Istyle Inc

TSE:3660

Earnings Call Transcript 2022-Q3

[Tetsuro Yoshimatsu, executive]

I am Yoshimatsu, President and Representative Director of istyle Inc. I would like to explain our third quarter figures.

Page 1. I'd like to talk about istyle's basic business model. As many of you may already know, we have @cosme, a user review and community-based media as well as online retail and Brick-and-Mortar shops in a hybrid business model. Our business model is to expand this to overseas as well.

Page 2. I'd like to give an overview of the third quarter financial results. Page 3. First, a summary of the third quarter results. In our consolidated financial results, we achieved record high Q3 cumulative net sales, and we were also able to record over 10% net sales growth for the third quarter year-on-year. Although there was an operating loss for the cumulative 3 quarters, we were able to achieve an operating income for Q3 itself. Looking at the Japanese domestic market, although COVID quasi-emergency measures were in place during Q3, we have been strong -- growth, both in On Platform and Beauty Service year-on-year. For the global business, excluding Korea business, which we consolidated from Q2, all existing businesses were profitable as a result of business reorganizations. Key KPIs such as MAU, number of members, number of Connects are strong across the board.

Page 4. Here are some specific figures. First, consolidated cumulative 3 quarters. Net sales were JPY 25.467 billion, up 109.8% year-on-year. Operating income was down JPY 584 million. I will explain later the more detailed figures that are shown here.

Page 5. Next is the overview of operating results and progress to our target. Impacted by the spread of Omicron infections, market recovery was lower than what we expected. Accordingly, we revised our full year forecast. I will explain the details on Page 21. As for the 3 cumulative quarters, net sales were JPY 25.4 billion, gross profit was JPY 11.6 billion, and SG&A was JPY 12.2 billion, resulting in operating income of negative JPY 584 million, ordinary income of negative JPY 635 million and net income of negative JPY 620 million.

Page 6. This is a trend of consolidated net sales. As you can see, we started to be affected by COVID from 2020. Until 2019, we were accelerating investment under our medium-term management plan towards net sales of JPY 50 billion. Since then, under COVID, we have been doing what we can under the prevailing circumstances such as liquidating and withdrawing from unprofitable businesses. As a result, in the third quarter, our net sales recovered to exceed the fiscal year 2019 pre-COVID figures. The market is still in a difficult situation, but we are seeing a recovery trend in our business, and we feel that the conditions are starting to be in place for us to move on to the next stage.

Page 7. Here, I show sales for each segment. First, net sales for the third quarter were JPY 8.358 billion, an increase to 110% from the previous year. Breaking down by segment, On Platform grew at 101%. Beauty Service was 119%. Global sales grew at 91.3% and Others, 90%. Operating profit ratio is also gradually improving.

Page 8. First, On Platform. This is a marketing solution for cosmetics companies, so it is an advertising business. We are seeing the gradual activation of the platform and the synergistic coupling among @cosme, E-Commerce and physical stores gradually starting to take shape, resulting in a forecast of increased sales and income for the fourth quarter. Profits are still low due to the resumption of bonus payments and the recording of software amortization expenses as we prepare for the next stage of growth, but we feel that we see conditions emerging that will lead us to the next stage.

Page 9. This is the net sales of the Beauty Service business, which includes domestic E-Commerce and retail stores. We saw very big sales growth of 119.2% year-on-year. We had expected the market to recover more quickly, but due to the lingering COVID pandemic with the Omicron variant, the market as a whole is still in a difficult situation. Even under such conditions, we have steadily grown to 119%. As for operating income, the store business, including large flagship stores, has become profitable and that combined with the growth of EC results in our maintaining profitability and our operating income margin growing as well.

Page 10. This is a global business. EC and wholesale business was affected by the reaction from the W11 in the second quarter, impact to Hong Kong stores from the spread of infections and the closure of one store. Operating income situation was extremely difficult due to COVID impact on Glowdayz in Korea and Hong Kong stores. Other businesses were profitable. In particular, as you can see from the graph, over the past 2 years, we have reorganized various unprofitable businesses to create a structure that is able to generate solid profits. As a result, we have made progress to the point of achieving profitability in all businesses, except for the Korean business, which we consolidated in the second quarter.

Page 11. The Other business is essentially the temporarily staffing business. This business has been steadily maintaining a profit despite the impact of COVID.

Page 12. As for SG&A expenses, system-related expenses are increasing. We are not simply reducing expenses, but are gradually taking steps toward the next stage of growth. Similarly, increasing the provision for bonuses has led to the overall SG&A expenses to increase. However, with the growth in net sales, we were able to reduce the SG&A ratio to 45.3%.

Page 13. As a result of all of this, the quarterly operating income by segment, which struggled severely under the COVID pandemic, is finally slowly starting to improve. Profit for On Platform, our base business of marketing solutions for cosmetics companies, are beginning to rise and flow of human movement is gradually recovering, leading to return to profitability of Beauty Service, which is our physical stores and e-commerce. The business has grown to the point where it can cover company-wide expenses and has become profitable on a consolidated basis for the third quarter. Although profits have decreased due to the consolidation of Glowdayz, we feel confident that if we can also improve the situation in Hong Kong and China, we can achieve a larger profit as a whole.

Page 14. Next is the status of operating services.

Page 15, a number of unique users is growing stably and steadily.

Page 16. The number of members is gradually increasing as a number of app-based numbers grows.

Page 17. The number of Connects, which is number of contracts between brands and users in marketing is also growing steadily to 26.9 million. It shows that we are not facing any major issues in terms of major KPIs, and we believe that this area is growing steadily and strongly as our foundational business.

Page 18. In the third quarter of this fiscal year, we released several new services. We announced a new initiative with Kao. Kao is developing a new skin matching technology based on RNA. Based on that, we jointly launched a sustainability initiative to solve the long-standing issue in the cosmetics industry of how to match consumer demand and production to reduce product's waste.

Page 19. In order to realize a sustainable society, istyle under the @cosme SUSTAINABILITY initiative has been implementing various measures to reduce product waste. In this initiative, we are taking sustainability actions from awareness raising to concrete reduction measures, including the collection of containers and the launch of a new media called BEAUTYHOOD.

Page 20. We have also endorsed the TCFD and participated in its consortium. In such ways, we are taking steps that we can, one step at a time. That wraps up the overview of the third quarter.

Page 21. From here, I'd like to explain the revised full-year earnings forecast and the situation we are in now.

Page 22. First, a summary of the expected results for the current fiscal year. The impact of COVID continued. We initially made the plan for this fiscal year in July of last year and started the new fiscal year. At that time, we put together a plan with the assumption that with the Olympic Games being held, the impact of COVID would be absorbed and that we were entering a phase to move forward. However, in reality, the effect of COVID was still large and recovery is still lagging in the domestic cosmetics industry.

Also, in overseas operations, we are trying to keep costs down as much as possible, but as seen in the current situation in China, the impact overseas is still not negligible and due partly to sluggish business of the Korean subsidiary, we consolidated in the second quarter. We are revising the initial plan downward. On the other hand, however, the fourth quarter is up from the third quarter, and we are now seeing the possibility of returning to profitability for the second consecutive quarter. And since the beginning of this year, we are starting to grow more confident of returning to profitability in this quarter.

While the recovery of the cosmetics industry as a whole, especially in Japan, has been slow. Beauty Service, which includes both E-Commerce and retail stores, has been growing. This is a testament to our growing presence and market share in the industry. While brand marketing budgets continue to shrink, On Platform sales are growing steadily. As a result, we are on track to break our pre-COVID consolidated sales record and achieved record high sales. Although the domestic market has not yet recovered, our services are gradually recovering ahead of the market, and we believe that this is a manifestation of the value we have built up over the years.

Under such circumstances, we'd like to revise our full year forecast as follows: Page 23. Our initial plan was net sales of JPY 39 billion, operating income of JPY 500 million and ordinary income, JPY 400 million. To be honest, we were anticipating a V-shaped recovery based on an extremely strong recovery in the market. However, taking into account that the recovery in the domestic market as a whole is weaker than we had expected, we have revised the plan to net sales of JPY 34.7 billion, operating income of negative JPY 450 million, ordinary income to negative JPY 560 million and net income to negative JPY 600 million.

Page 24. This is a revised plan for each segment. First, in the On Platform segment, we have revised net sales from JPY 8.4 billion to JPY 7.5 billion, and operating income from JPY 1.7 billion to JPY 980 million, a divergence of about JPY 1 billion in net sales. We had expected our marketing services to grow in tandem with a recovery in the performance of cosmetics companies who are our clients. However, business confidence in the domestic market has not yet recovered.

Of course, brands are working on new initiatives in various ways and doing what they can do now. And because they are calling on us to help them with that effort, On Platform sales are growing year-on-year, but not to the level of our original plan. So we have revised our forecast as shown here. The same is true for our Beauty Service. During the Golden Week holidays, we are finally starting to see customers going out and about, but just 6 months ago, the situation was still very severe. Despite this, sales grew to JPY 22 billion, and operating income is also growing significantly. Global sales have also been revised to JPY 4.3 billion from JPY 5.18 billion. Operating income is also in a difficult situation due to the impact of COVID, including the newly consolidated Korean business, but we hope to return to profitability as soon as possible. Overall, we have no choice but to revise our sales and profit forecast downward from the initial plan for the current fiscal year.

Page 25. This shows a net sales breakdown by segment for the Q4 expected results. We expect sales to grow the strongest in the past several years. At the very least, we feel that we will see significant growth compared to the previous year. Beauty Service is gradually recovering, especially at physical stores. At the same time, cosmetics brands are also gradually becoming more active. Overall, we expect a large increase in sales and an improvement in the operating profit margin.

Page 26. Operating income. The previous fiscal year was very difficult for us, but in the fourth quarter of the previous fiscal year, we committed to turning a profit. The tough situation has not changed in this fiscal year, but we have made it possible to pay out bonuses and are making progress in the development of software that will support the foundation for future growth. In Q1 and Q2, the results had not recovered fully, but in the third and fourth quarters, the figures are beginning to improve. I think that trend is evident when you compare with the previous fiscal year.

Page 27. Let's take a look not just at istyle, but the cosmetics market as a whole. This is the sales strength of the 3 major cosmetics manufacturers in Japan. The domestic cosmetics market is still in a difficult situation, still down 30% from the pre-COVID level and far from recovering the previous levels.

Page 28. Under the COVID pandemic, we believe we can recover sales ahead of the domestic market and grow beyond pre-COVID levels. In Beauty Service, physical stores saw difficulty from fiscal year '20, but we saw a significant contribution from the surge in our E-Commerce users. Subsequently, we withdraw from unprofitable stores and concentrated our human resources in highly profitable stores, resulting in sales growth. For the On Platform business, in the fourth quarter of fiscal '20, when COVID emerges, there was not a big impact on performances because the brand's marketing activities were planned ahead of time and projects were still being executed. However, in fiscal year 2021, the following year, the client's budget was reduced. Under these difficult circumstances, the current situation in fiscal year '22 is that we are gradually seeing a recovery.

Page 29. The following is the detailed explanation of each segment. First, the On Platform business is down compared to the initial plan, but compared to the results of the previous fiscal year, it has grown significantly to 107.4%. The number of brands utilizing the platform is gradually increasing, and that is showing in the results, but it has not yet returned to the level of the initial plan. Operating income, we have invested in human resources and systems and various businesses toward achieving medium- to long-term growth. The recovery of the market was slower than we had expected. So upfront expenses increased and profits decreased. However, as these sales, profits are also on a recovery trend, and we have laid the foundation for future earnings growth.

Page 30. Next is Beauty Service. In this business as well, the market recovery was slower than we had expected, which explains the deviation from our initial plan. However, although not as much as we assumed in the initial plan, store sales are recovering despite the impact of COVID. In particular, we feel that the market has been gradually recovering since May when we had the Golden Week holidays. In terms of profits, we have been able to improve our profitability and generate more profit. The fact that our domestic businesses, On Platform and Beauty Service are seeing improvement in performance is very good news for us.

Page 31. In the Global business, we reduced costs by liquidating and withdrawing from unprofitable businesses so we may return to profitability. We are still in a difficult situation due to COVID. So we are trying to ride out the storm while preparing for the next opportunity by concentrating our resources in China and Hong Kong. COVID impact is still very large in China and Hong Kong. As we are liquidating unprofitable businesses, the topline sales are inevitably declining. We were aiming for positive territory in terms of operating income, but due to the deterioration in profitability of the South Korean business, which we consolidated in the second quarter, the improvement was minor, but the situation has recovered to the point where the business is profitable except for South Korea and Hong Kong.

Page 32. Over the past 3 years, we have been proceeding with the liquidation and withdrawal of unprofitable businesses from where we can. Immediately after the start of COVID, we began by closing stores in Taiwan and Japan, and we sold the Salon business and more recently, Eat Smart as well so that we can focus on reviving our core businesses. Through these actions, we have been able to build a more lean structure as a whole, and we are now seeing a return to profitability in the third and fourth quarters as well as increased signs of growth in each of our stores and services. Although there was a gap from the initial forecast, I believe that the current situation is gradually improving.

Page 33. Regarding the revised operating income, human resources and system-related expenses have increased, but gross profit has been improving. And I feel that if we can get through this difficult period, we can still return to profitability for the full year, and our current initiatives should spur growth in new services and businesses.

Page 34. We recognize the urgent need to improve our performance as soon as possible so that we can return to profitability in consolidated operating income and deliver large profits and returns for our shareholders. We are now sorting out various things we can do and should do for the next fiscal year. We are gradually beginning to see signs of further growth for istyle, so we look forward to your continued guidance and support.

That was a brief overview of the third quarter and the fourth quarter and our outlook for this fiscal year. Thank you.

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