http://www.doshisha.co.jp/7483

Doshisha
Masayuki Nomura
President and COO, Doshisha Corporation

Reinforcing our businesses and operating base toestablish an "ONLY 1" business model◆ Summary of FY3/17 Consolidated Results
Doshisha reported lower sales and profits in FY3/17. Net sales declined 3.5% year on year to ¥107,015 million,
gross profit fell 2.7% to ¥26,230 million and selling, general and administrative expenses rose 5.1% to ¥19,150
million. As a result, operating income declined 19.0% year on year to ¥7,080 million, ordinary income fell
20.2% to ¥7,122 million and net income declined 17.1% to ¥4,770 million.

Net sales declined due to two main factors: weaker sales volumes for TVs in the product development modelbusiness amid increased price competition with new manufacturers, and falling sales of luxury brand watches
due to a continued pullback in inbound demand that started in FY3/15. The gross margin improved overall,
supported by the successful development and launch of new retail ideas and merchandise, but gross profit
declined due to the drop in net sales. Selling, general and administrative expenses increased, mainly reflecting
a rise in third-party warehousing expenses caused by higher volumes in the gift business and an increase inadvertising costs to raise product visibility and strengthen brands. That led to a decline in operating income,but we intend to continue investing in advertising in FY3/18, as spending in the previous fiscal year had apositive impact.

The copyright to this publication is owned by the Securities Analysts Association of Japan◆ FY3/17 Consolidated Results by Sales Channel
Sales to large electronics retailers were weak due to lower sales of TVs and luxury brand watches. There werealso signs of a pullback in demand for luxury brand watches in the discount store channel, but sales weresteady year on year, supported by strong sales of snow cone makers and other kitchen accessories, and bysolid sales of summer consumer electronics. In the online channel, an area we are working to strengthen,sales rose strongly on the back of closer cooperation with leading online retailers.

◆ FY3/17 Consolidated Results by Business Segment
Our operations are largely divided into two business segments: the Product Development Model Business andthe Wholesale Model Business. The Product Development Model Business plans, manufactures and sells
original Doshisha products. The Wholesale Model Business is a comprehensive sales proposal business,
mainly focused on selling and planning sales promotions for leading domestic and overseas brands andproducts sourced from major manufacturers in Japan. The product range in the Wholesale Model Businessincludes well-known luxury brand watches, bags and other items, traditional mid-year and year-end assortedgift packs arranged by Doshisha using merchandise sourced from leading domestic suppliers, and national
brand (NB) processed products.

The copyright to this publication is owned by the Securities Analysts Association of Japan<Product Development Model Business> ¥49,129 million, down 4.0% year on year
Sales of licensed brand products rose strongly, led by OEM products for Kaepa, our main licensed apparelbrand, and other apparel brands such as U.S. POLO ASSN. Sales of shoes were also firm, supported byadditional retail space in hardware stores and other new sales channels, which were initially opened up using
our range of sandals. In other categories, such as snow cone makers and designer mug bottles, we expanded
our range of merchandise, helping to drive sales growth. Our Taiwanese-style fluffy snow cone maker was
picked up by a range of media outlets and received a prize from specialist product magazine DIME. The
business segment also registered strong sales in categories such as apparel accessories for single-priceretailers and event merchandise such as Halloween costumes. However, sales in this segment declined year
on year, with sales in strong-performing categories insufficient to offset the slump in sales of TVs and winterconsumer electronics.

<Wholesale Model Business> ¥54,403 million, down 3.2% year on year
・ Famous brands: ¥26,154 million, down 9.5% year on year
Sales of developed brands and licensed brands increased. The business also registered higher sales ofproducts in the imported merchandise category, such as the UK FitFlop brand of comfort footwear. Itochu
Corporation, our long-term strategic partner, has the exclusive import rights for FitFlop and we have secured
the sole distribution rights for the Japanese market. However, sales of luxury brand watches declined year onyear due to a pullback in inbound demand.
The copyright to this publication is owned by the Securities Analysts Association of Japan

・ NB processing: ¥28,248 million, up 3.5% year on year
The business rolled out a number of new ideas and merchandise in NB processing, such as gift set tie-ups withfamous stores, gift assortments containing local souvenirs from roadside stops across Japan, and gifts that canbe ordered easily via email or social media. Those initiatives proved successful, leading to growth in thenumber of gift product partners and sales.

<Other / Affiliated Companies> ¥3,482 million, down 0.5% year on year

◆ Consolidated Forecasts for FY3/18

For the fiscal year ending March 31, 2018, we forecast net sales of ¥110.0 billion (up 2.8% year on year), grossprofit of ¥27.8 billion (up 6.0%), selling, general and administrative expenses of ¥19.8 billion (up 3.4%),
operating income of ¥8.0 billion (up 13.0%), ordinary income of ¥8.0 billion (up 12.3%), and net income of¥5.35 billion (up 12.1%). By business segment, we forecast sales of ¥54,450 million (up 10.8% year on year) inthe Product Development Model Business and ¥52,300 million (down 3.9%) in the Wholesale Model Business.
In the Product Development Model Business, we aim to grow our share of in-store sales at distributors byimplementing projects with online companies and by rolling out private brand (PB) products through specialist
retailer and hardware store sales channels. In the Wholesale Model Business, we plan to accelerate growth bycreating new markets for gift sets. In famous brands, we aim to increase sales by lowering the sales weighting
for luxury brand watches while increasing sales weightings for mid-range, developed and licensed brands withhigh in-store turnover.

The copyright to this publication is owned by the Securities Analysts Association of Japan◆ Business Strategy for FY3/18
Our goal is establish an "ONLY 1" business model by securing a competitive advantage and generating
sustained growth. We aim to do that by reinforcing our businesses and by strengthening our operating base toenhance the Group’s earnings capabilities. We will implement the following initiatives.

Reinforce businesses
・ Use our dual approach to nichemarkets to strengthen productcategories⇒ We aim to secure leading positions
in niche market categories using adual approach: identify and moveinto niche markets, and create newniche markets by adding uniquevalue to narrow target categories
andconcepts,existingevenmarkets.

inlargeUsing

thatapproach, we aim to reinforce ourProductDevelopment

Model

Business by actively creating new products from both a market-in and product-out perspective.
・ Create and develop new growth markets⇒ In the gift business, Doshisha’s mainstay business, the common view is that traditional mid-year andyear-end gift-giving is a mature market. To expand our business and generate new growth in thatenvironment, we are teaming up with external partners to create new markets. Two examples are our giftcard business and farm experience gifts. The new gift card business combines our existingsmartphone-based social media gift-giving system with a menu of experience gifts. The business also
leverages our wide range of diverse sales channels and entails almost no inventory risk.
The gift card system allows people tosend gifts whenever they feel like it, even
if they do not know the recipient’s address.
Our aim is to increase Doshisha’s shareof the gift market by making it easier for
consumers

topurchase

gifts.

Farm

experience gifts are part of our efforts toupgrade the existing gift catalog business.
The gifts offer more than fresh farm
produce and are designed to be fun for
the giver and the recipient. Recipients
receive access to a designated plot ofland at a farm, which they can cultivate and harvest themselves using a simulation app on their
The copyright to this publication is owned by the Securities Analysts Association of Japansmartphones. Fresh produce from the plot is later delivered to the recipient with a personalized farm sign.
We plan to expand our range of this type of experience gift to capture strong potential demand for
year-round gift-giving for important events.
・ Stepping up sales promotion, e-commerce and overseas sales⇒

We will continue to step up

sales promotion and e-commerce, building on efforts in the previous fiscal year.
⇒ We will work to grow overseas sales channels by actively exhibiting in local trade shows.
・ Create and build new businesses⇒ To establish our "ONLY 1" business model, we plan to diversify our business portfolio by creating newbusinesses. Specifically, we aim to generate synergies between existing businesses and build new
businesses through open innovation and industry-academia partnerships.

(1) Moving into the funeral business – a new sector for Doshisha⇒ We are moving into the funeral business as part of our investment in environmental, social and governance(ESG) fields. The number of deaths in Japan is rising as society ages. However, the number ofcrematoriums is declining, leading to a backlog in families waiting to cremate their loved ones. To help
resolve that social issue, we plan to produce a new refrigeration device with patented technology that
preserves the body while waiting for cremation. The device will be sold to distributors, undertakers andfuneral halls. The patented technology, which uses a direct continuous heat absorption method, is highly
regarded by customers, as the preservation process is better than existing approaches that use largeamounts of dry ice or cold-storage facilities.
The new approach is also more environmentally friendly, as it does not require dry ice. That reduces carbon
dioxide emissions, helping to alleviate
global warming. Through the funeralbusiness, Doshisha can therefore make adifference to society by supporting thedeceased and their families, the funeral
sector and the environment as a whole.
We also see it as an opportunity to growsales through synergies with our existing
range of memorial gifts such as traditionalpresents given in return for funeralofferings.

(2) Initiatives to develop products through industry-academia partnerships⇒ We are preparing to launch a new type of chocolate containing L8020, a lactic acid bacterium withantibacterial properties discovered by Professor Hiroki Nikawa of Hiroshima University Graduate School.
We also plan to launch the chocolate in other markets across Asia.

(3) Launching color contact lenses
The copyright to this publication is owned by the Securities Analysts Association of Japan⇒ We plan to start selling color contact lenses, which have become a fashion item for women. We will target
fashion- and trend-conscious female office workers and students in the 16 to 25 age range. Yuuna Suzuki, amodel contracted to the non-no fashion magazine, which is read by our target market, is our brandambassador for the color contact lens range.

Strengthening our operating base to grow earnings
・ Implementing our logistics strategy⇒ Faced with delivery price hikes by major transport companies and rising fees charged by third-party
warehousing companies, we have been working to curb logistics costs and improve logistics efficiency. To
address that issue, we have been gradually expanding our own logistics centers, promoting shipments fromoptimal locations, switching from major transport firms to local delivery companies in each area and building
a shared distribution framework for Group businesses. We have also established a business support center
to integrate all internal order management activities that were previously dispersed across businessdivisions. The center will standardize operations and boost efficiency by consolidating small-lot deliveries insingle shipments, leading to lower costs. Our goal is to limit the impact of rising logistics prices on ouroperations. Also, we have invested heavily in our new Kanto Logistics Center, due to open in November thisyear. We will use the center to continue reducing logistics costs, cut the number of personnel involved inmaterials handling and mitigate risk to

FY3/18 Business Strategy

our operations in the event of aReduce
logistics costdisaster. As our business expands,
we will implement a logistics strategy
inlinewithchanges

inSennan Logistics Center

Implementing our Logistics Strategy！
Improve business efficiency andtransform the earnings structure【 Changes in distribution conditions】
Rising fuel costs /labor shortages

theKanto Logistics CenterRisk
Emergence of online
diversification
retailers

environment by reducing logistics□Dual-hub logistics network(Tokyo: third-party
warehousing provider)costs through further efficiency gains
and by upgrading the capabilities ofour logistics infrastructure.

◆ FY3/18 Dividend Policy
We plan to pay a consistent and stable

Strategy& Initiatives⇒Shipments from optimal location□Systematically combine anddeliver shipments□Support centerestablished⇒Increase daily
shipment volumes⇒Establish a joint local delivery
network with local delivery firms

DoshishaGroup’sStrengths

Autumn 2017
□ Start up Kanto Logistics
Center⇒Streamline operating costs⇒Lower headcount,more efficient operations⇒Diversify disaster risk
⇒Improve logistics quality

Proprietary logistics centers…
Logistics issues can be resolvedin the best interests of the Group
Cost reduction

Business scalability

dividend based on a dividend payout
ratio target of 30%. For FY3/17, we will pay a full-year dividend of ¥50.00 per share.

(Tokyo, May 18, 2017)

The copyright to this publication is owned by the Securities Analysts Association of Japan