and ST HD Co., Ltd.

With approximately 90% of its business conducted domestically, the contraction of the domestic apparel market due to the declining birthrate, aging population, and population decline may affect business performance. As countermeasures, the company is promoting business diversification and customer base expansion through overseas expansion into East Asia and Southeast Asia, development of mass brands and lifestyle brands, and BtoB external tenant recruitment on its own EC site "and ST".

Since most of the company's products are produced in China and other Asian countries, rising product costs due to yen depreciation, increased transportation costs from global energy price hikes, and rising labor costs in production countries may affect financial condition and business performance. As countermeasures, the company utilizes forward exchange contracts, diversifies production to ASEAN countries, standardizes materials across multiple brands and consolidates orders for volume discounts, and reduces intermediary margins through direct transactions with factories.

Most stores are leased properties, and security deposits and guarantee money at the end of the fiscal year under review amounted to ¥14,330 million (approximately 10% of total assets), with the risk that all or part of these may become uncollectible in the event of bankruptcy of developers or others. In addition, impairment accounting is applied to substantial fixed assets, and additional impairment processing may become necessary due to deteriorating profitability or a significant decline in market prices. As countermeasures, the company conducts scrutiny of the appropriateness of security deposits and guarantee money and regional research through its branch system, and maintains an optimal store network through continuous store openings and closures.

The company's own EC site "and ST" has over 19 million members, and if a system failure or personal information leak occurs due to cyber attacks or unauthorized access, it may have a material impact on business performance, including loss of sales and damage to customer trust. As countermeasures, the company conducts security risk assessments by third-party organizations, introduces the latest security software, hires security specialist personnel, has established a specialized organization under the Security Committee, and conducts regular checks of all EC sites including overseas.

While the company handles product planning and supervision in-house, production is outsourced, and a suspension of product supply due to production delays, bankruptcy of suppliers, or disruption of transportation routes may affect business performance. There is also a risk of reputational damage as the commissioning party in the event of human rights violations or environmental pollution issues occurring at outsourced production sites. As countermeasures, the company diversifies production locations to ASEAN countries, secures multiple transportation methods and alternative routes, and requests compliance with group procurement guidelines and conducts regular monitoring of major business partners.

In the casual apparel retail market, trends and preferences change rapidly in the short term, and competition with domestic and overseas competitors is also intense, so failures in product planning or obsolescence of brand value may affect business performance. Changes in consumer purchasing behavior due to global warming and abnormal weather also pose a business risk. As countermeasures, the company collects customer preference information through stores, EC sites, and social media, and rapidly reflects this in product development, improves demand forecasting accuracy through EC advance reservation sales, and promotes IP collaboration products and expansion into non-apparel categories.

The sudden departure of management, including the Representative Director and Chairman from the founding family, may affect the business, financial condition, and business performance. Additionally, regarding the personnel required to operate over 1,600 domestic and overseas stores, if the company fails to adequately respond to the declining labor population and global wage increases, there is a risk of restrictions on store operations, rising labor costs, and decreased employee performance. As countermeasures, the company has introduced an executive officer system, established performance-linked stock compensation and stock delivery-type incentive plans, and implemented starting salary increases, wage improvements, and an employee referral system.

The apparel industry is globally recognized as having environmental impacts such as overproduction and pollution, and increased costs from stricter climate change-related regulations or the implementation of carbon taxes, as well as inadequate response to changing consumer behavior, may affect the medium- to long-term sustainability of the business. Insufficient consideration for biodiversity and natural capital could also lead to reputational damage risk. As countermeasures, the company analyzes and partially discloses financial impacts based on TCFD guidelines, considers procurement of renewable energy-derived power, and works to formulate sustainability targets and reduce environmental impact across the entire value chain.

In investments or acquisitions of external companies for the purpose of overseas expansion, acquiring new brands, or acquiring technology, as well as equipment and system investments for digitalization and logistics enhancement, there is a possibility that investment recovery may become difficult if the expected revenue or synergies are not achieved, or if the equipment or system does not perform as anticipated. As countermeasures, the company adheres to an investment principle within the range that maintains financial soundness, has established a discussion process at the Board of Directors (including outside directors), and has implemented a rule requiring the establishment of a third-party PMO for large-scale system investments.

In overseas business, there is a risk that expected business revenue may not be achieved due to insufficient response to local customer needs or difficulty in acquiring personnel, as well as risks of corruption and bribery arising from differences in business customs. Additionally, if governance over group companies pursuing multi-company management does not function effectively, it may affect the business performance of the entire group. As countermeasures, the company strengthens the functions of local subsidiaries and localizes personnel, confirms the absence of corruption through annual questionnaires to business partners, monitors through concurrent appointment of the company's directors as directors of group companies, and holds quarterly group company reporting sessions.