Pottery Barn 2014 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 is the only instrument we hold with a variable interest rate which subjects us to interest rate
risk. During fiscal 2014, we had borrowings of $90,000,000 under the credit facility, all of which were repaid in
the fourth quarter of fiscal 2014. If the interest rate on this existing variable rate debt instrument rose 10% 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, 2015,
our investments, made primarily in demand deposit accounts, 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 foreign currency impact related to these international purchase
transactions was not significant to us during fiscal 2014 or fiscal 2013. 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 and e-commerce businesses 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. 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 material to us in
fiscal 2014, we have continued to see volatility in the exchange rates in the countries in which we do business.
As we continue to expand globally, the foreign currency exchange risk related to the transactions of our foreign
subsidiaries may increase. To mitigate this risk, we hedge 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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