J. Front Retailing Co., Ltd. (3086) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you very much for attending despite your busy schedule. We would like to express our heartfelt sympathy for all affected by COVID-19 and all concerned. As you see on Page 2, subject to approval by resolutions at Annual Shareholders' Meeting to be held in May, J. Front Retailing determined a new management structure, including change of Representative Executive Officer. Under the next structure, Yoshimoto, Sawada and Makiyama will lead group management. At the same time, I, Yamamoto, will assume the Office of Director and Chairperson of Board of Directors. Needless to say, succession plan is the most important strategic decision-making. In Nomination Committee, while securing transparency and objectivity, we had discussions on succession plan. We set the time for me to be replaced in advance and give the next top management an opportunity for coaching. Unexpectedly, the start will be under unfavorable conditions. However, we decided to stick to our original plan. Our group completed 4 large-scale projects, including Ginza Six, and achieved expected results. We steadily built business model foundations through transition to a company with 3 committees, adoption of International Financial Reporting Standards, IFRS, and others. Besides, we made PARCO, a wholly owned subsidiary, which was a pending matter. I think we have good prospects on a series of challenges. As you are aware, Mr. Yoshimoto and Mr. Makiyama have been involved in management of J. Front Retailing Daimaru Matsuzakaya Department Stores and PARCO with me. I think Mr. Sawada will create a new business model of department stores by making good use of experiences and abilities in serving as Store Manager of department stores and supervising management planning division and group management strategy. Mr. Yoshimoto, as a leader, Mr. Sawada and Mr. Makiyama will cooperate with each other and manage the group to generate synergy between department stores and PARCO. I will continue to contribute the enhancement of our corporate value by fulfilling my duties in Board of Directors and making governance work from the position of overseeing execution as Director and Chairperson of Board of Directors. Please turn to Page 3. This slide shows today's agenda. Firstly, I will explain results for fiscal year 2019. Secondly, forecast for the first half and full fiscal year 2020. And thirdly, review of promotion system for medium-term growth. First of all, please go to Page 5 for fiscal year 2019 results. Consolidated gross sales of J. Front Retailing were JPY 1,133.6 trillion, up 0.8% year-on-year. Consolidated business profit was JPY 45.3 billion, down 0.3% year-on-year. Operating profit was JPY 40.2 billion, down 1.5%. Business profit was JPY 4.1 billion lower than October forecast. Operating profit was JPY 6.7 billion lower, and profit attributable to owners of parent was JPY 4.5 billion lower. As many onetime factors are included in difference from October forecast, we decided to pay year-end dividend of JPY 18 per share as planned. As a result, annual dividend, including interim dividend, is JPY 36 per share, up JPY 1 year-on-year and marking 9 consecutive years of dividend increases. Segment information is shown on Page 6 to Page 8. Page 9 shows Department Store business. Due to grand opening of main building of Daimaru Shinsaibashi store and last-minute demand before consumption tax hike. Gross sales, mainly including weak ticket products, increased more than 30% in September. Due to a reactionary drop, gross sales dropped by double digit in October. After that, as the months went by, the rate of decline decreased. However, due to a record-warm winter, winter sales were terribly sluggish and speed of improvement slowed down at once. Besides, due to spread of COVID-19 from late in January, inbound consumption slowed down rapidly and moves to refrain from going out spread also in Japan. As a result, traffic of customer both from home and abroad decreased significantly and our sales were heavily damaged unprecedentedly. I will talk about response to these new risks later again. Consequently, gross sales were down 3.8% year-on-year. However, business profit was up 5.2%, partly due to a significant decrease in retirement benefit expenses. Operating profit was down 27.2% due to recording of onetime expenses associated with revision of HR system and loss on retirement of north wing of Daimaru Shinsaibashi store and others. Results of Daimaru Matsuzakaya Department Stores are as shown on Page 10. In fiscal year 2019, in SG&A and other operating expenses, there were big changes in some items due to onetime extraordinary factors. Let me give a supplementary explanation. Please look at Page 11. In SG&A, personnel expenses decreased JPY 5.3 billion. It is mainly because retirement benefit expenses decreased JPY 4.2 billion due to evolution of lump-sum transfer allowance and second life support pension associated with extension of retirement age to 65. Besides, depreciation increased JPY 14.3 billion due to application of IFRS 16 and others. JPY 1.4 billion out of that was associated with extra depreciation of north wing of Daimaru Shinsaibashi store. Main items of other revenue and other expenses are as shown on Page 12. Lump-sum allowance associated with expansion of voluntary early retirement program, loss on retirement related to Shinsaibashi store and others concentrated in fiscal year 2019. I hope you recognize them as onetime factors. Page 13 shows situation of main building of Daimaru Shinsaibashi store, which opened as new hybrid Department Store business model in September last year. As for trends after January, especially reinforced categories such as luxury, cosmetics and watches were main drivers as we targeted. Total transaction volume increased 15% and customer traffic increased 11.1% year-on-year. For customer segment, sales of relatively young people from 25 to 34 years old, among whom we were relatively weak, increased 40%. We were also successful in rejuvenation. Although we are temporarily struggling with both inbound and domestic consumption due to COVID-19 currently, we noticed sufficient reaction to this new business model of department stores. We want to speed up to expand this business model to other flagship stores. That's all for Department Store business. Page 14 shows PARCO business. Gross sales increased 11.5% year-on-year, mainly due to opening of Kinshicho PARCO, grand opening of Shibuya PARCO in November and sales reserve for space of Shibuya PARCO. For sales of reserve floor space amount equal to revenue was also recognized as cost. Despite boosting effects by opening, due to weak performance of some rural stores in Neuve A, operating accessory shops business profit decreased 1.6%. Operating profit almost doubled due to increase in compensation income related to Shibuya PARCO and in the action to loss on store closure of Utsunomiya PARCO and others in previous year. Page 15 shows new Shibuya PARCO, which opened in November. With contents on higher force to attract foot traffic and expanded luxury brands, Shibuya PARCO succeeded in bringing in a wide age range of customers and exceeded plan substantially. We want to apply the achievements, such as unconventional floor composition and zones and newly curated sales areas, to other PARCO stores to suit their characteristics. Please turn to Page 16. In real estate business, gross sales increased 4.0% year-on-year due to strong contributions from Ginza Six and Ueno Frontier Tower and transfer of many shops around department stores to real estate business. Business profit decreased 13.8% due to increase in depreciation and property tax, resulting from transfer of north wing of Daimaru Shinsaibashi store to real estate business after main building opened in September. However, operating profit increased significantly by 44.2% due to booking of gain on sales of real estate. In credit and finance business, gross sales increased 2.4% year-on-year due to an increase in external margin fees and others. The business profit decreased 18.7% and operating profit decreased 19.1% because of increases in personnel expenses related to strengthening of organization, including recruiting of specialized HRs for future growth and facility expenses associated with relocation of Tokyo office. In other businesses, J. Front Design & Construction, which achieved 50% increase, thanks to interior construction of main building of Daimaru Shinsaibashi store, which opened in September, was a driver and offset sluggish business such as Daimaru Kogyo. As a result, gross sales increased 9.6%, business profit increased 36.7% and operating profit increased 34.0%. Consolidated statements of financial position and cash flows are shown on Page 17. We applied IFRS 16 starting in fiscal year ended February 2020. Accordingly, lease transactions for some stores were recognized as right-of-use assets and lease liabilities on balance sheet. Consequently, assets increased JPY 202.5 billion and liabilities increased JPY 220.4 billion. Besides, we conducted the tender offer for shares of PARCO from December 27 last year to February 17 this year to turn consolidated subsidiary PARCO into a wholly owned subsidiary. Partly due to approximately JPY 60 billion of funds necessary for this tender offer, interest-bearing liabilities increased significantly. Equity attributable to owners of parent, so-called equity, decreased partly because a difference of JPY 22 billion between purchase price of PARCO shares through tender offer and noncontrolling interest was directly deducted. This tender offer had no impact on cash flows as proceeds from borrowing were the same amount as payment for acquisition of shares. Let me move on to forecast for full fiscal year 2020. Page 19 shows major business risks we should take seriously in this fiscal year. In particular, risks associated with natural disasters listed at the top are the biggest threats. Now please look at Page 20. As you know, due to spread of COVID-19, situation in fiscal year 2020 is extremely uncertain. In particular, at department stores in our group, both inbound and domestic consumption was heavily damaged. Sales were down 20% year-on-year in February and down more than 40% in March. At the moment, there are no signs of ending. In response to these risks, we give utmost importance to safety of customers and employees. At department stores, we set temporary closing days and shortened business hours. In addition, we canceled all the big events attracting many customers, such as food fairs scheduled for March. At PARCO, we shortened business hours. Events and others with fear of close contact or changed in contents postponed or canceled. In our group as a whole, we are promoting telework, mainly in headquarters and actively adopting online meetings and conference calls, which do not take the form of gathering. By taking this opportunity, we are promoting work style reform further. Please go to Page 21. We will promote initiatives that consider safety of customers and employees and review of existing operations through work-style reform to the extent possible. However, when COVID-19 will end and at what pace consumption will recover remain uncertain. So it is extremely difficult to secure sales we envision. Therefore, for fiscal year 2020, we decided to maximize consideration for risks that are expected to have negative impact on our group sales and overhaul nonessential costs and investments on a 0 basis. Page 22 shows forecast for fiscal year 2020 based on these. Consolidated gross sales are expected to be JPY 1.010 trillion, down 10.9% year-on-year. Business profit will be JPY 17 billion, down 62.5%. Operating profit will be JPY 12 billion, down 70.2%. Page 23, please. In forecast for fiscal year 2020, negative impact of COVID-19 of JPY 165 billion is included in consolidated gross sales and negative JPY 33 billion is included in gross profit. We recognize these are mainly due to onetime factors. However, in this fiscal year, we forecast we cannot avoid unprecedentedly tough management environments, mainly in the first half. Therefore, dividends have not yet been determined at this time. We want to make a comprehensive judgment in light of future progress of business performance. Please look at Pages 24 and 25 for forecast by segment. We think Department Store business will be most impacted by COVID-19 in our group due to the current situation, which can be described as evaporation of inbound demand and domestic customers refraining from leaving home. We incorporated the negative impact of JPY 125 billion in gross sales and negative JPY 26.8 billion in business profit. In addition, speed of recovery after consumption tax hike seems slower than the previous tax hike. Consumer sentiment is cooling down due to sharp decline in stock prices in the entire stock market. Considering these, we forecast gross sales will be down 13.2% and business profit will be down 83.0%. In PARCO business, there are positive factors, such as contribution through operation of Shibuya PARCO, which opened in November last year and opening of PARCO in north wing of Daimaru Shinsaibashi store this autumn. However, we incorporated the negative impact of COVID-19 of JPY 30 billion in gross sales and negative JPY 4 billion in business profit. In particular, we forecast a strong blow will be given to entertainment business on which we placed expectation due to expansion of PARCO Theater. As a result, gross sales will be down 8.2% and business profit will be down 23.1%. In real estate business, opening of north wing of Daimaru Shinsaibashi store as real estate business is scheduled for autumn. As expenses before opening of north wing will be incurred, and percentage rent is expected to decrease due to COVID-19. Gross sales will be up 12.2% and business profit will be down 33.6%. In Credit and Finance Business, Daimaru Matsuzakaya card with renewed point program and design will be issued this autumn. We will get prepared for growth finally. However, due to COVID-19, a decrease in transaction volume, mainly of department stores, is unavoidable, and we expect it will be difficult to make up for increased expenses associated with issuance of the new card. Therefore, although gross sales will be up 14.0%, business profit will be down 10.6%. In other businesses, a reactionary drop after extraordinary demand of the renovation work of main building of Daimaru Shinsaibashi store, a J. Front Design & Construction, last year is expected. Besides, considering the risk that the impact of COVID-19 will spread to supply chain of design and construction in wholesale businesses leading to delivery delay and others, we expect gross sales will be down 11.0% and business profit will be down 46.2%. Forecast for Daimaru Matsuzakaya Department Stores is as shown on Pages 26 and 27. As a reaction to a significant decrease in retirement expenses associated with extension of retirement age last year, SG&A, mainly personnel expenses, are expected to increase. Going forward, we will reduce nonessential expenses and review investments to improve profit. Consolidated statements of financial position and cash flows are shown on Page 28. Despite severe outlook for operating cash flows due to impacts of COVID-19, we intend to minimize decrease in free cash flows by scrutinizing investment plan and others. Furthermore, we ensure sufficient funds on hand and availability of funding through issuance of commercial paper, commitment line and others. So we recognize financing and funding will not be significantly affected for the time being. Next, I will explain review of promotion system for medium-term growth. Firstly, on Pages 30 and 31, I will look back on the past 3 years of the medium-term plan. Our group aims at multiservice retailer beyond the framework of retail and is working on expansion in business domains and transformation of business model in existing businesses. For expansion and business domains, in 2017, we opened Ginza Six, a luxury mall; and Ueno Frontier Tower, a commercial complex equipped with office functions. Compared to the time before the current medium-term plan started, we were able to grow real estate business segment dramatically. In Credit and Finance Business, by adding specialized HRs actively, we reinforced management foundation for medium-term growth and got prepared for issuance of a new card, which is a key to growth this autumn. For business model transformation of existing businesses, we opened main building of Daimaru Shinsaibashi store as an unprecedentedly hybrid department store business model in September last year, a new Shibuya PARCO, enabling us to reach a wide range of customer segments with innovative tenant mix in November. We think both are leading to expected results at department stores and PARCO. How we can speed up to expand such new business models to other flagship stores is a challenge. Progress of business profit indicating profit of main businesses is shown on Page 32. When we made the current medium-term plan, we expected profit to increase in and after fiscal year 2020 after bottoming out in fiscal year 2019 due to full contribution of development projects, which opened last year and others. However, a drop in profit level also in fiscal year 2020 is unavoidable, and there has been delay in initiatives for new businesses, of which certain profit contribution was incorporated in the plan. In this situation, we have to say it is extremely difficult to achieve profit target in fiscal year 2021, the final year of the medium-term plan. Page 33, please. In business portfolio transformation, real estate business is steadily growing, but dependence on department store business increased as a whole and risk sensitivity to environmental changes enhanced. In this way, 3 years of the current medium-term plan have passed. While floor reserves leading to the future were achieved, it is hard to say profit level and progress in business portfolio transformation has been smooth. As shown on Page 34, I think assumptions changed at more than expected scale and speed compared to when developing current medium-term plan. The changes include not only pandemic risks caused by COVID-19, but also sluggish consumption beyond expectation, triggered by consumption tax hike abruptly accelerated shrinkage of women's apparel volume market, declining rural stores and declining competitiveness of urban flagship stores. Please go to Page 35. An important turning point came also to the group. That is to say, we converted PARCO, a consolidated subsidiary, into a wholly owned subsidiary. Through this, initiatives for dynamic business structural changes, which were not possible so far, and drastic HR exchanges became possible. I think readiness to build framework in which we can aim to maximize synergy at increased speed is a big positive factor. As shown on Page 36, as the exchanges are happening to external and internal environments, we judged it is best to set the direction with an ambitious target from a long-term perspective and as a new structure and upgrade strategy to bring out the strengths of the group more than ever to make a fresh start. To realize real business portfolio transformation we aim at, it is better than promoting the current medium-term plan as it is in the current framework. Therefore, we will terminate the current medium-term plan in fiscal year 2020. We want to position fiscal year 2020 as a year to cement a foothold for the group to aim higher from mid- to long-term perspectives while incorporating maximum risks to short-term performance. Please turn to Page 37. For new mid- to long-term plan, we will set quantitative goals for 2030 using KPIs. Firstly, we will make 3-year medium-term plan that will start in 2021 at the core. In such a period as now, when the speed of change is accelerated year-by-year, management cycle is necessary in which we have a long-term and quantitative vision cascaded down to an action plan for 3 years basically and achieve results. In other words, what our group lacks the most is nothing less than readiness to rapid change. To acquire readiness, not only more speed-oriented decision-making, but also execution capability to take specific actions properly and achieve steady results are absolutely necessary. Please turn to Page 38. In light of these and with PARCO becoming a wholly owned subsidiary as a turning point, we shifted to a new structure of executives and built a new system to promote medium-term growth. Specifically, we established new system review committee to generate synergy further and to promote highly efficient management. From the 4 angles shown here, we established subcommittees and already started practical operations to enhance management efficiency. For formulation of a new medium-term business plan to give a new clear picture of the future of the group, we will establish working group in these 6 fields and yield specific mid- to long-term plan. After going through these initiatives, we will give an outline and direction of a new mid- to long-term plan in results briefing for the second quarter held in October this year. In results briefing held in April next year, we will explain concrete initiatives for 3-year medium-term plan by including synergy with PARCO to a maximum extent. Lastly, please look at Page 40. Since the foundation, we got over many company crisis in our long history. Our corporate credo is service before profit. Those who play service before profit will prosper. I think we got over crisis because we put the credo in the center of management and have been practicing the credo simply and honestly. While going back to the starting point when facing crises, such DNA is still alive in our group. There is no crisis we cannot get over. In a fight with invisible enemy, we may have to be prepared for prolonged fight to some extent. What is important is to strengthen the defense in the short term, control costs and investments, which are controllable as much as possible and radically review existing operations to enhance productivity. On the other hand, we also need to prepare for the offense diligently so that we can turn around and call on the offensive when this crisis comes to an end. We are not satisfied with the current forecast for fiscal year 2020 at all. We intend to focus on what we should do at any cost, both in the short term and mid to long term, so that we will be able to say year 2020 was very meaningful and a big turning point for our group when we think back in the future. We will get over this clear and present danger steadily with all our strengths and work on sustainable growth and mid- to long-term enhancement of corporate value by achieving concrete results toward a new reality. Thank you very much for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]