Item 1A. Risk Factors
ITEM 1A RISK FACTORS
Except as disclosed below, there have been no material changes that have occurred related to our risk factors since the end of the most recent fiscal year. For further information, see Part I, Item 1A of our Annual Report on Form 10-K for the year ended January 30, 2021.
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We rely primarily on international sources of production, which subjects our business to risks associated with international trade.
We rely primarily on international sourcing for our footwear products through third-party manufacturing facilities located outside the United States. As is common in the industry, we do not have any long-term contracts with our third-party international manufacturers. International sourcing is subject to numerous risks, including trade relations, work stoppages, transportation delays (including delays at international and domestic ports) and costs (including customs duties, quotas, tariffs, anti-dumping duties, safeguard measures, cargo restrictions or other trade restrictions), domestic and international political instability, foreign currency fluctuations, variable economic conditions, expropriation, nationalization, natural disasters, terrorist acts and military conflict, changes in governmental regulations (including the U.S. Foreign Corrupt Practices Act) and geo-political events.
During 2021, we have experienced supply chain disruptions, port congestion and inflationary pressures, leading to delays in the receipt of inventory and significantly higher freight costs. Our in-transit inventory, which is not yet available to sell, has risen significantly as compared to historical levels. Depending on the timing of receipt of this inventory, certain customers may request price concessions or choose to cancel their orders altogether, which may negatively impact gross margins. If we are unable to sell this inventory as planned, we may have to liquidate it through other less profitable channels, which may result in a lower gross margin on those products. In addition, the extent and duration of these supply chain disruptions and inflationary cost pressures are uncertain and may limit our ability to meet incremental consumer demand, potentially impacting our net sales during the fourth quarter of 2021 and into 2022. While we are actively working to mitigate these cost pressures and recover our increased costs through price increases, there is no guarantee that we will be successful doing so.
In addition, the imposition of tariffs or other costs on imported products may result in an increase in product prices, which may in turn adversely impact our gross margins if we are unable to mitigate the impact of the costs. There is also uncertainty surrounding the impact of any changes to trade legislation as a result of the shift in the U.S. presidential administration and control of the U.S. Congress. At the same time, potential changes in manufacturing preferences, including, but not limited to the following, pose additional risk and uncertainty:
• Manufacturing capacity may shift from footwear to other industries with manufacturing margins that are perceived to be higher.
• Some footwear manufacturers may face labor shortages as workers seek better wages and working conditions in other industries and locations.
As a result of these risks, there can be no assurance that we will not experience reductions in available production capacity, increases in our product costs, late deliveries or terminations of our supplier relationships. Furthermore, these sourcing risks are compounded by the lack of diversification in the geographic location of our international sourcing and manufacturing. With the majority of our supply originating in China, a substantial portion of our supply could be at risk in the event of any significant negative development related to relations between United States and China.
Although we believe we could find alternative manufacturing sources for the products that we currently source from third-party manufacturing facilities in China or other countries, we may not be able to locate alternative manufacturers on terms as favorable as our current terms, including pricing, payment terms, manufacturing capacity, quality standards and lead times for delivery. In addition, there is substantial competition in the footwear industry for quality footwear manufacturers. Accordingly, our future results will partly depend on our ability to maintain positive working relationships with, and offer competitive terms to, our international manufacturers. If supply issues cause us to be unable to provide products consistent with our standards or manufacture our footwear in an efficient and cost-effective manner, our customers may cancel orders, or demand reductions in purchase prices, any of which could have a material adverse effect on our business and results of operations.
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