PAL GROUP Holdings CO.,LTD.

In the fashion apparel industry, changes in trends directly affect business performance, and it is difficult to eliminate this impact. Competition is particularly fierce among peer companies in the youth-oriented market, which is the Group's main customer base, and misreading trends can lead to excess inventory and declining sales. As countermeasures, the Group provides broad fashion coverage through multiple brands and verifies sales and inventory trends on a weekly basis.

The Group primarily opens stores as tenants in station buildings and commercial facilities, and if it cannot secure sufficient attractive store locations, the number of new store openings may be reduced. There is also a risk that business performance could be affected by the number, location, and timing of store openings. In selecting store locations, the Group comprehensively considers factors such as rent, trade area population, and appeal to young people to achieve efficient store development.

The Group has placed deposits for store leases in connection with tenant store openings, and as of the end of February 2025, these deposits accounted for 9.3% of total assets. Although most stores are opened with major developers, there is a possibility that all or part of the deposits may not be recovered due to the lessor's bankruptcy or other circumstances. While no specific instances of non-recovery are currently disclosed, the high proportion relative to total assets means the financial impact cannot be ignored.

In the retail industry, sales at existing stores tend to decline as time passes after opening, so the Group actively pursues scrap-and-build activities such as format changes and store closures. The business restructuring costs associated with this are recognized as necessary expenses that continue to arise, and could be a factor pressuring profitability. The Group seeks to maintain the overall competitiveness of its stores by combining new store openings with the revitalization of existing stores.

The spread of a large-scale global infectious disease, such as COVID-19, could significantly affect both procurement and sales, including through factory closures and store closures. On the procurement side, the Group is diversifying its suppliers, and on the sales side, it is working to secure sales by diversifying sales channels through a focus on e-commerce.

Because the apparel industry produces and procures products in line with seasonal consumer purchasing trends, there is a risk that climate change could lead to weak sales of already produced or procured merchandise. The Group thoroughly implements and promotes a "4-week MD" approach, completing the procurement-to-sales cycle within four weeks, and has established a system that allows it to quickly switch out merchandise being sold.

If an incident involving the external leakage of customer information were to occur, it could damage the Group's credibility and adversely affect its business performance. The Group states that it exercises the utmost care in managing customer information, but specific details of its management systems are not disclosed. Information leaks could also lead to brand damage, customer attrition, and legal risk, making this a significant risk.

Because the Group depends on imports for most of its merchandise, sharp fluctuations in exchange rates could cause procurement prices to surge and worsen the gross profit margin. In particular, in the miscellaneous goods business, which accounts for 38.3% of sales, some products have set upper limits on selling prices, creating a structure in which it is difficult to pass on cost increases through pricing. There is currently no specific disclosure of hedging measures.

On June 16, 2024, a server failure caused by unauthorized access occurred, requiring identification of the scope and cause of the system failure and recovery work. During the recovery period, significant operational disruption occurred, including manual aggregation of transactions and retroactive system entry to generate accounting data. The Group has since worked with external experts to conduct an investigation, developed countermeasures for the identified internal control issues related to cybersecurity, and is proceeding with responses according to plan.

The Group imports most of its merchandise from Asian countries, centered on China, and if serious political risk, geopolitical risk, or economic disruption were to occur in China, it could significantly affect merchandise procurement. Concentration of procurement in specific countries poses a risk of supply chain vulnerability, and as a countermeasure, the Group continues to promote diversification of its sourcing countries.