Aeon Co Ltd
TSE:8267
Earnings Call Analysis
Q3-2024 Analysis
Aeon Co Ltd
Aeon's overview of the third quarter of fiscal year ending February 29, 2024, highlighted continued robust performance, despite facing headwinds such as customer frugality, a prolonged summer heat, and mild winter. The substantial impact resulted in Aeon achieving record-high consolidated operating revenue of JPY 7,025.8 billion, and they marked a significant milestone by booking the first positive net income for owners, JPY 18.3 billion – a first in five years.
The Retail Business emerged as the bedrock for Aeon's performance, showing notable quarterly and nine-month growth, with a profit leap from JPY 14.2 billion to a considerable JPY 64.1 billion. Plans are afoot for it to contribute 52% to total sales by 2025, and initiatives like enhancing the Topvalu private brand have been the accelerant for profitability within retail.
Concerted efforts in the apparel sector to optimize inventory control and refine sales floor layouts have paid off with improved profit margins across all product lines. The Discount Store Business has seen consistent strength, with significant quarter-on-quarter operating profit growth of JPY 4.8 billion. On the flip side, the Health and Wellness Business saw a minor decline due to a reactionary drop in COVID-19-related demand which impacted operating profits by a reduction of JPY 0.4 billion.
The merger of AEON BIG is slated to occur in March 2024, with a strategic alignment for increased efficiency and cost reduction efforts seen in reduced energy costs. Internationally, challenges in ASEAN were tempered by growth in Vietnam and Indonesia, signaling a potential recovery trajectory in customer numbers and upturn in profits, especially in China, post-relaxation of the Zero COVID-19 policy.
Aeon's focus on cost controls is highlighted by better-than-expected utility cost management, reaping savings from a variety of energy initiatives and government measures. Labor costs increased as anticipated, aligning with proactive group-wide productivity enhancement efforts. Additionally, Aeon has made significant strides in its green strategy, attaining it's 2030 renewable electricity target seven years ahead of schedule and driving December sales with strong GMS and Discount Store performances.
Aeon has revised its earnings forecast for the fiscal year ending February 2024, based on third-quarter results and fourth-quarter projections, reflecting sales performance and an active pursuit of 5 key reforms and priority measures. The focus for the immediate future lies in maintaining profitability while navigating market challenges and leveraging group economies of scale.
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I'm Egawa, in-charge of Finance and Business Management. I appreciate your attendance today amidst your busy schedules for Aeon's financial results briefing.
First and foremost, we extend our heartfelt condolences to the victims of the Noto Peninsula earthquake. In the aftermath of the seismic event, several malls and stores experienced closures or operated on a limited basis. However, in our commitment to serving as a crucial infrastructure supporting daily life in the region, we swiftly restored our establishments, and all stores are now fully operational. With regard to relief efforts, we have diligently supplied essential items, including food, drinking water, blankets, disposable diapers and other necessities, responding properly to government requests in the affected areas. Furthermore, since January 3, we have initiated a nationwide campaign at our stores and offices collecting donations for emergency relief. Our earnest wish is for those impacted by the disaster to swiftly regain normalcy in their lives. Then, let's begin with an overview of the third quarter of the fiscal year ending on February 29, 2024. While the robust trend observed in the first half of the year persisted, the current quarter faced challenges stemming from a confluence of seasonal factors. These included a growing frugality among customers and unusually prolonged summer heat wave and a mild winter, collectively creating a challenging operating environment.
During the preceding first-half briefing, we anticipated a challenging third quarter in terms of profitability. Despite facing headwinds, the quarter's financial results did register a deficit in profit, attributable to owners of the parent. However, it is noteworthy that we successfully achieved the anticipated profit levels, significantly surpassing the figures from the previous year.
For the initial 9 months of the fiscal year, the company achieved a record-high consolidated operating revenue of JPY 7,025.8 billion. Operating profit reached JPY 142.8 billion, and ordinary profit totaled JPY 133.1 billion. Additionally, net income attributable to owners of the parent company amounted to JPY 18.3 billion, marking the first positive result in 5 fiscal years since fiscal year 2018.
Our endeavors to enhance the product appeal of our private brand, Topvalu, along with initiatives to restructure our profit framework and implement stringent cost controls have yielded success. Notably, profitability has seen marked improvement, particularly within the Retail Business. We find our financial results in the concluding months of the fiscal year to be promising and encouraging. This slide presents the performance results for the initial 9 months over the 5 years from fiscal year 2019, pre-COVID-19 to the current fiscal year. Operating revenues in all categories of profits have notably surpassed the figures from the previous year.
This slide illustrates operating revenue and operating profit segmented by business unit. Operating revenue exhibited growth across all segments. Throughout the reviewed period, the Retail Business emerged as the cornerstone, spearheading the group's overall performance. This trend persisted notably in the third quarter, with a particular emphasis on the success of the GMS and Supermarket businesses. The graph presented here illustrates the evolution of our profit portfolio. Prior to the onset of the COVID-19 pandemic, the operating profit generated by the Retail Business in the initial 9 months of fiscal year 2019 amounted to JPY 14.2 billion, representing 14% of the total. In the current fiscal year, the operating profit from the Retail Business has expanded significantly to reach JPY 64.1 billion, constituting 45% of the total.
As outlined in our medium-term management plan, our objective is for the Retail Business to contribute 52% to the total sales by fiscal year 2025. We are making steady and substantial progress toward realizing this target, as outlined in our medium-term plan. First is the GMS business. The operating loss for the quarter amounted to JPY 4.9 billion, reflecting a substantial improvement of JPY 13.5 billion compared to the same period in the previous year over the first 9 months.
The graph situated in the upper right-hand corner provides a detailed breakdown of the enhanced profitability, showcasing the cumulative year-on-year changes in operating profit for each company.
Aeon Retail Company Ltd., along with key players in the GMS business, namely Aeon Hokkaido Corporation and Aeon Kyushu Co. Ltd., have all realized significant improvements in profit. Despite challenges such as inflation and subdued consumer sentiment, our sales remained resilient, attributed to strategic initiatives. These efforts included the expansion of Topvalu sales, reinforcement of food offerings and the transformation of stores' handling nonfood items into specialty stores.
The year-on-year improvement in gross operating profit margins and SG&A ratios can be attributed to increased gross profit margins in key sectors such as apparel, food and health and beauty care. Additionally, operational efficiency gains resulting from the promotion of digital transformation, DX initiatives, played a pivotal role.
Furthermore, companies within the region that have undergone recent reorganization, namely Aeon Kyushu Co. Ltd., Aeon Tohoku Corporation and Aeon Hokkaido Corporation, are steadily demonstrating successful integration synergies. The next slide is about Aeon Retail. Aeon Retail Co. Ltd. achieved a cumulative profit improvement of JPY 2.7 billion during the first 9 months of the fiscal year, showcasing progress and enhancing profitability. To enhance the gross profit amount, we have strategically expanded sales floors and enriched product assortments, with notable success in growth categories, particularly food and health and beauty care.
In the apparel sector, we are focused on optimizing merchandise turnover through meticulous inventory control, simultaneously refining sales floor layouts in accordance with store sizes and reallocating personnel to bolster customer service. Consequently, gross profit margins improved across all product lines, as illustrated in the upper right graph, with the company's overall gross profit margin surpassing that of the previous year. Turning our attention to expenses. The graphs and tables on the right depict that the impact of wage hikes remained well within the anticipated range while energy costs exhibited a decline. With regard to digital transformation, alongside the continuous promotion of unmanned checkouts, the implementation of sales support tools and the phased introduction of an advanced demand forecasting system, we have achieved notable enhancements in the SG&A ratio and manhour productivity compared to the previous year. In addressing the long-standing challenge of establishing a nonfood specialty store operation model, we are currently conducting a trial of a new sales floor pattern at the Aeon Funabashi store. The initial results have been promising, and we plan to implement this pattern across multiple stores while simultaneously enhancing product assortments and display methods.
As we approach the conclusion of the fiscal year, our commitment remains steadfast on profit structure reforms and the key initiatives outlined in the midterm business plan. Our goal is to surpass the results of the previous year and achieve a higher operational standard. Next is the Supermarket Business. During the quarter, this segment returned to profitability, surpassing the previous year's loss results and recorded a higher profit compared to 2020, which experienced special demand due to COVID-19. The operating profit for the first 9 months totaled JPY 21.8 billion, marking a JPY 14.4 billion increase from the same period last year.
At My Basket, robust customer attraction, leveraging the price advantage of Topvalu best price, coupled with the influence of reduced energy costs, resulted in a JPY 4.9 billion increase in profit, contributing to the overall performance of the Supermarket Business. As depicted in the graph below, both sales and customer numbers have maintained a robust performance.
Furthermore, advancements in operational efficiency through digital transformation, including the implementation of electronic shelf tags and automated ordering, coupled with reduced utility costs resulting from decreased energy expenses, have contributed to improvements in both the operating gross profit margin and SG&A ratio. Consequently, this has led to a significant increase in overall profit. In the Kanto region, the tender offer for shares of Inageya, initiated on October 10 and concluded on November 29, resulted in Inageya becoming a consolidated subsidiary. Within Inageya as a pivotal point, the company is strategically positioned to fortify its leading presence in the Tokyo Metropolitan Area, particularly in Western Tokyo, as part of our ongoing commitment to expansion. The next slide is the Discount Store Business. The Discount Store Business has consistently performed strongly since the first quarter, with the company actively promoting product lineups and store revitalization to adaptive changes in purchasing behavior influenced by inflation.
Operating profit for the third quarter reached JPY 6.0 billion, marking a notable increase of JPY 4.8 billion compared to the same period in the previous year, surpassing the results influenced by the unique demand pattern seen during the COVID-19 pandemic in 2020. Both sales and customer numbers experienced growth. And profit margins saw an upturn, attributed to the success of our private brands, specifically tailored for the Discount Store Business. Additionally, the expansion of sales areas dedicated to large volume and case sales catering to the demands of bulk and layaway buyers, played a pivotal role in this positive outcome. Moreover, the SG&A ratio exhibited improvement due to reduced energy costs and heightened efficiency, resulting from the implementation of material-handling equipment and digital transformation.
Looking ahead to March 2024, we have strategic plans to merge AEON BIG and Maxvalu Minamitohoku. This merger aims to establish a robust discount store format with well-established low-cost operations, positioning us for further growth in this sector. Next is the Health and Wellness Business. For the initial 9 months of this fiscal year, operating profit experienced a decrease of JPY 0.4 billion compared to the same period in the previous year. This decline can be attributed in part to the impact of a reactionary drop in COVID-19-related demand for inspection kits and other products during the eighth wave of the pandemic in the third quarter of the prior year. Additionally, the sluggish growth in seasonal products influenced by the warm winter played a contributing role. While we successfully managed to restrain the rise in SG&A expenses to the anticipated level through strategic measures like optimizing personnel time management and implementing initiatives such as the Aeon Group's bulk electric power procurement, the operating gross profit fell short of our expectations.
Despite endeavors to market high-margin products in response to a reactionary decline in COVID-19-related demand, overall profit decreased. Moving into the fourth quarter, our focus will be on aligning with our guidance. We plan to achieve this by expanding private brand sales, reinforcing personalized sales approaches and maintaining strict control over SG&A expenses. Next is the Financial Services Business. The decline in profits increased during the quarter, with operating profit for the third quarter totaling JPY 27.2 billion, a decrease of JPY 14.7 billion from the same period last year. The recovery was somewhat slower than expected at the time of the first half.
In our domestic business, the balance of operating receivables has shown signs of recovery, reaching 90% of the pre-COVID-19 level. However, the operating profit for the first 9 months experienced a decline of JPY 10 billion, primarily attributed to expenses related to bad debt and the increase in sales promotion and system-related costs aimed at expanding the customer base. In our overseas business, operating profit witnessed a decline of JPY 5.4 billion, primarily attributed to an upswing in bad debt-related expenses, particularly in Thailand. Despite this, operating revenue demonstrated steady expansion, and there are indications that bad debt-related expenses are reaching a peak.
Another noteworthy development in the quarter was the acquisition of a local company in Vietnam holding a license for providing personal loans. This strategic move enables us to transition from a business model solely centered on offering installment loans for individual products to one that encompasses more lucrative financial products, including credit cards and personal loans. In the future, we'll concentrate on positioning Vietnam as the fourth pillar in our international expansion strategy. Next is the Shopping Center Development Business. Despite a decrease in segment profit for the quarter, attributed in part to consolidation adjustments, the operating profit for the 9 months amounted to JPY 34.5 billion, reflecting a gain of JPY 1.2 billion compared to the corresponding period of the previous year.
In Japan, the initial half of the quarter witnessed unusually warm temperatures, presenting a notable challenge, particularly for apparel specialty stores. Nonetheless, the latter half of the quarter saw a successful boost in customer engagement during Halloween and Aeon Black Friday. This resulted in increased sales and profits for both domestic malls and urban shopping centers, with specialty store sales surpassing the levels observed in the previous year. Despite this progress, the recovery falls slightly behind Aeon Mall's initial expectations, prompting us to redouble efforts in fortifying measures to attract customers in the upcoming period. While concerns persist in China regarding a potential decline in economic growth due to the sluggish real estate market, Aeon Mall has demonstrated robust performance in Jiangsu and Hubei provinces.
As illustrated in the graph on the upper right, income experienced a decrease of JPY 0.3 billion. However, when excluding the impact of fixed costs during the closure period, which were recorded as an extraordinary loss in the previous year, we estimate a real-term income increase of JPY 1.6 billion. On November 1, we inaugurated [ Aeon Mall Wuhan Jiangxia ], which has significantly elevated the value of real experiences, including recreational activities. This mall is thriving, achieving a new record for weekend store visits in China. In ASEAN countries, while the macroeconomic landscape was somewhat affected, there was a profit increase in Vietnam and Indonesia, particularly in regions where behavioral restrictions were eased. Next is the Services and Specialty Store Business. While the quarter witnessed a modest increase in operating profit by JPY 0.4 billion, the cumulative operating profit for the 9 months reached JPY 12 billion, marking a substantial rise of JPY 6 billion from the corresponding period last year. Despite the prolonged summer heat experienced in the initial half of the quarter, same-store sales across all companies remained resilient, showing a consistent trend of surpassing the previous year's figures. Furthermore, the enhanced profitability of each company was a result of successful cost reduction initiatives. These included efficiency measures such as expanding and diversifying merchandise suppliers, as well as engaging in joint group purchasing of furniture, fixtures and other items.
Notably, companies such as G Foot Co. Ltd., which is making commendable progress in its merchandising structural reforms, Aeon Fantasy Co. Ltd., achieving a record high operating profit from ASEAN operations, and Aeon Entertainment Co. Ltd., excelling in its high unit price live viewing business; played pivotal roles in driving the overall increase in profit. Lastly, the International Business. The decline in profits moderated in the quarter as the operating profit for the cumulative period of the third quarter totaled JPY 7.0 billion, a decrease of JPY 1.8 billion compared to the corresponding period last year.
ASEAN encountered a challenging business environment, marked by successive downward revisions to GDP forecasts across various countries. As depicted in the graph below, although there was an improvement of plus 0.39 percentage points in the operating gross profit margin, the operating profit margin declined from the previous year, influenced by the impact of inflation-driven higher wages and energy costs.
However, we anticipate a performance upturn, given the signs of a year-on-year recovery in the trend of customer numbers in ASEAN countries. In China, where conditions vary by region, overall sales and customer numbers are rebounding due to government measures to stimulate consumption and the relaxation of the Zero COVID-19 pandemic policy. As illustrated in the graph on the bottom right, the gross operating profit improved due to the recovery in apparel and food sales, leading to an overall increase in profit. On this slide, we present our assumptions for electricity and wage increases, as well as actual results for the reporting period.
During the third quarter, utility costs significantly came in below expectations, leading to a year-on-year decrease of JPY 8.4 billion and a cumulative decrease of JPY 2.9 billion for the 9 months. This deviation was largely attributed to the implementation of various initiatives, including the promotion of energy generation and conservation, early installation of energy-saving equipment, transitioning to contracts with new electricity providers and concerted efforts in group power procurement.
Additionally, the government's drastic reduction measures played a role in contributing to this outcome, which fell considerably below our initial projections. Regarding labor costs, there was a year-on-year increase of JPY 15.4 billion in the third quarter and a cumulative increase of JPY 40.4 billion for the 9 months. This figure closely aligns with our earlier forecasts.
As a response to the challenges posed by increased wages, the entire group is actively engaged in enhancing hourly productivity. Notably, hourly productivity for 16 affiliated companies in the 3 Retail business segments reached 106.5% of the previous year's level. In the upcoming fourth quarter, alongside group-wide initiatives aimed at further improving productivity, our primary focus will be on cost control, leveraging the economies of scale inherent within the group. This page serves as a report on our digital business. Green Beans launched in July, has expanded its services to cover 11 special boards in Tokyo, Kawasaki City in Kanagawa Prefecture and 8 cities in Chiba prefecture, areas where our physical stores are less prevalent.
Customers have highly praised the freshness of our produce, the flexibility of delivery time options and the exceptional customer service provided by our delivery crews. As anticipated, the number of members and orders has increased steadily since the platform's launch. We remain committed to enhancing our services and functionalities to streamline their shopping experience, making it more efficient and convenient for our customers. Next, I'd like to address Topvalu. In October, November and December, Topvalu implemented successful price-reduction and volume-increase campaigns that garnered positive feedback from customers. We are pleased to see that our endeavors to share the advantages of scale with customers through innovative corporate initiatives have received widespread support.
Concurrently, we have actively pursued value-added new product development, including targeted products crafted based on comprehensive research into the values and preferences of millennials and Generation Z. Thanks in part to these initiatives, Topvalu sales for the first 9 months of this fiscal year reached JPY 740.2 billion, equivalent to 110% of the same period in the previous year. We are currently poised to achieve the milestone of JPY 1 trillion by the end of the fiscal year. The next slide is about our promotion of green strategy. In December 2023, around 55% of the electricity consumed in our domestic stores transitioned to renewable energy. This milestone signifies the attainment of our interim target set for 2030, as outlined in the Aeon Decarbonization Vision, accomplishing this goal 7 years ahead of schedule. Moving forward, we are committed to intensifying our endeavors to foster a decarbonized society in collaboration with all stakeholders. This page illustrates our sales performance in December, spanning from Christmas to the New Year's holiday. Despite the persistent frugal mindset influenced by high prices, overall sales remained in accordance with expectations, primarily propelled by the demand for food products. Notably, the GMS and Discount Store businesses exhibited strong performances during this period. Finally, we would like to report on our earnings forecast. In the initial 9 months of the fiscal year, the outcome surpassed our initial expectations, driven by enhanced profitability resulting from structural reforms in the Retail Business and various cost control measures. This performance was achieved despite shifts in consumer behavior and increased frugal mindset and challenging weather conditions.
For the fiscal year ending February 29, 2024, we are updating our earnings forecast as initially disclosed in April 2023. This revision is based on our third quarter results and our outlook for the fourth quarter, considering sales performance in December and the new year. In the remaining 1.5 months of the fourth quarter, we'll actively pursue the 5 reforms and priority measures outlined in the medium-term management plan. The entire group is committed to working collaboratively to achieve the updated full-year forecast.
Concerning the upward revision of the operating profit to JPY 240 billion for this fiscal year, could you elaborate on its correlation with the figures up to the third quarter and the fourth quarter outlook? Additionally, please elucidate how the upper revision is indicative of distinct performance changes across different segments.
This is Egawa. While we acknowledge that the overall results surpassed expectations, notable accommodations are directed towards the exemplary performance of the GMS, Discount Store and Supermarket sectors within the Retail Business. These segments not only exceeded projections but also drove the overall outcome by adeptly navigating consumption polarization amid inflation. Their success can be attributed to improved gross profit margins and efficient cost control measures, particularly evident in the Topvalu business. Conversely, challenges were encountered in the Financial Services Business, with the decline attributed to an increased allowance for doubtful accounts. The Shopping Center Development Business, while showing improvement from the previous year, fell slightly short of expectations.
In the Retail Business, the focus for the fourth quarter is on maintaining anticipated figures rather than anticipating a substantial increase. In the Financial Services Business and Shopping Center Development Business, the revised profit targets will be met by compensating for the downturn.
This is Sakaki speaking. For the first 9 months of fiscal 2023, both operating profit and ordinary profit experienced a generally double-digit growth above the planned targets. The top line closely aligned with the plan, while net income significantly exceeded expectations.
In light of these outcomes and the fourth quarter forecast, we've adjusted our annual projections. It's noteworthy that in the fourth quarter of the previous year, there was a surge in COVID-19-related special demand, particularly within the Health and Wellness Business. Consequently, we're not anticipating a high growth rate for the top line in the final 3 months of this fourth quarter, as observed in previous periods. Recent trends indicate heightened consumer price sensitivity, particularly in November and December.
While we don't expect the top line growth seen in the first, second and third quarters, we anticipate approximately 3% growth in the fourth quarter. The company's full-year forecast for operating profit assumes a similar amount as the previous year. Net income for this fourth quarter is projected to be slightly lower than the JPY 25 billion reported in the previous year, setting the full year estimate at JPY 33 billion.
At the start of the year, the Nikkei featured an article titled "7% Hourly Wage Increase for Part-time Employees." Recognizing the significance of providing fair wages, especially in the labor market facing shortages, how does the company perceive wage considerations for the upcoming fiscal year, including the spring wage round?
Additionally, considering the outlined efforts to enhance productivity, how does the company intend to strike a balance between overall profits and ensuring the continued employment of its workforce?
This is Shikata, and I'd like to address the concept of labor cost, productivity and employment. While the Nikkei has emphasized the 7% wage increase, our focus extends beyond mere salary adjustments to the establishment of a new labor management relationship.
Contrary to the notion of a traditional spring wage round, we are committed to a year-round effort, where labor and management collaboratively address productivity enhancements and other challenges. Our goal is to foster a shared awareness of issues and work together to overcome them. Consequently, ongoing discussions occur throughout the year. And as a member of the Productivity Improvement Committee, I've actively contributed to boosting our productivity. The current fiscal year witnessed a 7% wage increase, resulting in record profits due to a strategic combination of productivity improvements, reduced manhours and enhanced gross profit margins. We view labor costs not merely as an expense but as an upfront investment, crucial for transforming into vitality. The 7% wage increase will be translated into profits by synergizing productivity enhancements with reduced manhours and improved gross profit margins. This form is the cornerstone of our philosophy.
Looking ahead, addressing the challenge of workforce shortages in the country will require more than wage increases. We regard investing in people as tantamount to promoting digital transformation and product investment. Our commitment is to collaborate with labor and management aiming to elevate labor costs, enhance productivity and ensure employment security.
I'm interested in understanding the details behind the JPY 20 billion increase in operating profit. Initially, our estimate projected a yearly rise in electricity costs of JPY 30 billion. Yet, the cumulative figures for the first 3 quarters indicated a decrease of JPY 2.9 billion.
Given this variance, is the predominant factor behind the upward revision of over JPY 20 billion attributed to expense control? Furthermore, is it overly optimistic to interpret the JPY 20 billion increase as indicative of substantial improvement opportunities?
This is Egawa. We effectively managed our electricity costs, and there has indeed been a significant improvement from our initial expectations. However, it's crucial to note that the relationship between lower electricity costs and increased profits is not as great forward calculation. Operating revenue, gross profit and operating gross profit have all seen positive growth. Typically, when budgeting, we incorporate buffers. The JPY 20 billion upper revision resulted from a combination of factors that boosted profits on the operating side as well as factors contributing to profit increases on the cost side, with a primary focus on electricity costs. While year-end and New Year holiday sales were favorable, consumption trends represented challenges since around November. It's not our stance that surpassing the new figure can be easily achieved.
The initial expenses associated with the full-scale operation of Green Beans by Aeon NEXT will be accounted for under the Other segment. Could you provide insights into the anticipated negative impact and the expected amount related to the upfront costs of the digital shift that will be allocated to the Other category for both the current year and the upcoming year?
This is Sakaki speaking. The digital business encompassing initiatives like Aeon Smart Technology and Aeon NEXT, falls under the Others category in the segment information. Presently, we lack precise figures regarding these businesses for the upcoming fiscal year.
As we are currently in the planning stages for the next fiscal year, it is anticipated that we will persist in making substantial upfront investments in the digital sector. Consequently, we expect the deficit to either align with the current figures or potentially show a slight increase.
The gross profit margin at Aeon Retail Co. Ltd. is experiencing improvement. Could you provide an analysis of the factors contributing to this increase? While there has been discussion about a rise in frugal mindset among consumers since November, are there plans to adjust the gross profit margin through changes in prices? Additionally, could you elaborate on your pricing strategy? Will the focus be on maintaining both margin and price?
This is Sakaki speaking. The gross profit margins at Aeon Retail have shown improvement across all product lines. The primary contributing factor is the increased composition ratio of Topvalu, providing a competitive advantage over rivals. This substantial enhancement in the markup ratio has played a pivotal role in boosting the overall gross profit margin. In the realm of other food products, meticulous price adjustments and control measures were implemented, particularly in the 3 fresh food categories and delicatessen products. This strategic focus has resulted in an augmented inventory turnover ratio, consequently elevating the gross profit margins. Within apparel and home furnishing, the company is actively managing inventories and striving to enhance turnover throughout the fiscal year. Notably, the implementation of an AI-based procurement management system is underway, aiming to improve order placement accuracy regarding selling price changes. These digital investments are proving instrumental in fostering improved gross profit margins.
Am I correct in understanding that the profits generated by functional subsidiaries responsible for a private brand and product procurement are booked under a segment labeled Adjustments?
I recall discussions about plans to allocate the profits of functional subsidiaries to their respective segments. Can you confirm whether the accounting approach will remain consistent for the current fiscal year? Additionally, are there expectations for sustained strength in the profits of functional subsidiaries throughout the fourth quarter and into the next fiscal year?
This is Egawa. The functional companies, namely Aeon Topvalu and Aeon Global SCM, are currently consolidated under the Adjustments. In the third quarter, adjustments amounted to JPY 11.6 billion, with each of the functional companies earning around JPY 4 billion.
Regarding the concept of returning profits to operating companies, it's clarified that this pertains to the internal reallocation of profits within the consolidated group segment. From an accounting perspective, while not all profits will be reallocated in the fourth quarter, there is an expectation for a slight increase in the amount recorded under Adjustments.
However, for the next fiscal year, we do not anticipate recording the same level of profit as in the current year. This decrease is particularly expected due to challenges faced by Aeon Global SCM, which manages logistics costs for operating companies and is encountering what is referred to as a 2024 problem.
How do you implement price strategies while maintaining a balance with a healthy gross profit margin?
This is Sakaki. The pricing policy is not viewed as a strategic initiative directly impacting gross profit margins. Given customer price sensitivity, our expectation is for prices to trend not upwards but rather towards the direction emphasizing price reductions and volume increases, a strategy we have actively pursued.
This is Shikata. Customer price sensitivity has heightened since October of the previous year, indicating a trend of price increase fatigue. Recognizing this and understanding the importance of controlling prices while delivering quality products, we leverage our private brands.
In particular, Topvalu has successfully reduced prices and increased volume during October, November and December. This achievement stems from our comprehensive control over product management, particularly with Topvalu being an in-house created private brand. By consolidating demand, especially in raw material procurement and optimizing material procurement and distribution routes, we have effectively reduced costs. Importantly, the strategy has not involved cutting prices at the expense of gross profit. Our corporate efforts have been directed towards returning profits to customers while maintaining a suitable profit margin.
Moving forward, we remain committed to offering competitive prices that stand out even when compared to those of other companies.