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ITEM 1A. RISK FACTORS
Our financial condition, results of operations, cash flows, and the performance of our common stock may be adversely affected by a number of risk factors, including those provided below. See Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended FebrJanuary 31, 2025 for a further description of risks and uncertainties associated with our business.
MACROECONOMIC AND RETAIL INDUSTRY BUSINESS RISKS
We are subject to impacts from changes in the macroeconomic environment, financial and credit markets, geopolitical conditions, and government regulation or policy. Continuing inflation, tariff increases (or threats of increases), potential supply chain disruptions, and other external events may have significant negative effects on our costs, and also on consumer confidence, shopping behavior, and spending, which may adversely affect our sales and profitability.
Elevated inflation, rapidly changing and increased tariffs on goods imported into the United States, other government policy and regulatory changes, geopolitical conflicts, bank failures, public health crises, and other potential, adverse developments and related uncertainties, could reduce demand for our merchandise, disrupt our buying patterns, increase our cost of goods, create shortages of merchandise, cause shipping delays and increase freight costs, decrease our inventory turnover, cause greater markdowns, and negatively affect our sales and margins. All of our stores are located in the United States and its territories, and while we directly import only a small portion of our merchandise, more than half of the goods we sell originate from China, so we are especially susceptible to changes in the U.S. economy and its trade policy (particularly toward China).
Consumer spending levels and shopping behaviors for the merchandise we sell are affected by many external macroeconomic factors. In addition to consumer sensitivity to the price points and value differentiation we offer on the merchandise we sell, elevated inflation, including increased fuel and energy costs, food prices, interest rates, housing costs, wage rates, unemployment levels, availability of consumer credit, consumer debt levels, income tax rates and the timing of tax refunds, various government policies and practices (including enforcement practices with respect to immigration, particularly in regions with a relatively high concentration of Hispanic customers, which is an important demographic group within our overall customer base), and the resulting effects on consumers disposable income and consumer confidence in future economic conditions all have an impact on consumer spending habits for our merchandise.
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Changes6 and uncertainty in U.S. trade or tax policy regarding apparel, shoes and home-related merchandise produced in China and other countries could adversely affect our business.
A predominant portion of the apparel, shoes, home-related merchandise, and other goods we sell is originally manufactured in other countries, including China. While we directly import only a small portfor a description of our merchandise, more than half of the goods we sell originate from China. The U.S. government has indicated a willingness to significantly change existing trade policies, and has imposed dramatically increased tariffs on goods imported into the United States, in particular on goods produced in China. This exposes us to risrisks of disruption and significant cost increases in our established patterns for sourcing our merchandise, and creates increased uncertauncertainties in planning our sourcing strategies and forecasting our margins. Changes in tariffs, quotas, trade relationships, or tax provisions that reduce the supply or increase the relative cost of goods produced in China and other countries could significantly increase our cost of goods and/or increase our effective tax rate. Although such changes would have implications across the entire retail sector, we may fail to effectively adapt and manage the adjustments in sourcing strategy that would be necessary in response to those changes. In addition to the general uncertainty and overall risk from potential changes in laws and policies, as we make business decisions in the face of uncertainty as to potential changes, we may incorrectly anticipate the outcomes, miss out on business opportunities, or fail to effectively adapt our business strategies and manage the adjustments that are necessary in response to those changes. These risks could adversely affect our revenues and expenses, increase our effective tax rates, and reduce our profitability and market share.
STRATEGIC RISKS
We are subject to risks associated with importing and selling merchandise produced in other countries.
Risks in importing and selling such merchandise include increased tariffs and more stringent quotas, economic and supply chain disruptions, uncertainties and adverse economic conditions (including shipping capacity limitations, cost increases, inflation, recession, and exchange rate fluctuations), foreign government regulations, employment and labor matters, concerns relating to human rights, working conditions, and other issues in factories or countries where merchandise is produced, transparency of sourcing and supply chains, exposure on product warranty and intellectual property issues, consumer perceptions of the safety of imported merchandise, geopolitical conflict (including wars and fears of war), political unrest, natural disasters, regulations to address climate change, and trade restrictions.
A predominant portion of the apparel, shoes, home-related merchandise, and other goods we sell (even when we purchase it domestically, often as excess inventory sold to us by a domestic vendor) is originally manufactured in other countries. In addition, we directly source a portion of the products sold in our stores from foreign vendors, predominantly in China. We also buy products that originate from foreign sources indirectly through domestic vendors and manufacturers representatives. More than half of the merchandise we sell is originally manufactured in China. Although our foreign purchases of merchandise are negotiated and paid for in U.S. dollars, increased tariffs or other import duties on goods imported into the United States, or decreases in the value of the U.S. dollar relative to foreign currencies, could increase the cost of products we purchase from overseas vendors and from domestic vendors who are reselling foreign-produced goods. When we are the importer of record, we may be subject to regulatory or other requirements similar to those applicable to a manufacturer.
To the extent that our vendors are located overseas or rely on overseas sources for a large portion of their products, any event causing a disruption, delay, or increase in the cost of imports, including imposition of import or other restrictions such as product detention, war, acts of terrorism, natural disasters, or public health issues could adversely affect our business. The flow of merchandise from our vendors could also be adversely affected by global shipping capacity limitations, labor stoppages, or by financial or political instability in any of the countries in which the goods we purchase are manufactured. Trade restrictions in the form of tariffs or quotas, or both, applicable to the products we sell could also affect the importation of those products and could increase the cost and reduce the supply of products available to us. We cannot predict whether China or any of the other countries from which our products are sourced, or in which our products are currently manufactured or may be manufactured in the future, will be subject to increased tariffs or trade restrictions imposed by the U.S. or foreign governments or the likelihood, type, or effect of any such restrictions.
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associated with our business.