Pottery Barn 2005 Annual Report Download - page 23

privacy concerns. Our failure to successfully respond to these risks and uncertainties might adversely affect the
sales in our Internet business, as well as damage our reputation and brands.
Our failure to successfully anticipate merchandise returns might have a negative impact on our business.
We record a reserve for merchandise returns based on historical return trends together with current product sales
performance in each reporting period. If actual returns are greater than those projected by management,
additional sales returns might be recorded in the future. Actual merchandise returns may exceed our reserves. In
addition, to the extent that returned merchandise is damaged, we often do not receive full retail value from the
resale or liquidation of the merchandise. Further, the introduction of new merchandise, changes in merchandise
mix, changes in consumer confidence, or other competitive and general economic conditions may cause actual
returns to exceed merchandise return reserves. Any significant increase in merchandise returns that exceeds our
reserves could harm our business and operating results.
We must successfully manage the complexities associated with a multi-channel and multi-brand business.
During the past few years, with the launch and expansion of our Internet business, new brands and brand
extensions, our overall business has become substantially more complex. The changes in our business have
forced us to develop new expertise and face new challenges, risks and uncertainties. For example, we face the
risk that our Internet business might cannibalize a significant portion of our retail and catalog businesses, and we
face the risk of increased catalog circulation cannibalizing our retail sales. While we recognize that our Internet
sales cannot be entirely incremental to sales through our retail and catalog channels, we seek to attract as many
new customers as possible to our e-commerce websites. We continually analyze the business results of our three
channels and the relationships among the channels, in an effort to find opportunities to build incremental sales.
However, as our Internet business grows and as we add e-commerce websites for more of our concepts, these
increased Internet sales may cannibalize a portion of our retail and catalog businesses.
We may not be able to introduce new brands and brand extensions, or to reposition existing brands, to improve
our business.
We have recently introduced three new brands – West Elm, PBteen and Williams-Sonoma Home, and may
introduce new brands and brand extensions, or reposition existing brands, in the future. All of these brands,
however, may not be successful growth vehicles. For example, in January 2006, we announced our decision to
transition the merchandising strategies of our Hold Everything brand into our other existing brands by the end of
fiscal 2006. Further, if we devote time and resources to new brands, brand extensions or brand repositioning, and
those businesses are not as successful as we planned, then we risk damaging our overall business results.
Alternatively, if our new brands, brand extensions or repositioned brands prove to be very successful, we risk
hurting our other existing brands through the potential migration of existing brand customers to the new
businesses. In addition, we may not be able to introduce new brands, brand extensions or to reposition brands in a
manner that improves our overall business and operating results.
Our inability to obtain commercial insurance at acceptable prices or our failure to adequately reserve for self-
insured exposures might have a negative impact on our business.
Insurance costs continue to be volatile, affected by natural catastrophes, fear of terrorism and financial
irregularities and other fraud at publicly traded companies. We believe that commercial insurance coverage is
prudent for risk management, and insurance costs may increase substantially in the future. In addition, for certain
types or levels of risk, such as risks associated with earthquakes, hurricanes or terrorist attacks, we may
determine that we cannot obtain commercial insurance at acceptable prices. Therefore, we may choose to forego
or limit our purchase of relevant commercial insurance, choosing instead to self-insure one or more types or
levels of risks. We are primarily self-insured for workers’ compensation, employee health benefits and product
and general liability claims. If we suffer a substantial loss that is not covered by commercial insurance or our
self-insurance reserves, the loss and attendant expenses could harm our business and operating results. In
addition, exposures exist for which no insurance may be available and for which we have not reserved.
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Form 10-K