GFOOT CO.,LTD.

The Company has been pursuing a business turnaround plan (business restructuring, MD structure reform, and organizational cost structure reform) since FY2023 (ending February 2023); however, the plan has not been achieved due to unmet sales targets, increased period-end inventory, and a decline in gross profit margin. The Company is in breach of financial covenants on borrowings from certain financial institutions, and it recognizes that events exist that raise material doubt about its ability to continue as a going concern. Based on the intention of AEON CO., LTD. to provide management support and the securing of a short-term borrowing facility with financial institutions, the Company has determined there is no concern regarding continuity for the time being; however, a difficult operating environment is expected to continue in FY2027 (ending February 2027).

As of the end of the current fiscal year, 522 of the Group's 594 stores are located within AEON Group shopping centers, and sales and customer traffic are heavily dependent on the industry position of the AEON Group. The parent company, AEON CO., LTD., holds 61.90% of common shares, and Group transactions are conducted across major aspects of business operations, including merchandise procurement, store leasing, logistics outsourcing, and brand royalty payments. If the AEON Group's ability to attract customers declines due to changes in Group strategy or industry restructuring, this would have a direct impact on the Group's business performance.

The Group's earnings are heavily dependent on the Japanese retail market, which continues to experience declining personal consumption, price deflation, and intensifying competition among businesses. Rising burdens from medical expenses and social insurance premiums, along with uncertainty in overseas conditions, could affect the Japanese economy and personal consumption, and households continue to exhibit strong thrift orientation amid elevated prices. Further deterioration in personal consumption could affect the Group's business, financial condition, and results of operations.

Competition in the footwear retail industry is intensifying due to an increase in directly operated stores by manufacturers and wholesalers, as well as entry from other industries such as apparel and general merchandise stores. The opening of competing stores nearby or of large shopping centers may lead to a decline in customer traffic and intensified price competition. These factors could affect the Group's business, results of operations, and financial condition.

Most of the footwear sold by the Group is imported and procured mainly from China and ASEAN countries, and significant changes in the political, economic, or legal conditions of producing countries pose a risk of disruption to merchandise procurement. Fluctuations in exchange rates and rising overseas production costs leading to higher costs, as well as bankruptcies of major overseas or domestic business partners or disruptions to merchandise supply, could affect business performance.

The Group holds fixed assets for store operations, and if profitability deteriorates, accounting standards relating to impairment of fixed assets may be applied, resulting in the recognition of impairment losses. In addition, a decline in the price of owned real estate could result in the recognition of impairment losses or losses on the sale of fixed assets, and there is also a risk of rising real estate leasing costs. Amendments to real estate-related laws or changes in accounting standards could also affect the financial condition.

Footwear is highly susceptible to changes in fashion trends and customer preferences, compounded by shifts in personal consumption trends due to economic fluctuations and changes in the competitive market. If merchandise procurement and product development fail to meet customer needs, business performance could be affected. Under the MD structure reform, unmet sales targets and increased period-end inventory due to expanded sales of private brand products have already occurred.

The Group employs a large number of part-time workers, and changes to various systems relating to social insurance and labor conditions, or amendments to relevant laws, could lead to an increase in labor costs. Under the organizational cost structure reform, efficiency has progressed through the digitalization of in-store operations, but labor productivity per hour has declined due to the decrease in gross profit margin.

Through the issuance of membership cards (point cards) and implementation of the My Number system, the Group holds personal information necessary for its operations, which it manages through the establishment of a dedicated department and internal regulations. Should such information be leaked externally, this could damage trust in the Group and affect business performance.

The Group operates stores nationwide, and there is a risk that disasters such as major earthquakes and typhoons, or the spread of new infectious diseases, could result in shortened operating hours or temporary store closures. If head office functions, logistics functions, or store operating activities are disrupted, this could affect business performance and financial condition. In addition, many of the products handled are highly seasonal, and adverse weather conditions such as cool summers, prolonged rain, or warm winters can also affect sales trends.