Village Vanguard CO.,LTD.

The Group recorded operating losses, ordinary losses, and net losses for two consecutive periods, the 36th and 37th fiscal periods, and is in breach of financial covenants under its loan agreements with financial institutions. If these covenants are enforced, there could be an impact on cash flow, giving rise to events that cast material doubt on the going-concern assumption. Although the Group has obtained consent from the financial institutions providing its main syndicated loan not to exercise their right to accelerate the loss of benefit of time, and current fund conditions are said to be stable, an early return to ordinary profit is essential.

The Group procures a large portion of its operating funds through borrowings from financial institutions, and its total borrowings represent a high ratio relative to equity capital. A sudden and significant change in interest rates could affect business performance and financial condition, and a breach of the financial covenants attached to a portion of its borrowings could have a major impact on the going-concern assumption. In the 37th fiscal period (fiscal year ended May 2025), the Group recorded an ordinary loss of ¥995 million, making improvement of its financial structure an urgent priority.

The Group's sales are weighted toward the second half of the fiscal year (December to May); in the 37th fiscal period, first-half sales were ¥11,803 million (47.3%) versus second-half sales of ¥13,158 million (52.7%). Because performance is heavily influenced by concentrated demand periods in the second half, such as the Christmas shopping season, year-end and New Year holidays, spring break, and long consecutive holidays, any unforeseen disruption during these peak sales periods would have a substantial impact on full-year results. The operating loss for the 37th fiscal period reached ¥935 million for the full year, revealing a weakening in the recovery capacity of second-half earnings.

The Company operates a nationwide network of 293 stores in total, comprising directly-operated and franchise stores (as of the end of the 37th fiscal period). While it opened 2 new directly-operated stores during the 37th fiscal period, it closed 16 directly-operated stores and 1 franchise store, and plans to close 39 stores in the 38th fiscal period. If it becomes difficult to open stores on desired terms due to tenant reshuffling accompanying renovations of existing shopping malls, there is a risk that the number of stores could decline significantly. Many of the store closures stem from declining profitability, raising concern about a vicious cycle in which the shrinking store network leads to a further contraction in sales scale.

The Group recognizes impairment losses when it determines that the book value of fixed assets is not recoverable for stores that have continuously recorded negative income and loss from operating activities, or for stores for which relocation or closure has been decided. If the number of loss-making stores increases going forward, substantial impairment losses are expected to be recorded, which could affect operating results and financial condition. Given the continued operating losses in the 37th fiscal period, the risk of an expanding pool of target stores remains high.

When stores are relocated or closed upon expiration of tenant lease terms, costs are incurred for restoring premises to their original condition, removing fixed assets, making new investments, and managing inventory during the relocation period. With 39 store closures planned for the 38th fiscal period, an increase in relocated or closed stores could result in substantial losses on disposal of fixed assets and higher selling, general and administrative expenses. Increases in these one-time costs could further worsen the financial condition of the Group, which has already been posting continued losses.

Much of the merchandise sold by the Group is dependent on imports from China and other Asian countries, typically via domestic trading companies. Regulatory changes, political instability, labor issues, natural disasters, terrorism, or other social disruptions in these regions, as well as significant exchange rate fluctuations, could disrupt the merchandise supply system and affect operating results and financial condition. In particular, during periods of yen depreciation, there is a risk that rising procurement costs will squeeze gross margins.

Books, music CDs, and similar items are subject to mandatory fixed-price sales under manufacturers' resale price maintenance agreements, but the Japan Fair Trade Commission has indicated a stance of promoting the eventual abolition of the resale system, and flexible arrangements such as "time-limited resale" and "partial resale" have already been introduced in some areas. If the resale system is abolished, the mode of sale would shift significantly from fixed pricing to free price competition, and intensified price competition could reduce the Group's profitability. Books and music CDs are a core category for the Company, and the impact of any change in the system would extend across the entire business.

As of the end of the 37th fiscal period, the Group recorded security deposits of ¥1,274 million, mainly deposited with commercial facilities where its stores are located. If a commercial facility where the Group operates a store were to experience an unforeseen event such as bankruptcy, recovery of the security deposit could become difficult, potentially affecting operating results and financial condition. Given the Group's own deteriorating financial condition, impairment of these deposits could constitute an additional loss factor.

The Group operates store-based business, POPUP business, and online business, seeking differentiation through creative space design and web sales of collaboration products, among other measures; however, intensifying competition with other companies in the same industry could affect operating results and financial condition. A contraction in consumer spending resulting from a domestic economic downturn would also directly affect business performance. Sales in the 37th fiscal period were ¥24,962 million, down from ¥25,282 million in the 35th fiscal period, a declining trend that reflects the difficult market environment.