Business and Other Risks

The following risks have the potential to impact the Gunze Group’s operating results and financial conditions. Note that items referring to the future are based on the Gunze Group’s judgment and assumptions as of March 31, 2016.

1. Quality control

As the policy of “quality first and commitment to supply of quality products” remains central to its business operations, a strict check system is in place at the Gunze Group to confirm safety and quality. Gunze strives to offer products and services that are safer, more comfortable, and more appealing. However, should any quality problem with materiality that is beyond its expectations occur, it may heavily and adversely impact not only the consumer’s evaluation of the product in question but also the reputation of the entire product offerings of the Gunze Group. The resultant sales drop could have a negative impact on the Gunze Group’s operating results and financial conditions.

2. Changing consumer tastes and preferences

In the apparel business, the Gunze Group is working on the establishment of a solid SCM system and reform of the product portfolio in order to correctly respond to changing preferences and demands from consumers. Because consumer preferences and demands change very rapidly, incorrect judgments on market trends are likely to lead to declining sales and increasing inventory levels. This, in turn, could have a significant negative impact on the Gunze Group’s operating results and financial conditions.

3. Unseasonable weather conditions

As the Gunze Group’s business is dominated by the sale of seasonal products, unseasonable weather conditions such as the unusually cool summer and warm winter could have a significant negative impact on the Gunze Group’s operating results and financial conditions.

4. Raw material price fluctuations

The Gunze Group’s products are manufactured mainly from raw fibers, cotton fibers, and plastic resins, and the prices of these raw materials can vary according to market conditions. Accordingly, soaring raw material prices lead to higher manufacturing costs. Therefore, in circumstances in which it is impossible to pass on the rising costs in the pricing of final products, the raw material price increases could have a significant negative impact on the Gunze Group’s operating results and financial conditions.

5. Information management

The Gunze Group handles and thus must manage a large amount of important information including information on individuals in the course of business operations. The Gunze Group is taking thorough and strict measures for information management. These measures include carefully maintaining and strengthening the security of information systems; employee education regarding information management; and concluding nondisclosure agreements with outsourcing contractors/suppliers. However, should leakage or illegal use of important information occur due to unexpected circumstances, the problem might adversely affect the social reputation of the Gunze Group and even make the Group liable for damage. Such circumstances could have a significant negative impact on the Gunze Group’s operating results and financial conditions.

6. Natural disasters and infection

The Gunze Group has various production facilities and other business sites in Japan and abroad. A large-scale earthquake, typhoon, flood, or other natural disaster, or the onset of infectious diseases such as a new strain of influenza, may interfere with production, sales, and other operations. Accordingly, the occurrence of such natural phenomena or diseases could have a significant negative impact on the Gunze Group’s operating results and financial conditions.

7. International business activities

The Gunze Group’s international business activities have various intrinsic risks, including political turmoil, uncertainty in social and economic trends, terrorism, wars, intellectual property lawsuits, and disease in foreign countries/regions. Such problems could subject the Gunze Group to potential difficulties in continuing business operations, and thus could have a significant negative impact on the Gunze Group’s operating results and financial conditions.

8. Foreign currency fluctuations

The Gunze Group’s business involves exports and imports denominated in foreign currencies. The Gunze Group therefore seeks to hedge against exposure to foreign currency fluctuations in ways such as entering into forward exchange contracts. However, it is impossible to avoid all risks associated with foreign currency fluctuations, and thus these could have a negative impact, in no small degree, on the Gunze Group’s operating results and financial conditions.

9. Market price fluctuations of stocks, etc.

As part of implementing business activities or business alliances, the Gunze Group holds stocks of some business associates. A majority of such stocks are listed on public stock exchanges, thus conditions of the stock market could have an impact, in no small degree, on the Gunze Group’s operating results and financial conditions.

10. Projected benefit obligations

Most companies comprising the Gunze Group employ a defined benefit system for their retirement plans. Projected benefit obligations are calculated with a discount rate based on the yield of long-term government bonds, meaning that fluctuations in interest rates may impact projected benefit obligations. A part of plan assets for the defined benefit system is managed through shares and other risk-bearing investments. Declines in stock markets therefore could possibly result in a drop in the return on investment. As a result, long-term interest rate fluctuations and the worsening of the asset management environment such as sliding share prices could have a significant negative impact on the Gunze Group’s operating results and financial conditions.