Pottery Barn 2007 Annual Report Download - page 18

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. Further, any merchandise that does not meet our quality
standards could become subject to a recall, which would damage our reputation and brands, and harm our
business.
Our dependence on foreign vendors and our increased overseas operations subject us to a variety of risks and
uncertainties.
In fiscal 2007, we sourced our products from vendors in 43 countries outside of the United States. Approximately
60% 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. For example, any upward valuation in the Chinese yuan, the euro, or any other foreign currency
against the U.S. dollar may result in higher costs to us for those goods. Although approximately 95% 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.
We are also subject to other risks and uncertainties associated with changing economic and political conditions in
foreign countries. These risks and uncertainties include import duties and quotas, concerns over anti-dumping,
work stoppages, economic uncertainties (including inflation), foreign government regulations, employment
matters, wars and fears of war, political unrest, natural disasters and other trade restrictions. We cannot predict
whether any of the countries in which our products are currently manufactured or may be manufactured in the
future will be subject to trade restrictions imposed by the U.S. or foreign governments or the likelihood, type or
effect of any such restrictions. Any event causing a disruption or delay of imports from foreign vendors,
including the imposition of additional import restrictions, restrictions on the transfer of funds and/or increased
tariffs or quotas, or both, could increase the cost or reduce the supply of merchandise available to us and
adversely affect our business, financial condition and operating results. Furthermore, some or all of our foreign
vendors’ operations may be adversely affected by political and financial instability resulting in the disruption of
trade from exporting countries, restrictions on the transfer of funds and/or other trade disruptions. Our overseas
operations in Europe and Asia could also be affected by changing economic and political conditions in foreign
countries, which could have a negative effect on our business, financial condition and operating results.
In addition, although we continue to improve our global compliance program, there remains a risk that one or
more of our foreign vendors will not adhere to our global compliance standards such as fair labor standards and
the prohibition on child labor. Non-governmental organizations might attempt to create an unfavorable
impression of our sourcing practices or the practices of some of our vendors that could harm our image. If either
of these occurs, we could lose customer goodwill and favorable brand recognition, which could negatively affect
our business and operating results.
Our overseas operations are subject to certain U.S. laws applicable to us, including the Foreign Corrupt Practices
Act. We must ensure that the employees in our overseas operations comply with these laws. If any of our
overseas operations, or our employees or agents, violates such U.S. laws, we could become subject to sanctions,
which could negatively affect our business and operating results.
The growth of our sales and profits depends, in large part, on our ability to successfully open new stores.
In each of the past three fiscal years, the majority of our net revenues have been generated by our retail stores.
Our ability to open additional stores successfully will depend upon a number of factors, including:
• our identification and availability of suitable store locations;
• our success in negotiating leases on acceptable terms;
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