| The following are some of the factors that could cause actual results to differ materially from estimates contained in our forward-looking statements: Fluctuations in consumer preference may adversely affect the demand of our products and result in a decline in our sales |
| Our retail costume jewelry and fashion accessories business fluctuates according to changes in consumer preferences, which are dictated in part by fashion and season |
| If we are unable to anticipate, identify or react to changing styles or trends, our sales may decline, and we may be faced with excess inventories |
| If this occurs, we may be forced to rely on additional markdowns or promotional sales to dispose of excess or slow moving inventory, which could have a material adverse effect on our results of operations and adversely affect our gross margins |
| In addition, if we miscalculate fashion tastes and our customers come to believe that we are no longer able to offer fashions that appeal to them, our brand image may suffer |
| Our business is affected by consumer spending patterns |
| Our business is sensitive to a number of factors that influence the levels of consumer spending, including political and economic conditions, such as recessionary and inflationary environments, the levels of disposable consumer income, energy costs, consumer debt, interest rates and consumer confidence |
| 8 _________________________________________________________________ [42]Table of Contents Declines in consumer spending on costume jewelry and accessories could have a material adverse effect on our operating results |
| Advance purchases of our merchandise make us vulnerable to changes in consumer preferences and pricing shifts and may negatively affect our results of operations |
| Fluctuations in the demand for retail fashion accessories and apparel especially affect the inventory we sell because we usually order our merchandise in advance of the applicable season and sometimes before fashion trends are identified or evidenced by customer purchases |
| In addition, the cyclical nature of the retail business requires us to carry a significant amount of inventory, especially prior to peak selling seasons when we and other retailers generally build up inventory levels |
| We must enter into contracts for the purchase and manufacture of merchandise with our suppliers in advance of the applicable selling season |
| As a result, we are vulnerable to demand and pricing shifts, and it is more difficult for us to respond to new or changing fashion needs |
| As a result, if sales do not meet our expectations, our results of operations may be negatively impacted |
| A disruption of imports from our foreign suppliers or significant fluctuation in the value of the US Dollar or foreign exchange rates may increase our costs and reduce our supply of merchandise |
| Approximately 83prca of our Fiscal 2006 merchandise was purchased from suppliers outside the United States, including approximately 60prca purchased from China |
| Any event causing a sudden disruption of imports from China or other foreign countries, including political and financial instability, would likely have a material adverse effect on our operations |
| We cannot predict whether any of the countries in which our products currently are manufactured or may be manufactured in the future will be subject to additional trade restrictions imposed by the US and other foreign governments, including the likelihood, type or effect of any such restrictions |
| Trade restrictions, including increased tariffs or quotas, embargoes, and customs restrictions, on merchandise that we purchase could increase the cost or reduce the supply of merchandise available to us and adversely affect our business, financial condition and results of operations |
| During the prior year, the US imposed trade quotas on specific categories of goods and apparel imported from China, and may impose additional quotas in the future |
| Substantially all of our foreign purchases of merchandise are negotiated and paid for in US dollars |
| As a result, our sourcing operations also may be adversely affected by significant fluctuation in the value of the US dollar against foreign currencies, restrictions on the transfer of funds, and other trade disruptions |
| Additionally, if China further adjusts the exchange rate of the Chinese Yuan or allows the value to float, we will likely experience an increase in cost of our merchandise purchased from China |
| Interruptions in distribution of our merchandise from our distribution facilities may negatively affect our profitability |
| Distribution functions for all of our North American stores are handled from our distribution center in Hoffman Estates, Illinois |
| Distribution functions for our stores outside of North America are handled through three distribution centers located in the United Kingdom, Switzerland and Austria |
| We plan to open during Fiscal 2008 a new distribution center in Europe to address our anticipated growth in Europe |
| As we construct or expand our distribution centers, we could experience delays and cost overruns, such as shortages of materials; shortages of skilled labor or work stoppages; unforeseen construction, scheduling, engineering, environmental or geological problems; weather interference; fires or other casualty losses; and unanticipated cost increases |
| The completion dates and ultimate costs could differ significantly from initial expectations due to construction-related or other reasons |
| Any significant interruption in the operation of our distribution centers, due to natural disaster or otherwise, would have a material adverse effect on our business, financial condition and results of operations |
| 9 _________________________________________________________________ [43]Table of Contents Store operations and expansion may affect our ability to increase net sales and operate profitably |
| Our continued success depends, in part, upon our ability to increase sales at existing store locations, to open new stores and to operate stores on a profitable basis and to maintain good relationships with mall developers and operators |
| Because we are primarily a mall-based chain, our future growth is significantly dependent on our ability to open new stores in desirable locations, including malls |
| Our ability to open new stores depends on a number of factors, including our ability to locate and obtain favorable store sites primarily in malls, negotiate acceptable lease terms that meet our financial targets, obtain adequate supplies of merchandise, hire and train qualified employees and expand our infrastructure to accommodate growth |
| Our ability to operate stores on a profitable basis depends on various factors, including whether we have to take additional merchandise markdowns due to excessive inventory levels compared to sales trends, whether we can reduce the number of under-performing stores which have a higher level of fixed costs in comparison to net sales, and our ability to maintain a proportion of new stores to mature stores that does not harm existing sales |
| There can be no assurance that our growth will result in enhanced profitability or that we will achieve our targeted growth rates with respect to new store openings |
| In addition, we must be able to effectively renew our existing store leases |
| Failure to secure real estate locations adequate to meet annual targets as well as effectively manage the profitability of our existing stores could have a material adverse effect on our results of operations |
| The failure to execute our international expansion or successfully integrate our international operations may impede our strategy of increasing net sales and adversely affect our operating results |
| Our international expansion is an integral part of our strategy to increase our net sales through expansion |
| If our international expansion is not successful, our results of operations are likely to be adversely affected |
| Our ability to grow successfully outside of North America depends in part on determining a sustainable formula to build customer loyalty and gain market share in certain especially challenging international retail environments |
| Additionally, the integration of our operations in foreign countries presents certain challenges not necessarily presented in the integration of our North American operations, such as integration of information systems |
| Also, we recently implemented new financial accounting software that we use to accumulate financial data used in financial reporting for our UK operations |
| We intend to implement this software in other foreign countries in which we operate |
| We plan to expand into new countries through organic growth and by entering into licensing and merchandising agreements with unaffiliated third parties who are familiar with the local retail environment and have sufficient retail experience to operate stores in accordance with our business model, which requires strict adherence to the guidelines established by us in our licensing agreements |
| Failure to identify appropriate licensees or negotiate acceptable terms in our licensing and merchandising agreements that meet our financial targets would adversely affect our international expansion goals, and could have a material adverse effect on our operating results and impede our strategy of increasing our net sales through expansion |
| Natural disasters or unusually adverse weather conditions or potential emergence of disease or pandemic could adversely affect our net sales or supply of inventory |
| Unusually adverse weather conditions, natural disasters, potential emergence of disease or pandemic, or similar disruptions, especially during the peak Christmas selling season, but also at other times, could significantly reduce the Company’s net sales |
| In addition, these disruptions could also adversely affect the Company’s supply chain efficiency and make it more difficult for the Company to obtain sufficient quantities of merchandise from suppliers |
| Information technology systems changes may disrupt our supply of merchandise |
| Our success depends, in large part, on our ability to source and distribute merchandise efficiently |
| We continue to evaluate and are currently implementing modifications and upgrades to our information technology systems supporting our product supply chain, including merchandise planning and allocation, inventory and price management |
| Modifications involve replacing legacy systems with successor systems 10 _________________________________________________________________ [44]Table of Contents or making changes to the legacy systems |
| We are aware of inherent risks associated with replacing and changing these core systems, including accurately capturing data and possibly encountering supply chain disruptions |
| We plan to launch these successor systems in a phased operating country approach over an approximate three-year period, which began in Fiscal 2006 |
| Although we are on track with the replacement of our systems, there can be no assurances that we will successfully launch these new systems as planned or that they will occur without supply chain or other disruptions |
| Supply chain disruptions, if not anticipated and appropriately mitigated, could have a material adverse effect on our operations |
| We are implementing certain other changes to our information technology systems that may disrupt operations |
| In addition to modifying and replacing our systems related to global retail store operations and international finance operations, we continue to evaluate and are currently implementing modifications and upgrades to our information technology systems for point of sales (cash registers), real estate, and international financial accounting |
| Modifications involve replacing legacy systems with successor systems, making changes to legacy systems or acquiring new systems with new functionality |
| We are aware of inherent risks associated with replacing these successor systems, including accurately capturing data and system disruptions and the ability to maintain effective internal controls |
| We plan to launch these successor systems in a phased operating country approach over an approximate three-year period, which began in Fiscal 2006 |
| We plan to complete installation of our new point of sales system in all our domestic stores, implement our international financial systems, and replace our lease management systems by the end of Fiscal 2008 |
| Although we are on track with replacement of our systems, there can be no assurances that we will successfully launch these systems as planned or that they will occur without disruptions to operations |
| Information technology system disruptions, if not anticipated and appropriately mitigated, could have material adverse effect on our operations |
| Fluctuations in same-store net sales may affect the price of our stock |
| Our comparable same-store net sales results have fluctuated in the past, on a monthly, quarterly and annual basis, and are expected to continue to fluctuate in the future |
| In addition, taking into consideration our consistent same store sales growth during the past several years, our ability to continue to deliver comparable increases in future years becomes more difficult to achieve each year |
| A variety of factors affect our same-store net sales results, including changes in fashion trends, changes in our merchandise mix, calendar shifts of holiday periods, timing of release of new merchandise, actions by competitors, weather conditions and general economic conditions |
| Our comparable store net sales results for any particular fiscal month, fiscal quarter or fiscal year in the future may decrease |
| As a result of these or other factors, our future comparable store net sales results may have a significant effect on the market price of our common stock because investors may look to our same-store net sales results to determine how we performed from period to period absent sales attributable to new stores |
| Changes in the anticipated seasonal business pattern could adversely affect our sales and profits and our quarterly results may fluctuate due to a variety of factors |
| Our business follows a seasonal pattern, peaking during the Christmas, Easter and back-to-school periods |
| Any decrease in sales or margins during these periods would be likely to have a material adverse effect on our business, financial condition and results of operations |
| Seasonal fluctuations also affect inventory levels, because we usually order merchandise in advance of peak selling periods |
| Our quarterly results of operations may also fluctuate significantly as a result of a variety of factors, including the time of store openings; the amount of revenue contributed by new stores; the timing and level of markdowns; the timing of store closings, expansions and relocations; competitive factors; and general economic conditions |
| 11 _________________________________________________________________ [45]Table of Contents Our growth is dependent on successful execution of our business strategy |
| During Fiscal 2006, we completed a five-year strategic plan with the assistance of a nationally recognized consulting firm |
| Our ability to grow our existing brands and develop or identify new growth opportunities depends in part on our ability to appropriately identify, develop and effectively execute strategies and initiatives identified in our plan, as well as new growth strategies and initiatives |
| Failure to effectively identify, develop and execute strategic initiatives may lead to increased operating costs without offsetting benefits and could have a material adverse effect on our results of operations |
| Our industry is highly competitive |
| The specialty retail business is highly competitive |
| We compete with national and local department stores, specialty and discount store chains, independent retail stores and internet, direct marketing to consumer, and catalog businesses that market similar lines of merchandise |
| Some competitors have more resources than us |
| Given the large number of companies in the retail industry, we cannot estimate the number of our competitors |
| Our successful performance in recent years has increased the amount of imitation by other retailers |
| Such imitation has made and will continue to make the retail environment in which we operate more competitive |
| Also, a significant shift in customer buying patterns to purchasing jewelry and accessories via the Internet could have a material adverse effect on our financial results |
| A decline in number of people who go to malls could reduce the number of our customers and reduce our net sales |
| Substantially all of our North American stores are located in regional shopping malls |
| Our sales are derived, in part, from the high volume of traffic in those malls |
| We benefit from the ability of the mall’s “anchor” tenants, generally large department stores and other area attractions to generate consumer traffic around our stores and the continuing popularity of malls as shopping destinations for pre-teens and teenagers |
| Sales volume and mall traffic may be adversely affected by economic downturns in a particular area, competition from non-mall retailers, other malls where we do not have stores, and the closing of anchor tenants in a particular mall |
| In addition, a decline in the popularity of mall shopping among our target customers, pre-teens and teenagers, and increased gasoline prices that may curtail customer visits to malls, could result in decreased sales that would have a material adverse affect on our business, financial condition and results of operations |
| The possibility of war and acts of terrorism could disrupt the Company’s information or distribution systems and increase our costs of doing business |
| A significant act of terrorism on US soil or elsewhere, could have an adverse impact on the Company by, among other things, disrupting its information or distributions systems; causing dramatic increases in fuel prices, thereby increasing the costs of doing business and affect consumer spending; or impeding the flow of imports or domestic products to the Company |
| We depend on our key personnel |
| Our ability to anticipate and effectively respond to the changing fashion trends and consumer preferences depends in part on our ability to attract and retain key personnel in our design, merchandising, marketing and other functions |
| 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 |
| The loss of services of key members of the Company’s senior management team or of certain other key employees could negatively affect the Company’s business |
| In addition, future performance will depend upon the Company’s ability to attract, retain and motivate qualified employees to keep pace with its expansion schedule |
| The inability to do so may limit the Company’s ability to effectively penetrate new market areas |
| 12 _________________________________________________________________ [46]Table of Contents Litigation matters incidental to our business could be adversely determined against us |
| The Company is involved from time to time in litigation incidental to its business |
| Management believes that the outcome of current litigation will not have a material adverse effect on our results of operations or financial condition |
| Depending on the actual outcome of pending litigation, charges would be recorded in the future that may have an adverse effect on our operating results |
| We make estimates for our tax liabilities based on tax positions that could be challenged in the future |
| We are subject to taxation in a number of foreign jurisdictions |
| When we estimate our taxes, we take into account our foreign operations, as well as our domestic operations |
| The estimates we make regarding domestic and foreign taxes are based on tax positions that we believe are supportable, but could be challenged by the Internal Revenue Service or a foreign jurisdiction |
| If we are unsuccessful in defending such a challenge, we could determine that our estimate for taxes was insufficient which could result in a charge to our earnings in the period such determination is made |
| The Company’s cost of doing business could increase as a result of changes in federal, state or local regulations |
| Unanticipated changes in the federal or state minimum wage or living wage requirements or changes in other workplace regulations could adversely affect the Company’s ability to meet our financial targets |
| In addition, changes in federal, state or local regulations governing the sale of the Company’s products, particularly regulations relating to metal content in our costume jewelry, could increase the Company’s cost of doing business and could adversely affect the Company’s sales results |
| Also, the Company’s inability to comply with these regulatory changes in a timely fashion or to adequately execute a required recall could result in significant fines or penalties that could adversely affect the Company’s financial statements as a whole |
| If our independent manufacturers or licensees or joint venture partner do not use ethical business practices or comply with applicable laws and regulations, our brand name could be harmed due to negative publicity and our results of operations could be adversely affected |
| While our internal and vendor operating guidelines promote ethical business practices, we do not control our independent manufacturers, licensees or joint venture partner, or their business practices |
| Accordingly, we cannot guarantee their compliance with our guidelines |
| Violation of labor or other laws, such as the Foreign Corrupt Practices Act, by our independent manufacturers, licensees, or joint venture partner, or the divergence from labor practices generally accepted as ethical in the United States, could diminish the value of our brand and reduce demand for our merchandise if, as a result of such violation, we were to attract negative publicity |
| As result, our results of operations could be adversely affected |
| We rely on third parties to distribute our merchandise and if these third parties do not adequately perform this function, our business would be disrupted |
| The efficient operation of our business depends on the ability of our vendors to ship merchandise through third party carriers directly to our individual stores |
| These carriers typically employ personnel represented by labor unions and have experienced labor difficulties in the past |
| Due to our reliance on these parties for our shipments, interruptions in the ability of our vendors to ship our merchandise or the ability of carriers to fulfill the distribution of merchandise to our stores could adversely affect our business, financial condition and results of operations |
| We may be unable to protect our trademarks and other intellectual property rights |
| We believe that our trademarks and service marks are important to our success and our competitive position due to their name recognition with our customers |
| There can be no assurance that the actions we have taken to establish and protect our trademarks 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 a violation of 13 _________________________________________________________________ [47]Table of Contents the trademarks, service marks and proprietary rights of others |
| The laws of some foreign countries may not protect proprietary rights to the same extent as do the laws of the US, and it may be more difficult for us to successfully challenge the use of our proprietary rights by other parties in these countries |
| Also, others may assert rights in, or ownership of, our trademarks and other proprietary rights, and we may be unable to successfully resolve those types of conflicts to our satisfaction |
| The Company may be unable to rely on liability indemnities given by foreign vendors which could adversely affect its financial statements as a whole |
| The Company imports approximately 83prca of its merchandise globally |
| Sources of supply may prove to be unreliable, or the quality of the globally sourced products may vary from the Company’s expectations |
| The Company’s ability to obtain indemnification from the manufacturers of these products may be hindered by the manufactures’ lack of understanding US product liability laws, which may make it more likely that the Company may have to respond to claims or complaints from its customers as if the Company were the manufacturer of the products |
| Any of these circumstances could have a material adverse effect on the Company’s business and its financial statements as a whole |