M
MESSAGE

Message from the CFO

We will rapidly transform our business model to focus on
intellectual creation driven by intangible assets.

or more as a hurdle rate out of consideration for financial returns.

will look to achieve an optimal capital allocation assuming ROE of

The IRR on the ¥7.1 billion in investments conducted prior to

10% or more under the next medium-term management plan.

March 2020 was 34%, greatly surpassing this hurdle rate.

A central pillar of investment under the next medium-term

Software investments, meanwhile, have produced an exceptional

management plan will be co-creative investment in start-up

rate of return on investment of 313% due in part to the fact thatcompanies and other targets. In the new plan, we intend to

we conduct development in-house, which not only speeds up

double such investments from the level of the current plan, ¥30.0

development but also creates such returns for our business.

billion over a five-year period. We can improve our success rate

Difficulty in Accomplishing Major Medium-Term
Management Plan Targets Due to COVID-19 Pandemic

represent 65% of total gross profit, a level nearly double that seen

Human resource development and R&D investments include thein co-creative investments by pursuing earnings contributions tobefore the start of the current medium-term management plan.

cultivation of our IT staff and the secondment of employees toour main business through collaboration with investees while

In the fiscal year ended March 31, 2020, the fourth year of the

Meanwhile, contracted future recurring gross profit, which repre-

start-up investees, efforts we anticipate will increase corporate value

also providing them access to our stores and other resources tomedium-term management plan, performance with regard to thesents gross profit to be recorded in future fiscal years, increased to aover the medium-to-long term. These investments also contribute tostimulate their growth. We aim to maintain an IRR of 10% or

key performance indicators (KPIs) of the plan was as follows:level that is 2.7 times greater than the amount of recurring grossongoing improvements in operating income per employee, whichmore for financial returns through this approach. Moreover, by

earnings per share (EPS) of ¥117.6, ¥5.1 lower than targeted; return

profit recorded in the fiscal year ended March 31, 2020. This earn-

was 1.7 times higher in the fiscal year ended March 31, 2020, thanpositioning co-creative investments as a central pillar of growthon equity (ROE) of 8.8%, 0.4 percentage point less than our target;

ings structure is resilient to major risk factors, like the COVID-19

it was in the fiscal year ended March 31, 2015.

investments, we hope to create a situation in which ROE stays

and return on invested capital (ROIC) of 3.7%, 0.1 percentage point

pandemic, and means that we should be less impacted by such

below the target. In this manner, performance with regard to all KPIs

occurrences than we would under our prior structure.

*2 Rate calculated using recent procurement prices for applicable marketable securities andbased on amounts if listed stocks were to be sold at the end of the respective fiscal year

above 10% and ROE consistently exceeds cost of shareholders’equity. In existing businesses, investments will rise in the
FinTech segment centered on software investment while invest-

fell below targets due to the impacts of the global COVID-19 pan-At the same time, we steadily moved forward with capital

demic, which occurred near the end of the fiscal year. Moreover, themeasures aimed at accomplishing our target balance sheet,

Investments in Intangible Assets (FY2020)

ments in renovations in the Retailing segment will decrease as

pandemic reduced consolidated operating income by ¥1.3 billion

resulting in a decrease in WACC and consequently a rise in

Amountcorporate value through both improved profitability and reduced

New business fields¥8.7 billion

IRR of 34% from investments in start-up
companies

the transition to fixed-term rental contracts is winding down. As

through a ¥1.5 billion reduction in Retailing segment income coupled with a ¥0.2 billion increase in FinTech segment income.

cost of capital. Furthermore, as recurring gross profit is

Human resource
development / R&D¥3.2 billion

Operating income per employee of ¥8.02 million(1.7 times higher than in FY2015)

The FinTech segment actually posted higher operating income

recorded as the total for both the Retailing and FinTech seg-

as a result of the pandemic as we continued to record recurring

ments, it is an ideal indicator for MARUI GROUP as it empha-

revenue while a significant drop in new card issuance costs was

sizes LTV in its management through a business merging

seen. The impacts of the pandemic are expected to weigh evenretailing and finance.

more heavily on the fiscal year ending March 31, 2021, the final
year of the medium-term management plan. We have therefore
judged that it will be difficult to accomplish the targets set for the

ROIC 3.7%

plan in the fiscal year ending March 31, 2022. We hope toaccomplish the goals of the current medium-term management
plan, specifically EPS of ¥130 or more, ROE of 10% or more, andROE 8.8%

Return on investment of 313%

ROE was around 5% prior to the establishment of the current

Taking this approach, investments in intangible assets, suchas co-creative investments and software investments, will likely
rise to account for around 80% of total growth investments
investments, we will rapidly transform our business model tofocus on intellectual creation driven by intangible assets.

medium-term management plan, but the earnings structuretransformations and capital measures conducted under the plan31, 2019, and 8.8% in the fiscal year ended March 31, 2020,

WACC 3.0%

a result, overall investments in existing businesses will decline.

under the next medium-term management plan. Through thesecaused this indicator to rise to 9.1% in the fiscal year ended MarchFiscal Year Ended March 31, 2020MARUI GROUP will launch a new medium-term management¥3.1 billion¥15.0 billion

Outlook for the Next Medium-Term Management Plan

*1 Referred to as “contracted future recurring revenue” until the fiscal year ended March 31,
2020, to reflect future recurring revenue based on revenue as displayed on financial
statements; referred to as “contracted future recurring gross profit” in this report to reflect
future recurring revenue based on gross profit

plan’s KPIs, namely EPS, ROE, and ROIC, in this year. We apologize for the disappointment this news causes.

Software
Total

Major Successes

coming in just below 10% in both years. Based on these trends, we

Hirotsugu Kato
Director, Managing Executive Officer, and CFO
In charge of IR, Finance, Sustainability, and ESG Promotion
President and Representative Director, D2C & Co. Inc.
Director, tsumiki Co., Ltd.

Cost of shareholders’ equity 6.9%

ROIC of 4% or more, as quickly as possible under the new plan.

Increasing of Investment in Intangible Assets

98

Ongoing Corporate Value Creation throughEarnings Structure Transformation

In tandem with the implementation of our medium-term manage-

Regardless of the unfortunate performance, we were able to makeassets for the purpose of fueling future growth. In the fiscal year

steady progress in transforming our business model and earnings

ended March 31, 2020, investments in intangible assets amounted

structure and in transitioning toward our target balance sheet

to ¥15.0 billion, twice as much as investments in stores and otherbased on the medium-term management plan. As a result, we

tangible assets. Breaking down these investments in intangible

have nearly completed the development of a structure that dis-

assets, we directed ¥8.7 billion toward new business development,

plays our desired corporate value, by which I refer to a structure inprimarily through investments in start-up companies; ¥3.1 billion towhich ROIC exceeds weighted average cost of capital (WACC) andsoftware; and ¥3.2 billion to human resource development and R&D

ROE surpasses cost of shareholders’ equity on a consistent basis.

investments, which, although being recorded as expenses on the

The most important goal of our earnings structure transformation

financial statements, are viewed as investments by us. Often times,

is to be able to show growth in recurring gross profit and contracted

we invest in start-up companies for the purpose of collaboration

future recurring gross profit,*1 which are important KPIs for manage-with the main businesses of the Retailing and FinTech segments,

ment emphasizing lifetime value (LTV). Recurring revenue contrib-

and we therefore anticipate returns through our business activities.

utes to improvements in LTV. This form of profit has come to

However, we have also set an internal rate of return (IRR)*2 of 10%

ment plan, we have also been increasing investment in intangible

99

Financial and Non-Financial Analysis by the CFO

Earnings Structure Based on Distinctive Business Model

Business Merging Retailing and Finance, and Earnings Structure
Since its founding as a company selling furniture on installment payments in 1931, MARUI GROUP has continued to evolve its distinctive
business model merging retailing and finance. Today, our operations are divided into the Retailing segment and the FinTech segment, butthese segments share the same customer base, making for a model that is conducive to generating synergies. This business model
merging retailing and finance also has a uniquely ideal earnings structure in which the earnings structures of both of our segmentscompensate for the deficiencies of the other segment’s model while capitalizing on its strengths.

Business Merging Retailing and Financerelationships with customers while encouraging them to upgrade

Building appealing stores increases revenues from fixed-term

to Gold cards. This multitude of unique advantages is a major

rental contracts while also enhancing our ability to draw custom-

characteristic of MARUI GROUP’s business model merging

ers, which in turn benefits credit card operations by creating

retailing and finance.

more opportunities to recruit new cardholders. Furthermore, as
we issue cards on-the-spot in stores, customers often use them

Figure 1: MARUI GROUP’s Business Modelright away, which effectively increases active user rates and card
revenues. The higher card revenues can be reinvested in retailstores. Through this process, MARUI GROUP’s business model

Enhancedability to
attract
customers

generates an ideal virtuous cycle (see Figure 1). Our value journey can be explained by looking at how this business model
functions across a timeline (see Figure 2).
Our relationships with customers generally begin in stores,
Increased
rent
revenues

and around 400,000 customers apply for credit cards at ourstores every year, often times using them immediately. This

Another major characteristic of MARUI GROUP’s business modelother initial expenses associated with new cards means thatmerging retailing and finance is how increases in customer contact

money is actually lost on new cardholders in their first few years.

points are effective at driving improvements in LTV. Increases in

However, once these cardholders start generating profit, this profit

ongoing transactions also spur growth in LTV. MARUI GROUP

can be anticipated to continue growing steadily thereafter. In thedisplays the revenue produced through those ongoing transactions

Retailing segment, meanwhile, we expect consistent earnings andvia the indicator of recurring gross profit. The transition to fixed-term

cash flows following the completion of the transition to fixed-term

rental contracts in the Retailing segment and measures for enhanc-

rental contracts. The combination of these two structures is

ing rent guarantee and other operations in the FinTech segment are

MARUI GROUP’s earnings structure. The consistent retail revenues

contributing to increases in recurring gross profit. As a result, recur-

ensure the Company does not incur overall losses no matter how

ring gross profit rose to ¥131.1 billion in the fiscal year ended March

much profit may be lost on new cardholders in their first year

31, 2020, representing 65% of total gross profit (see Figure 4).

while card revenues continue to grow after they climb into the

Recurring gross profit has grown rapidly over the past five years inpositive. This earnings structure of MARUI GROUP’s businessboth amount and portion of total gross profit, compared to recurringmodel merging retailing and finance is one of the factors behindgross profit representing less than 50% of total gross profit prior to

the Company’s continuously high profit growth.

the start of the current medium-term management plan.

Figure 3: Earnings Structure Based on Distinctive Business Model

Growth in card
revenues

Recruitmentof promisingtenants

Unique structure combining high growth potential of credit card business with consistent revenues from fixed-term rental contracts
Increased
use

Higher Gold
cardholders

Earnings Structure of Credit Card Business

MARUI GROUP’s Earnings Structure

Pro: High profit growth

Pro: High profit growth (credit card revenues)

Con: Losses recorded for several years

Pro: Consistent revenues (store revenues)

Reinvestment
in stores

Storesa significant benefit of our store operations. Stores also serve as

Figure 3). In our credit card operations, the issuance costs andCredit cards

Increases innewcardholders

Appealingstore
development

process allows for smooth, low-cost recruitment activities and isfinance has an earnings structure that is equally unique (seeChanges in Earnings Structure and Clear Indicators
for LTV Emphasizing Management Growth of
Recurring Gross Profit

MARUI GROUP’s distinctive business model merging retailing andRevenuevenues for ongoing contact, which can create lifelong

Credit card revenues

Earnings Structure of Stores (Fixed-Term Rental Contracts)
Pro: Consistent revenues

Figure 2: MARUI GROUP’s Value Journey

Con: Low profit growthStore revenues
Curve for exclusively credit card businesses

Use as main card

Time

Value

Lifelong relationships

400,000 in-store card applications

Figure 4: Ratio of Recurring Gross Profit to Total Gross Profit*
200 million annual visits

100 million annual purchases

Ongoing improvement in ratio of recurring gross profit to total gross profit

On-the-spot issuance and in-store use¥72.3 billion

START¥71.5 billion

Ongoing contact through shopping¥80.6 billion¥104.2 billion

Attracting customers

On board

Other grossprofit(non-recurring)¥69.7 billion¥99.3 billion¥93.6 billion

Growth¥52.9 billion(34%)¥60.8 billion(38%)¥67.4 billion(42%)

FY2014FY2015FY2016

87.6 billion(52%)

FY2017¥108.0 billion(60%)

FY2018¥122.7 billion(63%)

FY2019Recurring
gross profit¥131.1 billion(65%)

FY2020* Gross profit includes selling, general and administrative expenses paid by business partners.

100

101

Expansion of Contracted Future Recurring Gross Profit and Resilience

Capital Measures for Achieving Targeted Balance Sheet

Recurring gross profit represents profit that has already beenpotential of our revenue. This stability makes for improved resil-

The medium-term management plan slated to conclude with the

expectations due to growth in the FinTech segment, creating thegenerated. However, ongoing transactions also entail profit thatience in times of crisis, such as during the COVID-19 pandemic

fiscal year ending March 31, 2021, defines a target balance

possibility for excessive growth in interest-bearing debt. For thiswill be generated in future fiscal years based on contracts. This(see Figure 5). Using finance charges on revolving and install-sheet. Achieving this balance sheet will entail procuring funds

reason, the Company decided to begin systematically liquidating

profit does not appear on the financial statements for a given fiscal

ment payments, the primary form of earnings in the FinTech

through interest-bearing debt in response to increases in operat-

operating receivables in the fiscal year ended March 31, 2019,

year, but it is still an incredibly important indicator of revenue

segment, as an example, revolving and installment payment

ing receivables and other capital measures, seeking a level oftargeting a ratio of liquidation of 25%. In the fiscal year ended

stability and growth potential. For this reason, MARUI GROUP

transactions are projected to decline by between ¥30.0 billion andinterest-bearing debt equivalent to roughly 90% of operating

March 31, 2020, the ratio of liquidation was 24.7%. This level will

displays this profit through the indicator of contracted future¥60.0 billion in the fiscal year ending March 31, 2021, due to thereceivables, and maintaining an equity ratio of approximately

be maintained in the fiscal year ending March 31, 2021, while net

recurring gross profit. On March 31, 2020, contracted future

impacts of the pandemic. Regardless, earnings from these

30% (see Figure 7). After the establishment of the plan, operating

assets are kept below ¥1.0 trillion to maintain the ideal equity

recurring gross profit amounted to ¥350.0 billion, 2.7 times higher

transactions are anticipated to be up year on year. The reason forreceivables increased to a degree that exceeded initialratio of approximately 30%.

than the amount of recurring gross profit recorded in the fiscal

this projection is that roughly 70% of finance charges on revolving

year ended March 31, 2020. This figure indicates that theand installment payments for the fiscal year will be attributable toCompany has already secured nearly three years’ worth of futurecontracted future recurring gross profit that is already contracted

revenue, which has greatly increased the stability and growthat the beginning of the fiscal year (see Figure 6).

Figure 7: Balance Sheet
Total assets ¥886.0 billion(¥1,067.9 billion including liquidated accounts receivable)

Total assets ¥730.1 billion(¥799.1 billion including liquidated accounts receivable)

Figure 5: New Financial Indicator—Contracted Future Recurring Gross Profit
Contracted future recurring gross profit = Recurring gross profit that can be expected to recur in subsequent years after initial transaction
Gross profit not visible on
financial statements

2.7 times
higherContracted future
recurring
gross profit

3rd year

Recurring gross profit*

FY2019FY2020102

Equity ratio 39%% of operating receivables 86%(91% including liquidated accounts
receivable)

Shareholders’ equity¥289.8 billion

Fixed assets,others

FY2016

Liquidation of receivables¥840.0 billion
Ratio of liquidation
25%

Equity ratio 33%

FY2020Interest-bearing debt
¥530.0 billion% of operating receivables 84%(90% including liquidated accounts
receivable)

Shareholders’ equity¥300.0 billion

Fixed assets,othersEquity ratio 32%

FY2021 (Target)

3.7%, exceeding WACC, which was 3.0%, for the fourth consec­

to MARUI GROUP’s earnings structure together with capitalutive year, despite the decrease in income due to the COVID-19* Calculated using the number of outstanding years of contracts for store rent revenues and rent guarantees and credit card
expiration dates for affiliate commissions (fixed payments)

measures aimed at achieving the targeted balance sheet are

pandemic. In addition, ROE surpassed cost of shareholders’leading to the development of a structure in which ROIC exceeds

equity for the second consecutive year, with figures of 8.8% for

WACC and ROE surpasses cost of shareholders’ equity consis-

the former and 6.9% for the latter (see Figure 8).

 40.0 billion¥
reduction¥336.2 billion

tently. In the fiscal year ended March 31, 2020, ROIC came to¥366.3 billion¥370.0 billion

Revenue structure

Associated withinitial balance(Contracted future
recurring
gross profit)

70%

FY2019Average balance

Shareholders’ equity¥281.6 billion

Interest-bearing debt
¥479.8 billion

The growth of recurring gross profit and other transformations

Revolving and installment payment transactions projected to decrease by ¥30.0–¥60.0 billion in FY2021 due to COVID-19 pandemic,
but revenue from finance charges to increase as 70% will be attributable to balance at beginning of year

¥40.0 billion reduction in balance
assuming ¥60.0 billion decreasein transactions% of operating receivables 87%(89% including liquidated accounts
receivable)

Liquidation of receivables¥737.5 billion
Ratio of liquidation
24.7%

Liabilities ¥630.0 billion¥131.1 billion

Figure 6: Mechanism Increasing Finance Charges on Revolving and Installment Payments

Forecast for balance ofrevolving and installment
payment (liquidated)
reduction

Interest-bearing debt
¥359.3 billion

Operating receivables¥630.0 billion

Creation of Corporate Value through Earnings Structure Transformation and Capital Measures—
Development of Structure with ROIC Exceeding WACC and ROE Surpassing Cost of Shareholders’ Equity Consistently

1st year
Recurring
gross profit

FY2018

Liabilities ¥448.0 billion

Liabilities ¥595.6 billion¥350.0 billion

2nd yearContracted future
recurring gross profit

FY2017

Liquidation of receivables¥482.8 billion
Ratio of liquidation 14.3%

Fixed assets,others

5th year ~4th year

Operating receivables¥413.9 billion

Operating receivables¥555.6 billion

Total assets ¥930.0 billion(¥1,140 billion including liquidated accounts receivable)¥351.2 billion

FY2020

FY2021¥368.0 billion

Generated during
fiscal year

30%

Figure 8: ROIC, WACC, ROE, and Cost of Shareholders’ Equity
ROE 6.0%

Cost of shareholders’equity 7%–8%

ROE 9.1%

Cost of shareholders’equity 6.8%

ROE 8.8%

Cost of shareholders’equity 6.9%

ROIC 3.3%

WACC 3.3%–3.7%

ROIC 3.7%

WACC 2.8%

ROIC 3.7%

WACC 3.0%

Net assets ¥730.1 billion
FinTechROIC 3.9%
Retailing
ROIC 3.5%

Cost of liabilities

0.3%

Cost of shareholders’equity 7%–8%
FY2016

Net assets ¥890.2 billion

FinTechROIC 4.2%
Retailing
ROIC 3.8%

Cost of liabilities

0.3%

Cost of shareholders’equity 6.8%
FY2019Net assets ¥886.0 billion

FinTechROIC 4.6%
Retailing
ROIC 3.4%

Cost of liabilities

0.2%

Cost of shareholders’equity 6.9%
FY2020103