Pottery Barn 2006 Annual Report Download - page 51

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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, Mississippi 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 52 basis points (an
approximate 10% increase in the associated variable rates as of January 28, 2007), 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, primarily the euro. Any currency risks related to these transactions were not significant to us
during fiscal 2006 or fiscal 2005. 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 28, 2007, we have 14 retail stores in Canada, which expose us to market risk associated with
foreign currency exchange rate fluctuations. As necessary, we may enter into 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 foreign currency contracts during fiscal 2006 or fiscal 2005. Any gain or loss associated with these
types of contracts in prior years was not material to us.
39
Form 10-K