Listed below are the main risks that could affect the business or corporate affairs of the PPIH Group. We make every effort to avoid and mitigate these risks as soon as we recognize the possibility of such risks arising.
The following summary of risks includes future events, which are based on judgments and forecasts made by the Group based on the information available as of September 28, 2022, the date of filing the annual securities report to the Financial Services Agency of Japan.
The impact of COVID-19
With regard to the impact of COVID-19, it is difficult to accurately predict how it will spread and when it will subside in the future. Furthermore, the spread of infections in the future could also have an impact on our financial position and business performance. Although the PPIH Group will be affected by factors such as a decrease in inbound sales due to travel restrictions, we will respond quickly to changes in consumer trends, as well as respond flexibly while closely monitoring the impact of such restrictions.
Store Expansion & Securement of Human Resources
In the process of expanding its store network from its main base in the Tokyo metropolitan area to other areas of Japan, as well as increasing the number of subsidiaries for the purpose of business domain expansion, etc., the PPIH Group is striving to secure human resources through its own recruitment programs, including the use of employment agencies and the complete removal of the resume requirement for personnel hiring. However, if we are unable to secure and train the necessary personnel, the quality of our services may decline, resulting in reduced business performance.
Imports & Logistics/Distribution
As the Company's business scale expands, it imports an increasing proportion of its products, which may be affected by the political situation and economic environment in the exporting country. In addition, the logistics and delivery of products are outsourced to outside vendors, which may cause delays due to the business conditions of such vendors. The Company mitigates this risk by outsourcing both logistics and delivery to multiple vendors.
Our performance is greatly affected by our ability to quickly and appropriately identify demand for our products and, based on this information, offer an assortment of products that meets the needs of our customers. The PPIH Group holds regular employee training sessions and conducts video training in order to develop its employees. However, if we are unable to secure and train staff to properly conduct marketing and maintain an organizational management system, it may lead to a decline in business performance.
The Group is subject to various legal regulations as followings; the Large-Scale Retail Store Location Law for store openings, the Premium Labeling Law and Food Sanitation Law for selling the goods, the Antitrust and Subcontracting Law for procurement, and other laws including recycling-related laws for the environment etc. The revisions of laws and regulations and strict application of such may increase management costs and affect financial conditions and business results adversely.
Personal Information Protection Law
Although we have established internal regulations and set up a specialized department for the purpose of taking the utmost care in protecting customer information, in the unlikely event of an external leakage incident, it could have a significant impact on our business performance, including issues of social credibility and individual compensation.
Impairment of non-current assets
The Group estimates future cash flows of its assets in order to assess the possibility of the occurrence of an impairment loss. Potential impairment would have a material adverse effect on the Group's business, financial condition and results of operations.
Expansion by mergers and acquisitions
The Group has implemented mergers and acquisitions as a means of business expansion. The Company avoids risks through a thorough due diligence review of the target company, its business and relevant contractual matters. There is, however, the possibility of incurring contingent liabilities or discovering unrecognized liabilities after the merger and acquisition has taken place. In either case, there would be an adverse effect on the Group's business, financial condition and results of operations.
Loss on closing of stores
Store-operating Group companies actively pursue new store openings but may also close locations that prove unprofitable. A policy is in place stating that any newly opened store failing to achieve its initial revenue target will be closed if a turnaround in performance is unattainable even with management efforts to expand sales and reduce selling, general and administrative expenses. Losses associated with the closure of one or more stores due to poor performance could have a negative impact on consolidated results.
Foreign currency transactions
Store-operating Group companies import certain merchandise directly from overseas. If indirect imports are also included, most of the merchandise sold comes from outside Japan. Generally, the effective purchase price will trend downward if the yen is strong, and rise when the yen weakens. The gross profit margin is therefore susceptible to the risk of currency fluctuations. On occasion, merchandise-importing Group companies will undertake forward exchange contracts and formulate measures to avoid exchange rate risk. But there is no guarantee that these efforts will be completely effective, and general market risk from fluctuations in forex markets, in particular, will inevitably affect business results.
In the event of a natural disaster, such as a large-scale earthquake or typhoon, the Group's financial position and operating results may be affected due to restoration costs for store facilities and other equipment, a period of business suspension, and disruptions in product distribution and delivery. Therefore, we have established a disaster prevention headquarters and have a system in place to minimize damage in the event of such a situation.
The Group's aggressive store-opening activities tend to increase merchandise inventories throughout the Company. The Group strives to reduce inventory risk by managing merchandise sales trends and inventory quantities in real time through its POS system and core IT system. However, inevitable factors such as changes in consumer demand, abnormal weather conditions, and uneven demand due to seasonality may cause backlogs of inventory, which may in turn affect the Company's financial position and operating results through inventory disposal and the posting of valuation losses on merchandise.
Response to Climate Change
Given the large amount of energy used by the PPIH Group in its store operations, there is a risk of higher-than-expected energy and countermeasure costs in the event of a sudden increase in social demands, such as a significant tightening of laws and regulations related to climate change. These risks will be identified and disclosed through scenario analysis in line with TCFD recommendations, and measures will be taken to minimize risks by establishing the "PPIH Group decarbonization targets" and promoting energy conservation throughout store operations, creation of renewable energy through the use of solar panels and other store facilities, and replacement with renewable energy such as non-fossil certificate trading.
Note: The risks described above do not cover all of the potential risks that the PPIH Group may face. Other risks include, but are not limited to, litigation and amendments to laws or ordinances, which could affect the business of the Group.
As of September 28, 2022