J.Front Retailing Co Ltd

TSE:3086

Earnings Call Transcript 2019-Q2

[Ryoichi Yamamoto, executive]

Thank you very much for coming today, despite your busy schedule. We would like to express our deepest sympathy and condolences to all those who were affected by recent disasters. We sincerely pray for the earliest recovery of affected areas.

Today, I'll discuss results for the first half of fiscal year 2018, forecast for the second half and full year and specific initiatives for medium-term growth based on specific factors requiring attention in fiscal year 2019.

For the first half of fiscal year 2018, consolidated gross sales of J. Front Retailing was JPY 547.1 billion, down 2.0% year-on-year. Sales revenue was JPY 227.2 billion, down 3.1% year-on-year. Business profit was JPY 24.2 billion, up 6.6% year-on-year. Operating profit was JPY 24.2 billion, down 9.2% year-on-year in reaction to JPY 1.4 billion of gain on sales of real estate and JPY 1.9 billion of gain on sales of shares of subsidiaries recorded in previous year. Profit attributable to owners of parent was JPY 15.9 billion, down 2.5% year-on-year.

Compared to April forecast, business profit was almost in line with the forecast. Operating profit exceeded the forecast by JPY 200 million and profit attributable to owners of parent by JPY 600 million. Interim dividend increased JPY 1 to JPY 17 per share as planned. Interim dividend for the last fiscal year included JPY 1 commemorative dividend. So ordinary dividend increased JPY 2 year-on-year.

Consolidated statements of financial position and cash flows are as shown on this slide. Interest-bearing debt decreased JPY 8.4 billion to JPY 175.7 billion. Free cash flow was positive JPY 9.5 billion.

By segment, for Department Store business, spending by inbound tourists continued to be strong. Spending by the affluent in Japan was also brisk. Due to record heavy rain, mainly in Western Japan in July, and major typhoons late in August, some stores were forced to reduce business hours significantly. However, sales mainly of flagship stores were generally strong throughout the first half.

On the other hand, difficult conditions continued at suburban stores and rural stores, although there were signs of improvement due to change of business model and initiatives to reduce cost. As a result, sales revenue was up 1.8% and business profit was up 6.9% year-on-year. However, operating profit was down 8.0% in significant reaction to JPY 1.4 billion of gain on sales of real estate recorded in previous year.

We decided to close Daimaru Yamashina store, recently suffering from difficult conditions, in March next year due to uncertainty about the prospect of improvement in business environments.

For PARCO business, sales of Parco-ya in new format, which opened as a core tenant in Ueno Frontier Tower in November last year, continued to be strong. Urban stores remain strong, mainly with strong sales of accessories and food and drink.

On the other hand, rural stores struggled overall. Also, in reaction to a big hit movie in previous year in entertainment business and due to slackness of move a, total sales revenue of PARCO business was down 2.3% year-on-year. Business profit was down 12.0%. Operating profit was down 14.5%, also in reaction to reversal of impairment loss for all the PARCO in previous year.

For Real Estate business, sales revenue increased substantially by 43.4%, business profit by 66.6% and operating profit by 71.8% due to full operation of GINZA SIX, which opened in April last year, and Ueno Frontier Tower, which opened in November as well as effect of transfer of many shops around Daimaru Kobe store to Real Estate business.

For Credit and Finance business, sales revenue was up 3.3% year-on-year, partly due to an increase in affiliated stores fees. But business profit was down 19.2% and operating profit was down 17.6%, mainly due to an increase in renewal cost of Daimaru Matsuzakaya card and gold card for gaisho customers and increasing cost of strengthening security and impacts of change in commission rate.

For other businesses, sales revenue was down 18.8% year-on-year, business profit was down 7.1% and operating profit was down 21.1%. It was mainly due to struggling of J.Front Design & Construction engaged in design and construction contracting business and impacts of business transfer of Forest engaged in direct marketing at the end of August last year.

In Daimaru Matsuzakaya department stores, in response to shrinking market for women's volumes on clothing, we are reducing a large women's clothing area. And in vacated spaces, we are creating newly curated zones with a focus on beauty and expanding growth categories, such as luxury and watches. As a part of this initiative, we newly opened curated zones by combining cosmetics, food and drink and accessories in Daimaru Sapporo store. We opened the newly curated store by reducing women's clothing area on the third floor by 30% in April. After opening, compared to last year, sales for the first half were up 72.4% in the same area.

Sales for efficiency increased dramatically. Besides, ripple effects are seen in other sales areas on the same floor, and sales were up 17.1% on a whole floor year-on-year. Going forward, by adopting optimal format based on market analysis of each store, we intend to revitalize stores and enhance our ability to attract customers and profitability.

As for expansion of spending by inbound tourists, acceptance of mobile payments in all stores was a success. Sales for area expansion was also a success to enhance product lineup and services for cosmetics, particularly popular category. As a result, luxury sales continued to increase. Luxury sales of Daimaru Matsuzakaya department stores were JPY 28.2 billion, a 40.4% year-on-year. The number of customers increased 43.4%, in particular, continuing to show high growth rate. By product, sales of consumables, mainly including cosmetics, increased 61.3%. By country, the share of China exceeded 80%, and sales to Chinese customers were up 52.7%, still showing an overwhelming presence.

Actual spending by the affluent in Japan continued in all gaisho sales, targeting affluent customers, holding of tour events. This experience value strengthened lineup of products with high asset value, and expansion of customer base, through continuous acquisition of card accounts, were successful. As a result, credit sales of flagship stores, which show gaisho sales, increased 2.3% year-on-year. Through our initiatives, we newly acquired 7,895 gaisho card accounts. New accounts boosted sales by JPY 5.6 billion in the first half.

By store, Shinsaibashi store with brisk sales to inbound tourists showed a high year-on-year growth of 9.3%. In Sapporo store, newly curated area enhanced sales for efficiency. Consequently, sales of 7 flagship stores increased year-on-year. Sales of Kobe store decreased JPY 2.2 billion as operation of shops around it was transferred to Real Estate business in this fiscal year. Excluding the effect, Kobe store increased sales 1.0% year-on-year.

For costs, there were factors pushing up costs, such as extra depreciation, assuming renovation of north wing, which will be conducted after completion of new main building of Shinsaibashi store, and operational cost associated with renewal of POS cash registers. But by reducing packaging and delivery cost, APR cost, labor cost and others, we reduced total cost from original plan.

As a result, gross sales of Daimaru Matsuzakaya department stores were JPY 328.4 billion, up 2.1% year-on-year. Sales revenue was JPY 128.7 billion, up 4.3%. Business profit was JPY 14.6 billion, up significantly by 17.2%. Operating profit was JPY 13.6 billion, up 0.7% year-on-year despite reaction to JPY 1.4 billion of gain on sales of real estate recorded in previous year. Business profit was JPY 1.1 billion higher, and operating profit was JPY 1 billion higher than April forecast.

Let me move on to forecast for the second half and full year for fiscal year 2018. As for business environment surrounding our company, due to effects of natural disasters, such as major typhoons late in August and Hokkaido Eastern Iburi earthquake in September, economy of Kansai and Hokkaido areas, where key stores of our group are operating, is somewhat uncertain. We also recognize increasing upward pressure on cost against backdrop of increasing resource price and labor shortage in many aspects.

To make group-wide efforts to cope with this situation, while making steady investment for future growth, we will reduce no essential cost and thoroughly assess cost effectiveness from a short-term perspective. At the same time, we will do our best to achieve goals while balancing management from medium to long term and short-term perspectives.

For the second half, we forecast growth sales will be JPY 602.8 billion, up 3.8% year-on-year; sales revenue will be JPY 247.7 billion, up 5.3%; and business profit will be JPY 25.2 billion, up 7.5%. Consolidated operating profit will be JPY 24.2 billion, up 6.2%, despite reaction to gain on sales of real estate recorded in previous year. Net income attributable to owners of parent will be JPY 14.5 billion, up 19.9%.

By segment, in Department Store business, spending by the affluent will continue to be strong. On the other hand, by considering temporary decrease in spending by inbound tourists in Kansai area, resulting from the typhoon damages and the impacts of the earthquakes in Hokkaido and forecasting continuing difficulties at rural and suburban stores, we forecast 2.8% year-on-year increase in revenue. As we factor in an increasing onetime cost of system improvement and others in the second half, business profit will be down 1.7% and operating profit will be down 1.2%.

In PARCO business, revenue will increase 6.7% year-on-year, business profit will increase 8.8% and operating profit will increase 0.3% due to effect of: renovation of urban stores, such as Nagoya PARCO through operation of Parco-ya in new format, which opened in Ueno Frontier Tower in November last year; opening of Sannomiya ZERO GATE; and improved performance expected for move a, PARCO space systems and others.

In Real Estate business, revenue will increase substantially by 13.7% year-on-year and business profit by 56.6%, mainly due to full operation of Ueno Frontier Tower and transfer of shops around Daimaru Kobe store. But operating profit will decrease 47.3% due to reaction to JPY 1.6 billion of gain on sales of real estate recorded in previous year.

In Credit and Finance business, revenue will increase 5.4% year-on-year, but business profit will decrease 14.9% and operating profit will decrease 11.3% due to increasing cost of strengthening human resources for future growth.

In other businesses, business profit will increase 40.6% and operating profit will increase 52.2% due to expected improvement in performance of Daimaru Kogyo and J.Front Design & Construction.

In the second half, gross sales of Daimaru Matsuzakaya department stores will be up 3.1% year-on-year. Gross sales of Department Store business, excluding Real Estate business, will increase 2.9% year-on-year.

By store, we increased forecast of many urban stores, such as Nagoya store with strong sales through the affluent. On the other hand, we considered effect of Hokkaido earthquake on Hokkaido store and carefully reviewed forecast for suburban stores. Sales of Kobe store will increase 1.8%, excluding effect of transfer of shops around it to Real Estate business. Cost will increase JPY 1.8 billion year-on-year due to extra depreciation of north wing of Shinsaibashi store, system improvement cost and increasing packaging and delivery and advertising cost for forecast is decreased by JPY 400 million from April forecast.

As for full year consolidated forecast for fiscal year 2018, gross sales will be JPY 1,150,000,000,000, up 1.0% year-on-year; sales revenue, JPY 475 billion, up 1.1%; business profit, JPY 49.5 billion, up 7.0%; operating profit, JPY 48.5 billion, down 2.1%; and net income attributable to owners of parent, JPY 30.5 billion, up 7.1%. From April forecast, sales revenue was revised down by JPY 10 billion. Through salary cost control, April forecast of profit at this level remains unchanged. Forecasted ROE is 7.5%.

We plan to pay year-end dividend of JPY 18 per share. Annual dividend per share, including interim dividend, will be JPY 35, flat year-on-year. Annual ordinary dividend, excluding commemorative dividend of previous year, will be up JPY 2 and increase for 8 years in a row.

Forecast for consolidated statements of financial position and cash flows are as shown on this slide. By segment, April forecast for operating profit was revised upward by JPY 500 million in Department Store business, and by JPY 800 million in Real Estate business, and revised downward by JPY 900 million in PARCO business, by JPY 400 million in Credit and Finance business and by JPY 500 million in other businesses.

Next, I will share our thinking about medium-term business plan for fiscal year 2019 onwards. Under medium-term business plan, which started in fiscal year 2017, we also started to apply International Financial Reporting Standards, IFRS, which is quite different from JGAAP in concept of operating profit and others. Besides, we are working on 5-year plan instead of 3-year plan basis for conventional planning.

As basis for planning is different from the past, I feel strongly it will be hard for investors to see progress. Compared to plan, an image of growth curve towards target figures for the final year of the medium-term plan is not necessarily shared. So let me summarize special factors expected for fiscal year 2019 once again.

In fiscal year 2019, the third year of the medium-term plan, we plan to open new main building of Daimaru Shinsaibashi store and new Shibuya PARCO finally. However, as these 2 projects open in the latter half of the fiscal year, their profit contribution will be small in fiscal year 2019, the initial year of opening, partly due to onetime cost associated with opening and lump sum booking of fixed asset tax, which is unique to IFRS. To coincide with opening of main building of Shinsaibashi store, north wing, which is operating now, will be temporarily closed for conversion into real estate rental model. Besides, consumption tax hike is scheduled for October 2019. Based on the past experiences, we expect sales of Department Stores and PARCO will be negatively impacted for some months. Also, in Credit and Finance business, based on the direction shown in 100-day plan the other day, upfront expenditure will be incurred for full-scale growth of this business as a pillar for our group.

This slide shows future progress of medium-term business plan based on these factors. To understand process of growth we are aiming at, I recommend you to look at the trajectory based on business profit forecast. In fiscal year 2019, we aim to increase consolidated business profit, but growth is expected to be slow due to special factors that I mentioned earlier. After that, profit growth will be accelerated in a phased manner in fiscal year 2020, when new main building of Shinsaibashi store and new Shibuya PARCO will be fully operated, and 2021 when north wing of Shinsaibashi store will open after being connected to main building.

Based on these assumptions, I will talk about growth strategy, financial strategy and initiatives for ESG we should focus on to achieve medium-term business plan. For growth strategy, I will share with you urban dominant strategy, ICT strategy and Credit and Finance business strategy today.

As for urban dominant strategy, GINZA SIX, Ueno Frontier Tower and others opened in 2017. While contributing to development and revitalization of the areas by attracting new customers to the area, starting from these stores, our group was able to achieve big results. In fiscal year 2019, 2 new redevelopment projects, which should be at the core of town development, will be completed.

As for rebuilding of main building of Daimaru Shinsaibashi store, new main building is planned to open in fall 2019. In the new main building, we will show future directions of department stores in product selection, brand lineup, service, store environment and others. We hope to work construction reform to break away from the conventional department store model and embody new ideal form of department store model.

Main building of Shinsaibashi store will be a building with 10 stories above and 2 under the ground. By keeping architectural beauty of William Merrell Vories, we will fuse tradition and innovation to create new store environment. Sales floor area will be about 40,000 square meters, an increase of 9,000 square meters from prior to rebuilding. In products' lineup and services, we plan to remarkably enrich luxury beauty, representing Shinsaibashi store in food and drink. Layer structure will be quite different from traditional department stores. To be specific, traditional models of purchase on non-return basis and purchase recorded when sold will be mainly adopted on sales floors from the first through the third. But fixed term lease model will be adopted on floors from the fourth to the 10th and the first and the second floors in the basement. By creating a store with unprecedented hybrid sales floor structure with new experience value, we want to realize innovative and highly profitable new department store model. We plan to invest JPY 38 billion.

After opening of new main building, business model of north wing, which is operating as a department store, will be changed to real estate rental model with PARCO as a core tenant. For that purpose, in fall next year, it will be closed temporarily for renovation and will open in spring 2021 after being connected to main building. In this way, we will create hybrid commercial complex with more than 80,000 square meters floor area. We hope to bring new bustle to the area and contribute to attractive town development by attracting a broad range of customers, both from home and abroad.

As for new Shibuya PARCO, for this project, increasing floor area ratio was allowed based on evaluation of its contribution to urban renaissance. As for income and expenditure of the urban redevelopment project, proceeds from disposal of reserved floor area cover project cost, land maintenance cost, construction cost, compensation cost for suspension of business and others.

Office area, a reserve floor area, was already sold, and PARCO acquired store area. For this project, PARCO plans to invest JPY 21.4 billion in acquisition of commercial area, a reserve floor area, and interior furnishing. As for direction of store creation, we will create next-generation commercial space through the building with the use of special urban renaissance district and redevelopment project system.

We will repropose fashion by combining luxury mode and street culture and express sales floors of the future, promoting use of advanced technology. We will expand experienced-based contents by expanding PARCO Theater and at other multiple entertainment locations of the company. We will evolve PARCO brand by providing information globally.

Next, I will discuss progress of ICT strategy. We are building new customer base called Lifetime Service Hub and creating system to strengthen lifetime engagement with customers.

Our group companies, such as Daimaru Matsuzakaya and PARCO, hold their own good customer assets. However, for example, Department Store companies accumulate data mainly of customer profile and purchase information gained through ID cards, such as in-house credit cards, and the group does not centralize information. We cannot say foundation to bring out true value of information where customer assets have been developed. Therefore, under the concept of Lifetime Service Hub, as a group, we will integrate and centralize good customer database of more than 6 million people and reinforce initiatives of data economy by using ICT, including AI and apps.

In the current era of 100-year life expectancy, lifetime value of each individual is enhancing. In such a situation, we have many direct contact points with customers through various products and services. It is a big advantage of our group. It is, needless to say, value of information gained through contact points with customers will further enhance.

As for future steps, we will prerelease mobile app to provide incentives based on purchase amount at Daimaru Tokyo store in the second half and introduce it to each store gradually through the next fiscal year. With the use of apps, without being dependent on in-house cards, we will promote creation of ID of customers and expand customer base dramatically through department stores.

In the next step, we will start to use chat across the group and aim at qualitative improvement and quantitative expansion of customer information through accumulation of composition history and data of purchase history. By adding demonstration test of AI analysis to sophisticated data of enhanced quality, we intend to expand opportunities to provide optimal products and services and launch new businesses to create synergy among group companies.

As for growth initiatives for Credit and Finance business, based on 100-day plan developed this summer, after appointment of new President of JFR Card, we clarified future directions of business strategy in 2 aspects: payment and finance.

For payment, we will enhance the appeal of card products and promote cashless payment as pillars of strategy. To enhance appeal of card products, we plan to launch a project with department stores and issue new cards equipped with new loyalty program targeting next fiscal year. To promote cashless payment, we are collaborating with department stores and considering introduction of new payment technology to support cashless payment at department stores. By providing new payment means broadly in this way, I think it is possible to increase the number of customers dramatically.

For finance, we want to develop finance services for B2C and B2B by utilizing strengths of the group's transaction volume of more than JPY 1 trillion, reinforcing relationship with customers through payment and using gained data. Besides, in anticipation of mid to long-term growth, we intend to pursue our potentials in payment and finance while also considering drastic review of the current scheme itself of Credit and Finance business.

To speed up these new business strategies, acquisition of highly professional human resources, well versed in payment and finance businesses, is a pressing need. I also think it is essential to actively invest in platform using latest technologies. Therefore, there would be upfront investment and expenditure this and next fiscal year, and profit will decrease in the short term in Credit and Finance business. But profit will turn upward in fiscal year 2020, and we will change business so that we can aim for dramatic profit growth as core business of the group in the medium term.

Let me move on to financial strategy. By steadily promoting growth strategy in fiscal year 2021, the final year of the medium-term plan, we aim at IFRS-based consolidated operating profit of JPY 56 billion (sic) [ JPY 5.6 billion ] up JPY 14.2 billion from fiscal year 2016 and consolidated ROE of 8% or more.

For the 5-year medium-term business plan period, we will generate JPY 260 billion or more of operating cash flow and allocate JPY 200 billion to capital investment and growth investment to reform existing business and transform business portfolio.

Investment in medium-term plan will peak in fiscal year 2019 when new main building of Daimaru Shinsaibashi store and new Shibuya PARCO will open. After that, we plan to generate cash flow of more than JPY 20 billion in fiscal years 2020 and 2021, respectively. We judge investments based on WACC of each business, Department Store, PARCO, Real Estate and others. We adopt NPV method for development investment projects and payback period method for store renovation investment projects. We judge M&As in a comprehensive manner by using quantitative criteria, basically DCF method, and qualitative criteria, such as business strategy and regional contribution. Five-year cumulative free cash flows of JPY 60 billion or more will be used for shareholder return and expansion of equity. By promoting well-balanced capital policy, we will realize management structure that can achieve 8% ROE continuously.

Starting in the next fiscal year, we will further promote company-wide initiative of management with emphasis on balance sheet and optimize equity of each business company based on its optimal capital structure set for each operating company. In this process, we intend to control double leverage, an important rating indicator, to enhance capital efficiency further.

Next, I will discuss the ESG initiatives. We formulated sustainability policy this time and identified 5 materiality themes. We started full-scale initiatives to create sustainable society under long-term quantitative goals. For example, new main building of Daimaru Shinsaibashi stores scheduled to open in fall 2019 will be a model store for contribution to a low-carbon society. At the same time, we will promote specific actions with clear timeline in each materiality theme, management of the entire supply chain, promotion of diversity, work-life balance and coexistence with local communities. Details will be introduced at ESG briefing scheduled for November 30. I know you are busy, but I hope you will come for discussion.

In the current medium-term business plan, we made a declaration to alter the cost of the management to this continuous growth and transform into a multiservice retailer beyond the retail industry framework. I don't think reform the portfolio to review business structure drastically can be achieved in a short period of time. The bigger the amplitude of reform gets, the more steepness a company's journey to a goal. Therefore, in the current medium-term business plan, we can realize a real leap beyond expectation of stakeholders by not only minimizing negative risk, but also by going through a process of taking a risk boldly when we judge the risk is a positive risk. I think accumulation of the process will lead to building of strong business foundation, which will support sustainable growth. To be a multiservice retailer beyond framework of retailing we aim at, we will enhance corporate value with tenacity to create results by viewing true sightness of opportunity and threats in various risks or uncertainties surrounding business.

Thank you very much for your attention.