Isetan Mitsukoshi Holdings Ltd. (3099) Q4 2026 Earnings Call Transcript

Thank you very much for attending Isetan Mitsukoshi Holdings Financial Results Explanation Meeting for the fiscal year ending March 2026 today. I'll express my gratitude again for your understanding and cooperation for our IR activities. I am Ooyama from Corporate Communication and IR Division acting as a moderator for today. Now I'll introduce speakers for today. Director, President, and CEO, Tashiyuki Hosoya. I'm Hosoya. Thank you very much for attending today. Director, Managing Executive Officer and CFO, Yoshinori Makino. I'm Makino. Thank you very much. That's all. Thank you very much. CFO Makino and CEO Hosoya will explain the presentation material in this order, followed by a Q&A session. The meeting will take about one hour in total. Mr. Makino, please. Now, I'll explain the results for FI 2025 and the plan for FI 2026. This slide shows the FI 2025 PL results. From this time, we included the hunting of fixed-term lease contracts in department stores in gross sales handled, which is listed at the top of the table. As you see on the right, we generated very good profit in the fourth quarter. Sales were very strong. Growth profit increased by 4.3 billion yen year-on-year. HGNA expenses decreased by 1.2 billion yen. Consequently, operating profit increased by 5.5 billion yen year-on-year to 21.9 billion yen, significantly surpassing the previous record high for the fourth quarter. As a result, for the full-year growth sales handled nearly matched the previous year's level. Meanwhile, SG&A expenses were reduced by 4.6 billion yen through additional cost structure reform. For operating profit, we had maintained the plan of 78 billion yen announced last May. Ultimately, we added 2 billion yen and achieved 80 billion yen. Profit for the year benefited from the contributions of just over 10 billion yen, including gains on the sales of shares in affiliated companies and the review of tax effect, ranking in the fourth quarter. As a result, full-year profit reached 76 billion yen, significantly surpassing the previous record high. Here is the usual material showing domestic department stores' results for the first half and the second half. Total domestic department stores shown in the bottom in grey indicates year-on-year comparison was 97.2% in the first half and 102.2% in the second half. Strong domestic customer sales grew more in the second half than in the first half. Overseas customer sales did not reach the previous year's level but recovered to some extent in the second half, achieving 84% year-on-year for the full year. I'll talk about the graph showing the monthly trend of overseas customer sales. The gray bars represent FI 2024 results and the gold bars represent FI 2025 results. When you look at the comparison, the FY2025 results in gold exceeded the previous year only in October and March. The first half was affected by the rebound from strong performance two years ago, while the second half was impacted by voluntary travel restrictions to Japan, making overseas customer sales unpredictable throughout the year. As you see in the gold bar, April was the highest in the first half, followed by a downward trend. Given the current situation, we aim to increase sales in the first half of FY2026. The annual share of visitors by country or region fluctuated significantly. The red line shows the share of customers from China and Hong Kong, and the blue line shows customers from other countries. These shares reversed sharply in the second half, as the blue line shows nationalities of purchasing customers have diversified considerably, which we view as a positive trend also in reducing future volatility. This slide shows results by store. In particular, the Isatan Shinjuku main store on the top left exceeded 400 billion yen in gross sales for the first time in FY2024 and achieved further growth, which we consider quite positive. I'll omit details on this page. Next, I'll move on to changes in consolidated SG&A expenses. In the February IR outlook, we announced a plan of 258 billion yen, a year-on-year reduction of 3.3 billion yen. But in the fourth quarter, we were able to drive sales while further reducing costs. We think this was a significant factor in achieving operating profit of 80 billion yen. This slide shows performance by segment. In all segments, operating profit increased year-on-year and exceeded the breakdown of 78 billion yen target in a February IR plan. I think this represents a very strong start in a first year toward achieving the target of 85 billion yen set in phase 1 of our medium-term management plan. Now, I'll talk about the four-year plan for FY2026. Gross sales are planned to increase by approximately 50 billion yen year-on-year to 1.35 trillion yen. Gross profit to increase by 7.7 billion yen. We plan to increase SG&A expenses by 6.2 billion yen year-on-year by properly incorporating strategic spending and increases in expenses caused by various external factors. Operating profit will be 81.5 billion yen, up just under 1.5 billion yen. Profit will be 61.5 billion yen due to the rebound from last year's tax effects, and ROE will be over 10%. This slide shows domestic development store plan for the first half, the second half, and the full year. Also, with the idea of creating a buffer in the first half leveraging the rebound from last year's sales decline and the current strong performance for total domestic development stores in gray, we set the plan of 104% year-on-year for the first half and just under 103% for the second half with slightly more weight on the first half. The disclosed preliminary results for April show 105.9% year-on-year, indicating a strong start. Progress in May has been steady so far. We hope we'll ensure solid results in the first half. Here is a line graph showing the general trend of domestic and overseas customers. The dotted line show the results for FY2025 and the solid line show plan for FY2026. With advancement in identification of domestic customers and city sales from customers purchasing over 3 million annually, we found to achieve year-on-year increase with no major changes. For overseas customers, the numbers for March and April show results in May, June, and July, when sales dropped sharply last year, we will create a buffer. As I said earlier, for around October, when year-on-year growth was achieved, we will not make an over-ambitious plan. And for the full year, we plan to slightly exceed 100% year-on-year. This slide shows FY2026 sales plans for major stores and major regional companies of Iseta Mitsukoshi Ltd. In particular, we have slightly higher expectations for the three fructive stores on the top left and Iwataya Mitsukoshi on the bottom right. April preliminary results show the Iseta Mitsukoshi main store at 110% year-on-year, indicating a very strong start. We will secure solid sales, mainly at flagship stores. For full-year SG&A expenses, we planned a year-on-year increase of 6.2 billion yen. In cost-structure reform, we incorporated 3.3 billion yen reduction focusing on high-probability items. I will talk about the other increases by breaking them down into several factors. As an almost certain factor, the majority of an increase of 700 million yen in others on the far right is an increase due to changes in size-based business taxation system from this fiscal year. However, as corporate tax is reduced in net profit, the impact on net profit is expected to be neutral. 900 million yen rise from new consolidation is due to our subsidiary IM Food Style Limited acquiring businesses of the company called Onoya, operating seven supermarkets in Kanagawa Prefecture this year. However, as gross profit will grow more than this amount, this factor will have a slight positive impact on consolidated earnings. As for impact from price changes, we incorporated the impacts based salary increase already agreed with the union into personnel expenses shown on the top row. These are almost visible factors. Additionally, considering the current inflation, geopolitical instability, including the situation in the Middle East, and crude oil prices, we have estimated higher business consignment expenses, mainly facility management. We estimated utilities expenses by assuming crude oil prices at approximately $100 per barrel throughout the year. If prices fall in the second half, we think there will be room for flexibility. As we will increase remodeling investment in department stores year-on-year, we properly incorporated depreciation associated with increased investments and other repair costs into strategic expenditures. In sales-linked expenses, we assume advertising expenses and others will increase to some extent while monitoring the overall top-line performance. We will control expenses if necessary. This is the last slide in my part, plans by segment. We plan to increase operating profit in a department store business and a finance segment centered on MI card. In real estate segment, a slight decrease is incorporated due to the rebound from irregular operating profit in the latter half of the previous fiscal year. That concludes my presentation. Now I, Hosoya, will explain. Before discussing the progress of phase one of our current medium term management plan, I will briefly review the transformation of our overall business model. On the far left side of the diagram, it says attracting customers to special department stores. This reflects what we have consistently pursued as a department store, but the key is special department stores. When customers want to buy something good, how can we become the choice for customers? In this context, we use the term special department stores. What follows after attracting customers is our unique strategy. Specifically, we ensure that customers are always identified through the card and the app. Before the COVID-19 pandemic, the number of identified customers was around 2 million. In FY2025, the figure grew to more than 8 million, approximately four times larger. For these identified customers, we leverage both the power of people and the power of digital technologies, engaging in thorough consideration. We provide new value and information to customers. To achieve this, with our proprietary approach called Scientific Analysis of Department Stores, we conduct comprehensive data-driven analysis of business operations that previously relied on intuition. Furthermore, we have eliminated concepts such as group companies for the benefit of department stores, vertical divisions, and shared companies and instead focus entirely on how group companies can deliver new value to customers through intra-group coordination strategy. In addition, we are advancing the use of AI in earnest, pursuing the potential for generating new proposals by analyzing customer data through AI. We are also fostering human resources beyond the conventional department store personnel framework based on the perspective of individual customer business. Luckily, our group has two system companies which further enhance the effectiveness of these initiatives. Mackinac already explained these results as FY2025 achievements and I'll elaborate further. We improved efficiency dramatically in department stores. Net sales per square meter increased to 112% year-on-year, despite decrease in utilized department store floor area to 88% of the previous year. Net sales remained at the same level, resulting in improved per square meter productivity. Moreover, in our shift from mass to individual, through advances in scientific analysis of department stores, analyzing what types of expenses and advertising are most appropriate for each customer, we reduced H&A expenses, effectively leading to operating profit at 105% of the previous year. By doing so, we offset the shortfall of approximately 30 billion yen in overseas customer sales. Next, I'll discuss how we addressed concerns about the future of department stores and whether these resolutions will continue going forward. On the left, it says, revitalization phase of department stores. In FY2025, we achieved substantial operating profit of 80 billion yen. When formulating the previous medium term management plan, concerns included low profitability of department stores, susceptibility to external environments, and Japan's continued population decline. As I have been explaining, our data-driven approach rather than relying on intuition enabled us to overcome low profitability. We shifted from mass to individual, providing information tailored to the preferences of each individual customer rather than relying solely on mass marketing, which has led to steady growth in identified customer sales. To address population decline instead of mass market merchandising, we are targeting sophisticated and high-quality consumption. Discerning consumption will continue to expand. This is the story behind FI 2025 results. On the right, you see whether this story will continue. This story is still in phase one, and we are thinking about the next and subsequent steps to undertake from long-term perspectives. I am confident these initiatives will endure even if the management structure changes and will explain why. The vertical axis in this diagram represents timeline. The revitalization phase of department stores concluded within the first few years, during which we successfully established a highly profitable structure. The next phase is urban community development preparation phase. This is a phase of intergroup coordination activities across the group, how the entire group provides value and monetizes for the customers gathered by our department stores and how we can coordinate with our department stores. In the next phase, we'll enhance the value of real estate owned by our department stores. This does not simply mean building a new shopping center on land we own. Rather, we'll add new value and elevate the value of owned real estate. We aim to build a four-tier monetization model to expand profit, and beyond that, in fruition phase, we intend to monetize by leveraging identified customer data collected from across Japan and around the world. By engaging in all monetization domains, we see four opportunities. The first is expansion to the world. While customer identification has progressed, our business currently operates entirely in Japan and serves Japanese customers. By to the world, we mean pursuing customer identification on a global scale in the same way we do domestically.

The second point is expansion of our applications. Today, our core business is a store business almost entirely defined by selling goods in department stores. We want to move beyond this and expand the range of users by offering a wide array of value to the customers we have attracted through our department store business. The third point, expansion of space, is an issue directly linked to enhancing the value of our own real estate assets. Our approach is to skillfully enhance the value of the land we hold, make more effective use of the space available, and monetize it. At the same time, we will work on the fourth point, expansion of time. Traditionally, we have generated revenue during department store opening hours, that is, 10 hours from 10 a.m. to 8 p.m. We want to find ways to monetize the time outside of these hours. We will pursue initiatives with these four opportunities in mind, aligning every business entity in the same direction by these four opportunities with advancement of individual customer business process activities, operating a PDCA cycle accordingly. Both a three-year plan and annual plan are structured in line with this approach, and as a business entity, advancing in the same direction through intra-group coordination activities, not just limited to departments or business. Moving on, I'd like to discuss financial KPIs. Following few slides compare fiscal years 2025 and 2026 to make the information easy for everyone to follow and understand. There are two points I would like to highlight here. First, we have added an item, gross sales. In cases where items previously recorded under the consignment purchase method is converted to fixed-term lease agreements, the net sales or operating revenue for the same store would simply appear lower. However, to make it easier to understand, we decided to include gross sales alongside net sales, The second point concerns ROE. As I have explained earlier, we display the margin, the actual figure, excluding special factors. We have a strong determination to maintain ROE at around 10%, and for fiscal year 2026, we project leaching 10.1%. Next, I'd like to discuss our customer KPI unique to our company. Last fiscal year, we raised the purchase amount threshold per customer from 1 million yen to 3 million yen, creating the indicator Group Annual Sales from customers with purchases of 3 million yen or more. We intend to continue investing and use this indicator in this area this year. The reason is that, thanks to adopting this KPI, the number of customers with group annual sales of 3 million yen or more increased 14% year-on-year, reflecting a positive growth brought about by this KPI. Since the number of identified customers is a core of our strategy, we plan to increase this number even further throughout FI 2026. Before moving forward in the explanations aligned with the individual customer business process activities, I would like to take a step back and provide an overview of the trends in the number of identified customers, identified customer sales, and operating profit that I just mentioned. The bar graph shows the sales from identified customers and operating profit over the past 10 years, Starting in 2014, while the line graph plots the number of identified customers. The dip right in the middle corresponds to the COVID-19 period. If you look at the data on either side of that period, you'll see that before the pandemic, identified customer sales, which is primarily driven by MI card members, remained largely unchanged. Similarly, operating profit during that time also remained stable at around 30 billion yen. However, after the pandemic, as the number of identified customers rose sharply, operating profit also surged, as you can see here. Consequently, spending patterns shift from mass to individual, resulting in higher profits, and this is a pattern we have established. If you look at the upper right table, I believe this trend becomes even clearer. Pre-COVID, specifically from 2014 to 2017, average total turnover was 1,267.3 billion yen, which was higher than post-COVID level. However, identified customer sales after COVID-19 is up 22% of the pre-COVID level, with operating profit more than doubling. This fiscal year, the figure has risen even further to exceed 60 billion yen, which is a sign of even greater growth. From here, I'd like to explain four items in line with the individual customer business process activities. The first is attracting customers. A good example for this is remodeling of our three flagship department stores. It goes without saying that sales will naturally increase when remodeling is undertaken. The reason is that our remodeling is largely based on scientific analysis of department stores, placing high-quality products in underperforming areas, with an approach to improve the efficiency of return on investment to change the ranking of per square meter productivity. However, excessive remodeling can make our department stores monotonous. For this season, starting from FY2026, we will move beyond simple science-based remodeling. One initiative is the creation of a new team, namely the Zero Merchandising Group, to develop a variety of merchandising approaches that transcends our existing product classifications and concepts. Fostering entirely new ideas. Another initiative, which is already well underway, is to further pursue uniqueness by remodeling the western confectionary area in the basement floor of the Isetan Shinjuku Main Store. I really hope you'll take a look at it. And additionally, we are finally launching a dedicated fragrance area on the second floor of the Shinjuku Main Store. We've been focusing on fragrance for the past 10 years now, continuing the Salon de Parfum event all this time. And after 10 years, we became convinced that this was the right path to take and decided to move forward with this concept. We are launching a new dedicated fragrance zone on the second floor that will be the largest of its kind in Japan. We hope you will be able to have a look at this as well. Next is identification. Regarding identification, we have focused on increasing the number of identification methods throughout FY2025. First, we created MI card basic with no annual fee. This yielded positive outcomes. Additionally, for overseas customers, we introduced an app, namely Mitsukoshi Isetan Japan app. By carefully advancing in compliance with the laws of each of the countries involved, we acquired 880,000 customers in a year. However, these customers cannot yet be considered as identified as sufficient communication has not yet been established with them. We are confident that this will translate into significant results once they are properly identified. Regarding initiative for FY2026, let me highlight just one point. We intend to move forward with integration of customer IDs across group companies. As a first step, we plan to integrate the IDs between our travel company and Isetan Mitsukoshi. This will enable us to share a wider range of information. Third is expansion of usage. I mentioned earlier that with progress in identification, we saw increase in sales, and by providing solid information, this was done. With thorough pursuance of this principle, annual purchase amounts rose through targeted information provision. This may be an obvious fact. And in FY2025, we thoroughly implemented this approach. In addition, regarding our regional store sales, refer to this as our base network. This amounts to 20.3 billion yen turnover annually. As I mentioned earlier, our regional store sales are roughly 360 billion yen, with an effect of boosting that figure by about 5%. These sales are recorded at the Isetan Shinjuku Main Store and Mitsukoshi Nihonbashi Main Store with profits returned to each regional store. And by establishing a system where the profits go to the respective regional stores, I firmly believe that this management accounting approach will be a motivating factor for regional store members. Furthermore, our online business is continuing to perform well. Last year, we reported that it finally turned to profit, and in FY2025, it has roughly doubled year-on-year, so I believe this will continue to be a sustainable revenue source going forward. Looking ahead to FY2026, we intend to leverage groups' resources to add services in addition to merchandise. I would like you to consider that the unification of travel agency IDs I mentioned earlier is also a key point in this context. Viewed from a broader perspective, we have an intention to establish a profit model in which, on absolute basis, our group companies steadily accumulate profit. I feel that this vision is starting to take shape. Under this model, department stores attract customers, the group companies provide new value to those customers, and that value creation increases profits of the entire group. This is what we are aiming for. More specifically, we want to create a situation where the department store's customers who form the foundation of this network generate added value in various areas, and that added value translates into profits for the group companies. As noted in the Beyond section, identification of overseas customers is not yet sufficient. Once this identification achieves progress, I believe there will come a time when we enter a phase of more rapid results, and we will continue to work steadily towards that outcome. Fourth topic is lifetime customerization. Regarding the shift to high-value customers in FY2025, our initiatives in individual out-of-store sales performed exceptionally well, with total annual turnover reaching 107% EUR, significantly boosting the overall figure. What is even more surprising is that our out-of-store sales services for overseas customers surpassed 20 billion yen within 2.5 years since inception, which translates to 153% year-on-year. With a team of roughly 50 staff members, the average sales performance comes to over 400 million yen per person. For FI 2026, we have two key priorities. The first is to centralize the management of the successful out-of-store sales operations. We will appoint a single head of out-of-store sales division and manage out-of-store sales across all companies and regions as one. We want to demonstrate that no matter which store a customer belongs to or where they make a purchase, it is clearly recognized as Isetta Mitsukoshi Group's out-of-store sales. To advance this, we plan to slightly change how we publicize the GCP program itself. We have set a premium diamond stage for customers who purchase 10 million yen or more annually. However, we have scarcely disclosed this information before. Nevertheless, under this new structure, by deliberately showcasing this tier now, we will dramatically elevate our service and communication levels. I would like to invite you to look forward to these enhancements. Moving on, I'd like to discuss several of our platform strategies. First is our DX or digital transformation strategy. As you can see on the left under FI 2025 results, we have noted that, until now, we have primarily provided information based on customer attribute data. We've realized there are limits to this attribute-based approach, so we began using AI to enable more personalized analysis. We have seen that this leads to significant improvements in open rates, sales, and profit. We intend to drive this initiative even further. In FY2026, as I mentioned earlier, we plan to introduce additional tools to better support our out-of-store sales team. Traditionally, they operated on a one-on-one basis, one sales representative to one customer. But we have shifted to a model where multiple representatives serve a single customer. We have adopted a body system and a team approach, even having buyers accompany sell staff on visits, intentionally involving buyers to enhance their customers' experiential value. Now we plan to integrate the digital tools into this framework. Specifically, while previously our success hinged solely on quantitative purchasing data, we now intend to incorporate the qualitative purchasing insights held by our out-of-store sales teams. We believe this will further evolve our teamwork and body systems, so we aim to launch this initiative within the current fiscal year, as we are currently in the design phase of the scheme. Regarding our human resources strategy, we intend to explicitly use the term individual customer business and make it more visible and concrete this fiscal year. Next, regarding sustainability management, we have been steadily advancing this initiative, which began five years ago, enriching its content. This fiscal year, we plan to hold a sustainability briefing session and publish a comprehensive sustainability report to explain our activities. Next, our financial strategy. We assume a relatively high cost of equity at 8% to 9% and set a goal of consistently achieving ROE above 10%, which exceeds this hurdle rate. To realize this, we are implementing ROIC management approach, with each operating company calculating and reporting its own ROIC. In our case, we not only evaluate operating companies vertically, but also connect them horizontally through individual customer business management, Increasing the LTV, or lifetime value, of individual customers within the group, and thereby bringing incremental revenue to each business. So, business will be developed both vertically and horizontally. By promoting individual customer business management alongside ROIC management, we aim to raise ROE to above 10%. Regarding cash allocation, the initiatives outlined in Phase 1 of the three-year medium-term plan are progressing smoothly, according to schedule. However, there is one change. Our investment in sale of shares of affiliated companies has advanced, increasing our available funds. This cash inflow will be used in a balanced fashion for both gross investments and shareholder returns. Our investment plan has undergone a slight change from the original, particularly in the allocation of funds for department store remodeling. Next, I'd like to discuss shareholder return. During the medium-term management plan period, our shareholder return policy has consisted of two points, total payout ratio of 70% or more, and a progressive dividend. In addition to these, starting in FY2027, we will set a new, more aggressive numerical target of DOE of 5% or more, as we have finally reached DOE of 4% as disclosed earlier. In FY2025, we paid an annual dividend of 17 yen per share, and for FY2026, we plan to pay 80 yen per share. At ATM per share, DOE will be approximately 4.5%. For share repurchases in FI 2026, we plan to acquire 27 billion yen worth out of the 30 billion yen announced in February 2025. In FI 2027, we will add the DOE of 5% or more policy to realize a more proactive shareholder return. Through dialogues between our IR team and investors and analysts, we have come to a conclusion that the main strategic issues have been distilled into five key points. We would like to address those five points going forward as shown on the slide. That concludes my presentation. Thank you very much. With that, we'd like to end the financial briefing for today. Thank you very much for your participation despite your busy schedule.