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 25, 2019, the date of filing the annual securities report to the Financial Services Agency of Japan.
Store expansion and human resources
The Group has been expanding its business stronghold from the greater Tokyo metropolitan area to all over Japan, and increasing the number of subsidiaries in order to expand its business fields. If the Group fails to recruit and appropriately train its employees, the quality of business could deteriorate, which could lead to a decline in business results.
Import and distribution
The Group is importing an increasing portion of its merchandise from sources outside Japan. As an importer, the Group's business is subject to the risks generally associated with doing business abroad, such as foreign political conditions, regulations or the economic environment. Also, distribution centers, including in Saitama and Osaka, are operated by a third-party contractor on behalf of the Group. Any significant interruption in the operation of these facilities would have a material adverse effect on the Group's distribution and logistics.
Business results are greatly influenced by the ability of young marketing staff, particularly those in their 20s and 30s, to quickly and accurately pinpoint demand and expertly apply this information to the selection of merchandise matching customer needs. Failure to retain and train such staff, or to maintain the appropriate organizational structure to support such efforts, could lead to sluggish business results.
Consumer demand, weather and seasonality
Business results may be influenced by unavoidable factors, including fluctuations in consumer demand, changes in the weather and seasonal variations. The inability to prepare for and respond to changing external factors such as these may dampen improvement in business results.
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.
Future capital requirements
To expand Group operations, the Company may have to derive capital in new ways, such as bond issuance, depending on the amount of capital required for the target investment. Business expansion plans could be hampered by an unfavorable economic environment, high interest rates or other problematic fund procurement conditions.
The Group handles customers' personal information with precision and care. Any data leak would have a material adverse effect on the Group's reputation, financial condition and results of operations and could lead to possible litigation.
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.
Decline in the value of subsidiary and affiliated company shares
Shares of subsidiaries and affiliates are valued at cost. To the extent that the financial condition of subsidiaries and affiliates continues to deteriorate, by applying the Accounting for Financial Instruments, the potential impairment on shares without quoted market prices 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.
When a natural disaster such as a large-scale earthquake or typhoon occurs, the results of the Group's business, financial condition and results of operations may be affected due to restoration expenses incurred for store facilities, the interruption of business activities, and possible interference in logistics and shipping operations.
Inventories at stores throughout the Group have recently tended to rise because of the Company's aggressive stance on store openings. To minimize inventory risk, stores monitor sales trends and inventory volumes in real time through POS (point of sale) and core operating systems. However, changes in the operating environment, mainly fluctuating consumer demand and changes in the weather, could cause the turnover of inventory to slow, and the subsequent disposal of inventory and booking of loss on valuation of merchandise could adversely affect the Group's business results and financial position.
※ 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 25, 2019