FL » Topics » Item 1A. Risk Factors

These excerpts taken from the FL 10-K filed Mar 31, 2008.

Item 1A. Risk Factors

     The statements contained in this Annual Report on Form 10-K (“Annual Report”) that are not historical facts, including, but not limited to, statements regarding our expected financial position, business and financing plans found in “Item 1. Business” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The words “may,” “believes,” “expects,” “plans,” “intends,” “anticipates” and similar expressions identify forward-looking statements. The actual results of the future events described in these forward-looking statements could differ materially from those stated in the forward-looking statements.

     Our actual results may differ materially due to the risks and uncertainties discussed in this Annual Report, including those discussed below. Additional risks and uncertainties that we do not presently know about or that we currently consider to be insignificant may also affect our business operations and financial performance. Accordingly, readers of the Annual Report should consider these risks and uncertainties in evaluating the information and are cautioned not to place undue reliance on the forward-looking statements contained herein. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

The industry in which we operate is dependent upon fashion trends, customer preferences and other fashion-related factors.

     The athletic footwear and apparel industry is subject to changing fashion trends and customer preferences. We cannot guarantee that our merchandise selection will accurately reflect customer preferences when it is offered for sale or that we will be able to identify and respond quickly to fashion changes, particularly given the long lead times for ordering much of our merchandise from vendors. For example, we order the bulk of our athletic footwear four to six months prior to delivery to our stores. If we fail to anticipate accurately either the market for the merchandise in our stores or our customers’ purchasing habits, we may be forced to rely on markdowns or promotional sales to dispose of excess, slow moving inventory, which could have a material adverse effect on our business, financial condition, and results of operations.

     A substantial portion of our highest margin sales are to young males (ages 12–25), many of whom we believe purchase athletic footwear and licensed apparel as a fashion statement and are frequent purchasers of athletic footwear. Any shift in fashion trends that would make athletic footwear or licensed apparel less attractive to these customers could have a material adverse effect on our business, financial condition, and results of operations.

The businesses in which we operate are highly competitive.

     The retail athletic footwear and apparel business is highly competitive with relatively low barriers to entry. Our athletic footwear and apparel operations compete primarily with athletic footwear specialty stores, sporting goods stores and superstores, department stores, discount stores, traditional shoe stores, and mass merchandisers, many of which are units of national or regional chains that have significant financial and marketing resources. The principal competitive factors in our markets are price, quality, selection of merchandise, reputation, store location, advertising, and customer service. We cannot assure you that we will continue to be able to compete successfully against existing or future competitors. Our expansion into markets served by our competitors and entry of new competitors or expansion of existing competitors into our markets could have a material adverse effect on our business, financial condition, and results of operations.

     Although we sell merchandise via the Internet, a significant shift in customer buying patterns to purchasing athletic footwear, athletic apparel, and sporting goods via the Internet could have a material adverse effect on our business results. In addition, some of our vendors distribute products directly through the Internet and others may follow. Some vendors operate retail stores and some have indicated that further retail stores will open. Should this continue to occur, and if our customers decide to purchase directly from our vendors, it could have a material adverse effect on our business, financial condition, and results of operations.

2


We depend on mall traffic and our ability to identify suitable store locations.

     Our sales, particularly in the United States and Canada, are dependent in part on a high volume of mall traffic. Our stores are located primarily in enclosed regional and neighborhood malls. Mall traffic may be adversely affected by, among other things, economic downturns, the closing of anchor department stores or changes in customer preferences or acts of terrorism. A decline in the popularity of mall shopping among our target customers could have a material adverse effect on us.

     To take advantage of customer traffic and the shopping preferences of our customers, we need to maintain or acquire stores in desirable locations such as in regional and neighborhood malls anchored by major department stores. We cannot be certain that desirable mall locations will continue to be available.

The effects of natural disasters, terrorism, acts of war and retail industry conditions may adversely affect our business.

     Natural disasters, including hurricanes, floods, and tornados may affect store and distribution center operations. In addition, acts of terrorism, acts of war, and military action both in the United States and abroad can have a significant effect on economic conditions and may negatively affect our ability to purchase merchandise from vendors for sale to our customers. Any significant declines in general economic conditions, public safety concerns or uncertainties regarding future economic prospects that affect customer spending habits could have a material adverse effect on customer purchases of our products.

A change in the relationship with any of our key vendors or the unavailability of our key products at competitive prices could affect our financial health.

     Our business is dependent to a significant degree upon our ability to purchase brand-name merchandise at competitive prices, including the receipt of volume discounts, cooperative advertising, and markdown allowances from our vendors. The Company purchased approximately 77 percent of its merchandise in 2007 from its top five vendors and expects to continue to obtain a significant percentage of its athletic product from these vendors in future periods. Approximately 56 percent was purchased from one vendor — Nike, Inc. (“Nike”). Each of our operating divisions is highly dependent on Nike; they individually purchase 43 to 74 percent of their merchandise from Nike. We have no long-term supply contracts with any of our vendors. Our inability to obtain merchandise in a timely manner from major suppliers (particularly Nike) as a result of business decisions by our suppliers or any disruption in the supply chain could have a material adverse effect on our business, financial condition, and results of operations. Because of our strong dependence on Nike, any adverse development in Nike’s financial condition and results of operations or the inability of Nike to develop and manufacture products that appeal to our target customers could also have an adverse effect on our business, financial condition, and results of operations. We cannot be certain that we will be able to acquire merchandise at competitive prices or on competitive terms in the future.

     Merchandise that is high profile and in high demand is allocated by our vendors based upon their internal criteria. Although we have generally been able to purchase sufficient quantities of this merchandise in the past, we cannot be certain that our vendors will continue to allocate sufficient amounts of such merchandise to us in the future. In addition, our vendors provide support to us through cooperative advertising allowances and promotional events. We cannot be certain that such assistance from our vendors will continue in the future. These risks could have a material adverse effect on our business, financial condition, and results of operations.

We may experience fluctuations in and cyclicality of our comparable-store sales results.

     Our comparable-store sales have fluctuated significantly in the past, on both an annual and a quarterly basis, and we expect them to continue to fluctuate in the future. A variety of factors affect our comparable-store sales results, including, among others, fashion trends, the highly competitive retail store sales environment, economic conditions, timing of promotional events, changes in our merchandise mix, calendar shifts of holiday periods, and weather conditions.

     Many of our products, particularly high-end athletic footwear and licensed apparel, represent discretionary purchases. Accordingly, customer demand for these products could decline in a recession or if our customers develop other priorities for their discretionary spending. These risks could have a material adverse effect on our business, financial condition, and results of operations.

3


Our operations may be adversely affected by economic or political conditions in other countries.

     Approximately 27 percent of our sales and a significant portion of our operating results for 2007 were attributable to our sales in Europe, Canada, New Zealand, and Australia. As a result, our business is subject to the risks associated with doing business outside of the United States, such as foreign governmental regulations, foreign customer preferences, political unrest, disruptions or delays in shipments, and changes in economic conditions in countries in which we operate. Although we enter into forward foreign exchange contracts and option contracts to reduce the effect of foreign currency exchange rate fluctuations, our operations may be adversely affected by significant changes in the value of the U.S. dollar as it relates to certain foreign currencies.

     In addition, because we and our suppliers have a substantial amount of our products manufactured in foreign countries, our ability to obtain sufficient quantities of merchandise on favorable terms may be affected by governmental regulations, trade restrictions, and economic, labor, and other conditions in the countries from which our suppliers obtain their product.

     Our business is subject to economic cycles and retail industry conditions. Purchases of discretionary athletic footwear, apparel, and related products, tend to decline during recessionary periods when disposable income is low and customers are hesitant to use available credit.

Complications in our distribution centers and other factors affecting the distribution of merchandise may affect our business.

     We operate four distribution centers worldwide to support our athletic business. In addition to the distribution centers that we operate, we have additional third-party arrangements related to our operations in Canada, Australia and New Zealand. If complications arise with any facility or any facility is severely damaged or destroyed, the other distribution centers may not be able to support the resulting additional distribution demands. This may adversely affect our ability to deliver inventory on a timely basis. We depend upon UPS for shipment of a significant amount of merchandise. An interruption in service by UPS for any reason could cause temporary disruptions in our business, a loss of sales and profits, and other material adverse effects.

     Our freight cost is affected by changes in fuel prices through surcharges. Increases in fuel prices and surcharges and other factors may increase freight costs and thereby increase our cost of sales.

A major failure of our information systems could harm our business.

     We depend on information systems to process transactions, manage inventory, operate our website, purchase, sell and ship goods on a timely basis and maintain cost-efficient operations. Any material disruption or slowdown of our systems could cause information to be lost or delayed which could have a negative effect on our business. We may experience operational problems with our information systems as a result of system failures, viruses, computer “hackers” or other causes. We cannot be assured that our systems will be adequate to support future growth.

Unauthorized disclosure of sensitive or confidential customer information, whether through a breach of the Company’s computer system or otherwise, could severely harm our business.

     As part of the Company’s normal course of business, it collects, processes, and retains sensitive and confidential customer information. Despite the security measurers the Company has in place, its facilities and systems may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human error, or other similar events. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential information by the Company could severely damage its reputation, expose it to the risks of litigation and liability, disrupt its operations and harm its business.

Item 1A. Risk
Factors


     The
statements contained in this Annual Report on Form 10-K (“Annual Report”) that
are not historical facts, including, but not limited to, statements regarding
our expected financial position, business and financing plans found in “Item 1.
Business” and “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” constitute “forward-looking statements”
within the meaning of the Private Securities Litigation Reform Act of 1995. The
words “may,” “believes,” “expects,” “plans,” “intends,” “anticipates” and
similar expressions identify forward-looking statements. The actual results of
the future events described in these forward-looking statements could differ
materially from those stated in the forward-looking statements.


     Our
actual results may differ materially due to the risks and uncertainties
discussed in this Annual Report, including those discussed below. Additional
risks and uncertainties that we do not presently know about or that we currently
consider to be insignificant may also affect our business operations and
financial performance. Accordingly, readers of the Annual Report should consider
these risks and uncertainties in evaluating the information and are cautioned
not to place undue reliance on the forward-looking statements contained herein.
We undertake no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events or
otherwise.


The industry in which we operate
is dependent upon fashion trends, customer preferences and other fashion-related
factors.


     The
athletic footwear and apparel industry is subject to changing fashion trends and
customer preferences. We cannot guarantee that our merchandise selection will
accurately reflect customer preferences when it is offered for sale or that we
will be able to identify and respond quickly to fashion changes, particularly
given the long lead times for ordering much of our merchandise from vendors. For
example, we order the bulk of our athletic footwear four to six months prior to
delivery to our stores. If we fail to anticipate accurately either the market
for the merchandise in our stores or our customers’ purchasing habits, we may be
forced to rely on markdowns or promotional sales to dispose of excess, slow
moving inventory, which could have a material adverse effect on our business,
financial condition, and results of operations.


     A
substantial portion of our highest margin sales are to young males (ages 12–25),
many of whom we believe purchase athletic footwear and licensed apparel as a
fashion statement and are frequent purchasers of athletic footwear. Any shift in
fashion trends that would make athletic footwear or licensed apparel less
attractive to these customers could have a material adverse effect on our
business, financial condition, and results of operations.


The businesses in which we
operate are highly competitive.


     The
retail athletic footwear and apparel business is highly competitive with
relatively low barriers to entry. Our athletic footwear and apparel operations
compete primarily with athletic footwear specialty stores, sporting goods stores
and superstores, department stores, discount stores, traditional shoe stores,
and mass merchandisers, many of which are units of national or regional chains
that have significant financial and marketing resources. The principal
competitive factors in our markets are price, quality, selection of merchandise,
reputation, store location, advertising, and customer service. We cannot assure
you that we will continue to be able to compete successfully against existing or
future competitors. Our expansion into markets served by our competitors and
entry of new competitors or expansion of existing competitors into our markets
could have a material adverse effect on our business, financial condition, and
results of operations.


     Although we sell merchandise via the Internet, a significant shift in
customer buying patterns to purchasing athletic footwear, athletic apparel, and
sporting goods via the Internet could have a material adverse effect on our
business results. In addition, some of our vendors distribute products directly
through the Internet and others may follow. Some vendors operate retail stores
and some have indicated that further retail stores will open. Should this
continue to occur, and if our customers decide to purchase directly from our
vendors, it could have a material adverse effect on our business, financial
condition, and results of operations.


2





We depend on mall traffic and
our ability to identify suitable store locations.


     Our
sales, particularly in the United States and Canada, are dependent in part on a
high volume of mall traffic. Our stores are located primarily in enclosed
regional and neighborhood malls. Mall traffic may be adversely affected by,
among other things, economic downturns, the closing of anchor department stores
or changes in customer preferences or acts of terrorism. A decline in the
popularity of mall shopping among our target customers could have a material
adverse effect on us.


     To
take advantage of customer traffic and the shopping preferences of our
customers, we need to maintain or acquire stores in desirable locations such as
in regional and neighborhood malls anchored by major department stores. We
cannot be certain that desirable mall locations will continue to be
available.


The effects of natural
disasters, terrorism, acts of war and retail industry conditions may adversely
affect our business.


     Natural disasters, including hurricanes, floods, and tornados may affect
store and distribution center operations. In addition, acts of terrorism, acts
of war, and military action both in the United States and abroad can have a
significant effect on economic conditions and may negatively affect our ability
to purchase merchandise from vendors for sale to our customers. Any significant
declines in general economic conditions, public safety concerns or uncertainties
regarding future economic prospects that affect customer spending habits could
have a material adverse effect on customer purchases of our products.


A change in the relationship with
any of our key vendors or the unavailability of our key products at competitive
prices could affect our financial health.


     Our
business is dependent to a significant degree upon our ability to purchase
brand-name merchandise at competitive prices, including the receipt of volume
discounts, cooperative advertising, and markdown allowances from our vendors.
The Company purchased approximately 77 percent of its merchandise in 2007 from
its top five vendors and expects to continue to obtain a significant percentage
of its athletic product from these vendors in future periods. Approximately 56
percent was purchased from one vendor — Nike, Inc. (“Nike”). Each of our
operating divisions is highly dependent on Nike; they individually purchase 43
to 74 percent of their merchandise from Nike. We have no long-term supply
contracts with any of our vendors. Our inability to obtain merchandise in a
timely manner from major suppliers (particularly Nike) as a result of business
decisions by our suppliers or any disruption in the supply chain could have a
material adverse effect on our business, financial condition, and results of
operations. Because of our strong dependence on Nike, any adverse development in
Nike’s financial condition and results of operations or the inability of Nike to
develop and manufacture products that appeal to our target customers could also
have an adverse effect on our business, financial condition, and results of
operations. We cannot be certain that we will be able to acquire merchandise at
competitive prices or on competitive terms in the future.


     Merchandise that is high profile and in high demand is allocated by our
vendors based upon their internal criteria. Although we have generally been able
to purchase sufficient quantities of this merchandise in the past, we cannot be
certain that our vendors will continue to allocate sufficient amounts of such
merchandise to us in the future. In addition, our vendors provide support to us
through cooperative advertising allowances and promotional events. We cannot be
certain that such assistance from our vendors will continue in the future. These
risks could have a material adverse effect on our business, financial condition,
and results of operations.


We may experience fluctuations
in and cyclicality of our comparable-store sales results.


     Our
comparable-store sales have fluctuated significantly in the past, on both an
annual and a quarterly basis, and we expect them to continue to fluctuate in the
future. A variety of factors affect our comparable-store sales results,
including, among others, fashion trends, the highly competitive retail store
sales environment, economic conditions, timing of promotional events, changes in
our merchandise mix, calendar shifts of holiday periods, and weather
conditions.


     Many
of our products, particularly high-end athletic footwear and licensed apparel,
represent discretionary purchases. Accordingly, customer demand for these
products could decline in a recession or if our customers develop other
priorities for their discretionary spending. These risks could have a material
adverse effect on our business, financial condition, and results of
operations.


3





Our operations may be adversely
affected by economic or political conditions in other countries.


     Approximately 27 percent of our sales and a significant portion of our
operating results for 2007 were attributable to our sales in Europe, Canada, New
Zealand, and Australia. As a result, our business is subject to the risks
associated with doing business outside of the United States, such as foreign
governmental regulations, foreign customer preferences, political unrest,
disruptions or delays in shipments, and changes in economic conditions in
countries in which we operate. Although we enter into forward foreign exchange
contracts and option contracts to reduce the effect of foreign currency exchange
rate fluctuations, our operations may be adversely affected by significant
changes in the value of the U.S. dollar as it relates to certain foreign
currencies.


     In
addition, because we and our suppliers have a substantial amount of our products
manufactured in foreign countries, our ability to obtain sufficient quantities
of merchandise on favorable terms may be affected by governmental regulations,
trade restrictions, and economic, labor, and other conditions in the countries
from which our suppliers obtain their product.


     Our
business is subject to economic cycles and retail industry conditions. Purchases
of discretionary athletic footwear, apparel, and related products, tend to
decline during recessionary periods when disposable income is low and customers
are hesitant to use available credit.


Complications in our distribution
centers and other factors affecting the distribution of merchandise may affect
our business.


     We
operate four distribution centers worldwide to support our athletic business. In
addition to the distribution centers that we operate, we have additional
third-party arrangements related to our operations in Canada, Australia and New
Zealand. If complications arise with any facility or any facility is severely
damaged or destroyed, the other distribution centers may not be able to support
the resulting additional distribution demands. This may adversely affect our
ability to deliver inventory on a timely basis. We depend upon UPS for shipment
of a significant amount of merchandise. An interruption in service by UPS for
any reason could cause temporary disruptions in our business, a loss of sales
and profits, and other material adverse effects.


     Our
freight cost is affected by changes in fuel prices through surcharges. Increases
in fuel prices and surcharges and other factors may increase freight costs and
thereby increase our cost of sales.


A major failure of our
information systems could harm our business.


     We
depend on information systems to process transactions, manage inventory, operate
our website, purchase, sell and ship goods on a timely basis and maintain
cost-efficient operations. Any material disruption or slowdown of our systems
could cause information to be lost or delayed which could have a negative effect
on our business. We may experience operational problems with our information
systems as a result of system failures, viruses, computer “hackers” or other
causes. We cannot be assured that our systems will be adequate to support future
growth.


Unauthorized disclosure of
sensitive or confidential customer information, whether through a breach of the
Company’s computer system or otherwise, could severely harm our
business.


     As
part of the Company’s normal course of business, it collects, processes, and
retains sensitive and confidential customer information. Despite the security
measurers the Company has in place, its facilities and systems may be vulnerable
to security breaches, acts of vandalism, computer viruses, misplaced or lost
data, programming and/or human error, or other similar events. Any security
breach involving the misappropriation, loss or other unauthorized disclosure of
confidential information by the Company could severely damage its reputation,
expose it to the risks of litigation and liability, disrupt its operations and
harm its business.


This excerpt taken from the FL 10-K filed Apr 2, 2007.

Item 1A. Risk Factors

     The statements contained in this Annual Report on Form 10-K and incorporated by reference (“Annual Report”) that are not historical facts, including, but not limited to, statements regarding our expected financial position, business and financing plans found in “Item 1. Business” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The words “may,” “believes,” “expects,” “plans,” “intends,” “anticipates” and similar expressions identify forward-looking statements. The actual results of the future events described in these forward-looking statements could differ materially from those stated in the forward-looking statements.

     Our actual results may differ materially due to the risks and uncertainties discussed in this Annual Report, including those discussed below. Additional risks and uncertainties that we do not presently know about or that we currently consider to be insignificant may also affect our business operations and financial performance. Accordingly, readers of the Annual Report should consider these risks and uncertainties in evaluating the information and are cautioned not to place undue reliance on the forward-looking statements contained herein. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

The industry in which we operate is dependent upon fashion trends, customer preferences and other fashion-related factors.

     The athletic footwear and apparel industry is subject to changing fashion trends and customer preferences. We cannot guarantee that our merchandise selection will accurately reflect customer preferences when it is offered for sale or that we will be able to identify and respond quickly to fashion changes, particularly given the long lead times for ordering much of our merchandise from vendors. For example, we order athletic footwear four to six months prior to delivery to our stores. If we fail to anticipate accurately either the market for the merchandise in our stores or our customers’ purchasing habits, we may be forced to rely on markdowns or promotional sales to dispose of excess, slow moving inventory, which could have a material adverse effect on our business, financial condition, and results of operations.

     A substantial portion of our highest margin sales are to young males (ages 12–25), many of whom we believe purchase athletic footwear and licensed apparel as a fashion statement and are frequent purchasers of athletic footwear. Any shift in fashion trends that would make athletic footwear or licensed apparel less attractive to these customers could have a material adverse effect on our business, financial condition, and results of operations.

The businesses in which we operate are highly competitive.

     The retail athletic footwear and apparel business is highly competitive with relatively low barriers to entry. Our athletic footwear and apparel operations compete primarily with athletic footwear specialty stores, sporting goods stores and superstores, department stores, discount stores, traditional shoe stores, and mass merchandisers, many of which are units of national or regional chains that have significant financial and marketing resources. The principal competitive factors in our markets are price, quality, selection of merchandise, reputation, store location, advertising, and customer service. We cannot assure you that we will continue to be able to compete successfully against existing or future competitors. Our expansion into markets served by our competitors and entry of new competitors or expansion of existing competitors into our markets could have a material adverse effect on our business, financial condition, and results of operations.

     Although we sell merchandise via the Internet, a significant shift in customer buying patterns to purchasing athletic footwear, athletic apparel, and sporting goods via the Internet could have a material adverse effect on our business results. In addition, some of our vendors distribute products directly through the Internet and others may follow. Some vendors operate retail stores and some have indicated that further retail stores will open. Should this continue to occur, and if our customers decide to purchase directly from our vendors, it could have a material adverse effect on our business, financial condition, and results of operations.

2


We depend on mall traffic and our ability to identify suitable store locations.

     Our sales, particularly in the United States and Canada, are dependent in part on a high volume of mall traffic. Our stores are located primarily in enclosed regional and neighborhood malls. Mall traffic may be adversely affected by, among other things, economic downturns, the closing of anchor department stores or changes in customer preferences or acts of terrorism. A decline in the popularity of mall shopping among our target customers could have a material adverse effect on us.

     To take advantage of customer traffic and the shopping preferences of our customers, we need to maintain or acquire stores in desirable locations such as in regional and neighborhood malls anchored by major department stores. We cannot be certain that desirable mall locations will continue to be available.

The effects of natural disasters, terrorism, acts of war and retail industry conditions may adversely affect our business.

     Natural disasters, including hurricanes, floods, and tornados may affect store and distribution center operations. In addition, acts of terrorism, acts of war, and military action both in the United States and abroad can have a significant effect on economic conditions and may negatively affect our ability to purchase merchandise from vendors for sale to our customers. Any significant declines in general economic conditions, public safety concerns or uncertainties regarding future economic prospects that affect customer spending habits could have a material adverse effect on customer purchases of our products.

A change in the relationship with any of our key vendors or the unavailability of our key products at competitive prices could affect our financial health.

     Our business is dependent to a significant degree upon our ability to purchase brand-name merchandise at competitive prices, including the receipt of volume discounts, cooperative advertising, and markdown allowances from our vendors. The Company purchased approximately 78 percent of its merchandise in 2006 from its top five vendors and expects to continue to obtain a significant percentage of its athletic product from these vendors in future periods. Approximately 50 percent was purchased from one vendor — Nike, Inc. (“Nike”). Each of our operating divisions is highly dependent on Nike, they individually purchase 40 to 65 percent of their merchandise from Nike. We have no long-term supply contracts with any of our vendors. Our inability to obtain merchandise in a timely manner from major suppliers (particularly Nike) as a result of business decisions by our suppliers or any disruption in the supply chain could have a material adverse effect on our business, financial condition, and results of operations. Because of our strong dependence on Nike, any adverse development in Nike’s financial condition and results of operations or the inability of Nike to develop and manufacture products that appeal to our target customers could also have an adverse effect on our business, financial condition, and results of operations. We cannot be certain that we will be able to acquire merchandise at competitive prices or on competitive terms in the future.

     Merchandise that is high profile and in high demand is allocated by our vendors based upon their internal criteria. Although we have generally been able to purchase sufficient quantities of this merchandise in the past, we cannot be certain that our vendors will continue to allocate sufficient amounts of such merchandise to us in the future. In addition, our vendors provide support to us through cooperative advertising allowances and promotional events. We cannot be certain that such assistance from our vendors will continue in the future. These risks could have a material adverse effect on our business, financial condition, and results of operations.

We may experience fluctuations in and cyclicality of our comparable store sales results.

     Our comparable-store sales have fluctuated significantly in the past, on both an annual and a quarterly basis, and we expect them to continue to fluctuate in the future. A variety of factors affect our comparable-store sales results, including, among others, fashion trends, the highly competitive retail store sales environment, economic conditions, timing of promotional events, changes in our merchandise mix, calendar shifts of holiday periods, and weather conditions.

     Many of our products, particularly high-end athletic footwear and licensed apparel, represent discretionary purchases. Accordingly, customer demand for these products could decline in a recession or if our customers develop other priorities for their discretionary spending. These risks could have a material adverse effect on our business, financial condition, and results of operations.

3


Our operations may be adversely affected by economic or political conditions in other countries.

     Approximately 24 percent of our sales and a significant portion of our operating profits for 2006 were attributable to our sales in Europe, Canada, New Zealand, and Australia. As a result, our business is subject to the risks associated with doing business outside of the United States, such as foreign governmental regulations, foreign customer preferences, political unrest, disruptions or delays in shipments, and changes in economic conditions in countries in which we operate. Although we enter into forward foreign exchange contracts and option contracts to reduce the effect of foreign currency exchange rate fluctuations, our operations may be adversely affected by significant changes in the value of the U.S. dollar as it relates to certain foreign currencies.

     In addition, because we and our suppliers have a substantial amount of our products manufactured in foreign countries, our ability to obtain sufficient quantities of merchandise on favorable terms may be affected by governmental regulations, trade restrictions, and economic, labor, and other conditions in the countries from which our suppliers obtain their product.

      Our business is subject to economic cycles and retail industry conditions. Purchases of discretionary athletic footwear, apparel, and related products, tend to decline during recessionary periods when disposable income is low and customers are hesitant to use available credit.

Complications in our distribution centers and other factors affecting the distribution of merchandise may affect our business.

     We operate three distribution centers worldwide to support our athletic business. If complications arise with any facility or any facility is severely damaged or destroyed, the other distribution centers may not be able to support the resulting additional distribution demands. This may adversely affect our ability to deliver inventory on a timely basis. We depend upon UPS for shipment of a significant amount of merchandise. An interruption in service by UPS for any reason could cause temporary disruptions in our business, a loss of sales and profits, and other material adverse effects.

     Our freight cost is affected by changes in fuel prices through surcharges. Increases in fuel prices and surcharges and other factors may increase freight costs and thereby increase our cost of sales.

A major failure of our information systems could harm our business.

     We depend on information systems to process transactions, manage inventory, operate our website, purchase, sell and ship goods on a timely basis and maintain cost-efficient operations. Any material disruption or slowdown of our systems could cause information to be lost or delayed which could have a negative effect on our business. We may experience operational problems with our information systems as a result of system failures, viruses, computer “hackers” or other causes. We cannot be assured that our systems will be adequate to support future growth.

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