BRIDGE REPORT
(6537)

東証マザーズ

WASHHOUSE Co., Ltd. (6537)
President Yasutaka Kodama
President
Yasutaka Kodama
Corporate Profile
Company
WASHHOUSE Co., Ltd.
Code No.
6537
Exchange
TSE Mothers
FSE Q-Board
Industry
Service business
President
Yasutaka Kodama
Address
86-1, Shinei-cho, Miyazaki-shi, Miyazaki prefecture
Year-end
End of December
URL
Stock Information
Share Price Number of shares issued Total market cap ROE (Actual) Trading Unit
¥2,397 6,828,200 shares ¥16,367 million 15.4% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (Actual) PBR (Actual)
¥8.00 0.3% ¥37.62 63.7 times ¥634.49 7.6 times
*The share price is the closing price on September 8. The number of shares issued was taken from the brief financial report for the latest period.
ROE and BPS are those for the previous term.
*A 2 for 1 stock split became effective on April 1, 2017. PBR has been adjusted for the effect of the stock split.
 
Consolidated Earnings Trends
Fiscal Year Net Sales Operating
Income
Ordinary
Income
Net
Income
EPS DPS
Dec. 2015 (Actual) 2,050 219 219 131 38.21 8.00
Dec. 2016 (Actual) 3,118 294 284 192 35.25 8.00
Dec. 2017 (Forecast) 4,260 374 377 256 37.62 8.00
*The forecasted values were provided by the company. *The Company conducted a 100-for-1 share split on April 2, 2016, a 2-for-1 share split on April 1, 2017. EPS and DPS have been revised retroactively.

We present this Bridge Report reviewing the first half of fiscal year December 2017 earnings results of WASHHOUSE Co., Ltd.
 
Key Points
 
 
 
Company Overview
 
WASHHOUSE operates laundromats mainly based on the franchise system, with the aim of creating the global standard in the self-service laundry industry.
The company has developed an unprecedented franchise chain (FC) business system, which unifies the quality of stores by managing and operating all stores concurrently, so that both the FC headquarters and franchised shops can thrive. As a great advantage, the company has a stable earning structure with recurring revenue.
It made inroads into Osaka and Tokyo, embarking on nationwide business on a full-scale basis. It also plans to expand its business outside Japan.
As of the end of Jun. 2017, 431 laundromats (406 franchised ones and 25 directly managed ones) are in operation.
 
1-1 Corporate history
When starting up this business, president Kodama pondered over how to keep increasing sales and profit eternally in the age that will certainly witness the decreased birthrate and aging and declining population, whether the business has social meanings, whether there are any forerunners, whether the company can survive competitions, whether the business can be imitated easily, whether it is possible to achieve recurring revenue, and so on from various aspects, and decided to do the laundromat business.

For expanding the scale of business, the FC system is effective, but the FC business is accompanied by the problem of the conflict between the FC headquarters and franchised stores. In order to solve this problem, the company immediately introduced a call center that is in operation 24 hours a day all year round and the "system for managing and operating all stores at the same time," which is composed of the swift support based on webcams and remote control, etc. and reduced the burdens of franchised stores considerably. Its business grew steadily, partially thanks to the expansion of needs due to the increase in the number of working females.

From the Kyushu area, including Miyazaki Prefecture, where the business was launched, the company expanded its sales territory, entering Osaka in Dec. 2015 and Tokyo in Jul. 2016.
Then, in Nov. 2016, WASHHOUSE got listed on Mothers of Tokyo Stock Exchange and Q-Board of Fukuoka Stock Exchange.
 
 
1-2 Corporate ethos, etc.
The ethos of WASHHOUSE is "to think about all matters from the viewpoint of customers and keep being demanded bysociety."
Under this ethos, the company is working on "the creation of the global standard in the self-service laundry industry" with the aim of continuously offering satisfactory services to users on behalf of store owners by fully managing laundromats after the opening of the store rather than "just selling self-service laundry equipment and instructing owners to operate it."
 
1-3 Market environment
◎ Growing laundromat market
According to the "Survey on coin-operated cleaning facilities" by the Ministry of Health, Labour and Welfare, although it is somewhat out of date, the number of laundromats in Japan in fiscal 2013 was 16,693, and that in fiscal 1996 was 10,228, indicating a compound annual growth rate (CAGR) of 2.9%. If it keeps growing at a rate of 3%, it will exceed 18,000 in fiscal 2016, which is nearly equal to the number of the stores (18,140) of FamilyMart, which ranks second in the convenience store field (as of the end of Nov. 2016), and is catching up with the number of stores (19,166) of Seven-Eleven, which ranks first (as of the end of Nov. 2016).
 
 
◎ Growth factors
In the background of such growth, there are:
Women's needs for "the reduction in cleaning time" due to the increase of dual-earner households,
Measures against allergies, such as the allergy to pollen,
Decrease in the use of cleaning services due to the increase of low-priced high-quality clothes,
Enhancement of awareness of cleanliness,
and so on.

In addition to these external factors, enterprises, including WASHHOUSE, started offering a variety of services considering the convenience for users, and so "users have increased" and then "the number of laundromats has grown."
According to president Kodama, "rate of utilization," which indicates how many households use laundromats among all households living within 2 km from a store, was about 3% on national average 10 years ago, but it is now 5-8%, and expected to increase further.
 
◎ Market players
It is difficult to obtain detailed information, but the number of main players in the self-service laundry market is said to be 4 to 5. WASHHOUSE has the largest number of laundromats with the same brand, and is the only listed company in this field.
Although many enterprises carry out the FC business for growth (increasing in the number of stores), WASHHOUSE possesses an unparalleled "system for managing and operating all stores at the same time," which was developed in pursuing the streamlining of business operation and unification of quality. (For details, see "1-5 Characteristics and Strengths.")
 
1-4 Business contents
1. Business structure
WASHHOUSE conducts the three kinds of business: (1) FC business, (2) store management business, and (3) direct management business, etc.
 
 
(1) FC business
WASHHOUSE created a unique operation-supported FC business.
The company selects candidate places for opening laundromats, sells "a set of WASHHOUSE laundromat systems," which contains the design, interior finish work, equipment installation, etc. in a WASHHOUSE brand store, to franchisees, and receives the preparation fees for opening store, including advertisements, and fees for franchise rights.

For increasing franchisees, the company adopts the division system where sales staff visit possible franchisees, with which telephone staff set up an appointment, so that sales staff can concentrate on more active sales activities without the mental burden of sales calls. In addition, business simulation, contract production, etc. are conducted by other staff, so that sales staff can devote themselves to "footwork."
Furthermore, by concluding business matching contracts with financial institutions, etc., the company is accumulating information on sites for building laundromats and candidate owners, and developing a "system" for increasing laundromats.

WASHHOUSE designs a plan to open new laundromats for each term based on the accumulated data on correlative relations of "the number of years of career of sales staff and achievements of opening franchised stores."
Therefore, the company can achieve the target values set at the beginning of each term with overwhelming probability.
 
② Store management business
WASHHOUSE undertakes the management of all franchised stores, reports a monthly operation status, including revenue and expenditure, to franchisees, and subtracts the fee for laundromat management from monthly sales.

In order to keep each store "reliable, safe, and clean," WASHHOUSE provides franchisees with such services as
24/7 Call centers
Swift support based on webcams and remote control
Daily inspection and cleaning
Replenishment of detergents
Maintenance patrol
Bill collection
Advertisement
Sales are composed of the fees for store management and system maintenance, sales of detergents, cleaning fees, advertising charges, etc.

Since franchisees need not manage their laundromats, if they can bear initial investment costs, they can own multiple stores, increase revenue, and reduce the risk of revenue fluctuation with stores being operated in different regions.
 
③ Direct management business, etc.
The company directly manages some of "WASHHOUSE" laundromats, receiving the charges for washing and drying machines from users. A directly managed store is opened mainly when entering a new area. It takes the roles as an antenna shop, such as popularizing the "WASHHOUSE" brand as a "reliable, safe, and clean" laundromat, promoting possible users to use it, and offering a store model to franchisees and land owners (individuals and corporations that are thinking of utilizing their real estate).
In addition, the company receives commission fees related to the calculation of expenses for laundromat operation, etc. from enterprises.
 
2. Store operation
As of Jun. 2017, WASHHOUSE operates 406 franchised stores and 25 directly managed stores, that is, a total of 431 stores, mainly in the Kyushu and Chugoku regions. The company made inroads into Osaka in 2015 and Tokyo in 2016, and plans to conduct business nationwide on a full-scale basis.
 
 
1-5 Characteristics and strengths
(1) Creation of a new FC business system
WASHHOUSE can be characterized most by its unique FC business model.

In ordinary FC business, a conflict between the FC headquarters and franchisees tends to emerge.
While franchisees pay franchise fees and royalties to the FC headquarters, the FC headquarters permit them to use a brand name, offers know-how to them, supply products to them, store operation, staffing, etc. must be carried out by franchisees on their own responsibility.
For franchisees, the operation and management of stores are significant burdens. If their business performance is favorable, there are no problems, but if sales are sluggish, the franchisee complains, "the system of the headquarters is poor," while the FC headquarters blames, "the education in the franchisee is poor," and these complaints lead to a lawsuit in many cases.

Meanwhile, WASHHOUSE introduced the "system for managing and operating all stores at the same time." The company conducts necessary tasks for operating and managing franchised stores:
24/7 Call centers
Swift support based on webcams and remote control
Daily inspection and cleaning
Replenishment of detergents
Maintenance patrol
Bill collection
Advertisement
As a consequence, franchisees are free from the burdens of store operation.

In addition, since the company targets real estate that would have sales of over 1 million yen, it has meticulously surveyed the market, including local population, age distribution, income state, etc. and accumulated know-how for cultivating profitable property.
Thanks to the combination of the system for managing stores fully and the capability of cultivating profitable real estate, the satisfaction level of franchisees is very high, and no laundromats have been closed due to sluggish performance in the past 15 years. This result is outstanding.
 
(2) Bright, clean, easy-to-use stores
A laundromat generally reminds us of a "dimly-lit, dirty, and eerie" place, but WASHHOUSE operates "reliable, safe, and clean" stores with the unified brand targeting women and families including children.
 
 
 
In the past, using a laundromat was considered as one of "sloppy acts in homemaking." However, there is a growing interest in laundromats, which can wash and dry a larger amount of clothes in a shorter period of time than household washing machines, as the employment rate for women rose, high-rise condominiums increased, and the life-work balance changed. Especially, the washing of large items, such as futons and carpets, for removing ticks and allergens is attracting attention, due to the rising health consciousness.
In addition, the needs for laundromats mounted with equipment for washing and drying kids' sneakers are getting stronger.

In these circumstances, the company installs the following equipment for meeting the needs of consumers:
Washing machines with a capacity of 22 kg, which can wash a full sized futon, and dryers with a capacity of 25 kg (in standard stores),
Sneaker laundry equipment, which can wash sporting shoes, sneakers for commuting to school, etc.
Devices for removing stains free of charge
 
Furthermore, all stores are monitored by webcams 24 hours a day, and mounted with IoT laundry equipment, which can be controlled remotely by the headquarters, so as to offer real-time support like manned stores, although the laundromats are unmanned. Like this, the company has established a system that can be used by users without worry.
 
 
The company also indicates the components of detergents and the temperature in each dryer, to dispel the worries of consumers. In order to keep stores clean, the company clean stores every day, including the cleaning of the filters of dryers and the sterilization of washing machines.
 
(3) Stable earning structure with recurring revenue
The sales from the store management business are composed of the monthly store management fee (50,000 yen per store), the fee for system maintenance (10,000 yen), ad charge (30,000 yen), cleaning charge (about 40,000 yen), etc., that is, a total of about 130,000 yen/month.

As of the end of Dec. 2015, the number of franchised stores of WASHHOUSE was 256. Accordingly, the sales from store management in the term ended Dec. 2016 can be calculated by adding the sales from existing stores (256 stores × 130,000 yen/store/month × 12 months = 399 million yen) and the sales from new stores opened in the term ended Dec. 2016 (sales vary according to the date of opening).

The sales from store management in the term ending Dec. 2017 can be obtained by adding the sales from existing stores (399 million yen), the sales from new stores opened in the term ended Dec. 2016 (105 stores × 130,000 yen/store/month × 12 months = 164 million yen), and the (estimated) sales from new stores opened in the term ending Dec. 2017.
 
 
Like this, sales from the store management business grow steadily, as the sales from new stores are added to those from existing stores, year by year.
On the other hand, the satisfaction level of franchisees is very high, which can be represented by the fact that no stores have been closed in the past 15 years, and so there is a low possibility that the number of stores will decrease. This fortifies the stable earning structure with recurring revenue.
 
(4) Efforts for improving the soundness of the self-service laundry market
Although the laundromat market is growing, president Kodama mentioned that there remain a lot of problems, including the issue of compliance with the law.

For example, the dryers in a laundromat consume a large volume of gas, and so the Fire Service Act, the Building Standards Act, etc. specify the materials for exhaust ducts, how to install them, etc. in detail, for safety reasons. However, there are many illegal installations.
Some laundromat operators try to reel in users by offering to wash clothes on behalf of customers as a measure for differentiating their services from competitors, but they are very likely to be violating the dry cleaning business law.

The dry cleaning business law enforced in 1950 set forth the following provisions from the viewpoint of maintaining public health.
 
 
In a nutshell,
Even if a laundromat operator obtains a dry cleaner's license, he/she cannot offer services of handling and folding up the laundry, etc. at a laundromat, which is not a dry cleaning shop.
The washing machines and dryers inside a facility registered as a dry cleaning shop are exclusively for dry cleaning business operators, and so they cannot be used by others (users of laundromats) from the viewpoint of hygiene.
 
Despite the existence of these laws, in order to avoid the guidance from a public health center, some business operators set a counter inside their stores, install washing machines, explain "We use this washing machine," but actually they wash the laundry of users with unregistered laundromat equipment outside the counter (not installed ones), and fold up the laundry.

In this situation, president Kodama considered that in order to promote the use of laundromats, it is indispensable to develop "reliable, safe, and clean" laundromats inside his company and improve the soundness of the self-service laundry industry, therefore established the National Association of Laundromat Operators in Dec. 2003.

This association specified the operation standards for equipment and hygienic management complying with laws, regulations, etc. At present, the directly managed stores and franchised laundromats of WASHHOUSE belong to this association, which takes the roles of improving the soundness of this industry and educating general consumers (about the usefulness of laundromats, etc.).
 
 
First Half of Fiscal Year December 2017 Earnings Results
 
 
The opening of stores was delayed, because of the sluggish recruitment of workers. Sales grew, but profit dropped. The results did not reach the estimates.
Sales were 1,440 million yen, up 14.8% year on year. Sales grew in all of the three businesses, and gross profit rose 20.9% year on year, but they could not offset the augmentation in SG&A, and operating income dropped 64.5% year on year to 37 million yen.
Since the recruitment of workers was delayed, franchised shops were not opened as scheduled, and neither sales nor profit reached the initial estimates.
 
 
① FC business
The company newly opened a total of 45 laundromats, that is, 2 in Osaka, 1 in Okayama, 2 in Hiroshima, 4 in Yamaguchi, 1 in Kagawa, 1 in Ehime, 22 in Fukuoka, 1 in Saga, 4 in Nagasaki, 2 in Oita, 2 in Kumamoto, 2 in Miyazaki, and 1 in Kagoshima.
As a result, the number of FC stores as of the end of Jun. 2017 is 406.

The number of newly opened stores was 20 smaller than the initial estimate: 65.
This is because the recruitment of necessary sales staff members was delayed and so manpower was not enough, and it took time to start up laundromats.
Consequently, sales were 22% (394 million yen) smaller than the estimate, although the sales increased year on year.

The company examined its viability based on the assumption that a sales staff member with a career of less than one year will open one store, a member with a career of over 1 year will open 2 stores, a leader will open 4 stores, a branch head will open 6 stores, and an employee with a career of over 5 years will open 7 stores, considering individual abilities and sales staffing plans (31 members at the beginning of the term; 48 members at the end of the term), and calculated the assumed number of new opening laundromats. As a result, the company forecasts that 152 stores will be opened mainly in Kyushu during the term ending Dec. 2017. Sales were estimated assuming that the order amount per laundromat is 21 million yen.
 
② Store management business
Sales grew thanks to the increase in recurring revenue, but were 28.9% (7 million yen) smaller than the estimate, because of the delay in opening franchised stores.
 
③ Direct management business, etc.
As no directly managed laundromats were newly opened, the number of directly managed stores as of the end of Jun. 2017 is 25, unchanged from the end of the previous term. Sales were 2.2% (7 million yen) smaller than the estimate, as the revenue from regular maintenance increased, but the rainfall amount in the Japanese rainy season, which is typically a busy period, was 26.2% smaller than usual, and 55.7% smaller than that in the previous year.
 
 
Current assets declined 292 million yen from the end of the previous term due to the decrease in cash and deposits, etc. Noncurrent assets were nearly unchanged, and total assets decreased 292 million yen from the end of the previous term to 3,479 million yen.
Total liabilities dropped 260 million yen from the end of the previous term to 1,346 million yen, due to the decline in trade payables, etc.
Net assets shrank 32 million yen from the end of the previous term to 2,132 million yen, through the payment of dividends of surplus.
Consequently, equity ratio increased 3.9% from 57.4% at the end of the previous term to 61.3%.
 
 
Operating CF became negative, due to the drop in pretax net income, etc.
Investing CF became positive due to the decrease in purchase of property, plant and equipment, but free CF became negative.
The deficit of financing CF was nearly unchanged. The cash position improved.
 
 
Fiscal Year December 2017 Earnings Estimates
 
 
 
No revision to the earnings forecast. Significant growth in sales and profit due to the increase of FC stores.
There is no revision to the full-year earnings forecast, although the results for the second quarter were below the estimates.
Sales are estimated to increase 36.6% year on year to 4,260 million yen. The performance in the new areas, the Shikoku region and Okayama Prefecture, is healthy, and the company will open laundromats in other new areas.

It is also necessary to pay attention to the seasonal tendency that the opening of stores concentrates in the fourth quarter (Oct. to Dec.) every year.
This tendency is attributable to FC owners' and sales staff's intention to put new laundromats on track early and recoup their investments by opening stores to meet the demand in the wardrobe-changing season and the year-end and New Year days.
As a result, sales and profit in the fourth quarter become significantly larger than those in the other quarters. In this term, too, there is this tendency, and it is expected that stores will be opened mainly in Nov. and Dec.

Considering these factors, the company expects that it will be able to make up for the delaying in opening 20 stores in the first half and open 152 stores as initially planned.
In the store management business, sales are projected to decline due to the delay in opening laundromats, but the company carried out regular maintenance for keeping laundromats reliable, safe, and clean in the direct management business, etc. Accordingly, it is unnecessary to revise the estimated total sales and profit.
The dividend amount is to be 8 yen/share. The estimated payout ratio is 21.3%.
 
 
① FC business
The company plans to open 85 FC stores in Kyushu, 37 stores in Chugoku, and 30 stores in Kansai, that is, a total of 152 FC stores, marking a record high.
The number of FC stores as of the end of Dec. 2017 is to be 513.
 
② Store management business
As some FC stores will be opened, the number of stores whose management is entrusted to is to be 152.
 
③ Direct management business, etc.
The company plans to open 3 directly managed stores in Tokyo, and 1 store in Osaka, that is, a total of 4 directly managed laundromats.
 
(3) Business operation from now on
① Expansion of target areas for opening stores
As mentioned above, the company has opened stores in Okayama Prefecture, the Shikoku region, etc., where there had been no laundromats of the company, in the first half of this term. From now on, the company will expand target areas on a full-scale basis.
The directly managed stores in Shinjuku, Tokyo, which were opened last year, are accumulating data, and the company is steadily preparing for the FC business in the market of the Tokyo Metropolitan area, where it is expected to earn significant sales.

② Securing of personnel
The company increased recruitment staff for securing sales staff and is also actively recruiting management personnel for smoothly establishing and expanding new businesses.

③ Advancement into related and peripheral businesses
As for the in-house production of detergents, whose monthly use amount is 300,000 tons, the company is conducting the final check of the manufacturing of detergents. As for the construction of a factory, the company is having final discussions with Miyazaki Prefecture.
Since the investment amount is 700 to 1,000 million yen, the company will incur a depreciation of about 100 million yen per year, under the assumption that its service life is 7 years.
In order to cover this depreciation, the company is proceeding with a project for "making laundromats prefabricated." The company aims to stabilize its revenue by proceeding with the manufacturing of detergents in parallel with the business of selling mobile units to FC owners.

As for overseas business expansion, which is the pillar of its growth strategy, the prototype of a "cloud IT laundry system" was completed in collaboration with AQUA Co., Ltd. (which belongs to the Haier group in China) and Microsoft, and the trial operation has been started in Japan.
It will take a little more time to complete the final version, including the development of hardware, but the company is taking steady steps toward the cultivation of the huge global market through "the development of an optimal system for operating multiple stores."

④ Media strategy
The key for the growth of the company is the improvement in the utilization rate of laundromats.
As the laundromat utilization rate in Miyazaki Prefecture has been increasing from 3% in 2000, the necessary number of households for earning sufficient sales per store decreased from about 12,000 to 8,000, and so the room for opening stores and the number of stores increased.
At present, the utilization rate of laundromats in Japan is only 5%, and so there is significant room for increase.
The company takes the strategy for the nationally unified brand under the concept of reliability, safety, and cleanliness for boosting utilization rate, and diffuses the culture of washing futons by using TV commercials, etc. to promote the use of laundromats.
 
 
Conclusions
 
Unfortunately, the results for the first half could not reach the initial estimate, and the share price of the company declined considerably.
However, the company expects that in the second half, it will be able to make up for the delay in opening stores in the first half, because the efforts for opening laundromats in the new areas, including Okayama Prefecture and the Shikoku region, are producing good results, new stores are to be opened in other areas, too, and the opening of stores tends to concentrate in the fourth quarter. Accordingly, we would like to pay attention to their progress.
In addition, the sales of stores in Shinjuku, Tokyo, in which the company is gathering marketing data, are reportedly growing steadily. If their franchise business in the Tokyo Metropolitan Area centered around Tokyo gains momentum, it can be expected that their revenue will grow at a higher pace than that of store opening so far.
We would like to expect that the company will regain the trust of the market by reaching the earnings forecast in the short term and make efforts to have 20,000 laundromats inside Japan and 200,000 laundromats globally in the mid to long term.
 
 
<Reference: Regarding Corporate Governance>
 
 
◎ Corporate Governance Report
Last update date: Apr. 13, 2017

<Reasons for Non-compliance with the Principles of the Corporate Governance Code (Excerpts)>
The company mentioned, "We will implement all of the basic principles."
 
Disclaimer
This report is intended solely for information purposes, and is not intended as a solicitation to invest in the shares of this company. The information and opinions contained within this report are based on data made publicly available by the Company, and comes from sources that we judge to be reliable. However, we cannot guarantee the accuracy or completeness of the data. This report is not a guarantee of the accuracy, completeness or validity of said information and or opinions, nor do we bear any responsibility for the same. All rights pertaining to this report belong to Investment Bridge Co., Ltd., which may change the contents thereof at any time without prior notice. All investment decisions are the responsibility of the individual and should be made only after proper consideration.
Copyright(C) 2017 Investment Bridge Co., Ltd. All Rights Reserved.
 
 
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