J. Front Retailing
Q & A summary
Results presentation for the first six months of the fiscal year ending February 28, 2022
Date and time: 16:30 – 18:00 on Tuesday, October 12, 2021
Q. With regard to the SC Business (Parco), according to your presentation materials (page7), while gross sales increased from Q1 to Q2, revenue decreased, and as a result,business profit also decreased. I would like to know its background. I am afraid thatbusiness profit will not increase in H2 even though foot traffic will follow a recovery
trend and gross sales will improve.
A. (Mr. Makiyama)
As last year our stores closed mainly in April and May (Q1), percentage changes for thisfiscal year significantly react to it. Store closures bring about significant negative impact
including a decrease in rent and common service charge. However, our stores operated in thecurrent period and our support for the tenants that suspended operations this fiscal year issmaller than last year. For Q2, revenue rose much above standard sales because sales
increased in June last year due to revenge consumption. This year, however, sales moved at
an average pace from June to the middle of August and revenue in Q2 does not seem to have
jumped year on year compared to Q1. Actually, sales have recovered smoothly and businessprofit has also increased. Thus we expect to ensure enough business profit in H2.
Q. When comparing Q2 with Q1 this fiscal year, revenue and business profit did notincrease. Is it due to seasonal reasons?
A. (Mr. Makiyama)
We transferred Neuve A on June 30 and it had a significant impact. Concerning changes
from Q1 to Q2 excluding Neuve A, I would like to explain after confirming.
<Supplemental data>*Supplement (1) SC Business (excluding Neuve A)
Q1
Q2Gross sales¥48.9 billion¥52.0 billion
Revenue¥11.4 billion¥12.2 billion
Supplement (2) Excluding the effect of transfer of fixed costs in the SC Business(Q1: approx. ¥0.5 billion, Q2: almost zero)
Q1
Q2
Business profit¥1.2 billion¥1.3 billion
Q. I understand H2 plan for consolidated SGA remains unchanged from June forecast.
However, Q2 results were below June forecast. Is it not because you reduced costs inH1 and carried them over to H2 but because you just reduced costs? Concerningforecast for H2, is additional cost reduction that is not contained in your plan possible?
Concerning forecast for the reduction of fixed costs in FY2021, you told results in H1
were above the plan. Actually, how much cost did you reduce?
A. (Mr. Yoshimoto)Sales were relatively strong in June but sluggish from late July to August. And we reviewed
SGA flexibly. Some of them will be carried over to H2. The basic scenario for forecast for H2aims for sales recovery. Therefore, particularly in November and December, basically, we will
spend necessary cost. On the other hand, in the prolonged uncertain situation, we havemultiple scenarios to respond to risks.
Concerning the current situation, as we made a good start in October both in terms ofcustomer traffic and sales, I think SGA will be as expected if sales continue on a recovery
trend.
Concerning the structure reform (“reduce fixed costs ¥10.0 billion in three years” as
described on page 40 of our presentation materials), it is based on the assumption that fixed
costs are defined as the costs of which reduction effect will not be temporary just in a single
1year but will continue in later years. Therefore, for example, the temporary reduction ofoutsourcing expenses is not included. We define fixed costs as the costs of which reduction
effect will continue in the relevant fiscal year and subsequent fiscal years. Such reduction will
be made by changing our business model. It includes the shift from paper to digital to reduce
advertising expenses and the minimization of organization to reduce personnel expenses.
Of our three-year reduction target of ¥10.0 billion (compared to fiscal 2019), we plan toreduce (i) ¥6.0 billion through human resource structure reform and (ii) ¥4.0 billion throughcost structure reform. Considering the current severe situation, we should aim to reduce morethan ¥10.0 billion. However, they are big targets and we would like to strive to achieve it.
Expected reduction of ¥3.7 billion for fiscal 2021 (compared to fiscal 2019) includes:(i) Human resource structure reform
There is attrition of 250 to 300 employees due to retirement every year. However, whilereviewing and reducing positions, we reduce new graduate and mid-career recruitment. As aresult, we expect to eliminate 500 positions in these three years. We will continue to strive tominimize costs through organizational and human resource structure reforms.
(ii) Cost structure reform
We already work to reduce advertising expenses. We shifted to digital to reduce costs
continuously. We plan to reduce costs ¥1.0 billion by decreasing offices and transfer withoutfamily, and in addition, further promoting the joint purchase of the Group.
Reduction of ¥3.7 billion in fiscal 2021 includes SGA reduction of ¥3.0 billion and cost
reduction of ¥0.7 billion. SGA reduction of ¥3.0 billion includes the reduction of ¥1.4 billion
made in H1 and the reduction of ¥1.6 billion expected for H2.
Q. You told you have multiple scenarios for forecast for H2. If sales increase above
forecast, do you think you will invest costs looking ahead to the future? I would like toknow what you qualitatively think about the balance between periodic profit or loss andmeasures with an eye to the future.
A. (Mr. Yoshimoto)
Forecast for H2 is based on the idea that consumption will recover gradually. It is not basedon the negative impact of so-called 6th and 7th wave of COVID-19. Concerning inboundtourists, we assume that restriction on their entry to Japan, etc. will not be eased immediately.
On the other hand, we learned from our experience during the last year and a half that wecan respond to some situations by reducing SGA. And we are always conscious of thesituation that causes impairment losses like in H1 last year. We will respond flexibly assuming
various scenarios.
For the target in the medium-term plan (operating profit in fiscal 2023: ¥40.3 billion), I
recognize we have started late this fiscal year, which is the first year of the plan, due toCOVID-19. We need to make up for the delay somewhere. And I think we should accelerate
the Real × Digital Strategy, the Prime Life Strategy and others. The Department Store, Parcoand JFR Card will implement them steadily.
Q. Concerning your idea of fixed-term lease, you told about the Nagoya store. And is itcorrect to understand that it will change company-wide? Or is it limited to the Nagoya
store? I would like to know what you think about that.
A. (Mr. Yoshimoto)In our business strategy presentation in 2019, I told that we would remodel the Nagoya
store following the Shinsaibashi store. Though the plan has been temporarily suspended due
to COVID-19, looking at the Developer Strategy in the Nagoya Sakae area and with its threebuilding structure in mind, we are considering building a new hybrid model for theMatsuzakaya Nagoya store. The ratio of fixed-term lease of 40% of the Nagoya store can berealized without rebuilding its buildings unlike the Shinsaibashi store. Fixed-term lease is only
methodology, but it will be difficult to introduce the tenants that are attractive for customers
only in the format of uriage shiire (purchase recorded at the time of sale). And as a result, I
think the ratio of fixed-term lease will increase.
On top of it, strong gaisho sales are cited as the feature of the Nagoya store and we willbuild a model in light of them. The Department Store needs to establish and customize an2

optimal model according to the characteristics of each store. First, we would like to launch therenovation of the Nagoya store by fiscal 2023 to show tangible results as early as possible.
Q. Concerning forecast for margin ratio, if composition by merchandise category changes
and margin ratio decreases around 1% compared to before COVID-19, business profit
will decrease ¥6.0 billion to ¥7.0 billion. If sales return to normal to some extent, isthere no need to worry about that? On the other hand, if you assume that there areadverse factors, what measures will you take?
A. (Mr. Yoshimoto)Concerning profit margin in product sales, in the past, it was the accepted view that profit
margin will decrease if share of women’s clothing decreases and share of luxury items
increases. Share of women’s clothing has considerably decreased in these one or two years.
Profit margin of luxury items has been almost average or above average though it depends onitems. There remains a concern that profit margin will decline when sales recover in the future.
However, I recognize that profit margin will not necessarily continue to decrease due toincreasing share of luxury items.
Q. I think profit margin will not decrease so much in the future. But it has alreadydecreased more than 1% compared to 2018 – 2019 and gross margin is expected todecrease ¥6.0 billion to ¥7.0 billion compared to before. Do you intend to cover them byreducing fixed costs and making the transition to fixed-term lease?
A. (Mr. Yoshimoto)I think it may be good to offset the impact of decreased profit margin while investing in thetransition to fixed-term lease. However, in terms of the measures to be taken until fiscal 2023,
we will mainly reduce SGA.
Q. I would like to ask Mr. Sawada. On page 29 of your presentation materials, you tell
about “what will recover” and “what will not recover” concerning market changes inthe future. I think your view about it is on page 34. And I would like you to supplement
it a little more specifically about what is likely to return and what can become killer
content. Last week showrooming space opened in the Daimaru Tokyo store. I wouldalso like to know whether something like that will become a core.
A. (Mr. Sawada)
The one and a half year period since the COVID-19 outbreak yields various results andchanges. Based on them, we are discussing the future market in the company. From suchdiscussion, we consider art will grow in the future. Compared to advanced countries, its
market in Japan is smaller and it has room to grow.
We have implemented various initiatives since H2 last year, and particularly, modern art
events have produced good results. Even in rural stores, they have made a big achievement.
We have a strong pipe with art galleries, which was created through our past efforts and wewould like to steadily grow this field.
We also consider cosmetics as a market expected to grow. Various products including skincare, hair care, and face care products and those from natural sources, which are notdeveloped by only large manufacturers. We recognize this market will grow. We also see
luxury watches as a growth field.
On the other hand, the apparel market is obviously segmentalized. Conventional
department store’s idea of categories such as Mrs., New Mrs., and Career has obviously
become outdated. For example, we curated and offered very strong brands targeting young
women in a tranquil environment in the Kyoto store. Then middle-aged women briskly buy theclothing that their daughters bought. The business that produces many products semiannuallyand sells unsold products at discount prices has reached the limit. There have emerged somecompanies that manufacture good products and leave them as if archiving them. Somebrands attract customers who empathize with their stances and support them. I think it will be
important for us to find such brands carefully. If we can do this, the market will expand enough.
I will tell about the “asumise” in the Daimaru Tokyo store. Department stores use energy for3

finding currently selling products. Similarly, we need to find the products that will sell in thefuture. Connoisseurship is required and I think we also need an “equipment” to realize that.
We would like to make the “asumise” function as an equipment to find the products that willsell in the future.
Q. You told art would grow. Is it like the event held on the higher floors of the Daimaru
Tokyo store?
A. (Mr. Sawada)
Such events were held in the Tokyo store, the Kyoto store, etc. as store-wide promotion andwe will use art galleries in our stores including GINZA SIX. We have also found that art is easy
to sell online. Experts present art works with clear explanation online, and in some cases, wesell such works by lottery online. We will proceed with initiatives that combine the real andvirtual worlds.
Q. I think Parco always captures changes and I would like to know what customers will
return and what content will become strong in the process that customer traffic will
return.
A. (Mr. Makiyama)
Like the Department Store, I think art is a growth field. For example, Parco published fourbooks on Banksy and the combination of “artist,” “gallery” and “Parco” have delivered strong
results.
A fashion lover watches a documentary film on a designer and shops in a shop or an art
lover watches a documentary film on an artist and buys related products. Parco makes such
unique proposals that combine “goods” and “entertainment.”
Concerning what products are selling, even young people buy so-called street luxury items.
In the past, it was pointed out that the price range conflicted with the range of customers, but
recently, they are selling well. I think this field is expected to grow further.
Last fall, we opened a new zone Outdoor Park in Shibuya PARCO. Lifestyles are changing
partly due to the COVID-19 pandemic. But by creating a zone which urban people long for in
the center of the city, fashion lovers are attracted. It caused a buzz on SNS and made a goodstart.
Fashion is diversified and fashion lovers seek genuine goods that have stories. We would
like to develop good plans and gain recognition that Parco always communicates new fashion
themes so that Parco’s branding will evolve.
Q. I would like to ask Mr. Yoshimoto. You mentioned a “sense of speed” several times as a
key phrase in dialogues during the past half year or one year. In the increasingly
changing external environment, has the sense of speed of the management team andfrontline employees improved when you actually engage in management?
A. (Mr. Yoshimoto)
Our initiative to “digitalize touch points using app” is presented on page 30 of ourpresentation materials. I think app is the starting point of our digital strategy and recognizethat we have made progress partly due to the COVID-19 pandemic. Gaisho’s connaissligne
has 80,000 members and strives to improve its products and customer service function. I thinkthey are making progress with a sense of speed. However, there is a problem with theshortage of experts who promote digitalization.
In the meantime, for physical stores, while shifting their focus to experience and lifestyleand expanding prime content, I recognize that we need to face the current situation andaccelerate our efforts to decrease originally curated space by half and reduce women’svolume zone clothing.
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