J.Front Retailing Co Ltd

TSE:3086

Earnings Call Transcript 2021-Q2

[Tatsuya Yoshimoto, executive]

Thank you very much for attending today despite your busy schedule. We would like to express our heartfelt sympathy for everyone affected by COVID-19 and everyone concerned and express our deepest appreciation to everyone, including health care workers who are committed to preventing the spread of infection.

Page 2, please. Today, I'll explain results for the first half of fiscal year 2020, forecast for the second half and full fiscal year 2020 and priority policies towards full recovery and regrowth of our group.

Please turn to Page 4 for results for the first half of fiscal year 2020. Consolidated gross sales of J. Front Retailing were greatly affected by spreading infection of COVID-19 and were JPY 319.5 billion, down 41.5% year-on-year, which was an unprecedented and significant decrease. As a result, consolidated business profit was only JPY 200 million. Operating loss was JPY 20.6 billion and loss attributable to owners of parent was JPY 16.3 billion.

Compared to June forecast, due to success of additional review of SGA as group companies, including department stores, business profit was JPY 8.2 billion higher, operating loss improved by JPY 9.3 billion, loss attributable to owners of parent improved by JPY 7.3 billion.

We decreased interim dividend JPY 9 year-on-year to JPY 9 per share as scheduled to ensure management stability under challenging business environment.

Results by segment are as outlined on pages from 5 to 7.

Please go to Page 8. Department store business faced extremely difficult business environments beyond expectation, mainly in the first quarter, including 1.5 months closure from April to May under the declaration of a state of emergency due to the COVID-19 pandemic. After reopening, sales recovered to around 70% in June and July, but came to a standstill temporality in August, due to the respread of infection.

As a result, gross sales decreased 46.5% year-on-year. Business loss was JPY 4.4 billion, and operating loss was JPY 21.3 billion.

The big difference between business loss and operating loss was mainly due to reclassified fixed cost of JPY 8 billion, including cost of sales, and impairment losses of stores of JPY 9.7 billion arising during closure recorded under other operating expenses.

In the second quarter, gross sales decreased 28.0%. The decrease narrowed.

In addition, as we worked on further reduction of SGA, both business profit and operating profit turned positive.

Results of Daimaru Matsuzakaya department stores are shown on Page 9.

Please look at Page 10. As for SGA, as technical factors associated with the COVID-19 pandemic, JPY 6.6 billion of fixed cost during closure period, such as personnel expenses, depreciation and computing expenses, were reclassified to other operating expenses. Even after the reclassification, we reduced SGA mainly, including ad expenses, by more than JPY 10 billion. However, the decrease of SGA didn't fully offset the drop of gross profit.

Page 11 shows Parco business. Also at PARCO stores, very challenging situation continued in sales due to about 2 months store closure and reduced business hours.

We continued rent concessions for tenants under certain conditions also after reopening. In the entertainment business, a strength of PARCO, we expect it to attract new crowd through grand opening of PARCO Theater. However, many planned performances had to be canceled to avoid 3Cs, which enhances infection risks.

As a result, revenue decreased 31.1% year-on-year in the first half. Revenue improved and the decrease was 16.7% in the second quarter. Business profit was positive JPY 1.5 billion, but operating profit was negative JPY 2.6 billion.

In Real Estate business, on Page 12, gross sales and revenue dropped more than 20% due to rent concessions for tenants according to the length of closure and decrease in percentage rent caused by a decrease in transaction volume at commercial facilities such as Ginza Six.

As our profit decreased significantly, we posted positive profit, JPY 1.9 billion of business profit and JPY 1.6 billion of operating profit.

In Credit and Finance business, business profit and operating profit was only JPY 400 million, respectively, mainly due to a decrease in transaction volume of Daimaru Matsuzakaya department stores and an increase in advertising expenses for card renewal scheduled for January next year.

In other businesses, sales of J. Front Design and Construction increased year-on-year due to increased orders for hotel interior construction and others. However, Dimples engaged in staffing service, J. Front Foods in Restaurant Business and Others were damaged by the closure of commercial facilities.

In total, both sales and profit decreased. As a result, business profit and operating profit decreased sharply, but positive profit was secured.

Consolidated statements of financial position are shown on Page 13.

During the recent COVID-19 pandemic, we made financial stability and liquidity on hand. Our top priority accumulated cash on hand and increased the amount of commitment lines and others for fund raising.

Through such initiatives, we secured liquidity on hand, equivalent to working capital for 18 months as of the end of August 2020. Therefore, interest-bearing liabilities increased JPY 99.6 billion, from the end of the last fiscal year, and net D/E ratio was 0.8x.

By looking at for performance trends, we will reduce them. Besides, by looking at status of cash flows, we will reduce commitment lines to appropriate levels.

Cash flows are as shown on Page 14. Operating cash flow significantly decreased due to sluggish performance associated with the COVID-19 pandemic. However, free cash flow was positive as company-wide measures to reduce investments were successful.

Let me move on to forecast for the second half and full fiscal year 2020. Development of vaccines has been steadily continuing for COVID-19.

However, we cannot forecast when the pandemic will subside. Besides concerns are growing over a twindemic, which is a pandemic of COVID-19 and influenza occurring in the winter. Although future remains uncertain, we intend to steadily turn business profit and operating profit positive in the second half as a group. Please look at Page 16. For the second half, we forecast gross sales will be JPY 490.8 billion, down 16.5% year-on-year.

We forecast small profit, business profit of JPY 900 million and operating profit of JPY 30 million. From June forecast, we revised down gross sales forecast by JPY 2.1 billion, mainly through careful review of department stores.

However, by revising down SGA by JPY 2.3 billion at the same time, we give June forecast for business profit and operating profit almost unchanged.

For the full year, we forecast gross sales of JPY 810.4 billion, down 28.5% year-on-year. Business profit will be JPY 1.2 billion. Operating loss will be JPY 20.6 billion and loss attributable to owners of parent will be JPY 18.6 billion.

Full year dividend will be JPY 18 per share, flat year-on-year from the viewpoint of our basic capital policy of stable dividend payment and to show our strong will to turn business profit and operating profit positive in the second half. Annual dividend, combined with interim dividend will be JPY 27 per share, down JPY 9 year-on-year.

Page 17 and after shows forecast by segment. I will talk about assumptions for forecast. Please look at Pages 18 and 19 for department store business.

We expect inbound sales in the second half to be the same level as the first half, difficult to recover. On the other hand, we expect domestic consumption will gradually recover driven by affluent people.

Sales increased significantly due to last minute buying in September last year before consumption tax hike and sales decreased in October in reaction to it. So we have to pay attention to big change seen in monthly sales.

Page 20, please. We forecast improvement in gross sales at Daimaru Matsuzakaya Department Stores decrease of 18.6% in the third quarter and 11.3% in the fourth quarter.

For reference, in comparison with fiscal year 2018, sales will decrease 19.1% in the third quarter and 20.2% in the fourth quarter.

Page 21, please. In SGA, there is an increase in reaction to a decrease of JPY 4.1 billion in retirement benefit expenses resulting from system change associated with the extension of retirement age as a special factor last year.

Including the positive factor, we will reduce SGA by JPY 500 million. Consequently, business profit will be JPY 2.6 billion and operating profit will be JPY 2.2 billion.

Please go to Page 22 for Parco Business. They allow positive factors such as full operation at Shibuya PARCO, which opened in November last year, and opening of Shinsaibashi PARCO in November this year in Nagoya connected to main building of Daimaru Shinsaibashi Store in an integrated manner.

However, revenue will decrease 38.9% in reaction to booking of JPY 21.7 billion of revenue associated with sales of reserve for space of Shibuya PARCO last year and due to expected continuation of tenant rent concessions and delay in recovery of entertainment business.

Besides due to real estate registration license tax, a JPY 400 million incurred from transfer of the Nagoya asset of Shinsaibashi store to PARCO and cost increase, which were not factored in at the beginning of the current period business loss and operating loss will be JPY 1.8 billion.

Page 23 shows an outline of Shinsaibashi PARCO which will open next month with essence of new Shibuya PARCO, it will have large specialty stores, cinema complex, event space and others and will be a complex building beyond framework of conventional commercial facilities.

While cherishing commitment, colorful goods and experiences, art and culture, stimulating emotion, we will create store space also by making full use of technology. Besides with main building of Daimaru Shinsaibashi store in an integrated manner, we will provide the new sense of value and experiences for various customers visiting Shinsaibashi and incorporate structures for customers to walk around the entire facilities.

Page 24, please. In Real Estate business, we originally forecasted loss. However, due to cost reduction resulting from transfer of the Nagoya asset, which was not factored in at the beginning of the current period, we forecast operating profit of JPY 700 million.

In credit and finance business, we will issue Daimaru Matsuzakaya Card with renewed point program and design in January next year and preparation for growth will be finally ready.

However, due to upfront expenses for the card renewal and a change in accounting method for annual fee income, we forecast business loss and operating loss will be JPY 400 million.

In other businesses, greatly affected by a decrease in reaction to special demand for J. Front Design and Construction to construct the main building of Shinsaibashi store last year, business profit and operating profit will be JPY 600 million.

Consolidated statements of financial position and cash flows are as shown on Page 25. As for total assets for near-term financing and securing a safety in fund raising, we take up loans and issue commercial paper to secure sufficient cash on hand and maintain relatively high level of cash position.

Therefore, interest-bearing liabilities will increase JPY 101.2 billion from the end of the last fiscal year and net D/E ratio will be 1.27x.

As we recognize the appropriate level is about 0.6x, we will take appropriate responses in light of future trends of business performance.

Page 26, please. Operating cash flow will significantly decrease due to deterioration of business performance caused by the impacts of COVID-19. However, we intend to control expenses as much as possible by scrutinizing investment plans and others and secure positive free cash flow.

Next, I will talk about future initiatives towards full recovery and regrowth of our group from Page 27.

In the results briefing held in April, we said we would give an outline and direction of a new mid- to long-term plan envisioning goals for 2030 in today's results briefing.

However, the impacts of COVID-19 are prolonging more than we expected in April and the situation is still uncertain. So we thought we should have deeper discussions on a mid- to long-term plan, including a vision 10 years from now before making specific plans.

Therefore, today, we will explain priority policies, including reinforcement of management foundation to advance the next mid- to long-term plan.

As shown on Page 28, the major promise in promoting future management activities is how we will co-exist with COVID-19 as we cannot forecast when it will subside. Customers' consumption behavior and values about consumption changed dramatically due to COVID-19. The big wave of digitalization envisioned as a world 5 or 10 years from now is surging on various scenes of society, all at once.

Furthermore, in reality, concern is strong about maintaining and increasing stores' additional value of prime locations, which is a big advantage of our core business, Department Stores and PARCO.

It is no exaggeration to say these risks will shake the foundation of our group. It is obvious that failure to take appropriate measures can endanger the company's existence.

On the other hand, I think it is a golden opportunity to push forward, sweeping management reforms as these changes are rapid. Each and every one of us has to take the current situation as our own situation and change mindset drastically.

Page 29, please. In order for the group to achieve promptly full recovery and regrowth to meet expectations of stakeholders, we will prioritize and work on three things at the faster speed.

Firstly, structural reform; secondly, digital transformation; thirdly, full creation of synergy with PARCO, which became our wholly owned subsidiary.

These three should not end up as slogans. I think we must qualify timeline, plan and do to completion to survive COVID-19.

Page 30 shows the first policy, structure reform. In structural reform, how we will lower the breakeven point is an important point.

The key is to implement new organization and HR structure reform by accelerating business model transformation. In particular, we need to expand hybrid department store model, combining kaitori, purchase on non-return basis and shoka shiire, purchase recorded when sold with fixed-term leasing realized at Shinsaibashi store to other stores.

Through conversion into hybrid model, introduction of new contents responding to changes of customers can be promoted further. In addition, with completely different HR structure from that of conventional department stores, we can streamline organizations drastically.

We will introduce this model to Nagoya store as the highest priority model firstly and speed up and expand it to other flagship stores. In the same way, we will scrutinize and drastically change cost and SGA structures in PARCO and associated businesses.

Besides work style is changing dramatically through introduction of data working and use of remote conferencing realized with improved digital infrastructure.

By entrenching these further as new systems and forms, we will drastically review the entire business processes, including not only reduction of travel and transportation expenses, but also how offices should be.

We expect JPY 10 billion or more improvement in revenue as a fixed cost reduction through these initiatives.

Page 31, please. We will thoroughly stop the bleeding through strict identification of unprofitable businesses and stores and by more quickly deciding to shrink or withdrawal from businesses.

At the same time, we will improve management efficiency by restructuring the group businesses and also consider replacement of businesses.

We will implement structural reform and portfolio reform decisively through these initiatives.

Next, I will explain the second policy, digital transformation, on Page 32. The biggest issue of our group revealed in COVID-19 pandemic is the business structure of our core businesses, Department Stores and PARCO based on the assumption that real stores are open.

Therefore, when we were forced to close the stores, we were almost helpless due to restrictions of time and place, as you know. On the other hand, consumption is more radically polarized and digital shift has progressed at once.

In this situation, we could say we have to review strength of real stores of venues fundamentally. It is clearly difficult to meet customers' expectations only by promoting the expansion of online transactions and digitalization symptomatically.

Therefore, we will convert real stores into higher value-added venues for experiences for customers and create new value of experiences that merges real with digital unique to our group.

Page 33, please. Real stores are still the channels, providing the highest experience values, where contents and services can be felt with 5 senses.

So we will sophisticate real stores further. On the other hand, we will [indiscernible] reproduce attractiveness of the real or high-touch customer services and exciting content.

We will increase touch points with customers and reinforce relations by bringing so-called warmth unique to the real to digital.

Through the merger, we'd like to add digital information to real venues and create completely new purchase experiences and entertainment experiences.

What is important is that people play an important role regardless of whether a touch point with customers at a real or digital.

So we make sufficient investments in people, including provision of systems and incentive leading to enhancement of motivation for staff, including business partners standing at the forefront of the stores of our group and continuous implementation and education to enhance customer satisfaction.

That is to say, building a digital platform that connects customers to sales force with warmth is a filler of the x digital transformation our group is aiming at.

Page 34, please. At Daimaru Matsuzakaya Department Stores we will create systems where customers can receive advice and service from salespeople seamlessly, both online and off-line beyond restrictions of time and place.

To be more specific, we are gradually building system that allow customers to communicate and shop through blocks established in each shop.

Furthermore, we intend to realize unique OMO exclusive customer shopping experiences for cosmetics by the end of fiscal year 2021.

At PARCO, we position real PARCO stores equipped with showroom functions as [indiscernible]. We make sure to send customers to inform multiple EC platforms with real stores, communication capabilities as a starting point.

Through this, we will build systems for customers to experience comfortable purchase, both online and offline. Multiple EC platform is characterized by connection of real channels and online channels with PARCO points. On top of PARCO online store, tenants own EC will participate in the platform. Besides entertainment, a strength of PARCO has already become available online. We will develop ways to enjoy entertainment unique to online.

For you to realize DX of our group, links to initiatives that use digital technology are listed on the last page. I hope you will take a look later.

Page 35, please. We will move integrated database, lifetime service hub, integrating purchase information and behavioral log gained through purchase process as a group to the execution phase. We would deepen the understanding of customers to develop new contents and enhance accuracy of CRM.

Page 36, please. We will also gear up business operation reform using digital technology. We moved forward with realization of RPA and have prospects of streamlining about 300 back-office processes such as aggregation and verification.

Going forward, we will welcome paperless operations also in stores, which is a long-standing issue on a full-fledged scale and in a planned manner. As a result, we think it will be possible to reduce direct cost for huge volumes of strips and cost for storage warehouse and to streamline organization and HR structure drastically.

To realize that it is indispensable to drastically upgrade systems. Frankly speaking, our present systems have extremely complicated structures as a result of upgrading repeated many times over decades.

Therefore, group digital strategy unit will take the lead to launch a project, study the legacy and build optimal group systems promptly.

We are looking to complete business operation reform focusing on the pending issue of paperless operations through the infrastructure improvement.

Next, I will talk about the third policy, full scale creation of synergy with PARCO, on Page 37. As I mentioned earlier, Shinsaibashi PARCO, which will open in November this year, will be the most symbolic case of synergy with PARCO as a commercial facility integrated with Daimaru Shinsaibashi store, which opened last year. We will finally start full scale merger between Daimaru, Matsuzakaya and PARCO through mutual reward points, establishment of systems for sending customers to each other, integration of database and others.

With this initiative as a start, we will increase the appeal of stores and brand strength by using each others supplier's channels and providing PARCO's unique content represented by entertainment in department stores.

Page 38, please. Through transfer, the Real Estate business to PARCO, in September this year, we started initiatives to enforce the business foundation.

The point is reinforcement of developer functions. We intend to go deeply into development of areas such as Sakae District in Nagoya, Shinsaibashi District in Osaka, and Tenjin District in Fukuoka, and conduct researches on development of semi-urban locations in response to the new normal.

We will implement development of new projects to expand scale of real estate development as a core business playing a role in mid- to long-term growth and also consider asset replacement and use our circular investment scheme.

Page 39, please. It is true that challenging initiatives are included in the 3 priority policies. However, what is called integration in response to the rapid changes we are facing today is not whether you can or can't, but whether you will or won't.

I took over the [indiscernible] as a top management. I think my role is to accomplish what we decided to do. I am sure our group will be able to overcome this unprecedented crisis by accomplishing what I just mentioned.

To realize that, I think merger will be one keyword, that is to say, merger of real and digital, a merger of PARCO which became our wholly owned subsidiary and Department Stores and affiliated companies as a group.

We intend to create a strong portfolio with an enhanced ability to respond to changes by achieving the two mergers at the high level with no compromise.

Page 40, please. We plan to announce a medium- to long-term plan toward full recovery and regrowth, including these initiatives. In other words, what we should be 10 years from now after transformation of the group and specific initiatives of a medium-term 3-year business plan at the results presentation in April 2021.

So next page is the last page. Since the foundation, we got over many company crises by putting our corporate credo, service before profit, those who praise service before profit will prosper in the center of management.

I feel we were given an opportunity to go back to the starting point again by facing the current crisis of the COVID-19 pandemic. Why are we made alive now as a public entity of society? What is the meaning of our existence?

I think it is to face prominent changes in customers and society, find the best solution desperately and continue to provide it.

To solve social issues through business activities is nothing less than practicing our credo, service before profit simply and honestly.

Our group vision is to create and bring to life new happiness. I recognize the vision is required indeed in this situation.

Sustainable management should aim at realization of sustainability of society as well as sustainability of the company. I

t is impossible for a company to survive without coexisting with society. We think real corporate value will be enhanced in the mid- to long-term only if we can achieve social value and economic value.

In fiscal year 2020, to steadily turn business profit and operating profit positive in the second half is literally our minimum target. First of all, we will strive to build strong management foundation to recover to the level of fiscal year 2019 promptly.

At the same time, it is definite fiscal year 2020 will be a historical turning point for our group to aim at mid- to long-term growth again.

By turning this unprecedented crisis into opportunity and generating results steadily, we will work on sustainable growth and mid- to long-term enhancement of corporate value. Thank you very much for your attention.