Istyle Inc

TSE:3660

Earnings Call Transcript 2022-Q2

[Tetsuro Yoshimatsu, executive]

This is Yoshimatsu, President and CEO of istyle. Thank you for joining us today. I present the business results of the second quarter FY 2022 ending in June. First of all, I'd like to briefly walk you through our business for those who joined the meeting for the first time. Based on the media business, mainly the review of cosmetics in @cosme, the user's voice collected there will be reflected in e-commerce and store business, and our business model consists of 3 components. This business in Japan is deployed overseas as Global business. Overview of financial results for the second quarter FY 2022. Summary of the first half. Business recovered to achieve the record-high consolidated net sales. We are pleased that amid the continued tough conditions under COVID, we were able to grow the business and top line. Especially, it was remarkable that significant growth in e-commerce was achieved with a record-high sales at the year-end special event in e-commerce, @cosme Beauty Day. The large-scale flagship store in Harajuku, @cosme Tokyo, also achieved a record-high sales in December. With this, the store business turned profitable in the second quarter, and the entire business volume has been changing significantly. As for operating income, expenses increased slightly due to the posting of allowance for bonus, which was suspended in the previous year and expenses for user action activation measures, mainly in apps. And the consolidation of the Korean company, Glowdayz, also played a part to the decrease in profit. In Global business, considering the COVID impact, the impairment for Hong Kong stores were posted in extraordinary loss. KPI indicates the activated user actions and the growth were recorded in record-high MAU annual number of review post and app downloading. We had an impression that these numbers and the volume show the momentum in the favorable objection in the first half. Highlights in the first half. I will elaborate later, but total net sales were JPY 17.109 billion, up 10% year-on-year. Operating profit was minus JPY 633 million. By segment, net sales in On Platform business increased to 108% of the previous year, showing solid recovery. Beauty Service business or cosmetics retail business in Japan showed a strong sales recovery with 114% of the previous year. The operating loss in this business segment contracted significantly. In Global business, we have been liquidating and withdrawing from unprofitable businesses over years, reducing losses. But this time, new consolidation of Glowdayz increased losses, and operating income result was slightly below the internal plan. Other business is mainly temporary staffing business and with the expansion of COVID, especially around the time of our Olympic Games, the environment was tough. However, we successfully sustained the operating profit, and the results improved year-on-year. This is a progress against the plan. Despite the remaining uncertainties in the first half, the progress was in line with the plan, and we are now working hard to achieve the full year target. Year-on-year net sales. Since the mid-2020, we have been under COVID-19 and the tough conditions have been continuing. But for this first half, we marked record-high half year sales. To achieve this, we had some liquidation and withdrawals. Trends in segment sales. Net sales increased to 115% of the previous year, and let me elaborate this more in detail. On Platform net sales were 105.1% of the previous year with gradual growth in recovery. But frankly speaking, the situation still remains tough. As for the cosmetics industry as a whole, especially in Japan, as shown by the sales result of the major cosmetics companies, many said sales are still behind by 20% to 30% compared to the pre-COVID. Each manufacturer and brand have been desperately pursuing profit and tightening budget for marketing investment. Even under such circumstances, we were able to secure budget allocation and sales recover to this extent. As for Beauty Service business, sales in e-commerce have been growing substantially. Under COVID, environment has been the making where users tend to buy more in e-commerce. It has been almost 2 years under COVID, so it is not the temporary growth anymore, but we regard that as the daily platform cosmetics in e-commerce. Our site has been steadily gaining presence, and that is a major reason for the e-commerce growth. Another key point is the solid growth of sales in stores. Due to COVID that started 2 years ago, the stores have been struggling, especially from July to September when State of Emergency was declared in the expansion of pandemic positive cases, and manufacturers and retailers were seriously suffering. We were able to expand sales as such, which we deem as remarkable. Currently, people seldom drop by for shopping on their from school or working places, and the opportunity of outing is limited. But we were selected as stores to visit, and that led to the sales increase. Large flagship store in Harajuku attracted many customers' traffic. Considering that, we think that the results began to reflect that we are being established as a store of choice by users and producers. Global business. We have been accelerating this business as the investment domain in the midterm business plan. But under the COVID, we have been through the very tough process of a selection of business. And that has led the sales decrease in some businesses. But by the consolidation of Korean subsidiary, Glowdayz, net sales increased. However, the business environment for Glowdayz and Hong Kong stores have not been recovering yet. Other business is mainly temporary staffing business of beauty consultants. Currently, very tough condition is still sustained. But in future, having beauty consultants that can connect stores and e-commerce will be of prime importance. So monitoring closely to ensure profitability will keep this business. SG&A expenses, it has been growing substantially in this fiscal year. Personal-related cost increased due to the addition of consolidated Glowdayz and the resumption of bonus payment, which has been suspended until last year. Other costs and system-related costs increased, and as a whole, it is 113.4% of the previous year. We continue the necessary investment controlling its ratio to sales, and our direction to set the structure of enhanced cost control awareness remains unchanged. Operating income. As you see here, the loss in unprofitable businesses has been contracting. And if we recover the profit of cash cow On Platform business, we'll be able to show the improvement as a whole. This time, to achieve user action, we spent marketing costs to encourage the app downloading. And due to the upfront investment for the future upside, the profit is sweet. But from the second half, we expect to move to the phase of improvement gradually. I talked you through the numbers in the first half and its overview. Now I'd like to review the first half, and let me discuss the outlook. Now I don't think that COVID can be the excuse for the weakness. With the expansion of COVID, the cosmetics market, especially in domestic market, has been shrinking in scale, and each brand is cutting back the marketing cost to generate profit. Under such circumstances, I'd like to share with you here the current situation and what we need to do under such situation. At the center of our business, this On Platform business lies. This being the marketing solution for cosmetic brand remains unchanged. As I explained many times, based on the @cosme as the connecting point between brand and users, we have been creating meaningful encounters. As a result, now we are focusing on how we can capture the brand's marketing activities in our platform and how we can expand our business further beyond the current platform to boost sales of clients. Under the COVID-19, in the first half FY 2021, sales fell to JPY 3.4 billion. But since then, we have been achieving steady growth. What matters for us is not the fast recovery but how we can achieve the bigger growth from now on. To that end, we had 2 major strategies. First one was to expand the client base. Using Brand Official as a base, we have been creating the environment that encourage a variety of clients to participate. The second strategy was to increase the unit price per client. Based on these 2 major strategies, we have been growing On Platform business. Looking back the past, when the ad business of @cosme was a whole mainstay business, advertisement by client had certain limit. In the case of tie-up advertisement, for example, then if we were to increase the total sales, we had to increase unit price, which has discouraged smaller brands to participate. And the upside from the major clients were difficult to gain. Therefore, to find the breakthrough based on the Brand Official, we developed the solution business to connect users and brands. Thus, we were running after 2 years of small brand and large brand, but under the rapid exacerbation of the business environment under COVID, small brands were saving marketing cost, and without spending large cost, they are now shifting social media-based marketing. And we are focusing on initiatives to encourage clients to use @cosme platform. Having that in mind, we shifted policy to increase unit price. As a result, clients of Brand Official use our solutions, e-commerce and retail stores, and platform utilization increased. Rather than resulting to the conventional marketing on advertisement by trying to increase unit price, we were able to achieve the sales growth. The next issue is how we can develop our business in the growing small and medium brands. While raising unit price, it will be important to attract these potential customers into @cosme when they are poised to aim further growth, with the marketing that is not available in social media where they do their marketing at this moment. To achieve net sales target of JPY 15 billion, which was originally announced a midterm business plan, we have been making IT system investment. We have managed to come back to the closer to JPY 8 billion of segment sales. And I think that the next growth phase is to increase the sales further to the level where the investment will be absorbed. To achieve the growth, we need to activate user action in @cosme. It means not only users viewing the reviews on cosmetics, but searching the brand's information and taking contact with the various information. And eventually, it is critical to prepare the place where users can buy the products of the brand. Especially under the very tough conditions due to COVID, brands are shifting marketing cost to media and e-commerce, which are linked to sales. In such circumstances, istyle was able to improve the results, including e-commerce. And I think that is a testament that users action has delivered positive results. At the end of the last fiscal year, I said that completing various sorting out process, we were ready to look forward. However, after that, around the Olympic Games, we observed pandemic positive cases expansion. And recently, another spike occurred with Omicron variant. But in the first half, we were able to deliver solid results. Strong growth in retail sales has been serving as a key driver. E-commerce has been growing steadily, not simply as the rebound of the increased closure of stores. EC special events total distribution amount topped the targeted JPY 1 billion, and the store business turned profitable. Large flagship store marked the record high sales. Retail business is serving also as exit of marketing activity, and the user action is very reflected in the sales of retail business. Therefore, I think it is truly relevant that a number of brands that use our platform increase steadily. In the first half, we had provisions for allowance for bonuses, increased software amortization expenses and user activation expenses. Additionally, expenses related to Glowdayz P/L consolidation expanded losses. But with the improvement in sales and gross profit, we expect the operating income will be growing. With a gradual increase in On Platform business sales, we are increasingly confident that increased sales will boost the profit-related business, and that will lead to loss contraction on a consolidated basis, showing the improvement on our business results. Finally, latest status of operating services. As for the number of unique users, once we have been through tough times due to the changes in algorithm, but its foundation has been steadily developed, and this is elicited by the growth in unique users. Currently, opportunity to search for the cosmetic information has been increasing, including social media, but the strength of @cosme is recognized as it can be used concurrently with other social media, and that is represented in underlying growth. @cosme members have been rising steadily. Connections between brands and users have been increasing, but we would like to increase them further. We were able to create the opportunities for encounters between brands and users. And by developing our platform further, so that brands can leverage it more effectively, we would like to increase their connections further. As for other topics, we are selected to move to TSE Prime Market, and we were certified as a DX-certified business. Today, in various aspects, cosmetics industry market is poised to change significantly. Talking with representatives at cosmetic industry, I was more convinced. Many companies are making investment in digital and with this investment, the connections with users are drastically changing concurrently. Under such circumstances, enhancing our presence, we would like to develop into the company with solid position and a stable profitability in the cosmetic industry and beauty industry, which undergo the future reorganization. With this, I'd like to conclude my presentation on the business results. Thank you very much for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]