Risk Factors

Management personnel risk

Members of the Group's management team, led by Chairman, President and CEO Tadashi Yanai, play a major role in their respective areas of responsibility. If any officer becomes unable to fulfill his or her duties and the Group is unable to find any personnel who can take on those important responsibilities, this could have an adverse impact on business performance.

• In each of the Group's businesses, we have established a team-based executive management structure to ensure that decision-making and execution of duties are not dependent on specific management personnel.
• In each business, the managers themselves personally train the management personnel who will be their successors in those positions.
• We also actively recruit globally active management talent on an ongoing basis, and we have established dedicated educational institutions to educate and train our hired talent into managers.

Country risks and risks pertaining to international affairs

The Group's product production, supply, and sale infrastructure may be adversely impacted by events in countries and regions in which we manufacture products and conduct business, due to factors including changes in political or economic conditions, social disorder or deterioration of public safety due to terrorism or conflicts, changes in legal or tax systems, or the occurrence of large-scale natural disasters such as earthquakes, strong winds, floods, and infectious diseases on a global scale.

• The Group is moving forward with establishing a supply chain that can respond flexibly to changes in international conditions. This includes dispersing production sites across multiple countries and regions, as well establishing production management offices at our main production hubs to enable the timely monitoring of and quick response to local circumstances.
• We have accounting, tax, and legal specialists stationed at Group companies' offices to ensure that we can provide quick and appropriate responses and communication in the event that a risk materializes.
• With respect to cross-border tensions and deteriorating racial relations in specific countries and regions, the Group as a global company aims to contribute to the resolution of social issues in countries and regions in which we operate, and to achieve a lasting peaceful co-existence and co-prosperity in the communities within each region and country.

Environmental risks

• A delay in the Group s response to climate change by, for instance, reducing greenhouse gas emissions or switching to renewable energies, a delayed response to biodiversity, managing water resources, managing chemical substances, reducing waste emissions, and shifting to a circular business model, among other issues, or the failure to appropriately implement the above responses may result in losing the public trust in the Group brand. Delay in responding to climate change such as by reducing greenhouse gas emissions or switching to renewable energies, and failure to properly reduce waste emissions, pursue recycling initiatives, and manage chemical substances may result in the public losing trust in the Group brand.
• There is the risk that the increase in extreme weather due to climate change may adversely affect our product supply systems and our business as a whole.

• We persist in continually implementing concrete and highly effective initiatives under our Environmental Policy, in six priority areas: addressing climate change, improving energy efficiency, addressing biodiversity, managing water resources, managing chemical substances, and improving waste management and resource efficiency.
• In order to reduce our impact on climate change, we will work to identify and reduce greenhouse gas emissions in our business activities across the board, including every stage from production to disposal of products. For more information on specific initiatives, please see: "Fast Retailing Group TCFD Report".
• We will strengthen our efforts based on our Biodiversity Conservation Policy in order to avoid or minimize any negative impact on biodiversity throughout our value chain and to conserve and restore biodiversity.

Large-scale disaster risks

Large-scale disasters such as earthquakes, typhoons, volcanic eruptions, fires, storms and floods, explosions, and collapsed buildings can adversely affect our supply and sales systems, and also our management infrastructure in areas where there are head offices, retail stores, and production plants for products sold by the Group.

Led by the Risk Management Committee, we are committed to establishing an infrastructure by which, in the event of an actual or potential major earthquake or other major disaster, we have an emergency command system prepared, run by the Emergency Response Headquarters to: ensure the safety of customers, employees, and related personnel; mitigate damage to business resources; prevent secondary disasters; develop system infrastructure and decentralized restoration bases for quickly restoring business; prepare crisis management manuals and promote the global implementation of those manuals.

Risks related to resource management and the procurement of raw materials

Disasters, climate change, and other factors may cause escalating prices or difficulty in procuring the raw materials (such as cotton, cashmere, down, etc.) used in the products sold by the Group's businesses. If these risks materialize, the Group's product supply systems and performance may be adversely affected.

We have entered into procurement agreements with multiple suppliers so that we are able to source reasonably priced raw materials, without having to rely on a specific supplier for a specific raw material.

Foreign currency risks

• As many of the products handled by each of the Group's businesses are imported from overseas production plants, fluctuations in the currencies of settlement may have an adverse effect on the performance of each of our businesses in some countries or regions.
• As the Group as a whole has financial assets in a variety of currencies in line with where we operate our businesses, fluctuations in exchange rates against the Japanese yen, which is our functional currency, can have a major impact on financial gains and losses.

• In order to mitigate foreign exchange volatility in our international businesses, we have forward exchange contracts based on our procurement forecasts regarding each country and regional business. In this process, the Group Board of Directors discusses and approves specific hedging policies such as hedge ratios, time periods, and other aspects, taking into account their contribution to our financial security.
• The Board of Directors deliberates on the viability of the currencies in which our financial assets are held.

Information security risks

• If sensitive information such as customer information (including personal information) and trade secrets, etc. were to be leaked or lost, we would need to respond by recovering the information, and apologizing and paying damages. This may adversely affect our business performance and lead to loss of trust among our customers.
• If a government were to determine that we are in violation of legal regulations that restrict the transfer of personal information between countries and regions, such as the EU's General Data Protection Regulation (GDPR), we may lose customers' trust and be subject to significant fines that would negatively impact our business performance.

• In order to ensure that confidential information is properly managed, we have established an Information Security Office under the direction of a Chief Security Officer (CSO) who oversees the entire group, and works in cooperation with the IT and legal departments of each country and region in which we operate.
• The Information Security Office builds and improves the infrastructure needed to properly manage sensitive information (especially customers' personal information) in anticipation of external attacks, internal fraud and various other incidents. This is done by putting in place infrastructure, evaluating our administrative processes and ours contractors, establishing and standardizing internal rules, and conducting regular educational and awareness activities in each business division.

Intellectual property risks

• Intellectual property rights apply in relation to the Group's products and the latest technologies used in all kinds of areas, including product management, store operations, and e-commerce websites. These rights not being licensed to us by their owners would present difficulties in our use of these technologies or in supplying products.
• If these technologies or products were to infringe on the intellectual property rights of others, we may be liable to pay substantial damages or license fees that may adversely affect our business performance.
• If the Group's products were to be copied by third parties and sold at lower prices, this may negatively impact our business.

• The Group has a dedicated department in place dealing with intellectual property. This department investigates infringements during product development and during the implementation of technologies, and in an effort to prevent infringements of intellectual property rights also runs education and awareness activities for Group employees.
• We actively take steps to acquire the rights to new technologies that we develop. Furthermore, we monitor markets in the countries and regions in which we operate or plan to expand, and cooperate with local legal departments, local law firms, and government agencies to gather information about counterfeit products and other intellectual property infringements.
• If an infringement is confirmed or we fear such an infringement may have occurred, we work with local legal departments and local law firms to quickly consider our course of action, including a legal response.

Human rights risks

• Within the Group or its supply chain, deterioration in working environment or in health and safety, human rights violations such as forced labor, child labor, harassment or discriminatory behavior, or other such acts that significantly infringe on the human rights of those affected may result in the Group losing the trust of our customers and suppliers, and may negatively impact the supply and sale of our products.
• In Europe, the United States, and other countries and regions, tighter regulations and legislation aimed at protecting human rights in the supply chain may have a negative impact on the production, transportation and sales systems for the Group's products.

• Fast Retailing Group's human rights policy is based on our view that our most important responsibility is to respect the basic human rights of all people affected by the Group's businesses, whether they are employees of the Group or of our business partners, and to ensure those employees' physical and mental health, safety, and peace of mind.
• We have established a Human Rights Committee as an advisory and supervisory function, and we prevent human rights violations through implementing human rights due diligence, human rights training, and points of contact for reporting.
• Led by our Sustainability Department, we are committed to maintaining and improving suitable working environments with regard to our supply chain, through monitoring work environments at supplier factories, and operating hotlines for the employees of those factories. We are also promoting the procurement of raw materials for which the production processes have been confirmed to properly protect human rights and working conditions, in accordance with international standards.
• Going forward, we will establish traceability down to the raw materials procurement level for all countries and regions, and we will build a system that allows us to confirm for ourselves that there are no issues with human rights or working conditions throughout the entire supply chain. In addition, we will make use of third-party certification to objectively verify that human rights and working conditions are being properly protected.
• In the event that a human rights violation does occur, in addition to the Human Rights Committee investigating and deliberating on the matter as necessary, we also have in place a framework for providing mental healthcare for the victim.

Risks originating from business partners

• There are a variety of risks associated with business partners involved in product planning, production, transportation, and sales.
• These risks include the possibility that our partners may not share the values and principles of the Group, which may lead to a drop in business efficiency, or the possibility that it could be difficult for us to adequately collect on receivables. These possibilities can have an adverse effect on our business performance, and may result in our unintentionally engaging in business with anti-social organizations (e.g. criminal groups and individuals) or violations of laws on the part of our partners. If these risks were to materialize, they may lead to a loss of trust in the Group among our customers and society.
• In addition, for example during the transportation and delivery of products by delivery operators or while products are being stored at a warehouse, products may be destroyed, damaged, or stolen as a result of a natural disaster or human behavior, or it may not be possible to hand over products due to a problem arising with our partner or with local laws and regulations.

• In order to avoid entering into business relationships with inappropriate partners, all Group companies carry out credit checks as necessary when entering into a transaction with a new business partner.
• In addition, in order to build appropriate business relationships with all of our partners, we have established Business Partner Conduct Guidelines and conduct business only with those partners who agree to and comply with those guidelines.
• In response to the risks associated with dealing with delivery operators and warehouse operators, each of our businesses has logistics personnel in place who are in constant communication with our delivery and warehouse-operating business partners. These personnel are on-hand to promptly report any problems that arise in product shipping or storage to local management and the Global Logistics Headquarters, a system which enables them to promptly consider and action a response.

Impairment risks

If profitability decreases due to changes in the business environment, impairment losses may be recorded under property, plant, and equipment and right-of-use assets, among others.

• We apply impairment accounting to quickly identify signs of impairment, quickly identify unprofitable stores, and to ensure proper accounting.
• We identify the underlying causes of a store's drop in profitability, and develop fundamental profitability improvement plans for them.

Risks arising from changes in the business environment

In each country and region in which the Group's businesses operates, changes in the business environment, such as inclement weather and changes in consumption trends, may result in drops in product sales and the accumulation of excess inventory, negatively impacting our business performance.

We collect timely information on the products required by customers in the countries and regions in which the Group's businesses operate. We have the infrastructure in place to immediately commercialize those products as well as to produce and sell the quantity required, responding to changes in the business environment as flexibly as possible.