# COLUMBIA SPORTSWEAR CO (COLM) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from COLUMBIA SPORTSWEAR CO's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1050797/000105079724000032/colm-20231231.htm
Accession: 0001050797-24-000032
Filing date: 2024-02-26
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/COLM/
All MD&A years: /company/COLM/mda/
Previous year: /company/COLM/mda/fy2022/ (FY 2022)
Next year: /company/COLM/mda/fy2024/ (FY 2024)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Special Note Regarding Forward-Looking Statements", Item 1, Item 1A, and Item 8 of this Annual Report on Form 10-K. In addition, refer to Item 7 in our Annual Report on Form 10-K for the year ended December 31, 2022 for our discussion and analysis comparing financial condition and results of operations from 2022 to 2021.

OVERVIEW

As a global leader in designing, developing, marketing, and distributing outdoor, active and lifestyle products, our mission is to connect active people with their passions. We manage our product line in two major categories: apparel, accessories, and equipment products and footwear products. We provide our products through our four brands: Columbia, SOREL, Mountain Hardwear, and prAna. Apparel, accessories, and equipment products are provided by our Columbia, Mountain Hardwear and prAna brands. Footwear products are provided by our Columbia and SOREL brands. We sell our products in more than 100 countries and operate in four geographic segments: U.S., LAAP, EMEA, and Canada.

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We are investing in our strategic priorities to:

•accelerate profitable growth;

•create iconic products that are differentiated, functional and innovative;

•drive brand engagement through increased, focused demand creation investments;

•enhance consumer experiences by investing in capabilities to delight and retain consumers;

•amplify marketplace excellence, with digitally-led, omni-channel, global distribution; and

•empower talent that is driven by our core values through a diverse and inclusive workplace.

Ultimately, we expect our investments to enable market share capture across our brand portfolio, expand gross margin, improve selling, general and administrative expense efficiency, and drive improved operating margin over the long-term.

Profit Improvement Program

As part of our strategic priorities, we are implementing a multi-year profit improvement program to accelerate profitable growth and improve the efficiency of our operations. We are focused on four areas of cost reduction and realignment, including:

•operational cost savings;

•organizational cost savings;

•operating model improvements; and

•indirect, or non-inventory, spending.

When the benefits of this program are combined with the cost savings we anticipate to receive from normalized inventory levels, we believe we can reach $125 million to $150 million in annualized savings by 2026. We anticipate these cost savings will ramp up over the course of 2024 and 2025, with the full benefit being realized in 2026. In 2024, we anticipate realizing approximately $75 million to $90 million in realized cost savings.

Business Environment and Trends

Changing U.S. Marketplace | We believe there has been some moderation of the U.S. outdoor market following the exit from the COVID-19 pandemic. There are also new entrants into the historical U.S. outdoor market in the form of emerging brands and historically lifestyle and/or active brands. These brands are crossing over as we believe U.S. consumers and customers use more lifestyle products during outdoor activities.

Economic Environment Impacting Demand | We believe general economic uncertainty is impacting consumer and wholesale customer behavior and demand. Wholesale customers have been increasingly cautious managing inventory and in placing advance orders. This cautiousness has been most pronounced in the U.S., but we believe that retailer prudence is spreading to other regions, including Canada and Europe. Consumer demand, particularly in the U.S and Korea, has been generally soft for outdoor apparel and footwear products. We anticipate these trends will persist into 2024.

Promotional and Clearance Environment | We believe consumers are seeking value and promotions in the marketplace, which has dampened demand in full price channels, particularly in the U.S., including our direct-to-consumer e-commerce sites and branded stores. In 2023, our promotional levels were above levels prior to the COVID-19 pandemic as we leveraged our outlet stores and temporary clearance locations to profitably clear excess inventory. The proportion of older season clearance inventory being marked down and sold through our outlet stores and temporary clearance locations increased and resulted in lower DTC product margins. We anticipate continuing to utilize our fleet of outlet stores and temporary clearance locations to assist with inventory liquidation in 2024 and believe elevated promotional activity will continue into the first half of 2024.

Changing Consumer Shopping Habits | We believe consumers in the U.S. have adjusted shopping habits in a post-COVID pandemic world and have shifted back to brick-and-mortar retail shopping experiences. As a result, we expect our e-commerce channel to continue to be challenged year-over-year.

Distribution Center and Third-Party Capacity Pressure | As a result of highly volatile shifts in supply and demand and supply chain challenges, we exited 2022 with elevated inventory. These elevated inventory levels resulted in storage and process capacity pressures within our distribution centers and third-party logistics operations throughout 2023. These pressures included additional inventory carrying costs related to incremental outside storage, and other inventory related holding and handling costs, including losses in productivity, as we

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worked to normalize our inventory position. We exited 2023 with more normalized inventory levels. As these storage and process capacity pressures have alleviated, we expect to see a benefit to our operating results in 2024.

Normalized Freight Charges | For the majority of 2022, we experienced elevated ocean freight costs, which had a substantially unfavorable impact on our gross margin. Beginning in the fourth quarter of 2022, we began to experience significant declines in ocean freight costs and have since seen ocean freight container rates return to historical levels. Throughout 2023, our gross margin realized the benefits of these lower costs. We anticipate these lower ocean freight costs will persist and continue to benefit gross margin through the first quarter of 2024.

Seasonality | Our business is affected by the general seasonal trends common to the industry, including seasonal weather and discretionary consumer shopping and spending patterns. Our products are marketed on a seasonal basis, and our sales are weighted substantially toward the third and fourth quarters, while our operating costs are more equally distributed throughout the year. In 2023, nearly 60% of our net sales and nearly 80% of our operating income were realized in the second half of the year.

Heightened Geopolitical Risk | We sell our products in more than 100 countries and our ability to sell in certain markets may be impacted by ongoing geopolitical tensions. We believe these tensions will remain elevated and have manifested, and will continue to manifest, themselves in certain regions where we operate.

Increasing Regulatory Environment | Recently, the number of regulations at the global and jurisdictional level impacting our business, and in particular our products, has significantly increased. We expect this trend to continue, and as a result, will impact our expenses, product input costs and ultimately our products, which may in turn impact our revenue. These regulatory matters at a minimum include regulations related to climate, privacy and product chemistry. For example, in anticipation of the effectiveness of the regulations in California and New York states related to perfluoroalkyl and polyfluoroalkyl substances ("PFAS"), we have been working to eliminate PFAS chemicals across our global product line. We intend to stop manufacturing any apparel or footwear with PFAS intentionally added prior to our Fall 2024 season. This transition has the potential to impact the flow of our wholesale business in 2024, as well as our inventory management strategies for existing merchandise. In addition, these PFAS matters may result in a more promotional environment in 2024 as retailers move through merchandise containing PFAS.

RESULTS OF OPERATIONS

The following discussion of our results of operations and liquidity and capital resources should be read in conjunction with Part II, Item 8 of this Annual Report on Form 10-K.

Non-GAAP Financial Measure

To supplement financial information reported in accordance with accounting principles generally accepted in the United States ("GAAP"), we disclose constant-currency net sales information, which is a non-GAAP financial measure, to provide a framework to assess how the business performed excluding the effects of changes in foreign currency exchange rates against the United States dollar between comparable reporting periods. We calculate constant-currency net sales by translating net sales in foreign currencies for the current period into United States dollars at the exchange rates that were in effect during the comparable period of the prior year. Management believes that this non-GAAP financial measure reflects an additional and useful way of viewing an aspect of our operations that, when viewed in conjunction with our GAAP results, provides a more comprehensive understanding of our business and operations. In particular, investors may find the non-GAAP measure useful by reviewing our net sales results without the volatility in foreign currency exchange rates. This non-GAAP financial measure also facilitates management's internal comparisons to our historical net sales results and comparisons to competitors' net sales results. Constant-currency financial measures should be viewed in addition to, and not in lieu of or superior to, our financial measures calculated in accordance with GAAP.

The following discussion includes references to constant-currency net sales, and we provide a reconciliation of this non-GAAP measure to the most directly comparable financial measure calculated in accordance with GAAP below.

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Results of Operations — Consolidated

The following table presents the items in our Consolidated Statements of Operations, both in dollars and as a percentage of net sales:

[[GREPCENT_TABLE]]
[["","","","","Year Ended December 31,"],["(in millions, except for percentage of net sales and per share amounts)","","","","","","2023","","2022"],["Net sales","","","","","","","","","","$","3,487.2","","","100.0","%","","$","3,464.2","","","100.0","%"],["Cost of sales","","","","","","","","","","1,757.3","","","50.4","%","","1,753.1","","","50.6","%"],["Gross profit","","","","","","","","","","1,729.9","","","49.6","%","","1,711.1","","","49.4","%"],["Selling, general and administrative expenses","","","","","","","","","","1,416.3","","","40.6","%","","1,304.4","","","37.7","%"],["Impairment of goodwill and intangible assets","","","","","","","","","","25.0","","","0.7","%","","35.6","","","1.1","%"],["Net licensing income","","","","","","","","","","21.7","","","0.6","%","","22.0","","","0.7","%"],["Operating income","","","","","","","","","","310.3","","","8.9","%","","393.1","","","11.3","%"],["Interest income, net","","","","","","","","","","13.7","","","0.4","%","","2.7","","","0.1","%"],["Other non-operating income, net","","","","","","","","","","2.2","","","0.1","%","","1.6","","","0.1","%"],["Income before income tax","","","","","","","","","","326.2","","","9.4","%","","397.4","","","11.5","%"],["Income tax expense","","","","","","","","","","74.8","","","2.1","%","","86.0","","","2.5","%"],["Net income","","","","","","","","","","$","251.4","","","7.3","%","","$","311.4","","","9.0","%"],["Diluted earnings per share","","","","","","","","","","$","4.09","","","","","$","4.95"]]
[[/GREPCENT_TABLE]]

COLUMBIA SPORTSWEAR COMPANY | 2023 FORM 10-K | 23

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Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

Net Sales. Net sales by brand, product category and channel are summarized in the following table:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(in millions, except for percentages)","","Reported Net Sales 2023","","Adjust for Foreign Currency Translation","","Constant-currency Net Sales 2023 (1)","","Reported Net Sales 2022","","Reported Net Sales % Change","","Constant-currencyNet Sales% Change (1)"],["Brand Net Sales:"],["Columbia","","$","2,935.1","","","$","19.4","","","$","2,954.5","","","$","2,864.3","","","2%","","3%"],["SOREL","","336.7","","","(0.3)","","","336.4","","","347.3","","","(3)%","","(3)%"],["prAna","","113.6","","","0.1","","","113.7","","","143.1","","","(21)%","","(21)%"],["Mountain Hardwear","","101.8","","","0.8","","","102.6","","","109.5","","","(7)%","","(6)%"],["Total","","$","3,487.2","","","$","20.0","","","$","3,507.2","","","$","3,464.2","","","1%","","1%"],["Product Category Net Sales:"],["Apparel, Accessories and Equipment","","$","2,676.6","","","$","15.7","","","$","2,692.3","","","$","2,661.1","","","1%","","1%"],["Footwear","","810.6","","","4.3","","","814.9","","","803.1","","","1%","","1%"],["Total","","$","3,487.2","","","$","20.0","","","$","3,507.2","","","$","3,464.2","","","1%","","1%"],["Channel Net Sales:"],["Wholesale","","$","1,874.0","","","$","7.5","","","$","1,881.5","","","$","1,867.7","","","\u2014%","","1%"],["Direct-to-consumer","","1,613.2","","","12.5","","","1,625.7","","","1,596.5","","","1%","","2%"],["Total","","$","3,487.2","","","$","20.0","","","$","3,507.2","","","$","3,464.2","","","1%","","1%"]]
[[/GREPCENT_TABLE]]

(1) Constant-currency net sales is a non-GAAP financial measure. See "Non-GAAP Financial Measure" above for further information.

Overall, global net sales increased, driven by international sales growth in our Columbia brand, primarily from our Europe-direct, China and LAAP distributor businesses. In Europe-direct and China markets, healthy consumer demand drove growth in both our wholesale and DTC businesses throughout the year. Sales growth in our LAAP distributor business reflected strong demand for Spring and Fall 2023 merchandise. Earlier shipment of Spring 2024 also aided sales for our LAAP distributor business in the fourth quarter of 2023.

International sales growth was partially offset by softness in the U.S., driven by a culmination of factors including macro-economic uncertainty, warm winter weather, shifts in consumer shopping behavior, and slowing outdoor market trends. As a result, sales of all our brands declined in the U.S. during 2023.

Footwear sales growth reflected increased demand of clearance product sales, which more than offset weak demand for full price merchandise. Throughout 2023, footwear sales in the outdoor industry softened while competitive pressures within the footwear category were amplified. These headwinds, combined with warm winter weather in the fourth quarter of 2023, led to declining sales for both Columbia and SOREL footwear.

Our global DTC net sales reflected a 6% increase in brick-and-mortar business, offset by a 6% decrease in e-commerce business for the year ended December 31, 2023 compared to the same period in the prior year. The growth from our DTC retail store business was driven by contributions from new stores and temporary clearance locations to liquidate excess inventory. The decline in our DTC e-commerce sales was predominantly focused in the U.S. and driven by the same U.S. region factors mentioned above, as well as a shift in consumer shopping behavior back to physical in-store shopping.

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Gross Profit. Gross profit is summarized in the following table:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(in millions, except for percentages and basis points)","2023","","2022","","Change"],["Gross profit","$","1,729.9","","","$","1,711.1","","","$","18.8","","1","%"],["Gross margin","49.6","%","","49.4","%","","20 bps"]]
[[/GREPCENT_TABLE]]

Gross margin expanded primarily due to the following factors:

•an approximate 240 bps increase related to lower inbound freight costs; partially offset by

•unfavorable channel profitability reflecting lower DTC product margins and lower wholesale margins.

Lower DTC margins discussed above were primarily driven by higher clearance and promotional activity, including a greater proportion of sales of excess inventory through our DTC outlet stores and temporary clearance locations. Lower wholesale margins discussed above were primarily driven by actions to reduce excess inventory, and, to a lesser extent, inflationary product costs which were partially offset by price increases.

Selling, General and Administrative Expenses. SG&A expenses is summarized in the following table:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(in millions, except for percentages and basis points)","2023","","2022","","Change"],["Selling, general and administrative expenses","$","1,416.3","","","$","1,304.4","","","$","111.9","","9","%"],["Selling, general and administrative expenses as percent of net sales","40.6","%","","37.7","%","","290 bps"]]
[[/GREPCENT_TABLE]]

SG&A expenses growth reflected investments to support growth strategies, increased distribution and fulfillment costs related to elevated inventory, and inflationary pressures including increases in employee salaries and wages.

SG&A expenses increased primarily due to the following factors:

•higher omni-channel expenses of $46.2 million, primarily reflecting higher DTC expenses, including personnel expenses and costs associated with new stores and temporary clearance locations;

•higher supply chain expenses of $31.0 million, reflecting increased global distribution center expenses resulting from elevated inventory levels, including higher warehousing and fulfillment expenses, as well as third-party logistics transition-related costs; and

•higher information technology related expenses, reflecting increased personnel expenses to support digital strategies.

Impairment of Goodwill and Intangible Assets. For the year ended December 31, 2023, we recognized a $25.0 million impairment charge related to goodwill attributable to the prAna reporting unit resulting from our annual fourth quarter impairment testing. For the year ended December 31, 2022, we recognized $35.6 million of impairment charges related to the prAna brand as a result of our annual fourth quarter impairment testing. These charges consisted of an $18.7 million impairment charge related to prAna's trademark, an indefinite-lived intangible asset, and a $16.9 million impairment charge related to goodwill attributable to the prAna reporting unit.

Refer to our Critical Accounting Policies and Estimates below for further information regarding impairments.

Interest Income, net. Interest income, net is summarized in the following table:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(in millions, except for percentages)","2023","","2022","","Change"],["Interest income, net","$","13.7","","","$","2.7","","","$","11.0","","407","%"],["Interest income, net as a percent of net sales","0.4","%","","0.1","%"]]
[[/GREPCENT_TABLE]]

Interest income, net increased primarily reflecting higher yields on increased levels of cash, cash equivalents and short-term investments.

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Income Tax Expense. Income tax expense and the related effective income tax rate are summarized in the following table:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(in millions, except for percentages)","2023","","2022","","Change"],["Income tax expense","$","74.8","","","$","86.0","","","$","(11.2)","","(13)","%"],["Effective income tax rate","22.9","%","","21.6","%"]]
[[/GREPCENT_TABLE]]

Our effective income tax rates for the years ended December 31, 2023 and 2022 were impacted by discrete tax items, which lowered the effective income tax rate in each period. For the year ended December 31, 2023, our effective income tax rate was primarily impacted by a non-recurring benefit related to a foreign currency loss resulting from an intercompany transaction and a non-recurring foreign tax benefit. For the year ended December 31, 2022, our effective income tax rate was primarily impacted by a non-recurring benefit related to the finalization of the U.S. and foreign tax audits, a non-recurring benefit related to a decrease in accrued foreign withholding taxes and a non-recurring benefit related to a foreign currency loss resulting from an intercompany transaction.

Results of Operations — Segment

Segment operating income includes net sales, cost of sales, SG&A expenses, and net licensing income for each of our four reportable geographic segments. Operating income as a percentage of net sales in the U.S. is typically higher than the other segments primarily due to scale efficiencies associated with the larger base of net sales in the U.S. and, to a lesser extent, incremental licensing income.

We anticipate this trend to continue until other segments achieve scale efficiencies from higher levels of net sales volume relative to the fixed cost structure necessary to operate the business.

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

Net sales by geographic segment are summarized in the following table:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(in millions, except for percentage changes)","","Reported Net Sales 2023","","Adjust for Foreign Currency Translation","","Constant-currency Net Sales 2023 (1)","","Reported Net Sales 2022","","Reported Net Sales % Change","","Constant-currencyNet Sales% Change (1)"],["U.S.","","$","2,241.4","","","$","\u2014","","","$","2,241.4","","","$","2,302.2","","","(3)%","","(3)%"],["LAAP","","519.8","","","22.0","","","541.8","","","473.9","","","10%","","14%"],["EMEA","","469.2","","","(10.7)","","","458.5","","","438.6","","","7%","","5%"],["Canada","","256.8","","","8.7","","","265.5","","","249.5","","","3%","","6%"],["","","$","3,487.2","","","$","20.0","","","$","3,507.2","","","$","3,464.2","","","1%","","1%"]]
[[/GREPCENT_TABLE]]

(1) Constant-currency net sales is a non-GAAP financial measure. See "Non-GAAP Financial Measure" above for further information.

Operating income for each reportable segment and unallocated corporate expenses are summarized in the following table:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(in millions)","","2023","","2022","","Change"],["U.S.","","$","415.7","","","$","519.8","","","$","(104.1)"],["LAAP","","61.8","","","47.0","","","14.8"],["EMEA","","99.0","","","80.2","","","18.8"],["Canada","","55.6","","","53.0","","","2.6"],["Total segment operating income","","632.1","","","700.0","","","(67.9)"],["Unallocated corporate expenses","","(321.8)","","","(306.9)","","","(14.9)"],["Operating income","","$","310.3","","","$","393.1","","","$","(82.8)"]]
[[/GREPCENT_TABLE]]

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U.S.

U.S. operating income decreased $104.1 million to $415.7 million, or 18.5% of net sales, in 2023 from $519.8 million, or 22.6% of net sales, in 2022. The decrease was driven primarily by decreased net sales and increased SG&A expenses. U.S. net sales decreased $60.8 million, or 3%, in 2023, compared to 2022. U.S. net sales decreased primarily due to decreased wholesale shipments and lower DTC consumer demand. As of December 31, 2023, our U.S. business operated 161 retail stores, compared to 156 stores as of December 31, 2022. In addition, as part of our plan to reduce excess inventory, we operated 34 temporary clearance locations as of December 31, 2023 to support excess inventory liquidation efforts. SG&A expenses increased as a percentage of net sales to 31.0% in 2023 compared to 27.7% in 2022, primarily driven by increased warehousing and fulfillment expenses resulting from elevated inventory levels and higher DTC expenses reflecting higher personnel and costs associated with new stores and temporary clearance locations.

LAAP

LAAP operating income increased $14.8 million to $61.8 million, or 11.9% of net sales, in 2023 from $47.0 million, or 9.9% of net sales, in 2022. The increase was driven primarily by increased net sales. LAAP net sales increased $45.9 million, or 10% (14% constant-currency), in 2023, compared to 2022. Increased LAAP net sales were primarily driven by our China and LAAP distributor businesses, partially offset by declines in our Korea business. Increased China net sales reflected higher consumer demand, partially aided by the lapping of prior year government mandated restrictions to prevent the spread of COVID-19. LAAP distributor net sales increased due to higher Spring 2023 and Fall 2023 orders compared to the same periods in the prior year, as well as earlier shipment of Spring 2024 orders compared to the shipment of Spring 2023 orders. Decreased Korea net sales reflected challenging market conditions and efforts to reset the business to support long-term growth opportunities. LAAP SG&A expenses decreased as a percentage of net sales to 44.4% in 2023 compared to 46.0% in 2022.

EMEA

EMEA operating income increased $18.8 million to $99.0 million, or 21.1% of net sales, in 2023 from $80.2 million, or 18.3% of net sales, in 2022. The increase was driven primarily by increased net sales and gross margin. EMEA net sales increased $30.6 million, or 7% (5% constant-currency), in 2023, compared to 2022, driven by increased net sales in our Europe-direct business, partially offset by declines in our EMEA distributor business. Europe-direct net sales increased primarily due to broad-based growth across our DTC and wholesale businesses, including the earlier shipment of Spring 2024 orders compared to prior year. EMEA distributor net sales decreased primarily due to our anniversary of the prior year shipments to Russia (for orders that were placed prior to the invasion of Ukraine). Gross margin increased primarily due to favorable channel shifts driven by a lower proportion of distributor sales, which generally carry lower gross margins. EMEA SG&A expenses increased as a percentage of net sales to 27.1% in 2023 compared to 26.1% in 2022.

Canada

Canada operating income increased $2.6 million to $55.6 million, or 21.7% of net sales, in 2023 from $53.0 million, or 21.2% of net sales in 2022. The increase primarily resulted from increased net sales. Canada net sales increased $7.3 million, or 3% (6% constant-currency), in 2023, compared to 2022, driven by increased net sales in our Canada DTC business. Canada SG&A expenses increased as a percentage of net sales to 25.9% in 2023, compared to 25.0% in 2022.

Unallocated Corporate Expenses

Unallocated corporate expenses increased by $14.9 million to $321.8 million in 2023 from $306.9 million in 2022, largely driven by higher personnel expenses, partially offset by the impacts of the $25.0 million impairment charge related to prAna compared to the $36.5 million impairment charges in 2022.

LIQUIDITY AND CAPITAL RESOURCES

Including cash, cash equivalents, short-term investments and available committed credit lines, we had approximately $1.25 billion in total liquidity as of December 31, 2023. Our liquidity may be affected by the general seasonal trends common to the industry. Our products are marketed on a seasonal basis and our sales are weighted substantially toward the third and fourth quarters, while our operating costs are more equally distributed throughout the year. Our cash and cash equivalents and short-term investments balances generally are at their lowest level just prior to the start of the U.S. holiday season and increase during the fourth quarter from collection of wholesale business receivables and fourth quarter DTC sales. This trough cash position is impacted by the amount of product we order from our contract manufacturers in anticipation of customer demand and is more heavily impacted in advance of periods of expected high demand.

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Cash Flow Activities

Cash flows are summarized in the following table:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(in millions)","2023","","2022","","Change"],["Net cash provided by (used in):"],["Operating activities","$","636.3","","","$","(25.2)","","","$","661.5"],["Investing activities","(461.8)","","","72.7","","","(534.5)"],["Financing activities","(254.8)","","","(360.8)","","","106.0"],["Net effect of exchange rate changes on cash","0.4","","","(19.8)","","","20.2"],["Net decrease in cash and cash equivalents","$","(79.9)","","","$","(333.1)","","","$","253.2"]]
[[/GREPCENT_TABLE]]

The change in cash flows provided by operating activities was driven by a $713.5 million increase in cash provided by changes in assets and liabilities, partially offset by a $52.0 million decrease in cash provided by net income and non-cash adjustments. The most significant comparative changes in assets and liabilities included Inventories, and to a lesser extent, Accounts Receivable, Accounts Payable and Accrued liabilities. The $683.7 million increase in cash provided by Inventories reflected a decrease in inventory as we curtailed inventory purchases to compensate for elevated inventories exiting 2022 and liquidated excess inventory levels throughout 2023. The $188.3 million increase in cash provided by Accounts receivable was primarily driven by higher fourth quarter 2022 wholesale sales collected in 2023 compared to the same period in the prior year. These amounts were partially offset by the $126.3 million increase in cash used in Accounts payable primarily resulting from the earlier production of and payment for Spring 2024 and Fall 2024 inventory, as well as the $82.9 million increase in cash used in Accrued liabilities, which was primarily driven by higher sales reserves at the beginning of 2023 compared to 2022 resulting from higher sales in the fourth quarter of 2022.

Net cash used in investing activities was $461.8 million for 2023, compared to $72.7 million of cash provided by investing activities for 2022. For 2023, net cash used in investing activities consisted of $407.2 million in cash used for net purchases of short-term investments, as well as $54.6 million in cash used for capital expenditures. For 2022, net cash provided by investing activities consisted of $131.2 million in net sales and maturities of short-term investments partially offset by $58.5 million in cash used for capital expenditures.     

Net cash used in financing activities was $254.8 million for 2023 compared to $360.8 million for 2022. For 2023, net cash used in financing activities primarily consisted of repurchases of common stock of $184.0 million and dividend payments to our shareholders of $73.4 million. For 2022, net cash used in financing activities primarily consisted of repurchases of common stock of $287.4 million and dividend payments to our shareholders of $75.1 million.

Sources of Liquidity

Cash and cash equivalents and short-term investments

As of December 31, 2023, we had cash and cash equivalents of $350.3 million and short-term investments of $414.2 million, compared to $430.2 million and $0.7 million, respectively, as of December 31, 2022.

Domestic Credit Facility

Refer to Note 7 in Part II, Item 8 of this Annual Report on Form 10-K for further information regarding the domestic credit facility.

As of December 31, 2023, we had available an unsecured, committed revolving credit facility, which provides for borrowings up to $500.0 million. We were in compliance with all associated covenants and there was no balance outstanding under the facility.

International Credit Facility

As of December 31, 2023, our European subsidiary had available an unsecured, committed line of credit, which is guaranteed by the Company and provides for borrowings up to €4.4 million (approximately US$4.9 million). There was no balance outstanding under the facility.

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Other Sources

As of December 31, 2023, collectively, our international subsidiaries had unsecured, uncommitted lines of credit, credit facilities and overdraft facilities, providing for borrowings up to approximately US$106.7 million. There was no balance outstanding under these facilities.

Capital Requirements

Our expected short-term and long-term cash needs are primarily for working capital and capital expenditures. We expect to meet these short-term and long-term cash needs primarily with cash flows from operations and, if needed, borrowings from our existing credit facilities.

Our working capital management goals include maintaining an optimal level of inventory necessary to deliver goods on time to our customers and our retail stores to satisfy end consumer demand, alleviating manufacturing capacity constraints, and driving efficiencies to minimize the cycle time from the purchase of inventory from our suppliers to the collection of accounts receivable balances from our customers. Inventory balances may be elevated in advance of periods of expected high demand. As of December 31, 2023, our inventory balance decreased to $746.3 million, compared to $1,028.5 million as of December 31, 2022, driven by a meaningful reduction of purchases of Spring 2023 and Fall 2023 inventory, as well as the use of our outlet stores and temporary clearance locations to profitably clear excess merchandise. We believe older season inventories represent a manageable portion of our total inventory mix.

We have planned 2024 capital expenditures of approximately $60 to $80 million. This includes investments in our DTC operations, including new stores and digital and supply chain capabilities to support our strategic priorities. Our actual capital expenditures may differ from the planned amounts depending on factors such as the timing of system implementations and new store openings and related construction as well as the availability of capital assets from suppliers.

Our long-term goal is to maintain a strong balance sheet and a disciplined approach to capital allocation. Dependent upon our financial position, market conditions and our strategic priorities, our capital allocation approach includes:

•investing in organic growth opportunities to drive long-term profitable growth;

•returning at least 40% of free cash flow to shareholders through dividends and share repurchases; and

•considering opportunistic mergers and acquisitions.

Free cash flow is a non-GAAP financial measure. Free cash flow is calculated by reducing net cash flow from operating activities by capital expenditures. Management believes free cash flow provides investors with an important perspective on the cash available for shareholders and acquisitions after making the capital investments required to support ongoing business operations and long-term value creation. Free cash flow does not represent the residual cash flow available for discretionary expenditures since it excludes certain mandatory expenditures. Management uses free cash flow as a measure to assess both business performance and overall liquidity.

Other cash commitments

Our non-current Income taxes payable on the Consolidated Balance Sheet as of December 31, 2023 includes approximately $12.4 million of net unrecognized tax benefits. We are uncertain about whether or when these amounts may be settled. Refer to Note 10 in Part II, Item 8 of this Annual Report on Form 10-K for additional information.

The following table presents our estimated significant contractual commitments that will require use of funds:

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(1) Refer to Operating Leases in Note 9 in Part II, Item 8 of this Annual Report on Form 10-K.

(2) Refer to Income Taxes in Note 10 in Part II, Item 8 of this Annual Report on Form 10-K.

CRITICAL ACCOUNTING ESTIMATES

Management's discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make various

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estimates and judgments that affect reported amounts of assets, liabilities, sales, cost of sales, and expenses and related disclosure of contingent assets and liabilities. Refer to Note 2 in Part II, Item 8 of this Annual Report on Form 10-K for additional information regarding the significant accounting policies and methods used in the preparation of our consolidated financial statements.

We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential effect on our financial statements, so we consider these to be our critical accounting policies and estimates. Because of the uncertainty inherent in these matters, actual results may differ from the estimates we use in applying these critical accounting policies and estimates. We base our ongoing estimates on historical experience and other assumptions that we believe to be reasonable in the circumstances. Our critical accounting policies and estimates relate to sales reserves, allowance for uncollectible accounts receivable, excess, close-out and slow-moving inventory, impairment of long-lived assets, intangible assets and goodwill, and income taxes.

Management regularly discusses with our Audit Committee each of our critical accounting estimates, the development and selection of these accounting estimates, and the disclosure about each estimate in this Annual Report on Form 10-K. These discussions typically occur at our quarterly audit committee meetings and include the basis and methodology used in developing and selecting these estimates, the trends in and amounts of these estimates, specific matters affecting the amount of and changes in these estimates, and any other relevant matters related to these estimates, including significant issues concerning accounting principles and financial statement presentation.

Sales Reserves

The amount of consideration we receive and recognize as Net sales across both wholesale and DTC channels varies with changes in sales returns and other accommodations and incentives we offer to our customers. When we give our customers the right to return products or provide other accommodations such as chargebacks and markdowns, we estimate the expected sales returns and miscellaneous claims from customers and record sales reserves to reduce Net sales. As of December 31, 2023, our sales-related reserves were $103.9 million compared to $115.4 million as of December 31, 2022. The most significant variable affecting these reserve balances is sales levels. As a percentage of Net sales, the sales reserves balances were 3.0% as of December 31, 2023 compared to 3.3% as of December 31, 2022. The reserve for returns from customers or consumers is the component of our sales related reserves most susceptible to estimation uncertainty. These estimates are based on 1) historical rates of product returns and claims; and 2) events and circumstances that indicate changes to such historical rates, such as our customers' inventory positions and their anticipated sell-through rates. However, actual returns and claims in any future period are inherently uncertain and thus may differ from our estimates. As a result, we adjust our estimates of revenue at the earlier of when the most likely amount of consideration we expect to receive changes or when the amount of consideration becomes fixed. If actual or expected future returns and claims are significantly different than the sales reserves established, we record an adjustment to Net sales in the period in which such determination was made.

Allowance for Uncollectible Accounts Receivable

We make ongoing estimates of the collectability of our accounts receivable and maintain an allowance for estimated credit losses resulting from the inability of our customers to make required payments. The allowance represents our current estimate of lifetime expected credit losses over the remaining duration of existing accounts receivable considering current market conditions and supportable forecasts when appropriate. In determining the amount of the allowance, we consider our historical level of credit losses, as well as our judgments about the creditworthiness of customers based on ongoing credit evaluations. We analyze specific customer accounts, including aged receivables, customer concentrations, credit insurance coverage, standby letters of credit, and other forms of collateral, current economic trends, and changes in customer payment terms.

Our allowance for uncollectible accounts receivable increased to $5.5 million as of December 31, 2023 compared to $5.4 million as of December 31, 2022. Because future changes in the financial stability of our customers is difficult to estimate, actual future losses from uncollectible accounts may differ from our estimates and may have a material effect on our financial position, results of operations or cash flows. If the financial condition of our customers deteriorates and results in their inability to make payments, a larger allowance may be required. If we determine that a smaller or larger allowance is appropriate, we will record an adjustment to SG&A expenses in the period in which we make such a determination.

Excess, Close-Out and Slow-Moving Inventory

We make ongoing estimates of potential excess, close-out or slow-moving inventory. We evaluate our inventory on hand to identify excess, close-out or slow-moving inventory by contemplating our 1) purchasing plans; 2) sales forecasts; 3) historical liquidation experience; and 4) the level and composition of inventory from current and prior seasons that remains unsold and establish provisions as necessary to properly reflect inventory value at the lower of cost or net realizable value. Provisions are established when necessary in the period in which we make

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such a determination. As of December 31, 2023, our inventory provisions reduced gross inventory by $23.3 million compared to $29.4 million as of December 31, 2022. The level of estimated excess inventory as of December 31, 2023 decreased reflecting the use of our outlet stores and temporary clearance locations to profitably clear excess merchandise.

Long-Lived Assets

Long-lived assets, which include property, plant and equipment, lease right-of-use ("ROU") assets, capitalized implementation costs for cloud computing arrangements, and intangible assets with finite lives are measured for impairment only when events or circumstances indicate the carrying value may not be recoverable. Our retail fleet long‐lived assets are evaluated at the retail location level. Events that result in an impairment review of a retail location include plans to close a retail location or a significant decrease in the operating results of the retail location. When such an indicator occurs, we evaluate retail location long‐lived assets for impairment by comparing the undiscounted future cash flow expected to be generated by the location to the location long‐lived asset’s carrying amount. If the carrying amount of an asset exceeds the estimated undiscounted future cash flow, an analysis is performed to estimate the fair value of the asset. An impairment is recorded if the fair value of the retail location long‐lived asset is less than the carrying amount.

During 2023 we tested certain long-lived assets consisting of property, plant, and equipment and lease ROU assets for impairment at certain underperforming retail locations. For the years ended December 31, 2023 and 2022, impairment charges from underperforming retail stores were not material. Further declines in projected future performance may adversely affect the recovery of retail locations assets.

Indefinite-Lived Intangible Assets and Goodwill

We review and test our intangible assets with indefinite lives and goodwill for impairment in the fourth quarter of each year and when events or changes in circumstances indicate that it is more likely than not that the fair value of the asset or reporting unit is less than its carrying amount. Our intangible assets with indefinite lives consist of trademarks and trade names (collectively, "trademarks"). Substantially all of our goodwill is recorded in the U.S. segment and impairment testing for goodwill is performed at the reporting unit level. Key assumptions used in the discounted cash flow models are cash flow projections and the discount rate. Cash flow projections are developed in part from our annual planning process. The discount rate is based on the estimated weighted-average costs of capital of the reporting unit from a market-participant perspective. When we include market-based valuation methods to estimate fair value of our reporting units as part of the goodwill impairment testing, we utilize market multiples for guideline public companies.

In the impairment tests for trademarks, we compare the estimated fair value of each asset to its carrying amount. The fair values of trademarks are estimated using a relief from royalty method under the income approach. If the carrying amount of a trademark exceeds its estimated fair value, we calculate impairment as the excess of carrying amount over the estimate of fair value. As of December 31, 2023, the carrying value of indefinite-lived intangible assets was $79.2 million, of which $51.8 million was attributed to prAna's trademark. In our 2023 impairment test, the fair value of prAna's trademark exceeded its carrying value by approximately 10% as of the measurement date and, therefore, no impairment was recognized. As part of our evaluation, we performed a sensitivity analysis on the trademark impairment model. A 100 basis point decline in the compound annual growth rate for net sales assumed over the first five years would reduce the excess of fair value over the carrying amount to approximately 6%. Separately, a 100 basis point increase in the assumed discount rate would reduce the excess of the fair value over the carrying value to approximately 2%. A separate 50 basis point decline in the assumed royalty rate would reduce the excess of fair value over the carrying amount to zero. In 2022, we determined that the prAna brand’s trademark was impaired and we recognized an $18.7 million impairment charge for the year ended December 31, 2022.

In the impairment test for goodwill, we compare the estimated fair value of the reporting unit with the carrying amount of that reporting unit. If the carrying amount of the reporting unit exceeds its estimated fair value, we calculate an impairment as the excess of carrying amount over the estimate of fair value. We estimate the fair value of our reporting units using a combination of discounted cash flow analysis and market-based valuation methods, as appropriate. In our 2023 impairment test, we determined that prAna goodwill was impaired and we recognized a $25.0 million impairment charge for the year ended December 31, 2023, reducing the carrying value of prAna's goodwill to $12.3 million. The decline in estimated fair value from the fourth quarter 2022 impairment test reflected an increase in the weighted-average cost of capital used in the discounted cash flow model and lower operating income levels. In 2022, we determined that prAna goodwill was impaired and we recognized a $16.9 million impairment charge for the year ended December 31, 2022.

Our impairment tests and related fair value estimates are based on a number of factors, including assumptions and estimates for projected net sales, income, cash flows, discount rates, market-based multiples, and other operating performance measures. Changes in estimates or the application of alternative assumptions could produce significantly different results. These assumptions and estimates may change in the future due to changes in economic conditions, changes in our ability to meet sales and profitability objectives or changes in our business operations or strategic direction.

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Income Taxes

We make assumptions, judgments and estimates to determine our current provision for income taxes, our deferred tax assets and liabilities and our uncertain tax positions. Our judgments, assumptions and estimates relative to the current provision for income tax take into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Changes in tax law or our interpretation of tax laws and the resolution of current and future tax audits could significantly affect the amounts provided for Income tax expense in our Consolidated Statements of Operations.

Our assumptions, judgments and estimates relative to the value of a deferred tax asset take into account predictions of the amount and category of future taxable income. Actual operating results and the underlying amount and category of income in future years could cause our current assumptions, judgments and estimates of recoverable net deferred tax assets to be inaccurate. Changes in any of the assumptions, judgments and estimates mentioned above could cause our actual income tax obligations to differ from our estimates, which could materially affect our financial position, results of operations or cash flows.

Our assumptions, judgement and estimates relative to uncertain tax positions take into account whether a tax position is more likely than not to be sustained upon examination by the relevant taxing authority based on the technical merits of the position and the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant taxing authority. Changes in tax law or our interpretation of tax laws and the resolution of current and future tax audits could significantly affect the amounts provided for Income tax expense in our Consolidated Statements of Operations.

Our tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. As the calendar year progresses, we periodically refine our estimate based on actual events and earnings by jurisdiction. This ongoing estimation process can result in changes to our expected effective tax rate for the full calendar year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs so that our year-to-date provision equals our expected annual effective tax rate.

RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note 2 in Part II, Item 8 of this Annual Report on Form 10-K.