Like other companies in our industry, we have an extended design and manufacturing process, which involves product design, material purchases, inventory accumulation and the subsequent sale of the inventories, and accounts receivable collection. This cycle requires us to incur…
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Like other companies in our industry, we have an extended design and manufacturing process, which involves product design, material purchases, inventory accumulation and the subsequent sale of the inventories, and accounts receivable collection. This cycle requires us to incur significant expenses relating to the design, manufacturing, and marketing of our products in advance of the realization of sales, and results in significant liquidity requirements and working capital fluctuations throughout our fiscal year, which may be amplified by supplier performance issues and broader supply chain constraints. As a result, these liquidity and working capital demands may limit our ability to adjust inventory levels and respond efficiently to changes in consumer demand, particularly during periods of macroeconomic uncertainty. Our forecasting processes rely on assumptions, data, and systems that may not accurately reflect future consumer or customer demand, or supply chain conditions, including manufacturing capacity, raw material availability, and logistics constraints. Further, variability and constraints within our global supply chain may drive higher inventory procurement positions that could negatively affect our working capital and gross margin as a result of selling excess quantities through close out channels. As a result, our inventory levels, working capital requirements, and results of operations may be adversely affected by a number of factors, including: •constraints or inefficiencies in transportation capacity, delivery timing, inventory flow, or production scheduling, which may contribute to uneven inventory receipts, elevated inventory levels, or delays in fulfilling demand; •unfavorable or unexpected weather patterns that affect consumer demand for seasonally-driven products, particularly within our UGG brand, which may be intensified by the effects of climate change; •changes in consumer preferences, discretionary spending patterns, prevailing fashion trends, and pricing pressure that may require increased promotional activity to sell inventory; •macroeconomic conditions, including inflation, interest rate volatility, or global economic uncertainty, that may affect consumer purchasing behavior, supplier capacity, or logistics costs; and •market acceptance of our products and competing offerings, and variability in product availability. The evolution and expansion of our brands and product offerings have made our inventory management activities more challenging. For example, if we overestimate demand for any products or styles, we may be forced to increase promotional activity or adjust pricing to sell excess inventories, which would result in lower sales and reduced gross margin, and we may not be able to recover our investment in the development of new styles and product lines. On the other hand, if we underestimate demand, or if our independent manufacturing facilities are unable to supply Table of Contents 15products in sufficient quantities or on a timely basis, we may experience inventory shortages that may prevent us from fulfilling customer orders or result in delays in shipments to customers. If that occurred, we could lose sales, our relationships with customers could be harmed, and our brand loyalty could be diminished. In either event, these factors could have a material adverse effect on our results of operations.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 effect on our business.We rely upon a broad network of warehouses and distribution facilities to store, sort, package and distribute our products. Our distribution operations depend on the effective functioning of global transportation and logistics networks, including ports, carriers, and third-party service providers. Disruptions to these networks, including labor shortages or disputes, capacity constraints, fuel and freight cost volatility, routing inefficiencies, or infrastructure limitations could increase delivery times, delay inbound or outbound shipments, strain distribution capacity, increase fulfillment and other costs, and impair our ability to efficiently receive, store, and distribute products. In the US, we distribute products primarily through self-managed warehouses and DCs in Moreno Valley, California, and in Mooresville, Indiana, which feature a complex warehouse management system that enables us to efficiently pack products for direct shipment to our customers and consumers. We could face a significant disruption in our domestic warehouse and DC operations if our warehouse management system does not perform as anticipated or ceases to function for an extended period of time, which could occur due to damage to the facility, failure of software or equipment, cyber-security incidents, power outages or similar problems. Any significant disruption to our domestic warehouse or DC operations could adversely affect our ability to fulfill customer orders. In addition, increased reliance on automation, data analytics, and system integrations within our warehouse operations, including to address outdated or no longer supported software, systems and equipment, may increase the risk of system failures, data inaccuracies, or operational disruptions if such systems are not implemented or maintained effectively, which could similarly have a material adverse effect on our business.Internationally, we distribute our products through warehouses and DCs managed by 3PLs in certain international locations. For example, we are currently transitioning certain international 3PL operations to a new partner. While we conduct diligence prior to entering into service agreements with 3PLs, we depend on these providers to operate their warehouses and DCs in a manner that meets our business and performance requirements, including with respect to data security and compliance with applicable data protection and privacy laws, and the provision of quality services on a timely basis at the prices we expect. If our 3PLs fail to manage these responsibilities, including during or following an operational transition, system cutover, or data migration, or if their operations are disrupted as a result of factors outside of their control, such as sanctions that could in the future be imposed by the US government, or broader disruptions or inefficiencies in global logistics and transportation networks, our distribution operations could face delays, reduced reliability, or increased costs. The loss of or disruption to the operations of any one or more of these facilities could materially and adversely affect our sales, business performance, and results of operations. Although we believe we possess adequate insurance to cover the potential effect of a disruption to the operations of these facilities, such insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all. We rely upon independent manufacturers for all of our production needs, and the failure of these manufacturers to manage these responsibilities would prevent us from filling customer orders, which would result in loss of sales and harm our relationships with customers.We rely upon independent manufacturers and their respective material suppliers for all of our production needs, the majority of which are located in Southeast Asia, predominantly in Vietnam and Indonesia, which exposes us to geographic concentration risk, including risks arising from regional economic, political, environmental, or operational conditions, and we do not have direct control over these manufacturers or their suppliers. We expect our independent manufacturers to finance the production of goods ordered, maintain manufacturing capacity, comply with our policies, and store finished goods in a safe location pending shipment. The ability of our independent manufacturers to meet these expectations may be adversely affected by liquidity constraints or limitations in their access to third-party financing arrangements supporting their supply chains or working capital needs, which could reduce available production capacity, delay shipments, or result in lost sales. Disruptions arising from these geographic concentrations, our limited control over independent manufacturers and their suppliers, or our manufacturers’ inability to meet these expectations could adversely affect our ability to manufacture products or fulfill customer orders, which could negatively affect our results of operations. Table of Contents 15 Table of Contents 15 Table of Contents 15 products in sufficient quantities or on a timely basis, we may experience inventory shortages that may prevent us from fulfilling customer orders or result in delays in shipments to customers. If that occurred, we could lose sales, our relationships with customers could be harmed, and our brand loyalty could be diminished. In either event, these factors could have a material adverse effect on our results of operations.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 effect on our business.We rely upon a broad network of warehouses and distribution facilities to store, sort, package and distribute our products. Our distribution operations depend on the effective functioning of global transportation and logistics networks, including ports, carriers, and third-party service providers. Disruptions to these networks, including labor shortages or disputes, capacity constraints, fuel and freight cost volatility, routing inefficiencies, or infrastructure limitations could increase delivery times, delay inbound or outbound shipments, strain distribution capacity, increase fulfillment and other costs, and impair our ability to efficiently receive, store, and distribute products. In the US, we distribute products primarily through self-managed warehouses and DCs in Moreno Valley, California, and in Mooresville, Indiana, which feature a complex warehouse management system that enables us to efficiently pack products for direct shipment to our customers and consumers. We could face a significant disruption in our domestic warehouse and DC operations if our warehouse management system does not perform as anticipated or ceases to function for an extended period of time, which could occur due to damage to the facility, failure of software or equipment, cyber-security incidents, power outages or similar problems. Any significant disruption to our domestic warehouse or DC operations could adversely affect our ability to fulfill customer orders. In addition, increased reliance on automation, data analytics, and system integrations within our warehouse operations, including to address outdated or no longer supported software, systems and equipment, may increase the risk of system failures, data inaccuracies, or operational disruptions if such systems are not implemented or maintained effectively, which could similarly have a material adverse effect on our business.Internationally, we distribute our products through warehouses and DCs managed by 3PLs in certain international locations. For example, we are currently transitioning certain international 3PL operations to a new partner. While we conduct diligence prior to entering into service agreements with 3PLs, we depend on these providers to operate their warehouses and DCs in a manner that meets our business and performance requirements, including with respect to data security and compliance with applicable data protection and privacy laws, and the provision of quality services on a timely basis at the prices we expect. If our 3PLs fail to manage these responsibilities, including during or following an operational transition, system cutover, or data migration, or if their operations are disrupted as a result of factors outside of their control, such as sanctions that could in the future be imposed by the US government, or broader disruptions or inefficiencies in global logistics and transportation networks, our distribution operations could face delays, reduced reliability, or increased costs. The loss of or disruption to the operations of any one or more of these facilities could materially and adversely affect our sales, business performance, and results of operations. Although we believe we possess adequate insurance to cover the potential effect of a disruption to the operations of these facilities, such insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all. We rely upon independent manufacturers for all of our production needs, and the failure of these manufacturers to manage these responsibilities would prevent us from filling customer orders, which would result in loss of sales and harm our relationships with customers.We rely upon independent manufacturers and their respective material suppliers for all of our production needs, the majority of which are located in Southeast Asia, predominantly in Vietnam and Indonesia, which exposes us to geographic concentration risk, including risks arising from regional economic, political, environmental, or operational conditions, and we do not have direct control over these manufacturers or their suppliers. We expect our independent manufacturers to finance the production of goods ordered, maintain manufacturing capacity, comply with our policies, and store finished goods in a safe location pending shipment. The ability of our independent manufacturers to meet these expectations may be adversely affected by liquidity constraints or limitations in their access to third-party financing arrangements supporting their supply chains or working capital needs, which could reduce available production capacity, delay shipments, or result in lost sales. Disruptions arising from these geographic concentrations, our limited control over independent manufacturers and their suppliers, or our manufacturers’ inability to meet these expectations could adversely affect our ability to manufacture products or fulfill customer orders, which could negatively affect our results of operations. products in sufficient quantities or on a timely basis, we may experience inventory shortages that may prevent us from fulfilling customer orders or result in delays in shipments to customers. If that occurred, we could lose sales, our relationships with customers could be harmed, and our brand loyalty could be diminished. In either event, these factors could have a material adverse effect on our results of operations.