Pottery Barn 2011 Annual Report Download - page 28

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 on favorable terms with our service providers and other
vendors, 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. In addition, in times of economic
uncertainty, these long-term contracts may make it difficult to quickly reduce our fixed operating costs, which
could 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,
which involves updating or replacing legacy systems with successor systems over the course of several years.
There are inherent risks associated with replacing our core systems, including supply chain and merchandising
systems disruptions, that could 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 of software-related assets. We are also subject to the risks associated
with the ability of our vendors to provide information technology solutions to meet our needs. Any disruptions
could negatively impact our business and operating results.
We outsource certain aspects of our business to third party vendors and are in the process of insourcing certain
business functions from third party vendors, both of which subject us to risks, including disruptions in our
business and increased costs.
We outsource certain aspects of our business to third party vendors that subject us to risks of disruptions in our
business as well as increased costs. For example, we utilize outside vendors for such things as payroll processing
and various distribution center services. Accordingly, we are subject to the risks associated with their ability to
successfully provide the necessary services to meet our needs. If our vendors are unable to adequately protect our
data and information is lost, our ability to deliver our services is interrupted, or our vendors’ fees are higher than
expected, then our business and operating results may be negatively impacted.
In addition, we are in the process of insourcing certain aspects of our business, including the management of
certain infrastructure technology, furniture manufacturing, furniture delivery to our customers and the
management of our global vendors, each of which were previously outsourced to third party providers. We may
also need to continue to insource other aspects of our business in the future in order to control our costs and to
stay competitive. This may cause disruptions in our business and result in increased cost to us. In addition, if we
are unable to perform these functions better than, or at least as well as, our third party providers, our business
may be harmed.
Our efforts to expand globally may not be successful and could negatively impact the value of our brands, and
our increasing global presence presents additional challenges.
We are currently growing our business through global expansion. In fiscal 2009, we entered into a franchise
agreement with an unaffiliated franchisee to operate stores in the Middle East. Under this agreement, our
franchisee operates stores that sell goods purchased from us under our brand names. We have no prior experience
operating through these types of third party arrangements, and this arrangement may not continue to be
successful. The administration of this relationship may divert management attention and require more resources
than we expect. While this relationship has to date been a small part of our business, we plan to continue to
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