As of June 27, 2019
We discuss major risk factors below that can potentially affect the Group's operating results, share price, and financial condition. From the viewpoint of proactive information disclosure to investors, we have also included factors that we do not necessarily think are business risks, but that we consider to be important for investors to know in order to make informed investment decisions or understand our business activities. While recognizing the possibility that these risks may occur, we will strive to prevent their occurrence and prepare speedy and appropriate responses in the event that they occur in order not to hamper the Company's business activities.
Statements regarding the future herein are based on the management's judgments as of June 27, 2019, which is the date on which the Securities Report for the 25th fiscal year was submitted.
We primarily handle Internet devices, which comprise a wide variety of products such as smartphones and tablets, in addition to PCs. We are aggressively promoting the sales of the above products and are working to provide technical services and support to customers when they replace or add Internet devices. However, if the scope of our sales becomes smaller because our products cannot be promoted actively due to our transactions with the manufacturers and other factors, or if our sales quantity declines sharply because consumers are moving away from PCs or for other reasons, we may potentially lose opportunities to sell our products and technical support services, which may affect the Group's business performance.
Furthermore, the Group's business performance may potentially be affected if the aggressive promotion of new Internet devices results in a drastic change in product lineups at stores, an increase of inventories and costs, or loss on inventories due to products becoming obsolete.
For Internet devices, certain manufacturers or products sometimes become much popular suddenly due to technological innovation and the development of services. In such cases, we may increasingly depend on certain products or trading partners depending on whether we are allowed to carry the products and whether stable supply is ensured after we start to carry them. Any change to the sales and marketing policy of those manufacturers may potentially affect our supply of those popular products, preventing us from fully meeting customer demand, which may in turn affect the Group's business performance.
By operating our PC DEPOT Smart Life Stores and PC DEPOT stores, we provide not only Internet devices and related products such as PCs, smartphones, and tablets, but also service products such as technical services and support. We differentiate ourselves from electronics retail stores. We also expect to attract more customers through the synergy effects produced by opening new stores close to electronics retail stores.
However, if our competitors offer substantial discounts when selling PCs or peripheral products, the profitability of our PC sales would likely decline due to a fall in gross margins as a result of competition.
・PC DEPOT Smart Life Store（Movie）
In our business, service products that are developed in-house account for a certain amount of our total net sales. Specifically, we provide unique service products such as technical support and services, Premium Membership Service (maintenance services provided based on a monthly membership fee), and solutions services, in which products and services are combined with communication line services from mobile virtual network operator (MVNO) and fixed virtual network operator (FVNO) businesses. We are thinking of engaging in activities to legally protect these intellectual properties by obtaining system patents or taking other steps, and protecting the properties from all possible angles. However, our intellectual properties are not fully protected with regard to the above-mentioned businesses. Other companies may potentially imitate our businesses to compete with us by infringing on our intellectual property rights, or at least operate similar businesses that do not infringe on our rights. If the competition intensifies, the Group's business performance will potentially be affected. In addition, if other companies imitate our businesses in a negative manner, the bad reputation of their services may potentially affect the image of our company's services.
The Group provides service products such as a Premium Membership Service and solutions services for customers who are seeking continuous services and support when using the Internet and Internet devices. We also strive to improve and expand the quality of our service products so that customers can use our services securely, safely, and conveniently. However, in the event that we experience a delay in developing and offering service products or find it difficult to continue providing such products because we have decided to suspend or terminate the sales of relevant content items, or in the event that the number of withdrawals from our Premium Membership Service increases sharply, the Group's operations and business performance may potentially be affected.
We began to engage in mobile virtual network operator (MVNO) business in April 2009 and fixed virtual network operator (FVNO) business in February 2015, in which services from telecommunication companies are resold to customers. We record a certain level of sales and provide related monthly fee-based services to customers, so if the network of a telecommunications company is interrupted or suspended, our sales of telecommunications and related services may potentially decline, thereby affecting the Group's business performance.
The company and one of its subsidiaries provide internet service provider (ISP) service. The Group's operations and business performance may potentially be affected in the event that there is a sudden exodus of the subsidiary's ISP service members or if the ISP service is suspended over a certain period of time.
In some of our services, such as the Company's Premium Membership Service and solutions services, we collect, as subsequent monthly service fees, part of the sales proceeds for information devices in our product sales business (which represents a combination of services and Internet devices) and in the MVNO business. In response to increasing accounts receivable for such service products, we are preparing against default risk by stepping up credit management. However, if our bad debts increase more than expected and become unrecoverable, the Group's business performance may potentially be affected.
Under our franchise contracts, we process the procurement debts of our franchise stores as accounts receivable (credit) and the credit card settlements of franchise stores as deposits received (debt). We hedge some of the credit loss risks by offsetting these accounts; however, we may not potentially be able to recover all or part of the difference if the parent company of the franchise stores goes bankrupt.
O'ZZIO, a private-label brand of the Group, is our original brand. We have adopted an exclusive branding system whereby we convert products developed and manufactured by OEMs into products under our brands. Although the product liability and after-sales support lie with the manufacturer, we may potentially be liable for damage compensation that goes beyond our seller liability in the rare event that an accident or other issue arises in relation to the products.
To solve difficulties that customers encounter, we collect Internet devices used by customers such as PCs, smartphones, and tablets, at our store counters and provide technical services and support such as inspection and repair services, as well as data migration and recovery services. While doing so, there is a possibility that the Company may make a mistake when returning the Internet devices with which we have been entrusted to their proper owners, or make a procedural mistake. The Company practices store confirmation, etc., to prevent or deal with such mistakes. However, in the rare event that such a mistake occurs, the Group may potentially be asked to pay damage compensation, which in turn may affect the Group's operations and business performance.
Our business performance is closely related to new store openings. Therefore, a change or delay in plans to open the Group's and franchise stores may potentially affect the Group's business performance.
If store profitability deteriorates due to intensifying market competition, we strive to lower the negative impact on our overall financial results as much as possible by closing stores at an early stage. However, losses from such store closures and delays in opening substitute stores may potentially affect the Group's business performance.
We generally enter into a lease contract on buildings in which our stores are located. Therefore, if a lessor goes bankrupt, all or part of our guarantee and lease deposits may potentially become unrecoverable.
As of the end of the consolidated fiscal year, PC DEPOT PC Clinics had 53 directly managed stores, in addition to 5 stores managed by our subsidiaries; these stores are located within stores owned by K'S HOLDINGS CORPORATION. If the company experiences difficulty in continuing the operation of numerous stores due to the closure of stores or internal stores, etc., for some reason, the Group's business performance may potentially be affected.
・PC DEPOT PC Clinic in stores owned by K'S HOLDINGS CORPORATION（Movie）
President and Chief Executive Officer Takahisa Nojima is the founder of the PC DEPOT Group and has been CEO since our company was established. Mr. Nojima has a wealth of experience and knowledge about the retail industry, particularly electronics retail stores, and he plays an extremely important role in the decision-making and execution of management policies and business strategies. The Group is working to strengthen the sharing of information among directors and managers at board of directors and management meetings, as well as other meetings, and we are strengthening our management organization to develop a management structure that is not overly reliant on Mr. Nojima. However, the Group's operations and business performance may potentially be affected if Mr. Nojima is unable to continue his activities at the Group for some reason.
We think the Group will need to increase the number of staff who is equipped with the relevant expertise and skills at different business units of the Group, such as sales, technical, quality control, and store development staff, as well as staff for the planning and sales of service products and for administrative departments and all other departments. This is in order to i) improve our quality across a wide-ranging area from stores and call centers to the head office; ii) allow customers in local communities to feel at ease about using the stores; and iii) allow the Group to cope with further business expansion and diversification of business categories in the future. Through internal promotions, we continue to make our employees ready to serve our customers immediately as an effective workforce. However, if our new graduate recruitment, appointments of workers from outside the Group, and human resources development fail to go as planned, it will be difficult for the company management to allocate human resources properly, thus reducing the Company's competitiveness and limiting further business expansion, which may in turn affect the Group's operations and business performance.
Our Group is working to develop internal controls for legal compliance issues. To establish a more thorough internal management system, we have established the Compliance Office. We have confirmed the attitude of board directors, executive officers, and employees towards compliance by having them sign an oath and a confirmation letter so that they will conduct corporate activities under high ethical principles. However, in the rare event that one of them engages in an activity that violates a law or regulation, whether intentionally or due to negligence, it may potentially affect the Group's operations or business performance.
In the event that the brand image of the overall Group diminishes due to improper behavior by, or rumors about, the Company, its directors, or employees, regardless of whether such rumors are true or not, or a scandal occurs at a company that is under a franchise contract with us, the Group's operations and business performance may potentially be affected due to diminished confidence in the Group, loss of personnel, difficulty in securing human resources, etc.
As we are a publicly traded company, there is a possibility that we may be acquired by another company in a different line of business as well as one of our industry peers. In such a case, the Group's operations and business performance may potentially be affected.
The Group's businesses use many kinds of systems and software such as POS systems, systems to provide tools to customers in Premium Membership Service and solutions services, total management system, and the ISP service of one of our subsidiaries. In order for the systems to operate stably, the Group's IT strategy business unit ensures system redundancy, enhances system availability, backs up data, and increases security. However, in the event of a system failure due to i) a natural disaster such as an earthquake, ii) an infrastructure breakdown such as a power outage, iii) a hardware or software malfunction, iv) an overload caused by web traffic concentration, v) a computer virus infection, vi) an external attack, and vii) system data loss, we may potentially suspend our store operations, stop providing our service products including Premium Membership Service, halt customer charges, or fail to recover charges. Although we will deal with and solve such problems as a priority, we may potentially lose business opportunities, suffer reputational damage, and incur temporary expenses that are needed to recover the system, which may potentially affect the Group's operations and business performance.
Our Group's store openings are regulated by the Building Standards Act; ordinances stipulated by prefectural governments; the Act on the Measures by Large-Scale Retail Stores for Preservation of Living Environment, which is a law on new store openings or floor extensions in existing stores with a sales floor area of over 1,000 m2 (approx. 300 tsubo); and other rules. In the process of conducting our business, we adhere to regulations based on various laws related to the provision of products such as the Act against Unjustifiable Premiums and Misleading Representations, the Antimonopoly Act, the Subcontract Act, and the Telecommunications Business Law. We conduct the necessary inspections, and obtain permission and approval to promote our business.
Therefore, in the future, if legal regulations or ordinances are unexpectedly established or amended, or administrative organs change their guiding principles or require us to impose self-regulations, we may potentially have to adjust or delay store openings and operations, incur new handling costs, or face restrictions on our business activities, which may potentially affect the Group's operations and business performance.
Our Group pays careful attention to the protection of personal information by strengthening our personal information administrative system and limiting access to the personal information acquired and held by the Group. The Group's store operations are carried out according to the basic principle of "Don't ask, don't retain, and don't bring in unnecessary personal information." In addition, call centers for the Premium Membership Service also handle personal information strictly according to specific rules, including restrictions on entry/exit and who is allowed to access such information.
However, there is a possibility that personal information may potentially be divulged externally or misused, either intentionally or unintentionally, by people who are affiliated with the Group, or through unexpected situations such asunauthorized access to systems and computer virus infection. In the rare event that such a situation occurs, the Group may potentially be liable for damage compensation, thereby affecting the Group's operations and business performance. In addition, the Group's credibility may seriously diminish, which will also affect the Group's business activities considerably.
The Group may be subject to litigation for damage compensation resulting from infringements on the rights or interests of a third party, including customers, trading partners, and employees. This may potentially hinder our business expansion, harm our corporate image, and give rise to financial burden, thereby affecting the Group's operations and business performance.
The Group may be subject to administrative action or administrative guidance from an administrative agency. Such administrative action or guidance may potentially hinder our business expansion, harm our corporate image, and give rise to financial burden, thereby affecting the Group's operations and business performance.
In the event that store operations are affected by natural disasters such as earthquakes, typhoons, flooding and tsunami, fires, power outages, rolling blackouts caused by power shortages, or infrastructure breakdown in an area where the Group or franchisees operate stores, the resulting sales decline or the costs of restoration and personnel replacement may potentially affect the Group's operations and business performance. Moreover, the Group gives top priority to protecting the lives of our customers and employees as well as securing their safety, so in the event that a disaster occurs or an infectious disease breaks out, we will suspend operations until the risks have been eliminated and safety is secured, which may potentially affect the Group's business performance.
In preparation for such events, we aim to strengthen our crisis management system by reviewing our disaster response manuals and the seismic retrofitting of our stores, setting response levels according to the scale of infectious disease epidemics, and being on high alert at an early stage.