Seven & i Holdings Co Ltd

TSE:3382

Earnings Call Transcript 2024-Q1

[Yoshimichi Maruyama, Managing Executive Officer, CFO]

Hello, everyone. My name is Maruyama, Director & Managing Executive Officer of Seven & i Holdings. Allow me to express our sincerest appreciation for your continued understanding and support for the Seven & i Group's corporate activities, and to thank you for taking the time off your busy schedules to participate in today's financial results presentation for the first quarter of fiscal year 2023.

I would now like to start today's presentation. Shown on this slide is the executive summary. I will be going over the details of the agenda items listed here. This slide contains a status of progress of the strategic initiatives within the scope of the Medium-Term Management Plan, as outlined on previous occasions.

This fiscal year, in accordance with the reorganization of the Group's Financial Services as announced back in April we marked the completion of the transfer of Seven Card Service's shares to Seven Bank on July 1st.

The sale of Barneys Japan was completed on May 1st, and in June we announced the merger of Ito-Yokado and York, within the scope of the fundamental transformation of the Superstore operations.

Additionally, we continue the process toward closing the sale of Sogo & Seibu, and will inform stakeholders once the deal is complete. Furthermore, toward achieving our Group image for 2030, we will continue carrying out selection and concentration in our businesses, through the review of the business portfolio.

This slide contains the consolidated results highlight. Revenues from operations stood at 2 trillion and ¥650.6 billion, corresponding to 108.3% of the same period of the last fiscal year's results, and 98.2% of the initial plan. Operating income stood at ¥81.9 billion, corresponding to 80.1% of the same period of the last fiscal year's results, and 94.5% of the initial plan.

Net income attributable to owners of parent stood at ¥42.1 billion, corresponding to 64.9% of the same period of the last fiscal year's results, and 86.1% of the initial plan. This therefore represents an increase in revenues accompanied by a decrease in income.

In terms of operating income in the first quarter, while we had plan a decrease of over ¥15 billion, realized results came to a decrease of ¥20.3 billion, representing an underperformance of ¥4.8 billion versus the plan. Domestic operations registered a year-on-year increase in both revenues from operations and operating income, and also met the plan.

Additionally, while both merchandise sales and gross profit margin for 7-Eleven, Inc. which seeks to achieve sustainable growth by strengthening its proprietary products met the plan, 7-Eleven, Inc.'s fuel business weighed down on results, following a return to less extreme levels in terms of cents per gallon, which reached historic record highs in fiscal year 2022.

Furthermore, a weaker yen had a positive impact on operating income of ¥2.4 billion. Compared to the plan, net income attributable to owners of parent fell more than operating income. This was due to the aforementioned sale of Barneys Japan within the scope of the review of the business portfolio, for which we registered a special loss of ¥4.8 billion. Lastly, EBITDA corresponded to 97.2％ of the same period of the last fiscal year’s results. And to 99.2% of the plan, on account of an increase in depreciation expenses and the impact of a weaker yen on the amortization of goodwill.

This slide shows year-on-year change on a per segment basis for revenues from operations, operating income, and EBITDA. A strong performance from domestic operations coupled with the effects of a weaker yen translated into an increase in revenues from operations for operating segments excluding eliminations and corporate, allowing us to achieve a first quarter record high.

While Domestic convenience store operations drove operating income growth. Overseas convenience store operations were impacted by the fuel market, and this resulted in a decrease in operating income for this segment. Overall, operating income decreased by ¥20.3 billion on a year-on-year basis.

Lastly, EBITDA increased for all segments excluding eliminations and corporate with the exception of Overseas Convenience Store operations, allowing us to contain the decrease at ¥6 billion.

This slide contains the results for the aforementioned segments, this time compared to the plan. Operating income and EBITDA exceeded the plan for all segments, with the exception of Overseas Convenience Store operations.

In the second quarter and beyond, we expect to be able to further grow results by enhancing various initiatives in our domestic operations, and due to the fact that we are seeing profitability improvements to the fuel business within Overseas Convenience Store operations. So we continue to aim to achieve the targets for the full fiscal year.

I would now like to go over the status of the Group’s main business strategies, starting with Seven-Eleven Japan. The graph on the left shows the trend in existing store sales growth and gross profit margin. The execution of measures such as merchandise development leveraging Seven-Eleven Japan’s strengths and sales promotion through fair initiatives bore fruit. Allowing us to grow existing store sales by 4.9% in the first quarter and gross profit margin by 0.4%.

The table on the right pertains to selling, general and administrative expenses. Here, the resumption of merchandise exhibitions held in physical venues which we had stopped holding in order to prevent the spread of COVID-19. And expenses related to Seven-Eleven Japan’s 50th anniversary campaign translated into an increase in advertising expenses.

Furthermore, we also registered an increase in electricity costs and other costs, as selling, general and administrative expenses ultimately grew by ¥8.9 billion.

With that being said, we are fully confident that holding merchandise exhibitions in physical venues allows us to better communicate to franchised stores our strategies and policies, and this, in turn, contributes to further enhancing sales capabilities.

Going forward, while we expect cost increases resulting from inflationary pressures, we intend to continue carrying out management focused on cost effectiveness.

As shown in the graph on the left on this slide, increases in revenues and gross profit margin allowed us to offset the increase in general, and administrative expenses, as Seven-Eleven Japan registered an increase in operating income of ¥4.8 billion. Furthermore, we would also like to remind you that positive results weren't restricted to Headquarters, as the income of franchised stores, too, continues on an upward trend.

Starting on the next slide, I will be going over the fundamental factors driving Seven-Eleven Japan's current strong performance. This year marks Seven-Eleven Japan's 50th anniversary and in light of this milestone we have positioned Seven-Eleven Japan for the next half-century, as a company building a joyful future, together.

We also formulated Four-part Vision in the domains of health, community, the environment, and human resources. On top of this, and toward the realization of the Ideal Image, by promoting initiatives linking merchandise, sales promotion, and sales floor setup, we seek to offer both economic and social value and deliver sustainable growth.

As shown on this slide, we view Seven-Eleven Japan's strong value chain, which we have built up and perfected over the past half-century as one of the Company's strengths. Within this, we are able to deliver strong merchandise development capabilities thanks to a merchandise development structure resulting from team merchandising, and to an expansive merchandise lineup made possible by the fact that the Superstore operations is part of the Group.

Another factor is the existence of dedicated facilities which exclusively produce Seven Eleven merchandise over 90%. Furthermore, another very important factor is a logistics infrastructure allowing us to further raise the quality of our merchandise and to deliver them fresh to our customers.

By developing unique strengths in our value chain, we seek to adapt in a flexible manner to changes in the market and business environment, and to continue creating further added value. The vertical bar graph on the left shows the trend in food sales. Within this, the section of the graph colored orange represents sales of fresh food, while the section in green corresponds to sales of our private brand.

Furthermore, the red line combines these two to show the proprietary merchandise ratio. Seven-Eleven Japan has leveraged its aforementioned value chain, raising the proprietary merchandise ratio to over 76% of total sales. This highlights a foundation within our merchandise strategy, allowing us to adapt in a flexible manner to changes in the market and business environment.

We therefore consider this foundation to be one of the sources of Seven-Eleven Japan's strengths. The diagram on the right shows the growing dichotomy in consumer psychology in response to growing inflation in Japan, characterized by a focus on quality by some consumers and on price by others.

To illustrate this, we have included here a snapshot of cup noodle sales, as an example of changes in consumer behavior. As you can see, against the backdrop of growing consumer support for private brand merchandise, in particular, general private brand merchandise, which is priced more attractively has delivered strong growth.

High-quality private brand merchandise, too, has also delivered growth in terms of sales volume composition. In light of this, and as shown on the graph at the bottom, by making adjustments to our merchandise lineup in a flexible manner when it comes to high-quality and general private brand merchandise, this has allowed for growth in private brand merchandise to drive growth across the various merchandise categories.

In other words, we believe a high ratio of proprietary merchandise will contribute to Seven-Eleven’s resilience against the backdrop of a climate of uncertainty going forward, characterized by change.

This slide pertains to the fair initiatives carried out by Seven-Eleven Japan. The left-hand side of the slide deals with our main fairs, which we have held on a continuous basis starting last year, and which have been well received. Holding fairs with new themes and new versions of previous themes has allowed us to drive a strong existing store sales performance. Additionally, as shown on the right-hand side, starting this year and as initiatives rooted in the community, we have been holding regional fairs across different regions.

Within these, we promote collaboration with local municipalities and the promotion of local production for local consumption, and these initiatives have been well received by customers in these regions.

Going forward, by continuing to hold a variety of different fairs and offering merchandise with new value propositions, we aim to attract new customers and increase the frequency with which existing customers visit our stores.

Slide 13 outlines SIP initiatives, which refer to partnership initiatives between Seven-Eleven Japan and Ito-Yokado. Some SIP initiatives are already being implemented.

For example, in terms of merchandise, we have already started the introduction at all Seven Eleven stores of “EASE UP,” which is a brand of frozen foods carried by Ito-Yokado. Another example is the introduction to Ito-Yokado of Seven Eleven’s cup-sized delicatessen merchandise, under the “Plus-One-Deli” brand.

Additionally, we are also advancing sales promotion linking between Seven Eleven and Ito-Yokado stores, through which we aim to further deepen the Group’s collaboration with local communities. Furthermore, going forward, we will aim to further deepen collaboration in terms of logistics and procurement.

Within this scope, we are carrying out preparations for the opening of a new “SIP Store” in the second half of the fiscal year, for purposes of carrying out research toward the formulation of an ideal profile of convenience stores going forward, reflecting changes in consumer preferences and behaviors.

Through the execution of SIP initiatives, we are making gradual and steady progress toward putting in place a structure allowing us to deliver sustainable growth.

Here, before proceeding to the results for 7-Eleven, Inc., allow me to go over the business environment in the United States.

The graph on the left shows the consumer price index and producer price index, while the graph on the right shows the trend in the price of crude oil and the fuel retail price. The portions of the line shown in a different color for each graph correspond to the first quarter and show the levels for this period in fiscal years 2023 and 2022.

The consumer price index rose significantly during the first quarter of fiscal year 2022, going from 7.5% to 8.5%. While the level of increase slowed down during the same period in fiscal year 2023 from 6.4% to 5.0%. This nevertheless represents a year-on-year increase, and the impact of these inflationary pressures on households continues to be a cause for concern.

Additionally, geopolitical factors led to a historic increase in the price of crude oil in the first quarter of last fiscal year, which went from USD 83.2 to USD 108.5. This fiscal year, while prices dropped from these historic levels, crude oil continued trading at elevated levels from USD 78.1 to USD 73.3 which was next to the previous year. Fuel retail price, too, continues at elevated levels.

I would now like to discuss the financial results for the first quarter, having now explained the various external economic factors that were at play during this period.

Shown on Slide 15 are the trends in merchandise sales and gross profit margin, as well as fuel sales volume and cents per gallon gross profit for 7-Eleven, Inc. More specifically, the graph on the left shows existing store sales growth and gross profit margin of merchandise.

Our continued initiatives to enhance the offering of proprietary products, centered around fresh food and our private brands, are steadily bearing fruit, resulting in existing store sales growth of 4.7% in the first quarter, and an increase of 1.0% in gross profit margin. These are significant increases.

The graph on the right shows the trend in retail sales volume and overall cents per gallon in the fuel business. Cents per gallon registered a historic high in the first quarter of fiscal year 2022, resulting from the impact of Russia's invasion of Ukraine on the crude oil market, and against the backdrop of advancing inflation.

While retail fuel cents per gallon in the first quarter of fiscal year 2023 remained at elevated levels second only to last fiscal year, a year-on-year decrease because things have nevertheless calmed down.

Additionally, 7-Eleven, Inc. doesn't deal exclusively with retailing, but also operates the procurement and supply of fuel. The first quarter of last fiscal year saw a surge in the price of crude oil translating into a very significant increase in gross profit.

During the same period in fiscal year 2023, the range of crude oil market was tighter in terms of fluctuations, meaning that this did not have a large impact on gross margin and consequently resulted in a year-on-year decrease in cents per gallon. As a result, gross profit for the fuel business as a whole in the first quarter stood at negative 282 million U.S. dollars.

Allow me to discuss this topic in greater detail. More specifically, the vertical bars show sales volume per store while the red line shows cents per gallon. We have marked the cents per gallon of the first quarter results for each previous fiscal year with a small circle. While the results for the first quarter of fiscal year 2023 show a decrease from the historic highs seen in the previous fiscal year, as you can see, this nevertheless represents the second-highest level ever.

Additionally, starting in April, cents per gallon have shown a considerable recovery from first quarter levels. Furthermore, according to preliminary data, cents per gallon for the second quarter of fiscal year 2023 exceeds the plan, and is approximately $0.6 higher than the same period in fiscal year 2022.

Cents per gallon is determined as a function of a multitude of factors, such as the crude oil market, our competitors’ price policy, changes in the economic climate, etc., meaning that it consequently shows a high-level of volatility on a monthly and quarterly basis.

With that being said and taking into account the business and economic environment in the United States, we expect profits in the fuel business over the medium-term to remain above pre-COVID-19 levels.

Furthermore, in order to offer stakeholders a better understanding of our operations, we will be releasing cents per gallon information ahead of the Group’s results each quarter.

We invite you to review this information.

The table on the left of this slide shows a year-on-year comparison for the line item of selling, general and administrative expenses.

While selling, general and administrative expenses came to USD 2.263 billion in the first quarter, for a year-on-year increase of 2.2%. We view this in a positive light as, against the backdrop of rising costs resulting from inflation in the U.S. economy. We believe a review and reduction of costs by the Cost Leadership Committee allowed us to contain this increase at 2.2%.

Consequently, as shown in the waterfall chart on the right of the slide, the fuel business had a significant negative impact on operating income of ¥32.9 billion.

With that being said, we have been carrying out the strategic execution of initiatives related to merchandise, and these initiatives steadily bore fruit, in the form of a positive contribution to operating income of ¥12.1 billion.

Also in light of recent improvements in the fuel business, we view the plan for fiscal year 2023 as being well within reach.

As with Seven-Eleven Japan, we view further building up 7-Eleven, Inc.’s value chain and strengthening proprietary products as indispensable factors toward realizing sustainable growth in North America.

As shown on the left, the sales composition of proprietary products, consisting of fresh food, proprietary beverages, and private brands increased by 20 basis points on a year-on-year basis. Furthermore, as I mentioned earlier, we also registered significant growth in U.S. existing store merchandise sales and in merchandise gross profit margin.

In addition, building up the value chain is an indispensable step in strengthening fresh food, so we are carrying out preparations toward the start of operations of our Virginia Commissary in the third quarter of fiscal year 2023, and of our Ohio Commissary in the fourth quarter of fiscal year 2024.

We have enlisted the help of Warabeya Nichiyo which is a Japanese manufacturer of food merchandise for daily consumption and are carrying out various types of innovative merchandise development.

In the Dallas area, where we started a pilot program, we register an increase in the share of Warabeya merchandise as part of fresh food sales, and this has made a contribution to sales growth for fresh food overall.

The left of this slide shows our initiatives to strengthen and grow our proprietary beverages.

In addition to expanding the modernization program for coffee which is in high demand in the United States. We are also carrying out initiatives to improve and expand our assortment of bakery merchandise as a pairing with coffee. As it stands, this coffee modernization program currently covers over 4,800 stores, and we intend to further accelerate this program to achieve its introduction at all eligible stores by fiscal year 2025.

The right-hand section pertains to initiatives to expand our private brands. Against the backdrop of an increase in customers pursuing better value propositions, we have made initiatives in expanding and improving a private brand lineup combining both high-quality and attractive prices. We plan to bring to market 150 such items in fiscal year 2023.

Toward realizing sustainable growth with food at its core, we continue the steady execution of a growth strategy pertaining to merchandise and services, and are seeing concrete results. As announced within the scope of the Group's Medium-Term Management Plan, we will continue doing our utmost to maximize profits derived from the fuel business, but we are in the process of carrying out a transformation to the management structure.

This consists of initiatives to strengthen primarily fresh food and in doing so, we seek to reduce our dependence on the fuel business. This slide pertains to the fundamental transformation of the Superstore operations, more specifically to the fundamental transformation promotion process within the updated Medium-Term Management Plan, which we announced back in March.

For fiscal year 2025, we are targeting ¥55 billion in EBITDA and an ROIC of 4% or more for Tokyo Metropolitan Area Superstore operations. Toward this end, we first formulated a strategy and organization as part of a top-down phase. This was followed by a bottom-up approach consisting of the generation of initiatives and ideas to achieve these targets.

Nineteen subcommittees have proposed approximately 4,800 initiatives, and we are currently in the process of reviewing and considering these proposals as we move toward the action phase. We are narrowing these down, quantifying profits, and integrating these proposals into our plans. As an organizational structure to execute this process, we established 19 subcommittees as well as teams operating at the inter-departmental level to foster progress for the overall project.

Furthermore, we are moving forward with a process management structure composed of advisors. Going forward, we will be carrying out monitoring through the Strategy Committee and Board of Directors, making appropriate decisions in accordance with the situations facing us.

We will be going over the details of this fundamental transformation of Superstore operations including numerical figures in the earnings announcement for the second quarter, so we request your patience in the interim.

Lastly, this slide deals with the status of progress as it pertains to the Strategy Committee. The Strategy Committee is tasked with monitoring the progress of the Group's strategic priorities, such as the growth strategy for Domestic and Overseas convenience store operations and the aforementioned fundamental transformation of Superstore operations.

It is also tasked with continuing to objectively analyze and review the optimal Group portfolio structure for the execution of strategies, and strategic alternatives and provide advice to the Board of Directors to enhance the corporate value of the Group.

Mr. Stephen Hayes Dacus holds the position of Chair of the Strategy Committee, and starting in March of this year, the Committee has been discussing a variety of issues. It now consists of nine independent outside directors including two newly appointed directors has approved in the Company’s Annual Shareholders' Meeting in May.

A high-level overview of the agendas discussed by the Committee and the schedule for these discussions can be found on the bottom portion of the slide.

All Committee members are on the same page when it comes to the meaning and function of the Strategy Committee. And carry out discussions pertaining to the Group’s strategic priorities. Analyzing and evaluating the portfolio structure and strategic alternatives, in what corresponds to a new governance structure.

I am therefore proud to report to you that we are making steady progress in further enhancing Group corporate value through these and other initiatives.

This concludes my presentation. Thank you for your time.