J.Front Retailing Co Ltd
TSE:3086
Earnings Call Analysis
Q2-2024 Analysis
J.Front Retailing Co Ltd
In the first half of FY2023, the company posted a robust performance with consolidated gross sales reaching JPY 540.1 billion and revenue at JPY 191.6 billion, both of which indicated double-digit growth compared to the same period last year. Business profit soared by 48.2% to JPY 20.1 billion while operating profit increased similarly by 48.7% to JPY 19.6 billion. Profit attributable to the owners experienced a substantial surge of 27.0%, amounting to JPY 12.9 billion.
Despite the overall growth, the company faced headwinds as gross sales exceeded expectations by JPY 6.6 billion but revenue fell JPY 3.8 billion short due to reduced profit margins in the Department Store segment and a decline in commission income from the Shopping Center operations.
The Department Store segment maintained strong sales, particularly in luxury goods, which was amplified by relaxed COVID-19 restrictions and rising inbound tourism, leading to a 14.4% increase in gross sales year-on-year. While profit margin issues hindered revenue growth to 10.6%, business and operating profits saw remarkable leaps, doubling and tripling, respectively, due to adept SG&A expense management.
Core stores continued to display sales growth, and even terminal stores such as Umeda and Tokyo, which had not yet achieved pre-COVID levels, showed impressive recoveries with improvements of 20% and 30% respectively compared to the prior fiscal year.
The company witnessed inbound sales rebounding significantly in the first quarter which further escalated in the second, surpassing pre-pandemic levels. There remains substantial potential for growth as tourism numbers have only revived to 60% of their former rates.
The company dealt with unplanned increases in SG&A by JPY 600 million due to past tax adjustment but still managed to reduce overall SG&A expenses by JPY 1 billion from earlier projections, highlighting effective cost management strategies.
Revenue saw a significant uptick driven by subsidiaries like J.Front Design and Construction, which saw strong sales in large properties and the department stores' interior works, resulting in a 40.8% increase in business profit to JPY 1.9 billion.
While sales rose in the Payment and Finance segment, revenue missed targets due to strategic revisions and investments in personnel and systems for future consolidation efforts, temporarily impacting business and operating profits.
Total assets marginally grew by JPY 900 million to JPY 1,121.9 billion. Notably, interest-bearing liabilities were cut down by JPY 9.8 billion, excluding lease liabilities, pointing to the company's effort to reduce its debt exposure.
The company enjoyed an operating cash flow increase of JPY 12 billion due to profit growth. Combined with JPY 600 million in proceeds from asset sales against investments for store renovations, it managed to secure a healthy free cash flow of JPY 36.3 billion.
With a resurgence in economic activities post-pandemic and stable consumer confidence, the company anticipates increased spending by inbound tourists and sustained consumption by affluent consumers. However, concerns such as inflation's impact on consumer sentiment and the challenging business climate in rural areas warrant close monitoring.
The full year FY2023 forecast appears bright with consolidated gross sales expected to rise 13.2% to JPY 1.131 billion. Business profit is projected to climb a significant 71.0% to JPY 42.5 billion, while operating profit is set to more than double to JPY 40 billion, considering the strong growth trend in H1. Furthermore, operating profit and profit attributable to owners of the parent are anticipated to be JPY 2.5 billion and JPY 1.5 billion higher, respectively, than prior forecasts.
Key financial indicators like Return on Equity (ROE) and Return on Invested Capital (ROIC) are estimated to be at 7.4% and 4.9%, respectively. Shareholders can expect a year-end dividend of JPY 17 per share, signifying the company's commitment to delivering value to its investors.
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Thank you very much for taking time out of your busy schedule to join us today. First, please turn to Page 1. Today, I will explain the overview of results for the first half of FY 2023, followed by the second half and full year forecast for FY 2023 and then approach for renewed growth in the medium to long term. Now please turn to Page 3 for the first half FY 2023 results. The consolidated gross sales for the first half of FY 2023 was JPY 540.1 billion, and revenue was JPY 191.6 billion, and both items recorded double-digit growth year-on-year. As a result, business profit increased 48.2% to JPY 20.1 billion. Operating profit increased 48.7% to JPY 19.6 billion, and profit attributable to owners of parent increased 27.0% to JPY 12.9 billion, all of which recorded significant growth. Compared to the forecast announced in April, gross sales were JPY 6.6 billion higher, but revenue was JPY 3.8 billion lower due to lower profit margins in the Department Store business, and lower commission income in the Shopping Center business.
On the other hand, efforts to further reduce SG&A expenses mainly in Department Stores and Shopping Centers contributed to make business profit and operating profit JPY 1.1 billion higher, respectively, and profit attributable to owners of parent was JPY 400 million higher. Interim dividend was JPY 16 per share, an increase of JPY 1 year-on-year as originally planned. . Next, please turn to Page 4 for the overview of segment performance. In the Department Store business, sales remained strong, mainly for luxury items from the beginning of the fiscal year and consumption was further energized by the reclassification of COVID-19 to Class 5, under the Infectious Disease Control Law in May which is the same category as seasonal influenza. In addition to the strong consumption by affluent consumers, which has been driving the Department Store business, consumption among the middle class has become active to some extent. Furthermore, sales growth from inbound tourists accelerated further in the second quarter, as international travel recovers. As a result, gross sales increased by 14.4% year-on-year. While the revenue increase remained at 10.6% due to the lower profit margin, Business profit doubled from the previous fiscal year to JPY 11.6 billion, and operating profit increased 2.6x to JPY 10.1 billion, thanks to the flexible control of SG&A expenses despite many factors of increase. Next, please turn to Page 5. This page shows changes of sales in major stores of Daimaru Matsuzakaya with quarterly comparison to the previous fiscal year and FY 2019, as well as to the first half of FY 2018 for your reference. All core stores, excluding terminal stores that heavily depend on customer traffic, posted sales increases compared with the second quarter in FY 2019. Although sales at Umeda and Tokyo, which are both terminal stores, did not reach the pre-COVID level. They recorded significant improvement of 20% and 30%, respectively, compared with the previous fiscal year. . Please turn to Page 6. Inbound sales that already showed a steady recovery in the first quarter improved further in the second quarter to exceed the pre-COVID level. We are convinced that there is still considerable growth potential here as the number of those customers has just returned to 60% of the pre-COVID level. Next, please turn to Page 7 for details of SG&A of Daimaru Matsuzakaya department Store. the main factors for the increase from the previous year are a JPY 700 million increase in commissions, due to sales recovery, a JPY 400 million increase in advertising expenses, a JPY 400 million increase in personnel expenses such as a cost of living allowance to compensate for recent inflation, a JPY 300 million increase in outsourcing and temporary staffing and the JPY 200 million increase in utilities expenses.
In addition, JPY 600 million was posted as an unplanned SG&A for back taxes, related to past tax-exempt sales transactions that were found to be inappropriate. Even after taking these unplanned increases into account, we could reduce SG&A by JPY 1 billion compared to the April forecast, and we assume that we are able to control expenses flexibly.
In the Shopping Center business on Page 8, inbound sales, mainly at Shibuya PARCO and shinsaibashi PARCO exceeded JPY 10 billion in the first half, which increased gross sales but revenue decreased due to weak growth in commission income. On the other hand, business profit increased 17.2% year-on-year to JPY 4.8 billion, due to appropriate control of costs and SG&A expenses, such as increased reversal of advertising expenses, reduction of outsourcing expenses and reduction of headquarters expenses. In addition, gains on sale of real estate, including the building of Tsudanuma PARCO were also recorded and operating income increased 15.2% to JPY 5.7 billion. Next, please turn to Page 9 for developer business results. Revenue increased significantly driven by J.Front Design and Construction, which recorded sales of large properties and a strong performance in interior works of Department Stores. Business profit increased 40.8% to JPY 1.9 billion, and operating income increased 36.1% to JPY 2.2 billion year-on-year, due in part to cost reduction efforts by each operating company. Please turn to Page 10 for Payment and Finance business results. Sales increased due to an increase in margin commissions, but revenue did not reach the target due to the revision of point accounting and other factors. JFR Card is currently preparing to consolidate all of the credit card within the group and is working to expand its business base for the future. As a result, both business profit and operating profit decreased due to the significant impact of upfront costs for securing human resources and system investments. Please refer to Page 11 for other businesses. Mainstay Daimaru Kyoto increased sales and profit due to strong sales of electronic devices and automobile related parts. Please turn to Page 12 for the consolidated B/S. Total assets were JPY 1,121.9 billion, an increase of JPY 900 million from the end of the previous fiscal year. Interest-bearing liabilities, excluding lease liabilities were reduced by JPY 9.8 billion from the end of the previous fiscal year, as a result of further reduction efforts. . Consolidated cash flow is shown on Page 13. Operating cash flow increased by JPY 12 billion from the previous year, mainly due to profit growth. Cash flow from investing activities was JPY 600 million, due to an increase in proceeds from sale of assets despite investment in store renovations. As a result, we could secure free cash flow of JPY 36.3 billion.
Next, I will explain our forecast for the second half and full year of FY 2023. Please turn to Page 15. As for the business environment, economic activity after the pandemic is expected to become increasingly active and consumer confidence is expected to remain at a reasonable level with a favorable employment environment. In addition, spending by inbound tourists, which gained momentum in the second quarter is expected to further accelerate in the second half and the domestic consumption is also expected to remain strong among affluent consumers, supported by asset effects.
On the other hand, although rising resource and energy prices have become to an end, there have been a series of price hikes in food and daily necessities. So the impact on consumer sentiment needs to be monitored closely. Also, the disparity between urban and rural areas is clear, and we must take appropriate measures with an assumption that the business environment for stores in rural areas will become even more severe.
Please turn to Page 16. Based on the explanation so far, consolidated gross sales for full year FY 2023 is forecasted as JPY 1.131 billion, up 13.2% year-on-year. Business profit will increase 71.0% to JPY 42.5 billion. Operating profit will more than double to JPY 40 billion, and profit attributable to owners of parent is estimated to be JPY 27 billion, up 89.6%. As such, we expect significant profit increases at each profit level. Compared to the April forecast, the full year forecast is revised upward, considering the growth trend in the first half.
Consolidated full year gross sales are expected to increase by JPY 16 billion from the forecast. Operating profit will be up JPY 2.5 billion and operating profit, as well as profit attributable to owners of parent and forecasted to be JPY 1.5 billion higher, respectively. We expect ROE will be 7.4% and ROIC will be 4.9%. Both are important financial indices. The year-end dividend will be JPY 17 per share, up JPY 1 from the previous fiscal year and was the interim dividend, the annual dividend will be JPY 33, up JPY 2 from the previous fiscal year.
Next is the performance forecast by segment. Please refer to Page 18 for the department store business. In Japan, we expect spending by affluent consumers, mainly on luxury items will continue to be strong and consumption by the middle class will gradually improve as well. In addition, we expect spending by inbound tourists will accelerate further, mainly with an increasing number of customers from Mainland China. Based on the trend in the second quarter, which exceeded the results of the pre-COVID period. With that, we expect full year gross sales will increase 11.5% year-on-year, business profit will be up 89.3% to JPY 24.3 billion, and operating profit will be up 196.2% to JPY 22.3 billion.
Page 19 shows the sales forecast by store for the second half of the year due to sustained strong spending by affluent consumers and a further acceleration of consumption by inbound tourists, the second half comparable store sales total is expected to exceed the results for both FY 2019 and FY 2018, before Covid. In particular, we expect a significant increase in sales at the Shinsaibashi store, which shows the greatest strength with inbound tourists and Sapporo store, which expects to benefit from the renovation and introduction of large-scale luxury items. The Tokyo store, which had lagged behind other terminal stores, is also expected to increase sales compared to FY 2019.
The Meta store is also showing a steady recovery but we cannot deny that it is slower than other stores. So we need to implement measures separately for it. Next, please turn to Page 20 for SG&A of Daimaru Matsuzakaya department stores. In the second half, we expect a JPY 400 million increase in personnel expenses, due to bonuses in line with the business recovery and cost of living allowance payments, as well as a JPY 400 million increase in commissions due to increased sales and a JPY 500 million increase in operational costs due to system investment. Sales in the second half are expected to be significantly higher than the April forecast, but we will control costs tightly, under such a circumstance.
Next, please turn to Page 21 for the SE business. We expect the strong performance of Shibuya PARCO and Shinsaibashi PARCO will continue as they steadily capture inbound tourist demand, and we also expect renovations at Nagoya PARCO to have a positive impact. On the other hand, we have factored in the slower recovery of stores and rural areas, compared to urban stores and we estimate full year results will increase almost at the same level as in the first half for each profit level.
Next, please turn to Page 22 for the Developer business. In the second half, J.Front City Development, plans to record a gain on sale of developed properties with increased value as business profit and the Construction business is also expected to remain strong. we forecast a significant increase in both business profit and operating profit for the full year.
Next, please turn to Page 23 for Payment and Finance business results. Although upfront costs will be incurred to expand the business base, such as consolidation of credit card, we will secure profit as originally planned for the second half with efforts to control costs in a balanced manner. Please refer to Page 24 for other businesses. Improvement and the performance of Daimaru Koguyu is expected to contribute to a significant increase in both business profit and operating profit for the full year by maintaining the same level of growth in the first half. Page 25 shows the consolidated B/S forecast. Interest-bearing liabilities, excluding lease liabilities, are expected to be reduced by JPY 34.1 billion from the end of the previous fiscal year to JPY 215 billion, at the end of this fiscal year.
Please turn to Page 26 for cash flows. Cash flow from investment activities is expected to be 0 with investment in store renovation and proceeds from the sale of shares and equity method affiliate, Stalling Life Holdings. Next, I will explain our approach to renewed growth over the medium to long term. Please turn to Page 28. The 3-year medium-term business plan that started in FY 2021, which aims for a full recovery from the pandemic is now in its final stage. And while it has produced various positive results, it has also revealed challenges. First, let me explain some of the specific results that we find as promising for the future.
Please turn to Page 29. The first point is the potential for group synergy. Daimaru Shinsaibashi store was reconstructed and opened in September 2019. And Shinsaibashi was opened as a new store in November 2020 group combined these 2 retail stores with different characteristics, but we faced a major challenge at the start, as we were directly hit by the pandemic. On the other hand, we believe that this situation enabled these 2 stores to refine their knowledge further and work for synergies to be closer to customers. Daimaru Shinsaibashi store has met the needs of affluent consumers in Japan; mainly gaisho customers as originally planned, and its transaction volume in the previous fiscal year already exceeded the pre-COVID level. Shinsaibashi PARCO has also exceeded its preopening forecast for transaction volume. Both Daimaru and PARCO have succeeded in broadening their customer base and have been able to increase average spend per customer.
The second point is about the potential for new value creation and access to young affluent consumers, please turn to Page 30. One of the long-standing issues for department stores is that the customer base is heavily skewed toward relatively older generations. Under such a circumstance, the luxury mall, Ginza 6 was established by redeveloping the area, including the site of the former Matsuzakaya Ginza store. After a major innovation in 2021, it has become more obvious, that there is an interesting trend that has never been seen in Department Stores before. In the last fiscal year, index achieved a record high transaction volume, according to the Ginza 6 application data, about half of its transaction volume comes from customers in their 20s and 30s. Indicating the share of young customers has grown significantly compared to the time of its opening. This is not only because we created new value and new luxury mall market, but also because of the fact that young affluent consumers are on the rise. We are now convinced that there are many more things our group can do and should do to create new values and access young affluent consumers. The third point is the potential as global content. Please turn to Page 31. Shibuya PARCO was opened in November 2019 and is showing its full potential in the post-pandemic period as originally envisioned. Expanding IP content, which is a symbol of PARCO has driven a rapid recovery in the number of visitors and contributed to a significant increase in net transaction volume. In particular, transaction volume with inbound tourists in the first half was close to JPY 5 billion, accounting for approximately 30% of the total volume of the store and it is gaining increasing global support, as a one and only store. We are seeing a new approach to overseas customers at Shibuya PARCO that is different from Department Stores, and we assume this suggests something our group should think when we develop our overseas business strategy. The fourth point is the potential for creating new businesses. Please turn to Page 32. The subscription business, Another ADdress was launched in March 2021 and has attracted a lot of support from customers with a high sensitivity for fashion and a sustainable mindset. There is no direct cannibalization with department stores and by cultivating new markets, we are making progress beyond the business plan, established at the time of launch. Another ADdress's success factor is that it is fully market and customer-oriented and continues to implement the PDCA cycle by adopting a sustainable model and managing progress with clear KPIs, based on a detailed business plan. . However, what made the success possible was the passion and desire of the people who launched this business. In other words, the success factor is human resources. We recognize the urgency of creating a system to produce more of these kinds of human resources who can lead such innovation in our group.
Next, based on these achievements, I'd like to explain our approach to renewed growth in the medium to long term. Please turn to Page 33. The main theme of the ongoing medium-term business plan was revival. And from the next fiscal year, the focus will be on growth, will enter a new phase of aggressive strategic investment based on a sound balance sheet. Specifically, we will focus on the following 4 pillars: the first one is deepening and growing our core business, that is Retail business. The second one is building a foundation for growth for the Developer business and the Payment and Finance business. The third one is investment in human capital; and the fourth one is pursuing growth and profitability through ROIC by business. Please turn to Page 34. The most important element in deepening and growing the Retail businesses, strengthening store competitiveness and for these efforts, the large-scale renovation of Matsuzakaya Nagoya store will be an apoC-making event. Today, the driver of department store business is gaisho customers, that is consumption by affluent consumers. Matulakaanaguya Nagoya store is characterized by its overwhelming strength with gaisho customers. And in order to further solidify the strength, we will renew our product lineup services and store environment. We will also rebuild the fashion and lifestyle zones to cultivate the next generation of affluent customers. . Based on the policy of making strong stores stronger, we will aggressively make strategic investments for growth by focusing on core stores in both Department Stores and PARCO. At the same time, we will take appropriate measures to identify stores with issues, by considering changes in the business environment. Please turn to Page 35. Based on the assumption of strengthening store competitiveness, will strengthen our competitiveness in each area. This is a unique and growth-oriented initiative that can be implemented only by our group. The successful group synergy in the Shinsaibashi area mentioned earlier, will be applied and developed further in the Nagoya area, in order to create the strongest area in Nagoya with the local community, we will apply not only the synergy between Department Store and Shopping Center realized in Shinsaibashi but also attract customers through the commercial complex Nishiki-sanchome district 25 project, which is currently being implemented by the Developer business and strengthen customer data linkage by credit card consolidation. Please turn to Page 36. While focusing on this area, we will also take on the challenge to implement new customer acquisition methods through communities and sequentially deepen and grow our own unique retail business in 7 key cities for further expansion and development. Please turn to Page 37 and strengthening retail business, one of the important options is how to position overseas markets. Basically, we will explore how we can approach overseas customers, especially affluent consumers from the perspective of trade area expansion, rather than opening physical stores overseas. . To promote this activity in a full-scale manner in the group, we established a new section and holding company this past September to take charge of the overseas business strategy. As for a specific example of this initiative, we are promoting an ongoing project with the central group in Thailand and we'll pursue various possibilities in collaboration with operating companies such as approaching global markets through the unique content implemented by Shibuya PARCO to create new customers that will contribute to deepening the retail business.
Please turn to Page 38. In addition to measures to make our core Department Store and Shopping Center businesses stronger through synergies, it is essential to take on new challenges in the medium to long term. Another address mentioned earlier as a successful case is one such example, and eSports is another example for content. Going forward, we will define our core retail business as a growth business that creates a new value unique to our group while gradually expanding such new initiatives. Next, I will explain about building a foundation for growth as a group. Please refer to Page 39.
In the Developer business, the Shinsaibashi project in Osaka and Nishiki-sanchome District 25 project in Nagoya, which are currently under development. are scheduled to be completed and opened in 2026. In the Developer business, there is inevitably a time lag between investment and returns. It is important to demonstrate the growth potential of our Developer business by presenting a concrete pipeline and clarifying the relationship between investment and return. Next spring, we will make the pipeline more specific and present a clearer image of profit growth in the Developer business. Please refer to Page 40. We have decided to consolidate the issuer of credit cards within the group to JFR Card and will gradually switch to new credit cards, starting with Ginza 6 in 2024. Therefore, for the time being, including the current fiscal year, system investment and other expenses will be recognized upfront, but we have begun to make a steady step forward to expand the credit card customer base for the group. This will ensure evolution of various initiatives within the group based on the credit card business. Depending on area characteristics, we will strengthen collaboration between Department Stores, Shopping Centers and facilities created by the developer business and expand the solid customer base that supports the group. . At the same time, through such efforts to establish contact points with customers, we aim to increase revenue in the Payment and Finance business and achieved steady growth as one of the pillars of the group.
Next, please turn to Page 41. The details of human capital management are currently being formulated. But the basic idea is to clarify the future vision, eliminate the gap with the current status and synchronize the human resource strategy with the management strategy. we will cascade this human resource strategy to operating companies, each organization and even to individual employees and by spreading it and the entire group. We will establish it as our corporate culture.
Please turn to Page 42. Needless to say, innovation is indispensable in these uncertain times. The essence of innovation, large in the fact that only people can bring about such innovation in order to further produce such human resources and unprecedented discontinuous approach is essential. One example is the CVC initiative. Through the CVC fund launched in October last year, our contact with a wide variety of start-up companies have been dramatically expanding, we intend to accumulate know-how gained from the process of this initiative and extend it not only to the human resources involved in this initiative, but also to the entire organization digital knowledge is also indispensable for innovation. Last fall, we launched a human resource development program with the aim of developing 1,000 digital human resources. We will synchronize our management and human capital strategies, and invest in human capital as we create a pathway that will ultimately lead to financial value through output, such as new businesses and business process innovations to be generated by these human assets in the future. Next, I will explain the full scale usage of ROIC by business. Please refer to Page 43. Each business will set the hurdle rate based on what calculated by business and set the target ROIC, that is higher than the hurdle rate. Then by recognizing the appropriate investment amount calculated backward from the business-specific ROIC, we'll clarify the relationship, doing investment and return and strengthen our commitment. We plan to start full-scale usage of business-specific ROIC in the next fiscal year. But to do this, it is important to spread awareness of the concept of ROIC, throughout the group. In this fiscal year will create ROIC trees and link ROIC to single year budget. Also, we are working intensively to spread the concept of ROIC through training and study sessions for employees closer to the field, such as those in charge of performance management at operating companies. As for the ROIC, we will apply KPIs linked with financial figures up to a certain level, but at levels closer to the field, we will set KPIs that can be implemented in daily activities other than financial figures. Please turn to Page 44. We recognize that our capital cost for work is about 4% to 4.5% for the medium term, while keeping track of this capital caused by business, we believe that increasing the positive spread with ROIC, will lead to sustainable corporate value creation Therefore, it is essential to aim for consolidated ROIC of 5% or more first, which is higher than the capital cost. We also recognize that our medium- to long-term cost of shareholders' equity is about 6% to 7%.
Our target ROE is set at a level higher than the cost of shareholders' equity. In order to meet the expectations of our shareholders. Based on the strong recognition that it is essential to achieve ROE of 10% or more in the medium to long term, we want to achieve 8% or more at an early stage as the first milestone. Based on this direction, we plan to announce the details of our new medium-term business plan, which envisions renewed growth at the financial results briefing in April next year. Thank you.
My name is Takashi of Minor Securities. Thank you for the detailed explanations. I would like to ask President Sawada, Kawase and Yoshimoto. First, to President Sawada and Kawase. Sorry. I always asked similar questions. President Yoshimoto mentioned that the middle class has returned to Daimaru Matsuzakaya department Store to a large extent. And what kind of response do you feel? On the other hand, compared to before the COVID-19 pandemic, not all stores have returned to normal with Daimaru meta stores showing weak return, perhaps due to the competitive environment. What kind of response do you view, what do you think needs to be done to further increase sales in the future? And almost the same question to President Kawase. As you said, PARCO is doing very well in Shibuya and Shinsaibashi. I think that some regional stores are also doing well. But in general, the figures show that sales of the regional stores are a little weak. Please explain the differences between stores that are doing well and not so well and what the problems are for stores that are not so well.
And finally, to President Yoshimoto. You explained the results earlier in your review of the current medium-term plan, but did not present the challenges I wonder if you could talk about what are the challenges -- and I think the most important pillar for the next medium-term plan will be how much stronger the retail business will become. The retail business must be a crucial foundation of the company. In your explanation earlier, including the renovation of the Matsuzakaya Nagoya store, I think you dare to refer to retail rather than department stores. But how do you define this? Could you explain a little bit more about how the retail business will be positioned in the next midterm plan?
Thank you for the questions. I'm Sawada, President of Daimaru Matsuzakaya Department Stores. I would like to answer based on my understanding of the question. That is how I reacted after passing the first half. As I have already reported, we have made considerable investments over the past 3 years, to strengthen the 3 categories of luxury items, watches an art and to capture the top market share in the Department Store industry. And we are seeing reasonable results. Other than them, for example, for fashion, we can categorize brands into those that exceeded their 2019 results around the end of the first quarter and those that did not.
When we look at all the stores, the good brands are doing well. And sales of the back brands or the brands whose sales are not back are not back in any stores. The analysis, including interviews, on what its brand is doing and how customers are returning, shows that sales of the brands that have switched their touch point, including line works or investment apps to online are returning faster. The brands that are devising ways to control inventory and strengthen design capabilities upstream in the supply chain also performed well.
In other words, the brands that narrow down fabrics, but create various designs with their own fabrics are doing well. Among the various initiatives, we are beginning to see some winning strategies. We're trying to raise the overall level, while talking about such things with the brands that are relatively behind. The most positive response we're seeing is, again, like last time, Aside from the wealth and direct sales, the significant progress is digitalizing the touch point using the app. We have seen a considerable increase in the average spend per customer in this first half, and we intend to use this as one of our weapons.
On a store-by-store basis, sales of some stores have already exceeded the fiscal 2019 levels. But I can say that the stores that have made strategic investments over the past 3 years have become extremely strong. Sales of the stores that are taking a wait-and-see attitude are returning slowly. In other words, I feel that the proper actions lead to solid results. Thank you
I'm Kawase, President of PARCO Takahashi-san, thank you for the questions. Transaction volume has increased significantly by 50% and 60% from the previous year in COVID-19 pandemic, mainly Shibuya PARCO and Shinsaibashi PARCO. As President Yoshimoto said, inbounds are significantly affecting the results. For example, PARCO stores such as Sao PARCO and Fukuoka PARCO in the cities where inbound tourists are returning, although a little later than in the Tokyo area have good results. They all have in common, the experience value of culture, art and entertainment, unique to PARCO, which they are prepared, I mean the COVID-19 pandemic. We have achieved good results in the stores where we have already implemented mechanisms. This is not competition with other commercial facilities.
We have put in place mechanisms, that allow inbound tourists and local customers to choose PARCO when considering how to spend their days off. The group's policy is to make strong stores even stronger. So we would like to strengthen further our urban stores, which have continued to perform well. We want to emphasize the characteristics of entertainment and culture further. On the other hand, as shown in the results by store in the first half on Page 15 of the results presentation material, we consider Nagoya PARCO, Sendai PARCO and Hiroshima PARCO to be in stores with a slightly weaker recovery of only 10% from the previous year.
Those stores mainly sold a large proportion of clothing, and were designed to attract many customers from a wide area searching for clothing. Under the influence of COVID-19, the habit of buying personal items through e-commerce has spread, and the trend of shopping at the nearest commercial facility instead of going out to PARCO has also taken root. In such a situation, I'm aware that Nagoya PARCO , Sendai PARCO and Hiroshima PARCO have been a little slow in recovering from COVID-19. I talked about floor concept reforms or the experience value for successful stores.
We're also planning to renovate these stores to incorporate art and entertainment that will enhance the experience value. Not all floor concept reforms can be completed in 1 year, and some may take a little longer, but we would like to encourage customers to visit our stores through these efforts. Thank you.
I am Yoshimoto. I'm very sorry about the comment that I did not touch upon challenges. Personally, I think there are too many issues and partly, I do not know what to say. But ultimately, we have a pretty aggressive direction in sight. And the big challenge is to develop human resources in that direction. As I mentioned in my explanation, people are essential in everything we do in the future. But I think the issue of what to do with an organization to nurture those people or what to do with an organization to operate it is also critical.
The direction is to increase synergy like Daimaru and PARCO in Shinsaibashi, switched to a younger target like GINZA6 or have a global focus like Shibuya PARCO. And finally, as I mentioned another address as an example, I believe that the success of another address is because the people who took on this new business with an entrepreneurial mindset have been able to manage it by establishing detailed KPIs for the processes at their own risk.
And as I mentioned in the section on human capital management on Slide 41, I dare to provide numbers for the CVC fund and digital human resources. Regarding the CVC fund, it has contact with 4,800 employees and produces 200 employees, who will lead the transformation. Rather than having contact with start-ups and seeking new businesses in return for financial profits. CVC hopes to significantly contribute to revitalizing companies as a strategic return.
The person in charge of business strategy, travels to sites nationwide and works closely to connect the sites and startups. Connecting these things together and taking on new initiatives will likely produce many members like those involved in launching another address. Also, as for digital human resources, we plan to train 100 digital human resources, analysts and designers by fiscal 2024 and 1,000 by fiscal 2030, under our system.
Our management team recently received a portion of this training. Through these initiatives, I believe that creating an organization where every workplace has at least one digital expert will lead to success in the core part of the next medium-term plan. As for the comment on Retail business, I generally believe so. There's no doubt that Retail is our core business. However, rather than staying within the existing areas of Daimaru Matsuzakaya department stores or PARCO, I would like to explore new areas and measures by combining the different aspects of the people who grew up in these 2 companies.
As I mentioned earlier, about what is happening in Shinsaibashi, I have heard of cases where only young people from both stores came up with various projects in August and mutual customer referrals between our 2 stores improved considerably. If such things start to emerge spontaneously in the area, I think the initiatives in the area will probably be positive exponentially. And I would like to think about the mechanism for that by combining the Department Store and PARCO everywhere. I believe this will lead to a new vision for Retail, and it will be best if it can be understood as the vision for Retail, we aim for in the next medium-term plan. Thank you.
I am Kanamori, SMBC Nikko Securities. I have 3 questions, and all of them are related to the numbers you talked about. The first question is about your assumptions for the second half gross sales forecast Daimaru Matsuzakaya department stores. Would you give us more granularity in terms of concrete figures for duty-free sales and domestic customer sales, as well as how these figures are expected to grow from the previous year and the pre-COVID numbers, be it FY '18 or FY '19? Because you said that the recovery in inbound sales would pick up pace. I want to know how much so? I'd really appreciate if you answer me with specific numbers, percentages for both first half and second half.
Also with respect to the impact of treated wastewater from Fukushima nuclear power plant and the faltering pace of domestic consumption in China I don't think that these 2 factors put a damper on your sales as long as the latest figures from September monthly report, which covered the period of the Chinese travel season are concerned. But I'm wondering if you have any additional comment on that.
Should I continue or stop in a wait for answer to my first question? Okay. My second question is regarding how you see your gross margin -- product gross margin at Daimaru Matsuzakaya department stores. I think your gross margin dropped at 0.4 percentage points in the previous second half and this first quarter, respectively, from the same period of the year before. It was a relatively large drop and continues to decline in the second quarter, although the pace of decline slowed. If the recovery in inbound demand is going to pick up pace, as you said, how do you anticipate the gross margin to move for the next 6 months? Given your gross sales and gross profit forecast you gave us earlier, I assume that you expect the second half gross margin to go up, but I really appreciate if you can give us more details and make a comment on that. . The gross margin seems to stop decline despite strong luxury sales, especially during the second quarter. If you look at the figure by month, more details will certainly boost the conviction of your forecast. The third question is about PARCO. You talked about the commission income not reaching the target and that was offset by cutting costs. why did commission income not hit the target? And what more and how far can you cut cost going forward? Because my understanding is that PARCO business is light on cost. So if income continues to fall, how long do you think you can offset that shortfall just by cutting SG&A costs? Maybe you're cutting purchase costs as well as in addition to SG&A costs. So if you can comment on how you are going to manage cost or if there is any room for further cost cutting, I'd really appreciate your explanation. Thank you.
So with your question about inbound sales, you're referring to this number, JPY 29.5 billion, Daimaru Matsuzakaya stand-alone, is that right?
Yes, that's right.
Okay. Maybe it's not enough to suggest a trend anyway. So you asked for more granular information about our gross sales forecast for the second half. As I just said, duty-free sales was JPY 29.5 billion. It was about JPY 25 billion in the first half. In terms of granularity. I think we should divide this number by the number of operating days. And for the first half, it was about JPY 126 million in daily sales. For the second half, JPY 29.5 billion, the daily sales will be approximately JPY 163 million.
And for September, it was JPY 183 million per business day. For October, as you know, the first week of October is the busiest traveling season in China, the National Day holidays. So naturally, the demand was rather high. But even after the national holiday period, our daily sales are above JPY 200 million. So I think it is safe to say that this JPY 163 million daily sales projection for the second half is rather conservative. And therefore, we are confident that our growth sales will increase from last year. So that's about duty-free sales projection.
Then what about cash sales, excluding duty-free sales? Our current expectation is about JPY 210 billion, and this is up by 2.7% year-over-year. And cash sales, excluding duty-free sales for the first half were up 7.8% year-over-year. So again, our cash sales, excluding duty-free sales projection for the second half is conservative. And when you look at gaisho sales, the storyline is quite the same. Gaisho sales will continue to grow in the second half, but not as strongly as we saw in the first half. Gaisho sales grew 8.4% in the first half from last year, but we expect it to slow somewhat at 6.7%, give or take, in the second half.
We also expect AR to grow at JPY 105 billion or so, for the second half? It was about JPY 94 billion or JPY 95 billion in the first half. So the full year AR will be JPY 200 billion. And Department Store sales are expected to exceed JPY 210 billion. If you include Hakata, including Hakata, the whole Department Stores sales will exceed JPY 210 billion. This is exactly what we talked about before, discussed that our ambition is to see our gaisho sales reaching JPY 210 billion, and now we are confident that we will achieve this target.
Your second question is about our gross margin -- product gross margin. As you pointed out, our expectation is that our second half margin will improve by 0.4 or 0.3 percentage points, from that of the first half. One of the reasons why we expect improvement is because of the anticipated boost in cosmetic sales, following inbound recovery. But for the month of September, yes, it is improving, but not as strongly as we expected.
Then your last question, the impact of the treated wastewater from the plant on our sales and traffic. As you rightly pointed out, we are seeing no impact of that so far. Just so you know, our Kyoto store has the second largest inbound-related sales following Shinsaibashi store. Of course, if you go to Kyoto, you will see a huge turnout of foreign tourists. There are more hotels in Kyoto than before, and they are more longer staying foreign tourists in Kyoto. I think this is unique to Kyoto, but cosmetic products of Yoga are really popular among foreign tourists. That's it for me.
I'm Kawase, President of PARCO. Thank you for the questions, Marissa. So you are asking why commission income didn't reach the target. I think there are 3 factors at play. First of all, there are fixed rent tenants and commission-based rent tenants at PARCO, as you know. This year, we've seen quite a big growth in sales of our fixed rent tenants that include travel agencies and ticket sellers. In contrast, our commission-based rent tenants, not all of them, though, are not growing as our fixed rent tenants are. That's why you see some discrepancy between the overall transaction volume and the actual commission income. That's number one.
Number 2 is that there are tenants that are not commission-based, so an increase in revenue does not necessarily translate into more commission income. And those tenants are benefited greatly from the recovery in inbound tourists. So we've seen a big growth in revenue for those tenants that doesn't necessarily translate into an increase in our commission income. That's the discrepancy.
Lastly, we have an advanced based zone. This is not a regular floor lease contract, but a temporary short-term lease contract for special events. And usually, rent for event space is set cheaper than the regular lease contract. We have more events space today than before. The area for advanced space has been expanding since the end of FY '19 before COVID, for 2 reasons: One, we want to free up extra space for building frame reform. So we are expanding this event based on intentionally. The other reason is that a number of tenants have to leave because market conditions worsened during COVID, and we had no option but to convert those vacancies to event space.
In sum, there is a discrepancy between volume and commission because we have 2 types of tenants, fixed-rent tenants growing, but do not need to pay extra rent and commission-based rent tenants who are not growing as strongly as fixed rate tenants. Also, some tenants didn't reach the minimum threshold to pay commission, unless we have more events based today. Those are the 3 reasons why the commission income was below the target. You also asked how far we can manage or cut costs going forward. As you said, PARCO is not a cost-heavy business. we could still cut costs in the first half, firstly, because we are taking risks in advertising activities that actually helped grow our revenue by putting up big promotions, which would otherwise just cost money and be considered expenses. So we did spend on advertising, but because our advertising activities generated some revenue, advertising expenses are down on net.
Also for the first half, we looked closely at our expenses and could cut unnecessary consignment fees. But as you pointed out, we didn't have much room to cut costs going forward. that's why we need to increase our top line to get better results. That's all.
Thank you. If I may, I'd like to add just 1 comment on how much our Department Store sales have grown compared to pre-COVID years. I guess kind of Morrison asked about this. I have some numbers for you. Department store gross sales for FY 2023 grew 2.6% from FY 2019. And gaisho sales increased 19% over the same period, up 19% from FY 2019. Domestic cash sales dropped 5.2% and duty-free sales fall 10.7%. You may wonder if domestic cash sales will drop more than that, but the majority of luxury sales, luxury watch sales are actually domestic cash sales. So, this is what it is.
Are these numbers FY '23 full year forecast?
Yes, that is correct. .
I'm Yamaoka from Nomura Securities. I guess we're running out of time, so I'll ask just one major question and one follow-up question to my first question. My first question is, what is your long-term view on the top line, the Department Store sales? Inbound demand is coming back strongly, and domestic sales of big ticket items, including luxury items are picking up right now. Do you think there are still things you can do to keep raising the top line for next year and beyond? What is your top line growth trajectory for the years ahead? And the follow-up question to that is how you're going to control your costs going forward? Maybe this is something you have to address as a group and not only for the Department Store business, but what is your long-term view on cost control? .
I'd like to talk about my view on the point you raised in your first question. In the presentation, I try to focus on the performance of some particular stores such as Shinsaibashi, because I believe we've found a way forward that allows us to have a long-term view. More specifically, things like synergy between PARCO and daimaru Matsuzakaya at Shinsaibashi or young affluent customers for Ginza 6, these are examples of our growth drivers that are here to stay, and we are ready to leverage going forward.
So we all know the Department Store business has been really struggling to raise the top line. But more recently, we've got a way to raise revenue, especially at the stores in the big cities, and we know we need to adjust our strategy to this emerging reality. And we have so many things to add to or build on the history of growth of our department store business. We have the know-how of PARCO, know-how of Real Estate business and know-how of Payment business. Creating a new form of retail business by putting those elements together into our strategy, I think, will get us a long way in terms of raising the top line into the future. At least that is what I believe, and I believe that's our way forward. I'd like to hand over to Sawada-san to answer the question about cost control. Is it okay?
Yes. Thank you for the question. I also believe that there many things we can do to raise our top line and department store business. There are stores that we still need to add changes to. We have been implementing changes to our stores in the past 3 years, but there are some stores that haven't completed that process yet. So I believe there is still much room to grow in terms of top line. Also, well, I don't have hard evidence, and this may be just anecdotal information coming from our sales team and our vendors but we have the largest share of artwork sales and watch sales among Japanese department stores. That is obviously one of our strengths, having the largest share in the market, and that is a revenue driver for our directly managed stores. I believe we can continue to leverage our strength. So the fact that we have stores, do we still need to add changes and having the largest share in certain product categories, will give us much more room to grow our top line.
In addition, we launched some online services such as another address or RakuRich, and we are seeing these services grow and generate more revenue in the future. And we hope that those businesses will be profitable as soon as possible. So we have reasons to believe that our top line will continue to grow. Now with respect to cost control, I think we will have a clear plan in the next medium-term business plan. So let's focus on the stores like Shinsaibashi, Nagoya, co-pay and Sapura because these stores can earn at least JPY 5 billion in profit, even after corporate expenses allocation. We are thinking right now about what is the most cost-effective way to maintain those stores facility and infrastructure at 10-year intervals?
One way of doing it is, of course, keep using the building without major fixes for as long as possible. And then after 10 years, we spent a lot of money to do a big renovation. But we don't think that's the correct way. We think the more cost-effective way is to plan ahead and spend for small fixes and repairs here and there so as to extend the life of the building, that's a more prudent way to save cost in the long term, we think.
Speaking of renovation, some stores have their own budget for renovation and these stores should conduct large renovations at 5 or 10-year intervals. At any rate, we believe that the most cost-effective way to keep our stores up to date is to plan fixes, repairs and renovations at an interval of 10 years or so. Also, with regards to payrolls, we have more positions than people. Of course, hiring more people is one way to go, but we know what to do, and we have a strategy to win. So based on that strategy, we just have to take a closer look at -- and redesign our organizational structure and the roles and responsibilities. What I mean by that is we are going to reduce the number of positions, not hire more people to fill the current vacancies. So redesigning our current organizational structure, in terms of people is something that we need to accomplish in the next medium-term business plan.
Currently, outsourcing expenses are rising. And if we can successfully redesign our structure, we can eliminate those expenses. So that's another way to control costs. That's it.
Maybe I'd better ask [indiscernible] . Can you hear me?
Yes, we can.
Mr. Yoshimoto mentioned earlier that you are shifting your focused growth and making more aggressive investments. How do you plan to allocate cash flow as to aim for ROE of 8% first and then 10% beyond that, profit levels are recovering significantly. So it would be good if the recovery is even higher after investing, but I think there are some uncertainties. And I also think that retained earnings will accumulate to a certain extent with a current dividend payout ratio of 30% or more, the flexibility in terms of flexible shareholder returns has not been seen recently. But will we increased the allocation to shareholders a bit more as shareholder return or so-called cash allocation or even if it is not increased, free cash flow will increase significantly? So will there naturally be room for dividend increases and share buybacks, dividends are increasing due to a recovery in business performance that is more like a reserve recovery for the Department Store. But when thinking about the future, I wonder if the investment will increase even more and things will go back to what they were before. I think your company is doing well. But I would like to hear your thoughts on cash flow allocation and shareholder return distribution.
I'm Umebayashi. Thank you for your question. So that sounds question relates to the latter half or a more extended period. Yes, will ROE be really 10% or lower based on the 8- or 10-year vision? Originally, the group's capital policy has been based on determining a balance between strategic investments for growth, capital reinforcement and shareholder returns at each stage. As you are aware, we have been focusing on strengthening our financial position and increasing capital during the COVID-19 period. But for the 3 years of the next medium-term plan, basically, we would like to devote ourselves to strategic investments for growth.
Therefore, we set ROIC for each business as a hurdle to increase profits. However, based on our track record to date, Unfortunately, it is a fact that investments have not been linked to profits as expected. So I would like to consider a combination of strategic investments for growth and shareholder returns in the future. If we have planned to make a strategic investment for growth, but do not expect results to be successful, we would like to take a flexible approach by directly returning the balance in the form of shareholder returns and increasing its weight a little. That is our primary thought.
I think it is prerequisite to increase profits. Still, when our level of profit rises considerably with a current dividend payout ratio of 30%, retained earnings will increase considerably. So I personally think it will be good to increase DOE and dividend payout ratio for shareholder returns in consideration of capital efficiency in the future, I hope you will consider this point carefully. Thank you for your remarks. I want to consider this viewpoint appropriately.
As Wakabayashi-san said, investments will always be made with an eye on returns. We have included the developer and the payment and finance among the 4 pillars of growth that will follow. And I think that there will be quite a few areas where upfront investment will be involved. So I would like to give a clear total picture and think carefully about how much we will devote to growth and how much will we return to shareholders in a way that does not waste money. Thank you.