istyle Inc. (3660) Earnings Call Transcript & Summary

This is Tetsuro Yoshimatsu of istyle. First, I'd like to present the consolidated results for FY 2022 ended in June. This shows a summary of this document. Stores contributed to the increase in sales and operating income was profitable following the third quarter and the second half turned to be profitable. And the company achieved a record high full year sales, and the profitability started to stabilize with a robust major KPIs, including MAU. As for the business policies and the business plan for FY '23, we will enhance retail sales capabilities and the sales promotion capabilities to increase sales and return to profitability for the full year. Regarding the new management system, we will take the first step to separate management and business execution and gradually transition to the next-generation management system. As for the business alliances and financing, we've advanced the business alliances with Amazon.com, Inc. and Mitsui & Co. Limited, and raised JPY 5 billion in CV financing and issued warrants. For the details of business segment, please refer to this. Now I present an overview of financial results for FY 2022. As for the nonconsolidated fourth quarter summary, store sales have been recovering and nonconsolidated fourth quarter sales increased over 15% year-on-year. For the full year, operating loss is still posted but the company achieved an operating profit in the fourth quarter nonconsolidated results following the third quarter. The market of cosmetics industry remains tough. But in On Platform business, net sales increased year-on-year, even with a more conservative budget of clients. In Beauty Service, store sales increased 53% year-on-year in recovery of store sales and segment sales, including EC, marked a robust growth of 32%. In Global, lockdown in China affected more than expected, and the revenue in EC and wholesale declined 24%, but loss was gradually contracting due to the improvement in profitability. MAU has been sustained at over JPY 16 million, showing the solid communication with users. As for the full year results, sales grew steadily, mainly in stores, and that led to positive operating income in the second half. I will elaborate on this later. As for the full year results, they were mostly in line with the revised forecast on May 13. Net sales were JPY 34.4 billion. Operating income was minus JPY 453 million. Other income was minus JPY 593 million, and net income was minus JPY 571 million. Consolidated net sales marked a record high due to the strong contribution by the growth in Beauty Service. Quarterly sales trend by segment. In the fourth quarter alone, sales achieved 115.1% of the same quarter of the previous year and the segment breakdown is shown here. Quarterly sales trend of On Platform. Sales were 101.1% of the corresponding period of the previous year. This business also has been robust, and the operating profit has been lately stable. Beauty Service. After the lifting of pre-emergency measures in March, customer traffic at stores increased substantially and sales were 131.9% of the previous year. And with the recovery in store traffic, EC is also steadily growing. In Global, sales declined significantly temporarily affected by lockdown in China and net sales were 75.7% of the corresponding period of the previous year. OP margin improved through the profitability, excluding Glowdayz in Korea. Other business is temporary staffing agency business, and the business has been steady and sustained. SG&A expenses have been steadily controlled. They increased year-on-year as 110.9% of the previous year. But SG&A ratio to consolidated sales was 45.2%, and it has been on the declining trend showing the solid control. Operating income by segment. On Platform accounting for the major part, but now Beauty Service generates solid profit as a second pillar business, and this has significant importance because with the solid growth of Beauty Service, the earnings of On Platform will be growing in synergy. We finally began to observe the firm link between businesses. I'm particularly assured that including a large flagship store of @cosme Tokyo, we were able to achieve the profitability. Status of operating services. The number of unique users remains at high level. Membership continues to trend up. Connections, our marketing support service KPI to represent the connections with brand have been steadily growing. Full year review of FY 2022. Honestly speaking, Japanese cosmetics market is still in tough condition. Financial results of cosmetics companies showed gradual recoveries in international business, but their performance in Japan were all very sluggish. Overall, the full business recovery is yet to come. In particular, when we compare the sales of 3 major cosmetics manufacturers in Japan with those of pre-COVID 2019, they are still down by over 30%, falling short of the full recovery. Under such circumstances, good news was, we achieved a record high consolidated net sales and turned into profitability in the second half of the year. And in such environment, On Platform recovered its sales to 96% of the pre-COVID level. While cosmetics manufacturers have a strict eye on marketing efficiency, this result is a testament to show that @cosme is a partner of choice. Store sales grew to 121% of the previous year and EC to 118% of the previous year. Amidst the shrinking cosmetics market, our sales grew and our presence in the industry has been boosted. Furthermore, 2 major pillars of On Platform and Beauty Service started to generate solid profit. Finally, the company is ready to have a scope for the next phase as these 2 businesses started to generate foreign profit. In Global business, except the Korean business, which was consolidated in the second quarter, it has almost achieved profitability. I think this is due to the thorough divestment and withdrawals of the unprofitable businesses. Key KPIs, including MAU, have been kept steady. As for the bad news, though we anticipated quicker market recovery and accompanied growth of our earnings pillar On Platform as the unfavorable environment continued, its growth was below the initial plan. Given the slow growth of our sales, which could not offset the operating loss in the first half, we revised down the initial plan but consumers' behavior gradually began to change in line with a new lifestyle, and we would like to enhance the position and presence of istyle. Quarterly trend at the consolidated operating income. Operating loss was incurred due to various initiatives in the first half, but profitability was recovered in the second half. In On Platform business, multiple services are offered, including advertisement solutions and search promotion services in media, EC and stores. Increasing brand use multiple services, and that led to the increase in unit price per transaction to the level of pre-COVID. Beauty Service business has grown substantially, and it accounts for approximately 1% of Japan's cosmetics market of JPY 2.2 trillion. Furthermore, store profitability achieved a remarkable improvement. Under the pandemic, we reviewed the profitability thoroughly and operating profit ratio improved now even compared with the pre-COVID level. Light blue part in the chart shows the sales of large flagship store. And the dark blue part show the same-store sales. Same-store sales have recovered to 95% of the pre-COVID level and that partly contributed to the improved profitability. In the background of this robust growth, an overwhelming number of brands and the steady evolution of EC function contributed and a wider variety of store products and @cosme Tokyo also started to perform well. At the time of its launch, we intended to make it as a base of contents communication. The now renowned YouTubers and influencers come for video shooting, and it serves as a place to create new content. As a result, it achieved a record high monthly sales and daily sales, excluding those of its launch time, which were pre-COVID. Trending SG&A expenses. We have been particularly focusing on cost control in the post-COVID era. However, in order to achieve the target sales of JPY 50 billion in 2020, which was set at the time of midterm management plan making 5 years ago, we have been investing in human resources and the system proactively, then sales turned sluggish due to pandemic. And as a result, cost preceded and profitability remained sluggish though it showed a recovery trend. Year-on-year operating income variance analysis by PL factor. Gross profit increased with the sales growth, but why didn't profit grow in line? And why did it remain negative? First, we resumed a bonus payment from FY '22, though it has been suspended up to the previous fiscal year as we prioritize imminent issue of profitability improvement. Second, software amortization cost increased due to enhancement of platform foundation. And finally, advertisement costs increased to promote apps downloading. Despite cost increases, we were able to increase sales firmly and that resulted in the contraction of loss to JPY 453 million. Business plan for FY 2023. Net sales are JPY 40 billion. Operating income is JPY 500 million. Ordinary income is JPY 170 million and net income will be positive. This shows the business environment and policy overview as assumptions for the business plan. In On Platform, recovery of domestic cosmetics market and recovery of clients' business performance will be the key points. Under such circumstances, sales capability will be critical as a future growth driver not only in media as before, but also through initiatives, which link EC and stores will increase sales and profit. In Beauty Service, as for external environment, domestic cosmetics market will be gradually recovering. In E-Commerce, we continue to aim for robust growth centering on EC-special events. Stores will grow mainly by domestic demand as the fiscal market recovers, and we do not expect the inbound demand yet. Global business is still notably affected by COVID and the impact is especially tough in China, but we continue to improve profitability so that our E profitability will be achieved. Impact by business alliance that I mentioned at the beginning is not included in the plan for FY '23. As for the detail of the business alliances, let me elaborate later. As a topic for FY '23, @cosme Beauty Day is a key driver in E-Commerce. Last year, finally, we were able to achieve GMS of JPY 1 billion with this event. As for store business, we will open Lumine Yokohama store with a floor space of over 300 square meters, and this will be one of the largest stores. We plan to make it the brand-new istyle store with the input of our rich know-hows that have been accumulated up to date. Details by segment. Net sales in On Platform will increase JPY 1.5 billion. JPY 3.9 billion in Beauty Service and as we consolidate, sales will increase by over JPY 5 billion. Full year operating income will achieve profitability and profit in On Platform will increase by JPY 0.5 billion and by JPY 0.4 billion in Beauty Service. Though we are still in tough conditions, we achieved growth in sales and profit. Future business policies. So far, we were preoccupied by control of the loss, but with a gradual improvement in environment, I think that the foundation is getting ready to move forward looking at the current situation and the figures. We cannot keep looking down and now what we need to do to look ahead for the strong future growth, how should we act? Our first key point is to shift from the mere advertisement media. We need to have more comprehensive marketing measures to offer rich product experience to users and connect them to purchase. To that end, there are measures, including advertisement and sales promotion. But as a premise, we need to have strong sales capabilities on our own. We aim to be the #1 retail business in Japan, connecting online and off-line. And to achieve this, we have 2 major announcements this time. In E-Commerce, we concluded business alliance with Amazon.com, Inc. and in-store business, we acquired Tokyo Komachi stores. As for the business alliance with Amazon.com, Inc., we plan to open @cosme SHOPPING on amazon.co.jp as one of the specific initiatives. In addition to selling the beauty products of the wide range of brands and diverse categories, will also provide content information as they are available in @cosme. Regarding Tokyo Komachi, we acquired 4 stores of cosmetic specialty stores run by Miz Corporation. The Lazona Kawasaki, Lalaport Toyosu, Lalaport Yokohama and Aeon Urawa Misono, which are all located in large commercial facilities and large stores. Leveraging the expertise of operating in large stores that we have been accumulating, we will aim for further growth through expanding key store network. By enhancing stores and EC, we will be able to accumulate user data across online and off-line. But actually, it is quite difficult. Some companies have strength in off-line and others in online. But when it comes to database linkage and the grasp of user behaviors, due to different system structure, it is difficult to realize, but it is possible for us. Not only the data linkage, but also to expand the business domain we have taken actions for further growth, including alliance with Amazon in EC and expansion into untapped area and franchise development in store business. Potential lies there to grow earnings of On Platform. Brand Official is a service to visualize user behaviors across online and off-line. And we have a system to enable communication with users based on the analysis. This is only available with istyle in cosmetics industry, and now we are completing the structure to make it more robust. Based on the business-less alliances this time, we'd like to explore the future possibility through the close communication with brands. We'd like to find out together what we can do by combining EC and stores. This time, we joined hands with Mitsui & Co. Limited. We are struggling in Global business, partly due to pandemic. And there are, of course, something that we cannot do alone. But now we are having discussions saying that together, we will explore new possibilities and also within the business domains of Mitsui & Co. Limited if there isn't anything we can collaborate, we'd consider positively. In line with the business allowances, we secured financing. With Amazon, JPY 2.5 billion of CV and JPY 11.5 billion of subscription rights; and with Mitsui & Co. Limited, JPY 1.5 billion of CV. And with investment partnership, JPY 1 billion of CV was secured. In total, JPY 5 billion of CV and JPY 11 billion of warrants were set in the scheme. Outlining our financing is described here. So please refer to this slide. There was a media report saying that Amazon and Mitsui & Co. Limited will be the largest shareholder. But please take note that conversion of CV and exercise of the subscription right have not happened and they are not the shareholders as of today. We were informed by allottees that they will make a decision over timing and the rationale of the conversion or the exercise of rights considering the company's stock price and the status of the alliance, among others. Let me talk about the new management system. Since the foundation of the company, I have in charge of the management and execution as a President. But I contemplated how to build the next-generation management system and the company's role sharing of business. Development program of the next-generation management has been ongoing. Now in this juncture, when the company can finally look ahead, I'd like to separate management and the business execution by increasing the business domain covered by the next-generation members and it'll accelerate the decision-making speed on operational side. I'll be the Representative Director, Chairperson, CEO; and Sugawara, will be the Director, Vice Chairperson, CFO. Endo who has been the Representative of the Subsidiary, istyle Retail, will be the Representative Director, President and COO; and Hamada will be the Senior Vice President, CSO in the new management system. With the increase of new partners, we revisited the company structure and decided to move into the new management system. Finally, future is still highly unpredictable, but we think now we are ready to move ahead and can take a step further to the world that we hope to realize. This concludes my presentation. Thank you for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]