Item 1A. Risk Factors
ITEM 1A. RISK FACTORS
The outbreak of COVID-19 has had, and may continue to have, a negative impact on the global economy and on our business, operations, or financial results.
The novel strain of coronavirus (COVID-19) first identified in Wuhan, China in December 2019 has now spread to nearly all regions around the world. The outbreak, and measures taken to contain or mitigate it, have had dramatic adverse consequences for the economy, including on demand, operations, supply chains, and financial markets. The nature and scope of the consequences to date are difficult to evaluate precisely, and their future course is impossible to predict with confidence.
The COVID-19 crisis has already had several significant effects on our business and our financial condition, including the impact of the pandemic on the economies and financial markets of the regions in which we operate. "Shelter in place” and other similar mandated or suggested isolation protocols have disrupted third-party retail stores in our Wholesale channel and company-owned stores in our Direct channel, via store closures or reduced operating hours in the U.S. and around the world, which has decreased retail traffic and which also, in turn, decreased sales of our products in March and April when COVID-19 began materially impacting our North America business segment.
At this time, most third-party retail stores and our company-owned stores have reopened. However, we cannot reasonably estimate the length of time these stores will remain open, or if they will be mandated to close again as the COVID-19 crisis continues to evolve. The inability to sell our products through the Wholesale channel and within company-owned stores within the Direct channel has had and may continue to have a material adverse effect on our revenues and results of operations. Our e-commerce operations remain open globally, as do the e-commerce operations for many of our third-party retailers. The COVID-19 pandemic is also shifting demand patterns to favor our lower-margin products, which is producing a reduction in our gross margins.
The effects of the COVID-19 crisis could be aggravated if the crisis continues, and we could also see additional impacts that might include the following:
• a potential global recession, a decline in consumer confidence and spending, or a further increase in unemployment or reduction in government stimulus payments could continue to result in consumers having less disposable income and, in turn, decreased sales of our products;
• the continued disruption to third-party retail stores and company-owned stores resulting from "shelter in place" and similar protocols, which, even though largely rolled back, could be reinstated as the pandemic continues to evolve;
• social distancing measures or changes in consumer spending behaviors due to COVID-19 may continue to impact retail demand after the resumption of more normalized operations and such actions could result in a loss of sales and profit;
• difficulty accessing debt and equity on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deterioration in credit and financing conditions may affect our ability to access capital necessary to operate our business;
• the failure of our Wholesale channel customers to whom we extend credit to pay amounts owed to us on time, or at all, particularly if such customers are significantly impacted by COVID-19;
• the risk that the persistence or reoccurrence of COVID-19 could cause customers to avoid public places where our stores and those of our Wholesale partners are located;
• we have experienced and may continue to experience disruptions in our supply chain, as the outbreak has disrupted travel, affected consumer demand and spending habits and impacted manufacturing and distribution throughout the world; and
• we may be required to revise certain accounting estimates and judgments such as, but not limited to, those related to the valuation of long-lived assets and deferred tax assets, which could have a material adverse effect on our financial position and results of operations.
The rapid development and fluidity of the pandemic precludes any prediction as to the ultimate impact of COVID-19. The full extent of the impact and effects of COVID-19 on our business, operations, liquidity, financial condition and results of operations remain uncertain at this time but could be material.
The future impact of the COVID-19 crisis on our business, operations, or financial results is highly uncertain and will depend on numerous evolving factors that we cannot predict precisely, including, but not limited to:
• the duration, scope, and severity of the COVID-19 pandemic;
• the disruption or delay of production and delivery of materials and products in our supply chain;
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• the impact of travel bans, work-from-home policies, or shelter-in-place orders;
• the temporary or prolonged shutdown of manufacturing facilities or retail stores and decreased retail traffic;
• staffing shortages;
• general economic, financial, and industry conditions, particularly conditions relating to liquidity, financial performance, and related credit issues in the retail sector, which may be amplified by the effects of COVID-19;
• the long-term effects of COVID-19 on the national and global economy, including on consumer confidence and spending, financial markets and the availability of credit for us, our suppliers and our customers; and
• our success in attempting to reduce operating costs and conserve cash, which could require further actions to improve our cash position, including but not limited to, implementing expanded employee furloughs and foregoing capital expenditures and other discretionary expenses.
Although we recently announced our intention to initiate a quarterly cash dividend beginning in 2021, there can be no assurance as to the declaration or amount of future dividends.
We recently announced our intention to begin paying a quarterly cash dividend beginning in 2021. Any decision to declare and pay dividends, and the amount of any such dividends, will be dependent on a variety of factors, including compliance with Section 170 of the Delaware General Corporation Law; changes to our capital allocation policies; our results of operation, liquidity and cash flows; contractual restrictions in our debt agreements; economic conditions, including the impact of COVID-19 on our business and financial condition; and other factors the Board of Directors may deem relevant. There can be no assurance that we will declare dividends in any particular amounts or at all, and changes in our dividend policy could adversely affect the market price for our stock.