Business and Other Risks
Potential risk factors related to the Group's operations are described below. Forward-looking statements in the text below are forecasts based on the Company's judgment, targets, and assumptions as of the filing date of its latest financial report (May 24, 2018). Actual outcomes may differ from these forecasts. The risks enumerated below do not constitute an exhaustive list of all risks related to the Group's operations.
Common group risks
If these factors result in further deterioration in Japanese personal consumption, the Group's operations, financial condition, and earnings could be adversely affected.
Additionally, the Group implements fire prevention measures on a priority basis at its stores and other facilities, but if a fire occurs inside a store or other facility due to unforeseen circumstances and results in human casualties, widespread damage to the building or facility, or disruption of Group's sales, logistics, or supply-chain activities, the Group's operations, financial condition, and earnings could be adversely affected.
If an outbreak of a communicable disease such as H1N1 influenza occurs in the vicinity of the Group's stores or other facilities and results in human casualties or disruption of the Group's sales, logistics, or supply-chain activities, the Group's operations, financial condition, and earnings could be adversely affected.
If some other event such as an accident, act of violence or terrorism or any other incident that affects the Group's suppliers or supply chain or logistics network were to occur and resulted in human casualties or disruption of the Group's sales, logistics, or supply-chain activities, the Group's operations, financial condition, and earnings could be adversely affected.
Because these subsidiaries and affiliates are highly independent of the Company, there is a possibility that the Group cannot easily exercise effective control over them. This risk is expected to increase as the number of companies in the Group increases. If the Company is unable to exercise appropriate governance over the Group's subsidiaries and affiliates, the Group's operations, financial condition, and earnings could be adversely affected and the credibility of the Group's financial reporting could be impaired.
- Inability to secure funding required for acquisitions or new store openings
- Inability to identify suitable acquisition targets or find new store sites on the terms, or in locations, desired by the Group
- Inability to integrate acquisitions or overseas operations with existing businesses, resulting in an inability to fully utilize the Group's supply chains, logistics, sales promotion, financial, management, IT, and back-office functions
- Inability to retain or cultivate skilled staff required to expand operations or utilize IT systems
- Inability to develop shopping centers or retail stores within an appropriate budget or timeframe or inability to recruit prime tenants for such retail stores
- Failure to discover financial, tax, or legal problems of acquired companies prior to their acquisition and inability to subsequently resolve such problems
- Inability to maintain a consistent quality level for goods or services provided by the Group following an acquisition
- Inability to properly and effectively apply the Group's internal controls to acquired companies
Additionally, if a major earthquake, typhoon, other natural disaster, or unforeseen accident occurs in the vicinity of the Group's stores or other facilities, the stores/facilities' business activities are curtailed, and the Group fully or partially indemnifies its employees for lost wages, the Group's operations, financial condition, and earnings could be adversely affected.
Additionally, if the Group's market value of its shares or economic value of goodwill, etc. decreases in conjunction with group expansion, the Group may recognize a goodwill impairment loss. In such an event, the Group's operations, financial condition, and earnings could be adversely affected.
Risks related to merchandise and store operation
City Planning Act and Building Standards Act
Large-Scale Retail Store Location Act
Additionally, if the risk of owning real estate increases due to amendment of laws related to real estate or changes in accounting standards, the Group's operations, financial condition, and earnings could be adversely affected.
Additionally, if land owned by the Group is found to be affected by a previously unknown environmental problem, the land may decrease in value and the Group may be forced to incur substantial remediation expenses. In such an event, the Group's operations, financial condition, and earnings could be adversely affected.
Especially from China, the Group imports substantial merchandise and plans to continue to deploy its domestic business model in packaged form there. China's legal system is still developing and the Chinese government exercises broad discretion in terms of industrial regulation, including regulation of foreign investment. Material changes to regulations' content, implementation, or interpretation may frequently occur. Additionally, the Group's operations in China could be adversely affected in case of occurrence of violence or boycotts motivated by anti-Japanese sentiment.
Risks related to Financial Services Business
Some consolidated subsidiaries that are subject to capital adequacy ratio regulations prescribed by the Banking Act have established structures to manage those capital adequacy ratio. Although if they fail to maintain a capital adequacy ratio above the required level, they may be subject to administrative sanctions imposed by the Financial Services Agency, including partial or full suspension of business operations.
The Act imposes a cap on the effective annual percentage rate of interest of all loan products offered by consolidated companies that operate financial services businesses. Customers in Japan may assert claims for refunds of interest previously paid in excess of the interest rate cap. The Group has set aside an allowance for loss on refund of interest received to cover refund claims, but if refund claims exceed expectations, the Group's earnings could be adversely affected.
Additionally, such laws and regulations may be newly enacted, amended or repealed in the future. Such legislative action, depending on its content, could restrict provision of certain products or services or otherwise adversely affect the Group's operations, earnings and financial condition.
However, in case the Group's allowance for doubtful accounts, credit costs including write-offs, and non-performing loans increase more than expected, the Group's operating performance and financial condition could be adversely affected.
Risks related to Finance
However, the Group may be unable to raise funds in a timely manner on the terms it desires, as a result of a general economic recession including credit contraction, deterioration in its creditworthiness ensuing such as rating demotion or other factors, or business outlook. In such an event, the Group's operations, financial condition, and earnings could be adversely affected.