Pottery Barn 2007 Annual Report Download - page 48

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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, foreign currency exchange rates,
including the devaluation of the U.S. dollar and the effects of rising prices in the foreign countries in which we
do business. We do not engage in financial transactions for trading or speculative purposes.
Interest Rate Risk
As of February 3, 2008, we have three debt instruments with variable interest rates which subject us to risks
associated with changes in interest rates (the interest payable on our credit facility, Mississippi industrial
development bond and bond-related debt associated with our Memphis-based distribution facilities). As of
February 3, 2008, the total outstanding principle balance on these instruments was $25,972,000 (with an interest
rate of approximately 3.4% as of February 3, 2008). If interest rates on these existing variable rate debt
instruments rose 34 basis points (an approximate 10% increase in the associated variable rates as of February 3,
2008), 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. As of February 3, 2008,
our investments, made solely in money market funds, are stated at cost and approximate their fair values. 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 international purchase transactions
were not significant to us during fiscal 2007 and fiscal 2006. However, since we pay for the majority of our
international purchases in U.S. dollars, a decline in the U.S. dollar relative to other foreign currencies would
subject us to risks associated with increased purchasing costs from our vendors in their effort to offset any lost
profits associated with any currency devaluation. We can not predict with certainty the effect these increased
costs may have on our financial statements or results of operations.
In addition, as of February 3, 2008, we have 15 retail stores in Canada and limited operations in both Europe and
Asia, each of which expose us to market risk associated with foreign currency exchange rate fluctuations.
Although these exchange rate fluctuations have not been material to us in the past, we may enter into foreign
currency contracts in the future to minimize any currency remeasurement risk associated with the intercompany
assets and liabilities of our subsidiaries. We did not enter into any foreign currency contracts during fiscal 2007
or fiscal 2006.
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