Istyle Inc

TSE:3660

Earnings Call Transcript 2021-Q1

[Tetsuro Yoshimatsu, executive]

Good morning. This is Yoshimatsu from istyle Corporation. Thank you for taking time out of your busy schedules to join us today.

I would like to begin the financial results meeting for the first quarter of fiscal year ending June 2021. Normally, we would hold a meeting only every 6 months. However, in view of many questions about the impact of COVID-19 pandemic and the request for quarterly briefings from analysts and investors, we have decided to hold this meeting this time for the first quarter.

Let me share with you the current situation of the cosmetics industry before going into the details of our financial results. The cosmetic industry where istyle operates its business was one of the industries that was most affected by the COVID-19 pandemic. During the period of the state of emergency between April through June, the top 4 companies in the industry saw their sales dropping to 76% of the previous year's level. And during the period from July through September where there was a second wave, sales remained significantly lower at 79.7%.

Just like tobacco and alcohol, a significant part of cosmetic sales comes from duty-free shopping. Inbound tourism and travel retail sales have literally evaporated during this time, making it very difficult for the industry, and consumers also use cosmetics differently due to a self-imposed curfew and mask wearing. While cosmetics manufacturers cannot conduct sales and marketing activities so that they can recover sales from changing behaviors of consumers, such as staying home rather than going out, wearing makeup differently because of masks and purchasing cosmetics products on e-commerce and other non-face-to-face channels without testing the products and consulting with beauty advisers, leading to a need to an industry to change and innovate in order to adapt to the new lifestyle consumers.

In the midst of a pandemic, cosmetic manufacturers have also made major shift in their policies. Shiseido has announced that it will shift 90% to 100% of its media spend to digital by 2023, establishing a digital transformation team and sending out a message that the company will make a major shift towards digital. Similarly, Kao and KOSÉ have announced a message of digital transformation to strengthen their e-commerce operations. Non-Japanese brands who are competitive on the retail channel of Japan, especially in the department stores, have also announced that they were gradually shifting to expand EC channel, accelerating the digital initiatives.

Cosmetics companies are promoting a similar shift towards e-commerce and online communication. This is what we have done in istyle, and their digital transformation in marketing and e-commerce is definitely a tailwind for us.

In addition to @cosme online media site, the company operates @cosme SHOPPING e-commerce site and operate real stores called @cosme STORE and @cosme Tokyo, which are linked to the central database, which, in turn, feeds to Brand Official marketing and digital communication support service while consistently analyzing consumer behaviors.

The ongoing digital shift in the marketing of cosmetics industry and the shift towards e-commerce is very positive for our business. A key to successful digital transformation is an integrated approach rather than keeping activities in silos. The ongoing changes in consumer behaviors as well as communications with cosmetic consumers and companies and the brands suggests that we have significant opportunities to contribute to their transformation with the assets we have already cultivated so far. So that's the impressions we have so far during the first quarter.

Overall, my impression from the first quarter is that the situation in which our business is operating is moving in a positive direction for us in the wake of the corona disaster. Although it might take some more time for the positive momentum to translate into financial results, I believe that in 6 or 12 months after the policy announcement of cosmetic manufacturers, we will see positive impact.

In order to realize this, we are focusing on the selection of core businesses and optimization of their earnings. The financial results for the first quarter were still depressed by the impact of COVID-19. Net sales were JPY 7.5 billion, and OP was negative JPY 160 million. However, profits came in above our internal plan as a result of reduced SG&A expenses in -- across the group.

I will explain the figures for each segment later.

Here is the comparison of the figures with last year. Although net sales were 95% year-on-year, we were able to reduce operating losses compared to last year when it was significantly affected by the Hong Kong demonstrations and the China e-commerce law.

The chart shows the trends in net sales. The situation is more difficult than last year. But compared to the fourth quarter of the April to June quarter, sales are gradually recovering. Although it looks small compared to the projected sales at the end of the fiscal year, the trend is looking upward after hitting bottom in the first quarter.

The chart shows net sales by segment. On Platform business, 85.2%. The Beauty Service business, 114%. Global Service business, 64.9%; and Other business, 94.2% year-on-year.

Let's take a closer look at the On Platform business. We were not able to conduct sales activities from April to June as we had originally expected, and this has had a significant impact on our first quarter results. In addition, the future marketing policies of each cosmetics manufacturer and the brand have yet to be determined, and we are waiting to see what actions they will take, in particular, in the fields. And we expect this trend to continue until the end of this fiscal year. However, sales activities are gradually normalizing, and I feel that we are starting to gain more visibility into the future.

This is a trend for Brand Official. Although there were some cancellations due to the fixed cost reductions of some brands, the number of new acquisitions has also progressed, resulting in an almost flat trend quarter-on-quarter.

Next is the Beauty Service business, which is growing at 114% year-on-year. The fact that we are growing significantly on an aggregate base of both online and offline, when the industry as a whole is declining by 20% to 30%, is very positive. Also, as you can see from these numbers, in the fourth quarter of the last fiscal year from April to June, we saw a very significant growth in e-commerce as there were many store closures. On the other hand, right after the declaration of the state of emergency was lifted, just as customers began to come back in July, we saw a second wave of outbreak, nipping the nascent recovery in consumer traffic in August and September.

The hardest hit were stores in Central Tokyo where employees stopped commuting to office, and the sales of those stores have not fully recovered yet. On the other hand, even under those conditions, some suburban stores have exceeded last year's sales. Under these conditions, we wondered if customers who have shifted to e-commerce are ever coming back to physical stores. Despite our concern, however, physical store sales have actually improved significantly during the first quarter. Together with the rapid growth of e-commerce, the sales of the company grew significantly for the first quarter.

Although the increase in the number of customers buying in stores resulted in a decline in sales for e-commerce compared to the April to June quarter, there still was a significant growth compared to the third quarter of last fiscal year. We think that customers are finding it convenient to be able to shop both online and offline rather than just one way or the other.

We have struggled over the past few years with how to promote and grow e-commerce sales. 2 years ago, we started a special event called @cosme Beauty Day and tried to make it the best-selling day of the year. With this event, having experienced e-commerce shopping, the number of consumers has steadily increased. This year, we will hold the same event in the second quarter over 3 days from December 1 to December 3, providing customers with deeper e-commerce experiences.

The chart shows the trend of the Global business. We are rapidly reducing the amount of losses by controlling SG&A expenses while restructuring the business in the midst of difficult conditions. Under these circumstances, we are prioritizing loss reduction and closure of those businesses that are slower to recover investment. We are now in the phase where we need to focus only on profitable businesses. The retail sector in China is gradually returning to normal. So there has been a gradual improvement here as well.

Next is Other businesses. Although the temp staff business has been stagnant due to the pandemic, the results have exceeded our internal plan. We expect further recovery of the business as retail stores gradually reopen and hire more temp staff.

With regards to SG&A expenses, we are trying to cut back as much as possible. There were a large number of businesses that are in the investment stage and have not generated cash yet, but we are making progress in improving them by cutting costs wherever we can.

The chart shows operating profit by segment. The On Platform and the Beauty Service businesses were able to return to profitability, and the Global business was able to return to almost 0 with a negative value of JPY 40 million. We will work to restore the balance of earnings and quickly return to profitability on a consolidated basis.

Finally, I would like to summarize the impact of COVID-19. The On Platform business has been sluggish. And given the operating environment from April to September, this trend is likely to linger to some extent. But overall, we expect to see a gradual improvement due to the digital shift of cosmetics industry.

In the Beauty Service business, even though the overall market is down 20% to 30% in the midst of the pandemic, we are experiencing very strong growth year-on-year. Most importantly, e-commerce has grown significantly by more than 60% year-on-year. We'd like to sustain the growth in this area.

The Global business aims to return to profitability as soon as possible by reducing SG&A expenses. The Other business have also been affected by the pandemic. But the store contracting service of the temp staff business is gradually recovering and performing rather well.

As I mentioned earlier, we are aggressively reducing SG&A expenses of the entire organization, including reduced space and a new way of working at our offices. We work mostly from home since the outbreak, but we are now looking for ways to work more productively to ensure that each employee is able to maximize their performance rather than always coming to office to work or working from home without flexibility.

Next is the operating update of each business. The chart shows the trends in the number of monthly active users @cosme, which has remained flat since the algorithm changed in May. We have a lot of work to do such as overdue system improvements, but the number remained at a similar level as the last year. The number of @cosme members has been growing steadily.

Next is the connection volume. After experiencing a sharp drop when one of the services was discontinued, the volume was continuing to grow to reach an all-time high at the end of September. And the growth is expected to be sustained by the upcoming @cosme Beauty Day event.

In order to promote understanding of @cosme services, we have established a portal site called @cosme for BUSINESS for cosmetic brands. We will continue to strengthen our marketing solutions for not only major brands, but also for small and medium-sized brands and D2C brands.

As I mentioned earlier, we are going to hold the special event @cosme Beauty Day again this year. Many brands are participating for the first time in this event, and we'll be holding it for 3 days this time with the aim of achieving greater growth.

We also launched a China support service. One is cross-border live commerce targeting China. And we've started to test a method of selling products from Japan via live streaming. We've also teamed up with Tmall to start a business where we can ship directly to customers rather than using a bonded district as we did in the past. With this, we are now able to support brands that has been difficult to enter into China due to business risk and cost considerations. While focusing on these services that have potential for growth, we would like to build up numbers.

Strengthening our financial position is also one of the major challenges. We are going to issue new shares to strengthen our equity and financial position to a company called Locoguide Inc., whose President, Mr. Akita, has been the driving force behind Cookpad and Kakaku.com for many years. As we were looking for ways to strengthen our financial position, Locoguide has shown strong interest in the growth potential of our business and has offered to invest as a pure investor. The purpose of this capital increase is to repay the long-term debt and strengthen the financial position. The number of shares to be issued will be 6.1 million shares, and the total value is JPY 2,104.5 million. The capital injection scheduled for November 25 should resolve one of the issues we had for the balance sheet.

In the midst of the major change of cosmetic industry, we at @cosme are exploring the way forward. Having confirmed during the first and second quarters that our business is gathering momentum, we would like to achieve a V-shaped recovery at the earliest timing possible.

With this, I would like to conclude my remarks on the financial results for the first quarter. Thank you.