Banana Republic 2014 Annual Report Download - page 18

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6
• sourcing merchandise efficiently.
If we or our franchisees are not able to compete successfully in the United States or internationally, our results of
operations would be adversely affected.
If we are unable to manage our inventory effectively, our gross margins could be adversely affected.
Fluctuations in the global apparel retail markets impact the levels of inventory owned by apparel retailers, as
merchandise usually must be ordered well in advance of the season and frequently before apparel trends are
confirmed by customer purchases. In addition, the nature of the global apparel retail business requires us to carry
a significant amount of inventory, especially prior to the peak holiday selling season when we build up our
inventory levels. We must enter into contracts for the purchase and manufacture of merchandise well in advance
of the applicable selling season. As a result, we are vulnerable to demand and pricing shifts and to suboptimal
selection and timing of merchandise purchases. In the past, we have not always predicted our customers’
preferences and acceptance levels of our trend items with accuracy. If sales do not meet expectations, too much
inventory may cause excessive markdowns and, therefore, lower than planned margins.
We have key strategic initiatives designed to optimize our inventory levels and increase the efficiency and
responsiveness of our supply chain, including our seamless inventory and responsive supply chain initiatives.
Aspects of seamless inventory include more timely matching of product supply and demand across markets and
channels to reduce stranded inventory. Aspects of responsive supply chain include more vendor fabric
platforming, product demand testing, and in-season rapid response to demand. These initiatives involve
significant systems and operational changes and we have limited experience operating in this manner. If we are
unable to implement these initiatives successfully, we may not realize the return on our investments that we
anticipate, and our operating results could be adversely affected.
Our efforts to expand internationally may not be successful.
Our current strategies include pursuing continued international expansion in a number of countries around the
world through a number of channels. We currently plan to open additional Old Navy stores outside of North
America, including in Japan and China, open additional Gap stores in China, open additional international outlet
stores, and continue to grow online sales internationally. Our franchisees plan to open additional stores
internationally. We have limited experience operating or franchising in some of these locations. In many of these
locations, we face major, established competitors. In addition, in many of these locations, the real estate,
employment and labor, transportation and logistics, regulatory, and other operating requirements differ
dramatically from those in the places where we have more experience. Consumer tastes and trends may differ in
many of these locations 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.
In addition, we are exposed to foreign currency exchange rate risk with respect to our sales, inventory purchases,
operating expenses, profits, assets, and liabilities generated or incurred outside the U.S. Although we use
instruments to hedge certain foreign currency risks, these measures may not succeed in fully offsetting the
negative impact of foreign currency rate movements and generally only delay the impact of adverse foreign
currency rate movements on our business and financial results. For example, in fiscal year 2014, foreign
exchange fluctuations, in particular the depreciation of the currencies in Canada and Japan where we have
significant retail operations, had a significant impact on our financial results. We expect this impact to continue in
fiscal year 2015.
Our business, including our costs and supply chain, is subject to risks associated with global sourcing
and manufacturing.
Independent third parties manufacture all of our products for us. As a result, we are directly impacted by increases
in the cost of those products.