CHIKARANOMOTO HOLDINGS Co.,Ltd.

With no growth expected in the domestic dining industry due to population decline, aging, and the falling birthrate, competition is intensifying from new entrants across multiple business formats and from the prepared-meals (nakashoku) market centered on convenience stores. If customer traffic declines due to competitive dynamics or a shrinking dining market, net sales and operating profit may decrease. The Group continues aggressive store expansion domestically and overseas, but responding to structural market contraction remains a challenge.

The Group is pursuing aggressive overseas store expansion centered on Europe, the U.S., and Asia, but country risks such as political, economic, legal, and customary conditions in the countries of operation may affect business performance. In addition, if local partner companies with which license agreements have been concluded experience deteriorating performance or delays in store opening plans, there is a risk that store sales and royalty income will decrease. Because the Group operates through both directly managed stores and partner-operated formats, the complexity of risk management is high.

With global expansion, foreign-currency-denominated trade receivables such as royalty income from overseas subsidiaries and loans to overseas subsidiaries arise, resulting in foreign exchange gains and losses. When preparing consolidated financial statements, the financial statements of overseas subsidiaries are translated at the fiscal year-end rate or the average rate during the period, so significant exchange rate fluctuations may affect business performance and financial condition. The Group seeks to mitigate foreign exchange loss risk through methods such as debt-equity swaps, but full hedging has not been achieved.

Store opening funds are procured mainly through bank borrowings; at the end of the consolidated fiscal year under review, interest-bearing debt stood at ¥2,056 million, with an interest-bearing debt dependency ratio of 10.2%. The Group raises funds through long-term borrowings combining floating and fixed interest rates, and changes in interest rate trends and financial conditions may reduce ordinary profit and affect business development. While no significant concern about a sharp rise in interest rates is currently anticipated, interest rate fluctuation risk over a certain period remains.

There is a risk that securing the necessary quantity of raw materials becomes difficult, or that purchase prices rise sharply, due to disease outbreaks, unfavorable weather, fluctuations in the global supply-demand balance, and regulations such as import restrictions in various countries. The Group strives to procure high-quality ingredients with food safety and security as its first priority, but changes in the external environment may reduce operating profit. As a dining company that procures ingredients globally, ensuring supply chain stability is an important management challenge.

If a store's operating profit or loss deteriorates without prospect of recovery, or if the market price of fixed assets declines significantly, an impairment loss may be recognized, affecting business performance and financial condition. The Group already applies impairment accounting, but as fixed assets held increase in line with its aggressive store opening strategy, the risk of unprofitable stores arising continues to exist. In particular, for overseas stores, fluctuations in the price of key money (goodwill) in Europe also affect financial condition.

The Group is subject to a wide range of legal regulations, including the Food Sanitation Act, the Labor Standards Act, the Food Labeling Act, the Act on Control and Improvement of Amusement Businesses, the Antimonopoly Act, and harassment-related laws. If a serious compliance issue occurs, or if new costs arise in response to legal amendments, net sales and operating profit may decrease. This includes the risk that operating profit may decrease due to rising labor costs if legal amendments such as the expansion of social insurance coverage to part-time employees are implemented. Since the Group operates numerous stores domestically and overseas, the impact of increasing costs for regulatory compliance on management is significant.

With aggressive store expansion domestically and overseas, securing and developing personnel who understand and support the corporate philosophy has become an important management challenge. The Group is advancing personnel acquisition, including new graduate hires, mid-career hires, and promotion of part-time workers to full employee status, but if personnel recruitment and development do not proceed smoothly, it may become difficult to maintain store service levels or execute store expansion as planned, potentially reducing net sales and operating profit. As labor shortages intensify across the dining industry as a whole, competition for talent with other companies is also intensifying.

Management policy and business strategy depend to a considerable extent on Representative Director, Chairman and Founder Shigemi Kawahara, and if he becomes unable to continue executing management for any reason, this may affect business performance and financial condition. The Group is working to strengthen its management organization through delegation of authority commensurate with organizational growth and information sharing among directors and senior staff, but the risk of founder dependence has not been fully resolved.

Should a serious hygiene-related problem such as food poisoning occur, it may have a material impact on business performance, including a decrease in net sales. The Group strives to create clean stores through thorough proper ingredient and hygiene management at each store and the establishment of a dedicated hygiene department, but the risk cannot be completely eliminated while operating numerous stores domestically and overseas. With the spread of social media, the speed and scope of reputational damage in the event of a hygiene issue have expanded, carrying a risk of brand damage as well.