R Pan Pacific International Holdings / 7532
COVERAGE INITIATED ON: 2010.01.06 LAST UPDATE: 2020.02.17
Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an “owner’s manual” to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at [email protected] or find us on Bloomberg.
Research Coverage Report by Shared Research Inc. Pan Pacific International Holdings / 7532 R LAST UPDATE: 2020.02.17 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp Coverage
INDEX
How to read a Shared Research report: This report begins with the trends and outlook section, which discusses the company’s most recent earnings. First-time readers should start at the business section later in the report.
Executive summary ------3 Key financial data ------5 Recent updates ------6 Highlights ------6 Trends and outlook ------8 Monthly trends ------8 Quarterly trends and results ------9 Full-year company forecasts ------16 Long-term strategy and focus points going forward ------20 Business ------23 Group companies ------23 Main product categories ------25 Business model and strategy ------28 Store formats ------31 Strengths and weaknesses ------36 Market and value chain------37 Customers ------37 Historical financial statements and earnings ------39 Income statement ------39 Balance sheet ------40 Cash flow statement ------42 Company comments on recent earnings results ------43 Other information ------55 History ------55 News and topics ------60 Management ------61 Major shareholders ------62 Investor relations ------62 Company profile ------64
02/65 Pan Pacific International Holdings / 7532 R LAST UPDATE: 2020.02.17 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp Coverage
Executive summary
Pan Pacific International Holdings Corporation (PPIH) is one of Japan’s top retailers whose core business is the Don Quijote ◤ discount store chain. The company operates 693 stores in Japan and overseas as of end-June 2019. The company recorded sales of JPY1.3tn in FY06/19. As well as Don Quijote, the company runs family-oriented, large-scale discount stores, including MEGA Don Quijote and New MEGA Don Quijote. Based on the concept of making customers the utmost priority, PPIH has a unique store concept called CV+D+A, with CV standing for convenience, D for discount, and A for amusement to differentiate itself from peers. Most retailers pursue convenience for customers so that they can buy what they want, when they want, and offer products at competitive prices. In contrast, the company’s concept is for customers to spend time instore, enjoying an exciting shopping experience. Its stores attract consumers, because they provide a form of amusement not offered by conventional retailers.
The company’s operations prioritize the delegation of authority and store autonomy. The sales floor managers source, ◤ display, and price items in a way that helps consumers enjoy shopping, having researched demand and competitor trends in their trade area. Mass displays (displaying a large volume of the same product), point-of-purchase (POP) displays such as handwritten price labels and product copy, and spot products that highlight the low price or rarity value of a product are all techniques to enhance consumers’ shopping experience.
PPIH has an aggressive stance on M&A. To date it has acquired DIY store DOit Co., Ltd., GMS Nagasakiya Co., Ltd., and US ◤ supermarket chains. In January 2019, the company made Uny Co., Ltd. (GMS and other businesses) a wholly owned subsidiary. The company has run dual-name format stores with Uny since the two companies formed an alliance in August 2017, which had positive effects such as sharp increases in sales and customer traffic, and earnings improvement.
Having made Uny a subsidiary, the company’s annual sales reached approximately JPY1.6tn. The company sees earnings ◤ improvement of Uny’s retail business as the main profit growth driver. Shared Research is focusing on the earnings turnaround of Uny stores (mainly dual-name stores) as well as sales growth of Don Quijote and other existing stores from higher comparable store sales and accelerated store openings.
Trends and outlook
In FY06/19, the company reported full-year sales of JPY1.3tn (+41.1% YoY), operating profit of JPY63.1bn (+22.4% YoY), and ◤ net income attributable to owners of the parent of JPY48.3bn (+32.5% YoY), a new record high. At the end of FY06/19, the group had a total of 693 stores in operation and had achieved an ROE of 15.6%, thereby achieving the targets of JPY1.0tn in sales, 500 stores, and an ROE of 15% set out for FY06/20 under its Vision 2020 plan (announced in August 2015) one year ahead of schedule.
For FY06/20, the company forecasts full-year sales of JPY1.7tn (+25.7% YoY), operating profit of JPY72.0bn (+14.1% YoY), ◤ recurring profit of JPY72.0bn (+5.5% YoY), and net income of JPY46.0bn (-4.7% YoY). The addition of Uny as a consolidated subsidiary pushed up 1H consolidated sales by 67.3% YoY and 1H consolidated operating profit by 50.3% YoY. However, the company expects 2H consolidated sales to grow just 0.5% YoY and 2H consolidated operating profit to decline 18.8% YoY.
Under the leadership of Naoki Yoshida who took over as President and CEO in September 2019, PPIH unveiled its new ◤ medium- to long-term management plan Passion 2030, which targets operating profit of JPY200bn in 2030. In Japan, the company aims to maximize synergies, revive the GMS business and restructure its earnings, promote digital strategies, strengthen financial services business, and optimize its cost structure to hone its competitive edge. Overseas, the company will focus on creating business formats centered on Japanese brands and becoming a specialty store retailer of its own food brands. Sales targets are JPY2tn in Japan and JPY1tn overseas.
Strengths and weaknesses
Shared Research believes the company’s strengths are 1) ability to execute management policies in the field in ways that are compatible with the conditions of each region, 2) a powerful brand associated with an enjoyable shopping experience and low
03/65 Pan Pacific International Holdings / 7532 R LAST UPDATE: 2020.02.17 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp Coverage
prices, and 3) fast decision-making. Weaknesses include 1) becoming a giant corporation, 2) issues with familiarity, and 3) heavy dependence on the domestic market (see Strengths and weaknesses section for details).
04/65 Pan Pacific International Holdings / 7532 R LAST UPDATE: 2020.02.17 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp Coverage
Key financial data
Income statement FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Est. Sales 507,661 540,255 568,377 612,424 683,981 759,592 828,798 941,508 1,328,874 1,670,000 YoY 4.1% 6.4% 5.2% 7.7% 11.7% 11.1% 9.1% 13.6% 41.1% 25.7% Gross profit 129,074 139,543 149,807 161,018 181,741 201,893 218,580 243,991 370,527 478,000 YoY 4.5% 8.1% 7.4% 7.5% 12.9% 11.1% 8.3% 11.6% 51.9% 29.0% Gross profit margin 25.4% 25.8% 26.4% 26.3% 26.6% 26.6% 26.4% 25.9% 27.9% 28.6% SG&A expenses 103,738 110,223 117,438 126,726 142,638 158,708 172,395 192,423 307,417 406,000 YoY 1.3% 6.3% 6.5% 7.9% 12.6% 11.3% 8.6% 11.6% 59.8% 32.1% Operating profit 25,336 29,320 32,369 34,292 39,103 43,185 46,185 51,568 63,110 72,000 YoY 20.3% 15.7% 10.4% 5.9% 14.0% 10.4% 6.9% 11.7% 22.4% 14.1% Operating profit margin 5.0% 5.4% 5.7% 5.6% 5.7% 5.7% 5.6% 5.5% 4.7% 4.3% Recurring profit 25,138 29,283 33,201 35,487 40,160 43,797 45,523 57,218 68,240 72,000 YoY 19.1% 16.5% 13.4% 6.9% 13.2% 9.1% 3.9% 25.7% 19.3% 5.5% Recurring profit margin 5.0% 5.4% 5.8% 5.8% 5.9% 5.8% 5.5% 6.1% 5.1% 4.3% Ne t in c o m e 12,663 19,845 21,141 21,471 23,148 24,938 33,082 36,405 48,253 46,000 YoY 23.7% 56.7% 6.5% 1.6% 7.8% 7.7% 32.7% 10.0% 32.5% -4.7% Ne t ma rgin 2.5% 3.7% 3.7% 3.5% 3.4% 3.3% 4.0% 3.9% 3.6% 2.8% Per share data (split-adjusted; JPY) Shares issued (year-end; '000) 616,246 617,079 622,911 627,152 631,676 632,473 632,715 632,773 633,287 - EPS 21.0 32.2 34.2 34.4 36.8 39.4 52.3 57.5 76.2 72.6 Book value per share 200.6 232.1 267.0 298.8 336.2 366.1 409.4 458.9 520.4 - Dividend per share 4 4 4 5 5 6 7 8 10 12 Balance sheet (JPYmn) Cash and cash equivalents 35,031 34,237 31,698 42,690 49,717 42,894 76,430 71,973 172,673 Accounts receivable 4,585 4,889 5,371 5,730 6,820 7,720 8,966 12,848 18,744 Inventories 81,582 83,641 85,997 89,105 94,580 117,400 123,969 135,781 188,510 Total current assets 134,515 138,816 143,391 158,834 175,981 195,977 227,585 244,125 496,405 Total assets 341,300 362,651 386,622 432,135 505,666 560,568 642,868 807,057 1,278,567 Accounts payable 42,430 44,793 48,036 55,118 60,556 70,194 85,661 93,030 159,064 Total interest-bearing debt 133,580 133,342 126,506 134,531 167,507 186,499 211,068 332,712 549,902 Total liabilities 216,058 216,916 216,444 238,971 284,299 316,021 362,938 494,562 925,080 Shareholders' equity 127,087 146,590 167,233 187,637 209,682 231,788 258,282 291,337 329,296 Cash flow statement (JPYmn) Cash flows from operating activities 26,029 33,962 38,270 39,684 42,520 29,110 56,441 46,081 101,978 Cash flows from investing activities -44,789 -29,794 -23,293 -36,593 -52,641 -52,197 -40,593 -164,443 -37,113 Cash flows from financing activities 7,274 -4,637 -9,510 4,440 16,176 17,148 17,644 116,083 43,456 Financial ratios ROA (RP-based) 7.4% 8.1% 8.6% 8.2% 7.9% 7.8% 7.1% 7.1% 5.3% ROE 11.1% 14.9% 13.7% 12.1% 11.6% 11.2% 13.5% 13.3% 15.6% Equity ratio 36.2% 39.5% 43.0% 43.4% 42.0% 41.3% 40.3% 36.0% 25.8% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: The company executed a 2-for-1 stock split on July 1, 2015 and a 4-for-1 stock split on September 1, 2019.
05/65 Pan Pacific International Holdings / 7532 R LAST UPDATE: 2020.02.17 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp Coverage
Recent updates
Highlights
On February 17, 2020, Pan Pacific International Holdings Corporation (PPIH) announced a transfer of shares in a consolidated subsidiary (second-tier subsidiary).
Uny Co., Ltd., a consolidated subsidiary of the company, resolved to transfer shares in 99 Ichiba Co., Ltd. to G-7 Holdings (TSE1: 7508) and entered into a share transfer agreement. The agreement was signed on February 17, 2020. The transfer is structured as a two-stage transfer. The first transfer is scheduled for April 1, 2020 with plans to transfer 80% of issued shares at a transfer price of JPY1.0bn. The second transfer is scheduled for April 1, 2022 with plans to transfer the remaining 20% of issued shares at a transfer price of JPY250mn.
99 Ichiba Co., Ltd operates urban mini-supermarket mini PIAGO. In FY02/19, 99 Ichiba Co., Ltd booked sales of JPY13.6bn and operating profits of JPY143mn. This company operates 73 stores.
Reason for transfer In order to achieve new medium- to long-term “Passion2030” targets announced on February 5, 2020, the company believes further growth, including the selection and concentration of management resources, is necessary. This led to the decision to transfer the mini-supermarket business to a third party. The company thinks G-7 Holdings (transferee) is highly compatible with the mini-supermarket business. In addition to operating wholesale markets and farmers’ markets as a franchisee through a subsidiary, G-7 Holdings sells processed meat and operates a food wholesale business. Through the transfer, the company will optimize management resource allocation within the group and work to further increase corporate value.
The company expects the impact of the transfer on consolidated results to be minimal.
On February 10,2020, the company announced sales figures for January 2020; see the Monthly trends section for details.
On February 5, 2020, the company announced earnings results for 1H FY06/20 and its new medium- to long-term management plan; see the results section for details.
On January 10,2020, the company announced sales figures for December 2019.
On December 10, 2019, Shared Research updated the report following interviews with the company.
On the same day, the company announced sales figures for November 2019.
On December 6, 2019, the company announced a capital increase (an over-allotment to existing shareholders) at its overseas subsidiary DONKI Thonglor Co., Ltd.
In order to further expand stores in Thailand in future, and to build a closer relationship with the Saha Group, which operates a wide range of businesses in Thailand including consumer goods businesses and real estate, the company undertook a capital increase (THB350.0mn; approximately JPY1.3mn) and share allotment of its Thai subsidiary DONKI Thonglor Co., Ltd.
06/65 Pan Pacific International Holdings / 7532 R LAST UPDATE: 2020.02.17 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp Coverage
As a result, the ownership of DONKI Thonglor is as follows: company subsidiary PPI (Thailand) Co., Ltd. holds 60.0% (95.0% prior to the capital increase); longstanding business partner TOA Venture Holding Company Limited holds 22.0% (5.0%); and Saha Pathana Inter -Holding Public Company Limited and its three group companies hold 18.0% (0.0%).
The company holds that the impact of this matter on full-year consolidated results will be minor.
On November 29, 2019, the company announced that it had decided to spin off the home center and remodeling businesses operated by its wholly owned subsidiary DOit Co., Ltd.
Doit is a long-standing operator of a home center retail chain with a total of 16 stores, most of which are located in the greater Tokyo area. Doit became a consolidated subsidiary of PPIH (then Don Quijote) back in 2007, but its home center and remodeling businesses are now slated to be spun off to Kohnan Shoji Co., Ltd. (TSE1: 7516), who will take over the businesses through an absorption-type merger. In FY06/19, Doit generated sales of JPY15.9bn and an operating profit of JPY122mn, and its balance sheet at the end of the fiscal year showed total assets of JPY21.9bn and net assets of JPY19.3bn. Of this, the businesses that are being spun off accounted for JPY14.8bn of the sales, JPY6.5bn of the assets, and JPY185mn of the liabilities (Doit’s property rental/management business is not included in deal). In return for the home center and the remodeling businesses operated by Doit, PPIH expects to receive a total of JPY6.8bn. Going forward, PPIH plans to continue focusing its management resources on strengthening its discount store business, realizing synergies from its acquisition of Uny, and developing its overseas business. For its part, Kohnan Shoji plans to use its takeover of the home center business operated by Doit as a means of expanding its presence in the greater Tokyo area and will also transfer its management expertise with the aim of generating synergies in areas such as merchandising, sales, distribution, and IT systems. The date of record for the deal is currently slated for February 3, 2020.
On November 8, 2019, the company announced sales figures for October 2019.
On November 6, 2019, the company announced earnings results for Q1 FY06/20.
For previous releases and developments, please refer to the News and topics section.
07/65 Pan Pacific International Holdings / 7532 R LAST UPDATE: 2020.02.17 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp Coverage
Trends and outlook
Monthly trends
Don Quijote FY06/08 FY06/09 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY FY FY FY FY FY FY FY FY FY FY FY All st ores Sales 6.5% 5.9% 6.1% 5.9% 6.2% 7.1% 6.6% 12.3% 112.3% 11.8% 12.2% 5.0% Store count 148 150 162 169 185 200 217 242 243 292 313 322 Comparable Sales -3.3% 0.5% -1.5% 3.4% 0.5% -0.1% 0.8% 4.6% 4.6% 2.6% 4.1% 1.2% stores Customer count -2.2% 4.5% 3.8% 3.1% -0.8% -0.5% 0.1% 1.9% 1.9% 2.2% 2.3% 0.3% Customer spend -1.2% -3.8% -5.1% 0.3% 1.3% 0.4% 0.7% 2.7% 2.7% 0.4% 1.8% 0.9% Store count 123 144 149 158 164 179 194 208 209 258 283 297 By product Elect ric appliances -2.7% -4.8% -3.6% 5.1% -2.2% -0.5% -2.7% 4.8% 4.8% 10.5% 12.4% 2.2% Household goods 8.2% 9.8% 9.1% 7.9% 6.7% 7.9% 8.8% 14.8% 14.8% 18.2% 20.2% 5.2% Foods 10.9% 20.8% 14.4% 4.5% 7.3% 8.9% 13.1% 19.0% 19.0% 17.4% 16.2% 9.9% Watches & fashion merchandise 6.3% 0.0% 1.7% 4.3% 11.9% 11.2% 3.4% 8.8% 8.8% 2.7% 1.8% 0.7% Sporting & leisure goods 5.5% 4.1% 5.5% 8.2% 2.0% 8.3% 5.6% 7.1% 7.1% 3.7% 2.4% 0.0% Other products 0.1% 10.4% 21.7% 29.7% 10.9% -22.6% -1.1% -2.7% -2.7% -2.6% 1.5% 1.8%
Don Quijote FY06/19 Jul Aug Sep Oct No v Dec Jan Feb Mar Apr May Jun All st ores Sales 4.1% 5.9% 8.4% 4.9% 4.4% 2.6% 3.1% 5.9% 8.6% 6.9% 6.6% 4.1% Store count 314 319 320 321 324 325 326 327 327 322 322 322 Comparable Sales 0.0% 1.4% 3.5% 0.4% 0.5% -1.2% -0.3% 1.6% 4.1% 2.1% 2.2% 0.9% stores Customer count -1.1% -0.1% -1.4% 1.7% -0.4% -2.3% -0.3% 0.5% 2.2% 1.3% 3.1% 1.0% Customer spend 1.2% 1.5% 5.0% -1.3% 1.0% 1.1% -0.1% 1.0% 1.8% 0.9% -0.8% -0.1% Store count 288 291 283 291 294 299 301 301 301 295 296 297 By product Elect ric appliances -1.6% 1.0% 9.2% 2.0% 0.8% 1.3% 2.0% 4.2% 6.1% 7.1% 2.2% -2.4% Household goods 6.0% 7.1% 7.8% 7.4% 4.7% 3.6% 3.8% 5.8% 7.8% 3.3% 6.0% 4.2% Foods 9.0% 10.5% 10.5% 10.2% 9.0% 8.3% 8.4% 9.1% 13.7% 12.6% 10.7% 8.6% Watches & fashion merchandise 0.9% 2.9% 9.2% -2.8% 0.4% -3.1% -4.5% 1.6% 4.3% 4.0% 3.6% 1.8% Sporting & leisure goods -3.6% 0.7% -0.9% -0.8% -0.7% -3.6% 0.7% 3.8% 3.0% 2.8% 3.8% -2.7% Other products -0.2% -1.2% 3.7% 3.1% 2.3% -1.8% 1.2% 3.3% 5.0% 3.8% 4.7% 2.5%
Don Quijote FY06/20 Jul Aug Sep Oct No v Dec Jan Feb Mar Apr May Jun All st ores Sales -1.5% 3.5% 15.7% -4.8% -0.7% -2.1% 0.9% Store count 322 323 325 325 325 327 327 Comparable Sales -4.3% 1.1% 13.0% -6.9% -2.2% -3.4% -0.8% stores Customer count -3.5% 2.8% 7.6% -5.5% -2.3% -2.7% -1.6% Customer spend -0.9% -1.7% 5.0% -1.6% 0.2% -0.7% 0.9% Store count 297 302 296 307 309 310 313 By product Elect ric appliances -5.5% 5.3% 9.4% -6.7% -5.6% -8.6% -5.7% Household goods -2.2% 2.9% 23.7% -9.4% -2.7% -0.8% 2.6% Foods 5.9% 6.9% 20.3% 2.1% 4.1% 3.2% 3.2% Watches & fashion merchandise -5.6% -0.2% 2.6% -6.8% -3.0% -7.1% -1.7% Sporting & leisure goods -13.9% -0.8% 5.0% -8.3% -2.8% -5.6% 1.5% Other products 4.9% 9.4% 34.9% -12.5% -2.5% 3.9% 4.2%
UNY FY06/19 Jul Aug Sep Oct No v Dec Jan Feb Mar Apr May Jun All st ores Sales -0.3% -3.8% -1.0% -0.3% -5.0% -3.4% -3.0% -3.6% -1.3% -5.3% -4.9% -5.8% Store count 192 192 191 190 188 188 186 183 182 178 177 176 Comparable Sales 5.0% 1.4% 1.8% 3.0% -1.8% 0.2% -0.5% -1.1% 2.1% -1.6% 1.3% 1.1% stores Customer count 2.6% 1.0% 0.1% 0.6% -1.1% -0.4% -0.4% -0.5% 0.9% -2.0% 0.3% -0.2% Customer spend 2.4% 0.5% 1.7% 2.4% -0.7% 0.6% -0.2% -0.5% 1.1% 0.5% 1.0% 1.3% Apparel 2.5% 0.8% 0.9% -6.4% -4.8% 1.2% 2.4% 4.0% 2.4% -5.9% 8.2% 1.5% Household goods 4.4% 1.9% 2.6% 0.5% -1.0% 1.2% 2.6% -2.5% 5.0% -3.8% 4.1% 1.5% Foods 4.1% 2.3% 1.9% 2.8% -0.7% -0.2% -0.7% -1.3% 1.5% -0.1% -0.4% 1.0% Store count 190 190 189 188 186 187 181 178 177 173 173 169 UN Ret ail Store count 6 6 6 6 6 6 6 9 10 13 14 16
UNY FY06/20 Jul Aug Sep Oct No v Dec Jan Feb Mar Apr May Jun All st ores Sales -13.6% -6.6% -7.0% -15.3% -10.1% -13.8% -14.2% Store count 173 172 169 168 165 162 162 Comparable Sales -5.9% 2.7% 4.0% -3.5% 2.6% -0.7% 0.8% stores Customer count -5.5% 1.1% 2.0% -3.3% 1.2% -0.6% 0.6% Customer spend -0.5% 1.6% 2.0% -0.2% 1.4% 0.0% 0.1% Apparel -10.2% 13.8% 10.4% -9.1% 6.4% -2.4% -0.9% Household goods -5.8% 5.6% 29.2% -13.5% 2.6% -2.7% 3.4% Foods -5.1% 0.7% -0.8% -0.6% 1.8% 0.0% 0.7% Store count 168 166 161 161 159 158 156 UN Ret ail Store count 19 20 22 24 26 29 29 Source: Shared Research based on company data
08/65 Pan Pacific International Holdings / 7532 R LAST UPDATE: 2020.02.17 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp Coverage
Quarterly trends and results
Cumulative FY06/18 FY06/19 FY06/20 FY06/20 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 % of FY FY Es t . Sales 223,433 462,830 703,156 941,508 250,080 513,416 918,990 1,328,874 428,736 858,789 51.4% 1,670,000 YoY 11.0% 10.8% 13.4% 13.6% 11.9% 10.9% 30.7% 41.1% 71.4% 67.3% 25.7% Gross profit 59,268 120,176 180,615 243,991 66,732 135,611 252,117 370,527 122,620 247,793 51.8% 478,000 YoY 9.3% 8.6% 10.2% 11.6% 12.6% 12.8% 39.6% 51.9% 83.7% 82.7% 29.0% Gross profit margin 26.5% 26.0% 25.7% 25.9% 26.7% 26.4% 27.4% 27.9% 28.6% 28.9% 28.6% SG&A expenses 44,968 90,929 140,555 192,423 52,229 105,594 205,785 307,417 101,488 202,680 49.9% 406,000 YoY 7.9% 7.9% 10.9% 11.6% 16.1% 16.1% 46.4% 59.8% 94.3% 91.9% 32.1% SG&A rat io 20.1% 19.6% 20.0% 20.4% 20.9% 20.6% 22.4% 23.1% 23.7% 23.6% 24.3% Operating profit 14,300 29,247 40,060 51,568 14,503 30,017 46,332 63,110 21,132 45,113 62.7% 72,000 YoY 14.1% 11.0% 7.9% 11.7% 1.4% 2.6% 15.7% 22.4% 45.7% 50.3% 14.1% Operating profit margin 6.4% 6.3% 5.7% 5.5% 5.8% 5.8% 5.0% 4.7% 4.9% 5.3% 4.3% Recurring profit 14,301 31,058 43,441 57,218 17,917 35,330 51,758 68,240 20,449 45,555 63.3% 72,000 YoY 11.8% 15.3% 20.6% 25.7% 25.3% 13.8% 19.1% 19.3% 14.1% 28.9% 5.5% Recurring profit margin 6.4% 6.7% 6.2% 6.1% 7.2% 6.9% 5.6% 5.1% 4.8% 5.3% 4.3% Net income 8,465 18,678 27,163 36,405 11,646 23,616 37,052 48,253 12,604 28,890 62.8% 46,000 YoY 4.2% 13.5% 0.7% 10.0% 37.6% 26.4% 36.4% 32.5% 8.2% 22.3% -4.7% Net margin 3.8% 4.0% 3.9% 3.9% 4.7% 4.6% 4.0% 3.6% 2.9% 3.4% 2.8% Quarterly FY06/18 FY06/19 FY06/20 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Sales 223,433 239,397 240,326 238,352 250,080 263,336 405,574 409,884 428,736 430,053 YoY 11.0% 10.6% 18.8% 14.1% 11.9% 10.0% 68.8% 72.0% 71.4% 63.3% Gross profit 59,268 60,908 60,439 63,376 66,732 68,879 116,506 118,410 122,620 125,173 YoY 9.3% 8.0% 13.5% 15.9% 12.6% 13.1% 92.8% 86.8% 83.7% 81.7% Gross profit margin 26.5% 25.4% 25.1% 26.6% 26.7% 26.2% 28.7% 28.9% 28.6% 29.1% SG&A expenses 44,968 45,961 49,626 51,868 52,229 53,365 100,191 101,632 101,488 101,192 YoY 7.9% 7.9% 16.8% 13.7% 16.1% 16.1% 101.9% 95.9% 94.3% 89.6% SG&A rat io 20.1% 19.2% 20.6% 21.8% 20.9% 20.3% 24.7% 24.8% 23.7% 23.5% Operating profit 14,300 14,947 10,813 11,508 14,503 15,514 16,315 16,778 21,132 23,981 YoY 14.1% 8.2% 0.2% 27.2% 1.4% 3.8% 50.9% 45.8% 45.7% 54.6% Operating profit margin 6.4% 6.2% 4.5% 4.8% 5.8% 5.9% 4.0% 4.1% 4.9% 5.6% Recurring profit 14,301 16,757 12,383 13,777 17,917 17,413 16,428 16,482 20,449 25,106 YoY 11.8% 18.5% 36.4% 44.8% 25.3% 3.9% 32.7% 19.6% 14.1% 44.2% Recurring profit margin 6.4% 7.0% 5.2% 5.8% 7.2% 6.6% 4.1% 4.0% 4.8% 5.8% Net income 8,465 10,213 8,485 9,242 11,646 11,970 13,436 11,201 12,604 16,286 YoY 4.2% 22.6% -19.3% 51.4% 37.6% 17.2% 58.4% 21.2% 8.2% 36.1% Net margin 3.8% 4.3% 3.5% 3.9% 4.7% 4.5% 3.3% 2.7% 2.9% 3.8% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.
Performance by group FY06/18 FY06/19 FY06/20 Quarterlly (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Sales PPIH consolidated 223,433 239,397 240,326 238,352 250,080 263,336 405,574 409,884 428,736 430,053 YoY 11.0% 10.6% 18.8% 14.1% 11.9% 10.0% 68.8% 72.0% 71.4% 63.3% Don Quijote Group 223,433 239,397 240,326 238,352 250,080 263,336 251,389 255,244 271,226 263,805 YoY 11.0% 10.6% 18.8% 14.1% 11.9% 10.0% 4.6% 7.1% 8.5% 0.2% Uny Group ------155,063 156,683 160,886 170,150 YoY ------Gross profit PPIH consolidated 59,268 60,908 60,439 63,376 66,732 68,879 116,506 118,410 122,620 125,173 YoY 9.3% 8.0% 13.5% 15.9% 12.6% 13.1% 92.8% 86.8% 83.7% 81.7% GPM 26.5% 25.4% 25.1% 26.6% 26.7% 26.2% 28.7% 28.9% 28.6% 29.1% Don Quijote Group 59,268 60,908 60,439 63,376 66,732 68,879 63,676 65,593 71,230 70,226 YoY 9.3% 8.0% 13.5% 15.9% 12.6% 13.1% 5.4% 3.5% 6.7% 2.0% GPM 26.5% 25.4% 25.1% 26.6% 26.7% 26.2% 25.3% 25.7% 26.3% 26.6% Uny Group ------53,104 53,534 52,915 56,570 YoY ------GPM 34.2% 34.2% 32.9% 33.2% SG&A expenses PPIH consolidated 44,968 45,961 49,626 51,868 52,229 53,365 100,191 101,632 101,488 101,192 YoY 7.9% 7.9% 16.8% 13.7% 16.1% 16.1% 101.9% 95.9% 94.3% 89.6% SG&A rat io 20.1% 19.2% 20.6% 21.8% 20.9% 20.3% 24.7% 24.8% 23.7% 23.5% Don Quijote Group 44,968 45,961 49,626 51,868 52,229 53,365 53,532 54,693 54,828 55,944 YoY 7.9% 7.9% 16.8% 13.7% 16.1% 16.1% 7.9% 5.4% 5.0% 4.8% SG&A rat io 20.1% 19.2% 20.6% 21.8% 20.9% 20.3% 21.3% 21.4% 20.2% 21.2% Uny Group ------46,933 47,781 48,249 46,960 YoY ------SG&A rat io 30.3% 30.5% 30.0% 27.6% Operating profit PPIH consolidated 14,300 14,947 10,813 11,508 14,503 15,514 16,315 16,778 21,132 23,981 YoY 14.1% 8.2% 0.2% 27.2% 1.4% 3.8% 50.9% 45.8% 45.7% 54.6% OPM 6.4% 6.2% 4.5% 4.8% 5.8% 5.9% 4.0% 4.1% 4.9% 5.6% Don Quijote Group 14,300 14,947 10,813 11,508 14,503 15,514 10,144 10,900 16,402 14,282 YoY 14.1% 8.2% 0.2% 27.2% 1.4% 3.8% -6.2% -5.3% 13.1% -7.9% OPM 6.4% 6.2% 4.5% 4.8% 5.8% 5.9% 4.0% 4.3% 6.0% 5.4% Uny Group ------6,171 5,753 4,666 9,609 YoY ------OPM 4.0% 3.7% 2.9% 5.6% Source: Shared Research based on company data
09/65 Pan Pacific International Holdings / 7532 R LAST UPDATE: 2020.02.17 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp Coverage
By segment FY06/18 FY06/19 FY06/20 Cumulative (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Sales 223,433 462,830 703,156 941,508 250,080 513,416 918,990 1,328,874 428,736 858,789 YoY 11.0% 10.8% 13.4% 13.6% 11.9% 10.9% 30.7% 41.1% 71.4% 67.3% Discount Store 689,393 923,042 245,047 503,343 756,449 1,015,924 281,599 560,953 YoY - - - - 9.7% 10.1% 14.9% 11.4% GMS - - - - 133,953 266,058 128,153 260,564 YoY ------Rent 12,984 17,420 4,731 9,393 24,156 39,132 15,172 29,705 YoY - - - - 86.0% 124.6% 220.7% 216.2% Other 779 1,046 302 680 4,432 7,760 3,812 7,567 YoY - - - - 468.9% 641.9% 1162.3% 1012.8% Operating profit 14,300 29,247 40,060 51,568 14,503 30,017 46,332 63,110 21,132 45,113 YoY 14.1% 11.0% 7.9% 11.7% 1.4% 2.6% 15.7% 22.4% 45.7% 50.3% Operating profit margin 6.4% 6.3% 5.7% 5.5% 5.8% 5.8% 5.0% 4.7% 4.9% 5.3% Discount Store 39,906 51,508 14,188 29,494 39,355 49,589 14,963 28,110 YoY - - - - -1.4% -3.7% 5.5% -4.7% OPM 5.8% 5.6% 5.8% - 5.2% 4.9% 5.3% 5.0% GMS - - - - 3,141 7,039 2,864 10,005 YoY ------OPM - - - - 2.3% 2.6% 2.2% 3.8% Rent 2,067 2,768 779 1,375 4,495 7,795 3,159 6,741 YoY - - - - 117.5% 181.6% 305.5% 390.3% OPM 15.9% 15.9% 16.5% - 18.6% 19.9% 20.8% 22.7% Other -1,916 -2,691 -459 -870 -768 -1,240 12 43 YoY ------OPM -246.0% -257.3% -152.0% - -17.3% -16.0% 0.3% 0.6% Adjustments 3 -17 -5 18 109 -73 134 214 Source: Shared Research based on company data
By product category FY06/18 FY06/19 FY06/20 Cumulative (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Total sales 223,433 462,830 703,156 941,508 250,080 513,416 918,990 1,328,874 428,736 858,789 YoY 11.0% 10.8% 13.4% 13.6% 11.9% 10.9% 30.7% 41.1% 71.4% 67.3% Discount Store - - 689,393 923,042 245,047 503,343 756,449 1,015,924 281,599 560,953 YoY ------9.7% 10.1% 14.9% 11.4% Electric appliances 18,418 40,010 59,970 76,698 19,405 41,290 61,886 80,125 21,696 43,612 YoY 11.8% 12.7% 12.9% 11.3% 5.4% 3.2% 3.2% 4.5% 11.8% 5.6% % of Discount Store sales 8.7% 7.9% 8.2% 8.2% 7.9% 7.7% 7.8% Household goods 53,356 108,408 162,482 217,257 57,232 114,961 172,162 231,835 65,125 123,807 YoY 23.7% 23.5% 21.8% 18.4% 7.3% 6.0% 6.0% 6.7% 13.8% 7.7% % of Discount Store sales 23.6% 23.4% 22.8% 22.8% 22.8% 23.1% 22.1% Foods 73,231 153,557 232,745 311,565 81,143 167,943 257,625 350,897 98,753 202,219 YoY 14.6% 14.6% 14.4% 13.5% 10.8% 9.4% 10.7% 12.6% 21.7% 20.4% % of Discount Store sales 33.8% 33.1% 33.4% 34.1% 34.5% 35.1% 36.0% Watches & fashion merchandise 40,051 83,838 122,153 159,904 41,491 83,906 121,893 162,397 42,963 85,267 YoY -2.0% -2.3% 0.3% 0.9% 3.6% 0.1% -0.2% 1.6% 3.5% 1.6% % of Discount Store sales 17.7% 16.9% 16.7% 16.1% 16.0% 15.3% 15.2% Sports & leisure goods 15,803 31,079 42,549 54,946 15,821 30,871 42,570 55,889 16,199 31,290 YoY 5.2% 2.1% 3.5% 2.5% 0.1% -0.7% 0.0% 1.7% 2.4% 1.4% % of Discount Store sales 6.2% 6.5% 6.1% 5.6% 5.5% 5.8% 5.6% DIY goods 3,992 8,167 11,927 16,216 3,720 7,895 11,542 15,448 4,033 7,696 YoY 7.3% 4.8% 4.0% 2.5% -6.8% -3.3% -3.2% -4.7% 8.4% -2.5% % of Discount Store sales 1.7% 1.5% 1.6% 1.5% 1.5% 1.4% 1.4% Overseas 8,817 17,926 41,741 65,480 20,957 45,255 72,268 96,996 25,723 51,788 YoY 2.9% 6.9% 55.0% 82.3% 137.7% 152.5% 73.1% 48.1% 22.7% 14.4% % of Discount Store sales 6.1% 8.6% 9.0% 9.6% 9.5% 9.1% 9.2% Other - - 15,826 20,976 5,277 11,222 16,502 22,337 7,107 15,273 YoY ------4.3% 6.5% 34.7% 36.1% % of Discount Store sales 2.3% 2.3% 2.2% 2.2% 2.2% 2.2% 2.5% 2.7% GMS - - - - 133,953 266,058 128,153 260,564 YoY ------Electric appliances - 17,445 35,719 16,851 34,981 YoY ------% of GMS sales ‐ - 13.0% 13.4% 13.1% 13.4% Household goods - 19,370 32,378 19,764 40,965 YoY ------% of GMS sales - 14.5% 12.2% 15.4% 15.7% Foods - 92,500 185,532 86,779 175,082 YoY ------% of GMS sales - 69.1% 69.7% 67.7% 67.2% Watches & fashion merchandise - 4,638 12,429 4,759 9,535 YoY ------% of GMS sales - 3.5% 4.7% 3.7% 3.7% Source: Shared Research based on company data
10/65 Pan Pacific International Holdings / 7532 R LAST UPDATE: 2020.02.17 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp Coverage
Segment changes (applied in Q3 FY06/19)
Retail Rent Other Before (Major Nagasaki subsidiaries) DQ DOit DQ USA MURAKAI QSI PPRM JAM JCE D-One Realit PPIH PPLA ya
Uny Group UDR 99 Ichiba UNY UCS
After (Major subsidiaries) Discount Store GMS Rent Other Source: Shared Research based on company data
SG&A expenses, store count, and comparable store sales
SG&A expenses FY06/18 FY06/19 FY06/20 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 SG&A expenses 44,968 45,961 49,626 51,868 52,229 53,365 100,191 101,632 101,488 101,193 YoY 7.9% 7.9% 16.8% 13.7% 16.1% 16.1% 101.9% 95.9% 94.3% 89.6% Salaries and allowances 16,718 17,313 18,760 19,150 19,425 20,180 35,901 35,979 35,499 36,260 YoY 4.2% 7.7% 16.3% 17.6% 16.2% 16.6% 91.4% 87.9% 82.7% 79.7% Rents 6,602 6,800 7,443 7,485 7,453 7,689 13,453 13,536 13,411 13,545 YoY 17.1% 18.3% 28.0% 21.6% 12.9% 13.1% 80.7% 80.8% 79.9% 76.2% Commission fees 5,593 5,573 5,352 6,439 6,033 6,746 15,565 15,428 15,018 15,840 YoY 28.2% 10.1% 16.8% 16.7% 7.9% 21.0% 190.8% 139.6% 148.9% 134.8% Depreciation and amortization 3,343 3,498 3,896 4,078 3,669 3,940 6,193 6,210 5,830 6,134 YoY 0.1% 1.2% 9.3% 9.7% 9.8% 12.6% 59.0% 52.3% 58.9% 55.7% Other 12,712 12,777 14,175 14,716 15,648 14,810 29,079 30,480 31,730 29,413 YoY 3.3% 4.2% 14.5% 5.5% 23.1% 15.9% 105.1% 107.1% 102.8% 98.6%
Store count by format FY06/18 FY06/19 FY06/20 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Don Quijote 199 204 206 209 212 215 213 212 213 215 MEGA 40 41 42 43 43 43 43 44 44 44 New MEGA 73 77 78 80 81 83 87 88 89 89 MEGA Don Quijote Uny ------10 16 22 29 Apita / Piago ------182 176 169 162 Picasso 21 21 21 23 26 26 26 21 22 22 Kyo Yasu Do 4 3 4 4 4 4 3 4 4 4 mini Piago 74 73 73 73 Doit 17 17 17 18 17 16 15 15 15 15 Nagasakiya 2 2 2 2 2 2 2 2 2 2 Overseas 37 38 38 39 39 40 40 42 43 45
Store count by company FY06/18 FY06/19 FY06/20 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Don Quijote 294 303 306 313 320 325 327 322 325 327 Nagasakiya 40 41 42 43 43 43 43 44 44 44 UD Retail ------10 16 22 29 Uny ------182 176 169 162 Doit 17 17 17 18 17 16 15 15 15 15 Lirack 4 3 4 4 4 4 3 4 4 4 99 Ichiba 74 73 73 73 Daishin 1 1 1 1 1 1 1 1 1 1 SUM: Japan 356 365 370 379 385 389 655 651 653 655 Don Quijote (USA) 4 4 4 4 4 3 3 4 4 4 Marukai 9 9 9 9 9 10 10 10 10 10 QSI 24 24 24 24 24 24 24 24 24 24 PPRM - 1 1 2 2 2 2 3 4 5 SUM: Overseas 37 38 38 39 39 40 40 42 43 45 Total 393 403 408 418 424 429 695 693 696 700
Comparable stores FY06/18 FY06/19 FY06/20 (cumulative) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Sales increase 5.6% 4.8% 4.5% 4.1% 1.6% 0.6% 1.0% 1.2% 2.9% -0.7% Domestic 4.0% 2.8% 2.4% 1.9% 0.1% -0.8% -0.2% 0.2% 3.7% -0.3% Duty-free 1.6% 2.0% 2.1% 2.2% 1.5% 1.4% 1.2% 1.0% -0.8% -0.4% Customer count 4.6% 3.7% 3.0% 2.3% -0.9% -0.7% -0.2% 0.3% 2.2% -0.7% Customer spend 0.9% 1.1% 1.5% 1.8% 2.5% 1.3% 1.2% 0.9% 0.7% 0.0% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.
11/65 Pan Pacific International Holdings / 7532 R LAST UPDATE: 2020.02.17 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp Coverage
1H FY06/20 results (out February 5, 2020) Results summary 1H FY06/20 results: The company reported 1H consolidated sales of JPY858.8bn (+67.3% YoY), operating profit of JPY45.1bn ▷ (+50.3% YoY), and net income of JPY28.9bn (+22.3% YoY). The addition of Uny to the scope of consolidation in Q3 FY06/19 contributed to net earnings growth. The DQ Group (existing businesses outside the Uny Group) also recorded a YoY profit growth by aggressively attracting the rush to beat the consumption tax hike in Q1. 1H results surpassed the company forecast (as of November 2019) of JPY840.0bn in sales and JPY36.0bn in operating profit. PPIH revised its full-year forecast to reflect 1H results, raising its full-year outlook for sales to JPY1.67tn (from JPY1.66tn), operating profit to JPY72.0bn (from JPY68.0bn), and net income to JPY46.0bn (from JPY45.0bn), equal to EPS of JPY72.59. The company revised up its dividend forecast to JPY11.5 per share–an increase for the 17th consecutive fiscal year. Q2 results: In October–December 2019 (Q2 FY06/20), sales were JPY430.1bn (+63.3% YoY) and operating profit was ▷ JPY24.0bn (+54.6% YoY). Although the DQ Group posted a YoY profit decline because of a fallback in demand after the consumption tax hike, weaker consumer sentiment, unseasonable weather, and a drop in the number of visitors from South Korea, the addition of the Uny Group to the scope of consolidation made a substantial contribution.
Uny Group: On a net basis, the inclusion of the Uny Group in consolidated results added JPY170.2bn to sales and JPY9.6bn to operating profit (company’s unaudited estimates) in Q2 versus Q2 FY06/19. At the end of Q2, the Uny Group had 264 stores in operation versus 269 at the time of its addition to consolidated results in Q3 FY06/19. Despite the harsh operating environment, Q2 sales at existing Uny stores were down just 0.1% YoY. Uny stores converted to the dual-name format continued to generate synergy effects. The six stores converted first have continued to increase sales in their second year and are contributing to profit improvement, while the 23 stores converted in 2019 that are still in their first year posted a 69% YoY sales increase in February–December 2019.
DQ Group: The DQ Group reported Q2 sales of JPY263.8bn (+0.2% YoY), gross profit of JPY70.2bn (+2.0% YoY), and operating profit of JPY14.3bn (-7.9% YoY). At the end of Q2, the DQ Group had 436 stores in operation (+1.6% YoY) for a net increase seven stores versus the end of Q2 FY06/19. Comparable store sales at Don Quijote stores were down 0.7% YoY, of which domestic demand had a 0.3pp and duty-free sales 0.4pp negative effect. The decline in domestic demand was small considering adverse operating conditions for the retail business overall, such as frontloaded demand ahead of the consumption tax hike, a weakening of consumer sentiment after the tax hike, and unseasonable weather such as
major typhoons and a warm winter. Despite the decline in inbound tourist demand stemming from a drop in the number of visitors from South Korea, an increase in visitors from China, other Asian countries, North America, and Europe compensated. We can see that the company is minimizing the impact of factors inhibiting growth, such as the DQ Group supplying personnel to the Uny Group to generate synergy effects. Revised FY06/20 forecast: The company revised up its full-year forecasts to reflect 1H results. Based on the revised forecasts, ▷ PPIH forecasts 2H sales of JPY811.2bn (-0.5% YoY) and operating profit of JPY26.9bn (-18.8%). The company commented that its forecast assumes a 1.8% YoY decline in comparable store sales at Don Quijote stores and flat YoY sales at Uny stores. We think these forecasts are conservative, although the risk remains of the coronavirus outbreak reducing visitor numbers from China.
New medium- to long-term management plan Passion 2030
Passion 2030: The new medium- to long-term management plan formulated under the leadership of Naoki Yoshida who took ▷ over as President and CEO in September 2019, has been named Passion 2030. The company has increased in scale to become
12/65 Pan Pacific International Holdings / 7532 R LAST UPDATE: 2020.02.17 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp Coverage
Japan’s sixth-largest retailer in terms of market capitalization. The plan’s name indicates that despite its size, the management team sees the company as always being a fighter, maintaining the passion to grow even larger. The new plan covers a period of 10 years, which is likely to extend beyond President Yoshida’s term in office. Yoshida commented that his goal is to build a solid foundation for the longer term and achieve operating profit of JPY100bn during his term. Numerical targets: The 2030 operating profit target is JPY200bn, which assumes sales of JPY3tn (OPM of 6.7%). The company ▷ aims to achieve this target by expanding existing businesses to earn operating profit of JPY150bn, to which profit from the following is added. 1) Becoming a specialty store retailer of its own food brands, i.e., applying the apparel industry’s specialty store retailer of private label apparel (SPA) business model to food retailing by planning, manufacturing, and selling private brand products to drive merchandising reforms. 2) Cost optimization. 3) Strengthening financial services business. JPY2tn domestic sales: The company seeks JPY2tn in domestic sales while strengthening its earnings capability as a ▷ one-of-a-kind retailer (its current domestic sales is roughly JPY1.6tn). Management priorities in Japan are optimizing management resources through portfolio management and maximizing synergies; reviving the GMS business and restructuring its earnings; promoting digital strategies (use of data and AI in ways that support the sales floor); expanding the financial services business and making it profitable (e.g., by utilizing subsidiary UCS); and optimizing cost structure to strengthen competitiveness. Overseas sales target of JPY1tn: PPIH’s overseas sales are slightly over JPY100bn at this stage, but the company targets JPY1tn in ▷ overseas sales by establishing and expanding the Japanese brand specialty store business. The company plans to expand its
store network mainly in the ASEAN region in the short term and establish a business format for moving into North America at an early opportunity. Initiatives include creating new business formats centered on Japanese brands, becoming a specialty store retailer of its own food brands, expanding business in Asia, building a foundation and establishing a business format for expansion into North America, and developing a global shared service structure. Making the most of its management team: The company thinks there is ample room for development in its business. Initiatives ▷ include creating a new way to utilize GMS other than the chain store format, devising new store formats that serve central city
and small trade areas, targeting niche markets, applying the apparel industry’s SPA model to food, and utilizing data and AI. The company has grown its sales by a top-down management model driven by powerful leaders. Going forward, the management team intends to speed up decision-making by sharing information, utilize talent, and foster human resources. By doing so, we think the company will evolve into an organization in which a large team supports the sales floor.
Consolidated earnings
1,000 Sales YoY 80% 50 Operating profit YoY 60% 50 Recurring profit YoY 35% 70% 50% 30% 800 40 40 60% 25% 40% 50% 600 30 30 20% 40% 30% 15% 400 30% 20 20 20% 20% 10% 200 10 10 10% 10% 5%
0 0% 0 0% 0 0% (JPYbn) FY06/11FY06/13FY06/15FY06/17FY06/19 (JPYbn)FY06/11FY06/13FY06/15FY06/17FY06/19 (JPYbn)FY06/11FY06/13FY06/15FY06/17FY06/19 Source: Shared Research based on company data
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Results of the Don Quijote Group
Comparable store sales 15% Sales (comparable stores) Customer count (comparable stores) Customer spend (comparable stores) 10%
5%
0%
-5%
-10% Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Source: Shared Research based on company data
Gross profit margin (left) and SG&A ratio (right)
35% Consolidated Don Quijote group 35% Consolidated Don Quijote group 29%29%29%29% 30% 27%27%27%26%27%26%26%26%27% 27%27%26% 30% 25%25% 25%25% 24%24% 25% 27% 27% 25% 22%22% 22% 22% 27% 27%26% 26%26%26%27% 27%27%26% 26%26%27% 21% 21% 21% 21% 21%20% 25%25% 25% 20% 20% 20%19% 20% 20% 22%22% 22% 22% 21% 21% 21% 21% 21% 21%20%21% 21% 20% 20% 20%19% 20% 15% 15%
10% 10%
5% 5%
0% 0% Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 Source: Shared Research based on company data
Inbound tourists
Customer count ('000; right axis) Electric appliances Household goods 50 Customer spend (JPY'000) 500 Foods Watches and fashion Tourists visiting Japan (10,000; right axis) Sports and leisure goods Duty-free, % of total sales (left axis) 40 400 10%
30 300 8% 6% 20 200 4% 10 100 2%
0 0 0% Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 2015 2016 2017 2018 2019 2020 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 Source: Shared Research based on company data
Store count by format
695 693 696 700 700 Don Quijote Picasso MEGA and New MEGA DOit Nagasakiya 74 73 73 73 600 Overseas MEGA Don Quijote Uny Apita / Piago mini Piago 182 176 169 162 500 418 424 429 10 16 22 29 393 403 408 354 360 368 40 40 42 43 45 400 341 348 38 38 39 39 306 311 319 322 14 37 286 291 295 14 14 14 14 300 14 14 14 14 123 124 126 130 132 133 133 14 14 14 104 107 112 113 118 120 88 94 100 75 77 81 85 30 30 29 26 68 71 23 23 23 24 25 25 24 25 27 25 26 200 17 18 18 18 20 21 21 215 215 100 172 173 175 183 182 184 184 194 195 196 197 198 199 204 206 209 212 213 212 213 0 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 Source: Shared Research based on company data
14/65 Pan Pacific International Holdings / 7532 R LAST UPDATE: 2020.02.17 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp Coverage
Store openings and closures
695 693 696 700 25 New store openings Store closures Store count (right axis) 700 20 600 15 500 418 424 429 393 403 408 368 10 341 348 354 360 400 311 319 322 286 291 295 306 12 11 19 5 9 10 10 8 300 6 9 7 11 6 6 6 6 6 7 3 5 4 4 5 0 200 -2 -1 -1 -2 -2 -2 -1 -1 -2 -5 -3 -3 -3 -1 100 -5 -10 -7 0 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 -10 Q1 Q3 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 Source: Shared Research based on company data
Don Quijote, MEGA, and NEW MEGA, MEGA Don Quijote UNY store openings in Japan (including scrap and build, and format changes)
12 Don Quijote MEGA Picasso, other MEGA Don Quijote Uny
10
8
6
4
2
0 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20
Source: Shared Research based on company data
SG&A expenses
120 Salaries and allowances Rents Commission paid Depreciation Other 100.2 101.6 101.5 101.2 100 29.1 30.5 31.7 29.4 80
53.4 60 49.6 51.9 52.2 45.6 46.0 15.6 15.4 15.0 15.8 41.5 41.7 42.6 42.5 45.0 38.8 38.4 39.0 39.8 14.8 33.8 34.4 35.6 14.2 14.7 15.6 13.5 13.5 13.4 13.5 40 12.3 12.4 14.0 12.7 12.8 11.7 11.8 11.4 11.6 12.2 12.3 10.6 10.9 5.4 6.4 6.0 6.7 11.0 5.5 5.6 5.6 4.8 4.3 4.6 4.5 5.0 4.4 5.1 4.6 7.4 7.5 7.5 7.7 20 3.7 4.1 3.9 5.4 5.6 5.7 5.8 6.2 6.6 6.8 35.9 36.0 36.3 4.5 4.6 4.9 5.0 5.2 5.1 5.2 35.5 19.2 19.4 20.2 12.0 12.4 12.8 14.0 14.2 14.8 15.1 15.2 16.0 16.1 16.1 16.3 16.7 17.3 18.8 0 (JPYbn) Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 FY06/20 Source: Shared Research based on company data
New medium- to long-term management plan Passion 2030
FY06/19 FY06/20 FY06/30 10-year (JPYbn) Act. Est. MTP CA GR Sales 1,329 1,670 3,000 8.5% YoY 41.1% 25.7% Japan 2,000 Overseas 1,000 Operating profit 63 72 200 12.2% YoY 22.4% 14.1% OPM 4.7% 4.3% 6.7% Source: Shared Research based on company data
For details on previous results, please refer to the Historical financial statements section.
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Full-year company forecasts
FY06/19 FY06/20 Est. FY06/20 Est. (as of Nov. 6, 2019) FY06/20 Initial Est. (JPYmn) 1H 2H FY 1H 2H FY 1H 2H FY 1H 2H FY Sales 513,416 815,458 1,328,874 858,789 811,211 1,670,000 840,000 820,000 1,660,000 830,000 820,000 1,650,000 YoY 10.9% 70.4% 41.1% 67.3% -0.5% 25.7% 63.6% 0.6% 24.9% 61.7% 0.6% 24.2% Gross profit 135,611 234,916 370,527 247,793 230,207 478,000 238,000 232,000 470,000 234,000 232,000 466,000 YoY 12.8% 89.7% 51.9% 82.7% -2.0% 29.0% 75.5% -1.2% 26.8% 72.6% -1.2% 25.8% GPM 26.4% 28.8% 27.9% 28.9% 28.4% 28.6% 28.3% 28.3% 28.3% 28.2% 28.3% 28.2% SG&A expenses 105,594 201,823 307,417 202,680 203,320 406,000 202,000 200,000 402,000 200,000 200,000 400,000 SG&A rat io 20.6% 24.7% 23.1% 23.6% 25.1% 24.3% 24.0% 24.4% 24.2% 24.1% 24.4% 24.2% Operating profit 30,017 33,093 63,110 45,113 26,887 72,000 36,000 32,000 68,000 34,000 32,000 66,000 YoY 2.6% 48.3% 22.4% 50.3% -18.8% 14.1% 19.9% -3.3% 7.7% 13.3% -3.3% 4.6% OPM 5.8% 4.1% 4.7% 5.3% 3.3% 4.3% 4.3% 3.9% 4.1% 4.1% 3.9% 4.0% Recurring profit 35,330 32,910 68,240 45,555 26,445 72,000 36,000 32,000 68,000 34,000 32,000 66,000 YoY 13.8% 25.8% 19.3% 28.9% -19.6% 5.5% 1.9% -2.8% -0.4% -3.8% -2.8% -3.3% RPM 6.9% 4.0% 5.1% 5.3% 3.3% 4.3% 4.3% 3.9% 4.1% 4.1% 3.9% 4.0% Net in co me 23,616 24,637 48,253 28,890 17,110 46,000 21,800 23,200 45,000 21,000 24,000 45,000 YoY 26.4% 39.0% 32.5% 22.3% -30.6% -4.7% -7.7% -5.8% -6.7% -11.1% -2.6% -6.7% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.
PPIH announced a revision to its full-year forecast at the same time as disclosing 1H FY06/20 results. The following is based on company comments made before the revised earnings forecast announcement. Shared Research plans to update the report after interviews with the company.
For FY06/20, the company forecasts full-year sales of JPY1.66tn (+24.9% YoY), operating profit of JPY68.0bn (+7.7% YoY), recurring profit of JPY68.0bn (-0.4% YoY), and net income of JPY45.0bn (-6.7% YoY).
When it announced Q1 results, PPIH also made an upward revision to its full-year targets for sales, operating profit, and recurring profit (its initial forecast called for sales of JPY1.65tn, operating profit of JPY66.0bn, recurring profit of JPY66.0bn, and net income of JPY45.0bn) to reflect the fact that Q1 results exceeded the initial forecast. However, the company did not simply reflect the amounts by which the forecast was exceeded in Q1, instead taking possible negative impacts into account. It believes it necessary to factor in changes in consumer sentiment, including a drop in spending after the consumption tax hike at the beginning of October and the impact of government-led measures to ease the effects of the hike, including a system providing reward points for cashless payments.
The company expects the addition of Uny as a consolidated subsidiary to push up 1H consolidated sales by 63.6% YoY and 1H consolidated operating profit by 19.9% YoY. In contrast, it still expects Uny to add only 0.6% YoY to 2H consolidated sales and push down 2H consolidated operating profit by 3.3% YoY (PPIH has made no changes to its initial 2H forecast).
PPIH expects even fiercer competition in the retail industry, with a widening gap in performance between companies and stores, and further acceleration of store closures and industry consolidation. However, it does not necessarily view the situation as bleak. The company already has experience at increasing its share in the retail industry by targeting family-oriented needs in the face of a cooldown in consumer spending. It therefore sees the current environment as an opportunity for growth and intends to maintain its aggressive management stance.
Specifically, PPIH aims to maintain growth by: 1) promoting development of stores that match the size and features of each trade area, prioritizing “big convenience and discount” type stores represented by Don Quijote stores and family-oriented, large discount stores (mainly MEGA Don Quijote); 2) making further progress in converting Uny stores to dual-name format to maximize the effect of making Uny a subsidiary; and 3) aggressively developing overseas stores, mainly in the US and Southeast Asia.
In FY06/20, there will be more than 25 stores that have been converted to the dual-name format, more than the 10 converted stores the company had in FY06/19. Stores targeted for conversion generate JPY200-300mn/month in sales and will not be able to contribute to gross profit during the period of preparation before conversion. The opportunity loss from temporary store closures for conversion could be about JPY5.0bn for the year.
16/65 Pan Pacific International Holdings / 7532 R LAST UPDATE: 2020.02.17 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp Coverage
The company looks for a recurring profit decline. In FY06/19, it recorded a non-operating income of JPY5.1bn, due in part to the contribution of JPY6.0bn equity-method investment profit, but forecasts zero non-operating income in FY06/20.
Historical forecast accuracy
Results vs. Initial Est. FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Sales Initial Est. 497,000 510,000 528,900 560,000 596,300 634,000 730,000 820,000 880,000 1,000,000 Results 487,571 507,661 540,255 568,377 612,424 683,981 759,592 828,798 941,508 1,328,874 Results vs. Initial Est. -1.9% -0.5% 2.1% 1.5% 2.7% 7.9% 4.1% 1.1% 7.0% 32.9% Operating profit Initial Est. 18,000 23,000 27,000 30,500 33,500 34,800 39,800 45,000 48,000 53,000 Results 21,067 25,336 29,320 32,369 34,292 39,103 43,185 46,185 51,568 63,110 Results vs. Initial Est. 17.0% 10.2% 8.6% 6.1% 2.4% 12.4% 8.5% 2.6% 7.4% 19.1% Recurring profit Initial Est. 17,800 22,000 26,800 30,300 34,000 35,600 40,800 45,500 48,000 58,000 Results 21,109 25,138 29,283 33,201 35,487 40,160 43,797 45,523 57,218 68,240 Results vs. Initial Est. 18.6% 14.3% 9.3% 9.6% 4.4% 12.8% 7.3% 0.1% 19.2% 17.7% Net income Initial Est. 10,000 11,600 14,000 20,000 21,500 21,500 23,300 26,800 28,000 37,000 Results 10,238 12,663 19,845 21,141 21,471 23,148 24,938 33,082 36,405 48,253 Results vs. Initial Est. 2.4% 9.2% 41.8% 5.7% -0.1% 7.7% 7.0% 23.4% 30.0% 30.4% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.
The company conducted a 4-for-1 stock split with September 1, 2019, as the record date. The annual dividend of JPY11.0 per share indicated for FY06/20 represents an increase of JPY1.0 per share. For FY06/20, the company forecasts a dividend payout ratio of 15.5%. In the medium term, it targets a dividend payout ratio of at least 20% with a progressive dividend policy (increasing dividends in line with sustained earnings growth).
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Performance by segment
FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Total sales 487,571 507,661 540,255 568,377 612,424 683,981 759,592 828,798 941,508 1,328,874 YoY 1.4% 4.1% 6.4% 5.2% 7.7% 11.7% 11.1% 9.1% 13.6% 41.1% Retail 416,183 487,875 519,891 546,930 590,076 659,931 733,334 801,802 913,497 YoY 11.4% 17.2% 6.6% 5.2% 7.9% 11.8% 11.1% 9.3% 13.9% % of total sales 85.4% 96.1% 96.2% 96.2% 96.4% 96.5% 96.5% 96.7% 97.0% Discount Store 923,042 1,015,924 YoY - 10.1% % of total sales 98.0% 76.4% GMS 266,058 YoY - % of total sales - 20.0% Rent 15,737 15,669 15,453 16,370 17,092 18,200 19,781 20,559 21,295 39,132 YoY -1.1% -0.4% -1.4% 5.9% 4.4% 6.5% 8.7% 3.9% 3.6% 124.6% % of total sales 3.2% 3.1% 2.9% 2.9% 2.8% 2.7% 2.6% 2.5% 2.3% 2.9% Other 1,645 4,117 4,911 5,078 5,256 5,850 6,478 6,437 6,716 7,760 YoY -39.2% 150.3% 19.3% 3.4% 3.5% 11.3% 10.7% -0.6% 4.3% 641.9% % of total sales 0.3% 0.8% 0.9% 0.9% 0.9% 0.9% 0.9% 0.8% 0.7% 0.6% Operating profit 21,067 25,336 29,320 32,369 34,292 39,103 43,185 46,185 51,568 63,110 YoY 22.7% 20.3% 15.7% 10.4% 5.9% 14.0% 10.4% 6.9% 11.7% 22.4% OPM 4.3% 5.0% 5.4% 5.7% 5.6% 5.7% 5.7% 5.6% 5.5% 4.7% Retail 16,381 19,821 22,008 25,327 24,381 21,417 22,746 23,693 27,760 YoY 37.7% 21.0% 11.0% 15.1% -3.7% -12.2% 6.2% 4.2% 17.2% OPM 3.9% 4.1% 4.2% 4.6% 4.1% 3.2% 3.1% 3.0% 3.0% Discount Store 51,508 49,589 YoY - -3.7% OPM 5.6% 4.9% GMS 7,039 YoY - OPM 2.6% Rent 4,336 4,485 5,710 4,952 6,505 12,714 14,159 16,123 17,237 7,795 YoY -5.6% 3.4% 27.3% -13.3% 31.4% 95.4% 11.4% 13.9% 6.9% 181.6% OPM 27.6% 28.6% 37.0% 30.3% 38.1% 69.9% 71.6% 78.4% 80.9% 19.9% Other 597 1,174 1,843 2,025 3,540 5,372 6,733 6,395 6,329 -1,240 YoY 12.0% 96.6% 57.0% 9.9% 74.8% 51.8% 25.3% -5.0% -1.0% - OPM 36.3% 28.5% 37.5% 39.9% 67.4% 91.8% 103.9% 99.3% 94.2% -16.0% Adjustments -153 -144 -241 65 -134 -400 -453 -26 242 -73 Source: Shared Research based on company data
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Sales breakdown
FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Retail 416,183 487,875 519,891 546,930 590,076 659,931 733,334 801,802 913,497 YoY 11.4% 17.2% 6.6% 5.2% 7.9% 11.8% 11.1% 9.3% 13.9% Discount Store 923,042 1,015,924 YoY - 10.1% Electric appliances 51,069 56,210 56,049 55,773 54,469 56,842 60,978 68,912 76,698 80,125 YoY -1.8% 10.1% -0.3% -0.5% -2.3% 4.5% 7.3% 13.0% 11.3% 4.5% % of total sales 10.5% 11.1% 10.4% 9.8% 8.9% 8.3% 8.0% 8.3% 8.1% 6.0% Household goods 93,090 108,691 117,420 125,549 136,203 137,260 157,288 183,505 217,257 231,835 YoY 15.8% 16.8% 8.0% 6.9% 8.5% 13.0% 14.6% 16.7% 18.4% 6.7% % of total sales 19.1% 21.4% 21.7% 22.1% 22.2% 20.1% 20.7% 22.1% 23.1% 17.4% Foods 114,272 143,569 154,385 161,871 180,619 208,541 242,215 274,553 311,565 350,897 YoY 32.1% 25.6% 7.5% 4.8% 11.6% 15.5% 16.1% 13.4% 13.5% 12.6% % of total sales 23.4% 28.3% 28.6% 28.5% 29.5% 30.5% 31.9% 33.1% 33.1% 26.4% Watches & fashion merchandise 91,109 107,833 119,246 130,476 132,395 147,462 154,183 158,451 159,904 162,397 YoY 6.8% 18.4% 10.6% 9.4% 1.5% 7.0% 4.6% 2.8% 0.9% 1.6% % of total sales 18.7% 21.2% 22.1% 23.0% 21.6% 21.6% 20.3% 19.1% 17.0% 12.2% Sports & leisure goods 26,240 29,564 30,728 33,022 34,588 47,310 51,722 53,596 54,946 55,889 YoY 6.8% 12.7% 3.9% 7.5% 4.7% 6.4% 9.3% 3.6% 2.5% 1.7% % of total sales 5.4% 5.8% 5.7% 5.8% 5.6% 6.9% 6.8% 6.5% 5.8% 4.2% DIY goods 16,020 16,668 17,798 17,193 17,794 16,535 15,493 15,814 16,216 15,448 YoY -23.0% 4.0% 6.8% -3.4% 3.5% -7.1% -6.3% 2.1% 2.5% -4.7% % of total sales 3.3% 3.3% 3.3% 3.0% 2.9% 2.4% 2.0% 1.9% 1.7% 1.2% Overseas 16,967 15,226 12,940 13,731 24,645 35,591 39,842 35,925 65,480 96,996 YoY -6.0% -10.3% -15.0% 6.1% 79.5% 44.4% 11.9% -9.8% 82.3% 48.1% % of total sales 3.5% 3.0% 2.4% 2.4% 4.0% 5.2% 5.2% 4.3% 7.0% 7.3% Other 7,416 10,113 11,327 9,314 9,364 10,390 11,612 11,046 11,431 22,337 YoY 23.3% 36.4% 12.0% -17.8% 0.5% 6.4% 11.8% -4.9% 3.5% 6.5% % of total sales 1.5% 2.0% 2.1% 1.6% 1.5% 1.5% 1.5% 1.3% 1.2% 1.7% GMS 266,058 YoY - Electric appliances 35,719 YoY - % of total sales 2.7% Household goods 32,378 YoY - % of total sales 2.4% Foods 185,532 YoY - % of total sales 14.0% Watches & fashion merchandise 12,429 YoY - % of total sales 0.9% Source: Shared Research based on company data
Capital expenditures and depreciation
FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 (JPYmn) Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Capit al expendit ures 22,849 37,872 23,563 29,914 35,563 52,727 51,570 45,357 56,061 49,908 Cash flow basis 23,172 25,577 28,641 29,859 30,944 34,646 36,881 46,661 48,603 76,138 Difference 323 -12,295 5,078 -55 -4,619 -18,081 -14,689 1,304 -7,458 26,230 Depreciat ion and amort izat ion 9,823 9,908 10,474 11,051 11,408 13,003 15,092 15,952 17,378 23,722 Depreciat ion 9,372 9,385 9,566 10,026 10,402 11,672 13,301 14,075 14,815 20,012 Difference 451 523 908 1,025 1,006 1,331 1,791 1,877 2,563 3,710 EBITDA 30,890 35,244 39,794 43,420 45,700 52,106 58,277 62,137 68,946 86,832 YoY 18.5% 14.1% 12.9% 9.1% 5.3% 14.0% 11.8% 6.6% 11.0% 25.9% EBITDA margin 6.3% 6.9% 7.4% 7.6% 7.5% 7.6% 7.7% 7.5% 7.3% 6.5% Source: Shared Research based on company data
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Long-term strategy and focus points going forward Current medium-term plan Targets of medium-term plan ending FY06/20 The company announced its medium-term targets for FY06/20 (Vision 2020) in August 2015. Numerical targets for FY06/20 were sales of JPY1tn, 500 stores, and ROE of 15%. In FY06/19, sales were JPY1.3tn, the total number of group stores at year-end was 693, and ROE was 15.6%, attaining Vision 2020 targets a year early. President Koji Ohara, who spearheaded Vision 2020, personally put into practice the foundational management principle of delegating authority to employees before resigning from his post in September 2019.
The next medium-term plan will by formulated under the leadership of Ohara’s successor Naoki Yoshida, who took the helm in September 2019. The new plan is due to be announced in February 2020 and is believed to target sales of JPY2tn and operating profit of JPY100bn. The company’s founder Takao Yasuda has commented that in accordance with the foundational management principles, presidents should not serve for too long, and he expects to set the president’s term limit at around four years. In addition, although management has been led by someone who climbed the ranks from sales until now, the company is changing to a team management structure in which the sales department is led by a team of executives, centered on four managing executive officers, who each take on leading roles in their areas of expertise. President Yoshida says the PPIH group will take up new challenges, responding to market changes as it works to make its unique business style a more integral part of customers’ lives (with the addition of a new earnings model that uses a long-term view of time, including consideration of the lifetime value of customers) and carries on its tradition of creating new business formats. PPIH’s next medium-term business plan, in which what sort of foundation the company aims to establish over the next four years, warrants close attention.
Focus point 1: Domestic business Its priority in the domestic business is to leverage the GMS stores of Uny, which became a consolidated subsidiary in January 2019. Prior to this, Uny’s earnings structure relied heavily on revenue from tenants of its GMS facilities and its retail business itself was posting a loss of around JPY20bn per year. Eliminating this loss to make the retail business profitable alone would add JPY20bn to profits and can be regarded as a major growth driver for the group. Based on various methodologies, PPIH estimates that harnessing and revitalizing Uny could add around JPY20bn to profits.
Established business model for dual-name stores Based on a capital and business alliance concluded in August 2017, the company transferred six Uny stores (APiTA and PIAGO stores) to newly established subsidiary UD Retail Co., Ltd. Under this new management structure, the six stores were converted to a dual-name format (MEGA Don Quijote UNY and Don Quijote UNY) to revitalize their business. The first dual-name store (Oguchi store) opened in February 2018. Sharing the company’s management principles of making customers the utmost priority, delegating authority, and store autonomy with Uny and harnessing the experience of Uny’s employees yielded growth of 97% in sales and 72% in gross profit in FY02/19, and turned the stores profitable. Sales shot up following the dual-name conversions as young families, younger consumers, and foreign residents in Japan joined the core customer base of primarily female middle-aged consumers and seniors.
However, the company does not regard this as the completed dual-name store model, seeing scope for further sales expansion driven by non-food items such as daily necessities. We expect the company to continue making improvements by acquiring more knowledge on demand characteristics of each region and adapting to competitors’ trends in the same trade area. The company also sees scope to improve profitability further. Loss leaders and spending on advertising and promotions needed to attract customers when stores first open must be streamlined, as well as increasing the share of non-food items with relatively high GPM to improve overall profitability. We are also focusing on the spread of majica, its loyalty program to stabilize its customer base.
A change in the motivation of Uny employees is another factor likely to contribute to earnings improvement. Uny previously had a centralized management style, with its headquarters controlling the operations of individual stores. After conversion to dual-name stores, employees have had to think for themselves what they need to do to offer customers an enjoyable shopping experience that is convenient and saves them money. Sales growth teaches them the effectiveness of the actions they take, making for a rewarding work experience in the retail business. The company observes enhanced motivation among former Uny
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employees working in dual-name stores, which it expects to spread to other Uny employees. Kenji Sekiguchi, who became president of Uny in April 2019, met with all Uny employees (some 4,200) during 66 small meetings. Starting in October 2019, he has also been meeting with part-time and temporary employees working at Uny to resolve any uncertainty or concerns about changes to company operations and to collect feedback from the field. Dual-name stores are run by a partnership of employees seconded from Don Quijote and Uny. The company plans to have these stores run solely by former Uny employees within three years of conversion.
The company plans to increase the number of dual-name stores to over 100 by end-FY06/22 at a pace of 16 stores at end-FY06/19, around 40 stores at end-FY06/20, and 70 stores at end-FY06/21. As a general rule, newly opened and remodeled stores take five to seven years before posting peak sales. We are focusing on the potential for adding JPY20bn to profit, although it may take longer than expected before the effect of format conversion can be maximized.
Post-GMS formats Shared Research believes that the company may be looking ahead to the next step in its evolution once it has confirmed the effects of dual-name stores. One of the priorities of its current medium-term plan is to establish a post-GMS format. If the double-name store format proves successful in attracting customers and making a profit, the company can formulate a strategy of aggressively targeting the GMS market worth an estimated JPY13tn more than ever before. We see potential for the company to gain market share at a faster pace than opening stores independently by effective utilization of Uny stores that are not yet destined to convert to dual-name stores, and acquiring GMS and supermarkets with good store locations that they have failed to take full advantage of. We are focusing on acceleration of its post-GMS strategies at stores other than dual-name stores.
Growth of core Don Quijote business The company’s growth strategy for its core Don Quijote business is also of interest. Main strategies for sustained comparable store sales include attracting inbound demand, establishing a loyal customer base by utilizing IT (increase repeat customers), and expanding private brands centered on Jonetsu Kakaku and other original product items. We think the number of employees available to open new stores is limited, because many are being seconded to subsidiary UD Retail to stabilize the performance of dual-name stores, but its medium-term store opening plan remains a priority.
Marshmallow Initiative: In October 2019, PPIH announced establishment of a subsidiary for promoting its Marshmallow Initiative, which aims to respond to the new era the retail industry has entered, provide improved shopping experiences to customers, and deepen customer understanding. With increasing use of smartphones, consumers are changing the ways in which they obtain product information, the volume of that information is increasing, and there is greater diversity in their sense of value. In light of these developments, PPIH believes it must employ revolutionary initiatives instead of sticking with conventional marketing methods. Under the Marshmallow Initiative, in addition to efforts related to entertainment-oriented store management and products, which are the company’s strengths, PPIH will work with outside experts with diverse experience in technology in particular to optimize pricing, analyze consumer needs, and develop new financial services. At present, the Marshmallow Initiative has four parts: 1) Green Marshmallow is a project based on a capital and business alliance with FISM (unlisted). The project will use FISM’s strengths (its influencer network, influencer marketing, and data analysis technologies) and PPIH’s sales network of brick-and-mortar stores and its vast consumer data to analyze preferences and buying behavior on social media and promote marketing strategies. 2) Blue Marshmallow is a project involving PPIH’s first attempt at adopting artificial intelligence technology to optimize pricing and achieve more efficient inventory turnover by combining intuition, experience, and pluck with data science. 3) Yellow Marshmallow involves an advisory committee comprising teenagers who consider the next-generation retail industry with a focus on potential future trends. 4) Purple Marshmallow is an accelerator program based on a business alliance with Plug and Play Japan (unlisted) for collaboration with startups in the retail and financial fields. Marshmallow Co., Ltd., the subsidiary promoting the initiative, is seeking CEO candidates as of December 3.
PPIH also expects to expand financial services focused on majica digital cash, which has been promoted through Don Quijote, MEGA Don Quijote, and other stores. From spring 2020, customers will be able to use majica at APiTA and PIAGO stores, pushing the total number of stores where majica can be used above 600. What sort of earnings contribution can be gained, not just via coupons and reward points associated with majica, but also by leveraging various financial services and data, deserves particular attention. Sales of the uniko card, which has been provided by Uny until now, will be discontinued at the end of December 2019, and plans are to end its use entirely at the end of April 2020 (with some services being transferred to majica).
21/65 Pan Pacific International Holdings / 7532 R LAST UPDATE: 2020.02.17 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp Coverage
Enhancing alliance with FamilyMart After forming an alliance with FamilyMart Uny Holdings (now FamilyMart; TSE1: 8028) in August 2017, the company explored the following ideas: 1) sell Don Quijote products in FamilyMart stores, 2) joint development, purchasing, and promotions, 3) streamlining logistics functions, 4) collaboration in overseas markets and development of new formats, 5) personnel exchange, and 6) financial services. Although 1) showed some positive effects at three directly operated FamilyMart stores (30% YoY increase in daily turnover, 10% increase in customer traffic, and threefold increase in daily necessities), the company has no plans to expand these measures. We see no signs of the alliance expanding in scope, given that the FamilyMart Uny Holdings briefing only mentioned collaboration with PPIH in joint development of products and services, financial services (Pocket Card), and overseas expansion in Taiwan and elsewhere. In August 2019, FamilyMart Uny Holdings announced its “Plan to Acquire Additional Shares in PPIH,” in which it made clear its intention to acquire more shares and raise its current stake to 10–15% by August 2020. PPIH intends to focus on strengthening the alliance with FamilyMart and its parent, Itochu Corporation (TSE1: 8001).
Focus point 2: Overseas business focusing on the US and Asia Overseas sales in the Discount Store business were only JPY97.0bn (7.3% of total sales) in FY06/19. The scale of overseas business is still not large enough for it to be considered a main driver of profit growth in the company’s next medium-term plan. However, it is important to the company as a seed of longer-term growth.
In the US, the main businesses are Don Quijote (USA), which operates Don Quijote stores converted from stores acquired from Daiei in Hawaii; supermarket chain Marukai Corporation, whose stores are mainly in California; and QSI, Inc., a company that runs supermarkets in Hawaii. Koji Ohara, who left the position of president in September 2019, had labeled the US market a potential goldmine. The US economy remains strong and consumption continues to grow, while some retailers are struggling, which provides opportunities to obtain fitted-out properties at bargain prices. As well, the new Tokyo Central format, which sells food and variety goods imported from Japan as well as US national brands in stores with a live entertainment factor, has proved popular among US consumers.
The company opened its first Singapore store DON DON DONKI Orchard Central store in December 2017. Since then, the company has accelerated overseas expansion, opening stores in Singapore, Thailand, and Hong Kong. DON DON DONKI stores are specialty stores that almost exclusively sell products made in Japan or destined for the Japanese market. Like Tokyo Central, these stores are equipped with open-plan kitchens. The response to selling methods with an entertainment factor such as demonstrations of Japanese-style cooking in an open-plan kitchen has been favorable. Takao Yasuda, the founder of Don Quijote, is head of the ASEAN business, which is based in Singapore. At some stores, such as the one in Thailand, strict import restrictions have made procurement more difficult than expected (resulting in product shortages), but most of the stores opened so far have been thriving. The company plans to prioritize the cultivation of ASEAN markets, because stores in the ASEAN region have been successful and it has received many requests from developers to open stores in their properties.
22/65 Pan Pacific International Holdings / 7532 R LAST UPDATE: 2020.02.17 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp Coverage
Business
Group companies
The PPIH group consists of one holding company (Pan Pacific International Holdings), 72 consolidated subsidiaries, 12 unconsolidated subsidiaries, two equity-method affiliates, and eight non-equity method affiliates (as of June 30, 2019). Uny and its affiliates joined the group in January 2019.
Performance by company
Performance by company FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 (JPYmn) Sales (consolidat ed) 487,571 507,661 540,255 568,377 612,424 683,981 759,592 828,798 941,508 1,328,874 YoY 1.4% 4.1% 6.4% 5.2% 7.7% 11.7% 11.1% 9.1% 13.6% 41.1% Operating profit (consolidated) 21,067 25,336 29,320 32,369 34,292 39,103 43,185 46,185 51,568 63,110 YoY 22.7% 20.3% 15.7% 10.4% 5.9% 14.0% 10.4% 6.9% 11.7% 22.4% OPM 4.3% 5.0% 5.4% 5.7% 5.6% 5.7% 5.7% 5.6% 5.5% 4.7% Don QDQHD and Don Quijote Sales 326,708 346,559 368,109 394,261 423,232 480,838 544,809 609,414 679,732 734,616 YoY 6.1% 6.1% 6.2% 7.1% 7.3% 13.6% 13.3% 11.9% 11.5% 8.1% Operating profit 17,210 19,685 21,144 23,476 21,168 25,546 28,353 31,504 36,013 47,666 YoY 18.2% 14.4% 7.4% 11.0% -9.8% 20.7% 11.0% 11.1% 14.3% 32.4% OPM 5.3% 5.7% 5.7% 6.0% 5.0% 5.3% 5.2% 5.2% 5.3% 6.5% DOit Sales 19,723 19,435 20,719 20,048 19,879 17,438 16,403 16,708 16,820 15,873 YoY -17.3% -1.5% 6.6% -3.2% -0.8% -12.3% -5.9% 1.9% 0.7% -5.6% Operating profit 1,508 735 385 393 1,203 566 1,004 418 171 113 YoY 178.7% -51.3% -47.6% 2.1% 206.1% -53.0% 77.4% -58.4% -59.1% -33.9% OPM 7.6% 3.8% 1.9% 2.0% 6.1% 3.2% 6.1% 2.5% 1.0% 0.7% Nagasakiya Sales 120,915 124,377 135,816 135,683 143,449 150,639 157,101 165,700 177,825 185,440 YoY -1.6% 2.9% 9.2% -0.1% 5.7% 5.0% 4.3% 5.5% 7.3% 4.3% Operating profit -1,881 748 1,542 1,690 2,787 3,984 3,923 4,814 4,941 5,400 YoY - - 106.1% 9.6% 64.9% 42.9% -1.5% 22.7% 2.6% 9.3% OPM -1.6% 0.6% 1.1% 1.2% 1.9% 2.6% 2.5% 2.9% 2.8% 2.9% UD Ret ail Sales ------19,236 YoY ------Operating profit -1,261 YoY ------OPM ------6.6% Uny Sales ------276,825 YoY ------Operating profit ------11,407 YoY ------OPM ------4.1% Don Quijote (USA) Sales 17,266 15,226 13,186 13,985 17,341 19,676 21,055 18,703 22,997 23,918 YoY -6.1% -11.8% -13.4% 6.1% 24.0% 13.5% 7.0% -11.2% 23.0% 4.0% Operating profit 718 754 726 778 1,034 1,198 1,497 724 732 678 YoY 16.0% 5.0% -3.7% 7.2% 32.9% 15.9% 25.0% -51.6% 1.1% -7.4% OPM 4.2% 5.0% 5.5% 5.6% 6.0% 6.1% 7.1% 3.9% 3.2% 2.8% Marukai Sales 7,845 16,773 19,652 17,933 14,481 16,546 YoY - - - - - 113.8% 17.2% -8.7% -19.2% 14.3% Operating profit 415 449 784 579 451 606 YoY 8.2% 74.6% -26.1% -22.1% 34.4% OPM - - - - 5.3% 2.7% 4.0% 3.2% 3.1% 3.7% Japan Japan Asset Marketing Sales 37 6,309 14,228 16,640 18,109 19,736 22,093 YoY - - - - 16,951.4% 125.5% 17.0% 8.8% 9.0% 11.9% Operating profit -220 2,523 5,843 6,970 7,395 7,909 8,808 YoY - - - - - 131.6% 19.3% 6.1% 7.0% 11.4% OPM - - - -594.6% 40.0% 41.1% 41.9% 40.8% 40.1% 39.9% Source: Shared Research based on company data
23/65 Pan Pacific International Holdings / 7532 R LAST UPDATE: 2020.02.17 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp Coverage
Uny’s GMS business
Cumulative FY02/16 FY02/17 FY02/18 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Gross operating revenues 181,528 370,350 553,363 757,941 180,978 366,406 577,680 742,032 172,316 351,913 522,367 712,816 YoY -0.3% -1.1% 4.4% -2.1% -4.8% -4.0% -9.6% -3.9% Net sales 171,520 350,230 523,089 716,994 170,748 345,829 513,544 699,822 161,817 300,837 490,927 670,469 YoY -0.5% -1.3% -1.8% -2.4% -5.2% -13.0% -4.4% -4.2% Operating revenues 10,008 20,120 30,273 40,947 10,230 20,576 31,135 42,210 10,498 21,076 31,439 42,166 YoY 2.2% 2.3% 2.8% 3.1% 2.6% 2.4% 1.0% -0.1% Gross profit 40,486 82,443 124,474 169,657 40,511 76,518 119,010 162,609 38,277 77,204 115,500 156,898 YoY 0.1% -7.2% -4.4% -4.2% -5.5% 0.9% -2.9% -3.5% GPM 23.6% 23.5% 23.8% 23.7% 23.7% 22.1% 23.2% 23.2% 23.7% 25.7% 23.5% 23.4% Operating gross profit 50,495 102,563 154,748 210,604 50,741 97,095 150,146 204,820 48,775 98,281 146,940 199,065 YoY 0.5% -5.3% -3.0% -2.7% -3.9% 1.2% -2.1% -2.8% SG&A expenses 48,953 99,689 149,909 199,981 46,059 95,259 144,074 190,953 44,776 90,407 135,401 181,088 YoY -5.9% -4.4% -3.9% -4.5% -2.8% -5.1% -6.0% -5.2% Operating profit 1,541 2,874 4,839 10,623 4,682 1,836 6,071 13,866 3,999 7,873 11,539 17,977 YoY 203.8% -36.1% 25.5% 30.5% -14.6% 328.8% 90.1% 29.6% Quarterly FY02/16 FY02/17 FY02/18 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Gross operating revenues 181,528 188,822 183,013 204,578 180,978 185,428 211,274 164,352 172,316 179,597 170,454 190,449 YoY -0.3% -1.8% 15.4% -19.7% -4.8% -3.1% -19.3% 15.9% Net sales 171,520 178,710 172,859 193,905 170,748 175,081 167,715 186,278 161,817 139,020 190,090 179,542 YoY -0.5% -2.0% -3.0% -3.9% -5.2% -20.6% 13.3% -3.6% Operating revenues 10,008 10,112 10,153 10,674 10,230 10,346 10,559 11,075 10,498 10,578 10,363 10,727 YoY 2.2% 2.3% 4.0% 3.8% 2.6% 2.2% -1.9% -3.1% Gross profit 40,486 41,957 42,031 45,183 40,511 36,007 42,492 43,599 38,277 38,927 38,296 41,398 YoY 0.1% -14.2% 1.1% -3.5% -5.5% 8.1% -9.9% -5.0% GPM 23.6% 23.5% 24.3% 23.3% 23.7% 20.6% 25.3% 23.4% 23.7% 28.0% 20.1% 23.1% Operating gross profit 50,495 52,068 52,185 55,856 50,741 46,354 53,051 54,674 48,775 49,506 48,659 52,125 YoY 0.5% -11.0% 1.7% -2.1% -3.9% 6.8% -8.3% -4.7% SG&A expenses 48,953 50,736 50,220 50,072 46,059 49,200 48,815 46,879 44,776 45,631 44,994 45,687 YoY -5.9% -3.0% -2.8% -6.4% -2.8% -7.3% -7.8% -2.5% Operating profit 1,541 1,333 1,965 5,784 4,682 -2,846 4,235 7,795 3,999 3,874 3,666 6,438 YoY 203.8% - 115.5% 34.8% -14.6% - -13.4% -17.4% Source: Shared Research based on company data
Main affiliates of PPIH group and their businesses
Pan Pacific Retail Management (Singapore) DONKI Thonglor PPSI Don Quijote (USA) Marukai Hawaii Overseas retail Overseas Retail Division Marukai QSI Pan Pacific Realit Advertising and Promotions Data Service Advertising and Division Japan Inbound Solutions sales promotion Storecrews Outsourcing Outsourcing Division Don Quijote Fujiya Shoji Import and wholesale Lirack Pan Pacific UD Retail Domestic Distribution and International Nagasakiya Domestic retail Retail Division Holdings Doit WITH DOIT Daishin Pan Pacific International Trading Import and wholesale Pan Pacific Shared Service Administrative functions Operation Support Division Japan Commercial Pan Pacific Life Assist Insurance agency Insurance Division Establishment Pan Pacific Foods Tenant leasing, restaurant, franchise Real Estate, Restaurant, and D-One Store development Franchise Division Japan Asset Marketing Real estate leasing and management 99 Ichiba Small-sized urban supermarket Domestic Distribution and Unifood Food service Retail Division UCS Financial service Financial Service Division Uny Sunreform Domestic Distribution and Retail Div. Nexcom Advertising and Promotions Div. Service Sun Sougou Maintenance Real Estate Division My Support Outsourcing Division Source: Shared Research based on company data
24/65 Pan Pacific International Holdings / 7532 R LAST UPDATE: 2020.02.17 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp Coverage
Main product categories
The Discount Store business (76.5% of total sales) breakdown by product category in FY06/19 was foods 26.4%, household goods 17.5 %, watches & fashion merchandise 12.2%, electric appliances 6.0%, sports & leisure goods 4.2%, DIY goods 1.2%, and overseas 7.3%. The GMS business (20.0% of total sales) broke down into foods 14.0%, apparel 2.7%, and home-oriented goods 2.4%.
Don Quijote Co., Ltd.’s sales breakdown by product category is relatively easy to compare chronologically. In FY06/19, foods accounted for the largest share (33.9%), followed by household goods (28.3%), watches & fashion merchandise 19.8%, electric appliances 10.0%, and sports & leisure goods 6.9%. The sales share of foods was only 17.2% in FY06/00, increasing to 20.0% in FY06/05, 24.7% in FY06/10, and to 28.0% in FY06/15. This illustrates how the company increased the weighting of foods used as a hook to attract customers as well as the key to ensuring repeat visits. The share of household goods has also gradually increased from 23.8% in FY06/00 to 25.5% in FY06/10, 27.2% in FY06/15, and 28.3% in FY06/19.
Don Quijote discount sales breakdown by product
Electric appliances Household goods Foods Watches & fashion merchandise Sports & leisure goods Other 100% 8.0% 7.9% 7.6% 7.3% 7.7% 7.7% 7.5% 7.5% 7.6% 7.3% 7.4% 7.3% 7.0% 8.5% 7.9% 7.2% 6.9% 90% 10.1% 9.4% 9.3% 9.6% 9.8% 8.8% 20.7% 19.8% 80% 26.7% 25.5% 25.0% 26.5% 25.6% 24.9% 22.8% 19.3% 24.1% 24.7% 22.8% 22.6% 23.7% 25.5% 26.6% 27.5% 28.2% 28.1% 28.3% 26.3% 27.3% 70% 60% 18.0% 17.2% 17.2% 17.9% 15.7% 16.2% 18.5% 19.4% 19.6% 19.2% 32.4% 33.9% 50% 20.0% 20.2% 22.9% 24.7% 24.3% 24.5% 24.9% 26.4% 28.0% 29.8% 31.2%
40% 21.5% 22.1% 23.0% 23.8% 24.1% 24.2% 24.2% 30% 23.2% 22.4% 22.7% 23.4% 24.0% 24.8% 25.5% 25.9% 26.0% 26.1% 26.7% 27.2% 26.5% 28.3% 28.3% 20% 25.0% 26.4% 24.8% 23.5% 23.5% 23.3% 22.6% 10% 21.3% 20.7% 20.3% 20.4% 19.8% 18.3% 16.4% 14.9% 14.7% 13.4% 12.5% 11.4% 10.6% 10.1% 10.2% 10.2% 10.0% 0% FY06/97 FY06/99 FY06/01 FY06/03 FY06/05 FY06/07 FY06/09 FY06/11 FY06/13 FY06/15 FY06/17 FY06/19 Source: Shared Research based on company data Note: Product classifications changed starting in FY06/16
The GPM of foods in FY06/19 was 15.5%, smaller than 23.9% of the Discount Store business. GPM has been in the 15–16% range (around 10pp lower than the Discount Store business GPM of around 25%) for foods in the past 10 years. Consumers are especially price-sensitive regarding foods and there is plenty of competition from local supermarkets. Thus, it is difficult for the company to secure a large GPM on this category.
Notable is how overall GPM has not fallen despite the increased weighting of foods, which have relatively low GPM. Contributing factors are higher share of household goods (with higher GPM than the Retail business) while positioning foods as the key category for attracting customers. The GPM of electric appliances (whose role as a driver for customer traffic has weakened) rose from 19.1% in FY06/10 to 27.3% in FY06/18, also helping maintain GPM. We see management’s intention of differentiating between categories that attract customers (and in which the company engages in price competition) and those in which the company makes a profit by taking advantage of customers who visit Don Quijote stores to maintain and improve overall profitability.
We think original products have contributed to maintaining and improving GPM. Based on the concept of “allowing customer feedback to take shape,” the company launched its private brand Jonetsu Kakaku in October 2009, as well as selling OEM products that are only available at Don Quijote stores. The product cycle consists of the product development division gathering customer feedback and creating products that exceed their expectations, which are manufactured by partner firms and purchased by individual stores in consideration of consumer trends. Products are developed with excellent quality, enjoyment, and discovery in mind, differentiated from most private brands whose main appeal is low prices. The Jonetsu Kakaku products number more than 2,000. The company’s original product sales were JPY95.2bn in FY06/19, exceeding 10% share of domestic retail sales. Original product sales break down into foods 32.1%, watches & fashion merchandise 25.9%, household goods 20.7%, electric appliances 14.6%, and sports & leisure goods 5.5%.
25/65 Pan Pacific International Holdings / 7532 R LAST UPDATE: 2020.02.17 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp Coverage
The company reorganized the Jonetsu Kakaku brand into three product lines in 2016. Jonetsu Kakaku is a brand that offers incredibly low prices in response to customer demand. Jonetsu Kakaku Plus is slightly more upmarket, offering convenience and enjoyment at low prices. Jonetsu Kakaku Premium is the premium range, offering top value added in price, quality, functionality, and design.
Sales breakdown and GPM of Don Quijote Co., Ltd.
Don Quijote FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 (JPYmn) T ot al sales 326,708 346,559 368,109 394,261 419,910 471,542 532,671 596,419 666,052 704,810 YoY 6.1% 6.1% 6.2% 7.1% 6.5% 12.3% 13.0% 12.0% 11.7% 5.8% GPM 25.1% 24.9% 25.3% 26.0% 25.7% 26.1% 25.9% 25.8% 25.2% 24.9% Discount Store 320,912 340,747 362,246 388,192 413,691 464,660 525,040 588,297 657,315 695,728 YoY 6.1% 6.2% 6.3% 7.2% 6.6% 12.3% 13.0% 12.0% 11.7% 5.8% % of t ot al sales 98.2% 98.3% 98.4% 98.5% 98.5% 98.5% 98.6% 98.6% 98.7% 98.7% GPM 23.8% 23.6% 24.1% 24.8% 24.6% 25.0% 24.9% 24.7% 24.2% 23.9% Elect ric appliances 47,704 50,124 48,608 48,379 47,095 49,416 53,082 60,127 67,112 69,256 YoY -3.7% 5.1% -3.0% -0.5% -2.7% 4.8% 7.6% 10.5% 10.5% 10.5% % of t ot al sales 14.6% 14.5% 13.2% 12.3% 11.2% 10.5% 10.0% 10.1% 10.1% 9.8% GPM 19.1% 20.2% 21.7% 23.5% 24.6% 24.7% 27.8% 28.8% 27.3% 29.9% Household goods 81,789 88,265 94,074 101,490 110,462 126,619 131,504 155,768 186,277 197,086 YoY 9.1% 7.9% 6.6% 7.9% 8.8% 14.8% 14.4% 18.2% 18.2% 18.2% % of t ot al sales 25.0% 25.5% 25.6% 25.7% 26.3% 26.9% 24.7% 26.1% 28.0% 28.0% GPM 25.8% 25.4% 25.4% 25.6% 25.0% 26.0% 25.5% 28.5% 25.9% 25.7% Foods 79,373 82,959 88,745 96,662 109,310 129,953 156,524 183,690 212,756 235,684 YoY 14.4% 4.5% 7.0% 8.9% 13.1% 19.0% 19.5% 17.4% 17.4% 17.4% % of t ot al sales 24.3% 23.9% 24.1% 24.5% 26.0% 27.6% 29.4% 30.8% 31.9% 33.4% GPM 15.3% 15.2% 15.5% 15.6% 15.2% 16.0% 15.7% 15.2% 15.5% 15.5% Watches & fashion merchandise 81,755 85,295 95,188 105,894 109,524 119,015 130,663 134,331 135,915 137,822 YoY 1.4% 4.3% 11.6% 11.2% 3.4% 8.8% 9.5% 2.7% 2.7% 2.7% % of t ot al sales 25.0% 24.6% 25.9% 26.9% 26.1% 25.2% 24.5% 22.5% 20.4% 19.6% GPM 29.8% 28.7% 29.3% 30.0% 30.1% 30.4% 29.6% 28.6% 30.6% 29.3% Sports & leisure goods 24,074 26,041 26,513 28,707 30,321 32,473 44,799 46,485 47,291 47,693 YoY 5.5% 8.2% 1.8% 8.3% 5.6% 7.1% 5.4% 3.7% 3.7% 3.7% % of t ot al sales 7.4% 7.5% 7.2% 7.3% 7.2% 6.9% 8.4% 7.8% 7.1% 6.8% GPM 36.0% 36.5% 37.2% 37.6% 38.2% 39.2% 37.3% 34.1% 34.2% 35.4% Others 6,217 8,062 9,119 7,060 6,980 7,184 8,467 7,897 7,964 8,185 YoY 21.7% 29.7% 13.1% -22.6% -1.1% -2.7% 13.2% -2.6% -2.6% -2.6% % of t ot al sales 1.9% 2.3% 2.5% 1.8% 1.7% 1.5% 1.6% 1.3% 1.2% 1.2% GPM 17.3% 15.9% 16.0% 20.2% 21.7% 20.8% 25.6% 19.0% 19.7% 16.2% Rent 5,796 5,813 5,862 6,070 6,219 6,882 7,631 8,122 8,738 9,083 YoY 3.9% 0.3% 0.8% 3.5% 2.5% 10.7% 10.9% 6.4% 7.6% 3.9% % of t ot al sales 1.8% 1.7% 1.6% 1.5% 1.5% 1.5% 1.4% 1.4% 1.3% 1.3% GPM 98.7% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Source: Shared Research based on company data
Sales breakdown of original products (FY06/19)
Electric appliances Household goods Foods Watches & fashion merchandise Sports & leisure goods Other
14.6% 20.7% 32.1% 25.9% 5.5% 1.2%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Source: Shared Research based on company data
The product mix varies between store formats. In FY06/18, Don Quijote’s product mix was foods 29.9%, household goods 29.9%, watches & fashion merchandise 21.5%, and electric appliances 10.4%. MEGA Don Quijote has a large 54.8% share of foods, with household goods at 17.4%, watches & fashion merchandise 14.0%, and electric appliances 7.2%. New MEGA Don Quijote’s product mix is foods 36.9%, household goods 24.9%, and watches & fashion merchandise 19.1%. Thus, New MEGA Don Quijote has a smaller share of foods than MEGA Don Quijote, bringing it closer to the product mix of the Don Quijote format.
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Product mix by format (FY06/18)
Electric appliances Household goods Foods Watches & fashion merchandise Sports & leisure goods Other Don Quijote 10.4% 29.9% 29.9% 21.5% 7.0%
MEGA Don Quijote 7.2% 17.4% 54.8% 14.0% 4.5%
New MEGA Don Quijote 10.4% 24.9% 36.9% 19.1% 7.4%
Nagasakiya 5.4% 21.7% 2.7% 67.5% 2.0%
Total 9.7% 26.0% 37.0% 19.4% 6.6%
Source: Shared Research based on company data
The product mix has changed substantially with Uny joining the group in Q3 FY06/19. The Discount Store business accounted for 63.7% of sales, the GMS business for 33.0% (foods 22.8%, home-oriented goods 4.8%, apparel 4.3%, others 1.1%), and the Rent business for 3.2%.
Sales breakdown by segment
Source: Shared Research based on company data
Reference: Sales breakdown of Uny’s directly operated stores (FY02/18)
Apparel Household goods Fresh food Processed food
14.0% 13.2% 42.5% 29.5%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Source: Shared Research based on company data
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Business model and strategy
Unique store concept offering convenience, incredibly low prices, and enjoyable shopping experience For a company to achieve sustained growth in Japan’s retail market, which is unlikely to grow amid demographic changes, it must take market share away from its rivals. A point of difference that sets a company apart from other retailers is needed to increase market share. Based on the concept of making customers the utmost priority, PPIH has a unique store concept called CV+D+A, with CV standing for convenience, D for discount, and A for amusement to differentiate itself from peers. Most retailers pursue convenience for customers so that they can buy what they want, when they want, and offer products at competitive prices. In contrast, the company provides “amusement” (fun, excitement) that traditional retailers do not, with the goal of encouraging customers to spend time instore. Adding amusement as a new value to convenience and competitive pricing has proved popular among customers, helping the company’s growth.
Management principle of making customers the utmost priority The company’s management principle of making customers the utmost priority guides its actions and decision-making. Retailers face fickle consumer sentiment and social trends such as population decline, aging demographic, low birth rate, and increased competition. In this context, the company believes that it must make customers its top priority so that it can respond quickly to consumer needs and ensure each store offers a diverse range of products to attract consumers and enhance their shopping experience.
Store autonomy and delegating authority PPIH has a strategy of store autonomy and delegating authority to make stores better able to respond to changes in consumer needs and sentiment, and in competitor trends in each store’s trade area. Every trade area and store has different competitors. Each store must gather information on rival stores’ sales strategies and devise specific actions to win a larger market share while maintaining appropriate profitability. Then, each store makes quick changes to store presentation (the way products are displayed) and sets prices. Stores are also responsible for sourcing products that fit their presentation. They are given the authority to determine purchase, pricing, display, and selling based on the strategy of making customers the utmost priority.
The company’s employee performance review system is also consistent with these strategies. The performance of sales floor managers (merchandise planners) is rated by a benchmark with three components (inventory turnover, sales value, and gross profit). These benchmarks allow management to assess individual performance regardless of age, gender, nationality, or years of service. Weightings are approximately 50% for inventory turnover, 25% for sales, and 25% for gross profit. This benchmark requires merchandise planners to be nimble in their decision-making, abandoning products quickly if they do not sell as well as expected and sourcing and displaying alternatives. Store managers who are responsible for multiple sales floors are rated by the same benchmark of three components plus store operating profit.
Store presentation The company’s obvious point of difference for consumers is store presentation (mainly of Don Quijote stores) with a strong entertainment component. Techniques unique to PPIH include mass displays of products (in huge quantities and varieties), point-of-purchase (POP) cards with handwritten prices and product descriptions, spot products such as distributors’ surplus stock, highly seasonal products, and unusual products sold at incredibly low prices, and visual effects that create a mystical feel by, for example, deliberately creating narrow pathways instore. Instead of headquarters dictating a standard display format, each store creates its own entertaining presentation to maximize local demand.
Strengths in purchasing Stores also have considerable autonomy in sourcing products. The company’s headquarters sources staple items such as national brand household goods (accounting for about 60% of the total purchase value) in bulk to maximize discounts. Thus, stores can source low-priced national brand products from headquarters to sell at competitive prices. They are also free to make spot purchases (40% of total purchase value) from domestic and overseas manufacturers and wholesalers approved by the company. This system combines the advantages of low-priced bulk buying with the convenience of serving local needs.
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The company is also positive about buying seasonal items late in the season, models at the end of their cycle shortly before new models come out, and products with limited size availability such as apparel, all of which can be purchased at discounted prices. Based on an in-depth understanding of the trade area, the company is prepared to buy products likely to sell out in a short period of time even if sourced late in the season and without a full range of sizes. We think PPIH has won the confidence of manufacturers and wholesalers as a retail business capable of selling quickly merchandise with a high risk of return and disposal.
M&A The company’s key growth driver is gaining market share in each trade area (comparable store sales growth) based on customer focus by responding quickly to changing consumer trends and opening new stores by developing formats that are the best fit for consumer needs. However, inorganic growth by M&A is also an important growth driver for PPIH. The company moved into the supermarket business in Hawaii in 2006 after acquiring stores from Daiei, and has added to its list of consolidated subsidiaries DOit (DIY stores), Nagasakiya (GMS stores), Marukai Corporation (supermarkets in Hawaii and California), QSI (supermarket chain in Hawaii), and Uny. While difficult to predict the next acquisition, we think the company may embark on further M&A as an additional growth driver.
Fostering human resources PPIH has a distinctive management style, including store autonomy and delegating authority to individual stores under a strategy of making customers the utmost priority. Its management philosophy is also unique. Although competitors could emulate its form, such as product displays, they would struggle to emulate the substance, i.e., corporate culture. The management principles of PPIH are as follows: 1) We are committed to our business with honesty and selfless attitude, underpinned by noble intentions and high standard of morality. 2) We create at all times sales floors offering exciting and incredibly low-priced products. 3) We boldly delegate authority to individual stores and constantly check that employees are assigned to optimal positions. 4) We positively adapt to change and embrace creative destruction, eliminating the tendencies to seek stability and consensus. 5) We continue to challenge the status quo and do not fear withdrawal in the face of reality. 6) We do not seek easy money, instead pushing our core business in which we excel to the limits.
We note, however, that fostering human resources is essential if all employees and directors are to embrace this unique philosophy. The company’s human resource development program uses a book of management principles written under the guidance of founder Takao Yasuda (Genryu, 2011) as the absolute set of guidelines and rulebook for the ages. All PPIH employees regard the book as their spiritual “boss” in the conduct of their business.
Foundational management principles
Management principles Employee rules and code of conduct 1 We are committed to our business with honesty and selfless attitude, underpinned 1 Have an unconquerable spirit in the face of adversity and the tenacity to discover by noble intentions and high standard of morality. t he silver lining. 2 W e creat e at all t imes sales floors offering excit ing and incredibly low -priced 2 Have more passion than anyone toward the store, products, and customers. products. 3 Hone your w it s, your sensibilit y, and your inspirat ion on t he sales floor. 3 W e boldly delegat e aut horit y t o individual st ores and const ant ly check t hat 4 Polish your passion to win and your genuine tenacity, rather than relying on mere employees are assigned t o opt imal posit ions. doggedness. 4 W e posit ively adapt t o change and embrace creat ive dest ruct ion, eliminat ing t he 5 Endeavor to put yourself in the other person’s shoes in all situations. tendencies to seek stability and consensus. 6 If you are a sales floor leader, always work to develop employees who can replace 5 We continue to challenge the status quo and do not fear withdrawal in the face you. of realit y. 7 Mut ually acknow ledge individual diversit y, be it in managers, superiors, or 6 We do not seek easy money, instead pushing our core business in which we excel subordinates. t o t he limit s. 8 Enjoy what you do as a game rather than as work. 9 Think carefully about how a thing can be achieved instead of giving reasons why it can’t be. 10 Rather than simply going with the easy option, use your head to accommodate both options. Source: Shared Research based on company data
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Group/Don Quijote retail business performance indicators (JPYmn) FY06/09 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 Sales Retail (consolidated) 462,240 416,183 487,875 519,891 546,930 590,076 659,931 733,334 801,802 913,497 Don Quijote 307,997 326,708 346,559 368,109 394,261 419,910 471,542 532,671 596,419 666,052 YoY Retail (consolidated) 18.1% -10.0% 17.2% 6.6% 5.2% 7.9% 11.8% 11.1% 9.3% 13.9% Don Quijote 5.9% 6.1% 6.1% 6.2% 7.1% 6.5% 12.3% 13.0% 12.0% 11.7% Retail floor space (sqm) Consolidated (year-end) 590,424 602,725 637,867 684,400 719,695 795,449 844,383 952,347 1,024,601 1,144,089 Consolidated (average) 339,550 475,389 613,435 651,179 699,612 752,132 811,000 878,015 975,081 1,075,008 Don Quijote (year-end) 239,180 270,019 290,084 335,010 385,399 433,636 509,062 590,676 652,022 702,976 Don Quijote (average) 222,228 259,121 273,161 303,410 361,426 405,856 460,920 534,913 611,467 673,472 YoY Consolidated (year-end) 3.5% 2.1% 5.8% 7.3% 5.2% 10.5% 6.2% 12.8% 7.6% 11.7% Consolidated (average) 21.5% 40.0% 29.0% 6.2% 7.4% 7.5% 7.8% 8.3% 11.1% 10.2% Don Quijote (year-end) 11.0% 12.9% 7.4% 15.5% 15.0% 12.5% 17.4% 16.0% 10.4% 7.8% Don Quijote (average) 12.7% 16.6% 5.4% 11.1% 19.1% 12.3% 13.6% 16.1% 14.3% 10.1%
Average number of employees Retail (consolidated) 9,202 10,498 13,142 14,308 15,085 16,517 18,684 22,276 23,100 26,248 Don Quijote 6,846 7,394 7,475 8,708 9,563 10,771 12,404 14,924 15,682 17,041 YoY Retail (consolidated) 10.7% 14.1% 25.2% 8.9% 5.4% 9.5% 13.1% 19.2% 3.7% 13.6% Don Quijote 3.8% 8.0% 1.1% 16.5% 9.8% 12.6% 15.2% 20.3% 5.1% 8.7%
Number of stores Consolidated 218 220 228 242 255 283 306 341 368 369 Don Quijote 156 162 169 185 200 217 242 270 292 313 YoY Consolidated -2.2% 0.9% 3.6% 6.1% 5.4% 11.0% 8.1% 11.4% 7.9% 0.3% Don Quijote 5.4% 3.8% 4.3% 9.5% 8.1% 8.5% 11.5% 11.6% 8.1% 7.2%
Per employee (JPY'000, sqm) Sales (retail, consolidated) 40,603 39,644 37,123 36,336 36,257 35,725 35,321 32,920 34,710 34,800 Sales (Don Quijote) 44,992 44,188 46,361 42,274 41,228 38,985 38,015 35,692 38,033 39,085 Gross profit (Don Quijote) 11,218 11,101 11,528 10,710 10,720 10,030 9,931 9,256 9,794 9,840 Operating profit (Don Quijote) 2,128 2,328 2,633 2,428 2,455 1,965 1,631 1,369 1,434 1,562 Retail floor space 32.5 35.0 36.5 34.8 37.8 37.7 37.2 35.8 39.0 39.5 YoY Sales (retail, consolidated) 1.9% -2.4% -6.4% -2.1% -0.2% -1.5% -1.1% -6.8% 5.4% 0.3% Sales (Don Quijote) 2.1% -1.8% 4.9% -8.8% -2.5% -5.4% -2.5% -6.1% 6.6% 2.8% Gross profit (Don Quijote) 0.5% -1.0% 3.8% -7.1% 0.1% -6.4% -1.0% -6.8% 5.8% 0.5% Operating profit (Don Quijote) -5.0% 9.4% 13.1% -7.8% 1.1% -20.0% -17.0% -16.1% 4.7% 8.9% Retail floor space 8.6% 8.0% 4.3% -4.7% 8.5% -0.3% -1.4% -3.5% 8.8% 1.4%
Per sqm of store space (JPY'000) Sales (retail, consolidated) 1,361 875 795 798 782 785 814 835 822 Sales (Don Quijote) 1,386 1,261 1,269 1,213 1,091 1,035 1,023 996 975 989 Gross profit (Don Quijote) 346 317 315 307 284 266 267 258 251 249 Inventory (Don Quijote) 209 197 193 178 163 152 140 155 149 148 YoY Sales (retail, consolidated) -2.8% -35.7% -9.2% 0.4% -2.1% 0.4% 3.7% 2.6% -1.5% Sales (Don Quijote) -6.1% -9.0% 0.6% -4.4% -10.1% -5.2% -1.1% -2.7% -2.1% 1.4% Gross profit (Don Quijote) -7.5% -8.3% -0.4% -2.6% -7.7% -6.2% 0.4% -3.4% -2.8% -0.8% Inventory (Don Quijote) -14.2% -5.5% -2.1% -7.6% -8.5% -6.6% -8.0% 10.6% -3.9% -0.7% Source: Shared Research based on company data
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Store formats
PPIH is a conventional brick-and-mortar retailer selling its merchandise in standalone stores. In addition to its mainstay Don Quijote store format, following the acquisition of Nagasakiya the company created a large discount store format under the name MEGA Don Quijote. To facilitate the placement of smaller stores in urban settings, the company has also developed a number of different small store formats. With the acquisition of Uny, the company moved to develop its new dual-name Don Quijote UNY and MEGA Don Quijote UNY stores and also added the APiTA and PIAGO format stores that were operated by Uny.
Major store formats
Store format Average floor space No. of items Merchandise lineup Main target customers ('000 sqm) ('000) MEGA Don Quijote 8–10 60–100 Apparel, foods, household goods (focusing on foods and Housew ives, families New MEGA Don Quijote 3–5 40–80 daily goods) Developed in 2008, MEGA Don Quijote stores are Japan's first family-oriented general discount store featuring broad merchandise selection and deep discounts. New MEGA Don Quijote stores use the same concept but are smaller, reducing the space for perishable foods to instead focus on daily consumable goods and processed foods, and keeping an even closer eye on margins and operational efficiency
Don Quijote UNY 4–5 50–60 Apparel, foods, household goods (focusing on foods and Housew ives, families MEGA Don Quijote UNY 5–13 70–100 daily goods) Don Quijote-Uny stores and Don Quijote-Uny MEGA stores are the new formats for UNY's old general supermarket formats run under the APiTA and PIAGO banners. The converted stores have a much larger selection of non-food items and been popular among shoppers of all ages
Younger generations, Don Quijote 1–3 40–60 Amusement and variety couples General discount stores designed to deliver convenience, discount prices, and entertainment, Don Quijote stores are the mainstay format of the PPIH group
Small format s Focus on specialt ies Younger generations, (Picasso, Essence, Kyo-Yasu-Do, EKI Donki, 0.3–1.0 10–20 (convenience stores, mini- couples SORA Donki) supermarkets) The group's small format stores further condense the style of Don Quijote stores, reducing product offerings t o fit t he smaller foot print t o creat e a kind of combinat ion convenience st ore/mini supermarket
DOit 2–7 40–80 DIY-related, household goods Craft smen, families Sport ing t he cat chphrase, W e w ill st rive t o meet your needs w ill all our heart s!, DOit st ores are full-fledged home centers, carrying hardware and home improvement-related goods suitable for everyone from professional tradesmen to the average do-it-yourselfers, and are also active in home remodeling services
Apparel, foods, household Housewives, families, APiTA 6–15 50–80 goods elderly people APiTA stores are general supermarkets designed to serve a wide geographic market, offering a fashionable, enjoyable, and refreshing store environment designed to enrich the everyday life of consumers Apparel, foods, household PIAGO 1.5–8.0 40–60 goods (focusing on foods and Housewives, elderly daily goods) PIAGO stores are general supermarkets designed to make everyday life more convenient by offering PIAGO La: Foods Core 1–3 8–10 Foods and daily goods Housewives, elderly The PIAGO La: Foods Core format is a small-scale supermarket that carries high-quality foods to meet distinguishing tastes. Sporting the slogan, Luxury in proper doses, PIAGO Life stores carry high-quality food products aimed at making the lives of consumers more convenient, enjoyable, and fulfilling
mini PIAGO 0.1–0.3 2.5–3.0 Foods and daily goods Housewives, elderly Being rolled out mainly in the Metropolitan Tokyo area, mini-PIAGO stores are mini-supermarkets designed to offer consumers a close and convenient store where consumers can pick up simple, single- serving meals, fresh and safe perishable goods, and essential everyday goods
Source: Shared Research based on company data
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Number of stores
Number of stores FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 Store count (year-end; consolidated) 220 228 242 255 283 306 341 368 418 693 Don Quijote 149 149 157 165 174 183 194 198 209 212 MEGA Don Quijote 27 40 40 39 37 36 39 40 43 44 New MEGA Don Quijote - 3 9 17 28 41 55 72 80 88 MEGA Don Quijote/Uny ------16 Apita/Piago ------176 Picasso 11 11 14 14 15 18 20 21 23 21 Kyo Yasu Do ------3 4 4 4 mini Piago ------73 DOit 12 16 14 13 12 12 14 17 18 15 Nagasakiya 17 6 5 4 3 2 2 2 2 2 Overseas (US) 4 3 3 3 14 14 14 14 39 42 Store count (year-end; by company) Don Quijote (incl. Pau) 162 169 185 200 217 242 270 292 313 322 Nagasakiya 42 40 40 39 40 38 39 40 43 44 UD Retail ------16 Uny ------176 Lirack ------3 4 4 4 99 Ichiba ------73 DOit 12 16 14 13 12 12 14 17 18 15 Daishin Department Store ------1 1 1 1 Don Quijote (USA) 4 3 3 3 3 3 3 3 4 4 Marukai Corp. - - - - 11 11 11 11 9 10 QSI ------24 24 PPRM ------2 3 Comparable stores (Don Quijote) 149 158 164 179 194 208 209 258 283 297 Comp. store sales YoY -1.5% 3.4% 0.5% -0.1% 0.8% 4.6% 4.6% 2.6% 4.1% 1.2% Comp. store customer count YoY 3.8% 3.1% -0.8% -0.5% 0.1% 1.9% 1.9% 2.2% 2.3% 0.3% Comp. store customer spend YoY -5.1% 0.3% 1.3% 0.4% 0.7% 2.7% 2.7% 0.4% 1.8% 0.9% Source: Shared Research based on company data Note: Don Quijote and PAW stores are included in the “Don Quijote” figure. Picasso, Essence, EKI Donki, SORA Donki, and Jonetsu Shokunin stores are included in the “Picasso” figure. Note: Nagasakiya stores that have undergone a format change are classified as “MEGA” stores.
Don Quijote (often referred to as “Donki”) This is the flagship format; stores are between 1,000–3,000sqm, normally with several floors. Merchandise is presented in “compression display” style—narrow passages and tall merchandise shelves packed with up to 40,000–60,000 SKUs (items) decorated with loud handwritten signs. The layout can be confusing for new customers and changes often. However, this sense of confusion is a calculated corporate strategy to draw repeat customers to merchandise that the store wants to emphasize. All available goods are on display, with no space provided for inventory storage.
Don Quijote Roppongi store
Source: Shared Research based on company data
Unlike most other Don Quijote stores, the Don Quijote Nakameguro Honten store (renovated in August 2012) has wide aisles, so customers can shop around using shopping carts. The aisles effectively guide customers, and a significant variety of merchandise more likely catches their eyes.
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Don Quijote Nakameguro Honten store
Source: Shared Research based on company data
The traditional format has been modified, though, for regional locations where core customers are stay-at-home mothers rather than time-killing 20-year-olds. This is arguably causing a drift toward a more mainstream retailing format. Moreover, the increasing ubiquity of Don Quijote stores has also caused some of the novelty value of the format to wear off. Shared Research believes that Don Quijote may come under pressure to stay original by adding new stand-out features to continue successfully differentiating itself from competitors.
FY06/18 sales of the Don Quijote format broke down into household goods 29.9%, foods 29.9%, watches & fashion merchandise 21.5%, electric appliances 10.4%, and sports & leisure goods 7.0%.
MEGA Don Quijote/New MEGA Don Quijote This is a new large store format aiming to bridge the gap between the quirky urban Don Quijote format and the conventional GMS/large supermarket format. In its search for a large, suburban store format, the MEGA Don Quijote store concept emerged when after Don Quijote bought Nagasakiya (a failed GMS retailer with many unprofitable stores in good locations), and the first store opened in April 2008. It was an attempt to retain the concept of “amusement” while operating larger stores refurbished from existing Nagasakiya locations.
The MEGA Don Quijote store format is a family-oriented discount store. If the traditional Don Quijote store format is half discounted goods and half “entertainment,” then MEGA Don Quijote could be viewed as 4/5 discounted goods and 1/5 entertainment.
As of the end of FY06/18, there were a total of 43 stores. Sales break down into foods 54.8%, household goods 17.4%, watches & fashion merchandise 14.0%, electric appliances 7.2%, and sports & leisure goods 4.5%.
The New MEGA Don Quijote format is smaller than MEGA Don Quijote, with a reduced share of fresh food and focus on daily consumables and processed food to prioritize profitability and efficiency. As of the end of FY06/18, there were a total of 80 stores. Sales break down into foods 36.9%, household goods 24.9%, watches & fashion merchandise 19.1%, electric appliances 10.4%, and sports & leisure goods 7.4%.
Essence This is a new store format the company started in FY06/12. With a sales floor area of 300–1,000sqm and 10,000–20,000 items, the small stores have a more specialized selection of items than Don Quijote stores. The company envisions the format as urban discount stores that contain aspects of drug stores, supermarkets, and convenience stores.
Picasso This is a small format targeting small catchment markets in the Metropolitan area; it is currently deemphasized. The company had high hopes for a new convenience store format combining discounted goods with ready-to-eat meals but found it difficult to generate enough customer traffic to achieve high profitability. The Picasso model store is 300–500sqm and requires a third of the investment needed for Don Quijote stores and carries roughly a quarter of Don Quijote store inventory.
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DOit These stores are home improvement centers (DIY/hardware stores). There were 18 DOit stores as of the end of FY06/18, down from 24 at the moment of acquisition. The average size of DOit stores is between 2,000sqm and 7,000sqm, larger than normal Don Quijote stores.
Nagasakiya The company aims to rebrand Nagasakiya stores in the MEGA format. There were two Nagasakiya stores (GMS) still in operation as of the end of FY06/18.
Solution stores: Starting in FY06/13, the company began opening “solution” stores, designed to contribute to shopping center revitalization. Shopping center developers appear to often ask the company to open its stores in their facilities as anchor tenants, expecting revitalization effects for small and medium-sized shopping centers that have difficulty in attracting tenants. This means the company can often open stores under favorable terms and conditions.
Opening stores in such spaces means lower capex and quick store openings for the company. In such strategic store openings, the company remains flexible in terms of floor area, considering 1,000–15,000sqm to be feasible. More specifically, the company sees around 2,000sqm as appropriate for Don Quijote stores and 3,000–5,000sqm for New MEGA Don Quijote stores.
APiTA A store format developed by Uny with the concept “fashionable, fun, and new.” APiTA is a GMS store that serves large areas. Its objective is to propose an abundant lifestyle as a “store that helps improve the quality of daily life.” APiTA stores sell 50,000– 80,000 product items ranging from foods to household goods, apparel, and home-oriented products. Some stores are being converted to dual-name stores (MEGA Don Quijote UNY).
PIAGO A store format developed by Uny. PIAGO is a GMS store that caters to local needs. PIAGO stores sell a range of items from fashion goods to foods and provide services as a “store that makes daily life more convenient.” The company aims to make stores a welcoming and pleasant place for day-to-day shopping. Most PIAGO stores are smaller than APiTA stores, selling 40,000–60,000 product items. Some stores are being converted to dual-name stores (Don Quijote UNY and MEGA Don Quijote UNY).
PIAGO La: Foods Core A store format developed by Uny. A small, urban supermarket focusing on premium quality food with the theme “the right amount of luxury,” proposing food items that make life convenient, enjoyable, and luxurious. mini PIAGO Urban mini-supermarkets operated by Uny’s subsidiary 99 Ichiba Co., Ltd. Stores are mainly in the Tokyo area. Mainly targeting seniors, single-person households, and working women, stores sell fresh food, single-portion items that are easy to use up, and daily necessities. Its policy is to provide quality items at stable, low prices.
Overseas business
Don Quijote (USA) The company operates three Don Quijote stores in Oahu, Hawaii. These stores were acquired from Daiei in 2006 and remodeled, targeting local consumers and tourists. These stores offer an amusing and exciting shopping experience that only Don Quijote can offer, making the most of aisles where shopping carts can travel freely and high stud (4m) ceiling space.
Marukai Market The company turned the membership-based and non-membership-based supermarkets owned by Marukai Corporation (established in 1965) in California and Hawaii into a subsidiary in September 2013. These stores carry many Japanese products.
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There were 11 stores at the time of acquisition, some of which converted to the Tokyo Central format. The store count at the end of June 2018 was 10 (including Tokyo Central stores).
Tokyo Central This is a new format store opened in California in January 2015. Most were remodeled and converted from Marukai Market stores, although some are newly opened stores. The company created a space that allows customers to enjoy food as entertainment, offering food (mainly an extensive range of prepared food) and fashion/household items imported from Japan as well as US national brands. Tokyo Central stores, with its attractive open-plan kitchen and food court, feature traditional Japanese culture, the latest trends in Tokyo, and a warm California ambiance. They also feature a point-of-purchase (POP) displays developed in Don Quijote stores in Japan.
QSI A supermarket chain in Hawaii, QSI joined the PPIH group in September 2017. Store names include Times and Big Save Markets. The store count at the end of June 2018 was 24.
DON DON DONKI A store format tailored to the ASEAN region with stores in Singapore and Thailand. They are Japanese brand specialty stores almost exclusively selling products made in Japan or destined for the Japanese market. The Orchard Central store in Singapore was the first store to open. The first store in Thailand (Donki Mall Thonglor) opened in February 2019.
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Strengths and weaknesses Strengths Sales floor flair PPIH’s strength is found on the sales floor, where the retailer puts its management ideas into practice. Sales floor managers (merchandise planners) plan their sales floors by making inventory turnover the top priority while maximizing sales and gross profit. Their performance reviews use a benchmark with inventory turnover as the largest component, while store managers are also rated on their store’s operating profit. Each store makes purchase decisions and sets prices after fully researching competing store trends in their trade area and considering local climates and events. The company delegates authority to sales floor staff to hone their skills. This corporate culture has made the company a sum total of sales floors and developed a reputation among manufacturers and wholesalers for its ability to sell off products quickly.
Strong brand as a fun and low-price shopping destination The company has designed its stores based on an original concept of offering a place that is convenient, inexpensive, and entertaining to shop. The idea that customers can save money shopping at Don Quijote has gradually spread, attracting a core customer base. Many consumers also enjoy the shopping experience at Don Quijote, and store design that makes them think they might discover something totally unexpected has proved successful. This approach to store design has built a strong brand that draws consumers to Don Quijote.
Fast decision-making As well as opening many new stores, PPIH has acquired stores by M&A, including DOit, Nagasakiya, and Marukai Corporation. The company’s management decisions have previously been attributed to the leadership of founder Takao Yasuda, but its fast decision-making in key projects (e.g., the acquisition of Uny) has continued under the present management team. PPIH can be positioned as a fast decision maker among major companies not only in moving forward, but also in cutting losses such as closing stores.
Weaknesses Becoming a huge corporate group The company has achieved robust growth by progressively devolving authority and enhancing the competitiveness of its stores. At the same time, it must improve the overall efficiency of what has become a huge corporate group. We observe that many companies that grow into huge organizations eventually weaken as a result of headquarters and administrative divisions increasing their authority. PPIH has been no exception, encountering problems such as headquarters being too controlling or stores becoming dependent on its guidance. Thus, the growing scale of the company may become a weakness.
Consumers’ lack of familiarity with, or acceptance of stores While the company has steadily gained a loyal customer base because of its unique store concept of offering convenience, low prices, and amusement, many consumers do not feel comfortable with Don Quijote stores. Some consumers who only seek functionality (i.e., to buy what they need when they need it) find the company’s store presentation distracting. As well, the company’s previous reputation as a troublemaker may continue to persist among consumers who have not visited a PPIH store for a long time.
Heavily reliant on Japanese market Many companies that originated in Japan expand overseas and make the overseas business their growth driver. Although PPIH is moving into overseas markets such as the US, Singapore, and Thailand, their contribution is still modest. The company’s reliance on the Japanese market, which is unlikely to grow because of demographic factors, can be considered a weakness in the medium term.
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Market and value chain Customers PPHI has two overlapping but nevertheless distinct groups of customers:
Younger consumers in their 20s and 30s who often shop late at night and see shopping at Don Quijote as a sort of ◤ entertainment. These are the company’s traditional and core customer group.
Traditional day-time grocery buyers, mostly housewives, who shop primarily on price, freshness of produce and to some ◤ degree on convenience.
The importance of younger customers has been declining as the company has expanded regionally and into suburban locations, but loyalty of both groups of customers is low (switching costs are minimal) although this also depends on availability of alternative options in local markets. Depending on the store’s location and features, the company is targeting families seeking a place to go shopping at weekends.
Suppliers
Don Quijote buys from up to several thousand wholesalers. The company purchases many items at lower prices than most retailers for the following reasons: 1) top-class sales volume in Japan, 2) actively buying seasonal products late in the season because of its sales capability, and 3) willingness to take on products such as apparel with limited size availability.
Barriers to entry
Generally, barriers to entry in the retail space are low. Other retailers could emulate superficial aspects of the company’s business such as display methods. However, it is far more difficult to replicate the company’s purchasing power underpinned by outstanding domestic sales volume and aspects of its corporate culture such as fast response to changing consumer preferences, strongly growth-oriented employee training, and delegation of authority to sales floor personnel.
Competitors
The company has multiple competitors in various retail subsectors including discount stores, supermarkets, GMSs, electric appliance stores, and department stores. Convenience stores can also be considered competitors, because some of the company’s city center stores are open 24 hours. The company sells a diverse range of products from foods and household goods to watches & fashion merchandise, electric appliances, sports & leisure goods, apparel, and DIY goods. Consumers will compare prices, product ranges, and displays across a number of stores before making a purchase. The competitive environment is intense, because the company’s rivals are across multiple retail subsectors.
PPIH thoroughly researches local competitors of each store and formulates a strategy that sets out which stores it plans to take customers away from. The company intentionally assumes that multiple business players in various retail subsectors are its competitors, and constantly devises ways to increase its market share.
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Don Quijote’s sales ranking (domestic retailers)
Aeon 8,518 Seven & i Holdings 6,791 Fast Retailing 2,130
Yamada Denki 1,601
Pan Pacific International Holdings 1,329
Isetan Mitsukoshi Holdings 1,197
H2O Retailing 927
Takashimaya 913
Bic Camera 844
Tsuruha Holdings 782 (JPYbn) Source: Shared Research based on company data (as of August 2019)
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Historical financial statements and earnings Income statement Income statement FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Sales 487,571 507,661 540,255 568,377 612,424 683,981 759,592 828,798 941,508 1,328,874 YoY 1.4% 4.1% 6.4% 5.2% 7.7% 11.7% 11.1% 9.1% 13.6% 41.1% CoGS 364,065 378,587 400,712 418,570 451,406 502,240 557,699 610,218 697,517 958,347 Gross profit 123,506 129,074 139,543 149,807 161,018 181,741 201,893 218,580 243,991 370,527 SG&A expenses 102,439 103,738 110,223 117,438 126,726 142,638 158,708 172,395 192,423 307,417 Operating profit 21,067 25,336 29,320 32,369 34,292 39,103 43,185 46,185 51,568 63,110 YoY 22.7% 20.3% 15.7% 10.4% 5.9% 14.0% 10.4% 6.9% 11.7% 22.4% Non-operating income 2,900 2,699 2,922 2,852 2,771 3,543 3,287 4,076 6,941 12,888 Non-operating expenses 2,858 2,897 2,959 33,201 1,576 2,486 2,675 4,738 3,991 7,758 Recurring profit 21,109 25,138 29,283 33,201 35,487 40,160 43,797 45,523 57,218 68,240 YoY 32.0% 19.1% 16.5% 13.4% 6.9% 13.2% 9.1% 3.9% 25.7% 19.3% Extraordinary gains 892 1,388 2,499 1,262 382 317 117 12,786 650 12,958 Extraordinary losses 5,156 5,379 1,387 1,081 1,644 1,320 1,801 2,984 1,495 13,727 Pre-tax profit 16,845 21,147 30,395 33,382 34,225 39,157 42,113 55,325 56,373 67,471 Tax charges 6,307 7,911 9,658 11,328 10,172 12,225 12,558 16,228 17,529 17,552 Net income attrib. to non-controlling interests 300 573 892 913 2,582 3,784 4,617 6,015 2,439 1,666 Net in co me 10,238 12,663 19,845 21,141 21,471 23,148 24,938 33,082 36,405 48,253 YoY 19.7% 23.7% 56.7% 6.5% 1.6% 7.8% 7.7% 32.7% 10.0% 32.5% Capit al expendit ures 22,849 37,872 23,563 29,914 35,563 52,727 51,570 45,357 56,061 49,908 Cash flow basis 23,172 25,577 28,641 29,859 30,944 34,646 36,881 46,661 48,603 76,138 Difference 323 -12,295 5,078 -55 -4,619 -18,081 -14,689 1,304 -7,458 26,230 Depreciat ion and amort izat ion 9,823 9,908 10,474 11,051 11,408 13,003 15,092 15,952 17,378 23,722 Depreciat ion 9,372 9,385 9,566 10,026 10,402 11,672 13,301 14,075 14,815 20,012 Amort izat ion of negat ive goodw ill -857 -857 -857 -628 -342 -96 -86 -86 -86 -86 OP before depreciat ion and amort izat ion 30,890 35,244 39,794 43,420 45,700 52,106 58,277 62,137 68,946 86,832 YoY 18.5% 14.1% 12.9% 9.1% 5.3% 14.0% 11.8% 6.6% 11.0% 25.9% Profit margin 6.3% 6.9% 7.4% 7.6% 7.5% 7.6% 7.7% 7.5% 7.3% 6.5% Source: Shared Research based on company data
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Balance sheet
Balance sheet FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 (JPYmn) Cons. Cons. Cons. Cons Cons Cons Cons Cons Cons Cons Cash and deposits 41,734 35,031 34,237 31,698 42,690 49,717 42,894 76,430 71,973 172,673 Accounts receivable 4,045 4,585 4,889 5,371 5,730 6,820 7,720 8,966 12,848 18,744 Account s receivable–inst allment ------67,417 Purchased receivables - 6,787 6,761 6,738 6,009 5,439 6,606 - - - Inventories 74,452 81,582 83,641 85,997 89,105 94,580 117,400 123,969 135,781 188,510 Other 7,967 6,530 9,288 13,587 15,300 19,425 21,357 18,220 23,523 49,061 Current assets 128,198 134,515 138,816 143,391 158,834 175,981 195,977 227,585 244,125 496,405 T angible fixed asset s 123,734 154,870 169,336 186,094 212,723 262,127 292,052 310,766 347,913 610,880 Int angible fixed asset s 2,721 6,461 10,266 11,974 15,356 17,529 17,005 15,888 28,247 37,602 Investment securities 6,297 4,362 3,779 5,137 4,414 6,425 5,736 7,539 31,606 16,681 Lease and guarantee deposit 33,674 33,303 32,286 31,762 30,963 32,817 35,645 40,474 46,494 80,443 Investments and other assets 47,376 45,454 44,233 45,163 45,222 50,029 55,534 88,629 186,772 133,680 Fixed assets 173,831 206,785 223,835 243,231 273,301 329,685 364,591 415,283 562,932 782,162 Total assets 302,029 341,300 362,651 386,622 432,135 505,666 560,568 642,868 807,057 1,278,567 Accounts payable 42,670 42,430 44,793 48,036 55,118 60,556 70,194 85,661 93,030 159,064 Short-term debt 61,664 39,631 49,046 46,492 19,944 38,598 32,923 25,022 21,404 42,660 Payables under securitized receivables - - - - 5,912 7,040 7,147 7,152 7,262 7,304 Other 17,671 24,010 26,404 26,642 33,470 38,382 37,731 46,990 50,190 128,957 Current liabilit ies 122,005 106,071 120,243 121,170 114,444 144,576 147,995 164,825 171,886 337,985 Long-term debt 54,580 93,949 84,296 80,014 74,330 87,846 121,553 159,528 291,942 495,235 LT payables under securitized receivables - - - - 34,345 34,023 24,876 19,366 12,104 4,703 Other 18,684 16,038 12,377 15,260 15,852 17,854 21,597 19,219 18,630 87,157 Fixed liabilit ies 73,264 109,987 96,673 95,274 124,527 139,723 168,026 198,113 322,676 587,095 Tot al liabilit ies 195,269 216,058 216,916 216,444 238,971 284,299 316,021 362,938 494,562 925,080 Shareholders' equity 107,407 127,087 146,590 167,233 187,637 209,682 231,788 258,282 291,337 329,296 Valuation and translation adjustments -2,090 -3,482 -3,395 -889 -292 2,659 -260 771 -974 250 Share subscription rights - - - - - 13 23 98 345 724 Non-cont rolling int erest s 1,443 1,637 2,540 3,834 5,819 9,013 12,996 20,779 21,787 23,217 Net assets 106,760 125,242 145,735 170,178 193,164 221,367 244,547 279,930 312,495 353,487 Tot al liabilit ies and net asset s 302,029 341,300 362,651 386,622 432,135 505,666 560,568 642,868 807,057 1,278,567 Shareholders' equity 105,317 123,605 143,195 166,344 187,345 212,341 231,528 259,053 290,363 329,546 W orking capit al 35,827 43,737 43,737 43,332 39,717 40,844 54,926 47,274 55,599 48,190 Interest-bearing debt 116,244 133,580 133,342 126,506 134,531 167,507 186,499 211,068 332,712 549,902 Net debt 74,510 98,549 99,105 94,808 91,841 117,790 143,605 134,638 260,739 377,229 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Interest-bearing debt and net debt include payables on securitized receivables.
Profit margins FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Gross profit margin 25.3% 25.4% 25.8% 26.4% 26.3% 26.6% 26.6% 26.4% 25.9% 27.9% SG&A-to-sales ratio 21.0% 20.4% 20.4% 20.7% 20.7% 20.9% 20.9% 20.8% 20.4% 23.1% Operating profit margin 4.3% 5.0% 5.4% 5.7% 5.6% 5.7% 5.7% 5.6% 5.5% 4.7% Recurring profit margin 4.3% 5.0% 5.4% 5.8% 5.8% 5.9% 5.8% 5.5% 6.1% 5.1% Net margin 2.1% 2.5% 3.7% 3.7% 3.5% 3.4% 3.3% 4.0% 3.9% 3.6% Financial ratios FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. ROA (RP-based) 7.0% 7.4% 8.1% 8.6% 8.2% 7.9% 7.8% 7.1% 7.1% 5.3% ROE 10.5% 11.1% 14.9% 13.7% 12.1% 11.6% 11.2% 13.5% 13.3% 15.6% Financial ratios FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Total asset turnover 1.6 1.5 1.5 1.5 1.4 1.4 1.4 1.3 1.2 1.0 Inventory turnover 4.9 4.6 4.8 4.9 5.1 5.3 4.8 4.9 5.1 5.1 Days in inventory 74.6 78.7 76.2 75.0 72.0 68.7 76.8 74.2 71.1 71.8 Quick ratio 44.1% 49.9% 45.9% 47.4% 60.9% 56.3% 53.1% 62.9% 63.0% 91.1% Current ratio 105.1% 126.8% 115.4% 118.3% 138.8% 121.7% 132.4% 138.1% 142.0% 146.9% Equity ratio 34.9% 36.2% 39.5% 43.0% 43.4% 42.0% 41.3% 40.3% 36.0% 25.8% Net debt / Equity 69.4% 77.5% 67.6% 56.7% 48.9% 56.2% 62.0% 52.1% 89.5% 114.6% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.
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Per share data
Per share data (JPY) FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Shares issued (year-end; '000) 72,095 77,031 77,135 77,864 78,394 157,919 158,118 158,179 158,193 158,322 EPS 147 168 257 273 275 147 158 209 230 305 EPS (fully diluted) 138 164 257 272 273 147 158 209 230 304 Book value per share 1,461 1,605 1,856 2,136 2,390 1,345 1,464 1,638 1,836 2,082 Dividend per share 25 28 31 33 36 20 22 26 32 40 Split adjustment factor 2 2 2 2 2 1 1 1 1 1 (Adjusted for stock splits) Shares issued (year-end; '000) 144,190 154,062 154,270 155,728 156,788 157,919 158,118 158,179 158,193 158,322 EPS 74 84 129 137 138 147 158 209 230 305 Book value per share 730 802 928 1,068 1,195 1,345 1,464 1,638 1,836 2,082 Dividend per share 13 14 16 17 18 20 22 26 32 40 Source: Shared Research based on company data Note: the company executed a 2:1 share split effective July 1, 2015
Shareholder returns The company has been historically focused on growth and delivering shareholder returns through share price appreciation. Dividends have grown steadily since listing but the payout ratio in FY06/19 was still only 13.1%. The company has a progressive dividend policy of raising dividends in line with sustained earnings growth while seeking to increase its retained earnings to strengthen its business structure and finance further business expansion. In the medium term, the company targets a dividend payout ratio of over 20%.
The company has a policy of flexible share buybacks when its shares are trading at a PBR of less than 1.0x, taking into consideration profit growth opportunities and capital efficiency improvement.
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Cash flow statement
Cash flow statement FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/19 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cash flows from operating activities (A) 18,885 26,029 33,962 38,270 39,684 42,520 29,110 56,441 46,081 101,978 Pre-tax profit 16,845 21,147 30,395 33,382 34,225 39,157 42,113 55,325 56,373 67,471 Depreciation 9,823 9,908 10,474 11,051 11,408 13,003 15,092 15,952 17,378 23,722 Impairment losses 163 779 184 317 19 198 179 1,537 1,007 10,305 Amortization of goodwill -857 -857 -857 -628 -342 -96 -86 -86 -86 -86 Gain on negative goodwill -139 ------Change in working capital -1,412 -3,406 -2,899 894 5,146 -12 -15,541 -337 -8,413 -7,307 Decrease (increase) in trade receivables 556 -501 -196 -81 483 -93 -2,264 -2,928 -3,816 3,258 Decrease (increase) in inventories -3,879 -7,655 -4,517 -2,180 -1,739 -4,519 -23,022 -6,517 -9,235 -14,489 Increase (decrease) in trade payables 1,911 4,750 1,814 3,155 6,402 4,600 9,745 9,108 4,638 3,924 Income taxes -6,731 -7,303 -8,067 -10,477 -12,033 -15,499 -17,772 -15,830 -19,152 -27,462 Other 1,193 5,761 4,732 3,731 1,261 5,769 5,125 -120 -1,026 35,335 Cash flows from investing activities (B) -16,497 -44,789 -29,794 -23,293 -36,593 -52,641 -52,197 -40,593 -164,443 -37,113 Purchase of tangible and intangible fixed assets -21,240 -37,568 -20,075 -28,204 -33,917 -47,412 -44,201 -40,256 -54,036 -46,133 Proceeds from sale of tangible and intangible fixed assets 1,412 482 41 722 2,363 252 1,144 16,594 1,225 7,579 Payments for lease and guarantee deposits -1,145 -869 -1,379 -1,117 -1,072 -4,791 -4,492 -3,552 -2,123 -3,394 Proceeds from collection of lease and guarantee deposits 2,743 794 1,349 608 872 2,264 170 224 153 1,163 Proceeds from sales of shares of subsidiaries resulting in change in scope of consolidation - 1,178 - 575 - 713 - 3,265 - - Purchase of shares of subsidiaries resulting in change in scope of consolidation - -4,935 -6,360 -1,381 -2,948 -1,581 - - -16,283 -5,423 Purchase of shares of subsidiaries and associates ------3,527 -19,976 -7,936 Other 1,733 -3,871 -3,370 5,504 -1,891 -2,086 -4,818 -13,341 -73,403 17,031 Free cash flow (A +B) 2,388 -18,760 4,168 14,977 3,091 -10,121 -23,087 15,848 -118,362 64,865 Cash flows from financing activities -5,475 7,274 -4,637 -9,510 4,440 16,176 17,148 17,644 116,083 43,456 Net change in short-term borrowings -10,302 -964 -69 -2,143 -12,421 -384 -110 1,249 -281 - Net change in long-term borrowings 7,941 15,569 581 -4,247 -2,530 -12,518 20,915 25,352 128,632 -106,594 Proceeds from long-term borrowings 19,702 28,300 14,500 11,500 20,500 13,414 38,934 44,086 134,689 90,000 Repayment of long-term borrowings -11,761 -12,731 -13,919 -15,747 -23,030 -25,932 -18,019 -18,734 -6,057 -196,594 Issuance and redemption of bonds 12,410 -4,816 -567 -1,969 -18,370 30,726 7,507 5,301 587 165,031 Issuance of bonds 23,200 37,591 12,855 21,590 1,960 37,836 26,680 18,302 19,903 168,647 Redemption of bonds -10,790 -42,407 -13,422 -23,559 -20,330 -7,110 -19,173 -13,001 -19,316 -3,616 Cash dividends paid -1,595 -1,850 -2,157 -2,392 -2,573 -2,825 -3,159 -3,479 -4,113 -5,854 Other -13,929 -665 -2,425 1,241 40,334 1,177 -8,005 -10,779 -8,742 -9,127 Other 72 -206 3,507 1 - - -32 49 - 614 Change in cash and cash equivalents -3,201 -11,830 -409 6,158 7,973 7,187 -6,764 33,446 -2,211 108,639 Depreciation & goodwill amortization (A) 8,966 9,051 9,617 10,423 11,066 12,907 15,006 15,866 17,292 23,636 Capital expenditures (B) -21,240 -37,568 -20,075 -28,204 -33,917 -47,412 -44,201 -40,256 -54,036 -46,133 Change in working capital (C) 1,626 7,910 - -405 -3,615 1,127 14,082 -7,652 8,325 -7,409 Simple FCF (NI + A + B - C) -3,662 -23,764 9,387 3,765 2,235 -12,484 -18,339 16,344 -8,664 33,165 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.
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Company comments on recent earnings results Q1 FY06/20 results (out November 6, 2019) Results summary
Q1 FY06/20 results: The company reported Q1 consolidated sales of JPY428.7bn (+71.4% YoY), operating profit of JPY21.1bn ▷ (+45.7% YoY), and net income of JPY12.6bn (+8.2% YoY). The jump in sales and operating profit reflects a boost from the addition of the Uny Group to consolidated results (in Q3 FY06/19) and steady growth in the DQ Group (existing businesses outside the Uny Group). The company revised its full-year forecast to reflect above-plan Q1 results, raising its full-year estimate for sales to JPY1,660.0bn (from JPY1,650.0bn) and its estimate for operating profit to JPY68.0bn (from JPY66.0bn), while leaving its full-year estimate for net income unchanged at JPY45.0bn (equal to EPS of JPY71.03).
DQ Group: The DQ Group reported Q1 sales of JPY271.2bn (+8.5% YoY), a gross profit of JPY71.2bn (+6.7% YoY), and an operating profit of JPY16.4bn (+13.1% YoY). At the end of Q1, the DQ Group had 432 stores in operation for a net increase of 0.7% (or three stores) versus the end of the same quarter last year. Sales at existing Don Quijote stores finished the quarter up 2.9% YoY, experiencing a 4.3% decline in July amid adverse weather conditions, then turning around with a 1.1% rise in August before surging 13.0% YoY in September, aided by both a rush of buying just before the consumption tax hike went into effect and a special “8% discount” sales campaign. The solid rise in sales at existing Don Quijote stores in Q1 is a good sign that the DQ Group is able to keep profit from existing businesses growing, even as it
consciously takes steps that slow growth in order to facilitate the quick integration of the Uny Group, including slowing the pace of new store openings and seconding its own personnel to the Uny Group.
Inbound tourist demand: Sales to inbound tourists during the quarter were down, hurt by a drop in visitors from South Korea that was only partially offset by increases in tourists from other countries (including ASEAN countries, the US, England, and Australia). So, while rising domestic demand accounted for 3.7pp of the 2.9% rise in sales at existing Don Quijote stores in Q1, falling demand from foreign tourists reduced the rise in same store sales by 0.8pp. Still, results
during the period showed the company was successful in its efforts to capture demand from the many tourists that were in Japan for the Rugby World Cup matches. Racking up sales to tourists from a total of 195 different countries thus far, the company appears well-prepared to benefit from the influx of tourists expected in connection with the Tokyo Olympics and Paralympics in 2020.
Impact of Uny on consolidated results: On a net basis, the inclusion of the Uny Group in consolidated results added JPY160.9bn to sales and JPY4.7bn to operating profit (company’s unaudited estimates) versus the same quarter last year.
At the end of Q1, the Uny Group had 264 stores in operation versus 269 at the time of its addition to consolidated results in Q3 FY06/19; amid a harsh operating environment, Q1 sales at existing Uny stores were up a modest 0.1% YoY.
Dual-name stores: The company is still seeing synergies from its conversion of Uny stores to dual-name format stores, which is still working to boost overall sales and earnings. For the first six stores that were converted and have now been open more than one year, the company reported a 97% jump in sales during the initial 12-month period following their conversion, followed by a solid 0.5% YoY increase in sales during the July–September 2019 quarter. Compared with pre-conversion sales, food sales have accounted for a lower ratio of sales at these six stores and sales in other categories are up (including non-food daily necessities, home electronics, sporting goods/leisure products), and this favorable change in the sales mix has helped widen the gross profit margin. The company is looking for sales at these first six
dual-name format stores to continue growing from here as it fine-tunes its merchandise lineup to better meet local market needs and outperform the local competition. For the 16 new dual-name format stores that have been open for less than a year, the company reports that sales have doubled, customer traffic is up 56%, and gross profit is up 83% versus
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pre-conversion levels. The company is looking to have a total of approximately 40 dual-name format stores in operation by the end of FY06/20, around 70 by the end of FY06/21, and about 100 by the end of FY06/22. As before, the company is aiming to increase the amount of operating profit generated by the Uny Group by JPY20.0bn compared to its pre-acquisition level by FY06/24. Revised FY06/20 forecast: Along with the release of Q1 results, the company raised both its 1H and full-year forecast. For 1H, ▷ the company is now projecting consolidated sales of JPY840.0bn (+63.6% YoY) versus its initial estimate of JPY830.0bn and operating profit of JPY36.0bn (+19.9% YoY) versus its initial estimate of JPY34.0bn. For the full year, the company is now projecting consolidated sales of JPY1,660.0bn (+24.9% YoY) versus its initial estimate of JPY1,650.0bn and operating profit of JPY68.0bn (+7.7% YoY) versus its initial estimate of JPY66.0bn. The upward revision reflects only a portion of the above-plan results in Q1, as the new estimates effectively reduced the company’s outlook for Q2 (October–December 2019). We suspect this is due to the difficultly of projecting near-term sales trends in the wake of the consumption tax hike, as the company did not change its cautious outlook for 2H, which projects a 0.6% YoY rise in consolidated sales and a 3.3% decline in operating profit.
Q1 FY06/20 results In Q1 FY06/20, PPIH generated sales of JPY428.7bn (+71.4% YoY), operating profit of JPY21.1bn (+45.7% YoY), and net income of JPY12.6bn (+8.2% YoY). Profit hit a record high. Sales growth for summer merchandise in particular was sluggish in July with the impact of a rainy season that lasted longer than usual, but hot weather in August spurred demand centered on seasonal products. Sales recovered further in September on the strength of an 8% discount campaign and other active efforts to capture demand ahead of the consumption tax hike in October. Consolidation of the Uny Group contributed significantly to the net increase YoY. The DQ Group (existing businesses outside the Uny Group) saw an 8.5% YoY rise in sales and a 13.1% rise in operating profit, so profit hit a new high even without the impact of the Uny Group’s consolidation.
Results of the Don Quijote Group In Q1, the DQ Group’s earnings (unaudited) were sales of JPY271.2bn (+8.5% YoY), gross profit of JPY71.2bn (+6.7% YoY), and operating profit of JPY16.4bn (+13.1% YoY). Don Quijote’s comparable store sales were down 4.3% YoY in July on inclement weather, but recovered for a 1.1% YoY increase in August due to hot weather, while active efforts to capture demand ahead of the consumption tax hike led to a 13.0% YoY increase in September. As a result, sales were up 2.9% YoY in Q1. However, following the tax hike on October 1, comparable store sales fell 6.9% YoY in October.
One of the efforts to capture demand ahead of the consumption tax hike was an 8% discount campaign, as a result of which GPM was 26.3%, down slightly from 26.7% in Q1 FY06/19. Despite this dip in the margin, Q1 gross profit was above plan as the company’s aggressive strategy proved effective. Currently, Don Quijote stores are staffed by relatively young salespeople as more experienced salespeople have been reassigned to help establish dual-name stores (combined with Uny) and new overseas stores. The fact comparable stores still achieved record profit is a testament to the company’s excellent ability to train human resources. Nevertheless, internal assessments show that the younger salespeople still lack sufficient experience to respond quickly to external changes. The company believes it can further increase gross profit with the support of employees who conduct merchandising follow-up.
Breaking down the 2.9% YoY increase in Q1 comparable store sales, domestic demand had a positive impact of 3.7pp, but duty-free (inbound tourists) had a negative impact of 0.8pp. At Don Quijote stores, duty-free sales accounted for 7.9% of sales, down from 8.7% in Q1 FY06/19. Political factors have caused a significant decline in the number of South Korean tourists visiting Japan. Of the duty-free sales, South Korean tourists accounted for 12.2%, down from 22.8% in Q1 FY06/19. Sales to tourists from other regions (Taiwan, ASEAN, the UK, the US, and Australia) have been robust, offsetting some of the decline in sales to tourists from South Korea.
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The DQ Group had 432 stores at the end of Q1 (net increase of three stores or 0.7% YoY). Despite the opening of new stores, including the New Chitose Airport, Tochigi Hirayanagi, and Tokushima stores, the number of new DQ Group stores has been limited as the company turned its attention to establishing dual-name stores.
Results of the Uny Group The Uny Group generated sales of JPY160.9bn and operating profit of JPY4.7bn. Inclusion of the Uny Group in consolidation since Q3 FY06/19 contributed to the net increase YoY in consolidated earnings. There were 169 APiTA and PIAGO stores at the end of Q1 (-21 YoY, -11.1% YoY), and comparable store sales were up 0.1% YoY. Comparable store sales at APiTA and PIAGO were down 5.9% YoY in July due in part to inclement weather, but up 2.7% YoY in August and 4.0% YoY in September on increased demand ahead of the October consumption tax hike. However, following the tax hike, comparable store sales were down 3.5% YoY in October.
In Q1, there was an increase of six dual-name stores (stores converted from APiTA and PIAGO to MEGA Don Quijote UNY stores), bringing the total to 22. The six stores that were converted through March 2018 (the Oguchi, Tokaidori, Zama, Hoshikawa, Toyotamotomachi, and Kou stores) achieved a 97% YoY increase in sales during the first year following conversion (March 2018 to February 2019). Sales then remained robust from April to September 2019, for a YoY increase of 0.5%. The ratio of food sales dropped from 64.2% before conversion to 60.5% recently, while the ratios of daily necessities, home electronics, sporting goods and leisure products increased. Conversion also seems to have had a positive impact on GPM. Progress has been made in tracking consumer needs in each trade area, so the company believes it is still possible to increase the growth rate of the first six stores.
Sales at converted stores (stores that have been operating for more than one year)
120% 197% JPY25.9bn 100% 80% JPY13.2bn Year-on-year
Before After Apr May Jun Jul Aug Sep Oct 2019 (second year after transition) Source: Shared Research based on company data
At the 16 stores converted during 2019 (the Kani, Oumihachiman, Nakazato, Denpouji, Higashioumi, Fujichuuou, Kibuki, Yamato, Suzuka, Isesakiazuma, Shobata, Fujioka, HamamatsuIzumicho, Otagawa, Nabari, and Taketoyo stores), sales doubled for the period from February to September 2019 (or for the period from the conversion date through September for individual stores that were converted later) versus pre-conversion results, while customer counts were up 56% and gross profit up 83%. The ratio of food sales dropped from 74.2% before conversion to 53.7%, while the ratios of daily necessities, home electronics, sporting goods, and leisure products increased. The company made progress on building a foundation for increasing the gross profit margin. Conversion to dual-name stores appears to be generating synergies.
UD Retail, which operates the dual-name stores, generated Q1 sales of JPY19.0bn and an operating loss of JPY1.3bn. Its ability to turn a profit remains difficult as there are still stores being prepared for conversion (such stores are closed for remodeling and preparation for about three months before being reopened). However, PPIH believes UD Retail’s profit position will improve from FY06/21.
PPIH is looking to have a total of approximately 40 dual-name format stores in operation by the end of FY06/20, around 70 by the end of FY06/21, and about 100 by the end of FY06/22. As before, the company is aiming to increase the amount of operating profit generated by the Uny Group by JPY20.0bn compared to its pre-acquisition level by FY06/24.
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Full-year FY06/19 results (out August 13, 2019) Results summary FY06/19 results: The company reported full-year sales of JPY1.3tn (+41.1% YoY), operating profit of JPY63.1bn (+22.4% YoY), ▷ and net income attributable to owners of the parent of JPY48.3bn (+32.5% YoY). This was in line with its previous forecast for sales of JPY1.3tn, operating profit of JPY63.0bn, and net income of JPY48.0bn, and also a new record high. At the end of FY06/19, the group had a total of 693 stores in operation and had achieved an ROE of 15.6%, thereby achieving the targets of JPY1.0tn in sales, 500 stores, and an ROE of 15% set out for FY06/20 under its Vision 2020 plan (announced in August 2015) one year ahead of schedule.
Impact of Uny on consolidated results: The inclusion of Uny in consolidated results starting in Q3 (January–March 2019) added JPY311.7bn to sales and JPY11.9bn to operating profit in FY06/19, according to company estimates (not audited). At the time it was added to the group, Uny had a total of 269 stores in operation. As of the end of FY06/19, this number was down to 265 stores.
DQ Group: The DQ Group (excluding Uny and its subsidiaries) reported FY06/19 sales of JPY1.0tn (+8.3% YoY), gross profit of JPY264.9bn (+8.6% YoY), and operating profit of JPY51.1bn (-1.0% YoY). The 428 stores the DQ Group had in operation at the end of FY06/19 represented a net increase of 10 stores or 2.4%. Sales at existing stores finished up 1.2%
YoY, with 1.0pp of this from sales to inbound tourists and 0.2pp from domestic sales. By product category, the main growth drivers were food (+12.6% YoY), household goods (+6.7% YoY), and electric appliances (+4.5% YoY). Sales of sports & leisure goods rose a modest 1.7% YoY and sales of watches & fashion merchandise rose just 1.6% YoY. Sales of DIY goods were down 4.7% YoY. The full-year gross profit margin of 26.0% was up 0.1pp YoY. The SG&A-to-sales ratio of 21.0% was up 0.6pp YoY, pushed up by increases in personnel expenses and commission payments.
Dual-name stores: The change to its dual-name format at the first six stores (now in their second year in operation) has led to average growth in sales of 75%, growth in customer traffic of 46%, and growth in gross profit of 56% as of the April– June 2019 quarter compared with pre-conversion quarterly figures. This compares with growth in sales of 85%, growth in customer traffic of 56%, and growth in gross profit of 54% during the first three months of the first year following conversion, which means quarterly sales and customer traffic have come down a bit but gross profit is holding at the same level. During the first three months, the six dual-name stores had to prominently feature special bargain goods (on which they accepted lower gross margins) in order to increase name recognition, but the stores are well past that point and for
some time have been focusing mainly on profit management. The ten stores that have been converted to the dual-name format since the start of 2019 got off to a strong start, with sales up 123%, customer traffic up 68%, and gross profit up 107% compared with pre-conversion figures. The company is looking to have 26 more dual-name format stores in operation by the end of FY06/20, then get the total number of dual-name format stores up to around 70 by the end of FY06/21, then up to around 100 by the end of FY06/22. As before, the company is looking to increase the amount of operating profit generated by the Uny Group by JPY20.0bn over its pre-acquisition level by FY06/24.
Sales to inbound tourists: Don Quijote reported duty-free sales of some JPY68.4bn (+20.4% YoY), with this accounting for 9.8% of total sales by Don Quijote. By country, tourists from China accounted for 40.5% of its duty-free sales, tourists from South Korea 22.5%, and tourists from Taiwan 13.6%. Tourists from major ASEAN countries accounted for 16.3% of duty-free sales, with this figure rising steadily over the course of the year. FY06/20 forecast: For FY06/20, the company forecasts full-year sales of JPY1.7tn (+24.2% YoY), operating profit of JPY66.0bn ▷ (+4.6% YoY), recurring profit of JPY66.0bn (-3.3% YoY), and net income of JPY45.0bn (-6.7% YoY). The company expects the addition of Uny as a consolidated subsidiary to push up 1H consolidated sales by 61.7% YoY and 1H consolidated operating profit by 13.3% YoY. In contrast, it expects Uny to add only 0.6% to 2H consolidated sales and push down 2H consolidated
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operating profit by 3.3%. The projected decline in full-year recurring profit reflects the dropout of JPY5.1bn in non-operating income booked in FY06/19; the company expects to book no non-operating income or losses on a net basis in FY06/20. The 4-for-1 stock split previously announced by the company will go into effect September 1, 2019. The annual dividend of JPY11.0 per share indicated for FY06/20 represents an increase of JPY1.0 per share. For FY06/20, the company anticipates dividend payout ratio of 15.5%. In the medium term, it targets the payout ratio of at least 20%.
Key assumptions underlying the company’s FY06/20 forecast including capital spending of JPY40.0bn, at least 20 new store openings (including overseas), at least 25 conversions into dual-name format stores, and flat same store sales at both Don Quijote and Uny. Change in president and medium-term business plan: The company has announced that it will appoint Naoki Yoshida, ▷ currently Senior Managing Director and CAO, to the position of Representative Director (President and CEO) after its annual general shareholders meeting scheduled for September 25, 2019. As the next president, Naoki Yoshida will be heading the effort to put together a new medium-term business plan under which the company will be targeting sales of JPY2.0tn and an operating profit of JPY100.0bn. The company plans to make public the new business plan in February 2020.
Naoki Yoshida: After working for McKinsey & Company Japan and a number of other companies, Naoki Yoshida came onboard the PPIH group as president of Don Quijote (USA). In addition to heading up the group’s overseas operations, he also oversees the group’s accounting division. He current serves as Senior Managing Director and Chief Administrative Officer (CAO) and also as the Chief Compliance Officer (CCO). When he takes over as President and CEO, Naoki Yoshida
will be the third president, the first being the founder, Takao Yasuda, and the second being the current president, Koji Ohara. He will also be the first president that has not worked his way up through the ranks at the company.
Corporate governance: The elevation of someone without a sales background like Naoki Yoshida to lead the organization does not mean that the group is shifting its focus away from sales, as there remains plenty of support for the new president from long-time sales veterans including Takeshi Nishii, and the newly nominated directors Kazuhiro Matsumoto, Ken Sakakibara, and Kenji Sekiguchi. With the company having historically been led by someone whose background was
in sales, the appointment of Naoki Yoshida as president will certainly represent a change in leadership style toward team-based management. Still, the foundational management principles of the company are those that were laid out by its founder, Takao Yasuda, with one of those principles being delegating authority to subordinates as a means of passing along knowledge to the next generation of leaders. Thus, we find the current President and CEO, Koji Ohara, taking the opening afforded by the achievement of the targets under the medium-term plan one year ahead of schedule as an opportunity to step down as president and give the next president, Naoki Yoshida, roughly four years to devote all his
energies to growing the company.
Accelerating overseas expansion: After stepping down as President and CEO, Koji Ohara is slated to move into the position of president of the group’s US subsidiary, Pan Pacific Retail Management (USA). His appointment to this position overseeing US operations reflects the company’s belief that there is a lot of money to be made in the US given the favorable growth in the US economy and the ongoing growth in the US retail market, the declining cost of vacated retail property with fixtures left in place, and the favorable reception given by US consumers to the company’s Tokyo Central stores. Because of the importance of overseas expansion in the group’s overall expansion plans, Koji Ohara will be given a key role to play on this front. Meanwhile, at the group’s ASEAN business (in which company founder Takao Yasuda is still deeply involved), the favorable results from new store openings thus far has prompted the company to step up the pace
of new store openings and entry into new markets going forward.
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FY06/19 results The company posted record profits, reporting full-year sales of JPY1.3tn (+41.1% YoY), operating profit of JPY63.1bn (+22.4% YoY), and net income attributable to owners of the parent of JPY48.3bn (+32.5% YoY).
Uny became a wholly owned subsidiary of the company from January 2019 on additional acquisition of shares. Although the addition of Uny’s earnings had a substantial positive impact, sales and gross profit increased after adjusting for the effect of Uny’s consolidation, suggesting that the company’s existing business has continued to grow.
Uny Group Based on company materials, Uny’s 2H FY06/19 results (January–June 2019) were JPY311.7bn in sales and operating profit of JPY11.9bn. Although we cannot make a simple comparison due to differences in fiscal year and accounting standards, we can conclude that becoming a PPIH group company contributed to the improvement of Uny’s earnings, considering that its operating profit in 1H FY02/19 (March–August 2018) was JPY9.3bn. Changing some stores to the dual-name format and taking steps to raise the morale of Uny employees appear to have been effective.
The performance of stores converted to dual-name formats (MEGA Don Quijote UNY and Don Quijote UNY) was robust. The change to its dual-name format at the first six stores (now in their second year in operation) has led to average growth in sales of 75%, growth in customer traffic of 46%, and growth in gross profit of 56% as of the April–June 2019 quarter compared with pre-conversion quarterly figures. This compares with growth in sales of 85%, growth in customer traffic of 56%, and growth in gross profit of 54% during the first three months of the first year following conversion, which means quarterly sales and customer traffic have come down a bit but gross profit is holding at the same level. During the first three months, the six dual-name stores had to prominently feature special bargain goods (on which they accepted lower gross margins) in order to increase name recognition. We believe that these stores are now able to maintain year-ago gross profit levels without huge displays of loss leaders, indicating improved efficiency. As a rule, new stores attain peak profit after five to seven years, after which remodeling or other measures are required. The six stores initially converted to the dual-name format have the potential for further earnings improvement as they become better known in their trade areas and adapt to local needs.
The ten stores that have been converted to the dual-name format since the start of 2019 got off to a strong start, with sales up 123%, customer traffic up 68%, and gross profit up 107% compared with pre-conversion figures. Expectations are greater than ever that converting stores to the dual-name format improves earnings of Uny stores. The company is looking to have 26 more dual-name format stores in operation (around 40 in total) by the end of FY06/20, then get the total number of dual-name format stores up to around 70 by the end of FY06/21, then up to around 100 by the end of FY06/22. As before, the company is looking to increase the amount of operating profit generated by the Uny Group by JPY20.0bn over its pre-acquisition level by FY06/24.
DQ Group The DQ Group (excluding Uny and its subsidiaries) reported FY06/19 sales of JPY1.0tn (+8.3% YoY), gross profit of JPY264.9bn (+8.6% YoY), and operating profit of JPY51.1bn (-1.0% YoY). The 428 stores the DQ Group had in operation at the end of FY06/19 represented a net increase of 10 stores or 2.4%. Sales at existing stores finished up 1.2% YoY, with 1.0pp of this from sales to inbound tourists and 0.2pp from domestic sales.
By product category, the main growth drivers were food (+12.6% YoY), household goods (+6.7% YoY), and electric appliances (+4.5% YoY). Sales of sports & leisure goods rose a modest 1.7% YoY and sales of watches & fashion merchandise rose just 1.6% YoY. Sales of DIY goods were down 4.7% YoY.
The full-year gross profit margin of 26.0% was up 0.1pp YoY. As a rule, an increased sales share of food and reduced share of other products means lower GPM, but a higher GPM on electrical appliances and sports & leisure goods compensated. The SG&A-to-sales ratio of 21.0% was up 0.6pp YoY, pushed up by increases in personnel expenses and commission payments.
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Q3 FY06/19 results (out May 8, 2019) Results summary Cumulative Q3 FY06/19: Sales were JPY919.0bn (+30.7% YoY), operating profit JPY46.3bn (+15.7% YoY), and net income ▷ attributable to owners of the parent JPY37.1bn (+36.4% YoY), a record high
Uny consolidation: Uny was consolidated in Q3 FY06/19 (January–March 2019). Q3 sales were JPY405.6bn (+68.8% YoY),
operating profit JPY16.3bn (+50.9% YoY), and net income JPY13.4bn (+58.4% YoY)
Recovery in Don Quijote comparable sales: Don Quijote comparable store sales are recovering, with monthly sales -0.3% YoY in January, +1.6% YoY in February, and +4.1% YoY in March
By product category: Q3 discount store sales were JPY258.3bn (+7.4% YoY). The key driver was food (+13.3% YoY), with increases in household goods (+5.8% YoY), electric appliances (+3.2% YoY), and sports & leisure goods (+2.0% YoY), while watches & fashion merchandise (-0.9% YoY) and DIY goods (-3.0% YoY) fell
DQ Group: DQ Group (excluding Uny Group) operating profit was JPY10.1bn (-6.2% YoY) for Q3. The sales share of foods rose, and SG&A expenses rose faster than sales, partly due to sales department expenses. The company aims to grow sales and gross profit faster than SG&A expenses to absorb the impact of SG&A expense growth
Uny contribution: The net impact of Uny Group consolidation was an increase of JPY6.2bn in operating profit (company estimate)
Dual-name stores: The initial format changes to dual-name format at six stores yielded growth of 97% in sales to JPY25.9bn, 71% in customer count to 10.84mn, 72% in gross profit to JPY5.8bn, and JPY500mn in operating profit to JPY480mn in the 12 months to February 2019 compared to pre-conversion figures. The company plans to review prices on individual products to further improve GPM. The company expects to have 10 dual-name stores during FY06/19, 45 stores by end-FY06/20, 75 stores by end-FY06/21, and 100 stores by end-FY06/22
Extraordinary items: The company booked JPY9.1bn in negative goodwill and JPY1.4bn from a step acquisition as extraordinary gains in Q3, and JPY9.8bn in impairment losses, primarily in the discount store business Slight forecast revisions: The company revised its full-year FY06/19 forecasts to sales of JPY1.33tn, (+41.3% YoY, previous ▷ forecast of JPY1.37tn); operating profit of JPY63.0bn (+22.2 % YoY, unchanged), recurring profit of JPY67.0bn (+17.1% YoY, JPY65.0bn), and net income of JPY48.0bn (+31.9% YoY, unchanged)
The sales forecast revisions are mainly due to accounting policy. Under the previous forecast, the company assumed that sales would be recognized showing the gross value of Uny’s sales purchase-as-sold transactions (where the product sale and procurement occur simultaneously), but in fact sales were recognized on a net basis. There is no impact on operating profit. The upward revision to recurring profit reflects trends in the nonoperating balance through Q3
Note: The company said that results for the DQ Group are running slightly behind expectations but a better-than-expected improvement in the Uny Group’s results is offsetting this
Q3 FY06/19 results In cumulative Q3 FY06/19, sales were JPY919.0bn (+30.7% YoY), operating profit was JPY46.3bn (+15.7% YoY), and net income was JPY37.1bn (+36.4% YoY), marking new record highs. Uny became a wholly owned subsidiary in Q3 (January–March 2019), contributing to consolidated earnings.
In Q3 FY06/19, sales were JPY405.6bn (+68.8% YoY), gross profit was JPY116.5bn (+92.8% YoY), operating profit was JPY16.3bn (+50.9% YoY), and net income was JPY13.4bn (+58.4% YoY). GPM improved 3.6pp YoY from 25.1% to 28.7%. The consolidation of Uny helped to improve GPM. However, the SG&A-to-sales ratio rose 4.1pp YoY from 20.6% to 24.7%, reflecting Uny’s large SG&A expense weighting. OPM worsened 0.5% YoY from 4.5% to 4.0%.
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Based on a rough calculation by multiplying Q3 results by four to obtain annual values, sales reached JPY1.62tn and operating profit JPY65 .0bn as a result of making Uny a consolidated subsidiary.
Large extraordinary items were recorded in Q3. The company booked JPY9.1bn in negative goodwill and JPY1.4bn from a step acquisition for a total of JPY10.6bn as extraordinary gains, and a total of JPY11.9bn in extraordinary losses, including JPY9.8bn in impairment losses, primarily in the discount store business.
Results of the Don Quijote Group In Q3. the DQ Group (excluding Uny businesses) posted sales of JPY251.4bn (+5.4% YoY) and operating profit of JPY10.1bn (-6.2% YoY). Comparable store sales at Don Quijote Co., Ltd. were down 0.3% YoY in January 2019, but turned up thereafter, rising 1.6% in February and 4.1% in March. All-store sales grew 3.1% YoY in January, 5.9% in February, and 8.9% in March. The number of DQ Group stores totaled 439 at end-March 2019, increasing 7.6% from 408 a year earlier.
By product category, the key driver was food (+13.3% YoY), with increases in household goods (+5.8% YoY), electric appliances (+3.2% YoY), and sports & leisure goods (+2.0% YoY), while watches & fashion merchandise (-0.9% YoY) and DIY goods (-3.0% YoY) fell. Overseas sales were JPY27.0bn (+13.4% YoY), with the Singapore business making a contribution.
GPM was 25.3%, up 0.2pp from 25.1% a year earlier. Although the sales share of foods with relatively low GPM increased, improved margins on other products compensated, lifting the overall GPM of the DQ Group. The SG&A-to-sales ratio was up 0.7pp YoY from 20.6% to 21.3%, indicating that the increase in sales and gross profit are not sufficient to cover the rise in personnel and other expenses. The DQ Group’s OPM fell 0.5pp YoY from 4.5% to 4.0%.
Progress with dual-name stores Uny stores (APiTA, PIAGO) converted to MEGA Don Quijote UNY dual-name stores have maintained a strong performance. In FY02/19, sales (excluding concession sales) of the first six stores converted to dual-name stores (Oguchi, Tokaidori, Zama, Hoshikawa, Toyotamotomachi, and Kou stores) grew 97% to JPY25.9bn versus the pre-conversion total. Customer traffic increased 71% to 10.84mn, gross profit rose 72% to JPY5.8bn, and operating profit increased by JPY500mn to JPY480mn. Their conversion to dual-name stores proved more effective than the company’s assumption of around 50% sales growth.
Comparison of performance of dual-name stores before and after conversion
(JPYbn) (mn) (JPYbn) (JPYmn) Sales Customer count Gross profit Operating profit 30.0 12.00 6.0 500
25.0 10.00 5.0 400 +72％ +97％ +71％ 20.0 8.00 4.0 300 480 +JPY500mn 15.0 6.00 3.0 5.8 200 25.9 10.84 10.0 4.00 2.0 100 6.37 3.4 13.2 5.0 2.00 1.0 0 -20
0.0 0.00 0.0 -100 Before After Before After Before After Before After Source: Shared Research based on company data
The change in store format affected customer segments as well. Main customers prior to conversion were women in their 40s and 50s. After conversion, dual-name stores attracted new customers segments. The number of male customers who rarely visited APiTA and PIAGO stores increased sharply, and stores attracted more younger women aged 10–39. Young families, younger consumers, and foreign residents in Japan joined the core customer base of middle-aged consumers and seniors.
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Change in member breakdown by age group
Before (UCS and uniko members) After (majica members) Male (19%) Female (81%) Male (32%) Female (68%) 80s 80s 70s 70s
60s 60s
50s 50s
40s 40s
30s 30s
20s 20s
10s 10s
Source: Shared Research based on company data Note: Member customers prior to conversion are those who used the company’s services more than once during a year starting February 21, 2017. The number of member customers after conversion is as of March 16, 2019.
Change in customer segment breakdown
Foreign residents in Japan
Youth
Youth Young families
Young families
Middle-aged and Middle-aged and older older
Before After Source: Shared Research based on company data
The sales mix has also changed substantially as a result of the new format and customer segments. Before conversion, foods accounted for 64.2% of sales, home-oriented goods 19.0%, and apparel 16.8%. As sales grew, the share of home-oriented goods increased to 33.0% (electric appliances 6.8%, household goods 16.0%, sports & leisure goods 4.4%, and others 5.8%), while the share of foods contracted to 60.3% (processed food 39.3%, fresh food 21.0%) and apparel to 6.7%. Sports & leisure goods are relatively profitable for the company and likely to produce synergies with established formats (Don Quijote and MEGA Don Quijote). Its strategy of attracting repeat customers with foods, increasing the frequency of their visits, and securing profit with daily goods has proved successful.
Uny’s sales breakdown by product category
Before
Apparel Foods Household goods 16.8% 64.2% 19.0%
After Electric appliances Sports & leisure goods 6.8% 4.4% Apparel Processed food Fresh food Daily goods Other 6.7% 39.3% 21.0% 16.0% 5.8%
Apparel Foods Household goods 6.7% 60.3% 33.0%
Source: Shared Research based on company data
By end-Q3, four stores (Kani, Omihachiman, Nakazato, and Denpoji stores) had reopened as dual-name stores. Shortly after opening, these stores are seeing a similar rate of improvement in sales and customer traffic as the six stores converted earlier. Six more dual-name stores are scheduled to open by end-June 2019, bringing the total to 16.
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Overseas stores opened in ASEAN In Q3, PPIH made progress in opening stores and preparing to open more stores in the ASEAN region. The third Singapore store DON DON DONKI City Square Mall store opened in January 2019. The company opened a shopping mall DONKI Mall Thonglor in February and its first Thai store DON DON DONKI Thonglor store as the anchor tenant of the shopping mall. In May 2019, the company opened a small store (31sqm) mainly selling baked sweet potato in Singapore’s Changi Airport and DON DON DONKI Square 2 store, which mainly sells food including fresh fruit and vegetables, fish, meat, and prepared meals in Square 2, a shopping mall in Singapore.
Results of the Uny Group In Q3 FY06/19, the Uny Group contributed JPY155.1bn in sales, JPY53.1bn in gross profit, and JPY6.2bn in operating profit. All-store sales were down 2.6% YoY. Although comparable store sales secured YoY growth (+0.2% YoY), the drop in the number of stores hurt performance. The number of GMS stores at end-Q3 was 182 (89 APiTA and 93 PIAGO stores). By end-Q3, 10 stores had been transferred to subsidiary UD Retail as dual-name stores.
1H FY06/19 results (out February 5, 2019)
1H FY06/19: Sales were JPY513.4bn (+10.9% YoY), operating profit JPY30.0bn (+2.6% YoY), and net income attributable to ▷ owners of the parent JPY23.6bn (+26.4% YoY), a record high.
Results exceeded company forecasts announced at Q1: Sales by 0.3%, operating profit by 0.1%, and net income by 9.8% Upward revision: Pan Pacific International (PPIH) revised up its full-year forecasts to sales of JPY1.37tn (+45.5% from previous ▷ year results; initial forecast JPY1.0tn), operating profit of JPY63.0bn (+22.2%; JPY53.0bn), net income of JPY48.0bn (+31.9%; JPY37.0bn), and EPS of JPY303.31 (initial forecast, 233.90)
The main factor in the upward revision is the consolidation of Uny in Q3, with slight increases at existing businesses Uny: The company acquired 60% of Uny’s outstanding shares on January 4; combined with the previous 40% stake, Uny ▷ became a wholly owned subsidiary
The company confirmed the significant benefits of format changes to date under the collaboration (sales up 83%, gross profit 59%, and customer count 58% at trial stores)
PPIH plans to change the format of roughly 100 of the 188 Uny operated stores within five years. It estimates the boost to operating profit from the format change at JPY20.0bn (negative impact of JPY2.0 at existing stores)
Acquisition funds have been procured by bank loans and hybrid financing. Company reiterated that it had no plans for equity financing Sense of urgency at existing stores: Comparable store sales +0.4% YoY in October, +0.5% in November, and -1.2% in ▷ December. Company working to rekindle comparable store sales growth through new hires, delegation of more authority to sales floor, and systematic response Overseas: Longer-term aim is sales of JPY1tn (one-third of JPY3tn in group sales). Drivers to be ASEAN and West Coast of US ▷ Medium-term plan: Uny acquisition brings Vision 2020 sales targets of JPY1tn and 500 stores within range. PPIH is drafting new ▷ medium-term plan
Results summary 1H results and full-year forecasts: Record profit in 1H. Full-year forecasts incorporate UNY as subsidiary 1H FY06/19 sales were JPY513.4bn (+10.9% YoY), operating profit JPY30.0bn (+2.6% YoY), and net income attributable to owners of the parent JPY23.6bn (+26.4% YoY), a record high. Results exceeded company forecasts released at the time of Q1 announcement: sales by 0.3%, operating profit by 0.1%, and net income by 9.8%. In an industry suffering from a slump in consumption, the company’s efforts are succeeding. It has maintained an aggressive management stance to drive longer-term growth, prioritizing customer focus and giving autonomy to individual stores. The company’s efforts to tap into the inbound
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tourist demand are paying off as duty-free store sales were JPY31.8bn, +27.0% YoY. Customer traffic is growing faster than the number of visitors to Japan, suggesting that for many, Don Quijote is a must-see destination.
In standalone Q2, sales were JPY263.4bn (+10.0% YoY), operating profit JPY15.5bn (+3.8% YoY), and net income JPY12.0bn (+17.2% YoY). Don Quijote comparable store sales were sluggish at +0.4% in October, +0.5% in November, and -1.2% in December, but growth was underpinned by aggressive store openings. Gross profit, a KPI for the company, was JPY68.9bn (+13.1% YoY), and SG&A expenses rose 16.1% due to business expansion.
In Q2, sales of food (such as noodles, boil-in-the-bag food, confectionery) were up 8.1% YoY, household goods (sunblock, moisturizer, kitchen and bath ware) up 4.9%, and electric appliances (wireless headphones, smartphone accessories, game consoles) up 1.4%, but watches & fashion merchandise were down 3.1%. The company recognizes that its aggressive sales strategy was not enough to make up for the shortfall from a strategic inventory adjustment to imported brand-name products. It has uncovered new issues and is laying the groundwork for future growth. An aggressive store opening strategy saw overseas sales of JPY24.3bn, 2.7x the Q2 FY06/18 levels.
PPIH revised up its initial forecasts for the full year. It expects sales of JPY1.37tn (+45.5% from previous year results; initial forecast JPY1tn), operating profit of JPY63.0bn (+22.2%; JPY53.0bn), net income of JPY48.0bn (+31.9%; JPY37.0bn), and EPS of JPY303.31 (initial forecast, 233.90). This is mainly owing to the consolidation of Uny in Q3, with slight upward adjustments to existing businesses reflecting Q2 results.
The company has been working towards the targets of JPY1.0tn in sales, 500 stores, and an ROE of 15.0% laid out under its Vision 2020 medium-term business plan (announced in August 2015). With Uny now a wholly owned subsidiary, the company is on track to beat the targets for sales and stores in FY06/19 and is in the process of putting together a new medium-term plan, one that promises to address key issues including the how to make best use of Uny, the revitalization of existing domestic stores, new store opening plans, and overseas expansion.
Uny now a subsidiary: Aiming at extra JPY20bn in operating profit through format change The company acquired 60% of Uny s outstanding shares on January 4; combined with the previous 40% stake, Uny became a ’ wholly owned subsidiary. Its performance will be reflected in the consolidated results in Q3.
PPIH plans to improve earnings at Uny by converting the format of roughly 100 of the 188 Uny operated stores within the next five years to either the MEGA UNY or Don Quijote UNY format. It has conducted trial format changes with dual-name stores at Oguchi, Tokaidori, Zama, Hoshikawa, Toyotamotomachi, and Kou, and reported significant impacts following the conversions with sales up 83%, gross profit up 59%, and customer traffic up 58% (preliminary figures, comparing January 2019 with March 2018). It appears that the delegation of authority accompanying the format change has boosted the motivation of Uny employees, so this bodes well for future profit growth.
Based on multiple simulations under certain parameters, the company estimates that format conversions could yield roughly JPY20.0bn in additional operating profit. At the parent level, Uny reported total operating revenue of JPY712.8bn and an operating profit of JPY18.0bn in FY02/18 (Japanese accounting standards). In addition to JPY670.6bn in sales at directly managed stores, Uny’s operating revenue included JPY42.2bn in revenue from other sources, most of which was rent payments from store tenants. Excluding this rental income, an operating loss in Uny’s retail business was close to JPY20bn in FY02/18, so the first goal PPIH is looking to accomplish is putting the retail operations of Uny back into the black by making changes such as the conversion of Uny stores to the dual-name format.
While there may be some negative impact on other group stores in the vicinity, which the company expect to be only about JPY2.0bn, the company thinks it is far less than the potential benefits from the move.
At the 1H results briefing held on February 5, 2019, the company said it is currently planning to change formats at 10 stores in FY06/19 and another nine in FY06/20, but that it would like to bring the format conversions forward as much as possible after
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scrutinizing contract terms. In fact, not long after the results briefing the company added to the list, announcing confirmed plans for three more conversions to the dual-name format: the APiTA Minokamo store (scheduled to reopen following conversion in October 2019), the APiTA Toukadai store (scheduled to reopen following conversion in November 2019), and the APiTA Fukui store (scheduled to reopen following conversion in December 2019). Even though the company has said it plans to convert about 100 stores to the dual-name format over the next five years, it now appears to be aiming to meet the goal of 100 stores in only four years and spend the fifth year adding more such stores and refining the dual-name format concept and execution.
Note: In addition to the transfer of Uny shares from FamilyMart UNY Holdings (FU-HD, TSE: 8028), FU-HD announced a tender offer for 20% of the shares in the company. However, during the offer period (November 7 to December 19, 2018), the shares traded above the offer price (JPY6,600), so FU-HD managed only to acquire a portion (24,271 shares) of the planned total. On December 20, 2018, FU-HD commented that it planned to consider additional purchases of the company’s stock on market and by other means, while keeping a close eye on market developments, but it had not decided upon specific details such as timeframe.
Toward the acceleration of comparable store sales PPIH feels a sense of urgency in view of the slump in comparable store sales. It recognizes that there is still scope to grow comparable store sales if it moves promptly to meet evolving customer needs and proactively reconfigures its sales floors. It is already making moves to rekindle same-store sales growth, including personnel recruitment, devolving more authority to the sales floors, and rolling out systematic responses.
With regard to organizational restructuring, the company indicated that its previous structure consisting of seven sales departments and 60 branch offices has not served it well from the standpoint of timely decision-making at individual store level. For example, the company has found some stores that are receiving instructions from multiple channels while others have resorted to simply waiting to be told what to do, instead of actively pushing ahead with store reforms. In response, the company moved to simplify its organizational structure in February, reducing the number of sales departments to four and the number of branch offices to 20. With this change the company is expecting to see the local store managers to use their own experience and judgment to gauge shifts in local consumer preferences, and quickly make decisions that will lead to higher sales at existing stores.
Aiming for JPY1tn in overseas sales, primarily in ASEAN and US At the February 5, 2019 results briefing, President Ohara commented that “While I am President, I want to sow the seeds to reach our long-term aspirations of JPY3tn in sales, including JPY1tn from overseas.” The plan is for President Ohara to spearhead the drive in the US (mainly West Coast and Hawaii) and Thailand. Meanwhile, company founder and returning director Takao Yasuda will lead efforts in ASEAN excluding Thailand (mainly Singapore). Many retailers have been closing their brick-and-mortar stores in the US West Coast. In the view of President Ohara, this “vast number of vacant, outfitted stores looks like a mountain of treasure.” The company’s new name, Pan Pacific International, is a reflection of its ambition to dominate both sides of the Pacific through growth in the US and ASEAN.
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Other information
History
Don Quijote was established in 1980 by the current chairman and its largest shareholder Takao Yasuda. Cleaning and restocking his single shop at night, Yasuda discovered that there was a demand for late night shopping that he could profitably meet while the competition was literally asleep. Even today, Don Quijote stores generate more than 50.0% of sales from 8pm onward. Yasuda opened his first Don Quijote (Donki) outlet in 1989 using two signature principles: late night opening hours and cramming in as many items as space would allow (“compression display”).
Other early features preserved to this day are handwritten ad-hoc point of purchase (POP) displays, a rich choice of variety goods ranging from parallel import Rolex watches to fancy dress costumes, and “spot” merchandise. 30–40% of items sold in Don Quijote stores were sourced from excess inventories in the retail market chain and inventory liquidations by wholesalers and other retailers. Buying these “spot” items allowed the company to build a foundation for a business that offers low prices but maintains high margins.
Another discovery made by Yasuda was young urbanites required shopping entertainment (amusement factor) to kill time. Chaotic and fun, Don Quijote stores provided such entertainment. Its customers were “fun hunters” rather than the bargain hunters of conventional discount retailing. They would buy novelty products that other retailers were not carrying, which was another factor that allows the company to earn higher margins. To this day, the company expresses its business model as a formula—Convenience + Discounts+ Amusement (CV+D+A).
Initially, Don Quijote management gave chiefs of individual product sections at each store unprecedented freedom to make purchasing and merchandising decisions. They competed against their peers in other stores and other sections of their own store, stimulated by incentives and a transparent information flow system. This approach was partially changed in the recent years to a more centralized purchasing system for most products, but store staff still has a large degree of autonomy.
In 1996, Don Quijote listed on the JASDAQ market and in 2000 moved to the First Section of Tokyo Stock Exchange.
Don Quijote experienced some controversy in its early years as a listed company. When the company started opening bigger stores outside of night entertainment quarters, local residents vocally objected to the openings. Management eventually learned to deal with this issue by communicating with residents early on, compromising on details, and otherwise working to alleviate concerns. Don Quijote was also the victim of criminal incidents, which received substantial and sometimes unfavorable media attention. Problems subsided in late-2005 as the management learned from earlier PR mistakes. However, the non-conventional nature of the Don Quijote model will likely continue to draw public scrutiny, something that has sometimes affected its share price although had not dented its earnings.
The company rapidly expanded and had 27 stores in FY06/00 compared to seven at the end of FY06/97.
As part of the company’s search for a format that could be a competitor to convenience stores, FY06/01 saw the birth of the Picasso format, an experimental model for smaller markets. However, Picasso store openings were stopped at 15 stores in FY06/06, and they did not become a material earnings contributor. A large store format called PARO (“Purchase Amusement Rambling Oasis”) also emerged (later renamed PAW).
At the end of FY06/02, the company talked about a “Second Stage of Growth,” mentioning Don Quijote, Picasso, and PAW as three fully established formats. The company also started growing outside its core Tokyo market and opened stores nationwide in Osaka, Nagoya, Fukuoka and Sapporo.
In FY06/03, the company started selling drugs using pharmacists connected to consumers in the store by a videophone in an innovative attempt to bypass Japan’s strict pharmaceutical retailing legislation. While this service was well received by customers,
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it met objections from the Ministry of Health, Labor and Welfare, and after a prolonged debate the sales of drugs via videophone was allowed with some conditions. Ultimately, though, the service was terminated following April 2009’s revision to the Pharmaceutical Affairs Law.
In FY06/04, the company announced a new mid-term plan, called “7532” (in reference to Don Quijote’s exchange ticker code): 7.0% recurring profit margin, 500 yen in EPS, 300.0 billion yen in sales within 3 years, and double-digit top line and 20.0% earnings growth.
The company faced negative media coverage in FY06/05 when an arson attack on two of its stores in December 2004 killed three employees and injured another eight people. The company’s compression display policy was blamed as a factor behind the rapid spread of the fire, and also hampered victims’ escape. In response, the company implemented fire safety measures in excess of legal requirements and placed permanent guards on duty at its stores.
In August 2005, Don Quijote announced its intention to acquire a stake in Origin Toshu (now unlisted), a ready-made meal/boxed-lunch (bento) retailer. Don Quijote was eager to develop a convenience-store format but lacked expertise in ready-made meals; acquiring Origin would have given it access to this essential know-how. By February 2006, Don Quijote had accumulated a 47.8% stake in Origin in the open market. Origin saw the move as hostile. Ultimately, Aeon Co. (TSE1: 8267) emerged as a white knight with Don Quijote selling its shares at a considerable profit. The company’s convenience store ambitions though were later put on hold.
Also in 2005, the company stirred a minor controversy, which might serve as an illustration of its corporate culture: after the successful March 2005 opening of a store in Osaka with an integrated Ferris wheel, the company erected a half-pipe roller coaster on the roof of its Roppongi store, causing an outcry among some local residents who complained about noise pollution. The company closed the attraction.
In November 2006, the company became the sponsor of the corporate restructuring of DOit, a home improvement retailer with 24 stores in Saitama, Tokyo, and Kanagawa prefectures. Don Quijote took on the existing DOit debt for JPY14.9bn. This translated into roughly JPY620mn investment per DOit store. Don Quijote gained access to a number of strong locations and acquired JPY9.0bn (book value) worth of land. With the average floor space of 4,169sqm (vs. average of 1,175sqm for Don Quijote at the time), some of DOit stores were ideal for large-scale Don Quijote stores. Don Quijote proceeded to restructure operations. The theme of FY06/07 was “Do It Myself!”—a word play on Do-It-Yourself.
DOit
Source: Shared Research based on company data
In FY06/08, the pace of M&A accelerated with the acquisition of Nagasakiya in October 2007, a large supermarket operator with 55 stores in 18 prefectures. Don Quijote bought the initial 86.0% stake from Kyoden (TSE2: 6881) and related parties. It eventually paid a total of 13.3 billion yen for 100.0% of Nagasakiya and assumed 3.0 billion yen in net debt. The acquisition gave Don Quijote 369,108sqm of sales floor space overnight. The total investment translated into roughly 44,000 yen per sqm of sales space. By comparison, a new Don Quijote or PAW store usually costs around 200,000 yen per sqm. The acquisition pushed the company into one of the 25 largest Japanese retailers by sales.
In FY06/09, the attention was on the Nagasakiya turnaround. MEGA Don Quijote emerged as a new future template for growth. It acquired Big One, a discounter with 7 stores in prefectures of Aichi and Gifu, buying 100% of shares for 2.3 billion yen.
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In FY06/11, the company began developing a new store format under the MEGA Don Quijote franchise, New MEGA Don Quijote. Also, for its core Don Quijote format, the company began developing larger stores with a sales floor of 2,000sqm or larger. In this period, stores openings accelerated outside the Tokyo metropolitan area, while the company turned Fidec Corporation (company name changed to Accretive Co. on July 1, 2012; TSE1: 8423) into a subsidiary by underwriting a third-party offering of new shares.
In FY06/12, Don Quijote Shared Service Co., Ltd. was established (now a consolidated subsidiary) to provide shared back-office services to Don Quijote group companies.
In FY06/13, the company began opening stores as a means to help revitalize regional shopping centers. During this period, the company made The Earth Co. (company name changed to Japan Asset Marketing Co., Ltd. on July 2013) a subsidiary by underwriting a third-party offering of new shares.
In FY06/14, the company and Nagasakiya Co., Ltd. jointly established overseas holding company and headquarters Pan Pacific International Holdings Pte. Ltd. (PPI Holdings) in Singapore. The company also acquired Marukai Corporation (U.S.A.), a subsidiary of Marukai Corporation (Japan) and operator of 11 stores in Hawaii and California, through PPI Holdings’ subsidiary, Pan Pacific International & Co.
In August 2013, the company established Don Quijote Preparatory Co., Ltd. (now Don Quijote Co., Ltd.) by company split, with the aim of moving to a holding company structure. In December of the same year, the parent company changed its name to Don Quijote Holdings Co., Ltd. Don Quijote Preparatory Co., Ltd. also changed its name to Don Quijote Co., Ltd. and inherited the operations of the parent company (Don Quijote Holdings Co., Ltd.) via absorption-type split (with some exceptions).
In March 2014, the company launched its own majica e-money service.
In July 2014, founder, chairman, president and CEO Takao Yasuda became chairman and CEO, and Koji Ohara took over as president and COO.
In May 2015, the company opened its first Tokyo Central store in California. Marukai Costa Mesa was fully remodeled and opened as Tokyo Central, a new food supermarket format that sells a variety of take-out foods and an extensive range of food and various product items imported from Japan as well as US national brand products.
In July 2015, founder Takao Yasuda resigned as chairman and CEO, and Koji Ohara became president and CEO, reflecting Yasuda’s view that stepping down voluntarily while he was still physically and mentally capable was essential for the long-term prosperity of the group. It was a decision based on delegating management authority, which has always been a priority for Yasuda.
In September 2016, the company changed its governance structure from a company with a board of auditors to a company with an audit and supervisory committee.
In January 2017, the company sold part of its shares in consolidated subsidiary Accretive to Fuyo General Lease (TSE1: 8424), making Accretive an equity-method affiliate rather than a consolidated subsidiary.
In August 2017, the company reached a basic agreement with FamilyMart UNY Holdings (TSE1: 8028) to form a capital and business alliance. Under the agreement, FamilyMart UNY Holdings, which then owned 100% of Uny, transferred 40% of its UNY shares to PPIH (then Don Quijote Holdings), making Uny an equity-method affiliate of PPIH. At the operational level, the alliance called for some Uny stores to be converted to dual-name stores, the conversion of Uny stores scheduled to close into Don Quijote stores, some FamilyMart stores to be launched at some stores managed by Don Quijote, cooperate on the development of digital solutions and the use of big data, joint product development and procurement and joint sales promotions, the
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streamlining of distribution networks, cooperation on development of overseas markets and new business formats, personnel exchanges, and financial and other services.
In September 2017, the company acquired all shares in QSI, Inc., the operator of 24 grocery stores in Hawaii, making it a wholly owned subsidiary.
In December 2017, the company opened its first DON DON DONKI store in Singapore. DON DON DONKI stores are specialty stores that almost exclusively sell products made in Japan or destined for the Japanese market. The Southeast Asian style store format was a departure from stores in Japan. The stores have amusement features such as an open-plan kitchens for cooking demonstrations and sake bar counters. The Singapore store sells fresh food (fruit and vegetables, fish, meat, and take-out foods), processed food, household goods, daily consumables, cosmetics, and variety goods. Aiming to be a price leader in Singapore, the store sells an extensive product range consisting mainly of Japanese brands at discount prices. The store is managed by Pan Pacific International Pte. Ltd., whose CEO is Don Quijote founder Takao Yasuda.
In February 2018, the company opened its first dual-name MEGA Don Quijote UNY store. Starting with the Oguchi store, the company announced it would convert six stores to the dual-name format and plans further conversion after analyzing the performance of the six stores such as customer traffic and challenges.
In October 2018, the company announced that it would acquire the remaining 60% of Uny shares that it did not already own from FamilyMart UNY Holdings, making Uny a wholly owned subsidiary of PPIH (then Don Quijote Holdings) effective January 2019. FamilyMart UNY Holdings announced a public tender offer for up to 32,108,700 PPIH shares (20.17%). By selling the remaining Uny shares, FamilyMart UNY Holdings sought to maintain and strengthen its relationship with the company.
In December 2018, FamilyMart UNY Holdings announced the results of its public tender offer for PPIH share, reporting that it had acquired only 24,741 shares (0.02% of voting rights). FamilyMart UNY Holdings added that it would consider making another tender offer for PPIH share depending on stock market conditions but has yet to set a definitive timeframe in this regard.
In January 2019, the company made Uny Co., Ltd. a wholly owned subsidiary as it acquired the 60% stake in Uny that FamilyMart UNY Holdings had still owned.
In February 2019, the company changed its name to Pan Pacific International Holdings. The new name expresses the management team’s awareness that, as a major retailer in Japan, the company has a duty to fulfill its role and responsibilities as social infrastructure, and commitment to creating an internationally competitive retail business as a global company not only in Japan but also in the Asia–Pacific region.
In February 2019, the company opened its first store in Thailand, the Donki Mall Thonglor, located in Bangkok. In addition to a DON DON DONKI store, the Donki Mall Thonglor has attracted more than 30 other tenants with Japanese roots and also has amusement facilities.
In July 2019, the company opened its first store in Hong Kong, the DON DON DONKI Mira Place II store. As well as fresh food (fruit and vegetables, fish, meat, and take-out food), the store sells processed food such as confectionery, Japanese-style roasted sweet potato, which is popular in Singapore and Thailand, and a wide range of Japanese food products including a regional specialty section. The company strengthened the cosmetics and variety goods range as well to serve the local area, which attracts many tourists, to fulfill a range of needs not limited to those of local residents. The store interior is designed for an enjoyable shipping experience, with plenty of amusement elements that sets the PPIH group apart.
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Sales trends
(JPYbn) Takao Yasuda Koji Ohara Naoki Yoshida 2,000
1,500
1,000
500
0 FY06/89 FY06/92 FY06/95 FY06/98 FY06/01 FY06/04 FY06/07 FY06/10 FY06/13 FY06/16 FY06/19 Source: Shared Research based on company data
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News and topics August 2019 On August 16, 2019, FamilyMart UNY Holdings Co., Ltd. (TSE1: 8028, UFHD) announced plans to increase its stake in Pan Pacific International Holdings Corporation (PPIH).
UFHD decided to increase its stake in PPIH. During the two-year period from August 19, 2019 to August 18, 2021, UFHD plans to acquire between 8.1mn and 16mn shares (5.12–10.12% of voting shares). Combined with its existing position, UFHD will own between 10.0% and 15.0% of voting shares. The purpose of the acquisition is to strengthen the partnership between the two companies. As a general rule, UFHD will acquire shares in the market, but will also consider off-market transactions depending on the situation. While UFHD may complete the acquisition earlier than scheduled, it also may not acquire part or all of the acquisition as planned.
In October 2018, UFHD sold its UNY stake. At the same time, it made a tender offer for 20.17% of PPIH’s outstanding shares, however, acceptance came in below expectations. UFHD previously maintained that it would consider further acquisitions after carefully assessing market trends. This announcement puts the upper limit of the acquisition at 15.0% of outstanding shares.
On August 13, 2019, the company announced planned changes to representative directors and its board of directors. After the shareholder meeting on September 25, the current President and CEO, Koji Ohara is scheduled to retire, with plans for current Senior Managing Director and CAO, Naoki Yoshida, to assume the position of Representative Director (President and CEO).
July 2019 On July 12, 2019, the company announced a stock split.
Each share of common stock owned by shareholders recorded in the closing register of shareholders on the record date of August 31, 2019 (effectively Friday, August 30) will be split into four shares. The total number of the company’s issued shares prior to the stock split was 158mn shares (as of July 12, 2019). Following the stock split, this number will increase to 633mn shares.
June 2019 On June 14, 2019, the company announced an upward revision to its year-end dividend forecast.
In light of the group’s first Don Quijote store in Fuchu City, Tokyo having celebrated its 30th anniversary in March 2019, the company revised up its year-end dividend forecast to JPY30.0 (versus initial forecast of JPY28.0). With an interim dividend of JPY10.0 (ordinary dividend of JPY5.0 and commemorative dividend of JPY5.0) paid out at end-1H, the forecast for annual dividend per share was raised to JPY40.0. Actual annual dividend per share taking into account stock split has risen for 16 consecutive fiscal years since FY06/04, and the total dividend payout has risen for 22 consecutive years since FY06/98.
February 2019 On February 27, 2019, the company announced the acquisition of a portion of stake in Kanemi Co., Ltd.
PPIH announced that its board of directors had voted to approve the acquisition of a portion of stake in Kanemi Co., Ltd., a consolidated subsidiary of FamilyMart UNY Holdings Co., Ltd. (TSE1: 8028). Following the acquisition of shares, which will represent a partial reduction of the stake currently held by FamilyMart UNY Holdings, Kanemi will be accounted for as an equity-method affiliate of PPIH.
Kanemi operates retail outlets that sell sushi, deep-fried foods, and other prepared foods primarily within supermarkets. Kanemi is an important business partner of UNY Co., Ltd., which became a wholly owned subsidiary of PPIH on January 4, 2019.
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With this acquisition of Kanemi shares, PPIH is seeking to strengthen its relationship with Kanemi and thereby enable its plans for reformatting the prepared food sales floors operated by Kanemi within UNY stores to be implemented with the cooperation of these two companies. The share acquisition is also expected to enhance the profitability of the PPIH group as a whole.
For FY03/19, Kanemi is forecasting sales of JPY82.9bn and an operating profit of JPY483mn. The share transfer agreement was signed on February 27, 2019; the share transfer execution date is slated for April 12, 2019. The shares are to be acquired by PPIH at a total cost of approximately JPY7.9bn. After the share acquisition PPIH will own 2,615,061 shares of Kanemi, giving it a 26.55% of voting rights and making PPIH and FamilyMart UNY Holdings the largest and equal shareholders in Kanemi. The share acquisition is expected to have only a minor impact on PPIH consolidated results for FY06/19.
Management
Founder Takao Yasuda: Director (part-time) Takao Yasuda created in Don Quijote one of Japan’s more unusual and successful retailers. As such, he can be viewed as the main driver behind the company’s success. Yasuda is known for his no-nonsense, open conversational style and his passion for his company and the retail business.
Yasuda’s willingness to challenge conventional wisdom and Don Quijote’s non-orthodox business model has in the past created image problems for the company. Beginning around 2005 though the company has become much more aware about its public image, and public perception regarding the company appears to have improved. For example, its store openings no longer draw local opposition compared to its early days. Nevertheless, the company and its management are different from many more traditional Japanese companies, and that will continue to affect its image and possibly create polarized views.
The company, along with its Q2 FY06/15 earnings results, announced that founder Takao Yasuda, chairman and CEO, would step down. Yasuda will also resign as a director of Don Quijote’s domestic group companies, and will assume the titles of top advisor and founding chairman. He will become the head of an intermediate holding company to oversee the group’s international businesses. The group’s day-to-day foreign operations are managed by Kenji Sekiguchi, president of Marukai Corporation.
Yasuda stated that he would step down while he was still physically and mentally fit. This is necessary, according to Yasuda, in order for the company to continue to grow on a long-term basis. Yasuda stated that it would be best him to retire now that the company was set to post an increase in sales and profits for 26 years in a row and that the company had just overcome the consumption tax increase. Yasuda added that he had also completed the process of delegating management responsibilities.
Yasuda urged Don Quijote executives to emulate him and study Genryu, a book of management philosophy published by the company in April 2011 (a revised edition was published in September 2013). Don Quijote will become a formidable company if it produces more managers like Yasuda, he said.
Yasuda has complete trust in Koji Ohara, president and COO. Yasuda stated that Ohara would be instrumental as the next CEO in ensuring the company’s growth. However, Yasuda urged Ohara to find a successor of his own while he is still physically and mentally fit. The improvement of the company’s management metabolism would then become a tradition that leads to prosperity, Yasuda said.
At an extraordinary meeting of general shareholdings held on January 31, 2019, company founder Takao Yasuda was reappointed to the position of director. His reappointment was deemed necessary as the company values his wisdom as the founder of the company, the creator of a new discount store format, and his long track record that has brought the group to where it is today. Currently based in Singapore where he is directing the company’s overseas businesses, Yasuda is deemed especially necessary as a director at a time such as this when the company has just made Uny a wholly owned subsidiary and is looking to accelerate expansion efforts overseas.
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Career summary of President Koji Ohara
Feb. 1993 Joined Don Quijote (current Don Quijote Holdings); after being head of merchandise sections at Fuchu store (the company's first store), served as launch manager of Kisarazu, Makuhari, and Ichihara stores Sep. 1995 Director and Head of Sales Division 2, Don Quijote (current Don Quijote Holdings) Jan. 2005 President and Representative Director of affiliate REALIT Apr. 2009 President and Represent at ive Direct or of affiliat e Japan Commercial Est ablishment Sep. 2009 Director and CIO, Don Quijote (current Don Quijote Holdings) Jul. 2012 President and Representative Director, Don Quijote Shared Services Apr. 2013 Vice President, Director and COO, Don Quijote (current Don Quijote Holdings) Nov. 2013 Vice President, Representative Director and COO, Don Quijote Holdings Dec. 2013 President and Representative Director, Don Quijote Jul. 2014 President, Representative Director and COO, Don Quijote Holdings Chairman and Representative Director, REALIT Jul. 2015 President, Representative Director and CEO, Don Quijote Holdings Apr. 2017 President and Representative Director, Doit Source: Shared Research based on company data
Career summary of Senior Managing Director Naoki Yoshida
Dec. 1995 Joined McKinsey & Company Inc. (Japan) Mar. 1997 Joined Union Bancaire Privée Co., Lt d. Aug. 2002 Established Alterego Consulting Inc. and became President and Representative Director Feb. 2003 President and Representative Director, T-Zone Holdings, Inc. (now Mag Net Holdings, Inc.) Jul. 2007 President, Don Quijote (USA) Co., Ltd. Sep. 2012 Direct or, Don Quijot e Holdings (now Pan Pacific Int ernat ional Holdings) Nov. 2013 Senior Managing Director, Don Quijote Holdings (now PPIH) Dec. 2013 Director, Don Quijote Co., Ltd. (current position) Director, Nagasakiya Co., Ltd. (current position) Director, Doit Co., Ltd. (current position) Jul. 2015 Senior Managing Director and CCO, Don Quijote Holdings (now PPIH) Jun. 2017 Director, Accretive Co., Ltd. (current position) Nov. 2011 Audit & Supervisory Board member, Uny Co., Ltd. (current position) Jan. 2018 Represent at ive, Senior Managing Direct or, and Chief Administ rat ive Officer, Don Quijot e Holdings (now PPIH) Source: Shared Research based on company data
Major shareholders
Shares held Shareholding Top shareholders ('000) rat io Credit Suisse AG Hong Kong Trust A/C Clients for DQ Windmolen B.V. 31,307 19.8% Japan Trustee Services Bank, Ltd. (Trust account) 8,634 5.5% Anryu Shoji Co., Ltd. 8,280 5.2% The Master Trust Bank of Japan, Ltd. (Trust account) 7,888 5.0% Mizuho Trust & Banking Co., Ltd. (Trust account 0700121) 4,496 2.8% Yasuda Scholarship Foundation 3,600 2.3% Japan Post Bank Co., Ltd. 2,692 1.7% GIC PRIVATE LIMITED-C 2,589 1.6% Japan Trustee Services Bank, Ltd. (Trust account 5) 2,313 1.5% Credit Suisse AG Hong Kong Trust A/C Clients for La Mancha Holdings Pte. Ltd. 2,200 1.4% Source: Shared Research based on company data (As of June 30, 2019)
Foreign investors represent a large percentage of shareholders, 64.6% as of June 30, 2019.
Investor relations
IR department reports directly to the CFO. The company organizes quarterly results meetings. The company briefs on its earnings for Q1 and Q3 periods. For Q2 and Q4, the company’s president attends the meeting to discuss earnings and management strategy.
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IR Policy The company seeks to be thorough in discussing its earnings and gain trust of investors. The company makes realistic earnings forecasts and tries to avoid long-term projections that are difficult to achieve. The company analyzes its financial conditions and constantly makes necessary adjustments to earnings forecasts.
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Company profile Company Name Head Office 2-19-10 Aobadai Meguro-ku Pan Pacific International Holdings Corporation Tokyo, Japan 153-0042 Phone Listed On +81-3-5725-7532 Tokyo Stock Exchange 1st Section Established Exchange Listing September 5, 1980 December 17, 1996 Website Financial Year-End https://ppi-hd.co.jp/en/ June IR Contact IR Web - https://ppi-hd.co.jp/en/ir/
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