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

Doshisha
Masayuki Nomura
President and COO, Doshisha Corporation

Increase profits by improving
gross margin◆Summary of FY3/18 Consolidated Results
FY3/17
Consolidated(\\ million)
ActualYoY

FY3/18Compositio
n ratio

ActualCompositio
n ratio

ChangeReference
Pct.
Change5/8/17
forecast

Pct.
ChangeChange107,015100.0%

103,589

100.0%(3,425)-3.2%

110,000(6,410)-5.8%

Product Development
Model Business

49,12945.9%49,958

48.2%

828

1.7%

54,450(4,491)-8.2%

Wholesale
Model Business

54,40350.8%

50,60648.9%(3,796)-7.0%

52,300(1,693)-3.2%

Others

3,482

3.3%

3,024

2.9%

(457)

-13.1%

3,250

(225)

-6.9%

Gross profit

26,23024.5%

27,281

26.3%

1,051

4.0%

27,800

(518)

-1.9%

SG&A expenses

19,15017.9%

19,512

18.8%

362

1.9%

19,800

(287)

-1.5%

Operating income

7,080

6.6%

7,769

7.5%

689

9.7%

8,000

(230)

-2.9%

Ordinary income

7,122

6.7%

8,001

7.7%

878

12.3%

8,000

10.0%

Net income

4,770

4.5%

5,490

5.3%

719

15.1%

5,350

1402.6%Net sales

Doshisha reported lower sales and higher profits in FY3/18. Consolidated results were as follows: net sales¥103,589 million (down 3.2% year on year), gross profit ¥27,281 million (up 4.0%), selling, general andadministrative expenses ¥19,512 million (up 1.9%), operating income ¥7,769 million (up 9.7%), ordinary
income ¥8,001 million (up 12.3%), and net income ¥5,490 million (up 15.1%).
The main factors behind the decline in net sales were weaker sales in the Wholesale Model Business due
to a drop in procurement of high-end brand products and lower sales of traditional mid-year and year-end
gifts, and a slump in sales of TVs and LED lighting in the Product Development Model Business amid
continued severe price competition.
Growth in profits was supported by lower procurement costs in the Product Development Model Business,
which was the result of purchasing price negotiations with manufacturers. In addition, the Wholesale Model
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Business rapidly adjusted its product lineup in response to declining sales, contributing to an improvementin the gross margin. As a result, operating income and ordinary income both increased year on year.
The gross margin was 26.3%, a record-high thanks to improvements in net sales, gross margins and selling,
general and administrative expenses over the last ten years. However, the selling, general andadministrative expenses ratio also hit a record-high of 18.8% (up 0.9 percentage point year on year).

◆FY3/18 Consolidated Results by Sales Channel
Sales to hardware stores showed signs of recovery, rising 1% year on year, while sales to discount storesincreased 5%, supported by the launch of new private brand (PB) products. Sales to single-price retailers
also grew, rising 16% year on year on the back of strong demand for general merchandise. However, in the
online channel, an area we are reinforcing, sales declined 3% year on year, with weak demand for TVs andLED lighting cancelling out healthy sales of household goods, summer items, interior storage products andbrand products. Similarly, sales to large electronics retailers declined 24% due to weak demand for TVs,
LED lighting and luxury brand watches, while sales to specialist watch and clothing stores fell 12%.

◆FY3/18 Consolidated Results by Business Segment
Our operations are largely divided into two business segments: the Product Development Model Businessand the Wholesale Model Business.
The Product Development Model Business plans, manufactures and sells original Doshisha products. TheWholesale Model Business is a comprehensive sales proposal business, mainly focused on selling andplanning sales promotions for leading domestic and overseas brands and products sourced from major
manufacturers in Japan. The product range in the Wholesale Model Business includes well-known brandwatches, bags and other items, traditional mid-year and year-end assorted gift 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> ¥49,958 million, up 1.7% year on year
Kaepa, our main licensed apparel brand, registered strong sales, supported by effective sales display
proposals tailored to large discount stores and hardware stores, which have become two new sales
channels for the brand. Sales of interior storage products were also firm, mainly in the online channel,
supported by strong demand for our market-leading steel storage racks, office chairs and generalmerchandise at tool and hardware stores. In addition, sales of single-price merchandise and summer goods(snow cone makers, kamome fans) rose strongly. Sales of TVs declined year on year due to the impact ofintensifying price competition, but from 2H FY3/18 we implemented far-reaching reforms, including
overhauling the business structure in TVs and renegotiating contracts with manufacturers. In LED lighting,sales of standard LED light bulbs and ceiling lights declined amid intense price competition, but there weresigns of recovery on the back of firm in-store demand for new and unique products such as lighting
designed for power cuts and LED ceiling lights with fans.
<Wholesale Model Business> ¥50,606 million, down 7.0% year on year
Sales of famous brands declined 10.0% year on year to ¥23.5 billion, reflecting a drop in procurement ofluxury brand watches. However, the business recorded steady sales of private, licensed and tie-up brandwatches, particularly mid-range products, and branded bags. Sales from NB processing declined 4.1% year
on year to ¥27.0 billion. Although sales fell year on year, profitability improved due to a review of
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procurement methods, which was aimed at reducing discounted sales of leftover inventories at the end ofselling seasons, particularly food gift products. Everyday items and toys registered healthy sales, especiallyon a spot sales basis. Sales of a stuffed animal cushion in the shape of Doshisha’s character Goroneko
Summit were also strong.

◆Our vision
We are aiming to “Create an unrivalled company worldwide.” Doshisha supplies numerous products thathave leading positions in a wide range of niche categories, from clothing and food to homewares. That
collection of products means Doshisha is a hard company to define, but that also means we have no directcompetitors. In that sense, Doshisha is an “ONLY 1” company. We cannot predict how society will change orwhat kind of products consumers will need in the future. That means we have to build a powerfulorganization that leverages our distinct strengths as a leader in niche categories and that allows us to easilychange direction to take on new challenges.
Going forward, we will focus on developing four key strengths to realize our Medium- to Long-term Vision
for Doshisha: a company with 30 business groups each capable of generating annual sales of ¥10 billion.
Strength 1 – Networks: Business relationships with 4,800 companies operating a combined 300,000 stores,and links with 2,100 suppliers. Strength 2 – Business models: Three distinct business models based on
in-house development, famous brand wholesaling and gift NB processing. Strength 3 – Uniqueness: Supply
a wide choice of products ranging from ¥100 merchandise to luxury watches worth tens of millions of yenand operate a broad range of businesses providing lifestyle products in all areas related to clothing, foodand homewares. Strength 4 – Organizational management: Authority transferred to business divisions andstandalone profit performance at each division are closely linked to personnel evaluation systems.

◆Consolidated Forecasts for FY3/19
Consolidated(\\ million)

FY3/18YoY

FY3/191H

2H

Full year

1H2H

Full year

Net sales

50,42653,163

103,589

52,50057,500110,000

6,410

6.2%

Product Development
Model Business

23,93526,023

49,95824,95028,25053,200

3,241

6.5%

Wholesale
Model Business

24,91825,68850,606

26,40027,70054,100

3,493

6.9%

Others

1,572

1,451

3,024

1,150

1,550

2,700(324) -10.7%

Gross profit

13,46913,812

27,281

14,20014,90029,100

1,818

6.7%

SG&A expenses

9,700

9,811

19,512

10,30010,40020,700

1,187

6.1%

Operating income

3,769

4,000

7,769

3,900

4,500

8,400

630

8.1%

Ordinary income

3,882

4,118

8,001

3,900

4,600

8,500

498

6.2%

Net income

2,645

2,844

5,490

2,700

3,100

5,800

309

5.6%

The copyright to this publication is owned by the Securities Analysts Association of JapanChangePct. ChangeOur outlook for the fiscal year ending March 31, 2019 is for higher sales and profits. We forecast net salesof ¥110.0 billion (up 6.2% year on year), gross profit of ¥29.1 billion (up 6.7%), selling, general andadministrative expenses of ¥20.7 billion (up 6.1%), operating income of ¥8.4 billion (up 8.1%), ordinary
income of ¥8.5 billion (up 6.2%), and net income of ¥5.8 billion (up 5.6%).By business segment, we forecast
sales of ¥53.2 billion (up 6.5% year on year) in the Product Development Model Business and ¥54.1 billion(up 6.9%) in the Wholesale Model Business.
We aim to pay a consistent and stable dividend based on a dividend payout ratio of 30%. For FY3/18, wewill pay a full-year dividend of ¥50.00 per share.

◆Topics for FY3/19
In FY3/18, we streamlined our TV business operating structure to reduce fixed costs and ended ourexclusive TV distribution agreement with Orion Electric Co., Ltd. due to a mismatch in contract conditions.
We have started working with other manufacturers and plan to launch the first-ever Doshisha brand TVs.
We expect these moves to support an improvement in profitability in the TV business from FY3/19.
The funeral business (supplying refrigeration systems to preserve bodies prior to cremation), established inFY3/18, aims to help tackle the backlog of families waiting to cremate their loved ones, which is likely tobecome an increasingly serious social issue due to the rising number of deaths in Japan. More than 2,000of our systems have already been installed.
◆Question and Answer Session◆
Q: Net sales have been declining for some time but you forecast sales will recover in FY3/19 with growth of
6.2%. What is the basis for that outlook?
A: Our forecasts are formulated on a bottom-up basis reflecting figures collated from our 11 businessgroups, rather than a top-down approach decided by management.
We forecast a recovery in some business divisions that struggled in FY3/18, while general merchandise,
homewares and other divisions, which are seeing growth in sales, plan to launch new products in
FY3/19. Given those factors, we think our net sales target of ¥110 billion is well within reach.
Q: Electronically recorded monetary claims are increasing. Why is that?
A: That mainly reflects a shift from the use of notes to electronic records and a change from cash
receivables to notes by business partners that owe accounts receivable.
The total for cash receivables and notes receivables is largely unchanged.
Q: What is Doshisha’s share of the domestic TV market on a volume basis?
A: Our current share is roughly 3%, but we aim to increase that to around 5% in FY3/19.
Q: What is your outlook for inbound demand?
The copyright to this publication is owned by the Securities Analysts Association of JapanA: Three years ago we experienced an unprecedented spike in inbound demand, mainly for watches. In asingle year, sales increased ¥5 billion, but demand slumped the following year. Demand from visitors toJapan is shifting from luxury items and home electronics to cosmetics and everyday items, and tospending on travel itself. We have no plans to specifically target inbound demand, but any increase indemand from overseas visitors will be a welcome boost.
(May 17, 2018, Tokyo)

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