| DECKERS OUTDOOR CORP Item 1A Risk Factors |
| Our short- and long-term success is subject to many factors beyond our control |
| Stockholders and potential stockholders should carefully consider the following risk factors in addition to the other information contained in this report and the information incorporated by reference in this report |
| If any of the following risks occur, our business, financial condition or results of operations could be adversely affected |
| In that case, the value of our common stock could decline and stockholders and potential stockholders may lose all or part of their investment |
| Risks Relating to Our Business Our success depends on our ability to anticipate fashion trends |
| Our success depends largely on the continued strength of our Teva, UGG and Simple brands and on our ability to anticipate, understand and react to the rapidly changing fashion tastes of footwear consumers and to provide appealing merchandise in a timely manner |
| Our products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to rapid change |
| We are also dependent on customer receptivity to our products and marketing strategy |
| There can be no assurance that consumers will continue to prefer our brands, that we will respond quickly enough to changes in consumer preferences or that we will successfully introduce new models and styles of footwear |
| Achieving market acceptance for new products also will likely require us to exert substantial marketing and product development efforts and expend significant funds to create consumer demand |
| A failure to introduce new products that gain market acceptance would erode our competitive position, which would reduce our profits and could adversely affect the image of our brands, resulting in long-term harm to our business |
| Our UGG brand may not continue to grow at the same rate it has experienced in the recent past |
| Our UGG brand has experienced strong growth over the past few years, with net wholesale sales of UGG products having increased from dlra34cmam561cmam000 in 2003 to dlra150cmam279cmam000 in 2005, representing a compound annual growth rate of 108dtta5prca |
| We do not expect to sustain this growth rate in the future |
| UGG may be a fashion item that 17 _________________________________________________________________ [66]Table of Contents could go out of style at any time |
| UGG represents a significant portion of our business, and if UGG sales were to decline or to fail to increase in the future, our overall financial performance would be adversely affected |
| We may experience shortages of top grade sheepskin, which could interrupt product manufacturing and increase product costs |
| We depend on a limited number of key resources for sheepskin, the principal raw material for our UGG products |
| In 2005, four suppliers provided all of the sheepskin purchased by our independent manufacturers |
| The top grade sheepskin used in UGG footwear is in high demand and limited supply |
| In addition, sheep are susceptible to hoof and mouth disease, which can result in the extermination of an infected herd and could have a material adverse effect on the availability of top grade sheepskin for our products |
| Additionally, the supply of sheepskin can be adversely impacted by drought conditions |
| Our potential inability to obtain top grade sheepskin for UGG products could impair our ability to meet our production requirements for UGG in a timely manner and could lead to inventory shortages, which can result in lost potential sales, delays in shipments to customers, strain on our relationships with customers and diminished brand loyalty |
| Additionally, there have been significant increases in the prices of top grade sheepskin as the demand for this material has increased |
| Any further price increases will likely raise our costs, increase our costs of sales and decrease our profitability unless we are able to pass higher prices on to our customers |
| If we do not accurately forecast consumer demand, we may have excess inventory to liquidate or have difficulty filling our customers’ orders |
| Because the footwear industry has relatively long lead times for design and production, we must commit to production tooling and production volumes many months before consumer tastes become apparent |
| The footwear industry is subject to fashion risks and rapid changes in consumer preferences, as well as the effects of weather, general market conditions and other factors affecting demand |
| Our large number of models, colors and sizes in our three product lines exacerbates these risks |
| As a result, we may fail to accurately forecast styles and features that will be in demand |
| If we overestimate demand for our any products, styles or sku’s, we may be forced to liquidate excess inventories at a discount to customers, resulting in higher markdowns and lower gross margins |
| Conversely, if we underestimate consumer demand for any products, styles or sku’s, we could have inventory shortages, which can result in lost potential sales, delays in shipments to customers, strains on our relationships with customers and diminished brand loyalty |
| This may be particularly true with regard to our UGG product line, which has experienced strong consumer demand and rapid sales growth |
| We may not succeed in implementing our growth strategy |
| As part of our growth strategy, we seek to enhance the positioning of our brands, extend our brands into complementary product categories and markets through licensing, expand geographically and improve our operational performance |
| Another element of our growth strategy is our licensing initiatives |
| We may not be able to successfully implement any or all of these strategies |
| If we fail to do so, our rate of growth may slow or our results of operations may decline, which in turn could have a negative effect on the value of our stock |
| Our financial success is limited to the success of our customers |
| Our financial success is directly related to the success of our customers and the willingness of our customers to continue to buy our products |
| We do not have long-term contracts with any of our customers |
| Sales to our customers are generally on an order-by-order basis and are subject to rights of cancellation and rescheduling by our customers |
| If we cannot fill our customers’ orders in a timely manner, our relationships with our customers may suffer, and this could have a material adverse effect on us |
| Furthermore, if any of our major customers experiences a significant downturn in its business, or fails to remain committed to our products or brands, then these customers may reduce or discontinue purchases from us, which could have a material adverse effect on our business, results of operations and financial condition |
| 18 _________________________________________________________________ [67]Table of Contents Certain of our customers account for a significant portion of our sales and the loss of one or more of these key customers would significantly reduce our sales |
| Our five largest customers accounted for approximately 27dtta0prca of net sales in 2005 and 25dtta2prca of net sales in 2004 |
| Our single largest customer accounted for 15dtta8prca of net sales in 2005 and 14dtta1prca in 2004 |
| Any potential loss of a key customer, or a significant reduction in sales to a key customer, could have a material adverse effect on our business, results of operations and financial condition |
| Establishing and protecting our trademarks, patents and other intellectual property is costly and difficult |
| If our efforts to do so are unsuccessful, the value of our brands could suffer |
| We believe that our trademarks and other intellectual property rights are of value and are integral to our success and our competitive position |
| Some countries’ laws do not protect intellectual property rights to the same extent as do US laws |
| From time to time, we discover products in the marketplace that infringe upon our trademark, patent, copyright and other intellectual property |
| If we are unsuccessful in challenging a third party’s products on the basis of patent and trade dress rights, continued sales of such competing products by third parties could adversely impact our business, financial condition and results of operations |
| Furthermore, our efforts to enforce our trademark and other intellectual property rights are typically met with defenses and counterclaims attacking the validity and enforceability of our trademark and other intellectual property rights |
| Similarly, from time to time we may be the subject of litigation challenging our ownership of intellectual property |
| Loss of our Teva, UGG or Simple trademark, patent or other intellectual property rights could have a material adverse effect on our business |
| We face particularly strong challenges to our UGG trademark in Australia, where many Australian manufacturers sell competitive footwear on the Internet |
| Our trademark registrations in Australia are subject to challenge for non-use |
| In addition, certain Australia sheepskin boot manufacturers have asserted that the marks UGH and UGG are not valid as being generic terms for sheepskin boots |
| An administrative decision in the Australian trademark office has removed one of our Australian trademark registrations for UGH-BOOTS for non-use, and stated that “ugg, ugh and ug” are generic terms in Australia |
| However, only the Australian federal courts have jurisdiction to determine the issue |
| Our Australian registrations for UGG AUSTRALIA & Design and UGH are also being challenged for non-use, which we are contesting |
| If the challenges are successful, our rights in the trademarks, including our ability to prevent Australian competitors from using these trademarks in commerce in Australia, will be adversely affected |
| Although we derived less than 1prca of our revenue in the UGG product line from Australian sales in 2005, our ability to prevent Australian competitors from using the marks on the Internet and in other channels of trade that may reach consumers in other countries, including the US, could also be adversely affected and the integrity of our UGG brand could be harmed by the association with inferior products |
| We may lose pending litigation and the rights to certain of our intellectual property |
| We are currently involved in several disputes, including cases pending in US federal and foreign courts and in foreign trademark offices, regarding infringement by third parties of our trademarks, trade dress, copyrights, patents and other intellectual property and the validity of our intellectual property |
| Any decision or settlement in any of these disputes that renders our intellectual property invalid or unenforceable, or that allows a third party to continue to use our intellectual property in connection with products that are similar to ours could have an adverse effect on our sales and on our intellectual property, which could have a material adverse effect on our results of operations and financial condition |
| Counterfeiting of our brands can divert sales and damage our brand image |
| Our brands and designs are constantly at risk for counterfeiting and infringement of our intellectual property rights, and we frequently find counterfeit products and products that infringe on our intellectual property rights in our markets as well as domain names that use our trade names or trademarks without our consent |
| We have not always been successful, particularly in some foreign countries, in combating counterfeit products and stopping infringement of our intellectual property rights |
| Counterfeit and infringing products not only cause us to lose significant sales, but also can harm the integrity of our brands by associating our trademarks or designs with lesser quality or defective goods |
| 19 _________________________________________________________________ [68]Table of Contents In particular, we are experiencing more infringers of our UGG trademark and more counterfeit products seeking to benefit from the consumer demand for our UGG products |
| Enforcement of our rights to the UGG trademarks faces many challenges due in part to the proliferation of the term UGG in third party domain names that promote counterfeit products or otherwise use the trademark UGG without our permission |
| In spite of our enforcement efforts, we expect such unauthorized use to continue, which could result in a loss of sales for authorized UGG products and a diminution in the goodwill associated with the UGG trademarks |
| As our patents expire, our competitors will be able to copy our technology or incorporate it in their products without paying royalties |
| Patents generally have a life of 20 years from filing, and some of our patents will expire in the next ten years |
| For example, the patent for our Universal Strapping System used in many of our Teva sandals will expire in September 2007 |
| Our Universal Strapping System is currently used in many of our Teva sandals |
| Once patent protection has expired, our competitors can copy our products or incorporate our innovations in their products without paying royalties |
| To combat this, we must continually create new designs and technology, obtain patent protection and incorporate the new technology or design in our footwear |
| We cannot provide assurance that we will be able to do so |
| Sales of our Teva sandals may decline significantly if we incorporate substitute technologies in lieu of our Universal Strapping System for our Teva sandals |
| If our customers cancel existing orders, we may have excess inventory; if customers postpone delivery of existing orders to future periods, we may not achieve sales and earnings targets for the period, which could have a negative impact on our stock price |
| We receive customer orders and indications of future orders, which we use to determine which inventory items to purchase |
| We also use the timing of delivery dates in our customer orders to forecast our sales and earnings for future periods |
| If our customers cancel existing orders, it may result in lower sales, as well as excess inventories that could lead to inventory write-downs and closeouts, resulting in lower gross margin |
| The excess inventories could also have a negative impact on our cash flow |
| If customers postpone delivery of their orders, we may not achieve our expected sales and earnings forecasts for the period, which could have a negative impact on our stock price |
| Because we depend on independent manufacturers, we face challenges in maintaining a continuous supply of goods that meet our quality standards |
| We use independent manufacturers to produce all of our products, with almost all of the production occurring among four manufacturers in China |
| We depend on these manufacturers’ ability to finance the production of goods ordered and to maintain manufacturing capacity |
| The manufacturers in turn depend upon their suppliers of raw materials |
| We do not exert direct control over either the independent manufacturers or their raw materials suppliers, so we may be unable to obtain timely delivery of acceptable products |
| In addition, we do not have long-term contracts with these independent manufacturers, and any of them may unilaterally terminate their relationship with us at any time or seek to increase the prices they charge us |
| As a result, we are not assured of an uninterrupted supply of products of an acceptable quality from our independent manufacturers |
| If there is an interruption, we may not be able to substitute suitable alternative manufacturers because substitutes may not be available or they may not be able to provide us with products or services of a comparable quality, at an acceptable price or on a timely basis |
| If a change in our independent manufacturers becomes necessary, we would likely experience increased costs, as well as substantial disruption of our business and a resulting loss of sales |
| Similarly, if we experience a significant increase in demand and a manufacturer is unable to ship orders of our products in accordance with our timing demands and our quality standards, we could miss customer delivery date requirements |
| This in turn could result in cancellation of orders, customer refusals of shipments or a reduction in selling prices, any of which could have a material adverse effect on our sales and financial condition |
| We compete with other companies for the production capacity and the import quota capacity of our manufacturers |
| Accordingly, our independent manufacturers may not produce and ship some or all of any orders placed by us |
| 20 _________________________________________________________________ [69]Table of Contents If raw materials do not meet our specifications or if the prices of raw materials increase, we could experience a high return rate, a loss of sales or a reduction in our gross margins |
| Our independent manufacturers use various raw materials in the manufacture of our footwear that must meet our specifications generally and, in some cases, additional technical requirements for performance footwear |
| If these raw materials and the end product do not perform to our specifications or consumer satisfaction, we could experience a higher rate of customer returns and a diminution in the image of our brands, which could have a material adverse effect on our business, financial condition and results of operations |
| There may be significant increases in the prices of the raw materials used in our footwear, which would increase the cost of our products from our independent manufacturers |
| Our gross profit margins are adversely affected to the extent that the selling prices of our products do not increase proportionately with increases in their costs |
| Any significant unanticipated increase in the prices of raw materials could materially affect our results of operations |
| No assurances can be given that we will be protected from future changes in the prices of such raw materials |
| The costs of production and transportation of our products can increase as petroleum and other energy prices rise |
| The manufacture and transportation of our products requires the use of petroleum-based materials and energy costs |
| Any future increases in the costs of these materials and energy sources will increase the cost of our goods which will reduce our gross margin unless we can successfully raise our selling prices to compensate for the increased costs |
| Our independent manufacturers are located outside the US, where we are subject to the risks of international commerce |
| All of our current third party manufacturers are in the Far East, New Zealand and Australia with substantially all production performed by four manufacturers in China |
| Foreign manufacturing is subject to numerous risks, including the following: • tariffs, import and export controls and other non-tariff barriers such as quotas and local content rules, including the potential threat of anti-dumping duties and quotas which may be imposed by the European Union on the import of certain types of footwear from China; • increasing transportation costs due to energy prices or other factors; • poor infrastructure and shortages of equipment, which can delay or interrupt transportation and utilities; • foreign currency fluctuations; • restrictions on the transfer of funds; • changing economic conditions; • changes in governmental policies; • environmental regulation; • labor unrest, which can lead to work stoppages and interruptions in transportation or supply; • shipping delays, including those resulting from labor issues, work stoppages or other delays at the port of entry or port of departure; • political unrest, which can interrupt commerce and make travel dangerous; and • expropriation and nationalization |
| In particular, because most of our products are manufactured in China, adverse change in trade or political relations with China or political instability in the Far East could severely interfere with the manufacture of our products and could materially adversely affect our results of operations |
| Uncertainty regarding the short-term and 21 _________________________________________________________________ [70]Table of Contents long-term effects of the severe acute respiratory syndrome, or SARS, and the outbreak of avian influenza in China and elsewhere in the Far East could disrupt the manufacture and transportation of our products, which would harm our results of operations |
| We are also subject to general risks associated with managing foreign operations effectively and efficiently from the US and understanding and complying with local laws, regulations and customs in foreign jurisdictions |
| These factors and the failure to properly respond to them could make it difficult to obtain adequate supplies of quality products when we need them, resulting in reduced sales and harm to our business |
| Our business could suffer if our independent manufacturers, designated suppliers or our licensees violate labor laws or fail to conform to our ethical standards |
| We require our independent contract manufacturers, designated suppliers and our licensees to meet our standards for working conditions, environmental compliance, human rights and other matters before we are willing to place business with them |
| We do not control our independent manufacturers, designated suppliers or their respective labor practices |
| If one of our independent contract manufacturers or designated suppliers violates our labor standards by, for example, using convicted, forced or indentured labor or child labor, fails to pay compensation in accordance with local law or fails to operate its factories in compliance with local safety or environmental standards, we likely would immediately cease dealing with that manufacturer or supplier, and we could suffer an interruption in our product supply chain |
| In addition, the manufacturers’ or designated suppliers’ actions could damage our reputation and the value of our brands, resulting in negative publicity and discouraging customers and consumers from buying our products |
| Similarly, we do not control our licensees or any of their suppliers or their respective labor practices |
| If one of our licensees violates our labor standards or local laws, we would immediately terminate the license agreement, which would reduce our license revenue |
| In addition, the licensee’s actions could damage our reputation and the value of our brands |
| If our licensing partners are unable to meet our expectations regarding the quality of their products or the conduct of their business, the value of our brands could suffer |
| One element of our growth strategy depends on our ability to successfully enter into and maintain license agreements with manufacturers and distributors of products in complementary categories |
| We will be relying on our licensees to maintain our standards with their manufacturers in the future, and any failure to do so could harm our reputation and the value of the licensed brand |
| The interruption of the business of any one of our material licensing partners due to any of the factors discussed immediately below could also adversely affect our future licensing sales and net income |
| The risks associated with our own products will also apply to our licensed products in addition to any number of possible risks specific to a licensing partner’s business, including, for example, risks associated with a particular licensing partner’s ability to: • obtain capital; • manage manufacturing and product sourcing activities; • manage labor relations; • maintain relationships with suppliers; • manage credit risk effectively; and • maintain relationships with customers |
| Our licensing agreements generally do not preclude our licensing partners from offering, under other brands, products similar to those covered by their license agreements with us, which could reduce the sales of our licensed products |
| In addition, if we cannot replace existing licensing partners who fail to perform adequately, our net sales, both directly from reduced licensing revenue and indirectly from reduced sales of our other products, will suffer |
| 22 _________________________________________________________________ [71]Table of Contents If our brand managers cannot properly manage the licensees of their respective brands, our growth strategy could be impaired |
| Our growth strategy and future profits depend upon each of our brand managers finding and successfully managing licensees for each of their respective brands |
| Our brand managers may not be able to successfully implement the licensing aspect of our growth strategy and to develop and manage profitable license arrangements |
| We compete for opportunities to license our brands with other companies who have greater resources than we do and who may have more valuable brands and more licensing experience than we do |
| As a result, even if we do identify a suitable licensee, we may lose the opportunity to a competitor |
| Our brand managers’ failure to execute our licensing strategy successfully could negatively impact our results from operations |
| We may be unable to successfully identify, develop or acquire, and build new brands |
| We intend to continue to focus on identifying, developing or acquiring and building new brands |
| Our search may not yield any complementary brands, and even if we do find a suitable brand we may not be able to obtain sufficient financing to fund the development or acquisition of the brand |
| We may not be able to successfully integrate the management of a new brand into our existing operations, and we cannot assure you that any developed or acquired brand will achieve the results we expect |
| We compete with other companies who have greater resources than we do for the opportunities to license brands or buy other brands |
| As a result, even if we do identify a suitable license or acquisition, we may lose the opportunity to a competitor who offers a more attractive price |
| In such event, we may incur significant costs in pursuing a license or an acquisition without success |
| Our quarterly sales and operating results may fluctuate in future periods, and if we fail to meet expectations the price of our common stock may decline |
| Our quarterly sales and operating results have fluctuated significantly in the past and are likely to do so in the future due to a number of factors, many of which are not within our control |
| If our quarterly sales or operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially |
| Factors that might cause quarterly fluctuations in our sales and operating results include the following: • variation in demand for our products, including variation due to changing consumer tastes and seasonality; • our ability to develop, introduce, market and gain market acceptance of new products and product enhancements in a timely manner; • our ability to manage inventories, accounts receivable and cash flows; • our ability to control costs; • the size, timing, rescheduling or cancellation of orders from customers; • the introduction of new products by competitors; • the availability and reliability of raw materials used to manufacture our products; • changes in our pricing policies or those of our independent manufacturers and competitors, as well as increased price competition in general; • the mix of our domestic and international sales, and the risks and uncertainties associated with our international business; • our ability to forecast future sales and operating results and subsequently attain them; • developments concerning the protection of our intellectual property rights; and • general global economic and political conditions, including international conflicts and acts of terrorism |
| In addition, our expenses depend, in part, on our expectations regarding future sales |
| In particular, we expect to continue incurring substantial expenses relating to the marketing and promotion of our products |
| Since many of our costs are fixed in the short term, if we have a shortfall in sales, we may be unable to reduce expenses quickly enough 23 _________________________________________________________________ [72]Table of Contents to avoid losses |
| Accordingly, you should not rely on quarter-to-quarter comparisons of our operating results as an indication of our future performance |
| Loss of the services of our key personnel could adversely affect our business |
| Our future success and growth depend on the continued services of Doug Otto, our Chairman of the Board, Angel Martinez, our Chief Executive Officer and President, Connie Rishwain, the President of the UGG and Simple Divisions, Pat Devaney, Senior Vice President of Global Sourcing, Production and Development, Colin Clark, Senior Vice President, International, Janice Howell, Vice President of Operations, and John Kalinich, Vice President of Consumer Direct, as well as other key officers and employees |
| The loss of the services of any of these individuals or any other key employee could materially affect our business |
| Our Chief Financial Officer, Scott Ash, has announced his intent to depart the Company and we are in the market to hire a successor |
| Our future success depends on our ability to identify, attract and retain additional qualified personnel and to identify and hire suitable replacements for departing employees in key positions on a timely basis |
| Competition for employees in our industry is intense and we may not be successful in attracting or retaining them |
| We conduct business outside the US, which exposes us to foreign currency and other risks |
| Our products are manufactured outside the US, and our independent manufacturers procure most of their supplies outside the US We sell our products in the US and internationally |
| Although we pay for the purchase and manufacture of our products primarily in US dollars and we sell our products primarily in US dollars, we are routinely subject to currency rate movements on non-US denominated assets, liabilities and income since our foreign distributors sell in local currencies, which impacts the price to foreign customers |
| We currently do not use currency hedges since substantially all our transactions are in US dollars |
| Future changes in foreign currency exchange rates may cause changes in the dollar value of our purchases or sales and materially affect our results of operations |
| The People’s Republic of China has recently revalued its currency and abandoned its peg to the US dollar |
| We currently source substantially all production from China |
| While our purchases from the Chinese factories are currently denominated in US dollars, certain operating and manufacturing costs of the factories are denominated in the Chinese currency |
| As a result, this change or any further revaluations in the Chinese currency versus the US dollar could impact our purchase prices from the factories in the event that they adjust their selling prices accordingly |
| Any increase in our footwear purchase costs will reduce our gross margin unless we are able to raise our selling prices to our customers in order to compensate for the increased costs |
| Our most popular products are seasonal, and our sales are sensitive to weather conditions |
| Sales of our products, particularly those under the Teva and UGG brands, are highly seasonal and are sensitive to weather conditions |
| Extended periods of unusually cold weather during the spring and summer can reduce demand for Teva footwear |
| Likewise, unseasonably warm weather during the fall and winter months may reduce demand for our UGG products |
| The effect of favorable or unfavorable weather on sales can be significant enough to affect our quarterly results, with a resulting effect on our common stock price |
| We depend on independent distributors to sell our products in international markets |
| We sell our products in international markets through independent distributors |
| If a distributor fails to meet annual sales goals, it may be difficult and costly to locate an acceptable substitute distributor |
| If a change in our distributors becomes necessary, we may experience increased costs, as well as substantial disruption and a resulting loss of sales |
| 24 _________________________________________________________________ [73]Table of Contents Our sales in international markets are subject to a variety of laws and political and economic risks that may adversely impact our sales and results of operations in certain regions |
| Our ability to capitalize on growth in new international markets and to maintain the current level of operations in our existing international markets is subject to risks associated with international sales operations |
| These include: • changes in currency exchange rates which impact the price to international consumers; • the burdens of complying with a variety of foreign laws and regulations; • unexpected changes in regulatory requirements; and • the difficulties associated with promoting products in unfamiliar cultures |
| We are also subject to general political and economic risks in connection with our international sales operations, including: • political instability; • changes in diplomatic and trade relationships; and • general economic fluctuations in specific countries or markets |
| Any of the abovementioned factors could adversely affect our sales and results of operations in international markets |
| International trade 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 the products |
| 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 generally make it difficult to obtain products of our customary quality at a desired 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 to our market countries at preferred rates of duty, though we are uncertain precisely what effect these new agreements may have on our operations |
| The European Union is currently considering imposing anti-dumping duties and quotas on importations of certain types of footwear from China |
| Any increase in duties or the requirement for quotas will increase the cost of our products and may limit the amount of China-sourced products that we are able to sell to the European market |
| Because the vast majority of our footwear is currently produced in China, the imposition of anti-dumping duties or quotas on products manufactured in China will have a negative impact on our sales and gross margin in the European market |
| Finally, the increased threat of terrorist activity and the 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 |
| We depend on our computer and communications systems |
| We extensively utilize computer and communications systems to operate our Internet and catalog business and manage our internal operations |
| Any interruption of this service from power loss, telecommunications failure, 25 _________________________________________________________________ [74]Table of Contents failure of our computer system, failure due to weather, natural disasters or any similar event could disrupt our operations and result in lost sales |
| In addition, hackers and computer viruses have disrupted operations at many major companies |
| We may be vulnerable to similar acts of sabotage, which could have a material adverse effect on our business and operations |
| We rely on our management information systems to operate our business and to track our operating results |
| Our management information systems will require modification and refinement as we grow and our business needs change |
| If we experience a significant system failure or if we are unable to modify our management information systems to respond to changes in our business needs, then our ability to properly run our business could be adversely affected |
| Risks Related to Our Industry Because the footwear market is sensitive to decreased consumer spending and slow economic cycles, if general economic conditions deteriorate many of our customers may significantly reduce their purchases from us or may not be able to pay for our products in a timely manner |
| The footwear industry historically has been subject to cyclical variation and decline in performance when consumer spending decreases or softness appears in the retail market |
| Many factors affect the level of consumer spending in the footwear industry, including: • general business conditions; • interest rates; • the availability of consumer credit; • weather; • taxation; and • consumer confidence in future economic conditions |
| Consumer purchases of discretionary items, including our products, may decline during recessionary periods and also may decline at other times when disposable income is lower |
| A downturn in economies where our licensing partners or we sell products, whether in the US or abroad, may reduce sales |
| In addition, we extend credit to our customers based on an evaluation of each customer’s financial condition |
| Many retailers, including some of our customers, have experienced financial difficulties during the past several years, thereby increasing the risk that such customers may not be able to pay for our products in a timely manner |
| Our bad debt expense may increase relative to net sales in the future |
| Any significant increase in our bad debt expense relative to net sales would adversely impact our net income and cash flow and could affect our ability to pay our own obligations as they become due |
| We face intense competition, including competition from companies with significantly greater resources than ours, and if we are unable to compete effectively with these companies, our market share may decline and our business could be harmed |
| The footwear industry is highly competitive, and the recent growth in the market for sport sandals, casual footwear and other products manufactured by our licensees has encouraged the entry of many new competitors into the marketplace as well as increased competition from established companies |
| A number of our competitors have significantly greater financial, technological, engineering, manufacturing, marketing and distribution resources than we do, as well as greater brand awareness in the footwear market |
| Our competitors include athletic and footwear companies, branded apparel companies and retailers with their own private labels |
| Their greater capabilities in these areas may enable them to better withstand periodic downturns in the footwear industry, compete more effectively on the basis of price and production and more quickly develop new 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 industry |
| Additionally, efforts by our competitors to dispose of their excess inventories may significantly reduce prices that we can expect to receive for the sale of our competing products and may cause our customers to shift their purchases away from our products |
| 26 _________________________________________________________________ [75]Table of Contents We believe that our ability to compete successfully depends on a number of factors, including the quality, style and authenticity of our products and the strength of our brands, as well as many factors beyond our control |
| Maintaining our competitiveness depends on our ability to defend our products from infringement, our continued ability to anticipate and react to consumer tastes and our continued ability to deliver quality products at an acceptable price |
| If we fail to compete successfully in the future, our sales and profits will decline, as will the value of our business, financial condition and common stock |
| Consolidations, restructurings and other ownership changes in the retail industry could affect the ability of our wholesale customers to purchase and market our products |
| In the future, retailers in the US and in foreign markets may undergo changes that could decrease the number of stores that carry our products or increase the concentration of ownership within the retail industry, including: • consolidating their operations; • undergoing restructurings; • undergoing reorganizations; or • realigning their affiliations |
| These consolidations could result in a shift of bargaining power to the retail industry and in fewer outlets for our products |
| Further consolidations could result in price and other competition that could reduce our margins and our net sales |
| Terrorism, government response to terrorism and other world events could affect our ability to do business |
| We market and sell our products and services throughout the world |
| World events, including the threat of similar attacks in the future, and the impact of the US’s military campaigns may cause significant disruption to commerce throughout the world |
| We are unable to predict whether the threat of new attacks or the resulting response will result in any long-term commercial disruptions or do long-term harm to our business, results of operations or financial condition |
| To the extent that future disruptions further slow the global economy or, more particularly, result in delays or cancellations of purchase orders for our products or delays in shipping, our business and results of operations could suffer material damage |
| Risks Relating to Our Common Stock Members of management own sufficient shares to substantially control our company |
| At February 28, 2006, Doug Otto beneficially owned approximately 12dtta7prca of our common stock and all of our executive officers and directors as a group beneficially owned approximately 15dtta4prca |
| The ownership positions of Mr |
| Otto and our executive officers as a group, together with the anti-takeover effects of the Delaware General Corporation Law and provisions of our certificate of incorporation, our bylaws and our stockholder rights plan, would likely delay, defer or prevent a change in control of our company, may deprive our stockholders of an opportunity to receive a premium for their common stock as part of a change in control and could have a negative effect on the market price of our common stock |
| Our common stock price has been volatile, which could result in substantial losses for stockholders |
| Our common stock is traded on the NASDAQ National Market |
| While our average daily trading volume for the 52-week period ended February 24, 2006 was approximately 546cmam000 shares, we have experienced more limited volume in the past and may do so in the future |
| The trading price of our common stock has been and may continue to be volatile |
| The closing sale prices of our common stock, as reported by the NASDAQ National Market, have ranged from dlra17dtta15 to dlra41dtta07 for the 52-week period ended February 24, 2006 |
| 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; • changes in estimates by securities analysts (or failure to meet such estimates); • quarterly fluctuations in our sales and financial results; 27 _________________________________________________________________ [76]Table of Contents • broad market fluctuations in volume and price; and • a variety of risk factors, including the ones described elsewhere in this report |
| Accordingly, the price of our common stock is volatile and any investment in our securities is subject to risk of loss |
| Future sales of our common stock could adversely affect our stock price |
| Future sales of substantial amounts of shares of our common stock by the Company in the public market, or the perception that these sales could occur, may cause the market price of our common stock to decline |
| In addition, we may be required to issue additional shares upon exercise of previously granted options that are currently outstanding |
| Anti-takeover provisions of our certificate of incorporation, bylaws, stockholder rights plan and Delaware law could prevent or delay a change in control of our company, even if such a change of control would benefit our stockholders |
| Provisions of our certificate of incorporation and bylaws, as well as provisions of Delaware law, could discourage, delay or prevent a merger, acquisition or other change in control of our company, even if such a change in control might benefit our stockholders |
| These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions |
| As a result, these provisions could limit the price that investors are willing to pay in the future for shares of our common stock |
| These provisions might also discourage a potential acquisition proposal or tender offer, even if the acquisition proposal or tender offer is at a price above the then current market price for our common stock |
| These provisions include the following: • a board of directors that is classified so that only one-third of directors stand for election each year; • authorization of “blank check” preferred stock, which our board of directors could issue with provisions designed to thwart a takeover attempt; • limitations on the ability of stockholders to call special meetings of stockholders; • a prohibition against stockholder action by written consent and a requirement that all stockholder actions be taken at a meeting of our stockholders; and • advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings |
| We adopted a stockholder rights plan in 1998 under a stockholder rights agreement intended to protect stockholders against unsolicited attempts to acquire control of our company that do not offer what our board of directors believes to be an adequate price to all stockholders or that our board of directors otherwise opposes |
| As part of the plan, our board of directors declared a dividend that resulted in the issuance of one preferred share purchase right for each outstanding share of our common stock |
| Unless extended, the preferred share purchase rights will terminate on November 11, 2008 |
| If a bidder proceeds with an unsolicited attempt to purchase our stock and acquires 20prca or more (or announces its intention to acquire 20prca or more) of our outstanding stock, and the board of directors does not redeem the preferred stock purchase right, the right will become exercisable at a price that significantly dilutes the interest of the bidder in our common stock |
| The effect of the stockholder rights plan is to make it more difficult to acquire our company without negotiating with the board of directors |
| However, the stockholder rights plan could discourage offers even if made at a premium over the market price of our common stock, and even if the stockholders might believe the transaction would benefit them |
| In addition, we are subject to Section 203 of the Delaware General Corporation Law, which limits business combination transactions with 15prca or greater stockholders that our board of directors has not approved |
| These provisions and other similar provisions make it more difficult for a third party to acquire us without negotiation |
| These provisions apply even if some stockholders would consider the transaction beneficial |