| COLE KENNETH PRODUCTIONS INC Item 1A Risk Factors 17 Item 1A Risk Factors The Company operates in a changing environment that involves numerous known risks and uncertainties that could materially adversely affect our operations |
| The risks described below highlight some of the factors that have affected and in the future could affect our operations |
| Additional risks we do not yet know or that we currently think are immaterial may also affect our business operations |
| If any of the events or circumstances described below actually occurs, our business, financial condition or results of operations could be materially adversely impacted |
| We may not be able to respond to changing fashion and consumer demands in a timely manner |
| The footwear, apparel and accessory industries are subject to changing consumer demands and fashion trends |
| The Company believes that its success depends in large part upon its ability to identify and interpret fashion trends and to anticipate and respond to such trends in a timely manner |
| The Company has generally been successful in this regard but there can be no assurance that the Company will be able to continue to meet changing consumer demands or to develop successful styles in the future |
| If the Company misjudges the market for a particular product or product line, it may result in an increased inventory of unsold and outdated finished goods, which may have an adverse effect on the Companyapstas financial condition and results of operations |
| In addition, any failure by the Company to identify or respond to changing demands and trends could, in the long term, adversely affect consumer acceptance of the Companyapstas brand names, which may have an adverse effect on the Companyapstas business and prospects |
| The Company intends to market additional lines of footwear, apparel and fashion accessories in the future |
| As is typical with new products, demand and market acceptance for any new products introduce by the Company will be subject to uncertainty |
| Achieving market acceptance for each of these products may require substantial marketing efforts and the expenditure of significant funds to create customer demand |
| There can be no assurance that the Companyapstas marketing effort will successfully generate sales or that the Company will have the funds necessary to undertake such an effort |
| Our sales are influenced by general economic cycles |
| Footwear, apparel and accessories are cyclical industries dependent upon the overall level of consumer spending |
| Our customers anticipate and respond to adverse changes in economic conditions and uncertainty by reducing inventories and canceling orders |
| As a result, any substantial deterioration in general economic conditions, increases in energy costs or interest rates, acts of nature or political events that diminish consumer spending and confidence in any of the regions in which we compete, could reduce our sales and adversely affect our business and financial condition |
| The footwear, apparel and accessory industries are highly competitive |
| Competition in the footwear, apparel and accessory industries is intense |
| The Companyapstas products compete with other branded products within their product categories as well as with private label products sold by retailers, including some of the Companyapstas customers |
| In varying degrees, depending on the product category involved, the Company competes on the basis of style, price, quality, comfort and brand prestige and recognition, among other considerations |
| The Company also competes with numerous manufacturers, importers and distributors of footwear, apparel and accessories for the limited shelf-space available for the display of such product to the consumer |
| Moreover, the general availability of contract manufacturing capacity allows ease of access by new market entrants |
| Some of the Companyapstas competitors are larger, have achieved greater recognition for their brand names, have captured greater market share and/or have substantially greater financial, distribution, marketing and other resources than the Company |
| The loss of any of our largest customers could have a material adverse effect on our financial results |
| Although currently no customer comprises more than ten percent of our customer base, should one of our larger customers be negatively impacted, it could adversely affect our business |
| In recent years the retail industry has experienced consolidation and other ownership changes |
| In the future, retailers may have financial problems or consolidate, undergo restructurings or reorganizations, or realign their affiliations, any of which could further increase the concentration of our customers |
| The loss of any of our largest customers, or the bankruptcy or material financial difficulty of any customer, could have a material adverse effect on our business |
| We do not have long-term contracts with any of our customers, and sales to customers generally occur on an order-by-order basis |
| As a result, customers can terminate their relationships with us at any time or under certain circumstances cancel or delay orders which could reduce our sales and adversely affect our business condition |
| The success of our business depends on our ability to attract and retain key employees |
| The Company is heavily dependent on its current executive officers and management |
| The loss of any of our executive officers or management, including but not limited to, Kenneth Cole, or the inability to attract and retain qualified personnel could delay the development and introduction of new products, harm our ability to sell products, damage the image of our brands and/or prevent us from executing our business strategy |
| Imposition of quotas and fluctuations in exchange rates could increase our costs and impact our ability to source goods |
| The Companyapstas business is subject to risks of doing business abroad, including, but not limited to, fluctuations in exchange rates and the imposition of additional regulations relating to imports, including quotas, duties, taxes and other charges on imports |
| In order to reduce the risk of exchange rate fluctuations, the Company often enters into forward exchange contracts to protect the purchase price under its agreements with its manufacturers or purchases products in United States dollars |
| The Company cannot fully anticipate all of its currency needs and, therefore, cannot fully protect against the effect of such fluctuations |
| Although the majority of the goods sold by the Company are not currently subject to quotas, countries in which the Companyapstas products are manufactured may, from time to time, impose new or adjust prevailing quotas or other restrictions on exported products and the United States may impose new duties, tariffs and other restrictions on imported products, any of which could adversely affect the Companyapstas operations and its ability to import its products at the Companyapstas current or increase quantity levels |
| Other restrictions on the importation of footwear and the Companyapstas other products are periodically considered by the United States Congress and no assurances can be given that tariffs or duties on the Companyapstas goods may not be raised |
| If tariffs are raised in the future, they will result in higher costs to the Company, and if import quotas are imposed or made more restrictive, the Company may not be able to source its goods at historical factories or at similar prices |
| The voting shares of the Companyapstas stock are concentrated in one majority shareholder |
| Currently, Kenneth D Cole owns approximately 87prca of the voting power and approximately 42prca of the outstanding common stock of the Company |
| Cole has the ability to control (i) the election of all of the Companyapstas directors other than the directors who will be elected by the holders of Class A Common Stock, voting separately as a class, and (ii) the results of all other shareholder votes |
| Coleapstas interests may differ from the interests of the other stockholders |
| In the event of war or acts of terrorism or the escalation of existing hostilities, or if any are threatened, our ability to procure our products from our manufacturers for sale to our customers may be negatively affected |
| We import a substantial portion of our products from other countries |
| If it becomes difficult or impossible to import our products into the countries in which we sell our products, our sales and profit margins may be adversely affected |
| Additionally, war, military responses to future international conflicts and possible future terrorist attacks may lead to a downturn in the US and/or international economies, which could have a material adverse effect on our results of operations |
| Our business is subject to risks associated with sourcing outside the United States |
| Substantially all of our apparel 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, insufficient quality control, and failures to meet production deadlines or increases in manufacturing costs |
| The failure of any manufacturer to perform to our expectations could result in supply shortages for certain products and harm our business |
| In addition, our foreign manufactures may be adversely effected by addition factors such as: political instability in countries where contractors and suppliers are located; imposition of regulations and quotas relating to imports; imposition of duties, taxes and other charges on imports; significant fluctuation of the value of the dollar against foreign currencies; and restrictions on the transfer of funds to or from foreign countries |
| 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 in 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 |
| We rely on licensees for revenues, supply of products and compliance with Company standards |
| We license our trademarks to third parties for manufacturing, marketing, distribution and sale of various products and intend to expand our licensing programs |
| While we enter into comprehensive licensing agreements with our licensees covering product design, product quality, sourcing, manufacturing, marketing and other requirements, our licensees may not comply fully with those agreements |
| Non-compliance could include marketing products under our brand names that do not meet our quality and other requirements or engaging in manufacturing practices that do not meet our supplier code of conduct |
| These activities could harm our brand equity, our reputation and our business |
| In addition, our results could be affected by the results of our licensees or distributors |
| The financial difficulties of any of our partners or their failure to produce and deliver acceptable product could have an adverse impact on our business in the future |
| In the event of a business failure of any such partner or of the breakdown of our relationship with any domestic or foreign partner, there is no guarantee that the Company could replace such business |
| We maintain an inventory of selected products that we anticipate will be in high 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 manufacturers fail to supply quality products in a timely manner, we may experience inventory shortages, which may result in unfilled orders, negatively impact customer relationships, diminish brand loyalty and result in lost revenues |
| We rely on third parties for distribution and warehousing |
| We rely on warehousing and distribution facilities in California and New Jersey |
| Any disruption at either of these facilities due to fire, earthquake, flood, terrorist attack or any other natural or manmade cause, including operational or financial hardship of the provider, could damage a portion of our inventory or impair our ability to use our warehousing and distribution facilities |
| In addition, we will be transitioning the facilities in California during the first quarter of 2006, and although we are working closely with both current and former providers, we may incur slight delays in product shipments as a result of the transition |
| Any of these occurrences could impair our ability to adequately supply our customers and negatively impact our operating results |
| Outcomes of litigation or changes in regulatory control could impact our financial condition |
| From time to time, we may be a party to lawsuits and regulatory actions relating to our business |
| Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot accurately predict the ultimate outcome of any such proceedings |
| An unfavorable outcome could have a material adverse impact on our business, financial condition and results of operations |
| In addition, regardless of the outcome of any litigation or regulatory proceedings, such proceedings could result in substantial costs and may require that we devote substantial resources to defend the Company |
| Further, changes in government regulations both in the United States and in the countries in which we operate could have adverse affects on our business and subject us to additional regulatory actions |
| The loss or infringement of our trademarks and other proprietary rights could have a material adverse effect on our operations |
| We believe that our trademarks and other proprietary rights are important to our success and competitive position |
| Accordingly, we devote substantial resources to the establishment and protection of our trademarks on a worldwide basis |
| There can be no assurances that such actions taken to establish and protect our trademarks and other proprietary rights will be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as violative of their trademarks and proprietary rights |
| Moreover, there can be no assurances that others will not assert rights in, or ownership of, our trademarks and other proprietary rights or that we will be able to successfully resolve such conflicts |
| In addition, the laws of certain foreign countries may not protect proprietary rights to the same extent as do the laws of the United States |
| Any litigation regarding our trademarks could be time consuming and costly, and the loss of such trademarks and other proprietary rights, or the loss of the exclusive use of such trademarks and other proprietary rights, could have a material adverse effect on our operations |
| Implementation of management information systems may impact our financial results |
| In 2006 and over the next few years we plan to implement SAP information management software in our retail operations |
| The implementation of such software could be delayed and we may encounter computer and operational complications in connection with such implementation that could have a material adverse effect on our business, financial condition or results of operations |
| Difficulties migrating existing systems to the new software could impact our ability to design, produce and ship our products on a timely basis |
| Seasonality of our business and the timing of new store openings could result in fluctuations in our financial performance |
| Our business is subject to seasonal fluctuations |
| Historically, fourth quarterapstas sales are typically higher due to holiday business |
| Therefore, results of operations for any single quarter are not necessarily indicative of the results that may be achieved for a full fiscal year |
| Quarterly results have been, and in the future will continue to be, significantly impacted by the timing of new store openings and their respective pre-opening costs |
| Adverse publicity could negatively affect public perception of the brand |
| Our results could be substantially affected by adverse publicity resulting from our products or our advertising |
| Our expectations of growth anticipate new store openings which are subject to many factors beyond our control |
| Future growth in sales and profits in our Consumer Direct division will depend to some extent on our ability to increase the number of our stores |
| The lease negotiation and development timeframes vary from location to location and can be subject to unforeseen delays |
| The number and timing of new stores actually opened during any given period, and their associated contribution to operating week growth for the period, will depend on a number of factors including, but not limited, to: (1) the identification and availability of suitable locations and leases; (2) the availability of suitable financing to us and our landlords; (3) the timing of the delivery of the leased premises to us from our landlords in order to commence build-out construction activities; (4) the ability of us and our landlords to obtain all necessary governmental licenses and permits to construct and operate our restaurants on a timely basis; (5) our ability to manage the construction and development costs of new restaurants, and the availability and/or cost of raw materials; (6) the rectification of any unforeseen engineering or environmental problems with the leased premises; (7) adverse weather during the construction period; and (8) the hiring and training of qualified operating personnel in the local market |
| Any of the above factors could have a material adverse impact on our financial condition |