istyle Inc. (3660) Earnings Call Transcript & Summary

I am Yoshimatsu, President and CEO of istyle. Conventionally, financial results meetings are held twice a year at the end of the first half and fiscal year-end. But for this fiscal year, partly due to the condition under COVID-19 pandemic, quarterly meeting is organized. Today, I will present the results for the third quarter FY 2021. This slide shows executive summary. COVID-19 pandemic has been continuing longer than expected. And at the second quarter results announcement, we withdrew the full year forecast. We are in the phase to establish a strong corporate structure to ensure operating profit even under COVID-19 pandemic. At the time of the first half results meeting at the end of the second quarter, except a flagship store @cosme Tokyo and overseas stores, business returned to profitability. Net sales in this fiscal year are almost maintained year-on-year at the level of pre-COVID due to e-commerce growth. Full year forecast will be elaborated in detail later. Through thorough cost control and each business growth, we returned to positive operating profit in March for the single months. Since April, environment has been difficult with another declaration of state of emergency. But even in such condition, quarterly operating profit seems achievable now. For the full year, we plan to achieve profitability in net profit now. In many perspectives, we are in the phase to turn around the company, and I'd like to explain the third quarter results in such environment. As for the third quarter total, net sales were JPY 23.186 billion, and OP was minus JPY 624 million. Sales were 98.2% of the previous year. And as for OP, loss was reduced by almost JPY 800 million, coming notably closer to profitability. For each segment, let me describe more in detail later. For the full year, net sales target is shown JPY 30.9 billion. As for the total for 3 quarters, OP is minus JPY 624 million, ordinary income is minus JPY 822 million, and net income is minus JPY 1.39 billion, with no operating expenses and extraordinary losses. And let me talk about their details. As for nonoperating expenses, as consolidated periods, [ we will invest had ] different results from the plan due to COVID-19 pandemic that resulted in loss on investment in partnership and other losses on interest expenses and foreign exchange were posted, and JPY 356 million of nonoperating expenses were posted. As for extraordinary loss, at the second quarter results meeting, I talked about with withdrawal of unprofitable businesses and stores in Global segment and the relevant losses were incurred in this quarter. In the downsized offices and impairment loss on software led to the total of JPY 453 million of extra ordering loss. With this, I think the worst time is now over. Trend in net sales. Three quarters' total net sales were JPY 23.2 billion, almost comparable year-on-year. Quarter results by segment. In this quarter, net sales were JPY 7.57 billion, 98.7% of the previous year. By segment, On Platform was 84.9%. Beauty Service was 111.2%. Global was 87.8%, and other was 70.6% of the previous year. Due to the growth in Beauty Service and e-commerce, the total sales almost returned to the previous year's level. In particular, when you refer to OP ratio, it deteriorated drastically due to COVID-19 pandemic. But through cost reduction, among others, we are rapidly coming close to profitability. I'd like to discuss by segment. As for On Platform, sales were 84.9% of the previous year, JPY 1.71 billion, still in very tough conditions. In the third quarter FY 2020, COVID-19 pandemic has just started. And in the fourth quarter, state of emergency was declared, and the business grew tougher. And this year is turning to deeply tougher conditions year-on-year. Under such circumstances, we sign of bottoming out, clients regard the present condition as a new normal and began to consider future initiatives positively. Brand official is turning to positive, bottoming out in the previous quarter. So in On Platform, finally, we feel that we are heading for improvement. Beauty Service. Net sales are 111.2% of the previous year, marking year-on-year increase with remarkably strong JPY 4.552 billion. The most notable part is e-commerce growth, marking substantial growth of 166% of the previous year. Every year, we organized e-commerce special event, Beauty Day in the second quarter to expand e-commerce in Japanese cosmetic market, and we sustained the sales of over JPY 2 billion in this quarter also. Store sales are to grow from now. And when storage sales recovered, we can achieve the highest sales of segment. OP ratio turned positive as well. We consider that Beauty Service segment can generate steady profit, even with the loss-making flagship store. For Global, in the past, we made significant investment for this growth area as shown in the midterm management plan. However, due to COVID-19 and external environment, we had to have business restructuring and withdrawals, and we try to reduce cost. As for the restructuring of unprofitable stores and unprofitable businesses, I think almost all of the measures were already taken. Under such circumstances, sales were 87.8% of the previous year, achieving over JPY 1 billion. As for OP, it dropped temporarily due to inventory variation loss of Hong Kong store, but almost recovered to the level of the first half without the factor of Hong Kong stores. When COVID impact on Hong Kong stroes settles down, we think that the return to profitability is achievable. As a segment, temporary staffing agency business has been increasingly stabilizing. Net sales were 70.6% of the previous year, but I think that this segment is now a structure to generate stable profit. As for SG&A expenses, we tried to reduce cost here as well, and offices are downsized. And previously, there were some upfront costs in the form of investment. But that is also squeezed. Overall, SG&A ratio has been declining and fixed cost was notably reduced to 82% of the previous year. Then operating income of each segment is added up. In the third quarter, it was up JPY 162 million year-on-year and [ loss first ] contracting. By segment, following On Platform segment, Beauty Service and other segments recover to profitability. Global segment needs to improve our little farther for profitability. And the profitability for the entire consolidated group seems to be achievable. Let me talk about the latest operating services. Number of @cosme monthly unique users was 14.4 million, almost stabilizing. [ Apps ] has been growing gradually with membership of 6.7 million, showing stable growth here also. Connection showed the link between @cosme users and brand, and this number was 21 million. After switching to new service Brand Official, it has been showing stable growth. How we accelerate growth here would serve as one of our major KPIs. Number of contracts for brand official. Previously, cosmetic brands were not able to fix policy under COVID-19 pandemic. But recently, they are more prepared for the situation to continue growing more positive for e-commerce and new online advertisement, and we see the progress of negotiations. As for Brand Official, temporary number of contracts fell due to withdrawal of some brands, but it has already bottomed out. And from this quarter, it began to grow again. The target for this fiscal year is 300, and now we are taking various approaches and actions to explain Brand Officials for each brand. In the third quarter, following the second quarter, finally, we achieved profitability, except our flagship store and overseas stores. With a strong results of On Platform, we achieved monthly profitability in March, moving towards a positive direction. As for the forecast for the full year, based on the monthly profitability in March, we expect to turn for profitability in the fourth quarter as well. Originally, we had planned as such, the declaration of state of emergency was issued before Golden Week holidays in April, and it is still extended. Future is still unpredictable. Unless the store sales grow, clients promotion would not accelerate. Of course, some brands are growing through e-commerce, but many brands are still trying things around. And we expect to post a net profit for the full year. This slide shows revised plan. Net sales will be JPY 30.9 billion, trying to achieve some growth over the previous year. Operating income is minus JPY 620 million. With profit in the fourth quarter, we will achieve increase of JPY 1.7 billion year-on-year. Ordinary income is minus JPY 840 million, up JPY 1.6 billion year-on-year. Net profit will be positive, up JPY 5 billion year-on-year with remarkable improvement year-on-year. By segment, On Platform sales will be JPY 7 billion, affected heavily by COVID-19 pandemic, but OP will be up year-on-year. As for Beauty Service, slowdown of store business is more than offset by the growth of e-commerce. And the full year op will be minus JPY 260 million, up JPY 425 million year-on-year, and quarterly profitability will be achieved. Global sales will be JPY 4.65 billion, and we will finalize the withdrawal of unprofitable businesses. OP is minus JPY 160 million, but it shows notable improvement year-on-year. In other segment, which includes temporary staffing business and investment business, sales will be JPY 1.050 billion, and op will be minus JPY 30 million, contracting losses year-on-year. Company-wide cost will be minus JPY 1.5 billion. And through cost reduction, the company will be leaner. Detailed reason for change is shown on Page 23. Operating income is turning positive through improvement of each segment. Consolidated operating income. In the fourth quarter from April to June in the previous fiscal year, when COVID-19 pandemic broke out, we were in a very serious condition. From the first quarter of this year, we had advanced structural improvement step-by-step by withdrawing from the unprofitable businesses, among others. And in the third quarter, we progressed to minus JPY 80 million of operating income. And in the fourth quarter, we are striving to achieve profitability even by JPY 1 million. The future prospect is still extremely unpredictable. But as a whole company, we will advance both stores and e-commerce businesses, considering COVID-19 pandemic as one standard with reband promotions. We are working on SDGs proactivity as well. As you know, the entire society is working on SDGs actively. We like to do what we can do 1 by 1 in cosmetic industry, and we held Beauty SDGs week the other day. SDGs will be a major pillar of the company, and will form the foundation of major corporate strategy. Doing what we can do 1 by 1, we would like to advance istyle, @cosme and beauty-rated businesses under the new rule of societies. With this, I conclude the presentation for the financial results of the third quarter FY 2021. Thank you for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]