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(Exact name of registrant as specified in its charter)
—————————————————————
iOregon
i93-0498284
(State
or other jurisdiction of incorporation or organization)
(IRS Employer Identification Number)
i14375 Northwest Science Park Drive, iPortlandiOregoni97229
(Address of principal executive offices and zip code)
i(503)i985-4000
(Registrant's
telephone number, including area code)
—————————————————————
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon
Stock
iCOLM
iThe NASDAQ Global Select Market
—————————————————————
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
iYes
☒
No
☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
iYes
☒
No
☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer,""accelerated filer,""smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge Accelerated Filer
☒
Accelerated filer
☐
Non-accelerated
filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of federal securities laws. Forward-looking statements often use words such as "will", "anticipate", "estimate", "expect", "should", "may" and other words and terms of similar meaning or reference future dates. Forward-looking statements include any statements related to our expectations regarding the effectiveness of our investments, future performance or market position, including any statements regarding outdoor participation and a move to casualization by consumers, product price changes, the promotional environment, wholesale trade terms, inventories, shipping timing, consumer spending and preferences, store traffic, freight charges, scale efficiencies, logistics constraints, labor costs and
shortages, inflationary pressures, foreign currency translation, the geopolitical environment, consumer expectations, the impact of seasonal trends, materiality of legal matters, borrowings, our short and long-term cash needs and our ability to meet those needs, amortization expenses and maturities of liabilities.
These forward-looking statements, and others we make from time to time expressed in good faith, are believed to have a reasonable basis; however, each forward-looking statement involves risks and uncertainties. Many factors may cause actual results to differ materially from projected results in forward-looking statements, including the risks described in Part II, Item 1A of this Quarterly Report on Form 10-Q. Forward-looking statements are inherently less reliable than historical information. Except as required by law, we do not undertake any duty to update forward-looking statements
after the date they are made or to conform them to actual results or to changes in circumstances or to reflect changes in events, circumstances or expectations. New factors emerge from time to time and it is not possible for us to predict or assess the effects of all such factors or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement.
The accompanying unaudited condensed consolidated financial statements have been prepared by the management of Columbia Sportswear Company (together with its wholly owned subsidiaries, the "Company") and, in the opinion of management, include all normal recurring material adjustments necessary to present fairly the Company's financial position as of iSeptember
30, 2022, December 31, 2021 and September 30, 2021, the results of operations for the three and nine months ended iSeptember 30, 2022 and 2021, and cash flows for the nine months ended iSeptember
30, 2022 and 2021. The December 31, 2021 financial information was derived from the Company's audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021. A significant part of the Company's business is of a seasonal nature; therefore, results of operations for the three and nine months ended iSeptember
30, 2022 are not necessarily indicative of results to be expected for other quarterly periods or for the full year.
Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The Company, however, believes that the disclosures contained in this report comply with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended, for a Quarterly Report on Form 10-Q and are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.
i
PRINCIPLES OF CONSOLIDATION
The unaudited condensed consolidated financial statements include the
accounts of the Company. All significant intercompany balances and transactions have been eliminated in consolidation.
i
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates and assumptions. The Company's significant estimates relate to sales reserves, allowance for uncollectible accounts receivable, excess, close-out and slow-moving inventory, impairment of long-lived assets, intangible assets and goodwill, and income taxes.
i
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
None.
RECENT
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In November 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2021-10 (“ASU 2021-10”), Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance, to increase transparency of government assistance including the disclosure of (1) the types of assistance, (2) an entity’s accounting for the assistance, and (3) the effect of the assistance on an entity’s financial statements. ASU 2021-10 is effective for annual periods beginning after December 15, 2021. Early adoption is permitted. The impact of this new standard will depend on the amount of future government assistance received, if any.
As disclosed below in Note 10, the Company has ifour geographic reportable segments: United States ("U.S."), Latin America and Asia Pacific ("LAAP"), Europe, Middle East and Africa ("EMEA") and Canada.
iThe
following tables disaggregate the Company's operating segment Net sales by product category and channel, which the Company believes provides a meaningful depiction of how the nature, timing, and uncertainty of Net sales are affected by economic factors:
For the three and nine months ended iSeptember 30, 2022 and 2021, Net sales recognized from performance obligations related to prior periods were not material. Net sales expected to be recognized in any future period related to remaining performance obligations is not material.
Amortization
expense for intangible assets subject to amortization was $ii0.4/
million for the three months ended iSeptember 30, 2022 and 2021, and was $ii1.2/
million for the nine months ended iSeptember 30, 2022 and 2021.
The
following table presents the remaining estimated annual amortization expense for the years 2022 through 2027:
(in thousands)
2022
$
i413
2023
i1,650
2024
i688
2025
i—
2026
i—
2027
i—
/
i
NOTE
4 — SHORT-TERM BORROWINGS AND CREDIT LINES
Except as disclosed below, there have been no significant changes to the Company's short-term borrowings and credit lines as described in Note 7 in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.
DOMESTIC CREDIT FACILITY
In
July 2022, the Company terminated its unsecured, committed revolving credit agreement, maturing on December 30, 2025, which provided for funding up to $i500.0 million (the "Prior Domestic Credit Agreement") and, simultaneously, entered into a new credit agreement (the “Domestic Credit Agreement”). The Domestic Credit Agreement provides for up to $500.0 million of borrowings pursuant to
an unsecured, committed revolving credit facility (the “Credit Facility”), which is available for working capital and general corporate purposes, including a sublimit for the issuance of letters of credit. This Credit Facility matures on July 12, 2027. Interest, generally payable monthly, is based on the Company's option of either the secured overnight financing rate (“SOFR”) plus an applicable margin or a base rate. Base rate is defined as the highest of the following, plus an applicable margin:
• the administrative agent's prime rate;
• the higher of the federal funds rate or overnight bank funding rate set by the Federal Reserve Bank of New York, plus 0.50%; or
• the one-month SOFR plus
1.00%.
The applicable margin for SOFR loans will range from 1.00% to 1.50% based on the Company’s funded debt ratio. The applicable margin for base rate loans will range from 0.00% to 0.50% based on the Company’s funded debt ratio. A commitment fee ranging from 0.10% to 0.20% based on the Company's funded debt ratio is paid quarterly on the average daily unused commitment amount of the Credit Facility.
The Domestic Credit Agreement requires the Company to comply
with a financial covenant to maintain a certain funded debt ratio. In addition, the Domestic Credit Agreement includes customary covenants that, among other things, limit or restrict the ability of the Company and its subsidiaries to incur additional indebtedness and liens, engage in mergers, acquisitions and dispositions, and engage in transactions with affiliates, as well as restrict the amount of certain payments, including dividends and share buybacks in the event the Company's funded debt ratio is greater than a set amount.
As of iSeptember
30, 2022, the Company was in compliance with all associated covenants and there was ino balance outstanding under the Credit Facility.
iIn
October 2022, the Company borrowed $25.0 million from the Credit Facility. These borrowings accrue interest at a rate of 4.14% per annum.
OTHER SHORT-TERM BORROWINGS AND CREDIT LINES
As of iSeptember 30, 2022, there was €4.5 million
(approximately US$4.4 million) of borrowings outstanding under an overdraft facility utilized by the Company's European subsidiary, which was guaranteed by the Company. These borrowings accrued interest at a rate of 3.75% per annum and were repaid in October 2022.
In October 2022, the Company borrowed €15.0 million (approximately US$15.0 million) from an unsecured, uncommitted credit facility utilized by the Company's European subsidiary, which is guaranteed by the Company. These
borrowings accrue interest at a rate of 2.10% per annum.
The
Company is involved in litigation and various legal matters arising in the normal course of business, including matters related to employment, retail, intellectual property, contractual agreements, and various regulatory compliance activities. Management has considered facts related to legal and regulatory matters and opinions of counsel handling these matters, and does not believe the ultimate resolution of these proceedings will have a material adverse effect on the Company's financial position, results of operations or cash flows.
i
NOTE
6 — SHAREHOLDERS' EQUITY
Since the inception of the Company's stock repurchase plan in 2004 through iSeptember 30, 2022, the Company's Board of Directors has authorized the repurchase of $i2.0
billion of the Company's common stock, including an additional $500 million approved by the Company’s Board of Directors at its regular board meeting in April 2022. Shares of the Company's common stock may be purchased in the open market or through privately negotiated transactions, subject to market conditions, and generally settle subsequent to the trade date. The repurchase program does not obligate the Company to acquire any specific number of shares or to acquire shares over any specified period of time.
/
Under
this program as of iSeptember 30, 2022, the Company had repurchased 31.7 million shares at an aggregate purchase price of $1,470.6 million and had $529.4 million remaining available. During the nine months ended iSeptember
30, 2022, the Company repurchased an aggregate of $i286.9 million of the Company's common stock under this program. The Company did not repurchase common stock during the three months ended iSeptember
30, 2022.
i
NOTE 7 — STOCK-BASED COMPENSATION
The
Company's Stock Incentive Plan allows for grants of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock units, and other stock-based or cash-based awards. The Company uses original issuance shares to satisfy share-based payments.
iSTOCK-BASED
COMPENSATION EXPENSE
Stock-based compensation expense consisted of the following:
i
Three
Months Ended September 30,
Nine Months Ended September 30,
(in thousands)
2022
2021
2022
2021
Stock options
$
i2,018
$
i1,500
$
i5,853
$
i5,271
Restricted
stock units
i3,417
i3,164
i10,218
i9,216
Total
$
i5,435
$
i4,664
$
i16,071
$
i14,487
/
STOCK
OPTIONS
During the nine months ended iSeptember 30, 2022, the Company granted a total of i551,134
stock options at a weighted average grant date fair value of $i18.29 per option. As of iSeptember
30, 2022, unrecognized costs related to outstanding stock options totaled $i14.9 million, before any related tax benefit. These unrecognized costs related to stock options are expected to be recognized over a weighted average remaining period of i2.42
years.
RESTRICTED STOCK UNITS
During the nine months ended iSeptember 30, 2022, the Company granted
i246,031 restricted stock units at a weighted average grant date fair value of $i85.29
per restricted stock unit. As of iSeptember 30, 2022, unrecognized costs related to outstanding restricted stock units totaled $i25.3
million, before any related tax benefit. These unrecognized costs related to restricted stock units are expected to be recognized over a weighted average remaining period of i2.49 years.
Earnings per share ("EPS") is presented on both a basic and diluted basis. Basic EPS is based on the weighted average number of common shares outstanding. Diluted EPS reflects the potential dilution that could occur if outstanding securities or other contracts to issue common stock were exercised or converted into common stock.
i
A
reconciliation of the common shares used in the denominator for computing basic and diluted EPS is as follows:
Three Months Ended September 30,
Nine
Months Ended September 30,
(in thousands, except per share amounts)
2022
2021
2022
2021
Weighted average common shares outstanding, used in computing basic earnings per share
i62,098
i65,862
i62,967
i66,182
Effect
of dilutive stock options and restricted stock units
i112
i404
i211
i491
Weighted
average common shares outstanding, used in computing diluted earnings per share
i62,210
i66,266
i63,178
i66,673
Earnings
per share:
Basic
$
i1.80
$
i1.53
$
i2.95
$
i2.98
Diluted
$
i1.80
$
i1.52
$
i2.94
$
i2.96
//
Stock
options, service-based restricted stock units, and performance-based restricted stock units representing i2,174,505 and i652,317
shares of common stock for the three months ended iSeptember 30, 2022 and 2021, respectively, and i1,738,354
and i810,092 shares of common stock for the nine months ended iSeptember 30, 2022
and 2021, respectively, were outstanding but were excluded from the computation of diluted EPS because their effect would be anti-dilutive under the treasury stock method or because the shares were subject to performance conditions that had not been met.
i
NOTE
9 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) on the unaudited Condensed Consolidated Balance Sheets is net of applicable taxes, and consists of unrealized gains and losses on available-for-sale securities, unrealized gains and losses on certain derivative transactions and foreign currency translation adjustments.
iThe
following tables set forth the changes in Accumulated other comprehensive income (loss):
/
(in thousands)
Unrealized
gains (losses) on derivative transactions
(1) Amounts
reclassified are recorded in Net sales or Cost of sales on the unaudited Condensed Consolidated Statements of Operations. Refer to Note 11 for further information regarding reclassifications.
(1) Amounts
reclassified are recorded in Net sales, Cost of sales, or Other non-operating income (expense), net on the unaudited Condensed Consolidated Statements of Operations. Refer to Note 11 for further information regarding reclassifications.
(in
thousands)
Unrealized gains (losses) on available-for-sale securities
Unrealized gains (losses) on derivative transactions
(1) Amounts
reclassified are recorded in Net sales, Cost of sales, or Other non-operating income (expense), net on the unaudited Condensed Consolidated Statements of Operations. Refer to Note 11 for further information regarding reclassifications.
(in
thousands)
Unrealized gains (losses) on derivative transactions
(1) Amounts
reclassified are recorded in Net sales, Cost of sales, or Other non-operating income (expense), net on the unaudited Condensed Consolidated Statements of Operations. Refer to Note 11 for further information regarding reclassifications.
The Company has ifour reportable geographic segments: U.S., LAAP, EMEA, and Canada, which are reflective of the Company's internal organization, management and oversight structure. Each geographic segment operates predominantly in one industry: the design, development,
marketing, and distribution of outdoor, active and lifestyle products, including apparel, footwear, accessories, and equipment. Intersegment net sales and intersegment profits, which are recorded at a negotiated mark-up and eliminated in consolidation, are not material. Unallocated corporate expenses consist of expenses incurred by centrally-managed departments, including global information services, certain supply chain functions, finance, human resources and legal, as well as executive compensation, unallocated benefit program expense, and other miscellaneous costs.
i
The
following table presents financial information for the Company's reportable segments:
NOTE 11 — FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
In
the normal course of business, the Company's financial position, results of operations and cash flows are routinely subject to a variety of risks. These risks include risks associated with financial markets, primarily currency exchange rate risk and, to a lesser extent, interest rate risk and equity market risk. The Company regularly assesses these risks and has established policies and business practices designed to mitigate them. The Company does not engage in speculative trading in any financial market.
The Company actively manages the risk
of changes in functional currency equivalent cash flows resulting from anticipated non-functional currency denominated purchases and sales. Subsidiaries that use European euros, Canadian dollars, Japanese yen, Chinese renminbi, or Korean won as their functional currency are primarily exposed to changes in functional currency equivalent cash flows from anticipated United States dollar inventory purchases. Subsidiaries that use United States dollars and European euros as their functional currency also
have non-functional currency denominated sales for which the Company hedges the Canadian dollar and British pound. The Company seeks to manage these risks by using currency forward contracts
formally designated and effective as cash flow hedges. Hedge effectiveness is generally determined by evaluating the ability of a hedging instrument's cumulative change in fair value to offset the cumulative change in the present value of expected cash flows on the underlying exposures. Time value components ("forward points") for forward contracts are included in the fair value of the cash flow hedge. These costs or benefits will be included in Accumulated other comprehensive income (loss) until the underlying hedge transaction is recognized in either Net sales or Cost of sales, at which time, the forward points will also be recognized as a component of Net income.
The
Company also uses currency forward contracts not formally designated as hedges to manage the consolidated currency exchange rate risk associated with the remeasurement of non-functional currency denominated monetary assets and liabilities by subsidiaries that use United States dollars, euros, Canadian dollars, yen, won, or renminbi as their functional currency. Non-functional currency denominated monetary assets and liabilities consist primarily of cash and cash equivalents, short-term investments, receivables, payables, deferred income taxes, and intercompany loans. The gains and losses generated on these currency forward contracts not formally designated as hedges are expected to be largely
offset in Other non-operating income (expense), net by the gains and losses generated from the remeasurement of the non-functional currency denominated monetary assets and liabilities.
i
The following table presents the gross notional amount of outstanding derivative instruments:
As
of iSeptember 30, 2022, $i30.4 million of deferred net gains on both outstanding
and matured derivatives recorded in Accumulated other comprehensive income (loss) are expected to be reclassified to Net income during the next twelve months as a result of underlying hedged transactions also being recorded in Net sales, Cost of sales, or Other non-operating income (expense), net in the unaudited Condensed Consolidated Statements of Operations. When outstanding derivative contracts mature, actual amounts ultimately reclassified to Net sales, Cost of sales, or Other non-operating income (expense), net in the unaudited Condensed Consolidated Statements of Operations are dependent
on United States dollar exchange rates in effect against the euro, pound sterling, renminbi, Canadian dollar, and yen as well as the euro exchange rate in effect against the pound sterling.
As of iSeptember 30, 2022, the Company's derivative contracts had a remaining maturity of less than ithree
years. The maximum net exposure to any single counterparty, which is generally limited to the aggregate unrealized gain of all contracts with that counterparty, was $i13.1 million as of iSeptember
30, 2022. All of the Company's derivative counterparties have credit ratings that are investment grade or higher. The Company is a party to master netting arrangements that contain features that allow counterparties to net settle amounts arising from multiple separate derivative transactions or net settle in the case of certain triggering events such as a bankruptcy or major default of one of the counterparties to the transaction. The Company has not pledged assets or posted collateral as a requirement for entering into or maintaining derivative positions.
Certain assets and liabilities are reported at fair value on either a recurring or nonrecurring basis. Fair value is defined as an exit price, representing the amount that the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants, under a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value as follows:
Level
1
—
observable inputs such as quoted prices for identical assets or liabilities in active liquid markets;
Level 2
—
inputs, other than the quoted market prices in active markets, that are observable, either directly or indirectly; or observable market prices in markets with insufficient volume or infrequent transactions; and
Level 3
—
unobservable inputs for which there is little or no market data available, that require the reporting entity to develop
its own assumptions.
The Company's assets and liabilities measured at fair value are categorized as Level 1 or Level 2 instruments. Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from inputs, other than quoted market prices in active markets, that are directly or indirectly observable in the marketplace and quoted prices in markets with limited volume or infrequent transactions.
i
Assets
and liabilities measured at fair value on a recurring basis as of iSeptember 30, 2022 are as follows:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Special Note Regarding Forward-Looking Statements", Part I, Item 1 and Part II, Item 1A of this Quarterly Report on Form 10-Q. In addition, refer to Item 7 in our Annual Report on Form 10-K for the year ended December 31, 2021 for our discussion and analysis comparing financial condition and results of operations from 2021 to 2020.
OVERVIEW
We
connect active people with their passions. We are a global leader in designing, developing, marketing, and distributing outdoor, active and lifestyle products. We manage these products in two categories: apparel, accessories, and equipment products and footwear products. We provide our products through our four well-known brands: Columbia, SOREL, Mountain Hardwear, and prAna. Apparel, accessories, and equipment products are provided by our Columbia, Mountain Hardwear and prAna brands. Footwear products are provided by our Columbia and SOREL brands. We sell our products in approximately 90 countries and operate in four geographic segments: U.S., LAAP, EMEA, and Canada.
On September 22, 2022, we refined our long-term growth strategy. We are investing in our strategic priorities to:
•accelerate
profitable growth;
•create iconic products that are differentiated, functional and innovative;
•drive brand engagement through increased, focused demand creation investments;
•enhance consumer experiences by investing in capabilities to delight and retain consumers;
•amplify marketplace excellence , with digitally-led, omni-channel, global distribution; and
•empower talent that is driven by our core values through a diverse and inclusive workplace.
Ultimately, we expect our investments to enable market share capture across our brand portfolio, expand
gross margin, improve selling, general and administrative expense efficiency, and drive improved operating margin over the long-term.
Business Environment and Trends
Changes in Consumer Spending Ability and Preferences | In 2021, we believe government stimulus and unemployment benefits increased consumers’ discretionary spending ability. In addition, we believe we benefited as consumers shifted from service-based to product-based spending due to their limited ability to travel, attend entertainment-based experiences or purchase certain services. Beginning in the second quarter of 2022, we believe U.S. inflationary pressures, rising interest rates and recession fears
are weighing on the market. As a result, we expect consumer discretionary spending will come under increasing pressure over the next several months.
Increased Inflationary Pressures | Inflationary pressures, including inbound freight, raw materials, labor and product input costs, impacted our results in the first nine months of 2022. We implemented product price increases for our Spring 2022 season and, to a greater extent, for our Fall 2022 season. Price increases varied by market and product category. In the U.S., on average, we increased pricing by a mid-single digit percent for our Spring 2022 product line and by a high-single to low-double-digit percent for our Fall 2022 product line. Although price increases are not expected to offset gross margin pressure in 2022, we are beginning to experience lower inbound freight costs which will benefit gross margin over
time. As inbound freight costs subside and begin to offset inflationary cost pressures, including raw materials and labor, we expect lower product price increases in 2023.
Strengthening U.S. Dollar | The rapid strengthening of the U.S. dollar relative to major foreign currencies unfavorably impacted our results in the first nine months of 2022. The impact of unfavorable foreign currency translation is anticipated to continue to reduce 2022 net sales growth and profitability. We anticipate this trend to continue into 2023, impacting both the translation of our earnings as well as our foreign currency hedging of inventory purchases and non-functional currency sales.
Changing Geopolitical Environment | The macro-geopolitical environment changed rapidly as a result
of the invasion of Ukraine by Russian forces in the first quarter of 2022. We do not have any direct operations in Russia and historically have operated in that market through a contract with a third-party international distributor on an advance order basis. We paused taking new orders from this distributor for Russia, Ukraine, and Belarus following the invasion. However, prior to the conflict, we had already taken Fall 2022 orders from this distributor under its contract, certain of which we planned to and did fulfill in the third quarter of 2022. The impact of the invasion is being felt not only in
our relationship with this distributor, but also increased political tensions throughout the globe. These political tensions have the potential to manifest themselves in certain regions where we directly operate.
Increased Freight Charges | In the first nine months of 2022, we experienced elevated ocean freight charges as a result of an imbalance of supply and demand for steamship and ocean container capacity. As a result, these costs have had a substantially unfavorable impact on our gross margin. More recently, we began to experience declines in ocean freight charges.
We anticipate this shift in trend to continue for the remainder of 2022 and into 2023, and to benefit gross margin over time. We capitalize the cost of inbound freight into inventory, which creates a lag from the period in which we experience the decline in these charges and the subsequent impact to gross margin. Additionally, elevated oil prices continue to result in fuel surcharges from certain of our freight carriers that deliver product to our retail stores and to consumers.
Later Inventory Receipts | During the third quarter of 2021, several weeks of government mandated factory closures in Vietnam disrupted our manufacturing partners' operations and impacted production of product. As a result of these and other supply chain disruptions, we received Fall 2021, Spring 2022 and Fall 2022 inventory later than expected.
For
most of the second quarter of 2022, government efforts to control the spread of COVID-19 in China disrupted our distribution center's operations, which resulted in an inability to fulfill e-commerce, wholesale and owned DTC stores orders in China. In July 2022, certain disruptions from these government efforts eased. Excluding disruptions from government efforts to control the spread of COVID-19 as well as potential risks associated with the International Longshore and Warehouse Union negotiations, we expect supply chain inbound transit times to continue to modestly improve by late 2022. However, we continue to anticipate longer than historical inbound transit times for inventory receipts and shipments to our wholesale customers and inventory available for our DTC businesses in 2022, potentially resulting in impacts to future net sales and gross margin.
Looking forward to the Spring 2023
product season, we expect inventory production and logistics transit times to improve markedly and be more in-line with our historical experience, assuming no material downturn in port and railroad labor relations.
Excess Inventory Across the Marketplace | Strong consumer demand in 2021 and the first half of 2022 coupled with ongoing supply chain constraints resulted in a shortage of inventory in the marketplace. By the end of the second quarter of 2022, the arrival of long-delayed orders at retailers and a slowing of consumer demand resulted in excess inventory in the marketplace. With higher marketplace inventories and a rapidly changing economic environment, retailers are rationalizing their inventory needs. As a result, we experienced and continue to expect increased order cancellations for Spring 2022 and Fall 2022 orders. Because we expect marketplace inventories
to remain elevated and order cancellations to continue, we are adjusting future inventory purchases and plan to utilize our outlet stores to sell a portion of our excess inventory.
Increased U.S. Distribution Center Capacity Pressure | Elevated inventory levels combined with uneven flow of inventory receipts and shipments is resulting in storage and process capacity pressures within our U.S. distribution centers. We began to experience these pressures as we started moving Fall 2022 inventory into the marketplace. As a result of these expected pressures, our operations may be less efficient, and we expect to incur additional labor, outside storage and other costs.
Continued Labor Shortages | Labor shortages continue to be prevalent in the U.S. and labor costs
have risen in an effort to compete for employees. We have made certain wage adjustments in an effort to be more competitive in the current environment and have diminished the effects of current labor shortages on our operations at this time. However, we anticipate rising costs and labor shortages to continue for the remainder of 2022 resulting from the continued competition for talent.
Changes in Direct-to-Consumer Store Traffic | For the first nine months of 2022, the majority of our stores remained open in all major markets except China. For most of the second quarter of 2022, government efforts to control the spread of COVID-19 impacted many of our stores in China. In the third quarter of 2022, the easing of shutdowns as a result of China's zero-COVID policies improved consumer demand, favorably impacting the performance of our stores in China. Overall, our
global store retail traffic trends continued to improve, with our U.S. retail store traffic recovering to pre-pandemic levels in the first nine months of 2022. We expect store traffic to remain uneven across our store fleet.
Changes in Promotional Environment | In the first half of 2022, we operated in a low promotional environment and experienced fewer sales returns and customer accommodations than we have historically. In the third quarter of 2022, an increase in promotional activity began to unfavorably impact our DTC product margins compared to the same period from prior year in which promotions were exceptionally low. With elevated marketplace inventory, we anticipate the promotional environment and less favorable trading terms to continue.
Increased Outdoor Participation by Consumers | The COVID-19 pandemic drew a record number of individuals in the United States to spend an increased amount of time outside, including participating
in outdoor recreational activities. While outdoor participation rates may not be maintained, we believe that our addressable consumer base worldwide has been expanded and expect outdoor participation to remain elevated in comparison to pre-pandemic levels.
Casualization of the Apparel and Footwear Market | During the COVID-19 pandemic, we saw a move to casualization by consumers. Our products provide comfort and function in diverse environments. We believe we have benefited from this trend and expect it to continue to be a tailwind moving forward.
Changing Consumer Expectations | Consumer behavior continues to fluctuate. Consumer expectations and the related competitive pressures have increased and continue to increase relative to various aspects of our e-commerce
business, including speed of product delivery, shipping charges, return privileges and other evolving expectations. We maintain and continue to make substantial investments in information systems, processes and personnel to support our ongoing demand planning efforts to provide forecasting of optimal inventory to meet customer and consumer demands.
Seasonality | Our business is affected by the general seasonal trends common to the industry, including seasonal weather and discretionary consumer shopping and spending patterns. Our products are marketed on a seasonal basis, and our sales are weighted substantially toward the third and fourth quarters, while our operating costs are more equally distributed throughout the year. In 2021, over 60% of our net sales and over 75% of our operating income were realized in the second half of the year.
RESULTS
OF OPERATIONS
The following discussion of our results of operations and liquidity and capital resources should be read in conjunction with Part I, Item 1 of this Quarterly Report on Form 10-Q. All references to quarters relate to the quarter ended September 30 of that particular year.
Non-GAAP Financial Measure
To supplement financial information reported in accordance with accounting principles generally accepted in the United States ("GAAP"), we disclose constant-currency net
sales information, which is a non-GAAP financial measure, to provide a framework to assess how the business performed excluding the effects of changes in foreign currency exchange rates against the United States dollar between comparable reporting periods. We calculate constant-currency net sales by translating net sales in foreign currencies for the current period into United States dollars at the exchange rates that were in effect during the comparable period of the prior year. Management believes that this non-GAAP financial measure reflects an additional and useful way of viewing an aspect of our operations that, when viewed in conjunction with our GAAP results, provides a more comprehensive understanding of our business and operations. In particular, investors may find the non-GAAP measure useful by reviewing our net sales results without the volatility in foreign currency exchange rates. This non-GAAP financial measure also facilitates management's internal comparisons
to our historical net sales results and comparisons to competitors' net sales results. Constant-currency financial measures should be viewed in addition to, and not in lieu of or superior to, our financial measures calculated in accordance with GAAP.
The following discussion includes references to constant-currency net sales, and we provide a reconciliation of this non-GAAP measure to the most directly comparable financial measure calculated in accordance with GAAP below.
The following table presents the items in our unaudited Condensed Consolidated Statements of Operations, both in dollars and as a percentage of net sales:
Three
Months Ended September 30,
Nine Months Ended September 30,
(in millions, except for percentage of net sales and per share amounts)
Overall,
our global net sales increase reflected earlier shipment of higher Fall 2022 wholesale orders compared to shipment of Fall 2021 orders and higher consumer demand in our DTC business. This increase was tempered by later than historical shipping patterns for Fall 2022 shipments, as well as unfavorable impacts from changes in foreign currency exchange rates. Our global DTC e-commence business increased 9% and represented 11% of our global net sales for the third quarter of 2022, compared to growth of 6% and represented 11% of global net sales for the comparable period in 2021.
Gross Profit.Our gross profit may not be comparable to other companies in our industry as some companies may include all costs related to their distribution network in Cost of sales, while we include these expenses in SG&A
expenses. Gross profit is summarized in the following table:
Three Months Ended September 30,
(in millions, except for percentages and basis points)
2022
2021
Change
Gross
profit
$
458.5
$
408.4
$
50.1
12
%
Gross margin
48.0
%
50.7
%
-270 bps
Gross
margin contracted primarily due to the following factors:
•an approximate 210 bps decrease related to elevated inbound freight costs;
•unfavorable channel and regional net sales shifts primarily due to a higher mix of wholesale sales, largely driven by higher distributor sales, which typically carry a lower margin compared to DTC sales; and
•unfavorable year-over-year changes in inventory provisions; partially offset by
•increased channel profitability due to the net effect of higher wholesale margins and, to a lesser extent, lower DTC margins.
Higher wholesale margins discussed above were primarily driven by price
increases and a higher proportion of full price versus off price sales, partially offset by input cost pressure. Lower DTC margins discussed above were primarily driven by increased promotional activity.
Selling, General and Administrative Expenses.SG&A expenses includes all costs associated with our design, merchandising, marketing, distribution, and corporate functions, including related depreciation and amortization.
SG&A expenses is summarized in the following table:
Three
Months September 30,
(in millions, except for percentages and basis points)
2022
2021
Change
Selling, general and administrative expenses
$
319.0
$
280.1
$
38.9
14
%
Selling,
general and administrative expenses as percent of net sales
33.4
%
34.8
%
-140 bps
The SG&A expenses increase was primarily due to expenses incurred to support the growth of our business and investments to drive our brand-led consumer-focused strategies. Factors primarily contributing to the increase of SG&A expenses included:
•higher personnel expenses of $13.3 million, reflecting increased headcount to support business growth, as well as annual merit and other wage
rate increases;
•increased demand creation, including higher spending with sales growth; and
•higher global retail expenses associated with sales growth and new stores; partially offset by
•lower incentive compensation expense, reflecting lower expectation of year-end incentive compensation compared to last year.
Income Tax Expense. Income tax expense and the related effective income tax rate are summarized in the following table:
Three
Months Ended September 30,
(in millions, except for percentages)
2022
2021
Change
Income tax expense
$
(34.0)
$
(33.3)
$
0.7
2
%
Effective
income tax rate
23.3
%
24.9
%
Our effective income tax rate for the three months ended iSeptember 30, 2022 was impacted by discrete tax items, which lowered the effective
income tax rate for the period. For the three months ended iSeptember 30, 2022, our effective income tax rate was primarily impacted by a non-recurring benefit related to a decrease in accrued foreign withholding taxes. For the three months ended September 30, 2021, impacts to our effective income tax rate from discrete tax items were immaterial.
Net Sales.Net sales by brand, product category and channel are summarized in the following table:
Nine
Months Ended September 30,
(in millions, except for percentages)
Reported
Net Sales
2022
Adjust for Foreign Currency Translation
Constant-currency
Net Sales
2022 (1)
Reported
Net Sales
2021
Reported
Net Sales % Change
Constant-currency
Net Sales
% Change (1)
Brand Net Sales:
Columbia
$
1,903.0
$
48.9
$
1,951.9
$
1,663.2
14%
17%
SOREL
204.7
3.3
208.0
157.5
30%
32%
prAna
110.8
—
110.8
107.6
3%
3%
Mountain
Hardwear
76.1
0.8
76.9
68.4
11%
12%
Total
$
2,294.6
$
53.0
$
2,347.6
$
1,996.7
15%
18%
Product
Category Net Sales:
Apparel, Accessories and Equipment
$
1,760.6
$
37.2
$
1,797.8
$
1,543.1
14%
17%
Footwear
534.0
15.8
549.8
453.6
18%
21%
Total
$
2,294.6
$
53.0
$
2,347.6
$
1,996.7
15%
18%
Channel
Net Sales:
Wholesale
$
1,353.2
$
31.8
$
1,385.0
$
1,155.9
17%
20%
DTC
941.4
21.2
962.6
840.8
12%
14%
Total
$
2,294.6
$
53.0
$
2,347.6
$
1,996.7
15%
18%
(1)
Constant-currency net sales is a non-GAAP financial measure. See "Non-GAAP Financial Measure" above for further information.
Overall, our global net sales increase reflected earlier shipment of higher Spring 2022 and Fall 2022 wholesale orders and higher consumer demand in our DTC business. In addition, Columbia and SOREL brand net sales benefited from favorable late season cold weather product sales in the first quarter of 2022. Our global net sales increase was tempered by temporary store closures due to government efforts to control the spread of COVID-19 in China, supply chain disruptions, and unfavorable impacts from changes in foreign currency exchange rates. Our global DTC e-commence business grew 10% and represented 15% of our global net sales for the first nine months of 2022, compared to growth of 16% and represented 15% of global net sales for the comparable period in
2021.
Gross Profit.Gross profit is summarized in
the following table:
Nine Months Ended September 30,
(in millions, except for percentages and basis points)
2022
2021
Change
Gross
profit
$
1,121.1
$
1,022.3
$
98.8
10
%
Gross margin
48.9
%
51.2
%
-230 bps
Gross
margin contracted primarily due to the following factors:
•an approximate 300 bps decrease related to elevated inbound freight costs; partially offset by
•increased channel profitability due to higher DTC and wholesale margins.
Higher DTC margins discussed above were primarily driven by lower promotional levels, particularly in the first half of 2022. Higher wholesale margins discussed above were primarily driven by price increases and a higher proportion of full price versus off price sales, partially offset by input cost pressure.
Selling, General and Administrative Expenses.SG&A expenses is summarized in the following
table:
Nine Months Ended September 30,
(in millions, except for percentages and basis points)
2022
2021
Change
Selling,
general and administrative expenses
$
899.3
$
796.3
$
103.0
13
%
Selling, general and administrative expenses as percent of net sales
39.2
%
39.9
%
-70
bps
The SG&A expenses increase was primarily due to expenses incurred to support the growth of our business and investments to drive our brand-led consumer-focused strategies. Factors primarily contributing to the increase of SG&A expenses included:
•higher personnel expenses of $30.6 million, reflecting increased headcount to support business growth, as well as annual merit and other wage rate increases;
•increased demand creation of $20.7 million, including higher spending with sales growth; and
•higher global retail expenses associated with sales growth and new stores.
Income
Tax Expense. Income tax expense and the related effective income tax rate are summarized in the following table:
Nine Months Ended September 30,
(in millions, except for percentages)
2022
2021
Change
Income
tax expense
$
(51.9)
$
(42.5)
$
9.4
22
%
Effective income tax rate
21.9
%
17.7
%
Our
effective income tax rates for the nine months ended iSeptember 30, 2022 and 2021 were impacted by discrete tax items, which lowered the effective income tax rate in each period. For the nine months ended iSeptember
30, 2022, our effective income tax rate was primarily impacted by a non-recurring benefit related to the finalization of the U.S. and foreign audits, a non-recurring benefit related to a decrease in accrued foreign withholding taxes and a non-recurring benefit related to foreign currency loss resulting from an intercompany transaction. For the nine months ended September 30, 2021, our effective income tax rate was primarily impacted by a decrease in accrued foreign withholding taxes and a non-recurring benefit related to common stock benefits.
Segment operating income includes net sales, cost of sales, SG&A expenses, and net licensing income for each of our four reportable geographic segments. Operating income as a percentage of net sales in the U.S. is typically higher than the other segments primarily due to scale efficiencies associated with the larger base of net sales in the U.S. and, to a lesser extent, incremental licensing income.
We anticipate this trend to continue until other segments achieve scale efficiencies
from higher levels of net sales volume relative to the fixed cost structure necessary to operate the business.
Net sales by geographic segment are summarized
in the following table:
Three
Months Ended September 30,
(in millions, except for percentage changes)
Reported
Net Sales
2022
Adjust for Foreign Currency Translation
Constant-currency
Net Sales
2022 (1)
Reported
Net Sales
2021
Reported
Net Sales % Change
Constant-currency
Net Sales
% Change (1)
U.S.
$
607.0
$
—
$
607.0
$
510.5
19%
19%
LAAP
115.4
12.0
127.4
102.7
12%
24%
EMEA
153.5
14.8
168.3
109.2
41%
54%
Canada
79.1
2.8
81.9
82.3
(4)%
—%
$
955.0
$
29.6
$
984.6
$
804.7
19%
22%
(1)
Constant-currency net sales is a non-GAAP financial measure. See "Non-GAAP Financial Measure" above for further information.
Operating income (loss) for each reportable segment and unallocated corporate expenses are summarized in the following table:
Three Months Ended September
30,
(in millions)
2022
2021
Change
U.S.
$
145.3
$
139.1
$
6.2
LAAP
11.8
7.6
4.2
EMEA
35.6
26.2
9.4
Canada
20.2
22.8
(2.6)
Total
segment operating income
212.9
195.7
17.2
Unallocated corporate expenses
(67.6)
(62.2)
(5.4)
Operating income
$
145.3
$
133.5
$
11.8
U.S.
U.S.
operating income increased $6.2 million to $145.3 million, or 23.9% of net sales, for the third quarter of 2022 from $139.1 million, or 27.2% of net sales, for the comparable period in 2021. The increase was driven primarily by increased net sales, partially offset by decreased gross margin. U.S. net sales increased $96.5 million, or 19%, for the third quarter of 2022, compared to the same period in 2021. U.S. net sales increased across all channels, product categories and brands, largely driven by increased wholesale net sales for our Columbia and SOREL brands. Increased U.S. wholesale net sales were driven by earlier shipment of higher Fall 2022 orders compared to shipment of Fall 2021 orders. U.S. DTC net sales increased primarily from net sales growth generated from retail stores and, to a lesser extent, our e-commerce business. As of iSeptember
30, 2022, our U.S. business operated 148 retail stores, compared to 138 stores as of September 30, 2021. SG&A expenses increased as a percentage of net sales to 25.9% for the third quarter of 2022 compared to 25.2% for the same period in 2021.
LAAP
operating income increased $4.2 million to $11.8 million, or 10.2% of net sales, for the third quarter of 2022 from $7.6 million, or 7.4% of net sales, for the comparable period in 2021. The increase was driven primarily by increased net sales and SG&A expense leverage. LAAP net sales increased $12.7 million, or 12% (24% constant-currency), for the third quarter of 2022, compared to the same period in 2021, primarily in our LAAP distributor business. LAAP net sales increased due to earlier shipment of higher Fall 2022 orders compared to shipment of Fall 2021 orders and higher consumer demand as we lapped prior year provincial and government mandated restrictions to prevent the spread of COVID-19. These increases were offset by unfavorable impacts from changes in foreign currency rates. LAAP SG&A expenses decreased as a percentage of net sales to 40.9% for the third quarter of 2022 compared to 46.9% for the same period in 2021, primarily driven by demand creation,
personnel and retail expenses.
EMEA
EMEA operating income increased $9.4 million to $35.6 million, or 23.2% of net sales, for the third quarter of 2022 from $26.2 million, or 24.0% of net sales, for the comparable period in 2021. The increase was driven primarily by increased net sales and SG&A expense leverage. EMEA net sales increased $44.3 million, or 41% (54% constant-currency), for the third quarter of 2022, compared to the same period in 2021, driven by increased net sales in our EMEA distributor business and, to a lesser extent, our Europe-direct business. EMEA distributor net sales increased primarily due to the later shipment of Fall 2022 orders to our Russia-based distributor business, under pre-existing contractual obligations. Europe-direct net sales increased primarily due to higher consumer
demand, partially offset by unfavorable impacts from changes in foreign currency rates. EMEA SG&A expense decreased as a percentage of net sales to 19.7% for the third quarter of 2022 compared to 22.6% in 2021.
Canada
Canada operating income decreased $2.6 million to $20.2 million, or 25.6% of net sales, for the third quarter of 2022 from $22.8 million, or 27.8% of net sales, for the comparable period in 2021. The decrease primarily resulted from decreased net sales. Canada net sales decreased $3.2 million, or 4% (flat constant-currency), for the third quarter of 2022, compared to the same period in 2021. The decrease in Canada net sales was primarily driven by unfavorable impacts from changes in foreign currency rates and decreased net sales related to later shipment of Fall 2022 orders compared to
shipments of Fall 2021 orders in our Canada wholesale business, partially offset by increased net sales in our Canada DTC business. Canada SG&A expense increased as a percentage of net sales to 21.1% for the third quarter of 2022 compared to 20.1% for the same period in 2021.
Unallocated corporate expenses increased by $5.4 million to $67.6 million in 2022, from $62.2 million in 2021.
Operating
income for each reportable segment and unallocated corporate expenses are summarized in the following table:
Nine Months Ended September 30,
(in millions)
2022
2021
Change
U.S.
$
325.8
$
320.8
$
5.0
LAAP
21.7
16.3
5.4
EMEA
51.0
47.8
3.2
Canada
31.9
29.7
2.2
Total
segment operating income
430.4
414.6
15.8
Unallocated corporate expenses
(192.7)
(175.7)
(17.0)
Operating income
$
237.7
$
238.9
$
(1.2)
U.S.
U.S.
operating income increased $5.0 million to $325.8 million, or 21.4% of net sales, for the nine months ended September 30, 2022 from $320.8 million, or, 24.7% of net sales, for the comparable period in 2021. The increase was driven primarily by increased net sales, partially offset by decreased gross margin. U.S. net sales increased $223.2 million, or 17%, for the nine months ended September 30, 2022, compared to the same period in 2021. U.S. net sales increased across all channels, product categories and brands, led by increased net sales for our Columbia and SOREL brands. Increased U.S. wholesale net sales were driven by increased consumer demand and shipment of higher Spring 2022 and Fall 2022 orders compared to shipment of 2021 season orders. U.S. DTC net sales increased from net sales growth generated from our retail stores and e-commerce business. As of iSeptember
30, 2022, our U.S. business operated 148 retail stores, compared to 138 stores as of September 30, 2021. SG&A expenses increased as a percentage of net sales to 28.7% for the nine months ended September 30, 2022 compared to 28.2% for the same period in 2021.
LAAP
LAAP operating income increased $5.4 million to $21.7 million, or 7.0% of net sales, for the nine months ended September 30, 2022 from $16.3 million, or 5.6% of net sales, for the comparable period in 2021. The increase was driven primarily by increased net sales. LAAP net sales increased $17.2 million, or 6% (14% constant-currency), for the nine months ended September
30, 2022, compared to the same period in 2021, primarily in our LAAP distributor business and, to a lesser extent, our Japan and Korea businesses. This increase was primarily driven by earlier shipment of higher Fall 2022 orders compared to shipment of Fall 2021 orders and higher consumer demand as we lapped prior year provincial mandated restrictions to prevent the spread of COVID-19. These increases were offset by unfavorable impacts from changes in foreign currency rates and government efforts to control the spread of COVID-19 in China the second quarter of 2022. LAAP SG&A expense decreased as a percentage of net sales to 47.9% for the nine months ended September 30, 2022 compared to 50.3% for the same period in 2021.
EMEA
EMEA operating income
increased $3.2 million to $51.0 million, or 16.7% of net sales, for the nine months ended September 30, 2022 from $47.8 million, or 17.8% of net sales, for the comparable period in 2021. The increase was driven primarily by increased net sales. EMEA net sales increased $37.3 million, or 14% (increased 23% constant-currency), for the nine months ended September 30, 2022, compared to the same period in 2021, driven by increased net sales in our Europe-direct and EMEA distributor businesses. Europe-direct net sales increased primarily due to higher consumer demand, partially offset by unfavorable impacts from changes in foreign currency rates. EMEA distributor net sales increased primarily due to higher shipments of Fall 2022 orders compared to shipment of Fall 2021 orders. EMEA SG&A expenses decreased as a percentage of net sales to 26.4% for the nine months ended September
30, 2022 compared to 26.6% in 2021.
Canada
Canada operating income increased $2.2 million to $31.9 million, or 20.3% of net sales, for the nine months ended September 30, 2022 from $29.7 million, or 21.6% of net sales, for the comparable period in 2021. The increase primarily resulted from increased net sales. Canada net sales increased $20.2 million, or 15% (17% constant-currency), for the nine months ended September 30, 2022, compared to the same period in 2021, primarily driven by increased net sales in our Canada DTC and wholesale businesses. Canada SG&A expense decreased as a percentage of net sales to 26.2% for the nine months ended September 30,
2022, compared to 26.3% for the same period in 2021.
Unallocated corporate expenses increased
by $17.0 million to $192.7 million for the nine months ended September 30, 2022 from $175.7 million for the same period in 2021, largely driven by higher personnel expenses and technology related expenses, partially offset by lower incentive compensation.
LIQUIDITY AND CAPITAL RESOURCES
Including cash, cash equivalents, short-term investments and available committed credit lines, we had approximately $665 million in total liquidity as of September 30, 2022. Our liquidity may be affected by the general seasonal trends common to the industry. Our products are marketed on a seasonal basis and our sales
are weighted substantially toward the third and fourth quarters, while our operating costs are more equally distributed throughout the year. Our cash and cash equivalents and short-term investments balances generally are at their lowest level just prior to the start of the U.S. holiday season and increase during the fourth quarter from collection of wholesale business receivables and fourth quarter DTC sales. This trough cash position is impacted by the amount of product we order from our contract manufacturers in anticipation of customer demand and is more heavily impacted in advance of periods of expected high demand.
Cash Flow Activities
Cash
flows are summarized in the following table:
Nine Months Ended September 30,
(in millions)
2022
2021
Change
Net
cash provided by (used in):
Operating activities
$
(328.1)
$
(15.6)
$
(312.5)
Investing activities
88.5
(19.2)
107.7
Financing
activities
(339.7)
(151.4)
(188.3)
Net effect of exchange rate changes on cash
(24.9)
(5.0)
(19.9)
Net decrease in cash and cash equivalents
$
(604.2)
$
(191.2)
$
(413.0)
The
change in cash flows used in operating activities was driven by a $324.6 million increase in cash used in changes in assets and liabilities, partially offset by a $12.1 million increase in cash provided by net income and non-cash adjustments. The most significant comparative changes included Inventories, net, and to a lesser extent, Accounts receivable, net, Accrued liabilities,and Accounts payable. The $269.4 million increase in cash used in Inventories, net was driven by an increase in inventory purchases in anticipation of sales growth, temporary store closures due to government efforts to control the spread of COVID-19 in China and supply chain disruptions, resulting in higher than
initially planned order cancellations. The $84.8 million increase in cash used in Accounts receivable, net was primarily driven by growth in wholesale sales, partially offset by an increase in collections. The $43.2 million increase in cash used in Accrued liabilities was primarily driven by changes in accruals for incentive compensation. These amounts were partially offset by the $41.9 million increase in cash provided by Accounts payable primarily resulting from the effects of higher in-transit inventory.
Net cash provided by investing activities was $88.5 million for the nine months ended September 30, 2022, compared to net cash used in investing activities of $19.2 million
for the same period in 2021. For the 2022 period, net cash provided by investing activities consisted of $131.0 million in net sales and maturities of short-term investments, partially offset by $42.5 million in cash used for capital expenditures. For the 2021 period, net cash used in investing activities consisted of $20.4 million for capital expenditures, partially offset by $1.2 million in cash provided by sales and maturities of short-term investments.
Net cash used in financing activities was $339.7 million for the nine months ended September 30, 2022 compared to $151.4 million for the same period in 2021. For the 2022 period, net cash used in financing activities primarily consisted of repurchases of common stock of $287.4 million and dividend payments to our shareholders of $56.6 million. For the 2021 period, net cash used in financing
activities primarily consisted of repurchases of common stock of $118.6 million and dividend payments to our shareholders of $51.7 million, partially offset by net proceeds from the issuance of common stock related to share-based compensation of $18.6 million.
Cash and cash equivalents and short-term investments
As of September 30, 2022, we had cash and cash equivalents of $159.2 million and short-term investments of $1.0 million, compared to $763.4 million and $131.1 million, respectively, as of December 31, 2021 and $599.5 million and $1.1 million, respectively, as of September 30, 2021.
Domestic Credit Facility
Refer to Note 4 in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information regarding the domestic credit
facility.
As of September 30, 2022, we had available an unsecured, committed revolving credit facility, which provides for borrowings up to $500.0 million. We were in compliance with all associated covenants and there was no balance outstanding under the facility.
In October 2022, we borrowed $25 million from the domestic credit facility. These borrowings accrue interest at a rate of 4.14% per annum. We plan to repay these borrowings in the fourth quarter of 2022.
International Credit Facility
As of September 30, 2022, our European subsidiary
had available an unsecured, committed line of credit, which is guaranteed by the Company and provides for borrowings up to €4.4 million (approximately US$4.3 million). There was no balance outstanding under the facility.
Other Sources
As of September 30, 2022, collectively, our international subsidiaries had unsecured, uncommitted lines of credit, credit facilities and overdraft facilities, providing for borrowings up to approximately US$102.4 million. There was €4.5 million (approximately US$4.4 million) of borrowings outstanding under an overdraft facility utilized by our European
subsidiary, which was guaranteed by the Company. These borrowings accrued interest at a rate of 3.75% per annum and were repaid in October 2022.
In October 2022, we borrowed €15.0 million (approximately US$15.0 million) from an unsecured, uncommitted credit facility utilized by our European subsidiary, which is guaranteed by the Company. These borrowings accrue interest at a rate of 2.10% per annum. We plan to repay these borrowings in the fourth quarter of 2022.
Capital Requirements
Our
expected short-term and long-term cash needs are primarily for working capital and capital expenditures. We expect to meet these short-term and long-term cash needs primarily with cash flows from operations and, if needed, borrowings from our existing credit facilities. As our cash and cash equivalents and short-term investments balances are generally at their lowest levels just prior to the start of the U.S. holiday season, we borrowed $25 million from our domestic credit facility in October 2022 to meet our short-term cash needs prior to the fourth quarter cash collection of wholesale business receivables and fourth quarter DTC sales.
Our working capital management goals include maintaining an optimal level of inventory necessary to deliver goods on time to our customers and our retail stores to satisfy end consumer demand, alleviating manufacturing capacity constraints, and driving
efficiencies to minimize the cycle time from the purchase of inventory from our suppliers to the collection of accounts receivable balances from our customers. Inventory balances may be elevated in advance of periods of expected high demand. We maintain and continue to make substantial investments in information systems, processes and personnel to support our ongoing demand planning efforts to meet our working capital management goals. As of September 30, 2022, our inventory balance increased to $1,056.9 million, compared to $645.4 million and $720.9 million as of December 31, 2021 and September 30, 2021, respectively. Late inventory receipts and slower consumer demand have resulted in greater than anticipated order cancellations and higher inventory levels. We believe older season inventories represent a manageable portion
of our total inventory mix. To align inventory levels more closely with anticipated demand, we are adjusting future inventory purchases and utilizing our outlet stores to sell excess merchandise. We expect inventory to remain elevated for the next several quarters as we balance reducing inventory levels with maintaining profitability.
We have planned 2022 capital expenditures of approximately $80 to $90 million. This includes investments in our DTC operations, including new stores, and digital and supply chain capabilities to support our strategic priorities. Our actual capital expenditures may differ from the planned amounts depending on factors such as the timing of system implementations and new store openings and related construction as
well as the availability of capital assets from suppliers.
Our long-term goal is to maintain a strong balance sheet and a disciplined approach to capital allocation. Dependent upon market conditions and our strategic priorities, our capital allocation approach includes:
•investing in organic growth opportunities to drive long-term profitable growth;
•returning at least 40% of free cash flow to shareholders through dividends and share repurchases; and
•considering
opportunistic mergers and acquisitions.
Free cash flow is a non-GAAP financial measure. Free cash flow is calculated by reducing net cash flow from operating activities by capital expenditures. Management believes free cash flow provides investors with an important perspective on the cash available for shareholders and acquisitions after making the capital investments required to support ongoing business operations and long-term value creation. Free cash flow does not represent the residual cash flow available for discretionary expenditures since it excludes certain mandatory expenditures. Management uses free cash flow as a measure to assess both business performance and overall liquidity.
There have been no other significant changes to our other cash commitments as described in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's
discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make various estimates and judgments that affect reported amounts of assets, liabilities, sales, cost of sales, and expenses and related disclosure of contingent assets and liabilities. We believe that the estimates, assumptions and judgments involved in the accounting for sales reserves, allowance for uncollectible accounts receivable, excess, close-out and slow-moving inventory, impairment of long-lived assets, intangible assets and goodwill, and income taxes have the greatest potential effect on our financial statements, so we consider these to be our critical accounting policies and estimates. Because of the uncertainty inherent in these matters, actual results may differ from the estimates we use in applying
these critical accounting policies and estimates. We base our ongoing estimates on historical experience and other assumptions that we believe to be reasonable in the circumstances. Refer to Item 7 in our Annual Report on Form 10-K for the year ended December 31, 2021 for additional information regarding our critical accounting policies and estimates.
Management regularly discusses with our audit committee each of our critical accounting estimates, the development and selection of these accounting estimates, and the disclosure about each estimate in this Quarterly Report on Form 10-Q. These discussions typically occur at our quarterly audit committee meetings and include the basis and methodology used in developing and selecting these estimates, the trends in and amounts of these estimates, specific matters affecting the amount of and changes in
these estimates, and any other relevant matters related to these estimates, including significant issues concerning accounting principles and financial statement presentation.
There have been no significant changes to the Company's significant accounting policies described at Note 2 in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2021.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to Note 1 in Part I, Item 1 of this Quarterly Report on Form 10-Q.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has not been any material change in the market risk disclosure contained in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2021.
ITEM 4.
CONTROLS
AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We have evaluated, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of the end of the period covered by this report. These disclosure controls and procedures require information to be disclosed in our Exchange Act reports to be (1) recorded, processed, summarized, and reported in a timely manner and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer.
Based
on our evaluation, we, including our Chief Executive Officer and Chief Financial Officer, have concluded that as of September 30, 2022 our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
CHANGES IN
INTERNAL CONTROL OVER FINANCIAL REPORTING
There have not been any changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We
are involved in litigation and various legal matters arising in the normal course of business, including matters related to employment, retail, intellectual property, contractual agreements, and various regulatory compliance activities. We have considered facts related to legal and regulatory matters and opinions of counsel handling these matters and do not believe the ultimate resolution of these proceedings will have a material adverse effect on our financial condition, results of operations or cash flows.
Item 1A.
RISK FACTORS
In
addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factors should be considered carefully in evaluating our business. Our business, financial condition, results of operations, or cash flows may be materially adversely affected by these and other risks. Please note that additional risks not presently known to us or that we currently deem immaterial may also impair our business and operations.
The following risk factors include changes to and supersede the description of the risk factors associated with our business previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021.
CHANGES
IN PRODUCT DEMAND CAN ADVERSELY AFFECT OUR FINANCIAL RESULTS
We are Subject to a Number of Risks Which May Adversely Affect Consumer and/or Wholesale Customer Demand for Our Products and Lead to a Decline in Sales and/or Earnings.
These risks include, but are not limited to:
•Volatile Economic Conditions. We are a consumer products company and are highly dependent on consumer discretionary spending. Consumer discretionary spending behavior is inherently unpredictable. Consumer demand, and related wholesale customer demand, for our products may not support our sales targets, or may decline, especially during periods of heightened economic uncertainty in our key markets.
•Highly
Competitive Markets. In each of our geographic markets, we face significant competition from global and regional branded apparel, footwear, accessories, and equipment companies. Retailers who are our wholesale customers often pose a significant competitive threat by designing, marketing and distributing apparel, footwear, accessories, and equipment under their own private labels. We also experience direct competition in our DTC business from retailers that are our wholesale customers. This is true in particular in the digital marketplace, where increased consumer expectations and competitive pressure related to various aspects of our e-commerce business, including speed of product delivery, shipping charges, return privileges, and other evolving expectations are key factors.
•Consumer Preferences and Fashion/Product Trends. Changes in consumer preferences, consumer interest in outdoor activities, and
fashion/product trends may have a material adverse effect on our business. We also face risks because our success depends on our and our customers' abilities to anticipate consumer preferences and our ability to respond to changes in a timely manner. Product development and/or production lead times for many of our products may make it more difficult for us to respond rapidly to new or changing fashion/product trends or consumer preferences.
•Brand Images. Our brands have wide recognition, and our success has been due in large part to our ability to maintain, enhance and protect our brand image and reputation and our consumers' and customers' connection to our brands. Our continued success depends in part on our ability to adapt to a rapidly changing media environment, including our increasing reliance on social media and online dissemination of advertising campaigns. In addition, consumer and customer
sentiment could be shaped by our sustainability policies and related design, sourcing and operational decisions.
•Weather Conditions, Including Global Climate Change Trends. Our sales are adversely affected by unseasonable weather conditions. A significant portion of our DTC sales is dependent in part on the weather and our DTC sales growth is likely to be adversely impacted or may even decline in years in which weather conditions do not stimulate demand for our products. Unseasonable weather also impacts future sales to our wholesale customers, who may hold inventory into subsequent seasons in response to unseasonable weather. Our results may be negatively impacted if management is not able to adjust expenses in a timely manner in response to unfavorable weather conditions and the resulting impact on consumer and customer demand. The
magnitude by which global weather patterns trend warmer will influence the extent to which consumer and customer demand for our outerwear products will be negatively affected.
•Shifts
in Retail Traffic Patterns. Shifts in consumer purchasing patterns, including the growth of e-commerce and large one-stop digital marketplaces, e-commerce off-price retailing and online comparison shopping, in our key markets may have an adverse effect on our DTC operations and the financial health of certain of our wholesale customers, some of whom may reduce their brick and mortar store fleet, file for protection under bankruptcy laws, restructure, or cease operations. These related business impacts have already occurred at certain of our wholesale customers. We face increased risk of order reduction and cancellation when dealing with financially ailing wholesale customers. We also extend credit to our wholesale customers based on an assessment of the wholesale customer's financial condition, generally without requiring collateral. We may choose (and have chosen in the past) to limit our credit risk by reducing our level of business with wholesale customers experiencing
financial difficulties and may not be able to replace those revenues with other customers or through our DTC businesses within a reasonable period or at all.
•Innovation. To distinguish our products in the marketplace and achieve commercial success, we rely on product innovations, including new or exclusive technologies, inventive and appealing design or other differentiating features. If we fail to introduce innovative products that appeal to consumers and customers, we could suffer reputational damage to our brands and demand for our products could decline.
Certain of the above risks may be or have been exacerbated by the COVID-19 pandemic, see “An Outbreak of Disease or Similar Public Health Threat, or Fear of Such an Event, Such as the COVID-19 Pandemic, Could Have, and in the Case of the COVID-19 Pandemic Has
Had and is Expected to Continue to Have, an Adverse Impact on Our Business, Operating Results and Financial Condition.”
Our Orders from Wholesale Customers are Subject to Cancellation, Which Could Lead to a Decline in Sales or Gross Profit, Write-downs of Excess Inventory, Increased Discounts or Extended Credit Terms to Our Wholesale Customers.
We do not have long-term contracts with any of our wholesale customers. We do have contracts with our independent international distributors; although these contracts may have annual purchase
minimums that must be met in order to retain distribution rights, the distributors are not otherwise obligated to purchase products from us. Sales to our wholesale customers (other than our international distributors) are generally on an order-by-order basis and are subject to rights of cancellation and rescheduling prior to shipment of orders. We place the majority of our orders for products with our contract manufacturers for our wholesale customers based on these advance orders. We consider the timing of delivery dates in our wholesale customer orders when we forecast our sales and earnings for future periods. If any of our major wholesale customers experience a significant downturn in business or fail to remain committed to our products or brands, or if we are unable to deliver products to our wholesale customer in the agreed upon manner or reach mutually agreeable accommodations,
these customers could postpone, reduce, cancel, or discontinue purchases from us, including after we have begun production on any order, or seek to impose chargebacks.
Our Inability to Accurately Predict Consumer and/or Customer Demand for Our Products Could Lead to a Build-up of Inventory or a Lack of Inventory and Affect Our Gross Margin.
We have implemented key strategic initiatives designed to improve the efficiency of our supply chain, such as spreading out the production of our products over time, which may lead to the build-up of inventory well in advance of the selling seasons for such products. Additionally, we place orders for our products with our contract manufacturers in advance of the related selling
season and, as a result, are vulnerable to changes in consumer and/or customer demand for our products. Therefore, we must accurately forecast consumer and/or customer demand for our products well in advance of the selling season. We are subject to numerous risks relating to consumer and/or customer demand (see “We are Subject to a Number of Risks Which May Adversely Affect Consumer and/or Customer Demand for our Products and Lead to a Decline in Sales and/or Earnings” and “Our Orders from Wholesale Customers are Subject to Cancellation, Which Could Lead to a Decline in Sales or Gross Profit, Write-downs of Excess Inventory, Increased Discounts or Extended Credit Terms to Our Wholesale Customers” for additional information). Our ability to accurately predict consumer and/or customer demand well in advance of the selling season for our products is impacted by these risks, as well as our reliance on manual processes and judgments that are subject to human
error. These risks are heightened during periods of macroeconomic and geopolitical volatility (as we are currently experiencing).
Our failure to accurately forecast consumer and/or customer demand could result in inventory levels in excess of demand (as currently is the case), which may cause inventory write-downs and/or the sale of excess inventory at discounted prices through our owned outlet stores or third-party liquidation channels and could have a material adverse effect on our brand image and gross margin. In addition, we may experience additional costs relating to the storage of excess inventory.
Conversely, if we underestimate consumer and/or customer demand for our products or if our contract manufacturers
or third-party logistics providers are unable to supply or deliver products when we need them, we may experience inventory shortages, which may prevent us from
fulfilling
product orders resulting in lost sales, delay shipments of product, negatively affect our wholesale customer and consumer relationships, result in increased costs to expedite production and delivery, or diminish our ability to build brand loyalty.
WE ARE SUBJECT TO VARIOUS RISKS IN OUR SUPPLY CHAIN.
Our Reliance on Contract Manufacturers, Including Our Ability to Enter Into Purchase Order Commitments with Them and Maintain Quality Standards of Our Products and Standards of Manufacturing Processes at Contract Manufacturers, May Result in Lost Sales and Impact our Gross Margin and Results of Operations.
Our
products are manufactured by contract manufacturers worldwide, primarily in the Asia Pacific region. Although we enter into purchase order commitments with these contract manufacturers each season, we generally do not maintain long-term manufacturing commitments with them, and various factors could interfere with our ability to source our products. Without long-term commitments, there is no assurance that we will be able to secure adequate or timely production capacity and our competitors may obtain production capacities that effectively limit or eliminate the availability of our contract manufacturers. If we are unable to obtain necessary production capacities, we may be unable to meet consumer
demand, resulting in lost sales, as has recently occurred.
In addition, contract manufacturers may fail to perform as expected. If a contract manufacturer fails to ship orders in a timely manner, we could experience supply disruptions that result in missed delivery deadlines, which may cause our customers to cancel their orders, refuse to accept deliveries or demand a reduction in purchase price or cause us to incur additional freight costs.
Reliance on contract manufacturers also creates quality control risks. Contract
manufacturers may need to use sub-contracted manufacturers to fulfill our orders, which could result in compromised quality of our products. A failure in our quality control program, or a failure of our contract manufacturers or their subcontractors to meet our quality control standards, may result in diminished product quality, which in turn could result in increased order cancellations, price concessions, product returns, decreased consumer and customer demand for our products, non-compliance with our product standards or regulatory requirements, or product recalls or other regulatory actions.
We impose standards of manufacturing practices on our contract manufacturers for the benefit of workers and require
compliance with our restricted substances list and product safety and other applicable laws, including environmental, health and safety and forced labor laws. We also require that our contract manufacturers impose these practices, standards and laws on their subcontractors. If a contract manufacturer or subcontractor violates labor or other laws or engages in practices that are not generally accepted as safe or ethical, we may experience production disruptions, lost sales or significant negative publicity that could result in long-term damage to our reputation. In some circumstances, parties may assert that we are liable for our contract manufacturers' or subcontractors' labor and operational practices,
which could have a material adverse effect on our brand image, results of operations and our financial condition.
Volatility in the Availability of and Prices for Raw Materials We Use in Our Products Could Have a Material Adverse Effect on Our Revenues, Costs, Gross Margins and Profitability.
Our products are derived from raw materials that are subject to both disruptions to supply availability and price volatility. If there are supply disruptions or price increases for raw materials we use in our products (as is currently the case) and we are unable to obtain sufficient raw materials to meet production needs or offset rising costs by increasing the price of our products or achieving efficiency improvements, we could experience negative impacts to our sales and profitability.
For
Certain Materials We Depend on a Limited Number of Suppliers, Which May Cause Increased Costs or Production Delays.
As an innovative company, some of our materials are highly technical and/or proprietary and may be available from only one source or a very limited number of sources. As a result, from time to time, we may have difficulty satisfying our material requirements. Although we believe that we can identify and qualify additional contract manufacturers to produce or supply these materials or alternative materials as necessary, there are no guarantees that additional contract manufacturers will be available. In addition, depending on the timing, any changes in sources or materials may result in increased
costs or production delays.
Our Success Depends on Third-Party Logistics Providers and Our and Third-Party Distribution Facilities.
The majority of our products are manufactured outside of our principal sales markets, which requires these products to be consolidated and transported, sometimes over large geographical distances. A small number of third-party logistics providers currently consolidate, deconsolidate and/or transload almost all of our products. Any disruption in the operations of these providers or changes to the costs they charge, due to capacity constraints, volatile fuel prices or otherwise, could materially impact our sales and profitability. A prolonged disruption
in the operations of these providers could also require us to seek alternative distribution arrangements, which may not be available on attractive terms and could lead to delays in distribution of products, either of which could have a significant and material
adverse effect on our business, results of operations and financial condition.
In addition, the ability to move products over larger geographical distances could be constrained by ocean, air and trucking cargo capacity, or disrupted by limitations at ports or borders. These constraints and disruptions could hinder our ability to satisfy demand through our wholesale and DTC businesses, and we may miss delivery deadlines, which may cause our customers to cancel their orders, refuse to accept deliveries or demand a reduction in purchase price. In addition, increases in distribution costs, including but not limited to freight costs, could adversely affect our costs, which we may not be able to offset through price increases or decreased promotions.
We receive our products from third-party logistics providers
at our owned distribution centers in the United States, Canada and France. The fixed costs associated with owning, operating and maintaining such distribution centers during a period of economic weakness or declining sales can result in lower operating efficiencies, financial deleverage and potential impairment in the recorded value of distribution assets.
We also receive and distribute our products through third-party operated distribution facilities internationally and domestically. We depend on these third-parties to manage the operation of their distribution facilities as necessary to meet our business needs. If the third-parties fail to manage these responsibilities, our international and domestic distribution operations could face significant disruptions.
Our ability to meet consumer and customer expectations,
manage inventory, complete sales, and achieve our objectives for operating efficiencies depends on the proper operation of our existing distribution facilities, as well as the facilities of third-parties, the development or expansion of additional distribution capabilities and services, and the timely performance of services by third-parties, including those involved in moving products to and from our distribution facilities and facilities operated by third-parties. The uneven flow of inventory receipts during peak times at our distribution centers may cause us to miss delivery deadlines, as we work through inventory, which in turn may cause our customers to cancel their orders, refuse to accept deliveries or demand a reduction in purchase price.
OUR INVESTMENT IN STRATEGIC PRIORITIES EXPOSES US TO CERTAIN RISKS
We
May Be Unable to Execute Our Strategic Priorities, Which Could Limit Our Ability to Invest in and Grow Our Business.
Our strategic priorities are to drive brand awareness and sales growth through increased, focused demand creation investments, enhance consumer experience and digital capabilities in all of our channels and geographies, expand and improve global DTC operations with supporting processes and systems and invest in our people and optimize our organization across our portfolio of brands.
To implement our strategic priorities, we must continue to, among other things, modify and fund various aspects of our business, effectively prioritize our initiatives and execute effective change management. These efforts, coupled with a continuous focus on expense discipline, may place strain on internal resources,
and we may have operating difficulties as a result.
Our strategic priorities also generally involve increased expenditures, which could cause our profitability or operating margin to decline if we are unable to offset our increased spending with increased sales or gross profit or comparable reductions in other operating costs. This could result in a decision to delay, modify, or terminate certain initiatives related to our strategic priorities.
Initiatives to Upgrade Our Business Processes and Information Technology Systems to Optimize Our Operational and Financial Performance Involve Many Risks Which Could Result in, Among Other Things, Business Interruptions, Higher Costs and Lost Profits.
We regularly implement business
process improvement and information technology initiatives intended to optimize our operational and financial performance. Transitioning to these new or upgraded processes and systems requires significant capital investments and personnel resources. Implementation is also highly dependent on the coordination of numerous employees, contractors and software and system providers. The interdependence of these processes and systems is a significant risk to the successful completion and continued refinement of these initiatives, and the failure of any aspect could have a material adverse effect on the functionality of our overall business. We may also experience difficulties in implementing or operating our new or upgraded business processes or information technology systems, including, but not limited to, ineffective or inefficient operations, significant system failures, system outages, delayed implementation and loss of system availability, which could lead to increased
implementation and/or operational costs, loss or corruption of data, delayed shipments, excess inventory and interruptions of operations resulting in lost sales and/or profits.
We
May Not Realize Returns on Our Fixed Cost Investments in Our DTC Business Operations.
We continue to make investments in our digital capabilities and our DTC operations, including new stores. (See “Initiatives to Upgrade Our Business Processes and Information Technology Systems to Optimize Our Operational and Financial Performance Involve Many Risks Which Could Result in, Among Other Things, Business Interruptions, Higher Costs and Lost Profits”). Since many of the costs of our DTC operations are fixed, we may be unable to reduce expenses in order to avoid losses or negative cash flows if we have insufficient sales, including as a result of restrictions on operations. We may not be able to exit DTC brick and mortar locations and related leases at all or without significant cost or loss, renegotiate the terms thereof, or effectively manage the profitability of our existing brick
and mortar stores. In addition, obtaining real estate and effectively renewing real estate leases for our DTC brick and mortar operations is subject to the real estate market and we may not be able to secure adequate new locations or successfully renew leases for existing locations.
WE ARE SUBJECT TO CERTAIN INFORMATION TECHNOLOGY RISKS
We Rely on Information Technology Systems, including Third-Party Cloud-based Solutions, and Any Failure of These Systems May Result in Disruptions or Outages in Our E-Commerce and In-Store Retail Platforms, Loss of Processing Capabilities, and/or Loss of Data, Any of Which May Have a Material Adverse Effect on Our Financial Condition, Results of Operations or Cash Flow.
Our reputation and ability to
attract, retain and serve consumers and customers is dependent upon the reliable performance of our underlying technology infrastructure and external service providers, including third-party cloud-based solutions. These systems are vulnerable to damage or interruption and we have experienced interruptions in the past. We rely on cloud-based solutions furnished by third-parties primarily to allocate resources, pay vendors, collect from customers, process transactions, develop demand and supply plans, manage product design, production, transportation, and distribution, forecast and report operating results, meet regulatory requirements and administer employee payroll and benefits, among other functions. In addition, our DTC operations, both in-store and online, rely on cloud-based solutions to process transactions. We have also designed a significant portion of our software and computer systems to utilize data processing and storage capabilities from third-party cloud
solution providers. Both our on-premises and cloud-based infrastructure may be susceptible to outages due to any number of reasons, including, human error, fire, floods, power loss, telecommunications failures, terrorist attacks and similar events. Despite the implementation of security measures that we believe to be reasonable, both our on-premises and our cloud-based infrastructure may also be vulnerable to hacking, computer viruses, the installation of malware and similar disruptions either by third-parties or employees, which may result in outages. We do not have redundancy for all of our systems and our disaster recovery planning may not account for all eventualities. If we or our existing third-party cloud-based solution providers experience interruptions in service regularly or for a prolonged basis, or other similar issues, our business could be seriously harmed and, in some instances, our consumers and customers may not be able to purchase our products, which
could significantly and negatively affect our sales. Additionally, our existing cloud-based solution providers have broad discretion to change and interpret their terms of service and other policies with respect to us, and they may take actions beyond our control that could harm our business. We also may not be able to control the quality of the systems and services we receive from our third-party cloud-based solution providers. Any transition of the cloud-based solutions currently provided to different cloud providers would be difficult to implement and may cause us to incur significant time and expense.
If we and/or our cloud-based solution providers are not successful in preventing or effectively responding to outages and cyberattacks, our financial condition, results of operations and cash flow could be materially and adversely affected.
A
Security Breach of Our or Our Third-Parties' Systems, Exposure of Personal or Confidential Information or Increased Government Regulation Relating to Handling of Personal Data, Could, Among Other Things, Disrupt Our Operations or Cause Us to Incur Substantial Costs or Negatively Affect Our Reputation.
We and many of our third-party vendors manage and maintain various types of proprietary information and sensitive and confidential data relating to our business, such as personally identifiable information of our consumers, our customers, our employees, and our business partners, as well as credit card information in certain instances. Unauthorized parties may attempt to gain access to these systems or information through fraud or other means of deceiving our employees or third-party service providers. The methods used to obtain unauthorized access, disable or degrade service or sabotage
systems are constantly changing and evolving, and may be difficult to anticipate or detect for long periods of time. The ever-evolving threats mean we and our third-parties must continually evaluate and adapt our systems and processes, and there is no guarantee that these efforts will be adequate to safeguard against all data security breaches or misuses of data. Any breaches of our or our third-parties’ systems could expose us, our customers, our consumers, our suppliers, our employees, or other individuals that may be affected to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our reputation, or otherwise harm our business. While we maintain cyber liability insurance policies for coverage in the event of a cybersecurity incident, we cannot be certain that our existing coverage will continue to be available on acceptable terms or will be available, and in
sufficient amount, to cover the potentially significant losses that could result from a cybersecurity incident or that the insurer will not deny coverage as to any future claims.
In
addition, as the regulatory environment related to information security, data collection and use and privacy becomes increasingly rigorous, with new and constantly changing requirements applicable to our business, compliance with those requirements could also result in additional costs or liabilities. Non-U.S. data privacy and data security laws, various U.S. federal and state laws and other information privacy and security standards may be applicable to us. Significant legislative, judicial or regulatory changes have been and could be issued in the future. As new requirements are issued, new processes must be implemented to ensure compliance. In addition, previously implemented processes must be continually refined. This work is accomplished through significant efforts by our employees. The diverted attention of these employees may impact our operations and there may be additional costs incurred by us for third-party resources to advise on the constantly changing landscape.
Limitations on the use of data may also impact our future business strategies. Additionally, violations of these requirements could result in significant penalties or litigation from consumers.
In June 2021, the European Commission finalized recommendations in relation to cross border data transfers and published new versions of the Standard Contractual Clauses. The new requirements may cause us to incur costs and expenses in order to comply and may impact the transfer of personal data throughout the Company and to third parties.
We Depend on Certain Legacy Information Technology Systems, Which May Inhibit Our Ability to Operate Efficiently.
Our
legacy product development, retail and other systems, on which we continue to manage a portion of our business activities, rely on the availability of limited internal and external resources with the expertise to maintain the systems. In addition, our legacy systems, including aged systems in our Japanese and Korean businesses, may not support desired functionality for our operations and may inhibit our ability to operate efficiently. As we continue to transition from our legacy systems and implement new systems, certain functionality and information from our legacy systems, including that of third-party systems that interface with our legacy systems, may not be fully compatible with the new systems.
WE ARE SUBJECT TO LEGAL AND REGULATORY RISKS
Our Success Depends on the Protection of Our Intellectual Property Rights.
Our
registered and common law trademarks, our patented or patent-pending designs and technologies, trade dress and the overall appearance and image of our products have significant value and are important to our ability to differentiate our products from those of our competitors.
As we strive to achieve product innovations, extend our brands into new product categories and expand the geographic scope of our marketing, we face a greater risk of inadvertent infringements of third-party rights or compliance issues with regulations applicable to products with technical features or components. We may become subject to litigation based on allegations of infringement or other improper use of intellectual property rights of third-parties. In addition, failure to successfully obtain and maintain patents on innovations could negatively affect our ability to market and sell our products.
We
regularly discover products that are counterfeit reproductions of our products or that otherwise infringe on our proprietary rights. Increased instances of counterfeit manufactured products and sales may adversely affect our sales and the reputation of our brands and result in a shift of consumer preference away from our products. The actions we take to establish and protect trademarks and other proprietary rights may not be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as violations of proprietary rights. In markets outside of the United States, it may be more difficult for us to establish our proprietary rights and to successfully challenge use of those rights by other parties.
Litigation is often necessary to defend against claims of infringement or to enforce and protect our intellectual property rights. Intellectual
property litigation may be costly and may divert management's attention from the operation of our business. Adverse determinations in any litigation may result in the loss of our proprietary rights, subject us to significant liabilities or require us to seek licenses from third-parties, which may not be available on commercially reasonable terms, if at all.
Certain
of Our Products Are Subject to Product Regulations and/or Carry Warranties, Which May Cause an Increase to Our Expenses in the Event of Non-Compliance and/or Warranty Claims.
Our products are subject to increasingly stringent and complex domestic and foreign product labeling, performance, environmental and safety standards, laws and other regulations (such as those that will soon impact textiles containing certain polyfluoroalkyl substances). These requirements could result in greater expense associated with compliance efforts, and failure to comply with these regulations could result in a delay, non-delivery, recall, or destruction of inventory shipments during key seasons or in other financial penalties. Significant or continuing noncompliance with these standards and laws could disrupt our business and harm our reputation.
Our
products are generally used in outdoor activities, sometimes in severe conditions. Product recalls or product liability claims resulting from the failure, or alleged failure, of our products could have a material adverse effect on the reputation of our brands and result in additional expenses. Most of our products carry limited warranties for defects in quality and workmanship. We maintain a warranty reserve for estimated future warranty claims, but the actual costs of servicing future warranty claims may exceed the reserve.
We May Have Additional Tax Liabilities or Experience Increased Volatility in Our Effective Tax Rate.
As a global company, we determine our income tax liability in various tax jurisdictions and our effective tax rate based on an analysis and interpretation of local tax laws and regulations
and our financial projections. This analysis requires a significant amount of judgment and estimation and is often based on various assumptions about the future, which, in times of economic disruptions, are highly uncertain. These determinations are the subject of periodic domestic and foreign tax audits. Although we accrue for uncertain tax positions, our accruals may be insufficient to satisfy unfavorable findings. Unfavorable audit findings and tax rulings may result in payment of taxes, fines and penalties for prior periods and higher tax rates in future periods.
On December 22, 2017, the United States government enacted comprehensive tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the "TCJA"). The TCJA made broad and complex changes to the United States tax code. In addition, on March
27, 2020, the United States government enacted the U.S. Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). A change in interpretation of the applicable revisions to the United States tax code and related tax accounting guidance, changes in assumptions made in developing these estimates, and regulatory guidance that may be issued with respect to the applicable revisions to the United States tax code, and state tax implications as a result of the TCJA, the CARES Act, and other recent legislation may cause actual amounts to differ from our provisional estimates. In addition, proposals to reform U.S. and foreign tax laws could significantly impact how U.S. multinational corporations are taxed on foreign earnings and could increase the U.S. corporate tax rate. Although we cannot predict whether or in what form these proposals will pass, several of the proposals considered, if enacted into law, could have an adverse impact on our effective tax
rate, income tax expense and cash flows.
Other changes in the tax laws of the jurisdictions where we do business, including an increase in tax rates or an adverse change in the treatment of an item of income or expense, could result in a material increase in our tax expense. For example, changes in the tax laws of foreign jurisdictions could arise as a result of the Base Erosion and Profit Shifting project undertaken by the Organization for Economic Co-operation and Development ("OECD"). The OECD, which represents a coalition of member countries, has recommended changes to numerous long-standing tax principles. In addition, recent efforts to reform how digital profits are taxed globally could have significant compliance and cost implications. As these changes are adopted by countries, tax uncertainty could increase and may adversely affect our provision for income taxes.
WE
OPERATE GLOBALLY AND ARE SUBJECT TO SIGNIFICANT RISKS IN MANY JURISDICTIONS
Global Regulation and Economic and Political Conditions, as well as Potential Changes in Regulations, Legislation and Government Policy, May Negatively Affect Our Business.
We are subject to risks generally associated with doing business internationally. These risks include, but are not limited to, the burden of complying with, and unexpected changes to, foreign and domestic laws and regulations, such as anti-corruption and forced labor regulations and sanctions regimes, climate-change regulations, the effects of fiscal and political crises and political and economic disputes, changes in diverse consumer preferences, foreign currency exchange rate fluctuations, managing a diverse and widespread workforce, political unrest, terrorist
acts, military operations, disruptions or delays in shipments, disease outbreaks, natural disasters, and changes in economic conditions in countries in which we contract to manufacture, source raw materials or sell products. Our ability to sell products in certain markets, demand for our products in certain markets, our ability to collect accounts receivable, our contract manufacturers' ability to procure raw materials or manufacture products, distribution and logistics providers' ability to operate, our ability to operate brick and mortar stores, our workforce, and our cost of doing business (including the cost of freight and logistics) may be impacted by these events should they occur and
laws and regulations. Our exposure to these risks is heightened in Vietnam, where a significant portion of our contract manufacturing is located,
and in China, where a large portion of the raw materials used in our products is sourced by our contract manufacturers. Should certain of these events occur in Vietnam or China, they could cause a substantial disruption to our business and have a material adverse effect on our financial condition, results of operations and cash flows. Historically, this risk was also heightened in Russia, where our largest international distributor was located. However, following Russia's invasion of Ukraine, we paused all new orders with our Russia-based third-party international distributor for the Russia region. In 2021, the Russia-based distributor accounted for $66.6 million in revenue.
In addition, many of our imported products are subject to duties, tariffs or other import limitations that affect the cost
and quantity of various types of goods imported into the United States and other markets, including the punitive tariffs on U.S. products imported from China imposed in 2019. In addition, goods suspected of being manufactured with forced labor could be blocked from importation into the U.S., which could materially impact sales.
In connection with the United Kingdom's exit from the European Union (commonly referred to as "Brexit"), on December 24, 2020, the European Union ("E.U.") and the United Kingdom ("U.K.") reached an agreement, the E.U.-U.K. Trade and Cooperation Agreement, to govern aspects of the relationship of the E.U. and U.K. following Brexit. As a result of no longer having "free circulation" between the U.K. and the E.U., we have incurred additional duties. These additional costs may be mitigated
in the future.
Fluctuations in Inflation and Currency Exchange Rates Could Result in Lower Revenues, Higher Costs and/or Decreased Margins and Earnings.
We derive a significant portion of our sales from markets outside the United States, which consist of sales to wholesale customers and directly to consumers by our entities in Europe, Asia, and Canada and sales to independent international distributors who operate within EMEA and LAAP. The majority of our purchases of finished goods inventory from contract manufacturers are denominated in United States dollars, including purchases by our foreign entities. These purchase and sale transactions expose us to the volatility of global economic conditions, including fluctuations
in inflation and foreign currency exchange rates. Our international revenues and expenses generally are derived from sales and operations in foreign currencies, and these revenues and expenses could be and have been affected by currency fluctuations, specifically amounts recorded in foreign currencies and translated into United States dollars for consolidated financial reporting, as weakening of foreign currencies relative to the United States dollar adversely affects the United States dollar value of the Company’s foreign currency-denominated sales and earnings.
Our exposure is increased with respect to our wholesale customers (including international distributors), where, in order to facilitate solicitation of advance orders for the spring and fall seasons, we establish local-currency-denominated wholesale
and retail price lists in each of our foreign entities approximately six to nine months prior to United States dollar-denominated seasonal inventory purchases. As a result, our consolidated results are directly exposed to transactional foreign currency exchange risk and have been and could be further impacted by the United States dollar strengthening during the six to nine months between when we established seasonal local-currency prices and when we purchase inventory. In addition to the direct currency exchange rate exposures described above, our wholesale business is indirectly exposed to currency exchange rate risks. Weakening of a wholesale customer’s functional currency relative to the United States dollar makes it more expensive for it to purchase finished goods inventory from us, which may cause a wholesale customer to cancel orders or increase prices for our products, which may make our products less price-competitive in those markets. In addition, in order to
make purchases and pay us on a timely basis, our international distributors must exchange sufficient quantities of their functional currency for United States dollars through the financial markets and may be limited in the amount of United States dollars they are able to obtain.
We employ several strategies in an effort to mitigate this transactional currency risk, but these strategies may not and, in the current environment, have not fully mitigated the negative effects of adverse foreign currency exchange rate fluctuations on the cost of our finished goods in a given period or that price increases will be accepted by our wholesale customers, international distributors or consumers. Our gross margins are adversely affected whenever we are not able to offset the full extent of finished goods cost increases caused by adverse fluctuations in foreign currency exchange rates.
Currency
exchange rate fluctuations may also create indirect risk to our business by disrupting the business of independent finished goods manufacturers from which we purchase our products. When their functional currencies weaken in relation to other currencies, the raw materials they purchase on global commodities markets become more expensive and more difficult to finance. Although each manufacturer bears the full risk of fluctuations in the value of its currency against other currencies, our business can be and has been indirectly affected when adverse fluctuations cause a manufacturer to raise the prices of goods it produces for us, disrupt the manufacturer's ability to purchase the necessary raw materials on a timely basis, or disrupt the manufacturer's ability to function as an ongoing business.
Our Ability to Manage Fixed Costs Across a Business That is Affected by Seasonality May Impact Our Profits.
Our business is affected by the general seasonal trends common to the outdoor industry. Our products are marketed on a seasonal basis and our annual net sales are weighted heavily toward the fall/winter season, while our operating expenses are more equally distributed throughout the year. As a result, often a majority of our operating profits are generated in the second
half of the year. If we are unable to manage our fixed costs in the seasons where we experience lower net sales, our profits may be adversely impacted.
Labor Matters, Changes in Labor Laws and Our Ability to Meet Our Labor Needs May Reduce Our Revenues and Earnings.
Our business depends on our ability to source and distribute products in a timely manner. While a majority of our own operations are not subject to organized labor agreements, our relationship with our Cambrai distribution center employees is governed by French law, which includes a formal representation of employees by a Works Council and the application of a collective bargaining agreement. Matters that may affect our workforce (including COVID-19 infections or the risk thereof) at contract
manufacturers where our goods are produced, shipping ports, transportation carriers, retail stores, or distribution centers create risks for our business, particularly if these matters result in work shut-downs (with little to no notice), slowdowns, lockouts, strikes, limitations on the number of individuals able to work (e.g. social distancing) or other disruptions. The foregoing includes potential impacts to our business as a result of the International Longshore and Warehouse Union negotiations. Labor matters may have a material adverse effect on our business, potentially resulting in canceled orders by customers, inability to fulfill potential e-commerce demand, unanticipated inventory accumulation and reduced net sales and net income.
In addition, our ability to meet our labor needs at our distribution centers, retail stores, corporate headquarters, and regional subsidiaries,
including our ability to find qualified employees while controlling wage and related labor costs, is generally subject to numerous external factors, including the availability of a sufficient number of qualified people in the work force of the markets in which our operations are located, unemployment levels within those markets, absenteeism, prevailing wage rates, changing demographics, parental responsibilities, health and other insurance costs, adoption of new or revised employment and labor laws and regulations, and fear of contracting COVID-19. Our ability to source, distribute and sell products in a timely and cost-effective manner may be negatively affected to the extent we experience these factors. Our ability to comply with labor laws, including our ability to adapt to rapidly changing labor laws, as well as provide a safe working environment may increase our risk of litigation and cause us to incur additional costs.
We
May Incur Additional Expenses, Be Unable to Obtain Financing, or Be Unable to Meet Financial Covenants of Our Financing Agreements as a Result of Downturns in the Global Markets.
Our vendors, wholesale customers, licensees and other participants in our supply chain may require access to credit markets in order to do business. Credit market conditions may slow our collection efforts as our wholesale customers find it more difficult to obtain necessary financing, leading to higher than normal accounts receivable. This could result in greater expense associated with collection efforts and increased bad debt expense. Credit conditions and/or supply chain disruptions may impair our vendors' ability to finance the purchase of raw materials or general working capital needs to support our production requirements, resulting in a delay or non-receipt of inventory shipments during key seasons.
Historically,
we have limited our reliance on debt to finance our working capital, capital expenditures and investing activity requirements. We expect to fund our future capital expenditures with existing cash, expected operating cash flows and credit facilities, but, if the need arises to finance additional expenditures, we may need to seek additional funding. Our ability to obtain additional financing will depend on many factors, including prevailing market conditions, our financial condition and our ability to negotiate favorable terms and conditions. Financing may not be available on terms that are acceptable or favorable to us, if at all.
Our credit agreements have various financial and other covenants. If an event of default were to occur, the lenders could, among other things, declare outstanding amounts due and payable. If we were to borrow under our credit agreements we would be subject to
market interest rates and may incur additional interest expense when borrowing in a high interest rate environment.
Acquisitions Are Subject to Many Risks.
From time to time, we may pursue growth through strategic acquisitions of assets or companies. Acquisitions are subject to many risks, including potential loss of significant customers or key personnel of the acquired business as a result of the change in ownership, difficulty integrating the operations of the acquired business or achieving targeted efficiencies, the incurrence of substantial costs and expenses related to the acquisition effort, and diversion of management's attention from other aspects of our business operations.
Acquisitions may also cause us to incur debt or result in dilutive issuances of our equity securities. Our acquisitions may cause large one-time expenses or create goodwill or other intangible assets that could result in
significant impairment charges in the future. We also make various estimates and assumptions in order to determine purchase price allocation and estimate the fair value of assets acquired and liabilities assumed. If our estimates or assumptions used to value these assets and liabilities vary from actual or future projected results, we may be exposed to losses, including impairment losses, that could be material.
We do not provide any assurance that we will be able to successfully integrate the operations of any acquired businesses into our operations or achieve the expected benefits of any acquisitions. The failure to successfully integrate newly acquired businesses or achieve the expected benefits of strategic acquisitions in the future could have an adverse effect on our financial condition, results of operations or cash flows. We may not complete a potential acquisition for a variety
of reasons, but we may nonetheless incur material costs in the preliminary stages of evaluating and pursuing such an acquisition that we cannot recover.
Extreme Weather Conditions, Climate Change, and Natural Disasters Could Negatively Impact Our Operating Results and Financial Condition.
Extreme weather conditions in the areas in which our retail stores, suppliers, consumers, customers, distribution centers, headquarters and vendors are located could adversely affect our operating results and financial condition. Moreover, climate change and natural disasters such as earthquakes, hurricanes and tsunamis, whether occurring in the United States or abroad, and their related consequences and effects, including energy shortages and public health issues, could disrupt our operations, the operations of our vendors
and other suppliers or result in economic instability and changes in consumer preferences and spending that may negatively impact our operating results and financial condition.
An Outbreak of Disease or Similar Public Health Threat, Such as the COVID-19 Pandemic, Could Have, and in the Case of the COVID-19 Pandemic Has Had and is Expected to Continue to Have, an Adverse Impact on Our Business, Operating Results and Financial Condition.
An outbreak of disease or similar public health threat, such as the COVID-19 pandemic, could have, and in the case of the COVID-19 pandemic has had and is expected to continue to have, an adverse impact on our business, financial condition and operating results, including in the form of lowered net sales and the delay of inventory production and fulfillment in impacted regions.
Fear of contracting COVID-19, individuals contracting COVID-19 and the actions taken, and that may be taken, by governmental authorities, our third-party logistics providers, our landlords, our competitors or by us relating to the COVID-19 pandemic may (and in many cases, have):
•Cause disruptions in the supply chain, including the ability to produce and deliver product as expected (see “Our Reliance on Contract Manufacturers, Including Our Ability to Enter Into Purchase Order Commitments with Them and Maintain Quality Standards of Our Products and Standards of Manufacturing Processes at Contract Manufacturers, May Result in Lost Sales and Impact our Gross Margin and Results of Operations”, “For Certain Materials
We Depend on a Limited Number of Suppliers, Which May Cause Increased Costs or Production Delays” and “Our Success Depends on Third-Party Logistics Providers and Our and Third-Party Distribution Facilities”);
•Result in canceled orders, non-payment for orders received and/or delayed payment for orders received (see "Our Orders from Wholesale Customers are Subject to Cancellation, Which Could Lead to a Decline in Sales or Gross Profit, Write-downs of Excess Inventory, Increased Discounts or Extended Credit Terms to Our Wholesale Customers");
•Restrict the operation of our retail store operations and our ability to meet consumer demand at our stores (see "Labor Matters, Changes in Labor Laws and Our Ability to Meet Our Labor Needs May Reduce Our Revenues and Earnings" and "We May Not Realize Returns on Our
Fixed Cost Investments in Our DTC Business Operations");
•Cause inflation and currency rate fluctuations (see “Fluctuations in Inflation and Currency Exchange Rates Could Result in Lower Revenues, Higher Costs and/or Decreased Margins and Earnings”);
•Result in a misalignment between demand and supply (see "Our Inability to Accurately Predict Consumer and/or Customer Demand for Our Products Could Lead to a Build-up of Inventory or a Lack of Inventory and Affect Our Gross Margin");
•Result in labor shortages, including as a result of any vaccine mandate or our return to work policies ("Labor Matters, Changes in Labor Laws and Our Ability to Meet Our Labor Needs May Reduce Our Revenues and Earnings");
•Increase
reliance by consumers on e-commerce platforms (see "We are Subject to a Number of Risks Which May Adversely Affect Consumer and/or Wholesale Customer Demand for Our Products and Lead to a Decline in Sales and/or Earnings" and "We Rely on Information Technology Systems, including Third-Party Cloud-based Solutions, and Any Failure of These Systems May Result in Disruptions or Outages in Our E-Commerce and In-Store Retail Platforms, Loss of Processing Capabilities, and/or Loss of Data, Any of Which May Have a Material Adverse Effect on Our Financial Condition, Results of Operations or Cash Flow");
•Impair the financial health of certain of our wholesale customers (see "We are Subject to a Number of Risks Which May Adversely Affect Consumer and/or Wholesale Customer Demand for Our Products and Lead to a Decline in Sales and/or Earnings");
•Impact previous business assumptions (see "Acquisitions Are Subject to Many Risks", "We May Have Additional Tax Liabilities or Experience Increased Volatility in Our Effective Tax Rate" and "Our Inability to Accurately Predict Consumer and/or Customer Demand for Our Products Could Lead to a Build-up of Inventory or
a Lack of Inventory and Affect Our Gross Margin");
•Increase the reliance of our employees on digital solutions (see “We Rely on Information Technology Systems, including Third-Party Cloud-based Solutions, and Any Failure of These Systems May Result in Disruptions or Outages in Our E-Commerce and In-Store Retail Platforms, Loss of Processing Capabilities, and/or Loss of Data, Any of Which May Have a Material Adverse Effect on Our Financial Condition, Results of Operations or Cash Flow” and “A Security Breach of Our or Our Third-Parties' Systems, Exposure of Personal or Confidential Information or Increased Government Regulation Relating to Handling of Personal Data, Could, Among Other Things, Disrupt Our Operations or Cause Us to Incur Substantial Costs or Negatively Affect Our Reputation”);
•Restrict global business
and travel (see “Global Regulation and Economic and Political Conditions, as well as Potential Changes in Regulations, Legislation and Government Policy, May Negatively Affect Our Business”);
•Impair our ability to ship product through our owned or affiliated distribution centers, including as a result of capacity reductions, shift changes, labor shortages, higher than normal absenteeism and/or the complete shut-downs of facilities for deep cleaning procedures (see “Labor Matters, Changes in Labor Laws and Our Ability to Meet Our Labor Needs May Reduce Our Revenues and Earnings”);
•Cause rapid changes to employment and tax law (see “Labor Matters, Changes in Labor Laws and Our Ability to Meet Our Labor Needs May Reduce Our Revenues and Earnings”, and "We May Have Additional Tax Liabilities or Experience Increased
Volatility in Our Effective Tax Rate");
•Impair our key personnel (see “We Depend on Key Personnel”);
•Result in incremental costs from the adoption of preventative measures, including providing facial coverings and hand sanitizer, rearranging operations to follow social distancing protocols, conducting temperature checks and undertaking regular and thorough disinfecting of surfaces, and providing testing; and/or
•Cause any number of other disruptions to our business, the risks of which may be otherwise identified herein.
In addition, the impact of the COVID-19 pandemic may also exacerbate other risks discussed in this Item 1A, any of which could have a material effect
on us. The COVID-19 pandemic is ongoing, and its dynamic nature, including uncertainties relating to the duration of the pandemic, the return of consumer confidence and actions that may be taken by governmental authorities, landlords, our competitors or by us to contain the pandemic or to treat its impact, makes it difficult to forecast the degree to, or the time period over, which our sales and operations will be affected.
Our Investment Securities May Be Adversely Affected by Market Conditions.
Our investment portfolio is subject to a number of risks and uncertainties. Changes in market conditions, such as those that accompany an economic downturn or economic uncertainty, may negatively affect the value and liquidity of our investment portfolio, perhaps significantly. Our ability to find diversified investments
that are both safe and liquid and that provide a reasonable return may be impaired, potentially resulting in lower interest income, less diversification, longer investment maturities, or other-than-temporary impairments.
We Depend on Key Personnel.
Our future success will depend in part on our ability to attract, retain and develop key talent and to effectively manage succession. We face intense competition for these individuals worldwide, and there is a significant concentration of well-funded apparel and footwear competitors near our headquarters in Portland, Oregon. We may not be able to attract qualified new employees or retain existing employees, which may have a material adverse effect on our financial condition, results of operations or cash flows.
We
License our Proprietary Rights to Third-Parties and Could Suffer Reputational Damage to Our Brands if We Fail to Choose Appropriate Licensees.
We currently license, and expect to continue licensing, certain of our proprietary rights, such as trademarks or copyrighted material, to third-parties. We rely on our licensees to help preserve the value of our brands. Although we attempt to protect our brands through approval rights, we cannot completely control the use of our licensed brands by our licensees. The misuse of a brand by or negative publicity involving a licensee could have a material adverse effect on that brand and on us.
In addition, from time to time we license the right to operate retail stores for our brands to third-parties, primarily to our independent international distributors. We provide training to support these stores and set operational standards. However, these third-parties may not operate the stores in a manner consistent with our standards, which could cause reputational damage to our brands or harm these third-parties' sales.
RISKS RELATED TO OUR SECURITIES
Our Common Stock Price May Be Volatile.
Our
common stock is traded on the NASDAQ Global Select Market. The size of our public float and our average daily trading volume makes the price of our common stock susceptible to large degrees of fluctuation. Factors such as general market conditions, actions by institutional investors to rapidly accumulate or divest of a substantial number of our shares, fluctuations in financial results, variances from financial market expectations, changes in earnings estimates or recommendations by analysts, or announcements by us or our competitors may cause the market price of our common stock to fluctuate, perhaps substantially.
Certain Shareholders Have Substantial Control Over us and Are Able to Influence Corporate Matters.
As of September 30, 2022, three related shareholders,
Timothy P. Boyle, Joseph P. Boyle, and Molly E. Boyle, controlled just under 50% of our common stock outstanding. As a result, if acting together, Timothy P. Boyle, Joseph P. Boyle, and Molly E. Boyle are able to exercise significant influence over all matters requiring shareholder approval. These holdings could be significantly diminished (and with them the related effective control percentage) to satisfy any applicable estate or unrealized gains tax obligations of holders.
The Sale or Proposed Sale of a Substantial Number of Shares of Our Common Stock Could Cause the Market Price of Our Common Stock to Decline.
Shares held by Timothy P. Boyle, Joseph P. Boyle, and Molly E. Boyle, are available for resale, subject to the requirements of, and the rules under, the Securities Act of 1933 and the Securities
Exchange Act of 1934. The sale or the prospect of the sale of a substantial number of these shares may have an adverse effect on the market price of our common stock.
We also may issue our capital stock or securities convertible into our capital stock from time to time in connection with a financing, acquisition, investments, or otherwise. Any such issuance could result in substantial dilution to our existing shareholders and cause the market price of our common stock to decline.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
Since the inception of our share repurchase
program in 2004 through September 30, 2022, our Board of Directors has authorized the repurchase of $2.0 billion of our common stock, including an approved increase in April 2022 of $500 million. Shares of our common stock may be purchased in the open market or through privately negotiated transactions, subject to market conditions, and generally settle subsequent to the trade date. The repurchase program does not obligate us to acquire any specific number of shares or to acquire shares over any specified period of time. Under this program as of September 30, 2022, we had repurchased 31.7 million shares at an aggregate purchase price of $1,470.6 million, and had $529.4 million remaining
available. The Company did not repurchase common stock during the three months ended September 30, 2022.
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Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
