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

I'm Nagamine, Executive Officer and Senior Executive General Manager of the Financial Strategy Unit at J. Front Retailing. Thank you very much for taking the time to join us today despite your busy schedules. First, I will explain the first half FY 2025 results and the full year FY 2025 forecast. J. Front Retailing's consolidated gross sales for the first half FY 2025 were JPY 622.5 billion and revenue reached JPY 219.9 billion, both increased year-on-year. However, due to increased costs such as personnel expenses, business profit decreased by 13.2% to JPY 28.1 billion. Operating profit decreased by 23.9% to JPY 29.9 billion, and profit attributable to owners of parent fell by 36.9% to JPY 18.3 billion. As a result, profit declined at each level and all figures fell short of the forecast announced in April. Regarding shareholder returns, in line with our policy of maintaining a payout ratio of 40% or higher. We increased the interim dividend by JPY 5 per share year-on-year to JPY 27 per share as announced in April. In addition, from the perspective of optimizing the amount of shareholders' equity, we conducted share buybacks totaling JPY 15 billion from April to August. Next, I explain the performance by segment. First, regarding the department store business. Last year, inbound sales expanded far beyond expectations, starting around this spring, however, sales significantly decreased year-on-year by the shift from the substantial yen depreciation to appreciation. On the other hand, domestic consumption continued to perform robustly, driven primarily by higher spending per customer, supported by the various effect stemming from rising stock prices, among others. One example is that the largest event for Gaisho customers in the first half achieved the record high sales. Additionally, the opening of an official shop at the Osaka/Kansai Expo also contributed to boosting domestic sales. However, SG&A expenses were impacted by cost increases, including personnel expenses associated with base salary hikes, commissions related to the establishment of the official Osaka/Kansai Expo shop, outsourcing cost, personnel dispatch expenses and increased repair cost due to renovation work. While these costs were controlled to a certain extent compared to the initial plan, the larger-than-expected decline in inbound revenue had a significant effect resulting in both decreased revenue and profit in the department store business overall. In the shopping center business, we successfully minimized the impact of reduced floor space due to the large-scale renovation work at Shibuya PARCO. By our focus on expanding PARCO's unique Japanese content, we were able to attract a significant number of customers from Japan and overseas. Notably, inbound volume increased by 20% year-on-year in sharp contrast to the department store business. Furthermore, the entertainment business, including theatrical productions and the character-themed cafes performed strongly. In the shopping center business, the strong top line performance offset increase in cost of goods sold and SG&A expenses, resulting in an increase in business profit. Factors such as gains from the sale of land contributed to a double-digit increase in operating profit. In the Developer business, J. Front Design & Construction saw active progress in orders for department store renovation project and construction work at luxury brand shops. J. Front City development carried out asset replacement for multiple properties, combined with favorable conditions in the real estate market, we were able to mitigate to some extent the reactionary decline from the gain of property sales in the previous year. As a result, the total performance of the developer business improved to a profit level close to that of the previous year, despite the initial plan forecasting the significant year-on-year decline in profit. In the Payment and Finance business, revenue increased due to growth in merchant commissions. However, costs related to acquiring new members and add expenses, as well as personnel costs associated with the issuance of the new PARCO card and Hakata Daimaru card impacted and posted declines in both operating profit and business profit Next, the performance of Daimaru Matsuzakaya by specific stores is shown on Slide 6. On a comparable store basis, stores with high inbound sales shares such as Shinsaibashi and Kyoto stores struggled, resulting in a 1.6% decrease in revenue. Amid these challenges, Umeda store achieved a double-digit growth in overall sales, supported by the successful expansion of character themed content, which contributed to a 30% increase in inbound sales The Nagoya store, which has been undergoing a large-scale innovation project since last fiscal year continued to be affected by the construction work, but the effects of the renovations gradually started to emerge from the latter half of the first half, and we see this will lead to the full-scale operation in the second half. Inbound sales department stores saw a sharp slowdown in general merchandise sales during the first half of the current fiscal year, beginning in spring due to the appreciation of the yen, which narrowed the Japan overseas price gap in luxury brands. As a result, the average customer spending declined by approximately 30%. On the other hand, the number of customers has continued to increase. And we maintain the view that inbound shares represent an important market that department store can steadily grow over the medium to long term with appropriate response capability. Looking at customer numbers by country, China and Thailand showed a significant growth with the customers from China increased by 25.5% year-on-year and those from Thailand increased by 40%. This slide shows SG&A expenses for Daimaru Matsuzakaya department stores for the first half of FY 2025. Year-on-year increase was due to costs related to the expo, commissions due to the increased use of third-party credit services and expansion of QR payment and outsourcing and commissions fees, as well as ad expenses due to the Nagoya store renovations and enhanced events at various stores. On the other hand, compared to the April forecast, we managed to reduce expenses by JPY 0.5 billion, mainly in personal expenses. Performance of PARCO by store is shown on Slide 9. Shibuya PARCO undertook its first large-scale renovation since its reconstruction and reopening in 2019. Consequently, the impact of construction limited revenue growth to single digit in the first half, but the store has regained its original momentum since the renovation completion in September. Meanwhile, Nagoya PARCO and Sendai PARCO saw steady effects from the renovations of their pop culture and fashion loans, leading to a double-digit increase in revenue. Overall, PARCO stores continue to perform strongly. Next, this slide covers the consolidated balance sheet results. Interest-bearing liabilities, excluding lease liabilities were JPY 184.9 billion, a reduction of JPY 5 billion from the end of the previous fiscal year, even including the JPY 30 billion in bonds issued in the first half. The next slide shows our consolidated cash flow results. Investing cash flow decreased by JPY 5.3 billion year-on-year, partly due to the absence of the impact from the share acquisition related to the Daimaru Shinsaibashi store sales building conducted in the previous fiscal year. Next, I'll explain the performance forecast for the second half and the full year FY 2025. Please refer to Page 12. While the employment and income environment continued to improve, under the new political framework now being advanced, we anticipate that specific economic measures, such as tax cuts aimed at stimulating the economy may be introduced depending on future development. Spending among upfront consumers is expected to remain robust, driven by the various effect generated by the strong performance of the stock market. Regarding inbound tourism, our view that it remains a growth market with increasing customer numbers in the mid- to long term remains unchanged. However, we have come to recognize that the surge in department store inbound sales last fiscal year was a temporary spike driven by the rapid yen depreciation. Consequently, for this fiscal year, we have shifted to a more cautious outlook regarding the trend in high-end products. We believe it is necessary to assume that lower customer spending levels in the first half will continue to some extent in the second half as well. On the other hand, while the market turbulence initially seen at the beginning of the fiscal year has temporarily subsided regarding the impact of the new tariff policies introduced in the U.S. on the global economy, it remains unclear at this point how much these policies will have a long-term impact across various industries. We continue to monitor the situation closely. Additionally, while price increases, particularly in food prices continue, if the positive shift in real wages is not sustained, we believe it is necessary to anticipate a downturn in consumer confidence. Based on this business environment, we forecast full year consolidated gross sales to increase by 1.9% year-on-year to JPY 1,293 billion. However, business profit is expected to decline by 9.3% to JPY 48.5 billion, and operating profit is projected to fall by 24.4% to JPY 44 billion due to the reactionary decline from the onetime gain of JPY 8.5 billion from a gain on step acquisition in the previous year. Compared to the April forecast, gross sales have been revised downward by JPY 23 billion, business profit by JPY 5.5 billion and operating profit by JPY 6 billion. Regarding dividends, we plan to increase the annual dividend by JPY 2 per share to JPY 54 per share, maintaining the balance between the interim and year-end dividend as planned at the beginning of the fiscal year. This represents a fifth consecutive year of dividend increase following the COVID-19 pandemic. The outlook of each segment is outlined on this slide. In the department store business, we anticipate that the domestic demand will remain firm especially among upfront consumers. This will be supported by initiatives such as cultivating new high-value Gaisho customers in priority areas and strengthening out-of-store events. On the other hand, regarding inbound consumption, which expanded rapidly last fiscal year. We have revised our sales forecast from the initial plan based on the trends in the first half. For the shopping center business, the first large-scale renovation of Shibuya PARCO since its reconstruction in 2019 was completed, and the positive effects are expected to emerge from the second half onward. And by promoting reforms of the sales floor layout at each flagship store, including the renewal of allocations focused on IP content in Japan mode, we anticipate continued steady growth in capturing both domestic and overseas demand. The developer business is expected to experience a year-on-year decline in revenue and profit due to gains on sales of real estate assets in the previous fiscal year as well as a pullback from the orders for large-scale renovation work at department stores. However, given the performance of the first half, we have revised the initial plan upward and expect significant improvement. For the payment and finance business, we anticipate increased revenue driven by higher commission income from an increase in transaction volume, including the effect of consolidating cars within the group, such as a new PARCO and Hakata Daimaru card. However, as upfront cost for acquiring new cardholders, we continue in the second half, both business profit and operating profit are expected to decrease. The sales outlook for the major stores of Daimaru and Matsuzakaya is shown on this slide. The Nagoya store, which has been undergoing the large-scale renovation since last fiscal year, has largely completed the construction work, and we expect the revenue growth effects to fully materialize from the second half of this year. On the other hand, for stores with significant growth in inbound sales last year, such as Kyoto and Sapporo stores, we have carefully reassessed their sales forecast. As previously announced, the Umeda store, which has performed strongly with a double-digit growth in the first half began major renovation work in mid-October. With the closure of the upper floors and construction work on each floor starting phases, we expect a revenue decline from Q4. Next is the forecast for SG&A expenses for Daimaru, Matsuzakaya department stores in the second half, as shown on the slide. SG&A expenses are projected to increase by a total of JPY 1.6 billion year-on-year, primarily driven by factors such as the strengthening of Gaisho events, add expenses related to the large-scale renovation of the Umeda store, increased outsourcing and commission fees and higher commissions related to the offshore shop at Expo. Compared to the initial plan, we expect the increases in commissions, outsourcing and commission fees, while depreciation expenses for the landmark Nagoya Sakae, which were initially included in the SG&A have been transferred to cost as a part of change in accounting treatment. As a result, the increase in SG&A expenses from the initial forecast is limited to JPY 60 million. The forecast for the consolidated balance sheet is shown on this slide. Lastly, regarding the forecast of consolidated cash flow, we still expect to secure positive free cash flow, although we plan to actively pursue capital investments such as sales floor renovation and property development, mainly in the department store and the developer business to drive transformation. This concludes my presentation. Thank you very much for your attention.

I'm Ono, from J. Front Retailing. Thank you very much for taking the time to join us today despite your busy schedules. I would now like to explain the progress of the medium-term business plan. First, on Slide 22. As I have mentioned many times, the group aims to become a value co-creation retailer over the medium to long term. We will work together as one team to create three values and three synergies. The theme of this medium-term business plan is transformation for future growth, and we have already reached the halfway point. I would like to share my candidate assessment of the results and response during the year and a half, I have been in my current role, as well as my own personal view of the ongoing challenges we face. First, in terms of response, I would like to mention three things. One is to expand growth potential in the Nagoya and Osaka areas. Please look forward to the Sakae area next year. I believe that we are achieving steady progress in our efforts to make the entire Sakae area of destination for people. In Osaka, we have made preparations for new development to solidify our leadership position in Shinsaibashi, while in Umeda, we are advancing well-balanced preparations by pursuing efficiency, while considering the surrounding oversaturation of stores, yet simultaneously driving differentiation. The second is content ownership. I feel confident that we can materialize all aspects of MD, including merchandising, product content, IP content and service content. Moreover, we have been able to achieve this within a relatively short time frame. Of course, scaling up the business is the most important thing and I fully understand that this will come later. However, I believe that taking that first step firmly is a significant achievement. Third, we have been able to expand and strengthen our customer base, both domestically and internationally. We have successfully sourced all of the group's commercial cards in-house, commenced issuing new cards and advanced efforts to connect with our overseas VIP customers. While we anticipate this will likely promote circulation within the group to some extent, we have also refined the specific measures in this area. On the other hand, I'd like to mention three areas where we recognized challenges for the future as well. One is that we must continue to explore growth investment opportunities, including M&A to expand our business portfolio, while M&As involves other parties and cannot be rushed. We intend to thoroughly evaluate growth investment targets, including those that transcend the framework of our existing businesses. The second is building the foundation to achieve growth in the sense of increasing top line revenue, particularly the organization, personnel and fostering the corporate culture. Since taking office in March last year, I have been emphasizing that we must move forward in these areas, but they recognize it will be difficult. And honestly, it will take time. At Daimaru, Matsuzakaya, in particular, a powerful success story and mindset in sales reform permeates every corner. Therefore, I have the impression that there are still many employees, though certainly not all, who are reluctant to make decisions on their own and are unable to be proactive. To shift them to the market-oriented mindset, we need to keep adding more and more approaches. We have brought in someone from the outside to head our human resources strategy. As we begin implementing additional concrete actions at the operational level, we intend to ensure we keep up with these developments. The third is the fundamental transformation of business operations through the use of AI. We have been making solid progress to date in terms of productivity improvement, but we now believe that we are entering the phase focused on enhancing our top line growth. By leveraging AI to further increase productivity, enrich customer touch points and launch new services, we believe we can aim for an even higher level by using AI as a foundational infrastructure for these efforts. However, we recognize that the concrete plans for this area are still insufficient. We are determined to invest further resources to catch up in this area, as we firmly believe AI will be a game changer for our retail business. We intend to advance our efforts based on this conviction. Back to the slide description, Page 24. This page is titled "The Medium-term Business Plan and Future Initiatives." And the purpose of this page is to declare that actions outlined here will bear fruit in FY 2026. In particular, regarding the maximization of investment effects in the upper row, please understand this as a commitment to translate these efforts into revenue and profit within the next fiscal year. On the other hand, we have organized the lower part of the plan so that the content will be finalized by the end of FY 2026. Page 25. From here, I can be a little more specific. As part of our retail evolution, we have been working to enhance the appeal of our stores. Matsuzakaya, Nagoya has now nearly completed its extensive 2-year innovation. An analysis of ID customer sales for the first half showed solid growth by customers in their 20s and 30s. Furthermore, the share of Gaisho sales at the store has been increasing even more. We are currently achieving the desired results, and we intend to expand the effect of this area in a store operation policy. Page 26, PARCO. The entire company is now continuing to perform well. The floor layout reforms led by President Kawase, who has been enrolled since FY 2023 have been successful. In July of this year, we held a business strategy presentation where Shibuya PARCO store manager, Hiramatsu, also spoke as mentioned there, we are fundamentally reevaluating the value of our stores and advancing structural reforms to the floors and interior spaces. As a result, both customer numbers and sales volume are increasing. Inbound sales are also showing solid growth. Shibuya PARCO is performing exceptionally well at the moment. Next, Shinsaibashi PARCO, like Shibuya PARCO, will undergo its first major innovation as a new store. We hope you will look forward to further developments in this area starting in FY 2026. Page 27 is about inbound demand. Duty-free sales at department stores amounted to JPY 49.7 billion in the first half, with the full year forecast set at JPY 101.6 billion. This first half result of JPY 49.7 billion was a 24% decrease from the previous year. Although not listed there, inbound sales for the J.Front Group as a whole, including PARCO and GINZA SIX were down only 15% year-on-year in the first half. We believe this is a prime example of how the diversity of our group's commercial facilities contribute to the group's resilience. On a more topical note, the Daimaru Kobe store has seen a 1.5-fold increase in duty-free sales every month since this summer compared to the previous year. A major factor appears to be the opening of Kobe Airport to international charter flights. However, we also believe that the increase in inbound traffic to our traditionally strong area is also a positive indicator for the future. While I've mentioned various points, the crucial factor remains what I've emphasized before, stabilization. Our apps inbound membership has surpassed 120,000 users. But more importantly, inbound CRM is vital because it enables us to tailor proposals and attract customers through one-to-one communication. This is one-to-one engagement with VIPs. The threshold is quite high as it targets customers who have completed tax-free procedures at Daimaru, Matsuzakaya department stores at least twice with a total purchase amount exceeding JPY 1 million. Consequently, the number of customers in this inbound CRM program, which had aimed for 500 during the period of the medium-term business plan has surpassed 1,000 in just over half a year. Originally, this initiative was only promoted at the Daimaru Shinsaibashi store and only to customers from China. But in the second half, the scope of this initiative will be expanded to Sapporo Daimaru, Matsuzakaya Nagoya and Kobe Daimaru. Regarding target countries, following China, we have opened it to Thailand in anticipation of cooperation with Central, a partner of our group We believe that CRM in this area is not solely about increasing the number of customers or connecting with each individual customer going forward. Therefore, we will work to enhance the appeal of the products we propose and expand our services to maximize effectiveness. Next, on Page 28 is about Gaisho. Year-on-year growth for the first half was 5.2% compared to the same period in FY 2019 before the pandemic. This represents an increase of approximately 30%. Supporting this is an increase in average transaction values driven by strong sales of luxury goods, watches and other high-end products. However, for sustainable growth, we believe that the main focus should be on increasing the number of active members. While we are also working to uncover dormant accounts, Daimaru Matsuzakaya is now advancing concrete measures to expand the customer base itself. Leveraging partnerships with stores in major cities nationwide and PARCO. We are implementing strategies to expand new Gaisho sales customers in areas lacking department stores in blank areas and in regions without luxury brands. Next is Page 29, which covers our group customer strategy. With the launch of in-house issuance for the PARCO, Hakata Daimaru and GINZA SIX cards, the total number of cardholders within the group has begun to increase. We can expect both an expansion of the group's customer membership base and a direct contribution to revenue and profit from the next fiscal year onward from JFR Card, which is currently experiencing a temporary decline in earnings due to higher customer acquisition costs. In addition, since the issuance of the Daimaru Matsuzakaya card starting this month, we believe that the speed of development of such cards will be further increased. In addition, the company's app membership continues to grow. The number of active members of the Daimaru Matsuzakaya app reached 2.88 million at the end of August. This means that we were able to develop 240,000 new application members in 6 months. In addition, we will develop an initiative to enable customers to exchange Daimaru Matsuzakaya points for PARCO points to increase the overall LTV of the group's customers. Next is Page 29, which covers our group customer strategy. With the launch of in-house issuance for the PARCO, Hakata Daimaru and GINZA SIX card, the total number of cardholders within the group has begun to increase. We can expect both and an expansion of the group's customer membership base and a direct contribution to revenue and profit from the next fiscal year onward from JFR card, which is currently experiencing a temporary decline in earnings due to higher customer acquisition costs. In addition, since the issuance of the Daimaru Matsuzakaya card starting this month, we believe that the speed of development of such cards will be further increased. In addition, the company's app membership continues to grow. The number of active members of the Daimaru Matsuzakaya app reached 2.88 million at the end of August. This means that we were able to develop 240,000 new application members in 6 months. In addition, we will develop an initiative to enable customers to exchange Daimaru Matsuzakaya points for PARCO points to increase the overall LTV of the group's customers. Next is Page 30. Here is the priority area strategy. Nagoya Sakae has decided to name its new commercial complex, HAERA, which will be housed in the landmark Nagoya Sakae. We will make a more concrete announcement on the details of the content when we are a little closer to the opening. As we have consistently communicated, it is important to focus not only on physical infrastructure, but also on initiatives related to the experiential and community aspects. Moreover, these efforts should not be limited to our group alone, but should involve other players in the Sakae area as well. In line with this approach, we held our first community coprosperity event shown at the bottom right, this summer as a concrete initiative. “POP IS YOU SAKAE” is an art and culture event held in collaboration with facilities in the Sakae area, and we have worked with 14 projects including outside facilities to attract visitors and promote circulation. We plan to further expand these efforts in the coming year and beyond. Now Page 31. As for the other areas, I do not have any additional information about Shinsaibashi and Hakata to share at this time. We have considered internally the request we received regarding pipeline disclosures, not limited to this matter. However, we have decided to refrain from doing so from the perspective that could potentially cause inconvenience and confusion to stakeholders at our existing stores. we kindly ask for your understanding. On Page 32, we have once again organized our aims regarding content ownership and development. Until now, our company has focused on the physical location that where and developed retail business around that. However, with virtually no room left for new development in Japan, we believe that dramatic growth is difficult. Of course, based on the concept that existing stores should always be fresh, we recognize the need to continue redeveloping existing stores as appropriate, yet, amid soring costs and extended time lines, we believe the risks are increasing. That is why we intend to leverage the entire group's business expertise and assets to develop a retail business that owns the content, the products and services we sell. Through the three types of content outlined, we aim to achieve growth that transcends the boundaries of our existing businesses, including expansion into overseas markets and the digital domain. For merchandising content, Daimaru Matsuzakaya recently announced the establishment of a joint venture with Komehyo, and the launch of Disney-inspired brand called [ Annabelle ] we will also advance diverse initiatives, primarily focusing on food, including developing original products at Kochi Daimaru, supporting business succession funds and nurturing investments in the pride fund portfolio. PARCO has launched a game publishing business under the label PARCO GAMES. We will release three titles within this year. While we do not own the IP content itself, we have successfully launched our own initiative, utilizing third-party IP, [indiscernible] which has been well received. This summer, we opened shops in Hong Kong and overseas. As part of our service offerings, we have launched a reuse business through a joint venture with Komehyo. We have already opened four stores and we are currently exceeding our purchase volume target for the current fiscal year ending September. We are feeling quite encouraged by this progress and the overall momentum. As I mentioned earlier, we fully recognize that scalability poses a challenge for our content owning business. Nevertheless, we have taken the first step by leveraging our store and customer assets as an incubator for this content, we will proceed with this initiative through repeated trial and error. We will carefully identify where potential lies, while also considering the acquisition of external boosters through M&A. Page 34. As part of efforts to strengthen the group's management foundation, we will integrate J.Front Design & Construction and PARCO SPACE SYSTEMS in March next year. The two companies together now generate a business profit of JPY 4.3 billion, a significant increase compared with several years ago. In addition, each company maintains a high ROIC of 13.0% and 13.4%, respectively. By integrating their business resources and expertise, we will establish a structure capable of consistently providing value-added spaces for luxury hotels, luxury brands and commercial facilities from design and interior finishing to electrical equipment and building management. Page 35 covers the enhancement of productivity. We have long built our strength on cost management. While we have no intention of abandoning this strength we believe that the company's future growth should be driven not by expense reduction, but by top line expansion. Wherever possible, we will use systems, digital tools and AI to automate and improve efficiency. At the same time, we will develop foundational strategies to increase productivity per employee, not by reducing the denominator through cutting head count, but by expanding the numerator through growth in gross profit. Finally, on Page 36, I would like to note that our performance continues to be susceptible to external factors such as current exchange rates and stock market trends, which may understandably cause concern. Personally, I will continue to focus on what needs to be done from a medium- to long-term perspective without being overly swayed by short-term fluctuations. We remain committed to realizing our vision of becoming a value-creating retailer, and I ask for your continued support moving forward.

This is Shigeoka from Daiwa Securities. I have two questions. The first point is that the downward revision to the full year plan was larger than I had expected in terms of business profit. Why the shortfall in the first half is partly due to the sales and perhaps unavoidable. The downward revision amount to JPY 1.8 billion in the first half and JPY 3.6 billion for the second half. This results in a total reduction of JPY 5.5 billion from the original full year plan. Could you elaborate on the major factors contributing to this JPY 3.6 billion downward revision for the second half with breakdown by business segment? I think the breakdown is shown on Page 15. But if you look at the increase and decrease in business profit for the second half compared to the forecast for April, it does not add up to JPY 3.6 billion. Essentially, the main factors seem to be department store sales falling short of targets sales being weaker than anticipated and upfront costs incurred in the financial business and other areas. Can this be explained simply as sales being tougher than projected? Or are there other underlying issues? It was a bit long question, but I appreciate the explanation more in details.

Let me answer your question. My explanation is based on Page 15. Indeed, the situation for department store business in the second half, including inbound sales for -- to some extent, is somewhat challenging. The strong performance in the first half was significantly boosted by the positive effects of Daimaru Umeda store and Expo. However, since the Expo ended yesterday and the previously striving Umeda store is now undergoing partial renovations, a considerable backlash is expected for the department store. Another area with significant negative impact is the payment and finance segment. Starting this fiscal year, we have effectively launched new cars for PARCO and Hakata Daimaru and GINZA SIX beginning last year. While issuing these cars, acquisition costs have temporarily increased. Our policy is to steadily increase customer membership in this fiscal year to drive revenue and profit in subsequent years. As you pointed out, even if we add all these items together, the total negative amount isn't particularly large. However, the amount for the second half and the consolidation adjustment has increased significantly compared to the April announcement with the actual difference swing by JPY 2.5 billion. The main points are as follows: first, the holding company's stand-alone administrative expenses have increased. This expansion is partly attributed to preparation for future growth. Second, upfront cost for potential future investment projects have already been factored into the second half of this fiscal year. This cost will be reversed in the second half if the investment do not materialize. Furthermore, and other, the consolidated adjustment component has expanded due to the user breakdowns.

Thank you very much. So this consolidation adjustment is quite large and largely involves upfront investment. Should we view this as temporary one as upfront investment-related expenses rather than a general increase in operating cost?

Yes, you can think it as primarily a temporary increase. Of course, some ongoing expenses are included in the nonconsolidated administrative expenses, but we continue to manage this area in the second half, while keeping in mind the need for adjustment in the next year and beyond.

Understood. As a follow-up, I think sales at the official Expo store may have exceeded the plan quite a bit. For September and October, there was somewhat the last-minute rush in purchases, as well as the collaboration with limited edition items. I got the impression that items with good profit margin sold well. Taking all this into account, this is reflected in current plan figures, it appears that the impact is also included in the Q3. And in fact, they had a very strong impact on the first half of all. So should we see that you expect a reaction decline in the second half?

This is [ Monemuri ]. We cannot provide the detailed figures for the Osaka/Kansai Expo official store. But since the beginning of September, we have seen exceptionally strong performance. We are factoring this momentum into our projections for the shortfall or rather the target we must achieve in the second half. As a result, we expect the actual figures to be slightly higher than what we had anticipated. As reported in the media, the recent numbers in the past few days have been quite substantial. We would appreciate it if you could understand this as a slight upward deviation from our initial projections.

My second question regards the SG&A expenses for department stores. You said that you expect a slight increase over the plan, accounting for factors such as increases in commissions and outsourcing costs. Should we assume that there is little room for further cost containment through internal efforts in the second half? In the first half, inbound sales were a little tougher than expected. And I wonder if you shifted the gears slightly to adjust I was expecting the impact will be more pronounced in the second half as adjustment will take some time. But now I'm wondering if it's better not to focus too much on this point. Aria, the President talked about the improving productivity. Rather than cutting cost, he emphasized the importance of increasing productivity and improving efficiency. So could you please share any short-term measures you can implement or areas where you might find room for improvement in your current plans?

Department store SG&A expenses, including measures to reduce them in the second half was your question, I think. First, as a preliminary measure compared to the year-on-year change in SG&A expenses in the first half, second half will naturally be lower because of the measures implemented in the first half. Regarding short-term cost reduction, we intend to cut over hundreds of millions of yen in a robust manner. However, as you mentioned at the outset, structural increases, such as higher commission rates require careful mid- to long-term effort. This involves enhancing the value of our store spaces and working with some of our partners to enhance the value of the space. Therefore, while it may differ slightly from a pure short-term perspective, we have already begun implementing these initiatives. Beyond the short-term measures for cost reduction, we are aiming for longer-term initiatives, such as cost reductions through digital transformation, particularly at the headquarter level. As Mr. Ono mentioned earlier, we will raise base revenue, but we also want to consider how we can raise them efficiently with the current workforce.

This is Yamaoka from Nomura Securities. I have two questions as well. The first point is a follow-up question. Please allow me to stick to the same topic. But in terms of your company's overall approach to expenses this fiscal year, particularly concerning the adjustment mentioned earlier for Daimaru Matsuzakaya department stores, is this based on the adjustment that certain expenditures should be made for the future? At the start of the fiscal year, I think you told us to put a focus on short-term profit, while also keeping the future in mind. President Ono, would you share your perspective on this matter again?

Yes, I will answer your question. Naturally, in corporate management, we must strike a balance between making upfront investment to achieve mid- to long-term growth and delivering near-term performance results. What is different from our initial assumption is that, as mentioned earlier, regarding consolidated adjustment, the project we are now pursuing include those with high certainty of future growth. This includes factoring in the associated expenses that will arise. I hope I understand this point. Personally, I recognize that while this involves both accelerating and applying the rates, as mentioned earlier, we must also push forward with reducing costs in areas where further costs cuts are possible. I believe this is necessary and achievable. Therefore, working closely with the president of each operating company to strengthen management. We intend to address this thoroughly during the current fiscal year.

Sorry. But regarding this point, I'd like to ask a follow-up question about the Daimaru Matsuzakaya department stores. I see that increases in outsourcing costs and the commission fees and increased commissions have been highlighted in your graphs. And there were questions about them earlier. Given the current structure, for example, with the success of expo-related, do you regard this cost increase inevitable ones, do you mean that it can be helped?