Financial Summary

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Recent Updates

Highlights

On February 3, 2012, JIN released monthly sales data for January: click here to go directly to monthly sales charts.

(For original, Japanese-language only data in PDF format, please click here.)

On January 12, 2012, the company announced Q1 FY08/12 results: click here to go directly to Q1 FY08/12 results.

(For original, Japanese-language only announcement in PDF format, please click here.)

On January 5, 2012, the company released monthly sales data for December.

On December 5, 2011, the company released monthly sales data for November.

For corporate releases and developments more than three months old please refer to the News & Topics section.

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Trends & Outlook

Monthly Trends(JINS)

Quarterly Trends

Q1 FY 08/12 Results (Announced on January 12, 2012; please refer to the above table)

Q3 cumulative sales rose 41.2% YoY to 42.1 billion yen, driven at its mainstay Eyewear business by a mix of continued strong sales at existing stores, new store openings and the expansion of its e-commerce business. Gross profit margin (GPM) improved 3.1% YoY to 76.5% from 73.4%, of which, eyewear’s GPM increased by 2.5% YoY to 77.8% from 75.3%. Of the improvement in GPM, about 1.0% was attributed to foreign exchange effects (i.e., lower costs due to a stronger yen), while the remainder was due to economies of scale. Alongside the higher top-line figure, lower labor costs; and a lower SG&A-to-sales ratio, led by rental costs, resulted in marked improvements in operating and recurring profit, as well as net income.

The company released a number of key products during Q1, these included:

• The fifth generation of its "Air frame" glasses series, which it launched with a TV ad campaign, in September
• The launch of it Functional Eyewear series, among which it released the JINS PC and JINS Moisture models in September; and JINS Cycle and JINS Run models in November

The company opened 11 new JINS stores (specialty eyewear) during Q1 FY08/12. As of end-Q1 FY08/12 the company operated a total of 153 stores: 127 JINS stores; 20 Cours de Couleur stores (women's specialty goods) and six Naughtiam stores (men's specialty goods).

The company had checked with its suppliers regarding procurement shortfalls following the October/November 2011 flooding in Thailand and concluded that there would be no issues, it commented. On this point, while the flooding in Thailand meant there was still some uncertainty regarding the main plant of the company’s supplier as of January 2012, JINS has responded by cultivating other suppliers without any operational disruption or increase in costs.

The company maintained its 1H and full-year FY08/12 forecast. The company has launched a marketing campaign to raise brand awareness and its Functional Eyewear series has also been a hit, contributing to results. However, JIN remarked it would continue to pursue an aggressive advertising strategy into Q2 and beyond, and it expected labor costs to rise due to new store openings, both of which clouded its future earnings outlook and thus it decided to maintain its current forecast.

Operating profit for the period, however, exceeded the forecast by about 300 million yen. SR Inc. notes this was mainly driven by a 13.7% YoY increase in comparable store sales, rather than the 4.7% that the company had forecast.

In a post-results interview with SR Inc., JINS president Hitoshi Tanaka commented he felt more confident about hitting the company’s long-term target of 100 billion yen in sales noting the foundations for future growth were in place.

Part of this confidence over the prospect of achieving its sales target was due to the success of the company’s “functional eyewear” series. In particular, Tanaka said the company had received many inquiries about the JINS PC product and was confident this line could become a core product for JINS. SR Inc.'s rough estimate is that the company could sell anywhere between 300,000 to 400,000 pairs of the JINS PC line in FY08/12.

E-Commerce (EC) sales were also strong, with Q1 sales up about 2.6 times YoY. In order to increase the EC sales ratio, the company believes customers need to try purchasing online at least once and then will be converted to the method, resulting in an increase in the number of customers who will use its EC offering. The company carried out a campaign in December 2011 to encourage existing customers to use the EC platform by offering a 50% discount on second pair purchases when made online. The campaign was said well received (however, delays in processing, etc. meant the campaign was discontinued from January). In addition, a reform of the store system is planned for the end of FY08/12 that will automate a series of processes throughout its systems up to product delivery, which in turn should facilitate the streamlining of store operations.

On the other hand, the company flagged the following challenges going forwards:

• Further improvements to the functional eyewear series – while JINS PC and other products are selling well for now, the company is aiming to introduce prescription lenses for the JINS PC glasses, make further improvements to its SPORTS series, and carry out other enhancements to the line-up.
• Merchandizing, starting with existing products
• Store operations

As for the latter two points, Tanaka remarked the company was taking the necessary time to meet these challenges through new systems and further evolution of its Specialty store retailer of Private label Apparel (SPA) model.

Note: It is not possible to make exact YoY comparisons as FY08/11 was the first year the company issued consolidated financial statements. For reference purposes, the figures used for preceding financial periods are non-consolidated numbers.

For details on previous quarterly and annual results please refer to the Historical Financial Statements section.

Full Year (FY08/12) Outlook

The company forecast calls for sales to increase 27.6% YoY to 18.6 billion yen and operating profit to grow 56.9% YoY to 1.7 billion yen. The net income forecast is 700 million yen, with earnings per share of 34.2 yen and a 7.0 yen per share dividend, in line with the company's published 20% payout ratio divided policy.

The forecast is based on the following assumptions:

• At the JINS segment, it is assumed comparable store sales will increase 3.3% YoY(1H: +4.7% YoY [Q1: +4.7% YoY; Q2: +4.8% YoY]; 2H: +2.2% YoY [Q3: +4.8% YoY; Q4: -0.2%YoY]). The company expects to open 30 new stores and renovate 25 existing ones – the company’s full-year capex projection is 1.6 billion yen, which includes store renovation costs.
• In the Eyewear business, the gross profit margin is expected to improve to 75.5% (up 0.3% vs. FY08/11). The improvement is expected to be driven by a slight reduction YoY for the CoGS ratio for lenses due to the effects of increased volume, while the company has assumed the CoGs ratio for frames will stay put. Eyewear sales are projected to rise 30.5% YoY.
• The SG&A expense-to-sales ratio is forecast to fall 1.0% YoY to 64.9%. The company anticipates that it will continue to spend approximately 10.0% of sales on advertising going forward. As for fixed costs and growth in SG&A expenses, these should level off to some extent despite higher sales.

Given the above, the operating profit margin is expected to improve 1.5% YoY to 9.1%, and operating profit is forecast to grow 56.9% YoY.

Based on interviews with the company, SR Inc. gets the impression there is some scope for results to exceed the company's forecast driven by the number of new store openings and unit price assumptions for eyewear. The company commented it has only incorporated confirmed store openings in its forecast, and thus the pace of openings seen in FY08/11 may actually be achievable (approximately 40 new stores). It has also assumed unit prices for eyeglasses will remain in line with FY08/11, however, SR. Inc. understands eyewear prices bottomed out in FY08/11 and have begun to rise since then.

In terms of risks that actual results fall short of forecasts the primary concern is sluggish sales of the Functional Eyewear series. However, the company commented its assumptions for the series are conservative.

Longer Term Outlook

President Tanaka has targeted an ambitious 100.0 billion yen in sales within five years. Based on FY08/11 sales of 14.6 billion yen this means the company needs to achieve a compound annual growth rate (CAGR) of around 50.0% over the period. Nonetheless, as of October 2011, Tanaka said that remained confident that the company was moving toward this goal.

Given the current strategy of offering high quality, low priced glasses, it is probably safe to assume that the average price at JINS stores will stay more or less unchanged. The growth in sales is therefore a function of volume increases, achieved through opening more stores and increasing per-store sales. In the mid-term the company plans to operate 300 stores, a more than 3-fold increase from FY08/10 (see Stores discussion). At the same time its ambition is to more than double per-store sales from the current 130 million yen per year to 300 million yen per year.

While Japan has 650 shopping centers with at least 20,000 square meters of floor space, the company has stores in only around 69 of those locations as of end-FY08/11. Nonetheless, shopping centers which already have one or more other eyewear stores present an obstacle for further expansion. According to the company, many developers who manage shopping centers believe having numerous apparel shops within one shopping center is not an issue but having one or two eyewear stores is generally sufficient. The company believes by explaining to developers how its stores differ from ordinary eyewear stores it should be able to overcome this issue and from there be able to persuade other shopping centers. In addition to stores in shopping centers, the company’s new store opening plans also include train station buildings, dedicated apparel complexes and standalone stores.

JIN’s ability to develop more products will be a challenge as it pursues its 100.0 billion yen sales target. The Air frame has been successful, accounting for 50.0% of FY08/11 sales of all eyeglasses, but expanding the product lineup, with lines such as the Functional Eyewear series, in order to increase the number of units sold will be key to staying on the growth course. Recognizing this, JIN is beefing up its product line-up and planning a staggered round of major product launches between July 2011 and summer 2012 - moves that should monitored closely.

In a bid to cultivate a new market for consumers who previously did not see eyeglasses as necessary, the company has launched various glasses in its Functional Eyewear series with uses other than the traditional correction of eyesight. These include: glasses that elevate contrast for improved vision, glasses for golfers that protect the eye from impacts and harmful UV rays, running glasses, and glasses for computer users. In particular, sales of PC-use functional eyewear have been strong since introduction. The company believes that potential demand for the product is high.

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Business

Business Description

JIN is an eyewear retailer. As of FY08/11, it operated 116 JINS-branded eyewear stores across Japan, and sold about 2.3 million pairs of eyeglasses in FY08/11. In 2009, the company made a radical shift in its strategy, attempting to redraw the eyewear market map and redefine what it means to retail eyeglasses. While the move was getting underway in 2011, the first signs were promising. The company wants to become a “UNIQLO of eyewear retailing” but it is probably fair to say that if its new strategy is successful, the ripple effects in the Japanese eyewear market could be even more pronounced than the impact that Fast Retailing has had on apparel retail.

The company sees its approach as fundamentally different from the competition. Eyeglass retailers traditionally see their business as one of correcting vision. JIN believes that the eyewear should be seen as “lifestyle gear”, with elements of fashion and functionality joined together. Even more importantly, JIN wants to offer it at prices that make it possible for an average consumer to treat the pair of eyeglasses in the same way as she treated the UNIQLO fleece in 2001 or Nitori dinnerware in 2009 – feel real value, appreciate the quality, and buy several pieces at a time. In order to achieve this, JIN needs to perfect the use of the SPA model, something that has never been truly attempted in eyewear retail. Even more importantly, it needs to develop innovative products that sell, consistently. The company has just made its first baby steps in this direction (e.g. new store designs and Air frame brand and Functional Eyewear glasses). The jury is still out on whether it can live up to its promise. However, SR Inc. believes that as the only listed eyewear retailer attempting to spurn traditional retailing assumptions and redefine its business and the market, it deserves attention.

The company also sells fashion accessories and bags through a small network of dedicated stores and some JINS eyewear stores. This business (Cour de Couleur and NAUGHTIAM brands) is a small contributor to sales (9.7% in FY08/11). Accessory stores are growing at a slower pace than eyewear stores and their future contribution will decline further.

Business Model

JIN sells its eyewear at four price points – 4,990 yen, 5,990 yen, 7,990 yen, and 9,990 yen. The price includes lenses and a case. There are no additional charges, with a small exception of colored and progressive lenses which add 2,000 yen and 5,000 yen respectively to a set price. The all-inclusive, no-additional-option price strategy differentiates the company from many of its competitors who base prices on different lens and frame combinations.

Lenses and frames contribute approximately equal proportions of the gross profit per pair (with GPMs of roughly 70%). For frames, the design is mostly done internally and manufacturing is outsourced to multiple manufacturers in China, Korea, and Vietnam. Lenses are sourced mostly from a single manufacturer, HOYA (TSE 7741), a situation unique for the Japanese eyewear retailers who tend to rely on multiple suppliers. 100% of the lenses JIN offers in its stores are thin aspherical lenses. What is remarkable about JIN’s gross profitability is that despite substantially lower prices than all of its major competitors, its margins are essentially the same.

The largest SG&A cost components are unsurprisingly labor (approximately 22.0% of total sales) and rent (about 13.0% of sales). JINS’ stores are staffed with more people than competitors (about 10, vs. about 5 in other stores) to handle varying customer traffic and because shopping mall stores have long opening hours. The rent setup is typical for retailers opening tenant stores in shopping centers, a variable amount per based on sales, with minimum guarantees.

Advertising expense to sales has ranged between 1.4-2.5% of sales (FY08/05-FY08/09), however JIN started using TV commercials in the marketing mix in FY08/10. The company has a flexible approach to advertising budgeting: commenting that as long as gross profit is stable near 70%, approximately 10% of sales would be spend on advertising. In FY08/10 JIN’s TV commercials featured the JINSMAN, a faceless glass-wearing orange character dressed in a three-piece suit. To promote the new Air frame series, the company started airing new TV commercials using two young Japanese actors (without the JINSMAN) in September 2010 and in September 2011 started broadcasting adverts featuring popular actress Yu Aoi. .

SPA Model

JIN is attempting to apply an SPA (Specialty-store retailer of Private-label Apparel) business model to eyewear retailing (while a misnomer when applied to eyewear, the SPA term is used for convenience throughout this report). While SPA became widespread in apparel retailing, eyewear retailers neither felt the need to use it nor thought it could be possible. In a simplistically presented SPA model, retailers share information with suppliers to make sure the production and store inventory are quickly adjusted to the most recent demand trends. The SPA model is designed to create continuous feedback from the point of sale back through the value chain so that consumer demand is rapidly reflected at the store-front. This requires strong coordination between all the elements of the value chain.

To enable its version of SPA, JIN has an IT system in place providing sales, inventory, and ordering information for each item. This allows learning what sells and what does not in real time. The system also gives reordering signals and helps managing the markdowns.

The company decides the merchandising strategy during weekly meetings, using a “merchandising map” that specifies for how long certain products will be sold and at what price. Comparing sales information to the merchandising map allows the company to quickly identify which products aren’t selling as expected. Laggard items are marked down automatically to the next lower price point.

According to JIN, it is the only eyewear retailer in Japan using an SPA-type 52-week merchandising model while other retailers use a conventional 6-month seasonal ordering cycle. This gives an advantage when it comes to reordering – JIN can systematically send more orders for popular items to the suppliers, while the competitors are more likely to incur so called “opportunity losses” on such items (not having products that consumers want). What faster reaction time means is that to some extent, customers are telling the company what they want instead of retailers making the decisions.

One risk of letting consumers drive product decisions is that over time the product offering can become uniform. When certain styles or looks are selling well, the SPA model responds by putting more of the same or similar on store shelves. This has the effect of capturing the momentum of a building trend, but is much less effective when the trend stops. To be effective, SPA retailers need to constantly and carefully balance the mix of products with established popularity (short-term gain but long-term risk) and new items (short-term risk but long-term gain).

JIN’s Store(Source: Company Data Processed by SR Inc.)

Stores

The majority of JIN’s stores sell eyewear (116 as of FY08/11 all operated under the JINS brand, out of a total 141 stores). The typical JINS eyewear store is about 100 square meters, located in a shopping center (69 as of end-FY08/11) or high traffic area (such as a train station or fashion building). There are 10 staff on average (this seemingly large number is partly due to long opening hours of shopping malls but also fast turnover, high customer traffic nature of stores).

The majority of the floor space is for product display. JIN's display cases (in its new standard stores) are laid out in a honeycomb fashion, with a separate box space for each pair of glasses. Apart from making the product presentation crisp and product easily accessible, the display method plays an important role in store management. The store staff can easily see which items have sold and need to be replenished on the display. This makes reordering decision making straightforward, fast, and accurate. Additionally, the method is an elegant solution to the problem of inconsistent stocking. The eyewear store managers at JINS and other companies tend to have discretion in ordering, stemming from differences in individual markets where stores operate. However, this often leads to overstocking by managers who badly want to satisfy every customer and feel insecure about not having product. Given that the store performance is normally evaluated based on sales or gross profit amount, not cash-on-cash returns, incentives tend to be heavily skewed towards stocking inefficiency. Paradoxically, not having enough product is also easy to miss – just increase the distance between the items as you are trying to arrange them neatly and shortages of particular models go unnoticed. Putting each pair in an individual box space solves this problem and could be one of the key weapons of JIN’s SPA approach at the store level.

As of FY08/11, most of JINS’ 75 stores were located in major metropolitan areas: Tokyo (59.0% of sales), Osaka (15.1%), and Nagoya (13.0%). JIN’s store growth strategy is twofold: to open new stores, and to renovate the existing store network to a new design and layout. The company finalized the new format in early FY08/10 and believes it should substantially increase the store operating efficiency.

JIN aims to increase the store network to 300 in the mid-term. To reach this target, JIN needs to open about 40 stores per year (there were 116 JINS eyewear stores at the end of FY08/11). SR Inc. calculates that based on the assumptions current as of October 2011 (as comparable store sales continued to grow at that point), opening 40 new stores per year would cost about 1.4 billion yen (see the assumptions in the table below). The company will finance new store openings mainly from operating cash flows and debt, but doesn’t rule out the possibility of raising capital in the future.

Product

It is fair to say that product development is the critical piece of the company’s ambition to dominate the market. JIN must live up to its promise of innovation and high quality at price points below 6,000 yen. Competitors might be skeptical. JIN counters the skepticism, asserting that high quality can be delivered at unheard of before prices, pointing out that this is exactly what UNIQLO did. Large volume means economies of scale. Lower prices mean high volumes, especially when the product is right. What is required is the desire to take risk in product development, and readiness to change the underlying assumptions about the business.

Air frame(Source: Company Data Processed by SR Inc.)

The current product offering might be giving a hint of things to come. Air frame is a line of simple but fashionable looking glasses. The simple and clear message that the company sends is “ultra light and durable, available in many colors”. There is no emphasis on price (4,990 yen with some items offered at 3,990 yen). The Air frame has been very successful, accounting for about 50.0% of total glasses sold in FY08/11.

The approach to lenses is another example. JIN stresses only a few points, “no additional charges”, “thin aspherical lenses standard”, “lenses from a top domestic brand”. SR Inc. understands that in fact up to 85% or so of lenses offered by such competitors as Megane Ichiba (a store brand of Megane Top) are also aspherical, but the competitors feel no need to emphasize that or go 100% aspherical. JIN disagrees. Its position seems to be, “Why bother with the other 15%? Make a simple proposition instead – we give you only the best and the thinnest lenses, no gimmicks”. This approach is probably originating from the company’s roots in fashion accessories and could be summarized as “KISS (Keep It Simple, Stupid!) and tell (communicate the main benefit)”. SR Inc. wonders if all-aspherical lens choice may also have a bit to do with volume discounts and ease of sourcing from the sole supplier, HOYA (whose name is not immediately mentioned in advertising).

JINS PC(Source: Company Data Processed by SR Inc.)

JIN’s ability to repeat Air frame success with other innovative products is critical. Potentially interesting areas are prescription sunglasses and its functional eyewear series. The company's prescription sunglasses combine high specification UV400 lenses that block 99.0% of UV rays with designer frames at low prices. By offering useful features the Functional Eyewear series goes after a new market of consumers who previously did not see glasses as necessary. These features include: reducing eye stress and strain in various environments, eye-protection, and enhancing vision by increasing contrast. JINS Golf and JINS Sports went on sale in July 2011 and were followed by the launch of JINS PC in September of the same year. The JINS PC (price: 3,990 yen) line has drawn particular market interest; it targets the large number of people who stare at LED displays when using a PC or smartphone, watching TV, or gaming. The glasses cut about 55.0% of retina-damaging blue light by using next generation NXT lenses.

Profitability Snapshot, Financial Ratios

The decline in gross profit margins for most of JIN’s competitors seems to show the impact of price competition at the store level – price deflation which was in part fueled by the entry of JIN and other low price firms in the early 2000s. JIN, however, has seen its gross profit margin increase from 64% in FY08/05 to 73.3% in FY08/11. While pretty much all frames for all competitors including JIN are made in China, JIN sources directly, bypassing the wholesalers. In addition, substantial quantity of frames that JIN purchases, second only to Megane Top, clearly means low purchasing prices. For lenses, JIN has been enjoying a scale advantage from its unprecedented setup – while all of the company’s competitors purchase from several manufacturers, JIN buys mostly from HOYA.

The largest part of SG&A for most eyeglasses retailers is labor. JIN has more staff per store (about 10 vs. 5 for competitors) but JIN’s employees were cheaper (the average JIN employee earned about 2.9 million yen, vs. about 4.3-4.4 million yen for Paris Miki and Megane Top in 2009). The difference may be due to the fact that JIN started growing relatively recently so its staff is younger. The company uses a mix of full-time and contract (paid by hourly cost) in its stores while the competitors tend to have a higher proportion of more expensive full-time employees.

Advertising and rent are usually the next largest expenses. Most retailers spent about 6% of sales on advertising during 2005-2009, while JIN spent about 2%. Beginning in FY08/10, JIN increased its target to about 10% going forward, based on successful commercials run early in the year. Rent varies by store location (shopping malls charge a percentage of sales vs. a fixed amount for standalone stores). From 2005-2008 the median rent to sales ratio for peers was about 15% while JIN’s grew from 8.3% to 17.2%. One potential explanation for this is minimum rent guarantees for shopping malls combined with weak comparable store sales. This improved in F08/10: the rent was about 14.2% of sales and came in at 13.4% in FY08/11.

Strengths, Weaknesses

Strengths:

• Management ambition. While the competitors might disagree somewhat, SR Inc. felt that this was a differentiating strength for JIN. After some humbling difficulties in 2007-2008, JIN's founder Hitoshi Tanaka reset his goals and aspirations to become the #1 domestic retailer in terms of sales and earnings. He received an “adrenaline shot” when he met Tadashi Yanai, a towering Japanese retailing figure who is credited with taking the SPA model to a new level and his company, Fast Retailing, on a world conquest. Following the meeting, Tanaka realized that he was setting his goals too low and his strategy was defined by the market, rather than defining the market. He implemented a fundamental shift in business strategy and even philosophy. While it is premature to judge whether this newly found ambition would yield sustained results, it seems to have provided new energy to the entire organization.
• Ability to question conventional wisdom. What is eyewear? Who is the customer? What does the customer want? JIN is asking fundamental questions like these and not accepting the received wisdom of the industry that drives the thinking and management strategies of its competitors.
• Small and nimble. The company is still small compared to more established competition. It means several things. First, relatively small size of the store network allows changes to be implemented rapidly. Second, with less established culture and engrained practices and beliefs, it is arguably easier for the entire organization to absorb the change fast and believe in it. Third, it is relatively easier to build the growth momentum by opening new stores.
• Low price model as the starting point. JIN’s eyeglasses business has offered low prices from the start. Therefore, it does not face an excruciating challenge of how not to cannibalize and alienate its core cash-flow-producing high price customers, something that is a serious issue for most of its competitors (except maybe ZOFF).

Weaknesses:

• Short track record. While the company’s drive to change has been a success in FY08/10 and its growth strategy is clear, it is still premature to judge whether the rapid growth can be sustained. The management is experimenting with approaches and learning from its own experiences. Any setbacks could disrupt the momentum. While the company believes in success, it does not know yet whether the success is assured. Its rookie position gives the company unique opportunities but not every rookie ends up in the hall of fame. Is Air frame a success accident or the first in a long line of success? FY08/11 will be an important year for JIN to prove that it can sustain success and to build the confidence, both internally and externally, that it is for real.
• Eyewear SPA model is unproven. Similar to the point above, the SPA business model itself has not been shown before to work for eyewear. While it could be simply due to the fact that nobody tried, the fundamental questions remain. Does the consumer really need 52-week merchandising? Can the company bring about real product innovation? How to avoid increasing uniformity of product while maximizing sales of popular items. These and many other questions will need to be answered.
• Comparatively weaker financial position. JIN added debt in FY08/08-FY08/09 to fund store expansion. Some large competitors have much stronger balance sheets and sizeable cash positions which means more insulation from potential market shocks.

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Market & Value Chain

The eyeglass retail market in Japan is approximately 393.0 billion yen in 2009 (according to 2010 market survey data compiled by research firm Gankyo). The eyeglass retail market in Japan later bottomed out to 370.0 billion yen, and has begun to return towards the 380-390.0 billion yen range. It has been shrinking both in terms of volume and value in the past few years. Volume declined from about 20 million pairs sold in 2001 to about 16 million in 2009 as the replacement cycle grew. While a bad economy and poor consumption are probably the main culprits, an aging population also has had an impact. Generally speaking, age related vision deterioration starts in the late 30s and stabilizes in the late 50s; as Japan’s baby-boomer generation has aged, fewer have needed to replace their glasses. Price deflation is also well documented – the average price per pair has declined from about 29,000 yen in 2001 to about 25,000 yen in 2009 (Gankyo). JIN is actively helping to further the deflation trend – it is basically responsible for about 10% of the market volume but sells at about 1/4 of the average market price.

However, JIN wants to change the way investors look at the market and join it in defining at as a one-trillion-yen monster (see the company’s market size explanation below). While this view may strike a casual observer as unreasonably exaggerated, the company is simply trying to make a point – there is a potential to redefine and expand the market. JIN believes that its current (or potentially even lower) price points, combined with true product innovation, can change the eyewear market the same way mobile phones with built-in cameras changed the camera market – a complete upheaval. From JIN’s perspective a pair of eyeglasses can be:

Functional, purpose-specific tool. Emphasizing the function and offering eyeglasses that cater to particular situations (using a PC, playing golf, riding a bicycle etc.) is already emerging as a major trend among Japanese eyewear retailers. JIN wants to do more product innovation much faster than its competitors, using its SPA approach shunned by the rest of the pack. More importantly however, it wants to redefine the boundaries of such ‘functional’ markets by offering the product at prices never seen before.

Practical fashion item. JIN points out that trying to define eyeglasses as fashion accessories can prove perilous. Marketing “fashionable and cheap” to young consumers backfired when the bad economy heavily impacted young buyers, leading to a fizzling-out of 3-price formats offered by major retailers and JIN as recently as 2008. However, done correctly, emphasizing the fashion aspect of eyewear could theoretically not only increase buying frequency of existing consumers, but also bring new ones from those who do not need eyesight correction. JIN wants to try to do it properly this time, taking cues from apparel “fast fashion”.

JIN’s assumptions behind its target market:

1) There are about 186 million Japanese who do sports playable with glasses (golf, running, cycling)

2) There are about 91 million Japanese actively using computers

3) 186 million sports enthusiasts + 91 million computer users =277 million potential glasses wearers

4) Each person needs 1 pair per year, and assuming a 5,000 yen purchase price＝1.4 trillion yen

5) 1.4 trillion yen + conventional market size of 425 billion yen = 1.8 trillion yen

6) 1.8 trillion yen * 50% (assuming that half of the 277 million people buy one pair) = 1 trillion yen

Source: Japan Productivity Center, Ministry of Internal Affairs and Communications

The company’s long-term ambition is to reach the 100 billion yen sales mark. If the company’s view of the market is reasonably close, that would mean a 10% share the market.

Customers

JIN targets the mass consumer with its low price and clearly defined value propositions. Its customers are probably more likely to be younger and fashion conscious, people who want to look cool but don’t want to or can’t pay for it. The company does not perceive only such customers as its core target however (even if intuitively addressing them in its advertising campaigns). Instead it wants to go after for every person in Japan who wears glasses and then even for people who don’t. This may seem overly ambitious and many competitors would probably say that older consumers are too conservative and would not shop at JINS, that they care less about the price and more about the quality and service. JIN seems willing to prove that such a view is similar to another once prevalent view that no self-respecting older consumer would buy a fleece jacket for 1,990 yen or a T-shirt for 500 yen. The company believes that the key to success is to sell not a pair of glasses, but a highly affordable fun product that expands the meaning of daily eyewear for the consumer.

Suppliers

Typically, eyeglasses retailers use multiple suppliers for lenses, frames, etc. Doing so reduces single supplier risk and allows them to do some price comparisons. JIN uses multiple overseas manufacturers that supply frames, but uses a very different approach for lenses. HOYA (TSE 7741) supplies most of JIN’s lenses. The arrangement benefits both sides: JIN buys some of the highest quality lenses available, and HOYA increases its market share. The supplier relationship is a competitive advantage for JIN: although it does not disclose details, it seems logical that if JIN’s glasses sell for about 5,000 yen each and have gross profit margins similar to competitors offering higher prices, that HOYA offers some kind of volume-based pricing.

Barriers to Entry

The barriers to entry for eyewear retailing are low. Anyone can start an eyewear store. However, the highly competitive nature of the market and high degree of its maturity means that anyone entering the market must offer a high degree of differentiation and value innovation. It can be argued that as long as gross profit margins of eyeglass retailers remain high, there will be a temptation both inside and outside of the industry to develop lower priced business models and capture share.

Competition

JIN’s competition includes major eyeglasses retailers in Japan and more numerous smaller companies that operate small chains or single stores. Listed competitors include: Paris Miki Holdings (TSE 7455), Megane Top (TSE 7541), Aigan (TSE 9854), Megane Super (JASDAQ 3318). Intermestic’s (unlisted) Zoff stores are probably the closest to being a direct rival: Zoff’s average price is about 10,000 yen, and it has a similar size store network (about 98 stores in end of August 2010 vs. JINS’ 75).

It’s fair to say that when low priced eyeglasses retailers entered the market in 2001, the market wasn’t quite sure how to handle the new threat. Most competitors launched similar store formats, and decided that the best move was to separate the market: low prices for younger consumers, high prices for everyone else. The perception was that low prices must mean lower service and quality, and offering 10,000 yen glasses next to 30,000 yen glasses would drive away the 30,000 yen customer. This is one of JIN’s strengths: it only competes at low prices, and doesn’t risk cannibalizing higher price business.

Substitutes

The main substitutes for eyeglasses are contact lenses and laser surgery. Surgery has yet to enter the mainstream as of end of 2009. The contact lenses market is mature and while some fluctuations in market share between the contacts and eyeglasses might occur based on technological innovation and design, the relationship should probably considered stable.

Switching costs for contact lenses are low (an ophthalmologist writes a prescription before the first purchase), but need to be repurchased periodically. Costs for laser surgery are relatively high, but prices in the market are trending lower – SR Inc. estimates that eye surgery in Japan ranges between about 100,000 and 400,000 yen (the average price for glasses in FY03/09 was approximately 26,000 yen according to Gankyo).

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Strategy

JIN’s strategy is simple: completely reinvent the eyeglasses market, and redefine what it means to be an eyeglasses retailer. In the process, JIN aims to sell the most eyeglasses in Japan. To achieve this goal, the company is targeting what three misconceptions that it hopes to change in eyewear retail.

1. Price. JIN doesn’t think that glasses should be expensive and difficult to buy. Some competitors have different prices based on lens and frame combinations. JIN’s prices for most glasses are low and all-inclusive (prices are transparent). JIN’s low prices mean that consumers can afford more pairs if they want, using different glasses for specific needs.
2. Function. Innovation on function has become a hot topic in Japanese eyewear retailing in 2010. All large retailers have been working on offering customers glasses fitting various activities, golf, fishing, using PC etc. JIN believes that for this strategy to be really successful, developing innovative products needs to be combined with a stunningly low price, breaking down the hesitation to try. Competitors will sell new and exciting functional eyeglasses for 20,000-40,000 yen per pair. JIN thinks that they are missing the most important part – the game is not about developing cool product, it is about offering it at a price that compels everyone to buy and as a result expands the market boundaries. The company hopes that 4,990 yen price and cool features will together create an irresistible combination, expand the market, and fuel the chain reaction of innovation similar to one started by UNIQLO in apparel.
3. Speed. Most eyeglasses retailers follow a seasonal ordering and production cycle, with products arriving on the shelves about 6 months after it has been selected. JIN wants to speed this up to one week. While in a conventional model corporate buyers drive the retail decisions, hoping to make the right selections in the right quantities, the SPA model that JIN is working on adopting, speeds up the feedback, immediately telling a retailer what the customer likes. This model caused a revolution in apparel retailing and JIN is trying to start one in eyewear retailing.

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Historical Financial Statements

Earnings Results Discussion for the Year Preceding Current Year for reference purposes

FY 08/11 Results (Announced on October 14, 2011)

Sales rose 37.4% YoY to 14.6 billion yen, which was driven by:

• New store openings that were slightly above plans
• Ongoing comparable stores sales growth of around 10.0%
• September 2010 launch of its third generation Air Frame glasses series
• April 2011 launch of the fourth generation of Air Frame glasses, combined with a big advertising campaign for the product
• Increased popularity and growing customer base of the company

By business segment, Eyewear sales increased 44.3% YoY and while sales in the E-commerce business were still small, the business experienced strong growth as "One Piece" and "Evangelion" glasses proved to be hits. As of end-September 2011, JINS comparable store sales had recorded 29 straight months of positive YoY growth.

The company opened 43 new stores during FY08/11: 41 JINS stores (specialty eyewear), one Cours de Couleur store (women's specialty goods); and one Naughtiam store (men's specialty goods). On the other hand, the company closed three stores over the period: two Cours de Couleur store, and one Naughtiam store. As of end- FY08/11 the company operated a total of 141 stores: 116 JINS stores; 19 Cours de Couleur stores and six Naughtiam stores.

Operating profit climbed 74.7% YoY to a record high of 1.1 billion yen, surpassing the company’s 1.0 billion yen target. Because of increases in rent associated with the relocation of the company’s headquarters, and higher sales and promotional costs the SG&A-to-sales ratio increased. However, owing to higher sales, gross profit margin still increased to 73.3% from 70.3% a year earlier and thus profitability increased. According to the company, gross profit margin improvement was due to lower purchasing costs aided by the stronger yen, as well as manufacturing economies of scale for eyewear, shifting its production base to China and consolidating its contracted frame manufacturing plants.

In the Eyewear business, the total store inventory increased to 719 million yen (vs. 590 million yen in FY08/10). However, the company commented restocking would run at lower levels until current inventories clear. The inventory turnover rate was 22.3x (vs. 24.9x in FY08/10). By maintaining a rate in the 20x range, the company was able to retain turnover at levels considerably higher than competitors.

Note: It is not possible to make exact YoY comparisons as FY08/11 was the first year the company issued consolidated financial statements. For reference purposes, the figures used for preceding financial periods are non-consolidated numbers.

Q3 FY08/11 Results

The company announced Q3 FY08/11 results on July 8, 2011

Sales for Q3 FY08/11 were 10.5 billion yen, up 34.6% YoY. New stores openings, the September 2010 launch of its Air frame 3 series, the March 2011 launch of its Air frame 4 series and advertising campaigns, such as television commercials, all contributed to the higher top-line figure. In addition, sales prices appeared to be trending upward slightly since March.

The gross profit margin improved 1.5% YoY aided by lower costs driven by economies of scale in the eyewear business and shifting its production base. (Gross profit margin for the cumulative Q3 FY08/11 period was 73.5% vs. 72.0% for the cumulative Q3 FY08/10 period.) SG&A expenses increased 36.3% YoY owing primarily to higher advertising expenses (the SG&A expense to sales ratio for the cumulative Q3 FY08/11 period was 67.0% vs. 66.1% for the cumulative Q3 FY08/10 period). Meanwhile, operating profit rose 49.9% YoY to 687 million yen with the cumulative Q3 FY08/11 operating profit margin coming in at 6.5% vs. 5.9% for the cumulative Q3 FY08/10 period.

Sales were roughly in line with the company's projections, but operating profit came in higher than forecast. Operating profit exceeded the company's projections due to higher than projected gross profit lifted by the strong yen and thus an improved cost to sales ratio for glasses frames. In addition, SG&A expenses were lower than projected. This was because part of the company’s advertising budget was unused due to the earthquake.

The company maintained its full-year projection for FY08/11 after revising it in March 2011. However, SR Inc. believes actual results are highly likely to exceed the forecast based on the following facts: FY08/11 cumulative Q3 operating profit seems to be above the company’s projection, as mentioned above; and compared to the company’s assumption of a 2.1% increase YoY for its projected Q4 (June–August) comparative store sales, actual sales have been strong: June saw a 5.9% increase.

The company opened 39 stores by end-Q3 FY08/11: 37 JINS stores (specialty eyewear); one Cours de Couleur store (women's specialty goods); and one Naughtiam store (men's specialty goods). On the other hand, the company closed two stores: one Cours de Couleur store, and one Naughtiam store.

As of end-Q3 FY08/11 the company operated a total of 138 stores: 112 JINS stores; 20 Cours de Couleur stores and six Naughtiam stores.

Functional Eyewear Series

The company announced plans to begin releasing its “Functional Eyewear” from July 21, 2011. (For original PDF announcement in Japanese language only please click here.)

The Functional Eyewear series is a new product series developed to create a new market for people who do not usually wear eyeglasses, the company said. The collection uses the ultra-lightweight flexible TR-90 material that is used in the company’s flagship Air Frame ® series product.

With the exception of the JINS PC line, all lines have the option of installing prescription lenses for an extra 12,000 yen. Although, if there is strong demand for prescription lenses for the JINS PC line the company will try to meet the demand.

The series is divided into the following:

SPORTS Series

• JINS Golf: 7,990 yen (including tax) per pair, to be released on July 21, 2011
• JINS Sports: 7,990 yen (including tax) per pair, to be released on July 21, 2011
• JINS Clear: 7,990 yen (including tax) per pair, to be released on July 21, 2011
• JINS Cycle: 7,990 yen (including tax) per pair, to be released in September 2011
• JINS Run: 7,990 yen (including tax) per pair, to be released in October 2011

PROTECT Series

• JINS PC: 3,990 yen (including tax) per pair, to be released in October 2011
• JINS Moisture: 3,990 yen (including tax) per pair, to be released in October 2011

The SPORTS series products are designed for particular sports, such as golf, cycling, and running, based on the company’s study of what these sports require. The SPORTS Series line of the Functional Eyewear series also uses a new high-performance material called NXT ® for the lenses - a material developed for the U.S. Army. When compared to polycarbonate, which is generally used for sunglasses, the material provides almost complete UV protection (UV400nm 99.99%) and is both light and durable. Production is handled by Intercast - an Italian company.

The PROTECT series focus on eye-protection features, such as UV protection and reduction of eye fatigue and dry-eye. Based on SR Inc.’s interview with the company in mid-July, 2011, demand for the JINS PC line appeared strong. JINS PC is a type of functional eyewear that cuts about 55% of blue light because of its special PC-user-friendly lens developed by Intercast. Blue light is emitted from monitors and displays, and has an adverse impact on the retina. In addition, the company said Microsoft Japan will distribute the JINS PC line from August 2011 (prior to public release) to its programmers in its software development division.

The company planned to start work on detailed merchandizing plans for the Functional Eyewear series. Considering the necessity of developing a new value chain, how this series develops warrants future attention.

Q2（1H） FY08/11 Results

The company announced Q2 (1H) FY08/11 results on April 7, 2011. The company had revised upwards its earnings forecasts for 1H FY08/11 on March 4, and 1H net profit essentially matched the upwardly revised forecast.

Sales in 1H increased 35.1% YoY to 6.7 billion yen driven by new store openings and new product roll-outs such as the September 2010 release of the third series of “Air frame” branded eyeglasses coupled with aggressive advertising for the product, and the October 2010 launch of the “Titan frame”-branded eyeglasses.

The company’s gross profit margin improved by 1.2% to 72.4% in 1H FY08/11 from 71.2% a year earlier on the back of improved manufacturing economies of scale and shifting its production base to lower cost regions. Higher promotional costs associated with new product roll-outs though lifted SG&A expenses 37.4% higher YoY with the SG&A expense to sales ratio rising to 67.0% in 1H FY08/11 from 65.9% a year earlier.

Operating profit was up 36.9% to 363 million yen and 1H FY08/11 operating profit margin weighed in at 5.4% a marginal improvement on the 5.3% operating profit margin in 1H FY08/10.

Major developments during 1H FY08/11 were:

1) The “Air frame 3” glasses line beat initial sales expectations.

2) The “Titan Frame” series hit initial sales projections due to popularity with professionals and elderly customers, neither of whom are part of the company’s usual customer base.

3) Eyewear unit prices stopped declining in the latter half of 1H. Sales volumes had been lifted until then by a negative shift in product mix towards its cheaper 4,990 yen items. However, once it became clear this trend was ameliorating the company reevaluated its product lineup, and rolled out a wide range of products priced at 7,990 yen and higher. Consequently, it saw a slight YoY rise in unit prices during FY03/11.

“spectre JINS” and New Products

In March, 2011 the company launched a new sunglasses specialty store format called “spectre JINS” with stores in Tokyo’s Roppongi Hills and Osaka’s Umeda EST shopping complexes.

The company noted in Japan, sunglasses are treated essentially as fashion items that are not routinely worn. Pricing is extremely polarized between low end (models costing between 1,000 to 2,000 yen) and expensive brand-name items (costing tens of thousands of yen) with very little in between, plus public awareness over UV-eye damage is low.

The company aims to spur demand by positioning its products in the mid-range price band and targeting customers who do not normally wear glasses by creating not only fashionable products, but also highlighting the protective health dimension of wearing sunglasses.

“spectre JINS” offers glasses at four price points (including lenses) of 3,990 yen, 5,990 yen, 7,990 yen, and 9,990 yen. All use “NXT®” lenses: a lens material born out of US Navy research that combines lightness, with durability and superior UV blocking capabilities (99.99% of UV400nm radiation) versus the polycarbonate and other materials ordinarily used in most sunglasses.

The company said it will not limit the “spectre JINS” line to its sunglasses shops and it is also planning a roll-out of new functional eyewear products targeting various customer lifestyles from July 2011 through to spring 2012. Based on these developments, SR Inc. believes the company intends to use the “spectre JINS” line as a way to increasingly differentiate itself from other eyewear retailers over time.

Impact from the Tohoku Earthquake

(Based off management comments made at the April 19, 2011, results meeting)

Jin suspended all operations at some stores and shortened operating hours at others due to damage from March 11’s Tohoku Earthquake and rolling blackouts. As a result the company believes March 2011 sales will fall 5% short of its forecasts. However, given April 2011 sales performance the company believes 2H FY08/11 performance will recover from the sales decline of March 2011.

Q1 FY08/11 Results

The company announced Q1 FY08/11 results on January 13, 2011. As a percentage of the 1H forecast, Q1 numbers were as follows:

• Sales: 49.1% (1H forecast of 6.0 billion yen)
• Operating loss: 204 million yen (1H forecast: operating profit of 212 million yen)
• Recurring loss: 210 million yen (1H forecast: recurring profit of 208 million yen)
• Net loss: 227 million yen (1H forecast: net income of 44 million yen)

Q1 sales grew 36.4% YoY. This was due in part to strong sales of the third series of “Air frame” branded frames launched in September 2010 with the help of successful advertising. “Titan frames,” launched in October 2010, also contributed to sales growth. The gross profit margin increased to 73.4% (vs. 72.6% in Q1 FY08/10) thanks to increasing economies of scale and lower costs resulting from shifting the production base to lower cost regions. According to the company, the operating loss of 204 million yen (mostly due to higher advertising costs of 245 million yen) was smaller than initially expected.

The company opened 13 new stores during the quarter (12 JINS stores and 1 accessories store).

Plan vs. Actual

Operating profit exceeded the target due to strong sales of the “Air frame 3.” The company's commented that it successfully tapped into consumers’ demand for light and comfortable eyeglasses through effective advertising.

Potential sales and direct costs for the “One Piece” glasses which the company started selling on December 1, 2010 were not included in the company’s budget; however, it did include expected promotional expenses (about 41 million yen). In other words, although advertising costs grew more than expected (as discussed above), operating profit exceeded the plan.

Q2 Results Outlook

December 2010 comparable store sales at JINS grew a solid +15.1% YoY. The company said that strong demand for the "One Piece" frames and continued strength of "Air frame" helped comparable store performance (note that online sales of One Piece frames, also quite strong, weren’t included in the comparable store sales data). In discussing progress in January 2011, the company said that things were progressing smoothly for reasons similar to those discussed in December 2010.

Expansion to China

The company opened its first overseas store, "JINS Shenyang", in Shenyang, China on December 10, 2010. Shenyang, with a population of approximately 7.4 million, has developed rapidly as the largest city in northeastern China. Approximately half of the people reside in the 5 central wards which have a population density roughly equal to that of Japan's Shinjuku. The company chose Shenyang because they were able to open the store within Yamada Denki Shenyang, and rent is relatively inexpensive compared to Shanghai or Beijing. The company said that they have opened several stores within Yamada Denki domestically that have done very well, and that this reflects the cross-selling potential of their products with home electronics.

The merchandise and store design are very similar to those in Japan. The company uses all-in-one pricing with 3 price points (399 yuan, 599 yuan, 799 yuan; if 1 yuan = about 12.5 yen, 5,000 yen, 7,500 yen, 10,000 yen) which includes frames, lenses, and a case (similar to its offering in Japan).

According to the company, price points for eyeglasses in the Chinese market have segmented into two: very inexpensive, and those costing 1,000-3,000 yuan and more. The growing Chinese middle class seems to only purchase the higher priced glasses, and treats them as a "luxury" or "medical" purchase. Because of this perception, there are few competing offerings in the local market at JIN’s price points. The company commented that the initial performance of JINS Shenyang store was very strong.

Full Year FY08/10 Results

The company announced FY08/10 Q4 and full year results on October 7, 2010. The result was in line with the company’s estimate revision announced on September 30.

• Sales: 10.6 billion yen (+42.6% vs. previous year)
• Operating profit: 620 million yen (+330.4% vs. previous year)
• Recurring profit: 601 million yen (+371.2% vs. previous year)
• Net income: 233 million yen ( vs. loss of 19 million yen in the previous year)

Sales

Eyewear: Comparable store sales at JINS grew significantly, +35.5% YoY (+40.8% in 1H and +31.1% in 2H). This was partly due to the “New All in One Price” system that the company launched during FY08/09 (May 2009) which affected the full year results. The Air frame, launched in September 2009, was well received by customers and the company added a second series in March 2010, driving full year sales. Successful advertising centered on TV commercials also helped. JIN sold about 1.5 million pairs of eyeglasses in FY08/10, with about 450,000 pairs of the Air frame, or roughly 30% of the total.

Accessories: Sales for accessories were also strong. Comparable store sales at Cour de Couleur (women’s accessories stores) grew +7.7% YoY in FY08/10, thanks to gains from the SPA model and improved product development.

Gross, Operating Profit

Gross profit margin decreased to 70.9% (vs. 71.8% in FY08/09) partially due to a change in pricing (the “New All in One Price”). Stronger sales offset the lower GPM, which meant that the SG&A to sales ratio declined to 65.1% (vs. 69.8% in FY08/09). The company started running TV commercials, which substantially boosted advertising spending (1 billion yen vs. 187 million yen in FY08/09). The combined effect of these factors was an increase in operating profit margin to 5.9% vs. 1.9% in FY08/09.

Balance Sheet

Inventory turnover has been on an increasing trend throughout the year: from 20.8x in Q4 FY08/09 to 34.8x in Q4 FY08/10. In SR Inc.’s opinion, this may be an early sign that the company’s 52-week merchandising program has started delivering results. The company mentioned that success with the Air frame series was another reason that inventory turnover improved.

Net debt decreased to 155 million yen vs. 568 million in FY08/09, due to increases in net income.

Store Network

The company’s store network stood at 101 stores at the end of FY08/10, a net increase of 14 stores from 87 stores at the end of FY08/09. JINS eyewear stores increased to 75 from 64 at the end of FY08/09, and accessories stores increased to 26 stores from 23. The company opened 13 new JINS stores during Q4, more than the initial plan of 5 stores because comparable store sales remained strong. Two stores were closed, so the net increase of JINS stores was 11. The company opened 4 accessories stores and closed 1, for a net increase of 3.

Q3 Results

JIN announced Q3 FY08/10 results on July 8, 2010. As a percentage of upwardly revised full year estimates (released on June 29, 2010), results are as follows:

Sales: 74.7% (vs. 10.5 billion yen estimate)

Operating profit: 91.6% (vs. 500 million yen estimate)

Recurring profit: 95.3% (vs. 470 million yen estimate)

Net income: 127.5% (vs. 168 million yen estimate)

Q3 sales grew 52.5% YoY (see table above), due to continuing strong sales of Air frame glasses. In Q3, average monthly JINS store sales rose to 11.7 million yen, and gross profit margin for Q3 increased to 73.5%, higher than the full year estimate of 71.3%. The company opened 4 new stores during the quarter (3 JINS stores and 1 accessories store) and closed 1 accessories store for a total of 96 (71 JINS, 25 accessories stores).

The company mentioned that June sales and profit exceeded the internal budget, July sales were following suit (as of mid July), and that it expected August to be similar. JIN hopes to sell about 1.5 million pairs of eyeglasses during FY08/10, close to previously mentioned targets. Based on sales trends vs. expectations and cumulative Q3 results, it seems to SR Inc. that FY08/10 results could be somewhat ahead of the revised forecast.

Q2 (1H) Results

JIN announced Q2 (1H) FY08/10 results on April 12, 2010. As a percentage of upwardly revised full year estimates (released on April 5, 2010), results are as follows:

Sales: 49.0% (vs. 10.2 billion yen estimate)

Operating profit: 75.7% (vs. 350 million yen estimate)

Recurring profit: 80.0% (vs. 320 million yen estimate)

Net income: 124.0% (vs. 100 million yen estimate)

1H performance vs. initial forecasts

Sales

Original forecast: 4.3 billion yen (+21.8% YoY)

Actual: 5.0 billion yen

Operating profit

Original forecast: 4 million yen (vs. -29 million yen in 1H FY08/09)

Actual: 265 million yen

Recurring profit

Original forecast: -10 million yen

Actual: 256 million yen (vs. -34 million yen in 1H FY08/09)

Net income

Original forecast: -43 million yen (vs. -52 million yen in 1H FY08/09)

Actual: 124 million yen

Strong YoY sales growth continued from Q1, increasing 41.3% YoY. The comparable store sales recovery for JINS format which began in late FY08/09 continued to develop momentum, with double-digit increases for every month during 1H FY08/10. Comparable store sales for JINS were +40.8% YoY, compared to an initial forecast of 18.7%. According to the company, product differentiation, the “New All in One Price”, and successful advertising all helped grow sales. The Air frame was a big top-line contributor, adding about 40% of 1H eyewear sales.

Gross profit margin increased to 71.2%, from 70.2% in FY08/09, driven by higher eyewear margins (more than 2% increase).

The SG&A to sales ratio declined driven by strong sales. This was despite a substantial boost in advertising spending (540 million yen vs. 64 million yen in 1H FY08/09) as the company began running more TV commercials.

Inventory turnover has been on an increasing trend from 13.0x in early FY08/09 to 27.9x in Q2 FY08/10, a clear indication that the company’s 52-week merchandising program was bearing fruit.

Q1 Results

JIN announced Q1 FY08/10 results on January 13, 2010. As a percentage of 1H estimates, results were as follows:

Sales: 50.8% (vs. 1H forecast of 4.3 billion yen)

Operating profit: -120 million yen vs. 1H forecast of 4 million yen

Recurring profit: -125 million yen vs. 1H forecast of -10 million yen

Net income: -86 million yen vs. 1H forecast of -43 million yen

Q1 sales grew 44.0% YoY (see table above), due in part to strong sales of Air frame glasses. The company opened 4 new stores during the quarter (3 JINS stores and 1 accessories store).

Income Statement

JIN’s absolute level of sales have increased with the store network (from 22 stores in FY08/05 to 87 in FY08/09), however YoY sales growth has declined steadily from FY08/05-FY08/09.

The company’s SG&A to sales ratio has been increasing from FY08/05-FY08/09. The company’s largest costs are labor and rent (including lease payments), which have been increasing as a proportion of sales: from 32.7% in FY08/06 to 44.3% in FY08/09.

The net loss in FY08/08 was due to closing six stores resulting in extraordinary loss of about 300 million yen. The net loss in FY08/09 was due to taxes.

Net profit margin in FY08/09 was lower than levels in FY08/05-FY08/07, in part driven by higher SG&A expenses beginning in FY08/08 led by advertising. To the extent that advertising builds the JINS brand, a higher level of spending should be viewed as a net positive for the company: increasing awareness could increase the size of JIN’s market opportunity.

Historical performance vs. Estimates

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Balance Sheet

The company’s balance sheet has historically been highly liquid, with current assets exceeding total liabilities from FY08/05-FY08/08. Debt began increasing in FY08/08, and JIN increased leverage aggressively in FY08/09 (the equity ratio fell from 77.7% in FY08/07 to under 50% in FY08/09). The debt funded expansion: from 22 stores in FY08/05 to 87 in FY08/09).

Assets

Assets on the balance sheet have typically been current assets, mostly working capital. Fixed assets increased in FY08/08 when the company increased the store network by 20 (store count +43% YoY).

The most important assets on the balance sheet are arguably inventory. JIN monitors sales progress in weekly meetings and responds with discounting if sales are beneath expectations.

Liabilities

Liabilities on the balance sheet were mostly short term liabilities from FY08/05-FY08/08. The company added short and long-term debt in FY08/08 and FY08/09 to finance store network expansion.

Shareholders’ Equity

Shareholders’ equity increased in FY08/06 from the IPO (increasing paid in capital by approximately 900 million yen). Other changes in shareholders’ equity have comprised mostly net income.

Per Share Data

JIN has split its stock twice from FY08/05-FY08/09 (2 for 1 on both occasions): October 2005 and March 2007.

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Statement of Cash Flows

Operating Cash Flow

Operating cash flow was negative in FY08/08 due to a net loss for the year (see Income Statement). Operating cash flows have typically reflected net income, changes in working capital, and depreciation (other non-cash changes have been mostly minor).

Investing Cash Flow

Investing cash flows increased significantly in FY08/08 and FY08/09 as the company store network grew. JIN increased the number of stores by 20 in both FY08/08 and FY08/09.

Financing Cash Flow

FY08/06 financing cash flow was the result of the IPO (the company raised approximately 900 million yen). FY08/07 financing cash flow was negative due mostly to debt repayments and the dividend. FY08/09 financing cash flow was from an increase in debt (approximately 633 million yen) and approximately 297 million yen from sale and leaseback transactions.

Simple Free Cash Flow

JIN had been using (consuming) simple free cash flow from FY08/06-FY08/09. The main use of cash during these years was the expansion of the store network, which grew from 22 at the end of FY08/05 to 87 at the end of FY08/09. JIN’s investment in stores could be highly cash flow generative: management’s assumptions imply a cash on cash return of over 60% (see Store discussion for detail). In this context, cash invested in the store network could have a multiplier effect as the number of stores increases.

Inventory levels drove the cash conversion cycle from FY08/05-FY08/10. JIN improved their SPA model during FY08/09, so making conclusions on future cash efficiency based on previous years could be misleading.

JIN’s new store assumptions (see Store discussion for detail) imply an improvement in inventory management, however. New stores carry an average of 4 million yen of inventory, and JIN estimates approximately 120 million yen of annual sales. Assuming the gross profit margin is similar to previous years (70%), CoGS should be about 36 million yen per store. If this is the case, inventory turnover should be about 9x, which means that the days cash is committed to inventory drops substantially to about 41 days.

Note that this analysis applies only to expectations for new stores. Given the fact that the new store design created in early 2010 is a small part of the store network (10 stores at the end of FY08/10), major changes in cash conversion will likely take time. One conclusion, however, is that if new stores perform as expected, inventory efficiency could significantly free up cash as the store network grows.

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Other Information

History

JIN was founded in 1988 by the current president and main shareholder Hitoshi Tanaka. Tanaka started his first business at the age of 24, selling fashion accessories. On a trip to Korea in 2000, Tanaka visited an eyewear store that was selling glasses for fraction of the Japanese retail price. The difference was mostly due to a multilayer structure of the Japanese supply chain, with each layer adding a substantial profit margin. Sensing opportunity Tanaka started a low-price, fast-turnover eyeglass retailer. Around the same time, UNIQLO had its first runaway success, selling millions of fleece jackets for 1,900 yen. Here in Tanaka’s eyes was the proof that the low price could work in Japan.

JIN opened its first store in April 2001 in Fukuoka VIVRE store belonging to a now-defunct Mycal Group (the first ZOFF store, an eyewear retail concept closest to JIN, opened just two months prior). Competitors cropped up almost immediately. This and Mycal's bankruptcy in late 2001 created substantial challenges but the company survived. Despite initial challenges, JIN's eyeglasses business was successful. The company refined the store formats (then about four in eyewear and another two in accessories) and began investing in product development. In August 2006 JIN listed on the Osaka stock exchange (Hercules market).

The initial model was not differentiated enough however. With several store formats and lacking a clear-cut merchandising strategy and a sense of long-term direction, JIN’s sales and earnings started deteriorating amid poor consumption environment. This was all to change after Tanaka met Tadashi Yanai, the president of Fast Retailing in late 2008. The meeting convinced Tanaka that he needed a larger ambition, a clearer and bolder vision of his company future. The JIN described in this report was born from this conviction.

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News & Topics

October 2011

On October 14, 2011, the company announced FY08/11 results: click here to go directly to FY08/11 results.

(For original, Japanese-language only announcement in PDF format please click here.)

In addition, the company also announced an upward revision to its forecast year-end dividend payout to four yen per share from three yen per share.

(For original, Japanese-language only announcement in PDF format please click here.)

On October 7, 2011, the company announced it would establish a subsidiary in Shanghai, China.

(For original, Japanese-language only data in PDF format please click here.)

Subsidiary Overview

Company Name: Qing Zi Trade and Commerce (Shanghai) Co. [tentative name]

Capital: 700,000 US dollars (tentative)

Capital: 100.0% company

Business: development and expansion of eyewear stores in China

Date of establishment: December 2011 (tentative)

In October 2010 the company established a 100.0% owned subsidiary in Shenyang called Ji Zi Trade and Commerce (Shenyang) Co. as part of its push into China. The three stores in China confirmed the company’s business model there and in preparation for a full-fledged store expansion in China the company was planning on establishing a new Shanghai subsidiary.

September 2011

On September 14, 2011, the company announced it had been selected as a constituent of the J-Stock Index effective as of October 3, 2011.

August 2011

On August 31, 2011, the company announced it had signed a syndicated loan agreement with Sumitomo Mitsui Banking Corp. acting as the mandated lead arranger and book-runner, and Mizuho Bank Ltd. acting as a co-arranger on the deal.

(For original, Japanese-language only data in PDF format please click here.)

The company commented that the purpose of the loan was to create a stable funding base, ensure its financial well-being and help it adapt to changes in the business environment. The syndicated loan commitment is for 3.0 billion yen and runs from September 1, 2011 to August 31, 2012.

On August 08, 2011, the company announced the fifth generation of its "Air frame ® " glasses series would be released nationwide in Japan from September 16, 2011.

(For original PDF announcement in Japanese language only please click here.)

July 2011

On July 13, 2011,the company unveiled its Functional Eyewear series, which will be released from July 21 onwards according to model.

The Functional Eyewear series is a new product series developed to create a new market for people who do not usually wear eyeglasses, the company said. The collection uses the ultra-lightweight flexible TR-90 material that is used in the company’s flagship Air Frame ® series product. The SPORTS Series line of the Functional Eyewear series also uses a new high-performance material called NXT ® for the lenses. The series is divided into the following:

SPORTS Series

• JINS Golf: 7,990 yen (including tax) per pair, to be released on July 21, 2011
• JINS Sports: 7,990 yen (including tax) per pair, to be released on July 21, 2011
• JINS Clear: 7,990 yen (including tax) per pair, to be released on July 21, 2011
• JINS Cycle: 7,990 yen (including tax) per pair, to be released in September 2011
• JINS Run: 7,990 yen (including tax) per pair, to be released in October 2011

PROTECT Series

• JINS PC: 3,990 yen (including tax) per pair, to be released in October 2011
• JINS Moisture: 3,990 yen (including tax) per pair, to be released in October 2011

April 2011

On April 14, 2011, the company announced its board had decided to spin-off its ladies accessories unit into a separate company, Brand Nudey Co. effective as of June 1.

March 2011

On March 31, 2011, the company said it would begin selling a special “Evangelion New Theatrical Edition” collaboration eye-glasses set based on the popular anime franchise from August 6, 2011 at its stores nationwide.

On March 23, 2011, the company made an announcement regarding the impact of the March 11 Tohoku earthquake.

Store operating conditions:

• In some areas of Tohoku (northeastern Japan) and Kanto (around Tokyo), damage from the earthquake and resulting tsunami led to the temporary closure of five stores (i.e., four JINS stores and one Cours de Couleur store). The company wasn’t sure when it would be able to reopen three of the stores (i.e., two JINS stores and one Cours de Couleur store).
• Due to the scheduled electricity outages and logistical problems caused by gasoline shortages, delivery times were longer than normal, affecting some supplies (like special order lenses) and deliveries from the online store.

Effects of the scheduled electricity outages:

• Due to power shortages, scheduled electricity outages were taking place mostly in Kanto, where the company has 60 stores (46 are JIN stores). Therefore, store operating hours were shortened, and some stores were temporarily closeed during operating hours.
• The company said it was trying to conserve electricity by turning down the heat and using less lighting in the head office, switching off some store lights, etc.

Impact on financial performance:

The company was assessing damages from the earthquake and said that it would release details as necessary if it became clear that FY08/11 earnings will be impacted.

Note: The company has a dedicated support page for disaster victims on its website.

On March 13, 2011, the company made an announcement regarding the March 11 Tohoku earthquake.

Damage situation report:

• In some of the stores in Tohoku (northeastern Japan) and Kanto (around Tokyo), merchandise fell to the floor and fixtures as well as equipment were damaged. In response, the company temporarily closed or shortened operating hours at some stores.
• There are areas that are off-limits or lacking essential utilities, especially in the Tohoku region. The company expects that supplying merchandise to stores in these areas will be interrupted.

Impact on financial performance:

The company was assessing damages from the earthquake and said it would release details as necessary if it became clear that FY08/11 earnings will be impacted.

On March 4, 2011, the company announced revisions to its 1H and full year of FY08/11 forecasts. The revised 1H and full year of FY08/11 forecasts were as follows:

1H

Sales: 6.7 billion yen (vs. previous forecast of 6.1 billion yen)

Operating profit: 360 million yen (vs. previous forecast of 212 million yen)

Recurring profit: 351 million yen (vs. previous forecast of 208 million yen)

Net income: 70 million yen (vs. previous forecast of 44 million yen)

The company commented that the upward revision to its 1H FY08/11 forecasts was due to the combination of strong sales from the third series of “Air frame” branded frames, “Titan frames”, and “One Piece” glasses.

Full Year

Sales: 14.1 billion yen (vs. previous forecast of 13.0 billion yen)

Operating profit: 920 million yen (vs. previous forecast of 822 million yen)

Recurring profit: 885 million yen (vs. previous forecast of 792 million yen)

Net income: 357 million yen (vs. previous forecast of 357 million yen)

The company commented that the upward revision to its full year FY08/11 sales forecasts was due to the combination of the upward revision for 1H and an upward revision of the 2H store opening plan to 27 (vs. 13 previously). Operating and recurring profit were revised up slightly due to the increased cost estimates related to store openings in 2H (labor cost, recruiting cost and training cost) and the 1H revision. The net income forecast was unchanged due to the estimates for extraordinary losses related to store refurbishment, something not included in the previous forecast.

February 2011

On February 10, 2011, the company announced that it would launch a new store format, “spectre JINS” on March 10, 2011. The first “spectre JINS” store will open in Roppongi Hills (a new urban centre and one of Japan’s largest integrated developments, located in the Roppongi district of Minato, Tokyo). The company commented that “spectre JINS” will be sunglasses stores that sell high-spec functional sunglasses (featuring “NXT®” lenses) at four prices points: 4,990 yen, 5,990 yen, 7,990 yen, and 9,990 yen, including lenses. According to the company, “NXT®” was developed for military use, protects from nearly all ultraviolet rays (99.99% of UV400nm) and is both lightweight and extremely durable.

January 2011

On January 24, 2011, the company announced that it would launch the second series of the limited edition “One Piece” glasses and sunglasses line on March 19, 2011.

On January 21, 2011, the company announced that it would launch the fourth series of the “Air frame” line on March 1, 2011, featuring 300 design patterns for 44 frame models.

December 2010

On December 10, 2010, the company announced that it had opened a new store in Yamada Denki Shenyang (northeastern China).

November 2010

On November 10, 2010, the company announced that it had finished procedures to set up an affiliate (Jins Commerce & Trade Co., Ltd) in China in October 2010. The company said it would hold 100% of Jins Commerce & Trade Co., Ltd. The affiliate will operate eyewear shops in China.

October 2010

On October 21, 2010, the company announced that it would open a new store in the Matsuzakaya department store in Ginza on October 22, 2010. The company said that the addition of department stores to existing location options (standalone and shopping centers) would help broaden its customer base.

On October 13, 2010, the company announced that it would launch the “Titan frame” series on October 15, 2010. The Titan frame series is an original product made completely out of titanium. Prices for the Titan frames start at 5,990 yen (as with all JIN glasses this includes lenses). The company said that the Air frame series would be its core product for plastic frames, while the Titan frames would be the core product for metal frames.

September 2010

On September 30, 2010, JIN announced a revision to its FY08/10 forecasts. The revised figures are as follows:

Sales: 10.6 billion yen (previous forecast: 10.5 billion yen)

Operating profit: 620 million yen (previous forecast: 500 million yen)

Recurring profit: 600 million yen (previous forecast: 470 million yen)

Net income: 232 million yen (previous forecast: 168 million yen)

The company mentioned higher than expected sales for both JINS and Cour de Couleur (selling women’s accessories) store formats as the reason for the revision. SG&A expenses were in line with the initial plan.

On September 14, 2010, JIN announced that it would launch the third series of the “Air frame” line on September 17, 2010, featuring 140 design patterns for 6 frame models. The new series would include frames as light as 10 grams - the lightest that the company has ever sold (vs. 15 grams in the first series and 11 grams in the second). Another feature of the product is an improved fit - the earpieces were designed specifically for the head shapes of Japanese consumers. The company has sold more than 450,000 pairs of “Air frame” glasses since launching the product (from September 2009 until the end of August 2010). To promote the new Air frame series, the company started airing new TV commercials using two young Japanese actors (without the JINSMAN) from September 14, 2010.

On September 1, 2010, JIN announced a new online shopping site “JINS ONLINE SHOP” (http://www.jins-jp.com) on September 1, 2010. The shopping site uses cutting-edge technology which provides uniform shopping experience from any device: PC, mobile phones, iPhone or iPad.

The company merged the brand site (used for promotion and notification of events), and its online shopping site which were previously managed independently. In a new attempt at marketing, the website doesn’t use actual models to show eyewear. Instead, product pictures are combined with artists’ drawings of people of various age and gender, an intentional approach to more abstract merchandising.

The sales via shopping sites are increasing rapidly (July 2010’s monthly sales at JINS ONLINE SHOP grew 337% YoY), and the company sees the shopping site as an important channel for boosting the number of eyewear sold in FY08/11, and hope to increase the number of website users by 10x, to 1 million users.

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Top Management

Hitoshi Tanaka, Chairman and founder of the company, was born in 1963. He worked at a local credit union and started a fashion accessories manufacturing and wholesales business called “JIN Products” in 1987. In 1988, he organized a company and called it JIN Co. Ltd.

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Employees

As of FY08/11, the company employed 1,030 people (full and part-time). Average employee age was 27.5, working for the company for 2.1 years, earning a salary of 2.7 million yen.

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Major Shareholders

The largest shareholder is the company President and founder, Hitoshi Tanaka (controlling nearly 60% when including shares held by family members).

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Dividends and Shareholder Benefits

The company pays an annual dividend, using a 20% payout ratio as a basic policy.

JIN established a shareholder benefit program in 2007. The company provides a coupon book to shareholders worth 5,000 yen that can be redeemed at company stores.

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Investor Relations

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By the Way

Latest Q&A

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