With the year starting in the red, recovery toward the full-year profit plan is the key test

First-quarter revenue was ¥9,945 million, down only 0.3% from ¥9,971 million in the same period last year. However, operating results turned from a ¥214 million profit in the prior-year quarter to an operating loss of ¥285 million, ordinary results from a ¥242 million profit to an ordinary loss of ¥262 million, and net results attributable to owners of the parent from a ¥120 million profit to a loss of ¥214 million. Revenue progress against the full-year forecast of ¥48,494 million was 20.5%, below the simple 25% share of the year elapsed, and the supplemental materials also assessed overall progress as behind the full-year plan.

The year-on-year decline in profit was ¥505 million on an ordinary profit basis. The supplemental materials identify a ¥100 million decline in gross profit, a ¥68 million increase in personnel costs, a ¥13 million increase in advertising expenses, a ¥8 million increase in depreciation, and a ¥4 million negative impact from non-operating income and expenses as factors reducing profit, while exhibition expenses were a ¥24 million positive factor. “Other” was an additional ¥335 million negative factor, the largest amount, but its breakdown has not been sufficiently disaggregated in the published supplemental materials. At the next earnings announcement, it will be necessary to determine whether this represents temporary investment spending or continuing fixed costs, store expenses and system costs.

Margins also deteriorated. Gross margin fell 0.9 percentage points from 65.1% in the same period last year to 64.2%, while operating margin fell 5.1 percentage points from 2.2% to negative 2.9%. Selling, general and administrative expenses were ¥6,673 million, representing 67.1% of revenue. The company cites strategic investment to strengthen its customer base, production base and human capital, as well as the weak yen, higher prices and rising personnel costs, as factors behind the increase in expenses, but it has not disclosed when or which items of investment will contribute to earnings.

The company did not prepare a quarterly statement of cash flows for the first quarter and did not disclose cash flow from operating activities. Accordingly, at the next interim earnings announcement, it will be necessary to review not only whether revenue reaches at least ¥24,247 million, but also whether operating results return to profitability, gross margin recovers, the amount and effects of upfront investment become clearer, and operating cash flow improves. Achieving full-year operating profit of ¥2,500 million will require substantial profit generation in the second half, making it important to see whether the cumulative second-quarter results indicate a need to revise the plan.