BRIDGE REPORT
(9278)

東証1部

BOOKOFF GROUP HOLDINGS LIMITED (9278)
President Yasutaka Horiuchi
President
Yasutaka Horiuchi
Corporate Profile
Company
BOOKOFF GROUP HOLDINGS LIMITED
Code No.
9278
Exchange
TSE 1st Section
Industry
Retail (commerce)
President
Yasutaka Horiuchi
Address
2-14-20 Kobuchi, Minami-ku, Sagamihara-shi
Year-end
March
URL
Stock Information
Share Price Number of shares issued
(excluding treasury shares)
Total market cap ROE (Actual) Trading Unit
¥808 20,547,413 shares ¥16,602 million - 100 shares
DPS (Est.) Dividend yield (Est.) EPS (Est.) PER (Est.) BPS (Actual) PBR (Actual)
¥10.00 1.2% ¥67.52 12.0 times ¥640.77 1.3 times
*The share price is the closing price on November 21. ROE and BPS are actual results at the end of the previous term.
 
Consolidated Earnings Trends
Fiscal Year Net Sales Operating Income Ordinary Income Net Income EPS DPS
March2015 (Actual) 74,347 1,127 1,677 151 7.46 25.00
March 2016 (Actual) 76,564 -530 5 -528 -25.69 25.00
March 2017 (Actual) 81,344 116 588 -1,159 -56.41 10.00
March 2018 (Actual) 80,049 613 1,092 -889 -43.31 10.00
March 2019 (Forecast) 80,500 1,100 1,600 1,300 67.52 10.00
*The forecasted values were provided by the company. From FY3/16, net income is profit attributable to owners of the parent. Hereinafter the same shall apply.
*Allocation of 3,100,000 shares to third parties in May 2014.
 
We present this Bridge Report reviewing the first half of Fiscal Year March 2019 earnings results and Fiscal Year March 2019 Earnings Estimates about BOOKOFF GROUP HOLDINGS LIMITED.
 
Key Points
 
 
 
Company Overview
The company is one of the largest reuse chain stores that has expanded its reuse business into various fields, including books, CDs, DVDs, games, apparel, sporting goods, baby goods and miscellaneous goods. It has its own store network covering more than 800 (directly managed + franchised) stores all over the country. They pursue synergies between "reuse at physical stores" and "reuse at online stores." 【Business Description】 Its business includes Reuse Store business, BOOKOFF Online business for operating an E-commerce site "BOOKOFF Online," HUGALL business, which provides a purchase trading services for the wealthy class at major department stores (these businesses are segments to be reported), as well as other businesses including the operation of bookstores handling newly published books, "Aoyama Book Center," "Ryusui Shobou" and the undertaking of planning, designing and construction of interior and exterior finish work for stores of each business. Reuse Store Business As the chain headquarters of the reuse store "BOOKOFF" for books, software, etc., the company operates the franchise (FC) system and directly managed stores. There are three types of directly managed stores;1)"BOOKOFF" which handles books, CDs, DVDs, games, home appliances and mobile phones, etc., 2)"BOOKOFF PLUS" which is a medium-sized complex store where apparel & brand-name goods are added to "BOOKOFF" and 3)"BOOKOFF SUPER BAZAAR" which is a large-sized complex store dealing in a wide variety of commodities, in addition to books and software, such as home appliances (audio and visual devices, computers, etc.), apparel, sporting goods, baby goods, watches, brand bags, jewelry, tableware and miscellaneous goods. Its main subsidiaries, Booklet Co. Ltd., BOOKOFF-With Inc., BOOKOFF Okinawa Inc., Reuseconnect Inc. and Manas Co., Ltd operate "BOOKOFF" stores in Japan. BOOKOFF-With Inc. operates reuse stores for apparel, baby goods and others, in addition to the goods mentioned above. It is also a franchisee of a reuse chain store, "Kingram," which handles watches, brand bags and jewelry. In addition, Booklet Co., Ltd., BOOKOFF-With and BOOKOFF Okinawa Inc. operate reuse stores for apparel, etc. As for overseas business operation, BOOKOFF U.S.A. INC. runs "BOOKOFF" stores in the United States, BOK MARKETING SDN.BHD runs "Jalan Jalan Japan" in Malaysia, and SCI BOC FRANCE leases real estate owned in France. 【CSR Activities】 The company implemented "Sell-and-Support Program," in which part of the purchase amount will be donated to devastated areas, when customers use "Takuhonbin," a home-visiting service for buying used books, CDs, DVDs, game software, etc. (The BOOKOFF Group donates 10% of the purchase amount to the Japanese Red Cross Society and Red Feather Campaign.)
 
 
First Half of Fiscal Year March 2019 Earnings Results
The company secured an operating income of 549 million yen. Net sales were 38,953 million yen, down 0.7% year on year. Sales of Reuse Store business and BOOKOFF Online business increased, which almost absorbed the impact of the withdrawal of event sales in HUGALL business in the previous term. On the profit side, the profit of BOOKOFF Online business declined because it needed to bear the operating cost of department store desks for purchase taken over from HUGALL business (continuing in a smaller scale as BOOKOFF Online business). However, operating income (loss) improved significantly thanks to the increase in profit of Reuse Store business through improved profitability and the reduction of loss in HUGALL business as a result of cost reduction such as the withdrawal from unprofitable channels. The company secured a net income of 441 million yen thanks to the decrease in extraordinary loss (534 million yen → 115 million yen. An impairment loss of 509 million yen was posted in the same period of the previous year.). Rent and depreciation cost decreased thanks to the closing of unprofitable stores and the revision of fixed costs in Reuse Store business and the withdrawal from unprofitable channels in HUGALL business. Reuse Store Business Net sales were 34,841 million yen (up 1.4% year on year), and operating income was 1,671 million yen (up 12.3% year on year). In addition to the fact that sales at existing stores exceeded the same period of the previous year, large-scale complex stores opened in the previous term as well as Manas Co., Ltd. and BOK MARKETING SDN.BHD. (Malaysia), which became consolidated subsidiaries in the same term, also contributed to the sales increase. As sales of existing stores focusing on highly profitable books were well, fixed costs including the closure of unprofitable stores were reduced dramatically and the impact of the rise in minimum wages was offset by streamlining of operation through systematization, etc., the company saw profitability improvement. Sales at existing stores were 101.9% as compared with the same period of the previous year (97.0% in the same period of the previous year). The company brushed up individual stores under the Mid-Term Management Policy. As a result, Sales at existing stores have continued to exceed those in the same month of the previous year since March 2018. Procurement also went well with 104.1% as compared with the same period of the previous year. Sales of soft media, trading cards/hobby, jewelry/watches/brand bags increased year on year. Sales of books, the mainstay products, were slightly smaller than those in the same period of the previous year at 99.2%, but in three months for the second quarter (July to September), sales of books were 100.7% compared to the same period of the previous year, showing a sign of bottoming out. In the first half, 5 directly managed stores (including 3 stores with a comprehensive purchase counter) and 1 franchised store were opened. In addition, 23 directly managed stores were refurbished and 4 franchised stores were re-packaged. Meanwhile, 6 directly managed stores and 14 franchised stores were closed. The number of stores at the end of the first half is as follows: BOOKOFF: about 700 stores, BOOKOFF PLUS: 59 stores, and BOOKOFF BAZAAR: 42 stores. BOOKOFF Online Business Net sales were 3,615 million yen (up 19.3% year on year) and operating income was 13 million yen (down 88.8% year on year). In BOOKOFF Online business, sales increased thanks to strong sales of the E-commerce site "BOOKOFF Online" and the positive effect of sales channel expansion such as Yahoo shopping and Amazon etc. executed in the previous term, as well as the succession of operation of department store desks for purchase which used to be conducted by HUGALL business. Meanwhile, on the profit side, although the effect of the rise in shipping expenses for the E-commerce business was absorbed by the strong sales, the operation cost of the department store desks for purchase became a burden. Because operating loss of 112 million yen at department store desks for purchase (based on management accounting) was posted, "BOOKOFF Online" alone has secured operating income almost equal to that in the same period of the previous year. Closing of unprofitable channels for HUGALL business in the previous term, consolidation of operation functions, consolidation of logistics bases, and cost reductions through operational improvement are underway, and profits and losses on a single month basis are expected to return to the black in next spring. Total assets at the end of the first half were 41,069 million yen, down 6,812 million yen from the end of the previous year. Cash and deposits and short-term interest-bearing liabilities decreased due to early redemption of bonds with subscription rights to shares. The company retired 2,025,785 shares of treasury stock on September 28, 2018. Equity ratio was 32.6% (27.5% at the end of the previous term). Capital tie-ups with Yahoo Japan Corporation were canceled (business tie-ups will continue). Certain results were achieved through the capital tie-ups. Furthermore, there is a need to develop a system that allows each company to flexibly promote its own growth strategy in response to changes in the business environment. For these reasons, the capital tie-ups with Yahoo Japan Corporation were canceled (business tie-ups will continue). Accompanying the resolution of the capital tie-ups, the company acquired 3,100,000 shares of its common stock held by Yahoo Japan Corporation (15.08% of the total number of issued shares excluding treasury stock) for 2,343,600,000 yen in Off-Floor Trading (through the ToSTNeT-3 trading system).
 
 
Fiscal Year March 2019 Earnings Estimates
【Evaluation of the First Half and Priority Measures for the Second Half】 Evaluation of the first half In Reuse Store business, the sales composition ratio other than books and software has risen from 26% in the 2nd quarter of the fiscal year ended March 2015 to 36%, meaning the line of business is steadily expanding. In addition, the E-commerce sales to the Group sales ratio, the ratio of E-commerce sales (i.e. sales from Yahoo! Auction by directly managed stores + sales from BOOKOFF Online by E-commerce) in the Group sales (i.e. directly managed stores total + sales of BOOKOFF Online), also increased from 7% to 14%, and its trading area is also spreading to the Internet world. In addition, the profitability of Reuse Store business is also strengthening. While the gross profit ratio that was on a declining trend due to a change in the composition ratio of the commodity has bottomed out, thanks that the efficiency of operation through systematization, etc. and the reduction of fixed costs advanced, SG&A expenses that were on the rising trend have been suppressed at a level lower than before. Priority measures in the second half The challenge is "attracting customers." The number of customers at existing stores has remained below the level of the same period of the previous year. For this reason, in the second half, in addition to implementing periodic promotional activities(i.e. commercial messages), the company sets additional advertisement budgets and strengthens public relations activities on the handling of a wide range of merchandise, such as home appliances, mobile phones and apparel. Furthermore, it will make additional investments in the existing stores. In addition to accelerating refurbishment of interior and exterior of the stores, including disaster prevention measures to ensure that customers feel at ease in using the stores, it will expand the number of stores that use the reception and settlement system (electronic purchasing system) as a system investment to improve customer satisfaction. Sales increased 0.6% year on year and operating income increased 79.4% year on year. The company did not change the sales forecast, saying that "while closing of large stores and delays in the opening of new stores were not expected at the beginning of the fiscal year, the sales of existing stores exceeded the expectations." However, it upwardly adjusted the operating and ordinary income forecasts because book sales with a high gross margin exceeded the estimation and the low-cost operation is fully enforced in Reuse Store business. Furthermore, in association with the absorption-type merger of BOOKOFF Online, Inc. (scheduled in January 2019), which is the core of the group's E-commerce business, by BOOKOFF CORPORATION LTD. which operates the franchise headquarters, there will be tax effects that was not included in the initial forecast which will boost the net income. This is an absorption-type merger of a sub-subsidiary by a subsidiary company. With this merger, the company intends to develop a system that allows customers to easily obtain items at affordable prices by integrating the real stores membership base with the on-line one.
 
 
Mid-term Management Policy and Progress Status
The company sets the two business policies: "to polish individual stores" (store management and commodities) and "to make all-out efforts" (attracting customers and system). "To polish individual stores," the company is working on (1) refurbishment of stores, (2) expansion of comprehensive purchase counters, and (3) updating of the E-commerce site, based on the idea that polishing the reuse service for both real stores and on-line store is the starting point to become a leading company in the reuse business. Meanwhile, "to make all-out efforts," the company is promoting the concept of "unified BOOKOFF." It intends to pursue synergies that have been weak so far by strengthening collaboration between stores and non-store businesses. It will integrate and standardize the membership system, the platform of sales and purchasing, and the systems that support them, and then utilize assets such as membership, product information, and operation know-how accumulated in each service in all services. 【To polish individual stores】 In this first half, the company refurbished 23 directly managed stores. The refurbishment was not carried out in a uniformed manner but was unique to each store, taking into account locational characteristics, etc. For example, at BOOKOFF Chigasaki Kitaguchi store (Chigasaki, Kanagawa), in addition to apparel, marine related merchandise matching the characteristics specific to Shonan was introduced. BOOKOFF Kofu Heiwa Dori store (Kofu, Yamanashi), where many customers visit with their children, maintained its focus on books and added items related to hobbies. BOOKOFF Toyota Shimobayashi store (Toyota, Aichi) adjacent to NITORI Toyota store strengthened household appliances and musical instruments. BOOKOFF Musashi Koyama PALM store located in Tokyo's popular residential area with many parenting generations repainted the exterior and began to sell more books for children. Furthermore, in order to bolster procurement which is the lifeline of Reuse Store business, the company promoted the expansion of comprehensive purchase counters mainly in the inner-city area. In this first half, in order to fill the empty space of large shops with a purchase counter, it opened three small-sized stores, namely, Yoyogi Uehara store (Shibuya, Tokyo), Ebisu-Minami store (same) and Motosumiyoshi Bremen Street store (Kawasaki, Kanagawa). The company plans to open 2 or 3 stores in the second half, with a view to enhancing a wide range of purchasing in empty areas. Not only the real stores, the company also polished the E-commerce site. Specifically, in addition to renovation of general UI/UX such as unification of phrases and expressions, visualization of target traffic lines, and unification of tone and manners, Web serving (follow-up cart button, follow-up menu of delivery automated home-purchase cell top) and a new analysis tool (heat map tool) were introduced. Furthermore, the company also enriched the menu for members by implementing "My BOOKOFF" page. 【To make all-out efforts】 Regarding the measures for the members, the company released the official BOOKOFF application in June. Key functions include point management, coupon acquisition, store search, and push notification. The number of downloads has already reached 200,000, and the company is aiming for 1.2 million downloads during the next term by sequentially adding new functions. Through the use of the official application, it plans to gather data such as purchase status, location information, membership attributes, and shop information and will make use of the data in marketing to promote store visits and use of services. Regarding the electronic purchasing system, the streamlining of store operations is underway using the electronic purchasing system (tablet terminals) that was introduced to reduce the users' burden of writing and increase the efficiency of operations. As of October 2018, 367 stores have introduced the system, and the repeat purchasing customer rate (the number of member transactions after the second time divided by total purchase number) reached 63% in one year after these stores introduced the system. In the store operations, the number of processes to register the used goods by store staff decreased by 84%, and the reception and calculation time during the purchasing process decreased by 18% respectively. At the end of this fiscal year, the number of stores that have introduced the system will reach 500. The company intends to maximize sales promotion effect by strengthening collaboration with member services. As for utilization of E-commerce, the company is making efforts to create a sales platform of its E-commerce site, "BOOKOFF Online." Under this sales platform, products purchased at stores will be automatically listed on the E-commerce site, allowing customers to buy store products both at stores and on-line. The company also made it possible to check inventory on the "BOOKOFF Online." It will start listing soft media in the fiscal year ending March 2019 and expand the business to include books and other products. In addition to the above, the company will also work on expanding the business in Malaysia. As an exit strategy to maximize domestic purchase, it is expanding the business into Malaysia as a store brand of "Jalan Jalan Japan" which is demonstrating strong sales. On June 2, it opened "Jalan Jalan Japan Center Point Store" which is the third store in Malaysia. The company plans to broaden its store network and open a fourth store next spring. 【Performance goals】 As the goals for the 30th term (FY March 2021) that will become a milestone, the company sets "an ordinary income of 2.0 billion yen, a ROA (ordinary income to total assets ratio) of 5.0% or more, and the ratio of interest-bearing debt to cash flow from operating activities less than 5.0x", and so far, it is making a steady progress.
 
 
Conclusions
In the second half, it seems that the company is planning the additional investments of 200 to 300 million yen to increase the budget for advertisement and refurbishment of existing stores. Although it expects operating income to decline by nearly 20% year on year in the second half due to investment burden, the room for upward move is large, considering that the loss of HUGALL business will significantly decline from that of nearly 300 million yen in the same period of the previous year. By showing the results of its efforts for maintenance and improvement of the number of customers, the company wants to give momentum to recover business performance. The Mid-term Management Policy aims to achieve an ordinary income of 2 billion yen in the fiscal year March 2021. Considering that the ordinary income for the current term, which is forecasted to be 1.6 billion yen, is likely to be significantly higher than the forecast, there is a possibility that the company will achieve the target ahead of schedule. With the fiscal year March 2016 at the bottom, profits are on the rise, and growth expectations for the medium term will also increase if the target is achieved ahead of schedule. C to C (customer to customer) reuse business using flea market is attracting the attention of the market, but used products are always accompanied by quality risks and concerns about trading. In this sense, the company can segregate itself from other C to C reuse business operators, as it can provide a sense of security through its face-to-face service. It seems that the company will coexist in accordance with customers' lifestyles and lifetime. However, in order to do so, it is necessary to create synergies between the stores and the E-commerce site and improve convenience and operational efficiency.
 
 
<Reference: Regarding Corporate Governance>
◎ Corporate Governance ReportUpdated on October. 1, 2018 <Disclosure Based on the Principles of the Corporate Governance Code (Excerpts)> 【Principle 1-4】 In accordance with the "Regulations on Investment and Securities Management," the company stipulates policy not to acquire cross-holding shares in principle. However, as an exception, it may hold shares of its franchise chain member companies. Regarding the exercise of voting rights of cross-holding shares, the company will examine the contents of the proposal carefully, conduct dialogue with the companies as necessary, and judge whether it will contribute to the improvement of shareholders' value, and will exercise appropriately. 【Principle 1-7】 Regarding transactions between related parties, the company requires a resolution at the Board of Directors in accordance with the internal regulations in advance. The resolution shall be conducted in a manner that the officers concerned are excluded from the quorum of the relevant resolution as special stakeholders. The company also conducts a questionnaire survey every term to confirm whether there is any transaction between related parties, including officers of the company and its subsidiaries. 【Principle 3-1】 (i)The management philosophy and management strategies are posted on the company's website. ■ Management philosophy https://www.bookoffgroup.co.jp/corporate/philosophy.html (ii) The company discloses the basic idea and basic policy of corporate governance on its website and in the report on corporate governance. ■ Basic approach to corporate governance https://www.bookoffgroup.co.jp/ir/corporate.html (iii) The policies and procedures for deciding remuneration of directors are formulated by the Compensation Review Committee Regulations and disclosed in the report on corporate governance. The company decides the remuneration of directors at the compensation review committee composed of the president and independent external directors within the limits determined by the general meeting of shareholders, taking into consideration the performance of the company and the degree of contribution by each director to the company, etc. (iv) The company selects candidates for directors based on whether they can contribute to sustainable growth and corporate value enhancement and creates opportunities to have dialogue with the candidates. After deliberation at the nominating advisory committee based on the internal regulations, they will be decided at the Board of Directors. Candidates for corporate auditors are selected based on whether they can contribute to the sound management of the company, maintain and improve social credibility of the company and conduct a neutral and objective audit. After deliberation and agreement at the auditor's meeting, they are ultimately decided by the Board of Directors. The judgment standards for independence of external directors and external corporate auditors are disclosed in the report on corporate governance. (v) The company will disclose the reasons for the selection of candidates for directors and candidates for corporate auditors in the convocation notice. In addition, it will attach the career description of all candidates and their own comments as reference material to the convocation notice. 【Principle 5-1】 The company appoints an executive in charge of IR and designates the Corporate Planning Department as in charge of IR. For shareholders and investors, the company holds financial results briefings once in six months, and is conducting small meetings and individual interviews as needed. In addition, the company has established the IR policy and disclosed it on its website. ■ IR Policy <Policy to promote constructive dialogue with shareholders> https://www.bookoffgroup.co.jp/ir/policy.html
 
 
Disclaimer
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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