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Risk Factors

Last Updated: 2020.12.03
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(1) Policy

The Group has established a Risk Management Committee directly under the Board of Directors to serve as an organization to regularly identify potential risks in business activities, pinpoint critical risks, and establish and strengthen its risk management structure. Chaired by the Group CFO, the Committee centrally manages risk for the entire company. The Committee analyzes and evaluates how much and how often a risk impacts business, and discusses countermeasures starting with the most significant risks. It aims to establish a system to keep risks in check before they occur, and achieve a rapid resolution to risks that have occurred. It also reports critical risks to the Board of Directors and provides concrete support to each department regarding risk countermeasures.

(2) Individual risks

Of the risks pertaining to the status of businesses and accounting as described in the year-end report, the following are the main risks that if recognized would have a particularly large impact on the Group's operating results and financial situation. Future risks discussed in the descriptions below are based on the Group's assessment as of the date of publication of this document. In addition, the following list of risks is not exhaustive and may be affected in the future by risks that are unforeseeable or not perceived to be critical as at the date of publication of this document. Furthermore, risks that are not indicated to have "already materialized" in the "Risk Description and Effects on the Group" column have not yet resulted in material risks, and both the likelihood and timing of their materialization remains uncertain.

①Risk of the large-scale, global spread of infectious diseases (including COVID-19)

【Risk Description and Effects on the Group】
The large-scale, global spread of infectious diseases such as COVID-19 may cause difficulties in the production and supply of products to stores due to infection among employees of the Group and its partners, as well as due to measures enacted to prevent the spread of the disease. In particular, the global spread of COVID-19 has already materialized risks that have had negative effects on the entire Group, including the shutdown of production plants, logistical delays, restricted store hours, and more.

【Main Group Initiatives】
Led by the Company-wide Emergency Response Headquarters established by the Risk Management Committee, the Group develops medical evidence-based infection prevention measures aided by advice received from experts, and implements such measures at all Group offices and stores while ensuring all Group employees fully understand them. In addition to providing supplier factories with guidelines for improving their hygiene management to prevent infection at factories and for employee remuneration if factories are forced to shut down, we also have measures in place to support the financial stability of our production partners. In order to ensure that all customers can shop with peace of mind, in our stores we take all possible measures to prevent infection, and further request that all customers entering stores comply with the Group's infection countermeasures.

②Management personnel risk

【Risk Description and Effects on the Group】
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.

【Main Group Initiatives】
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 addition, 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.

③Country risks and risks pertaining to international affairs

【Risk Description and Effects on the Group】
The majority of products sold through the Group's businesses are produced in China and other Asian countries. In addition, we are actively expanding Group businesses overseas, and overseas business groups account for a growing ratio of our net sales. As a result, 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, or water disasters. For example, the boycotting of Japanese products in South Korea and the political instability in Hong Kong have had a significant impact on our performance in these countries and regions.

【Main Group Initiatives】
To prepare for such risks, 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 also have accounting, tax, and legal specialists stationed at Group companies' offices to ensure that we can respond quickly and appropriately 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.

④Environmental risks

【Risk Description and Effects on the Group】
As regulations on greenhouse gas emissions and the transition to renewable energy sources are being implemented on a global scale in order to fight climate change, we may lose the public's trust in the Group if we are slow to respond. There is also 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. Failure to properly reduce waste emissions, pursue recycling initiatives, and manage chemical substances may result in the public losing trust in the Group brand.

【Main Group Initiatives】
Led by the Sustainability Committee, we persist in continually implementing concrete and highly effective initiatives under our Environmental Policy, with which we must ensure medium to long-term compliance as a Group, in five priority areas: Addressing climate change, improving energy efficiency, managing water resources, improving waste management and resource efficiency, and managing chemical substances.

⑤Large-scale disaster risks

【Risk Description and Effects on the Group】
Large-scale disasters such as earthquakes, typhoons, volcanic eruptions, fires, storms and floods, explosions, and collapsed buildings can adversely affect our product production, product supply systems, product 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.

【Main Group Initiatives】
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 infrastructure for quickly restoring business; prepare crisis management manuals and promote the global implementation of those manuals.

⑥Risks related to resource management and the procurement of raw materials

【Risk Description and Effects on the Group】
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.

【Main Group Initiatives】
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.

⑦Information security risks

【Risk Description and Effects on the Group】
In the course of our e-commerce and other businesses, the Group handles customer information (including personal information), trade secrets, and other confidential information. If such sensitive information were to be leaked or lost, we would need to respond by recovering the information and paying damages to customers. This may adversely affect our business performance and lead to loss of trust among our customers. In addition, 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.

【Main Group Initiatives】
In order to ensure that confidential information held by the Group is properly managed, we have established an Information Security Office under the direction of a Chief Security Officer (CSO) who oversees the entire Group. Working 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.

⑧Intellectual property risks

【Risk Description and Effects on the Group】
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. In addition, 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. On the other hand, the Group is committed to investing significant resources in product development in order to meet the potential needs of our customers. If the Group's products were to be copied by third parties and sold at low prices, this may negatively impact our business performance.

【Main Group Initiatives】
In order to address these intellectual property risks, 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 educational and awareness activities for Group employees. In addition, 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. In the event that infringement can be confirmed or if 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.

⑨Human rights risks

【Risk Description and Effects on the Group】
All of the Group's businesses operate an SPA business model which integrates all stages of the business process, from products being designed by each business, to them being directly procured from factories and then delivered to customers. The supply chain involved in this SPA business model includes many of our business partners' employees, as well as those of the Group. Within the business system, deterioration in working environment or in health and safety, human rights violations such as 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 consequently may negatively impact the supply and sale of our products.

【Main Group Initiatives】
Our supply chain policy is based on our view that our most important responsibility is to respect the basic human rights of all people working in the supply chain of Group 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 also developed human rights guidelines, provide code of conduct (COC) training, operate an employee hotline, and conduct regular reviews in order prevent human rights violations from occurring. In addition, led by our Sustainability Department, we are committed to maintaining and improving suitable working environments through monitoring work environments at supplier factories, and operating hotlines for the employees of those factories. In the event that a human rights violation does occur, in addition to the Human Rights Committee investigating and deliberating on the matter, we also have in place a framework for providing mental healthcare for the victim.

⑩Risks originating from business partners

【Risk Description and Effects on the Group】
The Group conducts business with many suppliers and business partners, which presents 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 a partners financial status may make it difficult for us to adequately collect on receivables. These possibilities can have an adverse effect on our business performance, and furthermore 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 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 complete a transaction due to a problem arising with our partner or with local laws and regulations.

【Main Group Initiatives】
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, the Group has established Business Partner Conduct Guidelines and conducts business only with those partners who agree to and comply with those guidelines. For example, 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 onhand 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.

⑪Impairment risks

【Risk Description and Effects on the Group】
As a general rule, the Group considers each store as a small unit that generates an independent cash flow. We apply impairment accounting on that basis to determine the likelihood of a return on investment in a timely manner. 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. Due to the application of IFRS 16 from August 2020 onward, impairment losses when profitability decreases are now larger than before, due to increases in right-of-use assets on the balance sheet.

【Main Group Initiatives】
We apply impairment accounting to quickly identify signs of impairment, quickly identify unprofitable stores, and to ensure proper accounting. Furthermore, we strive to understand the underlying cause of a store's drop in profitability, and develop fundamental profitability improvement plans for them.

⑫Foreign currency risks

【Risk Description and Effects on the Group】
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 our performance of each business. 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 yen, which is the Group's functional currency, can have a major impact on financial gains and losses.

【Main Group Initiatives】
In order to mitigate foreign exchange volatility in our international businesses, we have forward exchange contracts that extend several years into the future based on our procurement forecasts. 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. In addition, the Board of Directors discusses the viability of the currencies in which our financial assets are held.

⑬Risks arising from changes in the business environment

【Risk Description and Effects on the Group】
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.

【Main Group Initiatives】
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.

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