Marui Group Co., Ltd. (8252) Earnings Call Transcript & Summary

It is now time for Marui Group financial results briefing for the second quarter of the fiscal year ending March 31, 2023. Thank you very much for taking time out of your busy schedule to attend today's meeting. Today's presentation materials can be downloaded from our corporate website. Please refer to overview of performance in 6 months ended September 31, 2022, and future direction. Today, we would like to explain our financial results for about 30 minutes and then take your questions. We are using the conference call system during questions-and-answer session. Please note that the recording of this presentation will be available on our website at a later date. Let me introduce today's speakers, Hirotsugu Kato, CFO, will give an overview of the financial results for 6 months ended September 2022 and progress of the medium-term management plan. Then Masahiro Aono, President of Marui; and Yoshinori Saito, President of Epos Card will explain the future direction of retailing and FinTech segments. In addition to these 3 speakers, Ms. Kutsukake, General Manager of IR Department will be available to answer questions. These are contents of today's meeting. First, CFO, Kato, will give an overview of the financial results for the 6 months ended September 2022 and the status of each segment.

My name is Kato. I will now present an overview of the financial results and the outlook. They are the contents I will be explaining today. Let me start with consolidated performance. There are 4 highlight points for the financial results. As I'll explain in detail later, the fact that the FinTech segment has maintained a high growth rate for the transactions and revenue offsets Retailing segment which has not recovered to pre-COVID level. As a result, total transactions have reached a record high and consolidated profit has almost recovered to pre-COVID level. EPS also reached all-time high due in part to our effective capital policy. Let me talk about main financial indicators. Total group transactions reached JPY 1,892.4 billion, a record high for the first half and operating income and net income have almost returned to pre-COVID levels. EPS also reached JPY 67 in the first half, breaking a record high for the first time in 3 years. This is revenue and operating income by segment. Retailing revenue was down due to the reduction of private-brand specialty stores, but operating income increased by JPY 0.8 billion. FinTech recorded the first increase in revenue and profit in 3 years due to transaction increase. Though Retailing profit level hasn't returned to the pre-COVID level, FinTech has steadily increased its profit every year since the start of pandemic. Looking at the operating income for each segment compared to the year ended March 2019, which is before COVID-19, Retailing decreased by JPY 3.6 billion, while FinTech increased by JPY 3.7 billion, almost offsetting each other. Next, this is the breakdown of changes in operating income. Operating income for the first half of the year increased JPY 1.3 billion year-over-year. Extraordinary factors include impacts from JPY 1.1 billion of fixed cost while stores were closed, transferred to extraordinary loss and JPY 0.3 billion of liquidated accounts receivables. Excluding these extraordinary factors, the actual increase in operating income was JPY 2.1 billion, with an increase of JPY 1.9 billion in Retailing and JPY 0.7 billion in FinTech. Eliminations increased by about JPY 0.5 billion due to personnel expenses for the co-creative investment. Next, I will explain the status of Retailing segment. This is the breakdown of changes in Retailing operating income. Operating income increased by JPY 0.8 billion in the first half, of which JPY 1.1 billion was due to extraordinary factor of transferring fixed cost, while stores were close to extraordinary loss. Excluding this extraordinary factor, the actual increase in operating income was JPY 1.9 billion. The breakdown is that gross profit increase of JPY 0.4 billion and cost reduction of JPY 1.8 billion. On the other hand, electricity cost was a negative factor of JPY 0.3 billion caused by rising fuel costs and other factors. Here are quarterly revenue and operating income. Despite an increase in commission due to growth in e-commerce transactions, sales decreased resulting from the reduction of specialty stores. As a result, revenue decreased by JPY 1.3 billion to JPY 18.2 billion. Operating income was JPY 0.3 billion, an increase of JPY 0.1 billion from the previous year due to the significant impact of the electricity price hike on the second quarter. This is the status of store visitors. The number of store visitors reached 80 million, 1.2x that of the previous year and is on track to reach the full year target of 170 million. We plan to increase the store business by an average of 10% per year during the period of medium-term management plan by further increasing the composition of non-retail tenants, which have a large number of store visitors. This is the progress of stores that don't sell. The floor space composition of non-retail tenants increased by 5% year-on-year to 51%, making a steady category shift. We are proceeding with tenant development with a plan to increase the percentage of non-retail tenants to 56% by the end of the fiscal year ending March 2023 and to 70% by the fiscal year ending March 2026. This is e-commerce transactions. In October last year, we started a team of 11 members in charge of UI dedicated to e-commerce website, including 3 specialists, and we have further increased the number of specialists to 7 this year to improve UI and UX. As a result, transaction volume has been on a recovery trend since the second half of the last year. And in the second quarter this year, it further increased from the first quarter to 110% year-over-year. Next, let me turn to the status of FinTech segment. This a breakdown of year-over-year change in FinTech operating income. Although the growth in new cardholders increased upfront investments such as card issuance costs, referred to as variable cost 2 in this chart, the increase in revenue due to the growth in transactions absorbed the increase in variable costs, resulting in an increase in operating income by JPY 1 billion to JPY 24.8 billion. This is Card credit transactions. Transactions for the second quarter was JPY 877.6 billion, 119% over the previous year. This is a new record high, as explained earlier. The transaction volume for the third quarter is expected to reach almost JPY 1 trillion if this pace continues. This is the breakdown of card credit transactions. Rent, E-commerce, and regular payments, which have been strategically strengthened to maximize the share of household finances, continued to perform well, while travel & entertainment, commercial facilities and food also has grown from the previous year. Travel & entertainment, hit hard by COVID-19, has recovered to higher than pre-COVID level in the first half of the year. If the current growth rate is maintained, we expect to achieve the target of JPY 3.6 trillion for the fiscal year ending in the March 2023, and the plan of JPY 5.3 trillion for the year ending March 2026. This is year-over-year change in installment and revolving transactions. Since we started to actively promote installment payments, transactions of revolving and installment payments combined has been growing by double digits, except for when the pandemic impact was huge, but revolving payments alone did not grow by double digits for a while. However, growth of the revolving payments alone was 12% year-over-year for the first half, the first double-digit growth in 5 years. As a result of high growth in both installment and revolving transactions, the installment balance continued to grow and the revolving balance also increased bringing the total installment and revolving balance, including liquidated accounts receivables, to JPY 382.1 billion, a record high since Epos Card was issued. Next is the balance of cash advance receivables. After COVID-19 hit, the balance had been on a decline, but it bottomed out in the fiscal year ended March 2022 and turned to increase this first half for the first time in 3 years. As a result, revenue is expected to increase going forward. The number of new cardholders increased by 80,000 year-over-year to 350,000, mainly due to an increase in applications in commercial facilities after significant drop due to pandemic and an increase in online applications for the cards tailored to each individual’s interests. New cardholders for cards tailored to each individual’s interests accounts for 36% of the total, increased from 18% last year, mainly due to an increase in the number of card designs and continued strong performance of Chiikawa and HERALBONY cards. The number of cardholders at the end of September 2022 increased by 150,000 year-over-year to a record high of 7.21 million, mainly due to a steady increase in new cardholders. We expect the number to be 7.3 million for the end of March 2023. And the composition of cardholders with high usage rates, such as cards tailored to each individual's’ interests, is expected to grow to 53%, making a steady shift to be used as main cards. Bad debt write-offs. Although the balance of receivables at the end of the period increased a lot with the growth in transactions, the ratio of bad debt write-offs improved significantly to 0.85%, down 0.11% from last year, as the amount of bad debt write-offs remained at the same level. This is the status of interest repayments. The repayment claims received, a leading indicator, has been continuously lower than the previous year since the second quarter last year. Accordingly, the interest repayment amount is also on the decline, but we continue to monitor the situation closely. Next, let me turn to co-creative investment. Co-creative investments made in the first half of this year was JPY 1.1 billion. This makes the total investment amount since the fiscal year ended March 2017 to JPY 23.4 billion. Next, let me talk about earnings contributions from co-creative investments to main business. The earnings contributions to main business was JPY 0.6 billion, and we target JPY 1.5 billion for the full year. The IRR is 18%, exceeding the hurdle rate of 10%. Next, balance sheet and cash flow. This is the status of balance sheet. Total assets increased by JPY 35.2 billion to JPY 955.2 billion, mainly due to JPY 27.7 billion increase in operating receivables from the end of March 2022. Capital allocation. Out of JPY 22.3 billion in core operating cash flow, JPY 4.7 billion was allocated to investment for growth, JPY 3.8 billion for share buybacks, and JPY 5.2 billion for dividends, making the total allocation of JPY 13.7 billion. Human capital investments including those reported as expenses, amounted to JPY 3.9 billion, accounting for 22% of personnel expenses. Finally, I would like to explain the full year forecast. Our forecast remains unchanged with EPS, JPY 109.3, ROE 8.4% and ROIC 3.5%, mainly because the second quarter has been generally in line with our expectations. There's also no change in the segment operating income forecast. That is all for me. Thank you very much. We will now continue with the explanation of our future direction based on the dialogues with our shareholders and investors. First, President Aono of Marui will explain our Retailing segment.

This is Aono. Let me go through Retailing segment. For Retailing, I will explain the progress and future direction of the 2 pillars of our strategy, namely, "Store that don't sell and Eventful stores." Stores that do sell is an initiative to transform the stores into a platform where off-line and online integrate. Over the past 1.5 years, the number of Internet-originated tenants have expanded and a number of experience-oriented tenants as well. As a result of co-creation with our business partners, the stores are attracting more customers. Due to COVID-19, off-line-only tenants have seen a decline in customers, while online-only tenants have seen their CPAs store. On the other hand, tenants that have both offline and online channels are gaining new customers and improving their business performance. N organic, which had been operating only online, opened its first real store in Marui and increased its visibility and dramatically expanded its business performance. The number of its customers is 1.4x that of tenants on the same floor. Realizing the value of a real store, the company opened 2 other stores outside Marui, where Marui employees have been entrusted with the management of the stores. The number of tenants originating from online stores has expanded to various categories, reaching 80 zones at the end of the first half of the year. The number of experience-oriented stores is also expanding. Conventional tenants rely on their stores to attract customers, but with experience-oriented stores, customers make reservations in advance and the tenants themselves attract customers. A purchase specialty store Eco-Ring opened a store in Kinshicho and its unit prices have increased because customers feel secure in coming to the store and can effectively use the waiting time. As a result, the number of its customers is three times that of other tenants on the same floor. In response to the needs of local customers, the number of such experience-oriented stores was expanded to 600 zones by the end of the first half. We will continue to expand the number of experience-oriented tenants that attract customers on their own. Although we are currently in the phase of recovery from COVID-19, traditional retail stores, which only focus on goods, will shrink in the long term. Conversely, the need for experience-oriented stores will continue to grow even after COVID-19 ends. Tenants such as terrarium classes and drone schools, which were unthinkable in the past, have opened in 60 zones in Marui and will continue to expand in the future. The need for mental and physical health services is increasing, and the growth of the stores that don't sell will continue to accelerate as new tenants are added. In the first half, the number of non-retail tenants was 1.5 times that of retail tenants. We will expand the area of non-retail space to 70% by the fiscal year ending March 2026, and we expect the number of customers entering our stores to reach 210 million. Stores that don't sell will improve their appeal to customers and will continue to evolve. The next step is to create eventful stores. We are working to create a store where various limited-time events motivate customers to visit the store. As a result, the number of customers has increased over the past 18 months, contributing not only to Retail but also to FinTech revenues. Events benefit not only customers but also business partners. The average contract term for tenants is 3 years, but events are 2 weeks and have no initial cost. The rent per tsubo is high, but the actual amount to open a store is extremely low cost. Against this backdrop, we are seeing an increasing number of business partners who want to open a store at our events. In the first half, we held 2,400 events despite COVID-19, the number of customers, per tsubo is 1.4x that of tenants for events. Due to the increase in new customers, events had 9 times the number of EPOS card enrollments per 10,000 customers compared to tenants. As a result, the number of new EPOS cardholders expanded to 160,000 in the first half. In addition, events have expanded not only inside Marui but also outside. During the first half, we received positive feedback on popular content, such as Evangelion, at outside commercial facilities. This year we will hold 220 external events to more than double the number of the previous year, and acquire 19,000 new cardholders. Events will expand not only store revenues but also EC transactions. In the first half, we held an event at the Tokugawa Museum of Art, which is a museum of swords. As you can see in the photo, the store was packed with highly enthusiastic customers, generating in-store revenue of JPY 14 million. Customers who were too far away to come to the event or those who missed the event purchased items on the EC, resulting in EC transactions worth JPY 40 million. By connecting stores and EC in this manner, the event turnover can be expanded to JPY 25 billion in stores and JPY 5 billion in EC in the fiscal year ending March 31, 2026. The development of business partners is essential to the expansion of these events. We utilize digital technology for this. OMEMIE, launched last year, allows rents and facilities to be viewed entirely online and contracts to be completed online. The number of OMEMIE-based outlets expanded from 4% last year to 18% in the first half of this year. Of the 400 companies that have used our services, 100 have opened real stores for the first time, expanding new business partners of the young generation. By promoting eventful store openings, we can increase revenues by JPY 3 billion and add 200,000 card holders by the final year. Creating stores that do not sell and creating eventful stores will contribute JPY 3 billion each to our revenue. In addition, we will achieve operating income of JPY 12 billion for the fiscal year ending March 2026, through systematic reduction of expenses. This conclude my presentation. Next, Mr. Saito, President of Epos Card, will cover the FinTech segment.

Thank you for your introduction. I will talk about the future direction of the FinTech segment, including new initiatives for future growth and efforts to improve customer engagement. First of all, I'd like to talk about BNPL, EPOS' smartphone cards and owner cards as new initiatives for the second half and beyond. The domestic market of BNPL is now around JPY 1 trillion, and it will double to JPY 2 trillion in the next 5 years. The BNPL service is mainly provided to major payment processing companies, but it is expected to be introduced by more companies, including credit card companies, in the future. BNPL provided by EPOS Card and named “Buy Now Pay Later by EPOS ” will serve as a gateway to EPOS Card members for minors and those who do not have a credit card, while providing a new payment option to existing EPOS card members, thereby promoting the use of EC. This BNPL will be introduced as a service that can be completed entirely with a smartphone. Payment is made by cell phone number and date of birth, and payment is completed by presenting the barcode displayed on the smartphone at a convenience store. The service will also offer installment payments and points, and will be launched as a unique service. We will start with Marui, our web channel in December this year, and then expand it to business partners, and work to develop a wide range of EC member stores. Five years from now, we aim to achieve transactions of over JPY 50 billion yen and a cumulative total of over 300,000 new cards with BNPL. The next point is the EPOS smartphone card. The strength of EPOS Card is instant issuance and instant use at stores, and currently we issue 270,000 new cards annually at 62 commercial facilities nationwide and we introduced the new smartphone card in October as a digital version of instant issuance and instant use. In our preliminary conversation with customers, they told that digital card would sound like a virtual currency and since they pay with their smartphones, smart card would make more sense, so the name was decided through such interaction. Customers also hoped that the name would indicate not having to pick up their wallets for online payments and address their resistance to taking out their cards on the train. Currently some people wanting to hold a new card through our EC services give up halfway through because they need to wait until the card is mailed for payment. This will be an opportunity loss. In the future, cards will be issued digitally and used instantly, resulting in eliminating such opportunity loss and increase in new cardholders. In addition, we will be the first in this industry to address online applications and usage 24/7. Our business partners are also requesting the same, so we will reinforce our development efforts. This is our smartphone card plan. This service can be used by existing members through an application. In the first month since its launch, more than 40,000 members have applied for membership without any particular promotions. With this increase in new members and the use of existing members, we expect more than 2 million customers over the next 5 years. In addition, we estimate that the increase in transactions through the Internet and convenience stores will have the effect of boosting LTV by more than JPY 10 billion. Next, I'd like to talk about the owner card. Until now, EPOS Card has not issued cards for corporate customers. Last year, we started considering the development of a corporate card as a voluntary project of the Marui Group, which brings together diverse human resources. After proposing specific service contents through dialogue with startups and many other company owners, we established a dedicated organization at EPOS Card to study the commercialization of this project. We have heard that in many cases, financial support is insufficient for sports small businesses that have just started up until they have built up credit. Based on the concept of two layers of credit, our owner card business will work to co-create new credit for business owners by issuing cards that support their businesses based on their personal credit. While general corporate cards are mainly intended for employees of large companies to support their business operations such as business efficiency and expense reimbursement, the owner card is intended for top business owners among EPOS card members and will be offered as a service to directly support their businesses. We will start a trial with about 100 companies in the second half of this year, and aim to start full-scale operation in the second half of next year. Based on credit card information, we estimate that there are approximately 100,000 to 150,000 target members, including company owners, and we also plan to make proposals to the managers of our investment partners for co-creation. Next, our efforts to improve customer engagement. First, let me give you an example of our recent initiatives. The HERALBONY CARD and the EPOS TOGETHER cards issued last year have been well received as they automatically link points to donations and support, and the amount of use after enrollment is high, resulting in a steady membership expansion. While customers appreciate the fact that they can support by using their cards, they also say that they cannot participate with other cards and that it is troublesome to go through the procedures each time. In addition, interest in social issues is growing year by year, and the transactions of EPOS Card donations and support has quadrupled over the past 3 years. On the other hand, 70% of all respondents of our survey answered that they are not able to take action on social issues, and there is a gap between awareness and action. Furthermore, in the domestic credit card industry, the competition to acquire members by offering attractive points is heating up. This trend seems to be escalating every year. With this background, we will provide great user-experience to customers, as well as proposing new ways to utilize points in the future. In addition, in light of the gap between awareness and action on social issues, we intend to increase our customer engagement by providing easier-to-use options for support. As a specific initiative, we will introduce a new point service next year. This service allows customers to select a recipient of support that is of interest to them and automatically allocate a certain percentage of their monthly points to a donation, investment, and so on. Since cards used for donations and investments have high LTV, we will aim to both support customers' sustainable lifestyles and increase corporate value with our new point service. Finally, through the new initiatives that I have described, we hope to further accelerate our efforts to realize the impact that the Marui group is aiming for. Thank you very much for your attention.

[Operator Instructions] Mr. Takahashi from Mizuho Securities.

This is Takahashi from Mizuho Securities. Thank you very much for your detailed explanation. I would like to ask 2 brief questions each for President Aono and President Saito. First question for President Aono. Looking at the results for the first half, I think the biggest change is in e-commerce area. You mentioned earlier how e-commerce was linked with eventful stores. Could you tell us what has been driving e-commerce revenue or a number of customers? Could you elaborate on why revenue from e-commerce is increasing? On top of that, given your earlier explanation and this increase in e-commerce revenue, I think you should be able to generate more profit. In the first half, as shown on Page 11, During Mr. Kato's explanation, gross profit was up by JPY 0.4 billion and cost reductions amounted to JPY 1.8 billion. So it seems that after the first half this year, you have already achieved more than half of JPY 3 billion cost reduction target for the medium-term management plan. Please give me a supplemental explanation as to whether that still changing structure of stores is not leading to an increase in gross profit or whether there's some other extraordinary factor and what we should expect from the perspective of profit?

Thank you for your questions. Now I, Aono will answer your questions. First, let me explain the reason for the growth of e-commerce. As I said during the last presentation, we have been striving to improve UI and UX mainly with our dedicated specialist personnel for online systems. Through SEO measures and various other improvements, the number of visitors has increased by 20% since the fourth quarter of last year, and the number increased by 33% in the first half of this year. This suggests that an increase in the number of new customers contributed to increasing transactions. In addition, e-commerce transactions linked with stores have grown 1.8x compared to last year to JPY 0.6 billion in the first half of this year. So it is growing due to the combination of improvement of product contents and UX.

Sorry, my question was not clear enough. I think already understand what you have just explained. But what kind of products and services are performing well in e-commerce? My question is about merchandise.

For merchandise, we are seeing growth, particularly in non-clothing items, including cosmetics. Clothing is growing, of course, but we are also seeing growth in other merchandise such as cosmetics, animation and entertainment due to the increase of new customers. Let me elaborate more on your concern about profit. I said earlier that gross profit increased by JPY 0.4 billion, but on the other hand, there's the impact of store closures. Since there was a negative impact of JPY 0.5 billion due to the closure of stores and the reduction of specialty stores, so the actual income from existing stores increased by JPY 0.9 billion. As for JPY 1.8 billion in cost reductions mentioned earlier, as we increased JPY 3 billion of revenues from tenants. Some will be reported as gross profit and others as SG&A expenses. So the large amount will be reversed and included in SG&A expenses. Therefore, this JPY 1.8 billion includes revenue from tenants covering the expenses.

Thank you very much. In essence, I understand that the reform of existing stores has been effective in the first half of the year.

Yes, we are doing well, and we believe that we can make additional growth in this area for the second half of the year.

Thank you very much. I would like to make a request to Mr. Kato and Ms. Kutsukake, what you just said has given me clearer understanding. So I would appreciate it if you could disclose your gross profit separately next time. This is a request. I have 2 questions for President Saito as well. During Mr. Kato's part earlier, he explained in which areas of revenue is recovering from 2019. I think I understand the overall picture to some extent, but I would like to know what changes you have observed in terms of recovery after 6 months of managing the company? For example, have you seen a better recovery with your loyal customers? Or have you seen an increase in the number of new cardholders? I appreciate it if you could tell me any changes you have noticed. I was also interested in your new initiatives such as BNPL and corporate cards. I don't think we need to worry about it too much. But please tell us what you are thinking about in terms of credit management and risk management in these new areas of finance?

Let me address your first question about transaction recovery. As Mr. Kato explained earlier, people's activities, including going out and paying with costs were significantly constrained last year and the year before. Therefore, the first half of this year saw a clear rebound from such environment. This is shown in a robust recovery of travel and entertainment, commercial facilities and food. And you are right, Mr. Takahashi, we are finally seeing a gradual recovery in the number of new cardholders and we expect that transactions of new cardholders will also increase strongly going forward. Does it answer your question?

Yes.

And your question about risk management of the new initiatives. As you may have read in the newspaper today, we believe that we must have a robust credit system in place as a company, as we are launching initiatives such as BNPL. For security, it means, for instance, one-time password to verify the identity of users and step-up approach that allows customers to start with a small payment amount and gradually increase their credit to expand the scope of usage, so as not to take too much risk at the beginning. The other major feature of BNPL is API connection with e-commerce merchants, which will allow us to connect various types of customer information. These are the measures we are taking to have robust risk management in place.

Thank you. Regarding the second point you just mentioned, I understand that your company's unique know-how will be utilized, which has been used for many years with Epos Card, and that you will also work closely with e-commerce merchants around system and security. Is it safe to assume that if you utilize resources properly, those new initiatives will be up and running smoothly?

It may not be that easy, though. I think it is fine to understand it that way.

[Operator Instructions] Mr. Kanamori from Okasan Securities.

This is Kanamori. Can you hear me?

Yes, we hear you.