Aeon Co Ltd

TSE:8267

Earnings Call Transcript 2019-Q3

[Kaori Miyake, executive]

Good afternoon. My name is Kaori Miyake. I am in charge of Investor Relations at Aeon. Thank you very much for participating in this telephone conference on Aeon's financial results for the first 9 months of the fiscal year ending February 28, 2019.

Without further ado, I will now report on the 9-month results. Aeon achieved higher revenue and profit in the first 9 months of fiscal 2018. Operating revenue was JPY 6,339.3 billion, setting a new record for the 9-month period. Operating profit increased by JPY 6.2 billion year-on-year to JPY 109.0 billion, also a 9-month record. Profit attributable to owners of the parent increased by JPY 5.0 billion, marking a return to 9-month profitability for the first time in 4 years. Looking at the results by business segment. Operating revenue increased in all business segments. And operating profit increased in 5 business segments: the GMS Business, Supermarket Business, Financial Services Business, Shopping Center Development Business and International Business.

The orange line graph shows year-to-year changes in the cumulative operating profit margin for the 9-month period to November. The blue bar graph shows year-to-year changes in profit attributable to owners of the parent for the same period. Although the level of profits remains insufficient, profit attributable to owners of the parent for the 9-month period to November steadily improved in conjunction with profitability improvement on the operating profit line.

This shows the operating results for the 3-month period from September to November. From October onward, in particular, a large year-to-year temperature difference affected sales of seasonal goods in the domestic retail operations. Nevertheless, even in these difficult business conditions, we were able to secure a profit increase on the operating profit line, thanks to our diverse business operations and overseas profit growth. Profit attributable to owners of the parent would be nearly the same level as the prior year if it were not for delays in finalization of insurance payouts for disaster-related losses due to the impact of the earthquake in Hokkaido and the 2 typhoons that struck Japan in September. This slide shows the third quarter operating results by business segment. The warm winter affected sales of highly seasonal product categories, and the results for the GMS Business, Supermarket Business and other domestic retail operations fell behind schedule. Although sales in the Health & Wellness Business continued to grow, they were also affected by the warm winter and came in slightly below plan. As a result, third quarter segment profit fell slightly as expenses preceded revenue.

In the Services and Specialty Store Business, sales and gross profit at G Foot and COX fell short of plan. This shortfall is attributable to inability to adapt to the abnormal weather and inventory disposal. On the other hand, the Financial Services Business posted a sharp profit increase, attributable mainly to resolution of a timing difference in the booking of profits that occurred in the second quarter and growth in overseas earnings.

The operating results of the International Business and overseas operations of Aeon Mall continued to improve. As a result, overseas growth compensated for delays in the operating results of the domestic retail operations. At Aeon Retail, the impact of the warm winter and other factors affected sales of clothing and other highly seasonal product categories.

As shown in the line graph at the bottom left of the screen, although sales were up year-on-year in September, the sales results were unfavorable in October and November when temperatures were above the prior year levels. Consequently, third quarter operating profitability deteriorated by JPY 2.1 billion while 9-month cumulative profitability improved by JPY 0.9 billion.

Although the third quarter results were unfavorable due to the impact of the weather, Aeon Retail implemented measures to enhance customer convenience and acquire new customers with a view to the future. In the first half of November, Aeon Retail conducted the Cyber "e" Sale on its e-commerce site and recorded a year-on-year sales increase of nearly 20%. Also, in the third year for the Black Friday sale, which Aeon pioneered in Japan, Aeon Retail was able to increase sales by an additional 17%. Members sales data indicates that approximately 25% of customers at the time of the sales were customers who did not shop at Aeon on a daily or frequent basis. We believe that by attracting customers to our stores, once again, through these shopping occasions, we were able to create motivation for future store visits. In addition, in conjunction with these sales, in November, Aeon Retail started full-scale provision of a service that enables customers to pick up at stores merchandise ordered and paid for on Aeon's e-commerce site. Aeon Retail will continue efforts to win customer loyalty by proposing a variety of purchasing occasions and methods. At Daiei, a sales promotion measure targeting seniors implemented to increase the number of customers achieved penetration. And in the third quarter, the number of members aged 65 and over increased by approximately 10%. Year-on-year comparison of same-store food sales shows that third quarter sales reached nearly the prior year level despite the impact of the warm winter.

With regard to expenses, cost cutting is progressing due to operating efficiency improvement from the introduction of an automated ordering system and replacement of POS cash register systems, coupled with reduction of sales promotion expenses. As a result, profitability improved by JPY 0.7 billion year-on-year in the third quarter after deteriorating in the first and second quarters. Following this shift to year-on-year improvement in profitability in the third quarter, Daiei will pursue further improvement during the period leading up to the fiscal year-end. Looking now at the operating results of overseas operations by company. Operating profit increased by JPY 2.1 billion year-on-year at Aeon Credit Service Malaysia, an overseas subsidiary of the Financial Services Business. Transaction volume increased accompanying the repeal of Malaysia's goods and services tax in June. In addition, the company promoted acquisition of middle-income customers by issuing a platinum credit card, enhancing the personal financing with risk-based pricing and other means. And transaction volume rose sharply.

Aeon Credit Service Malaysia also promoted cashless payment by launching a smartphone application-based payment service in October. Profit increased by JPY 0.4 billion at Aeon Malaysia, which accommodated (sic) [ accompanied ] last-minute purchasing and a trend toward purchasing of big-ticket goods ahead of introduction of a sales and services tax. As a result of progress with the market dominance store opening strategy in ASEAN countries and China, the overseas operations of Aeon Mall enjoyed branding benefits such as an increase in customer drawing power, attraction of excellent specialty stores and availability of leases with more advantageous terms and conditions. As a result, profitability improved by JPY 0.6 billion each in China and the ASEAN region, for a total increase of JPY 1.2 billion. And the overseas operations of Aeon Mall achieved profitability in the current fiscal year after posting a 9-month loss in the previous year. This slide shows overseas operating profit from 2015 onward on a quarterly basis. Although there are short-term variances due to prevailing external factors and onetime costs accompanying investments, et cetera, overseas profits are steadily rising over the medium term and driving the consolidated operating results. Next, I will briefly mention initiatives related to ESG. In the third quarter, we once again engaged in various initiatives in accordance with the Aeon sustainability principle. For details, please refer to the Aeon report, which is posted on the corporate website.

We conduct materiality analysis of various environmental issues and social issues from 2 perspectives: importance to Aeon's management and the requirements of society. We plot the results in tables such as those on the left of this slide to identify priority areas for initiatives at Aeon. We have announced some initiatives based on the risk analysis and news releases, which I invite you to read at your leisure. We consider contribution to the creation of a sustainable society, particularly with regard to energy problems, an especially important priority, and intend to continue to step up our initiatives in this area.

Continuing from the previous fiscal year, on January 22, we plan to hold a briefing to explain topics related to sustainable management. I cordially invite you to participate.

Finally, there is no change in the full year earnings forecasts from the earnings forecasts announced at the beginning of the fiscal year. Although domestic retail operations are slightly behind schedule due to the impact of natural disasters and unseasonable weather, from now until the fiscal year-end, we will increase the level of achievement of the sales and gross profit plans. And in the remaining fourth quarter, we will strive to the end to achieve the earnings forecasts by further strengthening cost control initiatives.