The Gap 2013 Annual Report Download - page 31

7
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. In addition, certain countries
represent a larger portion of our global sourcing. For example, approximately 28 percent of our merchandise, by
dollar value, is purchased from China. Accordingly, any delays in production and added costs in this country could
have a more significant impact on our results of operations.
Because independent vendors manufacture 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.
Risks associated with importing merchandise from foreign countries, including failure of our vendors to
adhere to our Code of Vendor Conduct, could harm our business.
We purchase nearly all merchandise from third-party vendors in many different countries and we require those
vendors to adhere to a Code of Vendor Conduct which includes environmental, labor, health, and safety
standards. From time to time, contractors or their subcontractors may not be in compliance with these standards
or applicable local laws. Although we have implemented policies and procedures to facilitate our compliance with
laws and regulations relating to doing business in foreign markets and importing merchandise into various
countries, there can be no assurance that suppliers and other third parties with whom we do business will not
violate such laws and regulations or our policies. Significant or continuing noncompliance with such standards
and laws by one or more vendors could have a negative impact on our reputation, could subject us to liability, and
could have an adverse effect on our results of operations.
Trade matters may disrupt our supply chain.
Trade restrictions, including increased tariffs or quotas, embargoes, safeguards, and customs restrictions against
apparel items, as well as U.S. or foreign labor strikes, work stoppages, or boycotts, could increase the cost or
reduce the supply of apparel available to us and adversely affect our business, financial condition, and results of
operations. We cannot predict whether any of the countries in which our merchandise currently is manufactured or
may be manufactured in the future will be subject to additional trade restrictions imposed by the United States and
other foreign governments, including the likelihood, type, or effect of any such restrictions. In addition, we face the
possibility of anti-dumping or countervailing duties lawsuits from U.S. domestic producers. We are unable to
determine the impact of the changes to the quota system or the impact that potential tariff lawsuits could have on
our global sourcing operations. Our sourcing operations may be adversely affected by trade limits or political and
financial instability, resulting in the disruption of trade from exporting countries, significant fluctuation in the value
of the U.S. dollar against foreign currencies, restrictions on the transfer of funds, and/or other trade disruptions.