Pottery Barn 2005 Annual Report Download - page 49

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks, which include changes in U.S. interest rates and foreign exchange rates. We do
not engage in financial transactions for trading or speculative purposes.
Interest Rate Risk
The interest payable on our credit facility, industrial development bond and the bond-related debt associated with
our Memphis-based distribution facilities is based on variable interest rates and is therefore affected by changes
in market interest rates. If interest rates on existing variable rate debt rose 44 basis points (an approximate 10%
increase in the associated variable rates as of January 29, 2006), our results from operations and cash flows
would not be materially affected.
In addition, we have fixed and variable income investments consisting of short-term investments classified as
cash and cash equivalents, which are also affected by changes in market interest rates. An increase in interest
rates of 10% would have an immaterial effect on the value of these investments. Declines in interest rates would,
however, decrease the income derived from these investments.
Foreign Currency Risks
We purchase a significant amount of inventory from vendors outside of the U.S. in transactions that are
denominated in U.S. dollars. Approximately 5% of our international purchase transactions are in currencies other
than the U.S. dollar. As of January 29, 2006, any currency risks related to these transactions were not significant
to us. A decline in the relative value of the U.S. dollar to other foreign currencies could, however, lead to
increased purchasing costs.
As of January 29, 2006, we have 14 retail stores in Canada, which expose us to market risk associated with
foreign currency exchange rate fluctuations. As necessary, we have utilized 30-day foreign currency contracts to
minimize any currency remeasurement risk associated with intercompany assets and liabilities of our Canadian
subsidiary. These contracts are accounted for by adjusting the carrying amount of the contract to market and
recognizing any gain or loss in selling, general and administrative expenses in each reporting period. We did not
enter into any new foreign currency contracts during fiscal 2005 or fiscal 2004. Any gain or loss associated with
these types of contracts in prior years was not material to us.
37
Form 10-K