Restoration Hardware 2012 Annual Report Download - page 85

If we encounter difficulties associated with any of our facilities or if any of our facilities were to shut down
for any reason, including as a result of fire, earthquakes (to which our California-based distribution and home
delivery facilities in Tracy and Mira Loma and our corporate headquarters in Corte Madera are particularly
vulnerable), power outages or other natural disasters, we could face shortages of inventory resulting in “out of
stock” conditions in our stores, significantly higher costs and longer lead times associated with distributing our
products to both our stores and online customers and the inability to process orders in a timely manner or ship
goods to our customers. Further, any significant interruption in the operation of our customer service center,
including the call center, could also reduce our ability to receive and process orders and provide products and
services to our stores and customers, which could result in lost sales, cancelled sales and a loss of loyalty to our
brand.
In January 2012, we opened a furniture home delivery hub in Avenel, New Jersey and, in February 2012, we
opened a furniture distribution center in North East, Maryland. We also recently expanded our West Coast
distribution center in Mira Loma, California, reduced the size of our furniture delivery hub in Tracy, California
and have entered into a lease in connection with a planned distribution center in Grand Prairie, Texas. We are
also planning to expand into an additional 400,000 square feet at our West Jefferson, Ohio distribution center in
May 2013, and in-sourcing three home furniture delivery facilities in 2013. As a result of these and other efforts
with respect to our distribution facilities, we may encounter operational difficulties with respect to our 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, and any such
difficulties could have a material adverse effect on our business, financial condition and results of operations.
Our results may be adversely affected by fluctuations in raw materials and energy costs.
Increases in the prices of the components and raw materials used in our products could negatively affect the
sales of our merchandise and our product margins. These prices may fluctuate based on a number of factors
beyond our control, including: commodity prices including prices for oil, lumber and cotton, changes in supply
and demand, general economic conditions, labor costs, competition, import duties, tariffs, anti-dumping duties,
currency exchange rates and government regulation. In addition, energy costs have fluctuated dramatically in the
past. These fluctuations may result in an increase in our transportation costs for freight and distribution, utility
costs for our retail stores and overall costs to purchase products from our vendors. Accordingly, changes in the
value of the U.S. dollar relative to foreign currencies may increase our vendors’ cost of business and ultimately
our cost of goods sold and our selling, general and administrative costs. If we are unable to pass such cost
increases on to our customers or the higher cost of the products results in decreased demand for our products, our
results of operations would be harmed. Any such cost increase could reduce our earnings to the extent we are
unable to adjust the prices of our products.
We are subject to risks associated with our dependence on foreign imports for our merchandise.
Based on total volume dollar purchases, in fiscal 2012 we purchased approximately 85% of our merchandise
from vendors located outside the United States, including 78% from Asia, the majority of which originated from
China. In addition, some of the merchandise we purchase from vendors in the United States also depends, in
whole or in part, on vendors located outside the United States. As a result, our business highly depends on global
trade, as well as trade and cost factors that impact the specific countries where our vendors are located, including
Asia. Our future success will depend in large part upon our ability to maintain our existing foreign vendor
relationships and to develop new ones. While we rely on our long-term relationships with our foreign vendors,
we have no long-term contracts with them and transact business on an order by order basis. Additionally, many
of our imported products are subject to existing duties, tariffs, anti-dumping duties and quotas that may limit the
quantity of some types of goods which we may import into the United States. Our dependence on foreign imports
also makes us vulnerable to risks associated with products manufactured abroad, including, among other things,
risks of damage, destruction or confiscation of products while in transit to our distribution centers located in the
United States, charges on or assessment of additional import duties, tariffs, anti-dumping duties and quotas, loss
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Form 10-K