| COST PLUS INC/CA/ ITEM 1A RISK FACTORS The following information describes certain significant risks and uncertainties inherent in our business |
| You should carefully consider these risks and uncertainties, together with the other information contained in this Annual Report on Form 10-K and in the Company’s other public filings |
| If any of such risks and uncertainties actually occurs, the Company’s 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 the Company’s other public filings |
| In addition, if any of the following risks and uncertainties, or if any other disclosed risks and uncertainties, actually occurs, the Company’s business, financial condition or operating results could be harmed substantially, which could cause the market price of our stock to decline, perhaps significantly |
| Our business is highly seasonal and our operating results fluctuate significantly from quarter to quarter |
| Our business is highly seasonal, reflecting the general pattern associated with the retail industry of peak sales and earnings during the Holiday season |
| Due to the importance of the Holiday selling season, the fourth quarter of each fiscal year has historically contributed, and we expect will continue to contribute, a large percentage of our net sales and much of our net income for the entire fiscal year |
| Any factors that have a negative effect on our business during the Holiday selling season in any year, including unfavorable economic conditions, would materially and adversely affect our financial condition and results of operations |
| We generally experience lower sales and earnings during the first three quarters and, as is typical in the retail industry, may incur losses in these quarters |
| The results of our operations for these interim periods are not necessarily indicative of the results for our full fiscal year |
| 5 ______________________________________________________________________ [28]Table of Contents We also must make decisions regarding merchandise well in advance of the season in which it will be sold |
| If the demand for our merchandise is significantly different than we have projected, it would harm our business and operating results, either as a result of lost sales due to insufficient inventory or lower gross margin due to the need to mark down excess inventory |
| Our quarterly operating results may also fluctuate based on such factors as: • delays in the flow of merchandise to our stores, • the number and timing of new store openings and related store pre-opening expenses, • the amount of sales contributed by new and existing stores, • the mix of products sold, • the timing and level of markdowns, • store closings or relocations, • competitive factors, • changes in fuel and other shipping costs, • general economic conditions, • labor market fluctuations, • the impact of terrorist activities, • changes in accounting rules and regulations, and • unseasonable weather conditions |
| These fluctuations may also cause a decline in the market price of our common stock |
| Our success depends to a significant extent upon the overall level of consumer spending |
| As a retail business our success depends to a significant extent upon the overall level of consumer spending |
| Among the factors that affect consumer spending are the general state of the economy, the level of consumer debt, prevailing interest rates and consumer confidence in future economic conditions |
| A substantial number of our stores are located in the western United States, especially in California |
| Lower levels of consumer spending in this region could have a material adverse affect on our financial condition and results of operations |
| Reduced consumer confidence and spending may result in reduced demand for our merchandise, may limit our ability to increase prices and may require us to incur higher selling and promotional expenses, which in turn would harm our business and operating results |
| The occurrence or the threat of international conflicts or terrorist activities could harm our business and result in business interruptions |
| Most of the merchandise that we sell is purchased in other countries and must be shipped to the United States, transported from the port of entry to our distribution centers in California or Virginia and distributed to our stores from the distribution centers |
| The precise timing and coordination of these activities is crucial to our business |
| The occurrence or threat of international conflicts or terrorist activities and the responses to those developments, for example, the temporary shutdown of a port that we use, could have a significant impact upon our business, our personnel and facilities, our customers and suppliers, the retail and financial markets and general economic conditions |
| 6 ______________________________________________________________________ [29]Table of Contents Our business and operating results are sensitive to changes in energy and transportation costs |
| We incur significant costs for the purchase of fuel in transporting goods from foreign ports and to our distribution centers and stores and for utility services in our stores, distribution centers and corporate offices |
| We continually negotiate pricing for certain transportation contracts and, in a period of rising fuel costs such as we have recently experienced, expect that our vendors for these services will increase their rates to compensate for the higher energy costs |
| We may not be able to pass these increased costs on to our customers |
| We must continue to open new stores and increase sales from existing stores to carry out our growth strategy |
| Our ability to increase our sales and earnings depends in part on our ability to continue to open new stores and to operate these stores on a profitable basis |
| Our continued growth also depends on our ability to increase sales in our existing stores |
| We intend to open stores in both existing and new geographic markets |
| When we open additional stores in existing markets it can result in lower sales from existing stores in that market |
| The success of our planned expansion will depend upon many factors, including the following: • our ability to identify suitable markets for expansion, • the selection, availability and leasing of suitable sites on acceptable terms, • the hiring, training and retention of qualified management and other store personnel, • satisfaction of regulatory requirements in new markets, including alcoholic beverage regulations, • control of costs associated with entering new markets, including advertising and distribution costs; and • our ability to maintain adequate systems, controls and procedures, including product distribution facilities, store management, financial controls and information systems |
| We cannot assure that we will be able to achieve our planned expansion, integrate new stores effectively into our existing operations or operate our new stores profitably |
| Our operating results will be harmed if we are unable to improve our comparable store sales |
| Our success depends, in part, upon our ability to improve sales at our existing stores |
| Our comparable store sales, which are defined as sales by stores that have completed 14 full fiscal months of sales, fluctuate from year to year |
| To ensure a meaningful comparison, we measure comparable store sales on a 52-week basis |
| Various factors affect comparable store sales, including: • the general retail sales environment, • our ability to source and distribute products efficiently, • changes in our merchandise mix, • competition, • current economic conditions, • the timing of release of new merchandise and promotional events, • the success of marketing programs, and • weather conditions |
| 7 ______________________________________________________________________ [30]Table of Contents These factors and others may cause our comparable store sales to differ significantly from prior periods and from expectations |
| If we fail to meet the comparable store sales expectations of investors and security analysts in one or more future periods, the price of our common stock could decline |
| We face a number of risks because we import much of our merchandise |
| We import a significant amount of our merchandise from over 50 countries and numerous suppliers |
| We have no long-term contracts with our suppliers, but instead rely on long-term relationships that we have established with many of these suppliers |
| Our future success will depend to a significant extent on our ability to maintain our relationships with our suppliers or to develop new ones |
| As an importer, our business is subject to the risks generally associated with doing business abroad such as the following: • foreign governmental regulations, • economic disruptions, • delays in shipments, • freight cost increases, • changes in political or economic conditions in countries from which we purchase products, and • the effect of trade regulation by the United States, including quotas, duties and taxes and other charges or restrictions on imported merchandise |
| If these factors or others made the conduct of business in particular countries undesirable or impractical or if additional quotas, duties taxes or other charges or restrictions were imposed by the United States on the importation of our products, our business and operating results would be harmed |
| Our dependence on our distribution centers carries certain risks |
| Merchandise distribution for all of our stores is currently handled from facilities in Stockton, California and Windsor, Virginia |
| Any significant interruption in the operation of these facilities, including any interruption as a result of the planned expansion of the Stockton facility purchased in February 2005, would harm our business and operating results, as would operational inefficiencies or failure to coordinate the operations of these facilities successfully |
| We may not be able to forecast customer preferences accurately in our merchandise selections |
| Our success depends in part on our ability to anticipate the tastes or our customers and to provide merchandise that appeals to their preferences |
| Our strategy requires our merchandising staff to introduce products from around the world that meet current customer preferences and that are affordable, distinctive in quality and design and that are not widely available from other retailers |
| In addition, a large percentage of our merchandise changes regularly |
| Our failure to anticipate, identify or react appropriately to changes in consumer trends could cause excess inventories and higher markdowns or a shortage of products and could harm our business and operating results |
| We face intense competition from a variety of other retailers |
| The markets that we serve are very competitive |
| We compete against a diverse group of retailers ranging from specialty stores to department stores and discounters |
| Our product offerings compete with such retailers as Bed Bath & Beyond, Target, Linens n’ Things, Crate & Barrel, Pottery Barn, Michaels Stores, Pier 1 Imports, Trader Joe’s and Williams-Sonoma |
| We compete with these and other retailers for customers, suitable retail locations and qualified management personnel |
| Many of our competitors have considerably greater financial, marketing and other resources than we have |
| 8 ______________________________________________________________________ [31]Table of Contents We rely on various key management personnel to ensure our success and have had significant management changes in the past year |
| Our success will continue to depend on our key management personnel |
| The loss of the services of one or more of these executives could harm our business and operating results |
| We do not maintain any key man life insurance policies |
| Within the past year, we have had significant changes in our management, including our Chief Executive Officer and our Chief Financial Officer |
| Moreover, we have recently added a Senior Vice President, Marketing, and a Senior Vice President, Supply Chain, and our Executive Vice President of Merchandising and Marketing has terminated employment and has not yet been replaced |
| Our common stock may be subject to substantial price and volume fluctuations |
| The market price of our common stock is affected by factors such as fluctuations in our operating results, a downturn in the retail industry, changes in stock market analysts’ recommendations regarding our company, other retail companies or the retail industry in general and general market and economic conditions |
| In addition, the stock market can experience price and volume fluctuations that are unrelated to the operating performance of particular companies |
| Our business is subject to risks associated with fluctuations in the values of foreign currencies against the United States dollar |
| We have significant purchase obligations with suppliers outside of the United States |
| During fiscal 2005, approximately 2dtta4prca of these purchases were settled in currencies other than the United States dollar |
| Fluctuations in the rates of exchange between the dollar and other currencies could harm our operating results |
| We have not hedged our currency risk in the past and do not currently anticipate doing so in the future |
| Provisions in our charter documents as well as our stockholders’ rights plan could prevent or delay a change in control of our company and may reduce the market price of our common stock |
| Certain provisions of our articles of incorporation and bylaws may have the effect of making it more difficult for a third party to acquire, or may discourage a third party from attempting to acquire, control of the Company |
| Such provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock |
| Certain of these provisions allow us to issue preferred stock without any vote or further action by the shareholders |
| In addition, the right to cumulate votes in the election of directors has been eliminated |
| These provisions may make it more difficult for shareholders to take certain corporate actions and could have the effect of delaying or preventing a change in control of the Company |
| In addition, our board of directors has adopted a preferred share purchase rights agreement |
| Pursuant to the rights agreement, our board of directors declared a dividend of one right to purchase one one-thousandth share of our Series A Participating Preferred Stock for each outstanding share of our common stock |
| These rights could have the effect of delaying, deferring or preventing a change of control of our company, discouraging a proxy contest or making more difficult the acquisition of a substantial block of our common stock |
| The rights agreement could also limit the price that investors might be willing to pay in the future for our common stock |
| Lawsuits and other claims against our company may adversely affect our operating results |
| We are involved in litigation, claims and assessments incidental to our business, the disposition of which is not expected to have a material effect on our financial position or results of operations |
| It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in our assumptions related to these matters |
| We accrue our best estimate of the probable cost for the resolution of claims |
| When appropriate, such estimates are developed in consultation with outside counsel handling the matters and are based upon a combination of litigation and settlement strategies |
| To the extent additional information arises or our strategies change, it is possible that our best estimate of our probable liability may change |
| 9 ______________________________________________________________________ [32]Table of Contents Changes in financial accounting standards related to equity compensation will cause us to record additional expense in the future, which will result in a reduction in our net income |
| In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Nodtta 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”), which will be effective for us in the first quarter of fiscal 2006 |
| SFAS 123(R) will cause us to recognize in our financial statements substantial compensation expense that had not previously been reflected except in the notes to our statements |
| It is unclear how investors and analysts will react to the additional compensation expense we are required to report under SFAS 123(R), and our stock price could be negatively affected |
| Further, to the extent we change or limit our use of equity incentives as a result of SFAS 123(R), it could affect our ability to recruit and retain qualified personnel |