BRIDGE REPORT
(9275)

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Bridge Report:(9275)NARUMIYA INTERNATIONAL the first quarter of Fiscal Year February 2020

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President Toshiaki Ishii

NARUMIYA INTERNATIONAL Co., Ltd. (9275)

 

 

Corporate Information

Exchange

TSE 1st Section

Industry

Retail Business (Commerce)

President, representative director and chief executive officer

Toshiaki Ishii

Address

2-4-1 Shibakoen, Minato-ku, Tokyo

Year-end

February

URL

http://www.narumiya-net.co.jp/

 

Stock Information

Share Price

Shares Outstanding

Total Market Cap

ROE (Actual)

Trading Unit

¥1,200

10,070,630 shares

¥12,084 million

-

100 shares

DPS (Estimate)

Dividend Yield (Estimate)

EPS (Estimate)

PER (Estimate)

BPS (Actual)

PBR (Actual)

¥31.00

2.5%

¥101.65

11.8 times

¥358.86

3.3 times

*The share price is the closing price on September 6. The number of shares outstanding, DPS, and EPS were taken from the brief report on results for
the first quarter of the term ending Feb. 2020. BPS was taken from the brief report on results for the term ended Feb. 2019.

 

Earnings Trends

Fiscal Year

Net Sales

Operating Profit

Ordinary Profit

Net Income

EPS

DPS

Feb. 2017 (Actual)

23,474

1,157

892

708

74.99

-

Feb. 2018 (Actual)

26,954

1,404

1,280

760

80.43

-

Feb. 2019 (Actual)

29,700

1,625

1,505

926

94.94

31.00

Feb. 2020 (Estimate)

33,007

1,712

1,646

1,007

101.65

31.00

*Unit: Million yen, yen. The estimated values were provided by the Company. The results for the term ended Feb. 2017 and the term ended Feb.
2018 are consolidated, and the results for the term ended Feb. 2019 are non-consolidated. Net income and EPS are the values after the adjustment of a gain on extinguishment of tie-in shares of 875 million yen. The results for the term ending Feb. 2020 are estimated to be consolidated. As for DPS (dividend per share), only the amounts after listing are indicated.

 

 

This report outlines Narumiya International Co., Ltd. and includes its growth strategies and the interview with President Ishii.

 

Table of Contents

Key Points
1. Company Overview
2. Earnings Trends
3. Future Growth Strategy
4. Interview with the President Ishii
5. Conclusions
<Reference: Regarding Corporate Governance>

 

Key Points

  • Narumiya International plans and manufactures clothes for babies, toddlers, and juniors*, and sells them via department stores, shopping centers (SCs), and e-commerce. As its characteristics and strengths, the Company handles a broad range of brands for each sales channel, and possesses top-class brand power, merchandising capability, excellent customer assets, etc. The Company aims to grow further by expanding shopping center (SC) channels and e-commerce, cultivating the Chinese market, offering intangible services, and so on. (babies and toddlers: 0 to 7 years old; juniors: 8 to 15 years old)

     

  • The sales for the term ending Feb. 2020 are estimated to be 33 billion yen, up 11.1% year on year. SC channels and e-commerce will keep contributing to sales. Operating profit is projected to rise 5.3% year on year to 1.7 billion yen. As a loyalty program was adopted at shopping centers (SCs), the Company will post a reserve for loyalty points this term, and SG&A expenses will augment, but it will be offset, and profit is expected to grow. The dividend amount is to be 31 yen/share. The estimated payout ratio is 30.5%.

     

  • Narumiya International considers the SC channel as the strongest trigger for growth. In SCs, where there are many opportunities to open shops, the Company will carefully select SCs for opening shops, and open shops at excellent growing SCs. In addition, the Company will actualize volume purchase discounts by expanding its business scale to boost its earning capability, and secure high gross profit by implementing cost reduction measures.

     

  • As for e-commerce (EC), which is the second strongest trigger for growth, the Company will improve the convenience of its website for smartphones, manage stocks for EC and real shops in a unified manner, integrate customer IDs, develop strong points of contact with customers in both real and online shops by establishing an omni-channel system, recommend optimal products based on the purchase history of each customer, enrich customer services, including benefits for loyal customers, etc.

     

  • Although it is difficult to grow sales from the department store channel significantly, the Company will strive to grow steadily, fortify the customer base, and improve profitability.

     

  • In addition, the Company aims to cultivate the Chinese and other Asian markets, which are growing, evolve into a kids’ lifestyle company by not only selling materials (clothes), but also offering experiences (services), and so on. It will also carry out M&A and form alliances actively.

     

  • We interviewed President Ishii about growth strategies, messages toward shareholders and investors, and so on. He said, “I hope you will support our company from the mid/long-term perspective rather than the short-term one, after understanding our company’s advantage and ideal state.”

     

  • We tend to think that the “declining birthrate and the shrinking population” are detrimental to Narumiya International, which handles children’s clothes, but President Ishii recognizes it as a big chance to expand the Company’s market share. In addition, he thinks that “real shops and e-commerce will not cannibalize each other for a while, and followers can grow by taking advantage of their strengths.” These two points are the most important for seeing the progress of the Company in the apparel field, where many enterprises are struggling.

     

  • Last month, there was news that motherways Co., Ltd., which was running shops of kids’ clothes mainly in the Tokyo Metropolitan Area, filed for voluntary bankruptcy. It is said that about 100 shops around Japan will be closed. According to President Ishii, there are about 10 companies, including Narumiya International, which operate business focused on kids’ clothes at a certain scale. Accordingly, that bankruptcy will definitely provide Narumiya International with some benefits for market survivors.

     

  • We would like to pay attention to the measures and activities of Narumiya International, which aims to evolve into “a kids’ lifestyle company” that is unrivaled in the mid/long-term perspective, while growing its existing businesses steadily.

     

1. Company Overview

Narumiya International plans and manufactures clothes for babies, toddlers, and juniors, and sells them via department stores and directly managed shops in shopping centers (SCs). Its e-commerce, too, is rapidly growing. As of 2019, the number of brands is about 20. As its characteristics and strengths, the Company handles a broad range of brands for each sales channel, and possesses top-class brand power, merchandising capability, which enables the successful operation of two sales channels, excellent customer assets, etc.
The Company aims to grow further by expanding shopping center (SC) channels and e-commerce, cultivating the Chinese market, offering intangible services, and so on.

 

【1-1 Corporate History】

Its predecessor is the Japanese clothes wholesaler Narumiya Orimono, which started business in Hiroshima in 1904. In 1952, Narumiya Orimono Co., Ltd. was established. In 1979, its headquarters was opened in Aoyama, Tokyo, and the Company was renamed Narumiya Co., Ltd. It expanded business throughout Japan, and after Company split-up and business transfer, the corporate name was changed to Narumiya International Co., Ltd. in August 1995. Its business grew, as the Company sold mainly colorful fashion items and products with original mascots, such as “mezzo piano” and “ANGEL BLUE” at directly managed shops in department stores and wholesaled them to specialized shops. It opened shops actively in department stores and fashion buildings throughout Japan, and in March 2005, it was listed in the JASDAQ market.

 

However, the Company failed to swiftly break away from the dependence on department stores and change its brand concept. Then, its sales and profit declined from the fiscal year in which it was listed in the stock market. Under the guidance of new shareholders, it cultivated new sales channels, established new companies, conducted M&A, entered the Chinese market, withdrew unprofitable brands, relocated the headquarters, and strived to reduce fixed costs, such as personnel expenses, but its performance did not recover. In order to promote speedy structural reform, the Company was delisted in March 2010.

 

After the delisting, Mr. Toshiaki Ishii, the former president of Adastria Co., Ltd. (1st section of TSE, 2685), was brought on board, in order to recover the business performance.
Mr. Ishii, who was appointed as representative director / chief executive officer / president in June 2010, started selling the toddler’s size products of the brand “petit main” at shopping centers in March 2011, renewed EC systems, shifted from department stores to shopping centers, and concentrated managerial resources into e-commerce, to upgrade its business portfolio.
In addition, the Company proceeded with the reform of its procurement system, effective cost reduction, etc. and succeeded in reforming its business structure, recovering its performance steadily.

 

In September 2018, it was listed in the second section of Tokyo Stock Exchange, and then listed in the first section of TSE in September 2019.
After the delisting, the Company underwent the transfer of shares, absorption-type merger, the change of the corporate name, etc. due to the replacement of shareholders, and in March 2018, the current Narumiya International Co., Ltd. was established. This is different in form from that before the delisting.

 

【1-2 Management philosophy】

Narumiya International upholds the following vision, mission, and value.

 

Vision

To become an enterprise that will be loved by all generations

Mission

To create “a moment,” “a lifestyle,” and “a future” through creative business activities

Value

Each employee takes action as a professional.

 

【1-3 Market environment】

According to Current Survey of Commerce: Sales of each product at department stores and supermarkets by the Ministry of Economy, Trade and Industry, the sales of clothes at department stores have been declining since the peak in the early 1990s, and the total sales of clothes, the sales of women’s clothes, children’s clothes, and apparel goods in 2018 were 45% of their respective peak sales.
The environment surrounding department stores is severe, due to the progress of deflation, the changes in consumer mind, etc. and it is difficult to expect that it will improve considerably in the future.

 

 

However, according to the commercial sales in each business category (retail) in Current Survey of Commerce, the sales of “textiles, clothes, and articles of daily use” in 2018 have decreased to around 70% of the peak in 1991, but have bottomed out and have been on a plateau.
Simple comparison is impossible, but it can be inferred that sales channels other than department stores have been healthy.

 

 

On the other hand, according to “E-commerce Market Survey” by the Ministry of Economy, Trade and Industry, the scale of the BtoC-EC market for “clothes, apparel goods, etc.” in 2018 was 1,772.8 billion yen, up 7.7% year on year. Since 2013, CAGR has grown 8.8%.
In addition, the ratio of EC sales (the ratio of the EC market scale to the scale of all markets of commercial transactions, including those by phone, fax, e-mail, and face-to-face) has steadily grown, and the weight and importance of EC in the apparel market are expected to increase further.

 

 

【1-4 Business description】

Narumiya International handles clothes for babies and kids in the format of SPA (specialty store retailer of private label apparel).

 

(1) Brands the Company handles
For respective sales channels, the Company offers the following brands for babies, toddlers, and juniors.
As of August 2019, the number of brands is 14 for babies or toddlers and 7 for juniors, that is, a total of 21.

 

① Major brands for babies and toddlers (0 to 7 years old)
◎ Department stores

 

 

This brand has romantic and sweet tastes, so that each girl can become cuter than anyone else. It offers a broad range of clothes, including casual and formal dress.

 

 

“klädskåp” is a Swedish word meaning “a wardrobe.” The theme of this brand is “clothing-based education,” which means the nurturing of mind through clothes.

 

 

This brand was born for paying homage to the sensitivity to the wonders of nature and life. Based on natural colors, they design clothes in the motif of familiar nature, including seasonal flowers and fruits. It is characterized by adorable, but not too soft details. The organic cotton certified strictly by the U.S. is used for achieving a supple taste and a comfortable texture.

 

◎ SC brands

 

 

This is a brand for girls and boys that offers trendy fashion combined with childishness at affordable prices. Customers can enjoy coordinates linked with the lineup for ladies “LIEN,” which is targeted at active women, including mothers.

 

 

This is a unisex brand that offers comfortable, relaxing casual wear.

 

 

“LIEN,” which is derived from a word meaning “a bond,” suggests simple, clear items lightly combined with trends with freewheeling styling. Its clothes blend into the lifestyle scenes of active women, including mothers, and enrich the connections between adults and children and also with beloved ones.

 

◎ Licensed brands

 

 

This is a brand of ANNA SUI for children’s clothes, whose keywords are “dreamy,” “classic elegance,” and “sweet grunge.”

 

 

Kate Spade New York, which was established in New York in 1993, is a lifestyle brand that handles handbags, apparel, jewelry, shoes, children’s wear, gifts, etc. This admires daily personal styles with optimistic, feminine approaches, and supports women who possess a youthful spirit and overflowing confidence.

(Taken from the website of Narumiya International)

 

② Major brands for juniors (8 to 15 years old)
◎ Department stores

 

 

This brand is for brilliant, romantic girls. Products range from elegant styles to trendy, causal styles.

 

 

This is a casual brand with a French taste. It suggests refined daily & school wear with monotone and pastel colors combined with trends.

 

 

This is a brand for boys who wear clothes designed by mixing American casual styles and current trends in a cheerful, yet cool manner.

 

◎ SC brand

 

 

This is a brand for cheerful girls who dress while mixing American casual, rock, and girlish styles.

(Taken from the website of Narumiya International)

 

(2) Sales channels
As mentioned in the section of the corporate history, the Company had been selling products via department stores, but is aggressively cultivating the channels of shopping centers (SCs) under the lead of President Ishii, who has strong connections with SCs and some achievements. In the term ended Feb. 2019, the sales from the SC channel exceeded the sales from the department store channel for the first time. In addition, the Company is actively strengthening the e-commerce channel.

 

 

 

① Department stores
The Company sells products mainly at leading department stores in urban areas. In 1985, it entered the field of children’s clothes with the brand “MINI-K,” which offers clothes for mainly babies and toddlers, and in 1988, it launched “mezzo piano,” which is one of the major brands. In 1991, it released ANGEL BLUE, the first brand for juniors. It cultivated the new market of juniors’ clothes, and released new brands one after another. Since it is unlikely that the department store market will grow considerably, the Company plans to improve profitability while maintaining the current condition.

 

 

② Shopping centers
In 2005, the first shop in a shopping center was opened. The Company directly runs shops in shopping centers in urban and suburban areas, such as AEON MALL and LaLaport.
In 2009, it released “Lovetoxic,” a brand for juniors, which offers products at lower prices than the apparel brands in department stores. In 2011, it debuted “petit main,” a low/medium-priced brand for shopping centers like Lovetoxic. The unisex brand “petit main” is targeted at mainly boys and girls aged 0 to 7 years.

 

 

③ Outlet malls
In 2006, the Company opened the first outlet in “Rinku Premium Outlets.” It directly runs shops in suburban outlet malls, such as Mitsui Outlet Park and Premium Outlets.

 

④ E-commerce
In 2008, the Company started concentrating on e-commerce on a full-scale basis, and opened NARUMIYA ONLINE as a directly managed online shop.
In addition to its original website, Narumiya International sells products via other online shopping sites, such as ZOZOTOWN, Rakuten, and Amazon, with the aim of improving convenience for customers and popularizing its brands.
The ratio of EC sales was 14% in the term ended February 2019, and is estimated to reach 20% in this term ending February 2020.
The ratio of sales from its original EC site was 43% in the term ended February 2019, and is estimated to be 50% this term. The Company aims to increase the ratio to 60% in the term ending February 2022.
The number of customers who purchased products at EC sites was about 230,000 in 2018. It is increasing considerably every year.
In August 2018, the Company started selling products via Tmall, the world’s largest BtoC-EC site operated by the Alibaba Group in China, by licensing out distributorship to a Chinese enterprise.
The sales of “petit main,” which is the primary brand of the Company, on November 11, 2018 (Singles’ Day) reached around 30 million yen, and got ranked in the top 10% in the category of children’s clothes, although the Company participated for the first time. In Japan, the average daily sales of “petit main” are about 1 million yen.

 

In March 2019, the Company acquired all shares of Heartfeel Co., Ltd., which plans and sells mainly casual wear for boys, and reorganized it into a subsidiary. The ratio of e-commerce sales of Heartfeel is over 90%, as Heartfeel specializes in e-commerce.
As Narumiya International specialized in brands for girls, this acquisition would enrich its brand portfolio and enhance its e-commerce.

 

 

⑤ Other
The Company wholesales products to local department stores and specialized apparel shops, and offers the license to use its brand trademarks.

 

(3) Activities for new businesses: the House Studio business
As Narumiya International has been manufacturing and selling clothes for children, it aims to evolve into a kids’ lifestyle company by providing not only materials (clothes), but also experiences (services).
As the first step, it formed a business tie-up with the photo studio LOVST, and opened the photo studio LOVST BY NARUMIYA in MARINE & WALK YOKOHAMA in September 2018. This service is to take pictures of daily scenes and life events as memories after choosing from 300 clothes for kids. It is expected that there will be synergy with the existing business, including the purchase of clothes after the rental for photo shooting. In half a year after the start of this business, the number of users exceeded 1,000. The number of customers and average spending per customer are growing steadily.

 

(Taken from the reference material of the Company)

 

【1-5 Characteristics and Strengths】

(1) Multi-channel and multi-brand strategies
As unique characteristics and strengths, Narumiya International handles a variety of brands suited for respective sales channels, including department stores, shopping centers, and e-commerce, which are used in a well-balanced manner.
The Company covers a wide range of age groups, from babies to juniors (0 to 15 years old), and prices, and can distribute not only longtime sellers, but also trendy products timely through appropriate channels.
It plans to establish several differentiated brands and cover uncultivated areas in each sales channel, by utilizing M&A like the case of Heartfeel.

 

(Taken from the reference material of the Company)

 

(2) Merchandising capability that enables the utilization of 2 sales channels
Department stores and shopping centers (SCs) have different customer segments and needs, so it is necessary to operate brands suited for respective sales channels. In addition, supply chains are totally different between them as shown below, so it is not easy to expand business from department stores to SCs or from SCs to department stores.

 

(Characteristics of supply chains of each sales channel)

Sales channel

Characteristics of supply chains

Lead time

Department stores

For providing high-priced products, supply chains can produce high-quality products worth more than the price in small lots.

Long

Shopping centers (SCs)

For providing low/medium-priced products, supply chains can achieve both high-fashion apparel and cost performance.

Short

 

In the contrast, Narumiya International has already established a system for supply chain management for both channels: department stores and SCs.
Since it possesses merchandising capability that enables the utilization of the two channels, it can decentralize revenue sources. This is a noteworthy strength.

 

Especially, we would like to pay attention to the Company’s competitive advantage in the SC chain, which is considered as the strongest growth driver.
The Company can grasp the trends of children’s wear when necessary, by utilizing its advanced planning capability and network for collecting information on the trends and brands inside and outside Japan, and can distribute more hot-selling products in the middle of a season, based on its robust network for procuring products from various trading companies.
With its flexible planning, manufacturing, and selling systems, which allow them to distribute products in a short period of time, Narumiya International can reduce the loss of opportunities and pursue the maximization of sales.

 

(3) Top-class brand power
Its brands are characterized by not only the variety but also their high quality.
In “Senken Kids’ Fashion Award in Fiscal 2017” hosted by the leading industrial newspaper “Senken Shimbun,” “petit main” won first place in the SC section, “ANNA SUI mini” won first place in the section of toddlers’ wear of department stores, “mezzo piano junior” won first place in the section of juniors’ wear at department stores, and “SENSE OF WONDER” won second place in the section of babies’ wear at department stores. In this way, they are recognized as top-class brands.

 

(4) Excellent customer assets
As the Company has nurtured the top brands for children’s clothes for many years, the loyalty* of its customers is extremely high.
These customer assets are the stable base for sale, and allow the Company to meet their needs and develop new brands or new businesses. Accordingly, they are essential intangible assets that constitute its corporate value.

 

*Loyalty of customers: This means “trust” and “affection” toward a specific brand, product, or service.

 

2. Earnings Trends

【2-1 1Q of the Fiscal Year February 2020 Earnings Results】

(1) Overview of profit and loss

 

FY 2/19 1Q

Ratio to sales

FY 2/20 1Q

Ratio to sales

YOY

Net sales

6,613

100.0%

7,725

100.0%

+16.8%

Gross profit

3,835

58.0%

4,492

58.1%

+17.2%

SG&A expenses

3,411

51.6%

3,938

51.0%

+15.5%

Operating profit

424

6.4%

554

7.2%

+30.7%

Ordinary profit

385

5.8%

540

7.0%

+40.1%

Net income

225

3.4%

332

4.3%

+47.8%

*Unit: Million yen. The values for the first quarter of FY 2/19 are non-consolidated. Net income is profit attributable to owners of the parent.

 

Sales and profit grew, as SC and e-commerce remained healthy.
Sales were 7,725 million yen, up 16.8% year on year. The sales via both SC and e-commerce increased by double digits.
Operating profit was 554 million yen, up 30.7% year on year. SG&A expenses augmented 15.5% year on year, due to sales commissions, rents, and goodwill amortization after the acquisition of Heartfeel Co., Ltd., but it was offset by sales growth and improvement in gross profit rate.

 

(2) Trend of each sales channel

 

FY 2/19 1Q

Composition ratio

FY 2/20 1Q

Composition ratio

YOY

Sales

 

 

 

 

 

Department stores

2,189

33.1%

2,082

27.9%

-4.9%

SC

2,686

40.6%

3,322

44.5%

+23.7%

E-commerce

761

11.5%

946

12.7%

+24.4%

Gross profit

 

 

 

 

 

Department stores

1,265

57.8%

1,166

56.0%

-7.8%

SC

1,657

61.7%

2,118

63.8%

+27.8%

E-commerce

440

57.9%

564

59.7%

+28.2%

*Unit: Million yen. Non-consolidated. The composition ratio of profit means profit rate.

 

① Department stores
Sales and profit dropped.
“ANNA SUI mini” and “X-girl STAGES,” which are brands for babies and toddlers, performed well, but the brands for juniors struggled because junior generations no longer go to department stores frequently like before.

 

② Shopping centers (SCs)
Sales and profit grew.
“petit main,” a brand for babies and toddlers, and “Lovetoxic,” a brand for juniors, grew considerably.

 

③ E-commerce
Sales and profit rose.
Through the renewal of the website in August 2018, the number of new customers increased, and performance is still healthy.

 

④ Other
The sales at retail outlets increased 13.4% year on year, indicating healthy performance.

 

(3) Topics
① M&A of “Heartfeel,” an apparel enterprise targeted at mainly boys
In March 2019, Narumiya International reorganized Heartfeel Co., Ltd. (headquartered in Tokyo), an apparel enterprise targeted at mainly boys, into a 100% subsidiary.

 

(Outline of Heartfeel Co., Ltd.)
Established in 2010. It operates GLAZOS, an apparel brand for boys ranging from senior pupils of elementary school to junior high school students.
As its characteristics and strengths, Heartfeel handles boys’ brands for juniors, where the degree of competition is relatively low, and specializes in the e-commerce channel, as the ratio of EC sales exceeds 90%. For the term ended Dec. 2018, sales were 998 million yen, operating profit was 49 million yen, and net assets were 185 million yen.

 

(Purpose of M&A)
In the field of boys’ apparel, there are no competing fashion brands, and the current demand for boys’ apparel is mainly met by sports brands. In addition, Narumiya International, which had been handling brands for girls, was considering that it would be necessary to develop a brand for boys as a mid-term strategy.
In these circumstances, the Company considered that it would be possible to expand its business further by combining the strengths of Heartfeel and the strengths of Narumiya International, including “the firm know-how and experience of nurturing brands and business administration” and “the capability of expanding business via SC channels,” and thus, decided to acquire Heartfeel as a subsidiary. The acquisition amount was about 630 million yen, including the expenses for due diligence.

 

(Future growth strategy)
The Company aims to increase revenue from not only the existing EC channel, but also the SC channel, at which Narumiya International excels, and will work on the development of a brand for boys, based on the synergy between GLAZOS and the Narumiya brands.

 

*Basic policy
GLAZOS is at the same position as LOVETOXIC, which is a SC brand of Narumiya International, but GLAZOS, which is targeted at boys, has no competitors in the juniors’ apparel field.
Narumiya International aims to grow this brand like LOVETOXIC, by utilizing its capability of distributing products via SCs.

 

*Concrete measures
In detail, the Company aims to expand business by taking the following three steps.

STEP 1

*Growth with the GLAZOS brand only

*Operation as a subsidiary

*To generate synergy in the know-how to operate EC sites (know-how to operate websites and conduct marketing)

・To expand sales by selling products at Narumiya Online

・To expand sales by leading customers from Narumiya Online

 

*To share the planning and production processes with Narumiya (target costs, turnaround time, and quality)

・To reduce costs and shorten turnaround time in cooperation with shared suppliers

STEP 2

Generation of further synergy with the EC business of Narumiya

*To integrate EC sites

*To integrate logistics systems

*To integrate customer databases

・To promote cross-selling

・To lead customers from Narumiya’s brands for toddlers

STEP 3

Distribution of more products of GLAZOS to shopping centers

*Test marketing before opening more real shops

*Acceleration of opening of shops based on the store operation led by Narumiya

 

② Capital and business alliances with World Co., Ltd.
In March 2019, the shareholding ratio of World Co., Ltd. (3612, the 1st section of TSE), which is a comprehensive apparel company, increased from 10.22% to 25.55%, and World Co., Ltd. became the largest shareholder.

 

Such enhancement of the capital relation is expected to generate the following synergetic effects.

1. Upgrade of the mission-critical system

 

For Narumiya, now is the time to replace the mission-critical system, and they are expected to support the upgrade of the system to a more efficient one.

2. Cooperation, including collaborative shipping

In order to cope with skyrocketing logistics costs, the Company will plan the sharing of logistics systems and warehouses, etc.

3. Synergy in e-commerce

In cooperation with World Co., Ltd., which targets women aged 20 to 34 years, the Company will attract mothers early and lead them to the website of Narumiya.

4. Synergy in the market of juniors’ apparel

The Company will implement measures for expanding its market and increasing customers based on the two competitive brands for female juniors: LOVETOXIC (Narumiya) and PINK-latte (World Co., Ltd.).

 

(3) Financial Condition
◎ Main BS

 

End of

Feb. 2019

End of

May 2019

 

End of

Feb. 2019

End of

May 2019

Current assets

8,233

7,809

Current liabilities

5,263

4,953

 Cash and deposits

1,847

934

 Notes and accounts payable - trade

2,698

1,987

 Notes and accounts receivable - trade

2,309

2,467

 Short-term loans payable

450

880

 Inventories

3,694

4,291

Non-current liabilities

5,362

6,135

Non-current assets

5,948

6,890

 Long-term loans payable

4,325

5,036

 Property, plant and equipment

1,100

1,235

Total liabilities

10,626

11,088

 Intangible assets

3,321

3,800

Net assets

3,556

3,611

 Goodwill

3,129

3,531

 Retained earnings

1,515

1,541

 Investments and other assets

1,527

1,855

Total liabilities and net assets

14,182

14,700

Total assets

14,182

14,700

Total loans payable

4,775

5,916

 

 

 

Equity ratio

25.1%

24.6%

*Unit: Million yen. The values as of the end of Feb. 2019 are non-consolidated, while the values as of the end of May 2019 are consolidated. The increases/decreases in the sentences are for your reference.

 

Due to the acquisition of Heartfeel Co., Ltd., cash and deposits declined, while goodwill, investments and other assets increased. Consequently, total assets rose 518 million yen from the end of the previous term to 14.7 billion yen. Due to the augmentation of short and long-term loans payable, total liabilities rose 462 million yen to 11,088 million yen. Net assets increased 55 million yen to 3,611 million yen.
Equity ratio dropped 0.5 points from the end of the previous term to 24.6%.

 

【2-2 Fiscal Year February 2020 Earnings Estimates】

(1) Outlook for profit and loss

 

FY 2/19

Ratio to sales

FY 2/20 (Est.)

Ratio to sales

YOY

Net sales

29,700

100.0%

33,007

100.0%

+11.1%

Gross profit

15,937

53.7%

17,898

54.2%

+12.3%

SG&A expenses

14,312

48.2%

16,186

49.0%

+13.1%

Operating profit

1,625

5.5%

1,712

5.2%

+5.3%

Ordinary profit

1,505

5.1%

1,646

5.0%

+9.4%

Net income

926

3.1%

1,007

3.1%

+8.7%

*Unit: Million yen. The results for the term ended February 2019 are non-consolidated. Net income is profit attributable to owners of the parent.

 

Sales and profit are estimated to grow.
Sales are estimated to be 33 billion yen, up 11.1% year on year. SC channels and e-commerce will keep contributing to sales.
Operating profit is projected to rise 5.3% year on year to 1.7 billion yen. As a loyalty program was adopted at shopping centers (SCs), the Company will post a reserve for loyalty points this term, and SG&A expenses will augment, but it will be offset, and profit is expected to grow. The dividend amount is to be 31 yen/share. The estimated payout ratio is 30.5%.

 

(2) Trend of sales in each sales channel

 

FY 2/19

Composition ratio

FY 2/20 (Est.)

Composition ratio

YOY

Department stores

98

33.0%

97

29.4%

-1.0%

Shopping centers

118

39.7%

131

39.7%

+11.0%

E-commerce

43

14.5%

63

19.1%

+46.5%

*Unit: 100 million yen

 

① Department stores
Sales are estimated to decrease slightly.
The Company plans to launch new brands after acquiring foreign-affiliated brands, and will improve labor productivity by integrating brands and deploying personnel while decreasing the selling space for juniors’ brands and improving the apparel business targeted at babies and toddlers.

 

② Shopping centers (SCs)
Sales are projected to grow by double digits.
This fiscal year, too, the Company will open about 20 shops.
As for existing shops, the Company will try to improve CRM by adopting the loyalty program and enhance its earning capacity by leading customers to each other’s EC site, etc.
In addition, with the aim of streamlining its business, the Company will streamline the warehousing process by adopting RFID, and save manpower by installing self-checkout machines, etc.

 

③ E-commerce
Sales are forecasted to rise considerably.
In the term ending February 2020, the Company aims to increase the ratio of EC sales to 20%. Through the acquisition of Heartfeel Co., Ltd., the ratio is expected to grow.
The Company will improve its original EC site, which has a high profit rate and can obtain customer data, to increase the ratio of sales from that site from 43% in the term ended February 2019 to 50% in the term ending February 2020.
The Company will also work on the promotion of digital marketing.
Concretely, it will integrate customers’ IDs with SCs, and strive to optimize selling areas by promoting customers of real shops to use EC sites and vice versa.
In the term ending February 2021, the Company plans to release its original app.
In addition, it will discuss the integration of logistics systems for shopping centers and e-commerce for streamlining business administration.

 

3. Future Growth Strategy

【3-1 Activities in each sales channel】

After President Ishii was appointed, Narumiya International shifted from the business focused on department stores to the one utilizing shopping centers and e-commerce, and will take the following measures in each sales channel.

 

 

(1) Shopping center (SC) channel
This remains the strongest trigger for growth.
The number of shopping centers in Japan has been growing and is now about 3,200. It has been on a plateau in the past several years. The Company plans to open shops in about 1,200 shopping centers, but the number of directly managed shops in SCs as of the end of May 2019 was 170. There is significant room for opening shops.

 

In this situation, in order to further enhance the selling capacity through the SC channel, the Company organized SC Business Section, which specializes in brands for shopping centers, and is concentrating managerial resources and streamlining brand operation.
As the survival of the fittest is progressing among shopping centers, the Company will select shopping centers more carefully and open shops at growing excellent SCs. Furthermore, in order to enhance its earning capacity, the Company will expand its business scale to actualize volume discount and take measures for cost reduction to secure a high gross profit.

 

In addition, the Company will grasp fashion trends earlier than anyone else and further shorten the business cycle of planning, manufacturing, and sale.
As mentioned in “1-5 Characteristics and strengths,” Narumiya International is excellent in planning, information gathering, and product procurement, and can distribute more hot-selling products in the middle of a season. By utilizing this advantage, the Company will increase sales from the SC channel.

 

(2) E-commerce
The rapidly growing e-commerce channel is recognized as the second trigger for growth, and the following measures will be implemented for further growth.

Activities

Concrete measures

Development of an original EC site where consumers can easily choose and purchase products

*To make the website for smartphones more convenient, as those who purchase products with smartphones will increase

Enhancement of utilization of customer data

*Unified management of stocks for e-commerce and real shops, and integration of customer IDs

*To develop an omni-channel system and cement contact points with customers in real shops and the Internet

Retention of good customers

*To suggest optimal products with reference to the purchase history, etc.

*To enrich customer services, including benefits for loyal customers (to enhance loyalty)

 

(3) Department store channel
It is difficult to increase the sales from the department store channel considerably, but the Company will strive to achieve steady growth, fortify the customer base, and improve profitability through the following activities.

 

*To share the benefits for market survivors by taking advantage of the merits of multi-brand operation
The Company will open its another brand shop in the selling space after a competing shop was closed, to expand the selling space share.
In addition, it will establish a system for releasing a new brand when necessary.

 

*Retention of customers for long-selling brands
As Narumiya International has specialized in children’s clothes for many years, in some cases, it has loyal customers of 3 generations.
As its staff will maintain and cement long-term relationships with customers, the Company will implement measures suited for each life stage of customers, to fortify the customer base and maximize LTV*.

 

*LTV: Life Time Value. This is the amount spent by one customer for products or services. A high LTV means that the customer has purchased and used products and services repeatedly.

 

*Streamlining of business through the curtailment of personnel expenses
The Company will increase the efficiency of sale by locating different brand shops to one another.

 

In the department store channel, it is difficult to distribute more products in the middle of a season due to the conventional commercial customs, etc. The Company will approach department stores, with the aim of establishing a system for procuring and releasing products in a short period of time like in the SC channel.

 

【3-2 Foray into the Chinese market】

The Chinese apparel market is expected to become the world’s largest market whose scale will be about 54 trillion yen by 2020. Due to the effects of the “one-child policy,” the number of births is on a plateau, but it is about 17 million per year, which is much larger than that in Japan, which is less than 1 million.
As mentioned above, the Company opened a shop in Tmall by licensing a Chinese business partner to distribute products in August 2018.
With this foothold, it will cultivate the huge Chinese market on a full-scale basis in various ways.
In addition, it will start research into neighboring Asian countries.

 

【3-3 Provision of intangible services】

As mentioned above, Narumiya International, which has been manufacturing and selling children’s clothes, aims to evolve into a kids’ lifestyle company, by offering not only materials (clothes), but also experiences (services).
The House Studio business, which was launched as the first step, made a good start.
The Company will operate business in new fields, by utilizing its top-class brand power and excellent customer assets, which are its strengths.

 

【3-4 Promotion of M&A and alliances】

Like the case of Heartfeel, the Company will cover the uncultivated genres of children’s clothes through M&A and alliances, and enhance its multi-brand strategy further.

 

4. Interview with President Ishii

After assuming the position of president in June 2010, Mr. Toshiaki Ishii brought his company back onto an upward track and is currently bringing about further growth. We asked him about future strategies for growth and for a message to shareholders and investors.

 

Q: “After taking up the position of president, what was the first thing that you worked on?”
A: “Firstly, we started to work on the transformation of our sales channels and our brand development.”
“We were able to improve our performance by focusing on shopping centers and e-commerce as the top two businesses.”

 

We had to consider how we would improve our performance given that in-company cost-cutting measures had already been implemented.
The first thing we started to work on was the transformation of our sales channels.
We needed to change the situation that we were operating almost exclusively in department stores despite the continuing trend towards casual wear. At my previous position, I had been building up a close relationship with Aeon shopping centers, and given that there was not a lot of competition in the category of children's wear, we were able to steadily increase the number of our shops.
Department stores have their own merits and operate on a certain scale. Although we cannot speak of their immediate reductions, we cannot help but think of the future business environment as harsh. The growth of shopping centers and e-commerce and the reform of our business in department stores are measures which we need to take in order to increase the value of our business.

 

Another measure we took was procurement and brand development.
As a way to further our business amidst our sales slump, although it couldn't be helped, we displayed our new products at exhibitions and determined the number of orders from the demand from wholesalers and department stores. As a result, during summer vacation, which is the time that children look forward to the most, our most appealing products were already sold out, and some of our products could not be found on shelves.
However, given that large changes would not be produced under such circumstances, by creating additional orders for our products which sold well, we were able to increase sales.
After that, we reviewed our existing brands and worked on creating new brands, and began to see the fruits of this effort. The atmosphere within our company improved, and we were able to face forward more confidently.

 

In addition, regarding e-commerce, which had already been going well at that time, we were able to add new brands to our existing department store brands, which led us towards steady expansion. By focusing on our shopping center and e-commerce channels, we were able to improve our performance to the point that we were able to take our company public once again.

 

Q: “How do you perceive the current market environment? Furthermore, with that in mind, where would you like to focus your efforts in the future?”
A: “While it is a reality that we cannot escape from the declining birthrate and the shrinking population, we think of this as a chance for our market share to rise.”
“There is enough room for opening new stores in shopping centers. We don't have any pressing concerns about cannibalism between shopping centers and e-commerce.”
“As for e-commerce, we have made progress in the development of exclusive original products, and we are aiming to be the number one e-commerce platform for children's clothing in Japan.”
“We are growing quickly, with the expansion of our nationwide market share and our entry to the growing Chinese and Asian markets.”

 

In Japan, while it is a reality that we cannot escape from the declining birthrate and the shrinking population, and it is generally said that the business environment is harsh, we think of this as a chance for our market shares to rise.
That is to say, because the market conditions are the way they currently are, we think that we can pursue growth, for example by using appropriate marketing to enter fields which other companies have withdrawn from, or by acquiring new brands through M&A.
To do so, firstly, we will further polish our company’s strengths by putting together the know-how which we have amassed up to this point. We find it necessary to bring about steady growth in our most basic operations, with shopping centers and e-commerce at the heart of this endeavor.

 

Regarding shopping centers, we plan to keep opening 20 new shops per year, but the target total number of shops is around 1,200, so we still have lots of room for new shops.
Additionally, expansion of e-commerce will be indispensable for the future growth of all apparel companies, but for companies which have already opened a large number of physical shops, the growth of e-commerce will lead to decreases in sales for physical shops, thus leading to cannibalism.
Such problems are not occurring for our company, given that we only started to steadily increase the number of our shops in shopping centers around five years ago. By making use of the benefits of such a late start, we would like to steadily expand our business.

 

Regarding e-commerce, when I first entered my position, our sales were around 1 billion yen, but in the last two years or so, fine-tuning has proceeded rapidly, and in the previous term, sales were 4.3 billion yen, and this term, sales are estimated to exceed 6 billion yen. Outside of shopping centers and department stores, we will develop original products which are available exclusively through e-commerce. We wish to strengthen our buying function and construct the number one e-commerce platform for children’s clothing in Japan.

 

On the other hand, countries like China where the population of children is far larger than that in Japan and various Asian countries where the population of children is increasing are promising markets.
Particularly, the fact that Japanese-made children's clothes are seen as being highly reliable is a large advantage for our company.
In August 2018, we entered the world’s largest e-commerce mall “Tmall,” and we were able to achieve good results from the beginning, but on the other hand, we have also begun to see points which we can improve.
Recently, we held a meeting with a representative from Alibaba, and many points became clearer to us, such as what kinds of goods are being sought after and what kind of challenges we face. We have already started to consider how we can solve these challenges. The current trend around us is the licensing-out. While observing the current situation, we are working as hard as we can.
We think that we can grow quickly, with the expansion of our nationwide market share and our entry to foreign markets.

 

Q: “What do you want your company to pursue, and what are the obstacles in that circumstances?”
A: “In addition to the growth which we have achieved centered on children's clothing, we want to use flexible thinking to enter new markets and evolve into a kids’ lifestyle company by making best use of our intangible assets such as our customers and our know-how.”
“One of our challenges is acquiring and training diverse and exceptional human resources.”

 

Our company has focused on children's clothing for many years, but in the medium to long term, we do not think that we need to limit our focus to selling clothing for children.
While focusing on children as a keyword, we want to focus on a broad range of sectors in addition to clothing, such as education, play, and sports. We are happy as long as we can create smiles on the faces of children and their parents.
Our first step in that direction is the creation of our House Studio business, which aims to provide experiences rather than just materials.
In addition to the growth which we have achieved centered on children's clothing, we want to use flexible thinking to enter new markets and evolve into a kids’ lifestyle company by making best use of our intangible assets such as our customers and our know-how.

 

One of the obstacles which stands before the achievement of that goal is acquiring and training diverse and exceptional human resources.
By taking use of various channels, including our public listing last year, we want all kinds of people - not just investors, but also students, for example - to know that while continuing to grow in the children's clothing sector, Narumiya International aims to become a unique and unparalleled kid’s lifestyle company.

 

Q: “Lastly, please tell us your message to shareholders and investors.”
A: “In addition to asking for your understanding of our advantages and goals, I wish for your support looking not from a short-term perspective, but rather from a medium-to-long term viewpoint.”

 

Our company sells clothes for children between the ages of 0 and 15. When kids turn 15, parents aren't able to buy their kids clothes from the same brand which they bought for their kids when they were two or three years old. Given that we received many requests from parents to make older kids’ versions of our clothes, we have decided to start a new brand.
We have customers with whom we have been doing business for a very long time - sometimes lasting for three generations. Such customers are an irreplaceable asset for us, and our company sees the fact that we have such customers as something which sets us apart.
Additionally, as mentioned earlier, we are aiming to grow into a kid’s lifestyle company which is active in many different fields, with a focus on children as a keyword.
In addition to asking for your understanding of our advantages and goals, I wish for your support looking not from a short-term perspective, but rather from a medium-to-long term viewpoint.

 

5. Conclusions

We tend to think that the “declining birthrate and the shrinking population” are detrimental to Narumiya International, which handles children’s clothes, but President Ishii recognizes it as a big chance to expand the Company’s market share. In addition, he thinks that “real shops and e-commerce will not cannibalize each other for a while, and followers can grow by taking advantage of their strengths.” These two points are the most important for seeing the progress of the Company in the apparel field, where many enterprises are struggling.
Last month, there was news that Motherways Co., Ltd., which was running shops of kids’ clothes mainly in the Tokyo Metropolitan Area, filed for voluntary bankruptcy. It is said that about 100 shops around Japan will be closed. According to President Ishii, there are about 10 companies, including Narumiya International, which operate business focused on kids’ clothes at a certain scale. Accordingly, that bankruptcy will definitely provide Narumiya International with some benefits for market survivors.
We would like to pay attention to the measures and activities of Narumiya International, which aims to evolve into “a kids’ lifestyle company” that is unrivaled in the mid/long-term perspective, while growing its existing businesses steadily.

 

<Reference: Regarding Corporate Governance>

◎ Organization type, and the composition of directors and auditors

Organization type

Company with an audit and supervisory board

Directors

6 directors, including 4 outside ones

Auditors

3 auditors, including 2 outside ones.

 

◎ Corporate Governance Report
Last updated: May 30, 2019

 

<Basic Policy>
In our business activities charter, as a company which cultivates the dreams of children around the world and provides complete and abundant livelihoods for children, we will build a trusting relationship with children, our customers, investors and shareholders, our clients, and regional communities, and will honestly respond to the expectations placed on us, and in order to fulfill our societal responsibilities, we declare the following 10 principles for action.

 

(1) We will constantly strive to gain the trust and satisfaction of our customers by working on development and providing for our customers in addition to providing socially useful products and services while focusing on safety and the protection of personal and customer information.
(2) We will conduct fair, transparent, and free competition along with proper transactions. Moreover, we will maintain healthy and appropriate relations with the government and authorities.
(3) We will widely communicate with society, including shareholders, and share corporate information in a proactive and fair manner.
(4) In addition to respecting the diversity, personalities, and individuality of our employees, we will foster a safe and comfortable working environment and achieve abundance in a low-pressure fashion.
(5) As environmental problems are a challenge shared by all humanity, and recognizing that a healthy environment is a prerequisite for our company’s existence and activities, we will act independently and proactively.
(6) As part of our company’s effort to be a good citizen, we will proactively conduct activities which contribute to society.
(7) We will take a stand against antisocial forces and organizations which threaten the order and safety of civil society.
(8) Regarding our international business activities, we will not only comply with international rules and local laws, but we will also respect local cultures and customs and conduct our business in such a way which furthers their development.
(9) Recognizing that the implementation of the spirit of this charter is their duty, the heads of management will ensure compliance within the Company and make these points clear to our clients in addition to setting a positive example. In addition, through the continuous consideration of others’ voices from within and outside of the Company, we will create an effective company structure and aim for the thorough enactment of business ethics.
(10) In the event that there exist conditions which go against this charter, the heads of management will openly take preventative measures and investigate the source of the problem. Additionally, we will carry out timely and precise information sharing and accountability measures. In addition to clearly defining the liability and authority concerned, we will conduct our own strict measures.

 

<Reasons for Non-compliance with the Principles of the Corporate Governance Code (Excerpts)>

Principles

Reasons for not implementing the principles

[Supplementary Principle 1-2. (4) Digital exercise of voting rights, English version of the convocation notice]

We have translated the convocation notice into English, but we have not created an environment in which voting rights can be exercised digitally. We are considering measures to create an environment in which voting rights can be exercised digitally.

[Principle 1-4 Strategically held shares]

(1) Policies relating to strategically held shares

 

In addition to strengthening relationships with our clients based on a medium to long-term perspective, we hold our clients’ shares, but in order to ensure the efficiency of our assets, the shares we hold have extremely low impacts. Thus, we are currently not going as far as to conduct periodic checks of the appropriateness of holding strategic stocks. However, based on management decisions, we may consider selling off certain shares in the case that we deem the holding of certain shares to be unnecessary.

 

(2) Regarding our idea about the ensuring of appropriate measures regarding the exercise of voting rights which relate to the strategic holding of shares

 

Our basic idea towards the exercise of voting rights which relate to the strategic holding of shares is as follows.

Regarding the exercise of voting rights which relate to the strategic holding of shares, we determine whether the Company being invested in has constructed appropriate governance structures and whether they are making appropriate decisions which will lead to a medium- to long-term increase in corporate value, and then make a comprehensive decision for each item on our agenda.

 

<Disclosure Based on the Principles of the Corporate Governance Code (Excerpts)>

Principles

Disclosure contents

[Principle 3-1 Completion of information disclosure]

(1) Our goals (management principles, etc.), management strategies, and management plan

Our corporate philosophy and medium-term management plan will be published on our website as well as on our financial results documents.

 

(2) Basic approach and policies towards corporate governance based on the various principles of this code

With regard to our basic idea and basic policies regarding our corporate governance, please refer to “1. Basic Idea” in the “I Basic idea regarding corporate governance and basic information on capital structure, business attributes, etc.”

 

(3) Policies and procedures for the board of directors to determine remuneration for management executives and directors

As a measure aimed at the improvement of corporate governance, we will enhance the objectivity and rationality of our management through deliberation and findings to the board of directors about our human resources and remuneration policies for directors and executive officers. The nomination and remuneration committee has been established for this purpose, thereby maximizing corporate value. This committee is composed of the president and all non-executive directors, and the chairperson is selected from among the non-executive directors.

 

(4) Policies and procedures for the board of directors to elect and dismiss management executives and nominate candidates for directors and auditors

The board of directors selects candidates who appropriately fulfill their roles and responsibilities as directors and auditors, and possess abundant experience, fine judgment, and excellent personalities. Regarding the appointment and dismissal of directors and executive officers, in order to ensure objectivity and transparency, the board of directors or the president consults with the nomination and remuneration committee about factors such as an evaluation of the Company's performance, and the board of directors makes its decision while considering the nomination and remuneration committee's findings. The nomination of auditor candidates is carried out in accordance with the auditors’ board's audit standards, and the nomination procedures abide by the rules of the auditors’ board and are approved by the auditors’ board.

 

(5) Reasons for nomination and dismissal of individual candidates for board member and auditor positions

The reasons behind the appointment and nomination of each candidate for directors and auditors will be detailed in the convocation notice for the general meeting of shareholders. In the event of a dismissal, we will disclose the relevant information in accordance with policies and procedures.

[Principle 5-1 Policies regarding constructive dialogue with shareholders, etc. ]

 

Our policies for our organizational development and initiatives to promote constructive dialogue with shareholders are as follows.

 

(1) In order to promote IR activities which contribute to the improvement of corporate value, the accounting department and the corporate planning office will work together under the director in charge of information disclosure, who will act as the supervisor of IR activities.

 

(2) Dialogue with shareholders will be handled by the corporate planning office, and to a reasonable extent, the president or a director in charge of information disclosure.

 

(3) By conducting regular shareholder surveys, we will strive to better understand our composition of shareholders and implement more effective IR activities.

 

(4) In addition to holding periodic financial results briefings for institutional investors and analysts, we will hold meetings and information sessions in conjunction with the progression of our business. We plan to provide information to individual investors while focusing on speed and convenience.

 

(5) When preparing disclosure documents, the accounting department will play a central role regarding accounting information such as brief financial reports, securities reports, financial statements, and so on, and other disclosure documents will be handled primarily by the corporate planning office. The accounting department, the corporate planning office, and the human resources and general affairs department will work together to collect appropriate information and ensure the accuracy of disclosed information. Additionally, we will publish disclosure documents, etc. on our website in English.

 

(6) Regarding the opinions and concerns identified in dialogues with shareholders and investors, the corporate planning office will report to the board of directors when necessary.

 

(7) When conducting dialogues with shareholders, we comply with relevant laws and regulations and manage insider information in an appropriate manner.

 

 

This report is intended solely for information purposes, and is not intended as a solicitation for investment. The information and opinions contained within this report are made by our company based on data made publicly available, and the information within this report comes from sources that we judge to be reliable. However, we cannot wholly guarantee the accuracy or completeness of the data. This report is not a guarantee of the accuracy, completeness or validity of said information and 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.

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