SANYO SHOKAI LTD.

Changes in global economic conditions and fluctuations in supply-demand balance may cause significant volatility in the prices of textile raw materials and auxiliary materials. If a sharp price increase or prolonged elevated prices occur, this could have a material impact on the Company's financial position, business performance, and cash flows. The Company addresses this through appropriate price pass-through and cost reduction efforts, but it is positioned as a particularly important risk.

Many of the Company's production bases are located in China and other Asian countries, and political and economic instability, changes in labor conditions, tightening regulations, natural disasters, infectious disease outbreaks, and other factors in these regions may disrupt manufacturing and logistics. This is classified as a particularly important risk that could have a material impact on the financial position, business performance, and cash flows through disruption of product supply.

The Company has entered into license agreements with multiple overseas brands for the manufacture and sale of products, and licensed brands occupy a strategically important position accounting for a substantial portion of net sales. If changes to contract terms, contract termination, or a decline in a brand's market competitiveness occur, this may affect the financial position, business performance, and cash flows. The Company addresses this by striving to maintain good relationships with licensors.

Fashion apparel, the Company's core products, is significantly affected by changes in consumer preferences and trends. If rapid trend changes or shifts in consumer preferences occur beyond expectations, this could lead to increased inventory risk and lost sales opportunities, potentially affecting the financial position, business performance, and cash flows. The Company addresses this by analyzing market trends and understanding consumer needs, and by developing products in line with trends.

The Company procures products from overseas and operates overseas subsidiaries, and fluctuations in foreign exchange rates affect procurement costs and the performance of overseas businesses. If sharp foreign exchange fluctuations occur, this may affect the financial position, business performance, and cash flows. The Company addresses this by implementing risk hedges such as forward exchange contracts.

Demand for fashion apparel is highly susceptible to seasonal and weather effects, and extreme weather such as a cool summer or warm winter could lead to decreased demand for seasonal products and increased inventory. In addition, if the Company's response to tightening environmental regulations associated with climate change and rising consumer environmental awareness is assessed as insufficient, this could lead to reputational risk and reduced competitiveness. The Company addresses this through production and sales planning utilizing weather information, agile inventory adjustments, and the promotion of its sustainability strategy.

Drawing on lessons learned from the global outbreak of COVID-19, the Company has implemented measures to ensure employee safety and business continuity; however, the emergence of new infectious diseases or a resurgence could lead to restrictions on store operations, a decline in consumer sentiment, disruption of the supply chain, and other effects. If these occur, they may affect the financial position, business performance, and cash flows.

The Company holds a large amount of customer personal information, and if information leakage occurs due to unauthorized access, cyberattacks, or other causes, this may affect the financial position, business performance, and cash flows through the occurrence of liability for damages and a decline in social credibility. The Company addresses this by establishing internal regulations, providing employee training, and strengthening system security, among other measures.

While the Company has established strict quality control standards and strives to provide safe, high-quality products, if unexpected quality issues or product liability-related incidents occur, this may affect the financial position, business performance, and cash flows through costs associated with product recalls and replacements, as well as damage to brand image and loss of credibility.

In conducting business both domestically and internationally, the Company must comply with the laws and regulations of each country, and if violations of laws or acts contrary to social norms occur, this may affect the financial position, business performance, and cash flows through legal sanctions such as fines, a decline in social credibility, and restrictions on business activities. The Company addresses this by strengthening its compliance framework and providing employee training.