Pottery Barn 2008 Annual Report Download - page 54

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks, which include significant deterioration of the U.S. and foreign markets, changes
in U.S. interest rates, foreign currency exchange rates, including the devaluation of the U.S. dollar, and the
effects of uncertain economic forces which may affect the prices we pay our vendors 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 1, 2009, 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 1, 2009, the total outstanding principal balance on these instruments was $13,575,000 (weighted
average interest rate of approximately 2.0% as of February 1, 2009). Although we had no borrowings outstanding
under our line of credit facility as of year-end, had we borrowed under our line of credit on February 1, 2009, the
interest rate in effect would have been approximately 2.8%. If interest rates on these existing variable rate debt
instruments rose 20 basis points (an approximate 10% increase in the associated variable rates as of February 1,
2009), 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 1, 2009,
our investments, made solely in U.S Treasury bills and 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, however, have and would in the future 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, however, 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 2008 and fiscal 2007. Since we pay for the majority
of our international purchases in U.S. dollars, however, 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 1, 2009, we have 16 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 2008
or fiscal 2007.
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