What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-26 compared with 2023-02-23 · 152 added, 142 removed, 268 unchanged (52% of the section changed)

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", Part I, Item 1 and Item 1A of this Annual Report on Form 10-K.

In addition, refer to Part II, Item 7 in our Annual Report on Form 10-K for the year ended December 31, 2021 for our discussion and analysis comparing financial condition and results of operations from 2021 to 2020.

We connect active people with their passions.

We are a global leader in designing, developing, marketing, and distributing outdoor, active and lifestyle products.

We manage these products in two categories:

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.

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 well-known brands:

We provide our products through our four brands:

Columbia, SOREL, Mountain Hardwear, and prAna.

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Footwear products are provided by our Columbia and SOREL brands.

We sell our products in approximately 90 countries and operate in four geographic segments:

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:

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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.

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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;

• 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

Economic Environment Impacting Consumer Spending Ability and Preferences | In 2022, we believe inflationary pressures, rising interest rates and recessionary fears began to impact wholesale customer behavior.

We expect consumer discretionary spending to be under pressure in 2023 and are preparing for the potential of a mild recession in the second half of 2023.

Elevated Inflationary Pressures | Inflationary pressures, including inbound and outbound freight, raw materials, labor, and product input costs, impacted our 2022 results.

We implemented product price increases for our Spring 2022 season and, to a greater extent, for our Fall 2022 and Spring 2023 seasons.

Price increases varied by market and product category.

In the U.S., on average, we increased pricing by a mid-single digit percent for our Spring 2022 product line, by a high-single to low-double-digit percent for our Fall 2022 product line, and by a high-single to low double-digit percent for our Spring 2023 product line.

Although price increases were not expected to fully offset gross margin pressure in 2022, in the fourth quarter of 2022, we began to experience lower inbound freight costs which we expect will benefit gross margin beginning in 2023.

We do not expect to implement meaningful product price increases as we begin to see the benefit of these lower costs.

Strengthening U.S.

Dollar | The rapid strengthening of the U.S.

dollar relative to major foreign currencies unfavorably impacted our results in 2022.

The impact of unfavorable foreign currency translation is anticipated to continue to unfavorably impact net sales and profitability through at least the first half of 2023 before shifting to a favorable impact in the second half of 2023.

Heightened Geopolitical Environment | Geopolitical tensions throughout the globe escalated in 2022 as a result of the invasion of Ukraine by Russia and other actions.

We believe these geopolitical tensions will remain elevated and have the potential to manifest themselves in certain regions where we directly operate.

Increased Freight Charges | In the first nine months of 2022, we experienced elevated ocean freight costs as a result of price increases stemming from an imbalance of supply and demand for steamship and ocean container capacity.

As a result, these costs have had a substantially unfavorable impact on our gross margin.

In the fourth quarter of 2022, we experienced significant declines in ocean freight prices.

We anticipate these lower ocean freight prices to persist into 2023.

Later Inventory Receipts | During the third quarter of 2021, several weeks of government mandated factory closures in Vietnam disrupted our manufacturing partners' operations and impacted production of product.

As a result of these and other supply chain disruptions that impacted the market, we received Fall 2021, Spring 2022 and Fall 2022 inventory later than expected and realized much higher than normal cancellations of Spring 2022 and Fall 2022 orders from our wholesale customers.

Spring 2023 inventory production and logistics transit times are improving markedly and are expected to be more in-line with our historical experience, assuming no material downturn in port and railroad labor relations.

COVID-19 Impacts in China | Throughout 2022, the efforts to control the spread of COVID-19 in China severely impacted the operations of our business in China.

For most of the second quarter of 2022, government efforts to control the spread of COVID-19 in China disrupted our distribution center's operations, which resulted in an inability to fulfill e-commerce, wholesale and owned DTC stores orders in China.

In the third and fourth quarter of 2022, similar restrictions impacted various aspects of our business, including the operation of DTC stores in China, as well as stores operated by our wholesale customers.

Upon the change in China's zero-COVID policy in early December 2022, increased COVID-19 infections negatively impacted business performance.

However, these impacts eased quickly and our business in China is rebounding.

Elevated Inventories | Strong consumer demand in 2021 and the first quarter of 2022 coupled with ongoing supply chain constraints resulted in a shortage of inventory in the marketplace.

By the end of the second quarter of 2022, the arrival of long-delayed orders at retailers and a slowing of consumer demand resulted in excess inventory in the marketplace.

With higher marketplace inventories and a rapidly changing economic environment, retailers rationalized their inventory needs and demonstrated a more conservative approach to inventory management.

As a result of the foregoing and the later inventory receipts previously discussed, we experienced increased order cancellations for Spring 2022 and Fall 2022 orders.

Due to our elevated inventory positions, we have adjusted future inventory purchases and are utilizing our outlet stores to profitability sell a portion of our excess inventory.

We expect our inventory position to normalize in the latter half of 2023.

Increased U.S.

Distribution Center Capacity Pressure | Elevated inventory levels combined with uneven flow of inventory receipts and shipments are resulting in storage and process capacity pressures within our U.S.

distribution centers and third-party logistics operations.

We began to experience these pressures as we received Fall 2022 inventory and expect this trend to continue well into 2023.

We expect to incur

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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additional inventory carrying costs in 2023 as a result of additional costs for outside storage, and other inventory related holding costs, as we look to normalize our inventory position.

Talent Market and Wage Rate Pressures | Labor costs have risen in an effort to retain and compete for employees.

We have made certain wage adjustments in an effort to be more competitive in the current environment.

However, we anticipate rising costs to continue into 2023 resulting from the continued competition for talent.

Changes in Promotional Environment | In the first half of 2022, we operated in a low promotional environment and experienced fewer sales returns and customer accommodations than we have historically.

Near the end of the third quarter of 2022, an increase in promotional activity began to unfavorably impact our DTC product margins compared to the same period in the prior year in which promotions were exceptionally low.

With elevated marketplace inventory, we anticipate the promotional environment and less favorable trading terms to continue into 2023.

Increased Outdoor Participation by Consumers | The COVID-19 pandemic drew a record number of individuals in the United States to spend an increased amount of time outside, including participating in outdoor recreational activities.

While outdoor participation rates may not be maintained, we believe that our addressable consumer base worldwide has been expanded and expect outdoor participation to remain elevated in comparison to pre-pandemic levels.

Changing Consumer Expectations | Consumer behavior continues to fluctuate.

Consumer expectations and the related competitive pressures have increased and continue to increase relative to various aspects of our e-commerce business, including speed of product delivery, shipping charges, return privileges and other evolving expectations.

We maintain and continue to make substantial investments in information systems, processes and personnel to support our ongoing demand planning efforts to provide forecasting of optimal inventory to meet customer and consumer demands.

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 2022, over 60% of our net sales and over 75% of our operating income were realized in the second half of 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

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Interest income, net 13.7 0.4 % 2.7 0.1 %

Other non-operating income (expense), net 1.6 0.1 (0.4) —

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 %

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Diluted earnings per share $ 4.09 $ 4.95

COLUMBIA SPORTSWEAR COMPANY | 2023 FORM 10-K | 23

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

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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.

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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Overall, our global net sales increase reflected higher shipments of Spring 2022 and Fall 2022 wholesale orders and higher consumer demand in our DTC business.

Retailers generally exited 2021 with lower than optimal inventory levels which contributed to the increased Spring 2022 and Fall 2022 wholesale demand to replenish inventory and fulfill anticipated consumer demand.

In addition, consumer demand in our DTC business remained healthy throughout the year as consumer traffic levels recovered in our DTC stores and positive e-commerce trends were sustained.

In 2022, our global DTC e-commerce net sales grew 8% and represented 18% of our global net sales.

In 2021, DTC e-commerce net sales grew 20% and represented 18% of our global net sales.

Columbia and SOREL brand net sales benefited from favorable late season cold weather product sales in the first quarter of 2022.

Columbia brand net sales continued to experience broad-based growth across all channels, product categories, and regions.

In the fourth quarter of 2022, SOREL, Mountain Hardwear and prAna net sales were unfavorably impacted from wholesale order cancellations resulting from supply chain disruptions and retailer cautiousness, as well as lower consumer demand.

Our global net sales increase was tempered by unfavorable impacts from changes in foreign currency exchange rates.

Gross Profit.

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Gross margin 49.6 % 49.4 % 20 bps

Gross margin contracted primarily due to the following factors:

• an approximate 180 bps decrease related to elevated inbound freight costs;

• unfavorable channel and regional net sales shifts primarily due to a higher mix of wholesale sales which typically carry a lower margin compared to DTC sales.

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.

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Selling, general and administrative expenses as percent of net sales 40.6 % 37.7 % 290 bps

SG&A expense growth reflects expenses to support the growth of our business, inflationary pressures, and investments to drive our brand-led consumer-focused strategies.

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 personnel expenses of $39.8 million, reflecting increased headcount to support business growth, as well as annual merit and other wage rate increases;

• increased demand creation spending of $21.0 million, including higher spending aligned with sales growth;

• higher global retail expenses associated with sales growth and the impact of new stores;

• higher information technology related expenses;

• higher outside storage and third-party logistics expenses;

partially offset by

• lower incentive compensation expense.

• 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;

• 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 the goodwill attributable to the prAna business.

For the year ended December 31, 2021, there were no impairment charges recorded for goodwill and intangible assets with indefinite lives.

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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:

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 %

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.

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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, 2022, our effective income tax rate was primarily impacted by a non-recurring benefit related to the finalization of U.S.

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.

For the year ended December 31, 2021, our effective income tax rate was primarily impacted by a decrease in accrued foreign withholding taxes and a non-recurring benefit related to common stock benefits.

Results of Operations — Segment

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See "Non-GAAP Financial Measure" above for further information.

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

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Operating income $ 310.3 $ 393.1 $ (82.8)

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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 increased net sales, more than offset by decreased gross margin.

net sales increased $241.9 million, or 12%, in 2022, compared to 2021.

net sales increased across all channels, product categories, and most brands, led by increased net sales for our Columbia and SOREL brands.

Increased U.S.

wholesale net sales were driven by increased consumer demand and shipment of higher Spring 2022 and Fall 2022 orders compared to shipment of 2021 season orders in the prior year, partially offset by increased order cancellations in the second half of 2022.

DTC net sales increased from sales growth generated from our retail stores and e-commerce business.

gross margin decreased primarily due to elevated inbound freight costs.

The decrease was driven primarily by decreased net sales and increased SG&A expenses.

net sales decreased $60.8 million, or 3%, in 2023, compared to 2022.

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.

SG&A expenses increased as a percentage of net sales to 27.7% in 2022 compared to 26.7% for 2021.

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 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 $8.4 million, or 2% (13% constant-currency), in 2022, compared to 2021, primarily in our LAAP distributor business.

LAAP net sales increased due to higher shipment of Fall 2022 orders compared to shipment of Fall 2021 orders, earlier shipment of Spring 2023 orders compared to shipment of Spring 2022 orders, and higher consumer demand as we lapped prior year restrictions to prevent the spread of COVID-19 in Japan.

These increases were partially offset by unfavorable impacts from changes in foreign currency exchange rates and government efforts to control the spread of COVID-19 in China.

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 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.

EMEA net sales increased $56.5 million, or 15% (26% constant-currency), in 2022, compared to 2021, driven by increased net sales in our Europe-direct and EMEA distributor businesses.

Europe-direct net sales increased primarily due to higher consumer demand, partially offset by unfavorable impacts from changes in foreign currency exchange rates.

EMEA distributor net sales increased primarily due to higher shipments of Fall 2022 orders compared to shipment of Fall 2021 orders and earlier shipment of Spring 2023 orders compared to shipment of Spring 2022 orders.

EMEA SG&A expenses decreased as a percentage of net sales to 26.1% in 2022 compared to 28.0% in 2021.

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 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 $31.0 million, or 14% (19% constant-currency), in 2022, compared to 2021, primarily driven by increased net sales in our Canada DTC and wholesale businesses.

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.

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Unallocated Corporate Expenses

Unallocated corporate expenses increased by $60.7 million to $306.9 million in 2022 from $246.2 million in 2021, largely driven by prAna impairment charges of $35.6 million, higher personnel expenses and technology related expenses, partially offset by lower incentive compensation.

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 $935 million in total liquidity as of December 31, 2022.

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.

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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

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Net decrease in cash and cash equivalents $ (79.9) $ (333.1) $ 253.2

The change in cash flows used in operating activities was driven by a $388.1 million increase in cash used in changes in assets and liabilities, partially offset by a $8.5 million increase 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, Accrued liabilities, Accounts payable, Accounts receivable, net , and Operating lease assets and liabilities .

The $299.6 million increase in cash used in Inventories was driven by an increase in inventory purchases in anticipation of sales growth, temporary store closures due to government efforts to control the spread of COVID-19 in China, supply chain disruptions, and higher than initially planned wholesale order cancellations.

The $45.8 million decrease in cash provided by Accrued liabilities was primarily driven by changes in accruals for incentive compensation.

The $35.1 million decrease in cash provided by Accounts payable primarily resulting from the effects of reduced in-transit inventory compared to 2021.

The $32.9 million increase in cash used in Accounts receivable, net was primarily driven by growth in wholesale sales, partially offset by an increase in collections.

These amounts were partially offset by the $22.4 million decrease in cash used in Operating lease assets and liabilities , which was primarily due to payment of non-recurring deferred rents and lease termination fees in 2021.

Net cash provided by investing activities was $72.7 million for 2022, compared to net cash used in investing activities of $163.8 million for 2021.

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.

For 2021, net cash used in investing activities consisted of $129.1 million in net purchases of short-term investments and $34.7 million 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 2021, net cash used in financing activities primarily consisted of repurchases of common stock of $165.4 million and dividend payments to our shareholders of $68.6 million, partially offset by net proceeds from the issuance of common stock related to share-based compensation of $23.0 million.

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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

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There was no balance outstanding under the facility.

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Other Sources

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Inventory balances may be elevated in advance of periods of expected high demand.

As of December 31, 2022, our inventory balance increased to $1,028.5 million, compared to $645.4 million as of December 31, 2021.

Unrealized projected sales growth for Fall 2022 and earlier receipts of Spring 2023 product resulted in higher inventory levels.

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.

To align inventory levels more closely with anticipated demand, we have adjusted future inventory purchases and we are leveraging our outlet stores to sell excess merchandise.

We expect inventory to remain elevated into the second half of 2023 as we carry forward inventory into future seasons, balancing reducing inventory levels with maintaining profitability.

We have planned 2024 capital expenditures of approximately $60 to $80 million.

This includes investments in our DTC operations, including new stores, U.S.

distribution projects to increase efficiency and expand storage, and digital and supply chain capabilities to support our strategic priorities.

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 market conditions and our strategic priorities, our capital allocation approach includes:

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;

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Management uses free cash flow as a measure to assess both business performance and overall liquidity.

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Other cash commitments

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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 estimates and judgments that affect reported amounts of assets, liabilities, sales, cost of sales, and expenses and related disclosure of contingent assets and liabilities.

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.

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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 net sales levels.

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 most susceptible component of our sales related to reserves to estimation uncertainty.

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' net inventory positions and their anticipated sell-through rates.

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.

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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.

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Allowance for Uncollectible Accounts Receivable

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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 decreased to $5.4 million as of December 31, 2022 compared to $8.9 million as of December 31, 2021.

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.

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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 such a determination.

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, 2022 increased reflecting both higher total inventory and unsold inventory levels partially offset by an improvement in the aging of unsold inventory.

Impairment of Long-Lived Assets, Intangible Assets and Goodwill

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.

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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.

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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.

In our 2022 impairment test, 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 reducing the carrying value to $51.8 million.

The decline in estimated fair value from the fourth-quarter 2021 impairment

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test reflects a decline in forecasted revenue, a lower estimated royalty rate, and a slightly higher discount rate.

As part of our 2020 annual impairment test, we previously re cognized a $17.5 million impairment of p rAna’s trademark.

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.

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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 2021 impairment test reflects lower assumed revenue and operating income lev els, w hile the weighted average costs of capital used in the discounted cash flow model remained relatively unchanged.

Our impairment tests and related fair value estimates are based on a number of factors, including assumptions and estimates for projected sales, income, cash flows, discount rates, market-based multiples, and other operating performance measures.

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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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.

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

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis