| SHOE PAVILION INC Item 1A Risk Factors We may not be able to successfully open new stores at an increased rate compared to the last several years, which could adversely affect our future earnings growth |
| A significant element of our growth strategy involves the expansion and improvement of our store base |
| The success of our planned expansion will depend significantly on the adequacy of our capital resources as well as our ability to locate suitable store sites and negotiate acceptable lease terms |
| In addition, there are a number of other factors that could affect our expansion plans, including the ability to: * build out new store sites on a timely and cost-effective basis; * hire, train and retain employees; and * expand and adapt our operational systems to serve a larger number of stores in an expanded geographic region |
| In addition, there can be no assurance that our expansion within our existing markets will not adversely affect the financial performance of our existing stores or our overall operating results, or that new stores will achieve net sales and profitability levels consistent with existing stores |
| Because our future revenue growth depends on new store openings, any postponement or reduction in the number of store openings could have a material adverse effect on our growth prospects |
| Our comparable store sales and quarterly financial performance may fluctuate for a variety of reasons, which, in turn, may impact the price for our common stock |
| Historically, our comparable store sales have fluctuated widely, and we expect them to continue to do so in the future |
| We define comparable store sales as those stores that have been open for at least 14 consecutive months |
| Our comparable store sales increased 3dtta9prcain fiscal year 2004 and decreased 3dtta9prcaand 1dtta0prcain fiscal years 2003 and 2002, respectively |
| For example, comparable store sales for the first half of 2005 benefited from significant rainfall in Southern California and the introduction of new merchandise categories (childrenapstas shoes and accessories) in selected store locations |
| Comparable store sales for the first half of 2006 are unlikely to benefit from the same factors |
| Because of the wide fluctuations in comparable store sales, investors may have difficulty consistently assessing our growth potential |
| In addition, fluctuations in our comparable store sales, including any decrease in 2006 comparable stores sales, could adversely impact our revenues, net income and the price of our stock |
| Our business is subject to seasonal and quarterly fluctuations which may, in turn, affect the price of our common stock |
| We have experienced, and expect to continue to experience, seasonal fluctuations in our net sales and net income |
| Historically, net sales and net income have been weakest during the first quarter following the holiday season |
| Our quarterly results of operations may also fluctuate significantly as a result of a variety of factors, including the timing of new store openings, the level of net sales contributed by new stores, merchandise mix, the timing and level of price markdowns, availability of inventory, store closures, advertising costs, the success of advertising campaigns, competitive pressures and changes in the demand for off-price footwear |
| For example, sales in the first half of 2005 benefited from significant rainfall in Southern California and the introduction of new merchandise categories (childrenapstas shoes and accessories) in selected store locations |
| Sales in the first half of 2006 are unlikely to benefit from the same factors |
| A decline in general economic conditions could lead to reduced consumer demand for our footwear and accessories |
| Consumer spending habits, including spending for the footwear and related accessories that we sell, are affected by, among other things, prevailing economic conditions, levels of employment, salaries and wage rates, prevailing interest rates, income taxes and policies, consumer confidence and consumer perception of economic conditions |
| In addition, consumer purchasing patterns are influenced by consumers &apos disposable income |
| As a result, economic developments that potentially reduce consumers &apos disposable income, such as recent increases in gasoline and energy prices and the rate of inflation, could impact consumer spending habits |
| Consumer confidence is also affected by the domestic and international political landscape |
| The outbreak or escalation of war, or the occurrence of terrorist acts or other hostilities in or affecting the United States, could lead to a decrease in spending by consumers |
| If consumers reduce spending, we could experience lower net sales than expected on a quarterly or annual basis and be forced to delay or slow our expansion plans |
| We may be unable to anticipate and respond to fashion trends and consumer preferences in the markets in which we operate, which could adversely affect our business, financial condition and results of operations |
| Our merchandising strategy is based on identifying each regionapstas customer base and having the proper mix of products in each store to attract our target customers in that region |
| This requires us to anticipate and respond to numerous and fluctuating variables in fashion trends and other conditions in the markets in which our stores are situated |
| A variety of factors will affect our ability to maintain the proper mix of products in each store, including: * variations in local economic conditions, which could affect our customers &apos discretionary spending; * unanticipated fashion trends; * our success in developing and maintaining vendor relationships that provide us with access to in-season merchandise at attractive prices; * our success in distributing merchandise to our stores in a timely and efficient manner; and * changes in weather patterns, which in turn affect consumer preferences |
| If we are unable to anticipate and fulfill the merchandise needs of each region, we may experience decreases in our net sales and may be forced to increase markdowns to slow-moving merchandise, either of which could have an adverse effect on our business, financial condition and results of operations |
| Our planned expansion into new geographic regions may heighten this risk |
| Historically, we have closed an underperforming store at the conclusion of the storeapstas lease term |
| If we are unable to close an underperforming store because the lease has not expired, we could suffer operating losses at such store until the lease ends or we otherwise restructure or buy out the lease |
| We actively monitor individual store performance and close underperforming stores at the conclusion of the lease term |
| In certain instances, we may be unable to close an underperforming store on a timely basis because of lease terms |
| The inability to close one or more underperforming stores on a timely basis could result in operating losses, which could have a material adverse effect on our results of operations |
| The covenants in our revolving credit facility may impact our ability to access borrowings to fund our expansion |
| Our current expansion plan anticipates funding new store openings in 2006 from cash flow, the net proceeds from this offering, tenant improvement allowances and from borrowings under our revolving credit facility |
| We maintain a revolving credit facility with Wells Fargo Retail Finance, LLC that provides for a credit facility of up to dlra20dtta0 million, including a dlra5dtta0 million sublimit for the issuance of letters of credit |
| Under the terms of this revolving credit facility we were subject to a capital expenditures limit of dlra6dtta0 million in fiscal year 2005 |
| In each remaining year of the revolving credit facility, Wells Fargo has indicated that it will adjust our capital expenditure limit based upon our business plan |
| Inasmuch as Wells Fargo has no obligation to cooperate with us in this regard, there is no assurance that we will be permitted to make the capital expenditures necessary to fully implement our expansion plans |
| Because we do not have long-term purchase agreements with any of our vendors, our ability to purchase quality merchandise under favorable terms and conditions is dependent on our being on good business terms with our vendors |
| Our future success will be significantly dependent on our ability to obtain merchandise that consumers want to buy, particularly designer label and branded merchandise with long-term retail appeal, and to acquire such merchandise under favorable terms and conditions |
| In 2005, our largest ten suppliers accounted for approximately 40 percent of our inventory purchases |
| The deterioration of our relationship with any key vendor or vendors could result in delivery delays, merchandise shortages or less favorable terms than we currently enjoy |
| We deal with our suppliers on an order-by-order basis and have no long-term purchase contracts or other contractual assurances of continued supply or pricing |
| Our footwear purchases typically involve manufacturing make- ups (shoes made exclusively for our channel) and opportunistic purchases |
| As our operations expand, our need for off-price inventory will continue to increase |
| Our inability to obtain a sufficient supply of high margin inventory, to negotiate favorable discount and payment agreements with our suppliers or to make opportunistic purchases could have a material adverse effect on our business, financial condition and results of operations |
| Our failure to retain our existing senior management team and to continue to attract qualified new personnel could adversely affect our business |
| Our future success will be dependent, to a significant extent, on the efforts and abilities of our executive officers |
| Dmitry Beinus, the founder, Chairman of the Board, Chief Executive Officer and President of our company, has primary responsibility for all major business decisions, including expansion into new states and regions, advertising, promotion and marketing activities |
| The loss of the services of any one of our executive officers, and Mr |
| In addition, our continued growth will depend, in part, on our ability to attract, motivate and retain skilled managerial and merchandising personnel |
| There can be no assurance that we will be able to retain a substantial percentage of our existing personnel or attract additional qualified personnel in the future |
| We have one distribution center |
| The loss or disruption of this center could have an adverse effect on our business and operations |
| Most of the inventory we purchase is shipped directly from vendors to a single centralized distribution center maintained by a third-party operator in Chino, California, where the inventory is then processed, sorted and shipped to our stores |
| Because a substantial portion of the inventory first goes through the Chino distribution center, any disruption at this site could negatively impact our receiving and distribution process |
| Our business interruption insurance may not be invoked or be sufficient to mitigate the financial losses caused by a disruption of this center |
| We would be adversely affected if our information technology systems were disrupted |
| Our corporate network is essential to our distribution process |
| If our information technology systems were shut down for any reason, such as a natural disaster, power outage or terrorist attack, or if our information technology systems do not operate effectively, we could incur significantly higher costs and longer lead times associated with distributing our products to our stores |
| Our insurance coverage may not be invoked or be sufficient to mitigate the financial losses resulting from a disruption in our information technology systems |
| Because much of our merchandise originates from foreign sources our business is subject to many of the risks associated with international trade |
| Many of the vendors with which we conduct business source their products from outside of the United States, particularly China, Brazil and Italy |
| As a result, we are subject to the risks generally associated with purchasing from foreign suppliers, such as: * economic and political instability in countries where these suppliers are located; * international hostilities or acts of war or terrorism affecting the United States or foreign countries from which our merchandise is sourced; * increases in shipping costs; * transportation delays and interruptions, including as a result of increased inspections of import shipments by domestic authorities; * work stoppages; * adverse fluctuations in currency exchange rates; * US laws affecting the importation of goods, including duties, tariffs and quotas and other non-tariff barriers; * expropriation or nationalization; * changes in local government administration and governmental policies; * changes in import duties or quotas; * compliance with trade and foreign tax laws; and * local business practices, including compliance with local laws and with domestic and international labor standards |
| There can be no assurance that the foregoing factors will not disrupt our supply of directly-sourced goods or otherwise adversely impact our business, financial condition and results of operations in the future |
| Our profitability may be negatively impacted by inventory shrinkage caused by customer and employee theft |
| The retail industry is subject to theft by customers and employees |
| Because we use a self-service format, where shoppers have access to both shoes of a pair, we must maintain substantial store security |
| There can be no assurance that we will not suffer from significant inventory shrinkage in the future, which could have a material adverse effect on our business, financial condition and results of operations |
| We may be unable to compete favorably in the highly competitive retail footwear market |
| The retail footwear market is highly competitive, and we expect the level of competition to increase |
| We compete with off-price and discount retailers (eg, Nordstrom Rack, Payless ShoeSource, Ross Dress for Less and Famous Footwear), branded retail outlets (eg, Nine West), national and regional retail stores (eg, DSW Shoe Warehouse, Nordstrom, Marshalls, Macyapstas, Sears, JC Penney, Loehmannapstas, Robinsons-May and Mervynapstas), traditional shoe stores and mass merchants |
| Many of these competitors have stores in the markets in which we now operate and in which we plan to expand |
| Many of our competitors have significantly greater financial, marketing and other resources than we have |
| In addition, new participants may enter the off-price segment of the footwear market in the future |
| Competitive pressures resulting from competitors &apos pricing policies could have a material adverse affect on our gross margins |
| As a result, we may face greater competition from other national, regional or local retailers and we may not be able to compete successfully with existing and new competitors |
| Our inability to effectively respond to such competition could have a material adverse effect on our business, financial condition and results of operations |
| Compliance with the requirements imposed by Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our net income |
| Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 ( "e Sarbanes-Oxley "e ), beginning with our Annual Report on Form 10-K for either the fiscal year ending December 30, 2006 or December 29, 2007, we will be required to furnish a report by our management on our internal control over financial reporting |
| In the event the aggregate market value of the common stock held by non-affiliates exceeds dlra75cmam000cmam000 as of July 1, 2006, we will be subject to Section 404 beginning with our annual report due in March 2007 |
| Otherwise we will be subject to Section 404 beginning with our annual report due in March 2008 |
| In order to achieve compliance with Section 404 of Sarbanes-Oxley within the prescribed period, we will need to engage in a process to document and evaluate our internal controls over financial reporting, which will be both costly and challenging |
| We can provide no assurance as to our or our independent auditors &apos conclusions with respect to the effectiveness of our internal controls over financial reporting under Section 404 of Sarbanes-Oxley |
| There is a risk that neither we nor our independent auditors will be able to conclude that our internal controls over financial reporting are effective as required by Section 404 of Sarbanes-Oxley |
| Moreover, the costs to comply with Section 404 of Sarbanes-Oxley, as presently in effect, could have a material adverse effect on our net income |
| In addition, during the course of our testing we may identify deficiencies that we may not be able to remediate in time to meet the deadline imposed by Sarbanes-Oxley for compliance with the requirements of Section 404 |
| Furthermore, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of Sarbanes-Oxley |
| Effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud |
| If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could drop significantly |