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

Global environmental problems such as global warming and ocean pollution is already an imminent threat. In recent years, we have been confronted with unprecedented issues, such as the Great East Japan earthquake and the spread of COVID-19. In response, the speed of change in the business environment is accelerating more than ever. So response towards change and delay in making decisions may become fatal for a company's survival. Please refer to Slide 2. Today, I would like to begin by explaining the overall picture of the JFR Group's sustainability management. What is required of the JFR Group now is to have a long-term perspective and to balance the resolution of social issues with corporate growth and simultaneously achieve these 2, which may seem contradictory. This is the sustainability management that the group has set forth this time. It is clear that companies cannot conduct their business activities by turning a blind eye to issues such as the environment, society and human rights. We believe that by integrating the concept of sustainability into our corporate and business strategies, we will be able to achieve a sustainable management framework for future growth. In the medium-term management plan that started in fiscal 2021, the group has formulated the following concepts: concept of sustainability management, corporate credo, positioning of the group vision, Well-Being Life as the goal of the group vision and sustainability policy. The group's corporate credo, which has long been a cornerstone of the group, is service before profit and abjure all evil and practice all good. These 2 statements are the same, and the spirit is to practice good for society. What is this good? In current terms, we are providing long-term value to all of our stakeholders, which is in line with the concept of stakeholder capitalism. As the spread of the coronavirus has transformed the world and the social and consumption structures are about to change, the value required of retailers is also changing. In order to promote sustainability management and realize the group's vision in this highly uncertain environment, we have deliberated and discussed the good things of the future. That is the long-term values that will lead to new affluence, security and happiness. As a result, we have come to the conclusion that the goal of our group vision is to realize a Well-Being Life for all people. The JFR Group's concept of Well-Being Life is not limited to the commonly used concept of physical health. The JFR Group's concept of Well-Being Life is to realize not only material and economic wealth, but also spiritual, physical and social wealth as well as environmental wealth. In a word, it is realization of a life that is rich in both body and mind. This is precisely the good thing referred to in the company credo. And we have come to the conclusion that the realization of this is the ultimate goal of a new happiness in life. While providing a Well-Being Life, a life that is rich in both body and mind to all of our stakeholders, the group must continue to grow sustainably as a company. This is a spirit that we have maintained for hundreds of years as our corporate credo, and it is exactly what we call CSV, creating shared value today. Sustainability management is a management approach that balances the resolution of social issues with corporate growth. We will realize specific initiatives in the form of CSV. Through CSV initiatives, we will realize the Well-Being Life for all stakeholders, including customers, employees and business partners. Please refer to Slide 3. I would like to explain Well-Being Life again here. I mentioned that the group's concept of Well-Being Life is a life that is rich in both body and mind. But how should we achieve this? Since its establishment, the group has offered a variety of lifestyles. We have strength in beauty, health, high quality, culture and trust that we have cultivated over the years. While making full use of these strengths, we have added a keyword, sustainability, to them. We believe that we will be able to propose a Well-Being Life by searching for and providing goods and products and services from all over the world and Japan that combine these strengths with the keyword sustainability. In order to achieve this goal, the 7 materialities outlined here are the key issues the group will tackle in the future. Please refer to Slide 4. In addition to the 5 materialities from fiscal 2021, the JFR Group has added promotion of a circular economy and realization of customers' healthy, safe and secure life as new materialities. In this way, we have further strengthened our efforts to address environmental issues and clarified our response to our customers who are our important stakeholders to make it clear that we will work together with them to address sustainability issues. The important thing to remember is that by addressing these 7 materialities, we will move closer to realizing a Well-Being Life. In each of these materialities, we will work to reduce risk and create new markets. This is the realization of our corporate credo. For specific details of each materiality, the executive officer in charge, Mr. Hirano, will explain. The JFR Group has been strengthening its sustainability initiatives and working to solve social issues. However, many social issues remain unresolved. The JFR Group will continue to promote sustainability management in Japan, contribute to the realization of a decarbonized society and work to solve as many social issues as possible through business growth. Thank you very much for your kind attention.

I am Hirano of J. Front Retailing. Thank you very much for taking time out of your busy schedule to join us today. I'd like to explain our materiality initiatives. Please turn to Page 2. The JFR Group has been working on 5 materiality issues since FY 2018 and has added 2 new materiality issues in FY 2021. By adding the promotion of a circular economy, we will strive for addressing the waste problem and realization of a circular economy in addition to the existing decarbonization efforts. As for the realization of customers' healthy, safe and secure life, we have added this new materiality issue as we had no materiality issues related to customers or our important stakeholders, and there are growing needs for health, safety and security due to COVID-19. Going forward, we will achieve the goal of our group vision, Well-Being Life, by promoting these 7 materiality issues. Please turn to Page 3. Since FY 2018, our group has been working to build a foundation for sustainability management primarily by reducing risks of materiality issues. From fiscal 2021, we have incorporated sustainability management into our medium-term management plan to demonstrate it is a core management initiative. From this fiscal year onward, in addition to the risk reduction in materiality issues, we will focus on creating business opportunities to contribute to our future growth. In this presentation, I will focus on 2 aspects, that is risk reduction in social issues and creation of business opportunities. Please refer to Page 4. First, I will explain our efforts for risk reduction in materiality issues. The first point is about the efforts related to our energy policy for carbon neutrality. Our group has been working on environmental issues as a top priority agenda for sustainability management. Current progress in reduction is described on the page. And we have revised the emission reduction target of Scope 1 and 2 emissions by FY 2030 in conjunction with the start of the current medium-term management plan. Originally, we set a target of 40% reduction from FY 2017 levels, but we have raised it to 60% and set it as a challenging target. Also, the emission reduction target of Scope 1 and 2 was added to the performance-based stock compensation plan for officers' remuneration as a nonfinancial indicator to clarify the management responsibility for climate change issues. We'll continue to increase the use of renewable energy, promote energy conservation and study energy creation for the progress in Scope 1 and 2 emission reduction to achieve carbon neutrality. Please turn to Page 5. The second point is reduction of Scope 3 emissions. It is an initiative which is not easy to work on. At present, our group calculates Scope 3 emissions and obtains a third-party assurance. But going forward, we will collaborate with suppliers to calculate more precise figures and implement reduction measures. To this end, Daimaru Matsuzakaya Department Stores plan to hold a briefing session for major customers in April 2022. This will be the second briefing following the one held in 2019 and will explain the current situation and ask for their understanding and cooperation in our future initiatives. With the collaboration with our suppliers, we will make steady efforts to reduce Scope 3 emissions to achieve carbon neutrality. Please turn to Page 6. The third point is realizing well-being that protects human rights and health of workers in the supply chain. In recent years, people have a stronger sense of crisis about human rights. In our business activities, we are required not to engage in human rights abuses as well as not to contribute to human rights abuses through business relationships such as supply chains. This is another issue that cannot be solved without collaboration with our suppliers. We asked our suppliers to adopt the JFR Principles of Action for Suppliers, and we are currently conducting the first assessment to confirm the progress in the adoption. In this assessment, we asked questions particularly about human rights in detail so that it can function as human rights due diligence. We'll continue to focus on promoting the adoption of the Principles of Action for Suppliers in our supply chain as well as reducing human rights risks. Please turn to Page 7 for explanation on creating business opportunities. First, let me talk about creation of new business opportunities by promoting a circular economy. In March 2021, Daimaru Matsuzakaya Department Stores launched a new business name, AnotherADdress, as a fashion subscription business. Based on the perspective of 3Rs, we have been successful in reducing food waste and waste plastics, collecting clothing through the ECOFF program and, for the first time this year, recycling cosmetics containers. We are also working on reuse and repair. Going forward, we will take one step forward and consider potential business opportunities, for instance, participating in a demonstration experiment of waste plastics recycling. By expanding these initiatives and building new business models, we will increase business growth opportunities by solving social issues with a circular economy. Please turn to Page 8. Next is about Well-Being Life we propose to our customers. This is an effort to realize our new materiality issue, realization of customers' healthy, safe and secure life. In November, we opened Welpa, a health care mall at Shinsaibashi PARCO. This is a space to propose an environment where women who are forced to make many choices as their mind and body undergo major changes at different stages of life can face their mind and body and enjoy the transformation of themselves. Starting with Shinsaibashi PARCO, we intend to open this mall at other PARCO and Daimaru Matsuzakaya Department Stores. In addition, for safe shopping during the COVID-19 pandemic, we conducted live commerce events for gaisho customers and served the customers online to work on noncontact communication and sales using digital technology. These efforts are linked to the Real x Digital Strategy set forth in the medium-term management plan. Going forward, our group will continue to work to create new business opportunities through activities to realize health, safety and security of the customers. Please refer to Page 9. In the medium-term management plan, we set forth a corporate vision of a corporate group that produces enriched lifestyles and design unique communities in harmony with local communities. Coexistence with local communities is an initiative of great importance for us. Starting with openings of the main building of Daimaru Shinsaibashi store and Shibuya PARCO in 2019, we opened a Shinsaibashi PARCO in 2020, and the development project of Nishiki-sanchome in Nagoya has started for the opening in 2026. And we'll continue to develop properties to enhance the attractiveness and revitalize local communities. Also, we are actively engaged in chisan-chisho, meaning local production for local consumption, through collaboration with local communities and the use of the Internet as well as industry academia partnership. We will continue to work on activities that will enhance the value of local communities and bring happiness and joy to everyone. Please turn to Page 10. From this page, I'll talk about the organization. The first point is about revitalization of the organization by realizing diversity. Our group has been working to increase the ratio of female managers, establish new systems and strengthen employee education to promote understanding of LGBT and promote employment of people with disabilities. Based on the idea that diversity is a driving force for growth, we'll further strengthen our initiatives for diversity. As a first step, we will start the Women's Empowerment Promotion Project in FY 2022 with a focus on corporate culture, systems and education. This is a group-wide project aimed at becoming a company where women can develop their careers easier than ever by reforming the working environment for women and changing the mindset of the management and employees. Please turn to Page 11. In order to achieve the diversity I mentioned earlier, it is essential to have new flexible ways of working. And we also believe that realizing such flexible ways of working enable us to achieve the Well-Being Life of our employees and their families. In addition to the existing flexible time system, we have expanded the remote work system to allow employees to work anytime, anywhere in a flexible manner. Also, we have been working to improve systems that respond to changes in life stages such as childcare and nursing care. We hope creating workplaces where employees can work in good mental and physical health will lead to better productivity. I have explained risk reduction and business opportunity creation in materiality issues. The world of Well-Being Life has a broad concept and a very large market. Environmental changes such as the pandemic and demographic issues like a declining birth rate and aging population will increase the need in a wider range of categories in the future. The JFR Group is committed to creating new business opportunities through risk reduction for social issues as a company and contribution to society and the planet. That is all for me. Thank you.

Hello, everyone. I'm Tabata, in charge of the AnotherADdress business. Thank you very much for joining us today. I will briefly explain about the AnotherADdress as a specific initiative for a circular economy. Please refer to the next page. I'll start by explaining 3 points about why we launched this AnotherADdress. The first point is promotion of a circular economy. The JFR Group has grown in mass production and mass consumption as a large-scale retailer operating Daimaru Matsuzakaya and PARCO. However, this mass production led to mass consumption, and the mass consumption has created a problem of mass disposal. In response to this problem, as a company which has grown through the mass production, we questioned if we could transform this into a new business model, if we could change our business model from a linear economy-based model to a circular economy-based model. And we wanted to take on this challenge, and we thought we should do it. This is the main driver for this service. The second point is response to new values of customers. Environmental awareness has become widely shared among general consumers. Also, in terms of consumption of goods, just as Netflix and Shopify have shifted from ownership to sharing of information, we are seeing a major shift in values from ownership to sharing even for goods. Rather than considering this major market change as a risk, we take it as an opportunity and want to work on it as a possibility for market expansion and business development. We promote this business with such a thinking. The third point is promotion of diversity and inclusion. In my case, I am responsible for this in-house venture company, AnotherADdress, in my early 30s, and I have been able to experience many things. Also, as a promoter of open innovation in this company, I have been strongly aware of the need for open innovation initiatives through my experiences in various venture companies and in San Francisco for 5 years. At AnotherADdress, I'm making the maximum use of my awareness of open innovation to create services with many partners. Please turn to the next page. Now let me tell you about the services provided by AnotherADdress. We have partnered with sophisticated brands and brands that many people know and want to try at least once, such as imported brands, [ Armani ]; domestic brands, [ Robe ] and Sakura; and department store brands, Beige and ADORE. With these partners, we provide a service that allows customers to freely choose and rent 3 pieces for JPY 11,880 for 1 month. This service is 100% web-based. So if the clothes you receive are with wrong size or different from your image, you can, of course, exchange them for the right one. Or if you really like the clothes after wearing for a month, you can purchase them. In addition, of course, this JPY 11,880 includes the cost of cleaning, repair and cost of round-trip delivery. At the bottom, a brief description of our business scheme is provided, and this is based on the idea of a circular economy. Customers place their order 100% online, and we work with 3PL companies, delivery companies, cleaning companies, repairers and apparel companies to create a scheme for recycle and rental of clothes, and customers pay the subscription fee to us. As we never want to throw away clothes, the most ideal situation would be customers like the clothes they rent and buy them. And for the clothes that are no longer wearable, we work with recycling companies to recycle them as fiber for reuse. This is the initiative we promote. Please turn to the next page. Next, I'll explain the business concept of AnotherADdress. The keyword cherished by our team is Fashion New Life. We are trying to create a new way of consuming fashion through this service and combine the essential value of fashion, such as the power of clothes to make people happy and energetic and the power to give people confidence with a sustainable and circular economy. We don't regard AnotherADdress as just a dress rental service. It is a service to circulate clothes with the rental scheme. And in this circulation, customers can buy the clothes if they like them. In the future, we want to help customers pass the clothes at home they no longer wear to other people. Or customers can put their own clothes in cardboard boxes, come and go once a month for cleaning, for off-season storage or for repair to extend the life of their own clothes. Based on this concept of Fashion New life, we will take all the customers involved with AnotherADdress and their own clothes into the circular economy and expanding it further. AnotherADdress is structured with such concept. Please turn to the next page. This service was launched in March, and clothes have already been rented over 15,000 times, and we have received a lot of positive feedback from our customers. For example, a woman in her 50s in Tokyo said, "I love clothes and bought a lot during the bubble economy to make my closet full of clothes. However, as I got older, I started to wonder what I want to do with so many clothes in my closet. That's when I found out about AnotherADdress. And I thought this service would make my closet organized, and I would be able to enjoy wearing clothes again. Now I'm really enjoying the service." Next is a voice of a woman in her 20s, "In summer, we hold an event with our partners to tell customers how to wash clothes at home, to keep them clean and to extend the life to help customers to clean our items by themselves." And from the customer in her 20s, we received the following feedback, "I didn't know there are so many techniques to take good care of clothes. I want to follow this idea of using clothes for a long time by extending their life. I totally agree with it." Next, a woman in her 40s in Fukuoka prefecture said, "When I buy clothes in stores, I tend to choose black ones because they are safe for matching. But this service has made it possible to wear a variety of clothes that I had wanted to try. And as a result, my coworkers and partner told me, 'You look great in that clothes. Where did you buy it?' And this makes me happy while at work, and my life has become very happy." In this way, we are working to realize the circular economy through this service. And at the same time, we feel that we are making people happy with their clothes. Please move on to the next page. This service has become possible by partners with whom we have built relationships through open innovation. For example, in the field of logistics, warehousing is supported by Hitachi Transport System; delivery services are performed by Smari and Yamato Transport; [ Sintek Brothers ] takes care of the laundry service; and Orimoto provides the repair service; and the Japan Environment PLANning is in charge of recycling. We operate the service with these partners. We are grateful for the kind words from our partners. For example, Mr. Mogi, President of BARREL Inc., [ Sentaku brother ], said, "The reason we participated the AnotherADdress service is because I totally agreed with the concept of this initiative. There are many issues in the cleaning industry such as environmental pollution by petroleum solvents and price competition to cause quality issues instead of recovering the condition of clothes by cleaning. So we want to promote organic cleaning and water cleaning in Japan, which are already used in Europe and United States. We are working together to create a service as we share the thoughts and hope to promote water cleaning and organic cleaning together in Japan through AnotherADdress in the future." Also, Mr. Iwamoto, Chairman of Japan Environment PLANning, which supports the recycling, said, "I feel it is very significant that a department store that has grown through selling clothes is participating in this project. Many of the brands participating in this service are using the subscription and rental schemes for the first time. It is totally a new idea that a department store leads such an initiative with participation of brands, and this is a new win. As a recycler, we'll continue to support them." One of the major strengths of the JFR Group is to connect people who make products with people who use them. We connect designers who put their heart and soul into the clothes, cleaners and repairers who take care of the clothes to be used for a long time and customers who strongly feel importance of sustainability. We are working on AnotherADdress as we feel significance of connecting these people to grow the service. Thank you.

Hello, everyone. I'm Sato, an Outside Director of J. Front Retailing. After listening to Mr. Tabata's very interesting story about AnotherADdress, I would like to talk about governance, which is a very serious subject. So please bear with me for a moment. As you know, our group is a company with a Nominating Committee, et cetera, and a company with a Nominating Committee, et cetera, is a system in which the management team is responsible for execution. And the Board of Directors supervises the execution. In the past, it used to be the case that a company with a board of corporate auditors had a corporate auditor, and the Board of Directors decided a large part of the business execution. However, nowadays, a large part of the decision-making and execution of business operations is left to the executive officers, and the Board of Directors supervises and monitors them. So this is the overall scheme. But in Japan, not many companies have adopted this company with the Nominating Committee, et cetera, scheme. Therefore, even if we do have the scheme, there is no clear standard for the role of the Board of Directors, and it is up to the wisdom of each company that has adopted this scheme. In the early days of a group, like a company with a board of auditors, the Board of Directors made decisions on a large part of the business and supervised it. However, at present, a large part of the decision-making has been transferred to the executive side, and the Board of Directors is now focused on monitoring and supervising the decisions made and actions taken by the executives. As for what we are doing in this context, as I mentioned here, we are focusing on setting agendas and discussing group strategies from a medium- to long-term perspective that will lead to the enhancement of corporate value. The Corporate Governance Code also places emphasis on the enhancement of corporate value over the medium and long term. And the company, for example, has set agendas and held discussions focusing on how to determine the group's business portfolio with a view to 2030. On the other hand, as you know, the distribution industry is currently in an extremely difficult situation due to COVID-19. In particular, under the declaration of a state of emergency, consumers, and I am a consumer myself, cannot go to stores even if they want to. And we're in a situation where they could not buy anything even if they wanted to. Therefore, it is a fact that both department stores and PARCO have been forced to face difficult corporate management. Under these circumstances, we are discussing what measures we can take to deal with these current issues along with discussions from a medium- to long-term perspective. The reality of the COVID-19 pandemic is that, as I'm sure all of you feel the same way, you never thought that such a pandemic would happen in your lifetime. I think the current situation is that it is difficult to find a solution as to what countermeasures should be taken or what the next move should be. But in this situation, we are struggling to come up with countermeasures through various discussions and exchanges in opinions. In this context, you may ask what outside directors are actually doing. Naturally, we attend the Board of Directors meetings and express our opinions. But there is also a briefing session in advance of the agenda for the Board of Directors meetings, followed by an executive session where only outside directors gather to share information and exchange opinions. In this session, there is no need for anyone to be the moderator or the chairperson. We can freely express our thoughts on the current or upcoming Board of Directors proposals. Their active opinions exchange in the session may be disagreeing with proposals coming from the executives. After sharing such opinions, we go to the Board meeting. After the Board of Directors meeting, we have an expanded executive session with the participation of President Yoshimoto. This is a meeting for the exchange of opinions between the top executives and outside directors. For example, we had a session the other day where we listened to President Yoshimoto's thoughts on the role of holding companies, what holding companies should do and what they should do from what perspective. And on the other hand, outside executives expressed our opinions. There is no conclusion at all, but perhaps some of what the outside directors have said may be useful for execution. In some cases, this may be an opportunity to clarify our misunderstanding or incorrect interpretation. I think the session, through the candid exchange of opinions between Mr. Yoshimoto and us, has been quite useful in that we can correct each others' mistakes and stimulate each other. Next, in this extremely difficult situation, what are the expectations for the group from the perspective of the outside directors? And what are the challenges? I have written them here. The first point is the optimization of the business portfolio. I think this is something all investors from a market perspective ask for any company. In the case of our group, we have 2 major pillars: the Daimaru Matsuzakaya Department Store and PARCO, which have become wholly owned subsidiaries. However, as for other segments, we have clearly indicated the developer business and the financial settlement business. But of course, we need to constantly criticize, verify and confirm whether these are sufficient even though we have clearly indicated them. Discussions are being conducted from this perspective, and I think this is the most important issue for us. But even so, even if there is one idea of optimization, I think the human resources that support the realization of that idea are also very important. I am a lawyer, so it is difficult for me to understand human resources policies. But I know that department stores and PARCO have been mixing human resources and boldly hiring mid-career workers. So what kind of human resources policies will be adopted in this context is also an issue for the future. And I think this is something that we can look forward to. For example, as written and following the asterisk, what we are focusing on as outside directors is how to build a new business model and how to respond to the digital shift. As you have been mentioned in your introduction of AnotherADdress, I believe that this is really one new business model that is being proposed to the world. And since it is a business that can be completed digitally, the expectations of the outside directors are very high. On the other hand, as we have been saying from the beginning, there is a considerable difference in the speed of change between what the outside directors think and what the executives think. We have always asked why the speed of change is not faster. We can see that the executive side is making decisions with great speed from their point of view. But from an external perspective, it is still too slow. This is always a discussion topic at the Board of Directors, and there was a major discussion about this at the executive session held the other day. Lastly, regarding the role of Independent Outside Directors, there are a number of things that could be mentioned, but I think there are 2 major ones. Governance is originally a set of rules to restrain management from running amok. So this is to prevent management getting out of control. And I think that the most important role of outside directors is to ensure that they are able to put the brakes on these kind of situations for this group. I think you don't have to worry about these kinds of things happening. The second role is to support proactive and decisive management decisions. And I think that this role is being emphasized very much. In our group, we have an old traditional model of success. So it is difficult to take a business model that is far removed from that model, and it is difficult to take a step forward. However, on the other hand, the company is currently thinking of various new ideas. And we, as outside directors, would like to support such proactive and decisive management decisions while, at the same time, supervising them and monitoring their direction. As for the stance of the Independent Outside Directors regarding the execution of their duties, I think it comes down to the fact that we can speak freely and not being influenced by management and that we can make decisions without being bound by past ties or history. I myself always think about this when I make my comments. And the other outside directors never hold back their opinions through difference to the management. Please be assured about this. We will continue to support and supervise the management team while keeping our antenna tuned in to the thoughts of sensitivity of various stakeholders. That is all for now. Thank you very much for your time. [Statements in English on this transcript were spoken by an interpreter present on the live call.]