The following risk items are those that investors assess as having the possibility of exerting a material impact on our business performance or financial position. Please note that forward-looking statements contained in these risk item descriptions are as assessed by the Company as at the time of writing.
1 Product planning and development
We make every effort to minimize risk in product planning and product development and gather information not only from the domestic market but from around the world in order to meet changing customer tastes and trends. However, as customer demand and fashion market trends can change rapidly in a short period of time, there could be a negative impact on our business performance if we fail to meet customer expectations or if we are late in responding to changes in trends.
Additionally, although we hold a number of intellectual property rights and pay careful attention that they are not infringed upon, if a third party violates our intellectual property rights, it may damage the Group’s business activities and there is the possibility that our brand image will be negatively impacted.
2 Quality control
Full attention is paid to quality control, especially needle inspection in clothing, as this could cause harm to customers as well as result in a negative impact on the credibility of the UNITED ARROWS Group and consequently its business performance.
In addition, should the UNITED ARROWS Group breach any statutory or regulatory requirement with respect to misleading representation, the potential exists for deterioration in the Group’s brand image.
Previously, UNITED ARROWS LTD. was issued a cease-and-desist order from the Fair Trade Commission and Consumer Affairs Agency of Japan in connection with a violation of the Act against Unjustifiable Premiums and Misleading Representations. In the event another order is issued, there is the possibility of a decline in the Group’s reputation and standing in society as well as a negative impact on its business performance.
3 Human resources
As business expands, we believe that it is imperative to hire new people and train them accordingly. Although we do not suffer from material issues at the moment, as competition to hire talented people becomes fierce among tier companies, and the condition arises where the number of young people declines to an absolute number where there becomes difficulty to hire new people, it will become difficult to hire talented people and there is also a possibility that our talented staff will be recruited by our competitors. As a result, we may lose to the competition in terms of the relative advantage of our sales force and consequently it might become difficult to expand business as we have previously been able to do.
4 Transactions with business partners
As many of the Group’s stores are leased in shopping centers or other commercial facilities, the Group’s business performance may be negatively affected because of a failure to collect debts or guarantee deposits due to such factors as the financial condition of lessees renting out stores or commercial facilities, the sharp rise in rents associated with an increase in the value of real estate, or unforeseen circumstances that make ongoing store operations difficult. Moreover, if such problems as important business partners, who may also exert a significant influence, or factories become bankrupt, there may be delays in or the failure of products reaching our stores. Depending on the conditions, this could also exert a negative influence.
Furthermore, the UNITED ARROWS Group’s business performance may be negatively affected in the event that circumstances arise that make ongoing business transactions difficult mainly for distribution networks that support the Group’s business activities, information system contractors or contractors that operate online stores.
Regarding the handling of CHROME HEARTS products, in addition to UNITED ARROWS-run stores, sales of such products are undertaken at stores operated by CHROME HEARTS JP, GK, a joint venture established between UNITED ARROWS LTD. and Frankster JP LLC, the controlling company that operates/manages the CHROME HEARTS brand. CHROME HEARTS JP, GK and UNITED ARROWS LTD. have signed licensing agreements with CHROME HEARTS JAPAN, LTD., which based on these license agreements gives them the right to sell products produced by CHROME HEARTS JAPAN, LTD. While UNITED ARROWS LTD. recognizes that the license agreement with CHROME HEARTS JAPAN, LTD. is ongoing, the license agreement may be cancelled in the event of a major contract violation by either CHROME HEARTS JP, GK or UNITED ARROWS LTD. as well as for other exceptional reasons. In addition, UNITED ARROWS LTD. has entered into an agreement with Frankster JP LLC to transfer its equity interest in CHROME HEARTS JP, GK in stages. As a result of this transfer, CHROME HEARTS JP, GK will cease to be a consolidated subsidiary of UNITED ARROWS from January 2021, and UNITED ARROWS LTD. is scheduled to retain no equity interest in CHROME HEARTS JP, GK from January 2025.
5 Customer information
The UNITED ARROWS Group handles large volumes of customer information. Although we pay careful attention to the handling of such information, any incidence of inadvertent disclosure or leakage due to a variety of factors including computer virus, cyberattack, or mishandling by employees or contractors could negatively impact the Group’s brand image and result in legal liability costs, consequently negatively impacting our business performance.
6 Natural disasters, major accidents, etc.
The Group’s stores in Japan are mostly located in large cities, while product distribution centers and business head office functions are centralized in the Tokyo metropolitan area. If major natural disasters or accidents occur in these areas, the Group’s operations could be negatively impacted, thereby exerting a negative impact on business performance.
In addition, we purchase products from all over the world, particularly Asia. As a result, our business performance could be affected by difficulty in product procurement caused by unexpected political conditions, economic and foreign currency exchange rate fluctuations, war or terrorist attacks, natural disasters, and so forth.
7 Other business risks
The UNITED ARROWS Group’s business performance in Japan may be negatively affected by any slump in consumer spending associated with a stagnant or declining economy due to such factors as an increase in the consumption tax rate or inclement weather, changes in consumption patterns due to demographic changes and other factors.
Meanwhile, turning to operations overseas, changes in local economic conditions, political and social turmoil, the enactment of new or revisions to existing statutory and regulatory requirements, natural disasters, or the incidence of an infectious disease all have the potential to impact the Group’s business performance.
In addition, looking at the business environment in which the UNITED ARROWS Group operates, increasingly intense competition from other companies reflecting growing market globalization, and an influx of new market participants each has the potential to negatively affect the Group’s performance, as these circumstances could decrease business competitiveness mainly due to slow progress in measures aimed at addressing changes in customer values and delays in the effective use of technological innovations.
In the event that the Group is unable to advance its business strategies in line with plans as a result of the aforementioned changes in its external environment or increasingly intense competition, there are concerns that the Group will be forced to incur an impairment loss or take other accounting measures that negatively impact its performance depending on the circumstances.