istyle Inc. (3660) Earnings Call Transcript & Summary

Hi, ladies and gentlemen. Thank you for watching this video for the istyle's fiscal year 2023 financial results and also our business plan for the FY 2024. This is Vice Chairperson and CFO of istyle, Kei Sugawara. So let's get started. So this is the summary. Our net sales revenue was our record high, JPY 42.9 billion, which is Y-o-Y 24.7% plus. And also, our operating income was JPY 817 million, which is the huge jump from last year's operating losses. So this is a Y-o-Y increase of JPY 1.3 billion. So On Platform segment, the B2B services, including the sales promotion grew and the sales reached record high full year, 8% Y-o-Y, and also increased operating profit by JPY 500 million Y-o-Y. The next is the Beauty Service segment and the largest jump coming from the brick-and-mortar stores, which is a sales increase by 46% Y-o-Y. And for the Q-on-Q from the last quarter, the 9% [ even ] plus. And also, at the same time, for the online side, the e-commerce is growing at the same time, as much as double-digit 16% plus Y-o-Y. In total, the whole Beauty Service segment increased 33% increase Y-o-Y. So the sales reach record high and also the profit improved by JPY 1 billion Japanese Y-o-Y. For the Global segment, that been very difficult. But at the same time, sales increased 3.5% Y-o-Y, due to the strong performance increase from the Hong Kong retail. And also profit improved JPY 120 million Y-o-Y. Although there are some of the difficult performance in Korea, as well. And for the last but not least, our main KPI, monthly active users, monthly unique users reached a record high of 19 million, which is very good for us. So this is the -- also the highlight of each of the segment. Some of the numbers already explained in previous pages. So there -- overall, the other segment has been -- performance increased from last year. So this is the comparison between the -- our plan and work styles. And this is we updated in last May, so that it's modified so that it's been quite accurate. The net sales and the operating income and the ordinary income was more or less similar to our model pipeline. And for the net income, we had more than the double across the triple of what we anticipated from the previous announcement by May. As I said, our revenue net sales was record high, especially for the last 4 years, during the COVID and also the previous year from the start of the COVID, we'll be having a really hard time for the last fiscal year. So especially for the year between FY '22 was generating the operating losses. So that we are back on the side, generating a positive operating profit. And at the same time, we made the huge jump of the record high sales. So this is a trend in the segment sales on a quarter basis. For the Y-o-Y, we had a 133.8% positive increase. At the same time, OP ratio was kind of okay for the Q4 as well. The -- what is good is the segment shows that the double-digit increase from Y-o-Y. So this is On Platform segment. Our main business, B2B service, more of the digital marketing and the solutions. We show a double-digit increase on Y-o-Y. And we had a slight decrease on the B2C service, which is what we see the non-core business at this moment. And then this is the Beauty Service segment. As you can see, there are -- retail increased quite a lot. On 140% in total and also for the retail, it's close to the 150%, Y-o-Y. And at the same time, I know that many of the digital company decrease in the e-commerce business side. But we are still showing close to 130% increase Y-o-Y this year. And also the -- this is a retail business, so that -- as we are increasing the size of the revenue that -- our operation increased quite a bit. For the Global segment, we are going up and down. If we are excluding the Korea business, on the top, you can see the OP ratio. There is our profitability increase and even increasing the career, we are close to the breakeven. And why we are increasing a lot is that the e-commerce and wholesale in China and other countries, and also the physical stores, we are showing the 134% increase on a Y-o-Y basis. For Others, also, we are decreasing the OP ratio. Our revenue is quite stable. So that we are kind of okay to see this segment. The trend in SG&A, as you can see that SG&A ratio against the total sales is that we are lowering as much as 41.5%, which is quite low compared to our long-time history. But at the same time, the size of the SG&A costs, it's increased 122.8% as a total. Y-o-Y basis. As you can see that we are increasing in the human resource personnel and also the merchandising related costs and other costs. But we are still maintaining the lower but of course for the system-related cost, which is a software development. Then this is our operating profit. Our operating profit ratio is quite okay as much as 2.3% at this moment, which is a Y-o-Y basis is more than double 209% Y-o-Y as a total. Then the largest contribution coming from the Beauty Service, the store and the e-commerce under. So that product segment also increased [ 122.5% ] increase as well. Then we are moving to the next chapter, which is the status of operating services. This is @cosme with unique users, which is a record high for us, 90 million in a month, and especially for the June. And the total population for Japanese female is about 66 million people. So there are, we are kind of like the only one beauty platform in Japan and beyond. Also as well as mature active users, the number of testers used has increased as much as 8.6 million, which is getting closer to the 10 million in a very short of period of time. This is a KPI what we call connection or connect -- the connection between the users and the brand on our -- platform media platform @cosme, which has also increased as well. Then this is the news. We announced last quarter that we are opening up our second flagship store in Osaka, called @cosme. Osaka, coming in the 1st of September to open. And we own the right track on the schedule. And we are disclosing the more in detail here. And the size of the space is quite large, probably the largest store in the west part of Japan. The size of the space is close to 800 square meters. And we have tried to introduce new things. That is the -- what we call Next Trend Zone, which is the new setup for us and displaying the brand-new Indian brands, creating the new trend in Japan. Also, at the same time, we is introducing about 500 brands and more. That includes Chanel and SUQQU and other stuff. Of course, just like @cosme TOKYO in Harajuku that, we saying mass market products to the global delivery brands altogether in one shopping place, creating the one-stop shopping experience to our customers. So the next chapter is we are looking back what happened during the COVID period between FY 2020 the last fiscal year. Though we had 2 main initiative we did for the last 3 years. The fastest that we are to connect the On Platform business segment and the Beauty Service segment based on our database. So there are -- we are to promote so many brands, as many as 900 active advertisers and clients to support branding activity on our media platform, which including On Platform business segment. Then -- at the same time, we are promoting on our e-commerce platform and our physical stores to boost the effectiveness of our media activities. And then we are selling quite a lot of new advertiser products, including some of the food products selling only in our platforms and also some of them we are selling in advance to the other department stores and as of physical stores or other e-commerce marketplace. Then that increased in a good ecosystem between On Platform segment and Beauty Service segment that if we had to sell a lot, that client spending more our On Platform segment. Then if they invest more on our On Platform segment, we are seeing even more that kind of ecosystem has happened during the last 3, 4 years. And at the same time, the COVID period, we closed down so many businesses and subsidiaries. And also, at the same time, specific for the overseas, we cut down some headcounts. And so that we are very lean now. So that we are selecting the more profitable business, and we are cutting down the noncore business at the same time here. So what we have achieved during the COVID period for the last 3 years, was the -- 5 points below here. We are now operating on a lean organization. And we display the huge growth on our retail online and offline at the same time. And we are in a stronger marketing position -- market position, within the beauty industry in Japan now and we are creating the mid- and long-term growth foundation, which is alliance with Amazon and Mitsui. And also, we increased organizational strengths and our human resource conditioning is really good at this moment. So let me explain one by one. And as you can see sales and SG&A has been increased for the past 4 years. And at the same time, our SG&A ratio against net sales has been lowered as much as for 42.7%. And we are still humble to even though the fixed cost. And also we even narrower the business streamline to increase the profitability down the road through. The second page is we show the growth in e-commerce and brick-and-mortar stores. And you can see that during the COVID, especially the -- when the COVID was really hard between FY '20 and FY '21 and FY '22, we increased a lot for our online business, e-commerce. And on the other hand, our retail stores, physical stores, decreased quite a bit during the hard time in the COVID FY'20 and FY '22. But as we are going through the post-COVID period, we increased a lot on our offering on FY '22 to FY '23. Especially for the last fiscal year for the FY '22, we increased a lot both on online and prime retail. So there are -- if you can see the bottom of the chart here down here, the left is the offering channel if you compare to the drugstore chains and the department store chains, our business -- the growth has been outstanding compared to these 2 retail channels. On the right side, if we are to compare with the major general e-commerce marketplace, well, the EC Mall means marketplace, and also major not only up, but the first strong e-commerce marketplace, our e-commerce has been increased quite a bit. Then, we announced last year that we are working with Amazon.com, Inc. of the U.S. and also Mitsui & Co., one of the largest Japanese trading company. We are working, currently preparing for our new initiative together with Amazon Japan to create a new marketplace on e-commerce. And also, we are working with our prime side, especially for the overseas together with the Mitsui for the several projects at this moment. Then this slide explained more in detail for the alliance with Amazon and the Mitsui & Co. As initiative is to open up customer shopping on Amazon.co.jp, and we are still negotiating with some of the brand, especially for the global brands. And also, this takes quite a lot of time, both of the brands and Amazon is a global company and the many layers of approval is required. The major brands are already secured, but also at the same time, we have to coordinate the inventory and also the data sharing and so many detailed operation is still happening for the preparation for the launch. And for the software development, that's already completed and the issue has been solved already. And we have other collaborative initiative include there. The collaboration on Amazon Prime Day for Amazon Beauty and @cosme, and we are to provide so many of the promotional support for Amazon Prime Day or using our online media and our physical retail altogether. And at the same time, we are supporting, coordinating beauty influencers and also our beauty advisers to help them providing the live commerce on the live streaming as well. And also, we also already launched the joint advertising services, combining the Amazon platform and @cosme platform and Amazon data and @cosme data as well. And also that we test opened our content media on between Amazon.co.jp already called Beauty trend by @cosme. It's already completed, and it's going live. For the Mitsui, we are working with Mitsui for several countries, some in Southeast Asia and some in Northeast Asia as well. We are still working on the projects for the business development, and we are going to announce as the project -- each of the project is launched. The last point we've been going through the COVID was the growth of people and organization. That was very difficult at the beginning on FY 2020. And we have to temporarily submit the new recruitment to reduce losses due to the COVID and we work really hard for the internal engagement project. And during the 2021 and '22, the engagement increase, that we are working together to overcome the COVID altogether. And at the same time, everybody in the company stay with the company during the COVID. They had a more strong bond and we had more longer, the working period over the 5 years now on average. And the engagement score internally has been increased. Then last fiscal year, we separate the Board and also the business executives, and introducing new CEO and the corporate officer system to promoting the younger talent creating the organization growth, and that includes a lot of the new talent have space to work harder, generating more performance as for each one of them, so that we are in a new era for a new organization. The next slide is the future business policy, which is more midterm or mid- and long-term perspective on what we are anticipating, download the future as our future directions. The questions, many investors, many people said that right now, @cosme is already well-recognized and it's already matured. No more growth, maybe. And the -- is there like more upside opportunities in the future? Our answer is yes. I started not just a company, just from the @cosme, just media and retail and e-commerce. We are trying new things for the future. Well mission is to update the world of the beauty while bringing happiness to many people. In this way, we have so many opportunities, and there are so many things we can do. Based on our basic foundation of what we have as our current @cosme. There are so many challenges in the beauty industry. The beauty companies, brands and also retail and distribution customers. There's so many issues because the industry has been matured. Well, although it's still growing. So that we have acquired another 5 business opportunities to build on our current foundation of @cosme. The first is to expand more the user actions. Second is to expand the cosmetics specialty store distributions. Third, provide beauty advisers new way to work, especially online. Fourth is to create opportunities to brand to meet user with a new way. The 5 is to develop new B2C -- well, sorry, it's 2C, it's Japanese-English, but B2C businesses based on our trust we get from our users and our brands. The first to expand actions. We increased quite a lot for our monthly active users. But on the other hand, the user actions has been much lower still. Of course, we are increasing. We have more purchases. Many of the users take action on our platforms, writing the product reviews, comments, like buttons, everything. But we have so much more to increase, and we are working hard on it, both on our mobile app and also website as well. So second point is we are foreseeing that so many new opportunity for winning the market for our offering and online retail here. But on the left side, even though if you look at the graph, the department stores and the beauty specialities stores going down for the last 10-plus years. And the drug store increase, as much as 136%, but e-commerce is across double or triple. That's what it is right now. And on the right side, for the point on that. If you look at the e-commerce, it's a huge chaos, but mostly, the mass market and the medium-priced products, the low-end -- high-end products are not much there still. But the drug store, of course, the drug stores, the specialties is, of course, in mass-market products only. But not much increase engagement as a CRM. Department stores, it's been very difficult. Recently covered, but many stores on the country side had a closing down. At the same time, they are struggling to creating the e-commerce and the store connections OMO system. And the specialty stores, of course, there is many stores closing down. And also, there have been so many issues with the business succession as well. So there are -- it looks like each one of our competitors has been so many hard things. So that we have more opportunities that we at the stores connecting the OMO platform. And second is the e-commerce and in-store DX has been very -- seems to be very difficult for many companies. There's so many brand stores and also the retail stores, try to introduce in the sort transformations, but seems to be very difficult. And also the e-commerce companies, they have been hard time to increase LTVs and especially for the, most of the sites from the brick-and-motor and the e-commerce creating the links. And third is we had so many directors from the existing specialty stores that we have to support them with the in-store DX and our know-how. So that we acquired 2 retail chains. And also, we are providing the franchise to the specialty store chains. The third point is we have to provide with advisers to the new way to work. The beauty advisors normally work in physical stores, of course, on a full-time basis. But now they can work online too. We try to provide a strong training program. And at the same time, providing the attractive working environment so that they can walk in a new way. The 3 ways to provide -- the Point A is we are developing tools for the social sellers. We are providing the beauty advisers, and as a beauty specialists, enable them to work as the sellers online, and we are providing the communication software right now at this moment. That's what's what we call Sekkyaku-san at this moment. B, is that we enable with adviser to meet customers in stores when it's necessary, which means that, of course, they are working offline normally. And we are providing them with the tablet, with the software, providing the advising tools and see that we are just about creating the new software utilizing the generating AI. In order to use that, they have more equipment with more efficient way to providing advising the tools. The fourth is we have to create new opportunities for brand to meet users. Conventionally, we have platforms so that we are our own platform on the upper side. Then we are connecting our users and brands. This is the ecosystem with the @cosme. And at the same time, we are providing the social networks, using the influencers and connecting to the users through the YouTube, Instagram, TikTok and other software and connecting this brand. So that we are not only stuck with close platform which is our own. But we are using the open system to bringing the social network to combine the creator ecosystem plus @cosme, our own platform altogether. Then #5, which is the last one. We had to develop new B2C business based on our trust that we get from our users. @cosme has been running very carefully, trying to build a trust from our users and brand. And our business or our platform could be a B2C basis, but our business source mainly coming from brand side. But based on that trust, we had to develop new user-oriented business, based on the B2C basis, utilizing our platform. This is still under the planning phase, but we are working on it. So using these 5 elements that we are creating the new opportunities to face and the passing our missions to update the beauty -- world of beauty, while bringing the happiness to stay to many. Then this is the key figures we are foreseeing in the future. I'm not saying when it's happening, but this is the image of numbers we are getting for the active users, monthly, 2 million users. Domestic stores, our directory owned stores 50 to 80 in the future. The retail GMV, JPY 100 billion. The B2B sales, JPY 12 billion to 15 billion. The new revenue stream, which was number five new B2C business, this is -- we cannot say yet. This is the image of numbers we are foreseeing. Then we haven't talked much about the overseas business. We are focusing on the Northeast Asia, mainly in Taiwan, Hong Kong with maintaining good financial governance. We are showing the quite good performance in Taiwan, Hong Kong. In Taiwan, which we acquired back in '19, '17 or so. As the beginning, the media was called [indiscernible] cosme, but they renamed to the @cosme back in 2019. And there stayed quite strong during the COVID and increased quite a bit and with the most active users of the 1 million, which is the 30% of young female in Taiwan. And -- we had difficulties in Hong Kong during the COVID, but the numbers coming back. The number of stores decreased from 6 to 3, but also the number of the stores cut down to half, the sales recovered quite much. And monthly store visitors is something about 230,000, which is 23% of the young female in Hong Kong. And also for the Hong Kong media, we opened up only 3 years ago, but the traffic increased quite a lot. Basically, almost every younger Hong Kong female knows about @cosme on mobile app. Monthly active users of 140,000, which is 40% of the young female in Hong Kong at this moment. Then at this moment, we work -- start working on Human Resource management, Human Capital Management. And we are structuring our human resource purposes. Then teams, breakdown into teams and also the -- also we are taking actions and try to increase more stronger outcome out than the outcome at this moment. The next is finally, let's talk about this fiscal year, how our business plan for this fiscal year. This is fiscal year, our clients, basically, the same strategy, still humble, stronger financial performance. Our net sales target is JPY 50 billion, which is 116.6% Y-o-Y. Operating income, JPY 1.2 billion, 146.8% Y-o-Y. Ordinary income, JPY 1 billion, 243.7% Y-o-Y. Net income, JPY 700 million, 254.3%. We are targeting more than 10% increase on sales and so as operating profit as well. And at this moment, we are to modify our segmentations. We had so many opinion from investors. Our original or former segment name has been too original to understand, that we made it more simplified, more general name to put. So On Platform segment, until the previous year, we had to include the B2B service which is the digital advertisement and marketing solutions. And also the B2C service, which is more of the premium membership. Then we are to modify -- to the Marketing Solutions segment, which includes only B2B service. Then we are moving the B2C service to the Other segment. Beauty Service segment, while we include is the same between last year to this year, we are increasing e-commerce on the physical stores. But we changed the name from Beauty Service to the name, Retail, just simple. Global, same. Others, B2C service added from the On Platform segment. So our new segments will be the Marketing Solution, Retail, Global, Others. Very simple and straightforward. So this is the breakdown of the new business segment. For the net sales, for the Marketing Solution, JPY 8.3 billion Y-o-Y, 111.3%. Operating income, JPY 1.6 billion, 140.8% Y-o-Y. Retail, JPY 35.5 billion, 121.5%. Operating profit JPY 1.45 billion, which is [ 3.8% ]. Global JPY 4.4 billion, which is just 100.1% increase. The operating profit, JPY 50 million which become just about breakeven. Others, JPY 1.8 billion, just below 100%, 99.1%, with JPY 200 million of operating profit, 89.4%. 89.4%, company might cost and others, we are adding just a little bit and the cost would be the JPY 2.1 billion. So this is the waterfall compared from last year. But our net sales, we are increasing a little bit JPY 840 million from Marketing Solutions, increasing a lot from the Retail to JPY 6.28 billion; Global plus 5 [million ]; Others, minus 16 million, that makes JPY 50 billion, increase on Y-o-Y 116.6%. For the operating income side. From last year's, we are increasing the JPY 460 million from the Marketing Solutions; plus 50, Retail; Global, 140; Others, minus 20 and company-wide cost, minus 250. That makes JPY 1.2 billion. So what's the cost? So the operating profit from last year, we are increasing JPY 3.75 billion for product gross profit. Then we are deducting JPY 1.63 billion for the human resource personnel cost. We are to increase the salaries, maintaining the -- our talent performance. And also the software-related costs, almost flat from last year. The merchandising-related costs, JPY 1.14 billion. Of course, we are increasing a lot more revenue from our e-commerce on the physical stores. We have to handle the most surprising inventory, that are taking out so many related costs. The number three, it's other costs, JPY 600 million. That is going for the marketing expenses. And also we are to increase the number of stores and especially for our flagship stores across in Osaka. Then remaining will be JPY 1.2 billion, our new operating profit target. Then why is this happening? The insight for the marketing solutions. Net sales, we are increasing sales through our link with our e-commerce and stores promotions. And for the operating profit, we are increasing the operating profit by the increase in revenue, offsetting the -- our personnel expenses for the retail, we are increasing 20% plus growth, both e-commerce and stores. Of course, we are increasing the e-commerce, and also the -- we didn't increase the numbers yet, but we are launching the new project with Amazon. And for the stores, we are increasing sales by the reopening of the COVID and also the inbound source duty-free sales. And also, we are increasing the number of stores. Of course, we are adding @cosme Osaka. We just acquired a new retail chain called the Cosmetics Sydney. But why the retail is increasing a lot, but why not increasing the profit instead? For e-commerce, we are adding some of the software development, but more positivity isflat compared to the last year. And we are for the offline stores, we have to spend a lot more for new store opening, and we are planning to have some of the refurnishing of our existing stores. And also, we have to spend a lot more for the reinforcing the personnel, which is the number of the headcount and also the average salary at the same time. For the Global, we are focusing on a more profitable areas. And at the same time, we are working hard on reboosting our business in China and turning around of our business in Korea at this moment. In that sense, we are going back on OSAKA to overcome to breakeven for the global segment. And the company-wide cost and others, especially, we are spending more for the personnel and other costs as well. For the -- just in case, we'd like to show the EBITDA for the last 10 years -- not 10 years, 9 years. And especially, you can see that for the COVID, for FY '20, our EBITDA went down to the close to 0. But during the COVID, we are coming back. And probably the last fiscal year was the record high already. And this year, our EBITDA will be much higher as well. And this is the last slide. So looking at our trend on our revenue and operating profit, starting from FY '19 before the COVID. From FY '20 to '23, that was during the COVID, 3.5 years. We are making losses for the FY '20, '21, '23, the whole 3 years. For FY '23, last year, we are back on saddle. This year, we are getting even stronger. This is what we have tried to achieve. No big changes. We are steady, being humble still, working hard. That's why we are doing this year. Thank you very much.