| PERRY ELLIS INTERNATIONAL INC Item 1A Risk Factors Our business faces certain risks |
| The risks described below may not be the only risks we face |
| Additional risks that we do not yet know of or that we currently think are immaterial may also impair our business |
| If any of the events or circumstances described as risks below or elsewhere in this report actually occurs, our business, results of operations or financial condition could be materially and adversely affected |
| 15 ______________________________________________________________________ [16]Table of Contents We rely on a few key customers, and a significant decrease in business from or the loss of any one key customer or key program would substantially reduce our revenues and harm our business |
| We derive a significant amount of our revenues from a few major customers |
| For example, net sales to our five largest customers totaled approximately 46prca, 32prca, and 39prca of net sales during fiscal 2006, fiscal 2005, and fiscal 2004, respectively |
| For fiscal 2006, two customers accounted for over 10prca of net sales, Federated/May Department Stores and Wal-Mart accounted for approximately 13prca and 11prca of net sales, respectively |
| During fiscal 2005, no customer accounted for more then 10prca of our net sales |
| A significant decrease in business from or loss of any of our major customers could harm our financial condition by causing a significant decline in revenues attributable to such customers |
| Although we have long-standing relationships with many of our customers, we do not have long-term contracts with any of them and purchases generally occur on an order-by-order basis |
| We believe that purchasing decisions are generally made independently by individual department stores within a company-controlled group |
| There has been a trend, however, toward more centralized purchasing decisions |
| As such decisions become more centralized, the risk to us of such concentration increases |
| Furthermore, our customers could curtail or cease their business with us because of changes in their strategic and operational initiatives, such as an increased focus on private label, consolidation with another retailer, changes in our customer’s buying patterns, financial instability and other reasons |
| If our customers curtail or cease business with us, our revenues could significantly decrease and our financial condition could be significantly harmed |
| We may not be able to anticipate consumer preferences and fashion trends, which could negatively affect acceptance of our products by retailers and consumers and result in a significant decrease in net sales |
| Our failure to anticipate, identify and respond effectively to changing consumer demands and fashion trends could adversely affect acceptance of our products by retailers and consumers and may result in a significant decrease in net sales or leave us with a substantial amount of unsold inventory |
| We believe that our success depends on our ability to anticipate, identify and respond to changing fashion trends in a timely manner |
| Our products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to rapid change |
| We may not be able to continue to develop appealing styles or successfully meet constantly changing consumer demands in the future |
| In addition, any new products or brands that we introduce may not be successfully received by retailers and consumers |
| Due to the fact that we began marketing women’s apparel with the acquisition of the Jantzen swimwear business in fiscal 2003, we may be more subject to additional changes in fashion trends as women’s fashion trends have historically changed more rapidly than men’s |
| If our products are not successfully received by retailers and consumers and we are left with a substantial amount of unsold inventory, we may be forced to rely on markdowns or promotional sales to dispose of excess, slow-moving inventory |
| If this occurs, our business, financial condition, results of operations and prospects may be harmed |
| We are dependent upon the revenues generated by our licensing alliances and the loss or inability to renew certain licenses could reduce our royalty income and consequently reduce our net income |
| A portion of our net income is derived from licensing income received from our licensing partners |
| The interruption of the business of several of our licensing partners at any one time could adversely affect our royalty income and net income |
| Licensing income accounted for dlra21dtta9 million or 2dtta6prca of total revenues for fiscal 2006 |
| We currently license the PING, Nike and PGA Tour brands from third parties |
| These licenses vary in length of term, renewal conditions and royalty obligations |
| The average term of these licenses is three to five years with automatic renewals depending upon whether we achieve certain targeted sales goals |
| We may not be able to renew or extend any of these licenses, on favorable terms, if at all |
| Our business could be harmed if we do not deliver quality products in a timely manner |
| Our sourcing, logistics and technology functions operate within substantial production and delivery requirements and subjects us to the risks associated with unaffiliated manufacturers, transportation and other risks |
| If we do not comply with customer product requirements or meet their delivery requirements, our customers could reduce our selling prices, require significant margin support, reduce the amount of business they do with us, or cease to do business with us, all of which would harm our business |
| 16 ______________________________________________________________________ [17]Table of Contents Because we do business abroad, our business could be harmed if changes, in political or economic stability, laws, exchange rates, or foreign trade policies should occur |
| Our relationship with our foreign suppliers subjects us to the risks of doing business abroad |
| As a result of our suppliers, in some instances, being at great geographic distances from us, our transportation costs are increased and longer lead times are required, which reduces our flexibility |
| Our finished goods are also subject to import duties, quotas and other restrictions |
| Other risks in doing business with foreign suppliers include political or economic instability, any significant fluctuations in the value of the dollar against foreign currencies, terrorist activities, and restrictions on the transfer of funds |
| Although we have not been affected in a material way by any of the foregoing factors, we cannot predict the likelihood or frequency of any such events occurring and any material disruption may have an adverse affect on our business |
| We may face challenges integrating the operations of any businesses we may acquire, which may negatively impact our business |
| As part of our strategy of making selective acquisitions, we acquire new brands and product categories |
| Acquisitions have inherent risks, including the risk that the projected sales and net income from the acquisition may not be generated, the risk that the integration is more costly and takes longer than anticipated, risks of retaining key personnel, and risks associated with unanticipated events and unknown legal liabilities |
| Any of these and other risks may harm our business |
| With respect to previous acquisitions, we faced many challenges in consolidating functions and integrating management procedures, personnel and operations in an efficient and effective manner, which if not managed as projected, could have negatively impacted our business |
| Some of these challenges included increased demands on management related to the significant increase in the size and diversity of our business after the acquisition, the dedication of management’s attention to implement our strategies for the business, the retention and integration of key employees, determining aspects of the acquired business that were to be kept separate and distinct from our other businesses, and difficulties in assimilating corporate culture and practices into ours |
| We expect that we will face similar challenges if we make significant acquisitions in the future |
| We have a significant amount of debt, which could have important negative consequences to us, including making it difficult for us to satisfy all of our obligations in the event we experience financial difficulties |
| We have a significant amount of debt |
| As of January 2006, we had dlra259 million of debt outstanding (excluding amounts outstanding under our letter of credit facilities) |
| Our substantial indebtedness could have important consequences, including: • making it more difficult for us to satisfy our obligations with respect to our senior subordinated notes, including our ability to repurchase such notes upon the occurrence of a change of control, • increasing our vulnerability to adverse general economic and industry conditions and adverse changes in governmental regulations, • limiting our ability to obtain additional financing to fund capital expenditures, acquisitions and other general corporate requirements, • requiring us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund capital expenditures, acquisitions or other general corporate purposes, • limiting the rights of holders of senior subordinated notes to receive payment if holders of our secured debt have not been paid, • limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate, and • placing us at a competitive disadvantage compared to our less leveraged competitors |
| Our ability to pay interest on our indebtedness and to satisfy our other debt obligations will depend upon, among other things, our future operating performance and cash flow and our ability to refinance indebtedness when necessary |
| Each of 17 ______________________________________________________________________ [18]Table of Contents these factors is, to a large extent, dependent on general economic, financial, competitive, legislative, regulatory and other factors beyond our control |
| If, in the future, we cannot generate sufficient cash from operations to make scheduled payments on our indebtedness or to meet our liquidity needs or other obligations, we will need to refinance our existing debt, obtain additional financing or sell assets |
| We cannot assure that we will be able to renegotiate or refinance any of our debt on commercially reasonable terms or at all |
| In addition, our interest expense may increase if general economic conditions result in an increasing interest rate environment because most of our debt is based on variable as opposed to fixed rates |
| We cannot assure that our business will generate cash flow, or that we will be able to obtain funding, sufficient to satisfy our debt service requirements |
| We operate in a highly competitive and fragmented industry and our failure to successfully compete could result in a loss of one or more significant customers |
| The apparel industry is highly competitive and fragmented |
| Our competitors include numerous apparel designers, manufacturers, importers and licensors, many of which have greater financial and marketing resources than us |
| We believe that the principal competitive factors in the apparel industry are: • brand name and brand identity, • timeliness, reliability and quality of services provided, • market share and visibility, • price, and • the ability to anticipate customer and consumer demands and maintain appeal of products to customers |
| The level of competition and the nature of our competitors varies by product segment with low-margin, mass-market manufacturers being our main competitors in the less expensive segment of the market and US and foreign designers and licensors competing with us in the more upscale segment of the market |
| If we do not maintain our brand names and identities and continue to provide high quality and reliable services on a timely basis at competitive prices, we may not be able to continue to compete in our industry |
| If we are unable to compete successfully, we could lose one or more of our significant customers, which, if not replaced, could negatively impact our sales and financial performance |
| We depend on certain key personnel the loss of which could negatively impact our ability to manage our business |
| Our future success depends to a significant extent on retaining the services of certain executive officers and directors, in particular George Feldenkreis, our chairman of the board and chief executive officer, and Oscar Feldenkreis, our president and chief operating officer |
| They are each party to an employment agreement which expires in 2010 |
| The loss of the services of either George Feldenkreis or Oscar Feldenkreis, or any other key member of management, could have a material adverse effect on our ability to manage our business |
| Our continued success is dependent upon our ability to attract and retain qualified management, administrative and sales personnel to support our future growth |
| Our inability to do so may have a significant negative impact on our ability to manage our business |