H2O RETAILING CORPORATION

Major changes in the environment surrounding the domestic retail industry, including the declining birthrate and aging population, the polarization of consumption structures, and intensifying cross-format competition, may affect the Group's business performance. As countermeasures, the Group is promoting the construction of a new business model that combines physical stores with digital channels by leveraging the diverse customer touchpoints in the Kansai area, strengthening the Department Store Business and Food Business, and building a revenue model for overseas customers and affluent customers that is less susceptible to external environmental factors.

When opening a new store or expanding sales floor space exceeding 1,000㎡, the Group is subject to review and regulation by prefectures and designated cities under the Large-Scale Retail Store Location Act, which may affect store opening plans. The Group is also subject to various laws and regulations, including the Antimonopoly Act, environmental and recycling-related laws, and the Act against Unjustifiable Premiums and Misleading Representations, and strives to respond appropriately and in a timely manner by closely monitoring trends in legal and regulatory revisions.

If legal revisions related to income tax, consumption tax, social insurance premiums, etc. are implemented, this may affect personal consumption and, in turn, the Group's net sales. Since the Group's business results are influenced by economic trends, particularly trends in personal consumption, tax system reforms represent a risk that directly impacts business performance.

If system operations are disrupted by unforeseen events such as earthquakes, large-scale power outages, or cyberattacks including ransomware, this may restrict business activities, damage social credibility, and have a material impact on business performance. As countermeasures, in addition to establishing a dedicated department and a cross-group specialist subcommittee and operating a 24/7/365 SOC monitoring system, the Group is promoting the renewal of its IT Business Continuity Plan (IT-BCP) and the establishment of an immutable backup system as key projects.

If customer information is leaked externally due to unforeseen accidents or unauthorized access, or if personal information is handled inappropriately, or if there are deficiencies in responding to domestic and international personal information protection regulations, this may lead to lower customer satisfaction, loss of credibility, and sanctions for legal violations, negatively impacting business performance. The Group is working to strengthen personal information protection governance through strict operations based on personal information management regulations and manuals, along with thorough employee training.

For the Group, which operates its business mainly in the Kansai region, if a Nankai Trough earthquake were to occur, massive human and physical damage from the earthquake and tsunami is expected, potentially leading to business suspension and posing a risk of a significant negative impact on business performance. In addition, there are concerns about business suspensions and lost opportunities due to increasingly frequent typhoons and torrential rains in recent years, as well as losses from store fires. As countermeasures, the Group has established response manuals, developed a safety confirmation system, stockpiled emergency supplies, conducted regular drills, and taken out property and casualty insurance.

The spread and prolongation of infectious diseases may have a significant negative impact on business performance, primarily in the Department Store Business, through voluntary store closures and decreased demand from both domestic and inbound customers. In the event of a new pandemic, the Group's policy is to prioritize the safety of human life while drawing on the know-how gained from its response to COVID-19 to minimize the impact on its business.

The occurrence of health hazards such as food poisoning, or product defects and improper labeling, may negatively impact business performance through decreased customer satisfaction and loss of credibility. As countermeasures, the Group has established specialized subsidiaries and cross-group specialist subcommittees, and actively promotes quality control and hygiene management measures aimed at ensuring the safety and reliability of its products.

The Group operates stores in China, and factors such as changes in China's political situation, economic environment, and laws and regulations, as well as terrorist acts and social unrest, may negatively impact business performance and financial condition. In addition, since the local-currency-denominated sales, expenses, and assets of the China stores are converted into yen when preparing the consolidated financial statements, they are also affected by exchange rate fluctuations.

Since many of the Group's stores and facilities are leased properties, if a lessor refuses to renew a lease agreement upon its expiration (or, in the case of fixed-term building lease agreements, fails to reach a new agreement), it may become difficult to continue operating the stores concerned. This risk is directly linked to the maintenance and expansion of the store network and could affect the Group's business foundation.