Seven & i Holdings Co Ltd

TSE:3382

Earnings Call Transcript 2022-Q1

[Junro Ito, executive]

Greetings, everyone. My name is Junro Ito, Director and Senior Executive Officer at Seven & i Holdings. I would like to thank you for taking the time off your busy schedules to participate in today's financial results presentation covering the first quarter of fiscal year 2022, which follows on the heels of last week's announcement of the Seven & i Group's new medium-term management plan. I will be discussing the financial results for the first quarter.

Additionally, during last week's presentation held on July 1, we discussed the change in business segments, which took effect in the current fiscal year. However, we will be reporting the financial results for the first quarter using the old segment classification. We request your understanding on this front.

Please turn to Page 2, which shows the trend in year-on-year change in existing store sales for each business format. The negative impact of the COVID-19 pandemic last fiscal year makes for relatively easier comparables from February onwards this year. For this reason, the dotted lines indicate a comparison with the fiscal year before last. The graph on the top left corner shows the results at our convenience store operations in Japan and in the United States.

The orange line corresponds to Seven-Eleven Japan. Starting in fiscal year 2022, the year-on-year impact of the COVID-19 pandemic has already played out somewhat. At Seven-Eleven Japan, we carried out efforts in the area of product development, the expansion of the range of products we offer and in terms of updating store layouts. These allowed us to address changes in purchasing behavior, namely the trend towards smaller commercial areas and greater diversity in consumer needs.

As such, we were able to deliver an existing store sales level comparable to the fiscal year before last, the sole exception being in the month of May. While we achieved the year-on-year growth in May, in fiscal year 2022, the declaration of another state of emergency following a surge in COVID-19 cases and the impact of unseasonable weather translated into a decrease compared to levels seen in the fiscal year before last.

The green line corresponds to 7-Eleven, Inc., which registered a both year-on-year sales growth and sales growth compared to the fiscal year before that. We believe this to be the result of efforts even surpassing our initiatives in Japan to offer product lineups adapted to changes in the way consumers use our convenience stores and to offer delivery options.

The graph on the top right-hand corner shows the results at the Superstore business, which continued to register strong stay-at-home demand. Food products at Ito-Yokado and at our food supermarkets delivered sales levels in line with last fiscal year, and continued to show a strong performance compared to the fiscal year before that.

Ito-Yokado, including tenants, was significantly negatively impacted by temporary store closures and limited operations resulting from the declaration of the state of emergency last year. This, therefore, led to year-on-year sales growth in the first quarter of fiscal year 2022. However, these results are still yet to recover to fiscal year 2020 levels.

The graph on the bottom left-hand corner shows the results at the department store and specialty store businesses. The negative impact from temporary store closures and limited operations resulting from the declaration of the state of emergency last year made for a relatively easier year-on-year comparables. We, therefore, registered year-on-year sales growth in the first quarter of fiscal year 2022. However, we continued facing a challenging situation in terms of a comparison with the results for the fiscal year before last.

Lastly, the graph on the bottom right-hand corner shows the results for the electronic commerce business. Both Ito-Yokado's IY online and IY Internet Supermarket Dark Store Nishi-Nippori services continue delivering strong results.

Please turn to the next page, which contains the consolidated financial results for the first quarter. In addition to the year-on-year percentage change in demand variance versus fiscal year 2021, we have also included a comparison versus fiscal year 2020. In the first quarter, we registered an increase in revenue and income since the significant negative impact of the COVID-19 pandemic in the previous year, made for relatively easier comparables. However, versus fiscal year 2020, the group's total sales decreased by 0.8%. Similarly, operating income decreased by 14.2%. Revenues from operations stood at JPY 1,555.3 billion, up 11.8% year-on-year.

Operating income stood at JPY 77.5 billion, up 8.6% year-on-year. Net income attributable to owners of parent stood at JPY 43 billion, up 208.7% year-on-year. This was the result of significant special losses incurred in last fiscal year related to COVID-19. We were able to resume operations this fiscal year leading to a significant decrease in special losses incurred and consequently, an improvement in net income. For more detailed information on the item of special losses, please refer to Page 22 of the appendix.

Page 4 discusses first quarter year-on-year change by business segment. Revenues from operations are shown on the left, which were significantly impacted by temporary store closures and limited operations resulting from the COVID-19 pandemic last fiscal year. This translated into a reactionary increase across all business segments with the exception of the financial services business. In the Overseas Convenience Store business, a recovery in consumer mobility translated into an increase in gasoline sales volume and an improvement in merchandise APSD. These contributed to a significant increase in revenues from operations.

Operating income is shown on the right. We registered an increase in operating income in the domestic convenience store business, thanks to an improvement in product sales and also in the specialty store business, thanks to the resumption of sales activities. These drove an increase in operating income. On the other hand, we registered a year-on-year decrease in the Superstore segment, which had seen a surge in demand in the previous fiscal year resulting from the COVID-19 pandemic. As such, on a consolidated basis, we registered a year-on-year increase of JPY 6.1 billion in operating income.

I will now be discussing the results at each of the main operating companies that make up the Seven & i Group. Please turn to the next page. First, I would like to start with Seven-Eleven Japan. The waterfall chart on the left shows the year-on-year change of operating income compared to the period during the state of emergency the previous year, restrictions have been more limited in scope this year.

Additionally, there has been a change in consumer psychology. As such, an improvement in existing store sales, among other factors, allowed us to deliver a year-on-year increase in operating income of JPY 8.1 billion. Additionally, we registered JPY 79.4 billion in EBITDA, a year-on-year increase of 11.8% or JPY 8.3 billion. The graph on the right shows the trend in existing store quarterly sales and in gross profit margin. Existing store sales grew by 3.3% year-on-year in the first quarter, a significant increase.

On the other hand, as shown by the dotted orange line, the state of emergency was once again declared in May. This, combined with unseasonable weather, meant we didn't see a recovery in existing store sales to fiscal year 2020 levels. Regarding preliminary existing store sales figures for June 2021, June 2020 was the final month of the Japanese government's initiative offering a 2% point of return for cashless payments, resulting in a surge in anticipatory demand.

This made for difficult comparables, translating into a year-on-year decrease of 0.3%. However, we believe it is safe to say that, were it not for this reactionary decline, we would have seen a year-on-year growth. The state of emergency has been lifted and existing store sales have recovered to a point exceeding our results in the fiscal year before last.

Regarding gross profit margin, we carried out a campaign in collaboration with PayPay in April. This led to an increase in the sales composition share of cigarettes. This weighed down on gross profit margin. However, gross profit margin, excluding cigarettes, saw an improvement centered primarily around the category of daily products and fast food.

Please turn to Page 6. The graph on the left shows the year-on-year trend in sales, the number of customers and average spending per customer while deploying sales of spaces and promoting products adapted to local needs, allowed us to stage a recovery trend in the number of customers. This number still hasn't returned to levels seen the year before last. On the other hand, average spending per customer is trending at levels surpassing the year before last, and this has had the effect of supporting sales.

The graph on the right shows the sales by merchandise category. Counter products struggled last year, but have since then staged a recovery. However, sales remained below the levels seen 2 years ago. On the other hand, Seven Premium delicatessen, frozen foods and wine and liquor products delivered significant sales growth last year and continued to trend at levels exceeding our performance the year before last.

We, therefore, continue seeing a trend in strategic purchases on the part of consumers, who now spend more time at home in light of telecommuting, stay-at-home demand and social drinking at home. Consumers have shifted to bulk shopping preferably at one location. We have also seen a further increase in demand for home cooking products and growth in food ingredients like fruits and vegetables. These are indicative of an accelerating shift to smaller commercial areas and changes in the way consumers use convenience stores.

Please turn to Page 7. As I mentioned earlier, there has been a change in purchasing behavior and also changes in 7-Eleven patronage. Previously, consumers would visit our stores with the objective of making purchases centered around food. However, against the backdrop of the COVID-19 pandemic, we realized the need to expand our merchandise assortment. In terms of products, consumers are more health and safety conscious and there has been an increase in demand for home cooking products and fresh food products.

Additionally, there is also demand for an assortment of household goods. As such, from December 2020, we started the sales test of products from Daiso, which runs a chain of JPY 100 at discount stores. We carry out these tests at 64 stores in the Shonan area, which we continue to integrate with the intention of further expanding the merchandise assortment we offer.

The graph on the right shows the results of this Daiso products sales test verification at 20 pilot stores. The green line shows the year-on-year change in sales of household goods at these 20 pilot stores while the gray line shows the average year-on-year change in sales of household goods for stores in the West Kanagawa zone, which includes stores in the Shonan area. As you can see, these pilot stores carrying Daiso products delivered a year-on-year sales performance exceeding the zone average. Driving these results is sales growth for household, recreational and cleaning products. Going forward, we would like to address demand for one-stop shopping.

Please turn to Page 8. The graph on the left shows the trend in sales by store location. The red line corresponds to the West Tokyo zone, which is characterized by a preponderance of stores in residential areas. Except for the month of May, these have been able to maintain year-on-year growth and also exceeded the sales performance for the year before that. On the other hand, the green line corresponds to the East Tokyo zone, which is characterized by a preponderance of stores located in office areas.

While sales recovered compared to the period during the state of emergency last year, circumstances remain challenging when compared to 2 years ago. In order to offer a merchandise assortment adapted to changes in the way consumers use convenience stores, we promoted the deployment of updated store layouts. As of the end of fiscal year 2021, we had introduced the new layout 2020 with a larger sales area for alcoholic beverages and approximately 5,000 stores, primarily centered around stores in residential and suburban areas.

We introduced this layout to add a further 1,000 stores during the first quarter of fiscal year 2022. We plan to introduce the new layout to add approximately 12,000 stores by the end of fiscal year 2022. This number represents the total number of stores compatible with the new layout 2020. Additionally, within the process of analyzing the commercial area for stores located at business sites.

We observed that there is demand at these stores for products associated with social drinking at home and home cooking products. We were, therefore, able to observe that there is demand for high value-added products at these stores. In light of this, we introduced a layout adapted to the needs of these commercial areas, add approximately 280 stores during the first quarter. We plan on expanding this layout change to 1,500 stores by the end of fiscal year 2022, and address the fact that stores at business sites are used like those in residential areas.

Next, please turn to Page 9, which discusses the cost structure. The graph on the left shows the trend in the year-on-year change in SG&A expenses in the first quarter. Sales promotion efficiency improved following the migration to sales promotions via the 7-Eleven app. Additionally, we adopted stricter requirements for the opening of new stores and carried out to the closure of unprofitable stores.

These measures allowed us to curb land and building rent. As such, in light of these factors and others, we have been able to curb SG&A expenses, especially fixed costs. While SG&A expenses in the first quarter of fiscal year 2022 grew year-on-year, partially on account of extraordinary factors, they decreased compared to 2 years ago. Helping curb SG&A expenses are our restructuring efforts at head office, which we started in the second half of fiscal year 2020.

Within the scope of these efforts, we promoted accounting, restructuring, store development, personnel optimization and property rental fee optimization. In particular, within accounting restructuring, efforts to go paperless, review work processes and internalize outsourced operations played a big role in reducing costs by JPY 1 billion in fiscal year 2021 compared to fiscal year 2019 levels before the implementation of this cost restructuring plan.

Going forward, we will continue the steady execution of these types of initiatives while striking a balance between reducing fixed costs and incurring sales expenses for the execution of effective sales promotion activities. Through this, we intend to improve profitability.

Page 10 shows the trend in year-on-year income change for franchised stores and discusses measures towards targeting sustainable growth. As shown in the graph, a 1% reduction in royalties starting in September of fiscal year 2018, the introduction of new layouts in the fall of fiscal year 2019 and a revision of royalties starting in fiscal year 2021, among other initiatives, bore fruit in increasing franchised store income.

While these are averages, franchised store income has consistently grown year-on-year. In the first quarter of fiscal year 2022, an increase in existing store sales and other factors led to a significant year-on-year increase in franchised store income, which grew by 12.3%. In order for both franchised stores and the head office to realize the sustainable growth, in fiscal year 2021, we primarily focused on enhancing support for franchised stores by strengthening ties between franchisees and the head office.

This was a defensive move. In fiscal year 2022, we intended to promote location-specific measures and realized top line growth by leveraging our online convenience store services. Additionally, we will also be deepening store counseling and offering measures taking into account each store's location, commercial area and customer demographic information.

Through this, we will be shifting our focus to aggressive support to increase sales and gross profit and thus achieve bottom line growth. Next, I would like to discuss our Overseas Convenience Store operations in the form of 7-Eleven, Inc. Please turn to Page 11. The period between January and March corresponds to the first quarter for 7-Eleven, Inc. As such, this does not incorporate to the results from Speedway, the acquisition of which was completed recently, as previously announced.

Operating income increased, thanks to a positive contribution from merchandise and gasoline. Additionally, while we registered an increase in SG&A expenses, 7-Eleven, Inc. still succeeded in delivering an operating income increase of JPY 1.1 billion. Furthermore, EBITDA stood at JPY 39.5 billion, a year-on-year increase of 7.7%.

The graph on the right shows year-on-year change in existing store sales and gross profit margin. Regarding the former, it has delivered year-on-year growth starting in December 2020, and also growth compared to 2 years ago starting in April. Additionally, while fast food has struggled in terms of the gross profit margin, we registered an improvement in nonalcoholic beverages and processed food.

This translated into a year-on-year increase of 0.1 percentage points in overall GPM. Page 12 discusses the topic of gasoline. The graph on the left shows the trend in the price of crude oil. While WTI has been on an upward trend throughout fiscal year 2021, the metric of cents per gallon, which indicates the gross profit amount per gallon, has remained stable. A significant sales volume increase in the wholesale department, which has a lower cents per gallon margin compared to other parts of the business, translated into a slight year-on-year decrease in overall CPG.

However, an increase in the overall sales volume was enough to offset this decrease in CPG. The fuel margin amount therefore increased by USD 64 million. Furthermore, while fuel sales volume per store posted a year-on-year decrease in the first quarter, starting in April, thanks to increased mobility on the part of consumers, the trend reversed to year-on-year growth.

Please turn to Page 13, where I will be discussing changes in customer behavior as it pertains to the use of convenience stores in the United States following the outbreak of the COVID-19 pandemic. The orange table shows product categories that registered growth during the pandemic. These continue to show growth even now. Examples of these are the product categories of frozen foods, alcoholic beverages and daily necessities.

Additionally, the green table at the bottom shows categories that initially struggled following the outbreak of the pandemic, but which have exceeded 2019 sales results in 2021. Examples of these are the product categories of hot foods, nonalcoholic beverages and processed foods like snacks, et cetera. We believe this increase in new customers with the COVID-19 pandemic as a catalyst and changes in the way consumers use convenience stores resulting from a recovery in mobility to be stable rather than being a temporary phenomenon.

As such, we believe this will continue making a positive contribution to sales, even after the impact of the COVID-19 pandemic diminishes. Please turn to the next page. The graph on the left shows the monthly sales trend for 7NOW, 7-Eleven, Inc.'s delivery service. Monthly sales for May 2021 have increased approximately tenfold from January 2020 prior to the outbreak of the COVID-19 pandemic.

The number of transactions per day per store stood at 15.6%, 3.9x the number in January 2020. The average basket size stood at $14.27, 1.7x the in-store basket amount. This underscores the significant demand for delivery services. As of the end of May 2021, we offer 7NOW at 3,890 stores and would like to expand this number to 6,500 stores by 2025.

I would now like to direct your attention to the right-hand side of the page, which details our approach to the restaurant business. Out of approximately 1,000 locations we obtained as a result of the acquisition of Sunoco in fiscal year 2018, approximately 360 were gas stations with adjacent to Laredo Taco locations, which is a Mexican fast food and restaurant chain.

By leveraging this know-how, carrying out in-store food preparation allowing us to provide high-quality products to customers and by offering delivery and drive-through services, we will seek to acquire the ability to compete in the fast food restaurant industry and aim to expand sales and profit. Currently, in addition to Laredo Taco, we also operate to raise the Roost locations, a fried chicken fast food restaurant chain.

In fiscal year 2020, lift to APSD sales for stores with adjacent Laredo Taco locations stood at USD 6,395, approximately USD 1,300 higher compared to stores without restaurant locations. In fiscal year 2021, we plan to increase the restaurant store count to approximately 600 stores.

Next, I would like to discuss the results at Ito-Yokado. Please turn to Page 15. In terms of operating income, Ito-Yokado registered a reactionary year-on-year increase in sales as temporary store closures and limited operations resulting from the declaration of a state of emergency last year made for a relatively easier comparables. On the other hand, a lower gross profit margin for food products and other factors translated into a year-on-year operating income decrease of JPY 500 million.

SG&A expenses increased by JPY 1.3 billion. However, we introduced a second career system starting in the current fiscal year as part of personnel measures within the scope of structural reform. This accounts for approximately JPY 1 billion in SG&A expenses.

I would now like to direct your attention to the right-hand side of the page to the table of factors in year-on-year change by store format. Stores that implemented structural reforms represented an operating income tailwind of JPY 1.2 billion. Starting in 2016, as of the end of May 2021, we had renovated 66 stores as part of our structural reform efforts.

The COVID-19 pandemic has brought about changes in consumer needs, and we are in the process of revamping sales spaces to better match the needs of smaller local commercial areas. These efforts have already partially borne fruit. Going forward, we will be carrying out a thorough commercial area analysis of stores to undergo reform and leverage and apply the know-how we have accumulated over the years within the scope of our store reform efforts.

Page 16 discusses the main efforts to improve productivity at Ito-Yokado. Ito-Yokado is currently promoting efforts, leveraging the use of AI. Allow me to discuss one such initiative, which aims to both realize revenue growth and enhance operational efficiency. Through this, we believe we can achieve an improvement in overall productivity. Our Ito-Yokado Hikifune Store is an example of a pilot store in which we are caring out verification tests involving representative initiatives like AI-based production planning, AI-based ordering, electronic price labeling and shopping cart to checkout services.

The graph on the left deals with our AI-based production planning initiative, which we deployed to the delicatessen sales floor space in June 2020. This translated into an increase in both sales and gross margin. Regarding the use of AI-based ordering and electronic price labeling for processed foods and daily foods, this has streamlined the ordering process and the process of updating prices.

These translated into a decrease in working hours, which in turn allowed us to curb salaries and wages. Additionally, while our shopping cart checkout service is a recent addition, which was only introduced in May of this year. As you can see, this initiative is making a contribution to reducing working hours spent at food checkout. Going forward, we will continue to verify the effectiveness of measures towards realizing further improvements in productivity and aim to realize higher sales and levels of operational efficiency.

Please turn to the next page, pertaining to our results at Sogo & SEIBU. Sales increased year-on-year following the negative impact of temporary store closures and limited operations at a large number of stores last year. However, in terms of SG&A expenses, last fiscal year, we were able to classify fixed expenses as special losses from temporary store closures and limited operations.

These did not recur this fiscal year leading to a year-on-year decrease in operating income of JPY 1 billion. As shown on the table to the right, which shows factors in year-on-year change in operating income by business segment, the store operating business continues facing significant headwinds. Last fiscal year, we registered an increase in orders for masks and emergency supplies against the backdrop of the pandemic.

These did not recur this fiscal year, leading to a reactionary decrease in operating income from corporate sales. Against this backdrop, business involving affluent customers, a non-store business we have been focusing our efforts on, delivered a strong performance compared to in-store sales. We will be strengthening our sales capabilities targeting affluent customers and raising the overall sales baseline.

Lastly, please turn to Page 18, which deals with financing for the recently announced completed acquisition of Speedway and an increase in the cash and deposit balance in the first quarter. As you are aware, the first quarter for the domestic business corresponds to the months of March, April and May. For 7-Eleven, Inc., this corresponds to the months of January, February and March.

As such, while the deal for the acquisition of Speedway was completed in May of 2021, this difference in accounting periods translated into an increase in the cash and deposits balance as of the end of the first quarter. Allow me to start with the topic of financing. The table on the left-hand side of the page shows the breakdown of financing carried out in Japan and in the United States for the acquisition of Speedway.

This started with a bond issue on the part of Seven & i Holdings in December 2020 and concluded with borrowing on the part of SCI in May 2021 for a total amount of JPY 2,293.2 billion. The table to the right shows the interest-bearing debt and cash and deposits balance as of February 28, 2021 at May 31, 2021. Between these 2 dates, the interest-bearing debt balance increased by JPY 1,219.9 billion, primarily on account of an increase in bond issuance.

This is shown on the third line from the top of the table on the left, as a bond issue from SCI in the amount of USD 10.95 billion, which was incorporated into the balance sheet in the first quarter. Furthermore, the JPY 832 billion in bond issuance and borrowings carried out by Seven & i Holdings is reflected in the interest-bearing debt and cash and deposit balance as of February 28, 2021.

Next, I would like to discuss cash and deposits, the balance of which had increased by JPY 1,377.9 billion between February 28, 2021 and May 31 2021. SCI carried out borrowings totaling USD 2.25 billion in May, which corresponds to the second quarter for 7-Eleven, Inc. The payment of the amount for the acquisition of Speedway was completed, but since this was not reflected in the results for the first quarter, we registered an increase in the cash and deposit balance.

This concludes today's financial results presentation covering the first quarter. Thank you for your time.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]