Banana Republic 2011 Annual Report Download - page 25

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.
The market for prime real estate is competitive.
Our ability to effectively obtain real estate to open new stores nationally and internationally depends on the
availability of real estate that meets our criteria for traffic, square footage, co-tenancies, lease economics,
demographics, and other factors. We also must be able to effectively renew our existing store leases. In addition, in
recent years, we have been seeking to downsize, consolidate, reposition, or close some of our real estate locations,
which in most cases requires a modification of an existing store lease. Failure to secure adequate new locations or
successfully modify existing locations, or failure to effectively manage the profitability of our existing fleet of
stores, could have a material adverse effect on our results of operations.
Additionally, the economic environment may at times make it difficult to determine the fair market rent of retail
real estate properties within the United States and internationally. This could impact the quality of our decisions to
exercise lease options at previously negotiated rents and the quality of our decisions to renew expiring leases at
negotiated rents. Any adverse effect on the quality of these decisions could impact our ability to retain real estate
locations adequate to meet our targets or efficiently manage the profitability of our existing fleet of stores and
could have a material adverse effect on our results of operations.
We experience fluctuations in our comparable sales and margins.
Our success depends in part on our ability to improve sales, in particular at our largest brands. A variety of factors
affect comparable sales, including fashion trends, competition, current economic conditions, the timing of new
merchandise releases and promotional events, changes in our merchandise mix, the success of marketing
programs, and weather conditions. These factors may cause our comparable sales results to differ materially from
prior periods and from expectations. Our comparable sales, including the associated comparable online sales, have
fluctuated significantly in the past on an annual, quarterly, and monthly basis. Over the past 24 months, our
reported monthly comparable sales have ranged from an increase of 11 percent in March 2010 to a decrease of 10
percent in March 2011. Over the past five years, our reported gross margins have ranged from a high of 40.3 percent
in fiscal 2009 to a low of 36.1 percent in fiscal 2007. In addition, over the past five years, our reported operating
margins have ranged from a high of 13.4 percent in fiscal 2010 to a low of 8.3 percent in fiscal 2007.
Our ability to deliver strong comparable sales results and margins depends in large part on accurately forecasting
demand and fashion trends, selecting effective marketing techniques, providing an appropriate mix of
merchandise for our broad and diverse customer base, managing inventory effectively, using effective pricing
strategies, and optimizing store performance. Failure to meet the expectations of investors, securities analysts, or
credit rating agencies in one or more future periods could reduce the market price of our common stock and cause
our credit ratings to decline.
Changes in our credit profile or deterioration in market conditions may limit our access to the capital
markets and adversely impact our financial results and our ability to service our debt.
In the first quarter of fiscal 2011, given favorable market conditions and our history of generating consistent and
strong operating cash flow, we made the strategic decision to issue debt. In April 2011, we issued $1.25 billion
aggregate principal amount of 5.95 percent notes due April 12, 2021. We also entered into a $400 million five-year
term loan due April 2016, which was funded in May 2011. As a result, we have additional costs that include interest
payable semiannually on the notes and at least quarterly on the term loan. We also have repayments due annually
for the term loan.
Our cash flows from operations are the primary source of funds for these debt service payments. In this regard, we
have generated annual cash flow from operations in excess of $1 billion per year for the past decade and ended
fiscal 2011 with $1.9 billion of cash and cash equivalents on our balance sheet. We are also able to supplement near-
term liquidity, if necessary, with our $500 million revolving credit facility. We continue to target a cash balance of
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