The Gap 2008 Annual Report Download - page 23

services remain with IBM per the original agreement. Our ability to realize the expected benefits of this
arrangement is subject to various risks, some of which are not within our complete control. These risks include, but
are not limited to, disruption in services, and the failure to protect the security and integrity of the Company’s data
under the terms of the agreement. We are unable to provide assurances that some or all of these risks will not
occur. Failure to effectively mitigate these risks if they occur could have a material adverse effect on our operations
and financial results.
Our efforts to expand internationally through franchising and similar arrangements may not be
successful and could impair the value of our brands.
We have entered into franchise agreements with unaffiliated franchisees to operate stores in many countries
around the world. Under these agreements, third parties operate, or will operate, stores that sell apparel,
purchased from us, under our brand names. Prior to fiscal 2006, we had no experience operating through these
types of third-party arrangements, and we can provide no assurance that these arrangements will be successful.
While we expect that this will be a small part of our business in the near future, we plan to continue to increase
these types of arrangements over time as part of our efforts to expand internationally. The effect of these
arrangements on our business and results of operations is uncertain and will depend upon various factors,
including the demand for our products in new markets internationally and our ability to successfully identify
appropriate third parties to act as franchisees, distributors, or in a similar capacity. In addition, certain aspects of
these arrangements are not directly within our control, such as the ability of these third parties to meet their
projections regarding store openings and sales. Other risks that may affect these third parties include general
economic conditions in specific countries or markets, changes in diplomatic and trade relationships, and political
instability. Moreover, while the agreements we have entered into and plan to enter into in the future provide us
with certain termination rights, to the extent that these third parties 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. A failure to protect the value of our brands or any other harmful acts or omissions by
a franchisee, could have an adverse effect on our results of operations and our reputation.
Our products are subject to risks associated with overseas sourcing and manufacturing.
The current unfavorable economic conditions, including the reduced ability to access credit, is having an adverse
impact on businesses around the world, and its impact on our vendors cannot be predicted. Vendors’ reduced
ability to access sources of capital could lead to their failure to deliver merchandise and could reduce the supply of
apparel available to us, which could adversely affect our business, financial condition, and results of operations.
Independent third parties manufacture nearly all of our products for us. If we experience significant increases in
demand, or need to replace an existing vendor, there can be no assurance that additional manufacturing capacity
will be available when required on terms that are acceptable to us, or at all, or that any vendor would allocate
sufficient capacity to us in order to meet our requirements. In addition, even if we are able to expand existing or
find new manufacturing sources, we may encounter delays in production and added costs as a result of the time it
takes to train our vendors in our methods, products, quality control standards, and environmental, labor, health,
and safety standards. Moreover, in the event of a significant disruption in the supply of the fabrics or raw materials
used by our vendors in the manufacture of our products, our vendors might not be able to locate alternative
suppliers of materials of comparable quality at an acceptable price, or at all. Any delays, interruption, or increased
costs in the manufacture of our products could have an adverse effect on our ability to meet consumer demand for
our products and result in lower sales and net earnings.
Because independent vendors manufacture nearly all of our products outside of our principal sales markets, our
products must be transported by third parties over large geographic distances. Delays in the shipment or delivery
of our products due to the availability of transportation, work stoppages, port strikes, infrastructure congestion, or
other factors, and costs and delays associated with transitioning between vendors, could adversely impact our
financial performance. Manufacturing delays or unexpected demand for our products may require us to use faster,
but more expensive, transportation methods such as aircraft, which could adversely affect our profit margins. In
addition, the cost of fuel is a significant component in transportation costs, so increases in the price of petroleum
products can adversely affect our profit margins.
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