Pottery Barn 2004 Annual Report Download - page 36

We face intense competition from companies with brands or products similar to ours.
The specialty retail and direct-to-customer business is highly competitive. Our specialty retail stores, mail order
catalogs and e-commerce websites compete with other retail stores, other mail order catalogs and other e-
commerce websites that market lines of merchandise similar to ours. We compete with national, regional and
local businesses utilizing a similar retail store strategy, as well as traditional furniture stores, department stores
and specialty stores. The substantial sales growth in the direct-to-customer industry within the last decade has
encouraged the entry of many new competitors and an increase in competition from established companies.
The competitive challenges facing us include:
• anticipating and quickly responding to changing consumer demands better than our competitors;
• maintaining favorable brand recognition and achieving customer perception of value;
• effectively marketing and competitively pricing our products to consumers in several diverse market
segments; and
• developing innovative, high-quality products in colors and styles that appeal to consumers of varying
age groups and tastes, and in ways that favorably distinguish us from our competitors.
In light of the many competitive challenges facing us, we may not be able to compete successfully. Increased
competition could negatively impact our sales, operating results and business.
We depend on key domestic and foreign vendors for timely and effective sourcing of our merchandise, and we are
subject to various risks and uncertainties that might affect our vendors’ ability to produce quality merchandise.
Our performance depends on our ability to purchase our merchandise in sufficient quantities at competitive
prices. We purchase our merchandise from numerous foreign and domestic manufacturers and importers. We
have no contractual assurances of continued supply, pricing or access to new products, and any vendor could
change the terms upon which they sell to us or discontinue selling to us at any time. We may not be able to
acquire desired merchandise in sufficient quantities on terms acceptable to us in the future. Better than expected
sales demand may also lead to customer backorders and lower in-stock positions of our products.
Any inability to acquire suitable merchandise on acceptable terms or the loss of one or more key vendors could
have a negative effect on our business and operating results because we would be missing products that we felt
were important to our assortment, unless and until alternative supply arrangements are secured. We may not be
able to develop relationships with new vendors, and products from alternative sources, if any, may be of a lesser
quality and/or more expensive than those we currently purchase.
In addition, we are subject to certain risks, including availability of raw materials, labor disputes, union
organizing activities, vendor financial liquidity, inclement weather, natural disasters, rising fuel prices and
general economic and political conditions, that could limit our vendors’ ability to provide us with quality
merchandise on a timely basis and at a price that is commercially acceptable. For these or other reasons, one or
more of our vendors might not adhere to our quality control standards, and we might not identify the deficiency
before merchandise ships to our stores or customers. In addition, our vendors may have difficulty adjusting to our
changing demands and growing business. Our vendors’ failure to manufacture or import quality merchandise in a
timely and effective manner could damage our reputation and brands, and could lead to an increase in customer
litigation against us and an attendant increase in our routine litigation costs.
Our dependence on foreign vendors subjects us to a variety of risks and uncertainties.
In fiscal 2004, we sourced our products from manufacturers in 38 countries outside of the United States.
Approximately 62% of our merchandise purchases were foreign-sourced, primarily from Asia and Europe. Our
dependence on foreign vendors means that we may be affected by declines in the relative value of the U.S. dollar
to other foreign currencies. Although substantially all of our foreign purchases of merchandise are negotiated and
paid for in U.S. dollars, declines in foreign currencies and currency exchange rates might negatively affect the
profitability and business prospects of one or more of our foreign vendors. This, in turn, might cause such foreign
vendors to demand higher prices for merchandise, delay merchandise shipments to us, or discontinue selling to
us, any of which could ultimately reduce our sales or increase our costs.
29
Form 10-K