Seven & i Holdings Co Ltd

TSE:3382

Earnings Call Transcript 2021-Q3

[Ryuichi Isaka, executive]

Happy New Year, everyone. My name is Isaka, President and Representative Director of 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 third quarter of fiscal year 2021. We are constrained by time limits, so without further ado, I would like to begin today's financial results presentation.

Page 2 contains today's agenda. We will start by discussing the results for the third quarter of fiscal year 2021, after which we will be discussing the revision to the full year forecast, a revision made taking into account the company's performance through to the end of the third quarter. Lastly, we will be discussing initiatives by the Seven & i Group towards sustainable growth going forward and our approach to this topic.

I would like to start with the results for the third quarter. Please turn to Page 4. Page 4 discusses the trend in year-on-year change in existing store sales for each business category. Shown on the upper-left corner is the Convenience store business in Japan and in the United States. The orange line represents existing store sales for Seven-Eleven Japan. We registered a rush demand in the month of September in anticipation of the tobacco price hike, which took place in October. This, among other factors, led to year-on-year existing store sales growth.

However, with a view towards preventing the spread of COVID-19, we canceled large-scale sales promotion strategies we usually carry out every year, such as 7-Eleven fair. As a result, among other factors, we registered a year-on-year existing store sales decline in October and November.

The green line represents existing store sales for 7-Eleven, Inc. The period between July and September corresponds to the third quarter for 7-Eleven, Inc. As in the second quarter, we continue registering year-on-year existing store sales growth.

The graph on the upper-right corner deals with the Superstore business. We continue registering strong demand from consumers spending more time at home.

The year-on-year sales comparison for Ito-Yokado, including tenants, in September and October was affected by the consumption tax hike that went into effect in October 2019. Additionally, apparel sales struggled in November and December, among other factors, leading to a slight year-on-year sales decrease. In terms of food sales, however, Ito-Yokado delivered year-on-year growth, surpassing that of our food supermarkets.

Our results for the Department store and Specialty store businesses are shown on the bottom-left corner. While sales at Sogo & SEIBU and Denny's, which were significantly impacted by temporary store closures during the state of emergency, remained lower on a year-on-year basis, both were on a recovery trend. However, we are once again facing challenging circumstances.

The e-commerce business, shown on the bottom right, continues delivering a strong performance. Ito-Yokado and Sogo & SEIBU online stores continued showing double-digit sales growth.

Please turn to the next page. Starting on the left-hand side, here, we show the consolidated financial results for the first half of the fiscal year for the third quarter and the cumulative results through to the end of the third quarter.

I would like to direct your attention to the cumulative results through to the end of the third quarter. We registered a decrease in revenues and profit primarily as a result of the impact of COVID-19. However, we were able to exceed the forecasts laid out in the plan we announced in October 2020 in terms of revenues from operations, operating income and net income attributable to owners of parent.

We registered JPY 4,276.8 billion in revenues from operations, which corresponds to a year-on-year decrease of 14%. In the first half of the fiscal year, this was primarily due to the temporary closure of large-scale facilities and specialty stores in the domestic market and due to shorter business hours. This was also due to lower fuel sales in the Overseas Convenience Store business.

We registered a JPY 285.6 billion in operating income, down 10.5% year-on-year. This exceeded the plan by JPY 9.8 billion. We registered JPY 179.7 billion in operating income during the first half of the fiscal year, down 12.4% year-on-year. However, in the third quarter, operating income recovered to JPY 105.8 billion or a year-on-year decline of 7.1%.

We registered JPY 130.9 billion in net income attributable to owners of parent, thanks to an operating income overperformance exceeding our expectations, among other factors. This represents a year-on-year decrease of 22.9% and an overperformance of JPY 11.8 billion versus the plan.

Net income attributable to owners of parent stood at JPY 72.5 billion for the first half of the fiscal year as we booked special losses associated with COVID-19. This translated into a significant year-on-year decrease of 34.5%. However, we registered JPY 58.4 billion in net income attributable to owners of parent in the third quarter. This represents a recovery as this translates into a less pronounced year-on-year decrease of 1.4%. EBITDA stood at JPY 479.8 billion, down only 5% year-on-year.

Please turn to Page 6. This page discusses the year-on-year change by business segment as of the end of the third quarter. On the left, we have revenues from operations. As you can see, we registered a year-on-year decrease in revenues from operations across all business segments due to the impact of COVID-19.

In particular, the Overseas Convenience Store business was affected by a decrease in fuel sales derived from shelter-at-home restrictions and by a slump in the price of crude oil. This led to a year-on-year decrease of over JPY 400 billion in revenues from operations associated with the Overseas Convenience Store business.

Shown on the right is operating income. While we secured a year-on-year operating income increase in the Overseas Convenience Store and Superstore businesses, we registered a year-on-year decrease in the remaining segments resulting from the impact of COVID-19, among other factors. While we registered a year-on-year decrease in revenues from operations in the Overseas Convenience Store business resulting from lower fuel sales volume, we registered an improvement in terms of cents per gallon, which is a measure of fuel gross profit.

Consequently, the gross profit amount rose significantly, resulting in a year-on-year increase in terms of operating income. In particular, we registered very challenging results for the Department store and Specialty store businesses, which were significantly affected by temporary store closures and shorter business hours in the first quarter.

I would now like to discuss trends for the major operating companies that comprise the Seven & i Group. I would like to start with Seven-Eleven Japan. Please turn to Page 7. The waterfall chart on the left shows the year-on-year change in operating income. While we registered a year-on-year decrease in SG&A expenses of JPY 10.7 billion as a result of a drop in sales and gross profit margin due to COVID-19, we still registered a year-on-year operating income decrease of JPY 16.4 billion.

Furthermore, royalties revision, which we started in March, had an impact of approximately JPY 7.2 billion, while we estimate to the negative impact of COVID-19 at approximately JPY 13 billion.

The graph on the right shows year-on-year trends in cumulative SG&A expenses as of the end of the third quarter. We increased the efficiency of sales promotions, thanks to a shift to sales promotions using our mobile apps. We established stricter standards for new store openings, curved the land and building rent through the closure of unprofitable stores, et cetera, and optimized the salaries and wages through work-style reform and accounting reform, et cetera.

Through these, we carried out cost structure reforms aimed at reducing head office expenses, achieving a year-on-year reduction in cumulative SG&A expenses through to the end of the third quarter for the first time. As we had also achieved in the first half of the fiscal year going forward, we will continue reviewing the cost structure.

Please turn to Page 8. The line graph on the left shows year-on-year existing store sales growth, while the vertical bar graph shows the year-on-year change in gross profit margin. As I mentioned at the beginning, while we registered a year-on-year sales growth for existing stores in September, we registered a year-on-year decrease in October and November due to the cancellation of large-scale promotion events, which we had carried out last year within the scope of preventing the spread of COVID-19. As a result, when looking at the third quarter in isolation, existing store sales decreased by 2% year-on-year.

Additionally, we continued to struggle in December as people refrained from going outside in light of a growing number of new COVID-19 cases. This, among other factors, led to a year-on-year decrease of 1.8% in terms of existing store sales. We, therefore, continued to be faced with a challenging environment.

When looking at gross profit margins for the third quarter in isolation, we continued registering subdued mobility on the part of consumers on account of COVID-19. Consequently, products with high gross profit margins, like soft drinks, counter fried food products, rice balls, et cetera, struggled. This led to a year-on-year gross profit margin decrease of 0.1%.

The graph on the right shows year-on-year trends in terms of sales by store location. The red line represents sales at stores in West Tokyo, which is characterized by a preponderance of residential areas. We were able to maintain year-on-year sales growth in this area.

However, as shown by the green line, sales struggled at stores in East Tokyo, which is characterized by a preponderance of office areas. Additionally, as shown by the orange line, sales at stores located inside railway stations, hospitals, highways, et cetera, struggled significantly, showing a year-on-year decline as mobility for purposes of commuting and for recreation has decreased. This weak sales performance at existing stores located inside railway stations, hospitals, highways, et cetera, is depressing the overall sales performance by approximately 1%.

Please turn to Page 9. The graph on the left shows a year-on-year comparison in terms of sales, foot traffic and average spending per customer. While we are seeing a gradual recovery in foot traffic, as we promoted the deployment of sales floors and products attuned to the needs of local communities, this number remains lower on a year-on-year basis.

On the other hand, we registered a year-on-year increase in average spending per customer. A factor behind this is a change in people's purchasing behavior. Working from home, demand from customers who want to make purchases without leaving the house, online drinking parties at home, et cetera, these indicate a more strategic approach to shopping on the part of customers spending more time at home.

Consequently, there has been an increase in the number of customers making bulk purchases lasting them 2 or 3 days. This has contributed to an increase in average spending per customer.

The graph on the right shows the year-on-year trend in sales by merchandise category. Sales of Seven Premium delicatessen, frozen foods and wine continued on an expansion trend. Going forward, we will continue to strengthen these categories while, at the same time, proceeding with a review of the product categories of processed foods, snacks and nonfood products in a speedy manner.

Please turn to Page 10, which discusses the progress and performance at new layout rolled-out stores. As I mentioned last time, in addition to the new store layouts we have introduced thus far, in order to address the needs of all dinner tables, we are in the process of rolling out to the new layout to 2020, allowing customers to find liquor products, delicatessen, beverages, precut vegetables and desserts all in one easily visually identifiable place.

The table on the left contains the results at the 800 stores in which the new layout was rolled out in September. In October, 1 month following the rollout, average daily sales per store had increased by JPY 14,000 year-on-year compared to the respective area average. Furthermore, 1 month later in November, average daily sales per store had increased by JPY 16,000 year-on-year compared to the respective area average. As consumers become aware of the new store layout, we have been able to observe the gradual positive influence of these changes.

The table on the right contains the rollout schedule. During our last financial results briefing, I had reported our intention of rolling out the new layout at 8,000 stores by the end of February 2021. However, the negative impact of COVID-19 has forced us to revise our guidance lower on this front.

We will, therefore, be rolling out to the new store layout at 6,000 stores by the end of February 2021. In addition to expanding coverage to all eligible stores by the end of fiscal year 2022, we would also like to extend the scope we have nurtured through the rollout of this layout to other stores with varied design layouts and to smaller stores.

Page 11 discusses last-mile initiatives. The diagram on the left shows the expansion schedule for 7-Eleven online convenience store. We are currently carrying out field tests at approximately 300 stores. And starting in October, we are now able to carry out real-time inventory checks.

Starting in December, we have reduced delivery times, which previously took 2 hours down to 30 minutes at the earliest. We, therefore, carried out and continue to carry out efforts towards improving user convenience.

At the same time, we have also started field tests for the delivery of products from our restaurant chain at Denny's using our 7-Eleven online convenience stores delivery system. We also intend to carry out field tests for the delivery of Sogo & SEIBU's food section products starting in February.

Next fiscal year, we want to roll out this online convenience store initiative at 1,000 7-Eleven stores. Toward further expansion, we will be further strengthening the Seven & i Group's last-mile efforts in the form of the transformation of our logistics program into a platform.

The diagram on the right showcases the group's last-mile DX platform. Customers can place orders from our EC websites. Currently, in the case of 7-Eleven, customers can order from a unique website on the 7-Eleven app, while Denny's customers can order from the Demae-can website. We will be aiming toward the efficient operation of this service by optimizing this order information in our logistics program platform, utilizing AI in terms of the vehicle and driver, delivery charge, delivery route and pickup location. We would like to fully utilize this logistics program platform across all component parts of the Seven & i Group to offer group products to customers in an optimal manner.

Please turn to Page 12, in which we discuss initiatives with franchisees to achieve sustainable growth. We continue providing support to franchise stores by providing a system that enables franchise stores to concentrate on store management with peace of mind by carrying out to the aforementioned last-mile effort and by carrying out the rollout of the new store layout and of labor-saving equipment.

In addition to these, this fiscal year, amidst an increase in COVID-19 cases, we have been providing COVID-related support to our franchisees who continue operating their stores as essential businesses. Additionally, we carried out a franchise store questionnaire in 2020, as we did in July 2019. We carry out to this questionnaire ourselves, and 74% of Seven-Eleven Japan franchisees expressed satisfaction. This represents an increase of 17 percentage points compared to July of 2019.

As shown on the graph on the right, franchise store income was positively impacted by a 1% reduction in royalties starting in September 2017 by the rollout of new layouts in the fall of 2018 and by a royalties revision in the current fiscal year. While these are average figures, franchise store income continues growing year-on-year.

Franchise store income was negatively impacted by COVID-19, dropping by 5% year-on-year in the first quarter of fiscal year 2021. However, franchise store income grew year-on-year in the second and third quarters.

In cumulative terms, through to the end of the third quarter, too, franchise store income also grew on a year-on-year basis. Going forward, we would like to continue close communication with franchise stores in carrying out initiatives alongside franchise stores toward realizing sustainable growth.

Next, I would like to discuss 7-Eleven, Inc. Please turn to Page 13. While we registered a year-on-year decrease in operating income during the first quarter, we were able to grow operating income by JPY 4.4 billion in terms of the cumulative results through to the end of the third quarter, thanks primarily to an improvement in fuel gross profit in the second quarter and beyond.

The graph on the right shows the year-on-year growth in existing store sales and change in gross profit margin. While we have registered year-on-year existing store sales growth starting in May, a resurgence in COVID-19 cases in the United States and a reduction in the number of store operation base led to a year-on-year decrease in November after 7 months of growth. However, preliminary estimates point to year-on-year existing store sales growth of 1% for December.

On the other hand, in terms of gross profit margin, as with Seven-Eleven Japan, the sale of products with high gross profit margins, like fresh foods and counter beverages, struggled. This led to a year-on-year decrease in gross profit margin.

Please turn to Page 14, which deals with trends associated with fuel. Shown on the left-hand side is the price of crude oil. The price of WTI went into negative territory for a brief period in April, falling significantly during the second quarter. While not as much as during the second quarter, during the third quarter as well, WTI traded at depressed levels year-on-year.

I would now like to direct your attention to the vertical bar graph on the right. Cents per gallon, which indicates the gross profit amount per gallon, rose by $0.18 year-on-year in the second quarter and continued showing year-on-year growth in the third quarter, rising $0.086 year-on-year.

People's mobility was restricted as a result of shelter-at-home directives resulting from COVID-19. While this led to a significant decrease in fuel sales, this decrease was offset by an improvement in cents per gallon. As such, cumulative fuel gross profit through to the end of the third quarter increased significantly by USD 282 million year-on-year or 23.3%.

Please turn to Page 15. As in Japan, there also continues to be a change in consumer behavior in the United States brought about by COVID-19. While the situation remains challenging in terms of foot traffic, alongside an increase in demand from people spending more time at home, there has been an increase in consumers buying daily necessities in bulk at nearby 7-Eleven stores in order to avoid the 3 Cs of closed spaces with poor ventilation, crowded places with many people nearby and close contact settings in the form of supermarkets away from home.

In light of this, average spending per customer remains at an elevated level, up 20% or more year-on-year. In particular, sales of frozen foods, alcoholic beverages, daily necessities, family sized ice cream and large beverages, et cetera, are showing strong results.

The graph on the right shows the trend in monthly sales for the delivery service 7NOW. Monthly sales for November were approximately 6x the number of sales for the month of January before COVID-19. The number of transactions per day per store stands at 23 with an average spending per customer of $15.20, close to 2x the amount of in-store sales. As planned, as of the end of December 2020, we had expanded this service to approximately 2,000 stores.

Please turn to Page 16, which discusses our DX strategy initiatives at SEI. The graph at the top shows the trend in the number of members for 7Rewards, 7-Eleven, Inc.'s loyalty program. The number of members exceeds 42 million, and usage has expanded to a level in which the scan rate covers 30% of daily store foot traffic. Monthly spend in the number of monthly store trips are also higher for 7Rewards members, so we have been able to observe positive effects from this program.

In order to provide further added value to members, we started offering a fuel loyalty program in June 2020 and a new service called 7-Eleven Wallet in November 2020. This fuel loyalty program gives customers who visit our stores to buy fuel the ability to pay through a safe and secure contactless payment system.

Additionally, by offering incentives like coupons, encouraging customers to make in-store purchases, we would like to leverage an additional business opportunity. As of the end of December 2020, this loyalty program can be used at 1/3 of stores offering fuel, which corresponds to approximately 1,500 stores.

Because of fear resulting from the rising number of COVID-19 cases, customers are eager to finish the checkout process as quickly as possible in a contactless manner. 7-Eleven Wallet addresses these needs.

Additionally, approximately 28% of adults in the United States do not own a credit card, so we have made it possible for customers to load up their 7-Eleven Wallet using cash, allowing them to have access to the same service as credit card-owning customers. As of the end of December 2020, 7-Eleven Wallet can be used at over 7,500 stores. Going forward, we will continue carrying out efforts to offer safety and convenience to customers through the use of DX.

Please turn to Page 17, which discusses the progress of raising funds associated with the acquisition of Speedway, which we announced in August 2020. Out of a total funding amount of USD 21 billion, 7-Eleven Inc. will be raising USD 13 billion through senior unsecured notes and bank term loans. During fiscal year 2021, of these, we intended to repay slightly over USD 5 billion through sales and leaseback, et cetera. As a result of this, the rest, just under USD 8 billion, is expected to remain in the form of senior unsecured note and bank loan balances.

On the other hand, we have plans for an USD 8 billion equity infusion from Seven & i Holdings. On December 14, 2020, Seven & i Holdings raised funds through a JPY 350 billion bond issue. The funding plan associated with the acquisition of Speedway is proceeding as expected, and we have no plans for equity financing. At the same time, we also reinforced 7-Eleven, Inc.'s governance, which concentrates the Seven & i Group's management resources.

To this end, we carried out changes in 7-Eleven, Inc.'s executive structure. Two new outside Directors from Seven & i Holdings have assumed their new posts: Yoshimichi Maruyama, Director and Head of Corporate Finance and Accounting Division; and Tamaki Wakita, Senior Officer of the Corporate Development Department.

Please turn to Page 18, which deals with our results for Ito-Yokado. While our results were influenced by a transfer of special losses associated with fixed costs, et cetera, starting in the fourth quarter of last fiscal year, Ito-Yokado has delivered operating income growth for the fourth consecutive quarter. We registered a year-on-year increase of JPY 2.7 billion in cumulative operating income through to the end of the third quarter to JPY 1.8 billion. This was primarily thanks to sales growth associated with food products and to stores that have undergone structural reforms.

The table on the top right breaks down by store category this year-on-year operating income increase of JPY 2.7 billion, corresponding to the cumulative performance through to the end of the third quarter. We were able to secure a year-on-year operating income increase of JPY 1.5 billion, thanks to stores that implemented structural reforms.

Consumer one-stop shopping needs have increased further, as it appears COVID-19 is unlikely to disappear anytime soon. In order to address this shift in consumer needs, we carried out a second large-scale remodeling in September of last year at our Tama Plaza store. We have received praise from customers as a result of the deployment of sales floors attuned to our customers' various life of assets and situations and by offering an assortment of stores and products attuned to each store's commercial area.

Including tenants, sales grew by approximately 20% year-on-year in November, greatly exceeding sales growth for overall existing Ito-Yokado stores, which grew by 0.7% year-on-year. We will also be expanding to other stores the deployment of sales floors attuned to each store's commercial area and to customers of various life of assets and situations.

Additionally, we will be carrying out initiatives towards increasing efficiency through the use of AI. Furthermore, we will also be optimizing headquarters personnel.

On the other hand, in terms of business restructuring, cooperation with outside companies to address unprofitable stores as well as store closures is proceeding according to plan. We are reexamining the future growth potential for each store based on environmental changes stemming from COVID-19.

Please turn to Page 19, which contains examples of initiatives using AI technologies, which I briefly mentioned earlier. Within the scope of initiatives toward realizing efficient management, we are carrying out initiatives using AI technologies to improve operational efficiency and optimize personnel allocation. Through this, we seek to increase man-hour productivity.

Here, I would like to discuss our AI-based product manufacturing plan and AI-based ordering proposal plan. The former plan involves production volume estimated based not on human intuition, but rather on an AI, calculating the optimal production volume and carrying out said production. The objective behind this is for franchise stores to fully unlock the potential of being able to fully sell inventory.

The graph on the left shows a year-on-year sales and gross profit comparison for products in the category of lunch boxes, sushi and delicatessen against the backdrop of struggling overall delicatessen sales resulting from the impact of COVID-19. We rolled out this plan at cooked rice meal sales spaces across all Ito-Yokado stores starting in June 2020, allowing us to deliver double-digit growth.

AI-based ordering proposal, shown on the right, tries to shift as much backroom inventory to sales floors as possible in order to reduce opportunity losses and make possible inventory optimization. At the same time, we are aiming to simplify the tasks of ordering inventory and organizing sales floors and optimize personnel allocation.

We started carrying out tests since 2019, and as the number of stores using this system grows and the use of this system becomes more established, we are seeing a trend toward inventory reduction. As such, we have gradually seen a positive effect.

We will be promoting initiatives toward increasing store operation efficiency by making sure employees and partners have a good understanding of the purpose behind the introduction of AI technologies, by carrying out efforts so that the use of these technologies becomes more established and by linking these with the optimization of personnel allocation, et cetera.

Please turn to Page 20, which deals with our operations at Sogo & SEIBU. While SG&A expenses decreased by JPY 25 billion as a result of the transfer of special losses associated with fixed costs and the curbing of sales promotions, this wasn't enough to offset a top line decrease. As such, operating losses worsened by JPY 4.4 billion year-on-year and stood at JPY 7 billion.

As shown on the table on the right, consumer psychology toward avoiding the 3 Cs remained strong in the third quarter. As such, flagship stores in the Tokyo Metropolitan area, which had driven results for Sogo & SEIBU, are struggling significantly.

On the other hand, 2 stores in which we carried out property management through remodeling and the stores we closed at the end of August represented a positive operating income factor of JPY 1.3 billion. Additionally, corporate sales, allowing us to secure new customers in the midst of the COVID-19 pandemic, made a positive operating income contribution of approximately JPY 700 million.

Going forward, we will continue carrying out efforts towards strengthening our framework and towards attracting new customers. Additionally, Sogo & SEIBU's ability to address wealthy customers is one of its strengths, and we will be enacting measures to respond to environment changes through the use of digital technology to host events outside our stores, et cetera.

Next, I would like to discuss the revision of the full year forecast. Please turn to Page 22. This page contains assumptions for the full year forecast, which I will be discussing.

The table at the bottom shows the assumptions at the time of the announcement of the forecast in July 2020. Back in July, our assumptions did not include a second and third COVID-19 wave.

Things have also changed significantly as the Japanese government once again declared a state of emergency last week. The primary requests by government officials are for restaurants to voluntarily refrain from operating after 8 p.m., for people to only go outside after 8 p.m. when absolutely necessary, for companies to switch 70% of employees to remote work, et cetera. The situation is, therefore, expected to have some impact on the Seven & i Group.

Page 23 contains the consolidated financial results forecast. We revised the full year forecast based on the progress through to the end of the third quarter and on the assumptions I mentioned earlier. For the fourth quarter, the impact resulting from the state of emergency declaration is very difficult to predict. In light of this, we have lowered the forecast.

However, based on our results through to the end of the third quarter, we have raised the forecast for each profit item for the full fiscal year. As a result, we have raised the full year operating income forecast by JPY 5 billion primarily based on the fact we were able to secure a better-than-expected fuel gross profit in the Overseas Convenience Store business, among other factors.

The full year operating income forecast, therefore, stands at JPY 345 billion. We have raised the ordinary income forecast by JPY 6 billion to JPY 332 billion. We have raised the net income attributable to owners of parent forecast by JPY 6 billion to JPY 144.5 billion.

Please turn to Page 24, which contains the forecast by business segment, revenues from operations on the left and operating income on the right. We have lowered our revenues from operations forecast for our Overseas Convenience Store operations by JPY 27 billion, in light of an increase in the number of COVID-19 cases in the United States, resulting in lower merchandise and fuel sales at existing stores.

Additionally, we anticipate people will further refrain from going outside as a result of an increase in the number of domestic COVID-19 cases. This led us to lower the revenues from operations forecast for domestic Convenience store operations and Department store operations. We have lowered the operating income forecast for Domestic Convenience Store operations by JPY 9.1 billion as a result of people further refraining from going outside.

On the other hand, in addition to Overseas Convenience Store operations, we have raised our initial conservative forecast for our Specialty store operations based on the circumstances through to the end of the third quarter. Furthermore, we have also raised the operating income forecast for eliminations and corporate by JPY 2 billion.

Page 25 contains the forecast for the major operating companies that comprise the Seven & i Group. For Seven-Eleven Japan, in light of the circumstances through to the end of the third quarter, we have lowered the existing store sales growth premise from a decrease of 1% to a decrease of 2.5%. We have also lowered the gross profit margin premise from flat to a decrease of 0.1%.

While we have made progress in curbing SG&A expenses, this is not enough to offset the decrease in sales and gross profit. As such, we have lowered the operating income forecast by JPY 10 billion.

For 7-Eleven, Inc., while we have registered robust product sales at existing stores, a request by government officials restraining people's mobility resulting from an increase in COVID-19 cases led us to lower the existing store sales growth premise by 0.2 percentage points to positive 0.7%. We have raised the gross profit margin premise from a decrease of 0.8% to a decrease of 0.7%.

On the other hand, while we expect a decrease in fuel sales volume, we have raised the fuel gross profit forecast based on the recent improvement trend associated with the metric of cents per gallon. In light of this, we have raised the operating income forecast by USD 54 million. The exchange rate forecast premise remains unchanged, so the equivalent amount in Japanese yen is JPY 5.8 billion.

Regarding Ito-Yokado and York-Benimaru, we took into account the circumstances through to the end of the third quarter and raised the existing store sales growth forecast. However, we are planning on carrying out the remodeling of stores, et cetera, we have previously not been able to carry out. In light of this, the operating income forecast remains unchanged.

Regarding Sogo & SEIBU, we have lowered the existing store sales growth forecast based on the circumstances through to the end of the third quarter. However, the operating income forecast remains unchanged in light of efforts toward curbing SG&A expenses.

Lastly, I would like to discuss initiatives by the Seven & i Group toward sustainable growth. Please turn to Page 27, which deals with environmental initiatives, which is an area that has been increasingly growing in importance in recent years.

Out of the 4 goals set forth in our GREEN CHALLENGE 2050 initiative, which we announced back in May 2019, we have changed our CO2 emission reduction target. We have set a CO2 emission reduction target of over 80% by 2050 compared to fiscal year 2014 levels associated with the operation of Seven & i Group stores. We have revised this reduction target from over 80% to net 0.

Additionally, in December 2020, we became the 44th company in Japan to participate in RE100, an international initiative with the aim of sourcing from renewable energy sources 100% of the energy needed to carry out corporate activities. The objective behind the Seven & i Group's participation is as follows.

Including SEI, we operate over 30,000 stores, and we are hopeful that the participation of a retailer of our size will help accelerate the adoption of renewable energies. We also feel a sense of responsibility. By promoting these initiatives, we are aiming to make a sustainable society a reality.

Please turn to Page 28, which discusses initiatives toward achieving a circular economy. These initiatives are possible for us precisely because the Seven & i Group operates a large number of stores.

The graph on the left shows the volume collection trend at group stores in which we have set up PET bottle collection units. As you can see, many of our customers use these units, leading to a significant increase in the volume collected. PET bottles collected are then recycled and reused, for example, as Seven Premium Hajime Green Tea bottles, among others.

However, a bottleneck in making the circular economy a reality is the insufficient number of facilities capable of recycling the PET bottles collected. In light of this, we have decided to establish a PET bottle recycling factory as a joint venture with France's Veolia, which possesses the technology to recycle not just relatively pristine PET bottles collected in collection units, but also low-grade PET bottle waste.

Please turn to Page 29. 7-Eleven operates in 17 countries and regions, where we operate approximately 70,000 stores. There are many differences between countries. However, environmental issues are a worldwide challenge common to everyone.

In order to make a sustainable future as a global brand a reality, we would like to promote SDGs alongside 7-Eleven licensee companies in each country. As an embodiment of this philosophy, we hosted 7-Eleven International Summit in March of 2019. We concluded a partnership with licensees from each country and adopted a joint declaration toward achieving the 17 SDG goals.

In November 2020, we hosted the 7-Eleven ESG Global Forum online. This event brought together the individuals in charge when it comes to issues related to sustainability for licensees from each country, allowing them to exchange information and ideas. At this ESG Global Forum, we were able to confirm that we are on the same page of social responsibility in dealing with urgent issues related to climate change like the need to reduce CO2 emissions and the issue of plastic pollution and that we will be tackling these issues together.

We interact with customers daily amidst the COVID-19 pandemic, and it is precisely because of this that we would like to offer new lifestyles to customers and take the lead when it comes to tackling environmental issues.

We have reached the last page, in which I would like to discuss the Seven & i Group's approach to the formulation of the new midterm management plan. Interest in the aforementioned environmental and social issues has increased tremendously recently.

Going forward, we believe these are themes that are absolutely indispensable in order for companies to make sustainable growth a reality. On the other hand, there is also a need going forward for companies to consider they needed to solve social issues through their core businesses, while, at the same time, delivering economic growth.

In light of these themes, we believe it's important to put together a management structure well suited to our business operations and to strengthen governance also in the sense of guaranteeing transparency. We believe this to be indispensable in building trust between the Seven & i Group and our stakeholders.

Furthermore, starting in 2020, the spread of COVID-19 has brought about changes to people's value system and behaviors on a global scale. As such, companies are also required to be able to offer solutions in this new normal paradigm.

Based on these various premises, we are in the process of formulating the new midterm management plan, which puts emphasis on a philosophy of reevaluating the raison d'être for the Seven & i Group and for each operating company that comprises the group and aim towards increasing corporate value. Some important aspects of the new midterm management plan are the approach to investment in growth businesses, business continuity optimization and an approach to environmental investments from the perspective of ESG.

Additionally, in order to increase this plan's effectiveness, we will be adopting a basic financial policy based on ensuring financial soundness, with the purpose of improving corporate value and on expanding returns in excess of the cost of capital, while increasing cash flow generating capabilities. You will find concrete KPIs in the bottom right-hand side.

We are carrying out preparations in terms of concrete content for the midterm management plan, which we will be announcing in the financial results briefing for the full fiscal year. For this reason, we ask you for your continued support.

This concludes today's presentation. Thank you for your time.

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