As a result, the amount does not necessarily reflect the dollar amount of our binding commitments or minimum purchase obligations, and instead reflects an estimate of our future payment obligations based on information currently available.

(3)	Our purchase obligations for commodities include sheepskin and leather, represent remaining commitments under existing supply agreements, which are subject to minimum volume commitments. We expect that purchases made by us under these agreements in the ordinary course of business will eventually exceed the minimum commitment levels.

(4)	Our other purchase obligations generally consist of non-cancellable minimum commitments for capital expenditures, obligations under service contracts and requirements to pay promotional expenses. Our promotional expenditures and service contracts are due periodically during fiscal years 2020 through 2024.

As of March 31, 2019, we had $4,891 of commitments for future capital expenditures, primarily related to retail store build-out of leasehold improvements and to our continued build-out and expansion of our warehouse and distribution center located in Moreno Valley, California. We estimate that the capital expenditures for the fiscal year ending March 31, 2020, including the aforementioned commitments, will range from approximately $35,000 to $40,000. We anticipate these expenditures will primarily relate to the build-out and expansion of our primary warehouse and distribution center, as well as IT infrastructure, system upgrade costs, and fixtures and upgrades for our global retail stores. However, the actual amount of our future capital expenditures may differ significantly from this estimate depending on numerous factors, including the timing of facility openings, as well as unforeseen needs to replace existing assets and the timing of other expenditures.

(5)	Our mortgage obligation consists of a mortgage secured by our corporate headquarters property. Payments represent principal and interest amounts. Refer to Note 6, “Revolving Credit Facilities and Mortgage Payable,” of our consolidated financial statements in Part IV within this Annual Report for further information on our mortgage obligation and payments.

(6)

Net unrecognized tax benefits are related to uncertain tax positions taken in our income tax return that would impact our effective tax rate, if recognized. As of March 31, 2019, the timing of future cash outflows is highly uncertain related to $8,086 of a statute of limitations liability therefore we are unable to make a reasonable estimate of the period of cash settlement. Refer to Note 5, “Income Taxes,” of our consolidated financial statements in Part IV within this Annual Report for further information on our uncertain tax positions.

Refer to Note 7, “Commitments and Contingencies,” of our consolidated financial statements in Part IV within this Annual Report for further information on our operating leases, purchase obligations, capital expenditures, and other contractual obligations and commitments.

Impact of Foreign Currency Exchange Rate Fluctuations

Foreign currency exchange rate fluctuations had an incremental negative impact on the years ended March 31, 2019 and 2017 compared to an incremental positive impact on the year ended March 31, 2018.

Refer to “Results of Operations,” above within this Item 7, as well as the consolidated statements of comprehensive income (loss), and Note 9, “Derivative Instruments,” of our consolidated financial statements in Part IV within this Annual Report for further information on the impact of foreign currency exchange rate fluctuations on our results of operations.

Critical Accounting Policies and Estimates

Management must make certain estimates and assumptions that affect the amounts reported in the consolidated financial statements, based on historical experience, existing and known circumstances, authoritative accounting

pronouncements and other factors that management believes to be reasonable, but actual results could differ materially from these estimates. Management believes the following critical accounting estimates are most significantly affected by judgments and estimates used in the preparation of our consolidated financial statements: allowances for doubtful accounts, estimated returns liability, sales discounts and customer chargebacks; inventory valuations; valuation of goodwill, intangible and other long-lived assets; and performance-based stock compensation.

Refer to Note 1, “General,” of our consolidated financial statements in Part IV within this Annual Report for a discussion of our significant accounting policies and use of estimates, as well as the impact of recent accounting pronouncements.

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 they have 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. We recognize revenue and measure the transaction price net of taxes, including sales taxes, use taxes, value-added taxes, and some types of excise taxes, collected from customers and remitted to governmental authorities. We present revenue gross of fees and sales commissions. Sales commissions are expensed as incurred and are recorded in SG&A expenses in the consolidated statements of comprehensive income (loss). As a result of the short durations of customer contracts, which are typically effective for one year or less and have payment terms that are generally 30-60 days, these arrangements are not considered to have a significant financing component.

Wholesale and international distributor revenue are recognized either when products are shipped or when delivered, depending on the applicable contract terms. Retail store and E-Commerce revenue are recognized at the point of sale and upon shipment, respectively. Shipping and handling costs paid to third-party shipping companies are recorded as cost of sales in the consolidated statements of comprehensive income (loss). Shipping and handling costs are a fulfillment service, and, for certain wholesale and all E-Commerce transactions, revenue is recognized when the customer is deemed to obtain control upon the date of shipment.

Beginning April 1, 2018, we adopted the new revenue standard set forth in Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, as amended, using the modified retrospective transition method. Accordingly, the comparative consolidated financial statements have not been adjusted and continue to be reported under legacy US GAAP. The changes in our accounting policy for the adoption of the new revenue standard and the impacts on our consolidated financial statements are as follows:

•

Deferral of In Transit Net Sales. Prior to adoption of the new revenue standard, we deferred recognition of revenue for certain wholesale and E-Commerce sales arrangements until the product was delivered. However, we now recognize revenue for these arrangements upon shipment of product, rather than delivery. As a result, on adoption of the new revenue standard, we recorded a cumulative effect adjustment net after tax increase to opening retained earnings of approximately $1,000 in our consolidated balance sheets.

•

Allowance for Sales Returns. We historically recorded a trade accounts receivable allowance for sales returns (allowance for sales returns) related to our wholesale channel sales, and the cost of sales for the product-related inventory was recorded in inventories, net of reserves, in our consolidated balance sheets. As of March 31, 2018, we recorded an allowance for sales returns for the wholesale channel of $20,848 and product-related inventory for all channels of $11,251 in our consolidated balance sheets. On adoption of the new revenue standard, we reclassified the allowance for sales returns for the wholesale channel to other accrued expenses and the product-related inventory for all channels to other current assets in our consolidated balance sheets. For the DTC channel, the allowance for sales returns was recorded in other accrued expenses, which is consistent with the prior period presented. Refer to the section below “Other Reserves” for further detail on our accounting policy for sales returns and key assumptions.

Refer to Note 1, “General,” under the heading “Recent Accounting Pronouncements” and Note 2, “Revenue Recognition,” of our consolidated financial statements in Part IV within this Annual Report for further information.

Accounts Receivable Allowances. The following table summarizes critical accounting estimates for accounts receivable allowances and reserves:

	As of March 31,
	2019							2018
	Amount				% of Gross Trade Accounts Receivable			Amount				% of Gross Trade Accounts Receivable
Gross trade accounts receivable	$	197,426			100.0	%		$	177,166			100.0	%
Allowance for doubtful accounts	(5,073		)		(2.6	)		(3,487		)		(2.0	)
Allowance for sales discounts	(710		)		(0.4	)		(1,400		)		(0.8	)
Allowance for chargebacks	(13,041		)		(6.6	)		(7,727		)		(4.4	)
Allowance for sales returns*	—				—			(20,848		)		(11.8	)
Trade accounts receivable, net	$	178,602			90.5	%		$	143,704			81.1	%

*Refer to the above section “Revenue Recognition” regarding a change in accounting policy that impacted comparability of the prior period presented.

Allowance for Doubtful Accounts. We provide an allowance against trade accounts receivable for estimated losses that may result from customers’ inability to pay. We determine the amount of the allowance by analyzing known uncollectible accounts, aged trade accounts receivable, economic conditions and forecasts, historical experience and the customers’ credit-worthiness. Trade accounts receivable that are subsequently determined to be uncollectible are charged or written off against this allowance. The allowance includes specific allowances for trade accounts, of which all or a portion are identified as potentially uncollectible based on known or anticipated losses. Our use of different estimates and assumptions could produce different financial results. For example, a 1.0% change in the rate used to estimate the reserve for accounts which we consider having credit risk and are not specifically identified as uncollectible would change the allowance for doubtful accounts as of March 31, 2019 by approximately $1,000.

Allowance for Sales Discounts. We provide a trade accounts receivable allowance for term discounts for our wholesale channel sales, which reflects a discount that our customers may take, generally based on meeting certain order, shipment or prompt payment terms. We use the amount of the discounts that are available to be taken against the period end trade accounts receivable to estimate and record a corresponding reserve for sales discounts.

Allowance for Chargebacks. We provide a trade accounts receivable allowance for chargebacks from wholesale customers. When customers pay their invoices, they may take deductions against their invoices that can include chargebacks for price differences, markdowns, short shipments and other reasons. Therefore, we record an allowance for known or unknown circumstances based on historical trends related to the timing and amount of chargebacks taken against wholesale channel customer invoices.

Sales Return Reserve. The following tables summarize estimates for our sales return liability as a percentage of the most recent quarterly net sales by channel:

	Three Months Ended March 31,
	2019							2018
	Amount				% of Net Sales			Amount				% of Net Sales
Net Sales
Wholesale	$	237,491			60.3	%		$	223,127			55.7	%
Direct-to-Consumer	156,639				39.7			177,557				44.3
Total	$	394,130			100.0	%		$	400,684			100.0	%

	As of March 31,
	2019							2018
	Amount				% of Net Sales			Amount*				% of Net Sales
Sales Return Liability
Wholesale*	$	21,538			9.1	%		$	—			—	%
Direct-to-Consumer	3,249				2.1			2,308				1.3
Total	$	24,787						$	2,308

*Refer to the above section “Revenue Recognition” regarding a change in accounting policy that impacted comparability of the prior period presented due to a reclassification of $20,848 from allowance for sales returns to sales return liability as of April 1, 2018.

Sales Returns. Reserves are recorded for anticipated future returns of goods shipped prior to the end of the reporting period. In general, we accept returns for damaged or defective products for up to one year. We also have a policy whereby returns are accepted from DTC customers for up to 30 days from point of sale for cash or credit with a receipt. Amounts of these reserves are based on known and actual returns, historical returns, and any recent events that could result in a change from historical return rates. Sales returns are a contract asset for the right to recover product-related inventory and a contract liability for advance consideration obtained prior to satisfying a performance obligation. Changes to the sales return reserve are recorded against gross sales for the contract liability and cost of sales for the contract asset. For our wholesale channel, we base our estimate of sales returns on any approved customer requests for returns, historical returns experience, and any recent events that could result in a change from historical returns rates, among other factors. For our DTC channel and reportable operating segment, we estimate sales returns using a lag compared to the same prior period and consider historical returns experience and any recent events that could result in a change from historical returns, among other factors. Our use of different estimates and assumptions could produce different financial results. For example, a 1.0% change in the rate used to estimate the percentage of sales expected to ultimately be returned would change the liability for total returns as of March 31, 2019 by approximately $2,000.

Inventory Reserves. The following tables summarize estimates for our inventory reserves:

	As of March 31,
	2019							2018
	Amount				% of Gross Inventory			Amount				% of Gross Inventory
Gross Inventories	$	288,565			100.0	%		$	308,622			100.0	%
Write-down of inventories	(9,723		)		(3.4	)		(9,020		)		(2.9	)
Inventories, net	$	278,842						$	299,602

Inventory Write-Downs. We review inventory on a regular basis for excess, obsolete, and impaired inventory to evaluate write-downs to the lower of cost or net realizable value. Our use of different estimates and assumptions could produce different financial results. For example, a 10.0% change in the estimated selling prices of our potentially obsolete inventory would change the inventory write-down reserve as of March 31, 2019 by approximately $1,700.

Goodwill and Indefinite-Lived Intangible Assets. We assess the impairment of goodwill and indefinite-lived intangible assets on an annual basis. We also perform interim impairment assessments of goodwill and indefinite-lived intangible assets if events or changes in circumstances between annual tests indicate a potential impairment. First, we determine if, based on qualitative factors, it is more likely than not that an impairment exists. Factors considered include historical financial performance, macroeconomic and industry conditions and the legal and regulatory environment. If the qualitative assessment indicates that it is more likely than not that an impairment exists, then a quantitative assessment is performed. The quantitative assessment requires an analysis of several best estimates and assumptions, including future sales and operating results, and other factors that could affect fair value or otherwise indicate potential impairment. We also consider the reporting units’ projected ability to generate income from operations and positive cash flow in future periods, as well as perceived changes in consumer demand and acceptance of products, or factors impacting the industry generally. The fair value assessment could change materially if different estimates and assumptions were used.

During fiscal years 2019, 2018 and 2017, we performed our annual impairment assessment and evaluated the UGG and HOKA brands’ wholesale reportable operating segment goodwill as of December 31st and evaluated our Teva indefinite-lived trademarks as of October 31st. Based on the carrying amounts of the UGG and HOKA brands’ goodwill and Teva brand indefinite-lived trademarks, each of the brands’ actual fiscal year sales and operating results, and the brands’ long-term forecasts of sales and operating results as of their evaluation dates, we concluded that these assets were not impaired.

During fiscal year 2017, we performed the annual impairment assessment of our Sanuk brand goodwill as of October 31, 2016, with the assistance of a third-party valuation firm. We conducted the following assessment, which identified an indication of impairment:

•

Under step one of the impairment assessment, management concluded that the fair value of the Sanuk brand wholesale reportable operating segment was below carrying value, which was primarily the result of lower-than-forecasted sales, lower market multiples for non-athletic footwear and apparel, and a more limited view of international and domestic expansion opportunities for the brand given the changing retail environment.

•

Under step two of the impairment assessment, management concluded that the fair value allocated to all of the assets and liabilities of the Sanuk brand wholesale reportable operating segment, using a hypothetical allocation of assets, including net tangible and intangible assets, resulted in a non-cash impairment charge of $113,944, which was recognized in the third quarter of fiscal year 2017 and recorded in SG&A expenses in the consolidated statements of comprehensive income (loss).

Definite-Lived Intangible and Other Long-Lived Assets. Definite-lived intangible and other long-lived assets, such as property and equipment and leasehold improvements, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. At least quarterly, we evaluate factors that would necessitate an impairment assessment, which include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the observable market value of an asset, among others. When an impairment-triggering event has occurred, we test for recoverability of the asset group’s carrying value using estimates of undiscounted future cash flows based on the existing service potential of the applicable asset group. In determining the service potential of a long-lived asset group, we consider the remaining useful life, cash-flow generating capacity, and physical output capacity. These estimates include the undiscounted future cash flows associated with future expenditures necessary to maintain the existing service potential. Long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If impaired, the asset or asset group is written down to fair value based on either discounted future cash flows or appraised values. An impairment loss, if any, would only reduce the carrying amount of long-lived assets in the group based on the fair value of the asset group.

We did not identify any definite-lived intangible asset impairments during the years ended March 31, 2019 and 2018. However, during fiscal year 2017, and in connection with the goodwill impairment discussed above, we identified an impairment of the Sanuk brand’s amortizable patent. Our analysis determined that the Sanuk brand’s amortizable patent, the Sanuk SIDEWALK SURFERS utility patent, was fully impaired as it had very limited value in the marketplace due to its limited ability to exclude others from creating similar products. As a result, we recognized a non-cash impairment charge to the patent of $4,086 in the Sanuk wholesale reportable operating segment during the third quarter of fiscal year 2017, which was recorded in SG&A expenses in the consolidated statements of comprehensive income (loss). We did not identify any additional impairments for the Sanuk brand’s other definite-lived intangible assets during fiscal year 2017, as the undiscounted future cash flows associated with those assets exceeded their carrying values.

During the third quarter of fiscal year 2017, we also recognized an impairment for definite-lived intangible assets in the DTC reportable operating segment of $4,743, due to a decline in market rental rates for European retail stores, which was recorded in SG&A expenses in the consolidated statements of comprehensive income (loss). Further, during the years ended March 31, 2019, 2018, and 2017, we recognized impairment losses for other long-lived assets, primarily for retail store related fixed assets due to performance or store closures as well as computer software of $180, $2,417, and $11,265, respectively, within our DTC reportable operating segment and recorded in SG&A expenses in the consolidated statements of comprehensive income (loss).

Refer to Note 3, “Goodwill and Other Intangible Assets,” of our consolidated financial statements in Part IV within this Annual Report for further information.

Performance-Based Compensation. In accordance with applicable accounting guidance, we recognize performance-based compensation expense, including performance-based stock compensation and annual cash bonus compensation, when it is deemed probable that the applicable performance criteria will be met. Performance-based compensation does not include time-based awards subject only to service-based conditions. We evaluate the probability of achieving the applicable performance criteria on a quarterly basis. Our probability assessment can fluctuate from quarter to quarter as we assess our projected results against performance criteria. As a result, the related performance-based compensation expense we recognize may also fluctuate from period to period.

At the beginning of each fiscal year, our Compensation Committee reviews our operating results from the prior fiscal year, as well as the financial and strategic plan for future fiscal years. Our Compensation Committee then establishes specific annual financial and strategic goals for each executive. Vesting of performance-based stock compensation or recognition of cash bonus compensation is based on our achievement of certain targets for annual revenue, operating income, pre-tax income, and earnings per share, as well as achievement of pre-determined individual financial performance criteria that is tailored to individual employees based on their roles and responsibilities with us. The performance criteria, as well as our annual targets, differ each year and are based on many factors, including our current business stage and strategies, our recent financial and operating performance, expected growth rates over the prior year’s performance, business and general economic conditions and market and peer group analysis.

Performance-based compensation expense increased $2,968 during fiscal year 2019 and $32,728 during fiscal year 2018. The primary reason for these increases was the achievement of the performance criteria governing our performance-based stock compensation and cash bonuses in fiscal year 2019 and fiscal year 2018, which was not the case for fiscal year 2017, which drove a higher change from fiscal year 2017 to fiscal year 2018. In addition, long-term performance-based compensation was higher during fiscal year 2019 compared to fiscal year 2018. Performance-based compensation expense is recorded in SG&A expenses in the consolidated statements of comprehensive income (loss).

Refer to Note 8, “Stock Compensation,” of our consolidated financial statements in Part IV within this Annual Report for further information on our performance-based stock compensation.

Income Taxes. Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will be in effect for the years in which those tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. We believe it is more likely than not that forecasted income, together with future reversals of existing taxable temporary differences, will be sufficient to recover our deferred tax assets. In the event that we determine all or part of our net deferred tax assets are not realizable in the future, we will record an adjustment to the valuation allowance and a corresponding charge to earnings in the period such determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of US GAAP and complex tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our financial condition and operating results.

We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. We determine on a regular basis the amount of undistributed earnings that will be indefinitely reinvested in our non-US operations. This assessment is based on the cash flow projections and operational and fiscal objectives of each of our US and foreign subsidiaries. We have not changed our indefinite reinvestment assertion.

Tax Reform. On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (SAB 118), which provides guidance on accounting for the impact of the Tax Reform Act. SAB 118 provides a measurement period, which should not extend beyond one year from the enactment date, during which we may complete the accounting for the impacts of the Tax Reform Act under Accounting Standard Codification Topic 740 (ASC 740). In accordance with SAB 118, we must reflect the income tax effects of the Tax Reform Act in the reporting period in which the accounting under ASC 740 is complete. Any adjustments to provisional amounts that are identified during the measurement period must be recorded and disclosed in the reporting period in which the adjustment is determined.

In accordance with SAB 118, we completed our accounting for the effects of the Tax Reform Act during the quarter ended December 31, 2018. This includes provisions of the Tax Reform Act which were effective on or after January 1, 2018, which include but are not limited to, US taxation of foreign earnings considered global intangible low-taxed income, minimum tax on base erosion anti-abuse, and limitations on the deductibility of interest expense and executive compensation. We analyzed the effects of the Tax Reform Act, including collecting, preparing and analyzing necessary information regarding foreign earnings and profits, performing and refining calculations and obtaining additional guidance from such standard setting and regulatory bodies as the US Internal Revenue Service, US Treasury Department, and the Financial Accounting Standards Board, among others. In connection with this analysis, we finalized our provisional estimates and recorded adjustments during the measurement period ended December 31, 2018 and filed our US federal income tax return for the year ended March 31, 2018.

While we have completed our accounting of the income tax effects under SAB 118, the related tax impacts may differ, possibly materially, due to changes in interpretations and assumptions that we have made, additional guidance that may be issued by regulatory bodies, and actions and related accounting policy decisions we may take as a result of the new legislation.

Refer to Note 5, “Income Taxes,” of our consolidated financial statements in Part IV within this Annual Report for further information on income taxes and the impacts of the Tax Reform Act.