PALEMO HOLDINGS CO.,LTD.

The Group operates nearly all of its 244 stores as tenants within shopping centers, and is therefore directly affected by changes in the commercial environment or declines in customer traffic. As fixed-term lease agreements increase, there is a possibility that contracts may not be renewed against the Company's wishes upon expiration of the contract period. New store openings are also subject to the opening status of shopping centers and tenant turnover, which may constrain the maintenance and expansion of the store network.

The Group has placed deposits with developers for the majority of its stores, and the balance of deposits placed at the end of the current consolidated fiscal year amounted to ¥1,863 million. If a developer becomes bankrupt or insolvent, the deposits may become unrecoverable, which could have a material impact on the Group's financial position and business results. Although risk mitigation measures such as store diversification have been implemented, dependence on the credit risk of individual developers remains an unavoidable structural factor.

The Group applies the "Accounting Standard for Impairment of Fixed Assets," and recorded an impairment loss of ¥187 million in the current consolidated fiscal year. Although the Group is pursuing a scrap-and-build policy, if the number of stores with continuing losses increases due to deteriorating profitability from changes in the shopping center environment, the scope of stores subject to impairment may expand, affecting the Group's financial position and business results.

The Group operates multiple business formats and shop brands in the apparel and sundries fields, but competitors exist in each format. If competitive rival companies open numerous stores in the same shopping centers and the Group fails to capture customer needs, this could adversely affect business results. Although the Group continues to pursue differentiated operations, responding to changes in the competitive environment remains key to performance.

The Group handles a large amount of apparel merchandise that is susceptible to trends, and periodic losses arise from the disposal of trend merchandise, becoming a factor in performance fluctuations. While the Group addresses this through establishing a quick response system, early identification of best-selling items, and thorough item management, a sudden change in fashion cycles could affect the Group's financial position and business results.

In the core apparel business, the final clearance periods for both summer and winter merchandise are concentrated in the second half of the fiscal year (August 21 to February 20), resulting in a tendency for full-year profit to be weighted toward the first half. This creates a structural risk in which sluggish performance in the first half (February 21 to August 20) directly affects full-year results. The Group strives to secure stable sales and profit on a quarterly basis, but eliminating this seasonality is not easy.

The majority of the products sold by the Group are imported from various countries, mainly China, and there is a risk that product costs will rise due to significant fluctuations in exchange rates such as yen depreciation. In addition, although the Group is diversifying procurement toward the ASEAN region, political conditions, economic environment, and natural disasters in major sourcing countries may affect product supply. Purchasing terms are determined on an order-by-order basis, and no permanent measures such as foreign exchange hedging are explicitly disclosed in the securities report.

Extreme weather such as record-breaking cool summers or warm winters, large-scale natural disasters such as earthquakes and typhoons, and the spread of infectious diseases such as COVID-19 may affect business results through a sharp decline in apparel demand or the suspension of store operations. As risk diversification measures, the Group is promoting the development and expansion of its sundries business and increasing sales through the e-commerce channel, but if such events occur on a scale exceeding expectations, they could have a material impact on the Group's financial position and business results.

The Group holds a large amount of customers' personal information through internet mail-order sales, and has strengthened its management system through the establishment of information security regulations and employee training. However, if unauthorized access to core systems or cyberattacks lead to an information leak due to unforeseen circumstances, this could disrupt business activities and affect business results.

The Group, which operates stores nationwide, requires a large number of personnel for store operations as well as product planning, development, and procurement, but the labor shortage continues to worsen amid a declining working population. Although the Group is working to strengthen recruitment and prevent turnover through work-style reforms, improved treatment, and better working conditions, if it fails to keep pace with rising wages and struggles to secure human resources, this could affect business results.