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

I am Takamasa Nagamine, Senior General Manager of the Financial Strategy Unit. Thank you very much for joining us today despite your busy schedule. I will begin by giving an overview of our FY 2025 results and the outlook for FY 2026. In FY 2025, consolidated gross sales increased to JPY 1,290.4 billion and revenue rose to JPY 445 billion. On the other hand, business profit declined 5.4% year-on-year to JPY 50.5 billion due to higher personnel expenses, commissions and the impact of price increases. Operating profit and profit attributable to owners of parent both decreased partly due to a onetime gain recorded in the previous year. However, profit at each level exceeded the forecast we announced in October. As for shareholder returns, as announced in October, we plan to increase the annual dividend by JPY 2 per share to JPY 54, including the interim dividend. Next, I will explain our performance by segment. In the Department Store segment, in loan sales have been showing signs of recovery in the second half, but the number of visitors from Mainland China declined significantly starting from December. As a result, inbound sales fell about 15% compared to the previous year when sales outperformed expectations. As for domestic consumption against the backdrop of wealth effect from higher stock prices and other factors, strategies aimed at deepening our retail business also proved effective. Gaisho sales remained strong, mainly driven by higher average spending per customer. In addition, sales at the official 2025 Osaka Kansai Expo store, which was opened through October and other initiatives also contributed. As a result, revenue grew for both the second half and the full year. SG&A expenses, however, increased due to approximately JPY 3 billion in expo-related costs as well as higher advertising expenses, outsourcing costs and commissions. As a result, the segment posted higher revenue but lower profit. In the Shopping Center segment, the positive effects of renovations of key stores such as Shibuya PARCO helped sustain strong performance in both domestic and inbound transaction volume. As a result, business profit increased 9.9%, although a loss related to the decision to close Shizuoka PARCO was recorded. Both business profit and operating profit increased for the full year. The Developer business recorded a year-on-year decline in both revenue and profit mainly due to the absence of large scale construction orders and the property sales booked in the previous fiscal year. However, supported by construction orders from both within and outside the group, and a modest increase in rental income, the business achieved the performance level announced in October. The Payment and Finance segment recorded an increase in revenue, driven by growth in card transaction volume and merchant fee income. However, profit declined despite the revenue increase owing to higher upfront costs for acquiring members associated with the launch of the new card. Next, sales by store at Daimaru Matsuzakaya are shown on Slide 8. While Shinsaibashi and other stores with a high proportion of inbound sales posted lower sales, the Nagoya store achieved revenue growth supported by the effect of the renovations to the main building completed in the first half. Please also note that since October, the Umeda store has been reducing sales for area in phases in preparation for a large-scale renovation. Next, I will explain duty-free sales at Daimaru Matsuzakaya. In the first half, sales declined due to slower sales of luxury brand, partly reflecting exchange rate effect. In the second half, sales showed signs of recovery, but decline in customer numbers caused by worsening Japan-China relations weighed on performance and sales fell again in the fourth quarter. As a result, duty-free sales posted a double-digit decline for the full year. While sales may fluctuate in the short term due to external factors, our view remains unchanged that inbound demand represents a key market with the potential for steady medium- to long-term growth, supported by an increase in visitors to Japan provided, we continue to strengthen our ability to capture this demand. To stabilize sales from inbound customers, we plan to further enhance our customer development initiatives with a particular focus on visitors from China and other neighboring Asian countries. SG&A expenses at Daimaru Matsuzakaya department stores are shown on this slide. Compared with the previous year, expenses increased by JPY 2.1 billion, excluding expo-related costs. The main factors were higher sales commissions, outsourcing expenses and advertising expenses to strengthen the events at each store. Compared with the October forecast, commissions and advertising expenses increased, but overall, expenses were approximately JPY 0.2 billion lower, broadly in line with plan. PARCO's performance by store is shown on this slide. Throughout the fiscal year, both domestic and inbound business remained strong. and comparable stores posted a 7.9% increase in revenue. Notably, in addition to Sendai and Nagoya PARCO, where renovation effects continued, Shibuya PARCO, which undertook its first large-scale renovation since reopening following its reconstruction in 2019 recorded significant growth from the September reopening onward, driven by renovation effects in areas such as pop culture and fashion. Next, the consolidated balance sheet is shown on this slide. Interest-bearing liabilities, excluding lease liabilities, decreased by JPY 13.5 billion from the end of the previous fiscal year, and the ratio of equity attributable to owners of parent stood at 36.4%. This page shows the results for consolidated cash flow. Investing cash flow reflected steady execution of business investment, including store renovations. However, due to asset sales and related factors, net cash used in investing activities decreased by JPY 13.1 billion year-on-year. Next, I will explain the FY 2026 outlook. Please turn to Slide 14. As employment and income conditions continue to improve, we expect personnel consumption to remain firm this year as well. Notably, we believe spending by affluent customers will remain strong, supported by wealth effect. As mentioned earlier, our view remains unchanged that inbound demand is a growth market. In the near term, the decline in customer numbers from China is expected to continue but we believe that higher spending per customer resulting from the weaker yen will provide some support. On the other hand, we recognize the need to closely monitor potential downside risks to consumer sentiment arising from the recent rise in crude oil prices due to turmoil in the Middle East as well as the extent to which changes in the global situation may spill over into the broader economy. At present, however, we believe that many significant uncertainties remain, making it difficult to clearly assess the magnitude of any actual impact. For the time being, we recognize the need to manage our businesses with a particular focus on responding to rising costs. Based on this business environment, we forecast full year consolidated gross sales to increase 4.4% driven by sales growth in each segment, including department stores and shopping centers with planned business profit of JPY 52 billion, up 2.8% year-on-year. Although the Department Store segment is expected to post lower profit due to factors such as the impact of innovation, strong performance in the shopping center and developer segments are expected to drive overall profit growth. Meanwhile, operating profit is forecast to decline 4.1% to JPY 47 billion, reflecting costs associated with store closures and other factors. Profit attributable to owners of parent is forecast to increase 2.5% to JPY 29 billion as for the annual dividend, as I will touch on later, we forecast an increase of JPY 2 per share to JPY 56. The outlook by segment is shown on this slide. In the Department Store segment, although there will be effects from renovations at the Umeda store and the absence of expo-related sales that were present in the previous year, we expect revenue growth through such measures as cultivating customers, including gaisho customers, strengthening off-site events and capturing the effects of renovation carried out in the current and prior years. For duty-free sales, our basic assumptions based on the current environment is that sales will remain at the same level as the previous fiscal year, while we continue to implement various measures. Although revenue is expected to increase, we forecast a decline in business profit due to higher personnel expenses, system-related costs and other factors. In the shopping center business, business profit is expected to reach a record high of JPY 14.5 billion, supported by increased transaction volumes driven by renovation effect at Shinsaibashi PARCO and Ikebukuro PARCO as well as continued benefits from prior year investments such as Shibuya PARCO. Meanwhile, operating profit is projected to decline due to costs associated with the closure of Shizuoka PARCO. In the Developer segment, we expect higher revenue and profit, supported by revenue growth in 2 business segments: Interior Construction and Facilities at a newly integrated company as well as profit contributions from property sales. In Payments and Finance, we expect higher revenue and profit supported by increased transaction volume from new card members, higher fee income than the decline in upfront costs associated with the issuance of the new card. The outlook for major Daimaru Matsuzakaya stores is shown on this slide. At directly managed stores overall,we expect higher domestic sales,particularly Gaisho sales as well as contributions from renovation effects. The Shinsaibashi store is expected to post double-digit revenue growth, supported by anniversary event and other initiatives. The Umeda store, however, is expected to see a revenue decline of about 40% due to sales flow closures and construction work related to its large-scale innovation. Projected SG&A expenses at Daimaru Matsuzakaya are shown on this slide. Expenses are expected to increase year-on-year by JPY 5 billion, excluding expo-related costs. This mainly reflects higher personnel expenses, system-related costs, repair expenses associated with store renovations as well as the impact of higher utility costs. The forecast for the consolidated balance sheet is shown on Slide 21. As indicated, both assets and interest-bearing liabilities reflect planned levels that include the use of our strategic investment framework for future growth. Next is the forecast for consolidated cash flow. As mentioned earlier, the forecast incorporates the use of the strategic investment framework within both investment and financing cash flows. Consolidated and segment-level ROIC is shown on Slide 23. While we do not expect to reach the targets set in the medium-term business plan, we will continue working to improve and enhance profitability in each segment from both a short-term and medium- to long-term perspectives. Regarding cash allocation, under the current medium-term business plan, which we position as a period of transformation will prioritize investment, including the strategic investments mentioned earlier while also steadily implementing shareholder returns. The specific details of shareholder returns are shown on Slides 25 and 26. For FY 2026, we forecast an annual dividend of JPY 56 per share, an increase of JPY 2, in line with our dividend policy, marking the sixth consecutive year of dividend increases. In addition, regarding share buybacks, in order to enhance capital efficiency over the medium to long term, optimize equity levels and strengthen shareholder returns we will acquire JPY 10 billion worth of our own shares this fiscal year following the previous 2 years. As a result, the total payout ratio under the current medium-term business plan is expected to be approximately 77%. That concludes my presentation. Thank you very much for your attention.

Good afternoon, everyone. I am Keiichi Ono from J. Front Retailing. Thank you very much for taking the time to join us today. I would like to speak about our medium-term perspective. First is the progress of our medium-term business plan. On Slide 29, as we have explained many times before, our group has defined its future vision to become a value co-creation retailer. We have been advancing initiatives aligned with this vision using the 3-3-1 framework. Since this has been presented on several occasions, I will not go into detail today. . Within this framework, we have identified 2 major pillars for our growth strategy for becoming a value co-creation retailer extending beyond 2030. The first is deepening retail operations, including expanding our customer base, enhancing the appeal of customer touch points and strengthening our content offerings. The second is evolving group synergies. As outlined in the second 3 of the 3-3-1 framework, we are further advancing group synergies along 3 axes: customers, areas and content. While the time lines for these initiatives differ, we are steadily pursuing them to achieve sustainable growth over the long term. Our financial outlook has already been explained. Looking back in FY 2023, the final year of the previous medium-term business plan, prior to the launch of the current plan, we focused on achieving a full recovery from the COVID-19 pandemic. At that time, consolidated operating profit stood at JPY 44.3 billion. For FY 2026, our outlook calls for consolidated operating profit of JPY 52 billion. While this represents steady growth, it falls short of the revised final year target of JPY 56 billion announced in April of last year. Given this situation, business conditions vary across the group. While our Shopping Center and Developer segments are performing strongly, the Department Store and the Payments and Finance segments continue to face challenges. This disparity underlies the current outlook. The next point is something I touched on 6 months ago. From my perspective, this medium-term business plan is centered on transformation. And I would like to briefly discuss the progress we have made and the challenges that remain. First, we view our progress and results through 3 main [indiscernible] and the themes here have not changed significantly. However, as we have made progress on our initiatives, I would like to discuss the first point, which is expanding the potential of our stores and areas. This involves enhancing the appeal and the profitability of our stores. As a result of major renovations at our flagship stores, PARCO's profit volume has grown significantly, reaching record high levels. From a group perspective, I believe PARCO has clearly raised the bar in terms of its contribution to process. Next, we are strengthening our presence in key areas. Our new commercial facility, Haera, in Nagoya, will finally open in June this year. We will maximize the impact of this project and have also acquired a new property in Kobe as recently announced. Together with our ongoing projects in Osaka and Fukuoka, we believe the group's growth potential in each of these areas is increasing significantly. The second point is the expansion of the group's customer base. As I mentioned earlier, we have completed the consolidation of our various credit cards within the group. And it has been about 1 year since the launch of the new card. Over the past year, we have seen significant progress in terms of rejuvenating our customer base, and I will discuss this in more detail later. Furthermore, regarding progress and the conversion into ID-based customers, we are deepening our engagement with high net worth individuals, primarily through our gaisho sales efforts. Additionally, regarding overseas inbound CRM, the number of customers has expanded beyond our expectations. The third point is new business, which we refer to as the promotion of high-efficiency business. Currently, one of our group's management challenges is capital efficiency. Therefore, we use this phasing to emphasize our focus on management efficiency in our new ventures. First, we are venturing into the content retail business. As previously mentioned, we have completed the implementation of content such as merchandising, intellectual property and services. And we are now in the process of launching the business. Next is the integration and the reorganization of our interior construction and building management businesses. As we mentioned at last year's IR business strategy presentation, this business has exceptionally high capital efficiency within our group with ROIC, hovering in the mid-teen range. We have now established the foundation to further expand this profit scale. Furthermore, we are launching a commercial facility value enhancement business. Specifically, we have made a partial investment in [indiscernible] in the Minato Mirai area of Yokohama, and have been commissioned to serve as its commercial adviser. The external environment is changing significantly, specifically given the selling of construction costs and the rising inflation, we recognize that it will be difficult for our group to continue acquiring land and initiating redevelopment projects. Therefore, we believe it is necessary to shift our development business strategy towards reliably and efficiently generating management fees. Now shifting the topic to the remaining challenges. We faced 2 main ones. First, we recognize that we have not yet fully realized the group's collective strength. Conversely, I believe this is where we have the most room for growth. As I have often mentioned, I believe I have established a very close working relationship with President Munemori and the President Kawase, who are here today. However, when we look at the organization at various levels, we still see instances where we have not fully overcome the silo mentality. This may be hindering the speed of collaboration across businesses. By taking proactive measures here, we can further accelerate the group's overall pace of initiatives. Next is the delay in driving transformation within our specialized business areas. As I mentioned 6 months ago, we still need to catch up in such areas as expanding their business portfolio through M&A and accelerating our IT and digitalization initiatives. Based on these challenges, we have significantly revamped our management structure starting this March, although this remains an initial response. The most significant change is that to further strengthen collaboration amongst the holding company, JFR, Daimaru Matsuzakaya Department Stores and PARCO, the top executives responsible for HR, finance and IT digital have been assigned to concurrent roles. These individuals were originally senior executives at JFR and now oversee both Daimaru Matsuzakaya and PARCO. Furthermore, we have recruited external talent to lead specialized business areas such as IT, digital and business development. In addition, while we described this as a move to strengthen our response to changes in the business environment, we have reshuffled the membership of the department store management team to revitalize it. The person has recently assumed the role of Head of the Management Strategy Unit at Daimaru Matsuzakaya previously served as the Head of PARCO's Management Strategy Unit. Furthermore, for the first time to my knowledge, we have appointed a store manager with a corporate background to one of Daimaru Matsuzakaya flagship stores. This individual comes from Oriental launch and we hope we will bring a fresh perspective to store management. We are actively pursuing these initiatives. Among these initiatives are our plans for 2026. First, with this fiscal year marking the final year of our medium-term business plan, it is essential that we firmly established the foundation for the lead forward we aim to achieve beginning next year. As we approach the final year of the medium-term business plan, we have repeatedly emphasized internally that this fiscal year is about tracking a balance between 2 key elements: financial performance and the transformation process itself, which has been central to driving future growth under this plan. As the culmination of the current medium-term business plan, see Page 37, we believe our group customer strategy has made significant progress. In terms of expanding our domestic and overseas customer bases, our first priority is to drive customer acquisition through our Gaisho sales operations. In addition to capturing the growing number of young affluent consumers, we are also focusing on developing untapped markets. By untapped markets, I mean prefectures where depending on the area, there are no longer any department stores or luxury brand shops. We plan to use our nationwide store network as a base to expand the reach across these broader areas. Regarding inbound CRM, we have already surpassed 2,000 customers and are beginning to see results in encouraging repeat visits. While the transaction volume of inbound sales and its share of total duty-free sales are still small, truly minimal, we believe this area will certainly yield results in the future. Furthermore, we are expanding the network of external partner merchants for the JFR card. We have been working on this for some time, and the number of stores have now reached approximately 750. These stores play a crucial role in connecting our main hubs with local shops within each region. We aim to reach 1,000 stores in the near future. As a result of these initiatives, we aim to increase the group's total number of ID-based customers to over 6 million by fiscal year 2026. Next, while we use the term CRM to refer to the system that connects our diverse customer touch points and platforms, I would like to focus my remarks here on the theme of rejuvenating our customer base. About 1 year ago, we transitioned the issuance and the management of the PARCO cards from an external card company to JFR Card within the group, and we have been issuing the card under this framework since then. As a result, as shown in the pie chart on the right, ID-based customers in the 20s through 40s collectively account for approximately 1/3 of our department store customers. In contrast, at PARCO, customers in their 20s alone make up 30%. When combined with those in the 30s or 40s, we have once again confirmed that 2/3 of our total customer base consists of customers in the 20s through 40s. Here in this, some of you may assume that PARCO's average spending per customer is lower than that of department stores. However, the data is shown on the lower right indicates that at the 6 PARCO stores in Central Tokyo, including Shibuya, customers with active PARCO card accounts spend annually about 1.5x more than Daimaru Matsuzakaya card customers, excluding special sales. Accordingly, we do it as highly positive but we're beginning to establish solid connections with younger customers who demonstrate strong spending appetite despite their age. While the aging of the customer base has long been a shared challenge for department stores, the presence of PARCO within the group clearly allows us to address and counter this challenge. From this perspective, as a domestic retailer focused on the upside market, we believe our customer demographics are more sustainable than those of any other retailer. To further leverage this advantage, we will introduce a points exchange program between our department stores and PARCO in fiscal year 2027. This is our key area strategy. HAERA, which I mentioned earlier, will open in Nagoya Sakae District this June. Since PARCO is scheduled to be introduced into the south wing of Matsuzakaya Nagoya in 2027, the projects for completion will come as we enter FY 2027. Even so, we intend to firmly begin the harvesting phase from this fiscal year. Regarding the Tenjin area in Fukuoka then the South wing in Shinsaibashi Osaka, we plan to firmly establish the direction of our major plans within this fiscal year. We also intend to actively promote collaboration within the area in COVID, as mentioned earlier. Next is the ownership and development of content. As previously explained, we have been advancing our initiatives across 3 areas: merchandising, IP and services. To be candid, we still have a long way to go before these business areas make a meaningful contribution to profits. We are truly just getting started. For at least the next year or 2, my focus will not be on profit generation. Instead, our priority is to prepare each business for future growth and in some cases, to assess its longer-term potential. Furthermore, over the next year. We plan to focus intensively on expanding the breadth over a content portfolio. This may include M&A and additional external partnerships. Meanwhile, in FY 2026, we will revise our future version and begin formulating our next medium-term business plan. As a current management challenge, we recognize the need to shift towards a more resilient business structure. Achieving sustainable growth and improved return on equity will be essential. To that end, the first step is to strengthen the profitability of our core businesses with a particular focus on further improving the profitability of Daimaru Matsuzakaya. In addition, by maximizing the value of our regional assets and expanding our business portfolio, we aim to achieve a return on equity of 10% or higher at an early stage. We will proceed with the revision of our future vision and the formulation of the medium-term business plan, incorporating these objectives. Our assessment of each management issue is as outlined today. Taking these factors into account, we plan to present the overall direction and the key elements of our proposed solutions at forums such as this in the autumn of this year approximately 6 months from now. That concludes my remarks.

This is Kaza haya from UBS Securities. I have 2 questions. The first regards the financial figures and the second concerned strategy. Regarding the first point, in your plans for the developer business this fiscal year, you mentioned an increase in profits due to property sales. Could you please specify the exact figures you are projecting for this? Also, regarding the budget for adjustments, as was the case in the previous fiscal year, you have included a year-on-year decrease of JPY 1.6 billion in business profit. Could you explain the reason behind this? That is my first question regarding the financial figures.

I'll take that question. Property sales in the developer business are currently projected at about JPY 4 billion. Although market conditions remain good. This is our current plan. As for the adjustment amount, the FY 2025 figure included costs set aside for potential M&A that were ultimately not used, along with reductions in holding company expenses as discussed during the third quarter earnings call. One factor here involves internal transactions, specifically with HAERA becoming fully operational. There will be internal rent transfers taking place. That is one aspect. Additionally, while we'll strive to contain expenses at the holding company, we anticipate a slight increase in certain areas. Consequently, we project a net adjustment amount of minus JPY 4.8 billion.

In that case, should we understand that this does not include any one-off strategic investment costs at this time?

Yes. This is business as usual.

My second question is more general. As President Ono mentioned at the beginning. The situation in the Middle East remains quite uncertain. President Ono, are you currently conducting any simulations regarding what might happen to the department store industry or specifically to Daimaru Matsuzakaya and PARCO if the situation in the Middle East drags on? Thank you.

Currently, the environment makes simulation extremely difficult. It is also challenging to determine the appropriate timing for such simulations. Therefore, we have not actually calculated specific figures regarding the potential impact this might have. I think there's a high likelihood that inflation will be further fueled. However, when it comes to the business of department stores like Daimaru Matsuzakaya, including PARCO, our core business involves luxury goods. So we generally carry few daily necessities. Within that context, the area most likely to be affected would be food, particularly fresh food. I have been chatting the numbers closely since we entered this inflationary phase. But so far, there has been virtually no impact. Therefore, if this trend continues, it seems unlikely that there will be a significant impact on our top line. The other aspect is costs.There is a possibility that increases in utilities and other expenses, including energy costs, may materialize with a lag of several months due to rising crude oil prices Therefore, we will continue to monitor the situation closely. There are several contingency plans in place for cost management in such scenarios, we have no choice but to manage the situation so that any impact remains within our expectations. As for PARCO, given the differences in business models, PARCO's model clearly makes it easier to absorb costs compared to Daimaru Matsuzakaya. Therefore, we are not particularly concerned about this aspect. Thank you very much.

This is Takahashi from Mizuho Securities. I'm truly sorry, I couldn't make it to the venue I have one question for President Ono. I apologize for always asking a similar question, but earlier you provided a view of progress to date and explain various challenges. Two years have passed since you took office and the external environment has changed dramatically during that time. Setting aside those external factors, I'd like you to summarize what you feel has been the most tangible achievement over these past 2 years. As you mentioned earlier, there appears to be discussions, particularly at the management level that increasingly move beyond the boundaries of PARCO or Daimaru as individual brands, focusing instead on areas such as content. At the same time, you also noted the need to further expand such collaboration across the broader organization. Looking back over these past 2 years, what would you say are the areas that remain unfinished or where you feel more should have been accomplished? Assume that precisely the direction of the policy starting this year. I would appreciate your thoughts on that. Thank you.

Mr. Takahashi. I believe I touched on this somewhat in my presentation today. But to elaborate further, and this might sound a bit contradictory, the area where I feel the most positive momentum is integration within the group. Please understand that I also cite this as a challenge precisely because I believe we can still go further with that integration. We have seen the decline in the sense of belonging to a specific company or background. And instead, there is a growing tendency to leverage the unique characteristics of each business to explore how they can be utilized across the group. I have the impression that such cross-functional thinking is increasingly taking place. One particularly notable initiatives, personnel exchanges at the store manager level between Daimaru Matsuzakaya and PARCO, although they are called personnel exchange. When I informed someone of a transfer, I tell them, there's no guarantee you'll go back to where you came from. You are core talent for the group. So there is no telling where you may go. In that sense, a store manager who joined Daimaru Matsuzakaya from PARCO believed it would be interesting to explore new ways of utilizing Gaisho and has since been creating practical examples of driving sales through the sales force in ways we had never seen before. Without going into details, I believe these developments clearly represent something that would have been unthinkable within our group until around 2020. And I see them as both a catalyst and the foundation for future growth. So as I mentioned earlier, if I were to single out one remaining challenge, it lies even further down the organization, have been encouraging general managers on an ongoing basis -- and I believe that if they and the layers below them could collaborate more openly across the boundaries of the company units and organizational structures, we will become even stronger. Sorry for the long answer, but that is all. Understood.

This is Shigeoka from Daiwa Securities. I apologize for joining online I have 3 questions. The first one regards the department store business. While the situation in the Middle East has had an impact on products for affluent customers in Japan, I get the sense that the wealth effect has not significantly eroded and consumption remains relatively robust. You've outlined your strategy on Page 37 of the materials. Could you tell us what you consider to be the most important points for further capturing the affluent market going forward and where you see the greatest potential for growth? Thank you.

Thank you, Shigeoka-san. I'll take this question. As you pointed out, the surge in the stock market has boosted asset values and the average spend per customer has also risen significantly. Furthermore, with the growing number of young affluent consumers, we are also seeing the positive impact of the demographic within our company. Based on the analysis, we are focusing on the idea that profitability will naturally grow over time if we can increase the number of high spending customers who generate a significant share of our top line revenues to achieve this growth we first need to increase the overall number of customers we serve. In other words, since the number of top-tier customers won't increase overnight, we need to increase the number of customers in the tier below them, and we believe there is room for growth here. To that end, this year's initiative to increase customer numbers as President Ono explained earlier, include expanding our gaisho sales territory and enhancing engagement with customers who do not yet rank among the top standards. In other words, to increase the average spend per customer, we plan to take various actions such as inviting customers to special events and promotions. We believe that customers are increasingly seeking more than just products, but also broader customer experience. We haven't yet been able to fully leverage our potential in this area. So we see considerable room for growth. To capitalize on this we are committed to strengthening customer touch points and enhancing the customer experience beyond shopping itself. We also plan to invest in these areas to drive top line growth. This is how we view the growth potential of Gaisho sales.

I see. So is it correct to understand that overall, there is still room for growth in both customer numbers and average spending per customer, although there are various stages involved.

Yes, at this stage, that is correct.

Thank you. My second question concerns PARCO and the shopping center business. I understand that operating profit declined due to losses associated with the closure of Shizuoka PARCO, but business profit is also only up slightly, compared with the momentum you have shown so far that appears somewhat conservative. Could you please elaborate on the background?

This is Kawase from PARCO. Thank you, Shigeoka-san. For FY 2026, we expect increases in several expenses. These include depreciation, maintenance costs, personnel costs and IT-related costs. One factor is that we expect preopening costs to be incurred within PARCO on a stand-alone basis for facilities scheduled to open in 2027. In addition, while the average age of our buildings is 36 years, we anticipate not only maintenance costs that grew over time, but also significant costs associated with major repairs, an increase in personnel expenses is also factored in. As a result, SG&A expenses are expected to rise, and this is reflected in a somewhat conservative outlook for business profit. That is the background.

Thank you. As usual, if sales come in a bit stronger than planned and things proceed smoothly, would it be fair to say there is potential for some upside -- of course, I understand there are various factors to consider such as the situation in the Middle East and rising costs. But would you say the overall outlook is being kept conservative?

Yes, we believe we must avoid underestimating costs. So it is fine to understand that our cost assumptions are conservative.