Business Risks

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

The UNITED ARROWS Group engages in product planning and development while gathering information from domestic and overseas markets in order to cater to customer tastes and respond to changing 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.

2 Product procurement

The UNITED ARROWS Group procures products manufactured in Japan as well as in Asia and other countries around the world. Accordingly, the ability to procure products, and consequently the Group’s business performance, could be negatively impacted by changes in the political or economic conditions of such countries, abrupt foreign exchange rate movements, wars, acts of terrorism, natural disasters, or other factors. Furthermore, should an important, irreplaceable supplier or contract factory go bankrupt or experience some other issue, the procurement of products may be delayed or become impossible, an occurrence with the potential to negatively impact the Group’s business performance.

3 Quality control

The UNITED ARROWS Group has established comprehensive quality management systems and seeks to foster a quality-oriented mindset among employees. Should harm be done to a customer due to the presence of a needle or some other dangerous article in a product as a result of failure to perform proper inspections, despite the aforementioned precautions, the credibility of the UNITED ARROWS Group and consequently its business performance may be negatively impacted. 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.

4 Intellectual properties

The UNITED ARROWS Group possesses a robust portfolio of intellectual properties, and it takes steps to protect its intellectual property rights. Should a third-party entity infringe on the Group’s intellectual property rights, it could impede the business activities of the Group and negatively impact its corporate and brand image and consequently its business performance.

5 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.

6 Store network

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 by a deterioration in the ability of these commercial facilities to attract customers. In addition, 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, a sharp rise in rents associated with an increase in the value of real estate, or unforeseen circumstances that make ongoing store operations difficult.

7 Business infrastructure

The Group’s business performance could be negatively impacted by a phenomenon that impacts the distribution networks or IT systems that support business activities or the operation of online stores that renders the continuation of business activities difficult.

8 Licensing agreements

CHROME HEARTS products, an important licensed brand for the Company, are sold at stores directly operated by UNITED ARROWS LTD. as well as at stores operated by CHROME HEARTS JP, GK, a joint venture established between UNITED ARROWS LTD. and Frankster USA, LLC, the controlling company that operates and manages the CHROME HEARTS brand (CHROME HEARTS JP, GK, was originally a joint venture with Frankster JP but has since been converted into a joint venture with Frankster USA, LLC, the sole owner of Frankster JP, following the liquidation of this company). CHROME HEARTS JP, GK, and UNITED ARROWS LTD. have signed licensing agreements with CHROME HEARTS JAPAN, LTD., which give them the right to sell products manufactured by CHROME HEARTS LLC. While UNITED ARROWS LTD. recognizes that the licensing agreement with CHROME HEARTS JAPAN, LTD., is ongoing, the licensing agreement may be canceled in the event of a serious 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 USA, LLC, to transfer its equity interest in CHROME HEARTS JP, GK, in a phased manner. As a result of this transfer, CHROME HEARTS JP, GK, will cease to be a consolidated subsidiary of UNITED ARROWS LTD. from January 2021, and UNITED ARROWS LTD. is scheduled to retain no equity interest in CHROME HEARTS JP, GK, from January 2025.

9 Customer information

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.

10 Natural disasters, major accidents, etc

The Group’s business performance could be negatively impacted by a phenomenon that impacts the distribution networks or IT systems that support business activities or the operation of online stores that renders the continuation of business activities difficult.

11 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.