Restoration Hardware 2015 Annual Report Download - page 20

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Reductions in the volume of mall and other in-store traffic or the closing of shopping malls as a result of changing demographic
patterns could significantly reduce our sales and leave us with unsold inventory.
A significant portion of our stores is currently located in shopping malls. Additionally, we believe that the in-store shopping
experience is essential to appreciating our product offerings, which was the impetus for our next generation Design Gallery format.
Sales at stores located in malls are derived, in part, from the volume of traffic in those malls. These stores benefit from the ability of
the malls to generate consumer traffic in the vicinity of our stores and the continuing popularity of the malls as shopping destinations
and positive experiences.
However, in recent years there has been a shift in consumer preferences to purchasing certain products online rather than in
stores. This shift, particularly when coupled with past unfavorable economic conditions in certain regions, has adversely affected mall
traffic in some regions and has threatened the viability of certain commercial real estate firms that operate major shopping malls. A
continuation of such trend, could adversely impact the sales generated by our stores currently located in shopping malls.
If we are unable to successfully operate our distribution centers, furniture home delivery hubs and customer service centers, as
well as fulfill orders and deliver our merchandise to our customers in a timely manner, our business and results of operations will
be harmed.
Our business depends upon the successful operation of our distribution centers, furniture home delivery hubs and customer
service centers, as well as upon our order management and fulfillment services and the re-stocking of inventories within our stores.
The efficient flow of our merchandise requires that our facilities have adequate capacity to support our current level of operations and
any anticipated increased levels that may follow from any growth of our business.
Due to our historical rate of growth and customer demand, we have found that our distribution centers often run at capacity, and
from time to time we have opened additional distribution and home delivery facilities in an effort to improve our ability to serve our
customers. We have encountered operational difficulties with respect to new facilities, such as disruptions in transitioning fulfillment
orders to the new distribution facilities and problems associated with operating new facilities or reducing the size and changing
functions of existing facilities. These difficulties can result in a negative experience for our customers. We also have encountered
various operating difficulties with respect to fulfilling orders and delivering merchandise to our customers in a timely or efficient
manner that is fully satisfactory to our customers. We are currently engaged in efforts to improve the quality of our customer
experience, which includes making changes to the way in which we operate our distributions centers, furniture home delivery hubs
and customer service centers. Some of these efforts may require us to make significant expenditures in periods in the near term, which
may also have a negative effect on our results of operations if there is no associated increase in revenues or decrease in returns or if
any such effect is less than anticipated. There can be no assurance however that any of these efforts will be successful or that we will
not encounter additional difficulties in achieving higher levels of customer satisfaction.
We currently rely upon independent third-party transportation providers for the majority of our product shipments, which subjects
us to certain risks.
We currently rely upon independent third-party transportation providers for product shipments from our vendors to our stores
and to our customers outside of certain areas. Our utilization of third-party delivery services for shipments is subject to risks, including
increases in fuel prices, which would increase our shipping costs, as well as strikes, work stoppages and inclement weather, which
may impact shipping companies’ abilities to provide delivery services that adequately meet our shipping needs. For example, strikes
or even threat of strikes involving longshoreman and clerical workers at ports in the past few years have completely shut down such
ports for periods of time, impacting retail and other industries. If we change shipping companies, we could face logistical difficulties
that could adversely affect deliveries and we would incur costs and expend resources in connection with such change. Moreover, we
may not be able to obtain terms as favorable as those received from the third-party transportation providers we currently use, which in
turn would increase our costs.
Our operations have significant liquidity and capital requirements and depend on the availability of adequate financing on
reasonable terms. If we are unable to borrow sufficient capital when needed, it could have a significant negative effect on our
ability to grow our business.
We have historically relied on the availability of some amount of debt financing. Although currently there are no amounts
outstanding under Restoration Hardware, Inc.’s revolving line of credit, we completed debt financings in 2014 and 2015 through the
issuance of two series of convertible senior notes for an aggregate principal amount of $650 million. As a result of the availability
under our revolving line of credit and the proceeds we received from our convertible senior note financings, we currently have
sufficient capital for the operation of our business in the near term.