Paris Miki Holdings | 7455 |
Transcription
Paris Miki Holdings | 7455 |
R LAST UPDATE【2016/7/1】 Paris Miki Holdings | 7455 | Research Report by Shared Research Inc. Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an “owner’s manual” to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at [email protected] or find us on Bloomberg. R Paris Miki Holdings | 7455 | Shared Research Report LAST UPDATE【2016/7/1】 INDEX Key financial data ----------------------------------------------------------------------------------------------------- 3 Recent Updates -------------------------------------------------------------------------------------------------------- 4 Highlights ----------------------------------------------------------------------------------------------------------------------- 4 Trends and outlook --------------------------------------------------------------------------------------------------- 5 Monthly trends ---------------------------------------------------------------------------------------------------------------- 5 Quarterly trends and results----------------------------------------------------------------------------------------------- 6 Full-year company forecasts and medium/long-term outlook ----------------------------------------------- 14 Business ----------------------------------------------------------------------------------------------------------------- 25 Business description ------------------------------------------------------------------------------------------------------- 25 Strengths and weaknesses ----------------------------------------------------------------------------------------------- 32 Market and value chain --------------------------------------------------------------------------------------------------- 34 Strategy ------------------------------------------------------------------------------------------------------------------------ 38 Historical financial statements -----------------------------------------------------------------------------------39 Income statement ---------------------------------------------------------------------------------------------------- 66 Balance sheet----------------------------------------------------------------------------------------------------------------- 67 Statement of cash flows -------------------------------------------------------------------------------------------------- 69 Other information---------------------------------------------------------------------------------------------------- 71 History -------------------------------------------------------------------------------------------------------------------------- 71 News and topics ------------------------------------------------------------------------------------------------------------ 71 Top management----------------------------------------------------------------------------------------------------------- 72 Employees -------------------------------------------------------------------------------------------------------------------- 72 Major shareholders --------------------------------------------------------------------------------------------------------- 73 Investor relations------------------------------------------------------------------------------------------------------------ 73 Company profile ------------------------------------------------------------------------------------------------------------ 74 www.sharedresearch.jp 02/75 R Paris Miki Holdings | 7455 | Shared Research Report Paris Miki Holdings > Key financial data LAST UPDATE【2016/7/1】 Key financial data Income Statement (JPYmn) Total Sales YoY Gross Profit YoY GPM Operating Profit YoY OPM Recurring Profit YoY RPM Net Income YoY Net Margin Per Share Data (JPY) Number of Shares ('000) EPS Dividend Per Share Book Value Per Share Balance Sheet (JPYmn) Cash and Equivalents Inventories Total Current Assets Tangible Fixed Assets, net Intangible Assets Other Long-Term Assets Fixed Assets Total Assets Accounts Payable Short-Term Debt Total Current Liabilities Long-Term Debt Total Fixed Liabilities Total Liabilities Net Assets Cash Flow Statement (JPYmn) Operating Cash Flow Investment Cash Flow Financing Cash Flow Financial Ratios Interest-Bearing Debt Net Cash ROA ROE Equity Ratio FY03/06 FY03/07 FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 Cons. 68,011 -1.3% 48,491 -1.9% 71.3% 9,243 -10.3% 13.6% 9,842 -8.5% 14.5% 5,594 20.4% 8.2% Cons. 66,929 -1.6% 47,405 -2.2% 70.8% 7,033 -23.9% 10.5% 7,692 -21.8% 11.5% 4,324 -22.7% 6.5% Cons. 63,876 -4.6% 45,370 -4.3% 71.0% 3,881 -44.8% 6.1% 4,500 -41.5% 7.0% 1,906 -55.9% 3.0% Cons. 57,745 -9.6% 39,759 -12.4% 68.9% -800 -1.4% -1,034 -1.8% -3,204 -5.5% Cons. 56,299 -2.5% 38,656 -2.8% 68.7% -543 -1.0% -172 -0.3% -233 -0.4% Cons. 60,140 6.8% 41,725 7.9% 69.4% 1,062 1.8% 1,666 2.8% 473 0.8% Cons. 59,547 -1.0% 39,795 -4.6% 66.8% -114 -0.2% -25 -0.0% -1,177 -2.0% Cons. 55,419 -6.9% 37,711 -5.2% 68.0% 427 0.8% 1,066 1.9% 103 0.2% Cons. 56,903 2.7% 38,488 2.1% 67.6% 808 89.2% 1.4% 1,035 -2.9% 1.8% 419 306.8% 0.7% Cons. 54,342 -4.5% 37,082 -3.7% 68.2% 175 -78.3% 0.3% 635 -38.6% 1.2% 198 -52.7% 0.4% Cons. 53,727 -1.1% 36,197 -2.4% 67.4% 269 53.7% 0.5% 174 -72.6% 0.3% -601 -1.1% Est. 53,982 0.5% 489 81.8% 0.9% 378 117.2% 0.7% 72 0.1% 52,903 105.7 63.0 1,036 52,950 81.7 63.0 1,055 51,505 37.0 63.0 1,018 51,503 31.5 881 51,498 31.5 847 51,489 9.2 18.0 827 56,057 18.0 781 56,057 2.0 18.0 769 56,057 8.1 18.0 771 56,057 3.9 18.0 764 56,057 -11.7 18.0 729 1.4 18.0 - 26,920 8,338 40,574 7,004 266 17,285 24,556 65,131 30,311 8,535 44,411 7,693 272 14,001 21,967 66,379 24,256 9,381 38,944 7,845 603 13,332 21,782 60,726 18,973 9,791 34,212 7,039 545 11,932 19,517 53,729 17,811 9,185 32,523 7,081 865 11,202 19,150 51,673 20,647 9,993 36,518 6,926 892 10,348 18,167 54,720 19,562 10,244 34,922 6,782 1,166 9,982 17,932 52,854 15,214 9,658 29,854 6,174 1,526 14,523 22,224 52,079 15,507 10,308 31,569 5,646 1,690 14,881 22,219 53,788 16,604 11,034 32,892 5,709 1,606 12,978 20,296 53,187 16,507 10,237 32,461 5,410 1,254 11,941 18,606 51,067 2,543 9,885 420 10,305 54,824 2,311 8 10,088 406 10,495 55,884 2,443 7,712 599 8,311 52,415 2,050 7,899 470 8,369 45,359 1,794 7,432 637 8,070 43,602 1,656 1,832 8,679 2,500 3,435 12,114 42,606 1,474 5,256 11,502 923 12,425 40,428 1,570 1,382 7,417 4,000 4,827 12,244 39,834 1,852 1,664 8,915 4,000 4,869 13,785 40,003 1,896 5,988 12,046 600 1,467 13,514 39,673 1,803 5,751 11,425 1,066 1,830 13,256 37,811 7,436 -478 -2,456 4,676 1,642 -3,250 1,390 -1,621 -5,666 -589 1,195 -2,438 2,156 -1,643 -1,694 1,035 -11,088 2,929 479 -421 -151 2,428 -2,207 -958 2,065 -137 -806 175 2,876 -149 1,095 -1,360 -694 26,920 15.5% 10.6% 83.9% 8 30,303 11.7% 7.8% 83.9% 24,256 7.1% 3.5% 85.8% 18,973 -1.8% -6.6% 84.0% 17,811 -0.3% -0.5% 83.9% 4,332 16,315 3.1% 1.1% 77.4% 5,256 14,306 -0.0% -2.9% 76.1% 5,382 14,832 2.0% 0.3% 76.0% 5,664 11,843 2.0% 1.1% 73.8% 6,588 13,016 1.2% 0.5% 73.9% 6,817 11,690 0.3% -1.6% 73.5% Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods. www.sharedresearch.jp 03/75 R Paris Miki Holdings | 7455 | Shared Research Report Paris Miki Holdings > Recent Updates LAST UPDATE【2016/7/1】 Recent Updates Highlights On July 1, 2016, Paris Miki Holdings Inc. announced June 2016 sales figures; see the monthly trends section for details. On June 6, 2016, Shared Research updated the report following interviews with the company. On June 1, 2016, the company announced May 2016 sales figures. On May 13, 2016, the company announced earnings results for Full-Year FY03/16; see the results section for details. On May 9, 2016, the company revised its full-year forecasts for FY03/16. Reasons for the revisions The company expects sales to fall behind initial forecasts despite efforts to close unprofitable stores and renovate existing stores, because customer footfall was not able to recover following the consumption tax hike in 2014. It lowered its operating profit forecast, as the lower SG&A expenses (in line with lower sales) will likely be insufficient to cover the missed sales forecast. In addition, the company booked a forex loss of JPY200mn, so recurring profit and net income attributable to parent company shareholders were also revised down. The forex loss comes from forex valuations of assets denominated in foreign currencies as of March 31, 2016. The company left its year-end dividend forecasts (JPY9 per share) unchanged. Earnings forecasts Earnings forecasts (JPYmn) Sales YoY CoGS Gross Profit YoY GPM SG&A expenses SG&A/Sales Operating Profit YoY OPM Recurring Profit YoY RPM Net Income YoY FY03/14 FY03/15 1H 2H 1H 29,374 27,529 28,232 0.8% 4.8% -3.9% 9,595 8,819 8,900 19,779 18,709 19,332 0.0% 4.3% -2.3% 67.3% 68.0% 68.5% 18,657 19,023 18,412 63.5% 69.1% 65.2% 1,122 -314 920 16.1% - -18.0% 3.8% -1.1% 3.3% 1,260 -225 1,067 18.5% - -15.3% 4.3% -0.8% 3.8% 863 -444 534 191.6% - -38.1% FY03/16 2H 1H Act. 2H Est. 26,110 28,185 25,542 -5.2% -0.2% -2.2% 8,360 9,052 17,750 19,133 -5.1% -1.0% 68.0% 67.9% 18,494 17,904 70.8% 63.5% -745 1,228 -959 - 33.5% -2.9% 4.4% -3.8% -432 1,159 -985 8.6% -1.7% 4.1% -3.9% -336 518 -1,119 -3.0% - FY03/14 FY03/15 FY03/16 FY FY New Est. Old Est. Change 56,903 54,342 53,727 54,958 -1,231 2.7% -4.5% -1.1% 1.1% 18,414 17,260 - 17,822 38,488 37,082 - 37,136 2.1% -3.7% 0.1% 67.6% 68.2% 67.6% 37,680 36,906 - 36,192 66.2% 67.9% 65.9% 808 175 269 943 -674 89.2% -78.3% 53.7% 438.9% 1.4% 0.3% 0.5% 1.7% 1,035 635 174 1,105 -931 -2.9% -38.6% -72.6% 74.0% 1.8% 1.2% 0.3% 2.0% 419 198 -601 500 -1,101 306.8% -52.7% - 152.5% - Source: Shared Research based on company data On May 2, 2016, the company announced April 2016 sales figures. For corporate releases and developments more than three months old, see the News and topics section. www.sharedresearch.jp 04/75 R Paris Miki Holdings | 7455 | Shared Research Report Paris Miki Holdings > Trends and outlook LAST UPDATE【2016/7/1】 Trends and outlook Monthly trends Monthly comparable-store sales Existing Stores Apr FY03/11 -4.1% FY03/12 3.6% FY03/13 -5.5% FY03/14 -4.2% FY03/15 5.5% FY03/16 -8.5% FY03/17 -6.7% May -3.4% 2.7% -6.6% -2.1% -6.2% 5.9% -8.9% Jun 3.4% -0.2% -4.9% -0.5% -4.4% 1.7% -7.0% Jul 3.2% 1.2% -12.7% 4.8% -8.4% 1.6% Aug 2.7% -1.6% -13.9% 3.7% -4.9% 2.2% Sep 3.1% -2.7% -5.1% -0.9% -0.9% -3.0% Oct 6.7% -2.7% -7.4% -1.0% -3.9% 5.1% Nov 4.3% -1.3% -10.8% 5.8% 1.9% -1.6% Dec 4.2% -4.1% -10.8% 5.1% -6.3% 1.7% Jan 0.1% -2.7% -11.7% 4.0% -3.8% -0.6% Feb 3.3% -7.7% -1.3% -1.6% 4.0% -2.6% Mar 0.7% 7.1% -4.1% 19.5% -18.3% -8.3% Aug 9.9% -2.6% -14.2% 0.5% -6.4% 1.0% Sep 10.2% -4.2% -5.7% -4.7% -2.2% -4.0% Oct 13.6% -3.5% -7.6% -5.0% -4.8% 4.3% Nov 10.6% -1.7% -11.1% 1.9% 0.8% -2.9% Dec 9.2% -4.6% -11.6% 1.8% -7.2% 0.5% Jan 5.3% -2.9% -12.8% 1.1% -4.9% -1.8% Feb 5.2% -8.3% -3.6% -4.2% 2.6% -3.5% Mar -2.2% 6.4% -7.0% 17.9% -19.4% -9.2% Source: Shared Research based on company data Monthly all-store sales All Stores FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 Apr 1.0% 2.3% -5.7% -7.5% 4.2% -9.1% -7.2% May 3.3% 2.4% -6.7% -5.3% -7.5% 5.1% -9.4% Jun 10.2% -1.3% -5.3% -3.8% -5.7% 0.4% -7.2% Jul 10.3% -0.2% -13.2% 1.8% -9.8% 0.6% Source: Shared Research based on company data www.sharedresearch.jp 05/75 R Paris Miki Holdings | 7455 | Shared Research Report Paris Miki Holdings > Trends and outlook LAST UPDATE【2016/7/1】 Quarterly trends and results Quarterly Performance (JPYmn) Sales YoY Gross Profit YoY GPM SG&A Expenses YoY SG&A / Sales Operating Profit YoY OPM Recurring Profit YoY RPM Net Income YoY NPM Comparable store sales growth Inventory Products Net cash FY03/14 Q1 Q2 Q3 14,121 15,253 13,910 -2.3% 3.9% 2.3% 9,529 10,250 9,324 -2.4% 2.4% 4.9% 67.5% 67.2% 67.0% 9,325 9,332 9,314 0.1% -1.6% -0.9% 66.0% 61.2% 67.0% 203 919 9 -53.9% 74.7% 6.0% 0.1% 1.4% 302 958 67 -32.4% 55.5% 2.1% 6.3% 0.5% 263 600 32 174.0% 200.0% 1.9% 3.9% 0.2% -2.3% 2.4% 3.2% 10,214 10,021 10,467 9,458 9,191 9,624 12,180 13,370 11,655 Q4 Q1 13,619 13,873 7.4% -1.8% 9,385 9,547 3.7% 0.2% 68.9% 68.8% 9,709 9,082 6.9% -2.6% 71.3% 65.5% -323 465 - 129.1% -2.4% 3.4% -292 532 - 76.2% -2.1% 3.8% -476 227 - -13.7% -3.5% 1.6% 8.2% -2.0% 10,308 10,604 9,403 9,651 11,843 11,396 Performance Breakdown (JPYmn) Sales Domestic segment Overseas segment YoY Domestic segment Overseas segment FY03/14 Q1 14,121 12,389 1,830 -2.3% -5.3% 26.5% Q2 15,253 13,341 2,019 3.9% 0.1% 38.9% Q3 13,910 11,973 2,012 2.3% -1.6% 33.9% Q4 13,619 11,869 1,823 7.4% 5.6% 18.0% FY03/15 Q1 13,873 11,986 1,989 -1.8% -3.3% 8.7% Q2 14,359 12,548 1,893 -5.9% -5.9% -6.2% Q3 13,380 11,529 1,939 -3.8% -3.7% -3.6% Q4 12,730 10,899 1,937 -6.5% -8.2% 6.3% FY03/16 Q1 13,822 11,974 2,003 -0.4% -0.1% 0.7% Q2 14,363 12,360 2,103 0.0% -1.5% 11.1% Q3 13,348 11,560 1,898 -0.2% 0.3% -2.1% Q4 12,194 10,100 1,729 -4.2% -7.3% -10.7% Domestic sales Frames Lenses Sunglasses Contact lenses Hearing aids Other 12,817 3,967 5,562 694 393 1,462 736 13,720 4,223 5,971 869 404 1,504 750 12,324 3,926 5,516 267 357 1,490 766 12,311 4,110 5,741 349 383 1,234 495 12,422 3,854 5,574 732 289 1,416 553 12,863 3,983 5,789 747 307 1,467 570 11,827 3,778 5,279 268 297 1,502 704 11,186 3,658 5,084 352 275 1,274 542 12,244 3,715 5,451 773 264 1,469 569 12,761 3,802 5,664 793 269 1,473 760 11,903 3,625 5,266 307 264 1,548 894 YoY Frames Lenses Sunglasses Contact lenses Hearing aids Other -5.5% -9.9% -8.2% 16.2% -15.8% 9.8% 5.4% -0.8% -2.9% -3.7% 12.0% -14.9% 11.6% 10.1% -0.5% -1.5% 1.6% 3.5% -21.0% 6.0% -9.9% 6.1% 7.3% 9.4% 10.8% -5.4% 2.9% -19.1% -3.1% -2.8% 0.2% 5.5% -26.5% -3.1% -24.9% -6.2% -5.7% -3.0% -14.0% -24.0% -2.5% -24.0% -4.0% -3.8% -4.3% 0.4% -16.8% 0.8% -8.1% -9.1% -11.0% -11.4% 0.9% -28.2% 3.2% 9.5% -1.4% -3.6% -2.2% 5.6% -8.7% 3.7% 2.9% -0.8% -4.5% -2.2% 6.2% -12.4% 0.4% 33.3% 1,304 46.5% 1,533 78.5% 1,586 30.9% 1,308 21.3% 1,451 11.3% 1,496 -2.4% 1,553 -2.1% 1,544 18.0% 1,578 8.8% SG&A expenses Sales promotion Advertising promotion Personnel Rent Depreciation Others YoY Sales promotion Advertising promotion Personnel Rent Depreciation Others 9,325 665 418 4,487 2,392 293 1,070 0.1% 3.3% 154.9% -2.3% -3.7% -7.3% -4.5% 9,332 690 317 4,483 2,465 311 1,066 -1.6% 7.6% 210.8% -3.1% -3.3% -14.1% -11.3% 9,314 682 350 4,434 2,404 321 1,123 -0.9% -2.7% 109.6% -2.3% -1.8% -5.9% -6.7% 9,709 654 328 4,879 2,410 325 1,113 6.9% 7.7% 54.7% 10.5% -0.2% -8.7% 3.7% 9,082 647 265 4,476 2,355 280 1,059 -2.6% -2.7% -36.6% -0.2% -1.5% -4.4% -1.0% 9,330 695 302 4,445 2,402 286 1,200 -0.0% 0.7% -4.7% -0.8% -2.6% -8.0% 12.6% 9,239 701 345 4,416 2,356 284 1,137 -0.8% 2.8% -1.4% -0.4% -2.0% -11.5% 1.2% 9,255 523 234 4,675 2,339 289 1,195 -4.7% -20.0% -28.7% -4.2% -2.9% -11.1% 7.4% Operating profit Domestic segment Overseas segment YoY Domestic segment 203 220 -16 -53.9% -59.2% 919 904 16 74.7% 58.3% 9 -10 18 - -323 465 -251 433 -121 31 - 129.1% 96.8% 455 525 -66 -50.5% -41.9% -204 -143 -60 - 887 1 -1 877 877 4 -4 867 2 -12 860 -10 -7 858 1 -3 Tenant Built-in Suburbs 342 104 441 336 103 438 339 100 438 338 97 432 334 97 429 Franchise Kinpodo OPTIQUE Directly managed 129 25 71 662 127 25 71 654 126 25 72 654 124 25 70 648 -5.5% -2.3% -0.8% 2.4% -0.5% 3.2% 194 3 177 8 6 107 1 -2 195 3 178 8 6 106 194 3 177 8 6 103 -1 -3 Difference YoY Store count (Domestic) Openings Closings Sales comp. (all stores) Sales comp. (comparable stores) Store count (overseas) Europe Asia Oceania America China Openings Closings FY03/15 Q2 Q3 14,359 13,380 -5.9% -3.8% 9,785 9,035 -4.5% -3.1% 68.1% 67.5% 9,330 9,239 -0.0% -0.8% 65.0% 69.1% 455 -204 -50.5% 3.2% -1.5% 535 0 -44.2% 3.7% 0.0% 307 208 -48.8% 550.0% 2.1% 1.6% -5.1% -3.2% 10,553 11,177 9,586 10,140 11,348 12,931 Q4 12,730 -6.5% 8,715 -7.1% 68.5% 9,255 -4.7% 72.7% -541 -4.2% -432 -3.4% -544 -4.3% -8.1% 11,035 10,044 13,016 Q1 13,822 -0.4% 9,500 -0.5% 68.7% 8,870 -2.3% 64.2% 630 35.5% 4.6% 686 28.9% 5.0% 323 42.3% 2.3% -0.5% 11,152 10,092 12,964 FY03/16 Q2 Q3 14,363 13,348 0.0% -0.2% 9,633 8,912 -1.6% -1.4% 67.1% 66.8% 9,034 8,964 -3.2% -3.0% 62.9% 67.2% 598 -52 31.4% 4.2% -0.4% 473 -36 -11.6% 3.3% -0.3% 195 -122 -36.5% 1.4% -0.9% 0.2% 1.9% 11,143 11,539 10,037 10,356 12,993 12,323 Q4 12,194 -4.2% 8,152 -6.5% 66.9% 9,060 -2.1% 74.3% -907 -7.4% -949 -7.8% -997 -8.2% -4.2% 11,375 10,237 11,690 FY03/16 FY03/17 % of FY Init. Est. Init. Est. 97.8% 97.5% 99.3% 28.5% 15.7% -120.2% FY03/14 54,958 53,982 1.1% 0.5% 37,136 36,469 0.1% 0.8% 67.6% 67.6% 36,192 35,979 -1.9% 0.1% 65.9% 66.6% 943 489 438.9% 81.8% 1.7% 0.9% 1,105 378 74.0% 117.2% 2.0% 0.7% 500 72 152.5% 0.9% 0.1% 0.5% FY03/15 FY03/16 56,903 49,380 7,522 2.7% -0.5% 29.8% 54,342 46,725 7,617 -4.5% -5.4% 1.3% 53,727 45,994 7,733 -1.1% -1.6% 1.5% 10,610 3,359 4,792 349 240 1,252 617 51,172 16,226 22,790 2,179 1,537 5,690 2,747 48,298 15,273 21,726 2,099 1,168 5,659 2,369 47,518 14,501 21,173 2,222 1,037 5,742 2,840 0.6% -4.0% -0.2% 14.6% -11.1% 3.1% 27.0% -5.1% -8.2% -5.7% -0.9% -12.7% -1.7% 13.8% -0.4% -2.1% -0.6% 12.0% -14.6% 7.7% -3.3% -5.6% -5.9% -4.7% -3.7% -24.0% -0.5% -13.8% -1.6% -5.1% -2.5% 5.9% -11.2% 1.5% 19.9% 1,602 7.1% 1,445 -7.0% 1,584 2.6% 5,731 41.9% 6,044 5.5% 6,209 2.7% 8,870 610 184 4,372 2,354 257 1,093 -2.3% -5.7% -30.6% -2.3% -0.0% -8.2% 3.2% 9,034 645 209 4,452 2,376 273 1,079 -3.2% -7.2% -30.8% 0.2% -1.1% -4.5% -10.1% 8,964 686 307 4,313 2,315 303 1,040 -3.0% -2.1% -11.0% -2.3% -1.7% 6.7% -8.5% 9,060 513 298 4,565 2,247 330 1,107 -2.1% -1.9% 27.4% -2.4% -3.9% 14.2% -7.4% 37,680 2,691 1,413 18,283 9,671 1,250 4,372 1.1% 3.8% 119.1% 0.6% -2.3% -9.1% -4.9% 36,906 2,566 1,146 18,012 9,452 1,139 4,591 -2.1% -4.6% -18.9% -1.5% -2.3% -8.9% 5.0% 35,928 2,454 998 17,702 9,292 1,163 4,319 -2.6% -4.4% -12.9% -1.7% -1.7% 2.1% -5.9% -541 -440 -112 - 630 704 -0 35.5% 62.6% 598 668 -70 31.4% 27.2% -52 40 -93 - -907 -816 -96 - 808 863 -103 89.2% 13.0% 175 375 -207 -78.3% -56.5% 269 596 -259 53.7% 58.9% 854 7 -11 846 3 -11 840 2 -8 836 4 -8 832 5 -9 822 1 -11 867 7 -27 846 11 -32 822 12 -36 334 97 427 335 98 421 328 98 420 323 98 419 321 98 417 321 96 415 316 96 410 338 97 432 328 98 420 316 96 410 122 25 69 644 120 26 71 641 119 26 74 635 116 26 75 629 115 26 73 626 115 24 73 624 115 24 72 621 115 24 72 611 124 25 70 648 116 26 75 629 115 24 72 611 6.1% 8.2% -3.1% -2.0% -6.2% -5.1% -4.0% -3.2% -9.1% -8.1% -1.4% -0.5% -0.8% 0.2% 0.6% 1.9% -5.1% -4.2% -0.4% 2.7% -5.6% -4.5% -1.6% -0.6% 191 3 174 8 6 100 1 -4 191 3 174 8 6 100 186 3 170 7 6 96 1 -5 184 3 167 8 6 90 185 3 168 8 6 87 1 -4 179 3 162 8 6 83 -4 173 3 157 7 6 79 2 -6 168 3 152 7 6 75 -4 167 1 151 7 6 73 1 -3 191 3 174 8 6 100 2 -10 185 3 168 8 6 87 2 -15 167 1 151 7 6 73 3 -17 -6 Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods. www.sharedresearch.jp 06/75 R Paris Miki Holdings | 7455 | Shared Research Report Paris Miki Holdings > Trends and outlook LAST UPDATE【2016/7/1】 Full-Year Performance (JPYmn) Sales YoY Gross Profit YoY GPM SG&A Expenses YoY SG&A / Sales Operating Profit YoY OPM Recurring Profit YoY RPM Net Income YoY NPM Comparable store sales growth Inventory Net cash FY03/04 FY03/05 FY03/06 FY03/07 FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY Performance Breakdown (JPYmn) Sales Domestic segment Overseas segment YoY Domestic segment Overseas segment Domestic sales Frames Lenses Sunglasses Contact lenses Hearing aids Other YoY Frames Lenses Sunglasses Contact lenses Hearing aids Other Difference YoY SG&A expenses Personnel Advertising promotion Depreciation Rent Sales promotion Others YoY Personnel Advertising promotion Depreciation Rent Sales promotion Others FY03/05 FY03/06 FY03/07 FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY FY FY FY FY FY FY FY FY FY FY FY 68,922 68,011 66,929 63,876 57,745 56,299 60,140 59,547 55,419 56,903 54,342 53,727 - 57,207 51,615 49,971 54,045 53,613 49,622 49,380 46,725 45,994 6,328 6,094 5,934 5,797 7,522 7,617 7,733 6,130 6,668 -6.9% 2.7% -4.5% -1.1% 6.8% -1.0% -2.5% 0.2% -1.3% -1.6% -4.6% -9.6% -5.4% -1.6% -7.4% -0.5% 8.2% -0.8% -9.8% -3.2% 1.5% 1.3% -2.3% 29.8% -8.1% 3.2% -3.7% -2.6% 68,454 67,201 65,422 61,406 55,470 53,360 57,202 56,368 51,380 51,172 48,298 47,518 23,045 22,294 21,628 19,958 17,680 17,201 18,410 17,996 16,569 16,226 15,273 14,501 33,345 33,383 32,944 30,288 27,407 25,869 27,360 26,521 22,936 22,790 21,726 21,173 1,946 2,179 2,099 1,797 2,222 1,645 1,509 1,851 2,266 1,961 1,608 1,752 2,812 2,449 2,285 2,280 2,074 1,799 1,537 1,168 1,037 3,288 3,013 3,491 5,285 5,690 5,119 5,659 5,742 4,299 4,719 3,606 3,895 4,120 2,997 3,389 2,841 2,747 2,578 2,858 2,369 2,840 2,166 2,195 2,621 2,698 3,307 2,886 -8.8% -0.4% -5.6% -1.6% 7.2% -1.5% -6.1% -9.7% -3.8% 2.5% -1.8% -2.6% -2.7% -5.1% -7.7% -11.4% 7.0% -2.2% -7.9% -2.1% -5.9% -3.3% -3.0% 4.5% -0.6% -3.1% -13.5% -4.7% -2.5% -9.5% -5.6% 5.8% -1.3% -8.1% 3.4% 0.1% 9.0% -6.1% -8.3% 5.9% 22.7% -2.9% 8.3% 12.0% -3.7% -8.2% -13.5% -18.0% -0.2% -9.0% -13.3% -14.6% -24.0% -11.2% -6.7% -12.9% -6.7% -7.1% -5.8% -8.4% -0.5% 1.5% 6.4% 8.0% 5.8% 4.3% 9.8% 8.5% 3.2% 7.7% 14.8% 13.1% 10.9% -0.6% -3.3% -13.8% 19.9% 1.3% 17.4% -9.2% 2.9% -19.7% -8.8% -12.7% 6,209 1,507 2,470 2,275 2,939 2,938 3,179 4,039 5,731 6,044 810 468 -0.0% 8.2% 27.1% 29.2% 41.9% 5.5% 2.7% 73.3% 86.0% 63.9% -7.9% -76.8% 39,134 39,248 40,372 41,488 40,559 39,199 40,663 39,910 37,283 37,680 36,906 35,928 2,454 2,593 2,691 2,566 3,123 3,200 2,880 2,617 2,747 2,667 2,937 3,046 1,441 645 1,413 1,146 998 1,115 1,366 1,522 1,556 1,337 1,418 1,428 20,552 20,616 21,115 21,602 21,086 20,353 20,723 19,935 18,177 18,283 18,012 17,702 9,699 9,682 9,894 9,671 9,452 9,292 8,785 8,736 8,882 8,341 8,266 8,382 1,375 1,250 1,139 1,163 1,447 1,503 1,308 1,401 1,339 1,251 1,182 1,225 4,846 4,599 4,372 4,591 4,319 4,710 5,412 5,088 4,832 4,483 4,756 4,635 3.7% -1.9% -6.6% 1.1% -2.1% -2.6% 0.3% 2.9% 2.8% -2.2% -3.4% -3.8% 3.8% -4.6% -4.4% -9.1% 5.0% -2.9% -2.8% -4.0% 3.7% 2.5% 2.5% -10.0% 7.8% -55.2% 119.1% -18.9% -12.9% 0.7% -21.9% 22.5% 11.4% 2.2% -14.1% 0.5% -1.5% -1.7% -3.5% 1.8% -3.8% -8.8% 0.6% 2.4% 2.3% -2.4% -3.9% 0.3% 1.7% 9.2% -0.2% 2.2% -2.3% -2.3% -1.7% -5.2% -0.9% 1.4% 4.8% -0.6% 2.7% -9.1% -8.9% 2.1% 3.6% 18.1% 3.9% -13.0% 7.1% -4.4% -13.5% -5.5% 1.9% -5.1% -4.9% 5.0% -5.9% 1.6% 14.9% -6.0% -5.0% -7.2% 6.1% 1.2% - 68,796 -7.1% 49,693 -8.1% 72.2% 40,674 -11.8% 59.1% 9,019 13.7% 13.1% 9,501 10.6% 13.8% 5,231 113.6% 7.6% -7.1% 10,483 22,660 68,922 0.2% 49,434 -0.5% 71.7% 39,134 -3.8% 56.8% 10,300 14.2% 14.9% 10,761 13.3% 15.6% 4,648 -11.1% 6.7% 1.9% 8,851 22,084 68,011 -1.3% 48,491 -1.9% 71.3% 39,248 0.3% 57.7% 9,243 -10.3% 13.6% 9,842 -8.5% 14.5% 5,594 20.4% 8.2% -2.4% 8,338 26,920 66,929 -1.6% 47,405 -2.2% 70.8% 40,372 2.9% 60.3% 7,033 -23.9% 10.5% 7,692 -21.8% 11.5% 4,324 -22.7% 6.5% -3.0% 8,535 30,303 63,876 -4.6% 45,370 -4.3% 71.0% 41,488 2.8% 65.0% 3,881 -44.8% 6.1% 4,500 -41.5% 7.0% 1,906 -55.9% 3.0% -7.5% 9,381 24,256 57,745 -9.6% 39,759 -12.4% 68.9% 40,559 -2.2% 70.2% -800 -1.4% -1,034 -1.8% -3,204 -5.5% -9.6% 9,791 18,973 56,299 -2.5% 38,656 -2.8% 68.7% 39,199 -3.4% 69.6% -543 -1.0% -172 -0.3% -233 -0.4% -4.5% 9,185 17,811 Operating profit 10,300 9,243 7,033 3,881 -800 -543 1,062 Domestic segment Overseas segment Adjustment YoY Domestic segment Depreciation Domestic segment Overseas segment Change in fixed assets Domestic segment Overseas segment Domestic store count Openings Closings Tenant Built-in Suburbs Franchise Kimpo-do OPTIQUE Directly managed Sales YoY (all stores) Sales YoY (comp. stores) Overseas store count Europe Asia Oceania The US China Openings Closings 14.2% 1,306 1,041 28 -24 363 160 518 166 875 2.5% 1.9% 188 5 148 26 9 107 31 -13 -10.3% 1,246 1,055 45 -31 369 163 523 178 877 -1.8% -2.4% 200 4 157 31 8 114 15 -8 -23.9% 1,274 1,052 26 -29 371 159 522 168 884 -2.6% -3.0% 223 4 181 32 6 138 28 -4 3,838 29 13 -44.8% 1,505 1,047 25 -30 369 154 524 162 885 -6.1% -7.5% 241 5 199 31 6 156 24 -6 -660 -183 43 1,510 1,020 34 -61 363 140 517 153 867 -9.7% -9.6% 235 5 197 27 6 150 5 -11 -398 -328 183 1,402 989 50 -81 380 118 491 145 24 820 -3.8% -4.5% 237 5 204 22 6 150 7 -7 1,426 -319 -44 1,401 1,260 141 1,601 1,483 118 954 13 -48 367 113 474 142 24 66 722 7.2% 1.9% 222 4 196 16 6 140 11 -21 60,140 6.8% 41,725 7.9% 69.4% 40,663 3.7% 67.6% 1,062 1.8% 1,666 2.8% 473 0.8% 1.9% 9,993 16,315 59,547 -1.0% 39,795 -4.6% 66.8% 39,910 -1.9% 67.0% -114 -0.2% -25 -0.0% -1,177 -2.0% -0.7% 10,244 14,306 55,419 -6.9% 37,711 -5.2% 68.0% 37,283 -6.6% 67.3% 427 0.8% 1,066 1.9% 103 0.2% -8.1% 9,658 14,832 56,903 2.7% 38,488 2.1% 67.6% 37,680 1.1% 66.2% 808 89.2% 1.4% 1,035 -2.9% 1.8% 419 306.8% 0.7% 2.7% 10,308 11,843 54,342 -4.5% 37,082 -3.7% 68.2% 36,906 -2.1% 67.9% 175 -78.3% 0.3% 635 -38.6% 1.2% 198 -52.7% 0.4% -4.5% 11,034 13,016 427 808 175 269 181 764 -360 -345 49 23 -87.3% 322.1% 1,351 1,384 1,213 1,254 137 130 1,543 1,921 1,792 1,433 128 109 949 887 21 7 -69 -26 372 342 110 104 441 467 134 129 24 25 60 72 731 661 -1.5% -8.8% -0.7% -8.1% 210 197 4 3 188 179 12 9 6 6 119 108 9 9 -30 -20 863 -103 47 89.2% 13.0% 1,260 1,130 130 1,236 1,091 145 867 7 -27 338 97 432 124 25 70 648 -0.4% 2.7% 191 3 174 8 6 100 2 -10 375 -207 7 -78.3% -56.5% 1,153 1,009 143 1,382 969 412 846 11 -32 328 98 420 116 26 75 629 -5.6% -4.5% 185 3 168 8 6 87 2 -15 596 -259 -66 53.7% 58.9% 1,200 1,123 176 876 631 245 822 12 -36 316 96 410 115 24 72 611 -1.6% -0.6% 167 1 151 7 6 73 3 -17 -114 FY03/16 FY03/17 Est. 53,727 53,982 -1.1% 0.5% 36,197 36,469 -2.4% 0.8% 67.4% 67.6% 35,928 35,979 0.1% -2.6% 66.9% 66.6% 269 489 53.7% 81.8% 0.5% 0.9% 174 378 -72.6% 117.2% 0.3% 0.7% -601 72 -1.1% 0.1% -0.6% 0.8% 10,237 11,690 - Diff. 255 272 51 220 204 673 - Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods. www.sharedresearch.jp 07/75 R Shared Research Report Paris Miki Holdings | 7455 | Paris Miki Holdings > Trends and outlook LAST UPDATE【2016/7/1】 Full-year FY03/16 results (out May 13, 2016) ▶ FY03/16: Operating profit at domestic segment up on cuts in SG&A expenses, smaller decline in same-store sales; consolidated operating profit also finishes higher despite growing losses overseas ▶ FY03/16: Same-store sales decline 0.6% YoY versus plan of +0.5%; overseas segment also finishes below plan as losses grow ▶ Organizational restructuring: Clarify role of holding company; holding company to focus on new businesses and investment while core subsidiary Miki manages domestic eyewear business ▶ Miki's new president: Track record includes turnaround of Australian subsidiary, revitalization of Shibuya store; willing to take risks as embarks on course targeting future growth ▶ Holding company: Having understood the direction of growth at domestic eyewear business, will invest in medical businesses will eye on future growth Quarterly sales Quarterly operating profit Source: Shared Research based on company data Earnings overview Though overseas losses expanded, domestic profits improved, supporting consolidated results; recovery of existing stores and less SG&A expenses contributed In full-year FY03/16, sales were JPY53.7bn (-1.1% YoY) and operating profit JPY269mn (+53.3% YoY or +JPY444mn). Domestic businesses increased operating profit by JPY224mn due to recovery of existing store sales and cuts in SG&A expenses, but overseas businesses were sluggish, especially in Korea. As a result, operating loss widened JPY52mn from a year earlier. www.sharedresearch.jp 08/75 R Shared Research Report Paris Miki Holdings | 7455 | Paris Miki Holdings > Trends and outlook LAST UPDATE【2016/7/1】 According to the company, it has been proceeding with its plan to close and consolidate unprofitable stores, along with focusing on actively renovating existing stores as the need arises in order to give them distinct formats. By doing so, it made efforts to increase the number of baby boomers and second generation baby boomers visiting its stores. Still, customer visits post consumption tax hike remain sluggish, forcing the company to miss initial estimates (the company revised down estimates on May 9, 2016). Operating profit benefits from closures of stores, and efforts to hold SG&A and advertising expenses in check Gross profit declined by JPY885mn YoY on a 0.9pp worsening of the CoGS-to-sales ratio. However, an overall effort to curb SG&A expenses through store closures and curbing advertising expenses gave operating profit a JPY94mn increase. Advertising and SG&A expenses were kept in check through cost-effectiveness analysis. Main subsidiary Miki appoints manager of successful rollout of Belle Epoque format stores as new president The group's main subsidiary, Miki, in February 2016 announced the appointment of a new president and new directors along with the assignment of existing directors to new positions (effective February 8, 2016). The new appointments are of particular significance given 1) the high level of expectations surrounding the new president of subsidiary Miki, and 2) the fact that this will be the first time that a board member of Paris Miki Holdings will not be serving concurrently on the board of the main subsidiary. The appointment of a new president was carried out in line with the company's initial promotion plans, as the former president of Miki (Hiroshi Tane, President and Representative Director of Paris Miki Holdings) had originally intended to step down as head of subsidiary Miki within one year after he assumed the position in June 2015. The new Miki president, Masahiro Sawada, has managed major store locations in Shibuya and elsewhere Japan, managed overseas subsidiaries, and was also the MD supervisor who oversaw the successful renovation of Belle Epoque format stores in FY03/16. Shared Research believes the new president can be counted on to aggressively implement more measures aimed at revitalizing Miki's existing store base going forward. Company plans for FY03/17 For FY03/17, the company estimates sales to grow 0.5% YoY (0.8% YoY for domestic comparable stores), and operating profit to grow 81.6% YoY, or up by JPY220mn. Toward FY03/17, Shared Research sees the new president pushing ahead with the efforts to revitalize existing stores and develop new stores that better appeal to second-wave baby boomers (those born in the early 1970s). As part of this effort, the company is working to revitalize its organizational structure through the promotion of a younger generation of managers, including the leader of the store format development team. The company had previously classified its store formats into four different types but is now planning to add three new types. The new formats are still in the trial-and-error stage of development, but we will be keeping a close eye on progress under the new format development team leader going forward. The company plans to open 20 new stores, while closing 20 mainly unprofitable stores in FY03/17. For new store candidates, the company puts emphasis on cities with large populations but few stores, planning mainly for stores in shopping centers as well as stand-alone stores along roads with heavy traffic. We see that it is growing emphasis on store development, and there is a chance it will adopt more aggressive store opening plans. As for SG&A expenses, thus far the company has been working to control spending through various means in addition to www.sharedresearch.jp 09/75 R Shared Research Report Paris Miki Holdings > Trends and outlook Paris Miki Holdings | 7455 | LAST UPDATE【2016/7/1】 closing stores. However, there is a chance the company will now shift tactics and do more upfront spending in key areas. Shared Research will be watching closely for developments on this front. Overseas subsidiaries Overseas, the company is closing unprofitable stores in areas with a difficult outlook, while considering aggressive expansion in areas with solid business and new areas. Visibility in South Korea is poor, but the company seems to be expecting favorable results from operations in Singapore and other Southeast Asian countries. Having achieved market penetration, operations in Thailand now have a stable earnings base; the company is also close to turning a profit in FY03/17 in Vietnam, where it also operates a hospital. Operations in Australia are expected to remain in the red but the company expects losses to continue to narrow. Domestic sales by product and consolidated GPM Source: Shared Research based on company data SG&A expenses Source: Shared Research based on company data Inventory assets Source: Shared Research based on company data www.sharedresearch.jp 10/75 R Paris Miki Holdings | 7455 | Shared Research Report Paris Miki Holdings > Trends and outlook LAST UPDATE【2016/7/1】 Japan Domestic segment performance Source: Shared Research based on company data Domestic year-on-year sales Source: Shared Research based on company data Domestic sales by product (all stores, retail) Source: Shared Research based on company data Unit prices (JPY) Average Eyeglass Unit Price excl. OPTIQUE PARIS MIKI OPTIQUE PARIS MIKI YoY All stores excl. OPTIQUE PARIS MIKI OPTIQUE PARIS MIKI Number of Eyeglasses Unit Sales (YoY) excl. OPTIQUE PARIS MIKI Number of Customers Counted (YoY) excl. OPTIQUE PARIS MIKI FY03/03 FY03/04 FY03/05 FY03/06 FY03/07 FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY FY FY FY FY FY FY FY FY FY FY FY FY FY 34,295 34,515 34,722 34,160 33,334 33,372 31,099 28,114 29,873 27,535 29,407 32,410 32,493 32,304 38,176 38,117 38,055 37,670 37,153 36,945 34,176 31,037 33,970 31,033 34,663 38,236 38,463 38,506 8,286 8,824 9,207 9,187 9,574 9,936 10,068 10,005 11,967 11,246 12,160 13,235 13,676 13,949 -6.7% 0.6% 0.6% -1.6% -2.4% 0.1% -6.8% -9.6% 6.3% -7.8% 6.8% 10.2% 0.3% -0.6% 1.3% -0.2% -0.2% -1.0% -1.4% -0.6% -7.5% -9.2% 9.5% -8.6% 11.7% 10.3% 0.6% 0.1% 3.6% 6.5% 4.3% -0.2% 4.2% 3.8% 1.3% -0.6% 19.6% -6.0% 8.1% 8.8% 3.3% 2.0% -9.4% -10.6% 3.3% -0.4% 0.3% -7.3% -3.6% 6.7% 0.4% 7.2% -18.4% -11.6% -6.2% -3.6% -18.6% -9.9% 4.1% -1.3% -1.3% -6.8% -3.1% 6.3% -1.0% 7.5% -19.5% -11.6% -6.5% -3.7% -8.8% -10.3% 0.4% -1.1% -4.3% -5.4% -6.3% -0.2% 2.3% -0.5% -8.4% -9.2% -6.9% -1.1% -14.0% -10.0% 0.6% -1.7% -5.2% -5.1% -6.4% -1.4% 0.8% -0.8% -8.3% -8.8% -6.7% -1.2% Source: Shared Research based on company data www.sharedresearch.jp 11/75 R Shared Research Report Paris Miki Holdings > Trends and outlook Paris Miki Holdings | 7455 | LAST UPDATE【2016/7/1】 Store count Source: Shared Research based on company data Overseas segment performance Source: Shared Research based on company data Overseas store count Source: Shared Research based on company data www.sharedresearch.jp 12/75 R Shared Research Report Paris Miki Holdings > Trends and outlook Paris Miki Holdings | 7455 | LAST UPDATE【2016/7/1】 China store count Source: Shared Research based on company data For details on previous quarterly and annual results, please refer to the Historical financial statements section. www.sharedresearch.jp 13/75 R Paris Miki Holdings | 7455 | Shared Research Report Paris Miki Holdings > Trends and outlook LAST UPDATE【2016/7/1】 Full-year company forecasts and medium/long-term outlook Earnings forecasts (JPYmn) Sales YoY CoGS Gross profit YoY GPM SG&A expenses SG&A/sales Operating profit YoY OPM Recurring profit YoY RPM Net income YoY Store count changes (domestic) Openings Closings Store count (Domestic) Domestic sales growth rate (all stores) Domestic sales growth rate (comparable stores) Capital expenditure Depreciation FY03/14 1H 29,374 0.8% 9,595 19,779 0.0% 67.3% 18,657 63.5% 1,122 16.1% 3.8% 1,260 18.5% 4.3% 863 191.6% -10 1 -11 877 2H 27,529 4.8% 8,820 18,709 4.3% 68.0% 19,023 69.1% -314 -1.1% -225 -0.8% -444 -10 6 -16 867 FY03/15 1H 28,232 -3.9% 8,900 19,332 -2.3% 68.5% 18,412 65.2% 920 -18.0% 3.3% 1,067 -15.3% 3.8% 534 -38.1% -9 1 -10 858 2H 26,110 -5.2% 8,360 17,750 -5.1% 68.0% 18,494 70.8% -745 -2.9% -432 -1.7% -336 -12 10 -22 846 FY03/16 1H 28,185 -0.2% 9,052 19,133 -1.0% 67.9% 17,904 63.5% 1,228 33.5% 4.4% 1,159 8.6% 4.1% 518 -3.0% -10 6 -16 836 2H 25,542 -2.2% -9,052 -19,133 -74.9% -17,904 -70.1% -959 -3.8% -985 -3.9% -1,119 -14 6 -20 822 FY03/17 1H Est. -3.1% 0.1% 2.7% 5.7% -4.7% -3.6% -9.1% -5.6% -1.1% -0.1% -2.2% -1.1% -0.4% 2.7% -5.6% -4.5% -1.6% -0.6% 0.8% 0.8% 622 678 788 582 472 627 1,096 526 466 575 562 625 1,410 1,260 1,568 1,153 1,028 1,200 2,039 2H Est. FY03/14 FY03/15 FY03/16 FY03/17 FY FY FY Est. 56,903 54,342 53,727 53,982 2.7% -4.5% -1.1% 0.5% 18,415 17,260 17,530 17,512 38,488 37,082 36,197 36,469 2.1% -3.7% -2.4% 0.8% 67.6% 68.2% 67.4% 67.6% 37,680 36,906 35,928 35,979 66.2% 67.9% 66.9% 66.6% 808 175 269 489 89.2% -78.3% 53.7% 81.8% 1.4% 0.3% 0.5% 0.9% 1,035 635 174 378 -2.9% -38.6% -72.6% 117.2% 1.8% 1.2% 0.3% 0.7% 419 198 -601 72 306.8% -52.7% -20 -21 -24 40 7 11 12 20 -27 -32 -36 20 867 846 822 822 Earnings performance and forecast for FY03/16 (JPYbn) Sales 90 OP OPM 30% 80 70 60 50 GPM (right axis) 76% 25% 74% 20% 72% 15% 70% 30 10% 68% 20 5% 66% 0% 64% 40 10 0 -10 FY03/00 FY03/04 FY03/08 FY03/12 FY03/16 -5% FY03/00 FY03/04 FY03/08 FY03/12 62% FY03/16 Source: Shared Research based on company data Company forecast for FY03/17 Key points ▶ ▶ ▶ ▶ Domestic segment: Impact from rollout of three new formats thru remodeling and new store openings Domestic segment: Overview of new formats of stores scheduled to be opened in FY03/17 Overseas segment: Progress towards improving profitability (especially in East Asia) and impact of store remodeling Holding company: Progress at medical business and new investments Shared Research will continue monitoring same-store sales closely to determine whether store remodeling is leading to higher sales. Overview FY03/17 will be the year when Paris Miki Holdings takes a new step toward assuring growth at its domestic eyewear business over the medium to long term. Under its new president Masahiro Sawada (appointed in February 2016), core subsidiary Miki has laid out aggressive plans for new store formats and other capital spending aimed at putting its domestic eyewear business back on the growth track and resolving the fundamental problem of sluggish growth in sales and earnings. Towards this end, Paris Miki Holdings has clarified the roles of the holding company and the domestic www.sharedresearch.jp 14/75 R Shared Research Report Paris Miki Holdings | 7455 | Paris Miki Holdings > Trends and outlook LAST UPDATE【2016/7/1】 eyewear business (run by Miki), giving the holding company the responsibility of finding new business opportunities and planning and executing the group's investment strategy, and Miki responsibility for managing the domestic eyewear business as its core businesses while seeking further expansion overseas. In February 2016, the group's main subsidiary, Miki, announced the appointment of a new president and new directors along with the assignment of existing directors to new positions. For the first time in the company's history, a board member of Paris Miki Holdings will not be serving concurrently on the board of the main subsidiary. Solving fundamental problem: lack of compelling service and product offering Consolidated sales and earnings at Paris Miki have been on the decline for more than a decade, with sales peaking at JPY68.9bn and operating profit at JPY10.3bn way back in FY03/05, and the dividend paid by the company has been less than earnings per share since FY03/08. Having studied the problem and determined that the fundamental reason for the prolonged decline in sales was probably a lack of products and services that really appealed to consumers, the company decided to use the planned retirement of the former president of Miki, who had pretty much kept the company on a set path since taking the helm, as an opportunity to appoint Masahiro Sawada as the new president of Miki in February 2016, tasking the new president with the job of making radical reforms to address Miki's biggest problems. The appointment of a new president at Miki was carried out in line with the company's initial promotion plans, as the former president of Miki (Hiroshi Tane, President and Representative Director of Paris Miki Holdings) had originally intended to step down as head of subsidiary Miki within one year after he assumed the position in June 2015. The new president of Miki has managed major store locations in Shibuya and elsewhere Japan, managed overseas subsidiaries and, in FY03/16, was in charge of merchandising for the successful Belle Epoque format stores, which the company is in the process of rolling out by renovating and converting existing stores. The new Miki president plans to start off by addressing three basic problems: 1) the lack of appeal of the company's existing stores to young consumers; 2) a lack of stores in prime locations in major cities; and 3) the revitalization of suburban stores. Surviving amid the drastic changes in the domestic eyewear market Starting as as a watch shop in 1930, Miki has been a dedicated eyewear retailer for 85 years and was at one time the leading company in the industry. The company has encountered a number of problems in recent years that have caused it to fall behind competitors, but now recognizes that it must address these problems, as detailed above, if it is to revitalize its business. The company understands that it will be hard pressed to survive in the current environment, which has changed dramatically from hay days in the past, unless it makes the reforms necessary to solve these problems and is therefore committed to making the reforms needed to build a new and better Miki. Keys to revitalizing growth: Change store format to reflect Miki's world view and attract customers, revitalize suburban stores The company's efforts to revitalize its domestic eyewear business will depend on the following: 1) its new music-fashion format stores; 2) Belle Epoque format store; and 3) salon format stores. More specifically, the company has aggressive plans for remodeling and new stores openings in all of these new formats. The music-fashion format stores will be aimed at bringing in more young people; the Belle Epoque stores will be built up as the company's new brand; and the salon format stores will be aimed at revitalizing sales at suburban stores. These new formats have already proven their effectiveness in boosting sales. The company converted its flagship store in www.sharedresearch.jp 15/75 R Shared Research Report Paris Miki Holdings | 7455 | Paris Miki Holdings > Trends and outlook LAST UPDATE【2016/7/1】 Shinsaibashi (Osaka) into its first music-fashion format store in November 2011; this was followed by the remodeling of its Shibuya (Tokyo) store into a music-fashion format store in June 2012 and the remodeling of four more stores to create music-fashion format stores in FY03/16. The company's opened its first Belle Epoque store in Kichijoji (Tokyo) in August 2014 and, as of the end of FY03/16, has converted a total of 26 stores into the new Belle Epoque format with all showing higher sales and earnings since their conversions. The company expects the shift to the new formats to yield an average improvement in sales of about 10% at the individual store level, with this improvement enduring even after the first year, and management reports increasing requests from property developers to open new stores in these formats. Transition to new store formats Note: Figures for FY03/17 represent Shared Research estimates based on store remodeling as of May 2016 Source: Shared Research, based on company data The figure above shows changes in the number of stores operating under the company's three new formats in recent years. With most of the stores in these new formats being opened during 2016, the total number came to only 32 stores as of the end of FY03/16. As this accounts for only 4% of the company's entire store base, it is still too small to be a sales or earnings driver at the domestic eyewear business. At the same time, it is also unrealistic to expect the company to make the large investment in money and people required to shift its entire store base to these new formats. Direction of reforms has been decided; implementation to come later In order to realize a V-shaped recovery in earnings in FY03/17, the company plans to invest heavily to carry forward its store strategy and improve its name recognition. It contrast to the past, when Miki could get by with small-scale remodeling with no risk, the investments it is planning this time around require it to accept some risk as to whether the spending will deliver the desired return. Even assuming the initial investments deliver those returns, the company might still have to step up spending on marketing and accelerate the pace of remodeling and new store openings. Because FY03/17 will be the first full fiscal year since the company embarked on a fresh start, investors will need to see whether the company's new strategy is indeed producing the desired results. Shared Research will be watching especially for evidence that remodeling and new store openings are producing the results expected. Accelerate rollout of new store formats to attract more customers In FY03/17, the company is counting on the new formats to increase the number of customers coming into its stores. By creating stores that will entice passersby and carefully matching the merchandise offering (and price points) with the store's format and the type of customers that frequent that area, the company believes it can capture latent demand. At the already remodeled music-fashion format stores, the company has successfully appealed to a particularly demanding market niche by creating a store exterior, interior, and merchandise lineup tied to a common theme and in sync with both the store's locale and retired customers. www.sharedresearch.jp 16/75 R Shared Research Report Paris Miki Holdings | 7455 | Paris Miki Holdings > Trends and outlook LAST UPDATE【2016/7/1】 With regard to store site selection, the company believes that its prosperous music-fashion format stores are well-suited to major urban areas, where it has traditionally been weak. Over the next three years, the company is looking to add another 30 or so music-fashion format stores and roughly 230 more Belle Epoque stores. As for the remaining suburban stores and local stores with close ties in the surrounding communities, the company plans to take steps to improve sales and earnings, included through the conversion to its salon format. After raising brand recognition, increase marketing expenditures; might also accelerate new store opening After using remodeling to raise the profile of its Pari Miki stores and Megane no Miki stores, the company plans to be more active on the promotion and advertising side (including television commercials), but will monitor sales closely to gauge the effectiveness of the additional spending. If the expansion of three new formats produces solid results the company might decide to reinvest the profits to roll out the new formats even faster. However, the first thing investors will want to watch is whether remodeling does indeed lead to higher sales. As things stand now, the company is planning on remodeling about 50 stores a year to the new formats, opening 100 new stores over the next three years, and closing about 60 stores that are losing money. Remodeling and the new store openings will primarily be aimed at expanding the number of stores in the three new formats discussed above. The company is projecting roughly a 10% increase in sales for FY03/19, but the heavy spending on remodeling and marketing the company has planned to support growth in the future has resulted in a more retrained operating profit growth forecast. That said, if the contribution to sales from remodeling and new store openings is steady and the company is able to accelerate restructuring, more of the benefits might flow through to the bottom line as well. Projected number of stores operating under new format Note: Forecast assumes all remodeling and new store openings are in one of the three new formats, and all store closures are of old format stores Source: Shared Research, based on company data Music-fashion format stores The representative stores in this format are the company's Shibuya store (converted in June 2012) and its Shinsaibashi store (converted in November 2011). As of the end of FY03/16, the company had a total of six music-fashion format stores, including its Grand Front Osaka store (opened in April 2012). In FY03/17, the company has already opened two new stores in this format, one in Harajuku and one in the Hakodate Mile shopping complex (both opened in April 2016). Over the next three years the company plans create about 30 more music-fashion format stores. Aimed at attracting young customers seeking stylish eyewear, the Shibuya store is designed to give the look of an American store in Paris, France in the 1950. Accordingly, the store employs red and black as base colors, and has vintage guitars and drum sets on display in its windows. The effect is such that at first glance it is difficult to tell that it is an eyeglass store, but the eye-catching display has been extremely successful, drawing in not only the younger buyers that www.sharedresearch.jp 17/75 R Shared Research Report Paris Miki Holdings > Trends and outlook Paris Miki Holdings | 7455 | LAST UPDATE【2016/7/1】 the company was targeting but also many seniors from the company's existing customer base. In fact, the store went from being one of the worst earnings performers before remodeling to the top-performing store afterwards. The company's flagship Shinsaibashi store, Harajuku store, and Hakodate Mile store sport similar designs. The company has also been exploring other creative concepts for shops. For example, it’s EYE WEAR by Paris Miki store in the Hankyu Men's department store in Tokyo. This outlet is not aimed at older customers, as are most displays in department stores, but rather is aimed strictly at men, enticing even the hard-to-please with fashionable displays of upscale eyewear. Another example is the La Confiance by Paris Miki store in the Yokohama Vivre retail complex; opened in October 2015, this store recreates an image of a Brooklyn (New York) store located in Paris, France. Spending on remodeling will run in the JPY20–30mn range, so the cost is comparable to opening a new store. However, the company will accept this risk worth in pursuit of growth, as the jump in sales at its successful Shibuya store suggests that it can expect to fully recover its investment. Music-fashion format: (Upper left: Harajuku store. Upper right: Hakodate store. Lower left: Yokohama Vivre store; Lower right: Hankyu Men's Tokyo store Source: Company photos Belle Epoque format stores Belle Epoque format stores are designed to evoke the image of old Paris (late-1800s through early 1900s), when the Moulin Rouge cabaret was thriving and there were constant scandals, such as the Ballets Russes scandal. The first store converted into this new format was the Kichijoji store (reopened after remodeling in August 2014). Following the success of the Kichijoji store, the company stepped up the pace of new openings and remodeling, putting in place a total of 18 Belle Epoque format stores during FY03/16 for a total of 24 stores and making plans for another 230 Belle Epoque format stores over the next three years. In the week after the Kichijoji store was opened after being converted to the Belle Epoque format, customer traffic at the store doubled and even after a year had past sales were still running 10% above the pre-conversion level, with young customers driving most of the growth. Like the Kichijoji store, Belle Epoque format stores are not just yellow, they sport a number of different variations but all evoke the image of a shop in Paris's famous shopping arcades (Passages). The company believes the unique ambiance of the Belle Epoque stores that draws in would-be customers through its doors is www.sharedresearch.jp 18/75 R Shared Research Report Paris Miki Holdings | 7455 | Paris Miki Holdings > Trends and outlook LAST UPDATE【2016/7/1】 the kind of store that shoppers will immediately associate with Paris Miki, and it is therefore the format that will account for the bulk of new store openings in the years ahead. As the Belle Epoque brand name is built up, the company also expects to see an increase in the effectiveness of spending on marketing. In keep with the "old Paris" image, the Belle Epoque store design has carefully incorporated antiqued furniture and period paintings; the company acquires these decorative pieces at auctions in an effort to keep costs down. Belle Epoque format stores (from left to right: Mile Mizoguchi store, Yume Town Yusushiro store, Kawakoshi Crea Mall store) Source: Company photos Salon format stores The company is counting on Salon format stores to help it revive sales at its suburban stores (410, as of the end of FY03/16) and will launch this initiative in FY03/17. Many of the company's suburban stores were opened back in the 1980s and are obviously quite old. In order to better appeal to baby boomers, which form the heart of the company's target market in suburban areas, the salon format stores try to recreate the ambiance of a hotel in suburban Paris and take other measures aimed at strengthening the ties between the store and local community. To hold down remodeling expenses, most of the exterior remodeling work is done around the store entrance. Furniture, paintings, are then used in the interior to create a more relaxing salon-type atmosphere. In total, the remodeling work to convert existing stores into salon format stores is said to run between JPY5mn and JPY10mn per store. In order to facilitate regular communication with the senior citizens living in the area, the salon format stores have set aside a special space where customers can regularly clean their glasses, enjoy tea or coffee service, and play classical or French (Chanson) music. These measures aim to further enhance the atmosphere and encourage people to stay longer, and eventually, buy something. The company hopes this approach will eventually lead to entire families buying eyewear at these stores. As of May 2016, the company had only two salon format stores in operation, one in Izumo City and one in the small town of Kawada in Ibaragi Prefecture (both were opened after remodeling in April 2016), but the response from customers thus far has been good. The salon format store in Izumo City employs basically the same concept as Belle Epoque format stores and some elements of Belle Epoque format design have been replicated. Going forward, the company plans to makeover more suburban stores to create a store atmosphere that is most suitable for increasing customers in that particular locale. www.sharedresearch.jp 19/75 R Shared Research Report Paris Miki Holdings | 7455 | Paris Miki Holdings > Trends and outlook LAST UPDATE【2016/7/1】 Salon format stores Source: Company photos Company also striving to open more large-scale stores in major metropolitan areas The company is planning to open 20 new stores in FY03/17 and a total of 100 new stores over the next three years. While most of the new stores will be in one of the three new formats discussed above, the company is also planning to take a different approach and open a number of large-scale stores in major metropolitan areas. As of May 20, 2016, the company had only 35 Miki stores in the 23 wards of Tokyo. At just over 4% of all Miki stores, this far too few in view of the large population and ongoing flow of people into Japan's largest city. In contrast, JIN (TSE1: 3046) has 37 out of its 300-some stores located in Tokyo. In the past, Paris Miki had deliberately held down the number of stores located in major metropolitan areas, where rents are naturally high. However, now that it has gained experience and found success with its new music-fashion format and Belle Epoque format stores, the company plans be more aggressive when it comes to open stores in major metropolitan areas, but investors will also want to keep a close eye on the impact on sales from the company's efforts to train and motivate store employees. Still, finding the right location and rolling out large-scale stores is expensive, and the sales required from these stores before contributing to earnings will be especially high, so investors will want to keep an especially close eye on the company's forecast for contributions to sales and earnings from this source. Another run at the low-price market with a new format At the recent results presentation meeting, Miki's new president (Masahiro Kiwada) said that low-price eyewear stores account for about 35%–36% of the JPY400bn domestic eyeglass market and that, even though the company has only eight stores to serve this market (under the Opt-Label name), he would like to employ the expertise the company has acquired over the years and start moving more aggressively into the low-price market. While giving no details, President Kiwada did say the company was planning to start opening low-price stores in a new format sometime this fiscal year. With regard to the increasing amount of retail sales going to the internet, he commented that the key to survival for brick-and-mortar retailers was creating a store atmosphere that consumers truly enjoyed. Domestic eyewear business At the company's domestic eyewear business, Shared Research will be focusing especially on 1) the conversion of old stores into stores with one of the new formats, 2) the company's efforts to open large-scale stores in major metropolitan areas, and 3) the new "X" format. With regard the remodeling (discussed previously), as of the beginning of FY03/17 plans call for 46 stores to be www.sharedresearch.jp 20/75 R Shared Research Report Paris Miki Holdings | 7455 | Paris Miki Holdings > Trends and outlook LAST UPDATE【2016/7/1】 remodeled and converted into one of the three new formats along 20 new stores opening, all of which will be in one of the three new formats. (This does not including 75 minor remodeling with no format changes.) Since the remodeling and openings will be spread out fairly evenly over the year, the company anticipates contributions over the course of the full year. The 46 planned remodeling and 20 new store openings represent roughly 8% of the company domestic store base of 822 stores as of the end of FY0316. Assuming 10% higher sales at these stores, our rough estimate puts the boost to sales over the full year around 0.4%, with the remodeling adding about 0.3ppts to same-store sales growth. The company is forecasting same-store sales growth of 0.8% over the full year, but added that 2H is likely to be stronger than 1H. Comparison with previous store formats (types A, B, C, and D) At this time, we would also briefly note the thinking behind the company's old store formats. As the old Type A stores are comparable to the Music-Fashion and Belle Epoque format stores, Shared Research is thinking the company will remodel Types B, C, and D stores to create either Belle Epoque format stores or salon format stores. Starting in FY03/15, Paris Miki divided all domestic stores (excluding Kimpo-do) into one of four categories (A–D) based on location, customers, and regional characteristics. It plans to develop its store network in ways appropriate to each store format: it aims to horizontally develop successful examples of type A stores; for types B and D, the company plans to capitalize on demand from elderly customers with proposal-based sales, and for type C stores—whose clients are mostly in their 40s—it plans to open new stores while nurturing customers that will go on to become the company’s core customer base. Type A Type A stores include the unique and fashionable Shibuya store, and the Shinsaibashi store in Osaka, with robust sales to inbound tourists. Customers are mostly in their 20s. This category also includes the new Belle Epoque store format. The Belle Epoque Shibuya store has booked double-digit sales growth every year since it was renovated in June 2012. In August 2014, the company renovated its third Belle Epoque store in Kichijoji, before opening a fourth in Marui Family Mizonokuchi in March 2015. Type B Type B stores are regional stores with a fixed customer base, mostly comprising customers who are 50 or older. Annual sales and average sales per customer tend to be high. These stores differentiate themselves from competition with staff with strong consulting sales skills, new product development—mainly lenses—and efforts to promote high-spec, high value-added products. Type C Type C stores are mainly in shopping centers, and are relaxed and family-oriented. These stores focus on simple proposals to customers, mostly teenagers and people in their 40s. The average spend per customer is the lowest of the four types of stores. With these stores, the company aims to capitalize on demand from families and second-wave baby boomers (those born in the early 1970s), in addition to elderly customers, the company’s specialty. In FY03/15, domestic comparable store sales fell 4.5% YoY. Yet type C store sales were roughly on par with the previous year, partly because of the lens-inclusive pricing strategy. Type D Type D stores are regional stores rooted in their communities, mainly suburban standalone stores. As with type B stores, www.sharedresearch.jp 21/75 R Shared Research Report Paris Miki Holdings | 7455 | Paris Miki Holdings > Trends and outlook LAST UPDATE【2016/7/1】 customers are mostly 50 or older, and average spend per customer is on par with the average for all domestic stores. The strategy is similar to type B stores, as the company aims to differentiate itself from the competition with new product development—mainly lenses—and efforts to promote high-spec, high value-added products. Domestic sales Source: Shared Research based on company data GPM and SG&A expenses The company is forecasting a gross profit margin of 67.6% in FY03/17, a 0.2ppt improvement over the previous year. The company does not include any significant impact from the appreciation of the yen in its forecasts as it only procures about 20% of its merchandise from overseas (mainly China). Paris Miki is looking for SG&A expenses to increase by JPY51mn, to JPY36.0bn, as it matches new store openings with the same number of closures, steps up openings of large-scale stores in major metropolitan areas, and embarks on an aggressive remodeling program to convert old stores into stores with entirely new formats (as discussed above). Shared Research sees clear signs that the company will continue to hold down overhead expenditures while at the same time aggressively investing to assure future growth. SG&A and GPM Source: Shared Research based on company data www.sharedresearch.jp 22/75 R Shared Research Report Paris Miki Holdings | 7455 | Paris Miki Holdings > Trends and outlook LAST UPDATE【2016/7/1】 Gross and operating margins, operating profit Source: Shared Research based on company data Overseas Overseas, Paris Miki plans to streamline its store network in areas where it faces difficult operating conditions, while possibly opening new stores in areas that are performing well, and new areas. It appears the company is not planning any major developments. Overall, the company expects higher sales and profits overseas. That said, investors will want to keep a close eye of the results from test stores in the music-fashion and Belle Epoque formats the company is opening in Singapore and Australia. In China and Korea, where the company is running large operating losses, management is looking to reduce losses. The company plans to continue closing unprofitable stores in both countries, and in Korea also plans to revamp its franchise operations. The company also suggested that it might test its music-fashion and Belle Epoque formats in China. Also overseas, we note that Paris Miki invested in and was involved in the business planning for the Japan International Eye Hospital, which opened in Hanoi, Vietnam in fall 2014 (operations started in September, and the hospital officially opened in November). That hospital in now in the black. Paris Miki also acquired a 20% stake in SAV-IOL SA, a Swiss manufacturer and distributer of leading-edge intraocular lenses for cataract surgery. Five doctors work at the Japan International Eye Hospital in Hanoi, including Vietnamese doctors. The medical team is led by Tadashi Hattori, who has worked as a doctor and manager at the Vietnam National Eye Hospital since 2002, and is well known for his volunteer work as an eye surgeon in Vietnam. This hospital is equipped with state-of-the-art facilities, including LASIK equipment (laser eye surgery). According to the company, it also offers patients a relaxing environment, with views of West Lake from the wards. Paris Miki operates a store of 30sqm or so on the first floor, but the facility remains a hospital for all intents and purposes. Shared Research hopes this facility helps advance the treatment of eye problems and diseases in Vietnam. SAV-IOL SA developed the world's first intraocular lenses that provide quality vision at all distances for patients going through cataract surgery. Unlike other multifocal lens, these lenses do not have a problem with ghost images or halos, and are therefore able to transmit clear images that the brain can immediately recognize without the eyes growing tired. Multifocal lenses have not gained much traction in Japan because they are not covered by Japan's national health insurance scheme but, in the rest of Asia outside of Japan, the company is looking forward to expanding its ground-breaking treatment for cataracts (a common ailment among nearly all the elderly). www.sharedresearch.jp 23/75 R Shared Research Report Paris Miki Holdings > Trends and outlook Paris Miki Holdings | 7455 | LAST UPDATE【2016/7/1】 Overseas earnings performance Source: Shared Research based on company data Overseas store count Source: Shared Research based on company data China store count Source: Shared Research based on company data www.sharedresearch.jp 24/75 R Paris Miki Holdings | 7455 | Shared Research Report Paris Miki Holdings > Business LAST UPDATE【2016/7/1】 Business Business description Paris Miki is the largest eyewear retailer in Japan by sales and number of stores. It has the largest store network in Japan despite steady losses of market share since 2004. Domestic sales by product (left) and domestic versus overseas sales (right) (JPYmn) Source: Shared Research based on company data Store count Source: Shared Research based on company data Typical store description The types of domestic stores can be divided into three main categories: Paris Miki and Megane no Miki brands (core store format), Kimpo-do (mainly selling inside department stores), and Opt LABEL/OPTIQUE PARIS MIKI (low-price format). The www.sharedresearch.jp 25/75 R Shared Research Report Paris Miki Holdings > Business Paris Miki Holdings | 7455 | LAST UPDATE【2016/7/1】 Paris Miki and Megane no Miki stores are the same format; Paris Miki is mostly used in the Tokyo/Kanto region, whereas Megane no Miki is typically found in Kansai. The company typically rents its stores—only a few store locations are owned. Store layout is straightforward: most of the space is used for displaying inventory for sale (stores carry approximately 1,200 units). The average store size is approximately 100sqm, and staffed with three to four people. Stores are standalone, tenant-in-building, or located inside shopping malls. The stores are mostly directly managed (743 out of 867, as of FY03/14). The company had 124 franchise stores (as of FY03/14); directly managed stores are the preferred structure. Store breakdown by format Source: Shared Research based on company data Paris Miki/Megane no Miki stores Many existing stores have “castle” exteriors featuring towers (see images below), a legacy design from early efforts to create a unique look. The castle-themed design was an important part of the company’s early success (see History), but the company has been experimenting with new formats and store displays to reflect new marketing efforts. Paris Miki has engaged French design firm Malherbe (a retail architecture and design specialist) to help renew its store network. For the brand image-wise, it was confirmed by the store at Seijyogakuen station evoking a Parisian apartment. Remodeling is expected to unify the brand image. Interior and exterior images of existing stores (the castle-theme) and some new store designs are shown below: Source: Shared Research based on company data www.sharedresearch.jp 26/75 R Shared Research Report Paris Miki Holdings | 7455 | Paris Miki Holdings > Business LAST UPDATE【2016/7/1】 Opt-LABEL/OPTIQUE PARIS MIKI stores The Opt-LABEL/OPTIQUE PARIS MIKI store was developed by the company in response to low-priced competitors entering the market. The shops carry only private brand frames, and prices are displayed inclusive of lens costs. The stores have mainly been opened in shopping malls. Source: Shared Research based on company data Paris Miki / Megane no Miki and Kimpo-do stores target consumers with average and above average discretionary income. Opt-LABEL/OPTIQUE PARIS MIKI stores target price- and fashion-sensitive consumers. Business model Eyeglasses (frames and lenses 76.2% of FY03/14 domestic retail sales) Eyeglasses are the core product that the company sells. The company uses two pricing methods: lenses and frames priced separately, or a fixed price for a complete set of glasses. The majority of frames sold by the company, slightly above 60% (retail sales basis), are private brands designed internally (examples include Au, Iki, Etos, 8vo, and Edge). Both set and separate pricing is used in Paris Miki / Megane no Miki stores. The price range for the bulk of frames sold separately is roughly JPY15,000–40,000. At the same time, the prices for a standard model of the gold frame Au series are JPY30,000–880,000, with the majority of Au frames in the JPY100,000–300,000 range. For lenses, the price is determined by such factors as thickness, weight etc. Prices start at JPY3,000 and reach just under JPY150,000 for the most expensive ones. At Opt-LABEL/OPTIQUE PARIS MIKI, prices include those of frames and lenses. Domestic unit price growth is declining. According to data provided by the company, the average unit price (frame and lenses) was JPY38,171 in FY03/00 and had fallen to JPY29,407 by FY03/13—a decline of 23.0%. Reasons for the price decline include competition with low-price retailers, the introduction of the less expensive Opt-LABEL/OPTIQUE PARIS MIKI stores, and price erosion at the main stores. Since FY03/14, however, unit prices have been improving as the company promotes high value-added products. www.sharedresearch.jp 27/75 R Paris Miki Holdings | 7455 | Shared Research Report Paris Miki Holdings > Business LAST UPDATE【2016/7/1】 Trends in key store metrics (JPY) Unit Prices All Stores ex. OPTIQUE PARIS MIKI OPTIQUE PARIS MIKI FY03/00 FY03/01 FY03/02 FY03/03 FY03/04 FY03/05 FY03/06 FY03/07 FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 Number of glasses sold All Stores ex. OPTIQUE PARIS MIKI Customer count All Stores All Stores % of OPTIQUE PARIS MIKI Number of glasses sold Number of glasses sold × Unit Sales YoY All Stores Comparable stores 38,171 38,360 36,743 37,696 7,996 -4.2% -0.1% 0.5% 9.1% 4.1% 8.0% 2.0% 9.1% 5.6% 8.3% Price 8.1% 3.1% 3.3% -2.0% 2.9% -2.2% 34,295 38,176 8,286 -6.7% 1.3% 3.6% -9.4% -18.6% -8.8% -14.0% 34,515 38,117 8,824 0.6% -0.2% 6.5% -10.6% -9.9% -10.3% -10.0% 34,722 38,055 9,207 0.6% -0.2% 4.3% 3.3% 4.1% 0.4% 0.6% 34,160 37,670 9,187 -1.6% -1.0% -0.2% -0.4% -1.3% -1.1% -1.7% 33,334 37,153 9,574 -2.4% -1.4% 4.2% 0.3% -1.3% -4.3% -5.2% 33,372 36,945 9,936 0.1% -0.6% 3.8% -7.3% -6.8% -5.4% -5.1% 31,099 34,176 10,068 -6.8% -7.5% 1.3% -3.6% -3.1% -6.3% -6.4% 28,114 31,037 10,005 -9.6% -9.2% -0.6% 6.7% 6.3% -0.2% -1.4% 29,873 33,970 11,967 6.3% 9.5% 19.6% 0.4% -1.0% 2.3% 0.8% 27,535 31,033 11,246 -7.8% -8.6% -6.0% 7.2% 7.5% -0.5% -0.8% 29,407 34,663 12,160 6.8% 11.7% 8.1% -18.4% -19.5% -8.4% -8.3% 32,410 38,236 13,235 10.2% 10.3% 8.8% -11.6% -11.6% -9.2% -8.8% 32,493 38,463 13,676 0.3% 0.6% 3.3% -6.2% -6.5% -6.9% -6.7% 32,304 38,506 13,949 -0.6% 0.1% 2.0% -3.6% -3.7% -1.1% -1.2% -12.0% -16.1% 12.3% 3.1% -7.5% -7.1% 12.0% 3.1% 2.5% 1.9% 12.3% 3.3% -1.8% -2.4% 16.0% 4.1% -2.6% -3.0% 13.2% 3.9% -6.1% -7.5% 12.8% 4.1% -9.7% -9.6% 13.9% 4.9% -3.8% -4.5% 18.6% 7.5% 7.2% 1.9% 17.7% 7.2% -1.5% -0.7% 23.4% 9.7% -8.8% -8.1% 23.3% 9.5% -0.4% 2.7% 24.1% 10.1% -5.6% -4.5% 25.3% 10.9% -1.6% -0.6% Source: Shared Research based on company data The level of inventory turnover varies between stores located in high-traffic shopping malls and stores located in suburban areas. Stores inventory is managed by a POS system. The company has a distribution center in Himeji that holds approximately 700,000 units of frames inventory; individual stores hold approximately 1,200 frames each. The inventory mix at each store is largely determined by individual store managers with guidance from the headquarters. Gross profit margins for frames and lenses are generally better than the company average of 66.8%; lenses tend to carry margins higher than frames. Domestic frame sales Source: Shared Research based on company data Domestic lens sales Source: Shared Research based on company data www.sharedresearch.jp 28/75 R Shared Research Report Paris Miki Holdings | 7455 | Paris Miki Holdings > Business LAST UPDATE【2016/7/1】 Sunglasses Sunglasses sold in stores can be considered as complementing the core eyeglass product; the product is not expected to contribute significantly to the overall sales. Sunglasses sold in stores are popular “national” brands (e.g. Police, Ray-Ban) with prices typically ranging from JPY5,000–20,000. Gross profit margins for sunglasses are generally lower than the company average. Domestic sunglasses sales Source: Shared Research based on company data Contact lenses and accessories The company sells contact lenses as complements to the main product, eyeglasses. Contact lenses are relatively easy to sell (no display space required, no fashion trend risk) and are likely to remain in the mix. Prices range from JPY3,800–32,000 per pair. Gross profit margins for contact lenses are generally lower than the company average, at 30–40%. Domestic contract lens sales Source: Shared Research based on company data Hearing aids The hearing aid business is relatively new for the company and represents an area of potential growth. Hearing aids have been increasing as a proportion of total sales since the company began reporting separate sales in FY03/05. Prices for hearing aids vary widely: from JPY35,000–480,000 per unit. Gross profit margins for hearing aids (at around 50%) are generally lower than the company average. Average unit price was JPY150,000 in FY03/15. www.sharedresearch.jp 29/75 R Paris Miki Holdings | 7455 | Shared Research Report Paris Miki Holdings > Business LAST UPDATE【2016/7/1】 Domestic hearing aid sales Source: Shared Research based on company data Cost structure FY Performance Breakdown (JPYmn) Sales YoY SG&A expenses Personnel Advertising promotion Depreciation Rent Sales promotion Others YoY Personnel Advertising promotion Depreciation Rent Sales promotion Others Sales comp. Personnel Advertising promotion Depreciation Rent Sales promotion Others SG&A composition Personnel Advertising promotion Depreciation Rent Sales promotion Others FY03/05 FY03/06 FY03/07 FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY FY FY FY FY FY FY FY FY FY FY FY 68,922 68,011 66,929 63,876 57,745 56,299 60,140 59,547 55,419 56,903 54,342 53,727 -76.8% 73.3% 86.0% 63.9% -7.9% 29.2% -0.0% 8.2% 27.1% 41.9% 5.5% 2.7% 39,134 39,248 40,372 41,488 40,559 39,199 40,663 39,910 37,283 37,680 36,906 35,928 2,937 3,046 3,123 3,200 2,880 2,617 2,747 2,667 2,593 2,691 2,566 2,454 1,418 1,428 1,115 1,366 1,522 1,556 1,337 1,441 645 1,413 1,146 998 20,552 20,616 21,115 21,602 21,086 20,353 20,723 19,935 18,177 18,283 18,012 17,702 8,341 8,266 8,382 8,785 8,736 8,882 9,699 9,682 9,894 9,671 9,452 9,292 1,251 1,182 1,225 1,447 1,503 1,308 1,401 1,339 1,375 1,250 1,139 1,163 4,635 4,710 5,412 5,088 4,832 4,483 4,756 4,846 4,599 4,372 4,591 4,319 -3.8% 0.3% 2.9% 2.8% -2.2% -3.4% 3.7% -1.9% -6.6% 1.1% -2.1% -2.6% -4.0% 3.7% 2.5% 2.5% -10.0% -9.1% 5.0% -2.9% -2.8% 3.8% -4.6% -4.4% 0.5% 0.7% -21.9% 22.5% 11.4% 2.2% -14.1% 7.8% -55.2% 119.1% -18.9% -12.9% -3.9% 0.3% 2.4% 2.3% -2.4% -3.5% 1.8% -3.8% -8.8% 0.6% -1.5% -1.7% -5.2% -0.9% 1.4% 4.8% -0.6% 1.7% 9.2% -0.2% 2.2% -2.3% -2.3% -1.7% -13.5% -5.5% 3.6% 18.1% 3.9% -13.0% 7.1% -4.4% 2.7% -9.1% -8.9% 2.1% 1.2% 1.6% 14.9% -6.0% -5.0% -7.2% 6.1% 1.9% -5.1% -4.9% 5.0% -5.9% 4.3% 2.1% 29.8% 12.1% 1.8% 6.7% 4.5% 2.1% 30.3% 12.2% 1.7% 6.9% 4.7% 1.7% 31.5% 12.5% 1.8% 8.1% 5.0% 2.1% 33.8% 13.8% 2.3% 8.0% 5.0% 2.6% 36.5% 15.1% 2.6% 8.4% 4.6% 2.8% 36.2% 15.8% 2.3% 8.0% 4.6% 2.2% 34.5% 16.1% 2.3% 7.9% 4.5% 2.4% 33.5% 16.3% 2.2% 8.1% 4.7% 1.2% 32.8% 17.9% 2.5% 8.3% 4.7% 2.5% 32.1% 17.0% 2.2% 7.7% 4.7% 2.1% 33.1% 17.4% 2.1% 8.4% 4.6% 1.9% 32.9% 17.3% 2.2% 8.0% 7.5% 3.6% 52.5% 21.3% 3.2% 11.8% 7.8% 3.6% 52.5% 21.1% 3.0% 12.0% 7.7% 2.8% 52.3% 20.8% 3.0% 13.4% 7.7% 3.3% 52.1% 21.2% 3.5% 12.3% 7.1% 3.8% 52.0% 21.5% 3.7% 11.9% 6.7% 4.0% 51.9% 22.7% 3.3% 11.4% 6.8% 3.3% 51.0% 23.9% 3.4% 11.7% 6.7% 3.6% 49.9% 24.3% 3.4% 12.1% 7.0% 1.7% 48.8% 26.5% 3.7% 12.3% 7.1% 3.8% 48.5% 25.7% 3.3% 11.6% 7.0% 3.1% 48.8% 25.6% 3.1% 12.4% 6.8% 2.8% 49.3% 25.9% 3.2% 12.0% Source: Shared Research based on company data The company’s cost structure is largely determined by store labor and rent. During FY03/15, employee and rent expenses were 74.4% of SG&A. The rental expense for standalone stores is directly negotiated with the landowner; stores located in shopping malls normally pay a fixed rent (the rent is variable for the department stores and for some shopping centers). Advertising expenditure varies significantly depending on whether the company airs TV commercials. These costs rose considerably in FY03/14 when the company conducted a large-scale TV advertising campaign. In FY03/15, the company kept these costs down by focusing its TV commercials on western Japan. www.sharedresearch.jp 30/75 R Shared Research Report Paris Miki Holdings > Business Paris Miki Holdings | 7455 | LAST UPDATE【2016/7/1】 Profitability snapshot, financial ratios Profit Margins FY03/06 FY03/07 FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. (JPYmn) Cons. 269 808 175 -114 427 1,062 -543 -800 3,881 7,033 Operating Profit 9,243 0.3% 0.5% 1.4% -0.2% 0.8% -1.0% 1.8% -1.4% 6.1% 10.5% OP Margin 13.6% 1,511 2,195 1,464 1,907 2,573 1,420 710 859 5,386 8,307 10,489 EBITDA 2.8% 2.7% 3.9% 2.4% 3.4% 4.3% 1.2% 1.5% 12.4% 8.4% 15.4% EBITDA Margin Financial Ratios 1.2% 0.3% 2.0% -0.0% 2.0% 3.1% -0.3% -1.8% 11.7% 7.1% ROA 15.5% 0.5% -1.6% 0.3% 1.1% -2.9% -0.5% 1.1% -6.6% 3.5% 10.6% 7.8% ROE 107.2% 101.8% 100.5% 100.9% 106.8% 113.1% 110.7% 105.6% 107.5% 101.6% 103.1% Total Asset Turnover 227.1% 231.4% 206.6% 187.6% 185.9% 192.0% 195.2% 178.0% 184.5% 161.7% 164.8% Inventory Turnover 213 233 204 189 199 190 198 199 160 185 156 Days of Inventory 12,395 11,400 11,365 12,497 10,226 11,192 11,973 9,705 10,054 8,984 Working Capital Requirement 8,188 410.5% 440.2% 505.0% 433.1% 437.6% 420.8% 303.6% 402.5% 354.1% 273.1% 284.1% Current Ratio Quick Ratio 295.5% 327.4% 350.0% 269.2% 277.6% 270.6% 197.3% 248.0% 217.8% 163.3% 169.0% 1.7% 9.3% 25.7% 25.3% 4.7% 28.1% 12.8% -7.5% 46.8% 15.6% 74.5% OCF / Current Liabilities 30.9% 29.6% 32.8% 37.2% 38.3% 35.4% 40.8% 46.3% 41.8% 49.1% 54.2% Net Debt / Equity 73.9% 73.5% 73.8% 76.1% 76.0% 83.9% 77.4% 84.0% 83.9% 85.8% 83.9% Equity Ratio 8.2% 1.3% 19.7% 15.9% 10.3% 3.9% 26.2% 14.8% -7.1% 71.5% 45.0% OCF / Total Liabilities 196 194 215 182 188 183 172 171 131 153 121 Cash Cycle (days) -102 -995 -608 1,132 781 172 966 721 349 796 Changes in Working Capital -858 Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods. www.sharedresearch.jp 31/75 R Shared Research Report Paris Miki Holdings | 7455 | Paris Miki Holdings > Business LAST UPDATE【2016/7/1】 Strengths and weaknesses Strengths ◤ A large number of stores (nationwide store network): Due to its size, the company can arguably enjoy economies of scale and should be able to invest in systems and such initiatives as nationwide advertising campaigns. Until recently, it was the only company capable of this in Japan. Currently, it can be argued that Megane Top developed capabilities similar to Paris Miki. However, given small relative market shares of the largest competitors, the size advantage gives the company leverage over smaller rivals. ◤ Well trained, experienced staff: Paris Miki store personnel are arguably some of the best in the industry. The company has been investing in training over the years and emphasized focus on customer service. Despite several years of weakening performance, Shared Research felt that Paris Miki employees retained a high level morale and motivation. However, it seems vital that the sense of direction for the company is regained soon, lest a state of apathy and inertia develop. ◤ Financial strength: The company had JPY14.6bn of cash and equivalents on the balance sheet (as of FY03/14), a reserve dwarfing any of its competitors. While a strong balance sheet can be sometimes be a double-edged sword (it can breed complacency and prevent a sense of crisis from developing in time), in times of competitive wars it is better to be rich than poor. (It can be noted that of the largest competitors Aigan is smaller but also cash rich, Megane Top is cash poor but its financial position has been recovering dramatically). Weaknesses ◤ Confused market positioning: Arguably the largest weakness for the company. Its stores in most cases fail to answer the core questions—“who is the target customer?” and “what is the company trying to sell/tell that customer?” The message is unclear. It offers an excellent quality product, their staffs are professional and service oriented, its stores are conveniently located. However, by not sharpening its message and brand image, it might end up ‘stuck in the middle’—excelling in parts but mediocre as a whole. Since FY03/11, the company has become more conscious of this and strived to ensure each store is more aware of its target-customer base, has differentiated itself according to business category, and sharpened its planning capabilities. As of June 2011 it was too early to tell whether these efforts had paid off, but Shared Research thinks it is worth closely monitoring these efforts during FY03/15. ◤ Not offering value: Value has been a major theme in the retailing worldwide in the past 10-20 years. A lowest possible price for a quality that is understood and demanded by the consumer is one definition of Value. Another expression of Value could be to offer customers a positive emotional experience and enhance their daily lives through unique, cool, or otherwise valuable products and services. “The price as value” is the easiest to understand and pursue, both for consumers and the firm. This is probably why the discount retailers are the biggest and fastest growing type in any branch of retailing (JINS, Zoff and Megane Ichiba are clearly such examples). However, there are many examples of great success achieved through other forms of “value innovation”. Paris Miki has been emphasizing the notion of Omotenashi (a uniquely Japanese notion of hospitality) and developing interesting customer solutions such as computerized individual eyeglass design. However, the company seems to have been unable to develop such initiatives into a distinct model that would resonate with the consumer. Instead, it drifted while watching dynamic rivals who compete on “price as value” basis steal market share. ◤ Large degree of autonomy at the store level: The company essentially operates a network of semi-autonomous stores guided by the headquarters, but which are pretty much left to their own devices in terms of execution (at www.sharedresearch.jp 32/75 R Shared Research Report Paris Miki Holdings | 7455 | Paris Miki Holdings > Business LAST UPDATE【2016/7/1】 least at territorial level). Such a leadership structure has contributed to the successful expansion in the past but Shared Research questions if the current competitive situation demands a different approach. The company introduced a POS system to strengthen operations from the current fiscal year (FY03/14). Shared Research has taken a positive view towards these changes, but believes whether or not an overhauled system can function smoothly needs to be monitored closely. Group companies Paris Miki – the core company of the group; eyewear retailing. 100% subsidiary of Paris Miki Holdings. Kimpo-do – the eyeglasses retailer acquired in FY03/10; 25 stores at domestic department stores such as Takashimaya and Isetan. 100% subsidiary of Paris Miki Holdings. Through this acquisition, the company is planning to expand into higher-priced glasses. Great Construction – store construction and property management company that supports the group’s retailing business. 100% subsidiary of Paris Miki Holdings. Create 3 - On February 3, 2011, subsidiary Paris Miki MD Inc. changed its name to Create 3. Paris Miki MD had previously acquired the assets of Fukui Kouki Ltd. following its bankruptcy proceedings. Fukui Kouki’s assets include factories, buildings and eyeglass frame manufacturing equipment. Overseas subsidiaries: ▶ PARIS MIKI S.A.R.L. - corporate entity for the French store network ▶ PARIS-MIKI LONDON LTD. - corporate entity for the United Kingdom store network ▶ ▶ ▶ ▶ PARIS-MIKI INTERNATIONAL GmbH - corporate entity for the German store network PARIS-MIKI OPTICAL (CHINA) Co., Ltd.- corporate entity for the China store network SHANGHAI PARIS MIKI OPTICAL CO. LTD. – corporate entity for the China store network SHANGHAI PARIS MIKI TRADING CO. LTD.- corporate entity for the China store network ▶ OPTIQUE PARIS-MIKI (S) PTE. LTD. – corporate entity for the Singapore store network ▶ PARIS MIKI OPTICAL TAIWAN., LTD. CO - corporate entity for the Taiwan store network ▶ OPTIQUE PARIS MIKI (M) SDN BHD - corporate entity for the Malaysia store network ▶ PARIS MIKI OPTICAL (THAILAND) LTD. - corporate entity for the Thailand store network ▶ ▶ ▶ DIANE OPTICAL INC. – corporate entity for the South Korea store network PARIS MIKI OPTICAL INTERNATIONAL LTD. - corporate entity for the Hong Kong store network PARIS MIKI AUSTRALIA PTY. LTD. – corporate entity for the Australian store network ▶ MIKI, INC. – corporate entity for the Hawaii store network ▶ KIMPO-DO (MALAYSIA) SDN BHD ▶ (SEATTLE BRANCH) - corporate entity for the Seattle store network www.sharedresearch.jp 33/75 R Shared Research Report Paris Miki Holdings > Business Paris Miki Holdings | 7455 | LAST UPDATE【2016/7/1】 Market and value chain Market overview Eyeglasses The Japanese market for eyeglasses and related goods is worth approximately JPY400bn. The repurchase cycle varies by age group. Generally speaking, the age related deterioration in eyesight (worsening visual accommodative response) starts in late 30s. This necessitates replacement purchases of eyeglasses every 2 or so years, as visual acuity deteriorates. With age it becomes harder to focus on objects at various distances. To address this problem, varifocal/progressive lenses (lenses with a gradient of the lens power) are frequently used. According to the company, the switch to progressive lenses is a positive stimulus for purchases of new eyeglasses, as consumers are buying eyeglasses for continuous use (because they can use these eyeglasses in all situations) and that increases the importance of the fashion component. This should lead consumers to buy multiple pairs according to their fashion choices. Simply speaking, varifocal eyeglasses are worn all the time. That is why more people would want to look good wearing them, compared to when they just pull eyeglasses for reading out of their pockets every now and then. In terms of price, the eyeglasses market in Japan could be divided into three main categories. Typically, more expensive glasses are sold in department stores. The top level of the market has fewer market participants and volume than other www.sharedresearch.jp 34/75 R Shared Research Report Paris Miki Holdings > Business Paris Miki Holdings | 7455 | LAST UPDATE【2016/7/1】 segments. The majority of the market competes at prices between 15,000 and 30,000 per pair (the average market price was 26,000 yen in 2008). The lowest tier of the market is characterized by relatively low prices; less than 10,000 yen per pair. Hearing Aids Paris Miki estimates that hearing aid usage per capita is approximately 25% of other developed countries. The two main types of hearing aids sold in Japan are analog and digital (referring to the sound processing technology). The market has grown by approximately 50% from 1990 to 2008, with growth stabilizing from 2003 to 2008. The hearing aid market could be entering a secular growth trend, due to Japan’s aging population (see Market Growth below). Domestic hearing aid market (total units shipped) Source: Japan Hearing Instruments Manufactures Association Suppliers Frames – just under 70% of frames sold by Paris Miki are private brands, developed within the company and manufactured externally (mostly domestically, however some are manufactured in China). SR Inc. understands that the company uses approximately 50 different suppliers to source frames. Lenses – Suppliers include: Hoya Corp. (TSE 7741), Seiko Holdings Corp. (TSE 8050), Tokai Optical (unlisted), Nikon Essilor (unlisted; subsidiary of French company Essilor). The company indicated that overall sourcing is roughly equally divided between the suppliers. SR Inc. understands that the company enjoys economies of scale for lens purchases compared to smaller retailers. Contact lenses – Main suppliers include: Johnson & Johnson K.K., Coopervision Japan, B.L.J. Co., Ltd., Menicon. Hearing Aids – Main suppliers include: Oticon Japan K.K., Siemens Japan K.K. Barriers to entry The barriers to entry for eyewear (both eyeglasses and contact lenses) retailing are low. Anyone can start an eyewear store. However, due to a highly competitive nature of the market and the high degree of its maturity, anyone entering the market must offer a high degree of differentiation and value innovation. Therefore sizeable entries are relatively unlikely. When they occur however, they can be disruptive as Intermestic Inc. demonstrated with Zoff. It can be argued that as long as gross profit margins of the eyeglass retailers remain high, there will be a temptation both inside and outside of the industry to develop lower priced business models and capture share. However, lowering the SG&A costs and sustaining high inventory turnover is difficult due to low purchasing frequency and high service content typical for eyewear retailing, and this is a challenge that any newcomer would new to overcome. www.sharedresearch.jp 35/75 R Shared Research Report Paris Miki Holdings | 7455 | Paris Miki Holdings > Business LAST UPDATE【2016/7/1】 Competition The market participants can be categorized into two main groups: specialized retail chains, and smaller stores that sell eyeglasses along other products such as watches and jewelry. The company estimates the latter represent roughly 70% of the market – the oligopolization of the market by large retail chains is hardly progressing. The current competitive landscape is the result of two phases of intense price competition that began with the entrance of Intermestic Inc.’s (Unlisted) Zoff shops in February, 2001. Average prices for glasses in 2000 were approximately 29,000 yen, and Zoff undercut the status quo by offering three fixed prices well below the industry average: 5,000 yen, 7,000 yen, and 9,000 yen. Consumers were attracted to low-price stores and the business rapidly grew. It is interesting to note that Intermestic Inc. was not an eyeglass retailer or manufacturer when it started Zoff, an example of outsider providing an innovative solution in the market where the existing players were unable to do so. Most incumbents were quick to launch low-priced stores in response to Zoff’s early success (Paris Miki launched the Opt-LABEL format in September, 2001). Zoff offered extremely low prices. These low prices were made possible by the following factors: private brand (no royalties), fewer models (less inventory), and frames manufactured in China. Low prices did not come without some risk, as consumers came to associate Zoff's low prices with low quality and this association eventually spread to other low-cost shops. Since 2009 though JIN Co. has had the most impact on the competitive landscape; the company used a radical pricing method to attract customers - a single price setting with no extra charges. The prices were 4,990, 5,990, 7,990 and 9,990 yen (the most expensive eyeglasses were less than 10,000 yen). JIN entered the eyeglasses market in April 2001 and from the beginning saw eyeglasses as a fashion item but it was the introduction of the new pricing system that led to exponential growth in sales. Megane Top launched a one-price concept in 2006 under the Megane Ichiba brand (lenses and frames for 18,900 yen). Megane Top’s price point was approximately 30% less than the average industry price of 28,000 yen when the shops opened. The company grew the store base and gradually converted its entire store network to the one-price store format. www.sharedresearch.jp 36/75 R Shared Research Report Paris Miki Holdings | 7455 | Paris Miki Holdings > Business LAST UPDATE【2016/7/1】 Other competitors include Megane Super and Aigan. Source: Shared Research, based on company data Substitutes The main substitutes for eyeglasses are contact lenses and corrective laser surgery. The surgery was yet to be considered a mainstream alternative as of May 2012. The contact lenses market is mature and while some fluctuations in the market share between the contacts and eyeglasses might occur based on technological innovation and design, the relationship should probably considered a stable one. It would appear that the aging population will benefit the eyeglass market due to more complex vision related and medical needs older consumers typically have. Switching costs for contact lenses are low (an ophthalmologist writes a prescription before the first purchase). Costs for laser surgery are relatively high, but prices in the market are trending lower – SR Inc. estimates that eye surgery in Japan can range between approximately 100,000 and 400,000 yen (the average price for glasses in 2010 was approximately 23,000 yen according to Gankyo). www.sharedresearch.jp 37/75 R Shared Research Report Paris Miki Holdings | 7455 | Paris Miki Holdings > Business LAST UPDATE【2016/7/1】 Strategy From 2000 until around mid-2010 Paris Miki went through several periods of searching for an appropriate strategy. These include experimenting with a franchise model, reactive expansion of low-price formats, and bringing in outsiders into the management team. The period from 2007 till 2013 may be characterized as a period of confusion. The company was unable to reach an internal consensus on its store and branding strategy, instead it responded to tectonic shifts in the business environment with moves such as closures of unprofitable stores and introduction of experimental store designs. During the difficult operational period Paris Miki found itself in, it operated a strategy of: ◤ “Think and act local.” Stores and territories have a significant degree of autonomy and try to deal with competitive challenges as they arrive in their local markets. That means that acting on a company level takes time. ◤ “Don’t spend money unless absolutely necessary.” Managing for cash flows has long been a trademark approach of Paris Miki and it served it well. Whether the tradition of financial conservatism became a financial inertia remains to be seen. ◤ Slightly confused market positioning (“price” or “value”) Paris Miki Co.’s president Kaga is emphasizing speed and a new awareness, starting with employees at each store, by reforming the pay system through the elimination of seniority-based pay and the strengthening of performance-linked pay elements. Other visible changes include the opening of an entertainment-themed store (Grand Front Osaka) and an increase in TV advertising, which the company has largely refrained from in the past (as of May 2014). In FY03/15, the company will divide stores into four segments, comprised of trendsetting stores, regional flagship stores, shopping center stores, and regionally focused stores. Through this initiative, Paris Miki aims to bring out the strengths in each type of store while providing a boost to comparable store sales. www.sharedresearch.jp 38/75 R Paris Miki Holdings | 7455 | Shared Research Report Paris Miki Holdings > Historical financial statements LAST UPDATE【2016/7/1】 Historical financial statements Q3 FY03/16 results (out February 12, 2016) ▶ ▶ ▶ Q3: Domestic same-store sales slightly below plan, but earnings on target. Larger losses in Korea, same outlook for Q4 Existing stores: More renovations/new openings of Belle Epoque format stores boost customer traffic and sales FY03/16: Full-term sales on track to finish below plan, but operating profit to finish in line with plan as continued closure of unprofitable stores reduces SG&A expenditures ▶ New President: Manager of successful rollout of Belle Epoque format stores named new president of main subsidiary Miki, can expect more strategies targeting growth ▶ FY03/17: New President expected to push development of new store formats to revitalize existing stores, attract more baby boomers and second generation baby boomers Quarterly sales Quarterly operating profit Source: Shared Research based on company data Earnings overview Though overseas losses expanded, domestic profits improved, supporting consolidated results; recovery of existing stores and less SG&A expenses contributed In the nine months of cumulative Q3, sales were JPY41.5bn (-0.2% YoY) and operating profit JPY1.2bn (+64.3% YoY or +JPY460mn). Despite a lower level of unprofitability at the company’s Australian subsidiary, conditions for overseas businesses were harsh due to worsening business sentiment, especially in Korea. However, domestic businesses increased profits due to recovery of existing store sales and cuts in SG&A expenses, contributing to the consolidated results. According to the company, it has been proceeding with its plan to close unprofitable stores, along with focusing on www.sharedresearch.jp 39/75 R Shared Research Report Paris Miki Holdings | 7455 | Paris Miki Holdings > Historical financial statements LAST UPDATE【2016/7/1】 renovating existing stores as the need arises in order to give them distinct formats. By doing so, it plans to increase the number of baby boomers and second generation baby boomers who visit its stores. Operating profit benefits from closure of stores, and efforts to hold SG&A and advertising expenses in check Gross profit declined JPY322mn YoY on a 0.6pp decrease in the CoGS-to-sales ratio. However, an overall effort to curb SG&A expenses through store closures and curbing advertising expenses gave operating profit a JPY460mn boost. Advertising and SG&A expenses were kept in check through cost-effectiveness analysis. Toward Q4 In Q4, we believe that the company will continue efforts to improve comparable store sales and close unprofitable stores. It also plans to launch measures to cope with the aging market in Japan and develop value-added products. Store openings and closings (12 stores opened, 33 stores closed) are expected to surpass initial forecasts, which call for the opening of 10 stores and the closing of 30 stores. Cumulative Q3 results for operating profit and recurring profit exceeded its FY03/16 full-year forecast. Although existing store sales through the end of Q3 were up only 0.5% YoY versus plan of +1.3%, the company expects operating profit to finish the full term in line with plan thanks to the closure of unprofitable stores and other measures aimed at controlling SG&A expenditures. Since both sales and profits in Q4 have tended to fall below those in Q3 due to seasonal factors, the Korean subsidiary, which continues to be a drag on overseas results, appears to have lost money again in Q4 (October–December). Domestic sales by product and consolidated GPM Source: Shared Research based on company data SG&A expenses Source: Shared Research based on company data www.sharedresearch.jp 40/75 R Shared Research Report Paris Miki Holdings > Historical financial statements Paris Miki Holdings | 7455 | LAST UPDATE【2016/7/1】 Inventory assets Source: Shared Research based on company data Main subsidiary Miki appoints manager of successful rollout of Belle Epoque format stores as new president The group's main subsidiary, Miki, announced the appointment of a new president and new directors along with the assignment of existing directors to new positions (effective February 8, 2016). The new appointments are of particular significance given 1) the high level of expectations surrounding the new president of subsidiary Miki, and 2) the fact that this will be the first time that a board member of Paris Miki Holdings will not be serving concurrently on the board of the main subsidiary. The appointment of a new president was carried out in line with the company's initial promotion plans, as the former president of Miki (Hiroshi Tane, President and Representative Director of Paris Miki Holdings) had originally intended to step down as head of subsidiary Miki within one year after he assumed the position in June 2015. The new Miki president, Masahiro Kiwada, has managed major store locations in Shibuya and elsewhere Japan, managed overseas subsidiaries, and was also the MD supervisor who oversaw the successful renovation of Belle Epoque format stores in FY03/16. Shared Research believes the new president can be counted on to aggressively implement more measures aimed at revitalizing Miki's existing store base going forward. Japan Domestic segment performance Source: Shared Research based on company data www.sharedresearch.jp 41/75 R Shared Research Report Paris Miki Holdings | 7455 | Paris Miki Holdings > Historical financial statements LAST UPDATE【2016/7/1】 Domestic existing store sales recover, and operating profit higher on cuts to SG&A expenses Amid a moderate recovery in consumer sentiment, core subsidiary Miki continued to close unprofitable stores and renovate existing stores. As a result, through the end of Q3 domestic businesses posted sales of JPY35.9bn (-0.2% YoY) and operating profit of JPY1.4bn (+73.3% YoY or +JPY597mn). While sales growth at existing stores continues to improve, reaching +1.9% in Q3, the +0.5% YoY growth rate for the first nine months of the fiscal year is still short of the company's full-term forecast of +1.3%. (For January, the company reported a 1.8% YoY decline in existing store sales.) Shared Research believes the rise in operating profit was due to huge benefits from efforts to restrain SG&A expenses and cost cut benefits from store closures. Store renovations and marketing aimed at inbound tourists adding to sales and earnings On the domestic front, inbound tourists and store renovations are making steady contributions toward earnings recovery, although comparable store sales still struggled. More renovations/new openings of Belle Epoque format stores Among the stores being renovated, Shared Research is focusing especially on the Belle Epoque format stores, which the company positioned to have their own uniqueness. Following the success of the Belle Epoque format store in the trendy Shibuya district, the company decided that it would not just renovate stores but also actively open new Belle Epoque format stores starting in 2H FY03/15 and would continue through the end of FY03/16. Working on renovations and new openings of Belle Epoque format stores in regions agreed to by Paris Miki MD, the company completed renovations and new openings of more than 10 Belle Epoque format stores during the first nine months of FY03/16. The company says that the renovations have resulted in both higher customer traffic and higher growth in sales at existing stores, and that it plans to do still more renovations and new store openings during FY03/17, taking both location and customer characteristics in careful consideration. The company reports that it has had some success with improving sales by reducing price points for its frames with lenses, though mainly at stores located in shopping centers and other commercial buildings. Catching demand from inbound tourists Domestically, renovations to existing stores and the opening of stores in the ‘‘shop-in-shop’’ format at LAOX (TSE 8202) helped lift sales and gross profit. This new store format is expected to boost operating profit, despite lower GPM from high commissions versus sales, since the consignment sales format eliminates personnel expenses (the stores specialize in frames and sunglasses, outsourcing vision tests to regular Paris Miki stores nearby). LAOX has operated a large duty-free store as a key tenant at EXITMELSA, a refurbished commercial building that was opened at Ginza 5-chome, a center of the fashionable Ginza district, in September 2015. Paris Miki opened its first ‘‘real’’ shop-in-shop in this LAOX store, with the store not operating as a small in-store section, but as a separate store in itself. www.sharedresearch.jp 42/75 R Paris Miki Holdings | 7455 | Shared Research Report Paris Miki Holdings > Historical financial statements LAST UPDATE【2016/7/1】 Domestic year-on-year sales Source: Shared Research based on company data Promoting private brand hearing aid products in earnest By product category, sunglasses grew by 7.2% YoY, riding on strong demand from inbound tourists, while hearing aids picked up by 2.4% YoY as the company launched an aggressive sales promotion of its private brand products. In its hearing aid business, Paris Miki rolled out a private brand expander (which increases overall sound) in FY03/15. In FY03/16, the company went on to introduce multiple price ranges for private brand products: JPY60,000---JPY120,000 for one ear; and JPY108,000---JPY188,000 for both ears. These products, offered at multiple price ranges, are poised to drive up sales and profits, as they are designed to appeal to customers who hesitated to buy at the original price, and as their gross profit margins are comparatively higher than other products. As the prices are lower than conventional products, the sales value would be lower if the sales volume was same. However, the sales through Q3 rose 2.4% YoY and GPM rose due to contribution of the private brand products, showing a steady effect of the company’s plan. Domestic sales by product (all stores, retail) Source: Shared Research based on company data Unit prices (JPY) Average Eyeglass Unit Price excl. OPTIQUE PARIS MIKI OPTIQUE PARIS MIKI YoY All stores excl. OPTIQUE PARIS MIKI OPTIQUE PARIS MIKI Number of Eyeglasses Unit Sales (YoY) excl. OPTIQUE PARIS MIKI Number of Customers Counted (YoY) excl. OPTIQUE PARIS MIKI FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY FY FY FY FY 29,873 27,535 29,407 32,410 32,493 33,970 31,033 34,663 38,236 38,463 11,967 11,246 12,160 13,235 13,676 6.3% -7.8% 6.8% 10.2% 0.3% 9.5% -8.6% 11.7% 10.3% 0.6% 19.6% -6.0% 8.1% 8.8% 3.3% 0.4% 7.2% -18.4% -11.6% -6.2% -1.0% 7.5% -19.5% -11.6% -6.5% 2.3% -0.5% -8.4% -9.2% -6.9% 0.8% -0.8% -8.3% -8.8% -6.7% FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 Q1-Q3 Q1-Q3 Q1-Q3 Q1-Q3 Q1-Q3 27,926 29,416 32,523 32,894 32,807 31,410 34,388 38,283 38,711 38,619 11,506 12,135 13,183 13,807 14,030 -7.0% 5.3% 10.6% 1.1% -0.3% -7.6% 9.5% 11.3% 1.1% -0.2% -4.5% 5.5% 8.6% 4.7% 1.6% 5.5% -16.9% -14.7% -5.0% -2.9% 5.9% -8.4% -15.0% -5.0% -3.3% -2.9% -8.4% -10.3% -6.7% -0.4% -3.3% -8.6% -10.1% -6.2% -0.6% Source: Shared Research based on company data www.sharedresearch.jp 43/75 R Shared Research Report Paris Miki Holdings | 7455 | Paris Miki Holdings > Historical financial statements LAST UPDATE【2016/7/1】 Company plans for FY03/17 Shared Research sees the new president pushing ahead with the efforts to revitalize existing stores and develop new stores that better appeal to second-wave baby boomers (those born in the early 1970s). As part of this effort, the company is working to revitalize its organizational structure through the promotion of a younger generation of managers, including the leader of the store format development team. The company had previously classified its store formats into four different types but is now planning to add three new types. The new formats are still in the trial-and-error stage of development, but we will be keeping a close eye on progress under the new format development team leader going forward. The company plans to open and close about the same number of stores in FY03/17 as it will in FY03/16, but given the growing emphasis on store development, there is a chance it will adopt more aggressive store opening plans. As for SG&A expenses, thus far the company has been working to control spending through various means other than closing stores. However, there is a chance the company will now shift tactics and do more upfront spending in key areas. Shared Research will be watching closely for developments on this front. Store count Source: Shared Research based on company data Overseas Overseas segment performance Source: Shared Research based on company data Overseas operations book operating loss; Southeast Asia books profit, losses grow in South Korea Overseas operations saw operating losses increase on both a YoY and QoQ basis. Southeast Asian operations (Thailand and Singapore) buoyed profits, but China and South Korea operations struggled owing to harsh economic conditions and weak retail sentiment. Particularly in South Korea, sales declined (mainly those at franchise stores) and related spending www.sharedresearch.jp 44/75 R Shared Research Report Paris Miki Holdings | 7455 | Paris Miki Holdings > Historical financial statements LAST UPDATE【2016/7/1】 and appraisal losses increased further, leading to the expansion of operating losses. The company indicated that conditions in South Korea were likely to remain difficult in Q4 (October---December). In an effort to improve the performance of directly managed stores, the company is renovating some stores while closing other, unprofitable stores. Still, the large proportion of businesses accounted for by franchise operations together with the tough operating environment make it likely that the company's overseas operations will continue to struggle in FY03/17. Losses declined at the company’s Australian stores, which were undergoing reorganization. The company had 15 fewer stores in China compared to this time last year and 12 fewer compared with the end of FY03/15. The company has opened two stores (in Q2) but closed 14 stores, demonstrating its commitment to cutting losses at unprofitable stores. Plans for FY03/17 Visibility in South Korea is poor, but the company is expecting favorable results from operations in Singapore and other Southeast Asian countries. Having achieved good market penetration, operations in Thailand now have a stable earnings base; the company is also close to turning a profit in FY03/17 in Vietnam, where it also operates an eye hospital. Operations in Australia are expected to remain in the red. Overseas store count Source: Shared Research based on company data China store count Source: Shared Research based on company data www.sharedresearch.jp 45/75 R Paris Miki Holdings | 7455 | Shared Research Report Paris Miki Holdings > Historical financial statements LAST UPDATE【2016/7/1】 1H FY03/16 results (out November 13, 2015) Quarterly sales (JPYmn 18,000 15% 16,000 10% 14,000 5% 12,000 0% 10,000 -5% 8,000 -10% 6,000 Q1 Q2 FY03/10 Q3 Q4 Q1 Q2 FY03/11 Q3 Q4 Q1 Q2 FY03/12 Q3 Q4 Q1 Q2 FY03/13 Q3 Q4 Q1 Q2 FY03/14 Q3 Q4 Q1 Q2 FY03/15 Q3 Q4 Q1 Q2 FY03/16 Q3 Q4 -15% YoY (right axis) Sales Quarterly operating profit (JPYm) 1,500 80% 1,000 60% 500 40% 0 20% -500 -1,000 0% Q1 FY03/10 Q3 Q1 FY03/11 Q3 Q1 FY03/12 Operating profit Q3 Q1 FY03/13 Q3 Q1 FY03/14 OPM (right axis) Q3 Q1 FY03/15 Q3 Q1 FY03/16 Q3 -20% GPM (right axis) Source: Shared Research based on company data Earnings overview Though overseas losses expanded, domestic profits increased, supporting consolidated results; recovery of existing stores and less SG&A expenses contributed Sales were JPY28.2bn (-0.2% YoY) and operating profit JPY1.2bn (+33.5% YoY or +JPY308mn). Overseas businesses expanded losses, due mainly to sluggish operations at a South Korean subsidiary. However, domestic businesses increased profits due to recovery of existing store sales and cuts in SG&A expenses, contributing to the consolidated results. Compared to the company’s estimates, sales failed to achieve the initial target by a narrow margin, but operating profit apparently exceeded the planned target. As gross profit margin was in line with the plan, the main factor that boosted the profit more than expected was less SG&A expenses than planned, due to closings of unprofitable stores and decreasing costs. Operating profit benefits from closure of stores, and efforts to hold SG&A and advertising expenses in check Gross profit declined JPY199 YoY on a 0.6pp decrease in the CoGS-to-sales ratio, but a JPY508mn decline in SG&A expenses on store closures and an overall effort to keep costs in check (mainly targeting advertising expenses) gave operating profit a JPY308mn boost. Advertising and SG&A expenses were kept in check through cost-effectiveness analysis. In 2H, the company plans to continue efforts for recovering existing store sales and to keep closing unprofitable stores. It also plans to launch measures to cope with the aging market in Japan and develop value-added products. As sales at existing stores in October rose 5.1% YoY and sales of eyeglasses (sets of frames and lenses) increased as well, Q3 got off www.sharedresearch.jp 46/75 R Paris Miki Holdings | 7455 | Shared Research Report Paris Miki Holdings > Historical financial statements LAST UPDATE【2016/7/1】 to a good start. For elderly customers, Paris Miki plans to continue measures that showed effects in 1H, such as strengthening the lineup of private brand hearing aid products and proposal-based sales of lenses. In 1H, the increase in private brand hearing aid products led to a rise in 1ppt of GPM of the product. For 2H, the company has not changed its spending plan specifically. The plan for opening and closing stores is also in line with the initial plan. Since both sales and profits of the company in 2H have tended to fall below those in 1H for seasonality, the trend is likely to be the same for FY03/16. Domestic sales by product and consolidated GPM 100% 74% 90% 73% 80% 72% 70% 71% 60% 70% 50% 69% 40% 68% 30% 67% 20% 66% 10% 65% 0% Q1 FY03/09 Q3 Q1 FY03/10 Q3 Q1 FY03/11 Lenses Q3 Q1 FY03/12 Frames Q3 Q1 FY03/13 Hearing aids Q3 Q1 FY03/14 Q3 Q1 FY03/15 Sunglasses, contact lenses Q3 Q1 FY03/16 64% Q3 GPM (right axis) Source: Shared Research based on company data SG&A expenses (JPYm) 12,000 12% 10,000 8% 8,000 4% 6,000 0% 4,000 -4% 2,000 -8% 0 Q1 Q2 FY03/11 Q3 Q4 Personnel Q1 Q2 FY03/12 Q3 Q4 Q1 Q2 FY03/13 Q3 Advertising & sales promotion Q4 Q1 Q2 FY03/14 Q3 Q4 Rent & depreciation Q1 Q2 FY03/15 Q3 Q4 Other expenses Q1 Q2 FY03/16 Q3 -12% Q4 YoY (SG&A, right axis) Source: Shared Research based on company data Inventory assets (JPYm) 18,000 270 16,000 240 14,000 210 12,000 180 10,000 150 8,000 120 6,000 90 4,000 60 2,000 30 0 Q1 Q2 FY03/10 Q3 Q4 Inventory Q1 Q2 FY03/11 Q3 Q4 Q1 Q2 FY03/12 Sales Q3 Q4 Q1 Q2 FY03/13 Q3 Q4 Inventory turnover (right axis) Q1 Q2 FY03/14 Q3 Q4 Q1 Q2 FY03/15 Q3 Q4 Q1 Q2 FY03/16 Q3 Q4 0 Merchandise inventory turnover (right axis) Source: Shared Research based on company data www.sharedresearch.jp 47/75 R Paris Miki Holdings | 7455 | Shared Research Report Paris Miki Holdings > Historical financial statements LAST UPDATE【2016/7/1】 Japan Domestic existing store sales recover, and operating profit higher year-on-year on cuts to SG&A expenses Amid a moderate recovery in consumer sentiment, core subsidiary Miki saw higher operating profit year-on-year, with lower costs and a recovery at existing stores enough to offset lower sales from closing unprofitable stores. As a result, domestic businesses posted sales of JPY24.3bn (-0.8% YoY), operating profit of JPY1.4bn (+43.2% YoY or +JPY414mn). Sales at existing stores declined 1.1% in 1H, but turned positive on 0.2% growth in Q2 (October growth: +4.3%). Shared Research believes the rise in operating profit was due to huge benefits from efforts to restrain SG&A expenses and cost cut benefits from store closures. Catching demand from inbound tourists On the domestic front, inbound tourists and store renovations are making steady contributions toward earnings recovery, although comparable store sales still struggled. Sales to inbound tourists helped overall sales and gross profit, improving performance at existing stores and progress at “shop-in-shop” stores, opened within LAOX (TSE 8202) stores. This new store format is expected to boost operating profit, despite lower GPM from high commissions versus sales, since the consignment sales format eliminates personnel expenses (the stores specialize in frames and sunglasses, outsourcing vision tests to regular Paris Miki stores nearby). LAOX has operated a large duty-free store as a key tenant at EXITMELSA, a refurbished commercial building that was opened at Ginza 5-chome, a center of the fashionable Ginza district, in September 2015. Paris Miki opened its first “real” shop-in-shop in this LAOX store, with the store not operating as a small in-store section, but as a separate store in itself. Promoting private brand hearing aid products in earnest By product category, sunglasses grew by 5.9% YoY, riding on strong demand from inbound tourists, while hearing aids picked up by 2.0% YoY as the company launched an aggressive sales promotion of its private brand products. In its hearing aid business, Paris Miki rolled out a private brand expander (which increases overall sound) in FY03/15. In FY03/16, the company went on to introduce multiple price ranges for private brand products: JPY60,000–JPY120,000 for one ear; and JPY108,000–JPY188,000 for both ears. These products, offered at multiple price ranges, are poised to drive up sales and profits, as they are designed to appeal to customers who hesitated to buy at the original price, and as their gross profit margins are comparatively higher than other products. As the prices are lower than conventional products, the sales value would be lower if the sales volume was same. However, the sales value in 1H increased 2.0% YoY and GPM rose around 1ppt due to contribution of the private brand products, showing a steady effect of the company’s plan. Domestic segment performance (JPYm) 16,000 20% 14,000 15% 12,000 10% 10,000 5% 8,000 0% 6,000 -5% 4,000 -10% 2,000 -15% 0 -20% -2,000 Q1 Q2 FY03/10 Q3 Q4 Q1 Q2 FY03/11 Q3 Q4 Q1 Q2 FY03/12 Sales (inc. intra-company transfer) Q3 Q4 Q1 Q2 FY03/13 OP Q3 Q4 Q1 Q2 FY03/14 Q3 OPM (right axis) Q4 Q1 Q2 FY03/15 Q3 Q4 Q1 Q2 FY03/16 Q3 Q4 -25% YoY sales (right axis) Source: Shared Research based on company data www.sharedresearch.jp 48/75 R Paris Miki Holdings | 7455 | Shared Research Report Paris Miki Holdings > Historical financial statements LAST UPDATE【2016/7/1】 Domestic year-on-year sales 12% 8% 4% 0% -4% -8% -12% Q1 Q2 FY03/09 Q3 Q4 Q1 Q2 FY03/10 Q3 Q4 Q1 Q2 FY03/11 Q3 Q4 Q1 Q2 FY03/12 Q3 Q4 Q1 Q2 FY03/13 Sales YoY (all stores) Q3 Q4 Q1 Q2 FY03/14 Q3 Q4 Q1 Q2 FY03/15 Q3 Q4 Q1 Q2 FY03/16 Q3 Q4 Sales YoY (comp. stores) Source: Shared Research based on company data Domestic sales by product (all stores, retail) (JPYm) 16,000 20% 12,000 10% 8,000 0% 4,000 -10% 0 Q1 FY03/10 Q3 Frames Q1 FY03/11 Lenses Q3 Q1 FY03/12 Hearing aids Q3 Q1 FY03/13 Q3 Sunglasses, contact lenses Q1 FY03/14 Q3 Q1 FY03/15 Q3 YoY (frames + lenses, right axis) Q1 FY03/16 Q3 -20% YoY (hearing aids, right axis) Source: Shared Research based on company data Unit prices ◤ ◤ ◤ All-store basis JPY32,589 (-0.2% YoY) Stores other than Opt-LABEL and OPTIQUE PARIS MIKI JPY38,310 (+0.3% YoY) Opt-LABEL and OPTIQUE PARIS MIKI stores JPY13,976 (+1.3% YoY) Number of glasses sold ◤ ◤ All-store basis -3.2% YoY Stores other than Opt-LABEL and OPTIQUE PARIS MIKI -4.3% YoY Customer count ◤ ◤ All-store basis -0.6% YoY Stores other than Opt-LABEL and OPTIQUE PARIS MIKI -1.1 YoY www.sharedresearch.jp 49/75 R Paris Miki Holdings | 7455 | Shared Research Report Paris Miki Holdings > Historical financial statements LAST UPDATE【2016/7/1】 Store count 50 1,050 40 30 950 20 10 850 0 -10 750 -20 -30 650 -40 -50 Q1 Q2 FY03/10 Q3 Q4 Q1 Q2 FY03/11 Q3 Q4 Q1 Q2 FY03/12 Q3 Q4 Store openings Q1 Q2 FY03/13 Q3 Store closures Q4 Q1 Q2 FY03/14 Q3 Q4 Q1 Q2 FY03/15 Q3 Q4 Q1 Q2 FY03/16 Q3 Q4 550 Store count (year-end) (right axis) Source: Shared Research based on company data Overseas Overseas operations book operating loss; while Southeast Asia posted profits, China and South Korea operations struggled Overseas operations saw the 1H operating loss expand from the previous JPY35mn to JPY70mn year-on-year. Southeast Asian operations (Thailand and Singapore) buoyed profits, but China and South Korea operations struggled owing to harsh economic conditions and poor retail sentiment. Particularly in South Korea, sales declined (mainly those at franchise stores) and appraisal losses increased further, leading to the expansion of the operating loss. The company aims to boost sales in South Korea by refurbishing existing stores and diminishing unprofitable stores. The operating loss also swelled temporarily on upfront costs of a UK subsidiary (earnings results out in February; reopened after renovation in June [Q2]), which closed for relocation. The newly opened London store, mainly targeting business people, got off to a good start as planned. In Q3, the loss at the UK subsidiary is likely to shrink on an expected rise in sales. Losses declined at the company’s Australian stores, which were undergoing reorganization. The company’s business in Vietnam has also been favorable and may show operating profit in FY03/17. Further, the company had 17 fewer stores in China compared to 1H last year, eight less than at the end of FY03/15. It opened two stores in Q2, but closed 10 stores (four in Q1 and six in Q2), demonstrating ongoing efforts to cut losses at unprofitable stores. As many Paris Miki stores were located in shopping centers, the overall sluggishness of the shopping centers apparently affected the company’s stores. www.sharedresearch.jp 50/75 R Paris Miki Holdings | 7455 | Shared Research Report Paris Miki Holdings > Historical financial statements LAST UPDATE【2016/7/1】 Overseas segment performance (JPYm) 2,500 100% 2,000 75% 1,500 50% 1,000 25% 500 0% 0 -500 -25% Q1 Q2 FY03/10 Q3 Q4 Q1 Q2 FY03/11 Q3 Q4 Q1 Q2 FY03/12 Q3 Q4 Sales (inc. intra-company transfer) Q1 Q2 FY03/13 Q3 Q4 Q1 Q2 FY03/14 Operating profit Q3 Q4 Q1 Q2 FY03/15 Q3 Q4 Q1 Q2 FY03/16 Q3 Q4 -50% YoY Sales (right axis) Source: Shared Research based on company data Overseas store count 250 200 150 100 50 0 Q1 FY03/11 Q3 Q1 FY03/12 Q3 Europe Q1 FY03/13 Q3 America Q1 FY03/14 Q3 Oceania Q1 FY03/15 China Q3 Q1 FY03/16 Q3 Asia (ex. China) Source: Shared Research based on company data China store count 10 150 5 140 0 130 -5 120 -10 110 -15 100 -20 90 -25 Q1 FY03/11 Q3 Q1 FY03/12 Q3 Q1 FY03/13 Openings Q3 Closings Q1 FY03/14 Q3 Q1 FY03/15 Q3 Q1 FY03/16 Q3 80 China store count (right axis) Source: Shared Research based on company data www.sharedresearch.jp 51/75 R Paris Miki Holdings | 7455 | Shared Research Report Paris Miki Holdings > Historical financial statements LAST UPDATE【2016/7/1】 Q1 FY03/16 results (out August 13, 2015) Quarterly sales (JPYmn) 18,000 15% 16,000 10% 14,000 5% 12,000 0% 10,000 -5% 8,000 -10% 6,000 Q1 Q2 FY03/10 Q3 Q4 Q1 Q2 FY03/11 Q3 Q4 Q1 Q2 FY03/12 Q3 Q4 Q1 Q2 FY03/13 Q3 Sales Q4 Q1 Q2 FY03/14 Q3 Q4 Q1 Q2 FY03/15 Q3 Q4 Q1 Q2 FY03/16 Q3 Q4 -15% YoY (right axis) Quarterly operating profit (JPYmn) 1,500 80% 1,000 60% 500 40% 0 20% -500 -1,000 0% Q1 FY03/10 Q3 Q1 FY03/11 Q3 Q1 FY03/12 Operating profit Q3 Q1 FY03/13 Q3 Q1 FY03/14 OPM (right axis) Q3 Q1 FY03/15 Q3 Q1 FY03/16 Q3 -20% GPM (right axis) Source: Shared Research based on company data Earnings overview Amid recovering consumer sentiment, core subsidiary Miki saw higher operating profit year-on-year, with lower costs and a recovery at existing stores enough to offset lower sales from closing unprofitable stores. Overseas operations book operating loss Overseas operations booked an operating loss of JPY0mn in Q1 FY03/16 (despite an operating profit of JPY31mn in Q1 FY03/15). Southeast Asian operations (Thailand and Singapore) buoyed profits, but China and South Korea operations struggled owing to sluggish economic conditions and retail sentiment. The operating loss also swelled temporarily on upfront costs of a UK subsidiary (earnings results out in February; reopened after renovation in June [Q2]), which closed for relocation. Results mostly in line with the company forecasts; looking to increase customer count. The company believes results were in line with its forecasts. Still, based on an analysis of comparable store sales, the company wants to expand the client base further, despite the higher average spend per customer than expected from ongoing efforts to promote high-spec, high value-added products. CoGS-to-sales ratio, SG&A expenses in line with forecasts; advertising expenses held in check through cost-benefit analysis The slight improvement in the CoGS-to-sales ratio was due to a shift in product makeup. SG&A expenses were in line with expectations, while rent expenses offset the dent made by closing Miki stores due to improved performance of the www.sharedresearch.jp 52/75 R Paris Miki Holdings | 7455 | Shared Research Report Paris Miki Holdings > Historical financial statements LAST UPDATE【2016/7/1】 Kimpo-do stores (with fluctuating rent). Advertising expenses were kept in check through cost-effectiveness analysis. Domestic sales by product and consolidated GPM 100% 74% 90% 73% 80% 72% 70% 71% 60% 70% 50% 69% 40% 68% 30% 67% 20% 66% 10% 65% 0% Q1 FY03/09 Q3 Q1 FY03/10 Q3 Q1 FY03/11 Lenses Q3 Q1 FY03/12 Frames Q3 Q1 FY03/13 Hearing aids Q3 Q1 FY03/14 Q3 Q1 FY03/15 Sunglasses, contact lenses Q3 Q1 FY03/16 64% Q3 GPM (right axis) Source: Shared Research based on company data SG&A expenses (JPYmn) 12,000 12% 10,000 8% 8,000 4% 6,000 0% 4,000 -4% 2,000 -8% 0 Q1 Q2 FY03/11 Q3 Q4 Personnel Q1 Q2 FY03/12 Q3 Q4 Q1 Q2 FY03/13 Q3 Advertising & sales promotion Q4 Q1 Q2 FY03/14 Q3 Q4 Rent & depreciation Q1 Q2 FY03/15 Q3 Q4 Other expenses Q1 Q2 FY03/16 Q3 Q4 -12% YoY (SG&A, right axis) Source: Shared Research based on company data Inventory assets (JPYmn) 18,000 270 16,000 240 14,000 210 12,000 180 10,000 150 8,000 120 6,000 90 4,000 60 2,000 30 0 Q1 Q2 FY03/10 Q3 Q4 Inventory Q1 Q2 FY03/11 Q3 Q4 Q1 Q2 FY03/12 Sales Q3 Q4 Q1 Q2 FY03/13 Q3 Q4 Inventory turnover (right axis) Q1 Q2 FY03/14 Q3 Q4 Q1 Q2 FY03/15 Q3 Q4 Q1 Q2 FY03/16 Q3 Q4 0 Merchandise inventory turnover (right axis) Source: Shared Research based on company data www.sharedresearch.jp 53/75 R Paris Miki Holdings | 7455 | Shared Research Report Paris Miki Holdings > Historical financial statements LAST UPDATE【2016/7/1】 Japan Domestic segment performance (JPYmn) 16,000 20% 14,000 15% 12,000 10% 10,000 5% 8,000 0% 6,000 -5% 4,000 -10% 2,000 -15% 0 -20% -2,000 Q1 Q2 FY03/10 Q3 Q4 Q1 Q2 FY03/11 Q3 Q4 Q1 Q2 FY03/12 Q3 Q4 Q1 Q2 FY03/13 Sales (inc. intra-company transfer) Q3 Q4 Q1 Q2 FY03/14 OP Q3 Q4 Q1 Q2 FY03/15 OPM (right axis) Q3 Q4 Q1 Q2 FY03/16 Q3 Q4 -25% YoY sales (right axis) Source: Shared Research based on company data Inbound tourists and store renovations positively impact results On the domestic front, inbound tourists and store renovations are making steady contributions toward earnings recovery, although comparable store sales still struggled. Sales to inbound tourists helped overall sales and gross profit, improving performance at existing stores and progress at “shop-in-shop” stores, opened within LAOX (TSE 8202) stores. This new store format is expected to boost operating profit, despite lower GPM from high commissions versus sales, since the consignment sales format eliminates personnel expenses (the stores specialize in frames and sunglasses, outsourcing vision tests to regular Paris Miki stores nearby). Domestic year-on-year sales 12% 8% 4% 0% -4% -8% -12% Q1 Q2 FY03/09 Q3 Q4 Q1 Q2 FY03/10 Q3 Q4 Q1 Q2 FY03/11 Q3 Q4 Q1 Q2 FY03/12 Q3 Sales YoY (all stores) Q4 Q1 Q2 FY03/13 Q3 Q4 Q1 Q2 FY03/14 Q3 Q4 Q1 Q2 FY03/15 Q3 Q4 Q1 Q2 FY03/16 Q3 Q4 Sales YoY (comp. stores) Source: Shared Research based on company data Promoting private brand hearing aid products in earnest By product category, sunglasses grew by 5.6% YoY, riding on strong demand from inbound tourists, while hearing aids picked up by 3.7% YoY as the company launched an aggressive sales promotion of its private brand products. In its hearing aid business, Paris Miki rolled out a private brand expander (which increases overall sound) in FY03/15. In FY03/16, the company went on to introduce multiple price ranges for private brand products: JPY60,000–JPY120,000 for one ear; and JPY108,000–JPY188,000 for both ears. These products, offered at multiple price ranges, are poised to drive up sales and profits, as they are designed to appeal to customers who hesitated to buy at the original price, and as their gross profit margins are comparatively higher than other products. www.sharedresearch.jp 54/75 R Paris Miki Holdings | 7455 | Shared Research Report Paris Miki Holdings > Historical financial statements LAST UPDATE【2016/7/1】 Domestic sales by product (all stores, retail) (JPYmn) 16,000 20% 12,000 10% 8,000 0% 4,000 -10% 0 Q1 FY03/10 Q3 Frames Q1 FY03/11 Lenses Q3 Q1 FY03/12 Hearing aids Q3 Q1 FY03/13 Q3 Sunglasses, contact lenses Q1 FY03/14 Q3 Q1 FY03/15 Q3 YoY (frames + lenses, right axis) Q1 FY03/16 Q3 -20% YoY (hearing aids, right axis) Source: Shared Research based on company data Unit prices ◤ ◤ ◤ All-store basis JPY32,368 (+1.3% YoY) Stores other than Opt-LABEL and OPTIQUE PARIS MIKI JPY38,299 (+3.5% YoY) Opt-LABEL and OPTIQUE PARIS MIKI stores JPY13,660 (-0.7% YoY) Number of glasses sold ◤ ◤ All-store basis -4.5% YoY Stores other than Opt-LABEL and OPTIQUE PARIS MIKI -6.0% YoY Customer count ◤ ◤ All-store basis -1.3% YoY Stores other than Opt-LABEL and OPTIQUE PARIS MIKI -1.9 YoY Success with Belle Epoque stores in Kichijoji, Crea Mall Kawagoe, and Marui Family Mizonokuchi In store renovation, Paris Miki seems to be witnessing a series of success stories. In August 2014, it renovated its store in Kichijoji (Musashino City, Tokyo) in the Belle Epoque format, representing Paris’ golden age (late 19th to early 20th centuries). As a result, the store posted robust growth year-on-year, with Q1 showing almost 30% growth year-on-year (over the figure prior to the renovation). Crea Mall Kawagoe (Kawagoe City, Saitama), which underwent a similar renovation in March 2015, attained 10% growth year-on-year. The Belle Epoque store in Marui Family Mizonokuchi (Kawasaki City, Kanagawa) has also been exceeding targets since its opening in March 2015. Paris Miki plans to renovate about 50 stores in FY03/16. The Kichijoji store format will not be applicable to all renovations because of its carefully selected location. Still, the company is looking to duplicate the successful model where applicable, while exploring ways to develop other stores in harmony with their regional characteristics. In 1H, the company opened most of its stores in shopping centers and other commercial facilities, with the number of new and closed stores in line with the plan. www.sharedresearch.jp 55/75 R Paris Miki Holdings | 7455 | Shared Research Report Paris Miki Holdings > Historical financial statements LAST UPDATE【2016/7/1】 Store count 1,050 50 40 30 950 20 850 10 0 -10 750 -20 -30 650 -40 -50 Q1 Q2 FY03/10 Q3 Q4 Q1 Q2 FY03/11 Q3 Q4 Q1 Q2 FY03/12 Q3 Q4 Q1 Q2 FY03/13 Q3 Q4 Q1 Q2 FY03/14 Store closures Store openings Q3 Q4 Q1 Q2 FY03/15 Q3 Q4 Q1 Q2 FY03/16 Q3 Q4 550 Store count (year-end) (right axis) Source: Shared Research based on company data Overseas Overseas segment performance (JPYmn) 2,500 100% 2,000 75% 1,500 50% 1,000 25% 500 0% 0 -500 -25% Q1 Q2 FY03/10 Q3 Q4 Q1 Q2 FY03/11 Q3 Q4 Q1 Q2 FY03/12 Q3 Sales (inc. intra-company transfer) Q4 Q1 Q2 FY03/13 Q3 Q4 Q1 Q2 FY03/14 Operating profit Q3 Q4 Q1 Q2 FY03/15 Q3 Q4 Q1 Q2 FY03/16 Q3 -50% Q4 YoY Sales (right axis) Source: Shared Research based on company data Overseas store count 250 200 150 100 50 0 Q1 FY03/11 Q3 Q1 FY03/12 Q3 Europe Q1 FY03/13 America Q3 Q1 FY03/14 Oceania Q3 China Q1 FY03/15 Q3 Q1 FY03/16 Q3 Asia (ex. China) Source: Shared Research based on company data www.sharedresearch.jp 56/75 R Paris Miki Holdings | 7455 | Shared Research Report Paris Miki Holdings > Historical financial statements LAST UPDATE【2016/7/1】 China store count 10 150 5 140 0 130 -5 120 -10 110 -15 100 -20 90 -25 Q1 FY03/11 Q3 Q1 FY03/12 Q3 Q1 FY03/13 Openings Q3 Q1 FY03/14 Q3 Closings Q1 FY03/15 Q3 Q1 FY03/16 80 Q3 China store count (right axis) Source: Shared Research based on company data FY03/15 results (announced on May 15, 2015) Quarterly sales (JPYmn) 18,000 15% 16,000 10% 14,000 5% 12,000 0% 10,000 -5% 8,000 -10% 6,000 Q1 Q2 FY03/10 Q3 Q4 Q1 Q2 FY03/11 Q3 Q4 Q1 Q2 FY03/12 Q3 Sales Q4 Q2 Q1 FY03/13 Q3 Q4 Q1 Q2 FY03/14 Q3 Q4 Q1 Q2 FY03/15 Q3 Q4 -15% YoY (right axis) Quarterly operating profit (JPYmn) 1,500 80% 1,000 60% 500 40% 0 20% -500 -1,000 0% Q1 FY03/10 Q3 Q1 FY03/11 Q3 Q1 FY03/12 Operating profit Q3 Q1 FY03/13 OPM (right axis) Q3 Q1 FY03/14 Q3 Q1 FY03/15 Q3 -20% GPM (right axis) Source: Shared Research based on company data Earnings overview Japan: comparable store sales continue to slide Sales were down year-on-year at main subsidiary Miki because of a protracted pullback in demand following the consumption tax hike, and the closing of unprofitable stores. Although the company is also opening new stores in parallel with closing unprofitable stores, comparable store sales continued to underperform. As a result, sales and operating profit both declined year-on-year, underperforming the company’s targets. www.sharedresearch.jp 57/75 R Paris Miki Holdings | 7455 | Shared Research Report Paris Miki Holdings > Historical financial statements LAST UPDATE【2016/7/1】 Overseas: operating loss widens; tackling a new challenge in Vietnam Overseas, the operating loss widened from JPY103mn in FY03/14 to JPY207mn. In China, results are improving as the company’s Chinese subsidiary closes unprofitable stores, but difficult conditions persisted amid sluggish economic growth and rising labor expenses. The company’s subsidiary in Southeast Asia had also been contributing to operating profit, but results were hit by lower sales at this subsidiary. Shared Research judges that the loss at the company’s Australian subsidiary has probably narrowed as it streamlines its store network. Sales fell at the UK subsidiary as it closed for relocation. Operating profit also declined owing to expenses associated with this relocation. Recurring profit, however, improved because the company received compensation for the relocation. The company also began investing in a medical business in Vietnam, as it takes on a new challenge in this region where eye healthcare remains underdeveloped. SG&A expenses (JPYmn) 12,000 12% 10,000 8% 8,000 4% 6,000 0% 4,000 -4% 2,000 -8% 0 Q1 FY03/11 Q2 Q3 Q4 Personnel Q1 FY03/12 Q2 Q3 Q4 Q1 FY03/13 Advertising & sales promotion Q2 Q3 Q4 Q1 FY03/14 Rent & depreciation Q2 Q3 Q4 Q1 FY03/15 Other expenses Q2 Q3 Q4 -12% YoY (SG&A, right axis) Source: Shared Research based on company data Domestic sales by product and consolidated GPM 100% 74% 90% 73% 80% 72% 70% 71% 60% 70% 50% 69% 40% 68% 30% 67% 20% 66% 10% 65% 0% Q1 FY03/09 Q3 Q1 FY03/10 Lenses Q3 Q1 FY03/11 Frames Q3 Q1 FY03/12 Hearing aids Q3 Q1 FY03/13 Q3 Sunglasses, contact lenses Q1 FY03/14 Q3 Q1 FY03/15 Q3 64% GPM (right axis) Source: Shared Research based on company data Towards FY03/16 In its management plan and forecasts for FY03/16, the company appears likely to continue policies from FY03/15: strengthening value-added products, continuing to close unprofitable stores, and expanding successful store formats. Shared Research will also keep an eye out for concrete initiatives to combat the sales and customer declines, as well as contributions to full-year earnings from stores that changed pricing displays (about 75), and performance of new stores inspired by the successful Shibuya store. The company plans to close 30 stores, and open 10 stores, mainly in shopping centers in areas where there are few stores, to capitalize on underlying demand. It also plans to develop new products together with manufacturers in www.sharedresearch.jp 58/75 R Paris Miki Holdings | 7455 | Shared Research Report Paris Miki Holdings > Historical financial statements LAST UPDATE【2016/7/1】 response to demand for glasses for different purposes. Overseas, the company plans to streamline its store network in areas with difficult operating conditions. It may expand in areas where business is robust and new areas. Inventory assets (JPYmn) 18,000 270 16,000 240 14,000 210 12,000 180 10,000 150 8,000 120 6,000 90 4,000 60 2,000 30 0 Q1 Q2 FY03/10 Q3 Q4 Q1 Q2 FY03/11 Inventory Q3 Q4 Q1 Q2 FY03/12 Sales Q3 Q4 Q1 Q2 FY03/13 Q3 Q4 Q1 Q2 FY03/14 Q3 Q4 Q1 Q2 FY03/15 Q3 Q4 0 Merchandise inventory turnover (right axis) Inventory turnover (right axis) Source: Shared Research based on company data Japan Domestic segment performance (JPYmn) 16,000 20% 14,000 15% 12,000 10% 10,000 5% 8,000 0% 6,000 -5% 4,000 -10% 2,000 -15% 0 -20% -2,000 Q1 Q2 FY03/10 Q3 Q4 Q1 Q2 FY03/11 Q3 Q4 Q1 Q2 FY03/12 Q3 Sales (inc. intra-company transfer) Q4 Q1 Q2 FY03/13 OP Q3 Q4 Q1 Q2 FY03/14 Q3 Q4 OPM (right axis) Q1 Q2 FY03/15 Q3 Q4 -25% YoY sales (right axis) Source: Shared Research based on company data Domestic year-on-year sales 12% 8% 4% 0% -4% -8% -12% Q1 Q2 FY03/09 Q3 Q4 Q1 Q2 FY03/10 Q3 Q4 Q1 Q2 FY03/11 Q3 Q4 Q1 Q2 FY03/12 Sales YoY (all stores) Source: Shared Research based on company data www.sharedresearch.jp Q3 Q4 Q1 Q2 FY03/13 Q3 Q4 Q1 Q2 FY03/14 Q3 Q4 Q1 Q2 FY03/15 Q3 Q4 Sales YoY (comp. stores) 59/75 R Paris Miki Holdings | 7455 | Shared Research Report Paris Miki Holdings > Historical financial statements LAST UPDATE【2016/7/1】 Store count 50 1,050 40 30 950 20 10 850 0 -10 750 -20 -30 650 -40 -50 Q1 Q2 FY03/10 Q3 Q4 Q1 Q2 FY03/11 Q3 Q4 Q1 Q2 FY03/12 Store openings Q3 Q4 Q1 Q2 FY03/13 Q3 Store closures Q4 Q1 Q2 FY03/14 Q3 Q4 Q1 Q2 FY03/15 Q3 Q4 550 Store count (year-end) (right axis) Source: Shared Research based on company data Domestic sales by product (all stores, retail) (JPYmn) 16,000 20% 12,000 10% 8,000 0% 4,000 -10% 0 Q1 FY03/10 Q3 Frames Lenses Q1 FY03/11 Q3 Q1 FY03/12 Hearing aids Q3 Q1 FY03/13 Sunglasses, contact lenses Q3 Q1 FY03/14 Q3 Q1 FY03/15 YoY (frames + lenses, right axis) Q3 -20% YoY (hearing aids, right axis) Source: Shared Research based on company data Unit prices ▶ ▶ ▶ All-store basis JPY32,493 (+0.3% YoY) Stores other than Opt-LABEL and OPTIQUE PARIS MIKI JPY38,463 (+0.6% YoY) Opt-LABEL and OPTIQUE PARIS MIKI stores JPY13,676 (+3.3% YoY) Number of glasses sold ▶ ▶ All-store basis -6.2% YoY Stores other than Opt-LABEL and OPTIQUE PARIS MIKI -6.5% YoY Customer count ▶ ▶ All-store basis -6.9% YoY Stores other than Opt-LABEL and OPTIQUE PARIS MIKI -6.7% YoY www.sharedresearch.jp 60/75 R Paris Miki Holdings | 7455 | Shared Research Report Paris Miki Holdings > Historical financial statements LAST UPDATE【2016/7/1】 Overseas Overseas segment performance (JPYmn) 2,500 100% 2,000 75% 1,500 50% 1,000 25% 500 0% 0 -500 -25% Q1 Q2 FY03/10 Q3 Q4 Q1 Q2 FY03/11 Q3 Q4 Q1 Q2 FY03/12 Q3 Sales (inc. intra-company transfer) Q4 Q1 Q2 FY03/13 Q3 Q4 Operating profit Q1 Q2 FY03/14 Q3 Q4 Q1 Q2 FY03/15 Q3 Q4 -50% YoY Sales (right axis) Source: Shared Research based on company data Overseas store count 250 200 150 100 50 0 Q1 FY03/11 Q2 Q4 Q3 Q1 FY03/12 Q2 Q3 Europe Q4 Q1 FY03/13 Q2 Q3 Q4 Oceania America Q1 FY03/14 Q2 China Q3 Q4 Q1 FY03/15 Q2 Q3 Q4 Asia (ex. China) Source: Shared Research based on company data China store count 10 150 5 140 0 130 -5 120 -10 110 -15 100 -20 90 -25 Q1 FY03/11 Q2 Q3 Q4 Q1 FY03/12 Q2 Q3 Openings Q4 Q1 FY03/13 Q2 Closings Q3 Q4 Q1 FY03/14 Q2 Q3 Q4 Q1 FY03/15 Q2 Q3 Q4 80 China store count (right axis) Source: Shared Research based on company data FY03/14 results (announced on May 15, 2014) At main subsidiary Paris Miki Co., the company continued development of its mainstay eyewear products, and aggressively made product proposals geared toward senior citizens. Paris Miki sees this customer segment as one with great potential, particularly for products such as hearing aids. Steady improvement in earnings drove comparable store sales up 2.7% YoY. Notable events during the January-March quarter which had an impact on sales were snowfall in February, which pushed down sales 1.6% YoY, and rush demand prior to the consumption tax hike, which resulted in a 19.5% YoY increase in sales for the month of March. However, sales appear to be sluggish for April and May following the tax increase. www.sharedresearch.jp 61/75 R Shared Research Report Paris Miki Holdings | 7455 | Paris Miki Holdings > Historical financial statements LAST UPDATE【2016/7/1】 GPM was down 0.4 points YoY to 67.6%, and private brands composed 78.0% of sales (78.4% in FY03/13). The company continued its drive to close unprofitable stores, and the SG&A-to-sales ratio consequently improved 1.1 points to 66.2%. Along with the announcement of FY03/14 results, Paris Miki commented on discrepancies between its full-year earnings forecasts (announced on May 15, 2013), and its full-year FY03/14 earnings results. Compared to its forecasts, sales were 2.6% lower, operating profit was 37.5% lower, recurring profit was 28.9% lower, and net income was 36.4% lower. The company attributed lower sales to growth in comparable store sales that was slower than expected as it continued to close unprofitable stores. Lower sales also yielded lower SG&A expenses, but this difference was not enough to make up for the loss in sales; operating profit, recurring profit, and net income were lower as a result. Domestic market Sales were JPY49.6bn (-0.5% YoY), and segment profit was JPY863mn (+13.0%). The company added 7 new stores, while closing 27 stores for a total of 867 stores (as of end of FY03/14). Although the number of stores decreased, sales were lower only slightly, and segment profit posted a YoY increase. Domestic sales by product category were as follows: ▶ ▶ ▶ ▶ ▶ Frames: JPY16.2bn (-2.1% YoY) Lenses: JPY22.8bn (-0.6%) Sunglasses: JPY2.2bn (+12.0%) Contact lenses: JPY1.3bn (-15.9%) Hearing aids: JPY5.7bn (+7.7%) Unit price and sales volume growth rates were as follows: ◤ Unit prices: JPY32,410 (+10.2% YoY) on all-store basis, JPY38,236 (+10.3%) for stores other than Opt-LABEL and OPTIQUE PARIS MIKI, and JPY13,235 (+8.8%) for Opt-LABEL and OPTIQUE PARIS MIKI stores ◤ Number of eyeglasses sold: Down 11.6% YoY on all-store basis, down 11.6% YoY for stores other than Opt-LABEL and OPTIQUE PARIS MIKI ◤ Number of customers: Down 9.2% YoY on all-store basis, down 8.8% YoY for stores other than Opt-LABEL and OPTIQUE PARIS MIKI Concerning hearing aids, the company began a rent to own service during Q4 FY03/13. Customers may use a hearing aid on a trial basis (while paying a monthly fee), and have the option to purchase the unit at any time. This new service was successful in attracting customers, and sales of hearing aids were up 7.7% YoY. The cumulative number of rent to own applications during FY03/14 was more than 2,300, and 450 of these customers moved on to purchase. Slightly less than 1,000 are still under rental. Overseas Sales were JPY7.7bn (+29.2% YoY), and segment loss was JPY103mn (compared to a segment loss of JPY360mn in FY03/13). Sales and operating profit were strong in the Southeast Asia region. However, conditions remain harsh in China, with an economic downturn and rising personnel expenses weighing on the company’s local subsidiaries despite measures taken to reorganize the store network. www.sharedresearch.jp 62/75 R Shared Research Report Paris Miki Holdings | 7455 | Paris Miki Holdings > Historical financial statements LAST UPDATE【2016/7/1】 FY03/13 results (announced on May 15, 2013) Sales were 55.4 billion yen (-6.9% YoY), operating profit was 427 million yen (operating loss of 114 million yen in the previous year), recurring profit was 1.2 billion yen (recurring loss of 25 million yen in the previous year), and net income was 103 million yen (net loss of 103 million yen in the previous year). At main subsidiary Paris Miki Co., the company changed its retail prices, while promoting functional lens lines, such as the RakuRakuKun series. However, economic uncertainties resulted in an 8.1% decline in comparable store sales over the previous year. Furthermore, gross profit margin improved to 68.0%, a 1.2 percentage point increase over the previous year (full-year GPM target was 68.7%). Private brand sales (unit volume basis) were 78% of total sales, a slight increase YoY. A reduction in SG&A expenses (-6.6% YoY at 37.3 billion yen) due to lower salaries and advertising costs resulted in higher profits in FY03/13, despite a 0.3 percentage point rise in SG&A-to-sales ratio. FY03/13 earnings results were basically in line with the company’s full-year forecasts revised on May 8, 2013. Higher unit prices YoY were due to the company encouraging customers to buy frames and lenses separately for more fashionable appearance, rather than just buying prefixed sets of eyeglasses. Advertising and promotional expenses were reduced during the year, which caused a decline in customer traffic at its stores. As a result, sales fell short of the company’s initial forecast. Domestic market Sales were 49.8 billion yen (-7.4% YoY), and segment profit was 764 million yen (+321.4% YoY). The company added 7 new stores, while closing 69 stores for a total of 887 stores (as of end of FY03/13). As a result, total store sales fell 8.8% YoY, mainly due to a reduction in the number of stores, which have been on a downward trend. Domestic sales by product category were as follows: ▶ ▶ ▶ ▶ ▶ Frames: 16.7 billion yen (-7.9% YoY) Lenses: 22.9 billion yen (-13.5% YoY) Sunglasses: 1.9 billion yen (+8.3% YoY) Contact lenses: 1.5 billion yen (-13.2% YoY) Hearing aids: 5.3 billion yen (+3.2% YoY) Unit price and sales volume growth rates were as follows: ◤ Unit prices: 29,407 yen (up 6.8% YoY) on all-store basis, 34,663 yen (up 11.7% YoY) for stores other than Opt-LABEL and OPTIQUE PARIS MIKI, and 12,160 yen (up 8.1% YoY) for Opt-LABEL and OPTIQUE PARIS MIKI stores ◤ Number of eyeglasses sold: Down 18.4% YoY on all-store basis, down 19.5% YoY for stores other than Opt-LABEL and OPTIQUE PARIS MIKI ◤ Number of customers: Down 8.4% YoY on all-store basis, down 8.6% YoY for stores other than Opt-LABEL and OPTIQUE PARIS MIKI In Q4 FY03/13, the company launched a rent to own service for hearing aids. Users pay a monthly fee and may purchase the hearing aid at any time. This initiative proved successful, with Q4 (January–March 2013) sales of hearing aids increasing 8.2% YoY. www.sharedresearch.jp 63/75 R Shared Research Report Paris Miki Holdings | 7455 | Paris Miki Holdings > Historical financial statements LAST UPDATE【2016/7/1】 The company revised its store closure plan for FY03/13, from the previous 50 to 69 stores during Q3 FY03/13. In Q4 FY03/13, the company closed 41 unprofitable stores, and consequently, SR Inc. believes that the company may see better profitability overall from FY03/14. Overseas Sales were 5.9 billion yen (-2.6% YoY), and segment loss was 360 million yen (compared to a segment loss of 345 million yen in FY03/12). The company was focusing on reorganizing its unprofitable stores overseas. FY03/12 results (announced on May 15, 2012) Sales were down 1.0% YoY at 59.6 billion yen, and the company posted an operating loss of 114 million yen (vs. an operating profit of 1.1 billion yen YoY), a recurring loss of 25 million yen (vs. an recurring profit of 1.7 billion yen YoY), and a net loss of 1.2 billion yen (vs. net income of 473 million yen YoY). The company explained sales at Paris Miki Co. declined as the subsidiary’s sales and advertising strategy failed to boost customer numbers and due to lower unit prices for eyeglasses. Operating profit was hit by a decline in sales but also by inventory write-downs, and a 2.6 point YoY decline in the gross profit margin to 66.8%. Inventory meanwhile actually rose by 250 million yen YoY to 10.2 billion yen at end-March 2012. Sales were 439 million yen above company estimate, and operating profit 477 million yen above estimate (lower deficit). The company downwardly revised its full year forecast via Q3 FY03/12 results announcement. Smaller-than-expected sales decline and lower SG&A expenses thanks to better personnel cost controls were behind results higher than estimates. SG&A expenses declined 1.9% YoY to 39.9 billion yen. Even though advertising expenses increased 7.8% YoY to 1.4 billion yen on Internet and other advertising, personnel expenses declined 3.8% YoY to 19.9 billion. Domestic Sales declined 0.8% YoY to 53.6 billion yen. In terms of retail sales, comparable store sales declined 0.7% YoY. Meanwhile, the total number of domestic stores remained in a declining trend. As of end-FY03/12 there were 949 domestic stores (vs. 954 as of end-FY03/11) with 21 new store openings and 26 closures over this period. As a result, all-store sales fell 1.5% YoY. At the subsidiary level, retail sales at Paris Miki Co. fell 1.7% YoY on an all-store basis and declined 0.9% YoY on a comparable-store basis. However, retail sales at Kimpo-do Co. increased 1.4% YoY on an all-store basis and 1.4% YoY on a comparative-store basis. Domestic sales by product category were as follows: ▶ ▶ ▶ ▶ ▶ Frames: 18.0 billion yen (-2.2% YoY) Lenses: 26.5 billion yen (-3.1% YoY) Sunglasses: 1.8 billion yen (-2.9% YoY) Contact lenses: 1.8 billion yen (-8.0% YoY) Hearing aids: 5.2 billion yen (+8.5% YoY) www.sharedresearch.jp 64/75 R Shared Research Report Paris Miki Holdings | 7455 | Paris Miki Holdings > Historical financial statements LAST UPDATE【2016/7/1】 Unit price and sales volume growth rates were as follows: ◤ Unit prices: 27,535 yen (down 7.8% YoY) on all-store basis, 31,033 yen (down 8.6% YoY) for other than Opt-LABEL, OPTIQUE PARIS MIKI, and 11,246 yen (down 6.0% YoY) for Opt-LABEL, OPTIQUE PARIS MIKI. ◤ Number of eyeglasses sold: Up 7.2% YoY on all-store basis, up 7.5% YoY for other than Opt-LABEL, OPTIQUE PARIS MIKI ◤ Number of customers: Down 0.5% YoY on all-store basis, down 0.8% YoY for other than Opt-LABEL, OPTIQUE PARIS MIKI Operating profit for the segment fell 51.2% YoY to 838 million yen. Lower unit prices for eyeglasses and inventory write-downs were behind the drop in gross profit margin at Paris Miki Co. From Q3, Paris Miki Co. began to earnestly market frame and lens sets, but this new approach failed to attract more customers, resulting in these poor results. SR Inc. believes the sluggish results can be attributed to a confused market positioning in which the company is not sure if its message should be "value" or "price", while its TV commercials and other advertising efforts have done little to raise brand awareness. Furthermore, the company commented that results at Kimpo-do Co., which mainly operates shops within department stores, fell slightly short of plans due to reduced operating hours and extra holidays at department stores in conjunction with rolling power cuts in the wake of the Great East Japan Earthquake. In November 2011, Kimpo-do opened its new Kyobashi flagship store along Chuodori in Kyobashi, Tokyo. According to the company, the floor space of this new store is around 198 sqm compared to the usual 66 sqm. Kimpo-do's head office functions were also relocated to this site, making supervision of this key store easier. The services provided by the Kyobashi flagship store will be expanded to its department store-based shops as the company strives to further improve the services it offers. Overseas Sales were down 2.6% YoY at 5.9 billion yen and this segment saw an operating loss of 345 million yen (vs. 319 million yen operating loss in FY03/11). Overseas retail sales declined 3.1% YoY, but increased 0.5% YoY when eliminating the impact of a stronger yen. By region, sales in Asia increased 2.4% YoY (+6.8% YoY when excluding impact of exchange rate fluctuations), sales in Europe were down 22.9% YoY (-19.3% YoY when excluding impact of exchange rate fluctuations) and sales in Oceania/Hawaii were down 22.1% YoY (-23.2% YoY when excluding impact of exchange rate fluctuations). By region, operating profit in Asia rose 16.9% YoY. Losses in Oceania/Hawaii were smaller due to the shuttering of unprofitable stores. The company had 12 stores in Oceania as of end-FY03/12 after the closure of four stores. The company said that it will continue to eliminate, whenever necessary, loss-making stores for which contracts have been completed. In South Korea there was a net gain of 15 stores (opened 16, closed 1) for a network of 41 stores, while in China there was a net decrease of 21 stores (opened 9, closed 30), leaving a network of 138 stores. The company said that its network in China is currently being reorganized with an eye on future growth. Furthermore, the company has not limited itself to eyeglasses, but has been offering a wide range of products including hearing aids and accessories as it tries to pinpoint customer needs and determine the ideal store makeup. www.sharedresearch.jp 65/75 R Paris Miki Holdings | 7455 | Shared Research Report Paris Miki Holdings > Income statement LAST UPDATE【2016/7/1】 Income statement Income Statement FY03/06 FY03/07 FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. (JPYmn) Cons. Cons. 68,011 66,929 63,876 57,745 56,299 60,140 59,547 55,419 56,903 54,342 53,727 Total Sales -1.6% -4.6% -9.6% -2.5% 6.8% -1.0% -6.9% 2.7% -4.5% -1.1% -1.3% YoY 17,529 18,414 17,260 19,524 18,505 17,986 17,643 18,414 19,751 17,708 CoGS 19,519 Gross Profit 48,492 47,405 45,371 39,759 38,656 41,725 39,795 37,711 38,488 37,082 36,197 68.0% 67.6% 68.2% 67.4% 66.8% GPM 71.3% 70.8% 71.0% 68.9% 68.7% 69.4% 39,910 39,199 40,663 37,283 37,680 36,906 35,928 40,559 SG&A 39,248 40,372 41,488 67.6% 67.0% 67.3% 66.2% 67.9% 66.9% 70.2% 69.6% 65.0% SG&A / Sales 57.7% 60.3% 3,883 -800 -543 1,062 -114 427 808 175 269 7,033 Operating Profit 9,244 -44.8% 89.2% -78.3% 53.7% -23.9% YoY -10.2% 0.5% 0.3% OPM 13.6% 10.5% 6.1% -1.4% -1.0% 1.8% -0.2% 0.8% 1.4% 570 243 722 326 263 Non-Operating Income 810 740 715 612 382 691 174 83 99 111 338 11 75 Non-Operating Expenses 210 81 96 845 1,666 -25 1,066 1,035 635 174 -172 Recurring Profit 9,844 7,692 4,502 -1,033 -2.9% -38.6% -72.6% -41.5% YoY -8.5% -21.8% 1.8% 1.2% 0.3% RPM 14.5% 11.5% 7.0% -1.8% -0.3% 2.8% -0.0% 1.9% Extraordinary Gains 594 72 147 61 93 42 238 566 38 Extraordinary Losses 561 597 577 1,669 192 390 451 467 276 494 310 558 528 542 Tax Charges 3,678 3,343 2,070 639 -128 862 816 534 19 -19 -38 20 8 -3 -22 2 Minority Interest 8 19 103 419 198 -601 1,907 -3,202 -233 473 -1,177 Net Income 5,597 4,327 - 306.8% -52.7% YoY 20.4% -22.7% -55.9% -1.1% -5.5% -0.4% 0.8% -2.0% 0.2% 0.7% 0.4% Net Margin 8.2% 6.5% 3.0% Source: Shared Research based on company data Paris Miki’s top-line sales grew to a peak of just under 84 billion yen in FY03/02 and then declined pretty much every year for a cumulative peak-to-trough decline of 33.0% as of FY03/10. Gross profit margins are also on the downward trend. Sales, General, and Administrative expenses have been largely determined by wages (the largest cost), rental expense, and advertising (including promotion) expenses (see Cost Structure discussion in Business Description). Operating profit margins have averaged 10.8% from FY03/00 until FY03/10. The company had operating losses in FY03/09, FY03/10, and FY03/12. The company has recognized some sizeable extraordinary losses during the period under review (FY03/00-FY03/11). In FY03/01 and FY03/02, extraordinary losses were mainly the result of accounting changes related to pension fund (defined benefit) obligations. The company discontinued the pension plan during FY03/03, and recognized a one-time charge of 3.2 billion yen. Extraordinary losses of 2.3 billion yen during FY03/05 were the result of inventory write down charges of approximately 2.0 billion yen. Impairment losses and expenses related to store closures were the main components of a 1.7 billion yen extraordinary loss recorded in FY03/09. www.sharedresearch.jp 66/75 R Paris Miki Holdings | 7455 | Shared Research Report Paris Miki Holdings > Income statement LAST UPDATE【2016/7/1】 Balance sheet Balance Sheet FY03/06 FY03/07 FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 Cons. Cons. Cons. Cons. Cons. Cons. Cons. (JPYmn) Cons. Cons. Cons. Cons. ASSETS 15,693 17,201 20,037 18,751 14,332 14,642 15,790 18,363 20,609 26,292 23,143 Cash and Equivalents 2,966 3,257 3,277 4,041 3,203 2,760 2,767 2,313 2,835 2,855 2,393 Accounts Receivable 814 814 865 882 811 610 610 3,776 4,018 3,646 609 Securities 10,244 9,658 10,308 11,034 10,237 9,993 9,185 9,791 9,381 Inventories 8,338 8,535 -167 -18 -15 -70 -100 -128 -187 -20 -30 -45 Allowance for Doubtful Accounts -107 2,918 2,184 1,841 1,805 2,851 2,569 3,154 2,710 3,038 1,983 3,031 Other Total Current Assets 40,576 44,413 38,944 34,212 32,523 36,518 34,922 29,854 31,569 32,892 32,461 11,974 11,584 11,350 11,327 11,247 11,995 13,008 12,903 13,400 Buildings 12,086 12,923 8,880 8,478 7,956 8,089 7,890 8,068 8,028 8,317 8,760 8,354 8,506 Equipment 1,062 1,062 1,062 1,062 1,051 1,051 1,051 1,051 1,051 1,070 1,068 Land 76 45 279 382 394 412 397 16 68 68 221 Leased Assets, Construction 34 108 122 131 128 33 37 33 52 24 Other 19 -14,675 -14,729 -15,487 -15,127 -15,498 -14,491 -14,766 -15,023 -15,529 -15,770 -15,594 Acc. Depreciation 5,410 5,709 5,646 6,174 7,004 7,693 7,845 7,039 7,081 6,926 6,782 Tangible Fixed Assets 219 124 315 410 481 149 157 Goodwill 384 482 851 1,307 1,566 1,606 1,254 396 445 272 Other 266 1,254 1,606 272 603 545 865 892 1,166 1,526 1,690 Total Intangible Assets 266 2,873 2,052 4,379 3,130 600 193 245 317 303 442 636 Investment Securities 2,000 Long-term Deposits 5,000 2,000 3,000 129 99 129 125 311 395 213 139 194 237 Long-term Receivables 336 8,422 7,491 7,039 6,605 6,090 8,908 9,588 10,284 11,153 Leaseholds and Security Deposits 11,771 11,251 482 362 258 174 115 596 786 999 1,186 Construction Assistance Funds 1,641 1,387 -11 -10 -26 -11 -11 -11 -10 -19 -11 -11 Allowance for Doubtful Accounts -24 -31 -36 -70 Allowance for Losses in Investments in Affiliates -26 941 833 691 533 946 461 617 276 392 537 Others 431 9,982 14,523 14,881 12,978 11,941 Total Other Fixed Assets 17,285 14,001 13,332 11,932 11,202 10,348 Total Fixed Assets 24,556 21,967 21,782 19,517 19,150 18,167 17,932 22,224 22,219 20,296 18,606 Total Assets 65,131 66,379 60,726 53,729 51,673 54,720 52,854 52,079 53,788 53,187 51,067 LIABILITIES Accounts Payable Short-Term Debt Curr Portion of Long-Term Debt Other Current Liabilities Total Current Liabilities Long-Term Debt Other Long-Term Liabilities Total Fixed Liabilities Total Liabilities SHAREHOLDER EQUITY (NET ASSETS) Issued Capital Reserves Retained Earnings Shares Held in Treasury Securities Valuation Adjustment Foreign Currency Adjustment Subscription Rights to New Shares Minority Interests Total Shareholder Equity (Net Assets) Working Capital Interest-Bearing Debt Net Cash 2,543 7,342 9,885 420 420 10,305 2,311 8 7,769 10,088 406 406 10,494 2,443 5,269 7,712 599 599 8,311 2,050 5,849 7,899 470 470 8,369 1,794 5,638 7,432 637 637 8,069 1,656 1,832 5,191 8,679 2,500 935 3,435 12,114 1,474 5,256 4,772 11,502 923 923 12,425 1,570 1,382 4,465 7,417 4,000 827 4,827 12,244 1,852 1,664 5,399 8,915 4,000 869 4,869 13,784 1,896 1,988 4,000 4,162 12,046 600 867 1,467 13,513 1,803 5,751 3,871 11,425 1,066 764 1,830 13,255 5,901 6,829 47,183 -6,123 414 468 5,901 6,829 48,145 -6,034 72 784 5,901 6,829 46,745 -8,387 22 963 5,901 6,829 41,153 -8,389 9 -394 5,901 6,829 39,297 -8,393 27 -313 5,901 6,829 38,496 -8,399 -3 -463 5,901 6,829 36,391 -8,401 21 -535 5,901 6,829 35,557 -8,401 44 -359 5,901 6,829 35,050 -8,402 165 145 152 54,824 8,188 26,920 185 55,884 8,984 8 30,303 341 52,415 9,705 24,256 249 45,359 10,054 18,973 253 43,602 10,226 17,811 246 42,606 11,192 4,332 16,315 220 40,428 11,973 5,256 14,306 262 39,834 11,365 5,382 14,832 313 40,003 12,497 5,664 11,843 5,901 6,829 34,321 -8,402 184 481 13 344 39,673 12,395 6,588 13,016 5,901 6,829 32,792 -8,402 13 384 35 257 37,811 11,400 6,817 11,690 Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods. Paris Miki’s Balance Sheet has been characterized by small amounts of debt and high levels of cash. The company has been in a substantial net cash position (cash and equivalents - total interest bearing debt). The equity ratio has stayed at a high level. Balance Sheet Ratios Quick Ratio Current Ratio Equity Ratio FY03/06 FY03/07 FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. 295.5% 327.4% 350.0% 269.2% 277.6% 270.6% 197.3% 248.0% 217.8% 163.3% 410.5% 440.3% 505.0% 433.1% 437.6% 420.8% 303.6% 402.5% 354.1% 273.1% 83.9% 83.9% 85.8% 84.0% 83.9% 77.4% 76.1% 76.0% 73.8% 73.9% Source: Shared Research based on company data Assets Assets on the company’s balance sheet have historically been cash (and equivalents) and inventories given that Paris Miki does not normally own its stores. The balance sheet is highly liquid as illustrated by relatively high quick ratio (cash, www.sharedresearch.jp 67/75 R Shared Research Report Paris Miki Holdings | 7455 | Paris Miki Holdings > Income statement LAST UPDATE【2016/7/1】 inventories, and receivables as a proportion of total current liabilities). Inventory on the balance sheet is monitored by a POS system installed in the stores. Non-current assets on the balance sheet are predominantly deposits for leases for the retail store network (fixed term land leaseholds). The fixed-term land leaseholds are depreciated by a declining balance method during the useful life. Depreciable assets on the balance sheet are related to store openings and refurbishments. Liabilities Most of the liabilities on the company’s balance sheet are current accounts payable. Although debt increased from FY03/11 to FY03/14, interest-bearing debt has stayed at a level below that of cash and an equivalent, meaning the company remains in a net cash position. Shareholders’ Equity Changes in shareholder equity have been largely determined by net income and dividends; there have been no instances of notable valuation charges or similar adjustments. www.sharedresearch.jp 68/75 R Paris Miki Holdings | 7455 | Shared Research Report Paris Miki Holdings > Income statement LAST UPDATE【2016/7/1】 Statement of cash flows Cash Flow Statement (JPYmn) Operating Cash Flow (A) Investment Cash Flow (B) Free Cash Flow (A+B) Financial Cash Flow Depreciation & Amortization (A) Capital Expenditures (B) Working Capital Changes (C) Simple FCF (NI + A + B - C) FY03/06 FY03/07 FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. 7,436 4,676 1,390 -589 2,156 1,035 479 2,428 2,065 175 1,095 -478 1,642 -1,621 1,195 -1,643 -11,088 -421 -2,207 -137 2,876 -1,360 6,958 6,318 -231 606 513 -10,053 58 221 1,928 3,051 -265 -2,456 -3,250 -5,666 -2,438 -1,694 2,929 -151 -958 -806 -149 -694 1,246 1,274 1,505 1,510 1,402 1,511 1,534 1,480 1,387 1,289 1,242 -1,437 -1,510 -2,201 -1,520 -1,031 -1,374 -1,432 -1,400 -1,229 -1,265 -924 -858 796 721 349 172 966 781 -608 1,132 -102 -995 6,264 3,295 490 -3,561 -34 -356 -1,856 791 -555 324 712 Source: Shared Research based on company data Operating cash flows have been somewhat volatile; there were two instances of negative operating cash flow since FY03/01. Negative operating cash flow in FY03/03 was a result of an increase in inventories (1.2 billion yen) and taxes paid (6.6 billion yen). From FY03/13 and beyond, the company posted net income, pushing up operating cash flows. Investment cash flows have reflected the company’s expansion and securities investment activities. Financial cash flows have been defined by cash dividend payments and share buybacks. Cash used for dividend payment and buybacks are shown below: Financial Cash Flow (JPYmn) Dividend Payment Treasury Stock Sale/Repurchase, net Dividends and Treasury Operations Financial Cash Flow FY03/06 FY03/07 FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. 3,339 3,333 3,304 2,436 1,622 1,274 925 925 927 927 2,353 2 4 6 1 3,339 3,333 5,657 2,438 1,626 1,280 926 925 927 927 2,456 3,250 5,666 2,438 1,694 -2,929 151 958 806 149 Source: Shared Research based on company data Simple free cash flow (net income adjusted for depreciation and amortization, subtracting capital expenditures and additions to working capital) has been relatively robust over FY03/00-FY03/08 period. Higher sales generally produced higher cash flow, as in FY03/00-FY03/02 period. Simple free cash flow in FY03/04 coincides with the end of the company’s capital expenditure cycle; store growth slowed from FY03/04 to FY03/14. Simple free cash flow was negative in FY03/09, due in part to a net loss for the period of 3.2 billion yen. In FY03/13, simple free cash flow increased thanks to net income recorded for the period. The company’s cash conversion cycle is shown in the following table Cash Conversion Cycle FY03/06 FY03/07 FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 (Days) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Accounts Receivable Turnover 28.4 24.2 23.1 25.0 19.9 21.1 18.6 16.9 14.1 16.7 Days in Accounts Receivable 13 15 16 15 18 17 20 22 26 22 Inventory Turnover 2.3 2.3 2.0 1.8 1.9 1.8 1.9 1.8 1.8 1.6 Days in Inventory 156 160 185 199 190 198 189 199 204 233 Payables Turnover 7.7 8.4 7.6 8.8 9.8 11.1 13.4 11.3 9.9 9.1 Days in Payables 48 43 48 42 37 33 27 32 37 40 Cash Conversion Cycle (days) 121 131 153 172 171 183 182 188 194 215 Source: Shared Research based on company data The cash conversion cycle for Paris Miki has been on an increasing trend. The spread between inventory and payable turnover has had the largest impact on the cash conversion cycle. Payables turnover has been increasing, indicating that the company was paying suppliers more quickly in FY03/13 vs. FY03/09, which explains the overall increase in the cash conversion cycle. Paris Miki has used a POS system to manage inventory since 1990. Despite the ability to efficiently track and reorder the www.sharedresearch.jp 69/75 R Shared Research Report Paris Miki Holdings | 7455 | Paris Miki Holdings > Income statement LAST UPDATE【2016/7/1】 inventory, the inventory cycle is an average of about 190 days. SR Inc. questions if this is the optimal use of company’s capital. The company has a warehouse for inventory, but also maintains relatively high levels at its shops. Increasing free cash flow by improving inventory turnover would allow the company to invest the cash into more productive purposes (refurbishing stores or marketing, for example). Currently, the HQ merchandising department is providing guidance regarding the inventory, however for the most part the inventory is kept at experience-based (and rarely questioned) levels that are perceived by store managers as necessary to satisfy “customers’ needs”. www.sharedresearch.jp 70/75 R Paris Miki Holdings | 7455 | Shared Research Report Paris Miki Holdings > Other information LAST UPDATE【2016/7/1】 Other information History The roots of the company can be traced back to 1930, when the founder Yoshio Tane opened a small watch shop called Seikakudo Tokeiten in Himeji City, in the Hyogo Prefecture. Miki Tokeiten Inc. was founded in Himeji in early 1950; the company sold clocks and watches, jewelry, and eyeglasses. The company changed its name to Megane no Miki (“A Miki store of glasses”) in 1960. Store growth was predominantly in the Hyogo Prefecture; brand recognition outside of the prefecture was limited. Growth of the business accelerated notably in 1973, when Tane opened a Miki-branded store in Paris, close to the Mitsukoshi department store. The concept was simple: Japanese tourists shopping at Mitsukoshi would see the Miki store, which would help create the association between the company and a sophisticated European image. Execution of the marketing strategy began in Japan during 1974 with the creation of the Paris Miki company (later to merge with Megane no Miki of Kansai region and renamed Paris Miki) to open retail stores in the Tokyo area. The store design was an effective component of the overall effort: the “towers” of the castle façade were easily identifiable by customers and could be seen from far away, rising above low-rise structures of the Japanese towns. The company listed on JASDAQ in 1995, and was listed on the second section of the TSE in 1996. The company’s stock was moved to the first section of the TSE in 1998. News and topics February 2016 On February 1, 2016, the company announced that Hiroshi Tane, president and representative director of main subsidiary Paris Miki Co., would be stepping down from his post following his resignation. Director Masahiro Sawada has been newly appointed as representative director, slated to come into effect February 8, 2016. September 2015 On September 14, 2015, the company announced that it will implement a shareholder benefit program to commemorate the 20th anniversary of its stock exchange listing. Details of the commemorative shareholder benefit program The program includes the issuance of investor benefit cards and incentives for long-term shareholders. Benefit cards Shareholders whose name appears on the register of shareholders, or those who own one unit of shares (100 shares) or more as of September 30, 2015, or March 31, 2016, will be sent cards, which can be used to receive a 20% discount on glasses purchased at any Paris Miki, Megane no Miki, OPTIQUE PARIS MIKI, or MIKISSIMES GINZA store. Each qualifying shareholder will be given three cards, and can use the card for up to five people when making purchases. Benefits for long-term shareholders Of the shareholders whose name appears on the register of shareholders, or those who own one unit of shares (100 shares) or more as of September 30, 2015, a survey will be sent to those who have held the company’s shares for 10 years www.sharedresearch.jp 71/75 R Paris Miki Holdings | 7455 | Shared Research Report Paris Miki Holdings > Other information LAST UPDATE【2016/7/1】 or more. Candidates will then be selected based on the answers to the survey, and offered benefits based on a lottery. The company is finalizing details of the benefits but plans to offer travel plans linked to its group businesses. The company has stated that this shareholder benefit program is limited to this one time and will not be continued. It will examine future programs in light of its overall shareholder policy. August 2015 On May 25, 2015, the company announced changes to executive management. At a meeting held on the same day, the board of directors agreed upon changes to the representative director and officers of the company. The company plans to officially decide upon these changes at the ordinary general meeting of shareholders to be held on June 23, 2015, and the subsequent meetings of the board of directors and board of corporate auditors. Overview of the changes Name New role Current role Mikio Tane Representative director and vice president Director Junichi Kaga Director and vice president Representative director and vice president Jiro Nagata Senior councilor (Miki Group) Representative director and vice president Tomoko Aramaki Director and head of IR Non-executive director Source: Shared Research based on company data Top management Hiroshi Tane, President of Paris Miki Holdings, is the oldest son of the company’s founder; born in 1931. Tane joined the company in 1950 at the age of 19, and was made an Executive Director in 1957. Tane became the company CEO in 1986 and Chairman in 1988. Mikio Tane, Vice President of Paris Miki Holdings, born in 1959; joined the company in 1984. Junichi Kaga, Vice President of Paris Miki Holdings, born in 1954; joined the company in 1977. Responsible for overseas operations. Employees At the end of FY03/16, the company employed 4,618 employees (3,227 full-time, 1,391 contract). www.sharedresearch.jp 72/75 R Paris Miki Holdings | 7455 | Shared Research Report Paris Miki Holdings > Other information LAST UPDATE【2016/7/1】 Major shareholders Top Shareholders Lunettes Inc. Codomo Limited HAL International Investments N.V. Employee Stock Ownership Mikio Tane CA Indosuez(Switzerland) SA Hiroshi Tane Japan Trustee Services Bank, Ltd. (Trust Account) SMBC Trust Bank Ltd. Designated Securities Trust Nobuhiko Tane Amount Held 27.11% 10.11% 7.27% 4.20% 2.21% 2.16% 1.97% 1.73% 1.48% 1.39% Source: Shared Research based on company data As of March 31, 2016 The largest shareholder is Hiroshi Tane, the President of the company. In addition to direct holdings, his ownership is represented through Lunettes Inc., Codomo Limited. Investor relations The company holds Q2 and full year results meetings, and maintains an IR website in both English and Japanese. www.sharedresearch.jp 73/75 R Shared Research Report Paris Miki Holdings | 7455 | Paris Miki Holdings > Other information LAST UPDATE【2016/7/1】 Company profile Company Name Head Office PARIS MIKI HOLDINGS Inc. Konan, Minato-ku 4-1-8 Tokyo, Japan 140-0001 Phone Listed On +81-3-6408-8601 Tokyo Stock Exchange 1st Section Established Exchange Listing January 27, 1950 August 9, 1995 Website Fiscal Year-End http://www.paris-miki.com/index.html March IR Contact IR Web http://www.paris-miki.com/investor/index.html IR Mail www.sharedresearch.jp IR Phone 74/75 R Shared Research Report About Shared Research Inc. We offer corporate clients comprehensive report coverage, a service that allows them to better inform investors and other stakeholders by presenting a continuously updated third-party view of business fundamentals, independent of investment biases. 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