Pottery Barn 2014 Annual Report Download - page 24

in higher recall-related expenses. Any recalls or other safety issues could harm our brands’ images and
negatively affect our business and operating results.
Our efforts to expand globally may not be successful and could negatively impact the value of our brands.
We are currently growing our business and increasing our global presence by opening new stores outside of the
United States, expanding our franchise operations, and offering shipping globally through third party vendors. In
fiscal 2013 we opened our first company-owned retail stores and launched e-commerce sites outside of
North America as part of our overall global expansion strategy. While our global expansion to date has been a
small part of our business, we plan to continue to increase the number of stores we open both directly and
through our franchise arrangements. We have limited experience with global sales, understanding consumer
preferences and anticipating buying trends in different countries, and marketing to customers overseas.
Moreover, global awareness of our brands and our products may not be high. Consequently, we may not be able
to successfully compete with established brands in these markets and our global sales may not result in the
revenues we anticipate. Also, our products may not be accepted, either due to foreign legal requirements or due
to different consumer tastes and trends. If our global growth initiatives are not successful, or if we or any of our
third party vendors fail to comply with any applicable regulations or laws, the value of our brands may be
harmed and our future opportunities for global growth may be negatively affected. Further, the administration of
our global expansion may divert management attention and require more resources than we expect. In addition,
we are exposed to foreign currency exchange rate risk with respect to our operations denominated in currencies
other than the U.S. dollar. Our retail stores in Canada, Australia and the United Kingdom, and our operations
throughout Asia and Europe expose us to market risk associated with foreign currency exchange rate
fluctuations. Although we use instruments to hedge certain foreign currency risks, such hedges may not succeed
in offsetting all of the impact of foreign currency rate volatility and generally only delay such impact on our
business and financial results. Further, because we do not hedge against all of our foreign currency exposure our
business will continue to be susceptible to foreign currency fluctuations. Our ultimate realized loss or gain with
respect to currency fluctuations will generally depend on the size and type of the transactions that we enter into,
the currency exchange rates associated with these exposures, changes in those rates and whether we have entered
into foreign currency hedge contracts to offset these exposures. All of these factors could materially impact our
results of operations, financial position and cash flows.
We have two franchise agreements with unaffiliated franchisees to operate stores in the Middle East and the
Philippines. Under these agreements, our franchisees operate stores that sell goods purchased from us under our
brand names. In fiscal 2014, we entered into a franchise agreement with an additional unaffiliated franchisee to
operate stores and e-commerce websites in Mexico, beginning in 2015. We continue to seek out and identify new
select franchise partnerships for select countries. The effect of these franchise arrangements on our business and
results of operations is uncertain and will depend upon various factors, including the demand for our products in
new global markets. In addition, certain aspects of our franchise arrangements are not directly within our control,
such as the ability of each franchisee to meet its projections regarding store openings and sales. Moreover, while
the agreements we have entered into may provide us with certain termination rights, to the extent that our
franchisees do not operate their stores in a manner consistent with our requirements regarding our brand
identities and customer experience standards, the value of our brands could be impaired. In addition, in
connection with these franchise arrangements, we have and will continue to implement certain new processes
that may subject us to additional regulations and laws, such as U.S. export regulations. Failure to comply with
any applicable regulations or laws could have an adverse effect on our results of operations.
We have limited experience operating on a global basis and our failure to effectively manage the risks and
challenges inherent in a global business could adversely affect our business, operating results and financial
condition and growth prospects.
We operate several retail businesses, subsidiaries and branch offices throughout Asia, Australia and Europe,
which includes managing overseas employees, and plan to continue expanding these overseas operations in the
future. We have limited experience operating overseas subsidiaries and managing non-U.S. employees and, as a
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