The Gap 2012 Annual Report Download - page 27

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• sourcing merchandise efficiently; and
• providing strong and effective marketing support.
In addition, our franchisees face significant competition in the markets in which they operate. If we or our franchisees are
not able to compete successfully in the United States or internationally, our results of operations could be adversely
affected.
Furthermore, beginning in fiscal 2013, we will combine all channels and geographies under one global leader each for
Gap, Banana Republic, and Old Navy. We do not have experience operating under this new global brand structure. If we
are not successful in competing effectively under this structure, our results of operations could be adversely affected.
We must successfully gauge apparel trends and changing consumer preferences to succeed.
Our success is largely dependent upon our ability to gauge the tastes of our customers and to provide merchandise that
satisfies customer demand in a timely manner. However, lead times for many of our purchases are long, which may make
it more difficult for us to respond rapidly to new or changing apparel trends or consumer acceptance of our products. The
global apparel retail business fluctuates according to changes in consumer preferences, dictated in part by apparel trends
and season. To the extent we misjudge the market for our merchandise or the products suitable for local markets or fail to
execute trends and deliver product to market as timely as our competitors, our sales will be adversely affected, and the
markdowns required to move the resulting excess inventory will adversely affect our operating results. Some of our past
product offerings have not been well received by our broad and diverse customer base. Merchandise misjudgments could
have a material adverse effect on our operating results.
Our ability to anticipate and effectively respond to changing apparel trends depends in part on our ability to attract and
retain key personnel in our design, merchandising, marketing, and other functions in the context of our new global brand
structure announced in October 2012. Competition for this personnel is intense, and we cannot be sure that we will be
able to attract and retain a sufficient number of qualified personnel in future periods.
Fluctuations in the global apparel retail business especially affect the inventory owned by apparel retailers, as
merchandise usually must be ordered well in advance of the season and frequently before apparel trends are evidenced
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.
Our business, including our costs and supply chain, is subject to risks associated with global sourcing and
manufacturing.
Independent third parties manufacture nearly all of our products for us. As a result, we are directly impacted by increases
in the cost of those products. For example, cotton prices rose substantially during fiscal 2011, which put significant
pressure on our average unit costs and gross margins.
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 that any vendor
would allocate sufficient capacity to us in order to meet our requirements. In addition, for any new manufacturing source,
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. Any delays, interruption, or increased costs in the manufacture of our products could 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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