Item 1A. RISK FACTORS
Our business faces numerous risks, many of which are beyond our control. The impact of these risks, as well as other unforeseen risks, could have a material
negative impact on our business, financial condition or results of operations. The trading price of our common stock or our senior notes could decline as a result. You should consider these risks before deciding to invest in, or maintain your
investment in, our common stock or senior notes.
Our profit improvement plan may not be successful in improving our results of operations or
financial condition.
In May 2013, we announced a multi-year profit improvement plan designed to improve upon our fiscal 2012 Adjusted EBITDA
results by an estimated $150 million when fully implemented in 2016. The plan includes certain changes in our strategic focus, senior management, operational processes and organizational structure and calls for further supply chain optimization,
reduction of corporate overhead, divestiture of certain non-core brands, licensing of certain product categories, reprioritization of marketing investments, revenue growth and improved pricing management. It may take longer than anticipated to
generate the expected benefits from these changes and there can be no guarantee that these changes will result in improved operating results. If we are not successful in implementing these changes and executing the plan in a timely and efficient
manner, we may not realize the benefits we expect. Additionally, as we work to globalize certain business processes, changes in existing processes may result in unforeseen issues and complications that could have an adverse impact on our results of
operations and financial condition.
We may be unable to continue to generate savings in selling, general and administrative expenses at the same
pace as in recent quarters.
Over the past several quarters, we have undertaken various restructuring activities related to the implementation of
our multi-year profit improvement plan, including, among other items, employee severance, discontinuation of certain product categories or brands, and facility exit costs. We believe these activities have contributed to reducing overall SG&A
levels on a go-forward basis. However, if we do not undertake additional restructuring activities, or decrease the pace of such restructuring activities, we will be unable to sustain further SG&A reductions in future periods, which could be
perceived negatively and, as a result, our stock price could decline.
Financial and competitive difficulties of our wholesale customers
(independent retailers) may negatively impact our revenues and profitability.
Our wholesale business has been negatively impacted in certain
jurisdictions due to financial and competitive difficulties experienced by various independent retailers that purchase our products. Our business may continue to be adversely impacted in the future as a result of such difficulties of such retailers.
Any continuation of financial and competitive difficulties for, or deterioration in the financial health of, our current or prospective wholesale customers could result in decreased sales, uncollectible receivables, increased product returns, or an
inability to generate new business. Also, any consolidation of retail accounts, or concentration of market share in a specific area, could significantly increase our credit risk. Any or all of these factors could have a material adverse effect on
our business, financial condition, and results of operations.
Additionally, as consumers become more confident shopping online, our wholesale channel
customers face increased competition from online competitors, including, but not limited to, Amazon in the Americas, Zalando in EMEA, and Taobao in China. These online competitors may have lower cost structures, higher sales volumes, wider product
assortments, and faster marketing response times than some or our traditional wholesale channel customers. In addition, our smaller independent wholesale accounts may face competitive challenges from large multi-location accounts that benefit from
better pricing and terms due to higher purchasing volume, larger marketing investments, higher levels of support from suppliers, and superior financial condition. Also, we have made, and plan to make, changes to our wholesale sales
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force structure whereby wholesale accounts generating less than a minimum annual order volume will not be serviced by a salesperson, but will instead be provided a self-service website from which
they may order our products. Lastly, our plans to reduce the size of our product assortment available to wholesale customers could have the effect of reducing wholesale revenues. We have experienced, and expect to continue to experience,
difficulties in expanding or maintaining our wholesale channel revenues due to these and other factors. Such difficulties in our wholesale channel could have a material adverse impact on our operating results, financial condition and stock price.
Unfavorable economic conditions could have a material adverse effect on our business, results of operations and financial condition.
Our financial performance has been, and may continue to be, negatively affected by unfavorable economic conditions. Continued or further recessionary economic
conditions, uncertainty concerning the euro, unemployment in the Euro zone, or other macro economic factors may have an adverse impact on our sales volumes, pricing levels and profitability. As domestic and international economic conditions change,
trends in discretionary consumer spending become unpredictable and subject to reductions due to uncertainties about the future. When consumers reduce discretionary spending, purchases of specialty apparel and footwear, like our products, tend to
decline which may result in reduced orders from retailers for our products, order cancellations, and/or unanticipated discounts. A continuation of the general reduction in consumer discretionary spending in the domestic and international economies,
as well as the impact of tight credit markets on us, our suppliers, other vendors or customers, could have a material adverse effect on our results of operations and financial condition.
The apparel, footwear and accessories industries are each highly competitive, and if we fail to compete effectively, we could lose our market position.
The apparel, footwear and accessories industries are each highly competitive. We compete against a number of domestic and international designers,
manufacturers, retailers and distributors of apparel, footwear and accessories. In order to compete effectively, we must (1) maintain the image of our brands and our reputation for authenticity in our core boardriding markets; (2) be
flexible and innovative in responding to rapidly changing market demands; and (3) offer consumers a wide variety of high quality products at competitive prices.
The purchasing decisions of consumers are highly subjective and can be influenced by many factors, such as brand image, marketing programs and product design.
A small number of our global competitors enjoy substantial competitive advantages, including greater financial resources for competitive activities, such as sales, marketing, strategic acquisitions and athlete endorsements. The number of our direct
competitors and the intensity of competition may increase as we expand into other product lines or as other companies expand into our product categories. Our competitors may enter into business combinations or alliances that strengthen their
competitive positions or prevent us from taking advantage of such combinations or alliances. Our competitors also may be able to respond more quickly and effectively than we can to new or changing opportunities, standards or consumer preferences. In
addition, if our sponsored athletes terminate their relationships with us and endorse the products of our competitors, we may be unable to obtain endorsements from other comparable athletes. If we fail to retain our competitive position, our sales
could decline significantly which would have a material adverse impact on our results of operations, financial condition and liquidity.
If we are
unable to develop innovative and stylish products in response to rapid changes in consumer demands and fashion trends, we may suffer a decline in our revenues and market share.
The apparel, footwear and accessories industries are subject to rapidly changing consumer demands based on fashion trends and performance features. Our success
depends, in part, on our ability to anticipate, gauge and respond to these changing consumer preferences in a timely manner while preserving the authenticity and image of our brands and the quality of our products.
As is typical with new products, market acceptance of new designs and products we may introduce is subject to uncertainty. In addition, we generally make
decisions regarding product designs months in
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advance of the time when consumer acceptance can be measured. If trends shift away from our products, or if we misjudge the market for our product lines, we may be faced with significant amounts
of unsold inventory or other conditions which could have a material adverse effect on our results of operations and financial condition.
The failure of
new product designs or new product lines to gain market acceptance could also adversely affect our business and the image of our brands. Achieving market acceptance for new products may also require substantial marketing efforts and expenditures to
expand consumer demand. These requirements could strain our management, financial and operational resources. If we do not continue to develop stylish and innovative products that provide better design and performance attributes than the products of
our competitors, or if our future product lines misjudge consumer demands, we may lose consumer loyalty, which could result in a decline in our revenues and market share.
Our business could be harmed if we fail to maintain proper inventory levels.
We maintain an inventory of selected products that we anticipate will be in demand. We may be unable to sell the products we have ordered in advance from
manufacturers or that we have in our inventory. Inventory levels in excess of customer demand may result in inventory write-downs or the sale of excess inventory at discounted or closeout prices. These events could significantly harm our operating
results and impair the image of our brands. Conversely, if we underestimate consumer demand for our products or if our manufacturers fail to supply quality products in a timely manner, we may experience inventory shortages, which might result in
unfilled orders, negatively impact customer relationships, diminish brand loyalty and result in lost revenues, any of which could harm our business.
Our business could be harmed if we fail to execute our internal plans to transition our supply chain and certain other business processes to global
scope.
We are in the process of transitioning our supply chain and certain other business processes to global scope. If our globalization efforts
fail to produce planned efficiencies, or the transition is not managed effectively, we may experience excess inventories, inventory shortage, lost revenues, or increased costs. Any business disruption arising from our globalization efforts, or our
failure to effectively execute our internal plans for globalization, could adversely impact our results of operations and financial condition.
Our
business could be harmed if we are unable to accurately forecast demand for our products.
To ensure adequate inventory supply, we forecast
inventory needs and place orders with our manufacturers before firm orders are placed by our customers. If we fail to accurately forecast customer demand, we may experience excess inventory levels or a shortage of product to deliver to our
customers. Inventory levels in excess of customer demand may result in inventory write-downs or write-offs and the sale of excess inventory at discounted prices, which would have an adverse effect on gross margin. In addition, if we underestimate
the demand for our products, our manufacturers may not be able to produce products to meet our customer requirements, and this could result in delays in the shipment of our products and our ability to satisfy customer demand, as well as damage to
our reputation and customer relationships. A failure to accurately predict the level of demand for our products could cause a decline in revenue and adversely impact our results of operations and financial condition.
The demand for our products is seasonal and is dependent upon several unpredictable factors.
Consumer demand for our products can fluctuate significantly from quarter to quarter and year to year. Consumer demand is dependent on many factors, including
customer acceptance of our product designs, fashion trends, economic conditions, changes in consumer spending, weather patterns during peak selling periods, and numerous other factors beyond our control. The seasonality of our business and/or
misjudgment in anticipating consumer demands could have a material adverse effect on our financial condition and results of operations.
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Our industry is subject to pricing pressures that may adversely impact our financial performance.
We source many of our products offshore because manufacturing costs, particularly labor costs, are generally less than in the U.S. Many of our
competitors also source their products offshore, possibly at lower costs than ours, and they may use these cost savings to reduce prices. To remain competitive, we may be forced to adjust our prices from time to time in response to these pricing
pressures. As a result, our financial performance may be negatively affected if we are forced to reduce our prices while we are unable to reduce production costs or our production costs increase and we are unable to proportionately increase our
prices. Any inability on our part to effectively respond to changing prices and sourcing costs could have a material adverse impact on our results of operations, financial condition and liquidity.
Fluctuations in the cost and availability of raw materials, labor, and transportation could cause manufacturing delays and increase our costs.
The prices of the fabrics used to manufacture our products depend largely on the market prices for the raw materials used to produce them,
particularly cotton. The price and availability of such raw materials may fluctuate significantly, depending on many factors, including crop yields and weather patterns. In addition, the cost of labor at many of our third-party manufacturers has
been increasing significantly. The cost of logistics and transportation fluctuates in large part due to the price of oil. Any fluctuations in the cost and availability of any of our raw materials or other sourcing costs could have a material adverse
effect on our gross margins and our ability to meet consumer demands.
Factors affecting international commerce and our international operations may
seriously harm our financial condition.
We generate the majority of our revenues from outside of the United States, and we anticipate that revenue
from our international operations could account for an increasingly larger portion of our revenue in the future. Our international operations are directly related to, and dependent on, the volume of international trade and foreign market conditions.
International commerce and our international operations are subject to many risks, including:
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recessions in foreign economies;
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fluctuations in foreign currency exchange rates;
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the adoption and expansion of trade restrictions;
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limitations on repatriation of earnings;
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difficulties in protecting our intellectual property or enforcing our intellectual property rights under the laws of other countries;
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longer receivables collection periods and greater difficulty in collecting accounts receivable;
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social, political and economic instability or hostilities;
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unexpected changes in regulatory requirements;
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fluctuations in foreign tax rates;
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tariffs, sanctions, and other trade barriers; and
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U.S. government licensing requirements for exports.
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The occurrence or consequences of any of these risks may
restrict our ability to operate in the affected regions and decrease the profitability of our international operations, which may harm our financial condition.
We have established, and may continue to establish, joint ventures in various foreign territories with independent third party business partners to distribute
and sell
Quiksilver, Roxy, DC
and other branded products in such territories. These joint ventures are subject to substantial risks and liabilities associated with their operations, as well as the risk that our relationships with our joint
venture partners do not succeed in the manner that we anticipate. If our joint venture operations, or our relationships with our joint venture partners, are not successful, our results of operations and financial condition may be adversely affected.
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We have operations in certain emerging markets and developing countries where the risk of asset misappropriation,
theft, other crimes, or frivolous claims is higher than in more developed countries. Likewise, there is less protection for intellectual property rights of foreign companies in these jurisdictions. These risks can significantly increase the cost of
operations in such markets.
In addition, as we continue to expand our overseas operations, we are subject to certain U.S. laws, including the
Foreign Corrupt Practices Act, in addition to the laws of the foreign countries in which we operate. We must use all commercially reasonable efforts to ensure our employees comply with these laws. If any of our overseas operations, or our employees
or agents, violates such laws, we could become subject to sanctions or other penalties that could negatively affect our reputation, business and operating results.
Uncertainty of changing international trade regulations and quotas on imports of textiles and apparel may adversely affect our business.
Quotas, duties or tariffs may have a material adverse effect on our business, financial condition and results of operations. We currently import raw materials
and/or finished garments into the majority of countries in which we sell our products. Substantially all of our import operations are subject to customs duties.
In addition, the countries in which our products are manufactured or into which they are imported may from time to time impose new quotas, duties, tariffs,
requirements as to where raw materials must be purchased, new workplace regulations or other restrictions on our imports, or otherwise adversely modify existing restrictions. Adverse changes in these costs and restrictions could harm our business.
We rely on third-party manufacturers and problems with, or loss of, our suppliers or raw materials could harm our business and results of
operations.
Substantially all of our products are produced by independent manufacturers. We face the risk that these third-party manufacturers
with whom we contract to produce our products may not produce and deliver our products on a timely basis, or at all. We cannot be certain that we will not experience operational difficulties with our manufacturers, such as reductions in the
availability of production capacity, errors in complying with product specifications and regulatory and customer requirements, insufficient quality control, failures to meet production deadlines, increases in materials and manufacturing costs or
other business interruptions or failures due to deteriorating economies. The failure of any manufacturer to perform to our expectations could result in supply shortages or delays for certain products and harm our business. Our business may also be
harmed by material increases to our cost of goods as a result of increasing labor costs, which manufacturers have recently faced.
If our independent
manufacturers fail to comply with appropriate laws, regulations, safety codes, employment practices, human rights, quality standards, environmental standards, production practices, or other obligations and norms, our reputation and brand image could
be negatively impacted and we could be exposed to litigation and additional costs which would adversely affect our operational efficiency and results of operations.
The capacity of our manufacturers to manufacture our products also is dependent, in part, upon the availability of raw materials. Our manufacturers may
experience shortages of raw materials, which could result in delays in deliveries of our products by our manufacturers or increased costs to us. Any shortage of raw materials or inability of a manufacturer to manufacture or ship our products in a
timely manner, or at all, could impair our ability to ship orders of our products in a cost-efficient, timely manner and could cause us to miss the delivery requirements of our customers. As a result, we could experience cancellations of orders,
refusals to accept deliveries or reductions in our prices and margins, any of which could harm our financial performance and results of operations.
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Labor disruptions at our suppliers, manufacturers, common carriers or ports may adversely affect our
business.
Our business depends on our ability to source and distribute products in a timely manner. As a result, we rely on the timely and free
flow of goods through open and operational ports worldwide and on a consistent basis from our suppliers and manufacturers. Labor disputes at various ports, our common carriers, or at our suppliers or manufacturers create significant risks for our
business, particularly if these disputes result in work slowdowns, lockouts, strikes or other disruptions during our peak importing or manufacturing seasons, and could have an adverse effect on our business, potentially resulting in cancelled orders
by customers, unanticipated inventory accumulation or shortages and an adverse impact on our results of operations and financial condition.
Our
business could suffer if we lose key management or are unable to attract and retain the talent required for our business.
Our performance is
significantly impacted by the efforts and abilities of our senior management team. If we lose the services of one or more of our key executives, we may not be able to successfully manage our business or achieve our business objectives. If we
are unable to recruit and retain qualified management personnel in a timely manner, our results of operations and financial condition could suffer.
We
have granted performance based restricted stock units to our senior management team that have the potential to generate compensation that could be substantial to them as individuals. These restricted stock units vest upon achievement of specified
common stock price thresholds and completion of the required service period. There is not a required post-vesting service period for the grantees. If our outstanding restricted stock units held by members of our senior management team ultimately
vest, the risk of management turnover would be heightened and a departure of any portion of the senior management team could have an adverse impact on our operations and financial condition.
Our debt obligations expose us to certain risks.
Our levels of debt and leverage may have negative consequences to us, including the following:
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we may have difficulty satisfying our obligations with respect to our indebtedness, and, if we fail to comply with these requirements, an event of default could result;
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we may be required to dedicate a substantial portion of our cash flow from operations to required interest and, where applicable, principal payments on indebtedness, thereby reducing the availability of cash flow for
working capital, capital expenditures and other general corporate activities;
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covenants relating to our indebtedness may limit our ability to obtain additional financing for working capital, capital expenditures and other general corporate activities;
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we may be subject to credit reductions and other changes in our business relationships with our suppliers, vendors and customers if they perceive that we would be unable to pay our debts to them in a timely manner;
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we have credit facilities that are subject to periodic review and renewal, and we may be unable to extend these facilities at terms favorable to us, requiring the use of cash on hand or available credit; and
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we may be placed at a competitive disadvantage against less leveraged competitors.
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The agreements
governing our debt obligations contain various covenants that impose restrictions on us that may affect our ability to operate our business.
The
agreements, including indentures, governing our indebtedness impose, and future financing agreements are likely to impose, operating and financial restrictions on our activities. These restrictions require us to comply with or maintain certain
financial tests and ratios. In addition, the agreements limit or prohibit our ability to, among other things:
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incur additional debt and guarantees;
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pay distributions or dividends and repurchase stock;
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make other restricted payments, including without limitation, certain restricted investments;
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enter into agreements that restrict dividends from subsidiaries;
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engage in transactions with affiliates; and
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enter into mergers, consolidations or sales of substantially all of our assets, including restrictions on the use of proceeds from sales of certain asset groups.
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These restrictions on our ability to operate our business could seriously harm our business by, among other things, limiting our ability to take advantage of
financing, merger and acquisition and other corporate opportunities.
Various risks, uncertainties and events beyond our control could affect our ability
to comply with these covenants. Failure to comply with any of the covenants in our existing or future financing agreements could result in a default under those agreements and under other agreements containing cross-default provisions. A default
would permit lenders to accelerate the maturity of the debt under these agreements and to foreclose upon any collateral securing the debt. Under these circumstances, we might not have sufficient funds or other resources to satisfy all of our
obligations. In addition, the limitations imposed by financing agreements on our ability to incur additional debt and to take other actions might significantly impair our ability to obtain other financing. We cannot assure you that we will be
granted waivers or amendments to these agreements if for any reason we are unable to comply with these agreements or that we will be able to refinance our debt on terms acceptable to us, or at all.
We lease retail stores, office space, and distribution center facilities under operating leases, and if we terminate such leases prior to their
contractual expiration, we could be liable for substantial payments for remaining lease liabilities.
We operate in excess of 600 retail stores, as
well as various offices, showrooms, and distribution centers, under non-cancelable operating leases. We have, at times, closed certain underperforming stores prior to the termination of their related lease agreements. As a result, we have incurred
mutually negotiated lease termination costs with landlords. We may close additional underperforming stores, or other leased facilities, prior to the termination of their related lease agreements in the future. Consequently, we may incur substantial
lease termination payments that could decrease our profitability, reduce our cash balances or amounts available under credit facilities, and thereby have an adverse effect on our business, financial condition, and results of operations.
Our success is dependent on our ability to protect our worldwide intellectual property rights, and our inability to enforce these rights could harm our
business.
Our success depends to a significant degree upon our ability to protect and preserve our intellectual property, including copyrights,
trademarks, patents, service marks, trade dress, trade secrets and similar intellectual property. We rely on the intellectual property, patent, trademark and copyright laws of the United States and other countries to protect our proprietary rights.
However, we may be unable to prevent third parties from using our intellectual property without our authorization, particularly in those countries where the laws do not protect our proprietary rights as fully as in the United States. The use of our
intellectual property or similar intellectual property by others could reduce or eliminate any competitive advantage we have developed, causing us to lose sales or otherwise harm our business. From time to time, we resort to litigation to protect
these rights, and these proceedings can be burdensome and costly and we may not prevail.
We have obtained some U.S. and foreign trademarks, patents and
service mark registrations, and have applied for additional ones, but cannot guarantee that any of our pending applications will be approved by the applicable governmental authorities. The loss of trademarks, patents and service marks, or the loss
of the exclusive use of our trademarks, patents and service marks, could have a material adverse effect on our business, financial condition and results of operations. Accordingly, we devote substantial resources to the establishment and protection
of our trademarks, patents and service marks on a worldwide basis and continue to evaluate the registration of additional trademarks, patents and service
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marks, as appropriate. There can be no assurance that our actions taken to establish and protect our trademarks, patents and service marks will be adequate to prevent imitation of our products by
others or to prevent others from seeking to block sales of our products as violations of their trademark, patent or other proprietary rights.
We
may be subject to claims that our products have infringed upon the intellectual property rights of others, which may cause us to incur unexpected costs or prevent us from selling our products.
We cannot be certain that our products do not and will not infringe the intellectual property rights of others. We may be subject to legal proceedings and
claims in the ordinary course of our business, including claims of alleged infringement of the intellectual property rights of third parties by us or our customers in connection with their use of our products. Any such claims, whether or not
meritorious, could result in costly litigation and divert the efforts of our personnel. Moreover, should we be found liable for infringement, we may be required to enter into licensing agreements (if available on acceptable terms or at all) or to
pay damages and cease making or selling certain products. Moreover, we may need to redesign, discontinue or rename some of our products to avoid future infringement liability. Any of the foregoing could cause us to incur significant costs and
prevent us from manufacturing or selling our products.
If we are unable to maintain our endorsements by professional athletes, our ability to
market and sell our products may be harmed.
A valuable element of our marketing strategy has been to obtain endorsements from prominent athletes,
which contribute to the authenticity and image of our brands. We believe that this strategy has been an effective means of gaining brand exposure worldwide and creating broad appeal for our products. We cannot be certain that we will be able to
maintain our existing relationships with these individuals in the future or that we will be able to attract new athletes to endorse our products. We also are subject to risks related to the selection of athletes whom we choose to endorse our
products. We may select athletes who are unable to perform at expected levels or who are not sufficiently marketable. In addition, negative publicity concerning any of our athletes could harm our brand and adversely impact our business. If we are
unable in the future to secure prominent athletes and arrange athlete endorsements of our products on terms we deem to be reasonable, we may be required to modify our marketing platform and to rely more heavily on other forms of marketing and
promotion, which may not prove to be effective. Our inability to obtain endorsements from professional athletes could adversely affect our ability to market and sell our products, resulting in loss of revenues and a loss of profitability.
In some cases, we sign multi-year contracts with sponsored athletes. If we should later wish to terminate the contract prior to the expiration date, we could
be required to pay an early termination penalty, or negotiated release payment, which could have an adverse effect on our business and results of operations.
Difficulties in implementing our new global Enterprise Resource Planning system and other technologies could impact our ability to design, produce and
ship our products on a timely basis.
We are in the process of implementing the SAP Apparel and Footwear Solution in addition to certain peripheral
technologies as our core operational and financial system (together, “ERP”). The ongoing implementation of the ERP is a key part of our continuing efforts to manage our business more effectively by eliminating redundancies and enhancing
our overall cost structure and margin performance. Difficulties in implementing SAP and integrating peripheral technologies to this new ERP could impact our ability to design, produce and ship our products on a timely basis, and thereby have an
adverse effect on our business, financial condition and results of operations.
We rely significantly on information technology and any failure,
inadequacy, interruption or security lapse of that technology could harm our ability to effectively operate our business.
Our ability to
effectively manage and maintain our supply chain, ship products to customers, and invoice customers on a timely basis depends significantly on several key information systems. The failure of these systems to operate effectively or to integrate with
other systems, or a breach in security of any of these systems, could cause delays in product fulfillment and reduced efficiency of our operations, and it could require significant capital investments to remediate any such failure, problem or
breach.
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In addition, hackers and data thieves are increasingly sophisticated and operate large scale and complex
automated attacks. Despite security measures that we and our third party vendors have in place, any breach of our or our third party service providers’ networks may result in the loss of valuable business data, our customers’ or
employees’ personal information, or a disruption of our business, which could give rise to unwanted media attention, damage our customer relationships and reputation, and result in lost sales, fines or lawsuits. In addition, we must comply with
increasingly complex regulatory standards enacted to protect this business and personal data. Any inability to maintain compliance with these regulatory standards could expose us to risks of litigation and liability, and adversely impact our results
of operations and financial condition.
Changes in foreign currency exchange rates could affect our reported revenues and costs.
We are exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to certain sales, royalty income, and product
purchases of our international subsidiaries that are denominated in currencies other than their functional currencies. We are also exposed to foreign currency gains and losses resulting from U.S. transactions that are not denominated in U.S. dollars
and to the current volatility and uncertainty concerning the euro. If we are unsuccessful in hedging these potential losses, our operating results could be negatively impacted and our cash flows could be significantly reduced. In some cases, as part
of our risk management strategies, we may choose not to hedge such risks. If we misjudge these risks, there could be a material adverse effect on our operating results and financial position. We may use foreign currency exchange contracts, or other
derivatives, to hedge certain currency exchange risks. Such derivatives may expose us to counterparty risks and there can be no guarantee that such derivatives will be effective as hedges.
Furthermore, we are exposed to gains and losses resulting from the effect that fluctuations in foreign currency exchange rates have on the reported results in
our consolidated financial statements due to the translation of the statements of operations and balance sheets of our international subsidiaries into U.S. dollars. We may (but generally do not) use foreign currency exchange contracts to hedge the
profit and loss effects of this translation effect because such exposures are generally non-cash in nature and because accounting rules would require us to mark these contracts to fair value in the statement of operations at the end of each
financial reporting period. We translate our revenues and expenses at average exchange rates during the period. As a result, the reported revenues and expenses of our international subsidiaries would decrease if the U.S. dollar increased in value in
relation to other currencies, including the euro, Australian dollar or Japanese yen.
Future sales of our common stock in the public market, or the
issuance of other equity securities, may adversely affect the market price of our common stock and the value of our senior notes.
Sales of a
substantial number of shares of our common stock or other equity-related securities in the public market could depress the market price of our common stock, senior notes, or both. We cannot predict the effect that future sales of our common stock or
other equity-related securities, including the exercise and/or sale of the equity securities held by entities affiliated with Rhône Capital LLC, would have on the market price of our common stock or the value of our senior notes.
Actions by our licensee partners could adversely impact our brand reputation.
We have licensed certain product categories to third party licensees which have the right to design, source, and sell certain products bearing our trademarks.
Failure of our licensees to source quality products, execute sales plans, or comply with laws, regulations, or other standards could harm the reputation of our brands and thereby have an adverse effect on our business, financial condition, and
results of operations.
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Employment related matters may affect our profitability.
As of January 31, 2014, we had no unionized employees, but certain French employees are represented by workers’ councils. As we have little control
over union activities, we could face difficulties in the future should our workforce become unionized. There can be no assurance that we will not experience work stoppages or other labor problems in the future with our non-unionized employees or
employees represented by workers’ councils.
The effects of war, acts of terrorism, natural disasters or other unforeseen wide-scale events
could have a material adverse effect on our operating results and financial condition.
The continued threat of terrorism, and associated
heightened security measures and military actions in response to acts of terrorism, has disrupted commerce and has intensified uncertainties in the U.S. and international economies. Any further acts of terrorism, escalated hostilities, a future war,
or a widespread natural or other disaster, such as the earthquake and resulting tsunami and radioactivity issues in Japan, may disrupt commerce, undermine consumer confidence and lead to a further downturn in the U.S. or international economies,
which could negatively impact our revenues. Furthermore, an act of terrorism, war or the implementation of trade sanctions, or the threat thereof, or any natural or other disaster that results in unforeseen interruptions of commerce could negatively
impact our business by interfering with our ability to obtain products from our manufacturers.
Failure to maintain adequate financial and
management processes and controls could lead to errors in our financial reporting and could adversely affect our business.
We are required to
document and test our internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX 404”). As a result, we have incurred and expect to continue to incur substantial expenses to comply with
SOX 404 requirements. If, for any reason, our SOX 404 compliance efforts fail to result in an unqualified opinion regarding the effectiveness of our internal controls, we could be subject to regulatory scrutiny and a loss of public confidence, which
could have a material adverse effect on our business, stock price and ability to attract credit. In addition, if we do not maintain adequate financial and management personnel, processes and controls, we may not be able to: (1) accurately
report our financial performance on a timely basis, which could cause a decline in our stock price and adversely affect our ability to raise capital, our results of operations, and our financial condition; and (2) appropriately manage or
control our operations, which could adversely impact our results of operations.
If our goodwill, other intangible assets, or other fixed assets
become impaired, we may be required to record a significant charge to our earnings.
We may be required to record future impairments of goodwill to
the extent the fair value of any of our reporting units becomes less than its carrying value. Our estimates of fair value are based on assumptions about future cash flows of each reporting unit, discount rates applied to these cash flows and current
market estimates of value. Based on the uncertainty of future revenue growth rates, gross profit performance, and other assumptions used to estimate goodwill recoverability, future reductions in our expected cash flows could cause a material
non-cash impairment charge of goodwill, which could have a material adverse effect on our results of operations and financial condition.
We also have
certain other intangible assets including, but not limited to, intellectual property and deferred tax assets, as well as fixed assets in our Company-owned retail stores, which could be at risk of impairment or may require valuation reserves based
upon anticipated future benefits to be derived from such assets. Any change in the valuation of such assets could have a material effect on our profitability.
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