IRBusiness and Other Risks

Business and Other Risks

The following are the major risks that management believes may have a material impact on the financial position, results of operations and cash flows of the consolidated companies among other matters related to the status of the Group's business and accounting.
Matters related to the future in the following text are in accordance with the Group’s judgement as of the end of the fiscal year under review.

① Increase in investment cost due to increasing competition

In the wholesale commodity and cosmetics industries to which our group belongs, there is a possibility of reorganization that transcends industry boundaries in the commodities we handle, and similar developments may occur in the retail industry, which is our major customer.
Moreover, the expansion of foreign-affiliated retailers may lead to the incorporation of logistics functions, and the evaluation of wholesalers' logistics functions may be diminished.
In order to respond to such changes in the environment, such as industry reorganization and accompanying changes in logistics patterns, we expect to need to expand into new business fields and make capital investments in large-scale logistics centers and other facilities to enhance logistics functions.
In such cases, a temporary increase in depreciation expenses and various logistics-related expenses could have an impact on the Group's results of operations. We will continue to develop a nationwide distribution network to respond to aggressive sales growth. Accordingly, we expect to incur increased costs and depreciation related to initial investments. However, we will continue to quickly recover investment costs by reducing inventory, operating costs in the center, and reducing delivery costs through the integration and elimination of existing centers as before.

② Fluctuation in business performance

Our group's performance tends to be lower in the 4Q than in other quarters.This was mainly attributable to a reaction to demand for daily necessities to be purchased collectively in December and a small number of business days in February.As a result, trends in results through the 3Q may not indicate annual trends in results.
In addition to the continuing trend described above, it is anticipated that quarterly trends will change significantly in the event of major environmental changes, such as the occurrence of natural disasters and the consumption tax hike, and there is a possibility that trends will not trend in line with past trends.
In response to these changes in the business environment, we analyze factors that have affected sales and profits in the past, forecast changes in demand for consumption, and consider and implement product and sales policies at management meetings and Board of Directors meetings attended by executive officers, etc.
The business performance by quarter for the fiscal years ended March 31, 2022 and 2023 are as follows.

(Units: ¥ Million)

Fiscal year ended March 31, 2022
1Q 2Q 3Q 4Q FY
Net sales
(Share of total
%)
213,840
(24.9)
215,653
(25.2)
223,387
(26.1)
204,206
(23.8)
857,087
(100.0)
Operating profit
(Share of total
%)
3,556
(27.9)
3,545
(27.8)
3,553
(27.9)
2,088
(16.4)
12,743
(100.0)
Ordinary profit
(Share of total %)
Ordinary profit 
(Share of total
%)
3,808
(27.7)
3,756
(27.3)
3,774
(27.5)
2,406
(17.5)
13,745
(100.0)

(Units: ¥ Million)

Fiscal year ended March 31, 2023
1Q 2Q 3Q 4Q FY
Net sales
(Share of total
%)
220,051
(24.7)
225,169
(25.3)
233,776
(26.2)
212,603
(23.8)
891,600
(100.0)
Operating profit
(Share of total
%)
3,429
(26.8)
2,937
(22.9)
3,730
(29.1)
2,715
(21.2)
12,812
(100.0)
Ordinary profit
(Share of total %)
Ordinary profit 
(Share of total
%)
3,768
(27.5)
3,145
(23.0)
3,871
(28.3)
2,895
(21.2)
13,680
(100.0)

③ Demand trend for pet animals

A decrease in the number of cat and dog breeders may lead to a supply shortage of pet animals. Moreover, as the average life-spans of cats and dogs are increasing, the proportion of animals of advanced age is increasing. The deaths of older animals may cause a decline in the number of pets. The overall number of pets may decrease in the event of an outbreak of a disease that is mutually transmissible between humans and animals. Sales of pet food and supplies may impact business performance due to fluctuations in the number of pets.
In recent years, there has been a decrease in the number of dogs being bred. However, the Company is taking measures to offset the decrease in sales due to the decline in the number of living creatures, such as promptly responding to changes in pet food and supplies, including the increasing longevity of pets and the increasing sophistication of pet food and supplies due to the changing relationship between pet owners and their pets.

④ Risks due to business customs

In the daily goods, cosmetics, and pet supplies wholesaling industry in which the Group operates, the Group receives payment of sales incentives and so forth from manufacturers, in accordance with the volume of product sales and payment conditions, etc. These are paid when the Group satisfies conditions agreed upon with the manufacturer, however if the system changes due to a change in the manufacturer’s sales strategy, this could have an impact on the Group’s business performance.
Furthermore, most of the Group’s product inventory can be returned to the manufacturers. However, if a manufacturer defaults on its debts due to civil rehabilitation proceedings and so forth, the Group may record inventory revaluation losses or become unable to return inventory, which could have an impact on its business performance.
In recent years, there have been no cases in which a manufacturer's default has had a significant impact on business performance. However, we have strengthened our supplier credit management, centered on accounts payable and inventory management, and have taken measures to mitigate risk.

⑤ Safety of pet food

With the enforcement of the Act on Ensuring the Safety of Pet Animal Food, an injunction on the production and distribution of pet food could occur in the event that products are found to contain material that exceeds safety levels. In addition, the occurrence of a shortage of pet food material due to an outbreak of avian influenza and so forth could have an impact on the Groups business performance.
In addition, for corn and other grains, which are often the main raw material for pet food, a shortage of pet food procurement due to crop failures caused by extreme weather worldwide could have an impact on the Group's business performance.
At this time, the Company is not aware of the possibility that such risks will materialize.
However, considering the possibility that this will occur in the future, we are strengthening information gathering on pet food through collaboration with suppliers and taking measures to mitigate risks by having multiple suppliers.

⑥ Country risk

Our group is expanding its overseas business, country risks due to political instability, trade sanctions, differences in culture and legal systems, and special labor-management relations in overseas locales may hinder smooth business operations and adversely affect our group's business performance and financial position. Similar risks are also possible when our suppliers' manufacturing plants are located overseas, which may cause product supply delays.

⑦ Credit risk

To manage credit risk of losses arising due to a deterioration of credit or business failure among business partners, the Group identifies high risk business partners based on information provided by credit check companies, sets credit limit amounts for them, and acquires the necessary collateral, guarantees, and other measures in accordance with their credit status. In addition, the Group records adequate allowance for doubtful accounts. However, if a loan becomes unrecoverable due to a deterioration of a customers’ business performance or similar reason, it could have an impact on the Group’s business performance.
In the past, there have been cases in which receivables have not been recoverable, but many of them have been minor and have not had a significant impact on management.
However, taking into account the possibility that the economy may decline due to changes in the social and economic environment and occur, we attempt to mitigate risks by re-setting transaction limits, obtaining guarantees, and setting credit insurance for customers who are concerned.

⑧ Impairment accounting

The Group owns a lot of land and buildings as operating assets. If the fair value of operating assets falls significantly below the carrying value, or if the profitability of the branches deteriorates, the Group may be required to record impairment of its non-current assets. In such cases, the Group will record extraordinary losses, which could have an impact on its business performance.
In response to these risks, the Group is working to mitigate risks by strengthening initiatives to improve profitability, such as discussing and implementing responses to customers in collaboration with the head office in response to the deterioration in profitability at each branch office.

⑨ Stock price fluctuation risk pertaining to investment securities

The Group holds strategic shareholdings mainly in business partners in order to maintain and strengthen business relationships.Consequently, depending on stock market trends or the performance of the companies that hold the shares, there may be significant changes in their respective stock prices, which could have a material impact on the Group's performance and financial position.
The Company responds to these risks by determining the appropriateness of individual holdings for all of its strategic stockholdings, and if it is determined by the Board of Directors or organization equivalent to the Board of Directors that the economic rationality to continue to be held is lacking, taking into account the economic situation at that time, gains and losses on the transfer, and other factors, and then conducting sales of its stockholdings at an appropriate time after dialogue with the relevant shareholder.

⑩ Major disasters

The Group has many sites throughout Japan. If a major disaster occurs, the logistics functions in the affected region may be paralyzed or a system failure could occur, causing a hold-up in the delivery of products.
The Great East Japan Earthquake and the large typhoons and heavy rains in recent years have caused such risks. As part of our efforts to strengthen BCP measures, we have established a system that enables us to supply products from distribution centers in other areas even if some distribution centers are damaged. We also have a system that prevents system failures through dispersed backup centers nationwide.

⑪ System faults

Much of the Group’s sales activities and product management relies on its computer network systems. If the systems stopped functioning due to a natural disaster, accident, or computer virus infection and so forth, some time would be needed to recover with a recovery system, which could have an impact on the Group’s business performance.
In order to ensure a stable supply of products even in an emergency, we have established a system that enables us to distribute and manage daily business data through multiple backup centers, and to quickly recover the system even in the event of a single center being damaged, thereby ensuring business continuity.

⑫ Risks Related to the Outbreak of Infectious Diseases

Due to the outbreak of an infectious disease or other outbreak, many employees of our group would be affected, the loss of human resources could make it difficult for us to continue our business, and this could have an impact on our results of operations.
In response to these risks, we assume every situation from the viewpoint of BCP and discuss the impact on our business and the countermeasures taken by the Board of Directors and the Management Meeting. The Head Office and branch offices formulate specific measures according to the respective environmental conditions, and implement measures to minimize the impact in the event of such an event, in order to reduce the risks.

⑬ Risks Associated with Climate Change

As a wholesale trading company that handles daily necessities, our Group is part of the social infrastructure that supports everyone's lives. Accordingly, we consider climate change-related risks to be an important issue, and have also set countermeasures and targets in our Long-Term Management Vision 2030.
Our financial results could be impacted by damage to our distribution network and our entire supply chain due to extreme weather conditions associated with climate change, as well as increased costs associated with the transition to a carbon-free society.

⑭ Risk Associated with human capital

In order for our group to realize sustainable growth, it is important to secure and develop diverse and talented human resources and to maximize their abilities. In the domestic market, labor shortages are progressing due to the declining population. If we are unable to secure and train the necessary human resources due to changes in the employment situation, the mobility of human resources, and other factors, our Group's business may be affected.
In responding to these risks, we are promoting our human resources strategy based on the 3 pillars of "securing diversity," "strengthening human resources," and "improving the workplace environment" based on respect for human rights. The Legal & PR/IR & ESG Department identifies company-wide risks, and ESG Committee and the Board of Directors comprehensively assess the magnitude of the impact of risks on management. The division works with each division to mitigate risks by promoting countermeasures.