[edit] Financial Summary

[edit] Recent Updates

[edit] Summary

Onward released FY02/11 Q1 results on July 8, 2010.

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[edit] Trends & Outlook

Update on Current Trading

At Onward Kashiyama sales were down 9% YoY for June, a weaker showing than in May. According to the company, in addition to shorter duration of family sales (closed sales event for employees and their families) compared to the previous year, the storefront revenues also declined about 3%. This was due to the fact that a number of competitors started their seasonal bargain sales in mid June. Onward Kashiyama has a policy of starting summer bargain sales from July. However, the performance was in line with the plan and the company sounded optimistic about July and August outlook. Amid harsh economic conditions and uncertainty regarding the outcome of the financial crisis, the company chose to reduce production resulting in less product available for bargain sales in 2009. In 2010 the company decided it could return to a more normal production regime meaning more product available for sale and therefore higher expected sales. Simply, in 2010 Onward Kashiyama has enough merchandise to sell and therefore hopes for higher sales.

It is important to highlight that the profitability picture is more appealing than one could judge from headline sales numbers. The company commented that full price items saw YoY increases in sales and those are substantially more profitable than the bargain ones. Further in Q2, higher expected sales should substantially boost margins given the high fixed cost nature of the business. In 2009 profitability was sacrificed for predictability as the company chose to sell less rather than risking potential inventory losses given the weak consumption environment.

In the overseas business, the Jil Sander's 1H sales (November year end) were below plan, but the profitability improved more than expected. JOSEPH results continued to be poor but were more or less in line with the plan. The company is hoping that better profitability at Jil Sander and higher sales at GIBO' Co. due to a growing number of brands the company is manufacturing for, will mean better performance in 2H.

Quarterly Trends

FY02/11 Q1 Results

The company announced FY02/11 Q1 results on July 8, 2010 (see the table above). Sales were down by 1.9% YoY, operating profit was up by 44.6% YoY, recurring profit was up by 30.3% YoY, and net income was up by 4.2 %. There was no change to the FY02/11 forecast.

Q1 results and Q2 company estimates derived from the 1H company estimate were as follows:

In Q1 the gross profit margin improved to 48.9%, higher than its full year estimates. Q2 company estimate imply a larger quarterly operating loss compared to FY02/10. However, the company does not expect any deterioration of performance. 1H and FY forecasts were not revised by the company at the time of Q1 FY02/11 announcement. SR Inc. believes that the company simply chose to err on the side of caution given continued uncertain environment. As a result, better than planned Q1 performance mathematically produced lower Q2 expectations. One could probably conclude that the company is therefore conservative.

Comment on seasonality. The company’s quarterly sales and profits fluctuate significantly due to the timing of seasonal bargain sales. Q2 includes the summer sales period of July, and the proportion of merchandize sold at normal prices is low in August as bargain sales continue while stores are converting to the new fall lineups. As a result, profitability is likely to be severely impacted - Q2 operating profit was negative in both FY02/09 and FY02/10. In a similar manner, Q4 profit is affected by the winter bargain sale in January and by the revaluation loss recorded at fiscal year-end.

Domestic business conditions. The gross profit margin of Onward Kashiyama improved due to recovering sales in core brands. Overall business cost reductions also led to an increase in profitability YoY. Particularly, the store development initiatives, expanding the store size, moving to stronger locations on the department store floor, closures of unprofitable stores in weaker locations etc., were bearing fruit. Stronger merchandise also contributed to improving performance. Results of Island, a subsidiary from December 2009, were strong and exceeded the plan. Island’s Grace Continental brand features highly versatile items, suitable for wear in both work and private situations, and attracts a wide range of customers. On the other hand, the company mentioned that sales and earnings at Onward Trading, a subsidiary mostly involved in uniform orders were below company expectations due to weak demand for uniforms.

Overseas business conditions. The results from overseas subsidiaries were in line with plan. Both sales and operating profit declined YoY due to the slow recovery in the luxury market. In Europe, sales were lower by 300-400 million yen compared to the plan, impacted by the weak euro. The company commented that foreign exchange fluctuations may impact 1H sales by around 3 billion yen.

Monthly performance. Sales were -5% for March (after compensating for internal sales). There was one less Sunday YoY; adjusting for this would have been -2% to -2.5% - better but still negative. The year-end push resulted in limited stock-outs and lackluster merchandising in March. Sales (direct retail, not wholesale, online, etc.) in April were relatively flat (-1% YoY). Bargain-priced items declined YoY, but the sales of full-price (new) items were positive YoY. In terms of production, the company maintained a cautious stance (85.6% of last year’s levels). Onward said that it increased production from April (+25-30% more product going into stores) and sales improved to up 4% YoY in May.

FY02/10 results

The company released FY02/10 results on April 9, 2010. Key results are as follows:

• Sales: 248.6 billion yen (-4.7% YoY)

• Operating Profit: 4.4 billion yen (-51.7% YoY)

• Recurring Profit: 6.1 billion yen (-2.6% YoY)

• Net Income: 2.2 billion yen (vs. net loss of 30.9 billion in FY02/09)

Full year (FY02/11) Outlook

Key management themes for FY02/11 are improving domestic business (achieving stable profit margins), and increasing overseas sales of recently acquired companies.

• Sales

The company expects sales to moderately increase YoY, reversing a three-year decline of approximately 22%. Results at the parent company are expected to decline approximately 2%; existing subsidiaries are expected to increase sales by 1% YoY, with the new Island subsidiary adding about 4.2 billion yen. One of the key sales strategies for FY02/11 is improved accuracy for products on shelves. The company suggested that not only will it produce more, but it hopes to have more of the right merchandise available that will be in demand during each season.

To some extent, Q1 could set the tone for the full-year. The company estimates that 2H sales estimates are relatively easy to achieve, however any shortfall in Q1 could make the full-year targets difficult to reach. Q1 results seem to have been in line with company plan, a ‘fair’ results in the company’s view. The company seemed confident that sales momentum would improve through rejuvenated marketing efforts and a better product mix.

• Operating Profit

OP is expected to increase, despite flat sales YoY. The company expects substantial improvements overseas (notably Jil Sander), as well as improved income in Japan. Specifically, YoY improvement in OPM is based on expectations for higher GPM (+0.1% from existing operations, +0.2% from new subsidiaries) and continuing cost control. Cost cutting at the parent company is expected to reduce SG&A by 1.3 billion yen, with other subsidiary companies contributing a reduction of 1.7 billion yen; +2 billion yen of SG&A is expected from new subsidiaries. The balance is amortization of goodwill (200 million yen).

• Recurring Profit

The company’s recurring profit estimate implies a net non-operating balance of approximately 2.4 billion yen. Onward has typically recognized a net non-operating profit (typically dividend, interest, royalty, rental income; residual to an extent) balance.

• Net Income

The net profit estimate reflects an improvement both in absolute growth YoY, as well as an expansion of net profit margin.

• Future Outlook

The company had previously stated a sales goal of 350 billion yen, with 30 billion yen operating profit and 35 billion yen of recurring profit by 02/11. While the targets were not achieved, the company maintains that they are eventually achievable. Onward is currently taking more of a “first things first” approach and focusing on near-term execution rather than attaching specific dates to specific targets. Currently, it is more practical, comments the company, to look at an operating profit target of 15 billion yen, even if sales increase to 250 billion yen or so. The previous 350/30/35 plan seems to be out of reach without further M&A (which is not ruled out).

With respect to closer targets (FY02/11), the company said that it is confident in at least meeting the estimates, commenting that 10 billion of operating profit is quite possible without major miracles.

SR Inc. notes that in discussion of future earnings targets, etc. the company implies margin expansion (30 billion operating profit with 350 billion of sales would be approximately 8.6% OPM, not achieved in recent history). The company’s assessment was simple: the business is straightforward and high gross margin, but with high fixed cost - once a certain sales level is breached, operating margin improvement accelerates and seemingly large numbers become easier to hit.

One critical element in any organization’s success is the ambition and willingness to win. After several years of struggle, it seems to be a fair question for Onward. The company acknowledges that FY02/10 was tough, but 2H was better which generally helped morale. The company seems to have drive and a sense of crisis needed to overcome some tough years. The company seemed confident in its ability to keep things on track, noting that management controls are “pretty tough” and achieving budget targets is seen as a management issue of the highest priority.

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[edit] Business

[edit] Business Description

The company’s core business is manufacturing and sales of fashion apparel. It derives the bulk (82.6% FY02/10) of revenues from Japan but has a growing worldwide presence, particularly in Europe. The company has started to emphasize overseas operations (FY02/10), but they are not yet significant (roughly 14%-17% of FY02/10 sales). The main channel in Japan is department stores (76.3% of FY02/10 domestic sales of Onward Kashiyama) where it sells most of its fashion brands for men and women (with smaller lines for kids and fashion accessories thrown in the mix). The company defines itself as a high-end apparel manufacturer.

The company reports results across two segments: Apparel and Other. The Apparel segment is the most important for Onward, generating 94.2% of consolidated sales and over 100% of OP in FY02/10.

The company is organized as a holding structure – Onward Holdings Co., Ltd. is the reporting entity that controls over 100 subsidiaries (FY02/10). By far the most important is Onward Kashiyama Co., Ltd., responsible for apparel sales in Japan. See Group Structure for more.

Main Segments

Apparel (94.2% of FY02/10 sales, 4.6 billion yen operating profit)

Womenswear has historically been the larger contributor to domestic sales in the Apparel segment (approximately 67.0% of FY02/10 sales); menswear has typically been less (24.3%).

Kumikyoku(Source: Company Data Processed by SR Inc.)

Womenswear

Womenswear focuses on upscale brand and fashion clothing. The target market in womenswear is working women in their 20s and to 40s. At the same time, SR Inc. wonders if some of brands started in 1990s targeting this demographic have since aged with their audience and are now addressing the tastes of a late 30s and older crowd. Onward's core domestic labels are Nijyusanku, Kumikyoku, ICB, and Jiyuku; JOSEPH and Jil Sander are the main international brands. (See Brand Strategy for more.)

Main brands:

• Nijyusanku (est. in 2H 1993): Onward Kashiyama’s largest brand. Targeting mainly career women in their 30s, the company calls the brand “Tokyo real clothes”, simple basic lines nuanced by recent fashion trends.. FY02/10 sales were 23.1 billion yen.
• Kumikyoku (est. 2H 1995): Casual lines with elements of today’s style, “standard clothing that does not stand still” for young working women in their 20s who prefer luxurious but natural looking apparel. FY02/10 sales were 12.4 billion yen.
• ICB (est. 2H 1995): Business formal line targeted for career women in their 30s. Offering good balance of quality, fashion, and price for various scenes of a working woman’s life.. FY02/10 sales were 8.5 billion yen.
• Jiyuku (est. 2H 2000): The brand for women in their late 30s and early 40s. Simple but luxurious clothing based on concepts of “sophisticated”, “high quality”, and “daily wear”. FY02/10 sales of 8.0 billion yen.
• any FAM (est. 2H 2005): Brand for new distribution channels such as shopping centers. Styling for women in their 30s with kids. High quality and easy-to-wear apparel at affordable prices.
• any SiS (est. 2H 2005): Brand for new distribution channels such as shopping centers. Basic clothing for working women in their 20s. Basic items incorporating the essence of the recent fashion trends. “Natural and feminine” casual brand with marine motives incorporating the essence of seasonal fashion trends.

iCB(Source: Company Data Processed by SR Inc.)

Menswear

Onward entered the apparel business by producing men’s suits and coats in 1950s. The company’s main products are suits, coats, and jackets, targeted mainly toward businessmen above 30.

Main brands:

• Gotairiku (est. 2H 1992): Clothing for urban businesspeople blending “cosmopolitan” and “relevant” under the concept of “apparel from Tokyo for the world”..

• EnterG (est. 1H 2010): Jackets and suits brand targeting young businesspeople well versed in casual clothing; value for money meets design value.

• J.Press (from 2H 1974): Targeting traditionally minded conservative 30-40-year olds. “Evolving tradition” of New York’s Madison Avenue.

• DAKS (from 1H 2004): Upscale British elegance with added elements of current fashion. Targeting 55-65-year-old fans of British traditional style. Onward Holdings acquired a manufacturing and sales license for menswear and golf wear in Japan. FY02/10 sales were 3.74 billion yen.

Gotairiku(Source: Company Data Processed by SR Inc.)

Overseas brands:

The company owns the apparel businesses of JOSEPH and Jil Sander after acquiring JOSEPH Group in 2005 and Jil Sander Group in 2008. These brands form the core of the global strategy push of the company.

• JOSEPH (from 2H 2005): High quality and easy-to-wear casual clothing based on the concept of “sleek & chic” targeting sophisticated urban men and women. Global brand with stores major cities of the world starting with London.
• Jil Sander (from 2H 2008): Luxury brand born in Germany in 1973, known worldwide for its simple and minimalistic but at the same time sharp tailoring and high level of sewing technology. Led by a Belgian designer Raf Simons as its creative director from 2005, Jil Sander collections infused with innovation but staying true to the original approach, have won consistently high acclaim.

JOSEPH Clothing Display(Source: Company Data Processed by SR Inc.)

Other (5.8% of sales, 39 million yen operating loss in FY02/10)

Includes logistics business, sports facilities and resort operations; negligible impact on the company’s performance.

Business Model

The company’s business model (manufacture and sale of apparel) is executed differently in Japan vs. internationally.

Domestically, Onward develops/designs apparel (for any of its multiple brands), manufactures at partner factories or through trading companies, and sells it in Japanese department stores. Although Onward bears risks from conception to final sale, the retail transaction is recorded as a sale by the department store; Onward books only a wholesale price. Any returns or unsold inventory are Onward’s responsibility, and it makes final decisions about merchandise price (full or discounted). The department store mark-up is a predetermined percentage of the price.

Internationally, the company develops apparel in two core brands, JOSEPH and Jil Sander, and sells to department stores and other merchants as well as in directly managed stores. Apparel manufacturing is handled primarily by GIBO’ Co., an Italian manufacturing subsidiary.

Domestic Business Description

While the company defines itself as an apparel manufacturer, it bears most characteristics of a SPA retailer (Specialty Store Retailer of Private Label Apparel). It has multiple brands and directs manufacturing (done by partner factories or trading companies) of apparel and accessories under those brands, rather than using its own factories. The key difference between Onward and other SPA retailers (Fast Retailing (UNIQLO), Inditex (ZARA), and Hennes & Mauritz (H&M) being examples) is that in the majority of cases, Onward doesn’t own directly managed stores. Instead the stores belong to department stores.

While in the past the company was a manufacturer (wholesaling to department stores), during the ‘90s and ‘00s it evolved into a retailer by all measures but technical details of who books sales and who owns stores.

Under the prevailing transaction form, the company owns fixtures, displays, and the inventory at stores. It also supplies sales staff. The store itself is owned by the department stores and items sold are booked as department store sales (going through department stores’ POS and accounting systems; Onward manages sales and inventory in timely manner using its own store information system in parallel). Technically, Onward recognizes these as wholesale sales. The reality is that Onward acts as a retailer, taking inventory and other operational risks. Department stores provide store space, and as such are little different from landlords. The gross margin of the department stores is essentially a rent calculated as a percentage of sales. Wholesale price is determined using a ratio called ‘buritsu’. ‘Buritsu’ is a department store’s gross profit margin. The ratios are determined in negotiations and differ by brand and company involved. Anecdotally, typical ratio is in the 30%-40% range but can reach higher or lower (with prestigious overseas brands purportedly paying low teen or even single digit rates).

A note on the terminology employed in the apparel manufacturer vs. Japanese department store relationship. The Japanese term for the main transaction method is “shouka” (“purchase-as-sold”), generally translated as “consignment sales”. Confusion can arise from the second method employed in the relationship, “itaku hanbai”, also translated as “consignment sales”. Despite common translation, the two methods have different accounting treatments. The former (“purchase-as-sold”) presumes that the title is not transferred to a department store until actual sale, i.e. never booked as department store inventory; the latter (“consignment sales”) implies the goods become department store inventory (returnable to the manufacturer if unsold).

The outright purchase method popular in US (department stores purchase inventory and assume inventory risk) also exists in Japan, and is called “kaitori” (“outright purchase”). This method, while famously employed by Isetan department stores for some of its business, is uncommon in Japan and represents a negligible part of Onward’s business.

Currently over 90% of all sales made by Onward are “purchase-as-sold” type. That means that the company is effectively is acting as a SPA retailer in terms of inventory risk.

Jiyuku Takashimaya Shinjuku (Source: Company Data Processed by SR Inc.)

(Examples of Onward Kashiyama)

Product development process and cycle at Onward Kashiyama

The process of product development is controlled/run by two main groups – sales (internal buyer) teams and planning (brand) teams. Production is driven by decisions of people who put product in stores – internal buyers (called “sales staff” by the company, they belong to one of eight domestic sales offices (branches) and internally source apparel for stores; customers are the end buyers of apparel). Their decisions are driven by performance and feedback from shops.

In general, there are four main fashion seasons, with some sub-seasons (e.g. early summer). For each of them, planning teams develop collection samples which are presented at internal seasonal exhibitions. An example of such an exhibition (typically twice a year) is a May fall-winter one. Items selected by buyers are then produced in initial quantities. Additional orders are made based on smaller interim exhibitions mid-season (4-6 per year) and viewings. Planning teams are responsible for making sure that items that are more likely to be reordered can be manufactured. That means securing materials early and keeping them in stock.

In terms of the additional production response, 30 days turnaround is the shortest possible cycle according to the company. If fabric and accessory parts are available, the order is dispatched to a factory in China and a ready garment is shipped by sea. If fabric needs to be bought or patterns altered, this adds at least another 1-2 weeks to production.

The company sources fabric and accessory parts in advance, which are kept at factories or warehouses of firms that actually “assemble” the apparel. It doesn’t own or operate production facilities but rather provides guidance to its subcontractors.

Each collection or merchandising mix for a particular period consists of both items that would not be reordered when sold and items that are likely to be reordered. Normally around 20-30% of the collection is designed with reorders and continuous production in mind. Those items (examples may include light casual tops, shirts, casual jackets etc.) are generally responsible for about 70% of total sales. At the same time, one-off items create the collection’s unique signature and add zest that increases the fashion statement of the brand. In a nutshell, the customer will most likely buy a pair of gray pants but she will remember that bold coat design in purple and associate her purchase at least partly with that design.

How much to allocate to each individual store is a complex decision based on a number of factors. As a manufacturer, the company has to guess which styles will sell and how much. Top management decides on a general direction, i.e. on how aggressive the company wants to be in terms of the amount of risk inventory and the number of new items to be introduced. This is driven by overall economic performance of the market and is a decision based both on bottom-up and top-down information. Buyers then make specific decisions on a per-brand and per-store basis, looking for the best-selling mix.

Buyers are organized by brand groups and are also responsible for a number of individual stores. The organization is ultimately centered on individual shops, each normally dedicated to one brand.

Discounting is done at the end of each season, during seasonal sales. The characteristic feature of Japanese seasonal sales is that discounting tends to be lower and start earlier than in US or European stores. SR Inc. notes that while discounts of 50%-70% are common during European bargain sales, in Japan 30%-50% range seems to be prevalent. In a way, the Japanese model provides a relatively shorter window for early season full-price customers, instead offering items at 30% lower prices in the middle of the season and selling items at higher markdown levels early on without having to discount further at the end of each season. The net result is a somewhat smoother distribution of seasonal performance.

The business decision making and tradeoffs of apparel trade

The issue of so called “opportunity losses” is an interesting one. Apparel retailers juggle between having unsold inventory on shelves and not having enough product on the shelves that customers want (inventory loss). Inventory losses are immediate, visible, and painful; hitting profit margins and impacting buyers’ careers. Opportunity losses (missed sales due to insufficient product on shelves from either stockouts or failing to put enough product in stores), are invisible. They are hard to track and non-punishing (especially when done by the entire organization). Rather, they are sometimes rewarded as healthy conservatism.

Onward is a conservative company in SR Inc.’s view, and its business seems experience-driven rather than systems-driven. This conservatism allowed the company to stay profitable despite struggling sales and its relative performance vis-à-vis peers has been respectable (see Competition) The problem however, is that relatively stable gross profit margins were set against rapidly declining sales. At the same time, the company found itself relatively unable or unwilling to cut SG&A, leading to substantial OPM deterioration. As highlighted above, it is difficult to judge whether the strategy was optimal, or if it was overly conservative, only enough to produce relatively predictable but poor results. It answers the question of whether the management control at Onward is solid (=yes) but leaves open the question whether the company can deliver incremental growth.

At Onward, the decision process regarding additional orders involves several branch offices and consensus building can take several days. The company maintains that while this reduces response time, bottom-up consensus building allows for greater unity and higher motivation of the sales teams.

Store staffing and sales practices.

The company’s hiring trends have been changing - new hires have been mostly on more flexible (from the company’s perspective) term-based contracts. It generally means benefits similar to permanent employees, but termination is easier. As a result of this shift fewer young staff fill senior positions, as promotions are generally reserved for permanent employees. This might be creating a situation where upper middle management is increasingly dominated by males in their 50s. While this means a wealth of experience, it can also mean resistance to change or slow decision making, especially considering new distribution channels or new ideas. Senior management is acutely aware of the issue and admits that changes are needed, but also points out that at least 1-2 years are needed to change attitudes, overcome resistance, and establish personnel policies to rejuvenate the organization.

Salespeople at company stores are full-time employees (contract sales employees). Staff report sales and inventory data directly to the headquarters using proprietary store information system. This enables additional orders and manufacturing of popular and highly profitable fast selling items to be performed in timely manner.

Store sizes, locations, and efficiency per square meters vary substantially by where the store is (department store, etc.) and the specific brand strategy. The merchandise mix is determined based on strategic sales plan. Individual stores have some freedom in terms of item placement and display inside the store.

New Distribution Channels.

The company readily admits that new channels, or “new distribution” in company’s parlance are the most important for domestic growth. FY02/10 sales in new channels (shopping centers, standalone stores, internet, etc.) were 28.2 billion yen, about 18% of total sales. This number somewhat overstates the real sales through the channel as the bulk of department store sales are recorded at wholesale prices (i.e. after deducting department store margin; so called “gedai” price). Nevertheless, new channel sales are large and rising. Furthermore, while the company does not disclose the profitability of new channels, it seems likely (particularly for internet sales) that ultimate profitability can be higher than for the core department store channel.

The shopping center channel has shown mixed performance over the past few years (FY02/08 to FY02/10). While Onward has brands specifically for this channel, their contribution has been limited, with three main brands (anyFAM, anySiS, field/stream) contributing less than 20% of total sales (with the same caveat as mentioned above).

The directly managed store channel is new for the company. It can probably be best characterized as interesting but largely irrelevant business-wise as of FY02/10 end.

A potentially interesting development has been the acquisition of Island Co., Ltd., operating Grace Continental stores in so called “fashion buildings” (e.g. Parco or Lumine), as well as in department stores. This and similar acquisitions hold the key to Onward’s growth outside its core channel and its core customer group. The company admits that to grow in new directions it needs new energy and ideas; unlikely to be easily found internally. It aims to develop the Island business and do further acquisitions to build a brand portfolio with 20-30 billion yen in sales that could be expanded both domestically and in emerging Asian fashion markets - most notably China. If successful, these new dynamic brands will be sold in shopping centers, fashion buildings, and online.

In terms of internet sales, Onward plans to achieve sales of 1.2-1.3 billion yen on its own site plus about 1.2 billion yen on 3rd party sites such as ZOZOTOWN (operated by Start Today) for the total of 2.5 billion yen in FY02/11. One thing that makes the Start Today offering uniquely appealing is that it combines operations of Onward’s own site and ZOZOTOWN, reducing overall cost. Onward products are also sold on Rakuten and other online malls.

One of the issues with Onward’s approach to online sales needs to be quickly addressed in SR Inc.’s opinion. Online sales are treated as a separate profit and risk center. This means that the risk budget is determined by the amount of sales it generates (still small), ignoring the vastly different sales potential driven by the website traffic. Allowing a higher risk budget while managing that risk at the business portfolio level should allow for substantially higher online sales.

Overseas Business

Although the company operates in Europe, Asia and the US but Europe accounts for the majority of the overseas business (approximately 15% FY02/10 sales). European operations use GIBO’ Co (Italian apparel company Onward acquired in 1990) as manufacturing platform. It has grown in strategic importance for Onward following acquisitions of JOSEPH Group (2005) and Jil Sander (2008). Onward owns close to 100% of GIBO’ Co (management has a small stake).

The European fashion business is characterized by widespread outsourcing. Design houses rarely have planning and manufacturing capability - this is provided by GIBO’. The company develops samples, produces and sells the product, in exchange for a license payment to the designer. To further GIBO’ Co’s manufacturing capabilities a number of specialty manufacturing firms were added over time:

• ERIKA s.r.l. in 2004 (luxury knitwear)
• IRIS S.p.A. in 2005 (luxury shoe manufacturer)
• FRASSINETI s.r.l. in 2007 (handmade leather bags)

One of the issues GIBO’s Co had over the years is that it was essentially a production and distribution purveyor for up-and-coming independent apparel labels. Once those labels achieved stable growth they were often picked up by major fashion houses (such as LVMH), disrupting stable growth for GIBO’ Co. Arguably therefore, acquisitions of JOSEPH and particularly Jil Sander were game changing events and a real start for Onward’s global expansion ambitions. (It should be noted that the company found its cost base is too high to produce for Joseph which price points are upscale but not luxury).

Cost Structure

The two main cost components for Onward have been costs of goods sold and labor. Onward’s gross profit margins have typically been stable at approximately 45.6% (FY02/02-FY02/10). One of the key risks for apparel manufacturers is inventory risk; if products don’t sell as expected, excess inventory must be either sold or written off. Onward utilizes the approach whereas the inventory unsold by the end of a season is marked down by 70%. The company commented that their policy is to aggressively liquidate unsold inventory at special sales and similar events to avoid having to incur inventory disposal losses. Inventory losses reported in CoGS for FY02/08 and FY02/09 were negligible.

Historically, the SG&A / Sales ratio has been about 38% (FY02/02-FY02/10), but rose to 44.2% in FY02/09. In terms of cost budgeting, the company allocates as much cost as they feel is necessary to achieve sales targets under certain profitability constraints. Labor is a constant that the company chose to work with; no restructuring-like labor cuts were ever performed. Advertising is treated as semi-fixed expense, with approximately 2.0 billion yen treated as the strategic base case, and cuts performed in difficult environments like the financial crisis of 2008-2009.

Profitability Snapshot, Financial Ratios

Gross profit margins have been stable; median of 45.6% from FY02/02 through FY02/10. Operating profit is thus a function of SG&A spending (the largest component being labor, see Business Model for more). In comparison to peers, Onward’s gross profit has been lower than the median (typically several percentage points); however the company’s OPM has been substantially higher than other firms (see Competition). One possible conclusion is that although Onward’s direct costs are higher (the company suggests that it uses high-quality components which can reduce GPM), management controls over expenses compensate for lower GPM.

The company’s asset base has been relatively productive in terms of turnover (averaging about 86.9% from FY02/02 through FY02/10). The company’s M&A activity has added notable goodwill to the balance sheet. Stable total asset turnover in light of added goodwill can be caused by two factors: increased efficiency of tangible assets, or the conclusion that prices paid in M&A have been justified in terms of additional sales; the latter seems to be the case in this situation.

SWOT Analysis

Strengths

• Strong execution and management controls. SR Inc. believes that Onward is a strong and well-managed company, however it is probably fair to raise a question how aggressively is it managed for growth.
• Strong presence in the department store channel. Number of department stores will decrease but will not disappear, thus stable source of revenue.
• Strong financial position. Considerable experience with overseas brands and overseas business.

Weaknesses

• Dependence on department store channel. Lack of retailing experience in other channels.
• Rigidity in formulating and implementing growth strategy.
• Dependence on economically sensitive high-end apparel.
• Dependence on shrinking Japanese market. Inability to directly apply domestic experience and expertise to worldwide growth.

Geography of Operations

Over 83% of sales generated in Japan; 15% in Europe; 3% in other regions (FY02/10). Core international labels are JOSEPH and Jil Sander. The company’s strategy includes expanding its presence overseas (expansion in Europe as well as Asia; see Strategy for more).

Group Companies

JOSEPH Montaigne Exterior(Source: Company Data Processed by SR Inc.)

104 group companies (as of end of February 2010).

The main subsidiaries are:

• Onward Kashiyama Co. Ltd. (Japan): Core company of the group.
• Onward Trading (Japan): Uniforms and sales promotion goods.
• Chacotte (Japan): Dancing wear, costumes and cosmetics.
• Creative Yoko (Japan): Pet fashion, character accessories etc.
• Bus Stop (Japan): Multi-brand store operation.
• Project Sloan (UK): Holding company of Joseph group companies.
• Joseph Ltd. (UK): Manufacture and sale of apparel, shoes, and bags.

• GIBO’ CO S.P.A. (Italy): Production platform in Europe with following subsidiaries:

IRIS (shoes)

CORPORATE (apparel; Antonio Berardi label)

ERIKA (knitwear)

FRASSINETI (leather bags)

• Violine S.a.r.l.(Luxemburg): Holding company of Jil Sander group companies. Includes 15 subsidiaries.
• Jil Sander Italia S.P.A.: Manufactures and sales of apparel (knit and woven), shoes and bags.
• Island Co., Ltd.: Grace Continental manufacturing and sales operations.
• Candela International Co., Ltd. (Japan): Operation of CROON A SONG select shops.
• Onward Fashion Trading (China) CO., LTD.: Sales of apparel.
• J Press Inc.: Apparel sales in the US.
• ACROSS Transport: logistics and processing of apparel.
• Onward Beach Resort Guam, Inc. (Guam): Hotels and resort facilities.
• Onward Golf Resort Guam, Inc. (Guam): Golf club in Guam.

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[edit] Market & Value Chain

Market Overview

There are several points to illustrate and most of them are well known and probably do not require much discussion. The demographic situation, i.e. declining and aging population, means that the market is and will continue shrinking gradually. The economic situation of the past several years (2007-2010) has changed apparel shopping patterns. While detailed and objective analysis is difficult due to a lack of data and the multidimensional nature of the topic, it is probably fair to say that in 2010, compared to 2000 and even more so to 1990, fewer people are buying apparel and less is spent per person.

While the womenswear market is facing severe challenges, the menswear market shrank dramatically both in term of volume and spending (down 22.5% from 2005-2009, data according to the Japan Department Stores Association). For all practical purposes, the market worth analyzing when assessing future growth is womenswear.

The casual apparel revolution led by Fast Retailing’s UNIQLO brand had profound implications for the entire apparel market, including the high-end apparel market where Onward operates. UNIQLO convinced the consumer that really cheap clothing could be fashionable and certainly not embarrassing to wear. This is sometimes mistaken for ‘deflation’. While general price declines on a macroeconomic level are widely seen as bad, the fact that a good quality fleece jacket can be bought in 2010 for 990 yen (vs. 5,000-10,000 yen in 1997), is probably a good thing. It also means that consumers questioned what “fashion” is and what “value” is.

This reassessment led to emergence of fast fashion, a worldwide trend but arguably particularly pronounced in Japan. Super quick production and reordering cycle (sometimes as short as a week) and low prices at acceptable quality for most “in” items allowed consumers to follow trends without spending too much money. In many ways, this contributed to hollowing out of the upscale apparel and created a substantial challenge for the main channel of such apparel, department stores.

SR Inc. does not believe that high-end apparel is dead. It has just become a smaller market.

Customers

Although the company’s main customer is department stores, it seems that end customers (who buy apparel) have most bargaining power in the value chain. Customers can shop easily in different channels (stores, online, etc.). In this sense, the consumer is clearly the most important; the relationship between department stores and manufacturers can be characterized as symbiotic (department stores need the right products, manufacturers need the channels) permitted that it remains mutually beneficial.

Suppliers

Onward doesn’t own factories; therefore arguably its key suppliers are overseas partners (90% of manufacturing is done outside Japan, of which 70-80% is done in China) with manufacturing capability. The power in the relationship between manufacturers and Onward seems to be tilted in Onward’s favor: the company orders in significant scale to dictate terms to some extent, and presumably there are other firms who could also provide production.

Role of trading companies

The Japanese trading houses play an important role in the value chain. They handle the production process, connecting Onward with manufacturing plants and suppliers, taking on risks that Onward cannot control. They generally guarantee prices for materials and produced items in Japanese yen, i.e. take on the currency fluctuation risks. Onward decides how much to buy and how much stock to hold, including parts. The main partners for the company are Mitsubishi Corporation (TSE 8058), Mitsui Corporation (TSE 8031) and Sumikin Bussan Corporation (TSE 9938).

Competition

In a larger sense the company competes with any apparel company, but World (unlisted) and Sanyo Shokai (TSE 8011) are direct competitors that merit mentioning in SR Inc.’s view.

World - operates wholesale and retail apparel business both in Japan and overseas.

Sanyo Shokai – a large apparel company selling largely in the department stores, a significant (undisclosed) component of revenues being Burberry license sales in Japan.

In a broader sense the company competes with other clothing labels, including such mass market ones such as Uniqlo, H&M, etc.

Substitutes

• Low price casual clothing, especially offered by “fast fashion” labels
• Other fashion related consumption (hair dressing, nail, esthetic salons)
• Other discretionary spending (mobile phones, leisure, etc.)

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[edit] Strategy

The high level strategy stated by the company is to offer highly fashionable, high quality products selling at prices appropriate to their value. The company is working on achieving that goal through what it calls “brand-based management”. It aims to establish worldwide presence focusing on its experience with high-end apparel.

In order to achieve its strategic goals, the company also states that it has been shifting the focus towards a “product-oriented” approach as opposed to a “market-oriented” approach. The difference between the two is that the “market-oriented” approach is mostly about trying to understand current trends and respond with an adequate product. The “product-oriented” approach is more about thinking up and creating a product which offers the consumer some unique value; proactive vs. reactive.

It appears to SR Inc. that despite the common theme, Onward’s domestic and overseas strategies are markedly different. Therefore, they are discussed separately in this report after a brief discussion about fashion brand building in general (more pertinent to the domestic business).

General Comments on Brand Strategy

Something that investors, especially foreign, notice about Japanese apparel companies is how many different brands they own. While some US and European companies have won with multiple brands, this typically was via acquisitions. Japanese firms tend to have many smaller domestically-oriented brands, developed in-house.

One explanation for this has been the historic focus on specific channels. To some extent all major Japanese apparel firms defined their businesses first by sales channel and then by the target consumer.

Onward and some peers mentioned in Competition have historically focused on department stores. The company calls itself a “general apparel company,” making all sorts of apparel including uniforms and pet wear. However both investors and consumers probably recognized it as a high-end apparel producer which sells in department stores.

While seemingly irrelevant to casual observers, SR Inc. believes that the channels dictated business and brand strategies for many Japanese manufacturers. Furthermore, it is likely that preferences and needs of core channel clients, especially powerful department stores, promoted independence of individual operators and proliferation of multiple smaller brands.

Independence here means the remarkable absence of major domestic M&A in the apparel sector. Each manufacturer, especially those selling in department stores, had brands which were replaceable and of limited uniqueness. Buying a competitor would not necessarily guarantee an increase in the sales space allocated by a department store. Developing brands in-house and mastering the relationship with the channel has been the smartest choice. Onward is one of the smartest if not the smartest when it comes to department stores. Hence Onward’s more than 70 brands, and a deep but historically profitable dependence on department store sales.

Conveniently, the multi-brand approach also reduces risk. Japanese consumers in particular have relatively short-lived preferences and the Japanese fashion cycle is notoriously short and volatile; brands that become too popular too fast often face violent downturns as customers grow weary and flock elsewhere. This is why large overseas apparel companies (excluding sportswear) are multi-brand conglomerates (who buy brands, not create them). Therefore, in SR Inc.’s view, it is reasonable to conclude that developing multiple brands has been and probably remains the optimal strategy in Japan. While it doesn’t create household names that carry on through generations, it allows apparel companies to manage their business in a manner not dissimilar from diversified asset management companies – a little bit of everything for a stable portfolio.

Some brands have distinct items which not only sell well but also distinguish the brand. Theory and Onward’s own JOSEPH achieved that in women’s pants. Similarly, mentioning Ralph Lauren invokes images of polo shirts, and Burberry, checkered pattern scarves and coats. Onward comments that selling such items is extremely easy and profitable, but finding the right balance between core and new items is one of the hardest parts of brand management. SR Inc. notices that in Onward’s case, it does not seem to have any domestic brands with “signature” items. Developing such brands requires bold vision and initial risk-taking. It’s possible that Onward’s (and other large and successful companies) relatively bureaucratic and consensus-based organization doesn’t easily lend itself to individual risk-taking. It’s therefore hard for Onward to repeat the success of acquired brands (JOSEPH, Jil Sander) domestically. This is probably why the company seems to prefer developing overseas brands as a separate group, using its Italian subsidiary GIBO’ Co. as a manufacturing platform. This seems the optimal choice for the worldwide expansion (see discussion below).

SR Inc. believes that Onward is a product-oriented company. It’s less about fashion per se, but more about building a product portfolio uniquely suited to its main department store channel. At the same time, the focus on product does not automatically imply that the company aims to develop truly unique products or maximize functional performance of individual items. Rather, the focus is on generating constant flow of apparel corresponding to individual styles of relatively narrowly defined brands.

Sales for higher-priced brands, even quite successful ones, typically range between 20-30 billion yen (the biggest rarely reaching 50 billion yen). They are different from mass-market brands bought by tens of millions of people. As prices increase so does fashion, i.e. the ability of the brand to respond to the unique needs of a particular group of customers.

Furthermore, famous international brands are sold worldwide and that allows the companies that run them to achieve some size. In most cases however, this also includes the sales of accessories. With apparel only it is hard to achieve. There are very few companies that sell 200-250 billion yen of apparel per year.

Domestic Strategy

Domestically, the plans to continue improving execution and foster relationships in the core department store channel. The company perceives its share of both sales and floor space in department stores as extremely important - it is the main if not only source of operating cash flow, and historically the company’s core competence.

(SR Inc. notes that this commitment to department stores could be one reason why the declining sales do not automatically lead to restructurings across-the-board. Furthermore, the company points out that given low flexibility of the Japanese labor market and high cost associated with the restructurings (one time pay-offs), it is not clear whether a drastic cost reduction would produce any long-lived benefits.)

SR Inc. estimates that department store sales will likely move in-line with the economic cycle and be a function of total sales floor space of major department stores (at least to some extent). Assuming that Onward’s share in the channel will remain stable/slowly increase is probably reasonable. Given continued renovations and floor expansion of the department stores in large cities, it is conceivable that over FY02/11-FY02/13, Onward’s sales in the channel could again reach the 148-150 billion yen, last seen in FY02/06-FY02/07.

Nijyusanku Matsuya Ginza(Source: Company Data Processed by SR Inc.)

Further domestic expansion would without doubt involve other distribution channels such as shopping centers, fashion buildings, multi-brand standalone stores, and the internet. At the start of FY02/11 the company strategy in these channels remained somewhat ill-defined. The company shows keen interest and growing commitment to the online channel, realizing that aggressive use of this channel should grow revenues while delivering margins possibly higher than those for department store sales.

In the short run (FY02/11-FY02/12) the company sees restoring profitability as the most urgent strategic goal. Given stable gross profit margins, improving profitability is to some extent about streamlining SG&A, but mostly about growing sales. Ideally, the company (reluctant to cut headcount) would want more sales space in various channels, supported by acceptable sales efficiency. That would allow spreading headcount and substantially improving the margin without painful restructuring. While SR Inc. wonders if such a strategy is finically optimal, or is driven by the harmony preservation mentality of management. It seems possible given the stabilization of department stores sales and growth in alternative channels; both supported by the nascent economic recovery.

The domestic brand strategy is twofold. The main part is to concentrate resources in core brands. At the same time Onward will seek to add new unconventional looks and styles (either create brands or, more likely, acquire existing brands). A good example of what the company is trying to do is the acquisition of Island Co. Ltd (12/2009), with its Grace Continental store brand. Also, areas like bags and accessories as well as successful high end SPA retailers might be potential acquisition targets. The value for money in the high-end will likely be emphasized with a focus on functional and innovative materials while staying with fashion trends.

Overseas Strategy

The overseas strategy is something that the market and the media were not giving Onward much credit for (as of early 2010). In some ways, this was deserved. The company made two large acquisitions in 2005 and 2008, at what seemed to be the market top. For FY02/10, both subsidiaries, JOSEPH and Jil Sander, failed to generate economic returns and were detractors of earnings. The company’s plan to achieve 100 billion yen in overseas sales seemed remote. The conclusion must be made that overseas operations thus far been unsuccessful.

SR Inc. thinks that though purchase timing was poor in hindsight, and execution in the few years following the acquisitions may seem inadequate, Onward may have the right to a few excuses. First, the financial crisis of 2007-2009 suddenly pushed the luxury apparel business from the fast lane of growth off the road. Assessing earnings of two high-end European brands, both of which relied on purely clothing sales over that period, one probably has to give Onward some benefit of the doubt. Furthermore, the currency trends were not necessarily favorable at the consolidated level. Second, while investors normally demand progress and changes within 12 months or even faster, brand businesses are hard to turn around at such speed.

Businesses are forward-looking entities, however. From FY02/11, the company appears to have a logical and promising overseas strategy. The plan is focused on Europe and centers on GIBO’ Co. The company has been acquiring specialist manufacturing companies in the recent years that allowed it to boast, as of 2009 end, development, production and distribution expertise in apparel, shoes, and bags (see Group Companies).

The strategy components for FY02/11-FY02/13 as seen by SR Inc.:

• Integrate production of JOSEPH and Jil Sander under GIBO’s Co control.
• Focus resources on Jil Sander as a major launch pad for growth. Introduce lower priced diffusion (“casual luxury”) lines (announced April 2010, see News and Topics) to mark the expansion in the critically important US and a cash-cow Japan market.
• Strengthen the offering of leather goods and accessories for both brands, leveraging GIBO’ Co’s production capabilities.

If such initial steps were well executed and proved successful, longer-term logical outcomes for the strategy could include expansion of both brands in major markets (Europe, US, Japan), and new sources of profitability from bags and accessories (brands need substantial retail apparel footprint to grow bags and accessories into a standalone business).

In terms of near-term expansion in Asian markets, this is likely to be pursued through existing Japanese brands such as ICB and 23ku, assisted by expansion in emerging high-end shopping center channel (in China, for example, or possibly on the shoulders of Japanese developers aggressively entering the Chinese market). The start of more aggressive expansion is slated by the company for the end of 2011.

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[edit] Historical Financial Statements

[edit] Summary

Stable growth in sales in core apparel business prior to large declines in FY02/08-FY02/10 (The company estimates call for bottoming out in FY02/11).

Stable gross margins, positive operating profit margins.

Strong balance sheet.

Consistent cash flow generation.

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[edit] Income Statement

The company’s sales rose at approximately 4.5% per year from FY02/02 through FY02/07 (peaking at approximately 319 billion yen in FY02/07) before declining about 22.0% into FY02/10.

Gross profit margins have been largely stable (45.6% average GPM within a tight range between 43.4% and 46.3%, FY02/02-FY02/10). Operating profit margins peaked at 8.9% in FY02/05 before declining to 1.8% in FY02/10. The largest factor impacting them has been sales given that the SG&A costs stayed largely unchanged over the period (with labor costs the biggest fixed component).

Onward has typically recognized net non-operating profit such as rent and royalties. The large non-operating expense in FY02/09 was due to a FX loss (subsidiary loans arranged in yen to lower the interest costs, backfiring when the yen exchange rate trend suddenly reversed from mid 2007; the practice was officially terminated following the losses).

Recurring profit margins have generally tracked changes in operating profit margins.

The company has recognized extraordinary losses in the past. The 22.2 billion yen loss in FY02/02 was related to a change in accounting convention (related to retirement benefit obligations). The 17.8 billion yen loss in FY02/07 was partially related to asset impairment charges of the resort business in Guam (approximately 6.1 billion yen). The company recognized a 37.8 billion yen extraordinary loss in FY02/09 largely due to a valuation charge on investment securities (approximately 22.6 billion yen) and impairment losses on goodwill of a UK subsidiary (approximately 11.6 billion yen).

Net profit margin peaked in FY02/04 when an accounting change related to pension liabilities provided a 10.5 billion yen extraordinary gain boosting the net income. The net loss in FY02/09 (30.9 billion yen) was due to extraordinary items discussed above.

The company NPM has been relatively stable (losses in FY02/09 notwithstanding); an important factor for ROE. DuPont ROE analysis (shown below) illustrates that NPM has been on an increasing trend from FY02/02 through FY02/08, while balance sheet risk had been stable. ROE (the product of net margin, asset turnover, and leverage) had been improving until losses in FY02/09. A recovery in net profit margin to previous levels would result in a higher ROE due to the increase in balance sheet leverage in FY02/09-FY02/10.

Historical Performance vs. Estimates

The company’s sales estimates appear reasonably accurate (FY02/09 being a notable exception, coinciding with the “Lehman Shock”).

Recurring profits have been largely in-line with company estimates. The deviations from FY02/08 to FY02/10 appear to be the result of lower sales combined with lower OP than expected (note that the non-operating balance has historically been stable).

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[edit] Balance Sheet

The company’s capital structure has been mostly equity from FY02/02-FY02/10 (low debt).The company has used debt financing in the past, typically short term (repaid all long term debt from in FY02/02; used more in FY02/09). The balance sheet has been highly liquid (current ratio above 100% from FY02/02 through FY02/10). The company has typically held a high cash balance (exceeding working capital requirements).

Assets

The asset base for the company has historically been dominated by fixed assets (tangible assets related to sales activities and other fixed assets such as investments and long term loans). The company’s M&A activity in FY02/06 and FY02/09 has resulted in substantial amounts of goodwill on the balance sheet. Adjusting (removing) goodwill from the balance sheet reveals a different liquidity profile: current assets (cash and working capital) are the largest group of assets. Onward does not own manufacturing facilities (see Business Model), therefore working capital is an important component of the business model.

Fixed assets on the balance sheet have been mostly property, plant, and equipment. The company has also reported other fixed assets on the balance sheet which have typically accounted for approximately 30% of total non-current assets. Most of these assets are inert (prepaid expenses, deferred tax assets, allowances for doubtful accounts, etc.), but two major accounts, investments and long-term loans, generate yields. Long term loans on the balance sheet have yielded between 2% and 8% (dividing interest income by average loan assets for the year); yields on investments have been lower (approximately 1%).

Liabilities

Liquidity of liabilities mirrors assets; current liabilities have historically been over 80% of total liabilities (from FY02/02 through FY02/10). Current liabilities have been mostly working capital, however the company’s use of short term debt has been an increasingly large component in current liabilities. Short term debt as of FY02/10 was bank loans.

The company seems to have shifted to using all short term debt in FY02/02 (total debt / assets was similar pre-2002, but the composition of short term debt increased), matching the short-term cycle of the business model. The company added long term debt in FY02/09, lowering the equity ratio from levels seen during FY02/02-FY02/07.

Net Assets

Shareholders’ equity has generally increased with net income (net dividend payments) from FY02/02 through FY02/10. A net 11.0 billion in valuation charge in FY02/07 (mostly related to land) offset net income for the year, and a net 28.5 billion yen charge in FY02/08 (9.7 billion yen related to securities and 18.6 billion yen of minority interest decreases) caused a 27.5 billion yen decline in net assets.

The company has also been a buyer of its own stock: purchasing approximately 5 billion yen in FY02/04, approximately 9.4 billion yen in FY02/06, and approximately 7 billion yen in FY02/08.

Per Share Data

Earnings per share had been on an increasing trend from FY02/02-FY02/08 and been volatile, in-line with net income. Both EPS and book value per share were significantly impacted in FY02/09 due to net losses during the year.

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[edit] Cash Flow Statement

Operating Cash Flow

The largest component of OCF has historically been net income (a median of 42.8% of from FY02/02 through FY02/10), illustrating the cash generating nature of the company’s business model. OCF in FY02/04 was the result of strong net income growth along with a reduction in working capital (payables increased 4.9 billion, reversing a decrease of 2.4 billion yen the previous year). OCF in FY02/06 grew YoY due to timing related to FY02/04 taxes (paid in FY02/05), creating the appearance of volatility which was not due to core earnings.

OCF was positive in FY02/09 despite a net loss of 30.9 billion yen. This was in part due to sizeable non-cash charges (22.6 billion yen securities write-down, 13.0 billion yen impairment losses).

Investment Cash Flow

FY02/06 investment cash flow of 37 billion yen was related to the purchase of the JOSEPH Group (16.9 billion yen) and the purchase of investment securities (13.3 billion yen). Investment cash flow in FY02/08 was due in part to the sale of Impact 21 (6.3 billion yen outflow). Investment cash flow in FY02/09 was largely due to the purchase of Jil Sander (26.6 billion yen) and Creative Yoko (6.7 billion yen).

Financial Cash Flow

The relatively large outflow in FY02/03 was mostly due to paying down debt (approximately 9.4 billion yen short-term, 2.1 long-term). The outflow in FY02/04 was due to a share buyback (5.3 billion yen) and repayment of short term debt (3.1 billion yen). Outflows in FY02/06 and FY02/08 were also the result of buybacks (9.4 and 7.0 billion yen, respectively). The inflow in FY02/09 was the result of a long term credit facility (approximately 30 billion yen) to finance M&A.

Simple Cash Flow

In terms of simple free cash flow the company has typically generated relatively large amounts, yielding a median of 5.5% per year (on average net assets, FY02/02-FY02/10).

The company has typically been efficient with cash conversion. Total days in cash increased from FY02/08 through FY02/10 due to lower inventory turnover, due in part to lower sales levels YoY (see Income Statement).

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[edit] Other Information

[edit] History

October 1927. Established as Kashiyama Shoten (Kashiyama Trading) in Osaka.

March 1947. Company name changed to Kashiyama Kogyo (Kashiyama Co., Ltd.)

October 1960. Listed on the 2nd Section of the Tokyo, Osaka and Nagoya Stock Exchange

July 1964. Listed on the 1st Section of the Tokyo, Osaka and Nagoya Stock Exchange

September 1988. Company Name changed to Onward Kashiyama Co., Ltd.

January 1990. Acquired GIBO SA

May 2005. Acquired UK fashion label JOSEPH

September 2007. Established Onward Holdings Co., Ltd.

October 2008. Acquired Jil Sander and CREATIVE YOKO Co., Ltd.

October 2008. Acquired Jil Sander S.p.A.

December 2009. Acquired Island Co., Ltd.

‘Kashiyama’ comes from its founder Junzo Kashiyama, who initially worked as an unpaid apprentice for Mitsukoshi kimono mercer (currently department store Mitsukoshi). In 1927, he set up his own apparel company called Kashiyama Shoten. Shortly after the Second World War, the company started making and selling ready-to-wear men’s suits. Womens suits were added in 1960. The company grew together with the Japanese economy and with fashion tastes (from tailored clothing to readymade). Onward has always had a main focus on one business: fashion apparel, which has been key in establishing durable relationships with department stores. In recent years Onward has heavily invested in overseas businesses by acquiring international labels such as Joseph in 2005, and Jil Sander in 2008.

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[edit] News & Topics

April 12, 2010 – the Jil Sander Group announced the launch of a new line called Jil Sander Navy, an important strategic step in development of the Jil Sander brand.

Jil Sander Navy is an extension of the core Jil Sander brand seeking to approach new types of customers and expand the appeal for the existing customers by emphasizing sports casual elements and lower price points.

Characterized by pure and simple line and ease of wear, the product range includes core outerwear, light jersey, and easy-to-wear knitwear as well as a line of accessories such as handbags, footwear and belts.

The collection was shown on June 2010 and the sales are planned to start simultaneously worldwide in 2011 season. The emphasis of the launch is on the US and Japanese markets.

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[edit] Top Management

Takeshi Hirouchi, representative director and chairman, was born in 1942 and joined the company in 1965. He became director in 1985, managing director in 1991, senior managing director in 1994 and representative director and president in March 1997. He became Representative Director and Chairman in March 2005. Due to transition to a holding-company structure in September 2007, he became Chairman and CEO of Onward Holdings Co., Ltd. while continuing to serve as representative director, chairman of newly established Onward Kashiyama Co., Ltd.

Kentaro Mizuno, representative director and president was born in 1949 and joined the company in 1973. He became director in 1998, and became Corporate Officer in 1999 due to the company’s adoption of executive officer system. He became managing executive officer in 2000. Since 1999, he has served as general manager of Kanto Branch, Tokyo Branch and Osaka Branch. In September 2007 with a transition to a holding-company structure, he was appointed representative director, president of newly established Onward Kashiyama Co., Ltd. In May 2008, he became representative director, president of Onward Holdings Co., Ltd., while continuing to serve as representative director, president of Onward Kashiyama Co., Ltd.

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[edit] Employees

Onward employed 4,008 full-time (12,278 part-time) employees as of FY02/10 on a consolidated basis. There were 35 employees at the parent level: average age 46.6, with the company for 19.8 years, earning a 8.8 million yen salary.

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[edit] Dividends and Shareholder Benefits

The company has a stated minimum 35% payout ratio, however the company also paid a dividend in FY02/09 when EPS was negative.

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[edit] Investor Relations

Result meetings are held in Tokyo after the announcement of interim and fiscal year end results. The company maintains an IR website in both English and Japanese.

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[edit] By the Way

The name Onward, added in 1962 was derived from a Christian hymn (“Onward Christian Soldiers”) that Junzo Kashiyama, the founder, liked.

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[edit] Latest Q&A

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