Istyle Inc

TSE:3660

Earnings Call Transcript 2023-Q2

[Kei Sugawara, executive]

This is Kei Sugawara. I'm Vice Chairman, Director, and CFO of istyle Inc., Tokyo. And thank you very much [indiscernible] for participating on this financial brief for the second quarter of the FY 2023. So let me get started. Okay. So let me start with the executive summary for the first half. And the results with the sales of JPY 20.4 billion, which was record high for the first half in the company's history. And that was the 90% Y-o-Y growth. And at the same time, operating income improved by JPY 0.9 billion Y-o-Y and positive plus JPY 250 million in the first half. So that we have back on the saddle to generating the operating profit for the half year basis. And On Platform, our sales growth was 7% plus. And at the same time, operating income increased by JPY 350 million. That was driven by the B2B service including sales promotion. Also, that the market environment is still not yet recovered from the COVID really.

And next, beauty services, the huge growth driven by the brick-and-mortar stores, continuous growth was up about 40% Y-o-Y. And at the same time, the e-commerce online retail also achieved a 13% Y-o-Y growth, thanks to the success of the big Christmas sales on @cosme Beauty Day on December. As a result, the total segment operating income improved by about JPY 0.5 billion Y-o-Y, which means the [indiscernible] as the whole segment become profitable. And Global, the Global has been very difficult for the last 3, 4 years, and we are still working on the restructuring of the business. And in that sense, the revenue might be decreased, but at the same time that we somehow become successful in generating profit at the operating income level. And that was for the -- maybe like the 3, 4 years since we become the -- making those businesses in here summary.

But the -- we achieved the past half by generating the net sales of JPY 20 billion and the same time, JPY 254 million in operating income. And On Platform, the net sales was 70% plus at close to the JPY 44 billion, with the operating income of the JPY 727 million, which was almost double on a Y-o-Y basis. For the Beauty Service, thanks to the huge growth in the brick-and-mortar offline stores, the net sales were [ JPY 13.5 billion ] with the 28% growth Y-o-Y with operating profit of JPY 380 million, which were the -- recovered from the loss-making business to the profitable business. Turnaround -- for the Global business the China was very difficult with the COVID for the second quarter, but somehow first quarter result was with the net sales of JPY 2 billion with operating profit of JPY 10 million, which was somehow profitable at the same time. Then there is other that was the [ move ], including the personnel services to the beauty brands, and the net sales was JPY 658 million with operating profit of JPY 4 million.

So the -- as compared to our -- the focus at the beginning of this fiscal year, the net sales was just about 50% so far as a progress. And they're more the same -- the pace of speed at the operating income level as well. So the -- as I mentioned earlier in the summary, [indiscernible] that this was a record high in the company's history for the [ Q2 results ] or past half of the result in revenue. So this is the quarter basis, the progress on a consolidated basis breakdown with each segment. And as you can see, the On Platform was Y-o-Y on the 9% growth. And Beauty Service was the leader for the growth in revenue with close to [ 30% ] growth.

And in the revenue, as I mentioned earlier, the -- with business restructuring, the revenue might be decreased a little bit here. And we somehow manage to the -- generate consolidated OP ratio of positive quote-based progress. And the OP ratio might be decreased a little bit due to the software amortization expenses. However, the -- in the revenue side, the B2B service, which we are currently focusing on is creating the double-digit sales, although that the small portion of the B2B services decreased quite a bit. Then this is the Beauty Service trend on a quarter basis. And as I mentioned earlier, the offline stores increased quite a bit with 40% plus increase and at the same time, the -- although many e-commerce company has decreased over the financials that we are still growing at the double-digit speed with 15% -- this is the quarter basis trend in global business segment, there are -- the all our business in China, which were included in the e-commerce and wholesale of the Global business.

The -- somehow we have managed to [indiscernible] the expenses and revenue that we become profitable for -- after many years of the restructuring -- and although our business in Korea, which was about the consolidated last year, then if we were to include that, the way of profitable and if we are excluding that, not our profitability is a little bit higher. Then this is others, the revenue increase as the Japan just about to start recovery for the corporate there is demand for the [ partner ] business in the beauty industry has been increased again.

This is our quarter progress on the SG&A expenses. And the SG&A ratio has been decreased continuously. And the currently, this is at 43.7%, which is quite low compared to the other quarters for the last 5 or 6 years. And the largest increase comes from the software related. But we are managing -- we are currently working on the project for controlling the software management. As a result, this is the operating income slide for the quarter of progress. And also that we -- the increase in the company-wide cost and those that are -- we manage to generating the profit on the -- all the business segments, which was pretty positive internally as well.

So next chapter, which is the operating service of the current status. The first, this is a monthly active users or unique users of our Platform altogether. And as you can see from the graph that we are generating the monthly active user of close 70 million Japanese female and males. And this is quite in good shape, and we are still the category killer or a leader in the online offline beauty services in Japan. And also at the same time, the -- of course, as registered member, sign-up numbers continuously increasing currently at 8.2 million. Then this is the connect one of the important KPI scores, and this is also in a good shape as well.

And here, I'd like to start with the review of the past half of this fiscal year between July to December. There are some goods and some [ bads ]. Well, we use lots of space for good. And -- the first of all, there is capital alliances with Amazon.com, Inc. in the U.S. and the Mitsui & Co. -- Mitsui and company, which is the leading Japanese trading conglomerate, which we announced back in the last August, and we are currently working with the joint project with both of them each. And we are not yet disclosing the outcome yet, but those projects are progressing quite well, and we are expecting the next level as the upside of our -- the opportunity and the possibilities.

The second, the -- this is already explained in the prior chapters. But the -- our financial condition was pretty good with our existing business spaces. And the Beauty Service dropped the [ wholesale ] and the both online and offline stores are doing really well and the Beauty Day, which I explained -- I will explain later, that was a huge success, and we have so many complements coming from beauty partners, the global beauty brands and the Japanese [ creams ] beauty brands as well. And first of all, the second of all, we are very happy with our consolidated result and operating income level, which we are finally the profitable for the past half. And also that we will be continuing to generating the operating profit for the second half as well, which in turn, we are anticipating the positive operating income for the full fiscal year, which we used to enjoy at least by many years by us for the last 4, 5 years, which was our dream in a way.

And also, the many investors asked us like how you're doing with @cosme TOKYO, which is our [ Brexit ] stores in Tokyo Harajuku, which were quite headache for us. It's because the traffic outside in Tokyo were not quite busy as the COVID. Gradually, all the consumers coming out and the same time that -- thanks to the collaboration between our own Platform business team and also Beauty Service team. We have so many of the pop-up event and the in-store promotions utilizing the @cosme TOKYO, the spaces that -- this drives a lot of traffic. I think the recovery will has been quite ahead of other department stores and shopping malls. So the -- our flagship store was pretty good in shape right now.

That was the good result of our internal collaboration between our Platform business team and Beauty Service business team. The -- connecting the value of the media power and the sales power of both of the sides and this resulted in we are receiving so many -- the contract with many promotions in the campaign and operating income also increased by 90%.

The Global business is also profitable. Thanks to all the team, especially from the China team, collaborating the several China-related subsidiaries working hard the [indiscernible] COVID in Mainland China was pretty severe for the second quarter was. As a result, all the segment turns profitable and operating profit -- operating income improved by JPY 0.9 billion Y-o-Y and the company become more stable. That was the good news for us. And on the other hand, the bad news, which is -- as I mentioned a little bit in one Platform business part. But actually, the condition in general for the beauty industry, not quite yet the -- recovered from the COVID. Still, there's no Chinese sources and the domestic market, the appetite for the consumption to the beauty products has been recovered quite a bit. But our client, the many beauty, the brands and companies, I guess that we are currently working with close to the 1/3 beauty companies at this moment actively.

But the financials are not yet recovered. So that once the financials become recovered and more profitable, I think that our business will be even much more easier. That's what we are expecting in shortly maybe sometimes the second half or the next fiscal year or so. So this is the market, the size of the trend for the last 7 years. And 2019 was the pre-COVID and which was a record high in Japanese beauty industry history. And if you're looking at the trend shift from 2020 to 2022, that the -- gradually, the market size has been recovered year-by-year. But still, there's we haven't really reached the record high level 2019. So there are -- I think our -- the beauty market size in Japan is more or less same as early 2010, like 2013 or '14 or so, which was quite at the time.

Then this is that our analysis on the [indiscernible] listed companies, the Japanese beauty companies. Then the trend shift and the COVID started, the number drops and the up and downs. But still, the comparison on the business side with the times in pre-COVID. Still the recovery [ stance ] still 60 to 70 something percent, yes. So that, as I mentioned earlier on the bad news, the notes no, but yes.

Then if you look at -- on the other side, the retail or the distribution channels, this is the comparison between the department stores and drug stores and our physical stores. If you are comparing the -- all the numbers with the pre-COVID time the department stores are still struggling. Some of the department stores financially might look good, but if you're taking out the beauty categories, they are still having a hard time.

Then drug stores, they are somehow bringing back the numbers. But the recovery with @cosme stores were pretty significant compared to other 2 distributor channels. This is a slide we showed about 3 years ago, and this is -- at the time we are foreseeing the future of our clients' demand, which was with the COVID -- same at the time the -- also the advertisers are expecting more of the results, not just the actions so that we are foreseeing the media result and also the sales promotion result, which directly is responding to the actual sales of the products. So there are -- this was actually happening right now, and that is the result of our re-growth combining the On Platform segment and the Beauty Service segment. We are in very good position in working with the beauty companies. It's because we have a one platform so that -- our consumer behavior, including the purchase history were integrated into one single database online, offline under media action to everything.

So that with that database will enable us to connect media and e-commerce and store actions. So there are -- our media had creating the high performance in the marketing actions result. And at the same time, we had power to sell these clients' products on online and offline. Is it the -- I can explain in a different format on the situation. But typically, we are working with many companies on the campaigns and promotions starting with media. Then at the same time, we are conducting the e-commerce campaign all together and all the data could be integrated together and this -- the data can be utilized to drive the -- our users and customers to our offline stores. And at the same time, these stores conducting the pop-up events and the campaigns and makeup events. And this off-line promotions are also related to the e-commerce campaigns and also media promotions as well.

Then after the campaigns that we can analyze all the data, and we can take other actions on the e-commerce and the physical stores, thanks to the -- our Marketing SaaS Brand Official that enable us to working -- collaborating together with our clients for the next actions -- the whole company in terms of revenue. And this is the breakdown of our historical trend on revenue by type of stores. Then the tick blue color indicating our standard of stores. Then if you look at these histories, the numbers are also increasing. At the same time, the lighter shape of the blue, is our flagship stores, the @cosme TOKYO. And this has increased quite a lot from the last fiscal year, and this is the -- we had the breaking sales record display on our second quarter -- and also on the top of that, we acquired a new kind of stores called Tokyo Komachi back in September, and that was extra to add up in total of all 3 different kind of stores. Then this was a growth of 50% compared to the pre-COVID the FY 2020 Q1 versus our latest quarter on our Q2 this fiscal year.

So this is our result in our Beauty Day at GMV taken place on -- the past 3rd of December last year. So that -- when we started this sales campaign back in FY '19, our first year result was JPY 400 million. Then this year, we are proudly to announce our result was JPY 1.6 billion, which was the 4x if we had to compare the 4 years back. And compared to the last year, this is the 45% growth Y-o-Y basis. The gray bars that the other quarters are also showing the growth from the beginning of the -- in the Beauty Day, almost or more than 95% the purchaser of Beauty Day are coming back as a repeated customers. So this ecosystem, which the Beauty Day acquiring new customers, the new customers become bigger customers. This ecosystem, our engine for increasing the size of the e-commerce business here to our B2B business On Platform business.

Then if you compare the first half of FY '20, which was just before the COVID started, our latest first half exceeded that numbers. Also the COVID recovery is not yet undergoing still in Japanese market. The reason is the -- I repeated so many times already in this session, our integration between On Platform business team and the Beauty Service segment teams are integrating together to serving our beauty clients creating the good result. And we have some more issue the upside opportunity, which there is so many newly creative small beauty companies in Japan, mostly direct to consumer model and influence our marketing model. And we have so much more opportunity with them. This is the situation of some of the countries and regions for the Global business segment. Other countries like Korea or Taiwan, the situation has been stable. But the China and Hong Kong has been very difficult.

China, of course, the -- in the second quarter until then the lockdown situation was pretty severe from the last summer to last autumn, then when the country open up the lockdown, so many of the Chinese nationals, it said that 70% to 80% of the population become positive on the COVID. So there the people are not going out, even the Uber drivers and the delivery drivers, these drivers also had COVID. So they [ couldn't work ] so supply chain stock so situation was really bad. But after the New Years' time, the country -- or country become showing the recovery. But not yet going out to travel overseas that is the situation.

And in Hong Kong, there's so many news and rumors saying that the borders between Mainland China and Hong Kong will be opened and never opened. Then finally, from the 6th of February, the market -- the border opened. But as I heard from the local team, there's not yet many tourists on the street, yet. And thus, the points as like last week's our Hong Kong stores at about 5% to 6% only of the duty free sales from Mainland China. That's the situation. So which means the -- at least in Mainland China and Hong Kong, the situation is not yet the full recovered. But it's just a new beginning so that we are pretty much the opportunistic about our progress consolidated basis on the first half by each year, then most the revenue and operating income was in a pretty good shape altogether. And revenue at JPY 20 billion is a record high. And also, at the same time, JPY 250 million operating income was the positive net income -- operating income after we had a previous operating income we had in FY '19, so that it's been 4 years, we are back on the saddle.

Then this is the [ total was ] on our balance sheet. Then our total was at the bottom on second half of FY '20. But we are gradually recovering the [ total was ]. And at the same time, the -- we're fortunate to have the massive bank loans with good terms. But at the same time, this means that our DE ratio was become higher, especially that was the highest on second half of FY '20. Then it's been gradually going down somehow. And we are in a more healthy shape on our balance sheet as well.

So this is the summary. We are working hard and the situation is not good or [ perfect ] yet, but still, all the business segment, we are working in a good pace of speed positively based on our existing business areas. And at the same time, we'll be able to announce shortly, but we haven't really displayed the world will be happening with our alliance with the Amazon and Mitsui Corporation yet. But this is a new opportunity. It's upside. So that the combining together of our business in existing areas plus new areas, we will be becoming much more stronger, and we are hoping to announce even better news very soon.

Thank you very much. This is the final of my presentation today. Thank you.