Financial Summary

Recent Updates

Highlights

On February 1, 2012, Megane Top released monthly sales date for January: click here to go directly to monthly sales charts.

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

On January 4, 2012,the company released monthly sales date for December.

On December 1, 2011, the company released monthly sales date 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

Quarterly Trends

1H/Q2 FY03/12 Results (Announced on November 7, 2011; please refer to table above)

On October 25, 2011, the company upwardly revised both its 1H FY03/12 and FY03/12 earnings forecast. 1H performance came in roughly in line with the revised numbers.

Sales were up 21.4% YoY at 32.1 billion yen. New store openings and the following three factors drove a 17.2% rise in comparable store sales growth (19.3% at Megane Ichiba and 1.6% at ALOOK), which all contributed to the higher top-line figure:

1. Impact from Megane Ichiba TV commercials emphasizing lens quality (featuring movie stars Ikko Furuya and Kumiko Okae)
2. Continued strong sales of its FREE FIT frames series (released in July 2010)
3. Strong sales of its ZEROGRA line (released in April 2011)
4. Higher average selling price (ASP) for ZEROGRA glasses. The percentage of sales for the 18,900 yen ZEROGRA price-point increased to 56.3% and 25,200 yen price-point sales also witnessed an increase to 5.3% resulting in a higher ASP for the ZEROGRA line.

The YoY monthly sales growth rate for all stores peaked in July 2011 at 32.8%, and then declined to settle within the teens. The company remarked this was a function of YoY base effects, as monthly sales significantly increased following the launch of FREE FIT in late July 2010. As of October 2011, comparable store monthly sales had posted 10 consecutive months of positive YoY growth and from April 2011 onwards posted growth rates in the teens. ZEROGRA, which features an ultra-lightweight frame made of Flex β titanium, was launched in April 2011 and accounted for 11.0% of units sold in 1H. Sales were strong for middle aged and senior citizen customers, a group where the company had been perceived to be weak.

A larger lens and sunglasses-type lens can be added to FREE FIT and the company has expanded its product line-up to 16 models and 97 versions. In 1H, the FREE FIT range constituted 17% of total units sold. With cumulative sales of around 600,000 frames it has proven to be a major hit, especially with customers aged 44 and below.

Gross profit margin improved 0.6% YoY to 68.8%. This was principally due to the increase in the ratio of private brand sales (rising to approximately 73% in 1H FY03/12 from 62.3% in 1H FY03/11) on the back of strong sales performances for the FREE FIT and ZEROGRA lines. Moreover, while there was a significant rise in personnel expenses following new store openings in 1H FY03/12 and from store openings in 2H FY03/11, the rise in SG&A expenses was capped at just 5.1% by restricting advertising and other costs. As a result, operating profit increased 131.8% YoY, to 5.7 billion yen, with a record-high operating profit margin of 18.5%.

Store Count

New stores (44 new stores opened): 27 directly managed Megane Ichiba stores, 1 ALOOK store, 16 franchised Megane Ichiba stores

Closed stores (5 stores closed): 4 directly managed Megane Ichiba stores, 1 franchised ALOOK store.

Total store count end-1H FY03/12: 732

Off which 598 were directly managed stores – 547 Megane Ichiba stores, 1 ALOOK store, 13 contact lens stores; and 134 were franchise stores – 126 Megane Ichiba stores, 8 ALOOK stores.

Continuing on from the previous financial period, the company focused 1H store openings on the large Kanto and Kinki area markets of east and west Japan, where it has low market share. (Of the 44 new stores, 19 were in Kanto and 10 were in Kinki.)

By improving brand awareness of the Megane Ichiba format, the company increased the number of fanchisee companies to 31. 16 franchise stores were opened in 1H, including in Okinawa, taking the number of franchise stores to 134. Following this increase in store numbers, sales and operating profit in the Franchise segment both steadily improved, increasing 46.0% and 57.4% respectively YoY.

2H Store Opening Schedule

• 33 new stores: 21 Megane Ichiba stores and 1 ALOOK store in the directly managed segment; 11 franchised Megane Ichiba stores
• 5 store closures: all directly managed, 1 Megane Ichiba store and ALOOK 4 stores
• 8 store relocations: all directly managed Megane Ichiba and ALOOK stores

By focusing on the Kanto and Kinki regions for store openings the company plans to further increase its market share in these areas.

Q1 FY03/12 Results

The company released FY03/11 results on August 5, 2011 (see table above).

Sales were up 22.8% YoY at 15.1 billion yen; comparable store sales were solid growing 18.0% YoY. New store openings and the following three factors drove further growth:

• Impact from Megane Ichiba TV commercials emphasizing lens quality (featuring movie star Ikko Furuya)

• Continued strong sales of its FREE FIT frames series (released in July 2010)

• Strong sales of its ZEROGRA line (released in April 2011)

Gross profit margin improved to 69.0% (vs. 68.5% a year earlier) due to strong sales of the ZEROGRA and FREE FIT lines as the ratio of private brand sales grew to approximately 72% from around 60% a year earlier. SG&A cost controls also contributed to improved operating profit – up approximately 4.1 times YoY at 2.5 billion yen.

Store Count

New stores: 10 directly managed Megane Ichiba stores, 1 ALOOK store, 8 franchised Megane Ichiba stores

Closed stores: 4 directly managed Megane Ichiba stores, 1 franchised ALOOK store.

Total store count end-Q1 FY03/12: 707

Of which 581 were directly managed stores (530 directly managed Megane Ichiba stores, 38 ALOOK stores and 13 contact lens specialty stores) and 126 were franchise stores (118 Megane Ichiba and 8 ALOOK).

The company upwardly revised its 1H and FY 03/12 forecast 2012 on 26 July, 2011. Following the revision comparable store sales in 1H are now projected to rise 11.6% YoY, yet actual figures up until July showed comparable store sales growing 21.1% YoY – significantly above company plans. The release of the FREE FIT line in late July 2010 means YoY comparable store sales rates from August 2011 onwards are likely to fall, nonetheless given actual results up until July 2011 this leaves room for it to achieve sales forecasts.

Full year (FY03/12) Outlook

The company upwardly revised its FY03/12 forecasts on two occasions, in June and October 2011.

FY03/12 Forecast

• Sales: 62.8 billion yen (vs. previous forecast of 61.0 billion yen and +18.4% YoY)
• Gross profit margin: 68.8%
• Operating profit: 9.2 billion yen (vs. previous forecast of 7.9 billion yen and +71.3% YoY)
• Recurring profit: 9.2 billion yen (vs. previous forecast of 8.1 billion yen and +71.6% YoY)
• Net income: 5.2 billion yen (vs. previous forecast of 4.4 billion yen and +92.7% YoY)

Earnings per share is forecast at 114.2 yen (based on the October 2011 share split).

The forecast assumes comparable store sales will increase 12.7% YoY for FY03/12, of which 2H will post comparable store sales growth of 8.2% (Megane Ichiba sales are expected to grow 14.1% YoY for the full year, with a 9.0% increase in 2H, and ALOOK sales are forecast to rise 1.6% YoY for the full year, with a 1.6% increase in 2H). FY03/12 gross profit margin is expected to improve 0.2%YoY. In 1H, private brand share of sales increased 0.6 % YoY, but it is anticipated that in 2H the gross profit margin will decrease 0.1% YoY due to the change in the sales mix provided by FREEFIT following the launch of the ZEROGRA line.

Longer Term Outlook

Megane Top’s longer-term goal is to increase its store network to about 1,000 directly managed stores and become the leading seller of glasses in Japan by the sales amount. At the company’s 1H FY03/12 results meeting, Chairman Shozo Tomizawa stated given the company had reached around 600 directly managed stores it was possible within the next five years the company may open 400 new directly managed stores and around 150 franchised Megane Ichiba stores. The company is appealing to a mass market consumer of a slightly higher than average age, trying to differentiate the Megane Ichiba store brand from the competition using persistent celebrity TV advertising. This approach has arguably been highly successful. The company will continue to use Bae Yong Joon (“Yong-sama”), a Korean TV actor and TV personality enjoying a superstar status among middle-aged Japanese housewives, as its core branding persona. Becky, a TV personality with a broad popular appeal, was added as an additional TV ad character to be used in specific marketing campaigns from FY03/11. Since the start of FY03/12, the company has used the actor Ikko Furuya and actress Kumiko Okae in its ad campaign to position its Megane Ichiba concept to middle aged and senior citizen customers.

Megane Top is leveraging it vertically integrated supply chain and increasing product development in an attempt to distinguish itself from competitors, via new frame styles, lens choices, and original products. For example, in FY03/11 it launched the FREE FIT range of glasses made from light and flexible polyamide frames and in FY03/12 it launched the titanium frame ZEROGRA line. SR Inc. believes the company needs to open stores in popular shopping centers in order for store expansion to actually generate adequate sales growth, in addition to its preference for standalone stores. The company has said from FY03/12 onwards it “will be more flexible on store opening patterns” and was optimistic about room for future growth.

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Business

Business Description

Megane Top is an eyewear retailer operating 693 stores across Japan (as of FY03/11). Over the past 30 years, the company has managed to accomplish growth while weathering several crises, and it now boasts the second largest eyewear sales in Japan after Paris Miki Holding Inc. (TSE 7455). Megane Top experienced particularly fast growth from 2006 thanks to its new Megane Ichiba format. It sold about 2.6 million pairs of eyeglasses in FY03/11 becoming the largest in Japan by volume.

Eyeglasses account for the largest proportion of total sales (77.9% in FY03/10), followed by contact lens and accessories (15.0%), and sunglasses, hearing aids & optical equipment (7.1%). Although the proportion was relatively small, contact lens and accessories have been stable contributors to earnings.

The company believes that one of the factors behind its success has been the unrelenting focus on customer needs. The company achieved remarkable growth in sales and profits amid the deflationary eyewear market. When Megane Top converted all of its existing stores to a single price point Megane Ichiba in 2006, it came as a shock to its competitors. SR Inc. notes however, that the company never intended to change the market, only to change the way it sold eyeglasses. This dramatic but evolutionary approach contrasts with revolutionary claims by such competitors as JIN Co., Ltd. (Jasdaq 3046). For its part, Megane Top seems skeptical about revolutions and focuses on decisive and effective execution while staying conventional in its market approach.

Megane Ichiba

In October 2006, Megane Top introduced the new Megane Ichiba store format and converted all its existing Megane Top stores into Megane Ichiba. On October 7, 2006, the company started opening new Megane Ichiba stores. This happened roughly at the same time as the move by Niman-Yen Doh, the original single price point eyeglass retailer, into Megane Top’s home market of Shizuoka (Please refer to Competition section for more information). The Megane Ichiba was too a single price point store, offering a pair of glasses (including the frame and the lenses) at a set price of 18,000 yen (excluding taxes). As the average price for eyeglasses sold at the Megane Top format stores at the time was 22,000, this conversion was a effectively a big price cut, bringing about substantial risks for the company should the customers fail to respond.

The gamble was well calculated, according to the company. It set the price based on its estimate of a “fair price” as seen by consumers. According to the research conducted by Megane Top, the consumers were likely to exhibit the highest propensity to purchase eyeglasses at around 20,000 yen. The company ultimately decided to set its price at 18,000 yen, or about 10% lower (the rival Niman-Yen Doh was selling its glasses at 20,000 yen). In FY03/07, the company opened 85 Megane Ichiba stores (including converted stores) in and around Shizuoka prefecture. After confirming the success in Shizuoka in FY03/08, it converted almost all of its Megane Top stores to Megane Ichiba brand. (At the end of FY03/08, of total 501 stores 403 were Megane Ichiba stores with only 6 Megane Top stores remaining).

To advertising its new store brand the company started using from April 2007 Bae Yong Joon (popularly known in Japan as Yong-sama), a Korean TV drama super star. This advertising strategy was successful and helped significantly enhance the visibility of Megane Ichiba stores. One factor that possibly helped the success was the decision by the company to built the brand image by advertising Megane Ichiba stores as “Yong-sama stores”, while avoiding emphasizing the 18,000 yen price. The company commented that many customers visiting Megane Ichiba stores were startled at this unexpectedly low price. The high quality image (sometimes suffering when a low price is emphasized) was sustained by the Yong-sama association. When customers subsequently saw the 18,000 yen price tag, they would get a strong message of “high quality + low price = exceptional value”.

In 2009-2010 Megane Top walked away from the single price point system one to a three-price offering. This may seem like backtracking on the original (and initially highly successful) strategy, raising suspicions that the company lost confidence in its business model. The changes did come after the one-price approach started showing signs of peaking out. However, the company is firmly insisting that such changes are just a logical evolution of the original approach and in no way should be seen as a retreat. Megane Top maintains that after it had successfully drawn the consumer attention to its stores using a single-price approach, the goal has shifted to capturing customers for whom the 18,000 yen price point is not optimal (e.g. too low and failing to convey a sense of high quality). The company’s ultimate goal is to expand its store network to 1,000 stores and to become the No.1 Japanese eyewear retailer in terms of sales. Whether this goal can be attained depends on whether the company is truly able to read and satisfy customers’ needs or, as its competitors hope, just got lucky. Time will show but Megane Top is confident that its game is far from over.

Price revisions in 2009 and 2010

Responding to the decline in Megane Ichiba comparable store sales from late 2009, the company started in November 2009 a “Mega Wari (Eyeglass Discount)” sales campaign, selling a set of eyeglasses at 15,000 yen (excluding tax). Prior to this campaign, the company had charged additional fee if the customer chose colored lenses. With Mega Wari, it additionally set different prices for single-focus and progressive lens. As a result the pricing became confusing and conflicting with the original Megane Ichiba message of “no added charges”. As a result, the campaign was unsuccessful with TV commercials and promotional activities failing to draw in enough new customers to offset discounts. Having learnt a lesson from this failure, the company reviewed the pricing again and introduced from April 1, 2010 three price points, 15,000 yen, 18,000 yen and 24,000 yen (excluding tax).

The weaker sales momentum from 2009 (and continuing into 2010) was likely caused by competitive pressures building three years after Megane Ichiba was first introduced, as rivals introduced similar pricing schemes and the original concept lost its originality. At the same time, it is also possible that the single price concept stopped being attractive for some customers. The company commented that it introduced a 15,000 yen price point to respond to the reality that amid the weak economy and deflationary trends in retailing, the eyeglasses priced at 18,000 yen are no longer perceived as cheap by many customers. On the other hand, the new 24,000 yen point aims at customers who prefer higher quality frames and tend to associate higher quality with higher prices. The company appears to have concluded that the single price point system was no longer optimal for satisfying a wide variety of consumer needs and preferences, something that a mass retailer needs to achieve to be successful.

Megane Top’s business model reminds SR Inc. of Aoyama Trading Co., Ltd. (TSE 8219). Although Aoyama Trading sells a large quantity of men’s suits to mass consumers, Aoyama is not a discounter that only emphasizes the magnitude of discounts to attract its customers. Instead the mass consumer probably tends to see of Aoyama as a retailer that sells cheap but never sacrifices the quality. Customers who purchase suits at Aoyama’s stores are probably not overwhelmed with the sense of coolness or exclusiveness that they may get shopping at high end specialty stores or department stores . However, they get what they came for, at a low price and polite service. Megane Top is similar. It sells to a mass consumer good quality eyeglasses at sufficiently low prices, in stores modern enough for customers to feel comfortable, and providing enough service to meet average customer needs. Like Aoyama, a fixture in the Guinness Book of Records for selling the largest number of men’s suits by one company in the world, Megane Top simply wants to sell as many eyeglasses as it can to as many people as possible.

Business Model

Eyeglasses（77.9% of FY03/11 sales）

As a general rule, the company sells eyeglasses as a fixed-price set of frame and lenses. This is in contrast with a traditional approach, still employed by most eyewear retailers in Japan, where the retailer shows a price of the frame and lets the customer choose from a wide menu of differently priced lenses. The company’s sales are driven primarily by volume, although pricing mix plays a limited role since introduction of a three-price system. The volume growth is likely to be driven primarily by the new stores that the company has been opening aggressively. In FY03/11, Megane Ichiba sold 2.6 million units of eyeglasses; the number of stores at the end of FY03/11 was 693 stores. About 60% of eyeglasses sold by the company are so called “private brands” (PB), meaning the company has more control over design and development. The role of “national brands” (NB) is less important than for such products as sneakers or detergent, therefore the difference between the PB and NB is somewhat superficial. As of May 2011, the eyeglasses at Megane Ichiba stores sell at 15,000 yen, 18,000 yen, and 24,000 yen (excluding taxes), and in most cases no additional fee is charged whatever type of lenses customers select. The average price of eyeglasses sold at ‘Megane Ichiba’ in FY03/11 was 17,030 yen.

The eyeglasses sold at “alook” stores, a second store format operated by the company, sell at 5,000 yen, 8,000 yen, 10,000 yen, and 12,000 yen (excluding taxes). The customers pay additional 2,000 yen, 3,000 yen, 5,000 yen or 8,000 yen for options such as aspherical or bifocal lenses. The “alook” stores target younger customers and the average price of eyeglasses sold in FY03/11 was 8,998 yen.

The cost breakdown per pair of eyeglasses is about 60% for lenses and 40% for frames. The gross profit margin, 68.6% in FY03/11 has been mostly flat over the past several years (FY03/08-FY03/11).

The company purchases most frames from factories in China, but produces about 15% of frames in its own factory located in the town of Sabae in Fukui prefecture. Like other eyewear retailers, the company buys lens from multiple suppliers, both domestic and overseas.

Contact lenses and accessories (15.0% of FY03/11 sales)

The company sells contact lenses through specialty stores named “Contact Man”, “abc Contact” and “Lens Direct”. Lens Direct is an on-line store.

Optical equipment, hearing aids, sunglasses, and others（7.1% of FY03/11 sales）

Although hearing aids sales have been increasing (35.8% YoY as of FY03/11), FY03/11 sales only reached about 1.2 billion yen. The hearing aids market size of in Japan is approximately 60 billion yen (FY03/11) and expected to continue to grow backed by the rapidly aging population. The company started to increase the emphasis on hearing aids by establishing the hearing aids group in November 2003, but the business has remained relatively small and the market share is estimated by the company to be only about 2%. If the market grows steadily and the company manages to expand this business, it could become a second pillar next to the eyeglasses. However, Megane Top has yet to really figure out how to sell hearing aids. Historically, Japanese people tend to be unwilling to let others know that they have hearing problems, and many do not use hearing aids. Customers who purchase hearing aids typically prefer visiting smaller private shops with fewer customers rather than buying from the young store staff in Megane Top’s stores.

Sales of sunglasses were about 918 million yen in FY03/11 (1.7% of total sales). The Japanese market for sunglasses has traditionally been small as it was not common to wear sunglasses for eye protection; however, young people are increasingly wearing sunglasses as fashion items. Megane Top sells fewer pairs of sunglasses compared to its rivals, and the company aims to expand sales in the segment.

Typical Store Description

Megane Top operates two types of eyeglass retail stores: Megane Ichiba (634 stores at the end of FY03/11) targeting mass consumers, and lower-priced “alook” (46 stores at the end of FY03/11). The company also has 13 stores specializing in selling contact lenses. 583 out of the total 693 stores at the end of FY03/11 were directly-managed stores and the remaining 110 – franchise stores.

The average store size is 130-160 square meters with a parking space available for 10 cars. The store staff is 4-5 people. There are approximately 1,200-1,600 eyeglass frame SKUs per store, varying depending on the store size.

Most Megane Ichiba stores are standalone stores. The company tends to rent rather than own and has very few stores in shopping centers – just 7.5% of its total store count. According to the company, such stores are higher cost as long opening hours of a shopping center mean more staff is required. Also, the rent charged by shopping center operators (typically a fixed minimum amount plus a percentage of revenues) tends to be substantially higher compared to roadside locations. This means that, assuming similar customer drawing power, the profitability of roadside stores is higher, making them a preferred choice. The drawing power point is important – Megane Top has been able to achieve high brand recognition thanks to persistent and effective TV advertising and the company stores do not need to rely on “borrowed” customer traffic. At the same time, the company’s stores are frequently located near other popular retail stores or roadside restaurants, enhancing incentives for drive-by customers to pull over and shop at Megane Ichiba.

Future store openings

Of the total 693 stores (as of FY03/11), with the most stores in the Kanto area around Tokyo at 186 stores, this is followed by the Chubu region centered around Nagoya (which includes Shizuoka prefecture, the company’s home prefecture) with 173 stores. The company has 91 stores in the Kinki area (centered around Osaka). Megane Top’s market share in both of those markets is significantly lower compared to its Chubu market share. At the same time Kanto and Kinki are home to the majority of the Japanese population and the company is keen to grow its share there. The store openings in Kanto and Kinki are focused on directly managed stores in high traffic locations, e.g. near train stations. As the company is expanding mostly in locations where it had no prior presence, it comments that short term comparable store sales dynamics do not affect the decisions about the timing and pace of new store openings.

Over the past few years, the company has been also increasing the number of the franchise stores. While it will continue to open directly managed stores in major metropolitan areas, franchise is a suitable solution for more sparsely populated areas. Franchise stores generate royalty income for the company in locations where high rent burden of directly managed stores would make those uneconomical. This allows, among other things, to increase returns on nationwide TV advertising. 25% out of the total of 1,000 stores (the long-term store count target) will likely be franchise stores. The FY03/11 plan called for 39 new stores, 23 directly managed (33 stores opened and 10 closed) and 16 franchise stores. Nonetheless, the company sees the pace of 50-60 directly managed store openings per annum as optimal.

If the number of stores reaches 1,000, the number of directly-managed stores should be about 750 stores vs. 574 stores as of FY03/11 end. Considering this, SR Inc. estimates that the company will need to add about 180 directly managed stores over the next several years. As of March 2011, the costs required to open 50 stores per year is about 2.5 billion yen. (Please see the following table titled Assumptions.)

Merchandising and sales strategies

A substantial part of the product sold in Megane Ichiba stores is under the company’s own internally developed private brands (PB). In FY03/10, PB items accounted for 52% of the total number of the frames sold and the ratio increased to 66% in FY03/11. The remainder of the merchandising mix are so called “national brand” (NB) frames bought from wholesalers. The company owns a frame manufacturing factory in Fukui prefecture, which is capable of producing about 30,000-40,000 frames per month and supplies about 15% of all frames sold in Megane Ichiba and “alook” stores. Frame production consists of approximately 200 distinct steps and is highly labor-intensive. Therefore, it is important to manufacture in low labor cost locations. In Megane Tops’s case, partner manufacturers in China and Korea produce the majority of PB frames. The company maintains however that its own domestic factory plays an important role – manufacturing small lot series and experimenting with new advanced materials and design ideas. It can then provide production expertise to the overseas partners to ensure higher quality and cement cooperation commitment.

The lead time from planning to production is about six months (with the range of four months to one year). New products require preparing multiple mock-up samples for evaluation and adjustments, a time consuming exercise. A new mold is then manufactured. Although a lot is outsourced, the company also employs in-house frame designers, who work on original items such as frames in collaboration with TV personalities or character-based models (e.g. Batman themes eyeglasses). Speaking of design, the company recognizes that it is an important element but should not necessarily be “edgy and cool”. Most customers will likely purchase frames that feature familiar, comfortable designs.

In 2008-2009 the name of the game in Japanese eyewear retailing has been the price competition. In 2010 several major retailers including Megane Top felt that they now need to try to shift the focus to providing the best and most original products at the existing price points rather than keeping to lower those price points. Design but particularly specific functionality (glasses specifically for golfing, reading, driving, fishing etc.) is the new focus. Megane Top launched special eyeglasses “Mega Raku” (for PC use) as a functional product and plans to release “FREE FIT” eyeglasses in July 2010 (“FREE FIT” glasses don’t slip easily but have a comfortable fit). The company is strengthening sales of its colored product series (featuring rich color variations) through TV promotions featuring the popular TV personality Becky. While the theme of differentiation based on functionality and design is repeated by a number of companies, SR Inc. is skeptical about the extent of such differentiation. Given the speed of, and readiness to engage in imitation it seems unlikely that any one competitor can have a sustainable advantage.

Megane Top mainly targets mass consumer in slightly higher age groups. The company is adopting localized sales strategies, and is trying to offer a product assortment with the maximum appeals for the mass market. The stores have a simple but modern look and the stores are easily visible from the street. The service is fast, with a pair of glasses ready in 25 minutes. Each store generally holds about 1,200-1,600 SKUs split among 30-40 brands, with 3-4 models per brand and about four color choices per model.

As of early FY03/11, the company did not think that on-line stores could replace brick-and-mortar stores as a powerful sales channel. Although the company sells contact lenses on-line, the company believes that on-line sales are not suitable for eyeglasses as they require the fitting process (adjusting nose pads and earpieces so that the glasses are comfortable).

SG&A Breakdown

The largest components of SG&A expenses are labor (28.4% of FY03/11 sales) and rent (10.7% of FY03/11 sales). The company’s ratio of rent to total sales has been lower than competitors (Paris Miki 16.1% of FY03/10 sales, JIN 14.2% of FY08/10 sales). The stores opened by Megane Top are mostly roadside stores, so rent is fixed at levels generally lower than for stores in shopping centers. Since FY08/00, the ratio of advertising costs to sales has been 5.6-8.2%. (The company sets the target ratio of advertising and promotion cost to sales at 8%). The company has been broadcasting Megane Ichiba commercials, mainly on television, using Bae Yong Joon. After the price revision in April 2010, it began using TV celebrity Becky also, mainly for specific sales campaigns.

Profitability Snapshot, Financial Ratios

From FY03/05-FY03/06, the company’s gross profit margin decreased in line with the deterioration of the business performance, but the margin has been recovering (from FY03/07 onward). Operating profit margin, recurring profit margin and net profit margin have moved almost in line with the trend of the gross profit margin. Currently, the company’s profit margins are at the highest levels among competitors as an increase in the number of customers allowed to successfully offset the average price reduction that came with the store format conversion to Megane Ichiba. The company started aggressive TV advertising at the time of conversion, which increased customer traffic and drove up the volume of sales sufficiently to achieve an impressive growth in total sales despite lower prices.

Strengths, Weaknesses

Strengths:

• Strong leadership, prompt decision-making: Megane Top is a family-owned company, established by current chairman Shozo Tomizawa in 1980. The source of its rapid growth lies in Mr. Tomizawa’s strong leadership and management philosophy willing to make changes. Before taking the bold strategy converting the traditional Megane Top format to the Megane Ichiba format all at once, the company had a bitter experience as its background that the business performance deteriorated in FY03/05 and FY03/06 due to the failure in its policy bringing in the executive officer from outside. By adopting the bold strategy aiming to revive the company, it successfully achieved the strong recovery. This drastic change can be only possible under the top-down management attributable to a family-owned company. Once the company judged that the recruitment from outside was a failure, it not only promptly replaced its management but also returned to its original strengths as “eyeglass retailer” by rapidly introducing Megane Ichiba format.
• Highly recognizable Megane Ichiba brand: The Megane Ichiba stores quickly gained the nationwide visibility thanks to the TV commercials using Bae Yong Joon. The enhanced awareness can be a big weapon for the company to open new stores in the future. As the other eyewear retailers are not equipped with the visibilities like Megane Top, in order to secure the number of customers visiting stores, they are forced to open stores in shopping centers which have the power to attract customers. On the contrary, the Megane Ichiba stores are capable of attracting customers on their own as they are well known. The company also plans to increase stores under a franchise system, and franchised stores are likely to benefit much from the advertising effect coming from well-recognized Megane Ichiba stores.
• Pricing strategies based on customer needs: The company has flexibly determined its pricing policies. An easy example illustrating such a policy is that the company once determined to set price at 18,000 yen (excluding taxes), about 10% cheaper than 20,000 yen offered by 20,000-Yen Doh, which was then rapidly expanding the business, while making an assumption that the price at which consumers are willing to purchase eyeglasses is about 20,000 yen. In April 2010, the company employed a new pricing system, and moved from one price point system to three price points system with prices set for 15,000 yen, 18,000 yen and 24,000 yen (all excluding taxes). As the company judged that the 18,000 yen one price would no longer meet customer demand by taking into consideration the economic environment and the appropriate prices for eyeglasses in the market, it promptly corrected its pricing policy. After Zoff entered the market in February 2001, the company introduced “alook” format selling lower-priced glasses. SR Inc. believes that the company’s brave risk-taking policies and prompt management decisions especially on determining prices have been the major drivers for the growth it has achieved.

Weaknesses:

• Dependence on top management: The company is an owner-run company, which focuses on centralized control. As the current president acknowledged, it is possible to run a company with 500~600 stores with the current management style, but when stores reach 1,000, delegating authority needs to improved and the organizational control needs to be strengthened. The company has an advantage in that it can congeal and work together toward a specific goal, but it seems that individual initiative might need improvement. SR Inc. thinks that the chairman’s focus has been on improving overall execution; however, it seems that some additional tweaks could be required at the employee level.
• Comparatively weaker financial position: Megane Top has been focusing on building a more sound financial position for the past several years by reducing interest-bearing debt. However, some large competitors such as Paris Miki and Aigan have much stronger balance sheets and sizeable cash positions which means more insulation from potential market shocks.
• Lack of a “what’s next” strategy: Eyewear retailing is a business easily imitated by competitors in terms of both product lineup and pricing. ‘Megane Ichiba’ gave the company a large advantage but after several years since its introduction, competitors started to set up similar store formats at similar pricing strategies, leading to loss of uniqueness. To ensure continued success, new strategies to create a unique value proposition for customers are required, however, in SR Inc.’s view this isn’t clear yet. Although the company is focusing on developing functional and well-designed products, these products don’t constitute a long-term strategy to differentiate the company from competitors with similar (and possibly better) offerings.

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Market & Value Chain

Market Overview

The eyeglass retail market in Japan is approximately 440 billion yen as of 2009 (according to 2010 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 2009 as the replacement cycle grew. While a bad economy and poor consumption are probably the main culprits, an aging baby boomer 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).

As the market size has been shrinking, increasing the market share is seen by the company as strategically important. Theoretically, growing the market share seems possible. Of the estimated 390 billion yen total market, the top 5 major eyeglass retail chain stores (Miki Holdings, Megane Top, Megane Super, Aigan, and JIN) account for approximately 159 billion yen which is only 40% of the total market share. Small chain stores, private stores, and stores selling eyeglasses in combination with wristwatches and jewelry account for the remaining 60%. Major retail chains are yet to dominate the market. SR Inc. thinks that Megane Top should be able to grow its business further by capitalizing on high brand recognition of Megane Ichiba.

Customers

Megane Top sees every age group as its customers, but mainly focuses on the “volume zone” of the market. When the company launched the Megane Ichiba store brand, it focused advertising on women in their 40s to 60s, by choosing Bae Yong Joon (Yong-sama) as its main character. While this particular segment is one of the strongest in terms of the eyewear demand, its share for the company was low in the pre Megane Ichiba era. The advertising strategy worked extremely well, according to the company. Not only did Yong-sama attract the desired demographic, but the housewives brought their husbands, multiplying the positive impact.

The “alook” is focused on younger demographic. It’s trying to bring in fashion-oriented young adult customers that that the company has so far failed to catch. Success has been mixed as of end FY03/11. The format has few stores and low recognition. The company is attempting to revitalize the concept by focusing on design collaborations and store refurbishments. However, SR Inc. doubts if Megane Top really has a well defined strategy for “alook”.

Suppliers

Normally, eyeglass retailers have several lens and frame suppliers. As a result, the risk for supplier is lowered and purchasing price is easy to compare. As of end-FY03/11, the company was the largest seller of eyeglasses in Japan (by number of pairs sold), providing it with a significant scale merit in purchasing of both frames and lenses.

Lenses: Eyeglasses sold by the company are equipped with fixed focal lenses. Suppliers include Sola Optical Japan Ltd. (a subsidiary of the Carl Zeiss AG), Nikon-Essilor Co., Ltd. (unlisted: a subsidiary of Essilor), and HOYA (TSE 7741). Sola Optical Japan Ltd. supplies most of the fixed focal lenses. About 80% of lenses sold by Megane Ichiba in 2010 were aspherical lenses.

Frames: About 66% of frames sold by the company are private brand frames. Of those, about 3/4 are purchased from 10 Chinese and 3-4 Korean manufacturers, and 1/4 is manufactured at the company’s own factory in Fukui prefecture. The remaining 40% are so-called “national brands” purchased from domestic wholesalers.

Barriers to Entry

Barriers to entry for eyewear (both eyeglasses and contact lenses) retailing are low. Anyone can start an eyewear store. However, due to a highly competitive nature of the market and the high degree of its maturity, anyone entering the market must offer a high degree of differentiation and value innovation. Therefore sizeable entries seem unlikely. When they occur however, they can be disruptive, as Intermestic Inc. demonstrated with Zoff. It can be argued that as long as gross profit margins of the 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. However, lowering the SG&A costs and sustaining high inventory turnover is difficult due to low purchasing frequency and high service content typical for eyewear retailing, and this is a challenge that any newcomer would new to overcome.

Competition

Megane Top’s competition includes major eyewear retailing chains and a large number of smaller companies that typically operate few or a single store. Listed competitors include: Paris Miki Holdings (TSE 7455), Aigan (TSE 9854), Megane Super (Jasdaq 3318). Although such large players as Megane Super and the long-term market leader Paris Miki have been suffering from declining sales and profitability, low price retailers such as JIN Co. Ltd. (Hercules 3046) have been growing, despite some volatility. JIN uses fixed set prices with no additional charges with the most expensive offering at 9,990 yen (including tax) and the average price point of 5,990 yen. JIN had 64 stores as of February 2010 end.

The current competitive landscape is the result of two phases of intense price competition that began with the entrance of Zoff-branded shops in February, 2001. Average prices for glasses in 2000 were approximately 29,000 yen, and Zoff undercut the status quo by offering three fixed prices well below the industry average: for 5,000 yen, 7,000 yen, and 9,000 yen. Consumers were attracted to Zoff’s low-price stores, and the business rapidly grew. Most incumbents were quick to launch low-priced stores in response to Zoff’s early success (Megane Top launched the “alook” in July 2001 and Paris Miki launched the Opt-Label format in September, 2001).

Megane Center (unlisted) launched a one-price store format called 20,000-Yen-Doh. 20,000-Yen-Doh is an eyeglasses chain store headquartered in Sendai that mainly provides services in Tohoku area. The store offered a complete set of standard glasses for 20,000 yen (21,000 yen including tax) in 2005 and opened new stores in the western part of Japan.

Substitutes

The main substitutes for eyeglasses are contact lenses and laser surgery. Surgery has yet to enter the mainstream as of end-FY03/11. 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

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Strategy

Over the past several years, Zoff’s entry into the market has affected the eyewear retail market by pushing down average prices. Eyewear chain stores responded to this deflationary threat by setting up low-priced stores themselves, leading to a further price competition. SR Inc. believes that to prosper in this environment the eyewear retailers must differentiate. Megane Ichiba was a significant success because it offered such differentiation – a single all-in-one affordable price was a dramatically new experience for the consumers. Compared to the average selling price of about 28,000 yen for a pair of glasses (2006 data, according to market survey data compiled by research firm Gankyo), a pair for 18,000 yen (excluding tax) with no additional charges was a very appealing proposition.

All-in-one price is now prevalent among the eyewear chain stores, and no longer exclusive to ‘Megane Ichiba’. Most of the major eyewear chain stores stand a lot to lose and little to gain from further price competition. After years of the cutthroat race to lower prices, the eyewear retailers started to realize that this in itself did not allow them to gain share or grow profits. Megane Top, a company probably most responsible for bringing the average price points down since its 2006 Megane Ichiba push, also commented at its FY03/10 results meeting that it would try not to engage in further price competition but would attempt to compete on products, more specifically, functionality.

SR Inc. is skeptical whether the attempt to make the mass consumer use several pairs of glasses in different situations can be successful if such function-specific eyewear is offered at 20,000-30,000 yen price points. The risk is that such products will remain just small niche products and will simply increase the costs for the retailers. However, Megane Top may have a relative advantage given its scale as well as focused and decisive management style.

The company, like many of its competitors, is trying to expand market share amid tough market conditions. It does not aim to redefine the market, creating a proverbial “blue ocean” as some of its competitors (like JIN) are ostensibly trying to do. Instead, the main focus is on how to develop better product, on how to swim faster to survive and dominate in the conventional “red ocean” market of Japanese eyewear retailing.

While recent repeated changes of the pricing schemes might look like a drift in strategy and give a sense of lack of managerial direction, the company maintains that it is simply responding to the evolving customer needs and shifting market reality. The speed of that response and the ability to change quickly as needed are the weapons that Megane Top is using to try to stay one step ahead of the competition. This reminds SR Inc. of a famous story.

Two men are being chased by a bear in the woods. As the bear is gaining on them, one of the men stops and begins to put on a pair of running shoes. The second man stops beside him and says, "The bear is too fast for us. You don't think those running shoes will help you outrun the bear do you?" The first man replies, "All I have to do is outrun you."

The current strategy of Megane Top might not lead to a dramatic success similar to the one the company achieved early on with Megane Ichiba. However, the company seems to believe that it does not have to outrun the market but only its competitors.

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Historical Financial Statements

Earnings Results Discussion for the Year Preceding Current Fiscal Year (for reference purposes)

FY03/11 Results

The company released FY03/11 results on May 13, 2011.

The company recorded sales of 53.1 billion yen for the period, up 8.6% YoY on a parent basis (consolidated accounts were no longer available from FY03/11), operating income also rose 15.5% to 5.4 billion yen on a parent basis.

The strengthening of its private brands and solid performance of its FREE FIT frames series launched in July 2010 contributed to the increase in profitability.

Actual results were mostly in line with the company’s forecasts, but same store sales growth rate at existing stores fell short of projections by 0.2% YoY (essentially flat). The company noted its product lineup was biased towards FREE FIT, with sales of other products in December 2010 and January 2011 falling slightly short of projections which impacted the sales growth rate. However, from February 2012 onwards the company’s performance was in line with projections, and the FREE FIT range took an 18% share of sales in the eyeglasses market.

Gross profit margin improved 0.2% YoY to 68.6% and exceeded forecasts by 0.3%. The higher gross profit margin was driven by an increased share of sales of private brands to 66% in FY03/11 from 52% a year earlier and the absence of any clearance sales in FY03/11 unlike FY03/10. Operating income also exceeded projections as a result of SG&A/sales ratio coming in below the targeted level.

Store Count

New stores: 31 directly managed Megane Ichiba, 2 ALOOK, and 19 franchised Megane Ichiba stores. Closed stores: 8 directly managed Megane Ichiba, 2 ALOOK, and 3 franchised ALOOK stores. Total store count end-FY03/11: 693 stores. Of which 574 are directly managed stores (524 directly managed Megane Ichiba, 37 ALOOK and 13 contact lens specialty stores) and 119 are franchise stores (110 Megane Ichiba and 9 ALOOK).

Impact of March 11 Tohoku Earthquake

The company recorded an 80 million yen loss related to store reconstruction fees and destroyed merchandise. As of May 17, 2011 operations were suspended at 5 stores, but the company planned to reopen them one at a time from the end of May 2011.

Q3 FY03/11 Results

The company released Q3 FY03/11 results on February 4, 2011.

Cumulative sales through Q3 grew 5.7% YoY to 39.8 billion yen and operating profit increased by 6.7% YoY to 4.0 billion yen. SR Inc. assumes that the results were due to the strong performance of the FREE FIT frames (released on July 23, 2010).

Cumulative Q3 comparable store sales were beneath the company’s expectations, down 2.4% YoY (vs. a 1.9% increase for the full year). However, due to changes in product mix (sales of private brands increased from 53% of sales to 68% of sales YoY), gross profit margin improved 0.2% to 68.7% YoY, exceeding expectations by about 0.5%. Reductions in SG&A expenses resulted in slightly higher than expected operating profit.

The FREE FIT frames continue to sell well, with approximately 260,000 sold during Q1-Q3, and approximately 130,000 sold during just Q3 (FREE FIT frames were 26% of eyeglass sales during Q3). Sales contributions from existing stores were affected by price competition in FY03/10 and a reduction in television commercials last year, and were therefore lower than expected. Sales at existing stores during December 2010 were 10.7% YoY, lower than expectations (a 2.0% YoY decrease).

Sales at existing stores during January 2011 were +1.1% YoY, but this was lower than the company expected.

Q2 FY03/11 Results

The company released Q2 (1H) FY03/11 results on November 5, 2010. 1H FY03/11 results were in line with the company’s revised estimate announced on October 26. As a percentage of the full year company estimate, Q2 (1H) FY03/11 results were as follows:

• Sales: 48.6% (vs. FY estimate of 54.5 billion yen)
• Operating profit: 46.4% (vs. FY estimate of 5.3 billion yen)
• Recurring profit: 45.5% (vs. FY estimate of 5.3 billion yen)
• Net income: 43.1% (vs. FY estimate of 2.6 billion yen)

In Q2 (1H), sales were lower than initially planned by approximately 434 million yen. However, this was due to lower than initially expected number of new stores and hence lower new store sales contribution. The company raised the criteria for new stores following several months of comparable store sales declines. Specifically, the minimum projected monthly sales hurdle for new stores was increased from 7.5 to 9.0 million yen. This higher hurdle meant fewer qualifying candidate locations and therefore fewer newer stores. The company initially intended to open 35 directly-managed stores in 1H, but only opened 24. The comparable store sales assumption stood at -4.0% YoY and the actual results were on target at -4.2% YoY.

Operating profit was 816 million yen higher than initially planned. Despite lower than forecast sales, the gross profit margin was 0.2% points better than budget and SG&A costs – 1.0 billion yen lower than expected. Gross profit margin improved despite about 3% lower average spend per customer at Megane Ichiba and “alook” stores, as the company increased the ratio of private brand items in its mix (65% in 1H vs. 52% in FY03/10). SG&A was lower than budget due to few than budgeted store openings (meaning correspondingly lower advertising, personnel, and rental costs).

Both sales and operating profit reached record high levels in Q2, helped to a great degree by the strong performance of the FREE FIT frames (released on July 23, 2010). Comparable store sales turned positive in August, and the company attributes this turnaround to FREE FIT success. Customers bought approximately 110,000 FREE FIT frames in Q2, and the company commented this was three times the original production plan, leading to shortage of the product on store shelves. Such shortages were eliminated by early November 2011.

There were 24 new directly managed stores opened during 1H (22 Megane Ichiba and 2 “alook” stores). The company added a net 8 franchise stores (added 10 Megane Top stores and closed 2 “alook” stores). The store network (group level) stood at 707 stores at the end of Q2 FY03/11 (644 Megane Ichiba, 49 “alook”, and 14 contact lens stores).

Q1 FY03/11 Results

The company released Q1 FY03/11 results on August 6, 2010. As a percentage of the 1H company estimate, Q1 numbers were as follows:

• Sales: 45.7% (vs. 1H estimate of 26.9 billion yen )
• Operating profit: 38.3% (vs. 1H estimate of 1,630 million yen)
• Recurring profit: 34.3% (vs. 1H estimate of 1,690 million yen)
• Net income: 17.8% (vs. 1H estimate of 680 million yen)

Q1 sales were slightly below budget, but OP was almost in line with the company plan; the impact of lower sales was offset by reduced costs of around 400 million yen (mainly labor from reorganizing stores). Q1 comparable store sales for Megane Ichiba were -7.9% and “alook” was -15.9%. The company expects comparable store sales of -3.1% YoY for 1H FY03/11. Though comparable store sales were below budget, the company indicated the main reasons for the decline were the following:

The company shifted towards a multi-pricing system (mainly 15,000 and 18,000 yen) from the single 18,000 yen price.

The company reduced advertising following the FREE FIT launch in July.

The company held a clearance sale in 2009 from late June through the end of August, but no clearance sale was scheduled in 2010.

The company commented that the launch of FREE FIT was postponed to July 23 due to delays in the securing production capacity in the South Korean frame factory, but sales of FREE FIT were very strong after its launch (as of the beginning of August). The company expects comparable store sales will continue to be weak in August but will start to recover from September.

There was no change to the 1H forecasts and FY03/11 forecasts.

There were 16 new directly managed store openings (15 Megane Ichiba stores and 1 “alook” store). For franchise stores, 6 Megane Top stores opened and 1 “alook” store was closed. At the group level, there were 675 stores at the end of Q1 FY03/11 end (612 Megane Ichiba stores, 49 “alook” stores, and 14 contact lens stores).

Full Year FY03/10 Results

Sales were 49.6 billion yen (+6.4% YoY), operating profit 4.8 billion yen (-10.3% YoY), recurring profit 4.8 billion yen (-10.5% YoY), net income 2.4 billion yen (-18.5% YoY).

As a percentage of the original company forecast, the results are as follows:

• Sales: 96.7% (vs. forecast of 51.3 billion yen)
• Operating profit: 79.5% (vs. forecast of 6 billion yen)
• Recurring profit: 79.4% (vs. forecast of 6.1 billion yen)
• Net income: 73.8% (vs. forecast of 3.2 billion yen)

FY03/10 Results Highlights

FY03/10 was a challenging year; the comparable store sales momentum developed in FY03/09 faded into 2H, bringing the YoY comparable store sales to -3.2%; vs. +0.3% initially expected. Comparable store sales in Q4 were particularly difficult (declines in the double digits during February and March) and the company revised down its original full year forecasts. The introduction of “Mega Wari (Eyeglass Discount)” campaign in November (selling fixed focal lenses at a price of 15,000 yen (excluding taxes)) had limited success, partly because competitors quickly followed suit.

The pricing structure was changed during the year: from a “one price” format to three (15,000 yen, 18,000 yen, and 24,000 yen (excluding taxes)). Sales by price in the month of April (FY03/11) were: 43% @15,000 yen, 48% @18,000 yen, and 1% @24,000 yen. When discussing the breakdown at the FY03/10 results meeting, the company said that it eventually wanted to increase the weight of 24,000 yen glasses to about 10% of total sales.

The customer count was +9.8% YoY for all stores in March 2010 (-8.3% for comparable stores). The company increased its share of the 35-54 year-old demographic, where both replacement frequency and discretionary incomes tend to be higher. The company estimated its market share at about 20% of the male population and about 15% of the female population in the 35-54 year-old demographic for FY03/10, vs. about 15% and 10%, respectively, for FY03/09.

102 stores were added during the year (62 directly managed, 40 franchise). The company aggressively expanded in Kanto (+44 stores) and Kinki (+24 stores), Japan’s most densely populated regions. These areas will continue to be the focus of both new store openings and advertising campaigns.

Costs were generally in line. Decrease in sales due to the lowering average prices (-5.4% YoY) were offset by lower COGS so the gross profit margin was flat YoY. SG&A spending was in line with the company expectations, increasing 2.6 billion yen YoY; the largest components (labor, rent, and advertising) were in similar proportions to sales from previous years. Total SG&A costs increased more than sales (+10.0% YoY vs. +6.4% YoY), depressing operating and recurring profit margins.

The company had 803 million yen of extraordinary losses (related to impairment loss from underutilized real estate and unprofitable store) which explained the decline in net income YoY.

A look at "alook"

Comparable store sales at "alook" (low priced format) have been down for two years in a row, and the company acknowledged that the business struggled in FY03/10. "alook" was contributing 10% of total sales and was still a profitable business. Heading into FY03/11, it should receive greater focus from management with more targeted advertising, improved designs, and investment on development of human resources. The low price store format has been difficult for other retailers to "get right". Megane Top has a culture of decisive and aggressive management and it seems unlikely that "alook" will be left to linger indefinitely. However, the exact turnaround strategy is still an open question.

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Income Statement

The sales jump in FY08/02 was from the contribution of new stores (57 “Megane Top” stores and 15 “alook”). Another large sales increase, in FY03/08, was due to rapidly improved comparable store sales (+14.8% YoY) and strong contribution from the new stores (+28.4% YoY), driven by a massive success of then-new Megane Ichiba store brand.

The operating profit margins declined over the FY08/03-FY03/06 period due to rising fixed costs (adding stores) and lackluster comparable store sales (YoY declines of averaging -4% from FY08/01-FY03/06).

Extraordinary losses in FY03/06 were mainly due to impairment charges.

Historical Performance vs. Estimates

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Balance Sheet

The balance sheet has been liquid from FY08/00-FY03/10, with the current ratio averaging over 80%. Megane Top used debt to increase the store network during FY08/01-FY03/08 (from 195 to 501 stores).

Assets

Assets on the balance sheet are typical for a retailer: mostly working capital (inventory) and fixed assets related to the store network.

Liabilities

Current liabilities have typically been larger than fixed; the largest component being short-term debt. Megane Top has used both bank loans and corporate bonds as debt financing. Other liabilities have been negligible.

Shareholders’equity

Most changes in shareholder equity have been the result of net income and dividend payments. Megane Top performed an additional share offering in FY03/08, increasing shareholders’ equity by approximately 2.6 billion yen.

Per Share Data

Shares were split 4 times from FY08/00-FY03/10:

1.3 for 1 in April 2009 (FY03/10)

1.2 for 1 in April 2008 (FY03/09)

2 for 1 in July 2007 (FY03/08)

1.2 for 1 in April 2001 (FY08/01)

The EPS decline in FY03/08 was partially due to equity issuance during the year.

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Cash Flow Statement

Operating Cash Flow

The company’s operating cash flows in FY08/02 was lower than other years due to increases in working capital; the addition of 87 stores was the biggest single year expansion until FY08/02. New stores require inventory investments, which reduces operating cash flow. Operating cash flows from FY03/07-FY03/10 improved due higher net profit margins and the depreciation effect from the larger store network.

Investment Cash Flow

Large increases in investment cash flows in FY08/02, FY03/08, and FY03/10 were for expanding the store network.

Financial Cash Flow

Financing cash flows from FY08/00-FY03/11 include equity and debt. Megane Top added approximately 5.4 billion yen of debt in FY08/02 (nearly doubling debt on the balance sheet) to fund growth. The company started paying it back in FY03/07 from operating cash flows. The cash outflow in FY03/09 was largely due to paying back long term debt (approximately 3.2 billion yen). The company issued new shares in FY03/08, raising approximately 2.6 billion yen.

Simple Free Cash Flows

The store network expansion in FY08/02 (a net increase of 87 stores) resulted in negative simple free cash flow (capex plus working capital were about 5 billion yen) in FY08/02. The company remained committed to expansion in FY03/06, spending approximately a net 1.0 billion yen on tangible assets, but the net loss during the year pushed simple free cash flow into a negative territory. The company generated positive simple free cash flow during FY03/07-FY03/11 when net income improved (excluding FY03/08 when the company spent 3.1 billion yen on capex).

Cash Conversion Cycle

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Other Information

History

Shozo Tomizawa founded Megane Top in Shizuoka in 1980. Back then most eyeglass retailers tended to stay local respecting implicit market boundaries and rarely crossing into rivals’ territories. The overall market was growing fast for a number of years and retailers had little to gain from direct price competition. The arrival of discount general merchandise stores in Shizuoka led Tomizawa to rethink this approach. Discount stores proved that consumers wanted lower prices, but most eyeglasses retailers understandably resisted lowering prices. Megane Top started selling cheaper and started expanding nationwide. Following years of successful growth, the company listed on the Jasdaq market in 1997.

In the early 2000s, the company experimented with bringing in outside talent to lead the company. The company drifted from Chairman Tomizawa’s original vision, and after seeing limited results, he decided to step in to correct the course in 2005. After reestablishing Megane Top’s identity, Tomizawa sped up his succession plans and appointed his son, Masahiro Tomizawa, as the company president.

In the mid-2000s the Japanese eyewear market was adrift. Price competition had been taking a toll on all eyeglasses retailers, and Megane Top was searching for the best fit. It noticed 20,000-Yen Doh, a small up-and-coming chain selling the glasses at just one price (20,000 yen) with no additional charges for standard lenses. Megane Top’s own research showed that consumers were most likely to feel a strong value proposition and be inclined to buy at around 20,000 yen. The company decided to pick the price point 10% lower, pricing all of its glasses at that new 18,000 yen price and redesign its entire store network, abandoning the familiar Megane Top brand. Some would say that Megane Ichiba stores were 20,000-Yen Doh knock-offs but looking at it in 2010 such an argument would be similar to arguing about the true originality of Starbucks coffee shops. The concept was taken to a different level when Megane Top implemented it at its massive store network. The first Megane Ichiba stores opened in FY03/07 and the last Megane Top stores closed in FY03/08. Shrinking the entire pricing curve to one point was a significant gamble for the company, as was establishing a new brand from scratch. To connect with its most important customers, housewives (who not only buy for themselves but also drive their husbands’ purchasing decisions), the company started heavily using TV ads in Shizuoka and hired Bae Yong Joon (known among his adulating fans as Yong-sama) as its core branding persona.

Apart from advertising, one reason that the transition to the Megane Ichiba format was so successful was management’s execution of the one price model. Megane Top explains that it is a chain store operator; stores are as uniform as possible to maximize overall efficiency.

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News & Topics

On November 2011

On November 7, 2011, the company released 1H/Q2 FY03/12 results: click here to go direct to the 1H FY03/12 results section.

(For original Japanese-language only release in PDF format please click here)

October 2011

On October 25, 2011,the company upwardly revised both its 1H FY03/12 and FY03/12 earnings forecast.

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

The revision was as follows:.

1H FY03/12 Forecast

Sales: 32.1 billion yen (vs. previous forecast of 30.8 billion yen)

Operating profit: 5.7 billion yen (vs. previous forecast of 4.6 billion yen)

Recurring profit: 5.7 billion yen (vs. previous forecast of 4.7 billion yen)

Net income: 3.2 billion yen (vs. previous forecast of 2.6 billion yen)

FY03/12 Forecast

Sales: 62.8 billion yen (vs. previous forecast of 61.0 billion yen)

Operating profit: 9.2 billion yen (vs. previous forecast of 7.9 billion yen)

Recurring profit: 9.2 billion yen (vs. previous forecast of 8.1 billion yen)

Net income: 5.2 billion yen (vs. previous forecast of 4.4 billion yen)

The upward revision to the 2H forecast was due to the positive effects of Megane Ichiba TV commercials emphasizing lens quality, continued strong sales of the company’s FREE FIT frames series (released in July 2010) and solid sales of its ZEROGRA line (released in April 2011). Full-year forecast numbers were revised higher on the back of the new 2H projections.

September 2011

On September 30, 2011, the company announced it would launch a special manufacturer co-developed, tinted eyeglass lens for use with computer screens at Megane Ichiba stores nationwide from October 1, 2011.

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

According to the company, until now tinted lenses that reduced computer screen-related eye strain did not exist. These PC lenses will go on sale for an additional cost of 2100 yen for a pair of glasses.

August 2011

On August 23, 2011, Megane Top announced its board had passed a resolution to change its articles of incorporation to allow share splits and implemented a split.

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

The move will go into effect on September 30, 2011, resulting in a 1.5 for one split (the total number of shares issued rising to 45,492,000 shares from 30,328,000 shares). The dividend per share forecast remains unchanged despite the stock split and the company expects to pay its 12 yen per share dividend.

On August 5, 2011, the company released its Q1 FY03/12 results: click here to go direct to the Q1 FY03/12 results section.

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

July, 2011

On July 26, 2011, the company upwardly revised its 1H and full year forecast for FY03/12. The revisions were as follows

1H FY03/12

Sales: 30.8 billion yen (vs. previous forecast of 28.7 billion yen)

Operating profit: 4.6 billion yen (vs. previous forecast of 3.0 billion yen)

Recurring profit: 4.7 billion yen (vs. previous forecast of 3.0 billion yen)

Net income: 2.6 billion yen (vs. previous forecast of 1.7 billion yen)

FY03/12

Sales: 61.0 billion yen (vs. previous forecast of 57.3 billion yen)

Operating profit: 7.9 billion yen (vs. previous forecast of 5.9 billion yen)

Recurring profit: 8.1 billion yen (vs. previous forecast of 6.0 billion yen)

Net income: 4.4 billion yen (vs. previous forecast of 3.3 billion yen)

The company noted its upward revision to its 1H sales forecast was driven by the effects of its Megane Ichiba brand’s quality eyeglass lenses TV commercials, continued solid sales of its FREE FIT line (released in July 2010) and strong sales for its ZEROGRA line (released in April 2011). Full year result forecasts were upwardly revised due to the impact of the revision to 1H forecasts.

(For original, Japanese language only release in PDF format please click here)

May 2011

On May 13, 2011, the company released FY03/11 results: click here to go direct to the FY03/11 results section.

April 2011,

On April 7, 2011, the company said from April 8 it would start selling its new Zerogra line of super-lightweight eyeglasses.

March 2011

On March 15, 2011, the company made an announcement regarding the March 11 Tohoku earthquake.

Damage situation report:

• In some stores in the Tohoku (northeastern Japan) and Kanto (around Tokyo), store equipment and buildings housing were damaged.
• The company temporarily closed or shortened operating hours of stores in areas that lacked essential utilities such as electricity and water service.

Impact on financial performance:

The company was assessing damage from the earthquake and said it would release details as necessary if it became clear that FY03/11 earnings will be impacted.

Note: The company attached a separate support page for disaster victims to its press release.

February 2011

On February 4, 2011, the company released Q3 FY03/11 results.

November

On November 5, 2010, the company released Q2 (1H) FY03/11 results.

October

On October 26, 2010, the company announced a revision to 1H and full year FY03/11 forecasts. The revised figures were as follows:

1H FY03/11 forecasts

Sales: 26.5 billion yen (previous forecast: 26.9 billion yen)

Operating profit: 2.5 billion yen (previous forecast: 1.6 billion yen)

Recurring profit: 2.4 billion yen (previous forecast: 1.7 billion yen)

Net income: 1.1 billion yen (previous forecast: 680 million yen)

FY03/11 forecasts

Sales: 54.5 billion yen (previous forecast: 54.9 billion yen)

Operating profit: 5.3 billion yen (previous forecast: 4.2 billion yen)

Recurring profit: 5.3 billion yen (previous forecast: 4.3 billion yen)

Net income: 2.6 billion yen (previous forecast: 2.0 billion yen)

The company explained that the change in forecasts (lower sales with higher operating profit) was due to the combination of price competition affecting total sales and a better than expected cost outlook (selling more higher-margin private brands and lower costs vs. budget).

August 2010

The company announced Q1 FY03/11 results on August 6, 2010.

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Top Management

Shozo Tomizawa is the founder and Chairman. His role within the company is to help set longer-term strategy and vision for the company. He is also active in guiding the retail execution at the store level, continuously paying visits to individual locations and meeting store managers.

Masahiro Tomizawa is the president and founder’s son; he leads the company’s daily operations. Masahiro Tomizawa is a young leader by any standard (born in 1981), a fact even more unusual for a large Japanese firm. He was groomed for succession since joining the company in 2005 and the company arguably felt that he had thorough understanding of the organization and the market, and can lead the company under the guidance of his father.

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Employees

At the end of FY03/11, the company employed 3,399 employees (1,729 full-time, 1,670 temporary). The average employee age was 34.0 (working for the company on average for 6.7 years).

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Dividends and Shareholder Benefits

The company provides discount coupons to shareholders of record at the end of the first and second halves of the fiscal year.

Dividend payments from FY08/00-FY03/10 were a stable amount (vs. percentage of earnings). When considering the effect of stock splits, the payout rate ranged between 6.5% and 35.2% from FY08/00 to FY03/10.

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Investor Relations

The company holds analyst results meetings semiannually and maintains an IR website (Japanese only).

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By the Way

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Latest Q&A

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