Aeon Co Ltd

TSE:8267

Earnings Call Transcript 2019-Q1

[Kaori Miyake, executive]

Good afternoon. My name is Kaori Miyake, and I am in charge of Investor Relations at Aeon. Thank you very much for attending this briefing on Aeon's financial results for the first quarter of the fiscal year ending February 28, 2019.

I will now report on the first quarter result. First, operating revenue rose to JPY 2,104.6 billion, setting a first quarter record for a seventh consecutive year. Operating profit and ordinary profit were JPY 39.6 billion and JPY 40.2 billion, respectively, both record highs. Profit attributable to owners of parent increased 78.3% year-on-year.

Moving on to the results by segment. Profitability improvement progressed in the GMS business and International Business, with profitability improving by JPY 1.8 billion and JPY 1.5 billion, respectively. The Shopping Center Development Business and Financial Services Business, pillars of the group's earnings, showed steady profit growth. Beginning in the current term, we have changed the name of the Drugstore and Pharmacy Business to the Health & Wellness business.

Welcia Holdings, the core company in this segment, achieved strong 13.4% growth in operating revenue on 5% year-on-year same-store sales growth, coupled with new store openings and M&A activities, despite the impact of drug price reductions accompanying revision of medical treatment fees under the Japanese health care system in April. Although operating profit was mostly unchanged from the previous year, it exceeded our original projection.

The Supermarket Business posted a profit increase, thanks to improvement in the gross profit margin and progress in controlling expenses, despite the impact on customer traffic of unseasonable weather in April and May.

Although the Services and Specialty Store Business experienced a profit decrease due to lower movie attendance in the cinema business coupled with poor performance at some specialty store companies, it continues to undertake profitability improvements.

Next, let's examine the results by area. Overseas operating profit increased by JPY 5.1 billion. This pie chart shows a breakdown of profit growth by segment.

The International Business, in which the group operates general merchandise stores and supermarkets as well as the overseas operations of the Financial Services Business and Shopping Center Development Business, contributed to the overseas profit growth. As a result, operating profit generated overseas, in the first quarter, exceeded 20% of the total. We will continue to pursue overseas business growth and profitability improvements in each business.

Next, I will discuss the situation at key companies. Aeon Retail achieved profitability improvements of JPY 1.2 billion. Although same-store sales fell below the prior-year level, due in part to the previously mentioned weather effects, a trend toward lowering the price of products per item and an increase in the number of items purchased per customer, continued in the first quarter. By category, sales were above the prior-year level in the home appliances category, which benefited from the strong sales on customer appreciation days and the liquor category, in which sales have remained strong since the liquor tax revision a year ago.

The gross profit margin at directly operated floors increased 0.4 points, year-on-year. The gross profit margins of the delicatessen category improved, and growth in Topvalu sales contributed to profitability improvements in the inner garments category.

Expenses were controlled within the planned budget, thanks to efficient use of marketing and promotion expenses, and decreased by JPY 0.6 billion year-on-year. This, coupled with an increase of JPY 0.6 billion on the gross operating profit line, led to a profitability improvement of JPY 1.2 billion.

Sales of Topvalu, Aeon's private brand, have been increasing since fiscal year 2017. First quarter Topvalu sales at Aeon Retail increased sharply by 8.2%, year-on-year. And in particular, sales of the low-priced brand Topvalu best price, which meets the needs of especially thrift-conscious customers, surged by 20.8%.

Aeon Retail store, which took over management of general merchandise stores in the Kanto, Kinki and Nagoya areas from Daiei in September 2015 and March 2016, achieved a profitability improvement of JPY 0.6 billion. The operation and management of stores transferred from Daiei has been integrated with Aeon Retail.

Aeon's products and sales policies have penetrated into these stores, due in part to an organizational restructuring implemented in the second half of last year, specifically to increase the degree of management control over transferred stores, and sales of the transferred stores increased 2.8% year-on-year. Notably, customer traffic increased 3.7% year-on-year and these stores are steadily winning back the loyalty of local customers.

Gross profit margin improvements are steadily progressing at a rate similar to that of Aeon Retail. Stores, for which at least 1 year has passed since refurbishment, continue to grow their sales. The Shin Urayasu Store, which implemented measures to revitalize mainly its food section showed first quarter sales growth of 18.7%. The Higashitotsuka store, refurbished more than 1.5 years ago, achieved growth of 6.5%. In addition, the Topvalu brand has shown particularly strong sales growth at these large-scale refurbished stores and is contributing to improvements in the business results.

In the Financial Services Business, transaction volumes increased in Japan and overseas, and profit rose by JPY 2.5 billion. Both in Japan and abroad, the timing of earnings announcements of listed companies differs. At AEON Credit Service, Asia, in Hong Kong, which announced its first quarter results the other day, earnings increased by 5.4% year-on-year due to new cardholder acquisition, resulting from a collaborative project with a popular animation program and card use promotion. In addition, the company curbed expenses through efficient use of marketing and promotion expenses, and ordinary profit surged by 27.7%, year-on-year.

In Thailand as well, we pursued expansion of operations and profitability improvements by implementing a joint sales promotion project to commemorate the first anniversary of an alliance with a major local retail group.

Aeon Mall posted a profit increase of JPY 0.5 billion. In Japan, specialty stores at existing malls achieved sales at the prior year level. Sales of specialty stores at malls that increased their floor space, or were refurbished, increased by 8% year-on-year, contributing to the business result.

As shown on the slide, overseas specialty store sales at existing malls grew substantially in each country. As a result, 17 of 24 overseas malls operated in the black, and overseas operations achieved a profit increase of JPY 0.4 billion, operating profitably for a second consecutive quarter.

Aeon Qingdao, part of the International Business, increased profits, thanks to a successful refurbishment of existing stores. The other GMS companies in China worked to improve same-store profitability and achieved across-the-board profit increases.

Aeon Malaysia posted a profit increase of JPY 0.3 billion. The company met needs of local customers and achieved higher sales and profits through refurbishment of existing stores and early preparation and offering of products for the Chinese New Year.

AEON BIG Malaysia focused on profitability improvements and achieved improvements of JPY 0.3 billion by improving the mark-up rate, reducing disposal losses and refurbishing stores.

Aeon Vietnam achieved strong results, with sales during the Chinese New Year period increasing 18% year-on-year due to an increase in the number of regular customers and strong sales of gift products.

Also, local needs for safe, secure, high-quality food are increasing. The company is strengthening its offering of organic vegetables and imported products, and food sales increased 16% year-on-year.

This concludes the overview of first quarter business results. The results for the first 3 months of the term are generally in line with the full year earnings forecasts. The group will continue to make every effort to achieve the targets we have promised our shareholders and investors. I request your continued support.