TSI HOLDINGS CO., LTD.
Q3 Financial Results Briefing for the Fiscal Year Ending February 2020
January 14, 2020

Event Summary[Company Name]TSI HOLDINGS CO., LTD.

[Event Type]Earnings Announcement[Event Name]

Q3 Financial Results Briefing for the Fiscal Year Ending February 2020

[Fiscal Period]

FY2019 Q3[Date]

January 14, 2020

[Number of Pages]

15[Time]

09:59 – 10:42(Total: 43 minutes, Presentation: 31 minutes, Q&A: 12 minutes)[Venue]Aoyama Building 6F
1-2-3 Kita-Aoyama, Minato-ku, Tokyo 107-0061[Venue Size][Participants][Number of Speakers]

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Shinichi Uetadani
Masaaki Oishi

Chief Executive Officer
Director

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Presentation
Moderator: Good morning. We will now begin a briefing session for the financial results of TSI HOLDINGS CO.,LTD., which were announced later last week.
First, as usual, Mr. Uetadani, Chief Executive Officer of the Company, will explain the outcomes in accordancewith the materials on hand. Following that, we will hold a question and answer session.
Uetadani: I would like to explain the details of the financial results in the third quarter.
I think it would be better to talk about the overall picture rather than talk about each brand. We will spend alittle more time on answering questions.

First of all, I will explain the general results according to the materials.
Please see the overview of profits and losses on page two. In the figures below the top right part in dark blue,
sales were up 7.2% YoY.
The biggest contributor was Ueno-Shokai, which we acquired last year and was consolidated on a full-yearbasis in the current year. Last year, there were still some brands that were being abolished, and excluding the

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2effects of them and Ueno-Shokai, sales were down 1%, a slight decrease or almost flat. Therefore, it does notmean that sales in the existing brands increased.
However, we have decided to focus on profits rather than sales in the current fiscal year. Considering various
environmental factors, we understand that the results were reasonable. The slight problem is in gross profit
below, which was up 6.3% YoY. The growth rate was smaller than that of sales.
After struggling in the first half of the fiscal year, our businesses did not recover in the second half. Excluding
Ueno-Shokai and the businesses that were closed last year, gross profit fell 4%.
In this regard, I was convinced that this was not a temporary phenomenon because we also had a mild winterlast year. We were trying to curb inventories, as our stance was not to seek a forcible increase in sales. Evenso, we were unable to keep up with the year-before figures.
As a result, although sales and gross profit rose YoY, they decreased slightly, excluding the impact of UenoShokai.
SG&A expenses grew even faster than sales. Similarly, SG&A expenses in the continuing operations were up
around 3% YoY.
We did not waste our resources. In fact, SG&A expenses rose simply while sales and gross profit ended in thesluggish growth. In particular, as we slashed the holding company's expenses considerably, we were far fromwasting our money. Despite soaring distribution costs and personnel costs, there was no major factor thatcaused SG&A expenses to swell. I believe that we could not manage the costs satisfactorily amid the overall
trend.
As a result, operating income was down over 40% and ordinary income was down nearly 30%. Net income
increased, but this is because of the capital gains by selling our stake in Callaway Apparel to Callaway Golf,
which was our joint venture partner, in the first half.
That was the overall picture. Excluding the acquired business and others, sales declined slightly and grossprofit fell a little more, resulting in operating income that fell short of the target.

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The summary of the brands is described on page three. We will not explain them individually, but if you haveany questions, we will answer them later. As you can see, roughly the top 10 sales were not necessarily good,though the results were not uniform.
Gross profit does not necessarily increase simply because sales decline. There was not a major blow as a whole
because each brand has controlled inventories and implemented a sales strategy without bargains. nano・
universe showed the biggest sales. This brand was a major failure. Sales were almost the same as a year earlier,but gross profit margin ratio, fell 3.5 percentage points. This was largely due to a considerable impact in thefirst half of the current year. Sales grew more in the first half, but the brand tended to do business withrelatively large inventories. In the second half, though inventories were tightened considerably, nano・
universe was dealt the biggest blow.
As I will explain later, there were small effects in the brands that have established their positions at relatively
high price levels, and the brands targeting the high-volume zone performed most poorly. That was thesituation in the third quarter.
As nano・universe was on an uptrend, we planned to increase sales further, but it failed to grow out. Grossprofit decreased, as we could not grow sales at usual prices even though inventories were narrowed down. It
was of no use to keep our inventories after the season, so we had to decide on bargains at some point.
However, we believe that the sharp fall in GPM was a larger problem than the decline in sales.

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4The other brands appear to have stayed relatively steady as they controlled inventories and took the sales
strategy without discounts while sales were slightly shy of the targets.
Gross profit of PEARLY GATES, the fourth biggest brand, seems to have declined remarkably, but sales
performed well, including those from loyal customers, in the 30th year of the brand and new products weresold well during this season. While the other brands were seriously affected by the irregular weather, the tax
hike, and other factors, PEARLY GATES held momentum to overcome adverse factors on a full-year basis.
However, GPM declined slightly partly due to an increase in wholesale sales. Even so, PEARLY GATES was far
from poor sales results during this season and left a high level of inventories. The decline in GPM came withina manageable extent.
Among the other brands, sales of NATURAL BEAUTY BASIC and MARGARET HOWELL failed to reach their yearbefore levels. However, both brands managed to show slight rises in gross profit.
ROSE BUD has been operating with its inventories further tightened than in the previous year since the firsthalf of the current year. Although sales declined, GPM rose and the business was even more robust.
STUSSY, which had been struggling, has shifted to a healthier state. Sales in HUMAN WOMAN declined slightly
in reaction to last year’s large-scale promotions during the brand’s 20th year, but GPM was steady.
In UNDEFEATED, a sneaker brand, sales and profits have been increasing steadily, along with opening newstores at a smoothly growing pace.
There was a problem with HUF, an American streetwear brand we acquired. Its Japanese business has been
extremely strong. However, in the US, gross profit declined slightly in a switch from wholesale targeting largescale retailers to directly managed stores.
As for directly managed stores in the US, sales declined due to a delay in the opening of stores behind theinitial plan. As inventories rose slightly, they were reduced by sales at off-price stores, so gross profit also
declined.
Since it has taken time for the rebranding of HUF in the US, the US and Japanese teams are currently working
together to upgrade the HUF products for directly managed stores. This approach follows the pattern
implemented at a group company called JACK, which operated STUSSY, improved the quality and brand powerin Japan, and then circulated those changes around the world.
The quality of new-year merchandise has greatly increased, and the HUF brand has developed a good
reputation with customers, including wholesalers. However, as I previously mentioned, the rebranding in the
US is taking a considerable amount of time.
We had planned to expand HUF into a global brand after we acquired it. In addition to the Japanese market,
we also had planned to develop the brand in China. However, the trade friction between the US and China
has been a point of concern. Though we are proceeding with the plan somewhat cautiously, if we finally agreewith a partner company in China, we will be able to get it off to a good start in the next fiscal year. We will
announce the start of the business as soon as a contract with the partner is finalized. We plan to start the HUF
business in China with the suitable partner in the coming fiscal year.
You can see the third line from the bottom in terms of the total number of continuing brands. Sales rose
remarkably as Ueno-Shokai was consolidated but I think that the problem is a decline in GPM.
That is the overview of the whole situation.

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In this situation, I will take measures when each brand has a problem, and of course we will increase thepurchase rate among visitors. I will explain our thoughts about the situation on page four.
So far, I have been talking about the cumulative results up to the end of November. Looking at the third
quarter–September through November–alone, sales at existing stores (excluding new stores) declined 1.2%
YoY in September, 16.6% in October, and 4.2% in November. Cumulative sales in September throughNovember were down around 7%.
Of course, the biggest reason would be in our products and sales efforts, but I believe this is a major trendthat will continue in the future.
People often cite the tax increase, disasters, and a warm winter. Though there will be no tax increase nextyear, consumer sentiment will remain depressed. Consumers will continue to refrain from buying wastefulitems and will only buy what they need. We cannot expect that they will go shopping without a clear purpose,
partly due to eco-friendly consciousness.
As far as natural disasters and global warming are concerned, I do not believe that the frequency of typhoons
and heavy rains will be decrease for the time being as global warming advances, so the impact of natural
disasters will not be limited to the current fiscal year. I think it is better to assume that heavy rains andtyphoons may occur again. In addition, the warm winter will also continue for the time being.

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6Our businesses were strongly affected by these circumstances in the current year. Regarding the consumption
tax increase in October, in fact, our brands were not luxury brands with high asset values, and we did not
expect a last-ditch rush of consumption ahead of the tax hike and a reactive fall in demand afterward.
Psychologically, we assumed that there would be no buying spree beforehand, but thought there may be areaction after the tax increase. As such, we planned to sell whatever we could among the autumn and wintergoods in August and September, hold off in October, and then try to rebuild sales in November and thereafter.
The trend was just as we had expected, but the decline in October was so large that it was difficult to recoverin November.
Sales to highly loyal customers begin in September to October, or as early as in August. The key point is thatthey did not buy our goods at the beginning of the season as it became cold, but we steadily attracted
customers who are loyal to our brands and bought our products, including coats and outerwear, during the
hot season.
Brands with particularly loyal customers, such as ADORE, MARGARET HOWELL, PEARLY GATES and UenoShokai's brands, marked sales above the year-before levels in August and September. However, there were
declines thereafter. The brands failed to recover sales in October and November, as they were unable toattract general customers to go shopping after it became cold.
However, this strategy should not be looked upon as a failure. We will continue focusing our services to loyal
customers and generate sales. The problem is that it is a matter of course that general customers do not buy
autumn or winter goods unless it gets cold. Therefore, we have to formulate an overall plan on the assumptionthat this trend will continue.
As written in the section of sales on page four, we plan to raise in-house EC ratioand our omni-channel
customers. Sales from customers who have registered as members and buy our goods through ecommerce
and at stores have steadily been increasing, so we will maintain this route. What we have to do is to work out
an entire plan on the assumption that sales will fall in October and November and that there may not be cold
weather next year.
Regarding gross profit, we cannot afford to lower the cost of sales ratio and provide customers with lowquality products at this time, so I do not want to adopt a strategy of lowering the cost of sales ratio at all. We
would like to reduce wasteful costs, but will continue to compete by increasing the ratio of proper sales
without discounts while keeping inventories at low levels.
As we cited examples here, we have narrowed down inventories for AVIREX, nano・universe and ARPEGE,
and will continue to implement this strategy as well. We simply cannot maintain a plan of producing a large
quantity of goods at the beginning of a year and reduce the inventories by selling them during the year.
We also worked to restrain discounts on a number of occasions this time. We used AI to carefully decide how
far we can discount, whether we offer a 30% discount from the beginning or wait with a 20% discount, or
whether or not to discount depending on item numbers. We have made considerable efforts to restrain
discounts, but the efforts have not catch up with the trend, though we will continue to restrain them.
Roughly speaking, we will operate at a small number of directly managed stores with a small quantity of
inventories. I think it would be impossible to maintain an approach of opening a large number of stores,
providing a large amount of inventory, and reducing inventories by selling them at all stores. Using our own
ecommerce inventories, we will concentrate on a way to send out products in desirable colors and sizes tocustomers who visit our stores and order them in our ecommerce inventories.

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At our Company, the brands that have a lot of highly loyal customers and relatively high unit prices are moving
ahead, and we continue this approach thoroughly. We intend to combine the way of increasing the ratio of
our own ecommerce services to turn customers into omni-channel members with the way of doing businesswith fewer inventories.
Overall, what I have discussed with you today is no different from what I said last year. Though I intended toprepare for the trend, my preparations were not satisfactory and I apologize for being unable to catch up withthe trend.
There is no major change in our model or strategy. In addition to maintaining the proper sales strategy, we
will not follow the conventional marketing tactics, as they no longer fit the current climate conditions.
Though we provide some of our products for bargains according to stores, brands like ARPEGE and STUSSY
will continue to refrain from offering any discounts. MARGARET HOWELL and ADORE do not offer discounts
for coats and outerwear.
I would like to talk about a determined plan at a briefing session for the year, but in these circumstances, we
intend to accelerate the structural reform that was announced in the medium-term plan. We transferredauthority to each brand in a fairly complete manner and made it possible to build a distinctive character as abrand. However, we will not be able to make it in time for digital investment, logistics, procurement, oroverseas expansion unless we compete by exerting collective power. We plan to change the overall businessstructure toward March. The new plan will be announced as soon as possible.
Regarding the problem of what will be the key, as I mentioned earlier, overseas and digital operations havebecome major pillars for us, and we need to establish a group-wide organization. Including this, we are
currently preparing for a major change in the next fiscal year.
This is the summary of the third quarter results.

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As usual, the supplementary material refers to sales figures by sales channel and the number of stores. In
terms of sales channels, ecommerce sales continued to grow, and specifically in-house ecommerce sales
increased sharply with double-digit growth. We will continue to increase mainly the weight of in-houseecommerce.
Although sales at department stores appear to have declined, sales at urban department stores grew.
Especially when we try to sell items with relatively established brand characters at high unit prices, leading
department stores will continue to be an important channel.
Consequently, our business with urban department stores has been expanding nationwide, and the new
brands launched this fiscal year have opened stores at a top-class department store in each region. Thoughsales at department stores appear to have fallen, there are additional factors, such as a rise in the weight of
Ueno-Shokai, which has no department store channel. Our strategy is to increase transactions withdepartment stores in urban areas considerably, even if those with regional department stores decrease.
The decline in overseas sales is due to the impact of the sale of our stake in Beijing Tsubomi Fashion late lastyear.
In concluding the overall explanation, I suspect you will ask why we don’t make a downward revision in thissales and profit situation. My policy is to disclose unpleasant issues as soon as they are perceived.

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9At present, however, we have sales data in December, but do not have profit figures in the month. If necessary,
we will announce a downward revision without waiting for our full-year results.
Currently, since we have narrowed down our inventories, we do not expect a worse situation by incurring ahuge appraisal loss in the fourth quarter. We planned a profit-making plan for the fourth quarter and expect
a better situation than currently, but we are not optimistic about whether we will reach the disclosed target
levels. I expect quite a severe situation. Please allow us time to report how severe the situation will be after
we have obtained necessary figures.

Document Notes
1.
2.

Portions of the document where the audio is unclear are marked as follows: [Inaudible].
This document has been translated by SCRIPTS Asia.

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