Sanrio Company,Ltd.

The majority of sales are related to characters, with a high degree of dependence on a small number of characters centered on Hello Kitty, creating a structural vulnerability of concentrated popularity among female demographics. The rapid rise of competitors' characters via SNS and other channels has intensified the competitive environment, with low entry barriers amplifying this risk. Expansion into new businesses such as games, digital, and edutainment does not guarantee recovery of development costs, raising concerns about impacts on financial condition and business performance.

The Group is promoting global expansion centered on China and North America, but is exposed to various risks including geopolitical risk, differences in business customs, and import/export regulations. In China, the exclusive license granted to Alifish creates a risk that an economic slowdown or heightened tensions over Taiwan and the South China Sea could directly lead to a decline in sales. In North America, maintaining relationships with licensees is a challenge, and securing sales channels remains uncertain.

While approximately 90% of product manufacturing is outsourced overseas, mainly to China, overseas sales account for approximately 40% of total sales and approximately 30% of gross profit, meaning that exchange rate fluctuations directly affect earnings. Although position adjustments are made based on foreign currency cash flow forecasts, complete avoidance of foreign exchange risk is difficult, and translation of the consolidated financial statements is also affected. When the yen appreciates, a decline in inbound demand also adversely affects sales in the domestic merchandise and licensing businesses.

Intellectual property rights related to characters, including copyrights and trademarks, form the foundation of the business, and the distribution of counterfeit products by third parties poses a risk of lost sales opportunities for genuine products and brand damage. Strengthening measures against intellectual property infringement requires substantial expenses, and the effectiveness is not guaranteed. Conversely, there is also litigation risk from third parties alleging infringement, which could result in injunctions against character use and significant liability for damages.

There is a risk that the brand and character image could be damaged by disputes with customers, inappropriate conduct by employees or collaboration partners, and the spread of negative information via social media. Restoring a damaged brand requires substantial expense and time, with wide-ranging adverse effects on price competitiveness, customer acquisition, and talent recruitment. Since maintaining the character image is fundamental to the business, the impact could be particularly severe.

If a system outage or information leak occurs due to external cyberattacks or unauthorized access, this could result in violations of the Personal Information Protection Act and other laws, regulatory sanctions, and substantial costs for recovery and damages. Failures in technology infrastructure could also lead to decreased sales, legal liability, and reduced customer satisfaction. Although appropriate information security measures are in place, complete protection remains difficult to achieve.

Character development is, in principle, handled by in-house personnel, making the securing and retention of talented development staff key to business continuity. Competition for talent has intensified against a backdrop of rising wages both domestically and internationally, and long-term employment continuity is not guaranteed. The departure of employees with experience and know-how to other companies could result in a competitive disadvantage, and failure of new characters to gain popularity or a decline in the popularity of existing characters would directly affect the financial condition.

Royalty income constitutes a significant portion of earnings, but the Group's authority to control licensees' product marketing and sales volume is limited, creating a structure that depends on licensees' proactive efforts and contract compliance. In the merchandise business, all product manufacturing is outsourced to third parties, with approximately 80% dependent on overseas manufacturers centered on China, and changing manufacturing partners could make it difficult to ensure quality and safety. In digital fields such as games, dependence on external creators and others is also increasing.

Two domestic theme parks account for the operating profit of the theme park business, and there is a risk that visitor numbers could decline due to disasters such as earthquakes, suspension of public transportation, severe weather, extreme heat, and similar factors. If injuries resulting from disasters, accidents, or food safety issues spread via media and social media, this could trigger a chain of brand damage and declining visitor numbers. Since theme parks are also an important point of contact between consumers and the characters and brand, the impact on the business extends beyond revenue alone.

The Group's products are not necessarily essential items for consumers, so changes in disposable income due to economic downturns, inflation, and other factors directly affect sales. The expansion of inbound demand has contributed to growth in the domestic merchandise and licensing businesses, but the continuation of this trend is not guaranteed. Rising fuel, raw material, and labor costs could increase manufacturing and transportation costs, potentially putting pressure on profitability.