WATTS CO., LTD.

If there are no store opening opportunities that meet profitability criteria, a decline in the number of new store openings may worsen business performance. In addition, there are cases where store closures become unavoidable due to the closure of entire commercial facilities such as shopping centers and supermarkets where stores are located, or due to tenant turnover. Under a policy that prioritizes profit over sales, the Company actively closes unprofitable stores, and fluctuations in the number of stores directly affect business performance.

Store operations rely on part-time and temporary employees, and if capable supervisors (full-time employees) cannot be secured, there is a risk that store operation levels and service quality will decline. Difficulty in securing part-time and temporary staff leads to increased recruitment costs and wage increases, worsening profitability. Furthermore, the expansion of social insurance eligibility criteria for short-hour workers and the application of the paid leave system may result in new cost burdens.

Since purchasing is conducted in principle in yen from domestic manufacturers and wholesalers, the Company is not directly affected by foreign exchange fluctuations. However, since suppliers handle a large volume of imported goods from China and elsewhere, exchange rate fluctuations indirectly affect purchasing costs. In addition, rising raw material and crude oil prices have widened the range of cost fluctuations for products such as plastic goods, making the outlook for purchasing costs more unstable. If these factors overlap, the impact on profitability may become significant.

While the 100-yen shop industry continues to expand, competition is intensifying due to new entrants from other industries and the increase in flat-price sales corners within existing mass retailers. A deteriorating competitive environment may affect the Group's business performance through declines in customer traffic and price competitiveness. Maintaining competitive advantage in the markets of the Company's main businesses remains an ongoing challenge.

As the number of stores increases, merchandise inventory also increases, requiring the continuous introduction of new products and the removal/disposal of stagnant inventory to maintain sales floor efficiency. Although inventory control is managed using POS system data, if a large amount of stagnant inventory arises due to changes in consumer trends or other factors, it may adversely affect business performance. As the Company plans further increases in the number of stores going forward, the importance of inventory management is expected to increase further.

The Company takes protective measures, such as setting up allowances for doubtful accounts according to the financial condition of landlords and wholesale customers, for security deposits and guarantee deposits paid to landlords upon store openings, sales proceeds entrusted at some in-shop stores, and receivables arising from wholesale sales on credit. However, if a business partner becomes insolvent or similar events occur, bad debt losses may arise, potentially affecting business performance.

Disruptions to the ordering and delivery system may occur due to internet outages, server failures, computer virus infections, and other causes. If a system failure occurs, it may affect business performance through delays in merchandise supply and disruptions to store operations.

Unfavorable weather conditions such as prolonged rain, heavy snow, warm winters, or extreme heat may reduce the number of store visitors, affecting business performance. In the event of natural disasters such as typhoons or earthquakes, or sudden accidents, store operations or head office functions may be forced to suspend, leading to a decline in sales and posing a risk of significant impact on the overall performance of the Group.

The Group aims to expand store operations in overseas markets to achieve scale expansion, but is exposed to various risks including local economic trends, exchange rate fluctuations, changes in legal regulations related to investment, trade, competition, and taxation, differences in business customs, labor relations, extreme weather, and political and social factors. If these factors act in combination, the profitability of overseas operations may be impaired, potentially affecting the Group's overall business performance.

The Company positions M&A as a promising option for building new sources of revenue to complement the 100-yen shop business, and maintains a policy of carefully examining investment returns. However, if the intended objectives cannot be achieved for various reasons and invested funds cannot be recovered, it may affect the Group's business performance. Attention must also be paid to the impact on finances from impairment of asset value after M&A, including the risk of impairment of fixed assets.