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

Doshisha
Masayuki Nomura
President and COO, Doshisha Corporation

Overhauling the business portfolio
to support sustainable growth◆Summary of 1H FY3/19 Consolidated Results
End of 2Q FY3/18
Consolidated(\ million)
ActualComposition
ratio

End of 2Q FY3/19

ActualComposition
ratio

50,426 100.0%

48,477 100.0%

Product Development
Model Business

23,93547.5%

24,580Wholesale
Model Business

24,91849.4%

Others

1,572

Gross profit

YoY

ChangeReference

Pct. Change

5/7/18
forecast

ChangePct. Change(1,948)-3.9%

52,500(4,022)

-7.7%

50.7%

645

2.7%

24,950

(369)

-1.5%

22,38846.2%(2,529)-10.2%

26,400(4,011)-15.2%

3.1%

1,508

3.1%

(64)

-4.1%

1,150

358

31.1%

13,46926.7%

13,268

27.4%

(201)

-1.5%

14,200

(931)

-6.6%

SG&A expenses

9,700

19.2%

10,510

21.7%

810

8.4%

10,300210

2.0%Operating income

3,769

7.5%

2,758

5.7%

(1,011)-26.8%

3,900(1,141)-29.3%

Ordinary income

3,882

7.7%

2,845

5.9%

(1,036)-26.7%

3,900(1,054)-27.0%Net income2,645

5.2%

1,861

3.8%

(784)

-29.7%

2,700(838)-31.1%Net sales

For the first half of FY3/19, Doshisha reported consolidated results as follows: net sales of ¥48,477
million (down 3.9% year on year), gross profit of ¥13,268 million (down 1.5%), selling, generaland administrative expenses of ¥10,510 million (up 8.4%), operating income of ¥2,758 million(down 26.8%), ordinary income of ¥2,845 million (down 26.7%), and net income of ¥1,861
million (down 29.7%).
Compared with start-of-year forecasts, sales in the Product Development Model Business were¥369 million lower than projected (1.5% below forecast), with sales of in-house brand TVs,launched at the end of FY3/18, falling short of TV sales in the same period of the previous fiscal
year. Sales in the Wholesale Model Business were ¥4,011 million lower than projected (15.2%below forecast). There were several reasons for the shortfall in the Wholesale Model Business. In
the segment’s famous brands business, a major retailer adjusted procurement volumes in the firstquarter, and in the second quarter the business faced a sharp drop in the supply of brand products,
which are a key element of the segment’s sales plan. In the segment’s national brand (NB)
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processing business, sales volume for mid-year gift sets declined due to a record-low catch ofcrabs, the ingredient for canned crab, which is the main item in mid-year gifts sets. In addition,
operations in both businesses were affected by a typhoon that made landfall in September. One ofDoshisha’s proprietary logistics centers took a direct hit from the typhoon, forcing a halt tooperations for three days due to a power cut. Even after power was restored, warehouse capacity
utilization declined because of damage caused by the typhoon. Moreover, the typhoon prevented
imports from passing through Kansai Airport and other entry points, causing disruption to supply
chains during the peak shipment period for autumn and winter products, which also had a negative
impact on sales.
The gross profit margin was 27.4%, the highest on record, reflecting price negotiations with
manufacturers and an increase in the sales weighting for products developed in-house. Selling,
general and administrative expenses increased ¥810 million year on year and the selling, generaland administrative expenses ratio was 21.7%. Following the start of in-house operation of logistics
centers, third-party outsourcing costs previously booked under logistics costs are now included inpersonnel expenses and third-party warehousing usage fees are now included in depreciation(other selling, general and administrative expenses).
Price increases by distribution companies also had an impact on selling, general and administrative
expenses. As part of efforts to address that issue, we continue to move logistics operations
in-house, but the projected decline in costs has not yet materialized due to disruption during thestart-up phase of the Kanto Logistics Center. As a result, the transfer of operations from third-party
warehousing providers has been delayed and we are placing priority on ensuring shipments reachour business partners, which is leading to an increase in operating costs. Going forward, we aim toreduce costs by consolidating deliveries, using optimal locations for distribution, and reviewing
packaging methods. We will also make use of the Kanto Logistics Center, deliver products tocustomers' distribution centers and start shipments earlier in the day.

◆Summary of 1H FY3/19 Consolidated Results by Business Segment
Our operations are largely divided into two business segments: the Product Development Model
Business and the Wholesale Model Business. The Product Development Model Business plans,
manufactures and sells original Doshisha products. The Wholesale Model Business is acomprehensive sales proposal business, mainly focused on selling and planning sales promotions
for leading domestic and overseas brands and products sourced from major manufacturers inJapan. The product range in the Wholesale Model Business includes well-known brand watches,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) processedproducts.

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60

Product Development
Model Business

Wholesale ModelBusiness* Figures in ( ) are composition ratio

40

Famous brands

Figures in [ ] are percent change year on year

50.950.4 [-1.0%]

23.4

23.9(46.1%)

Other

NB processing(47.5%)[+1.9%]

48.4 [-3.9%]

24.5(50.7%)[+2.7%]

11.9(50.9%)

24.9
14.0(27.5%)*8.8(18.2%)[-7.7%]

25.9

010.9(21.8%)(23.4%)

20

End of 2Q FY3/17(49.4%)[-3.8%]

13.9(27.6%)[-0.5%]End of 2Q FY3/18[-19.6%]22.3(46.2%)[-10.2%]13.5(28.0%)[-2.7%]End of 2Q FY3/19

From 4Q FY3/17, a portion of net sales that had been classified and measured under the Product Development Model Business has
been transferred to the Wholesale Model Business, in accordance with changes to the internal management method. Segment
information disclosed for the end of 1H FY3/17 was prepared based on the measurement method following the change.

◆1H FY3/19 Consolidated Results by Sales Channel
Sales in the hardware store channel were steady compared with the same period in the previous
fiscal year, with sales of summer merchandise and homewares helping to offset weak sales of TVs.
In the online channel, sales increased 5% year on year, supported by efforts with e-commerce
retailers to grow sales. Sales to single-price retailers increased 34% year on year. However, sales
in the discount store retailer channel, which accounts for a high share of Doshisha’s famous brandsales, declined 8%, and sales to large electronics retailers dropped 22%. Sales to generalmerchandisers fell 20% year on year. While sales of household goods and summer merchandise
were strong, weak demand for mid-year gifts impacted sales.

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◆Consolidated Forecasts for FY3/19
FY3/18

Consolidated(\ million)

1H

2H

FY3/19Full year

1H2H

YoY
Full year

Change410

Vs. start-of-year forecasts

Pct.
ChangeChangePct.
Change0.4% 110,000 (6,000)-5.5%Full year

Net sales

50,42653,163 103,589

48,47755,522 104,000

Product Development
Model Business
Wholesale
Model Business

23,93526,023

49,95824,58027,41952,000

2,041

4.1%

53,200 (1,200)-2.3%

24,91825,68850,60622,38826,511

48,900 (1,706)-3.4%

54,100 (5,200)-9.6%Others

1,572

1,451

3,024

1,508

1,591

3,100

75

2.5%

2,700

400

14.8%

Gross profit

13,46913,812

27,281

13,26814,731

28,000718

2.6%

29,100 (1,100)-3.8%

SG&A expenses

9,700

9,811

19,512

10,510

10,58921,100

1,587

8.1%

20,7001.9%

Operating income

3,769

4,000

7,769

2,758

4,141

6,900(869) -11.2%

8,400 (1,500) -17.9%

Ordinary income

3,882

4,118

8,001

2,845

4,154

7,000 (1,001) -12.5%

8,500 (1,500) -17.6%

Net income

2,645

2,844

5,490

1,861

2,7884,650

5,800 (1,150) -19.8%(840) -15.3%

400

In light of 1H FY3/19 results, the Company has revised its consolidated forecasts for FY3/19, whichwere disclosed on October 31. Details are as follows. We now forecast net sales of ¥104.0 billion(+0.4% year on year), down from ¥110.0 billion previously, gross profit of ¥28.0 billion (+2.6%),
down from ¥29.1 billion, selling, general and administrative expenses of ¥21.1 billion (+8.1%), upfrom ¥20.7 billion, operating income of ¥6.9 billion (-11.2%), down from ¥8.4 billion, ordinary
income of ¥7.0 billion (-12.5%), down from ¥8.5 billion, and net income of ¥4.65 billion (-15.3%),
down from ¥5.8 billion. By business segment, we forecast sales of ¥52.0 billion (+4.1% year onyear) in the Product Development Model Business, down from ¥53.2 billion previously, and ¥48.9
billion (-3.4%) in the Wholesale Model Business, down from ¥54.1 billion.

◆ Scenario for 2H FY3/19
Business portfolio management,
whichisakeypartofourcorporate philosophy – Never lose
our passion for what we do – is thedriving force behind Doshisha’sgrowth.

Portfolio

management

involves integrating business units
to improve sales synergies andsplitting business units to focus on
specialist product categories while
expanding the product lineup.
Reorganizing our portfolio usingthat approach creates new markets, which drives Doshisha's growth. In the second half of FY3/19,
we plan to review the business portfolio and rebuild our organization to create an operating
structure that supports sustainable growth.
The copyright to this publication is owned by the Securities Analysts Association of JapanWe have classified the businesses in our portfolio into three types: “maintain and reinforce”,“transform,” and “consider for renewal.” The “maintain and reinforce” category includes theProduct Development Model Business, businesses that contribute to society, e-commerce andoverseas sales. In the Product Development Model Business, we have clarified overlapping roles
and simplified complex decision-making processes in order to speed up product development. Inbusinesses that contribute to society, we have launched sales of refrigeration systems to preserve
bodies prior to cremation. The systems are designed to help tackle the backlog of families waiting
to cremate their loved ones. We forecast the business will become profitable in FY3/20. Oursystems are being installed at funeral homes, but we are also stepping up efforts to sell thesystems to hospitals, where they are likely to play a useful role in hospital autopsies. The“transform” category includes the famous brands business and the gift business in the Wholesale
Model Business and the food products business in the Product Development Model Business. The“consider for renewal” category covers audio & video (A&V)-related businesses. We are already
implementing measures to scale back our A&V businesses and stem the increase in selling, generaland administrative expenses. However, we are also looking into developing new products toincrease earnings and using synergies with other business units to reduce operating costs further.
Also, we established a Business
Development Division in August
2018 to identify and develop newbusinesses.

We

have

alreadylaunched multiple joint projects
with other companies, but thisspecialist division will be more
nimble, allowing us to move into
new business fields and buildnewbusinessmodelsmorerapidly. At the same time, wehaverealigned

ouroperating

structure, reducing the numberof business units from seven to five. To improve business efficiency and increase sales, food andalcoholic beverages have been transferred from the fourth business unit to the third business unit,
which have the same sales channels.
In addition, the seventh business unit, which was responsible for all A&V-related businesses, hasbeen abolished. A&V operations have been transferred to the second business unit, which hasdeveloped a large number of in-house niche products. The second business unit will harness its
product planning capabilities to develop new TV products.

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◆Strategy for 2H FY3/19
Based on the theme “Strengthen & Evolve,” we will implement our business strategy for eachbusiness model, reinforce e-commerce operations and overseas sales, create new businesses andstrengthen our logistics strategy. In e-commerce, we plan to increase the number of products thatare only available online. In overseas sales, we will actively exhibit our products at trade shows. InNovember, we exhibited at the China International Import Expo in Shanghai. We are also rollingout sales promotions tailored to each region, including street marketing campaigns anddemonstration sales events.
With our business strategy for the Product Development Model Business, we will step up
development and branding to offer products with value unique to Doshisha, based on our Niche No.
1 strategy and product branding capabilities. In the Wholesale Model Business, our businessstrategy for famous brands will involve using digital marketing and our strengths in productsourcing to enhance Doshisha’s ability to handle all aspects of sales, from stimulating buying
behaviour to sourcing and sales area support, including marketing. In NB gift processing, ourstrategy is to increase market share in mid-year and year-end gifts, while also stepping up efforts
in year-round gifts. In year-round gifts, we have teamed up with an IT venture firm to launch giftsales via smartphones. Users can customize product settings, creating a wider choice of products
such as catalog gifts, reciprocal wedding gifts and gifts for company shareholders, as well as
conventional presents gifted between consumers.

◆FY3/19 Dividend Policy
Doshisha aims to pay a consistent and stable dividend based on a dividend payout ratio of 30%.
For FY3/19, we plan to pay a full-year dividend of ¥50.00 per share.
(November 14, 2018, Tokyo)

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