Istyle Inc

TSE:3660

Earnings Call Transcript 2020-Q2

[Tetsuro Yoshimatsu, executive]

Thank you for coming out of your busy schedule today. I am Yoshimatsu, CEO and President for istyle. We would like to get started with the financial briefings for the second quarter of fiscal year 2020. I believe many of you have already seen the financial results. We are posting an extraordinary loss for this quarter.

And let us apologize for making you worry about such a huge loss that we had to make. However, we believe it was a necessary judgment for us to take a step forward in order to obtain larger earnings in the future. We take this as a step within the overall plan, so we will continue to make efforts in achieving the plan. Let me first go over the current status within the mid-term business plan. At the beginning of the year, we announced that we had a loss-making plan for this fiscal year. In this mid-term business plan, we were facing delays in various projects and we thought we had to accelerate our efforts during this year. We also explained that we wanted to extend our investment period by 1 year. And so we focused on accomplishing what we were supposed to complete within the past 3.5 years during this first half. Looking back at the last 3.5 years, we started with renewal of @cosme app, acquiring overseas businesses, and we even expanded and developed stores in overseas markets.

Even recently, we have released an updated brand official to establish the core of our service. We held a special event called Beauty Day to generate upside to our e-commerce business. We opened a large flagship store, @cosme Tokyo, the other day in Harajuku. And so it was a phase to complete what we are supposed to do now. Thanks to these efforts, we are seeing a steady growth of Brand Official, which is a core of our new business. And domestic e-commerce business has grown by close to 2.5x of what we made 3 years ago. A new effort @cosme Tokyo store had a successful opening.

In a sense, I think we are having a pretty good start. On the other hand, among the efforts that we made for the last 3 years as part of seeding processes, we have some businesses not really turning into successes or others already started to see some signs of successes, however, taking longer to harvest the results.

So we thought about how far we need to continue those efforts, and we reviewed comprehensively all the overseas businesses. And we decided to bolster, downsize or close down unprofitable businesses. The quarter results that we announced today are reflecting such review results.

Now that we have completed what we are supposed to do, I think this remaining 18 months would be the timing to make a company further streamlined so we can start generating profits.

This is the financial highlights for the second quarter. Net sales were JPY 15.942 billion. OP was negative JPY 1.157 billion. I will give more details in the following pages.

In our initial plan, our net sales were JPY 39 billion, OP was negative JPY 1.24 billion.

However, the results from July through December came out to be net sales of about JPY 15.9 billion, OP of negative JPY 1.157 billion and ordinary income of negative JPY 1.176 billion. The reason why we saw such a huge loss was an extraordinary loss booked in Q2 was JPY 3.03 billion. Let me explain more details on the extraordinary loss in the next page. So we basically have 3 reasons for the extraordinary loss. First, impairment of goodwill of overseas subsidiaries due to the delay in progress of 2 overseas companies that we acquired in 2017 compared to the original plan. So we reversed the whole goodwill to post an extraordinary loss.

Second, impairment of overseas stores. We explained that we decided to withdraw the retail business in Taiwan. So we booked the loss for this withdrawal. In addition, we have booked impairment losses for 5 retail stores located in Hong Kong and Thailand, where huge gaps were seen against the plan.

Third, we revalued our investment securities and booked an extraordinary loss impairment worth JPY 41 million, which came out to be a total of JPY 3.03 billion.

This is a trend in net sales. And net sales were JPY 15.9 billion, which was 98.3% of the previous year. It was largely affected by the changes in the external environment of global businesses. On the other hand, we do see some steady growth in other businesses. I will give more details for each segment later. This is a trend in segment sales.

On Platform business was 96.4% of last year. Beauty Service increased by 4.6% year-on-year. Global business was 69.4% over the previous year. Other increased by 67.2% year-on-year.

First of all, this is the On Platform business, it was 96.4% of the previous year. In this business, we ended in the predecessor service of Brand Official, the Brand Fan Club, at the end of September, and this resulted in a temporary decrease in sales for Q2. However, its performance was as expected. On the other hand, we had a steady growth in the number of contracts for Brand Official. Therefore, we believe the decrease was one-off impact.

This is a number of Brand Official contracts. The number of contracts increased beyond 200 to reach 207 brands by the end of Q2. Currently, we are focusing on our sales activities to reach the June end target of 300 brands.

Next is the Beauty Service business. Overall, this business grew by 4.6% year-on-year.

And particularly, e-commerce business performed strongly. It grew by 50% year-on-year. On the other hand, although we held a special event for e-commerce just for 1 day called @cosme Beauty Day, we had some challenges remaining because we failed to reach the target. Regarding the stores, we did see the impact of the store decrease, which was 91.4% of the previous year, but we had even bigger impact of tax hike reactionary slump. We have more details on the next page, based on the recent status on the growth rate of the same-store sales. Because of a consumption tax hike in October 2019, we saw the last-minute pre demand in Q1, whereas a reactionary post-hike slump in Q2. This reactional slump was bigger than we expected.

The second impact was the e-commerce law in China, which started last year. There was a decrease of social buyers and sales to overseas visitors accordingly.

And regarding the @cosme Beauty Day, we did see a strong growth in sales for the overall e-commerce business. However, the store sales have declined by almost half of what -- last year. This was due to the reduced point return rate from 20% to 10%.

Excluding those special factors, the same-store sales have increased by 3% year-on-year, so there is no weakness seen in the @cosme store business.

The Global business. Things have changed drastically since January of last year. First, it was affected by the e-commerce law in China. This resulted a sharp decline in the e-commerce and wholesale businesses in China, and effects of demonstrations on retail stores in Hong Kong continue to be significant. We must continue monitoring development closely.

Stores in Taiwan were affected a lot by the restriction on tourist visas for citizens visiting Taiwan from the Mainland China, which started in August of last year. As a result, the Global business was 69.4% of last year.

Other business. We saw a solid performance in temporary staffing agency service. There was an increase in sales because of the sale of operational investment securities. However, we revalued some other operational investment securities to book an impairment loss to cause an income decline.

Regarding SG&A. Now, we are paying the rents for @cosme Tokyo starting in this -- September. At the same time, various SG&A costs such as labor costs have occurred, which created a big pressure on SG&A. In addition, we had a one-off promotional cost for @cosme Beauty Day in December, which drove the SG&A increase substantially in Q2. Based on such results, we will be controlling the costs more. As a result, operating income by segment has performed, as you see on this slide.

Next, let me explain the status of operating services. This is a trend in the monthly unique users. It has been declining because of the changes in the algorithms by the search site engines, but it seems to have stopped declining by continuous initiatives taken by us since last year. I believe we started to see the impact of such efforts being gradually effective. We intend to increase the number of app users in the mid- and long run to reinforce the fusion of the online and off-line worlds. The number of @cosme members has been steadily increasing to 5.7 million at this point. This is a trend in connections, the KPI for the Brand Official. There was a temporary drop when we ended the Brand Fan Club in September. We have been working to sustain the connection KPI by converting the old service Brand Fan Club to a new service, Brand Official. However, we saw a temporary drop because of the pricing issue and also because it was taking time to gain understanding of the value of the new service. So it is on the decline right now, but we still believe we can grow even from now. We'll continue using connection as our KPI to closely monitor the growth of the business and connection between users and the brand.

And this is a trend of number of Brand Official introductions. This is the same page as before, it has been growing on a steady basis. We have released new functions in January, and we are working on sales activities on those functions, and we are also receiving feedbacks that brand customers are feeling values for new @cosme services and potential for the Brand Official.

And there was another major event, @cosme Beauty Day.

Last time, in 2018, we achieved JPY 400 million. And this time, in 2019, we had a target of JPY 1 billion. However, we fell far from this target. The major reason was the change of point return rate from 20% down to 10%. Last time was 20%, which limited the number of brands who participated in the event. So this time, in order to have more brands to participate, we lowered the point return rate to 10%. As a result, we had 234 brands participated, including the first-timer famous brands from overseas. We were able to increase the number of brands joining the event. However, this also weakened the impact on the users. In particular, for the last 12 months, there were more companies who offer point return campaigns. And just by having 10%, wasn't strong enough as an incentive to users.

At the same time, there were sales going on by other players in the market at the same time. In addition, we did not put on the mass advertising in order to be efficient in our advertisement. Reflecting on the previous experience, we try to be more efficient, which ended up having our advertisement becoming less effective.

Based on this result, we will, once again, review what we should be doing from now on. We want to take actions in order to grow e-commerce market in Japan. There were also a positive results. E-commerce sales increased by 1.6x year-on-year. So there was no doubt this was a meaningful event in order to increase the base for our e-commerce business.

So there was another event that is @cosme Tokyo. It opened on January 10, which was, in fact, in Q3.

And we are seeing a very strong start since its opening. In some days, the number of visitors exceed 10,000 in one day. So this store has been going as we had planned. In addition to the store, along with @cosme Beauty Day and the Brand Official, we expect to drive their synergies to grow the business furthermore.

Let me talk about the situations on the global business. I have mentioned changes in external environment on the global business earlier, but we have more details on this slide.

Regarding stores in Taiwan. Now we had the restrictions of tourist visas for visitors coming from Mainland China which started in August. Among 4 stores in Taiwan, some were performing well and some started to perform better, but by reviewing various aspects, we decided to withdraw from Taiwan this time.

The stores in Hong Kong are affected by the large-scale demonstrations which started in June.

We opened our stores, #5 and #6 in Mong Kok and Causeway in October and December, respectively.

We concluded contracts for those stores in May. Then demonstration has started right after that, resulting such difficult situations. Honestly speaking, we did not expect demonstrations would be lasting this long.

Stores in Thailand. Due to the various situations, such as baht appreciation, sales are not growing compared to the initial expectation, causing a huge gap to the plan. China is affected a lot by the aftermath of the introduction of e-commerce law since January of last year.

Social buyers are now in the formal distribution channels, which intensify the competition in the market. And things are getting much tougher, driven by the stronger renminbi and weaker yen.

Malaysia. Right after we acquired the business, competition has intensified, driven by e-commerce sites operated by the major Chinese platform businesses, offering free deliveries or discounts on products. And because of such an intense competition, we have seen a bigger gap to the plan.

The Media business, which we acquired in the United States, again, we see a huge gap to the plan because we failed to spend huge resources into this business.

In the Global business, since we are engaged in businesses in many different countries, we are in the current situation because of the overlapping of various factors happening in different regions. Based on this result, we are now reviewing nonprofitable businesses.

We made a revision to the earnings forecast as of February 7. Net sales will revise to be JPY 34 billion compared to the initial plan of JPY 39 billion. OP was revised from negative JPY 1.24 billion to negative JPY 1.48 billion. Ordinary income was revised from negative JPY 1.39 billion to a negative JPY 1.58 billion. And net income was revised from negative JPY 1.7 billion to a negative JPY 4.5 billion. This is largely affected by the extraordinary loss of JPY 3.03 billion.

So between the first half and second half, we plan to have a sharp improvement in earnings capability into the second half. Numbers for the first and second half on the right-hand side.

In the second half, net sales are expected to be JPY 18 billion, OP to be negative JPY 320 million, ordinary income to be negative JPY 400 million, net income to be negative JPY 500 million. So plan is to see a substantial improvement in the profitability in the second half versus first half.

There are 2 changes in the initial forecast numbers regarding the sales and cost bookings in each segment. First is the in-store ad sales at @cosme Tokyo. It was booked under the Beauty Service in the initial forecast, but we reclassified them into an On Platform business in order to clarify the sales capability in the retail service.

In addition, the promotional cost used for @cosme Beauty Day was also reclassified from the corporate cost over to Beauty Service segment, and the numbers in column A have reflected those changes. Comparing to the column A, column B contains the new revised numbers.

Let me explain the revised numbers. There was no particular change to the net sales for On Platform segment. OP increased with the cost reduction efforts.

Beauty Service segment had a decreases in sales and profit because sales target for @cosme Beauty Day was not achieved and start of @cosme Tokyo delayed by 1 month.

Net sales for Global segment was lowered substantially from JPY 10.8 billion to JPY 7 billion due to major environmental changes. This is showing changes to each segment forecast. This slide contains more details of what I just explained. So please take a look at the slide later. This is showing comparison between the first and the second half for each segment. We expect to see a reduction in losses, driven by the increase in the Brand Official as well as the operation of @cosme Tokyo for the second half.

Now despite the impairment loss that was posted this time, we think the most important thing is when we plan to start making profits and what we need to do to make that happen.

Let me again go back to our mid-term business plan. Now we are in the year 4, which is the expand investment phase. And next year, we will be in the building earning base phase. So we are now at a good turning point to move into a phase to enhance our earnings capabilities. Therefore, we thought it was the right timing to select and concentrate on right businesses for completion by classifying between those which start bearing the results, those that we are sure to capture the results and those that are not successful. We believe not good results will be brought just by continuing on all the businesses in an incomplete manner.

First of all, On Platform business. We'll concentrate on Brand Official. In Beauty Service business, now that we opened @cosme Tokyo, we need to make sure this store to be on track while we review nonprofitable stores.

E-commerce is making steady progress. So we need to make sure to sustain this growth to continue.

In the Global business, the business portfolio will be reviewed to stop making losses while strengthening financial conditions and controlling the costs.

When it comes to Brand Official, we've done what we are supposed to do during this period. We are moving forward without having much worries, and we are all making a steady progress in making proposals to customers.

In particular, now that we have this @cosme Tokyo, I think this became a good opportunity for customers as a brand to experience what it means to be connected to the users and also the connection between online and off-line, which was difficult to be felt in the past. I think customers were able to feel this store. It's not something like what we had before.

Selection and focus. We have reviewed and discussed until the last minute, and we thought we needed to step on accelerator when we need to move forward, while we need to pull back when needed.

As a result, we came to a conclusion to post an extraordinary loss. We have reviewed nonprofitable businesses, subsidiaries and business portfolio. With this effort, we expect to see an improvement in OP because of a substantial decrease in the goodwill amortization in the second half.

Strengthening financial conditions. We made a very important decision this time in order to establish a financial position to withstand the upcoming business developments. We decided to get a JPY 6 billion borrowing from a financial institution. It will be a lump sum repayment in 3 years, therefore we should be able to avoid a situation to have a sudden negative impact on the cash flow.

This is the balance sheet for your reference. Retained earnings have declined. So we intend to consider how we can recover this retained earnings in the fastest manner. Especially the fact that financial institution has provided such a huge loan this time, proves that they think our plan was sufficiently feasible.

And I think the most important thing for us is to accomplish this plan, which is also important for shareholders' return. We will be controlling the costs as well. The overall sales have increased, and we completed what we are supposed to do. So I think now is the time for us to narrow down the necessary spending, so we can bring the SG&A ratio to be back to the previous level.

This is the last page. Here is a list of initiatives taken by each segment. Now our way forward has become clear. In On Platform business, we need to increase the number of contracts in Brand Official, while trying to establish sales in advertisement or marketing at the same time. In Beauty Service, we need to continually enhance @cosme Tokyo, e-commerce and existing stores. In Global business, we need to revise our strategies to stop making losses.

On a financial aspect, with the long-term borrowings, we stabilized the cash position and eventually, we need to properly control SG&A so that we can transform the company to have a high profitability, all at the same time. We have made a significant decision this time. And we want to move forward, believing this will surely lead to our future.

That is all for the financial results for the second quarter. Thank you very much for your attention.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]