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, "Financial Statements," within this Quarterly Report, and the audited consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data," of our 2022 Annual Report.

Certain statements made in this section constitute "forward-looking statements," which are subject to numerous risks and uncertainties, including those described in this section. Our actual results of operations 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 section entitled “Cautionary Note Regarding Forward-Looking Statements” and Part II, Item 1A, "Risk Factors," within this Quarterly Report.

Overview

We are a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyles 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 to a broad demographic. We sell our products through quality domestic and international retailers, international distributors, and directly to our global consumers through our DTC business, which is comprised of our e-commerce websites and retail stores. 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.

Financial Highlights

Consolidated financial performance highlights for the nine months ended December 31, 2022 (fiscal year to date), compared to the prior period, were as follows:

• Net sales increased 17.5% to $2,835,715.

**◦**Channel

▪Wholesale channel net sales increased 15.1% to $1,712,250.

▪DTC channel net sales increased 21.3% to $1,123,465.

**◦**Geography

▪Domestic net sales increased 15.9% to $1,909,067.

▪International net sales increased 20.7% to $926,648.

• Gross margin decreased 130 basis points to 50.4%.

• Income from operations increased 13.1% to $546,832.

• Diluted earnings per share increased by $2.17 per share to $15.90 per share.

Trends and Uncertainties Impacting Our Business and Industry

We expect our business and the industry in which we operate will continue to be impacted by several important trends and uncertainties, including the following:

Supply Chain

• Similar to other companies in our industry, we continue to monitor pressures in the global supply chain, which has shifted the timing of shipments across our brands compared to the prior period. However, we are beginning to see improvements in transit lead times and related freight costs, compared to the prior period, but these impacts do remain elevated compared to pre-pandemic levels and we expect will continue in the near term.

• While we are actively managing our inventory positions, including investing in supply chain and related tools, our short-term priority remains meeting customer demand and expectations, which may result in inventory levels outpacing sales growth in the near term.

• We continue to be flexible in adapting to the fluid logistics environment by implementing additional measures to mitigate the effects of supply chain disruptions, which has and may continue to result in higher costs. Our efforts include expanding our global warehouses, DCs, and 3PL arrangements, as well as diversifying and increasing the number of our third-party manufacturers.

Brand and Omni-Channel Strategy

• We remain focused on accelerating consumer adoption of the HOKA brand with all geographic regions and distribution channels experiencing significant year-round growth, which has positively impacted our financial results and seasonality trends. Our efforts to drive HOKA brand performance are primarily focused on distribution management, launching innovative product offerings and global marketing campaigns to drive brand awareness, and further expanding the HOKA brand presence through our DTC channel.

• Our marketplace strategies in Europe and Asia (international reset strategies) have continued to drive UGG brand awareness and consumer acquisition by building brand acceptance through localized marketing investments. However, unfavorable foreign currency exchange rates have partially offset international growth of the UGG brand in the current fiscal year.

• Our long-term growth strategy remains focused on building our DTC channel to represent an increased portion of our total net sales, and prioritizing consumer acquisition and experience to sustain strong demand and market positions for our brands.

• We continue to adopt selective price increases as appropriate by brand and product, which we believe can help mitigate gross margin pressures.

Refer to Part I, Item 1A, “Risk Factors,” of our 2022 Annual Report, for detailed information on the risks and uncertainties that have the potential to cause our actual results to differ materially from our expectations.

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 CEO, President, and 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 a broad demographic.

HOKA Brand**.** The HOKA brand is an authentic premium line of year-round performance footwear that offers enhanced cushioning and inherent stability with minimal weight, apparel, and accessories. Originally designed for ultra-runners, the brand now appeals to world champions, taste makers, and everyday athletes. Strong marketing has fueled both domestic and international sales growth of the HOKA brand, which has quickly become a leading brand within run and outdoor specialty wholesale accounts and is rapidly growing within selective key accounts. As a result, the HOKA brand is bolstering its net sales, which continue to increase as a percentage of our aggregate net sales.

Teva Brand**.** The Teva brand created the very first sport sandal when it was founded in the Grand Canyon in 1984. Since then, the Teva brand has grown into a multi-category modern outdoor lifestyle brand offering a range of performance, casual, and trail lifestyle products, and has emerged as a leader in footwear sustainability observed through recent growth fueled by young and diverse consumers passionate for the outdoors and the planet.

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 with a focus on innovation in comfort and sustainability. 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 consist primarily of the Koolaburra brand. The Koolaburra brand is a casual footwear fashion line using plush materials and is intended to target the value-oriented consumer in order to complement the UGG brand offering.

Refer to the “Reportable Operating Segment Overview,” in Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” of our 2022 Annual Report for further discussion of our outlook on consumer demand drivers for our UGG, HOKA, Teva, Sanuk, and Other brands products.

Direct-to-Consumer**.** Our DTC business encompasses all our brands and is comprised of our e-commerce websites and retail stores that are intertwined and interdependent in an omni-channel marketplace.

*•*E-Commerce Business. Our global e-commerce business provides us with an opportunity to directly engage with and communicate a consistent brand message to consumers that is in line with our brands’ promises, encourages awareness of key brand initiatives, offers targeted information to specific consumer demographics, and drives consumers to our retail stores.

*•*Retail Business. Our global Company-owned retail stores are predominantly UGG brand concept stores and UGG brand outlet stores, as well as new openings for HOKA brand stores.

• Flagship Stores. Primarily located in major tourist locations, these are lead stores in prominent locations designed to showcase UGG and HOKA brand products in mono branded stores that are typically larger than our general concept stores with broader product offerings and greater traffic that enhance our interaction with our consumers and increase brand loyalty.

*•*Shop-in-Shop Stores (SIS). 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.

*•*Partner Retail Stores. Represent UGG and HOKA mono branded stores which are wholly owned and operated by third parties and not included in the total count of our global Company-owned retail stores.

Our net sales related to the businesses and stores above are recorded in our DTC reportable operating segment, except for the net sales for partner retail stores, which are recorded in each respective brand's wholesale reportable operating segment, as applicable.

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 certain 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 results of operations and assessing our prospects for future performance. However, the information 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 our performance relative to other companies. 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 remeasurements 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. 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 not indicative of our core results of operations and are largely outside of our control.

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 historically significantly exceeded our aggregate net sales in the quarters ending March 31st and June 30th. However, 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 impact from seasonality to continue to decrease over time. However, our seasonality has recently been impacted by supply chain challenges and the impact of these challenges on future periods is uncertain.

Results of Operations

Three Months Ended December 31, 2022, Compared to Three Months Ended December 31, 2021. Results of operations were as follows:

			Three Months Ended December 31,
			2022												2021												Change
			Amount						%						Amount						%						Amount						%
Net sales			$	1,345,640					100.0		%				$	1,187,752					100.0		%				$	157,888					13.3		%
Cost of sales			633,111						47.0						566,531						47.7						(66,580)						(11.8)
Gross profit			712,529						53.0						621,221						52.3						91,308						14.7
Selling, general, and administrative expenses			349,869						26.0						327,825						27.6						(22,044)						(6.7)
Income from operations			362,660						27.0						293,396						24.7						69,264						23.6
Total other (income) expense, net			(2,644)						(0.1)						439						—						3,083						702.3
Income before income taxes			365,304						27.1						292,957						24.7						72,347						24.7
Income tax expense			86,642						6.4						60,014						5.1						(26,628)						(44.4)
Net income			278,662						20.7						232,943						19.6						45,719						19.6
Total other comprehensive income (loss), net of tax			12,086						0.9						(4,261)						(0.3)						16,347						383.6
Comprehensive income			$	290,748					21.6		%				$	228,682					19.3		%				$	62,066					27.1		%
Net income per share
Basic			$	10.55											$	8.49											$	2.06
Diluted			$	10.48											$	8.42											$	2.06

Net Sales. Net sales by location, and by brand and channel were as follows:

			Three Months Ended December 31,
			2022						2021						Change
			Amount						Amount						Amount						%
Net sales by location
Domestic			$	906,843					$	796,149					$	110,694					13.9		%
International			438,797						391,603						47,194						12.1
Total			$	1,345,640					$	1,187,752					$	157,888					13.3		%
Net sales by brand and channel
UGG brand
Wholesale			$	374,082					$	432,093					$	(58,011)					(13.4)		%
Direct-to-Consumer			556,366						513,814						42,552						8.3
Total			930,448						945,907						(15,459)						(1.6)

			Three Months Ended December 31,
			2022						2021						Change
			Amount						Amount						Amount						%
HOKA brand
Wholesale			223,872						122,636						101,236						82.5
Direct-to-Consumer			128,264						61,942						66,322						107.1
Total			352,136						184,578						167,558						90.8
Teva brand
Wholesale			25,180						16,287						8,893						54.6
Direct-to-Consumer			5,369						4,308						1,061						24.6
Total			30,549						20,595						9,954						48.3
Sanuk brand
Wholesale			3,040						3,138						(98)						(3.1)
Direct-to-Consumer			2,576						2,926						(350)						(12.0)
Total			5,616						6,064						(448)						(7.4)
Other brands
Wholesale			20,169						24,247						(4,078)						(16.8)
Direct-to-Consumer			6,722						6,361						361						5.7
Total			26,891						30,608						(3,717)						(12.1)
Total			$	1,345,640					$	1,187,752					$	157,888					13.3		%
Total Wholesale			$	646,343					$	598,401					$	47,942					8.0		%
Total Direct-to-Consumer			699,297						589,351						109,946						18.7
Total			$	1,345,640					$	1,187,752					$	157,888					13.3		%

Total net sales increased primarily due to higher HOKA brand wholesale and DTC channel sales for the HOKA and UGG brands, partially offset by lower UGG brand wholesale. Further, we experienced an increase of 19.3% in the total volume of pairs sold to 19,200 from 16,100, compared to the prior period. On a constant currency basis, net sales increased by 17.5%, compared to the prior period.

Drivers of significant changes in net sales, compared to the prior period, were as follows:

• Wholesale net sales of the HOKA brand increased globally from gaining market share with existing customer accounts along with increasing volume shipped for select incremental door expansion within strategic accounts, driven by higher demand across an assortment of franchise road running updates as well as trail and hiking categories. These results include lapping disrupted shipments in the prior period.

• DTC net sales increased primarily due to higher global net sales for the HOKA and UGG brands, primarily driven by consumer acquisition and retention online through higher demand across an assortment of franchise road running updates as well as trail, hiking, and fitness categories for the HOKA brand, and for our Classics franchise derivatives and multi-use hybrid products for the UGG brand. Comparable DTC net sales for the 13 weeks ended January 1, 2023, increased by 22.1%, compared to the prior period.

• Wholesale net sales of the UGG brand decreased due to lower global net sales, primarily driven by a reduction of domestic shipments to manage existing marketplace inventory levels as well as shifts in timing of international shipments compared to the prior period.

• International net sales, which are included in the reportable operating segment sales presented above, increased by 12.1% and represented 32.6% and 33.0% of total net sales for the three months ended December 31, 2022, and 2021, respectively. These changes were primarily driven by higher net sales for the HOKA brand in all international regions and channels, as well as for the UGG brand in Europe in the DTC channel, partially offset by lower net sales for the UGG brand in Europe in the wholesale channel and Asia in all channels. These results include unfavorable impacts from the strengthening of the US dollar on foreign sales across all channels, primarily for the UGG brand.

Gross Profit. Gross margin increased to 53.0% from 52.3%, compared to the prior period, primarily due to a decrease in freight costs, favorable channel mix shift to DTC, and favorable HOKA brand mix shift, including from domestic price increases implemented in the prior fiscal year. These favorable impacts to gross margin were partially offset by unfavorable changes in foreign currency exchange rates and a return to more normalized promotional and closeout activity for the UGG brand, compared to the prior period.

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

• Increased payroll and related costs of approximately $18,100, including for outside services, as well as higher performance-based compensation and stock-based compensation.

• Increased other variable net selling expenses of approximately $9,700, primarily due to higher rent and occupancy expenses, materials and supplies costs, and sales commissions, partially offset by lower warehousing fees.

• Increased other operating expenses of approximately $5,200, primarily due to higher IT and travel expenses, partially offset by lower legal expenses.

• Increased advertising and promotion expenses of approximately $2,000, primarily due to higher promotional marketing expenses for the HOKA brand, partially offset by lower advertising and promotion expenses for the UGG brand.

• Decreased net foreign currency-related losses of $10,000, primarily driven by remeasurements with favorable changes in Asian and European exchange rates against the US dollar.

• Decreased impairments of operating lease and other long-lived assets of approximately $2,200.

Income from Operations. Income (loss) from operations by reportable operating segment was as follows:

			Three Months Ended December 31,
			2022						2021						Change
			Amount						Amount						Amount						%
Income (loss) from operations
UGG brand wholesale			$	114,372					$	126,085					$	(11,713)					(9.3)		%
HOKA brand wholesale			68,658						18,039						50,619						280.6
Teva brand wholesale			3,976						2,188						1,788						81.7
Sanuk brand wholesale			(1,048)						(31)						(1,017)						(3,280.6)
Other brands wholesale			(1,851)						1,139						(2,990)						(262.5)
Direct-to-Consumer			292,693						257,517						35,176						13.7
Unallocated overhead costs			(114,140)						(111,541)						(2,599)						(2.3)
Total			$	362,660					$	293,396					$	69,264					23.6		%

The increase in total income from operations, compared to the prior period, was due to higher gross margins on higher net sales, combined with lower SG&A expenses as a percentage of net sales.

Drivers of significant net changes in total income from operations, compared to the prior period, were as follows:

• The increase in income from operations of HOKA brand wholesale was due to higher global net sales at higher gross margins, combined with lower SG&A expenses for advertising and promotion expenses as a percentage of net sales.

• The increase in income from operations of the DTC channel was due to higher global net sales, primarily for the HOKA and UGG brands, at lower gross margins, as well as lower DTC SG&A expenses for advertising and promotion expenses as a percentage of net sales.

• The decrease in income from operations of UGG brand wholesale was primarily due to lower global net sales, partially offset by higher gross margins.

• The increase in unallocated overhead costs was due to higher payroll costs, including performance-based compensation, partially offset by higher foreign currency remeasurement gains.

Total Other (Income) Expense, Net. Total other (income) expense, net, compared to the prior period, increased, primarily due to higher interest income on invested cash balances driven by higher average interest rates.

Income Tax Expense. Income tax expense and our effective income tax rate were as follows:

			Three Months Ended December 31,
			2022						2021
Income tax expense			$	86,642					$	60,014
Effective income tax rate			23.7		%				20.5		%

The net increase in our effective income tax rate, compared to the prior period, was primarily driven by higher income from operations, including changes in jurisdictional mix of worldwide income before income taxes, as well as reduced net discrete tax benefits, primarily due to stock-based compensation and return to provision adjustments, partially offset by reserves for uncertain tax positions.

Foreign income before income taxes was $112,102 and $107,072 and worldwide income before income taxes was $365,304 and $292,957 during the three months ended December 31, 2022, and 2021, respectively. The decrease in foreign income before income taxes as a percentage of worldwide income before income taxes, compared to the prior period, was primarily due to lower foreign gross profit as a percentage of foreign net sales compared to domestic gross profit as a percentage of domestic net sales, partially offset by lower foreign operating expenses as a percentage of worldwide sales.

Net Income. The increase in net income, compared to the prior period, was due to higher gross margins on higher net sales, combined with lower SG&A expenses as a percentage of net sales. Net income per share increased, compared to the prior period, due to higher net income and lower weighted-average common shares outstanding driven by further stock repurchases.

Total Other Comprehensive Income (Loss), Net of Tax. The increase in total other comprehensive income (loss), net of tax, compared to the prior period, was due to higher foreign currency translation gains relating to changes to our net asset position for favorable Asian and European foreign currency exchange rates against the US dollar.

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Nine Months Ended December 31, 2022, Compared to Nine Months Ended December 31, 2021. Results of operations were as follows:

			Nine Months Ended December 31,
			2022												2021												Change
			Amount						%						Amount						%						Amount						%
Net sales			$	2,835,715					100.0		%				$	2,414,332					100.0		%				$	421,383					17.5		%
Cost of sales			1,406,513						49.6						1,165,520						48.3						(240,993)						(20.7)
Gross profit			1,429,202						50.4						1,248,812						51.7						180,390						14.4
Selling, general, and administrative expenses			882,370						31.1						765,403						31.7						(116,967)						(15.3)
Income from operations			546,832						19.3						483,409						20.0						63,423						13.1
Total other (income) expense, net			(4,392)						(0.1)						1,121						—						5,513						491.8
Income before income taxes			551,224						19.4						482,288						20.0						68,936						14.3
Income tax expense			126,189						4.4						99,158						4.1						(27,031)						(27.3)
Net income			425,035						15.0						383,130						15.9						41,905						10.9
Total other comprehensive loss, net of tax			(15,321)						(0.6)						(2,414)						(0.1)						(12,907)						(534.7)
Comprehensive income			$	409,714					14.4		%				$	380,716					15.8		%				$	28,998					7.6		%
Net income per share
Basic			$	16.00											$	13.87											$	2.13
Diluted			$	15.90											$	13.73											$	2.17

Net Sales. Net sales by location, and by brand and channel were as follows:

			Nine Months Ended December 31,
			2022						2021						Change
			Amount						Amount						Amount						%
Net sales by location
Domestic			$	1,909,067					$	1,646,843					$	262,224					15.9		%
International			926,648						767,489						159,159						20.7
Total			$	2,835,715					$	2,414,332					$	421,383					17.5		%
Net sales by brand and channel
UGG brand
Wholesale			$	873,249					$	915,925					$	(42,676)					(4.7)		%
Direct-to-Consumer			741,635						691,439						50,196						7.3
Total			1,614,884						1,607,364						7,520						0.5
HOKA brand
Wholesale			678,792						420,763						258,029						61.3
Direct-to-Consumer			336,386						187,351						149,035						79.5
Total			1,015,178						608,114						407,064						66.9
Teva brand
Wholesale			91,662						78,857						12,805						16.2
Direct-to-Consumer			28,557						29,036						(479)						(1.6)
Total			120,219						107,893						12,326						11.4
Sanuk brand
Wholesale			18,826						20,540						(1,714)						(8.3)
Direct-to-Consumer			8,475						10,635						(2,160)						(20.3)
Total			27,301						31,175						(3,874)						(12.4)

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			Nine Months Ended December 31,
			2022						2021						Change
			Amount						Amount						Amount						%
Other brands
Wholesale			49,721						51,806						(2,085)						(4.0)
Direct-to-Consumer			8,412						7,980						432						5.4
Total			58,133						59,786						(1,653)						(2.8)
Total			$	2,835,715					$	2,414,332					$	421,383					17.5		%
Total Wholesale			$	1,712,250					$	1,487,891					$	224,359					15.1		%
Total Direct-to-Consumer			1,123,465						926,441						197,024						21.3
Total			$	2,835,715					$	2,414,332					$	421,383					17.5		%

Total net sales increased primarily due to higher HOKA brand wholesale and DTC channel sales for the HOKA and UGG brands, as well as higher Teva brand international net sales in the wholesale channel, partially offset by lower UGG brand net sales in the wholesale channel. Further, we experienced an increase of 19.6% in the total volume of pairs sold to 45,800 from 38,300 compared to the prior period. On a constant currency basis, net sales increased by 20.9% compared to the prior period.

Drivers of significant changes in net sales, compared to the prior period, were as follows:

• Wholesale net sales of the HOKA brand increased globally from gaining market share with existing customer accounts along with increasing volume shipped for select incremental door expansion within strategic accounts, driven by higher demand across an assortment of franchise road running updates, as well as trail and hiking categories. These results include lapping disrupted shipments in the prior period.

• DTC net sales increased primarily due to higher global net sales for the HOKA and UGG brands, primarily driven by consumer acquisition and retention online through higher demand across an assortment of franchise road running updates as well as trail, hiking, and fitness categories for the HOKA brand, and across our Classics franchise derivatives and multi-use hybrid products for the UGG brand. Comparable DTC net sales for the 39 weeks ended January 1, 2023, increased by 24.5%, compared to the prior period.

• Wholesale net sales of the UGG brand decreased due to lower domestic net sales, primarily driven by a reduction of domestic shipments to manage existing marketplace inventory levels, partially offset by higher international sales growth, including as a result of our international reset strategies, driven by higher demand for our Classics franchise derivatives.

• Wholesale net sales of the Teva brand increased due to higher international net sales primarily driven by earlier distributor shipments.

• International net sales, which are included in the reportable operating segment net sales presented above, increased by 20.7% and represented 32.7% and 31.8% of total net sales for the nine months ended December 31, 2022, and 2021, respectively. These changes were primarily driven by higher net sales for the HOKA, UGG, Teva brands in all international regions and channels, except for lower net sales in Asia for all channels for the UGG brand. These results include unfavorable impacts from the strengthening of the US dollar on foreign sales, primarily for the UGG and HOKA brands.

Gross Profit. Gross margin decreased to 50.4% from 51.7%, compared to the prior period, primarily due to unfavorable changes in foreign currency exchange rates, higher ocean freight rates embedded in inventory sold, a return to more normalized domestic promotional and closeout activity and an unfavorable product mix shift for the UGG brand. These unfavorable margin pressures were partially offset by a decrease in air freight usage, favorable HOKA brand mix shift including from domestic price increases implemented in the prior fiscal year, and favorable channel mix shift to DTC.

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

• Increased payroll and related costs of approximately $40,000, including for outside services, partially offset by lower performance-based compensation.

• Increased other variable net selling expenses of approximately $30,700, primarily due to higher materials and supplies costs, rent and occupancy expenses, sales commissions, credit card fees, and warehousing fees.

• Increased variable advertising and promotion expenses of approximately $20,800, primarily due to higher promotional marketing expenses for the HOKA brand to drive global brand awareness and market share gains, highlight new product categories, and provide localized marketing, partially offset by lower advertising and promotion expenses for the UGG brand.

• Increased other operating expenses of approximately $16,700, primarily due to higher travel, IT, depreciation, and sample expenses, partially offset by lower legal expenses and net insurance premiums.

• Increased net foreign currency-related losses of $6,100, primarily driven by remeasurements with unfavorable changes in Asian and Canadian exchange rates against the US dollar.

• Increased allowances for trade accounts receivable of approximately $3,800, primarily due to an increase in bad debt expense to account for higher open accounts receivable balances.

• Decreased impairments of operating lease and other long-lived assets of approximately $1,100.

Income from Operations. Income (loss) from operations by reportable operating segment was as follows:

			Nine Months Ended December 31,
			2022						2021						Change
			Amount						Amount						Amount						%
Income (loss) from operations
UGG brand wholesale			$	257,120					$	283,624					$	(26,504)					(9.3)		%
HOKA brand wholesale			201,850						107,696						94,154						87.4
Teva brand wholesale			19,206						21,599						(2,393)						(11.1)
Sanuk brand wholesale			1,768						4,896						(3,128)						(63.9)
Other brands wholesale			3,517						12,004						(8,487)						(70.7)
Direct-to-Consumer			393,849						335,934						57,915						17.2
Unallocated overhead costs			(330,478)						(282,344)						(48,134)						(17.0)
Total			$	546,832					$	483,409					$	63,423					13.1		%

The increase in total income from operations, compared to the prior period, was primarily due to higher net sales and lower SG&A expense as a percentage of net sales, partially offset by lower gross margins.

Drivers of significant net changes in total income from operations, compared to the prior period, were as follows:

• The increase in income from operations of HOKA brand wholesale was due to higher global net sales at higher gross margins, combined with lower SG&A expenses as a percentage of net sales.

• The increase in income from operations of the DTC channel was due to the higher global net sales, primarily for the HOKA and UGG brands, at lower gross margins, as well as lower DTC SG&A expenses as a percentage of net sales.

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• The decrease in income from operations of UGG brand wholesale was due to lower global net sales at lower gross margins.

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

• The increase in unallocated overhead costs was due to higher payroll costs, higher other operating expenses, including depreciation, IT, and travel expenses, higher other variable net selling expenses, including materials and supplies costs and warehousing fees, and higher foreign currency-related remeasurement losses.

Total Other (Income) Expense, Net. Total other (income) expense, net, compared to the prior period, increased primarily due to higher interest income on invested cash balances driven by higher average interest rates.

Income Tax Expense. Income tax expense and our effective income tax rate were as follows:

			Nine Months Ended December 31,
			2022						2021
Income tax expense			$	126,189					$	99,158
Effective income tax rate			22.9		%				20.6		%

The net increase in our effective income tax rate, compared to the prior period, was primarily driven by higher income from operations, including changes in jurisdictional mix of worldwide income before income taxes, as well as reduced net discrete tax benefits, primarily due to stock-based compensation and reserves for uncertain tax positions, partially offset by return to provision adjustments.

Foreign income before income taxes was $173,598 and $165,643 and worldwide income before income taxes was $551,224 and $482,288 during the nine months ended December 31, 2022, and 2021, respectively. The decrease in foreign income before income taxes as a percentage of worldwide income before income taxes, compared to the prior period, was primarily due to lower foreign gross profit as a percentage of foreign net sales compared to domestic gross profit as a percentage of domestic net sales, partially offset by lower foreign operating expenses as a percentage of worldwide sales.

Net Income. The increase in net income, compared to the prior period, was primarily due to higher net sales and lower SG&A expense as a percentage of net sales, partially offset by lower gross margins. Net income per share increased, compared to the prior period, due to higher net income and lower weighted-average common shares outstanding driven by further stock repurchases.

Total Other Comprehensive Loss, Net of Tax. The increase in total other comprehensive loss, net of tax, compared to the prior period, was due to higher foreign currency translation losses relating to changes to our net asset position, primarily for unfavorable Asian foreign currency exchange rates against the US dollar.

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 utilize available cash to build inventory levels during certain quarters in our fiscal year to support higher selling seasons. While the impact of seasonality has been mitigated to some extent, we expect our working capital requirements will continue to fluctuate from period to period.

As of December 31, 2022, our cash and cash equivalents are $1,057,843. While we are subject to uncertainty surrounding the pandemic and related macroeconomic factors, we believe our cash and cash equivalents balances, cash provided from ongoing operating activities, and available borrowings under our revolving credit facilities, will provide sufficient liquidity to enable us to meet our working capital requirements and contractual obligations for at least the next 12 months.

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Our liquidity may be 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, including estimating inventory requirements that require earlier purchasing windows to manage supply chain constraints, our ability to respond to the impacts and disruptions caused by the pandemic, our ability to respond to economic, political, and legislative developments, and various other risks and uncertainties described in Part I, Item 1A, “Risk Factors,” of our 2022 Annual Report. Furthermore, we may require additional cash resources due to changes in business conditions, strategic initiatives, or stock repurchase strategy, a national or global economic recession, 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 there are unexpected material impacts on our business in future periods from the pandemic and we need to raise or conserve additional cash to fund our operations, 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 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. Although we believe we have adequate sources of liquidity over the long term, a prolonged or more severe economic recession, inflationary pressure, or a slow recovery could adversely affect our business and liquidity.

Repatriation of Cash. Our cash repatriation strategy, and by extension, our liquidity, may be impacted by several additional considerations, which include clarifications of, future changes to, or interpretations of global tax law and regulations, and our actual earnings for current and future periods. During the nine months ended December 31, 2022, and 2021, no cash and cash equivalents were repatriated. As of December 31, 2022, and March 31, 2022, we have $276,834 and $133,053, respectively, of cash and cash equivalents held by foreign subsidiaries, a portion of which may be subject to additional foreign withholding taxes if it were to be repatriated. Beginning with the tax year ended March 31, 2018, pursuant to the Tax Reform Act, an installment election was made to pay the one-time transition tax on the deemed repatriation of foreign subsidiaries’ earnings over eight years. The cumulative remaining balance as of December 31, 2022 is $33,761. We continue to evaluate our cash repatriation strategy and we currently anticipate repatriating current and future unremitted earnings of non-US subsidiaries only to the extent they already have been subject to US tax, if such cash is not required to fund ongoing foreign operations.

Refer to Note 5, “Income Taxes,” of our consolidated financial statements in Part IV of our 2022 Annual Report for further information on the impacts of the recent Tax Reform Act.

Stock Repurchase Program. 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. The stock repurchase program does not oblige us to acquire any amount of common stock and may be suspended at any time at our discretion. On July 27, 2022, our Board of Directors approved an increase of $1,200,000 to our stock repurchase authorization. As of December 31, 2022, the aggregate remaining approved amount under our stock repurchase program is $1,459,145.

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Capital Resources

Revolving Credit Facilities. We maintain bank credit facilities for working capital and general corporate purposes. In December 2022, we refinanced our Primary Credit Facility, which provides for a five-year, $400,000 unsecured revolving credit facility, contains a $25,000 sublimit for the issuance of letters of credit, and matures on December 19, 2027.

During the nine months ended December 31, 2022, we made no borrowings or repayments under our revolving credit facilities. As of December 31, 2022, we have no outstanding balances and no outstanding letters of credit under the Primary Credit Facility and Japan Credit Facility, outstanding bank guarantees of $29 under the China Credit Facility, and available borrowings of $466,330 for all revolving credit facilities. However, the Company has outstanding letters of credit of $940 under the Prior Credit Agreement as of December 31, 2022.

The Japan Credit Facility expires on January 31, 2023, and we plan to cancel the parent guarantee. If borrowing needs arise, Deckers Japan is able to borrow from one or more of our subsidiaries through intercompany loans as permitted under the Primary Credit Facility.

Debt Covenants. As of December 31, 2022, we are in compliance with all financial covenants under our Primary Credit Facility, China Credit Facility, and Japan Credit Facility.

Refer to Note 5, "Revolving Credit Facilities," of our condensed consolidated financial statements in Part I, Item 1 within this Quarterly Report and Note 6, “Revolving Credit Facilities and Mortgage Payable,” of our consolidated financial statements in Part IV of our 2022 Annual Report for further information on our revolving credit facilities.

Cash Flows

The following table summarizes the major components of our condensed consolidated statements of cash flows for the periods presented:

			Nine Months Ended December 31,
			2022						2021						Change
			Amount						Amount						Amount						%
Net cash provided by operating activities			$	477,883					$	227,370					$	250,513					110.2		%
Net cash used in investing activities			(56,053)						(41,315)						(14,738)						(35.7)
Net cash used in financing activities			(198,897)						(278,342)						79,445						28.5
Effect of foreign currency exchange rates on cash and cash equivalents			(8,617)						1,187						(9,804)						(825.9)
Net change in cash and cash equivalents			$	214,316					$	(91,100)					$	305,416					335.3		%

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

The increase in net cash provided by operating activities during the nine months ended December 31, 2022, compared to the prior period, was primarily due to $197,482 of favorable changes in operating assets and liabilities, as well as $53,031 of favorable net income after non-cash adjustments, including from favorable changes in bad debt expense, deferred tax expense, and depreciation, amortization, and accretion. The favorable changes in operating assets and liabilities were primarily due to net favorable changes in trade accounts receivable, net, income tax payable, inventories, other accrued expenses, and income tax receivable, partially offset by net unfavorable changes in trade accounts payable, other assets, prepaid expenses and other current assets, and long-term liabilities.

Significant impacts to working capital compared to the prior period were primarily due to changes in (1) a higher rate of collections for trade accounts receivable, net, on higher net sales, partially offset by higher trade accounts receivable allowances, (2) net trade accounts payable due to timing of payments and lower freight costs, and (3) purchases of inventories to support higher demand for the HOKA brand and to maintain global service levels to mitigate the impacts of supply chain disruptions.

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Investing Activities. The increase in net cash used in investing activities during the nine months ended December 31, 2022, compared to the prior period, was primarily due to higher capital expenditures for IT infrastructure, system, and other technology costs, refreshes of existing and new retail stores, for leasehold improvements for our warehouses and DC's.

Financing Activities. The decrease in net cash used in financing activities during the nine months ended December 31, 2022, compared to the prior period, was primarily due to stock repurchases at a lower price per share.

Contractual Obligations

Leases. As previously disclosed in our 2022 Annual Report as a subsequent event, in April 2022 we signed a lease for additional space, which we expect to be operational in the third quarter of our next fiscal year, at our US warehouse and DC in Mooresville, Indiana with an initial lease term of ten years for a minimum commitment of approximately $46,000.

Purchase Obligations. We have been subject to the following adjustments to our purchase obligations:

3PL Agreements. Since March 31, 2022, we entered into 3PL agreements relating to international logistics operations that require additional minimum commitments of approximately $86,000, which is expected to be paid over a period of three to five years.

Commodities. During December 2022, we received refunds of deposits of $10,000 reflecting the return of funds previously advanced to sheepskin suppliers under certain expired supply agreements. Deposits are initially recorded in other assets in the condensed consolidated balance sheets and are returned from sheepskin suppliers as the Buyer purchases the remaining minimum commitments corresponding to unused sheepskins on previously expired contracts. As of December 31, 2022, an additional deposit refund due but not yet paid of $6,877 was reclassified from other assets to other current assets in the condensed consolidated balance sheets. As of December 31, 2022, remaining deposits recorded in other assets in the condensed consolidated balance sheets is $16,266.

Except as described above, there were no other material changes outside the ordinary course of business during the nine months ended December 31, 2022, to the contractual obligations and other commitments last disclosed in our 2022 Annual Report and as of March 31, 2022.

Refer to the section "Contractual Obligations" in Part II, Item 7, within our 2022 Annual Report for further information on our contractual obligations and other commitments.

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 we believe to be reasonable, but actual results could differ materially from these estimates. The full impact of the ongoing pandemic and related macroeconomic factors on our business and operations, including inflationary pressures, foreign currency exchange rate volatility, changes in interest rates, changes in commodity pricing, and recessionary concerns, is unknown and cannot be reasonably estimated for certain key estimates. However, we 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 actual results, our condensed consolidated financial statements may be materially affected. Refer to the section "Use of Estimates" within Note 1, "General," of our condensed consolidated financial statements in Part I, Item 1 within this Quarterly Report, for a summary of applicable key estimates and assumptions.

There have been no material changes to the critical accounting policies and key estimates and assumptions disclosed in the section "Critical Accounting Policies and Estimates" in Part II, Item 7, within our 2022 Annual Report.

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