Seven & i Holdings Co Ltd
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Seven & i Holdings Co Ltd
Earnings Call Analysis
Q2-2024 Analysis
Seven & i Holdings Co Ltd
Under the leadership of President Isaka, Seven & i Holdings presented its Q2 financial results for FY2023, illustrating a mixed financial canvas. Interestingly, while the firm experienced a dip in operating revenues to JPY 5,547.0 billion, 1.8% below the previous year, it painted a contrasting picture with its operating and ordinary income, which saw record highs. Specifically, operating income rose to JPY 241.1 billion, 2.7% up from the prior year, and ordinary income climbed to JPY 226.8 billion, a 3.2% increase. This divergence primarily stemmed from North America's fuel business lagging, while a robust domestic performance underpinned the record results, leading to an adjusted net income of JPY 143.9 billion.
In a strategic move, Seven & i offloaded its participation in Sogo & Seibu, embracing a renewed focus on capital efficiency and growth prospects. This divestiture enabled the recapture of over JPY 100 billion in capital, releasing the conglomerate from approximately JPY 125 billion in debts tied to its consolidated balance sheet. The maneuver reflects a broader ambition to deliver enhanced shareholder value through better capital allocation and a streamlined business portfolio. Moreover, the corporation has reassured investors of interim dividends staying stable at JPY 56.5 per share.
An ambitious blueprint for fiscal year 2025 foresees a sweeping transformation of superstore operations within Tokyo's bustling hub. This endeavor is off to a promising start, with first-half FY2023 EBITDA reaching JPY 6.4 billion, surpassing both previous year's figures and initial projections. By focusing on food over apparel and corralling its operations to high-density areas, Seven & i aims for a significant optimization, targeting an eventual EBITDA of JPY 55 billion and a Return on Invested Capital (ROIC) of over 4%. A tapering of SG&A expenses, productivity uplifts, and infrastructural investments comprise the pathway to reach a competitive EBITDA margin of 6.8% by FY2025, positing the firm's position alongside peers.
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Good afternoon, everyone. My name is Isaka, President and Representative Director of Seven & i Holdings. Allow me to express our sincerest appreciation for your continued understanding and support for the Seven & i Group's corporate activities. And to thank you for taking the time off your busy schedules to participate in today's financial results presentation for the second quarter of fiscal year 2023.
Shown on this slide is today's executive summary. Operating and ordinary income achieved record highs in the first half of fiscal year '23. The transfer of shares of Sogo and Seibu was completed on September 1, as we continue making steady progress on strategic initiatives such as the review of the business portfolio. The same can be said in regard to the fundamental transformation of superstore operations, Tokyo Metropolitan area as we make steady progress toward our stated fiscal year 2025 target.
I will be going over the details later on in today's presentation. Next is today's agenda. CFO, Maruyama, will be going over the consolidated results for the first half of the fiscal year and the fiscal year 2023 forecast. After which, I will be discussing the Seven & i Group's management policy.
I would now like to yield the floor to CFO, Maruyama.
Hello, everyone. My name is Maruyama, allow me to go over the consolidated results for the first half of the fiscal year and the fiscal year 2023 forecast. First are the consolidated results highlights for the first half. Revenues from operations stood JPY 5,547.0 billion, corresponding to 98.2% of the same period of the last fiscal year's results and 99.9% of the initial plan. Operating income stood at JPY 241.1 billion, corresponding to 102.7% of the same period of the last fiscal year's results and 102.2% of the initial plan. Ordinary income stood at JPY 226.8 billion, corresponding to 103.2% of the same period of the last fiscal year's results and 103.1% of the initial plan. As you can see, while revenues from operations registered both a year-on-year decrease and their performance versus the initial plan primarily on account of the fuel business in North America weighing down on results, a strong performance from domestic operations drug results and allowed us to post record results in terms of both operating and ordinary income.
We recorded special losses derived from the transfer of shares of Sogo and Seibu. So on account of this, net income attributable to owners of parent came to JPY 80.2 billion, corresponding to 59.0% of the same period of the last fiscal year's results and 58.1% of the initial plan. With that being said, on an adjusted basis, excluding the impact of the transfer of shares of Sogo and Seibu and Barneys Japan, net income stood at JPY 143.9 billion, corresponding to 105.8% of the same period of the last fiscal year's results and 104.3% of the initial plan. These results indicate a steady increase in the Seven & i Group's earnings power and additionally, a weaker yen had a positive impact of [ net ] JPY 7 billion on operating income.
This slide shows year-on-year change on a per segment basis for revenues from operations operating income and EBITDA, overseas convenience store operations saw record fuel cents per gallon levels in the first quarter of fiscal year 2022, brought about by temporary nonrecurring factors. Consequently, in fiscal year 2023, [ citing ] income suffered a significant year-on-year decrease in the absence of these factors. With this decrease becoming a cause for concern for stakeholders, However, since per gallon in the second quarter this year, significantly exceeded levels during the same period last year, and this allowed us to significantly reduce the decrease in operating income. Additionally, domestic operations, especially domestic convenience store operations as in the first quarter remained strong and drove overall growth.
Furthermore, domestic and overseas convenience store operations drove EBITDA, which grew by JPY [ 28.1 ] billion on a consolidated basis. This slide can see the aforementioned results for the segments. This time compared to the plan. Operating income and EBITDA realized results exceeded the plan across all segments with the exception of overseas convenience store operations. Next are the fiscal year 2023 forecast. I would now like to go over the main factors behind the revision to the consolidated financial forecast for fiscal year 2023. On September 1, we released an assessment of the impact of the completion of the transfer of shares of Sogo and Seibu on the company's performance. And furthermore, revised the annual exchange rate forecast from JPY 131 to the U.S. dollar to JPY 137. Today's revision to the forecasts as it pertains to consolidated revenues from operations to sales for 7-Eleven Japan and sales and gross profit for 7-Eleven, Inc. was done in light of the trend in fuel retail price and merchandise sales results in convenience store operations in Japan and the United States.
In particular, there remains a great deal of uncertainty in terms of the outlook for the U.S. economy and consumer spending as well as in terms of the ForEx market. Furthermore, fluctuations in each relevant factor have both a positive and negative impact on profits. So for this reason, as it stands the forecast for consolidated operating income and all other profit line items remain [ unchanged ]. Information within the scope of the consolidated financial forecast for fiscal year 2023, we have revised revenues from operations to JPY 11.432 billion, corresponding to 96.8% of the same period of the previous fiscal year's results.
The operating income forecast remains unchanged at JPY [ 525 ] billion corresponding to 103.6% of the same period of the previous fiscal year's results as does the net income forecast at JPY 230 billion, corresponding to 81.9% of the same period of the previous fiscal year's results.
Furthermore, on an actual results basis, excluding the impact of special losses, we expect JPY 293.7 billion in net income corresponding to 104.6% of the same period of the previous fiscal year's results. We, therefore, expect to realize steady growth.
Please allow me to use this opportunity to go over the purpose and outcomes following the completion of the transfer of shares of Sogo and Seibu on September 1. Sogo and Seibu ended with a deficit in the last 4 years and also owed approximately JPY 300 billion in debt, which included financing from the Seven & i Group. Within the scope of the Seven & i Group's strategy, we had deemed it unfeasible for us to continue allocating management resources to Sogo and Seibu. Give us and considering the Fortress Investment Group's extensive expertise in the areas of real estate and corporate turnarounds as well as the vast capital resources as disposal we deemed and trust the operation of Sogo and Seibu to them as the best option available. More specifically, we determined the Fortress Investment Group should be the best option available for Sogo and Seibu to pursue a new vision as a department store in terms of an improvement to its growth prospects and capital efficiency. As well as in terms of the continuation of employment to end of the business itself. The sale of Sogo & Seibu impacted the Seven & i Group in 2 ways. First, of the approximately JPY 170 billion in group finance extended into Sogo and Seibu forgave JPY 91.6 billion of this debt However, taking into account the amount left after this debt forgiveness and considering tax effects, we can actually recover over JPY 100 billion in capital. Second, the JPY 125 billion in domestic bank financing obtained by Sogo and Seibu will no longer feature in the group's consolidated balance sheet, reducing the group's consolidated liabilities and improving its financial position.
In light of this, the closing of this sale represents a significant opportunity for Sogo and Seibu in that it allows it to free itself from a large financial burden to reembark on a growth trajectory. For the Seven & i Group 2, while it incurred a temporary nonrecurring special loss, the sale allows us to further improve corporate value and to the shareholder value, primarily through improvements to capital efficiency.
I would now like to detail our capital reallocation plan following the recovery of capital after the sale of Sogo & Seibu. Domestic and overseas convenience store operations are the main generators of operating cash flow. We will be reallocating this operating cash flow and the cash inflows resulting from the transfer of shares of Sogo and Seibu to businesses with strong growth potential with the special enters on convenience store operations. We also intend to use this cash to reduce the interest-bearing debt balance, thus improving our financial position and to enhance shareholder returns, including share buybacks. We will be revealing the details of this shareholder return strategy in a timely manner as soon as a decision is finalized on this front.
Furthermore, we will be distributing an interim dividend of JPY 56.5 per share, as stated in the initial plan. This concludes my presentation. I would now like to yield the floor to President Isaka, who will be going over the Seven & i Group's management policy.
This is Isaka speaking. I would now like to go over the Seven & i Group's management policy. This slide shows the status of progress of the strategic initiatives within the scope of the medium-term management plan as outlined on previous occasions. The transfer of shares of Sogo and Seibu was completed on September 1. We believe this transfer marked a new start toward regrowth for Sogo and Seibu with support from the Fortress Investment Group. Additionally, within the scope of the fundamental transformation of the superstore operations, as announced on March 9 of this year, the merger between Ito-Yokado and York was completed on September 1. I will be going over the specifics of the Seven & i Group's plan toward the fundamental transformation of superstore operations in the Tokyo Metropolitan area.
We will be carrying out to the fundamental transformation of superstore operations in the Tokyo metropolitan area with a fiscal year 2025 target. But first, allow me to go over the situation for this business as it currently stands in fiscal year 2023, the first year of this strategy. In the first half, EBITDA stood at JPY 6.4 billion, corresponding to 109.2% of the same period of the last fiscal year's results and 139.5% of the initial plan. We furthermore expect a strong performance for the full fiscal year, and therefore, I believe this fiscal year will mark a strong start toward the execution in earnest of fundamental transformation. This slide is a reposting for the presentation materials used in the presentation held on March 9, 2023, covering the results of group strategy reevaluation. We will be carrying out the fundamental transformation of superstore operations by executing fundamental initiatives 1 through 4, coupled with monitoring with visibility as shown in number 5. Through this, we seek to achieve an EBITDA of JPY 55 billion and 4% or more of ROIC for Tokyo Metropolitan Area Superstore operations in fiscal year 2025.
Next, I will explain the process for implementing a fundamental transformation of superstore operations. First, we formulated in a top-down fashion, targets to be achieved and then carefully reviewed and considered approximately 4,800 initiatives generated in a bottom-up manner, refining this number down to approximately 2,500 initiatives to be implemented and executed. Within these, we further prioritized initiatives with a higher probability of success and larger benefits to be derived. Furthermore, the formulation of this action plan for fundamental transformation involved discussions starting with the preparation and to design periods carried out by the Strategy Committee, which consists exclusively of independent outside directors. The 4 fundamental initiatives are as follows: the complete exit from the self-operated apparel business, accelerated focus on the Tokyo metropolitan area with additional store closures, consolidate superstore operations in the Tokyo metropolitan area and established group strategic infrastructures. At last preparations are in place to execute to these initiatives.
Process management will be carried out by external advisers and monitoring by the Board of Directors and the Strategy Committee with all operating companies working as a cohesive unit in the execution of these initiatives.
I will now be discussing the strategies for Tokyo Metropolitan Area superstore operations to achieve JPY 55 billion or more in EBITDA and 4% or more of ROIC in fiscal year 2025.
Next is the fundamental transformation road map. This slide shows the major KPIs towards the execution of 4 fundamental initiatives. As the major effects to our P&L resulting from their execution. We will be exiting the apparel business to focus on food so that we can concentrate on more favorable businesses and areas. Additionally, we will be making efforts to focus Ito-Yokado store locations on high population density areas. As such, by fiscal year 2025, we expect to have carried out a complete withdrawal from our self-operated apparel business and to operate in 93 Ito-Yokado stores. Furthermore, we will be making steady progress in the PMI process for Ito-Yokado and York, which completed a merger on September 1. In doing so, we expect to be able to significantly reduce SG&A expenses, and we will also seek to improve the labor share through the execution of measures to improve productivity. In terms of the growth strategy, by leveraging strategic investment infrastructure like our Processing Center and Central Kitchen, raising the sales share of delicatessen merchandise and offering greater quality merchandise with greater frequency in an efficient manner, we aim to grow not just sales, but also improved gross profit. Concurrently, we will also work to improve store operation productivity and further raise profitability at our company overall.
By achieving these major KPIs, we expect to achieve the 4 major effects outlined on Slide 17. Shown here are 2 specific examples carried out within the 4 major initiatives I mentioned just now. Shown on the left is an example within major initiative number one, which calls for the complete exit from the apparel business for us to increase our focus on food. Drugstore merchandise and cosmetics and food merchandise go very well together. So within this initiative, we are carrying out food and drug initiatives with sales paces for these merchandise categories, by creating sales spaces seamlessly integrating food merchandise with drugs to our merchandise and cosmetics, we seek to encourage shoppers to browse more, sending foot traffic between these merchandise categories, we have already implemented this Food and Drug initiative at 30 stores which registered a first half of the fiscal year sales performance corresponding to 101.8% of the same period of the last fiscal year's results. These results make apparent to the benefits of this initiative and we have furthermore seen a positive impact on customer foot traffic. We expect to expand this initiative to 86 stores by fiscal year 2025. The examples shown on the right pertains to major initiative number three, which refers to productivity improvements through the consolidation of Superstore operations in the Tokyo Metropolitan area. Within this scope, installing self-checkout counters allows us to make it more convenient for customers who no longer have to wait in line at the cash register while also making it possible to allocate cashier staff to the manufacturing of food and to sales. In other words, this makes for the more efficient use of human resources. And through this, we will seek to improve Star productivity. We have already installed these self-checkout counters at 50 stores, and the results show JPY 116,000 in food sales per man hour for higher productivity compared [ to ] stores not yet using this system. We intend to adopt self-check counters at all Ito-Yokado stores by fiscal year 2025. Reducing total labor hours and improving profitability.
I would now like to quantify the expected positive contribution to EBITDA stemming from the major effects outlined on Slide 17. Effects related to expenses, namely store expense reduction, profit and loss impact from store closures and SG&A optimization account for over 80% of the plan to grow EBITDA. As such, the steady execution of initiatives to reduce expenses increases the probability of our being able to achieve our targets. Additionally, in terms of the effects of sales and gross profit, since we expect changes in the business climate, we have only included initiatives with a high probability of success in the forecast. In other words, we have put together a rather conservative forecast with upside potential. So based on this, we will continue carrying out steady efforts toward achieving our fiscal year 2025 EBITDA target of JPY 55 billion.
The waterfall chart on the left represents our approach to investment capital related to the fundamental transformation of superstore operations in the Tokyo metropolitan area. As we have mentioned on previous occasions, the capital necessary for this transformation will be sourced from cash flows generated within Tokyo Metropolitan area superstore operations. With the breakdown of the use of this capital being as shown on this slide.
As shown on the right-hand side of the slide, we seek to achieve our stated right target through the steady execution of a number of initiatives. Going forward, we will continue to steadily improve operating income, enhancing this business' earnings power in order to achieve our stated target for fiscal year 2025 and in order to deliver growth in fiscal year 2026 and beyond, we expect to record some special losses through to fiscal year 2024, derived from the execution of fundamental structure with one.
Because of this, we expect net losses, the numerator in its equation for fiscal year 2023 and 2024, followed by a significant improvement in fiscal year 2025 and beyond. Additionally, we will seek to optimize invested capital, the denominator in its equation, by narrowing down the business domains and areas we operate in, as a result, while we expect ROIC to be negative for fiscal years 2023 and 2024, we will work to achieve our ROIC target of 4% or more by fiscal year 2025.
By executing each of the various initiatives I have mentioned thus far, we will be improving EBITDA and simultaneously transforming the profit structure to allow us to achieve sustainable growth in fiscal year 2026 and beyond. We will work to improve the EBITDA margin to reach 6.8% in fiscal year 2025, which is a level more or less comparable to that of other companies' GMS operating companies and supermarkets operating companies. So we don't view this as a particularly high target. An EBITDA margin of 6.8% is not the final target. As we believe it is possible to improve profitability with an eye toward growth in fiscal year 2026 and beyond and enhance our competitiveness.
We view this fundamental transformation to be undertaken through to fiscal year 2025, nearly as a stepping stone. The vertical axis represents the EBITDA margin while the horizontal axis represents revenues from operations. The bubble size is equivalent to EBITDA size. And in this chart, we have plotted various domestic supermarkets and GMS companies. Over the long term, we expect a number of structural changes to take place within the domestic market in Japan. And in order to deliver sustained growth amidst these changes, by fiscal year 2025, we will have positioned ourselves as a player in the country, boosting both high profitability levels and a large operating scale. Within this scope, we will raise our competitiveness, putting in place a foundation toward growth in fiscal year 2026 and beyond for the superstore business, which includes York-Benimaru. The fundamental transformation of superstore operations in the Tokyo Metropolitan area is therefore a vital initiative in achieving this, and we will be working to deliver progress on this front.
I would now like to discuss the status of progress as it pertains to the Strategy Committee. The Strategy Committee consists exclusively of independent outside directors and is tasked when monitoring the progress in the execution of the group's strategic priorities as well as with the continued comprehensive and objective review of the optimal group portfolio structure and strategic alternatives. The Strategy Committee was therefore established with the objective of making recommendations to the Board of Directors based on these activities to enhance medium- to long-term corporate value. So far, the Strategy Committee has convened a total of 10x to discuss group's strategic priorities like the growth strategy for domestic and overseas convenience store operations the transformation of superstore our operations and our DX strategy as well as optimal group portfolio structure and strategic alternatives. The Strategy Committee, therefore, continues active and frequent discussions on these topics. In particular, the committee has carried out 4 monitoring sessions thus far on the topic of transformation in superstore operations, starting from the preparation and to design periods of this fundamental transformation. The committee has plans to continue transparent monitoring efforts as we move into the implementation period. Simultaneously, it will also continue considering the optimal group portfolio structure in accordance with the degree of progress being made. The Strategy Committee shares its analysis and evaluation status with all directors on the Board as necessary, ensuring proper communication.
I would now like to discuss the Seven & i Group's domestic and overseas convenience store operations starting with 7-Eleven, Inc. Before delving into the specifics of our operations in this business, I would first like to discuss the macroeconomic environment as it pertains to merchandise and fuel in the United States. The graph on the left shows the trend in the consumer price index while the graph on the right shows the trend in the price of crude oil and fuel retail price. As shown by the solid line, last year saw a large increase in the CPI in the range of 7.5% to 9.1%. This year, too, while the pace has slowed down somewhat, the CPI nevertheless increased in the range of 6.4% to 3.0%. As such, inflation remains high and its impact on consumer spending is a cause for concern. Regarding the price of crude oil, geopolitical turmoil in early 2022 led it to a way historic jump in prices, which went from USD 83.2 to USD 114.8 per barrel. While crude oil has gone down from these historic levels, it nevertheless continued trending at elevated levels of USD 78.1 to USD 70.3. The retail price of fuel too remains high. The United States continues facing price inflation, and it is in this light as well as in the light of a very challenging economic climate, discouraging consumption, then I would like to break down the results for the first half of the fiscal year.
The graphs on this slide detailed the trend in merchandise sales and gross profit and fuel sales volume and total cents per gallon for 7-Eleven, Inc. The line graph in orange on the left-hand side of the slide shows existing store sales growth, while the vertical bars in green represent year-on-year change in gross profit margin. We are seeing steady results from our efforts to enhance proprietary products with a special focus on fresh food and private brand merchandise. As a result, existing store sales grew by 4.7% year-on-year in the first quarter and 1.7% in the second quarter even in the face of depressed consumer spending. Gross profit margin, too, continues to improve, growing by 1.0 percentage points in the first quarter and by 0.9 percentage points in the second quarter. I would now like to direct your attention to the graph on the right, with the orange line representing fuel sales volume growth per store and the green bars representing the year-on-year change in total cents per gallon for the fuel business.
Last year, Russia's invasion of Ukraine impacted the crude oil market. This, coupled with inflation, led to historic record highs in cents per gallon. It was against this backdrop that cents per gallon decreased significantly in the first quarter of fiscal year 2023. But retail cents per gallon since then improved significantly in the second quarter. Reaching a level of [ $0.040 ] higher than the same period last fiscal year. With that being said, fuel gross profit in the first half of the fiscal year was impacted by the decrease in the first quarter. Ultimately coming in at negative USD 255 million.
This slide shows the trend in indicators in retail operations within the fuel business. The vertical bars represent fuel sales volume per store with the red line showing retail cents per gallon. Retail cents per gallon registered a significant year-on-year decrease in the first quarter of fiscal year 2023, following historic record levels last year. However, it showed a recovery trend in the second quarter for a cumulative first half performance in line with last year's results. As such, while fuel sales volume in the second quarter in isolation decreased by 3.5% year-on-year, the retail gross profit amount exceeded last year's levels. Retail cents per gallon is determined by a confluence of factors such as the crude oil market, the retail market, changes in the economic climate, et cetera. This translates into high levels of monthly and quarterly volatility was taking into account the economic climate in the United States and the environment we operate in, we believe that over the medium term, profitability levels for the fuel business will remain above pre-COVID levels. Additionally, starting in August of this year, we now disclose cents per gallon results on a quarterly basis prior to the earnings announcement. The figures for the third quarter will be published on our company website on November 15. So we invite you to review these if you have the time.
The table on the left shows a year-on-year comparison for the item of selling, general and administrative expenses. Selling, general and administrative expenses stood at approximately USD 4.6 billion in the first half for a year-on-year increase of 1.3%. In reality, we view this as a positive in that despite inflationary pressures in the U.S. economy pushing up costs, we were nevertheless able to contain this increase at 1.3%. Thanks to a review of expenses and efforts to reduce expenses carried out by the Cost Leadership Committee.
This brings us to the waterfall chart showcasing the change in operating income found on the right-hand side of the slide. The fuel business registered a significant profit decrease of JPY 31.4 billion, following historic conditions in the market for gasoline last year. Yet despite this, we carried out strategic initiatives related to merchandise and these started bearing fruit for a positive contribution to operating income of JPY 20.2 billion. As a result of this, first half operating income on a Japanese yen basis grew by JPY 470 million to JPY 166.6 billion.
I would now like to discuss the external environment against which we run our convenience store operations in North America. And the initiatives we executed. As you are aware, while the U.S. economy has delivered some level of growth starting in early 2023, the consumption environment has been nothing short of challenging. A number of factors have been weighing on consumers' financial position and that inflation has pushed costs up. The Federal Reserve has raised interest rates and the Supplemental Nutrition Assistance Program, which had been rolled out as an economic stimulus package during COVID ended in February. The personal savings rate has on a declining trend in recent months. coupled with an increase in the credit card delinquency rate. And these data points underscore more defensive spending habits on the part of consumers. Against this backdrop, we are seeing changes in consumer behavior, such as, for example, strong demand for affordable, high-quality food and beverage and for competitively priced private brands. Also on the rise is the desire on the part of consumers to purchase competitively priced merchandise in a convenient way using their smartphones against the backdrop of shift in focus toward value. 7-Eleven, Inc. views these changes in the external environment and consumer behaviors has an opportunity to expose a greater number of consumers to our merchandise offerings. Within this scope, we carried out a variety of value promotions through which we advertised the appeal of our fresh foods as shown on the top right-hand corner.
Fresh food existing store sales grew by a significant 8.8% on a year-on-year basis in the first half. Additionally, we also make available a fuel price log program through the 7-Eleven app to customers fueling at the pump and issue coupons for fresh food and beverage offerings through which we encourage customers to visit and spend at stores. 57% of fuel price lock users purchase items in store and have a store visit frequency, 90% higher than that of regular 7 rewards members. Meaning we have been able to observe positive aspects associated with this program. We, therefore, seek to respond to the current challenging consumption environment by enhancing our offering of proprietary products and by leveraging digital technologies to drive in-store trips.
Regardless of the business climate, we view enhancing proprietary products as being vital as an important effort to enhance the value chain toward the development of high-quality fresh food, we enlisted the help of Warabeya and started operations at our new Virginia commissary on September 11, 2023. And this commissary manufactures high-quality products like the ones shown here on the bottom left-hand corner of the slide. As shown on the top right-hand corner, as of the end of September, Warabeya distributed 26 items to 278 stores and the relevant merchandise subject categories, which include these products showed sales growth of 28% compared to prior to their introduction. Furthermore, we have plans to expand distribution of Warabeya products to approximately 1,300 stores as soon as possible in fiscal year 2023. As shown on the vertical bar graph at the bottom, we did the scope of the medium-term management plan. We plan to raise the sales composition percentage for proprietary products including fresh food, proprietary beverages and private brands to 33.5% by fiscal year 2025. And furthermore, we will also aim to increase the merchandise average per store day.
I would now like to discuss 7-Eleven Japan. The graph on the left shows the trend in existing store sales growth percentage and change in gross profit margin. Initiatives such as merchandise development, leveraging 7-Eleven Japan's strengths and this is promotion of fair initiatives have been successful, allowing us to grow existing store sales by 4.5% on a year-on-year basis in the second quarter and improved gross profit margin by 0.2 percentage points. Additionally, merchandise average daily sales per store across all stores in the first half of the fiscal year exceeded JPY 700,000 for the first time in company history. And we believe this is proof that the initiatives we have been carrying out have been well received by consumers. Going forward, we expect changes in the external environment to translate into changes in consumer preferences. We will therefore work diligently to anticipate and identify these changes and continue to incorporate them into our merchandise offerings and sales spaces.
The table on the right pertains to selling, general and administrative expenses. We resumed merchandise exhibitions held physical venues which we had halted during the COVID-19 pandemic and also recorded expenses related to the company's 50th anniversary. These factors resulted in an increase in advertising expenses and this was accompanied by higher utility expenses like electricity as overall selling, general and administrative expenses grew by 4.6% year-on-year. With that being said, we are confident that holding merchandise exhibitions in physical venues allows us to better communicate our strategies and policies to franchise stores, leading to a further improvement in sales capabilities. Going forward, while we expect increases in costs due to inflationary pressures, we intend to continue management taking into account a cost-benefit analysis of each initiative.
As you can see from the waterfall chart on the left, higher sales and gross profit margin offset the increase in selling, general and administrative expenses. Allowing us to significantly grow operating income in the first half of the fiscal [ year ] by JPY [ 12 ] billion. This wasn't limited to head office operations as income of franchised stores, too, is on a steady upward trend, growing by 7.8% year-on-year.
I would now like to go over the status of the 7Now delivery service operated by 7-Eleven Japan. As of the end of August, 7Now was available at approximately 4,700 stores. And as you can see from the graph on the left, sales associated with this service continue a steady climb. The bottom left-hand corner shows the results of a data study of [ 790 ] members, who also make use of our 7Now service available at approximately 4,700 stores. You can see the change in total spending for customers going from making in-store purchases only in fiscal year 2022 to making both in-store purchases and using 7Now in fiscal year 2023. As you can see, in-store purchase levels remain almost the same with the amount spent on 7Now added on top of that, indicating that users have different use cases for in-store and 7Now purchases. As you can see from the green horizontal bar graph on the right of the top 50 items by sales volume, proprietary products account for a very significant 76% in what is a very telling data point. Additionally, of the top 10 items, 5 are items prepared in store, such as Croquettes and Corn Dogs shown in orange. We believe this data indicates that 7Now was viewed by consumers as serving both the needs of people looking for food delivery services and stocking up on products. And this represents a use case completely different from the types of e-commerce seen so far. Strengthening proprietary merchandise is a necessity also in our delivery service and we will be carrying out efforts to offer nationwide this delivery service offering food items freshly prepared in store, a service unique to 7-Eleven.
We released the 7Now app on September 5, with the objective of further improving user convenience. As you can see from the graph on the bottom left-hand corner, the app has registered strong download numbers, garnering it as of October 4, the #1 place in the category of food and drink which includes apps by prominent fast food chain and delivery services. Additionally, as shown on the top right-hand corner, the release of the app allowed us to improve the conversion rate by 20%. We already offered high-quality customer experience value in the form of real-time inventory linkage into delivery in 30 minutes at the earliest and the lineup of high-quality proprietary merchandise only available at 7-Eleven. The release of this app allows for seamless linkage from the 7-Eleven app and improved operability. And we believe this is the reason behind the high conversion rate.
As shown on the bottom right-hand corner, sales per day for 7Now increased following the release of the app. What's more, in early October, [ GAP ] became a hot topic on social media with sales per day growing 3.1-fold compared to [ 2 ] sales in August. We have sought to leverage [ 7iD ] to deepen our relationship with our customers, allowing us to address latent needs. And we believe we have indeed been able to achieve this. The release of this app has translated into usability improvements, and we will be working to further improve mechanisms, incentivizing users to use our app more and more by means of offering promotions and other benefits. What's more, we will be expanding this service nationwide. We have plans to expand 7Now coverage to 12,000 stores this fiscal year into all stores next fiscal year. This is expected to result in a sales increase of several dozen billion annually.
Last, we would like to hold the 7 Seven & i Group's first IR Day event titled IR Day 2023. Over the years, I have had the opportunity to use these financial results presentations as a venue to share with stakeholders our group's business strategy. However, we execute a large number of strategic initiatives, making it impossible to condense everything into these quarterly results presentations. It was against this backdrop that we made the decision to hold a new type of event twice a year. During which we'll be expanding on our group's business strategy initiatives to be carried out over the medium to long term, including ESG initiatives, policies, et cetera, and sharing this information with domestic and overseas investors and analysts to the better understanding of our company. During our IR day, the heads of each operation will be going over various initiatives. With the first of these events scheduled for Tuesday, October 31. So we greatly welcome your interest.
This concludes today's presentation.