Pottery Barn 2007 Annual Report Download - page 21

consumer privacy concerns. In addition, we must keep up to date with competitive technology trends, including
the use of improved technology, creative user interfaces and other Internet marketing tools, which may increase
costs and which may not succeed in increasing sales or attracting customers. 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.
We may not be able to introduce new brands and brand extensions, or to reposition existing brands, to improve
our business.
We have recently in the past and may in the future introduce new brands and brand extensions, or reposition
existing brands. Our newest brands – West Elm, PBteen and Williams-Sonoma Home – and any other new
brands, however, may not be successful growth vehicles. In January 2006, we announced our decision to
transition the merchandising strategies of our Hold Everything brand into our other existing brands. 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 and 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.
We believe that commercial insurance coverage is prudent for risk management. Insurance costs may increase
substantially in the future and may be affected by natural catastrophes, fear of terrorism and financial
irregularities and other fraud at publicly traded companies. 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, if at all. 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.
11
Form 10-K