Pottery Barn 2007 Annual Report Download - page 22

Our inability or failure to protect our intellectual property would have a negative impact on our business.
Our trademarks, service marks, copyrights, patents, trade dress rights, trade secrets, domain names and other
intellectual property are valuable assets that are critical to our success. The unauthorized reproduction or other
misappropriation of our intellectual property could diminish the value of our brands or goodwill and cause a
decline in our sales. We may not be able to adequately protect our intellectual property. In addition, the costs of
defending our intellectual property may adversely affect our operating results.
We may be subject to legal proceedings that could be time consuming, result in costly litigation, require
significant amounts of management time and result in the diversion of significant operational resources.
We are involved in lawsuits, claims and proceedings incident to the ordinary course of our business. Litigation is
inherently unpredictable. Any claims against us, whether meritorious or not, could be time consuming, result in
costly litigation, require significant amounts of management time and result in the diversion of significant
operational resources. There are an increasing number of cases being filed against companies generally,
including a growing number of business method patent infringement lawsuits. The plaintiff in each case claims to
hold a patent that covers certain technology or methodologies, which are allegedly infringed by the operation of
the defendants’ business. We are currently a defendant in such patent infringement cases and may be named in
others in the future, as part of an industry-wide trend. There has also been a rise in lawsuits against companies
like us that collect personal information from customers. The cost of defending such claims or the ultimate
resolution of such claims may harm our business and operating results.
We need to successfully manage our employment, occupancy and other operating costs.
To be successful, we need to manage our operating costs and continue to look for opportunities to reduce costs.
We recognize that we may need to increase the number of our employees, especially in peak sales seasons, and
incur other expenses to support new brands and brand extensions, as well as the opening of new stores and
direct-to-customer growth of our existing brands. From time to time, we may also experience union organizing
activity in currently non-union facilities. Union organizing activity may result in work slowdowns or stoppages
and higher labor costs. In addition, there appears to be a growing number of wage-and-hour lawsuits against
retail companies, especially in California.
We contract with various agencies to provide us with qualified personnel for our workforce. Any negative
publicity regarding these agencies, such as in connection with immigration issues or employment practices, could
damage our reputation, disrupt our ability to obtain needed labor or result in financial harm to our business,
including the potential loss of business-related financial incentives in the jurisdictions where we operate.
Although we strive to secure long-term contracts with our service providers and other vendors and to otherwise
limit our financial commitment to them, we may not be able to avoid unexpected operating cost increases in the
future. Further, we incur substantial costs to warehouse and distribute our inventory. Significant increases in our
inventory levels may result in increased warehousing and distribution costs in addition to potential increases in
costs associated with inventory that is lost, damaged or aged. Higher than expected costs, particularly if coupled
with lower than expected sales, would negatively impact our business and operating results.
We are undertaking certain systems changes that might disrupt our business operations.
Our success depends, in part, on our ability to source and distribute merchandise efficiently through appropriate
systems and procedures. We are in the process of substantially modifying our information technology systems,
including design, sourcing, merchandise planning and forecasting, purchase order and inventory management,
customer order management, and pricing and promotions management. Modifications will involve updating or
replacing legacy systems with successor systems during the course of several years. There are inherent risks
associated with replacing our core systems, including supply chain and merchandising systems disruptions that
affect our ability to get the correct products into the appropriate stores and delivered to customers. We may not
successfully launch these new systems, or the launch of such systems may result in disruptions to our business
operations. In addition, changes to any of our software implementation strategies could result in the impairment
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