| BOMBAY COMPANY INC ITEM 1A Risk Factors |
| The value of an investment in Bombay involves significant risks and uncertainties |
| One should carefully consider the risks and uncertainties described below |
| If any of such risks and uncertainties actually occurs, our business, financial condition or operating results could differ materially from the plans, projections and other forward-looking statements included in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report and in our other public filings |
| Our turnaround strategy may disrupt our business |
| We have been involved in a multi-year turnaround strategy that has focused on regaining market share, aggressively repositioning our real estate portfolio, attracting new customers, improving the quality of our merchandise assortment and investing in infrastructure to support the other initiatives |
| This turnaround strategy may lead to disruptions in our business that could adversely affect our business operations and our financial results |
| Further, if our turnaround strategy is not successful, or if we do not execute the strategy effectively, our business operations and financial results could be adversely affected |
| We may not have sufficient liquidity to execute our turnaround strategy |
| During the past three years, we have had over half of our store leases come up for renewal which has resulted in significant investments of capital |
| During this same time period, we have seen a significant decline in our cash balances as a result of the required investments and recently, two years of operating losses |
| We currently believe that our available cash and cash equivalents, cash flow from operations and cash available under our existing credit facilities will be sufficient to finance our operations and expected capital requirements for at least the next twelve months |
| However, if the turnaround fails to materialize and we do not meet our plans, we might experience liquidity issues during peak borrowing periods and may require additional external funding to support our operations |
| We may need to raise additional funds through capital market transactions, asset sales or financing from third parties or a combination thereof |
| Additional sources of funds may not be available on terms favorable to us or at all |
| If adequate funds are not available or are not available on acceptable terms, our business could suffer if such inability to raise funds threatens our ability to execute our turnaround strategy and reduces our operating flexibility |
| Availability of additional funds may be adversely affected because of our recurring losses from operations and negative cash flows |
| Moreover, if additional funds are raised through the issuance of equity securities, the percentage of ownership of our current stockholders will be reduced |
| Newly issued equity securities may have rights, preferences and privileges senior to those of investors in our common stock |
| In addition, the terms of any new debt could impose restrictions on our operations or capital structure |
| Our competition is both intense and varied, and our failure to effectively compete could adversely affect our prospects |
| The home furnishings industry has become increasingly competitive with mass merchants and warehouse clubs entering the market in a more significant way |
| We also compete with traditional furniture stores, other specialty retailers, department stores and, to a lesser extent, with alternative channels of distribution such as e-commerce and mail order |
| Changes in the amount and degree of promotional intensity or merchandising strategy exerted by our current competitors and potential new competition could present us with difficulties in retaining existing customers, attracting new customers and maintaining our profit margins |
| In addition, some of our competitors may use strategies such as lower pricing, wider selection of products, larger store size, improved store design, and more efficient sales methods |
| While we attempt to differentiate ourselves from our competitors by focusing on the timeless and classically styled home furnishings shown in lifestyle settings, our business model may not allow us to compete successfully against existing and future competitors |
| 9 _________________________________________________________________ We may continue to experience fluctuations in our comparable store sales |
| Our success depends, in part, upon our ability to increase sales at our existing stores |
| Various factors affect comparable store sales, including the number of stores we open, close or expand in any period, potential disruption to our customer base as we migrate to off-mall locations; the general retail sales environment; consumer preferences and buying trends; changes in sales mix among distribution channels; our ability to efficiently source and distribute products; changes in our merchandise mix; competition; current local and global economic conditions; the timing of our releases of new merchandise and promotional events; the success of marketing programs; and the cannibalization of existing store sales by new stores |
| Among other things, weather conditions can affect comparable store sales because inclement weather can require us to close certain stores temporarily and thus reduce store traffic |
| These factors may cause our comparable store sales results to differ materially from prior periods |
| Our comparable store sales have fluctuated significantly in the past on an annual, quarterly and monthly basis, and we expect that comparable store sales will continue to fluctuate in the future |
| Our comparable store sales results for Fiscal 2005, 2004 and 2003 were (2prca), (12prca) and 13prca, respectively |
| Past comparable store sales are no indication of future results |
| Our ability to improve our comparable store sales results depends in large part on maintaining and improving our forecasting of customer demand and buying trends, selecting effective marketing techniques, providing an appropriate mix of and using more effective pricing strategies |
| Any failure to meet the comparable store sales expectations of investors and security analysts in one or more future periods could significantly reduce the market price of our common stock |
| We may not be able to find appropriate locations as we migrate our stores from mall to off-mall, expand our store base in major markets, and rationalize the real estate portfolio |
| As part of our turnaround strategy, we have attempted to find suitable off-mall real estate sites to which we can relocate stores when mall leases expire |
| As a result of a significant growth in the store base during the mid 1990’s, we have been faced with a large number of leases with expiration dates over the past three years |
| During this same period, we have sought to expand our store base by increasing store density in major markets |
| Additionally, in order to enhance the customer experience, we are seeking off-mall locations that are approximately 20prca to 30prca larger for the core operations and have expanded the assortment to include children’s home furnishings |
| Where we do not have the ability to find appropriate off-mall locations, we have entered into either short-term or long-term extensions |
| Our ability to open new stores and to expand, remodel or relocate existing stores depends on a number of factors, including our ability to: · obtain adequate capital resources for leasehold improvements, fixtures and inventory on acceptable terms, or at all; · locate and obtain favorable store sites and negotiate acceptable lease terms; · construct or refurbish store sites; · hire, train and retain skilled employees; and · continue to upgrade our information and other operating systems to support operations |
| The rate of our migration and expansion will depend on the availability of adequate capital, which in turn will depend in large part on cash flow generated by our business and the availability of equity and debt capital |
| There can be no assurance that we will have adequate cash flow generated by our business or that we will be able to obtain equity or debt capital on acceptable terms, or at all |
| Moreover, our credit facility contains restrictions on the amount of debt we may incur in the future |
| If we are not successful in obtaining sufficient capital, we may be unable to open additional stores or expand, remodel and relocate existing stores as planned, which may adversely affect our migration and expansion strategy resulting in a decrease in sales |
| There also can be no assurance that our existing stores will maintain their current levels of net sales and store-level profitability or that new stores will generate sales levels necessary to achieve store-level profitability |
| New stores that we open in our existing markets may draw customers from our existing stores and may have lower sales growth relative to stores opened in new markets |
| New stores also may face greater competition and have lower anticipated sales volumes relative to previously opened stores during their comparable years of operations |
| Also, stores opened in non-mall locations may require greater marketing costs in order to attract customer traffic |
| These factors may reduce our average store contribution and operating margins |
| If we are unable to profitably open and operate new stores and maintain the profitability of our existing stores, our net income could suffer |
| We recently announced our intention to exit certain under-performing locations |
| In the recent past, we exited the majority of leases at the end of the lease term with minimal expense associated with the transaction |
| To the extent that we will attempt to terminate certain leases relating to under-performing locations prior to lease expiration, our ability to exit those stores on an economic basis will be dependent upon our being able to successfully negotiate acceptable terms with landlords |
| 10 _________________________________________________________________ We may not be able to effectively manage our inventory levels, particularly excess or inadequate amounts of inventory, which could adversely affect our financial results |
| We source inventory both domestically and internationally, and our inventory levels are subject to a number of factors beyond our control |
| These factors, including reduced consumer spending and consumer disinterest in our product offerings, could lead to excess inventory levels |
| Additionally, we may not assess appropriate product life cycles or end-of-life products, leaving us with excess inventory |
| To reduce these inventory levels, we may be required to lower our prices, adversely impacting our margin levels and our financial results Alternatively, we may have inadequate inventory levels for particular items, including popular selling merchandise, due to factors such as unavailability of products from our vendors, import delays, untimely deliveries or the disruption of international, national or regional transportation systems |
| The occurrence of any of these factors on our inventory supply could adversely impact our financial results |
| Any potential tariffs imposed on products that we import from China, as well as the potential sudden strengthening of China’s currency against the US dollar, could reduce our gross margins and our overall profitability |
| We purchase a significant portion of our inventory from manufacturers located in China |
| Changes in trade regulations (including tariffs on imports) or the continued strengthening of the Chinese currency against the US dollar could increase the cost of items we purchase, which in turn could have a material adverse effect on our gross margins |
| Our business is subject to risks generally associated with US and foreign government regulations related to product sourcing |
| As such, our business is subject to US and foreign government regulations and legislation related to product sourcing |
| Additional duties, quotas, tariff and other restrictions may be imposed upon the sourcing of our products in the future |
| We cannot predict the effect that such actions would have on our cost of operations and our ability to source products |
| Additional duties, quotas or tariffs could have a significant impact on our business, financial condition and results of operations |
| We may not be able to attract, retain and grow an effective management team or changes in the cost or availability of a suitable workforce to manage and support our operating strategies could cause our operating results to suffer |
| Our success depends in large part upon our ability to attract, motivate and retain a qualified management team and employees |
| Qualified individuals needed to fill these positions could be in short supply |
| The inability to recruit and retain such individuals could result in high employee turnover at our stores and in our Company overall, which could have a material adverse effect on our business and financial results |
| Additionally, competition for qualified employees requires us to continually assess our compensation structure |
| Competition for qualified employees has required, and in the future could require, us to pay higher wages to attract a sufficient number of qualified employees, resulting in higher labor compensation expense |
| Various types of employee related claims may be raised from time to time |
| We may also experience union organizing activity in currently non-union distribution facilities, stores and in our Company overall |
| Union organizing activity may result in work slowdowns or stoppages and higher labor costs, which would harm our business and operating results |
| Higher than expected costs, particularly if coupled with lower than expected sales, would negatively impact our business and operating results |
| The occurrence of severe weather events or natural disasters could significantly damage or destroy outlets or prohibit consumers from traveling to our retail locations, especially during the peak winter holiday shopping season |
| If severe weather, such as a large hurricane, tornado or earthquake, occurs in a particular region and damages or destroys a significant number of our stores in that area, our overall sales would be reduced accordingly |
| In addition, if severe weather, such as heavy snowfall or extreme temperatures, discourages or restricts customers in a particular region from traveling to our stores, our sales would also be adversely affected |
| If severe weather occurs during the fourth quarter holiday season, the adverse impact to our sales could be even greater than at other times during the year because we generate a significant portion of our sales during this period |
| Changes to estimates related to our property and equipment, or results that are lower than our current estimates at certain store locations, may cause us to incur non-cash impairment charges |
| We make certain estimates and projections in connection with impairment analyses for certain of our store locations for which current cash flows from operations are negative |
| Impairment results when the carrying value of the asset exceeds the undiscounted future cash flows over the life of the lease |
| These calculations require us to make a number of estimates and projections of future results, often up to ten years into the future |
| If these estimates or projections prove to be inaccurate, we may be required to take impairment charges on certain of these store locations |
| If these impairment charges are significant, our results of operations could be adversely affected |
| 11 _________________________________________________________________ We may be vulnerable to disruptions in our business due to reliance on technology |
| We rely upon our existing information systems for operating and monitoring all major aspects of our business, including sales, warehousing, distribution, purchasing, inventory control, merchandise planning and replenishment, as well as various financial functions |
| These systems and our operations are vulnerable to damage or interruption from: · fire, flood and other natural disasters; · power loss, computer system failures, Internet and telecommunications or data network failures; · operator negligence; improper operation by or supervision of employees; · physical or electronic loss of data or security breaches, misappropriation and similar events; and · computer viruses |
| Any disruption in the operation of our information systems, the loss of employees knowledgeable about such systems or our failure to continue to effectively modify such systems could interrupt our operations or interfere with our ability to monitor inventory, which could result in reduced net sales and affect our operations and financial performance |
| We also need to ensure that our systems are consistently adequate to satisfy our needs |
| The cost of any such system upgrades or enhancements could be significant |
| Any additional terrorist activities in the US, as well as the international war on terror, may adversely affect our sales and our stock price |
| An additional terrorist attack or series of attacks on the United States could have a significant adverse impact on the United States’ economy |
| This downturn in the economy could, in turn, have a material adverse effect on our sales |
| Furthermore, the threat of terrorist attacks in the United States since September 11, 2001, as well as the ongoing international war on terror, continues to create economic and political uncertainties in the United States |
| The potential for future terrorist attacks, the national and international responses to terrorist attacks, and other acts of war or hostility could cause greater uncertainty and cause the economy to suffer in ways that we currently cannot predict |
| In addition, these events could cause or contribute to a general decline in equity valuations, which, in turn, could reduce our market value |
| We may not be able to obtain commercial insurance at acceptable prices which might have a negative impact on our business |
| Insurance costs continue to be volatile, affected by natural catastrophes, fear of terrorism and financial irregularities and other fraud at publicly-traded companies |
| We believe that commercial insurance coverage is prudent for risk management and insurance costs may increase substantially in the future |
| In addition, for certain types or levels of risk, such as risks associated with earthquakes or terrorist attacks, we might determine that we cannot obtain commercial insurance at acceptable prices |
| Therefore, we might choose to forego or limit our purchase of relevant commercial insurance, choosing instead to self-insure one or more types or levels of risks |
| If we suffer a substantial loss that is not covered by commercial insurance, the loss and attendant expenses could negatively impact our business and operating results |
| We may not be able or may fail to protect our intellectual property which would adversely impact on our business |
| Our trademarks, service marks, copyrights, trade dress rights, domain names and other intellectual property are valuable assets that are critical to our success |
| The unauthorized reproduction or other misappropriation of our intellectual property could diminish the value of our brands or goodwill and cause a decline in our sales |
| We may not be able to adequately protect our intellectual property |
| In addition, the costs of defending our intellectual property may adversely affect our operating results |
| Our quarterly results of operations fluctuate due to a variety of factors, including seasonality |
| Our quarterly results have fluctuated in the past and are expected to fluctuate in the future, depending upon a variety of factors, including shifts in the timing of holiday selling seasons, including Valentine’s Day, Easter, Mother’s Day, Father’s Day, Halloween, Thanksgiving and Christmas, and the strategic importance of fourth quarter results |
| A significant portion of our revenue and all of our net earnings have been realized during the period from October through December |
| In anticipation of increased holiday sales activity, we incur certain significant incremental expenses, including the hiring of a substantial number of temporary employees to supplement our existing workforce |
| If, for any reason, we were to realize significantly lower-than-expected revenue or net earnings during the October through December selling season, our business and results of operations would be materially adversely affected |