Aeon Co Ltd

TSE:8267

Earnings Call Transcript 2018-Q3

[Kaori Miyake, executive]

Good afternoon. My name is Kaori Miyake, and I'm in charge of Investor Relations at Aeon. Thank you very much for attending this briefing on Aeon's financial results for the first 9 months of the fiscal year ending February 28, 2018.

First, I would like to touch on the business environment surrounding Aeon. According to the cabinet office's monthly economic report, the Japanese economy continues on a moderate recovery track, and personal spending is also growing moderately. In the retail industry, however, same-store sales of chain stores declined year-on-year in the third quarter. Moreover, customers still have a strong tendency to economize, as shown by the robust sales of price reduction products at Aeon stores. At the same time, customers want to live healthy, energetic lives. Health and vitality have become among the established values, stimulating higher year-on-year sales in our Drugstore and Pharmacy Business as well as Aeon Retail's beauty and pharmacy categories. Never before has it been more important to offer price points and products responsive to the changing values of our customers. In this diversifying and changing consumer environment, Aeon succeeded in posting record operating revenue for the 9-month period. In terms of profitability, we achieved year-on-year improvements in operating income, ordinary income and profit attributable to owners of the parent. Operating income surpassed JPY 100 billion, the first time it exceeded that level since fiscal 2011, when we achieved record income for the full year.

I would now like to review our segment results. We made progress improving the profitability of the GMS Business, whose profit improvement is a priority in our medium-term management plan begun this fiscal year. In fact, the GMS Business had the largest profitability improvement of all our segments. Although the Supermarket Business and the Services and Specialty Store Business posted year-on-year declines in operating income, 5 business segments, including GMS, posted year-on-year improvements. And overall, we achieved year-on-year profit growth.

For the September through November third quarter, we achieved growth in operating revenue as well as year-on-year quarterly improvements in operating income, ordinary income and profit attributable to owners of the parent. In terms of operating income, we have posted year-on-year improvements for 6 straight quarters, reflecting a steady profitability improvement.

In Japan, the 3-month period of the third quarter was characterized by low vegetable prices and record-low catches of marine products. The weather patterns in the latter half of October also affected business, with 2 typhoons striking Japan on consecutive weekends. It was an especially challenging environment for companies dealing in fresh foods. Our Supermarket Business actually posted higher gross operating profit, thanks to improved gross profit margin. Operating income declined because the higher gross income could not cover increases in personnel expenses and utilities caused by higher unit price of electricity charges. The business is promoting further improvements in productivity and taking other reforms to become a group with the #1 regional supermarkets throughout Japan.

The Services and Specialty Store Business posted lower operating income due mainly to the robust performance of the cinema operation business in the same period last year when results were boosted by a record-breaking hit animation movie. Regarding other business segments, there was steady year-on-year growth in operating income.

Next, I would like to explain the results of Aeon Retail, which is responsible for the profitability of the GMS Business. Aeon Retail narrowed its operating loss by JPY 7.4 billion year-on-year. Although same-store sales did not reach the previous year's level, the company posted growth in the number of items purchased per customer, and the overall trends continued to improve.

The price reductions on Topvalu products received strong customer approval. Sales of these products increased about 30% year-on-year, and the numbers of those products purchased increased about 60% year-on-year. Aeon Retail's gross profit margin also increased year-on-year, thanks to higher sales in the clothing category and efforts to reduce losses on price reductions in the food section. Aeon Retail also continued to implement steady cost controls, which helped to improve profitability.

Reviewing third quarter sales in each individual product category. Although external factors mentioned previously impacted sales in the agricultural and marine products categories, sales increased year-on-year in the kids, pharmacy, liquor, beauty and ladies categories. In the kids category, sales were boosted by popular game consoles as well as better-than-expected demand during the Black Friday promotion period.

In the food category, beer sales increased year-on-year as Aeon Retail used the group's economies of scale to maintain prices on major beer brands. New Topvalu low malt beer, Mugi no Megumi, which is produced at a domestic brewery, also posted strong sales. Sales in the pharmacy, beauty and ladies categories also increased year-on-year as previously mentioned. As a result, Aeon Retail's active initiatives in various categories during the third quarter helped cover the challenging business environment in the fresh foods business.

In the third quarter, Aeon Retail's gross operating profit rebounded to year-on-year growth as a result of improvement in gross margins and the positive effects of new store openings. In terms of expenses, Aeon Retail continued to reduce expenses year-on-year in the third quarter by responding to customer changes with revamped promotional flyers and advertising methods as explained at the second quarter briefing. These initiatives offset higher social insurance costs, unit price of electricity charges and expenses for new store openings.

Next, I would like to explain the progress of reforms at Daiei. Sales at GMS stores transferred from Daiei to Aeon's GMS operators posted same-store sales growth of about 3% through the 9-month period. Initially after the transfer, there was insufficient awareness among customers of Aeon's special promotion days. A strong year-on-year sales improvement on special promotion days and robust sales of private brand Topvalu products led to overall sales growth at the transferred stores.

In one example of success, the Shin Urayasu Store refurbished in May, posted 55% year-on-year sales growth in its delicatessen area for the third quarter, reflecting the refurbishment by leveraging its location and special characteristics. Daiei, which is reforming its business and refocusing around food, posted a JPY 1.5 billion improvement in profitability thanks to the promotion of EDLP, strength in credit card membership campaigns and higher productivity.

Overall, our results for the 9-month period were generally consistent with the full year targets announced in October when we revised upward our forecast. We will strive over the remaining months to meet the targets.

Lastly, I would like to note that in November, we released our first Aeon Report, an integrated report on our overall corporate policy, management philosophy, medium and long-term value-creation story and our sustainable management initiatives. In December, we also held a sustainable management briefing to explain the major initiatives as explained in the Aeon Report. This sustainable management briefing attracted more than 200 members from the media and investors and lasted longer than the planned 1 hour, including the Q&A session. The contents of the Aeon Report and the briefing are available on our website, and I encourage everyone to access them for more information.

Thank you for attending today's briefing.