Bridge Report:（2722）IK the second quarter of the fiscal year ending May 2021

Chairman & CEO Hiroshi Iida	I.K Co., Ltd. (2722)

Company Information

Stock Information

*The share price is the closing price on January 21. Each figure was taken from the brief report on results for the second quarter ending May 2021. ROE and BPS were taken from the results of the previous term.

Earnings Trend

*Unit: million yen, yen. The estimated values are those announced by the Company. Stock split in a ratio 1:2 was conducted on 1st December 2017 and 1st April 2018. EPS and DPS were retroactively adjusted.

The financial statement for the second quarter of the fiscal year ending May 2021 and many more about I.K Co., Ltd. will be described.

Table of Contents

Key Points
1. Company Overview
2. Second quarter of Fiscal Year ending May 2021 Earnings Results
3. Fiscal Year ending May 2021 Earnings Forecasts
4. Future Strategy
5. Conclusions
<Reference: Regarding Corporate Governance>

Key Points

• The sales for the second quarter of the fiscal year ending May 2021 were 11,091 million yen, up 25.9% year on year. The sales of the B-to-C and B-to-B-to-C businesses rose 1,766 million yen and 450 million yen, respectively, year on year. Sales of other segments also improved 64 million yen, resulting in an increase in the overall sales by 2,281 million yen. Operating income augmented 352 million yen year on year to 534 million yen. The SG&A ratio was 47.8%, up 2.2 points from the second quarter of the previous year, due to increased advertising costs and higher packing and freight expenses. However, it was offset as the gross profit margin was 52.6%, up 4.9 points from the previous year’s second quarter.

   

• Sales grew significantly due to the demand by people staying at home for Speed Heat and Step 8 through TV shopping in the B-to-C business. In terms of profits, PB products (in-house developed products), which have a high gross margin, contributed to the strong performance via the TV and online shopping routes.

   

• In November 2020, the company upwardly revised its earnings forecast for the fiscal year ending May 2021. According to the previous estimates, sales were forecasted to be 10,690 million yen in the second quarter, and operating income was projected to be 451 million yen, but the actual figures exceeded these estimates. Nonetheless, sales and operating income estimates in the full-year forecast have been left unchanged at 19,846 million yen and 804 million yen, respectively. The dividend is unchanged at 12.00 yen / share. The expected payout ratio is 17.2%.

   

• The company aims to become a full-fledged “marketing manufacturer,” a business model that is one of a kind in the world. Currently, the percentage of the in-house developed products is 68% of the company’s total products. We want to see how quickly the company can change this percentage from 68% to 100%.

   

   

1. Company Overview

I.K Co., Ltd. is a “marketing manufacturer,” which conducts integrated business activities including product planning, manufacturing, selling and distribution through its original promotion strategy.
The company operates the three businesses: the “B-to-C business,” to sell sundries, food products, and cosmetics via TV shopping, EC, and shops to consumers, the “B-to-B-to-C business,” to sell products via various routes, including co-op stores, mail-order companies, shops, overseas channels, etc., and the “other business,” to offer IT solutions for developing and selling systems.
The company strives to establish a group management to make all stakeholders its fans by promoting “the increase of fans” as its corporate philosophy.

◎Performance Trends

1-1 Corporate History

After spending his high school and college days in a “freewheeling” school environment, Mr. Hiroshi Iida (present chairman and CEO), who had a strong entrepreneurial spirit from the beginning, worked for a nonlife insurance company and went on to establish I.K Ltd. in May 1982. While working on the sales of various products, he opened an account of Aichi CO-OP Union in April 1983 on getting favors from people in charge of sales and started trading with occupational co-ops.
As the sales of flyers about a rechargeable cleaner, the first product, became a major hit, the horizontal expansion to other co-ops progressed, the number of items handled also increased and the business expanded rapidly. It got listed on the JASDAQ market in December 2001.
Due to the increase in recognition and reliability after the listing, the company began supplying products to the mail-order systems of department stores and retailers in a full-fledged manner, steadily expanding sales outlets, and achieved sales increases for 25 consecutive terms until the fiscal year ended May 2007.

However, as the Lehman’s bankruptcy put the growth at halt, the company shifted to a “marketing manufacturer” that conducts integrated business activities including product planning, manufacturing, sales and distribution of products on its own using a unique promotion strategy and established “B to C channels” in addition to “B to B to C” to offer its products directly to customers, which allowed it to return to the growth track once again.
The company is actively putting efforts in M&A such as making Prime Direct Inc., a major company for television shopping, into a wholly owned subsidiary in September 2014.

1-2 Management Philosophy

1-3 Business Description

(1) Segments
From the fiscal year ended May 2020, the company will enhance the operation speed and focus investments on promising businesses, all of which are necessary steps for growth. In addition, it will try to let investors gain a better understanding about its business. That is why the company has changed the business segment to “B to C Business,” “B to B to C Business,” and “Other.”

(Source: The company)

①B to C business
The subsidiary, Primedirect Inc. offers products directly to consumers via websites and TV shopping slots, while the subsidiary Food Cosmetic Co., Ltd. sells SKINFOOD, which is the food cosmetic of a South Korean cosmetic brand, at shops. The total number of shops as of the end of November 2020 was 26, including 22 directly managed shops and 4 franchised ones, which are located mainly in station buildings of major cities in Japan.

②B to B to C business
The cosmetics, apparel goods, shoes, bags, products related to beauty and health, etc. designed and developed by the company as a manufacturer are offered to consumers through various routes, including co-op stores, mail-order companies, shops, and overseas channels.

(Major Sales Routes)

③Other
The subsidiary AlfaCom, Ltd. sells systems for the establishment of contact centers, such as the voice call recording system “Voistore,” the business version of LINE “LINE WORKS,” the chat system “M-Talk,” etc.

(2) Main Products Developed by the Company
As a marketing manufacturer, the company develops products in various genres in house.

<<Cosmetics>>

(Source: The company)

<< Sundries>>

(Source: The company)

<<Food Products>>

(Source: The company)

<<Others>>

(Source: The company)

1-4 Characteristics and strengths: Business model as a marketing manufacturer

The primary point characterizing the company is a business model as a "marketing manufacturer" which conducts integrated business activities including planning, manufacturing, sales, and distribution of products on its own with a unique promotion strategy.
The company’s business model is composed of the following 3 functions.

(1) Powerful product development, discovery, and procurement
The company is developing, discovering and procuring attractive products by taking advantage of information gained from a wide range of sales channels and experiences cultivated over 30 years. The "Development Approval Conference" is held once a week, and three teams of cosmetics, sundries and food with 7 to 8 members in each team, propose new products to officers and people in charge of sales.
In their company where challenges are valued, each team proposes an average of 10 or more items each month based on freewheeling ideas, but not everything is approved.
The company has set "10 rules for development," which stipulates "emphasis on originality" and "thorough differentiation" regarding product development, and the proposed product is strictly criticized based on them, and homework is given out sometimes. However, these processes train the staff members in charge of development and are leading to further enhancement of product development capabilities.

(2) High marketing ability
“High marketing ability” is playing a major role in developing a hit product.
Test marketing is conducted using various sales channels to check whether candidate products actually sell well. By making innovations in various aspects such as package, timing, target and price and conducting new promotions, the company has been creating many hit products.

(3) Various sales channels
Rather than just proposing products to the various sales outlets mentioned above, they propose the best ways of selling and showcasing in other sales channels together with successful stories of those channels.
They blend ideas unique to I.K co., Ltd. with the needs and feedbacks of customers and brush them up daily.
It is a major feature of the company that it provides all solutions, which fit the sales channels, to customers including product selection, catalog and medium creation, quality control, order reception, logistics and customer service.

While many other companies in the same industry specialize in planning and marketing of products, have only stores as their sales channels, and outsource manufacturing and distribution work to other companies, the company can execute a unique promotion strategy that they cannot imitate as the company can respond flexibly with the system and know-how.

1-5 ROE Analysis

Particularly, ROE was recovered to be double-digit due to the increase in net income margin. Net income margin for the fiscal year May 2021 is forecasted to increase from the previous term to 2.91%.

2. Second quarter of Fiscal Year ending May 2021 Earnings Results

(1) Consolidated Business Results

*Unit: million yen. Net income is profit attributable to owners of parent.

Sales and operating income increased significantly.
Sales were 11,091 million yen, up 25.9% year on year. Sales of SKINFOOD stores struggled due to the impact of the novel coronavirus. However, TV shopping suited for meeting the demand of people staying home and the sales of food products through the co-op and mail-order routes, which allow customers to purchase products without going out, contributed significantly. Gross profit margin rose due to the increase in sales of TV shopping and co-op routes, and gross profit increased 39.0% year on year. Also, SG&A expenses, mainly the advertising expenses, augmented, but it was offset, and operating income and other profits grew considerably.

(Variation in Selling, General and Administrative Expenses)

*Unit: million yen

Advertising expense ratio rose 2.9 points year on year due to the increase of TV shopping slots etc. Packing and freight costs also augmented 1.2 points year on year due to the rise in costs of goods delivery and shipping at distribution centers. On the other hand, SG&A ratio was up only 2.2 points due to the improvement of labor costs by 1.5 points year on year.

◎Quarterly Earnings

(2) Trend of each segment

*Unit: million yen. Composition ratio of operating income is operating income margin.

① B to C business
Sales and profit increased.
The considerable improvement in sales of the top-selling products, Speed Heat, Air Yawn, and Step 8 via TV shopping made up for the decrease in sales at SKINFOOD stores, resulting in an overall increase of 1,766 million yen in sales.
The overall operating income for the B-to-C business was 364 million yen. This improvement was attributed to the rise in MR (sales/media costs) by 0.2 points year on year, the improved TV shopping sales, and the increase in the gross profit margin by 4.2 points.

② B to B to C business
Sales increased, and operating income turned positive.
Sales of wholesale of cosmetics to drug stores decreased. However, sales of food products through the co-op route and the mail-order route were up 42.4% and 65.9%, respectively. Therefore, overall sales increased 450 million yen to 5,920 million yen. As a result of the increase in sales and the SG&A ratio going down by 2.0 points, operating income increased 157 million yen, turning positive.

③ Other
Sales increased, and operating income turned positive.
The acquisition of new customers for the company’s main product, M-Talk (chat system), and the sales of Voisore (call recording system) were behind the increase in sales. In terms of profits, operating income turned positive thanks to M-Talk’s strong sales and a 16.8 point drop in the SG&A ratio.

(3) Financial condition and cash flow

◎Main BS

*Unit: million yen

Total assets increased 653 million yen from the end of the previous fiscal year to 8,022 million yen due to a rise in trade receivables and inventories. Total liabilities augmented by 406 million yen year on year to 4,966 million yen due to an increase in borrowings. Net assets were 3,056 million yen, up 246 million yen year on year due to an increase in retained earnings. The equity ratio fell 0.1% from the end of the previous fiscal year to 37.9%.

3. Fiscal Year ending May 2021 Earnings Forecasts

(1) Full-year earnings forecast

*Unit: million yen. The estimated values are those announced by the Company.

Sales and profit are estimated to increase. Sales are expected to mark a record high.
Sales are expected to be 19,846 million yen, up 7.4% year on year, and operating income is projected to be 804 million yen, up 36.3% year on year.
On November 10, 2020, the company upwardly revised its earnings forecast for the fiscal year ending May 2021. According to the previous forecast, sales were estimated to be 10,690 million yen in the second quarter, and operating income was projected to be 451 million yen , but the actual numbers exceeded the estimate for both of them. Nonetheless, sales and operating income estimates in the full-year forecasts have been left unchanged at 19,846 million yen and 804 million yen, respectively. The dividend is unchanged at 12.00 yen/share. The expected payout ratio is 17.2%.

(2) Trend of each segment

（Sales forecast for each segment.）

*Unit: million yen

(Monthly sales for each segment.)

4. Future Strategy

(1) Company-wide Strategy

The following are the four company-wide initiatives.

① To become a full-fledged “marketing manufacturer,” a business model that is one of a kind in the world
In order to become the world’s one and only “marketing manufacturer,” the company pursues a system in which TV shopping ignites the market and seamlessly leads to increased profits in each sales channel.
The company needs to strengthen its marketing, product development, and sales capabilities to achieve the above, and thus, it will actively invest its management resources.

② Efforts to improve e-commerce
The company will train and scout for specialists in managing e-commerce websites or resort to M&A.

③ To export Japan Beauty overseas
The company’s immediate goal is to focus on the Chinese market.

④ Logistical reforms
The company aims to increase work productivity in warehouses by implementing a new system.

(2) Strategies for each segment

① B to C business
◎ TV shopping
The company will broadcast the existing top-selling products, Step 8, Air Yawn, and Aged Black Garlic.
It will launch VOLZAC Mineral Station in January.
It will conduct a test marketing for three items (the new series of Step 8, etc.) between March and May.
This will allow the company to always have 5-6 top-selling items and optimize TV slots. In addition, the company will aim to expand TV slots and achieve stable expansion and growth.

◎ E-commerce website
The company will optimize the website as a tool to receive orders through TV shopping.
The company will also make a full-scale entry into the subscription-type business following cosmetics (LUXER).

◎ Shopping
The company will enhance the online sales of SKINFOOD cosmetics.
It will increase the number of pop-up stores of OLIVE YOUNG and launch an official website for it.

② B to B to C business
◎ To cultivate the co-op market in depth
The company will maintain and expand the relationship of trust that it has built through successful partnerships in the co-op and mail order routes and introduce its own products it has developed as a marketing manufacturer. By doing so, it will expand sales mainly in food planning, which is performing well. The company will also implement sales reforms suitable to the new lifestyles in order to improve productivity.

◎ Retail store route
The company will supply LB cosmetics and egg cosmetics to more stores, mainly drug and variety stores. It will also invest its promotional costs intensively in social networking sites such as Instagram and YouTube.

◎ Overseas route
The company strives to thoroughly capture the Chinese market with LB cosmetics, egg cosmetics, and B! FREE series cosmetics.

5. Conclusions

As we face the second and third waves of the novel coronavirus and the state of emergency has been declared for the second time, mainly in large cities, no one can tell when the pandemic will subside. Under these circumstances, it is crucial to continue to meet the demand of people staying home, which is the driving force behind the current business performance. We have great hopes for the synergistic effects of the company’s ability as a “marketing manufacturer” to create hit products on its own and its marketing skills to accurately promote its products through TV shopping.

Moreover, the company aims to become a full-fledged “marketing manufacturer,” a business model that is one of a kind in the world. Currently, the percentage of the in-house developed products is 68% of the company’s total products. We want to see how quickly the company can change this percentage from 68% to 100%.

<Reference: Regarding Corporate Governance>

◎ Organization type, and the composition of directors and auditors

◎ Corporate Governance Report
Last updated: December 17, 2020

<Basic Policy>
While corporate governance is expected to function effectively, the company strives to become a reliable firm by improving its management foundation, maintaining high ethics and increasing the transparency of the management further in order to fulfil the social mission and responsibility as a listed company.
Also, the company considers the establishment of a management structure that can respond to the changes in the business environment fast and accurately as one of the important business challenges, and it is making efforts in information sharing from many sides by holding a regular meeting of Board of Directors (once/month), an extraordinary meeting of Board of Directors (as per the need), an in-house officers meeting (once/week) with regular directors (including directors serving as audit and supervisory committee members) and executive officers, and a top meeting (once/week) composed of people from team mangers post or above.

<Reasons for Non-compliance with the Principles of the Corporate Governance Code (Excerpts)>

<Disclosure Based on the Principles of the Corporate Governance Code (Excerpts)>

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