JIN Co Ltd (3046)
From www.sharedresearch.jp
Contents |
[edit] Financial Summary
[edit] Highlights
JIN released monthly sales data for August on September 3, 2010.
On September 1, 2010, the company announced the launch of the new “JINS ONLINE SHOP” (please see News and Topics)
JIN released monthly sales data for July on August 5, 2010.
The company announced Q3 FY08/10 results on July 8, 2010.
[edit] Trends & Outlook
Monthly Trends
Quarterly Trends
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).
Full year (FY08/10) Outlook
Note: JIN revised full year estimates on June 29, 2010.
Update on full year revision
JIN upwardly revised its estimates for 1H and full year on April 5, 2010 and then the full year estimates again on June 29, 2010. The Air frame has been a big part of 1H success (contributing about 40% of total eyewear sales) and TV commercials have been making a positive impact.
The company has also revised comparable store sales assumptions (JINS eyewear stores only) following a stronger than expected showing. The new full year numbers were set at +33.6% YoY vs. +14.2% in the initial forecast.
Furthermore, the company revised up the store openings plan, adding 12 more JINS stores vs. 5 originally planned, and 2 accessories store, for a total of 102 stores (76 JINS stores and 26 accessories stores) as of end of FY08/10.
JIN expects an increase in SG&A but a decline in the SG&A to sales ratio of about 3%. Labor and rent are increasing in proportion to sales, but advertising is budgeted at approximately 9% of FY08/10 sales vs. about 2% in previous years. TV commercials in 1H FY08/10 have been helping boost sales, and this should be the level of spending going forward (about 10%, see Business Model). OPM should increase to 3.4%, almost doubling from FY08/09.
Estimates include extraordinary losses of about 70 million yen, related to 5 store refurbishments. The company’s expected tax rate is approximately 42%.
Longer Term Outlook
JIN stated a 20 billion yen sales and 10% operating profit margin targets for FY08/13. Longer-term the company’s ambition is to reach the 100 billion yen sales mark. While investors would be forgiven for being skeptical when considering financial data from FY08/08-FY08/09 when the company recorded net losses, the company has made a major shift in strategy. Indeed, one asset that doesn’t show up either in the financial statements or footnotes is the newly found ambition of President Tanaka to make JIN the number one eyewear retailer in Japan.
The first test will be comparable store sales in FY08/11. The company’s focus in FY08/10 has been on refurbishing existing stores, but in FY08/11 it will likely put more emphasis on opening new stores. Responding to SR Inc. questions the company sounded optimistic about its ability to maintain at least flat comparable store sales. Even if comparable store sales were flat, this would still mean a healthy increase of total sales of about 26%-27% YoY (given 6 months contribution from about 25 new stores and full year contribution from 10 stores opened during FY08/10). The company commented in its interview with SR Inc. that it thought comparable store sales in September 2010 should be higher YoY, despite some analysts’ concerns to the contrary. September 2009 sales increase was driven to a large extent by the Air frame. However, the Air frame only contributed for about 10 days in September - the line was released on September 17, 2009. In addition, stockouts caused by stronger than anticipated demand and staff shortages during peak hours led to opportunity losses. This trend continued to some extent at least into October. The company has since added sales staff and learned to understand necessary inventory levels better.
SR Inc. estimates roughly 12 million yen per store in sales in FY08/10 and the same level for FY08/11. Increasing sales volumes is a key piece to the puzzle – JIN wants to sell more than 2 million pairs of eyeglasses in FY08/11, which would possibly make it the largest eyewear retailer by volume in Japan. The gross profit margins should remain unchanged or decline slightly. Lower production costs due to sourcing from mainland China and economies of scale should offset higher percentage of domestically sourced parts (screws and other precision parts) as well as higher cost titanium frames. SR Inc. estimates 72% for FY08/11. On the other hand, the operating profit margin seems likely to increase, probably by about 2% vs. FY08/10, driven by fixed cost leverage. The assumption is based on the model case assumption of a 30% store level OPM (based on 72% GPM, 16% labor, 13% rent, and 13% other expenses; see additional discussion in Stores section below). SR Inc. also assumes roughly 20% increase in HQ labor expenses and stable ratios of variable expenses to sales for other items, including accessory store operations.
Another key factor will be strengthening the brand. The company commented that its brand recognition among consumers is significantly lower than for major competitors. JIN believes that it can increase recognition and boost sales through more aggressive advertising spending. The company hopes that lessons learned from its TV advertising campaigns of late 2009 and early 2010 will help to shape a better advertising strategy.
JIN's ability to develop more products will be a continuing challenge as it pursues longer-term ambitions. The Air frame has been successful, accounting for over 30% of 1H FY08/10 eyewear sales, but sustaining momentum is the key to staying on the growth course. Recognizing this, JIN has added design staff and is beefing up its product line, targeting new product launches in the fall of 2010 and spring 2011.
[edit] Business
[edit] Business Description
JIN is an eyewear retailer. As of 1H FY08/10, it operated 68 JINS-branded eyewear stores across Japan, forecasting to sell approximately 1.5 million pairs of eyeglasses in FY08/10. 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 is only getting underway in 2010, the first signs are 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 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 (19.8% in FY08/09). 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 (about 75% of FY08/09 sales were at price points of 5,990 yen or lower). 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.
Given the current strategy, it is probably safe to assume that the average price at JINS stores will stay more or less unchanged. The growth in company sales is therefore a function of volume increases, achieved through opening more stores and increasing per-store sales. By FY08/14 the company plans to operate 300 stores, a more than 3-fold increase from FY08/10 (see Stores discussion). At the same time it will attempt to approximately double per-store sales from the current 100 million yen per year.
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. Lenses are sourced mostly from a single manufacturer, Hoya, 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 24% of total sales) and rent (about 15% 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 has ranged between 1.4-2.5% of sales (FY08/05-FY08/09), however JIN started using TV commercials in the marketing mix in 1H 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. Instead of using celebrities, an expensive choice that worked well for the competitor Magane Ichiba, JIN's TV commercials feature the JINSMAN, a faceless glass-wearing orange character dressed in a three-piece suit.
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).
Stores
The majority of JIN's stores sell eyewear (68 as of Q2 FY08/10 all operated under the JINS brand, out of a total 93 stores). The typical JINS eyewear store is about 100 square meters, located in a shopping center (52 as of Q2 FY08/10) 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 FY08/09, most of JINS' 64 stores were located in major metropolitan areas: Tokyo (56.5% of sales), Osaka (15.7%), and Nagoya (14.0%). 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 2010 and believes it should substantially increase the store operating efficiency.
JIN aims to increase the store network to 300 by FY08/14. To reach this target, JIN needs to open about 40-50 stores per year (assuming about 76 JINS eyewear stores at the end of FY08/10, in line with the plan). SR Inc. calculates that based on the assumptions current as of June 2010 (as comparable store sales continued to grow at that point), opening 45 new stores per year would cost about 1.6 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.
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 40% of total sales in the spring of 2010.
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).
JIN’s ability to repeat Air frame success with other innovative products is critical. One potentially interesting area is prescription sunglasses: JIN has been adding design staff and could launch new products in spring 2011. The recipe for prescription sunglasses is similar to eyeglasses: using top quality lenses (UV400 that block 99% of UV rays) and cool designer frames at low prices.
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 72% in FY08/09. 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 2005-2008, while JIN spent about 2%. Beginning in FY08/10, JIN increased its target to about 9% 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. The expected improvement in F08/10 seems to support this: the rent budget of 1.5 billion yen is about 14.7% of expected sales.
SWOT Analysis
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, and drove its equity ratio to the lowest level since during FY08/05. Some large competitors have much stronger balance sheets and sizeable cash positions which means more insulation from potential market shocks.
[edit] Market & Value Chain
The eyeglass retail market in Japan is approximately 500 billion yen (according to 2008 market survey data compiled by research firm Gankyo). 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 2008 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 26,000 yen in 2008 (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 five-trillion-yen monster. 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”.
Whether or not the market can be ten times bigger is doubtful. But even simply quadrupling JIN’s volume to about 6 million pair would make for very respectable growth and a lot of market share in the existing 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 94 stores in end of June 2010 vs. JINS' 73).
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).
[edit] 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.
- - 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.
- – Function. Innovation on function has become a hot topic in Japanese eyewear retailing in 2010. All large retailers have been working on offering its customers the 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.
- – 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.
[edit] Historical Financial Statements
[edit] 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/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
[edit] Balance Sheet
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.
[edit] Cash Flow Statement
Cash Flow Statement
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 has 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-FY08/09. 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 (less than 10 stores as of 1H 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.
[edit] Other Information
[edit] 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.
[edit] News & Topics
September 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.
[edit] 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.
[edit] Employees
As of FY08/09, the company employed 577 people (full and part-time). Average employee age was 26.8, working for the company for 1.9 years, earning a salary of 2.9 million yen.
[edit] Major Shareholders
The largest shareholder is the company President and founder, Hitoshi Tanaka (controlling nearly 60% when including shares held by family members).
[edit] Dividends and Shareholder Benefits
The company pays an annual dividend, using 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.