Business Risks

The UNITED ARROWS Group believes that we need to continuously strive to allocate in-house human resources in a way that meets customer attributes and preferences, to secure the right personnel in the right places, and to develop human resources in order to respond to changes in the trends of the times.
In recent years, new lifestyles, casual fashion, and online purchasing behavior in this post-coronavirus era, are forcing companies to devise new methods to sell their products (improvement in e-commerce site sales ratio, augmentation of digital marketing, etc.) and to showcase their product lineup in ways that are in line with the times. In order to respond to this environment, it is important to attract talented human resources required in the new era, such as marketing and IT personnel.
Although there are no serious obstacles at this time, if we are unable to properly assign human resources that are compatible with the sense of the times demanded by our customers or hire and train human resources compatible with our strategy, or if there is an unexpected outflow of human resources, it may affect the execution of our strategy and the achievement of our long-term vision.

■ Countermeasures:
To address these risks, the Group will continue to actively invest in education to attract human resources who are sensitive to changes in the trends of the times and in acquiring human resources in the IT field, etc.
In addition, we will promote human resource allocation that ensures the right personnel are placed in the right job when working on various initiatives by visualizing the experience, skills and vision of each and every employee while making use of talent management systems, and will strive to improve employee engagement by creating an environment where employees can work with high motivation.
In the IT field, the DX Promotion Division was established in the fiscal year ended March 2022, and the executive officer and general manager in charge of this division are experts in this field who have extensive experience at other companies.

■ Relevance to our management strategy:
UA CREATIVITY Strategy (Strengthen brand appeal)

■ Timing of influence:
Medium- to long-term (3 years or more ahead)

The UNITED ARROWS Group collects information from markets in Japan and overseas and is channeling our efforts into the planning and development of products that meet customer preferences (needs) and respond to changes over time. However, customer preferences (needs) and trends in the fashion market tend to change rapidly over a short period of time.
In recent years, Japan has seen a sharp change in consumer behavior due to declarations of a state of emergency, etc. during the coronavirus pandemic, and this trend is expected to continue.
Even in the post-coronavirus era, changes in consumption patterns (prevailing online consumption, casual fashion, and increased need for personal leisure, etc.) caused amid the pandemic have taken root as changes in consumer lifestyles.
If the Group fails to successfully respond to changes in the trends of the times and other related matters, our competitiveness and brand value are highly likely to decline, affecting the medium to long-term business performance of the Group.

■ Countermeasures:
To address these risks, the Group will make effective use of external environmental data, such as consumption trends, trend information and weather information, as well as data on our customers, including customer attributes and purchase history, to provide highly accurate services optimized for each customer. In addition, this will improve the function of UNITED ARROWS LTD. ONLINE (our e-commerce site) on an ongoing basis, establish an environment in which customers can buy the products they want, where and when they want them, and provide a variety of services that enhance the value of their experience.
In recent years, the Group has been enhancing various initiatives, such as developing apparel derivative brands for yoga, golf, and outdoors, in addition to those for apparel brands. Together with these initiatives, we will expand our business into areas other than apparel.

■ Relevance to our management strategy:
UA MULTI Strategy (Business development for business expansion)

■ Timing of influence:
Medium- to long-term (3 years or more ahead)

Aiming to become a highly sensitive and value-added lifestyle provider group, the UNITED ARROWS Group is working to streamline its corporate management and increase the value we provide to customers.
Considering the growing tendency to purchase online, the evolution of digital technology, and increasing data utilization, it is vital to digitize our sales activities and internal operations in order to improve our competitiveness.
If the UNITED ARROWS Group fails to provide customers with the online purchasing experience they desire or promote digitization of our internal operations due to a lack of specialized in-house personnel, the Group’s competitiveness will not be enhanced, which may have a negative impact on the execution of strategies and achievement of our long-term vision.

■ Countermeasures:
To address these risks, we renewed our e-commerce site, UNITED ARROWS LTD. ONLINE and linked the inventory to our brick-and-mortar stores in March 2022, and have been working on a variety of other OMO* measures, such as digitization of customer service skills and online customer services.
The Group will also seek to improve the efficiency of our corporate operations and increase the value we provide to customers by expanding our business operations into non-apparel markets and overseas markets through the revamping of our core product management system, which centralize inventory data of actual stores, online shopping, and distribution warehouses. In addition, in terms of human resources, we will continue to actively invest in acquiring human resources in the IT field, etc.
(*) OMO: Online Merges with Offline, the integration of online and offline channels.

■ Relevance to our management strategy:
UA CREATIVITY Strategy (Grow and expand existing businesses)
UA DIGITAL Strategy (Promote OMO / Supply chain optimization)

■ Timing of influence:
Medium- to long-term (3 years or more ahead)

Companies in the apparel industry are required to give due consideration particularly to the environment and human rights across the supply chain in their business operations. Amid growing social demand for sustainability, the UNITED ARROWS Group believes that our top priority over the long term is to stop relying on sales growth that is based on mass production and mass consumption. This means "creating maximum corporate value with limited resources" while aiming to expand business operations, as well as properly procuring the right amount of products in consideration of the supply chain and selling them without waste, in other words, improving the ratio of regular price sales.
Considering the disclosure of information on these sustainability initiatives is being legislated, if the Group fails to respond to the future tightening of sustainability-related laws and regulations, or if unforeseen environmental or human rights issues arise in the supply chain, our corporate value may be affected. For example, it is likely that our corporate activities will not be supported by customers and investors.

■ Countermeasures:
To address these risks, the Group established the Sustainability Committee under the Management Committee. It consists of Executive Directors and Executive Officers and has full-time Outside Directors as observers, and has discussions on strategic policies and specific measures.
The Group set five themes for the key issues of, “supply chain,” “resources,” “community,” “human resources,” and “governance,” and in 2022, established three categories of priority appeal, “circularity,” “carbon neutrality,” and “humanity,” and seven quantitative targets associated with each.
With regard to the Supply Chain, we established the UNITED ARROWS Group Human Rights Policy in April 2023, in addition to the formulation of Behavioral Guidelines (Code of Conduct) for Business Partners Related to Product Procurement, which aims to increase transparency across the supply chain, prevent human rights violations, and give consideration to the environment.

■ Relevance to our management strategy:
UA DIGITAL Strategy (Supply chain optimization)

■ Timing of influence:
Medium- to long-term (3 years or more ahead)

*Reference: Sustainability Promotion Structure Chart

While the UNITED ARROWS Group aims to further expand our business and customer base, an occurrence of changes in the macroeconomic environment, such as sluggish consumption associated with economic stagnation, inflation, demographic changes in Japan, or sharp rises in raw materials and purchase prices, could result in a decline in sales and soaring expenses and affect the Group's business activities and performance.

■ Countermeasures:
To address these risks, we are gathering information on the macroeconomic environment, setting precise prices and implementing cost control measures, as well as making efforts to procure adequate inventory and improve the ratio of regular price sales.

■ Relevance to our management strategy:
UA CREATIVITY Strategy (Grow and expand existing businesses)

■ Timing of influence:
Short-term (within 3 years)

The UNITED ARROWS Group operates many of its stores in rented spaces in commercial facilities such as shopping centers.
Because more and more people are shopping online, fluctuations in the ability of such commercial facilities to attract customers may reduce the number of customers entering the stores, which may affect the Group's business performance.
In addition, depending on the financial condition of the store lessor or commercial facility, it may become impossible for the Group to collect part of debts and the security deposit we have paid upon opening a store, the rent may soar due to increases in real estate prices, or an unexpected situation may occur and make it difficult for the store to continue operating, causing a drop in revenue. These could affect the Group’s business performance.

■ Countermeasures:
To address these risks, before deciding to open a new store, we will pay close attention to market conditions in the area where the store will be opened and strive to optimize ours sales channels, including stores and e-commerce.
In addition, regarding new stores, we will conduct a credit check for business partners before concluding a contract, regularly monitor store profit and loss after the opening, and when there is a discrepancy between targets and actual results, actively push ahead with sales promotions in cooperation with developers and continue to implement follow-up measures. Furthermore, we will continue applying in-house rules regarding investment and withdrawal.

■ Relevance to our management strategy:
UA CREATIVITY Strategy (Grow and expand existing businesses)

■ Timing of influence:
Short-term (within 3 years)

The UNITED ARROWS Group purchases products produced not only in Japan but also in many other primarily Asian countries.
Political situations, conflicts, terrorism, and natural disasters in these countries could hinder product procurement and affect our business performance.
In addition, if a supplier or a subcontractor that has an important and unique impact on the UNITED ARROWS Group goes bankrupt or other problems occur, product delivery may be delayed or impossible, and depending on the situation, that may affect business performance.

■ Countermeasures:
To address these risks, the Group is developing a system to prepare for these emergencies, including the diversification of suppliers and the preparation of emergency response manuals for product procurement.
We are also working to digitize product procurement and to visualize product status from ordering to delivery. By making it possible to check the status of product procurement in a timely manner, we aim to improve the accuracy of inventory procurement and enhance operational efficiency.
In addition, we are also planning to restructure our distribution centers in line with future business expansion.

■ Relevance to our management strategy:
UA DIGITAL Strategy (Supply chain optimization)

■ Timing of influence:
Medium- to long-term (3 years or more ahead)

The UNITED ARROWS Group is strengthening our global expansion to further expand our customer base and broaden the range of value we offer. In particular, we recognize Taiwan and China as markets with high medium- to long-term growth potential and are working to develop the Chinese market in addition to expanding the number of new stores in Taiwan.
China also plays an important role as a producer of products offered by the Group.
However, there are currently growing concerns about China-Taiwan relations, and any future political turmoil or conflict in these countries for business expansion could affect our strategy, supply chain and business performance.

■ Countermeasures:
To address these risks, we are gathering various information on China-Taiwan relations, diversifying production areas, drawing up and disseminating a business continuity plan (BCP), and developing overseas emergency response manuals to ensure the safety of employees overseas.

■ Relevance to our management strategy:
UA MULTI Strategy (Global expansion)

■ Timing of influence:
Medium- to long-term (3 years or more ahead)

The UNITED ARROWS Group stores are concentrated in large cities in Japan, with distribution centers and head office functions also concentrated in the Tokyo metropolitan area.
Natural disasters, such as a major typhoon or torrential rain, which are both physical risks in these areas, may hinder product procurement or result in damage to store facilities, and store closures, which may affect our business activities and performance.
On the other hand, if changes in the Max. and Min. temperatures or a shift in the seasons occurs, affecting demand and the purchasing behavior of customers, etc., it is highly likely that the Group will not be able to adapt to these changes under current product plans.
An abnormal climate and increases in average temperatures may also cause a hike in costs for the production of the raw materials.
The transition to a decarbonized society aimed at avoiding climate change will be accompanied by changes in regulations, markets, and other areas that introduce policies to curb greenhouse gas emissions, such as carbon taxes and carbon pricing, and there is a risk that the Group will be unable to respond to these changes, resulting in a significant chance of financial impact on the Group. Materialization of such risks may tarnish the Groups’ reputation (evaluation or review by customers and society), leading to a decline in brand value.

■ Countermeasures:
To address these risks, the UNITED ARROWS Group is working to diversify raw material suppliers and considering alternative materials.
In addition, we have incorporated and established a risk management system in our Risk Management Regulations to respond to natural disasters, and will continue to review our Business Continuity Plan (BCP). In order to enhance the effectiveness of our crisis management system, we are regularly conducting drills to confirm the extent of damage in the event of a disaster.
In addition, we are working to increase the ratio of regular price sales by strengthening product appeal through the introduction of product ranges that aren’t affected by season and by reviewing product plans and launch timing, such as a shift from season MD.
We are not only considering our carbon reduction targets, but are already using renewable energy at some stores. We will continue to promote further measures to realize a decarbonized society.

■ Relevance to our management strategy:
UA DIGITAL Strategy (Supply chain optimization)

■ Timing of influence:
Medium- to long-term (3 years or more ahead)

The UNITED ARROWS Group has worked to raise awareness of quality issues among employees and established a thorough quality control system. Even so, if a product is contaminated with hazardous materials, such as needles, due to improper inspection, etc., resulting in harm to a customer, customer confidence in the Group may deteriorate, affecting business performance.
In particular, with the expansion of the e-commerce business, the level of labeling has increased, and the risk of improper labeling is growing year by year. Any violation of relevant laws and regulations due to improper labeling may lead to deterioration of our brand image.
In the past, the UNITED ARROWS Group has been subject to administrative dispositions by the Fair Trade Commission and the Consumer Affairs Agency for violating the Act against Unjustifiable Premiums and Misleading Representations. Any similar administrative punishment may adversely affect our social credibility, which would in turn affect business performance.

■ Countermeasures:
To address these risks, the Group will make continuous efforts to develop and build a management system in accordance with in-house rules and to ensure compliance. When defective products or improper labeling occurs, company-wide meetings, etc. will be held to report and share information concerning the incident and to examine and determine countermeasures in order to prevent a recurrence.

■ Relevance to our management strategy:
UA CREATIVITY Strategy (Strengthen brand appeal)

■ Timing of influence:
Short-term (within 3 years)

The UNITED ARROWS Group handles a large variety of confidential information, including personal information, and pays close attention when handling such information. If a leakage of confidential information occurs due to attacks by computer viruses, cyber-terrorism, management mistakes by employees or contractors, etc., the brand image of the Group may deteriorate and the Group may have to bear the cost of legal obligations, which is likely to affect the Group’s strategies and business performance.

■ Countermeasures:
To address these risks, the Group has high quality security systems and conducts risk management in cooperation with companies specializing in security and in line with the Information Security Regulations, which was revised on April 1, 2021. Such systems and management include measures against unauthorized access, anti-virus measures, data protection measures, and user authentication. Furthermore, in order to prevent leakage of information from within the Group, we have established an Information Security Policy to ensure appropriate information management, and provide Information Security Training for employees.
In addition, the Information Security Committee was newly established within the Risk Management Committee in the previous fiscal year to discuss these types of risks with employees, including management, and thereby countermeasures will be planned and implemented at an early stage to mitigate such risks.

■ Relevance to our management strategy:
UA DIGITAL Strategy (Supply chain optimization)

■ Timing of influence:
Short-term (within 3 years)

Should an event occur that makes it difficult to continue business operations in the logistics network or information systems that support our business activities, or in the operation of our e-commerce site, the supply of products could be disrupted, which could affect our business performance.

■ Countermeasures:
To address these risks, the Group will promote the development and review of BCP, including redundant configuration of information systems and e-commerce sites in a cloud environment and the dispersion of such systems to multiple locations.
In addition, we will continue to enhance business operations and communication with our contractors.

■ Relevance to our management strategy:
UA DIGITAL Strategy (Supply chain optimization)

■ Timing of influence:
Medium- to long-term (3 years or more ahead)

The Group calculates the below-cost selling ratio and the estimated amount of inventory to be sold in order to determine the valuation of products. Since these calculations are based on the forecast of inventory to be sold in the future, if such forecast differs from the actual situation due to changes in economic conditions, etc., the book value of products may be reduced in the consolidated financial statements for the next fiscal year.
In addition, since the recoverable amount used for the impairment assessment of noncurrent assets is calculated based on their value in use, and the calculation is based on business performance forecasts for the future, etc., if the actual result is different from the forecasts due to changes in economic conditions, etc., the amount of impairment loss in the consolidated financial statements for the following consolidated fiscal year is likely to be affected.
Furthermore, the UNITED ARROWS Group owns numerous intellectual property rights and endeavors to protect them. However, an illegal infringement of rights related to the Group by a third party, etc., may impede our business activities, lowering our brand image. In the event of such, the Group’s business performance is likely to be affected.
At present, due to Russia’s invasion of Ukraine and the resulting economic sanctions against Russia, political instability continues worldwide. However, the Group sees the impact of this situation to be limited.

■ Countermeasures:
To address these risks, the Group will continue to control merchandising based on marketing research in domestic and overseas fashion markets, weather forecasts and monitoring results of sales trends when forecasting future inventory.
In addition, the Group is taking prompt action against infringement of its intellectual property rights by conducting periodic investigations using outside firms and by having the Intellectual Property Management Department, in cooperation with legal experts, issue warnings to infringers.