istyle Inc. (3660) Earnings Call Transcript & Summary

I'm Yoshimatsu, President and CEO of istyle. Thank you for joining us despite your busy schedule. I will present on the earnings results for FY 2020 ended in June and the business plan for FY 2021 ending in June. This slide shows the overview of the full year earnings results of FY 2020. Net sales were JPY 30.564 billion. OP was minus JPY 2.325 billion. We had a tough result due to a slumping global business and the impact by COVID-19. At the results announcement of the third quarter, we presented the second revised forecast. Without knowing the impact of COVID-19, our forecast was a conservative one. They were JPY 27.6 billion for sales, minus JPY 3 billion for OP and minus JPY 6 billion for net income. But the results were above the initial expectation of the worst scenario with the impact of COVID-19. On the other hand, JPY 4 billion of extraordinary loss was posted. As for the breakdown of extraordinary loss, we have already announced the impairment of goodwill for 2 overseas subsidiaries in the first half FY '20. Additionally, we suffered the impairment loss for overseas stores and loss on closures, short-term loss for store closings and staffing due to impact of COVID-19 in Japan and the impairment loss on software assets. And as a result, JPY 3.598 billion of extraordinary loss was posted. As a result, net sales declined year-on-year for the first time since the foundation of the company. I'm very much embarrassed with the results, and sorry for all of you. Trends in segment sales. In all segments, net sales year-on-year were clearly weak, affected by COVID-19. In total, fourth quarter sales fell to 85.1% of the corresponding period of the previous year. On platform business, net sales were 96.7% at the previous year. It seems that cosmetics clients tightened their budget due to COVID-19 and orders stalled. Clients' advertisement policies seem to have been pending. And MAU recovered with the continued system development as SEO countermeasures. But due to the required system redevelopment, one-off amortization cost was posted and loss was incurred. As for the Brand Official contract, fourth quarter was flat quarter-on-quarter because our sales activities were insufficient and decision-making process of clients have been taking much longer time and key factors in their decision-making process were not clearly visible. Beauty Service business. Net sales of Beauty Service were 96.4% of the previous year. Honestly speaking, I was prepared to face tougher results. Majority of stores closed for 2 months, and their sales were 44.7% of the previous year, below 50%. On the other hand, e-commerce sales grew sharply. And in total, net sales settled down with 96.4% of the previous year. In this segment, fourth quarter operating profit was positive, and this is due to the extraordinary loss posted in this quarter which were transferred from the rent and the staffing cost of the closed stores after the declaration of state of emergency. Global business. Situation changed drastically since the enactment of new EC law in China in January 2019. Under such circumstances, we moved proactively from the first half FY '20 and expected to deliver results from the second half. But due to the further competitive environment and the outbreak of COVID-19 pandemic, condition is very severe. As for stores in Hong Kong and Thailand, in particular, normal operation was hampered by COVID-19, as in Japan, and their sales was sluggish. Other business. Temporary staffing business accounts for majority of Other business. In most of the staffing business, sales staff are dispatched to stores. But majority of those stores are closed, and net sales declined sharply. With market deterioration, JPY 218 million of impairment loss on investment securities was posted. And in this year, massive loss was incurred. SG&A expenses. SG&A expenses was 104.3% of the previous year. Up to the first half FY '20, through selection and concentration, we have been setting up the structure to head for midterm plan sales target of JPY 50 billion. But in the second half and onward, the expense has been cut back due to the drastic environmental changes. Total SG&A went up due to the temporary software amortization cost. But excluding it, SG&A contracted in line with the current business scale. As a result, as shown in operating income by segment, all segments except Beauty Service posted minus operating income. Status of operating services. This slide shows @cosme's monthly unique users. Our efforts in SEO countermeasures and changing existing systems began to deliver results steadily. And monthly unique users have been recovering to the level of previous year. Membership has been expanding steadily. Connections between brand and user has been increasing steadily with the growth of Brand Official. I'd like to review FY 2020 ended in June, covering both of good and bad aspects. As for good aspects, despite the sharply weakening cosmetics industry, due to the growth in SaaS business, stock type revenue increased and that resulted in the solid business results, getting away from the excessive dependence on volatile advertisement services. And the stores have been closed due to COVID-19 but, with the strong growth of e-commerce business, our sales capacity in cosmetics industry has grown substantially. Then with the gradual recovery of stores, I believe in the strong growth potentials of Beauty Service business. On the other hand, SEO has been delayed before, but the sustained efforts began to gradually deliver results. And we are pleased with the good news of MAU recovery. On the other hand, as for bad aspect, business confidence of the entire cosmetics industry worsened sharply. As for the weakening overseas market environment, we have been promoting selection and concentration of business. But domestic revenue-generating divisions began to slow down due to COVID-19, and we had to cut back the investment in salons and others, where mid- to long-term growth was expected, with further contraction and withdrawal of business. This resulted in an impairment loss and the temporary amortization of the system, which is in making. And towards the net sales target of JPY 50 billion shown in midterm plan, we have been increasing headcounts. But the revenue decreased, affected by COVID-19, and the balance of income and expenses deteriorated. As for current condition of cosmetics industry, total sales of top 10 listed cosmetic companies from April to June are shown here, and it is down by almost 30% year-on-year, 72% of the previous year. Firstly, it is due to the absence of the inbound demand, which was enormous in cosmetics industry. Secondly, due to store closure, sales stalled. And in particular, counsel process is important for cosmetics, but it was very difficult for users to try cosmetics. Thirdly, due to less opportunity of makeup for wearing face masks and less contact with people, the entire cosmetics industry faces bleak environment. This slide shows review of results. As of the announcement of the second quarter results, we revised the target. It was due to sluggish global business, delay in opening of Harajuku store and failure in achieving target at e-commerce special events. Then performance worsened due to COVID 19. Let me explain the difference between the second quarter revised target and the results. Net sales fell sharply due to stalled advertisement orders, store closures and overseas market, including China, which were affected as well as Japan. Staffing business sales dropped sharply due to store closures, where temporary staff are dispatched. They led the operating income to minus JPY 2.3 billion. Compared to the initial plan, in the initial plan, net sales were JPY 39 billion, OP was minus JPY 1.2 billion, but the results were sales were JPY 30.6 billion and OP was minus JPY 2.3 billion, heavily affected by COVID-19. Impact on each business is briefly shown here. Let me explain how each segment was impacted. As for On Platform business, business confidence of the entire cosmetic industry was dampened, and the fourth quarter results were well below target. And the lack of sales activity in the fourth quarter will affect the results of the first quarter FY '21. But on the other hand, the current condition will not be sustained, and the various trials and errors have started in the cosmetic industry as to the delivery of cosmetics. Our sales activity has already resumed, including online sales activity and online new events. And we expect the results will be materialized gradually from the second quarter. Beauty Service. In Beauty Service, following the state of emergency declaration, we had to close stores. A part of local stores was kept open, but their impact on the entire segment was minor. Since June, operations gradually began to return to normalcy, but we regard it necessary to consider new style of stores and selling products facing the second wave of COVID-19. E-commerce achieved strong growth. In December 2019, e-commerce special event was held. We had an ambitious target of GMV JPY 1 billion per day, but it was not achieved and had some difficulties. But we acquired new customers through this event, and it also contributed to the growth in the fourth quarter. We were informed that our growth was higher than the other e-commerce sites, and one key differentiation factor was that we were able to sell products which were only available at off-line stores. Why were we able to sell the off-line only product at our EC site? Because we run off-line stores and have established the trust relationship with brands, and they granted us the sales permission. That partly contributed to the e-commerce growth. And combining sales of e-commerce and the stores, our sales capability has been growing strongly. As a result, under the present situation, net sales of Beauty Service increased year-on-year, which we regard as positive development. Global business also suffered considerably, affected by COVID-19. In the first half, we faced difficulties with intensified competition in cross-border EC in China and the local protest demonstration in Hong Kong. In Taiwan, after the ban on Visa issuance in China, with no inbound tourist from Mainland China, we decided a withdrawal from Taiwan and took various other measures. Since January, we had expected to see gradual recovery. But COVID-19 hit us, and we must contract business further in Hong Kong and Thailand. And in Malaysia, we may consider further withdrawal and selloff. This slide shows implemented measures. Originally, FY '20 was planned to be the investment phase. But given the slowdown of revenue-generating business, we had to suspend investment. And our top priority is placed on curbing expenditures in each business. Trends in consolidated net sales and number of employees. We have been increasing the employees and the building structures to achieve the midterm plan target. But compared to the net sales target of JPY 50 billion in the initial midterm plan, they resulted to JPY 30.6 billion, whereas number of the employee is over 1,400, close to the targeted 1,500 in the midterm plan. Currently, sales and expenses are clearly imbalanced. As for SG&A, we have been curbing the expense from the middle of the year. But the resulted expense increased from JPY 14.7 billion to JPY 15.9 billion. Being referred to SG&A by quarter, the cost was sharply reduced toward the fourth quarter. We'd like to take company-wide cost control to enhance profit-generating structure. As for financials, in the first half, we had a funding of JPY 6 billion for working capital and JPY 2 billion for CapEx of our large store. And with additional JPY 1.5 billion for COVID-19, we secured the liquidity for the time being. Let me recap summary of FY 2020. Along with the worsening business confidence of cosmetics industry, we also faced tough condition. But Brand Official grows steadily, and sales capability of e-commerce and stores has grown year-on-year. Considering our position in this industry, I feel great potential for the future. As for business policies for FY 2021, we have 3 major policies. Firstly, we will pull out and liquidate unprofitable business. We will implement it wherever possible. Secondly, we reinforced SaaS Brand Official. We continue to grow it as a core of our business following the previous year. Thirdly, we will strengthen sales capacity linking off-line and online, having both businesses enhance our strong sales capacity. Combining with Brand Official, we would like to strengthen our beauty platform further. As for the first policy of pulling out and liquidating unprofitable business. In On Platform business, we decided to pull out of salon business, which is non-cosmetic business. Originally, we plan to make it as a part of beauty platform business and made upfront investments through trial and errors, but as of today, we had to pull out. In Global business, we are exploring a way to transfer HERMO EC site in Malaysia and are considering further pull out of cross-border EC in China and overseas unprofitable stores. Second policy is to reinforce SaaS Brand Official. Our business consists of media, e-commerce and store. We have been earning through advertisement and sales promotion via platform that connects user and brands. Here, we used our marketing support service of Brand Official, which visualizes user behavior, upgrades marketing of cosmetics brand and the improved cost performance. We will strive further to make Brand Official stable earnings space. As for Brand Official plan, the present contracts are 240, and target for this year is 300 postponed by a year. In the near future, we'd like to achieve 800 as a mid- to long-term target. Achieving MRR of JPY 400 million, we would like to stabilize earnings. Third policy is to strengthen sales capacity linking off-line and online. Despite the impact of COVID-19, our cosmetic sales as a whole increased. As a major reason for growth, we have an extensive product lineup, which is only possible with the management of off-line stores. We are not devoted to e-commerce. And as we also have off-line stores, we can have these strengths. Second point is @cosme's credibility and rich content. You can enjoy shopping experience at the store. And established neutral media of @cosme and the fact that only authentic products are sold are highly appreciated. Third point is to promote DX for retail through collaboration of off-line and online. E-commerce will continue to grow. Then what about off-line store sales? We'd like to promote the cosmetics sales, including online sales, considering how we would promote the collaboration of off-line and online. During the spread of COVID-19, frequently asked questions includes as follows: Does istyle continue to promote physical store? Isn't policy highly risky in this environment? Is it better to concentrate on e-commerce? We do acknowledge that e-commerce is much more profitable than physical stores. But considering market size, physical stores market size is still enormous, and 95% of cosmetics are still sold at physical stores. Physical stores had to be closed this time due to COVID-19, and online sales have grown. But on the other hand, it is true that we reaffirmed what can be experienced at physical stores and their importance. By combining online and off-line, I think it is essential for us and required for us to achieve high profitability and build the unprecedented retail business model. And I believe strengthening this will lead to the growth of SaaS business of Brand Official and advertisement and sales promotion. We launched online beautician project for further strengthening. To serve cosmetics, you need to offer explanation. I talked with online shopping company staff, and he said, "A product which was not sold with 5-minute talk was sold with 30 minutes explanation." Customer interaction in sales is necessary. How can the storefront counseling be offered online? Development of tools, training for beauticians and knowledge sharing can grow into a large business. The tool to materialize this is a shared counseling log, and it will serve as a key to promote online beautician project. Users will shop at several different off-line stores, not one. That is also true with online shopping. But even he or she goes to a different store, with shared counseling log, data can be shared. This data covers both off-line and online. In many stores, customer information is still managed on paper, and stores are sometimes competitors and data are not shared. So paper data was to be shared only with brand, but we will put them on system and develop as a new system shared by brands. This is already introduced at the large Harajuku flagship store. We'll deploy this at the new upcoming stores through trials and errors and aim to develop further. Our new store was opened in Yokohama in June. Opening a store in this timing was an extremely difficult decision to make. But there's a new style of a store, I made that decision. We will encourage users to use @cosme, encourage them to buy cosmetics at the retail shop of e-commerce and off-line stores and we will create the system that will enable brand to see the users' behaviors. We will also visualize users, not only those who purchase, but also those who are yet to purchase and connect users and brands. COVID-19 highlighted various issues, but major policies were not wrong, and we like to refine and develop them further. FY 2021 targets. Net sales plan for this year is JPY 37.2 billion. Operating income is JPY 50 million. Ordinary income is minus JPY 70 million, and net income is minus JPY 0.2 billion. In the first half, due to the impact of COVID-19, our loss is expected. But through selection and concentration, we'd like to achieve profit in operating income. This should have been the target of the previous year but, affected by the COVID-19 and others, there was a delay. And in this year, we will ensure profitability. As for the sales target of JPY 50 billion in the midterm plan, due to future uncertainty, we'd like to withdraw it in this timing and focus on strengthening our business foundation. Net sales of On Platform in plan are JPY 8.7 billion and Beauty Service sales are JPY 21 billion. Global business sales will be flat year-on-year, focusing on thorough cost-cutting to clear losses in this year. As for the sales by segment, compared to the previous year, they remain mostly unchanged, except Beauty Service. Beauty Service sales will go up as e-commerce will continue to grow. Closed stores will resume operation, and our large flagship store will make a full year contribution. In On Platform, reduced sales by the pull out of salons will be offset by other businesses. And in total, its sales will be mostly unchanged. As for operating income, temporary amortization, which was posted in the previous year and upfront expenses of a large store will not be recurring in this year, and the overall cost will be reduced. Therefore, profitability on operating income will be recovered. Contract target of Brand Official for this year is 300. Software amortization cost is being recovered by the current Brand Official sales, and profit will continue to expand. Ultimately, we'll return earnings capacity to originally planned level. Investment will be concentrated in 3 areas, as mentioned. And we will continue to aim for the mid- to long-term growth, striking optimum balance with profit. COVID-19 continues to spread, and the situation continues to be highly unpredictable. Future of the entire cosmetic industry is, honestly speaking highly uncertain. But because of this, I'm convinced that there are many more things that istyle and @cosme can do, and we'd like to grow our business focusing on those points. This concludes my presentation on the results of FY 2020. Thank you very much for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]