10-K 1 deckfy2016331201610-k.htm 10-K Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant To Section 13 or 15(d)
of the Securities Exchange Act of 1934

For The Fiscal Year Ended March 31, 2016

Commission File Number: 001-36436

DECKERS OUTDOOR CORPORATION

(Exact name of registrant as specified in its charter)

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

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

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, par value $0.01 per share
New York Stock Exchange
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o No ý

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x
Accelerated filer o
 
 
Non-accelerated filer o
Smaller reporting company o
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

At September 30, 2015, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting stock held by the non-affiliates of the registrant was approximately $1,866,513,908, based on the number of shares held by non-affiliates of the registrant as of that date, and the last reported sale price of the registrant's common stock on the New York Stock Exchange on that date, which was $58.06. This calculation does not reflect a determination that persons are affiliates for any other purposes.

The number of shares of the registrant's Common Stock outstanding at May 13, 2016 was 32,023,300.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement on Schedule 14A relating to the registrant's 2016 annual meeting of stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, are incorporated by reference in Part III of this Annual Report on Form 10-K. With the exception of the portions of the Proxy Statement specifically incorporated herein by reference, the Proxy Statement and related proxy solicitation materials are not deemed to be filed as part of this Annual Report on Form 10-K.
 




DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS

 
 
Page
 
 
Item 1B.
Unresolved Staff Comments
*
Item 4.
Mine Safety Disclosures
*
 
 
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
*
Item 9B.
Other Information
*
 
 
 
 
 
 

*Not applicable.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K, filed with the Securities and Exchange Commission (SEC) on May 31, 2016 (Annual Report on Form 10-K), and the information and documents incorporated by reference in this Annual Report on Form 10-K, contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which statements are subject to considerable risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements other than statements of historical fact contained in, or incorporated by reference into, this Annual Report on Form 10-K, including statements regarding our future or assumed condition, results of operations, business plans and strategies, competitive position and market opportunities. We have attempted to identify forward-looking statements by using words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” “will,” or “would,” and similar expressions or the negative of these expressions. Specifically, this Annual Report on Form 10-K, and the information and documents incorporated by reference in this Annual Report on Form 10-K, contains forward-looking statements relating to, among other things:

the results of our retail store fleet optimization and brand office consolidation;
the successful implementation of our Business Transformation Project, as defined herein;    
our global business, growth, operating, investing, and financing strategies;
our product offerings, distribution channels, and geographic mix;
the success of new products, brands, and growth initiatives;
the impact of seasonality and weather on our operations;
expectations regarding our net sales and earnings growth and other financial metrics;
our development of worldwide distribution channel;
trends affecting our financial condition, results of operations, or cash flows;
our expectations for expansion of our Direct-to-Consumer (DTC) capabilities;
overall global economic trends including foreign currency exchange rate fluctuations;
reliability of overseas factory production and storage;
the availability and cost of raw materials; and
the impact of recent accounting pronouncements.

Forward-looking statements represent our management's current expectations and predictions about trends affecting our business and industry and are based on information available at the time such statements are made. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy or completeness. Forward-looking statements involve numerous known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements predicted, assumed or implied by the forward-looking statements. Some of the risks and uncertainties that may cause our actual results to materially differ from those expressed or implied by these forward-looking statements are described in Part I, Item 1A, "Risk Factors" and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Annual Report on Form 10-K, as well as in our other filings with the SEC. You should read this Annual Report on Form 10-K, including the information and documents incorporated by reference herein, in its entirety and with the understanding that our actual future results may be materially different from the results expressed or implied by these forward-looking statements. Moreover, we operate in an evolving environment. New risks and uncertainties emerge from time to time and it is not possible for our management to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause our actual future results to be materially different from any results expressed or implied by any forward-looking statements. Except as required by applicable law or the listing rules of the New York Stock Exchange (NYSE), we expressly disclaim any intent or obligation to update any forward-looking statements.

We qualify all of our forward-looking statements by these cautionary statements.

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PART I

References in this Annual Report on Form 10-K to "Deckers", "we", "our", "us", or the "Company" refer to Deckers Outdoor Corporation together with its consolidated subsidiaries. UGG®, Teva®, Sanuk®, Hoka One One® (Hoka), Ahnu®, Koolaburra® by UGG (Koolaburra) and UGGpureTM are some of our trademarks. Other trademarks or trade names appearing elsewhere in this report are the property of their respective owners.

Unless otherwise specifically indicated, all amounts in Items 1 and 1A herein are expressed in thousands, except for employees, store and country counts and share data.

Item 1. Business

General

Deckers Outdoor Corporation was incorporated in 1975 under the laws of the State of California and, in 1993, reincorporated under the laws of the State of Delaware. We are a global leader in designing, marketing and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high performance activities.  We believe that our footwear is distinctive and appeals broadly to women, men and children. We sell our products, including accessories such as handbags and loungewear, through quality domestic and international retailers, international distributors, and directly to end-user consumers both domestically and internationally, through our websites, call centers, and retail stores. Our primary objective is to build our footwear lines into global lifestyle brands with market leadership positions. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort, and products tailored to a variety of activities, seasons, and demographic groups. All of our products are currently manufactured by independent contractors primarily in Asia. Our continued growth will depend upon the broadening of our products offered under each brand, the appeal of our products to our consumers, expanding domestic and international distribution, successfully opening new retail stores, increasing sales to consumers, and developing or acquiring new brands.

Change in Fiscal Year

In February 2014, our Board of Directors approved a change in our fiscal year end from December 31 to March 31. The change was intended to better align our planning, financial and reporting functions with the seasonality of our business. The 2016, 2015 and 2013 fiscal years relate to the periods ended March 31, 2016, March 31, 2015 and December 31, 2013, respectively. The 2014 transition period was the quarter ended March 31, 2014 to coincide with the change in our fiscal year end.

Recent Developments

In July 2014, we acquired our UGG brand distributor that had been selling to retailers in Germany and continues to operate as a wholesale business in Germany through the acquired subsidiary. The acquisition included certain intangible and tangible assets and the assumption of liabilities. The purchase price of the acquisition was not material to our consolidated financial statements.

In April 2015, we acquired substantially all the assets related to the Koolaburra brand, a line of fashion casual footwear using sheepskin and other plush materials. We believe there is significant consumer demand for footwear using sheepskin and other plush materials at price points below those of the UGG brand. We intend to position Koolaburra as a high-quality, fashionable and affordable alternative to UGG and to distribute Koolaburra primarily through channels which do not offer the UGG brand. In November 2015, we added the "by UGG" attribute to the Koolaburra name to communicate to the consumer that the Koolaburra products come from the same company that designs and manufactures the UGG line.

In July 2015, we sold certain tangible and intangible assets related to the MOZO® brand, a footwear brand crafted for culinary professionals. In February 2016, we sold certain tangible and intangible assets, including the trade name related to the TSUBO brand, a line of mid and high-end dress and dress casual footwear. The impacts of these sales were not material to our consolidated financial statements.

In February 2016, we announced the implementation of a retail store fleet optimization and office consolidation that was intended to streamline brand operations, reduce overhead costs, create operating efficiencies and improve collaboration and included the closure of facilities and relocation of employees. We have begun to realign our brands

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across two groups: Fashion Lifestyle and Performance Lifestyle. The Fashion Lifestyle group will include the UGG and Koolaburra brands. The Performance Lifestyle group will include the Teva, Sanuk and Hoka brands. As part of this realignment, we also relocated our Sanuk brand operations in Irvine, California to the corporate headquarters in Goleta, California. In addition, we closed our Ahnu brand operations office in Richmond, California. Furthermore, we are in the process of evaluating our portfolio of retail stores. We have identified 24 retail stores that are candidates for potential closure or relocation.

Subsequent to the sales of the MOZO and TSUBO brands, the operating results for our other brands only include Hoka, Ahnu and Koolaburra. We plan to leverage elements, including particular styles, of the Ahnu brand under the umbrella of the Teva brand beginning in calendar year 2017. Refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 2 to our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on our restructuring efforts.

For the past several years, we have been planning and preparing to improve, automate and streamline our operational systems, processes, infrastructure and management (Business Transformation Project or BT). One such initiative was to upgrade our enterprise resource planning (ERP) system. Our ERP system integrates finance and accounting, purchase order management, inventory control, and sales across all lines of business. The ERP system centralizes all of our transactional data. We anticipate that the result is to increase efficiencies within the entire company. The initiative to upgrade our ERP system worldwide went live in April 2016.

Products

We currently market our products primarily under six proprietary brands, composed of the following three primary brands and other brands:

UGG. The UGG brand is one of the most iconic and recognized brands in the global footwear industry and highlights our successful track record of building niche brands into lifestyle market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, with expanded product offerings and a growing global audience that attracts women, men and children. UGG brand footwear earns media exposure from numerous outlets both organically and from strategic public relations efforts, including an increasing amount of exposure internationally. Our long term growth strategy for the UGG brand relies on a combination of expanded distribution through wholesale partners, owned, branded third-party retail stores and our E-Commerce websites globally. We expect to continue to diversify the product offering to drive growth through our women’s, men’s and children's footwear offering, and enter new categories of loungewear, outerwear and home. We intend to do this by leveraging our industry expertise for capabilities and distribution as we target both existing and new customers of the brand.

Teva. Teva is our active lifestyle brand, born from the outdoors and rooted in adventure. As the originator of the sport sandal, today the Teva product line includes casual sandals, shoes and boots built for ultimate versatility. We are focused on regaining our leadership position as a premium brand by focusing on the modern outdoor market, and continuing to expand our casual offerings to appeal to a wider range of consumers through utility-driven design, color and premium materials.

Sanuk. Sanuk is our fun lifestyle footwear brand rooted in surf culture but embraced by an eclectic mix of style-savvy optimists. The Sanuk brand is probably best known for the patented SIDEWALK SURFERS® shoe and its Yoga MatTM and Beer Cozy sandal collections. The brand has a history of innovation, product invention, foot-friendly comfort, unexpected materials and clever branding. We plan to elevate the approach in which we communicate the Sanuk brand story to a broader audience, especially women, through highly targeted communications that retain the brand's unique attitude. We also expect to continue to build on the Sanuk brand's authentic position in the surf and outdoor markets through its relationships with prominent professional athletes and ambassadors, including surfers, photographers, artists, and musicians known as much for their unique personal styles and charisma as for their specialized talents.

Other Brands. In addition to our three primary brands, our three other brands include Hoka, a line of footwear for all capacities of runners designed with a unique performance midsole geometry, oversize midsole volume and active foot frame; Ahnu, a line of performance outdoor and yoga footwear which we have discontinued operating as a separate brand and are looking to leverage under the Teva brand umbrella; and Koolaburra, a line of fashion casual footwear using sheepskin and other plush materials.


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With respect to Hoka, we plan to focus on growing awareness with a broader audience, focusing on women, and telling bold and brave innovative product stories through digital and social communications.  We also plan to continue to build on Hoka’s authentic position in the specialty running market through relationships with prominent professional athletes and ambassadors.

We plan to launch the Koolaburra line with a targeted group of national footwear retailers and mid-market department stores.

Sales and Distribution

US Distribution. At the wholesale level, we distribute our products in the US through sales representatives, who are organized geographically and by brand. In addition to our wholesale business, we also sell products directly to consumers through our websites and owned retail stores. Our brands are generally advertised and promoted through a variety of primarily digital consumer media campaigns. We benefit from editorial coverage in both consumer and trade publications. Each brand's dedicated marketing team works closely with targeted accounts to maximize advertising and promotional effectiveness. We also manage brand marketing on a global basis to ensure consistent consumer communications in all regions and channels. We determine our global communication plans based on brand strategies, consumer insights, and return on investment measures.

Currently, our sales force is generally separated by brand, as each brand generally has certain specialty consumers; however, there is overlap between the sales teams and customers. We have aligned our brands' sales forces to position them for the future of the brands. Each brand's respective sales manager recruits and manages his or her network of sales representatives. We believe this approach for the US market currently maximizes our selling efforts, while we continue to explore synergies in our sales force operations to reflect the constantly evolving retail marketplace.

We distribute products sold in the US through our distribution centers in Camarillo and Moreno Valley, California. Our distribution centers feature a warehouse management system that enables us to efficiently pick and pack products for direct shipment to customers. For certain customers requiring special handling, each shipment is pre-labeled and packed to the retailer's specifications, enabling the retailer to easily unpack our product and immediately display it on the sales floor.

International Distribution. Internationally, we distribute our products through independent distributors and directly to retailers in many countries, including throughout Europe, Asia-Pacific, Canada, and Latin America, among others. In addition, as we do in the US, in certain countries, we sell products directly to consumers through our websites, e-commerce marketplaces and our owned retail stores. For our wholesale and DTC businesses, we operate distribution centers with third-party logistics providers (3PLs) in certain international locations. Our principal wholesale customers include specialty retailers, selected department stores, outdoor retailers, sporting goods retailers, shoe stores, and online retailers.

UGG Wholesale. We sell our UGG footwear and accessories primarily through higher-end department stores such as Nordstrom, Neiman Marcus, Dillard's and Bloomingdale's, as well as independent specialty retailers such as Journeys, and online retailers such as Zappos.com. We believe these retailers support the luxury positioning of our brand and are the destination shopping choice for the consumer who seeks out the fashion and functional elements of our UGG products. As the retail marketplace continues to evolve and change to reflect changing consumer habits, we continually review and evaluate our UGG wholesale distribution approach and segmentation.

Teva Wholesale. We sell our Teva footwear primarily through specialty outdoor and sporting goods retailers such as REI, L.L. Bean and Dick's Sporting Goods, as well as online retailers such as Zappos.com. Our brand strength in casual and women’s footwear has also expanded our business to a wider distribution of department store and mall channels including Nordstrom, Dillard's and Urban Outfitters, as well as family footwear with DSW, Famous Footwear and Rack Room. We believe distribution that services active lifestyle consumers with premium assortments, merchandising and customer experience will continue to be areas of growth for the brand.

Sanuk Wholesale. We sell our Sanuk footwear primarily through independent action sports retailers, outdoor retailers, specialty footwear retailers and larger national retail chains including Nordstrom, Dillard's, Journeys, DSW, Urban Outfitters and Tilly's. We believe all these retailers showcase the brand's creativity, fun, and comfort and allow us to effectively reach our target consumers for the brand.


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Other Brands Wholesale. Our other brands are sold primarily at specialty running stores, high-end department stores, outdoor specialty accounts, independent specialty retailers, and with online retailers that support our brand ideals of comfort, style, and quality. Key accounts of our other brands include Nordstrom, Dillard's, Hanigs, REI, and Zappos.com.

Direct-to-Consumer. Our DTC business is comprised of our retail store and E-Commerce businesses. As a result of our evolving Omni-Channel strategy, we believe that our retail stores and websites are largely intertwined and dependent on one another. We believe that in many cases consumers interact with both our brick and mortar stores and our websites before making purchase decisions. For example, consumers may feel or try on products in our retail stores and then place an order online later. Conversely, they may initially research products online, and then view inventory availability by store location and make a purchase in store. Some examples that demonstrate the extent to which the sales channels are combined include the following:

“UGG Rewards”: We have implemented a consumer loyalty program under which points and awards are earned across the DTC channel.

“Infinite UGG”: We provide online shopping access, inside retail stores, for all SKUs available on our E-Commerce websites.

“Buy online / return in-store”: Our consumers can buy online and return unwanted products to the store.

“Click and collect”: Our consumers can buy online and have products delivered to certain of our retail stores for pick-up.

“Retail inventory online”: Our consumers can view specific store location inventory online before visiting the store.

Our retail stores enable us to directly impact our consumers' experiences, meet the growing demand for these products, sell the products at retail prices and generate greater gross margins. Our retail stores are predominantly UGG concept stores and UGG outlet stores. Through our outlet stores, we sell some of our discontinued styles from prior seasons, as well as full price in-line products, and products made specifically for the outlet stores. At March 31, 2016, we had a total of 153 retail stores worldwide. Refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 2 "Restructuring" to our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K for further disclosure and discussion.

Product Design and Development

The design and product development team for each of our brands creates new innovative footwear products that combine our standards of aesthetic leadership, high quality, comfort, and functionality. The design function for all of our brands is performed by a combination of our internal design and development staff and outside freelance designers. By utilizing outside designers, we believe we are able to review a variety of different design perspectives on a cost-efficient basis and anticipate color and style trends more quickly. Refer to Note 1 to our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K for a discussion of the research and development costs we have incurred for the last three years.

In order to ensure quality, consistency, and efficiency in our design and product development process, we continually evaluate the availability and cost of raw materials, the capabilities and capacity of our independent contract manufacturers, and the target retail price of new models and lines. The design and development staff works closely with brand management to develop new styles of footwear and accessories for our various product lines. We develop detailed drawings and prototypes of our new products to aid in conceptualization and to ensure our contemplated new products meet the standards for innovation and performance that our consumers demand. Throughout the development process, we have multiple design and development reviews, which we then coordinate with our independent manufacturers. This helps to ensure that we are addressing the needs of our consumers and are working toward a common goal of developing and producing a high quality product to be delivered on a timely basis.


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Manufacturing and Supply Chain

We do not manufacture our products; we outsource the production of our brand footwear to independent manufacturers primarily in Asia. We require our independent contract manufacturers and designated suppliers to adopt our Supplier Code of Conduct, which specifies that they comply with all local laws and regulations governing human rights, working conditions, and environmental compliance before we are willing to conduct business with them. We also require our manufacturing partners and licensees to comply with our Restricted Substances Policy, Anti-Corruption Policy and other compliance policies and procedures as a condition of doing business with us. Primarily, as we grow, we expect to continue to rely exclusively on independent manufacturers for our sourcing needs.

The production of footwear by our independent manufacturers is performed in accordance with our detailed specifications and is subject to our quality control standards. We maintain a buying office in Hong Kong and an on-site supervisory office in Pan Yu City, China that together serve as a link to our independent manufacturers, enabling us to carefully monitor the production process from receipt of the design brief to production of interim and final samples to shipment of finished product. We believe this regional presence provides predictability of material availability, product flow and adherence to final design specifications. To ensure the production of high-quality products, the majority of the materials and components used in production of our products by these independent manufacturers are purchased from independent suppliers that we designate.

At our direction, our manufacturers currently purchase the majority of the sheepskin used in our products from two tanneries in China, which source their skins for our products primarily from Australia and the UK. We maintain communication with the tanneries to monitor the available supply of sufficient high quality sheepskin for our projected UGG brand production. To ensure adequate supplies for our manufacturers, we forecast our usage of sheepskin in advance at a forward price. We have also entered into purchase commitments with certain sheepskin suppliers. Refer to Note 7 to our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information on our minimum purchase commitments. We believe current supplies are sufficient to meet our current and anticipated demand, but we continue to investigate our options to accommodate our expected growth or unexpected supply chain issues.

Excluding sheepskin and UGGpure, we believe that substantially all the various raw materials and components used to manufacture our footwear, including wool, rubber, leather, and nylon webbing are generally available from multiple sources at competitive prices. We began using UGGpure, wool woven into a durable backing, in many of our UGG products in 2013. We generally outsource our manufacturing requirements on the basis of individual purchase orders or short-term purchase commitments rather than maintaining long-term purchase commitments with our independent manufacturers.

We have instituted pre-production, in-line, and post-production inspections to meet or exceed the high quality demanded by us and consumers of our products. Our quality assurance program includes our own employee on-site inspectors at our independent manufacturers who oversee the production process and perform quality assurance inspections. We also inspect our products upon arrival at our distribution centers.

Patents and Trademarks

We utilize trademarks with virtually all of our products and believe that having distinctive marks that are readily identifiable is an important factor in creating a market for our products, promoting our Company, and distinguishing our products from the products of others. We currently hold trademark registrations for UGG, Teva, Sanuk, Hoka One One, Ahnu, Koolaburra and UGGpure, and other marks in the US and in many other countries, including Canada, China, various countries in the European Union, Japan and Korea. At March 31, 2016, we hold 186 utility and design patent registrations in the US and abroad and have filed 17 new patent applications which are currently pending. These patents expire at various times. We regard our proprietary rights as valuable assets and vigorously protect such rights against infringement by third parties.


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Seasonality

Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters ending September 30 (our second fiscal quarter) and December 31 (our third fiscal quarter) and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31 (our fourth fiscal quarter) and June 30 (our first fiscal quarter) of each year. With the large growth in the UGG brand over the past several years, our aggregate net sales in the quarters ending September 30 and December 31 have exceeded net sales in the quarters ending March 31 and June 30.  We currently expect this trend to continue. Nonetheless, actual results could differ materially depending upon a number of factors, including consumer preferences, unexpected changes in weather conditions, availability of product and raw materials, competition, and the willingness of our wholesale and distributor customers to continue to carry and promote our various product lines, among other risks and uncertainties. Refer to Part I, Item 1A, "Risk Factors" and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations".

Inventory Management

Inventory management is important to the financial condition and operating results of our business. We manage our inventory levels based on existing orders, anticipated sales and the rapid-delivery requirements of our customers. Our inventory strategy is focused on continuing to meet consumer demand while improving our inventory efficiency over the long term by putting systems and processes in place to improve our inventory management. These systems and processes are designed to improve our forecasting and supply planning capabilities. In addition to systems and processes, key areas of focus that we believe will enhance inventory performance are added discipline around the purchasing of product, production lead time reduction, and better planning and execution in selling of excess inventory through our outlet stores and other liquidation channels.

Our practice, and the general practice in the footwear and accessory industries, is to offer retail customers the right to return defective or improperly shipped merchandise. As it relates to new product introductions, which can often require large initial launch shipments, we commence production before receiving orders for those products from time to time. This can affect our inventory levels as we build pre-launch quantities.

Backlog

Historically, we have encouraged our wholesale and distributor customers to place, and we have received, a significant portion of orders as preseason orders, generally four to eight months prior to the anticipated shipment date. We work with our wholesale customers through preseason programs to enable us to better plan our production schedule, and inventory and shipping needs. Unfilled customer orders as of any date, which we refer to as backlog, represent orders scheduled to be shipped at a future date, which can be cancelled prior to shipment. The backlog as of a particular date is affected by a number of factors, including seasonality, manufacturing schedule, and the timing of product shipments as well as variations in the quarter-to-quarter and year-to-year preseason incentive programs. The mix of future and immediate delivery orders can vary significantly from quarter-to-quarter and year-to-year. As a result, comparisons of the backlog from period-to-period may be misleading.

At March 31, 2016, our backlog of orders from our wholesale customers and distributors was approximately $582,000 compared to approximately $609,000 at March 31, 2015. While all orders in the backlog are subject to cancellation by customers, we expect that the majority of such orders will be filled in fiscal year 2017. We believe that backlog at year-end is an imprecise indicator of total revenue that may be achieved for the full year for several reasons, including that backlog only relates to wholesale and distributor orders for the next season and current season fill-in orders, and it excludes potential sales in our DTC business during the year. Backlog is also affected by the timing of customers' orders and product availability.


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Competition

The casual, outdoor, athletic, fashion and formal footwear markets are highly competitive. Our competitors include athletic and footwear companies, branded apparel companies, and retailers with their own private labels. Although the footwear industry is fragmented to a certain degree, many of our competitors are larger and have substantially greater resources than us, including athletic shoe companies, several of which compete directly with some of our products. In addition, access to offshore manufacturing has made it easier for new companies to enter the markets in which we compete, further increasing competition in the footwear and accessory industries. In particular, in part due to the popularity of our UGG products, we face increasing competition from a significant number of domestic and international competitors selling products designed to compete directly or indirectly with our UGG products.

We believe that our ability to successfully compete depends on our ability to:

predict and respond to changing consumer preferences and tastes in a timely manner;

produce products that appeal to consumers;

produce products that meet our requirements and consumer expectations for quality;

accurately predict and forecast consumer demand;

ensure product availability;

manage the impact of seasonality, including unexpected changes in weather conditions;

maintain brand loyalty and authenticity;

price our products in a competitive manner;

implement our Omni-Channel strategy, including providing a unique customer service experience;
  
implement our Business Transformation Project in a cost-effective manner; and

manage the impact on our business of the rapidly changing retail environment.


We believe we are well positioned to compete in our industry. However, we cannot ensure that we will be able to compete effectively, and competitive pressure may have a material adverse effect on our business, financial condition and results of operations.

Employees

At March 31, 2016, we employed approximately 3,500 employees in the US, Europe, and Asia, none of whom were represented by a union. This figure includes approximately 2,000 employees in our retail stores worldwide, which includes part-time and seasonal employees. We employed approximately 3,400 employees at March 31, 2015, including approximately 1,900 employees in our retail stores. The overall increase in employees during fiscal year 2016 was primarily related to the increase in retail employees as a result of the net increase in retail stores open at March 31, 2016 compared to March 31, 2015. As we optimize our retail store fleet, we expect that our employee count will fluctuate accordingly. We believe that we have good relationships with our employees.

Financial Information about Segments and Geographic Areas

Our five reportable business segments include the strategic business units responsible for the worldwide operations of our brands' (UGG, Teva, Sanuk and other brands) wholesale divisions, as well as our DTC business. The majority of our sales and long-lived assets are in the US. Refer to Notes 12 and 13 to our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K for further discussion of our business segments. Refer to Note 13 of our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K for financial information about geographic areas and concentration of related business risks. Refer to Part I, Item 1A, "Risk Factors" for a discussion of the risks related to our foreign operations.

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Government Regulation

Compliance with federal, state, and local environmental regulations has not had, and it is not expected to have, any material effect on our capital expenditures, earnings, or competitive position based on information and circumstances known to us at this time.

Available Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website at www.deckers.com. Such documents are available as soon as reasonably practicable after they are filed with or furnished to the Securities and Exchange Commission.  Our filings may also be read and copied at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

We also make available through our website the following corporate governance documents: Audit Committee Charter, Compensation Committee Charter, Corporate Governance Charter, Code of Ethics, Accounting and Finance Code of Conduct, Corporate Governance Guidelines, Conflict Minerals Report and Conflict Minerals Policy.

The information contained on or accessed through our website does not constitute part of this Annual Report on Form 10-K, and references to our website address in this Annual Report on Form 10-K are inactive textual references only.
  
Item 1A. Risk Factors

Our short and long-term success is subject to numerous risks and uncertainties, many of which involve factors that are difficult to predict or beyond our control. Investing in our common stock involves substantial risk. Before making a decision to invest in, hold or sell our common stock, stockholders and potential stockholders should carefully consider the risks and uncertainties described below, in addition to the other information contained in or incorporated by reference into this Annual Report on Form 10-K, as well as the other information we file with the Securities and Exchange Commission. If any of the following risks are realized, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that case, the value of our common stock could decline and stockholders may lose all or part of their investment. Furthermore, additional risks and uncertainties of which we are currently unaware, or which we currently consider to be immaterial, could have a material adverse effect on our business. Refer to the section entitled "Cautionary Note Regarding Forward-Looking Statements" on page 2 of this Annual Report on Form 10-K.

Many of our products are inherently seasonal, and the sales of our products are highly sensitive to weather conditions, which makes it difficult to anticipate consumer demand for our products, estimate our inventory requirements, manage our expenses, and forecast our financial results.

Due to the nature of many of our product offerings, sales of our products are inherently seasonal. Historically, the highest percentage of UGG brand net sales have occurred in the fall and winter months (our second and third fiscal quarters), and the highest percentage of Teva and Sanuk brand net sales have occurred in the spring and summer months (our first and fourth fiscal quarters). In light of the significant growth of the UGG brand over the past several years, and the relative size of the UGG brand as compared to our other brands, this trend has resulted in our aggregate net sales for the third and fourth fiscal quarters significantly exceeding our aggregate net sales in the first and fourth fiscal quarters.  While we have taken steps to diversify our product offerings, both by creating more year-round styles within our existing brands, and by acquiring and developing new brands, we expect this trend to continue for the foreseeable future. As a result of the relative concentration of our sales in certain months of the year, factors which specifically impact consumer spending patterns in those months, such as unexpected weather patterns, declines in consumer confidence or worsening economic conditions, will have a disproportionate impact on our business, and could result in our failure to achieve financial performance that is in line with our expectations.


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In particular, sales of our products are highly sensitive to weather conditions, which are difficult to predict and beyond our control. For example, extended periods of unseasonably warm weather during the fall or winter months may significantly reduce demand for our UGG products, which we experienced during fiscal 2016 when temperatures hit record highs in certain key markets during the fall months and holiday season. Because we have an extended design and manufacturing process, which involves the initial design of our products, the purchase of raw materials, the accumulation of inventories, the subsequent sale of the inventories, and the collection of the resulting accounts receivable, at the time manufacturing decisions are made, it is difficult for our management to predict how future weather conditions may impact consumer spending patterns generally, and the demand for our products in particular. In addition, this production cycle requires us to incur significant expenses relating to the manufacturing and marketing of our products in advance of the realization of any revenue from the sale of our products, and results in significant liquidity requirements and working capital fluctuations throughout our fiscal year. This also makes it challenging for us to estimate and manage our inventory requirements, especially as our product offerings continue to broaden and diversify. Furthermore, this production cycle makes it difficult for our management to timely adjust expenses in reaction to unfavorable weather patterns, and the resulting order cancellations and weak consumer demand. As a result, unanticipated weather conditions have had, and may in the future have, a material, negative impact on our financial condition and results of operations. In addition, the unpredictability of weather conditions makes it more difficult for us to accurately forecast our financial results and to meet the expectations of analysts and investors.

We use sheepskin to manufacture a significant portion of our products, and if we are unable to obtain a sufficient quantity of sheepskin that meets our quality expectations, it could have a material adverse impact on our business.

For the manufacturing of our products, we purchase certain raw materials that are affected by commodity prices, the most significant of which is sheepskin. The supply of sheepskin, which is used to manufacture a significant portion of our UGG products, is in high demand and there are a limited number of suppliers that are able to meet our expectations for the quantity and quality of sheepskin that we require. In addition, our unique product design requires sheepskin that may only be found in limited geographic locations. We presently rely on only two tanneries to provide the majority of our sheepskin. If the sheepskin provided by these tanneries, and the resulting products we deliver to consumers, do not conform to our quality specifications or fail to meet consumer expectations, we could experience a higher rate of customer returns, which would reduce our net sales and harm our reputation. Similarly, if the tanneries are not able to deliver sheepskin in the quantities required, this would negatively impact our manufacturing process and lead to inventory shortages, which would result in a loss of sales and strain our relationships with our customers.

In addition, any factors that negatively impact the business of these tanneries, such as loss of customers, financial instability or bankruptcy, could prevent them from delivering sheepskin to us in the quantities expected or at all. In addition, our sheepskin suppliers currently warehouse their inventory at a limited number of facilities in China. The loss or destruction of any of these facilities, whether as a result of a natural disaster, the outbreak of hostilities, work stoppages or other unforeseen events, would likely result in shortages in our supply of sheepskin. These events are unpredictable and not within our control. If any of these events were to occur, it would likely result in interruptions in our manufacturing process, the loss of sales and harm to our reputation.

There have been significant fluctuations in the price of sheepskin in recent years as the demand for this commodity from our customers and our competitors has changed. We believe the significant factors affecting the price of sheepskin include: weather patterns, harvesting decisions, incidence of disease, the price of other commodities such as wool, the demand for our products and the products of our competitors, and global economic conditions. Most of these factors are not considered predictable or within our control. For example, if the price of wool increases, sheep herders may choose not to harvest their sheep and instead choose to shear their sheep for wool, thus decreasing the supply of sheepskin. Similarly, sheepskin is a by-product of the food industry, and the demand for sheep meat has generally been decreasing, thus leading to an overall reduction in the number of sheep available. Any factors that increase the demand for, or decrease the supply of, sheepskin could cause significant increases in the price of sheepskin, which would increase our manufacturing costs and reduce our gross margins.
  
Beginning in 2013, in an effort to partially reduce our dependency on sheepskin, we began using a new raw material, UGGpureTM, in some of our UGG products. In addition, we use purchasing contracts and other pricing arrangements to attempt to reduce the impact of fluctuations in sheepskin prices. However, in the event of a significant and prolonged increase in sheepskin prices, such as what we experienced in the past several years, these strategies may not be sufficient to fully offset the impact on our financial results from the increased prices. In that event, it is unlikely we would be able to adjust our product prices sufficiently to eliminate the impact on our gross margins and our financial results may suffer.

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The footwear and fashion industry is subject to rapid changes in consumer preferences, and if we do not accurately forecast consumer demand, we could lose sales, our relationships with customers could be harmed and our brand loyalty could be diminished.

The footwear and fashion industry is subject to rapid changes in consumer preferences and tastes, which make it difficult to anticipate demand for our products, estimate our inventory requirements, and forecast our financial results. We believe there are many factors that may affect the demand for our products, including:
 
consumer acceptance of our products;
consumer demand for products of our competitors;
the extent to which consumers view certain of our products as substitutes for other products we manufacture;
the lifecycle of our products and consumer replenishment behavior;
evolving fashion and lifestyle trends, and the extent to which our products reflect these trends;
brand loyalty;
seasonality, including the impact of anticipated and unanticipated weather conditions;
our reliance on manual processes and judgment for certain manufacturing and inventory planning functions;
changes in consumer confidence and buying patterns, and other factors that impact discretionary income and spending; and
changes in general economic and market conditions.

Like other companies in the footwear industry, we have an extended design and manufacturing process, which requires us to forecast production volumes and estimate inventory requirements many months before consumer preferences become apparent and consumers make a decision to purchase our products. The significant expansion of our product offerings in recent years, both within and across brands, has only made these activities more challenging. If we overestimate demand for any products or styles, we may be forced to incur significant markdowns or sell excess inventories at reduced prices, which would result in lower revenues and reduced gross margins. On the other hand, if we underestimate demand for certain products or styles, or if our independent manufacturing facilities are unable to supply products in sufficient quantities, we may experience inventory shortages that may prevent us from fulfilling customer orders or result in us delaying shipments to customers. If that occurred, we could lose sales, our relationships with customers could be harmed, and our brand loyalty could be diminished.

Our success depends on our ability to anticipate and promptly respond to changing consumer preferences and fashion trends, and to effectively market our new and existing products.

Our success depends in part on the continued strength of our brands, which in turn depends on our ability to anticipate, understand and promptly respond to the rapidly changing preferences and fashion tastes of footwear and apparel consumers. As our brands and product offerings continue to expand, it is necessary for our products to appeal to an even broader range of consumers whose preferences cannot be predicted with certainty. For example, many UGG products include a fashion element and could go out of style at any time. If we fail to react appropriately to changes in consumer preferences and fashion trends, consumers may consider our UGG brand image to be outdated or associate our UGG brand with styles that are no longer popular. This problem is exacerbated by the fact that our production cycle typically involves long lead times, which requires us to make manufacturing decisions several months in advance of a purchasing decision by the consumer. If we are not successful in anticipating or reacting to changes in consumer preferences and fashion trends, our sales may decline and our overall financial performance may be adversely affected.

Our success is driven to some extent by brand loyalty, and there can be no assurance that consumers will continue to prefer our brands. The value of our brands is largely based on evolving consumer perceptions, and one or more missteps with respect to factors such as product quality, product design or customer service, could result in negative perceptions and a corresponding loss of brand loyalty and value. In addition, negative claims or publicity regarding our company, our products, our brands, our marketing campaigns or our celebrity endorsers, could adversely affect our reputation and sales regardless of whether such claims are accurate. Social media, which accelerates the dissemination of information, can increase the challenges of containing any such negative claims. If consumers begin to have negative perceptions of our brands, whether or not warranted, our brand image would become tarnished and our products would become less desirable, which could have a material adverse effect on our business.


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Furthermore, we are dependent on consumer receptivity to our new products and to the marketing strategies we employ to promote those products. Consumers may not purchase new models and styles of footwear or accessories in the quantities projected or at all. In addition, attempting to achieve market acceptance for new products requires us to incur substantial product development and marketing costs, which are typically incurred many months in advance of the completion of the sale of the products. If we introduce new products that do not gain market acceptance, it could erode our competitive position, adversely affect the image of our brands, and result in sales below our expectations.

If our Business Transformation Project does not result in the anticipated benefits to us, or if it results in unanticipated disruption to our business, our financial condition and operating results could be adversely affected and our business may become less competitive.
As part of our ongoing effort to improve the overall efficiency and competitiveness of our business, we have taken steps to implement a Business Transformation Project, including upgrading our enterprise resource program systems, and inventory management and control systems. We have additional plans to continue to improve, automate and streamline our other operational systems, processes, infrastructure and management. While we believe our Business Transformation Project has the potential to reduce our expenses, increase our efficiency and enhance our ability to be competitive in the long term, we have incurred, and expect to continue to incur, significant expenses to implement the project. Many of these expenditures have been, and will continue to be, incurred in advance of the realization of any direct benefits to our business. We cannot guarantee that we will be successful in implementing our Business Transformation Project, or that our efforts will result in the anticipated benefits to us. If we are not successful in implementing our Business Transformation Project in a cost-effective manner, our financial condition and operating results could be adversely affected and our business may become less competitive.
In addition, implementation of our Business Transformation Project has the potential to be disruptive to our existing business operations as our managers and employees attempt to learn new software programs and control systems, and adapt to new operating requirements, while continuing to manage and operate our business. If we are unable to successfully manage any disruption to our business caused by our Business Transformation Project, we could incur unanticipated expenses, loss of customers and harm to our reputation, any of which would harm our business.
If we are unsuccessful in implementing our retail store fleet optimization and brand office consolidation plans, we may incur significant costs and expenses without any corresponding benefits to our business, in which case our financial condition and operating results may be adversely affected.

We are in the process of implementing a restructuring plan, including a retail store fleet optimization and brand office consolidation, which is designed to realign our brands, streamline brand operations, reduce infrastructure and overhead costs, create operating efficiencies, and improve collaboration. This initiative involves the potential closure of approximately 24 of our retail stores, the relocation of our Sanuk brand operations office, and the closure of our Ahnu brand operations office. In connection with the restructuring efforts, we have incurred, and expect to continue to incur, significant costs and expenses relating to the write-off of leasehold improvements, the early termination of office and store leases, employee relocation and severance costs, and the disposal of equipment. There can be no assurance that the benefits from the retail store fleet optimization and brand office consolidation, including from any potential reduction in overhead costs or improvement in operating efficiencies, will be sufficient to offset the costs and other charges that we have already incurred and that we expect to incur in the future. If we fail to realize the anticipated benefits from the implementation of these strategies, or if we incur costs or expenses in amounts that are greater than our estimates, our financial condition and operating results may be adversely affected.

It may be difficult to identify new retail store locations that meet our requirements, and any new retail stores may not realize returns on our investments.

While we expect to close or relocate a number of retail stores in connection with our retail store fleet optimization plans, we are concurrently working to identify opportunities to open new retail stores. Global store openings involve substantial investments, including those relating to leasehold improvements, furniture and fixtures, equipment, information systems, inventory, and personnel. In addition, since a certain amount of our retail store costs are fixed, if we have insufficient sales, we may be unable to reduce expenses in order to avoid losses or negative cash flows. As we have experienced in the past, due to the high fixed cost structure associated with the retail segment, the closure of a retail store can result in a significant negative financial impact, including write-offs of leasehold improvements and inventory, lease termination costs, and severance costs. As a result of our ongoing retail store fleet optimization plans, and in light of the significant costs and impairments that can be incurred upon the closure of a retail location, we expect

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to conduct a thorough diligence process and apply stringent financial parameters when assessing whether to open a new retail store location. However, there can be no assurance that any new retail location that we identify will ultimately generate a positive return on our investment. In addition, in light of the difficult and rapidly changing retail environment, it may prove challenging to identify a sufficient number of retail locations that meet our stringent financial requirements, in which case we may not be able to fully execute our growth strategy.
 
Furthermore, we license the right to operate retail stores for our brands to third parties through our partner retail program. We expect to increase both the number of third parties we engage within our partner retail program and the number of stores that they operate. We currently plan for most of the partner retail stores to be operated in international markets, with the largest increase anticipated to be in China. We provide training to support these stores, and set and monitor operational standards. However, the quality of these store operations may decline due to the failure of these third parties to operate the stores in a manner consistent with our standards or our failure to adequately monitor these third parties, which could result in reduced sales and cause our overall brand image to suffer.

We face intense competition from both established companies and newer entrants into the market, and our failure to compete effectively could cause our market share to decline, which would harm our financial condition and results of operations.

The footwear industry is highly competitive and we expect to continue to face intense competitive pressures. We believe that we compete on the basis of a number of factors, including our ability to:
   
predict and respond to changing consumer preferences and tastes in a timely manner;
produce products that appeal to consumers;
produce products that meet our requirements and consumer expectations for quality;
accurately predict and forecast consumer demand;
ensure product availability;
manage the impact of seasonality, including unexpected changes in weather conditions;
maintain brand loyalty and authenticity;
price our products in a competitive manner;
implement our Omni-Channel strategy, including providing a unique customer service experience;
implement our Business Transformation Project in a cost-effective manner; and
manage the impact on our business of the rapidly changing retail environment.

Our inability to compete effectively with respect to one or more of these factors could cause our market share to decline, which would harm our financial condition and results of operations.

Our competitors include athletic and footwear companies, branded apparel companies, and retailers with their own private labels. In addition, these competitors include both established companies, as well as newer entrants into the market. In particular, we believe that, as a result of the growth of the UGG brand, certain competitors have entered into the marketplace specifically in response to the success of our brands, and that other competitors may do so in the future. A number of our larger competitors have significantly greater financial, technological, engineering, manufacturing, marketing, and distribution resources than we do, as well as greater brand awareness in the footwear and apparel markets. Our competitors’ greater capabilities in these areas may enable them to more effectively compete on the basis of price and production, develop new products more quickly, identify or influence consumer preferences, and withstand periodic downturns in the footwear industry or in economic conditions generally. With respect to newer entrants into the market, we believe that access to offshore manufacturing and changes in technology will continue to make it easier and more cost effective for these companies to compete with us.
  
As a result of the competitive environment in which we operate, we have faced, and expect to continue to face, intense pricing pressure. For example, efforts by our competitors to dispose of their excess inventories may significantly reduce prices of competitive products, which may require us to reduce the pricing of our products in order to compete, or cause consumers to shift their purchasing decisions away from our products entirely. We have also faced, and expect to continue to face, intense pressure with respect to competition for key customer accounts and distribution channels. Furthermore, the competitive environment makes it more difficult to forecast inventory requirements as production decisions are required to be made several months in advance of the purchase of our products. If we fail to compete effectively in the future, our sales could decline and our margins could be impacted, either of which could have a negative impact on our financial condition and results of operations.


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Our financial success is influenced by the success of our customers, and the loss of a key customer could have a material adverse effect on our financial condition and results of operations.
  
Much of our financial success is directly related to the ability of our retailer and distributor partners to successfully market and sell our brands through to consumers. If a retailer fails to meet annual sales goals, it may be difficult to locate an acceptable substitute retailer. If a distributor fails to meet annual sales goals, it may be difficult and costly to either locate an acceptable substitute distributor or convert to a wholesale direct model. If we determine that it is necessary to make a change, we may experience increased costs, loss of customers, increased credit risk, and increased inventory risk. In addition, there is no guarantee that any replacement retailer or distributor will generate results that are more favorable than the terminated party.

We currently do not have long-term contracts with any of our retailers. We do have contracts with our distributors with terms ranging up to five years, however, while these contracts may have annual purchase minimums which must be met in order to retain the distribution rights, the distributors are not otherwise obligated to purchase our products. Sales to our retailers and distributors are generally on an order-by-order basis and are subject to rights of cancellation and rescheduling by our wholesale customers. We use the timing of delivery dates in our wholesale customer orders to forecast our sales and earnings for future periods. If any of our major customers, experience a significant downturn in business or fail to remain committed to our products or brands, these customers could postpone, reduce, or discontinue purchases from us. These risks have been exacerbated recently as our retail customers face a retail industry that continues to undergo significant structural changes fueled by technology that is altering consumer behavior. As a result, we could experience a significant decline in sales, write downs of excess inventory, or increased discounts to our customers, any of which could have a material adverse effect on our financial condition or results of operations.

Our five largest customers accounted for approximately 21.9% of worldwide net sales in fiscal year 2016 and 22.2% of worldwide net sales in fiscal year 2015. Any loss of a key customer, the financial collapse or bankruptcy of a key customer, or a significant reduction in purchases from a key customer could have a material adverse effect on our financial condition and results of operations.

Failure to adequately protect our intellectual property rights, to prevent counterfeiting of our products, or to defend claims against us related to our intellectual property rights, could reduce sales and adversely affect the value of our brands.

Our business could be significantly harmed if we are not able to protect our intellectual property rights. We believe our competitive position is largely attributable to the value of our trademarks, patents, trade dress, trade names, trade secrets, copyrights and other intellectual property rights. Although we are aggressive in legal and other actions in pursuing those who infringe on our intellectual property rights, we cannot guarantee that the actions we have taken will be adequate to protect our brands in the future, especially because some countries’ laws do not protect intellectual property rights to the same extent as US laws. If we fail to adequately protect our intellectual property rights, it would allow our competitors to sell products that are similar to and directly competitive with our products, which could reduce sales of our products. In addition, any intellectual property lawsuits in which we are involved could cost a significant amount of time and money and distract management’s attention from operating our business. Any unexpected increases in legal fees and other costs associated with the defense of our intellectual property rights could result in higher operating expenses, which would negatively impact our profitability.

The success of our brands has also made us the target of counterfeiting and product imitation strategies. We continue to be vulnerable to such infringements despite our dedication of significant resources to the registration and protection of our intellectual property and to anti-counterfeiting efforts worldwide. If we fail to prevent counterfeiting or imitation of our products, we could lose opportunities to sell our products to consumers who may instead purchase a counterfeit or imitation product. In addition, if our products are associated with inferior products of infringers, it could adversely affect the value of our brands.

In addition to fighting intellectual property infringement, we may need to defend claims against us related to our intellectual property rights. For example, we have faced claims that the word "ugg" is a generic term. Such a claim was successful in Australia, but similar claims have been rejected by courts in the US, China, Turkey and the Netherlands. We have also faced claims that “UGG Australia” is geographically deceptive. Any court decision or settlement of these matters that prevents trademark protection of our brands, that allows a third-party to continue to sell products similar to our products, or that allows a manufacturer or distributer to continue to sell counterfeit products, could lead to intensified competition and a material reduction in our sales.


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We may not succeed in implementing our growth strategies, in which case we may not be able to take advantage of certain market opportunities and may become less competitive.

As part of our overall growth strategy, we are continually seeking out opportunities to enhance the positioning of our brands, diversify our product offerings, extend our brands into complementary product categories and markets, expand geographically, increase our overall retail presence, and improve our financial performance and operational efficiency. For example, we continue to pursue opportunities to expand our Direct-to-Consumer presence, including through new retail stores and expanded E-commerce capabilities. We are also considering expanding our partner retail program in certain markets based on our analysis of the market opportunity and business efficiencies. In addition, as part of our international growth strategy, we may continue to transition from a third-party distribution model to a direct distribution model. Further, we are exploring relationships with third parties for the expansion of the UGG brand into different product categories, including licensee and sourcing agent arrangements. We anticipate that substantial further expansion will be required to realize our growth potential and take advantage of new market opportunities. Failure to effectively implement our growth strategy could negatively impact our revenues and rate of growth, and result in our business becoming less competitive. In addition, taking steps to implement our growth initiatives could have a number of negative effects, including increasing our working capital needs, causing us to incur costs without any corresponding benefits, and diverting management time and resources away from our existing business.

We face risks associated with pursuing strategic acquisitions, and our failure to successfully integrate any acquired business or products could have a material adverse effect on our results of operations and financial position.

As part of our overall growth strategy, we consider strategic acquisitions in order to extend our brands into complementary product categories and markets. For example, in April 2015 we acquired substantially all the assets related to the Koolaburra brand. Our ability to continue this practice depends on our ability to identify and successfully pursue suitable acquisition candidates. Acquisitions involve numerous risks, challenges and uncertainties, including the potential to:

expose us to risks inherent in entering a new market or geographic region;
lose significant customers or key personnel of the acquired business;
encounter difficulties managing geographically-remote operations;
divert management’s time and attention away from other aspects of our business operations;
issue equity securities to finance the acquisition, which would be dilutive to our existing stockholders;
incur indebtedness to finance the acquisition, which would result in debt service costs and potentially include covenants restricting our operations; and
incur costs relating to a potential acquisition that we fail to consummate, which we may not be able to recover.

Additionally, we may not be able to successfully integrate the operations of any acquired businesses into our operations, or to achieve the expected benefits of any acquisitions. Following an acquisition, we may also face cannibalization of existing product sales by our newly-acquired products, unless we adequately integrate new brands and products with our existing products, aggressively target different consumers for our newly-acquired products, and increase our overall market share. The failure to successfully integrate any acquired business or products in the future could have a material adverse effect on our results of operations and financial position.

Our business could be adversely affected by the loss of key members of our management team or other key personnel.

Our future success and growth depend largely upon the continued services of our executive officers and other key employees. From time to time, there may be changes in our executive officers or other key employees resulting from the hiring or departure of such personnel, which may disrupt our business. Our executive officers and other key employees are generally employed on an at-will basis, which means that such personnel could terminate their employment with us at any time. For example, we have hired new executives in key leadership roles over the last several years, including the President of Fashion Lifestyle and President of OmniChannel. The loss of one or more of our executive officers or other key employees, and the often extensive process of identifying and hiring other personnel who will work effectively with our employees and lead our company to fill those key positions, could have a material adverse effect on our business.


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We depend on skilled personnel and, if we are unable to retain or hire additional qualified personnel, we may not be able to achieve our strategic objectives and our operating results may suffer.

To execute our growth plan, we must continue to attract and retain highly qualified and motivated personnel across our company. In particular, in order to continue to develop new products and successfully operate and grow our key business processes, it is important for us to continue hiring highly skilled footwear and accessory designers and information technology specialists. Competition for these skilled professionals is intense within our industry and there continues to be upward pressure on the compensation paid to these professionals. Many of the companies with which we compete for experienced personnel have greater name recognition and financial resources than we have. If we hire employees from competitors or other companies, their former employers may attempt to assert that we or these employees have breached their legal obligations, resulting in a diversion of our time and resources. In addition, our headquarters are located in Goleta, California, which is not generally recognized as a prominent commercial center, and it is difficult to attract qualified professionals due to our geographic location. As a result, we may have difficulty hiring and retaining suitably skilled personnel with the qualifications and motivation to expand our business. If we are unable to attract and retain the personnel necessary to execute our growth plan, we may be unable to achieve our strategic objectives, our operating results may suffer and we may be unable to compete in the market.

In addition, prospective and existing employees often consider the value of the stock awards they receive in connection with their employment when deciding whether to take a job. If the perceived value of our equity awards decline, or if the price of our stock experiences significant volatility, it may adversely affect our ability to recruit and retain highly skilled employees. If we fail to attract new personnel or to retain and motivate our current personnel, our future growth prospects could be adversely affected and our business could be harmed.

Additionally, as part of our efforts to improve overall efficiency and competitiveness of our business, we have added new leadership both within our brands and to our Omni-Channel platform, as well as streamlining and restructuring our existing personnel and brand management. If we fail to effectively implement these management and personnel changes, we may be unable to achieve our strategic objectives and operating efficiencies.

Our corporate culture has contributed to our success and, if we cannot maintain this culture as we grow, we could lose the passion, creativity, teamwork, focus and innovation fostered by our culture.

We believe that our culture has been and will continue to be a key contributor to our success. If we do not continue to develop our corporate culture or maintain our culture and core values over time, we may be unable to foster the passion, creativity, teamwork, focus and innovation that we believe have contributed to the growth and success of our business. Any failure to preserve our culture could negatively affect our ability to recruit and retain personnel and to effectively focus on and pursue our strategic objectives. As we continue to pursue our goals and implement new strategies, we may find it difficult to maintain our corporate culture.

We rely upon a number of warehouse and distribution facilities to operate our business, and any damage to one of these facilities, or any disruptions caused by incorporating new facilities into our operations, could have a material adverse impact on our business.
We rely upon a broad network of warehouse and distribution facilities in order to store, sort, package and distribute our products both domestically and internationally. In the US, we distribute products through self-managed distribution centers in Camarillo and Moreno Valley, California. These distribution centers feature a complex warehouse management system that enables us to efficiently pack products for direct shipment to customers. However, we could face a significant disruption in our domestic distribution center operations if our warehouse management system does not perform as anticipated or ceases to function for an extended period of time, which could occur as a result of damage to the facility, failure of certain equipment, power outages or software problems. These risks are exacerbated by the ongoing implementation of our Business Transformation Project since the warehouse management system is required to work together with our enterprise resource program systems and inventory management and control systems. If our domestic distribution center operations are impeded for any reason, it could result in shipment delays or the inability to delivery product at all, which would result in lost sales, strain our relationships with customers, and cause harm to our reputation, any of which could have a material adverse impact on our business.
In addition, we began operating our distribution center in Moreno Valley in the fourth quarter of fiscal year 2015. In general, building out a new distribution facility, and incorporating the operations of the new facility into our business in an efficient and cost effective manner presents many challenges. During the first several months of operations of the Moreno Valley facility, we experienced logistical challenges which caused shipment delays and resulted in lost

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sales, primarily for the Sanuk brand. While we continue to work on improving operations at the Moreno Valley facility, we expect to continue to experience disruption to our business as a result of bringing the facility online, including the potential for additional shipment delays, cancelled orders and other logistical issues. In addition, any new distribution facilities that we build or acquire in the future may experience similar difficulties.
Internationally, we distribute our products through a number of distribution centers managed by third-party logistics providers (3PLs). We depend on these 3PLs to manage the operation of their distribution centers as necessary to meet our business needs. If the 3PLs fail to manage these responsibilities, our international distribution operations could face significant disruptions. The loss of, or disruption to the operations of, any one or more of these facilities, whether due to natural disasters, the outbreak of hostilities, work stoppages, or other adverse events, could materially adversely impact our sales, business performance and operating results.

We rely on independent manufacturers for most of our production needs, and the failure of these manufacturers to manage these responsibilities would prevent us filling customer orders, which would result in loss of sales and harm our relationships with customers.

We rely on independent manufacturers and their respective material suppliers for most of our production needs, although we do not have direct control over the manufacturers or their suppliers. We depend on these independent manufacturers for a number of functions that are critical to our operations, including financing the production of goods ordered, maintaining manufacturing capacity, complying with our restricted substances policy and storing finished goods in a safe location pending shipment. If the independent manufacturers fail to manage these responsibilities, we may be unable to obtain timely delivery of products in sufficient quantities that meet our quality standards. In that event, we may not be able to fill customer orders, which would result in lost sales and harm to our relationships with customers.

We do not currently have long-term contracts with these independent manufacturers, and so are not assured of a long-term, uninterrupted supply of acceptable quality and competitively-priced products from our independent manufacturers. While we do have long-standing relationships with most of these manufacturers, any of the manufacturers may unilaterally terminate their relationship with us at any time, seek to increase the prices they charge us, or extract other concessions from us. In the event of a termination of an existing relationship with a manufacturer, we may not be able to substitute alternative manufacturers that are capable of providing products or services of a comparable quality, at an acceptable price, or on a timely basis. If we must find alternative manufacturers, we would likely experience increased costs as well as substantial disruption to our business, which could result in a loss of sales and earnings.

Interruptions in the supply of our products can also result from adverse events that impair the operations of our manufacturers. We keep proprietary materials that are required for the production of our products, such as shoe molds, knives, and raw materials, under the custody of our independent manufacturers. If these independent manufacturers were to experience loss or damage to these proprietary materials, whether as a result of natural disasters, outbreak of hostilities or other adverse events, we cannot be assured that the manufacturers would have adequate insurance to cover such loss or damage, and, in any event, the replacement of such materials would likely result in significant delays in the production of our products, which could result in a loss of sales and earnings.

Most of our independent manufacturers are located outside of the US, where we are subject to the risks associated with international commerce.

Most of our independent manufacturers are in Asia and Latin America, with the majority of production performed by a limited number of manufacturers in China. Foreign manufacturing is subject to numerous risks and uncertainties, including the following:

tariffs, import and export controls, and other non-tariff barriers such as quotas and local content rules on raw materials and finished products;
increasing transportation costs and a limited supply of international shipping capacity;
delays during shipping, at the port of entry or at the port of departure;
increasing labor costs and labor disruptions;
poor infrastructure and shortages of equipment, which can disrupt transportation and utilities;
restrictions on the transfer of funds from foreign jurisdictions;
changing economic and market conditions;
changes in governmental policies and regulations including intellectual property, labor, safety, and environmental regulations;

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refusal to adopt or comply with our Supplier Code of Conduct, Conflict Minerals Policy and Restricted Substances Policy;
customary business traditions in China and Vietnam such as local holidays, which are traditionally accompanied by high levels of turnover in the factories;
decreased scrutiny by custom officials for counterfeit products;
political instability, which can interrupt commerce, including acts of war and other external factors, over which we have no control;
heightened terrorism security concerns, which could subject imported or exported products to more frequent or more lengthy inspections;
use of unauthorized or prohibited materials or reclassification of materials;
disease epidemics and health-related concerns that could result in a reduced workforce or scarcity of raw materials;
disruptions at manufacturing or distribution facilities caused by natural or other disasters; and
adverse changes in consumer perception of goods, trade, or political relations with China or Vietnam.

These risks and uncertainties, or others of which we are currently unaware, could interfere with the manufacture or shipment of our products by our independent manufacturers. This could make it more difficult to obtain adequate supplies of quality products when we need them, which could negatively impact our sales and earnings.

While we require that our independent manufacturers adhere to environmental, labor, ethical, health, safety, and other standard business practices and applicable local laws, and while we periodically visit and audit their operations, we do not control their business practices. If we discovered non-compliant manufacturers or suppliers that cannot or will not become compliant, we would cease dealing with them, which could increase our costs and cause us to suffer an interruption in our product supply chain. In addition, the manufacturers’ violations of such standards and laws could result in negative publicity, which could damage our reputation and the value of our brands.

We conduct business outside the US, which exposes us to foreign currency risk, and could have a negative impact on our financial results.

We operate on a global basis, with approximately 35.0% of our net sales for the year ended March 31, 2016 from operations outside the US. As we continue to increase our international operations, our sales and expenditures in foreign currencies become more material and subject to currency fluctuations. A significant portion of our international operating expenses are paid in local currencies. Also, our foreign distributors sell in local currencies, which impacts the price to foreign consumers. Many of our subsidiaries operate with their local currency as their functional currency. Future changes in foreign currency exchange rates and global credit markets may cause changes in the US dollar value of our purchases or sales and materially affect our sales, profit margins, or results of operations, when converted to US dollars. Changes in the value of the US dollar relative to other currencies could result in material fluctuations in foreign currency translation amounts or the US dollar value of transactions and, as a result, our net earnings could be materially adversely affected.

We currently utilize forward contracts or other derivative instruments for the amounts we expect to purchase and sell in foreign currencies to mitigate exposure to fluctuations in the foreign currency exchange rate. As we continue to expand international operations and increase purchases and sales in foreign currencies, we will evaluate and may utilize additional derivative instruments, as needed, to hedge our foreign currency exposures. Our hedging strategies depend on our forecasts of sales, expenses, and cash flows, which are inherently subject to inaccuracies. Therefore, our hedging strategies may be ineffective. In addition, the failure of financial institutions that underwrite our derivative contracts may negate our efforts to hedge our foreign currency exposures and result in material foreign currency or contract losses. Foreign currency hedging activities, transactions, remeasurements or translations could materially impact our consolidated financial statements.


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Labor disruptions could negatively impact our results of operations and financial position.

Our business depends on our ability to source and distribute products in a timely manner. Labor disputes that affect the operations of our independent manufacturers, tanneries, transportation carriers, retail stores or distribution centers create significant risks for our business, particularly if these disputes result in work slowdowns, lockouts, strikes or similar disruptions. For example, in recent years, labor disputes at US shipping ports have impacted the delivery of our products. Any such disruptions may have a material adverse effect on our business by potentially resulting in cancelled orders by customers, unanticipated inventory accumulation, and increased transportation and labor costs, each of which may negatively impact our results of operations and financial position.

Our sales in international markets are subject to a variety of legal, regulatory, political, cultural and economic risks that may adversely impact our operating results in certain regions.

Our ability to capitalize on growth in new international markets and to maintain the current level of operation in our existing international markets is subject to risks associated with international operations that could adversely affect our sales and operating results. These risks include:

changes in foreign currency exchange rates, which impact the prices at which products are sold to international consumers;
limitations on our ability to move currency out of international markets;
burdens of complying with a variety of foreign laws and regulations, which may change unexpectedly, and the interpretation and application of which are uncertain;
legal costs and penalties related to defending allegations of non-compliance with foreign government policies, laws and regulations;
inability to import products into a foreign country;
changes in US and foreign tax laws;
complications due to lack of familiarity with local customs;
difficulties associated with promoting and marketing products in unfamiliar cultures;
political instability;
changes in diplomatic and trade relationships between the US and other countries; and
general economic fluctuations in specific countries or markets.

International trade and import regulations may impose unexpected duty costs or other non-tariff barriers to markets while the increasing number of free trade agreements has the potential to stimulate increased competition; security procedures may cause significant delays.

Products manufactured overseas and imported into the US and other countries are subject to import duties. While we have implemented internal measures to comply with applicable customs regulations and to properly calculate the import duties applicable to imported products, customs authorities may disagree with our claimed tariff treatment for certain products, resulting in unexpected costs that may not have been factored into the sales price of such products and our forecasted gross margins.

We cannot predict whether future domestic laws, regulations or trade remedy actions or international agreements may impose additional duties or other restrictions on the importation of products from one or more of our sourcing venues. Such changes could increase the cost of our products, require us to withdraw from certain restricted markets, or change our business methods and could make it difficult to obtain products of our customary quality at a competitive price. Meanwhile, the continued negotiation of bilateral and multilateral free trade agreements by the US and our other market countries with countries other than our principal sourcing venues may stimulate competition from manufacturers in these other sourcing venues, which now export, or may seek to export, footwear and accessories to our target markets at preferred rates of duty, which may have an effect on our sales and operations.

Additionally, the increased threat of terrorist activity, and law enforcement responses to this threat, have required greater levels of inspection of imported goods and have caused delays in bringing imported goods to market. Any tightening of security procedures, for example, in the aftermath of a terrorist incident, could worsen these delays and increase our costs.


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Key business processes and supporting information systems could be interrupted and such interruption can adversely affect our business.

Our future success and growth depend on the continued operation of our key business processes, including information systems, global communications, the internet, and key personnel. Hackers and computer viruses have disrupted operations at many major companies. We may be vulnerable to similar acts of sabotage. Key processes could also be interrupted by a failure due to weather, natural disaster, power loss, telecommunications failure, failure of our computer systems, sabotage, terrorism, or similar event such that:

critical business systems become inoperable or require significant costs to restore;
key personnel are unable to perform their duties, communicate, or access information systems;
significant quantities of merchandise are damaged or destroyed;
we are required to make unanticipated investment in state-of-the-art technologies and security measures;
key wholesale and distributor customers cannot place or receive orders;
E-Commerce customer orders may not be received or fulfilled;
confidential information about our customers may be misappropriated or lost damaging our reputation and customer relationships;
we are exposed to unanticipated liabilities; or
carriers cannot ship or unload shipments.

Interruptions to key business processes could have a material adverse effect on our business and operations and result in lost sales and reduced earnings.

Furthermore, we rely on certain information technology management and enterprise resource planning systems to prepare sales forecasts, track our financial and operating results, and otherwise operate our business. As our business grows and we expand into additional distribution channels and geographic regions, these systems may require expansion or modification. We may experience difficulties expanding these information technology and resource planning systems or transitioning to new or upgraded systems, which may result in loss of data or unreliable data, decreases in productivity as our personnel become familiar with and adapt to the new systems, and increased costs for the implementation of the new or upgraded systems. If we are unable to modify our information technology or resource planning systems to respond to changes in our business needs, or if we experience a failure or interruption in these systems, our ability to accurately forecast sales, report our financial and operating results, or otherwise operate our business could be adversely affected.

The loss, theft or misuse of sensitive customer or company information, could damage our relationships with customers, harm our reputation, expose us to litigation and adversely affect our business.

Our business involves the storage and transmission of sensitive information, including the personal information of our customers, credit card information, employee information, data relating to customer preferences, and proprietary company financial and strategic data. The protection of our customer, employee and company data is vitally important to us as the loss, theft or misuse of such information could lead to significant reputational or competitive harm, litigation and potential liability. As a result, we believe that our future success and growth depends, in part, on the ability of our key business processes, including our information and global communication systems, to prevent the theft, loss or misuse of this sensitive information. However, as with many businesses, we are subject to numerous security and cybersecurity risks which may prevent us from maintaining the privacy of sensitive information and require us to expend significant resources attempting to secure such information.

As has been well documented in the media, hackers and computer viruses have disrupted operations at many major companies, and we may be vulnerable to similar security breaches. While we have expended, and will continue to expend, resources to protect our customers and ourselves against these breaches and to ensure an effective response to a security or cybersecurity breach, we cannot be certain that we will be able to adequately defend against any such breach. Techniques used to obtain unauthorized access to attack systems are constantly evolving and, in some cases, becoming more sophisticated and harder to detect. Despite our efforts, we may be unable to anticipate these techniques or implement adequate preventive measures in response, and any breaches that we do not detect may remain undetected for some period. In addition, measures that we do take to prevent risks of fraud and security breaches have the potential to harm relationships with our customers or suppliers, or decrease activity on our websites by making them more difficult to use or restricting the ability to meet our customers' expectations in terms of their online shopping experience.

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Any failure to maintain the security of our customers’ sensitive information, or data belonging to our suppliers, could put us at a competitive disadvantage, result in deterioration of our customers’ confidence in our brands, and subject us to potential litigation, liability, fines and penalties. While we maintain insurance coverage that may, subject to policy terms and conditions, cover certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses and would not remedy damage to our reputation. In addition, employees may intentionally or inadvertently cause data or security breaches that result in unauthorized release of personal or confidential information. In such circumstances, we could be held liable to our customers, suppliers, employees or other parties, or be subject to regulatory or other actions for breaching privacy laws or failing to adequately protect such information or respond to a breach. This could result in costly investigations and litigation, civil or criminal penalties, operational changes and negative publicity that could adversely affect our reputation and our results of operations and financial condition.

We are also subject to payment card association rules and obligations under our contracts with payment card processors. Under these rules and obligations, if information is compromised, we could be liable to payment card issuers for associated expenses and penalties. In addition, if we fail to follow payment card industry security standards, even if customer information is never compromised, we could incur significant fines or experience a significant increase in payment card transaction costs.

Our revolving credit facility agreement, which provides our lenders with a first-priority lien against substantially all of our assets, exposes us to certain risks.

From time to time, we have financed our liquidity needs in part from borrowings made under a revolving credit facility. Our credit facility provides for a committed revolving credit line of up to $400,000. Our obligations under the agreement are guaranteed by our existing and future wholly-owned domestic subsidiaries (subject to certain exceptions) and are secured by a first-priority security interest in substantially all of our assets, including all or a portion of the equity interests of certain of our domestic and first-tier foreign subsidiaries.

Our credit facility also contains a number of customary financial covenants and restrictions, which may restrict our ability to engage in transactions that would otherwise be in our best interests. Failure to comply with any of the covenants could result in a default. A default under the credit facility could cause the lenders to accelerate the timing of payments and exercise their lien on our assets, which would have a material adverse effect on our business, operations, financial condition and liquidity. In addition, because borrowings under the credit facility bear interest at variable interest rates, which we do not currently anticipate hedging against, increases in interest rates would increase our cost of borrowing, resulting in a decline in our net income and cash flow. There were outstanding borrowings of approximately $53,000 under our credit facility at March 31, 2016.
  
In addition, we have a credit facility in China (China Credit Facility), which provides for an uncommitted revolving line of credit of up to CNY 150,000, or approximately $23,200. At March 31, 2016, we had approximately $14,000 of outstanding borrowings under the China Credit Facility.

The tax laws applicable to our business are very complex and we may be subject to additional tax liabilities as a result of audits by various taxing authorities or changes in tax laws applicable to our business.

We conduct our operations through subsidiaries in several countries, including the US, the UK, Japan, China, Hong Kong, Macau, the Netherlands, Bermuda, France, Germany, and Canada. As a result, we are subject to tax laws and regulations in each of those jurisdictions, and to tax treaties between the US and those countries. These tax laws are highly complex, and significant judgment and specialized expertise is required in evaluating and estimating our worldwide provision for income taxes.

We are subject to audits in each of the various jurisdictions where we conduct business, and any of these jurisdictions may assess additional taxes against us as a result of these audits. Although we believe our tax estimates are reasonable, and we undertake to prepare our tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audits, and any related litigation, could be materially different from our estimates or from our historical tax provisions and accruals. The results of an audit or litigation could have a material adverse effect on our operating results or cash flows in the periods for which that determination is made, and may require a restatement of prior financial reports. In addition, future period earnings may be adversely impacted by litigation costs, settlement payments, or interest or penalty assessments.


22


We are also subject to constant changes in tax laws, regulations and treaties in and between the nations in which we operate. Our tax expense is based upon our interpretation of the tax laws in effect in various countries at the time that the expense was incurred. A change in these tax laws, treaties or regulations, or in the interpretation thereof, could result in a materially higher tax expense or a higher effective tax rate on our worldwide earnings. In addition, it is possible that tax proposals could result in changes to the existing US tax laws that affect us, although we are unable to predict whether any proposals will ultimately be enacted. Any changes in tax laws, treaties or regulations could increase our income tax liability and adversely affect our net income and long term effective tax rates.

We may incur disruption, expense, and potential liability associated with existing and future litigation.

We are involved in various claims, litigation and other legal and regulatory proceedings and governmental investigations that arise from time to time in the ordinary course of our business. Due to the inherent uncertainties of litigation and other such proceedings and investigations, we cannot predict with accuracy the ultimate outcome of any such matters. An unfavorable outcome could have a material adverse impact on our business, financial position, and results of operations. The amount of insurance coverage we maintain to address such matters may be inadequate to cover these or other claims. In addition, any significant litigation, investigation, or proceeding, regardless of its merits, could divert financial and management resources that would otherwise be used to benefit our operations or could negatively impact our reputation in the marketplace.

New regulations related to "conflict minerals" may cause us to incur additional expenses and could limit the supply and increase the cost of certain metals used in manufacturing our products.

In August 2012, the SEC adopted a new rule requiring disclosures by public companies of specified minerals, known as conflict minerals, that are necessary to the functionality or production of products manufactured or contracted to be manufactured. The rule requires companies to perform due diligence, and to annually report to the SEC whether or not such minerals originate from the Democratic Republic of Congo or an adjoining country. The rule could affect sourcing at competitive prices and availability in sufficient quantities of certain minerals used in the manufacture of our products. The number of suppliers who provide conflict-free minerals may be limited. In addition, there may be material costs associated with complying with the disclosure requirements, such as costs related to determining the source of certain minerals used in our products, as well as costs of possible changes to products, processes, or sources of supply as a consequence of such verification activities. Within our supply chain, we may not be able to sufficiently verify the origins of the relevant minerals used in our products through the due diligence procedures that we implement, which may harm our reputation. We file a Form SD, Specialized Disclosure Report, on or about May 31 each year.

Our common stock price has been volatile, which could result in substantial losses for stockholders.

Our common stock is traded on the New York Stock Exchange under the symbol “DECK”. The trading price of our common stock has been and may continue to be volatile. The closing prices of our common stock, as reported by the NYSE, have ranged from $42.27 to $76.14 for the 52-week period ended May 13, 2016. The trading price of our common stock could be affected by a number of factors, including, but not limited to the following:

changes in expectations of our future performance, whether realized or perceived;
changes in estimates by securities analysts or failure to meet such estimates;
published research and opinions by securities analysts and other market forecasters;
quarterly fluctuations in our sales, margins, expenses, and financial results;
the financial results and liquidity of our customers;
the shift of revenue recognition as a result of changes in our distribution model;
claims brought against us by a regulatory agency or our stockholders;
announcements to repurchase our stock;
the declaration of stock or cash dividends;
general market and economic conditions;
consumer confidence;
broad market fluctuations in volume and price; and
a variety of risk factors, including the ones described elsewhere in this Annual Report on Form 10-K and in our other filings with the SEC.

In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of individual companies. Accordingly, the price of our common stock is volatile and any investment in our stock is subject to risk of loss. These broad market and industry

23


factors and other general macroeconomic conditions unrelated to our financial performance may also affect our common stock price.

Changes in economic conditions may adversely affect our financial condition and results of operations.

Volatile economic conditions and general changes in the market have affected, and will likely continue to affect, consumer spending generally and the buying habits and preferences of consumers. A significant portion of the products we sell, especially those sold under the UGG brand, are considered to be luxury retail products. The purchase of these products by consumers is largely discretionary, and is therefore highly dependent upon the level of consumer spending, particularly among affluent consumers. Sales of these products may be adversely affected by factors such as uncertain or worsening economic conditions, increases in consumer debt levels, or a decline in consumer confidence. During an actual or perceived economic downturn, fewer consumers may shop for our products, and those who do shop may limit the amount of their purchases or substitute less costly products for our products. As a result, we could be required to reduce the price we can charge for our products or increase our marketing and promotional expenses to generate additional demand for our products. In either case, these changes could reduce our sales and gross margins, which could have a material adverse effect on our financial condition and results of operations.

We sell a large portion of our products through higher-end specialty and department store retailers. The businesses of these retailer customers may be impacted by factors such as changes in economic conditions, reduced customer demand for luxury products, and decreases in available credit. If these or other factors result in financial difficulties or insolvency for our retail customers, such pressures would have an adverse impact on our estimated allowances and reserves, and potentially result in us losing key customers.

Furthermore, economic factors such as increased transportation costs, inflation, higher costs of labor, and higher insurance and healthcare costs may increase our cost of sales and our operating expenses.

Anti-takeover provisions contained in our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws, as well as provisions of Delaware law, could impair a takeover attempt.

Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws contain provisions that could have the effect of rendering more difficult hostile takeovers, change-in-control transactions or changes in our Board of Directors or management. Among other things, these provisions:

authorize the issuance of preferred stock with powers, preferences and rights that may be senior to our common stock, which can be created and issued by our Board of Directors without prior stockholder approval;
provide that the number of directors will be fixed by the affirmative vote of a majority of the whole Board of Directors;
provide that board vacancies can only be filled by directors;
prohibit stockholders from acting by written consent without holding a meeting of stockholders;
require the vote of holders of not less than 66 2/3% of the voting stock then outstanding to approve amendments to our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws; and
require advance written notice of stockholder proposals and director nominations.

As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which may delay, deter or prevent a change-in-control transaction. Section 203 imposes certain restrictions on mergers, business combinations and other transactions between us and holders of 15% or more of our common stock.

Any provision of Delaware law, our Amended and Restated Certificate of Incorporation, or our Amended and Restated Bylaws, that has the effect of rendering more difficult, delaying, deterring or preventing a change-in-control transaction could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

We do not expect to declare any dividends in the foreseeable future.

We have never declared or paid any cash dividends on our existing common stock. We do not anticipate declaring or paying any cash dividends to holders of our common stock in the foreseeable future and intend to retain all future

24


earnings for the growth of our business. Consequently, investors may need to rely on sales of our common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors should not purchase our common stock with the expectation of receiving cash dividends.

Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.

Generally accepted accounting principles in the United States, or US GAAP, are subject to interpretation by the Financial Accounting Standards Board, or FASB, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant impact on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change.

Item 2. Properties

Our corporate headquarters are located in Goleta, California. The construction of our new fourteen acre corporate headquarters in Goleta, California was substantially completed in January 2014. Subsequent to March 31, 2016, we acquired 3.7 acres of land adjacent to our corporate headquarters to accommodate future expansion.

We have two US distribution centers, both in California. We began operating our distribution center in Moreno Valley in the fourth quarter of fiscal year 2015 and continue to operate our distribution center in Camarillo. Our international distribution centers, located in China, Hong Kong, Japan, the Netherlands and the UK are managed by 3PLs.

We also have offices in China, Hong Kong and Vietnam to oversee the quality and manufacturing standards of our products, an office in Macau to coordinate logistics, offices in China, Hong Kong and Japan to coordinate sales and marketing efforts, and offices in France, Germany, the Netherlands and the UK to oversee European operations and administration.

At March 31, 2016, we had 54 retail stores in the US ranging from approximately 1,000 to 7,000 square feet. Internationally, we had 99 retail stores in Austria, Belgium, Canada, China, France, Hong Kong, Japan, the Netherlands and the UK. Our E-Commerce operations are in Arizona, China, Japan and the UK and many other European countries. We have no manufacturing facilities, as all of our products are manufactured by independent manufacturers.

Other than our new corporate headquarters, we lease, rather than own, our facilities from unrelated parties. With the exception of our DTC facilities, our facilities are attributable to multiple segments of our business and are not allocated to the reportable segments. We believe our space is adequate for our current needs and that suitable additional or substitute space will be available to accommodate the foreseeable expansion of our business and operations.

The following table reflects the location, use and approximate size of our significant physical properties at March 31, 2016:

Facility Location
 
Description
 
Lease or Own
 
Facility Size (Square Footage)

Moreno Valley, California
 
Warehouse Facility
 
Lease
 
794,000

Camarillo, California
 
Warehouse Facility
 
Lease
 
723,000

Goleta, California
 
Corporate Offices
 
Own
 
196,000



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Item 3. Legal Proceedings

As part of our policing program for our intellectual property rights, from time to time, we file lawsuits in the US and abroad alleging acts of trademark counterfeiting, trademark infringement, patent infringement, trade dress infringement, trademark dilution, and state or foreign law claims. At any given point in time, we may have a number of such actions pending. These actions often result in seizure of counterfeit merchandise or out of court settlements with defendants or both. From time to time, we are subject to claims where plaintiffs will raise, or defendants will raise, either as affirmative defenses or as counterclaims, the invalidity or unenforceability of certain of our intellectual property rights, including our trademark registration and design patents for UGG. We also are aware of many instances throughout the world in which a third-party is using our UGG trademarks within its internet domain name, and we have discovered and are investigating several manufacturers and distributors of counterfeit UGG, Teva and Sanuk products.

Although we are subject to other routine legal proceedings from time to time in the ordinary course of business, including employment, intellectual property and product liability claims, we believe that the outcome of all pending legal proceedings in the aggregate will not have a material adverse effect on our business or consolidated financial statements.


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PART II

Unless otherwise specifically indicated, all amounts in Items 5, 6, 7 and 7A herein are expressed in thousands, except for share data and store count.

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on the NYSE under the symbol "DECK". Prior to May 5, 2014, our common stock was traded on the NASDAQ Global Select Market under the symbol "DECK".

The following table shows the range of low and high closing sale prices per share of our common stock, based on the last daily sale, for the periods indicated.

 
Common Stock
Price Per Share
 
Low
 
High
Year ended March 31, 2016
 
 
 
First Quarter
$
68.15

 
$
76.58

Second Quarter
56.75

 
74.37

Third Quarter
46.30

 
62.16

Fourth Quarter
42.27

 
60.55

Year ended March 31, 2015
 
 
 
First Quarter
$
76.11

 
$
86.33

Second Quarter
81.53

 
99.38

Third Quarter
81.56

 
98.57

Fourth Quarter
66.05

 
94.10


At May 13, 2016, we had approximately 49 stockholders of record based upon the records of our transfer agent, which does not include beneficial owners of our common stock whose shares are held in the names of various securities brokers, dealers and registered clearing agencies.

We did not sell any equity securities during the year ended March 31, 2016 that were not registered under the Securities Act of 1933, as amended.

Stock Performance Graph

Below is a graph comparing the percentage change in the cumulative total stockholder return on the Company's common stock against the cumulative total return of the NYSE Composite Index, and the S&P 500 Apparel, Accessories & Luxury Goods Index for the five-year and one quarter period commencing December 31, 2010 and ending March 31, 2016. The data represented below assumes one hundred dollars invested in each of the Company's common stock, the NYSE Composite Index and the S&P 500 Apparel, Accessories & Luxury Goods Index on January 1, 2011.

The stock performance graph shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under either of such Acts. Total return assumes reinvestment of dividends; we have not declared or paid any cash dividends on our common stock since our inception.

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The following table assumes $100 invested on January 1, 2011 and assumes dividend reinvested.

 
12/31/2010
 
12/31/2011
 
12/31/2012
 
12/31/2013
 
3/31/2015
 
3/31/2016
Deckers Outdoor Corporation
$
100.0

 
$
94.8

 
$
50.5

 
$
105.9

 
$
91.4

 
$
75.1

S&P 500 Apparel, Accessories & Luxury Goods Index
100.0

 
124.4

 
127.6

 
159.4

 
152.2

 
135.1

The NYSE Composite Index*
100.0

 
96.4

 
112.1

 
141.7

 
155.5

 
149.6


*The NYSE Composite Index is an index that measures the performance of all stocks listed on the NYSE.

Dividend Policy

We have not declared or paid any cash dividends on our common stock since our inception. We currently do not anticipate declaring or paying any cash dividends in the foreseeable future. Our current credit agreement allows us to make cash dividends, provided that no event of default has occurred or is continuing and provided that our total adjusted leverage ratio does not exceed 2.75 to 1.00. At March 31, 2016, we were in compliance with this provision and we remain in compliance as of May 31, 2016.

Stock Repurchase Program

In June 2012, we approved a stock repurchase program to repurchase up to $200,000 of our common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, and other factors. The program did not obligate us to acquire any particular amount of common stock and the program may be suspended at any time at our discretion. At February 28, 2015, we had repurchased approximately 3,823,000 shares under this program for approximately $200,000, or an average price of $52.31 per share.

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In January 2015, we approved a new stock repurchase program to repurchase up to $200,000 of our common stock, which included the same stipulations as the purchase program approved in June 2012, as described above. At March 31, 2016, we have repurchased approximately 1,797,000 shares under this program for approximately $122,100, or an average price of $67.95 per share, leaving the remaining approved amount at approximately $77,900.

The following table summarizes the activity under our stock repurchase programs during the period from December 31, 2013 through March 31, 2016:

 
Total number
of shares
purchased*
(in thousands)
 
Average price
paid per share
 
Approximate dollar
value of shares
added/(purchased)
(in thousands)
 
Approximate dollar
value of shares that
may yet be purchased
(in thousands)
December 31, 2013


 


 


 
$
79,300

January 1, 2014 — September 30, 2014

 
$

 
$

 
79,300

October 1, 2014 — October 31, 2014
157

 
84.66

 
(13,300
)
 
66,000

January 1, 2015 — January 31, 2015

 

 
200,000

 
266,000

February 1, 2015 — February 28, 2015
1,089

 
73.41

 
(79,900
)
 
186,100

March 1, 2015 — March 31, 2015
190

 
73.73

 
(14,000
)
 
172,100

June 1, 2015 — June 30, 2015
625

 
72.69

 
(45,400
)
 
126,700

August 1, 2015 — August 31, 2015
321

 
67.68

 
(21,700
)
 
105,000

September 1, 2015 — September 30, 2015
33

 
62.32

 
(2,100
)
 
102,900

February 1, 2016 — February 29, 2016
266

 
56.41

 
(15,000
)
 
87,900

March 1, 2016 — March 31, 2016
175

 
56.97

 
(10,000
)
 
77,900

Total
2,856

 
$
67.95

 
 
 
 

* All shares purchased were purchased as part of a publicly announced program in open-market transactions.

Item 6. Selected Financial Data

We derived the following selected consolidated financial data from our consolidated financial statements.

The financial data are derived from, and qualified by reference to, the following audited consolidated financial statements not included in this Annual Report on Form 10-K:

Consolidated statements of comprehensive income for the years ended December 31, 2012 and 2011.

Consolidated balance sheets at March 31, 2014, and December 31, 2013.

The financial data are further derived from, and qualified by reference to, the following accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K:

Consolidated statements of comprehensive income (loss) for the years ended March 31, 2016, March 31, 2015 and December 31, 2013 and the transition quarter ended March 31, 2014.

Consolidated balance sheets at March 31, 2016 and March 31, 2015.


29


Historical results are not necessarily indicative of the results to be expected in the future. You should read the following consolidated financial information together with our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K and the related notes and Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations".

 
Years ended March 31,
 
Quarter ended (transition period) March 31,
 
Years ended December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
 
2011
 
(In thousands, except per share data)
Statements of operations data
 
 
 
 
 
 
 
 
 
 
 
Net sales:
 
 
 
 
 
 
 
 
 
 
 
UGG wholesale
$
918,102

 
$
903,926

 
$
83,271

 
$
818,377

 
$
819,256

 
$
915,203

Teva wholesale
121,239

 
116,931

 
45,283

 
109,334

 
108,591

 
118,742

Sanuk wholesale
90,719

 
102,690

 
28,793

 
94,420

 
89,804

 
26,039

Other brands wholesale
100,820

 
76,152

 
18,662

 
38,276

 
20,194

 
21,801

Direct-to-Consumer
644,317

 
617,358

 
118,707

 
496,211

 
376,553

 
295,498

Total net sales
1,875,197

 
1,817,057

 
294,716

 
1,556,618

 
1,414,398

 
1,377,283

Cost of sales
1,028,529

 
938,949

 
150,456

 
820,135

 
782,244

 
698,288

Gross profit
846,668

 
878,108

 
144,260

 
736,483

 
632,154

 
678,995

Selling, general and administrative expenses
684,541

 
653,689

 
144,668

 
528,586

 
445,206

 
394,157

Income (loss) from operations
162,127

 
224,419

 
(408
)
 
207,897

 
186,948

 
284,838

Other expense (income), net
5,242

 
3,280

 
334

 
2,340

 
2,830

 
(424
)
Income (loss) before income taxes
156,885

 
221,139

 
(742
)
 
205,557

 
184,118

 
285,262

Income taxes
34,620

 
59,359

 
1,943

 
59,868

 
55,104

 
83,404

Net income (loss)
122,265

 
161,780

 
(2,685
)
 
145,689

 
129,014

 
201,858

Net income attributable to noncontrolling interest

 

 

 

 
(148
)
 
(2,806
)
Net income (loss) attributable to Deckers Outdoor Corporation
$
122,265

 
$
161,780

 
$
(2,685
)
 
$
145,689

 
$
128,866

 
$
199,052

Net income (loss) per share attributable to Deckers Outdoor Corporation common stockholders:
 
 
 
 
 
 
 
 
 
 
 
Basic
$
3.76

 
$
4.70

 
$
(0.08
)
 
$
4.23

 
$
3.49

 
$
5.16

Diluted
$
3.70

 
$
4.66

 
$
(0.08
)
 
$
4.18

 
$
3.45

 
$
5.07

Weighted-average common shares outstanding:
 
 
 
 
 
 
 
 
 
 
 
Basic
32,556

 
34,433

 
34,621

 
34,473

 
36,879

 
38,605

Diluted
33,039

 
34,733

 
34,621

 
34,829

 
37,334

 
39,265


30


 
As of
 
Years ended March 31,
 
Quarter ended (transition period) March 31,
 
Years ended December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
 
2011
 
(In thousands)
Balance Sheet Data
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
245,956

 
$
225,143

 
$
245,088

 
$
237,125

 
$
110,247

 
$
263,606

Working capital
547,267

 
519,051

 
501,647

 
508,786

 
424,569

 
585,823

Total assets
1,278,068

 
1,169,933

 
1,064,204

 
1,259,729

 
1,068,064

 
1,146,196

Long-term liabilities
72,099

 
65,379

 
53,140

 
51,092

 
62,246

 
72,687

Total Deckers Outdoor Corporation stockholders' equity
967,471

 
937,012

 
888,849

 
888,119

 
738,801

 
835,936


31


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation

References to "Deckers," "we," "us," "our," or similar terms refer to Deckers Outdoor Corporation together with its consolidated subsidiaries. The following discussion of our financial condition and results of operations should be read together with our accompanying consolidated financial statements and the accompanying notes included in Part IV of this Annual Report on Form 10-K. Certain reclassifications were made for all prior periods presented including the year ended March 31, 2015, the quarter ended March 31, 2014 (transition period) and years ended December 31, 2013, 2014, and 2015 to conform to the current period presentation.

Unless otherwise specifically indicated, all amounts herein are expressed in thousands, except for share data, and store count.

Overview

We are a global leader in designing, marketing and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high performance activities. We market our products primarily under six proprietary brands, composed of the following three primary brands and our other brands:

UGG®: Premier brand in luxurious comfort footwear, and expanding into handbags, apparel, home and cold weather accessories;

Teva®: Born from the outdoors, active lifestyle footwear for the adventurous spirit; and

Sanuk®: Authentic Southern California casual footwear for those seeking a playful escape.

In addition to our three primary brands, our other brands include Hoka One One® (Hoka), a line of footwear for all capacities of runners designed with a unique performance midsole geometry, oversized midsole volume and active foot frame; Ahnu®, a line of performance outdoor and yoga footwear; and Koolaburra® by UGG (Koolaburra), a line of fashion casual footwear using sheepskin and other plush materials.

We sell our brands through quality domestic retailers and international distributors and retailers, as well as directly to our end-user consumers through our Direct-to-Consumer (DTC) business. Independent third parties manufacture all of our products.

Change in Fiscal Year

In February 2014, our Board of Directors approved a change in our fiscal year end from December 31 to March 31. The change was intended to better align our planning, financial and reporting functions with the seasonality of our business. The 2016, 2015 and 2013 fiscal years are for the periods ended March 31, 2016, March 31, 2015 and December 31, 2013, respectively. The 2014 transition period was the quarter ended March 31, 2014, to coincide with the change in our fiscal year end.

Recent Developments

In July 2014, we acquired our UGG brand distributor that had been selling to retailers in Germany and continues to operate as a wholesale business in Germany through the acquired subsidiary. The acquisition included certain intangible and tangible assets and the assumption of liabilities. The purchase price of the acquisition was not material to our consolidated financial statements.

In April 2015, we acquired substantially all the assets related to the Koolaburra brand, a line of fashion casual footwear using sheepskin and other plush materials. We believe there is significant consumer demand for footwear using sheepskin and other plush materials at price points below those of the UGG brand.

In July 2015, we sold certain tangible and intangible assets, and the trade name related to the MOZO® brand, a footwear brand crafted for culinary professionals. In February 2016, we sold certain tangible and intangible assets, including the trade name related to the TSUBO brand, a line of mid and high-end dress and dress casual footwear. The impacts of these sales were not material to our consolidated financial statements.


32


In February 2016, we announced the implementation of a retail store fleet optimization and office consolidation that was intended to streamline brand operations, reduce overhead costs, create operating efficiencies and improve collaboration and included the closure of facilities and relocation of employees. We have begun to realign our brands across two groups: Fashion Lifestyle and Performance Lifestyle. The Fashion Lifestyle group will include the UGG and Koolaburra brands. The Performance Lifestyle group will include the Teva, Sanuk and Hoka brands. As part of this realignment, we also relocated our Sanuk brand operations in Irvine, California to the corporate headquarters in Goleta, California. In addition, we closed our Ahnu brand operations office in Richmond, California and consolidated our European offices. Furthermore, we are in the process of evaluating our portfolio of retail stores. We have identified 24 retail stores that are candidates for potential closure. Subsequent to the sales of the MOZO and TSUBO brands, the operating results for our other brands only include Hoka, Ahnu and Koolaburra. We plan to leverage elements, including particular styles, of the Ahnu brand under the umbrella of the Teva brand beginning in calendar year 2017. Refer to Note 2 to our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K for further information.
 
As a result of the retail store fleet optimization, office consolidation and software impairments, we have expensed restructuring charges totaling approximately $25,000 at March 31, 2016. Of this amount, approximately $9,000 is related to lease termination costs, $4,000 is related to severance costs, $6,000 is related to impairment of leasehold improvements and various assets, $4,000 is related to various BT supply chain software impairments, and $2,000 for termination of various contracts. Of the total amount, approximately $15,000 was accrued as a non-cash impact at March 31, 2016, but will have cash impacts in the fiscal year ended March 31, 2017. Approximately $2,000 of the charges was recognized in cost of sales and the remainder was recorded in selling, general and administrative (SG&A). It is anticipated that we will incur an additional $10,000 to $15,000 of similar restructuring charges in the fiscal year ending March 31, 2017. The segment impacts of the total restructuring charges is as follow: Sanuk brand wholesale charges of approximately $3,000, other brands wholesale charges of approximately $2,500 related to the Ahnu brand, DTC charges of approximately $10,500, and the remainder of approximately $9,000 to unallocated overhead expenses, primarily BT supply chain software impairments and European office consolidation. The restructuring is expected to result in annualized expense savings in the range of $30,000 to $35,000. We expect to complete a majority of the restructuring activity by the end of the fiscal year ended March 31, 2017. It is anticipated that these cost savings will be offset by increases in other SG&A expenses during the fiscal year ended March 31, 2017.

For the past several years, we have been planning and preparing to improve, automate and streamline our operational systems, processes, infrastructure and management (Business Transformation Project or BT). One such initiative was to upgrade our enterprise resource planning (ERP) system. Our ERP system integrates finance and accounting, purchase order management, inventory control, operations and sales across all lines of business. The ERP system centralizes all of our transactional data. We anticipate that the result is to increase efficiencies within the entire company. The initiative to upgrade our ERP system worldwide went live in April 2016.

Trends Impacting our Overall Business

Our business has been, and we expect that it will continue to be, impacted by several important trends:

Sales of our products are highly seasonal and are sensitive to weather conditions, which are beyond our control. Even though we continue to expand our product lines and create more year-round styles for our brands, the effect of favorable or unfavorable weather on our aggregate sales has been, and is likely to continue to be, significant. We especially saw the impact of this trend during the third quarter when weather was unseasonably warm in many of our key markets. Weather will continue to be a significant factor impacting our business, and it will continue to be difficult for us to predict the impact that weather conditions in any future period will have on our financial condition and operating results.

We believe there has been a meaningful shift in the way consumers shop for products and make purchasing decisions, and we expect these behaviors will continue to evolve. In particular, the retail industry appears to be experiencing a significant and prolonged decrease in consumer traffic.

Fluctuations in currency exchange rates have significantly increased the value of the US dollar compared to most major foreign currencies over the past couple of years. We believe that this has been a significant factor contributing to a slowdown in traffic within our domestic retail locations, particularly within our flagship stores, which are located in major tourist cities. While we seek to hedge some of the risks associated with currency exchange rate fluctuations, these changes are largely outside

33


of our control. We expect these changes will continue to impact the demand for our products and our operating results.

The sheepskin used in certain UGG and Koolaburra products is in high demand and limited supply, and there have been significant fluctuations in the price of sheepskin in the past, as the demand for this material has fluctuated. While we continually strive to contain our material costs by entering into fixed price contracts, exploring new footwear materials and utilizing new production technologies, we expect that fluctuations in sheepskin prices will continue to materially impact our financial condition and operating results. In recent years, the impact of sheepskin price fluctuations on our operating results have been less dramatic, which we believe is partially a result of our introduction of UGGpure™, which is real wool material woven into a durable backing.

Continuing uncertainty surrounding US and global economic conditions has adversely impacted businesses worldwide. Some of our customers have been, and more may be, adversely affected, which in turn has, and may continue to, adversely impact our financial results.

We believe that consumers have narrowed their footwear product breadth, focusing on brands with a rich heritage and authenticity as market category creators and leaders. We also believe that consumers have become increasingly focused on luxury and comfort, seeking out products and brands that are fashionable while still comfortable.

We believe that the growth and evolution of the DTC channel is a principal factor that has allowed us to evolve the lifestyle nature of our brands and to diversify our product lines. The DTC channel exposes individual consumers to the full line of our products, including non-core products such as casual boots and specialty classics. In addition, sales through the DTC channel are typically associated with higher gross margins, which have a favorable impact on our operating results.

We have responded and intend to continue to respond to consumer focus on sustainability by establishing objectives, policies, and procedures to help us drive key sustainability initiatives around human rights, environmental conservation, and community affairs.

By emphasizing our brands' images and our focus on comfort, performance and authenticity, we believe we can continue to maintain a loyal consumer following that is less susceptible to fluctuations caused by changing fashions and changes in consumer preferences. In addition, by continuing to diversify our brands, and responding to our customers’ demands for innovative product offerings, we believe we can mitigate the impact of seasonality on our business and provide sustainable growth across our brands.

Use of Non-GAAP Measures

In order to provide a framework for assessing how our underlying businesses performed during the relevant periods excluding the effect of foreign currency rate fluctuations, throughout this Annual Report on Form 10-K we provide certain financial information on a “constant currency basis,” which is in addition to the financial measures calculated and presented in accordance with United States generally accepted accounting principles (US GAAP). In order to calculate our constant currency information, we calculate the current period financial information using the foreign currency exchange rates that were in effect during the previous comparable period. We believe that evaluating certain financial and operating measures, such as net sales, net income (loss) and reportable segment information on a constant currency basis is important, as it facilitates comparison of our current financial performance to our historical financial performance, excluding the impact of foreign currency rate fluctuations that are not indicative of our core operating results and are largely outside of our control. However, constant currency measures should not be considered in isolation as an alternative to US dollar measures that reflect current period exchange rates, or to other financial measures calculated and presented in accordance with US GAAP.

Segment Overview

Below is an overview of each of the operating segments of our business, including some key trends and factors that we believe affect each segment, as well as some of our strategies for growing each segment.


34


UGG Brand

For almost 40 years, the UGG brand has been one of the most iconic and recognized brands in the global footwear industry which highlights our successful track record of building niche brands into lifestyle market leaders. With loyal consumers around the world the UGG brand has proven to be a highly resilient line of premium footwear, with expanded product offerings and a growing global audience that attracts women, men and children. UGG brand footwear continually earns media exposure from numerous outlets both organically and from strategic public relations efforts, including an increasing amount of exposure internationally. The UGG brand has invested in creating holistic, impactful integrated campaigns across paid, earned and owned media channels, including mobile, digital, social, out-of-home (OOH) and print, which are globally scalable, contributing to broader public awareness of the brand and its products.

We believe the continued demand for UGG products has been, and will continue to be, driven by the following:

High consumer brand loyalty, due to almost 40 years of delivering quality and luxuriously comfortable UGG footwear.

Evolution of our Classics business through the evolution of features in our Classic boot and the introduction of innovative, Classics-inspired products such as the Classic Slim, the Classic Luxe, and the Classic Street, alongside targeted marketing campaigns.

Continued growth and diversification of our UGG footwear product lines in non-core categories, including weather, casual boots, slippers, specialty classics, and transitional products that bridge the seasons, which has been driven by an important shift in the way we guide our wholesale customers in the pre-booking process.

Exploration of opportunities in new product categories and styles beyond footwear, such as loungewear, handbags, cold-weather accessories and new home offerings.

Continued growth of the DTC channel, which we believe will continue to allow us to diversify our UGG product lines, as the DTC channel exposes individual consumers to the full line of our products.

Continued enhancement of our Omni-Channel capabilities to enable us to increasingly engage existing and prospective consumers in a more connected environment and expose them to the brand. In particular, we are working towards a more segmented channel and product approach to the market, whereby we can customize our product offerings based on unique consumer reach, market positioning and brand experience.

Continued evolution of our men’s product lines, alongside targeted UGG for Men campaigns.

We believe the iconic status and luxurious comfort of UGG products will continue to drive long-term consumer demand for the brand. Recognizing that there is a significant fashion element to UGG footwear, and that footwear fashions and consumer preferences fluctuate, one of our key strategies involves diversifying the UGG product line and presenting UGG as a year-round, global, premium lifestyle brand with a broad product line suitable for a variety of climates and a number of occasions. As part of this strategic approach, we have increased our product offerings, including expanding our line of Classics-inspired products, evolving our core product offerings such as the Classic to deliver more qualities desired by the consumer, growing our transitional collection and spring lines, expanding our men’s and children's lines, as well as introducing a variety of home offerings, handbags, cold weather accessories and apparel products. We also continue to focus on our marketing and promotional efforts, which we believe have contributed, and will continue to contribute, to our growth. In April 2016, we continued the evolution of our UGG stylized logo to reflect a more modern, simplified aesthetic. We believe that the evolution of the UGG brand and our strategy of product diversification will also help decrease our reliance on sheepskin, which is in high demand and subject to price volatility. Nonetheless, we cannot assure investors that our efforts will continue to result in UGG brand growth.


35


Teva Brand

For over 30 years Teva has fueled the expression of freedom through the adventure and outdoor lifestyle around the globe. Teva pioneered the sport sandal category in 1984, and the Originals Collection honors the heritage of Teva by revamping the styles on that the brand was founded by blending their original simplicity with modern sophistication. In the US, our focus will be to bolster our leadership position in sandals and to grow our market share through the modern outdoor lifestyle category extensions.

Within the US, we expect that Teva will grow its position as a market leader within the sport sandal and modern outdoor lifestyle categories (shoes and boots). Growth opportunities within our current core channels of distribution - outdoor specialty, sporting goods, and family footwear retail chains - will be pursued through deepening penetration with evolved and expanded product offerings. Teva plans to support its channel expansion beyond present distribution with focused investments in targeted, solution-driven marketing programs in order to attract new lifestyle consumers to the brand. However, we cannot assure investors that these efforts will be successful.

Sanuk Brand

The Sanuk brand was founded almost 20 years ago, and from its origins in the Southern California surf culture, has emerged into a brand with an expanding fan base and growing presence in the relaxed casual shoe and sandal categories. The Sanuk brand’s use of unexpected materials and unconventional constructions combined with its fun and playful branding has contributed to the brand’s identity and growth since its inception, and led to successful products such as the Yoga Mat™ sandal collection and the patented SIDEWALK SURFERS®. We believe that the Sanuk brand provides growth opportunities, especially within the casual shoe and sandal markets, supporting our strategic initiatives spanning new product launches and Omni-Channel development. However, we cannot assure investors that our efforts to grow the brand will be successful.

Other Brands

Our other brands consist primarily of Hoka, Ahnu and Koolaburra. These brands are sold through most of our distribution channels, and primarily through our wholesale channels.

The Hoka brand focuses on designing shoes with a unique performance midsole geometry, oversized midsole volume and an active foot frame. These shoes are used by marathon runners, ultra-marathon runners and everyday runners.

We plan to leverage elements, including particular styles, of the Ahnu brand under the umbrella of the Teva brand beginning in calendar year 2017.

In April 2015, we acquired substantially all the assets related to the Koolaburra brand, a line of fashion casual footwear using sheepskin and other plush materials. We intend to position Koolaburra as a high-quality, fashionable and affordable alternative to UGG and to distribute Koolaburra primarily through channels which do not offer the UGG brand. In November 2015, we added the "by UGG" attribute to the Koolaburra name to communicate to the consumer that the Koolaburra products come from the same company that designs and manufactures the UGG line.

With respect to Hoka and Koolaburra, we expect to continue to leverage our design, marketing, and distribution capabilities to grow these brands. Nevertheless, we cannot assure investors that our efforts to grow these brands will be successful.

Direct-to-Consumer

Our DTC business is comprised of our retail store and E-Commerce businesses. As a result of our evolving Omni-Channel strategy, we believe that our retail stores and websites are largely intertwined and dependent on one another. We believe that in many cases consumers interact with both our brick and mortar stores and our websites, before making purchase decisions. For example, consumers may feel or try-on products in our retail stores and then place an order online later. Conversely, they may initially research products online, and then view inventory availability by store location and make a purchase in store. Some examples that demonstrate the extent to which the sales channels are combined include the following:


36


“UGG Rewards”: We have implemented a consumer loyalty program under which points and awards are earned across the DTC channel.

“Infinite UGG”: We provide online shopping access inside retail stores, for all SKUs available on our E-Commerce websites.

“Buy online / return in-store”: Our consumers can buy online and return products to the store.

“Click and collect”: Our consumers can buy online and have products delivered to certain of our retail stores for pick-up.

“Retail inventory online”: Our consumers can view specific store location inventory online before visiting the store.

Our owned retail stores enable us to directly impact our consumers' experiences, meet the growing demand for these products, sell the products at retail prices and generate annual operating income. Our retail stores are predominantly UGG concept stores and UGG outlet stores. Through our outlet stores, we sell some of our discontinued styles from prior seasons, as well as full price in-line products, and products made specifically for the outlet stores. At March 31, 2016, we had a total of 153 retail stores worldwide.

We converted three of our retail stores in China to partner retail stores during the year ended March 31, 2016 and seven during the year ended March 31, 2015. Upon conversion, each of these stores became wholly-owned and operated by third parties in China. Sales made to the partner retail stores are included in our UGG brand wholesale segment and not in our DTC segment, as of the date of conversion. We anticipate opening more partner retail stores in China in the coming years.
The E-Commerce business provides us with an opportunity to communicate to consumers with a consistent brand message that is in line with our brands' promises, drives awareness of key brand initiatives, offers targeted information to specific consumer demographics, and drives consumers to our retail stores. At March 31, 2016, we operate our E-Commerce business through an aggregate of 20 Company-owned websites in nine different countries.

We believe that results for our DTC segment have been impacted, and will continue to be impacted, by the following important trends and factors:

We intend to launch certain products directly through the DTC segment, including certain Classics-inspired products, which we believe will drive growth within the segment.

The evaluation of the growth of the DTC channel provides us with important data about product demand that we share with wholesale customers to help them make more informed ordering decisions.

We expect operating profit to remain strong for the DTC channel, and for the DTC channel to serve as a key driver of our overall profitability. This is principally because the gross margins associated with sales made through our DTC channel are typically higher than those associated with sales made through our wholesale channel.

We believe that our retail store fleet is an important component of our DTC segment. We have already penetrated the major metropolitan markets globally with our retail presence, and we intend to maintain our retail presence in these top markets and to continue further expansion in secondary markets, as appropriate. However, we are in the process of evaluating our portfolio of retail stores with the goal of optimizing our fleet, and have identified 24 retail stores that are candidates for closure.

We continue to expect that our E-Commerce business will be a driver of growth, although we expect the growth rate will decline over time as the size of the E-Commerce business increases.

We believe the results of the retail component of our DTC business have been negatively impacted by recent weather patterns, which differ from historical weather patterns.


37


We believe the strengthening of the US dollar as compared to most major foreign currencies has reduced tourism traffic in our domestic retail stores, which has further negatively impacted the results of the retail component of our DTC business.

We report comparable DTC sales on a constant currency basis for combined retail stores and E-Commerce businesses that were open throughout the reporting period in both the current year and prior year. There may be variations in the way that we calculate comparable DTC sales in contrast to some of our competitors and other apparel retailers. As a result, information included in this Annual Report on Form 10-K regarding our comparable DTC sales may not be comparable to similar data made available by our competitors or other apparel retailers.

Seasonality

Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters ending September 30 (our second fiscal quarter) and December 31 (our third fiscal quarter) and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31 (our fourth fiscal quarter) and June 30 (our first fiscal quarter) of each year.

The following table summarizes our quarterly net sales and income (loss) from operations:

 
Fiscal Year 2016
 
Quarter Ended
6/30/2015
 
Quarter Ended
9/30/2015
 
Quarter Ended
12/31/2015
 
Quarter Ended
3/31/2016
Net sales
$
213,805

 
$
486,855

 
$
795,902

 
$
378,635

(Loss) income from operations
(63,708
)
 
51,213

 
202,500

 
(27,878
)

 
Fiscal Year 2015
 
Quarter Ended
6/30/2014
 
Quarter Ended
9/30/2014
 
Quarter Ended
12/31/2014
 
Quarter Ended
3/31/2015
Net sales
$
211,469

 
$
480,273

 
$
784,678

 
$
340,637

(Loss) income from operations
(50,482
)
 
59,583

 
214,581

 
737


With the large growth in the UGG brand over the past several years, net sales in the quarters ending September 30 and December 31 have exceeded net sales in the quarters ending March 31 and June 30. We currently expect this trend to continue. Nonetheless, actual results could differ materially depending upon consumer preferences, unexpected changes in weather conditions, availability of product, competition, and our wholesale and distributor customers continuing to carry and promote our various product lines, among other risks and uncertainties. Refer to Part I, Item 1A, "Risk Factors" for a further discussion of our risk factors.



38


Results of Operations

Year Ended March 31, 2016 Compared to Year Ended March 31, 2015

The following table summarizes our results of operations:

 
Years ended
 
3/31/2016
 
3/31/2015
 
Change
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
Net sales
$
1,875,197

 
100.0
%
 
$
1,817,057

 
100.0
%
 
$
58,140

 
3.2
 %
Cost of sales
1,028,529

 
54.8

 
938,949

 
51.7

 
89,580

 
9.5

Gross profit
846,668

 
45.2

 
878,108

 
48.3

 
(31,440
)
 
(3.6
)
Selling, general and administrative expenses
684,541

 
36.5

 
653,689

 
36.0

 
30,852

 
4.7

Income from operations
162,127

 
8.7

 
224,419

 
12.3

 
(62,292
)
 
(27.8
)
Other expense, net
5,242

 
0.3

 
3,280

 
0.2

 
1,962

 
59.8

Income before income taxes
156,885

 
8.4

 
221,139

 
12.1

 
(64,254
)
 
(29.1
)
Income tax expense
34,620

 
1.9

 
59,359

 
3.2

 
(24,739
)
 
(41.7
)
Net income
$
122,265

 
6.5
%
 
$
161,780

 
8.9
%
 
$
(39,515
)
 
(24.4
)%



39


Net Sales. The following table summarizes our net sales by location and our net sales by brand and channel:

 
Years ended
 
3/31/2016
 
3/31/2015
 
Change
 
Amount
 
Amount
 
Amount
 
%
Net sales by location:
 
 
 
 
 
 
 
US
$
1,219,744

 
$
1,165,350

 
$
54,394

 
4.7
 %
International
655,453

 
651,707

 
3,746

 
0.6

Total
$
1,875,197

 
$
1,817,057

 
$
58,140

 
3.2
 %
 
 
 
 
 
 
 
 
Net sales by brand and channel:
 
 
 
 
 
 
 
UGG:
 
 
 
 
 
 
 
Wholesale
$
918,102

 
$
903,926

 
$
14,176

 
1.6
 %
Direct-to-Consumer
606,247

 
589,267

 
16,980

 
2.9

Total
1,524,349

 
1,493,193

 
31,156

 
2.1

Teva:
 
 
 
 
 
 
 
Wholesale
121,239

 
116,931

 
4,308

 
3.7

Direct-to-Consumer
11,810

 
9,812

 
1,998

 
20.4

Total
133,049

 
126,743

 
6,306

 
5.0

Sanuk:
 
 
 
 
 
 
 
Wholesale
90,719

 
102,690

 
(11,971
)
 
(11.7
)
Direct-to-Consumer
15,522

 
12,021

 
3,501

 
29.1

Total
106,241

 
114,711

 
(8,470
)
 
(7.4
)
Other brands:
 
 
 
 
 
 
 
Wholesale
100,820

 
76,152

 
24,668

 
32.4

Direct-to-Consumer
10,738

 
6,258

 
4,480

 
71.6

Total
111,558

 
82,410

 
29,148

 
35.4

Total
$
1,875,197

 
$
1,817,057

 
$
58,140

 
3.2
 %
 
 
 
 
 
 
 
 
Total Wholesale
$
1,230,880

 
$
1,199,699

 
$
31,181

 
2.6
 %
Total Direct-to-Consumer
644,317

 
617,358

 
26,959

 
4.4

Total
$
1,875,197

 
$
1,817,057

 
$
58,140

 
3.2
 %

The increase in overall net sales was due to increases in total DTC sales and other brands, UGG brand and Teva brand wholesale sales, partially offset by a decrease in Sanuk brand wholesale sales. We experienced an increase in the number of pairs sold in the UGG brand, other brands and Teva brand wholesale segments, as well as the DTC segment, offset in part by a decrease in the number of pairs sold in the Sanuk brand wholesale segment. This resulted in an increase in the overall volume of footwear sold for all brands of 4.6% to approximately 32,100 pairs sold for the year ended March 31, 2016 from approximately 30,700 pairs for the year ended March 31, 2015. The mitigating impacts on overall net sales were foreign currency exchange rate fluctuations as the US dollar continues to strengthen against most major currencies and increased promotional activity, which consisted of vendor-specific markdowns, price reductions, chargebacks, sales discounts, and sales reserves. On a constant currency basis, overall net sales increased to approximately $1,925,000.

Wholesale net sales of our UGG brand were positively impacted by an increase in the volume of pairs sold in the amount of approximately $73,000. Wholesale net sales were negatively impacted by an increase in promotional activity of approximately $27,000 to promote sales that were slow due to warmer weather and to clear out inventory that will be obsolete in future seasons. Wholesale net sales were also negatively impacted by a decrease in weighted-average selling price per pair (WASPP) of approximately $26,000 reflecting unfavorable foreign currency exchange rates and an increased impact of approximately $7,000 from closeout sales. On a constant currency basis, wholesale net sales of our UGG brand increased 4.5% to approximately $945,000.


40


Wholesale net sales of our Teva brand increased largely due to an increase in the volume of pairs sold and an increase in WASPP. The increase in the volume of pairs sold had an impact of approximately $1,000 and the increase in WASPP had an impact of approximately $2,000. The increase in WASPP was attributable to a decreased impact from closeout sales as compared to the prior period.

Wholesale net sales of our Sanuk brand decreased primarily due to a decrease in the volume of pairs sold, offset in part by an increase in WASPP. The decrease in the volume of pairs sold had an impact of approximately $13,000 and the increase in WASPP had an impact of approximately $1,000. The increase in WASPP was attributable to a decreased impact from closeout sales as compared to the prior period.

The increase in other brands net sales was due to an increase in the volume of pairs sold primarily for the Hoka brand and an increase in WASPP. The increase in volume of pairs sold had an impact of approximately $22,000 and the increase in WASPP had an impact of approximately $2,000. The increase in WASPP mainly reflects a shift in product mix.

Net sales of our DTC segment increased 4.4% to approximately $644,000 primarily due to an increase in net sales from our E-Commerce business of approximately $32,000, partially offset by a decrease in net sales from our retail store business of approximately $5,000. The increase in total DTC net sales was primarily the result of an increase in the number of pairs sold with an impact of approximately $92,000 primarily due to UGG and Teva. The increase in DTC net sales was primarily due to the number of stores opened since March 31, 2015, increased traffic to our websites and improved conversion rates in both E-Commerce and retail businesses due to improved product offerings and new promotions offered on Classic products, offset in part, by declining traffic trends in our retail stores worldwide. These increases were offset in part by a decrease in WASPP of approximately $66,000 and an increase in promotional activity of approximately $3,000 primarily related to the UGG brand. The decrease in WASPP was primarily due to a shift in store mix from concept to outlet, a shift in sales mix to lower priced product in the stores, increased offering of lower price point products for both businesses and the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, DTC net sales increased 7.4% to approximately $663,000.

Comparable DTC sales on a constant currency basis for the 52 weeks ended March 27, 2016 decreased 1.0% to approximately $511,000 compared to the same period in fiscal year 2015 primarily as a result of a decrease in comparable retail store sales of approximately $42,000, largely offset by an increase in comparable sales from E-Commerce operations of approximately $37,000. The decrease in comparable DTC sales was primarily due to declining traffic trends in our retail stores worldwide, offset in part by increased website traffic, and improved conversion rates in both our E-Commerce and retail store businesses due to improved product offerings and new promotions offered on Classic products. The decrease in comparable DTC sales was primarily the result of a decrease in WASPP of approximately $41,000, largely offset by an increase in the number of pairs sold in the amount of $36,000. The decrease in the comparable DTC WASPP was primarily due to a shift in product mix.

International sales, which are included in the segment sales above, for all of our products combined, increased 0.6%. International sales represented 35.0% and 35.9% of worldwide net sales for the years ended March 31, 2016 and 2015, respectively. The increase in international sales was due to increases of approximately $11,000 for other brand products, primarily Hoka, and $7,000 for Teva brand products. The net sales increase was largely offset by sales decreases of approximately $11,000 and $3,000 in UGG and Sanuk brand products, respectively. On a constant currency basis, international sales increased 8.2% to approximately $705,000.

Gross Profit. Gross margin was 45.2% for fiscal year 2016 compared to 48.3% for the same period last year. The decline in gross margin was driven by a negative impact from foreign currency exchange rate fluctuations of approximately $13,000 caused by the strengthening of the US dollar, greater promotional activity of approximately $13,000, restructuring and other charges of approximately $5,000, and greater closeouts of approximately $4,000, offset, in part, by improved sheepskin costs of approximately $4,000.


41


Selling, General and Administrative (SG&A) Expenses. The change in SG&A expenses was primarily due to:

increased salaries of approximately $19,000, largely attributable to transition and stabilization costs related to the move from Irvine to our new distribution center in Moreno Valley and a timing difference attributable to full operations commencing in the first quarter of fiscal year 2016 at Moreno Valley. Salaries were also impacted by $4,000 of severance related to restructuring expenses for our retail store fleet optimization and office consolidation and $4,000 for new retail stores opened subsequent to March 31, 2015;

increased occupancy and rent expense of approximately $16,000, largely driven by the $9,000 restructuring charges for early termination of office and store leases related to our retail store fleet optimization and office consolidation and new retail stores opened subsequent to March 31, 2015;

increased impairment charges for retail stores of approximately $9,800 for which the fair values did not exceed their carrying values based on our long-lived assets impairment analysis;

increased expense of approximately $6,000 for store closure and lease termination costs related to our retail store fleet optimization and office consolidation;

increased information technology costs of approximately $5,000, largely related to the restructuring charge of $4,000 for impairment of certain supply chain software related to the BT implementation and the reorganization of our supply chain team causing older software to be obsolete;

increased depreciation expense of approximately $4,000 related to operations commencing at our new distribution center in Moreno Valley in the first quarter of fiscal year 2016;

an increase in our accounts receivable allowances of approximately $4,000, reflecting our ongoing assessments of credit risks for several customers whose recent payment history and financial condition necessitated an increase in the allowance;

decreased recognition of performance-based compensation of approximately $18,000 because the threshold level of the performance objectives relating to fiscal year 2016 was not achieved as compared to the partial achievement of performance objectives in the prior fiscal year;

decreased expenses of approximately $12,000 related to the impact of foreign currency exchange rate fluctuations in the current period compared to the prior period; and

decreased amortization expense of approximately $3,000, primarily attributable to the acquisition of our UGG brand distributor that had been selling to retailers in Germany in the prior year period that did not carry forward to the current period.

Income (loss) from Operations. The following table summarizes operating income (loss) by segment:

 
Years ended
 
3/31/2016
 
3/31/2015
 
Change
 
Amount
 
Amount
 
Amount
 
%
UGG wholesale
$
246,990

 
$
269,489

 
$
(22,499
)
 
(8.3
)%
Teva wholesale
17,692

 
13,320

 
4,372

 
32.8

Sanuk wholesale
15,565

 
21,914

 
(6,349
)
 
(29.0
)
Other brands wholesale
(4,384
)
 
(9,838
)
 
5,454

 
55.4

Direct-to-Consumer
101,756

 
150,320

 
(48,564
)
 
(32.3
)
Unallocated overhead costs
(215,492
)
 
(220,786
)
 
5,294

 
2.4

Total
$
162,127

 
$
224,419

 
$
(62,292
)
 
(27.8
)%
 

42


The decrease in income from operations resulted from lower gross margins driven by the negative impact of foreign currency exchange rate fluctuations, increased promotional activity of approximately $29,000 and higher SG&A expenses primarily as a result of approximately $25,000 of restructuring and other charges.

The decrease in income from operations of UGG brand wholesale was the result of the increased promotional activity of approximately $27,000. These factors were partially offset by a decrease in operating expenses of approximately $3,000. The decrease in operating expenses is attributable to the decrease in amortization related to the conversion of our Germany distributor in the prior year period and a decrease in marketing and advertising, offset in part by an increase in accounts receivable allowances.

The increase in income from operations of Teva brand wholesale was primarily the result of a 2.6% increase in gross margin. The increase in gross margin was due to a decreased impact from closeout sales.

The decrease in income from operations of our Sanuk brand wholesale from the prior year period was primarily due to a decrease in sales and $3,000 of restructuring charges, partially offset by a decrease in operating expenses of approximately $3,000. The decrease in operating expenses was primarily attributable to lower marketing and advertising and lower sales and commission expenses.

The operating results of our other brands wholesale improved over the prior year period due to an increase in net sales and a 3.2% increase in gross margin, partially offset by an increase in operating expenses of approximately $5,000 reflecting $2,500 of restructuring charges. The increase in gross margin was primarily attributable to a shift to higher margin Hoka brand products. The increase in operating expenses was also attributable to marketing expenses for the Hoka brand.

The decrease in income from operations of our DTC business resulted from an increase in DTC operating expenses of approximately $37,000, a decrease in gross profit and the increase in promotional activity of approximately $3,000. The increase in DTC operating expenses was largely attributable to restructuring charges of $10,500 related to our retail store fleet optimization, $9,800 of other impairment charges for retail stores during fiscal year 2016 and operating expenses for stores opened subsequent to March 31, 2015.

The decrease in unallocated overhead costs was primarily due to a lower unfavorable impact of foreign currency exchange rate fluctuations in the current period compared to the prior period of approximately $22,000 and a reduction in performance-based compensation of approximately $12,000, partially offset by increased salaries of approximately $11,000 primarily for our Moreno Valley distribution center, increased depreciation expense of approximately $7,000 primarily for our Moreno Valley distribution center, increased information technology costs of approximately $3,000 largely related to supply chain software impairment charges and increased occupancy and rent expense of approximately $3,000 primarily for additional corporate office space and our Moreno Valley distribution center and increased general expenses of $4,000.

Refer to Note 12 to our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K for a discussion of our reportable business segments.

Other Expense, Net. The increase in total other expense, net was primarily due to an increase in interest expense as a result of the balances outstanding under our lines of credit during fiscal year 2016.

Income Taxes. Income tax expense and effective income tax rates were as follows:

 
Years ended
 
3/31/2016
 
3/31/2015
Income tax expense
$
34,620

 
$
59,359

Effective income tax rate
22.1
%
 
26.8
%

Our effective tax rate decreased 4.7%. The decrease in the effective tax rate was primarily due to a change in the jurisdictional mix of annual pre-tax income. The jurisdictional mix change was the result of greater promotional activity and restructuring charges reducing domestic profitability in combination with the strategic supply chain reorganization completed during the year ended March 31, 2015.


43


Foreign income before income taxes was $105,938 and $95,850 and worldwide income before income taxes was $156,885 and $221,139 for the year ended March 31, 2016 and 2015, respectively. The increase in foreign income before income taxes was primarily due to an increase in compensation earned by our foreign-based global product sourcing organization, which commenced operations on July 1, 2014 and lower foreign operating expenses as a result of amortization related to conversion of our Germany distributor in the prior period and expense reduction efforts.

For the fiscal year 2016, we generated approximately 23.0% of our pre-tax earnings from a country which does not impose a corporate income tax compared to 25% for fiscal year 2015. Undistributed earnings of non-US subsidiaries are expected to be reinvested outside of the US indefinitely. Such earnings would become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of dividends. At March 31, 2016, we had approximately $233,000 of cash and cash equivalents outside the US that would be subject to additional income taxes if it were to be repatriated.

We expect that our foreign income before income taxes will continue to fluctuate from year to year based on several factors, including our expansion initiatives and global product sourcing organization. In addition, we believe that the continued evolution and geographic scope of the UGG brand, our continuing strategy of enhancing product diversification, and our expected growth in our international DTC business, will result in increases in foreign income before income taxes as a percentage of worldwide income before income taxes in future years.

Net Income. Our net income decreased as a result of the factors discussed above. Our income per share decreased due to lower net income, offset in part by a reduction in the weighted-average common shares outstanding. The overall reduction in the weighted-average common shares outstanding was primarily the result of our share repurchases made during the twelve months ended March 31, 2016.

Year Ended March 31, 2015 Compared to Year Ended December 31, 2013

The following table summarizes our results of operations:

 
Years ended
 
3/31/2015
 
12/31/2013
 
Change
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
Net sales
$
1,817,057

 
100.0
%
 
$
1,556,618

 
100.0
%
 
$
260,439

 
16.7
 %
Cost of sales
938,949

 
51.7

 
820,135

 
52.7

 
118,814

 
14.5

Gross profit
878,108

 
48.3

 
736,483

 
47.3

 
141,625

 
19.2

Selling, general and administrative expenses
653,689

 
36.0

 
528,586

 
33.9

 
125,103

 
23.7

Income from operations
224,419

 
12.3

 
207,897

 
13.4

 
16,522

 
7.9

Other expense, net
3,280

 
0.2

 
2,340

 
0.2

 
940

 
40.2

Income before income taxes
221,139

 
12.1

 
205,557

 
13.2

 
15,582

 
7.6

Income tax expense
59,359

 
3.2

 
59,868

 
3.8

 
(509
)
 
(0.9
)
Net income
$
161,780

 
8.9
%
 
$
145,689

 
9.4
%
 
$
16,091

 
11.0
 %

Overview. Overall net sales increased for all distribution channels of all segments. The increase in income from operations resulted from increased sales and gross margin, partially offset by higher SG&A expenses.

44



Net Sales. The following table summarizes net sales by location and net sales by brand and channel:

 
Years ended
 
3/31/2015
 
12/31/2013
 
Change
 
Amount
 
Amount
 
Amount
 
%
Net sales by location:
 
 
 
 
 
 
 
US
$
1,165,350

 
$
1,042,274

 
$
123,076

 
11.8
%
International
651,707

 
514,344

 
137,363

 
26.7

Total
$
1,817,057

 
$
1,556,618

 
$
260,439

 
16.7
%
Net sales by brand and channel:
 
 
 
 
 
 
 
UGG:
 
 
 
 
 
 
 
Wholesale
$
903,926

 
$
818,377

 
$
85,549

 
10.5
%
Direct-to-Consumer
589,267

 
480,503

 
108,764

 
22.6

Total
1,493,193

 
1,298,880

 
194,313

 
15.0

Teva:
 
 
 
 
 
 
 
Wholesale
116,931

 
109,334

 
7,597

 
6.9

Direct-to-Consumer
9,812

 
7,053

 
2,759

 
39.1

Total
126,743

 
116,387

 
10,356

 
8.9

Sanuk:
 
 
 
 
 
 
 
Wholesale
102,690

 
94,420

 
8,270

 
8.8

Direct-to-Consumer
12,021

 
7,260

 
4,761

 
65.6

Total
114,711

 
101,680

 
13,031

 
12.8

Other brands:
 
 
 
 
 
 
 
Wholesale
76,152

 
38,276

 
37,876

 
99.0

Direct-to-Consumer
6,258

 
1,395

 
4,863

 
348.6

Total
82,410

 
39,671

 
42,739

 
107.7

Total
$
1,817,057

 
$
1,556,618

 
$
260,439

 
16.7
%
 
 
 
 
 
 
 
 
Total Wholesale
$
1,199,699

 
$
1,060,407

 
$
139,292

 
13.1
%
Total Direct-to-Consumer
617,358

 
496,211

 
121,147

 
24.4

Total
$
1,817,057

 
$
1,556,618

 
$
260,439

 
16.7
%

We experienced an increase in net sales in all brands and distribution channels with the largest impact due to increased total DTC sales and UGG and other brands wholesale sales. On a constant currency basis, net sales increased by 18.0% to approximately $1,837,000. We experienced an increase in the number of pairs sold in all segments. This resulted in a 17.6% overall increase in the volume of footwear sold for all brands and channels to approximately 30,700 pairs for the year ended March 31, 2015 compared to approximately 26,100 pairs for the year ended December 31, 2013. Our WASPP decreased to $46.53 for the year ended March 31, 2015 from $46.87 for the year ended December 31, 2013. The decreased WASPP was primarily due to our Teva and Sanuk wholesale segments, partially offset by an increase in WASPP in our other brands wholesale segment.

Wholesale net sales of our UGG brand increased primarily due to an increase in the volume of pairs sold, partially offset by the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, wholesale sales of our UGG brand increased by 11.1% to approximately $909,000. For UGG wholesale net sales, the increase in volume had an impact of approximately $89,000, including approximately $5,000 related to the negative impact of foreign currency exchange rate fluctuations.

Wholesale net sales of our Teva brand increased primarily due to an increase in the volume of pairs sold, partially offset by a decrease in the WASPP. The decrease in WASPP was primarily due to a shift in product mix and an increased impact from closeout sales. For Teva wholesale net sales, the increase in volume had an impact of approximately $15,000 and the decrease in WASPP had an impact of approximately $7,000.


45


Wholesale net sales of our Sanuk brand increased primarily due to an increase in the volume of pairs sold, partially offset by a decrease in WASPP. The decrease in WASPP was primarily due to a shift in product mix. For Sanuk wholesale net sales, the increase in volume had an impact of approximately $14,000 and the decrease in WASPP had an impact of approximately $5,000.

Wholesale net sales of our other brands increased due to an increase in the volume of pairs sold as well as an increase in the WASPP. The increase in WASPP was primarily due to a shift in brand mix. The increase in volume of pairs sold had an impact of approximately $36,000 and the increase in WASPP had an impact of approximately $2,000.

Net sales of our DTC segment increased 24.4% to approximately $617,000 primarily due to an increase in net sales from our E-Commerce business of approximately $63,000 as well as an increase in net sales from our retail store business of approximately $58,000 due to the addition of new stores opened subsequent to December 31, 2013. The increase in total DTC net sales was primarily the result of an increase in the number of pairs sold with an impact of approximately $171,000, offset in part by a decrease in WASPP of approximately $53,000 and an increase in sales discounts. The decrease in WASPP was primarily due to increased offering of lower price point products for our E-Commerce and retail businesses, a shift in store mix from concept to outlet and the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, DTC net sales increased 27.0% to approximately $496,000.

Comparable DTC sales on a constant currency basis for the fifty-two weeks ended March 29, 2015 increased 14.4% to approximately $345,000 compared to the fifty-two weeks ended December 29, 2013 primarily as a result of an increase in comparable sales from E-Commerce operations of approximately $56,000, offset in part by a decrease in comparable retail store sales of approximately $12,000. The increase in comparable DTC sales was primarily the result of an increase in the number of pairs sold with an impact of approximately $79,000, offset in part by a decrease in WASPP in the amount of $36,000. The decrease in WASPP was primarily due to increased offering of lower price point products for our comparable E-Commerce and retail businesses and a shift in store mix from concept to outlet. The increase in comparable DTC sales was primarily due to increased web traffic to our E-Commerce websites partially offset by a shift in sales from our retail to E-Commerce channel.

International sales, which are included in the segment sales above, for all of our products combined increased by 26.7% for the year ended March 31, 2015 as compared to the year ended December 31, 2013, partially offset by the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, international sales increased by 30.5% to approximately $671,000. International sales represented 35.9% and 33.0% of worldwide net sales for the years ended March 31, 2015 and December 31, 2013, respectively. The increase in international sales as a percentage of worldwide net sales was largely due to the continued growth in our UGG brand internationally across all channels of approximately $122,000.

Gross Profit. Overall gross margin increased 100 basis points, primarily due to an increase in the mix of DTC sales, which generally carry higher margins than our wholesale segments. The increased mix of DTC sales contributed approximately 70 basis points to the overall increase in gross margin. An increase in the UGG brand wholesale gross margin, primarily related to the July 2014 acquisition of our UGG brand distributor in Germany, contributed approximately 20 basis points to the overall increase in gross margin. The factors discussed above include the negative impact of foreign currency exchange rate fluctuations. Our gross margins fluctuate based on several factors including the factors discussed above.

Selling, General and Administrative Expenses. The change in SG&A expenses was primarily due to:

increased DTC costs of approximately $62,000 largely related to new retail stores opened subsequent to December 31, 2013 of approximately $44,000 and related corporate infrastructure for our retail business and increased marketing and advertising and expansion for our E-Commerce business of approximately $18,000;

increased expenses of approximately $20,000 for marketing and promotions related to our wholesale business, primarily for the Hoka and UGG brands;

increased expenses of approximately $16,000 for corporate infrastructure to support our international wholesale expansion and OmniChannel transformation;


46


increased information technology costs of approximately $8,000, in part due to accelerating the amortization expense for certain software projects that will not be used;

increased sales and commission expenses of approximately $8,000 largely driven by the increase in wholesale sales;

increased US distribution center costs of approximately $7,000, largely driven by the increase in sales and our new Moreno Valley distribution center; and

increased expenses of approximately $7,000 related to the negative impact of foreign currency exchange rate fluctuations.

These increases were partially offset by decreased recognition of performance-based compensation of approximately $8,000.

Income (loss) from Operations. Refer to Note 12 to our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K for a discussion of our reportable segments. The following table summarizes operating income (loss) by segment:

 
Years ended
 
3/31/2015
 
12/31/2013
 
Change
 
Amount
 
Amount
 
Amount
 
%
UGG wholesale
$
269,489

 
$
224,738

 
$
44,751

 
19.9
 %
Teva wholesale
13,320

 
9,166

 
4,154

 
45.3

Sanuk wholesale
21,914

 
20,591

 
1,323

 
6.4

Other brands wholesale
(9,838
)
 
(9,807
)
 
(31
)
 
(0.3
)
Direct-to-Consumer
150,320

 
132,532

 
17,788

 
13.4

Unallocated overhead costs
(220,786
)
 
(169,323
)
 
(51,463
)
 
(30.4
)
Total
$
224,419

 
$
207,897

 
$
16,522

 
7.9
 %

Income from operations increased due to the increase in sales and gross margin, partially offset by higher SG&A expenses as well as the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, income from operations increased by 13.5% to approximately $236,000.

The increase in income from operations of UGG brand wholesale was primarily the result of the increase in net sales as well as a 3.1 percentage point increase in gross margin, partially offset by an increase in operating expenses of approximately $16,000 including the negative impact of foreign currency exchange rate fluctuations. The increase in gross margin was primarily due to an increase in higher-margin wholesale sales, largely related to the acquisition of our UGG brand distributor in Germany. The increase in operating expenses was primarily due to marketing and promotions, amortization and sales and commissions.

The increase in income from operations of Teva brand wholesale was primarily the result of a decrease in operating expenses of approximately $5,000 as well as the increase in net sales, partially offset by a 3.1 percentage point decrease in gross margin. The decrease in operating expenses was primarily due to decreased design and sales and commission expenses. The decrease in gross margin was primarily due to an increased impact from closeout sales.

The increase in income from operations of Sanuk brand wholesale was primarily the result of the increase in net sales as well as a decrease in operating expenses of approximately $2,000, partially offset by a 4.8 percentage point decrease in gross margin. The decrease in gross margin was primarily due to a shift in sales mix as well as an increased impact from closeout sales.

Loss from operations of our other brands wholesale was comparable to the prior period.

The increase in income from operations of our DTC business resulted from the increase in net sales, a 1.9% decrease in gross margin due to increased sales discounts and the positive impact of foreign currency rate fluctuations

47


of approximately $9,000, offset in part by an increase in DTC operating expenses of approximately $61,000 and an increase in sales discounts. The increase in DTC operating expenses was largely attributable to stores opened subsequent to December 31, 2013 and related corporate infrastructure for our retail business, and marketing and advertising and expansion for our E-Commerce business.

The increase in unallocated overhead costs was primarily due to (1) expense related to increased corporate infrastructure of approximately $16,000 to support our Omni-Channel transformation and international wholesale expansion, (2) the negative impact of foreign currency exchange rate fluctuations of approximately $16,000, (3) increased information technology costs of approximately $8,000, (4) increased US distribution center costs of approximately $7,000 and (5) increased depreciation expenses of approximately $4,000 related to our corporate headquarters buildings, partially offset by a reduction in performance-based compensation of approximately $5,000.

Refer to Note 12 to our accompanying consolidated financial statements in Part IV of this Annual Report on Form 10-K for a discussion of our reportable business segments

Other Expense, Net. The increase in other expense, net was primarily due to an increase in interest expense.

Income Taxes. Income tax expense and effective income tax rates were as follows:

 
Years ended
 
3/31/2015
 
12/31/2013
Income tax expense
$
59,359

 
$
59,868

Effective income tax rate
26.8
%
 
29.1
%

The decrease in the effective tax rate was primarily due to a change in the jurisdictional mix of annual pre-tax income. The jurisdictional mix change was primarily due to increased compensation earned by our foreign-based global product sourcing organization as a result of the strategic supply chain reorganization completed during the year ended March 31, 2015, which reduced our effective tax rate 4.2%. The decrease was partially offset by overall discrete tax liabilities of approximately $1,600 recognized during the year ended March 31, 2015 compared to overall discrete tax benefits of approximately $900 recognized during the year ended December 31, 2013. The discrete tax liabilities relate to provisions recorded for unrecognized tax benefits as well as prior year US federal and state tax adjustments. The discrete tax benefits relate to a combination of prior year US federal, state and foreign tax adjustments.
 
For the fiscal year 2015, we generated approximately 25.0% of our pre-tax earnings from a country which does not impose a corporate income tax. Unremitted earnings of non-US subsidiaries are expected to be reinvested outside of the US indefinitely. Such earnings would become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of dividends. At March 31, 2015, we had approximately $132,000 of cash and cash equivalents outside the US that would be subject to additional income taxes if it were to be repatriated.

Foreign income before income taxes was $95,850 and $60,851, and worldwide income before income taxes was $221,139 and $205,557 for the years ended March 31, 2015 and December 31, 2013, respectively. Foreign income before income taxes represented 43.3% and 29.6% of worldwide income before income taxes for the years ended March 31, 2015 and December 31, 2013, respectively. The increase in foreign income before income taxes as a percentage of worldwide income before income taxes was primarily due to increased compensation earned by our foreign-based global product sourcing organization as a result of a strategic supply chain reorganization completed during the year ended March 31, 2015.

We expect that our foreign income before income taxes will fluctuate from year to year based on several factors, including our expansion initiatives. In addition, we believe that the continued evolution and geographic scope of the UGG brand, our continuing strategy of enhancing product diversification, and our expected growth in our international retail and E-Commerce business, will result in increases in foreign income before income taxes as a percentage of worldwide income before income taxes in future years.

Net Income. Our net income increased as a result of the items discussed above. Our diluted earnings per share increased primarily as a result of the increase in net income, as well as by a reduced number of diluted weighted-average common shares outstanding. The reduction in the diluted weighted-average common shares outstanding

48


was the result of our share repurchases during the year ended March 31, 2015. The weighted-average impact of the share repurchases was a reduction of approximately 200,000 shares.

Transition Period Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013 (Unaudited)

The following table summarizes our results of operations:

 
Three Months Ended March 31,
 
2014
 
2013 (unaudited)
 
Change
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
Net sales
$
294,716

 
100.0
 %
 
$
263,760

 
100.0
%
 
$
30,956

 
11.7
 %
Cost of sales
150,456

 
51.1

 
140,201

 
53.2

 
10,255

 
7.3

Gross profit
144,260

 
48.9

 
123,559

 
46.8

 
20,701

 
16.8

Selling, general and administrative expenses
144,668

 
49.1

 
120,907

 
45.8

 
23,761

 
19.7

(Loss) income from operations
(408
)
 
(0.2
)
 
2,652

 
1.0

 
(3,060
)
 
(115.4
)
Other expense, net
334

 
0.1

 
142

 
0.1

 
192

 
135.2

(Loss) income before income taxes
(742
)
 
(0.3
)
 
2,510

 
0.9

 
(3,252
)
 
(129.6
)
Income tax expense
1,943

 
0.6

 
1,503

 
0.5

 
440

 
29.3

Net (loss) income
$
(2,685
)
 
(0.9
)%
 
$
1,007

 
0.4
%
 
$
(3,692
)
 
(366.6
)%

Overview. The increase in overall net sales was primarily due to an increase in our UGG brand sales through our retail stores and E-Commerce websites as well as an increase in our other brands wholesale sales, partially offset by a decrease in Teva wholesale sales. We experienced a loss from operations during the three months ended March 31, 2014 compared to income from operations for the three months ended March 31, 2013. The change resulted from higher SG&A expenses, partially offset by an increase in gross profit.


49


Net Sales. The following tables summarize net sales by location, brand, and distribution channel:

 
Three Months Ended March 31,
 
2014
 
2013 (unaudited)
 
Change
 
Amount
 
Amount
 
Amount
 
%
Net sales by location:
 
 
 
 
 
 
 
US
$
198,293

 
$
182,693

 
$
15,600

 
8.5
 %
International
96,423

 
81,067

 
15,356

 
18.9

Total
$
294,716

 
$
263,760

 
$
30,956

 
11.7
 %
Net sales by brand and channel:
 
 
 
 
 
 
 
UGG:
 
 
 
 
 
 
 
Wholesale
$
83,271

 
$