Pottery Barn 2013 Annual Report Download - page 50

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 economic uncertainty 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
Our line of credit facility is the only instrument we hold with a variable interest rate which could, if drawn upon,
subject us to risks associated with changes in that interest rate. As of February 2, 2014, there were no amounts
outstanding under our credit facility.
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 2, 2014,
our investments, made primarily in money market funds, interest-bearing demand deposit accounts and time
deposits, are stated at cost and approximate their fair values.
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 2% 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 2013 or fiscal 2012. 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 cannot predict with certainty the effect these increased costs may
have on our financial statements or results of operations.
In addition, our retail stores in Canada, Australia and the United Kingdom, and operations throughout Asia and
Europe, expose us to market risk associated with foreign currency exchange rate fluctuations. Substantially all of
our purchases and sales are denominated in U.S. dollars, which limits our exposure to this risk. While the impact
of foreign currency exchange rate fluctuations was not significant in fiscal 2013, as we continue to expand
globally, the foreign currency exchange risk related to the transactions of our foreign subsidiaries will increase.
To mitigate this risk, beginning in April 2013, we began hedging a portion of our foreign currency exposure with
foreign currency forward contracts in accordance with our risk management policies (see Note M to our
Consolidated Financial Statements).
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