Aeon Co Ltd

TSE:8267

Earnings Call Transcript 2021-Q1

[Kaori Miyake, executive]

Thank you very much for taking time from your busy schedules to participate in today's briefing on Aeon's first quarter financial results. We have opted to hold this briefing online as we did with the previous briefing on the fiscal year 2019 full year results. Now, without further ado, I will begin with an overview of the first quarter operating results.

In the first quarter, Aeon was substantially affected by the novel coronavirus outbreak. We responded to people's needs for food and daily essentials in our role as a lifeline that supports local communities, while placing the highest priority on the safety of customers and employees. At the same time, revenue and profit declined as a result of measures implemented in accordance with the state of emergency declared by the central government, including temporary suspension of operations at shopping malls. And Aeon posted a consolidated operating loss of JPY 12.5 billion, representing a profit decrease of JPY 40.2 billion year-on-year. This impact of the break on the operating profit line in the first quarter, notwithstanding operating performance, was better than expected since the state of emergency was lifted earlier than we anticipated. And sales followed a recovery trend after bottoming out in April.

At the beginning of the term, we expressed the operating profit forecast as a range. Looking at the first quarter results only, operating profit came in at the high end of that range. However, we find it impossible to predict what lies ahead. I will discuss the future outlook later.

Aeon recognized JPY 29.8 billion in depreciation, rent and other expenses incurred during temporary suspension of operations as infectious disease-related cost under extraordinary loss. As a result, we booked a loss of JPY 53.9 billion on the bottom line.

At this juncture, I will briefly explain the relationship between novel coronavirus outbreak periods and the accounting periods.

The orange sections on the chart indicate the peak outbreak period in each geographical area, and the sections outlined in dotted lines are the periods included in the first quarter consolidated financial results. Although there are slight differences in the periods included in the results by business and area, the chart shows that the novel coronavirus has had a greater impact on the operating results in the current term.

With regard to China, except for some companies, the operating results from January to March are included in Aeon's first quarter consolidated results. This period includes February, when infection rates were peaking in China. The peak outbreak period for the ASEAN region was April and beyond, which overlaps with the period when the operating results of Aeon Financial Services overseas listed subsidiaries, are included in the consolidated financial results. As for the domestic market, as you know, the first quarter was when Japan took a direct hit from the outbreak.

The next slide shows the operating results by segment, sorted in descending order of amount of profit increase. Operating revenue and operating profit from the Supermarket Business and Health and Wellness Business increased year-on-year. The results from the International Business, which consists of overseas General Merchandise Store and supermarket operations, were nearly unchanged, while profit from the Services and Specialty Store Business, and the 3 segments below it decreased.

The situation in key business segments is shown on subsequent pages.

The Supermarket Business achieved a substantial profit increase of JPY 19.9 billion. Opportunities to have meals at home have increased since March due to mass school closures and people working from home and refraining from outings, which has enabled the supermarket companies to substantially grow their sales, as shown in the graph on the screen.

In June as well, sales far exceeded the prior year level. Also, a trend toward cutting back on outings and quick shopping trips close to home has gained impetus, and people are increasingly economizing out of anxiety about their future because of the COVID-19 crisis. As a result of these and other factors, sales at small discount stores and supermarkets in the Greater Tokyo Area have increased in the order of 20% to 30% year-on-year.

Next, let's look at the situation in the Shopping Center Development Business. The graph on the screen shows year-on-year monthly changes in specialty store sales at malls in China, Japan and Vietnam from January to June. The orange line shows the results for China, where about half of our malls temporarily suspended operations in February. Although some tenants, such as cinemas and amusement facilities remained closed on government instructions, all malls resumed operations on April 1 and are showing a recovery trend. The pink line on the graph shows the results for Japan, where sales at all malls are now recovering following resumption of operations after temporary suspensions. The preliminary figures for June indicate that although some caution is still required with respect to cinemas, amusement facilities and food and beverage tenants, sales at specialty stores that sell goods have risen to the point of exceeding the prior year level. The green line shows the results for Vietnam, which closely tracked the results for Japan.

Specialty store sales have shown a comparatively solid recovery since the relaxing of social distancing measures and preliminary figures for June indicate that sales have returned to over 80% of the prior year level. Also, we have implemented partial rent reductions in Japan and overseas for specialty store operators who are important business partners of Aeon. We want to work together with our partners to balance infection countermeasures and continuity of operations.

The Services and Specialty Store Business also saw a decline in operating revenue and operating profit, with cinemas and amusement facilities and specialty stores alike, feeling the effects of people staying at home and the temporary suspension of operations of the commercial facilities where they are located.

In the General Merchandise Store Business, apparel sales were substantially affected by people refraining from outings. The graph on the left of the screen shows the changes in Aeon Retail's same-store sales by category. The black line on the graph shows apparel sales, which after having in April, followed a recovery trend after the lifting of the state of emergency and returned to near the prior year level in June. However, the results were substantially affected by a decline in the gross profit margin, partly attributable to inventory disposal. The light blue line shows food sales, which reached or exceeded the prior year levels throughout the quarter.

Nevertheless, as shown in the graph on the right, general merchandise stores that are the mainstay tenants of shopping malls saw a decline in customer traffic due to temporary suspension of operations of specialty store zones and had a very difficult April. On the other hand, so-called big-box general merchandise stores experienced little change in customer traffic and maintained strong sales by meeting customer needs for quick shopping trips. A similar result to that of the Supermarket Business.

Next, let's look at the situation in the Financial Services Business. States of emergency and other restrictions on activities have been imposed in the overseas countries, where we have financial services operations. And many branch offices have been forced to temporarily close. This has affected sales activities, including receivables collection activities. In some countries, such as Malaysia, financial institutions have been requested by central banks to extend repayment dates. Although activity restrictions in various countries are gradually being relaxed, the provision of allowance for doubtful accounts has increased because of the provision against future bad debt risk. And this is the main factor contributing to the profit decline in the Financial Services Business.

In Japan, although credit card shopping transaction volume declined, profit fell only slightly, thanks to cost control efforts, such as curbing of marketing and promotion expenses and promotion of switching to web-based statements. Credit card shopping transaction volume in Japan has shown a recovery trend since the second half of May in response to relaxation of stay at home and business closure requests. And in May, purchases of home appliances and furniture, in addition to food and other daily necessities, increased substantially. Although the results for June have not yet been finalized, volume is expected to exceed the prior year level by some 5%.

From this point on, I will briefly touch on Aeon's policy for future initiatives to balance infection countermeasures and economic activity.

On the left of the screen is a corporate advertisement placed in newspapers on June 4, that communicated Aeon's desire to create a new normal together with our customers. As a concrete way of helping prevent the spread of infection, on June 30, Aeon instituted the Aeon COVID-19 Protocol for Infectious Disease Control. We invite you to visit the Aeon website for details. We have made 4 aims of the protocol, the fourth of which declares, Aeon will implement measures to reduce the number of customer touch points. The next page introduces a few examples of initiatives that are already underway.

Demand for online supermarket shopping increased substantially in the first quarter, with the number of new members and sales showing sharp growth. Also for customers who want to reduce time spent in stores and the risk of infection, we're increasing the number of stores offering drive-thru pick-up services. The number of stores has increased from 39, as of May 31, to 61.

We are also expanding customer self-scanning and self-checkout services, namely Scan & Go at U.S.M.H. and Regi Go at Aeon Retail.

With regard to noncontact e-money payment methods, we are participating in the My Number Point program and began accepting applications this month. At AEON Retail, although payment using Aeon Card, the WAON e-money service and other cashless payment methods already accounted for around 65% of total payments, the cashless payment ratio grew to nearly 70% in the first quarter. Through participation in the My Number Point program, we intend to further increase this ratio in order to reduce shopping times and, otherwise, enhance customer convenience.

Although Aeon was busy responding to the novel coronavirus outbreak during the first quarter, we also proceeded with strategic liquidation and reorganization, a reform set out in the medium-term management plan. We sold the Zwei marriage matchmaking service in April, discontinued the Claire's accessory shop business in March and decided and publicly announced the sale of shares of Aeon Forest, which operates The Body Shop, in June. Beginning with Laura Ashley Japan in 2018, over the past 3 years, we have decided to withdraw from these businesses as a result of examination of their future growth potential.

At the same time, with regard to business development and growth areas, in June, we launched an e-commerce service business together with Signa Sports United, of Germany, through a joint venture company. During the past few years, we have proceeded with development of frozen food, organic food and natural product sales businesses and expansion into the e-commerce field in partnership with companies like Signa and Ocado. We intend to continue to carefully identify growth areas and proceed with structural reforms.

To conclude my presentation, I will discuss the earnings forecast for fiscal 2020. At this time, there is no change to the earnings forecast announced at the beginning of the term. In Japan, although the state of emergency has been lifted, the possibility of a second wave cannot be ruled out, given that the number of newly infected is once again on the increase, with more than 100 new cases reported per day nationwide on consecutive days since late June. Looking at the other countries where Aeon has business operations, lockdown have resumed in some areas of China, which was the first country to contain infections. And the number of newly infected continues to increase in Indonesia and other ASEAN countries.

The number of cases continues to rise globally, and we think that balancing the pandemic prevention and economic activity will be no simple matter until therapeutic drugs have been developed and widely distributed. Aeon intends to continuously examine the infection rates in Japan and overseas, including the possibility of a second wave of infection in Japan and its impact on Aeon's financial results.

Although the outlook remains uncertain, the Aeon Group will work as a team to overcome this crisis by putting into practice it's customer first philosophy as a corporate group with an ever lasting innovative spirit.

[Unknown Analyst]

It was explained earlier that first quarter operating profit was largely as expected. Could you tell us how well each segment performed?

[Unknown Executive]

The performance of almost all of our domestic businesses improved, faring better than we expected at the start of the quarter. More specifically, the Supermarket and Health and Wellness businesses did much better than expected. These businesses were not really affected by the temporary shutdown of shopping centers and other related factors. In addition, although the scope of the state of emergency was further expanded, a shortening of the period that shopping centers had to cease operations enabled the General Merchandise Store, Shopping Center Development and Services and Specialty store businesses to post results considerably higher than planned. Our businesses in China and ASEAN also performed according to plan, largely in line with our initial scenarios.

The only business that fell far short of our original scenarios was the Financial Services Business. Measures such as self-restraint and suspension of business operations and temporary closures implemented at member stores in Thailand and Malaysia also exceeded our expectations.

[Unknown Analyst]

Earlier, we heard about the recent differences in customer traffic at big-box store formats and shopping mall formats. Since June, however, the downtrend in customer numbers may be flattening, as indicated on the graph shown earlier. Are you seeing any differences in the trend, depending on store location and type?

[Unknown Executive]

June results are still based on preliminary reports, so we do not yet have data for each store type. But sales at multi-general merchandising stores increased in May as shopping centers resumed operations. And I expect this trend continued in June also.

[Unknown Analyst]

I doubt Aeon or any of us could have imagined in April the situation that we have seen emerge. But what is the biggest change since then? I imagine that Aeon, in particular, has a wide range of different responsibilities to its customers and employees. But I wonder if you could tell us if there has been any change in management priorities since April?

[Kaori Miyake, executive]

Yes, to a certain extent, we were unable back in April to foresee some aspects of the current situation. We anticipated that the pandemic and the need for measures to prevent its spread would wind down in the first half of the year, but the situation was different. Of course, I believe we stated the assumption that the impact on consumer spending would continue for about a year thereafter, but we did not expect that at this point in time, we would still need to remain being vigilant and continue implementing measures to suppress the pandemic's spread.

Back in April, many people thought warm summer temperatures would help settle things down. But we are now seeing that, that view was not accurate. I had not anticipated that store operations would need to maintain such high levels of vigilance for an extended period of time. We have issued a protocol regarding necessary precautions, and the entire company must endeavor to provide working environments that employees can work in safely and with peace of mind as well as providing customers with the peace of mind to shop in our stores. I think the same high level of vigilance stores will remain in place for the foreseeable future.

That said, I find it somewhat reassuring that our businesses, except for financial services, appear to be progressing at or slightly ahead of the pace envisioned in our scenarios. That said, we cannot let our guard down at all for the rest of this year.

[Unknown Analyst]

E-commerce demand is rising and new members have increased fourfold. However, sales have only increased about 20%, a somewhat lackluster increase. What challenges have been brought into relief by this rise in e-commerce, not just for your online supermarkets, but for the group as a whole, including neighborhood stores and larger stores and malls that also serve as leisure destinations? Also, in what areas do you think the Aeon Group may not be fully harnessing consumer expectations.

[Unknown Executive]

Speaking in general, from an industry-wide perspective and not just Aeon, the sudden huge increase in online traffic led to problems with products going out of stock. This problem has already been resolved as have the related logistics issues. Another issue is related to the online supermarket service orders being filled at retail stores, which led to problems in the order picking process at these stores. At first, the order picking process took a lot of time but we were able to flexibly deploy employees separately on the second and third floors, for example, not just from our general merchandise stores, but from all group stores. For example, we received support from employees of Aeon Mall specialty shops, which had been temporarily closed down. We will continue to utilize the approaches we have established to resolve future issues with products and order picking.

Product delivery was another challenge. We are preparing various models, including drive-thru product pickup services. We will strengthen our e-commerce operations by not only improving delivery but by preparing a variety of provision methods that meet customer needs, including having customers come to pick up their online purchases.

[Unknown Analyst]

I think Aeon Financial Services' adoption of IFRS for accounting for reserves in Asia led to a technical blip in those reserves, owing to a sudden accumulation in response to the difficult outlook. If that blip disappears and transaction volume returns, we probably don't need to worry about what can be considered a special drop off limited to the first quarter. I've also heard that the government's guidelines and impairment are not yet clear and that there may be no need to take impairment losses as the decline in revenues is a temporary one caused by the coronavirus. So will you not post an important loss if the decline proves temporary and things return to normal in the second quarter? Or is your intention to post a loss based on the current situation in order to strengthen the subsidiaries' finances?

[Takeshi Miyazaki, executive]

As you've pointed out, with Aeon Financial Services application of IFRS, they will, of course, set aside reserves based on our future plans. As for posting impairment losses, we will make a decision based on a careful assessment to whether or not the current situation is a temporary one.

[Unknown Analyst]

Although there is uncertainty in the outlook, can we, therefore, assume that decisions about impairment losses will be based on Aeon rules and not government guidelines?

[Unknown Executive]

That is correct.

[Unknown Analyst]

It was mentioned that a JPY 1.2 trillion commitment line existed at the start of this fiscal year. What financial actions were taken during the first quarter? And what are your future plans?

[Unknown Executive]

The JPY 1 trillion we mentioned at the start of the fiscal year includes short term debt facilities as well as the commitment line. The amounts and limits on usage have not changed. In the first quarter, the group mainly utilized surplus funds and accumulated cash and deposits. Except for a certain time in April, interest rates were relatively stable, so we tapped into commercial papers and short term loans. Of course, we will also continue to consider longer-term commitment lines and funding.

[Unknown Analyst]

Given the widespread sluggishness in apparel sales, not only at Aeon, but other retailers as well, what is the inventory situation in the General Merchandise Store Business, such as at Aeon Retail? Also, how should we view the impairment risk faced by the General Merchandise Store business?

[Kaori Miyake, executive]

While the coronavirus presented us with unusual conditions in the first quarter, inventory conditions were not very good even before that. So we were steadily working to bring inventory levels down as we perceived it as an issue. Those efforts were yielding positive results when we were hit by the coronavirus and inventories ballooned significantly. Since we had already been working to properly reduce inventory levels, the subsequent increase had an impact on our gross profit. We will continue to work on this issue while carefully watching inventory levels and have generally got them under control. As for possible impairment losses, we will continue to carefully assess the situation, as noted earlier.

[Unknown Analyst]

How much is Aeon Retail's inventory for apparel items, for example, increased compared with May 2019? And what is the overall inventory level?

[Unknown Executive]

I don't have the exact numbers with me right now, but I understand that inventory has been reduced. Inventory devaluation carried out in the first quarter was greater than originally planned, which has contributed to the faster-than-expected progress in our inventory reduction.

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