Aeon Mall Co Ltd

TSE:8905

Earnings Call Analysis

AEON Malls' Strategic Initiatives and Expansion Plans

AEON Malls is focusing on both domestic and international growth. Domestically, they plan to rejuvenate their 160 malls in Japan, focusing on tenant replacement and enhancing communal spaces. Internationally, they continue to expand with new malls in Indonesia, China, and Vietnam. A significant part of their growth strategy involves restructuring their business and reallocating resources to more profitable ventures. AEON also emphasizes attracting more customers through innovative events and enhancing customer appreciation days, anticipating strong revenue growth from these efforts. Additionally, they are deepening their market dialogue to ensure seamless execution of their performance plans.

Strong Financial Performance Signals Growth

In the first quarter, the company achieved record highs in both operating revenue and operating income, marking a significant milestone in its financial journey. Operating income surged to JPY 11.7 billion, up JPY 1.4 billion from the previous year, indicating a robust year-on-year growth of nearly 14%. This growth was largely driven by the domestic mall business, which saw customer traffic grow by 1.5% at existing malls and specialty store sales grow by 3.1%. Additionally, cost reduction measures such as lower electricity costs further bolstered profit margins.

Regional Performance: Domestic vs. International

While the domestic business thrived, international operations presented a mixed picture. Operating income from overseas rose slightly to JPY 3.7 billion, an increase of JPY 0.1 billion year-on-year. However, profit declines in markets like China and Cambodia were offset by growth in Vietnam and Indonesia. Notably, customer base in China continued to expand with double-digit growth, but challenges arise from a declining price per customer due to an economic slowdown linked to the real estate market.

In-depth on Domestic Growth Strategies

Evaluating the reasons behind strong domestic sales reveals that renovations played a crucial role. Malls that underwent renovations witnessed a sales increase of 6.7% year-on-year compared to non-renovated venues. Specifically, significant increases were noted in AEON Mall Hiroshima Fuchu and Makuhari Shintoshin. Inbound tourism, another key area of focus, is projected to grow from JPY 5.3 trillion last year to JPY 7 trillion this year and possibly JPY 10 trillion in the near future, creating further opportunities for sales growth.

Management's Vision and Future Initiatives

The newly appointed management team expressed a commitment to revitalizing existing malls and expanding floor space to optimize value. A budget of JPY 6 billion is allocated for structural reforms this year, with plans for more granular assessments of individual malls before finalizing investments. Ongoing strategies will also look to enhance customer experiences through targeted promotions, including loyalty discounts on special customer appreciation days and a variety of community events designed to drive foot traffic back into malls post-COVID.

Future Challenges and Strategic Focus

Despite current success, challenges persist, particularly in international markets. The management is re-evaluating its overseas strategy, considering adjustments based on profitability, and has acknowledged oversights in business expansion. In response, the management aims to streamline operations by reallocating resources to enhance the core commercial activities and returning a portion of profits to shareholders as growth investments materialize.

Conclusion: A Positive Outlook with Attention to Risks

While the first quarter of the fiscal year indicates a strong start for the company, the path forward will require strategic navigation of both domestic and international challenges. The focus on renovations, revitalizing existing properties, and harnessing inbound tourism demand shows promise. Still, investors should monitor management's execution of these strategies and their impact on profitability moving forward. Overall, the combination of robust domestic growth alongside cautious international expansion could offer a balanced investment opportunity for stakeholders.

Earnings Call Transcript 2025-Q1

[Keiji Ohno, executive]

Now after explaining the first quarter financial summary I'm going to explain our initiatives for the second quarter and beyond as well as what the new management team has in mind. Please turn to Page 3. In the first quarter, we achieved record highs in both operating revenue and operating income. We secured year-on-year increases in profits at all levels, we are progressing at a faster pace than planned against the figures announced for the first half of the fiscal year.

Please see the next page. I will explain each segment. The slide you are looking at is a summary of the performance of the domestic business. Operating income increased JPY 1.4 billion from the previous year to JPY 11.7 billion, achieving double-digit growth. This profit growth was driven by the domestic mall business where customer traffic at the existing 92 malls grew 1.5% year-on-year and specialty store sales grew 3.1% year-on-year, resulting in an increased lease income percentages.

In terms of expenses, cost reductions, such as lower electricity costs also contributed to improved profits. As shown in the graph below right, preliminary figures for June show that specialty store sales remained strong, improving 12.8% year-on-year. The same trend is continuing in July. Please see the next page. Next is the overseas business. Operating income increased JPY 0.1 billion from the previous fiscal year to JPY 3.7 billion. A record high for the first quarter.

Looking at the breakdown by country on the bottom left of the slide, profits declined in China and Cambodia, but Vietnam and Indonesia covered the decline in profits resulting in an overall increase in operating income. As for China, the Beijing malls closed last year and the profit from the Beijing malls was about JPY 270 million excluding the profit from the Beijing malls, the profit level was almost the same as the previous year.

In China, the number of customers continued to show double-digit growth but the price per customer has dropped significantly. Although this is not limited to our industry, we are certainly affected by the economic slowdown caused by the sluggish real estate market and the major issue that remains is how to improve our business performance from the second quarter onward.

Please see Page 7. I mentioned that domestic sales were strong, but let me summarize why they were good. The first reason is renovations and inbound. Sales at malls that underwent renovations grew 6.7% year-on-year, which is a very high increase compared to non-renovated nonactivated malls. This can be attributed to the extremely successful large-scale floor space expansion and renovations that have been implemented since last year.

Sales at AEON MALL Hiroshima Fuchu, Makuhari Shintoshin and Kyoto, which underwent renovations last year, also showed a significant increase over the previous year. I will talk more about this for the second quarter in the future. But I believe that the most important point for us is to how to revitalize existing stores in Japan, I will continue to focus on this issue.

And also on the right side, inbound. In addition, we have enacting priority measures for inbound customers. And the AEON Mall Tokoname and AEON Mall Okinawa Rycom shown on the slide are showing double-digit growth. As I will explain later, inbound demand is set to have been around JPY 5.3 trillion last year, but I believe it will reach JPY 7 trillion this year and eventually reach JPY 10 trillion in the near future.

Since we have stores all over the country, we believe that one of the most important issues is how to capture inbound demand outside of the priority malls. Next, please. Here are some of the examples in which the sales increased through most unique sales promotions. The first is the enhancement of loyal customers shown on the left side of the slide, on customer appreciation days of April 20th and 30th, a lot of customers come.

This year, we started measures to attract these customers not only to the retail zone, but also to specialty stores. The results were a very good start, and we will continue to offer a 5% discount to gold members at our specialty stores.

And we will continue to implement ways to increase sales on customer appreciation days.

On the right side of the slide are the Golden Week events, we implemented many events after COVID-19, there were cases in which we were slow to attract customers or have no experience in attracting customers. Now however, we're holding a wide variety of events at each of our malls to bring back customers who lost the habit of visiting malls after Corona.

Among these events, in addition to sports and our strong kids events we're focusing on food-related events to attract more customers since food is currently popular. I do not go into detailed performance figures here. Please see Page 16. From here, I will explain the details of our initiatives from the second quarter and beyond. First, let me talk about new stores. As you have already heard, we opened AEON Mall Delta Mas in Indonesia in March. We also opened an AEON Mall in Hangzhou, China in June.

We also plan to open AEON Mall Hue in Central Vietnam in the second half of the year. Vietnam is a strong market now and also Hunan Changsha, which will be the first one, and it's going to be around fall. Please see the next page. Hangzhou and Changsha in China are areas where we intend to aggressively open new stores.

As shown in the figure on the left, we have already opened malls in 4 major business expansion areas in China or 5 areas to be more precise. In particular, we intend to promote new mall openings in the Jiangsu and Zhejiang areas and the Hubei and Hunan areas to strengthen the allocation of resources.

Please see the next page. In the domestic market, as I mentioned earlier, we would like to focus on how we can reorganize existing malls. The most important thing is to replace specialty stores or as we call them tenants and I believe that this is the first priority in the renovations of domestic malls. We have AEON Mall stores in China and ASEAN countries. We are thinking of obtaining more information in these regions and having promising tenants move in, in other words, replacing tenants as one of our strategies.

While replacing such tenants, of course, we believe it is important to realize comfortable spaces and appropriate environments in common areas, which is what we are currently focusing on. Although it is difficult to see the connection between the common areas and revenue, there's no doubt that there are places where customers can play free of charge and this hot climate.

We would like to attract customers together with attractive tenants by emphasizing the safety and security of these areas. Next, please. Next, I would like to talk about inbound tourism. As I mentioned earlier, we're going to strengthen our efforts in this area, and we would like to divide our efforts into 2 major areas. The first is for group travelers. Currently, 20 AEON malls can accommodate large buses, and we intend to expand this to all malls in the future.

To be honest, the number of group tours is gradually decreasing compared to its peak period, but we still receive a great deal of sales from the large number of people who come to our stores in groups. We would like to work on how to improve the system for accepting group travelers.

The right-hand side of the slide shows individual or single travelers. These travelers are the same as group travelers, but they make their travel plans in Japan before they arrive, not after they arrive. Therefore, we have overseas stores. This is our biggest advantage.

Therefore, we would like to cooperate with the Chinese and ASEAN sites to plan how we can use this to encourage people to visit the AEON Mall before the trip to Japan. Next, please. I would like to talk about attracting more customers to malls in Japan. This summer has been very hot and dry rainy season. We're working with local governments to create cooling shelters where people can come to AEON to cool off relax and unwind rather than staying at home in the heat to prevent heat stroke.

This project has been very well received and is appreciated by the government as well as our customers. However, we're going to differentiate ourselves simply by cooling down the inside of the building so we would like to create a sense of specialists by adding extra features such as children's pool or misting in the outdoor area, along with a comfortable space inside the building. We would like to create a special feeling by planning something extra.

Also, as you can see on the right side of the slide, we're still making various efforts to promote sports such as basketball and soccer in some areas. For example, we are holding an official ping pong tournament in a mall in Okayama. We hope to expand this kind of activity to the company-wide level and further strengthen coexistence with sport.

In terms of environmental measures, we will start collecting used clothing as resources based on the concept of the circular economy mall. We collect used clothing from customers and reuse and recycle them and all AEON malls nationwide gradually starting in June. These are the topics for the second quarter and beyond.

Please turn to Page 15. The new management team, including myself, has been appointed, and we are currently discussing various issues within the company. Although we have not yet reached the point where we can put down figures, I would like to explain to you our thinking at this point about 3 months after the appointment. First, from a business perspective, as I explained earlier, we have 160 malls in Japan.

And we would like to focus on how to maximize the value of these malls. In this sense, we'd like to work on value creation such as revitalization, expansion of floor space inbound sales, as I explained, and measures to attract customers in various ways, which you'd like to do in the short term.

Next is the fundamental business structure reforms and we have set a budget of JPY 6 billion for this year. However, we'd like to make a firm decision on this better by looking at the situation of each mall or store one by one. So we will do this but I would like to ask for a little more time. As for cost reduction measures, we're engaged in various businesses in addition to AEON Malls, but we're aware that maybe we're expanding our business a little bit too much.

So we'd like to reduce costs by allocating our resources and human resources to our commercial activities. It is roughly 10 to 15 years since we opened our overseas AEON malls. We'd like to further grow our overseas business by redesigning our overseas strategy once again. We are currently in the process of deciding which countries to focus on and which new countries to consider.

As I have already mentioned in the midterm business plan, we will focus on activating and rehabilitating of existing properties in Japan. In addition, as the demographic trend in Japan is the people are gathering from the regions to the cities we will focus on what we can do to the cities where people together.

For example, the AEON credit service and in retail are connected. And as I mentioned earlier, the AEON Mall Group has stores in Japan, China and ASEAN countries. But we are aware that the connection between Japan, China and ASEAN businesses is a little weak. So we need to link these areas as a single company and create synergies.

We are thinking about this from a business perspective in order to conduct this kind of business, we need to decide how to allocate investment based on this strategy, allocating them where they're necessary and efficient and holding back on those where they are not.

By increasing profits from such growth investments we will return profits to our shareholders. Last but not least, I'd like to talk about dialogue with the market. I believe that our first and foremost role of the new management team is to ensure the achievement of the performance plan that we have announced. We will do our utmost to achieve this goal.

In addition, the members present today, including myself, the directors in charge of Japan and overseas. I would like to ask each of you to please join us in further deepening our dialogue in response to the questions you may have that concludes my presentation. Thank you very much.

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