Bridge Report:（9327）e-LogiT  Second quarter of the Fiscal Year Ending March 2022

President Ryoichi Kakui	e-LogiT Co., Ltd. (9327)

Company Information 

Stock Information 

*Stock prices as of the close price o December 3, 2021. Share Outstanding, DPS and EPS are taken from the brief financial report for the second quarter of term ending March 2022. ROE and BPS are taken from the brief financial report for the term ended March 2021.
 

Earnings Trends 

* Unit: million-yen, yen. Estimates calculated by the company. 
 
 This Bridge Report introduces e-LogiT Co., Ltd.’s second quarter of the Fiscal Year Ending March 2022 Earnings Results, etc.

Table of Contents 

Key Points
1.Company Overview
2. The Second Quarter of Fiscal Year ending March 2022 Earnings Results
3. Fiscal Year ending March 2022 Earnings Forecasts
4. Conclusions
<Reference: Regarding Corporate Governance>

Key Points 

• The company offers all logistical services in one place as fulfillment service, mainly logistics agency service for mail-order companies, including product storage, picking, packing, and delivering. Their competitive advantage is their ability to flexibly respond to increases in shipment volume of shippers by utilizing Fulfillment Centers (FCs), which use a dominant marketing strategy. The company aims to make omni channel logistics, including physical stores in addition to mail-order logistics and e-commerce, as its business domain. 

   

• In the second quarter of the term ending March 2022, net sales increased 8.0% year on year to 5,724 million yen. The number of new client companies increased 45 in the first half. The number of client companies increased 31 in the last term and the term before last, and new customer development progressed smoothly and largely in line with the plan. However, the shipment volume for existing customers fell below the initial forecast, resulting in a single digit increase in revenue. Gross profit declined 40.9% year on year. Cost of sales augmented due to packing and freight charges, rent for new franchisees, and an increase of personnel following the increase of clients. Gross profit margin also declined 5.0 points. An operating loss of 100 million yen was posted. The company was unable to absorb the 35.6% year on year increase in SG&A expenses, including personnel, training, and advertising costs. At the beginning of the term, the company had assumed an operating income of 19 million yen, but since sales did not reach the forecast, operating income also fell short.

   

• The company has downwardly revised its earnings forecasts for the term ending March 2022. Net sales are expected to increase by 9.6% year on year to 11,720 million yen, with an operating loss of 292 million yen.

   

• In terms of net sales, the sales of client companies’ goods related to sports and concert events are expected to grow significantly after the lifting of restrictions on activities under the state of emergency. Demand from people staying at home was expected to drop after the lifting. However, even after the declaration of the state of emergency was lifted, restrictions on the number of visitors to events are still in place, and it remains uncertain when the restrictions will be fully lifted. In addition, demand from people staying at home gradually began to drop around August before the lifting of the state of emergency, and the decline has been greater than expected. FC sales consist of storage, cargo handling, and shipping fees per tsubo (= 3.3 m2), but cargo handling and shipping fees are decreasing due to a decrease in shipment volume.

   

• In terms of profit, the company is expecting to not be able to absorb the cost and rent of opening Saitama Soka Fulfillment Center, which was newly opened in June 2021, as well as the associated increase in personnel expenses, due to the downward revision of sales.

   

• Unfortunately, this was a significant downward revision, and the company is expected to post a loss. The company recognized that high fixed costs were an issue and set up the Recovery V Plan to reform its profit structure and become more efficient and resilient by reducing fixed costs. It will be interesting to see when the plan, which consists of three measures: (i) providing high value-added services, (ii) improving rental rate, and (iii) increasing productivity, will start producing effects.

   

• We hope that the company will take advantage of the expansion of the EC market, recover its business performance, and continue IR activities to regain the trust of investors as soon as possible.

   

1. Company Overview

【1-1 Corporate History】 

【1-2 Corporate Philosophy】 

The company set the following vision, mission, and value. 

 
Although the company’s clients are shippers, the company keeps at the heart of its management to bring the heart moving experiences gained from goods and services to the mail-order users (end customers) who purchase products on mail-order websites by delivering products quickly and carefully, and it believes that increased sales through the end users’ greater satisfaction and repeated purchases will lead to the shippers’ own greater satisfaction. 

【1-3 Market Environment】 

(Taken from the reference material of the company)

(Taken from the reference material of the company) 

(Taken from the reference material of the company)

【1-4 Business Description】 

(1) Outline of services

① Logistics Agency Service 
At the request of mail-order companies, the company receives their products and undertakes a series of logistics operations such as product management, picking, distribution processing, packing, delivery, and payment collection. 
 

*Customized products 
Products that follow the unique packing instructions (message cards, campaign goods, appendix bundles, etc.) from mail-order companies, instead of being simply packaged and shipped. 

② Operation Agency Service 
At the request of mail-order companies, the company undertakes product photography, product data uploading, order processing, customer support, etc. 
 

 
③ Logistics Consulting Service 
By utilizing the knowledge accumulated through the experiences of the mail-order distribution business, the company offers year-long training programs for a flat rate, online training courses at the e-LogiT club, distribution insight and improvement seminars, and consulting for the mail-order distribution companies to improve the distribution forefront. 
 
(2) Operation of FCs 
As of June 2021, the company operates the following seven FCs as its bases for logistics agency service. 

The second Osaka FC is scheduled to open in the term ending March 2023. 
 
In opening a new FC, upfront investments for rental fees and material purchases will occur, but sales will increase year by year with the operation of new customers, and operating income will usually turn positive from the third year after opening to contribute to earnings. 
In addition, the negative impact of upfront investments on profits will be mitigated as the ratio of new FCs to existing FCs decreases.  

【1-5 Characteristics and Strengths】 

(1) Domination with large distribution centers
When opening a FC, the company aims for a floor area of about 5,000 tsubo (1 tsubo = approximately 3.3 square meters). This is much larger than those of other companies’ mail-order distribution centers, which tends to be in the 1,000-2,000 tsubo range.
In the Kanto area, the company is going forward with its dominant strategy by keeping the FCs within 20 km of each other when opening a new one. 

(Taken from the reference material of the company)

(2) Mass-customization
In each step of logistics — arrival of goods, storage, packing, wrapping, and shipping — other companies in the same industry, especially major operators that use platformers and robotics for efficiency improvement, tend to apply the same operation to all shippers. 

In contrast, the company is supporting the uniqueness of each shipper, while the underlying workflow is unified company-wide. 
This enables the company to help express the unique worldview and values of the clients’ brands by using delivery methods, specific wrapping, and materials according to the shipper’s request. Since the workflow is unified company-wide, efficiency is maintained. 

This is the unique initiative of the company aiming to be No.1 in “creating heart moving experiences” as seen in its Mission. 

(Taken from the reference material of the company)

(3) IT × Logistics
The company has developed its own WMS (Warehouse Management System) software that manages product information in the warehouse such as the storage location, expiration date, arrival and shipment of goods, and quantity. 

(4) Specializing in mail-order logistics to hone knowledge 
In the 21 years since its establishment, the company gradually developed its services centered on mail-order logistics agency service, learnt how to deal with the high-mix low-volume logistics, which is considered difficult, and has been accumulating experiences and knowledge with diverse items such as car supplies, apparel, supplements, cosmetics, and wine. In addition, the company has honed its knowledge through on-site practice and logistics consulting. 

(5) Emphasis on the front line 
At every FC, all staff members are always aware of quality and improvement. The company realizes and maintains high quality by thoroughly sticking with accomplishing each normal task perfectly. When a problem such as a shipment error occurs, the company thoroughly investigates the cause, makes improvements, and makes sure to share the findings with all staff members. 
In addition, the company actively takes up the improvement proposals from on-site staff involved in various processes, and the number of improvement proposals exceeds 7,200 annually. 

【1-6 Growth Strategy】 

(1) Value-chain development 

*Customer journey
A series of experiences that a customer follows — from the encounter with a product or service to actually purchasing/using it with the intention to purchase/use it — is perceived as a “journey.”
For a mail-order company to turn prospective customers into actual customers and fans of its products, it is necessary to manage the customer experience throughout the “journey” that the customer follows. To manage the customer experience efficiently and to take appropriate marketing measures, it is necessary to create a customer journey map that visualizes and captures its pathway.

(2) Expanding target customers/areas 

(3) Establishment & evolution of FC 

(Taken from the reference material of the company)

In addition to the conventional mail-order logistics and e-commerce, the company intends to make the omnichannel market including actual stores its business domain, and is working to secure management resources for that purpose. 

【1-7 Shareholder Return】 

2. The Second Quarter of Fiscal Year ending March 2022 Earnings Results

(1) Overview of business results (Non-consolidated) 

* Unit: million yen. 2Q of FY 3/21 is taken from the reference material of the company (It isn’t subject to quarterly review by an auditing firm).

Posted a loss as the cost increase, despite increase of sales
In the second quarter of the term ending March 2022, net sales increased 8.0% year on year to 5,724 million yen. The number of new client companies increased 45 in the first half. The number of client companies increased 31 in the last term and the term before last, and new customer development progressed smoothly and largely in line with the plan. However, the shipment volume for existing customers fell below the initial forecast, resulting in a single digit increase in revenue. Gross profit declined 40.9% year on year. Cost of sales augmented due to packing and freight charges, rent for new franchisees, and an increase of personnel following the increase of clients. Gross profit margin also declined 5.0 points. An operating loss of 100 million yen was posted. The company was unable to absorb the 35.6% year on year increase in SG&A expenses, including personnel, training, and advertising costs. At the beginning of the term, the company had assumed an operating income of 19 million yen, but since sales did not reach the forecast, operating income also fell short.

(2) Financial position and cash flow

Main Balance Sheet 

* Unit: million yen. 

Total assets decreased by 18 million yen from the end of the previous term to 4,997 million yen due to a decrease in cash and deposits.
Total liabilities increased 101 million yen from the end of the previous term to 3,061 million yen due to mainly increases in long-term and short-term loans payable.
Net assets decreased by 120 million yen to 1,936 million yen due to decreases in retained earnings
Equity ratio decreased by 2.3 points from the end of the previous term to 38.7%. 

 
Cash Flow 

* Unit: million yen.

Free cash flow was negative due to quarterly net loss before taxes and payment of guarantee deposits in connection with the opening of new franchise.
Financial CF was positive due to revenues from long-term debt and stock issuance.

(3) Topics

In July 2021, the company received the results of the initial assessment of compliance with the listing maintenance standards for the new market category from the Tokyo Stock Exchange and confirmed that the company complied with the listing maintenance standards for the new market category Standard Market.
In response, the company decided to select the Standard Market as the new Tokyo Stock Exchange market category.
The company will now proceed with the prescribed procedures related to the application for the selection of the new market category in accordance with the application schedule set by the Tokyo Stock Exchange.
 

3. Fiscal Year ending March 2022 Earnings Forecasts 

【3-1 Earnings Forecasts】 

* Unit: million-yen. Estimates are calculated by the company. 

Downwardly revised earning forecast
The company has revised its financial forecast downward. Sales are expected to increase by 9.6% year on year to 11,720 million yen, and operating loss is expected to be 292 million yen.

(Sales)
*Assumption
Among customers, sales of goods related to sports and concert events are expected to grow significantly after the lifting of restrictions on activities such as the declaration of a state of emergency.
Demand for nesting is expected to rebound after the lifting of the restrictions.

*Current situation
Restrictions on the number of visitors to events will continue even after the declaration of the state of emergency is lifted, and 100% admission is uncertain.
The decline in demand for nesting began gradually in August, prior to the lifting of the emergency declaration, and the extent of the decline is greater than expected.

FC sales consist of storage fees per tsubo, cargo handling fees, and shipping and handling fees, etc. However, cargo handling fees and shipping and handling fees are decreasing due to a decrease in shipment volume.

(Profit)
As a result of the downward revision to sales, the company does not expect to be able to absorb the cost of opening the new Saitama Soka Fulfillment Center, which opened in June 2021, as well as rent and associated labor costs.

The dividend is still to be determined.

(Created by Investment Bridge based on materials of the company)

【3-2 Response】

By reducing fixed costs, the company aims to reform its revenue structure and become more efficient and resilient.
Specifically, the following three measures will be promoted as the Recovery V Plan.

① Providing high value-added services
To provide high value-added services such as an operation agency service.

② Increasing rental rate
To utilize Nestainers (steel storage shelves and racks), etc., and utilize the resulting vacant space for subleasing, etc., to improve space efficiency.

③ Increasing productivity
To optimize the allocation of personnel by improving productivity through the installation of automated equipment and other measures.

【3-3 Major Medium to Long-term Policies】

Despite the downward revision of business performance, as mentioned in the "Market Environment" section, the company will promote the following measures, as the further expansion of the B to C-EC market is expected.

4. Conclusions

Unfortunately, this was a significant downward revision, and the company is expected to post a loss. The company recognized that high fixed costs were an issue and set up the Recovery V Plan to reform its profit structure and become more efficient and resilient by reducing fixed costs. It will be interesting to see when the plan, which consists of three measures: (i) providing high value-added services, (ii) improving rental rate, and (iii) increasing productivity, will start producing effects.
We hope that the company will take advantage of the expansion of the EC market, recover its business performance, and continue IR activities to regain the trust of investors as soon as possible.

<Reference: Regarding Corporate Governance> 

Last updated on Nov. 26, 2021. 
<Basic Policy>
The Company aims to maximize its corporate value by achieving sustainable business growth based on the following vision, mission and values.

◆ Vision
To anticipate change and continue to evolve emotional experience of people.

◆ Mission
-To grasp distribution from a global perspective
-To seek solutions useful to future customers before anyone else
-To become a professional group of mail order/retail logistics
-To become the No. 1 company in "creating excitement" by achieving high added value using innovative technology

◆ Value
-To constantly think and act for the benefit of the future customers, and become a trusted figure
-To create success together with shippers through overwhelming proposal capabilities
-To continuously learn and make self-improvement with new viewpoints
-To act quickly, try first, and work together to complete each task
-To enjoy work with a humble and honest heart

Based on this vision, mission, and values, we will strive to select, improve, and strengthen the most appropriate business management system in order to respond quickly to changes in the business environment, build a highly transparent corporate governance system that includes thorough compliance and appropriate information disclosure, and fulfill our corporate social responsibility.
By implementing these measures, we will earn the trust of all our stakeholders, including customers, business partners, shareholders, investors, employees, and local communities, and build good relationships with them.

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

<Disclosure Based on the Principles of the Corporate Governance Code >