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

Thank you very much for attending today despite your busy schedule. Please go to Page 1. Today, I'll explain results for fiscal year 2020, forecast for fiscal year 2021, and fiscal year 2021 to fiscal year 2023 medium-term business plan. Please turn to Page 3 for results for fiscal year 2020. Consolidated gross sales of J. Front Retailing were greatly affected by spreading infection of COVID-19 and were JPY 766.2 billion, down significantly by 32.4% year-on-year. Despite securing a profit of JPY 2.3 billion in consolidated business profit, operating loss was JPY 24.2 billion and loss attributable to owners of parent was JPY 26.1 billion. Compared to October forecast, due to improvement of gross profit margin and additional review of SGA, a group companies, business profit was JPY 1.1 billion higher. On the other hand, operating loss deteriorated by JPY 3.6 billion, partially due to recording of loss associated with decision of closing 2 PARCO stores. Besides, as a result of detailed examination of business environment at PARCO, we booked tax expenses from reversal of deferred tax assets. Consequently, loss attributable to owners of parent deteriorated by JPY 7.5 billion. Year-end dividend is JPY 18 per share, the same as last fiscal year and in line with plan. Annual dividend, including interim dividend, is JPY 27 per share, down JPY 9 year-on-year. Results by segment are as outlined on pages from 4 to 6. Please go to Page 7. Department store business was a business most significantly impacted by COVID-19 in the group. In the first half, about as long as 1.5 months of closure was forged and business environment was more challenging than ever before. Although we saw a gradual recovery trend after that, infection spread again in late November and the state of emergency was reissued in January. Our standstill lasted in the second half of the fiscal year. As a result, gross sales decreased 34.7% year-on-year, business loss was JPY 4.8 billion. Operating loss was JPY 22.1 billion due to reclassification of fixed cost during suspension of operation and recording of impairment loss and others. Results of Daimaru Matsuzakaya Department Stores are as shown on Page 8. Please go to Page 9. As for SGA, there were technical negative impacts caused by reclassification and fixed cost during suspension of operations from April to May last year, such as personnel expenses, depreciation and computing expenses. Excluding the negative impacts, we reduced SGA, mainly personnel expenses and ad expenses by more than JPY 15 billion; however, the decrease of SGA didn't fully offset the drop of gross profit. Page 10 shows PARCO business. PARCO stores were also greatly affected by about 2 months store closure and reduced business hours in the first half. Also after reopening, we provided rent relief for tenants under certain conditions and the challenging situation continued. Besides, we gradually resumed the entertainment business by holding online events partially while controlling infection risks. However, we were not able to fully demonstrate our potential. Due to these factors and the reactionary drop to sales of reserve floor space associated with the Shibuya redevelopment project in the previous fiscal year, revenue was down 38.6% year-on-year. However, we secured JPY 2 billion of profit in business profit. On the other hand, mainly due to recognition of loss on store closings as a result of decision of closing Tsudanuma and Shintokorozawa PARCO, operating loss was JPY 6.8 billion. Please look at Page 11 for Shinsaibashi PARCO which newly opened last year. Shinsaibashi PARCO opened on November 20, 2020. Although it coincided with the third wave of COVID-19, the store attracted attention from customers and got off to a better start than we expected. In March this year, cinema complex was nearly opened on the 12th floor and unique Shinsaibashi Neon Restaurant Street was opened in a second basement. Highly original Shinsaibashi PARCO was completed. More than 4 months have passed since opening. In a building integrated with adjacent Daimaru Shinsaibashi store, Shinsaibashi PARCO is generating synergy, and sales have been exceeding internal plan. The integration of our department store and PARCO was materialized, I hope, it will lead to potential of other areas. In real estate business on Page 12, both gross sales and revenue decreased double digit due to tenant rent relief during closure in the first half and decrease in percentage rent as a result of reduced transaction volume throughout the fiscal year. Consequently, although profit decreased significantly, we secured a profit of JPY 2.6 billion in business profit and a profit of JPY 1.9 billion in operating profit. In credit and finance business, business profit and operating profit was only about JPY 400 million, respectively, mainly due to a decrease in transaction volume of Daimaru Matsuzakaya Department Stores, an increase in advertising expenses for card renewal in January this year and change in annual fee accounting method in the second half. In Other, Revenue of Daimaru Kogyo increased year-on-year due to strong performance of the electronic devices. However, revenue decreased 20% in total as a result of a reactionary drop to large orders associated with construction of Daimaru Shinsaibashi store received by J. Front Design and Construction in the previous fiscal year. It was also due to significant impacts of suspension and reduction of operation and retail facilities on Dimples' personnel recruitment business and restaurant business of J. Front Foods. As a result, business profit and operating profit decreased more than 30%, but profit were secured. Consolidated statements of financial position are shown on Page 13. Under the COVID-19 pandemic, we gave top priority to financial stability and liquidity on hand. Therefore, interest-bearing liabilities increased JPY 84 billion from the end of the previous fiscal year; and net D/E ratio, excluding lease liabilities, was 0.66x. By looking at performance trends, we will reduce those. Besides, in light of status of cash flows, we will reduce commitment lines to appropriate levels. Cash flows are as shown on Page 14. Operating cash flow decreased significantly due to sluggish performance associated with the COVID-19 pandemic; however, free cash flow was positive due to reduction of investment. Let me move on to forecast for fiscal year 2021. As for COVID-19, preparations are being made for expanded vaccination. On the other hand, concerns are arising over the fourth wave of infection due to recent rapid spreading of new variants, and we are still in an unpredictable situation. In fiscal year 2021, our starting year for the new medium-term business plan, we will give first priority to accelerated structural reform and welcome drastic business model transformation of core businesses based on the assumption that the uncertain situation will last. Please look at Page 16. For fiscal year 2021, we forecast gross sales will be JPY 1.005 trillion, up 30.6% year-on-year. Business profit will be JPY 18.5 billion. As we factor in structural reform excesses expected for this fiscal year, we forecast operating profit of JPY 11 billion. For dividend, we plan to pay interim dividend of JPY 14 per share and year-end dividend of JPY 15. Annual dividend will be JPY 29, up JPY 2 year-on-year. Starting in this fiscal year, there are 4 reportable segments: Department Store business, SC business, Developer business and Payment and Finance business. As for the changes, Page 17 shows comparison with the previous segments. For example, Ginza Six formerly included in real estate business, was transferred to department store business. J. Front Design and Construction formerly included in Other was transferred to Developer business. Please be aware that composition of each segment is partially different from the previous competition. Please look at Pages 18 and 19 for Department Store business. We expect domestic consumption will be driven by affluent people in Japan and steadily recover month by month. Inbound sales are expected to gradually move later in the fiscal year. SGA will increase JPY 21.8 billion year-on-year due to a reaction to a special factor of the previous fiscal year, reclassification of fixed cost during store closure to other operating expenses and an increase in variable costs associated with an increase in sales. Advertising expenses and outsourcing expenses are expected to decrease JPY 5.5 billion compared to fiscal year 2019. As a result, business profit will be JPY 7.5 billion and operating profit will be JPY 5.5 billion. Please go to Page 20. Gross sales of Daimaru Matsuzakaya Department Stores will be up significantly at each store year-on-year. In comparison with fiscal year 2019 to understand the real situation, sales are expected to recover from 19.2% reduction in the first half to 5.8% reduction in the second half. We remain relatively cautious about Tokyo and Umeda stores, which highly depend on railway passengers. Page 21 shows breakdown between the first half and the second half of factors pushing up SG&A at Daimaru Matsuzakaya Department Stores. So please refer to the page. Page 22 shows SC business. Shinsaibashi PARCO, which opened in November last year, made its real rent opening with opening of the restaurant floor in a second basement in March. As we also expect significant reduction of tenant rent relief and further recovery of entertainment business, the forecast revenue will be at 28.0% year-on-year. Due to these reasons, we forecast operating profit of JPY 7.4 billion and operating profit of JPY 6.9 billion. Please go to Page 23. Developer Business mainly consists of real estate rental revenue and revenue of design and construction. Due to upfront investment for the time being, design and construction accounts for around 70% of the profit. We forecast business profit of JPY 2.2 billion and operating profit of JPY 2.6 billion. In Payment and Finance business, with renewal of Daimaru Matsuzakaya card in January this year, preparation are finally ready for expansion of the customer base. On the other hand, partly due to increase in promotion costs associated with new customer acquisition for the card renewal and continued impacts of change in annual fee accounting method, business profit and operating profit will be JPY 800 million, respectively. For Other, as we carefully forecast Daimaru Kogyo and Daimaru Matsuzakaya sales associates, business profit will be JPY 1.1 billion and operating profit will be JPY 1 billion. Consolidated statements of financial position and cash flows are as shown on Page 24. Interest-bearing liabilities are expected to decrease JPY 28.8 billion year-on-year. Net D/E ratio excluding lease liabilities will be 0.69x. As we recognize the appropriate level is around 0.6x, we would take appropriate responses in light of future trends of business performance. Page 25, please. Operating cash flow is expected to decrease JPY 4.4 billion year-on-year, partly due to increase in working capital; however, we will secure free cash flow of JPY 30 billion by keeping investment within the scope of depreciation. Next, I will explain medium-term business plan starting in this fiscal year. Please go to Page 27. We positioned the period of the previous medium-term business plan starting in fiscal year 2017 as a phase of changing the group structure towards transforming our business portfolio. And we have steadily worked to expand our business domain, transform the business models of our existing businesses and reinforce ESG initiatives and so forth. Besides as PARCO became our wholly-owned subsidiary, we strengthened the structure for further enhancement of corporate value of our group. In this way, our initiatives for portfolio reform and business model transformation are steadily leading to results in some cases; however, our reform is only half done as a whole. I think we need to review process of driving reform fundamentally. On the other hand, speed of change in management environment is accelerating than before. I feel the gear was shifted up by 2 or 3 speed stages. It is no exaggeration to say delay in response to changes or delay in decisions could be detrimental to a company's existence. Please go to Page 28. In the context of these environmental changes, we picked up 14 business risks, which seems to influence our management significantly, out of more than 80 risks, we currently recognize and made a new medium-term business plan in consideration of response to those risks. Please look at Page 29. Our group faced with an unprecedented crisis due to the COVID-19 pandemic, which can be set to have changed the world drastically. Vulnerability of the business overly dependent on real stores was exposed, concerns arose about advantage of urban locations, which we considered as our strengths. In this way, obsolescence of the business model, which had been an issue even before the COVID-19 pandemic became more conspicuous. Having said that, I'm sure this situation gave us an opportunity to strongly realize again how significant it is to have person-to-person relationship and communication and real face-to-face meetings. How important it is to give first priority to safety and security of customers and employees, and we are with all the stakeholders, including customers, shareholders, business partners and communities. Please go to Page 30. Including such awareness, we decided to add 2 items: realization of customers' healthy, safe and secure life and promotion of the circular economy to materiality issues, along with the 5 items already identified as items we should welcome. By working on materiality issues, we will achieve both social and economic value and promote sustainability management. Page 31 shows system of high-level concept and strategy of our group. In accordance with our corporate credo, service before profit, we position sustainability management at the core of the medium-term business plan and integrate corporate strategy and business strategy with sustainability management. We also practiced CSV using the group's strengths and make proposals for well-being life by creating new value. Please look at Page 32. The group's strengths are: commercial production capability; good customer base; partners, including suppliers and creators; and real estate assets in major urban areas. We decided to focus on 3 strategies and initiatives for growth in the new medium-term business plan based on medium- to long-term environmental changes. The 3 strategies are: firstly, real digital strategy; secondly, prime life strategy; and thirdly, developer strategy. Page 33 shows an overall structure of medium-term business plan, I will give you the details later. Please go to Page 34. As I mentioned in the results briefing held in October last year, we will overcome the unprecedented crisis we are currently facing and achieve full recovery to operating profit level of fiscal year 2019 over the 3-year period. In an unprecedentedly rapid change, waiting will not recover anything. I think we need to utilize this opportunity to drive change boldly on the assumption, nothing will ever be the same again. No change, no full recovery. If we cannot turn this crisis into an opportunity for change, there will be no future for our group. That is our determination. I think for recovery, we will achieve through this medium-term plan is corporate reform itself to survive in the future. Please go to Page 35. This graph shows image of medium- to long-term portfolio on operating profit. When we achieve full recovery in fiscal year 2023, operating profit share of retail businesses, including department store and PARCO will still be more than 80%; however, the share will be reduced to about 60% in fiscal year 2030. On the other hand, we intend to increase share of non-retail businesses such as Developer and Payment and Finance to about 40%. Through these initiatives, we will change portfolio to highly resilient portfolio. Numerical targets for major financial and nonfinancial indicators for fiscal year 2023, the final year of the new medium-term business plan are as shown on Page 36. We aim for full recovery of both PL and BS in fiscal year 2023. At the same time, we clarified and will commit to quantitative targets in sustainability indicators. The process for full recovery of operating profit is as shown on Page 37. Operating profit will be positive due to a reactionary increase from onetime special factors such as impairment loss and loss on store closings incurred in last fiscal year and recovery from COVID-19. And then, structural reform will boost operating profit by JPY 10 billion, and the 3 strategies that I mentioned earlier by more than JPY 16 billion. The process for full recovery of PL and BS is shown on Page 38. For business profit, We made a cautious start in this fiscal year and will accelerate growth in the next fiscal year and the fiscal year after next. As we speed up structural reform in this fiscal year, the gap between business profit and operating profit will be relatively significant. Next, I will explain the 3 key strategies of the medium-term plan specifically. Page 39, please. First, I will talk about real digital strategy. As I mentioned earlier, vulnerability of business model of core businesses, department store and PARCO was revealed by COVID-19. As you know, in the department store and PARCO business model, sales activities became almost impossible when movement of people was restricted. We have to admit the current retail business model, which is overly dependent on real stores has reached a limit. Therefore, to respond to the rapid change we are currently going through, I think, fundamental redefinition of commercial model beyond the existing framework is an unavoidable necessity. That said, there is no doubt that real stores are important places to amplify value through people. That is to say, I think, it is important to create new experience value through OMO that merges digital into real, which plays a central role. Please go to Page 40. The COVID-19 pandemic gave us an opportunity to reaffirm how department stores do business within time and location constraints. It is safe to say there are business opportunities in overcoming the constraints. This slide shows OMO of department stores in customer journey. We don't intend to expand so-called e-commerce. Regardless of online or offline, centering around stores, we will build unique shopping sites from which we can fill the [ wombs ] of people. To be more specific, we will build an all-in-all shopping site for cosmetics in fiscal year 2021 and OMO shopping site for art in fiscal year 2022. For the specific image of our OMO for cosmetics, we put the link on the last page of this presentation material. So please refer to that. I think you can feel that is clearly different from so-called e-commerce. These are just examples. Going forward, we would develop and expand characteristic OMO starting from people one after another. Page 41 shows the image of PARCO's OMO. By building digital SC platform linking online and off-line channels, we want to realize OMO via cycle of mutually sending customers between real channels and online channels. As for entertainment, our strength of PARCO, we will strengthen hybrid entertainment featuring live and digital instead of relying on only attracting customers to physical locations. Please go to Page 42. Through respective initiatives of department store and PARCO as a new retail model, we will build proprietary media focused on people emerging real and digital different from so-called e-commerce centering around goods. Through the media, we will provide content to create new experience value and aim at media commerce that we realize multiple revenue streams. We were already dependent on business at real stores. In order for us to enhance experience value or customize further, merger of real and digital is obviously necessary; however, I think it is more important to enhance appeal of real stores and content to make use of digital. Page 43, please. For department store, firstly, we will expand growth categories such as luxury and flagship stores and focus on reinforcement of item groups that have a high share within the industry to enhance a competitive advantage in each area. We will work on development of new content and services and enhancement of quality of space also through synergy with PARCO. Besides, to implement these initiatives, we will overhaul sales floor configuration boldly. More specifically, we will have space of our own curation, redesign and expand content by shifting focus to lifestyle, and introduce new content by shifting focus to experience. Please go to Page 44. For PARCO, we would disseminate elements of store development of Shibuya PARCO, which has strong power of communication to mainly flagship stores. Besides, we will newly launch wellness service that supports women's inner beauty and health and rollout community working space, SkiiMa, which is popular in Shinsaibashi PARCO to Kichijoji PARCO. In this way, by continuing with development of content in response to new sense of value and lifestyle, we will increase real store value and brand value. Now I will talk about subscription business we entered as one new content in March. Please look at Page 45. We launched fashion subscription business, Another ADdress in March this year. It is a service to respect intrinsic value of fashion and sustainable initiatives and aim to shift to socially and environmentally sustainable business model based on the belief that close and not disposable. We provide sophisticated brand lineup and freedom for customers to choose what they want to wear now. We would like to create such experiences of fashion subscription and build a new market, which is not existent in existing businesses. Next, let me explain prime life strategy on Page 46. For gaisho customer strategy, we will dig deeper into core content, highly supported by customers such as luxury and [indiscernible] development of new solutions. In addition, we will expand OMO shopping using connaissligne or [ close ] site for gaisho customers and increase virtual events. We will also expand nouveau riche customers, mainly in Tokyo area and promote retention of affluent foreign customers. Page 47 shows expansion of customer base by advancing CRM. We are actively trying to acquire app members at department stores. The number of cumulative downloads exceeded 1 million. Going forward, we will promote customer acquisition, hoping these customers will hold in-house credit cards. We will also expand lifetime value for customers through full use of the group-integrated database mainly from department stores and PARCO. Page 48 shows initiatives for growth of Payment and Finance business. Equipped with a new point program, Daimaru Matsuzakaya Card was renewed in January 2021. With this, as an opportunity through alliance with department stores, we will promote acquisition of new cardholders and expand basis for growth. Besides, we will promote merchant business and start expanding new financial service fields, such as loan and insurance business to steadily strengthen business pace. Through these, we aim to achieve operating profit of JPY 5 billion early in Payment and Finance business. Next, I will explain Developer business, a new segment positioned as a medium- to long-term growth pillar on Page 49. In Developer business, we aim at development from conventional real estate business. We will welcome development of large-scale complexes in areas such as Shinsaibashi Osaka and Sakae Nagoya, promote CRE strategy to improve profitability and start operation of our circular investment scheme. In this way, we will drive changes in portfolio for revenue diversification in Developer business. Medium-term pipeline, I can mention now, in Developer business is strong, on Page 50. The current medium-term plan period is upfront investment phase. We will aim at dramatic growth of this business as a core business in our group in fiscal year 2024 onwards. Page 51, please. We set up 3 committees in holdings to refine the 3 growth strategies I mentioned as medium- to long-term projects. We will make maximum use of the group's strengths and management resources beyond boundaries of operating companies in the group and achieve specific results. Page 52, please. Along with these growth strategies, we will welcome management structure reform at an accelerated speed to ensure full recovery further. More specifically, we will reduce fixed costs via business model reform to lower breakeven point. We will reduce fixed costs through organizational and personnel structure reform in each business, including business model reform, revision of store operation methods and areas for business process outsourcing. We will work on cost reductions such as streamlining offices and use of digital media for advertising and promotion. Through these, we intend to reduce fixed costs by more than JPY 10 billion compared with fiscal year 2019. We will also work on group business reorganization and sale of non-business assets to increase efficiency of management. Next, I will talk about strengthening of management base on Page 53. As for IT strategy, we will rebuild backbone systems such as group common accounting system and promote revision and standardization of business processes to shift to high value-added operations and respond to diversified work styles. Regarding HR strategy, to secure human resources that will carry out growth strategies, we will strengthen employee skill development and recruitment of specialists from outside. Besides, for promotion of diversity and inclusion and realization of work-life integration, we will promote assignment and education aimed at encouraging active participation of women, work style reforms and employment of people with disabilities. Next, I will explain finance strategy on Page 54. To increase sophistication of business management, we decided to officially and newly introduce ROIC as a management indicator in this fiscal year. For each business segment, we will set a hurdle rate higher than the capital cost and aim for ROIC above the hurdle rate to enhance corporate value. In particular, we will strengthen management of Developer business and Payment and Finance business for which medium- to long-term growth is expected. Please look at Page 55 for cash flow allocation. In the new medium-term business plan over the 3-year period, we plan to generate operating cash flow of JPY 190 billion, JPY 90 billion of which is to be allocated to capital investment and growth investment. Free cash flow will be appropriated to improvement of balance sheet damaged by COVID-19 and appropriate return to shareholders. Page 56 shows growth investment and capital investment. Basically, we plan and implement capital investment within the scope of depreciation. We also decided to allocate JPY 10 billion as funds for growth investment for the future, including M&A and alliance. Next, I will explain return to shareholders on Page 57. Our basic policy is to return profits with consolidated dividend payout ratio of at least 30% and to consider share buyback as appropriate. In the last fiscal year, we booked significant loss due to the COVID-19 pandemic and reduced dividend for the first time in 11 years. We aim to achieve full recovery, the biggest theme for the medium-term business plan, and recover dividend per share to fiscal year 2019 level as early as possible. Page 58 is the last page. Since the foundation, we got over many company crisis by putting our corporate credo: service before profit. Those who place service before profit will prosper in a center of management. Frankly speaking, the COVID-19 pandemic this time is a powerful enemy beyond imagination. In the face of hardship, we want to go back to the starting point, rack our brain and overcome this difficulty at any cost. Companies are definitely creatures. If companies cannot cope with environmental changes, companies will go out of business eventually. The current changes triggered by the COVID-19 pandemic cannot be solved by experience. To deal with social changes and changes of sense of value happening at an unprecedented pace, readiness for change on a level different from the past is required. With readiness, with change, we will steadily achieve full recovery over the 3-year period and change direction to regrowth. In fiscal year 2030, 10 years down the road, we aim at consolidated operating profit of JPY 80 billion and transforming into a highly efficient corporate group generating ROE of at least 10% required at the global level. At the same time, we will make sure to confront social and environmental issues happening globally and carry out responsibility as a group to solve them. Through these initiatives, while creating both social value and economic value, we will contribute to creation of sustainable society and realize the group vision: create and bring to life new happiness. Thank you very much for your attention.