Banana Republic 2009 Annual Report Download - page 27

Asia, and begin offering online sales internationally, including in Canada and a number of European countries. We
do not have any experience operating in a number of these countries, and we have no experience offering online
sales internationally. In many of these countries, we face major, established competitors. In addition, in many of
these countries, the real estate, employment and labor, transportation and logistics, and other operating
requirements differ dramatically from those in the places where we have experience. Moreover, consumer tastes
and trends may differ in many of these countries, and as a result, the sales of our products may not be successful or
result in the margins we anticipate. If our international expansion plans are unsuccessful or do not deliver an
appropriate return on our investments, our operations and financial results could be materially, adversely affected.
We also 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
this will continue to be a small part of our business in the near future, we plan over time to continue increasing these
types of arrangements 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 locations, 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, the
value of our brands could be impaired 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. 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 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 income.
Because independent vendors manufacture nearly all of our products outside of our principal sales markets, third
parties must transport our products 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 gross 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 gross margins.
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