Restoration Hardware 2014 Annual Report Download - page 28

We have historically experienced fluctuations in customer response to our catalogs. Customer response to
our catalogs depends substantially on product assortment, product availability and creative presentation, the
selection of customers to whom the catalogs are mailed, changes in mailing strategies, the page size, page count,
frequency and timing of delivery of the catalogs, as well as the general retail sales environment and current
domestic and global economic conditions. The failure to effectively produce or distribute our catalogs could
affect the timing of catalog delivery. The timing of catalog delivery has been and can be affected by shipping
service delays. Any delays in the timing of catalog delivery could cause customers to forgo or defer purchases. If
the performance of our catalogs declines, if we misjudge the correlation between our catalog circulation and net
sales, or if our catalog circulation optimization strategy is not successful, our results of operations could be
negatively impacted.
Our failure to successfully anticipate merchandise returns might have a negative impact on our business.
We record a reserve for merchandise returns based on historical return trends together with current product
sales performance in each reporting period. If actual returns are greater than those projected and reserved for by
management, additional sales returns might be recorded in future periods. In addition, to the extent that returned
merchandise is damaged, we often do not receive full retail value from the resale or liquidation of the
merchandise. Further, the introduction of new merchandise, changes in merchandise mix, changes in consumer
confidence or other competitive and general economic conditions may cause actual returns to exceed
merchandise return reserves. Adverse economic conditions in the past have resulted in an increase in our
merchandise returns. Any significant increase in merchandise returns that exceeds our reserves could harm our
business and operating results.
We face product liability risks and certain of our products may be subject to recalls or other actions by
regulatory authorities, and any such recalls or similar actions could have a material adverse effect on our
business.
We face product liability, product safety and product compliance risks relating to the design, manufacturing,
raw material sourcing, testing, contents, importation, sale, use and performance of some of our products. The
products we sell must be designed and manufactured to be safe for their intended purposes. Some of our products
must comply with certain federal and state laws and regulations. For example, some of our products are subject
to the Consumer Product Safety Act, the Federal Hazardous Substances Act and the Consumer Product Safety
Improvement Act (the “CPSIA”), which empower the Consumer Product Safety Commission (the “CPSC”) to
establish product bans, substance bans, substance limits, performance requirements, test methods and other
compliance verification processes. The CPSC is empowered to take action against hazards presented by
consumer products, up to and including product recalls. We are required to report certain incidents related to the
safety and compliance of our products to the CPSC, and failure to do so could result in a civil penalty. The CPSC
is particularly active in regulation and enforcement activities related to the kinds of children’s products sold in
our Baby & Child division. Certain of the products we sell are subject to the Lacey Act, prohibiting the
importation and sale of products containing illegally harvested wood, among other things. Likewise, many of our
products are subject to the California Air Resources Board (the “CARB”) regulations of formaldehyde emissions
from composite wood products (e.g., plywood, medium density fiberboard, etc.).
We maintain a product safety and compliance program to help ensure our products are safe, legal and made
consistently in compliance with our values. Nonetheless, our products have, from time to time, been subject to
recall for product safety and compliance reasons, and concerns of product safety and compliance could result in
future voluntary or involuntary removal of products, product recalls, other actions by applicable government
authorities or product liability, personal injury or property damage claims.
Federal, state, provincial and local legislators and regulators in the United States and Canada, where our
products are sold, continue to adopt new product laws and regulations. These new laws and regulations have
increased or likely will significantly increase the regulatory requirements governing the manufacture and sale of
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