NOVARESE Inc (2128)
From www.sharedresearch.jp
Contents |
[edit] Financial Summary
[edit] Recent Updates
The company announced Q2 FY12/10 results on July 30, 2010.
On June 25, 2010, the company announced an off-floor distribution of 1,000 shares for 59,962 yen (from June 24 to June 30, 2010).
The company announced Q1 FY12/10 results on April 30, 2010.
On April 9, 2010, the company announced that President Asada made a stock gift to employees:
- Number of shares: 429
- Transfer date: May 31, 2010
- Asada’s direct ownership post transfer: 37.73%
[edit] Trends & Outlook
Quarterly Trends
Q2 Results
The company announced Q2 FY12/10 results on July 30, 2010 (see table above). As a percentage of the full year company forecast, the cumulative Q2 numbers were as follows:
- Sales: 43.5% (vs. full year forecast of 11.0 billion yen)
- Operating profit: 29.1% (vs. full year forecast of 1.9 billion yen)
- Recurring profit: 29.9% (vs. full year forecast of 1.9 billion yen)
- Net income: 29.9% (vs. full year forecast of 1.1 million yen)
Accumulated Q2 results were almost in line with the initial company estimate. However, sales decreased 4.3% YoY, a result of a lower order backlog from the previous year (high utilization meant potential customers could not see facilities on weekends). Although gross profit margins of the Wedding Production and Dresses segments improved slightly, the gross profit margin in Hotel and Restaurant dropped 3.4% YoY due to lower sales, so overall gross profit declined 1% YoY (from 56.9% to 55.9%). Expenses for opening the Hiroshima Monolith (opened in February 2010) and Niigata Monolith (scheduled to open in October 2010) guest houses resulted in a 30.8% decrease of operating profit to 552 million yen. The company controlled recruiting costs and advertising expenses, so operating profit exceeded the initial plan of 470 million yen.
Wedding Production:
Sales declined 3.6% YoY to 1.8 billion yen due to a decrease in the number of ceremonies (1,083 vs. 1,131 ceremonies, -4.2% YoY). Facility utilization dropped from 64.9% to 53.2% YoY. The total per-wedding spend was unchanged; the company brought some services in-house (wedding video production) and increased dress prices. Additionally, the company started selling “hikidemono” (gifts for guests) from their catalog, which includes items exclusively available in the catalog and some luxury brand items. Novarese’s catalog is unique in the Japanese wedding industry, and appears to be successful: as of August 2010, approximately 70% of wedding couples bought gifts from Novarese’s catalog. These sales also help to increase the revenue per guest. Novarese purchases most items in the catalog directly from manufacturers, which helps reduce costs. As a result, gross profit margin of the segment improved 2.1% YoY (from 51.0% to 53.1%).
Dresses:
Sales were down 10.0% YoY to 963 million yen, a result of discontinuing some partnerships with distributors. The company tried to offset the lower sales volume by increasing the average amount spent, focusing on after party and guest garments. The result was that per wedding spend increased 5.8% YoY while sales volume fell 14.9% YoY. The gross profit margin for the segment was unchanged YoY at 88.0%.
Hotel and Restaurant:
Sales were down 1.9% YoY to 2.0 billion yen due to fewer wedding ceremonies held. Per-wedding spend also decreased by 4.6% YoY. Although the company made efforts in controlling cost, lower sales drove GPM down to 42.8% vs. 46.2% a year earlier (-3.4% points).
The company revised its full year forecast when announcing FY12/10 Q2 results. The only change was sales - down to 11 billion yen (vs. 11.5 billion yen earlier). The company said that the delayed opening of Amandan Blue Kamakura (from November 2010 to March 2011) was behind the revision.
Business conditions
Both orders and the order backlog improved in Q2: orders increased 12.4% YoY (from 1,228 to 1,380), and the order backlog increased 8.6% YoY (from 1,608 to 1,747). A couple normally never signs a contract without seeing the actual venue, and lower utilization meant more opportunities to show facilities, which led to more contracts. According to the company, the number of new customer visits increased thanks to an improved website and minor tweaks to magazine advertisements.
Focusing on employee education and customer service is also starting to bear fruit. In some bridal salons where sales are lagging, the company is trying to improve sales volumes by having experienced staff close sales, and less experienced employees take over afterward.
At the Q2 FY12/10 analyst results meeting, President Asada commented that in addition to its conventional first-line Monolith and Amandan brands, the company would launch a second-line brand targeting a lower price point (about 2.8-3.3 million yen per wedding vs. a 4 million yen average price for a Novarese guest house wedding in Q2 FY12/10). The company will rent and renovate struggling “kekkonshiki jo” facilities and hotels instead of building from scratch, which means lower upfront costs and therefore less total risk. Although profitability for these facilities might not be as high as Monolith or Amandan facilities, the company will try to improve the gross profit margin by making smart purchasing decisions.
The company also announced that it opened a casual sushi restaurant called “SHARI” in Shanghai on July 2, 2010. According to the company, the wedding business in Shanghai has signs of a ‘boom’ market. As a first step, the company will enter the market by providing consulting services to local wedding venues without making investments. The company established SHARI as part of a strategy to build the infrastructure which will further help shape its China strategy.
Q1 Results
The company released Q1 FY12/10 results on April 30, 2010 (see the table above). As a percentage of the 1H company estimate, Q1 numbers were as follows:
Sales: 40.8% (vs. 1H estimate of 4.8 billion yen )
Operating profit: 7.2% (vs. 1H estimate of 470 million yen)
Recurring profit: 8.0% (vs. 1H estimate of 477 million yen)
Net income: 7.2% (vs. 1H estimate of 276 million yen)
Q1 results exceeded company expectations in all categories. Specifically:
- Wedding Production: +14.6% above plan
- Dresses: +12.7% above plan
- Hotel & Restaurant: +8.8% above plan
Wedding Production:
Sales declined 5.5% YoY due to lower facility utilization (44.9% vs. 54.3% in Q1 FY12/09; 436 ceremonies vs. 464). This was expected following weak orders taken in FY12/09 when the unusually high facility utilization hampered sales activities (representatives could not show facilities to the prospective customers on weekends), and a decision not to engage in excessive price competition also had an impact.
In Q1 FY12/10 orders improved 8.0% YoY (713 vs. 660) with the resulting increase in the order backlog (1,727 vs. 1,707). Two new facilities contributed, and all existing facilities but one saw YoY order increases. Lower utilization rates meant it was easier to show facilities, opposite to the situation of FY12/09. Seasonal pricing introduced in 2009 has helped too – discounting low season slots to increase competitiveness but keeping high season rates unchanged or even hiking them. The company added that orders in April, the first month of Q2, were “strong”.
Despite the tough competitive environment, per-wedding spend was unchanged YoY at the core guest house format. Bringing some services such as ”wedding video production” in-house and expanding the range of original gifts contributed positively. Seasonal pricing should start to have some negative effect in late Q2 or early Q3, but only to a small degree – prices for options and accessories are not discounted and the prices for ceremonies on popular days are even sometimes raised.
The average per-wedding spend at revival facilities declined 4.5% YoY. This was mainly due to lower sales at Hotel Suwako Forest – the popular Onbashira festival that is held once every seven years near Lake Suwa left local residents with less money for other celebrations; other revival facilities were performing well according to the company.
Comparable facility sales were down 16.7% YoY (utilization rates of 46.5% vs. 54.3% in Q1 FY12/09). Spend per wedding was marginally lower (-2.7% YoY) driving gross profit margin also slightly down (45.5% vs. 47.9%).
Dresses:
Sales were down 9.9% YoY with referral sales (down 30.5% YoY) driving the decline – the company discontinued several relationships due to disagreements over pricing. Non-referral (Novarese own ceremonies) sales were up 2.4% YoY. Average spend increased 6.6% to 628,000 yen thanks to incremental revenues from afterparty and guest garments and other initiatives.
Hotel and Restaurant:
Sales were down 2.7% YoY due to fewer wedding ceremonies held but offset slightly by banquet sales (+21.2% YoY). Consolidated purchasing increased gross profit margins by 1%-2%, however lower sales drove GPM down to 38.3% vs. 43.6% a year earlier.
FY12/10 Estimates
The company’s sales projections represent an 8.5% increase YoY (a new guest house opening in Q1 should contribute approximately 5%). Facilities are expected to grow by 3 units: 2 guest houses and 1 dress shop. Although the full year estimate did not include new revival facilities, the company indicated that the properties were in the market and any transaction decisions affecting the full year would be made in Q1. The company indicated that the FY12/10 target for wedding production was 3,000 ceremonies (+25% YoY).
During the FY12/09 results meeting, management indicated that price competition was increasing, and that competitors were lowering prices. Novarese indicated that it will continue seasonal pricing introduced in FY12/09 (maintaining prices for peak-demand days, and reducing prices for off-peak days) in reaction to lower prices in the market. The company assumes that prices will soften slightly in FY12/10 (approximately 5%) in both Wedding Production and Dresses.
Although per-segment gross profit assumptions are not disclosed, gross margins for Wedding Production is expected to decline slightly (51.2% in FY12/09), increase in Hotel and Restaurant (45.8% in FY12/09), and remain flat in the Dresses segment (87% in FY12/09).
The 2H sales estimate is 6.7 billion yen (+19.6% YoY), 2H operating profit estimate is 1.4 billion yen (+47.3 % YoY), which includes the full-year contribution of facilities opened during FY12/09 and in 1H FY12/10.
Expansion of guest house facilities is expected to continue; the company expects capital expenditures of 2 billion yen during FY12/10. Specific projects include two new guest houses: 1 in Hiroshima, and 1 in Niigata. Opening a guest house in Kamakura (larger than average, with two banquet facilities) initially scheduled in November 2010 was delayed to March 2011.
[edit] Business
[edit] Business Description
Novarese’s core business is the production of personalized guest house weddings that are defined by elegance, sophistication, and exclusivity (in Japanese, “guest house” refers to rental properties which are often designed to specific styles or themes ranging from an architectural motif to a fantasy environment). Other business includes restaurant and catering operations as well as garment sales and rental through a network of wedding dress stores. Through aggressive expansion, revenue has been grown rapidly from 576 million yen in FY12/01 to 10.6 billion yen in FY12/09; a median rate of 43.0% per year.
The roots of the firm can be traced back to 2000, when Takeharu Asada established “Workaholic” in Nagoya (later renamed Novarese). Asada’s previous work experience in the industry led him to the conclusion that there was room in the market for a more personalized wedding experience.
Initial growth was focused on Dress locations; the first company-owned guest house was added in 2003. Novarese’s guest house business has historically targeted more regional areas (as opposed to metropolitan); Dress stores are adjacent to the suburban wedding facilities or placed in city shopping districts.
The company reports business along three segments: Wedding Production (39% of FY12/09 sales), Dresses (21% of FY12/09 sales), and Hotel & Restaurant (40% of FY12/09 sales).
At the end of FY12/09, the total store count was 39; 12 guest houses, 3 “revival” facilities (essentially, turnaround opportunities), 14 dress shops, 9 partner locations, and 1 restaurant. Projected store count for FY12/10 is 43; reflecting 2 new guest houses, 1 new dress shop, and 1 overseas restaurant.
Wedding Production (39% of FY12/09 Sales)
Novarese’s wedding facilities fall into three different categories – the core “guest house” format, “revival” locations, and partnering with hotels or famous restaurants. Guest houses are divided further: Monolith-class buildings are more urban and contemporary whereas the Amandan style embraces the features of surrounding nature in the design (locations are central for Monolith, and less so for Amandan).
“Tie-up” arrangements are production agreements with hotels or restaurants hosting the event. These locations yield lower per-wedding revenue to the company, but help build the brand and offer revenue diversification.
Along with facilities to host the event, Novarese also offers clients other amenities, such as video and photography services, flowers, and coordinating gift giving to guests (“hikidemono”).
Dresses (21% of FY12/09 Sales)
Novarese Dress outlets operate under two separate brands: “Novarese” and “ecruspose.” The “Novarese” brand, focused mostly on Italian made imported dresses, is positioned for higher price points and uses more simple and elegant styling, where “ecruspose” was developed to convey a cute and fresh image for a younger demographic with higher price sensitivity. All design apart from prêt-a-porter pieces from collaboration brands is done by in-house designers; manufacture is outsourced. Novarese Dress stores are found in popular large city shopping districts positioned to achieve brand awareness for both the Dresses and Novarese Wedding Production; ecruspose stores are adjacent to the guest house facilities and located in or near regional cities.
Specific services offered at Novarese stores include rental and sales of imported bridal dresses and tuxedos, traditional kimonos, ceremonial garments for the family, as well as related accessories.
Hotel & Restaurant (40% of FY12/09 Sales)
Operations in the Hotel & Restaurant segment are mostly the banquet operations offered with weddings (approximately 80% of FY12/09 segment revenue). Maintaining restaurant operations helps smooth fixed costs during the non-peak wedding season and keeps staff trained. The company has a long term lease of a hotel in Nagano (Hotel Suwako Forest), but the primary use of the facility is hosting weddings with hospitality services offered in connection with the ceremony attendance. The hotel has proved to be an opportunity for the company to apply its turnaround expertise in guest houses to other businesses. The hotel was a running at a net 50 million yen loss in 2008; the company restructured the business (limiting services to only guest and banquets) with full year FY12/09 result of a net profit of 50 million yen.
Business model
Wedding Production (39% of FY12/09 Sales)
Novarese’s core business is producing weddings. The guest house facilities are either built by the company on leased land, or both the building and land are secured with long-term leases. In rare cases the company would acquire both land and the building. Clients are attracted mostly through targeted advertisements in popular wedding-themed channels, and the sales process is completed after customers visit the guest house of their choice. A wedding planning specialist introduces clients to specific options and services available for their constraints, and then other details are finalized. The couple places an initial deposit (100,000 yen) to secure a specific date, and then make one payment after three months (300,000 yen) and pay the balance 7 days before the wedding (with any ‘extras’ paid within two weeks after the wedding).
On average, a couple will spend about 4 million yen on a wedding at the Novarese guest house; the average spend at the “kekkonshiki jo” and hotels is lower at about 3.4 million yen (FY12/09); the price is mostly determined by the number of guests, but particular options or bundled services can also have an impact. Revenue per wedding has been increasing since FY12/05 - the average number of attendees per wedding has been stable, but spend per guest has increased from 47 thousand yen to 54 thousand yen - an increase of 3.5% per year.
When discussing the FY12/09 results, the company indicated that price per wedding spend could be peaking, both for the company and possibly the industry. Novarese has targeted increasing total spend per wedding through adding services such as photography and floral arrangements (through acquisitions) in order to capture a larger proportion of the total wedding spend.
Novarese’s wedding facilities are limited to two weddings per day, to maintain the feeling of exclusivity and personal service for each client wedding. There are two time slots, with time in-between to allow for a refit of the location and to minimize any overlap between arriving and departing guests.
The typical guest house building is approximately 1,000-1,500 square meters, which requires an estimated 350 million yen to build (including equipment). The company projects sales of about 650 million yen per year (about 160 weddings, assuming an average price of 4 million yen). The operating profit assumption is 200 million yen (32% OPM) and assuming working capital needs are relatively constant, results in free cash flow generation of 140 million per year (assuming tax of 45% and a depreciation add-back of 15 million yen). Note that this analysis does not include any refurbishment expenses – to maintain the ‘new’ look and feel of the site, a renovation will be performed approximately every 3-4 years, with an expected cost of 50 million yen.
- This suggests an expected utilization rate of over 70% per year – there are approximately100 standard days in the wedding season (Saturdays, Sundays, most holidays) and two timeslots per facility per day (10:30 until 13:30 for the first ceremony and reception, and 16:00 until 19:00 for the second ceremony and reception). Novarese has indicated that 65-70% is the optimal utilization rate for guest house facilities; but the exact level of utilization varies per location and per type (Monolith facilities, for example, have higher expected utilization)
- The headcount needed for the operation is approximately 20 (13 full time employees with 7 part time).
Dresses (21% of FY12/09 Sales)
Novarese dresses are rented or sold directly through store outlets operated by the company. Customers are attracted by Novarese advertising and through internal and external referrals. As the number of outlets has grown, external referral sales (cases where the weddings are not performed on Novarese facilities or by Novarese) have become an increasingly smaller portion of overall sales in the segment – comprising 33% of total sales in FY12/09, down from 58% of total sales in FY12/04.
The rental business is the majority of segment activity (90% of couples rent garments for their wedding). Rental prices for a single dress can range from 200 to 400 thousand yen; tuxedos range from 100 to 140 thousand yen. A deposit of 30,000-70,000 yen is made when the garments are selected and the balance due is paid one week before the wedding.
- The average spend per couple is about 600 thousand yen when including spending on accessories.
The typical dress shop is 200-500 square meters, and requires 4-9 staff – the high-touch nature of the business requires a maximum of 1.5 fitting rooms per employee.
Novarese’s store network is divided between 8 Novarese locations and 6 “ecruspose” stores (FY12/09). Profit is a function of maximizing sales per store (either through increasing customers or higher spending per couple).
The improvement in efficiency has been gained through higher spend per customer. Spend per customer in Novarese stores has increased 36.8% from FY12/05 to FY12/09 – from 453 to 615 thousand yen per couple. The increase in revenue was due largely to accessories, and the company expects this trend to continue as the offering of accessories and related services expands.
Fixed costs for the segment include expenses associated with the store network. CoGS are relatively low for rental garments – the clothing inventory is treated as an asset with a multi-year life and depreciated or impaired as needed. Each dress has about 5-7 total uses, and per-use costs include cleaning. Gross profit margins in the Dress segment have remained robust – approximately 82% from FY12/04 to FY12/09.
Hotel & Restaurant (40% of FY12/09 Sales)
Novarese’s sales in the Hotel & Restaurant segment are generated mostly through food and beverage sales in the Wedding Production segment (80% of segment FY12/09 sales were for weddings, 20% for banquets). Wedding menu choices are largely fixed (four choices available ranging from 13,000 to 21,000 yen per person). Limited restaurant operations are maintained (lunch and dinner service) mostly for training – standalone restaurant operations are not seen as a significant profit center of the company. Average prices for lunches are about 3,000 yen with dinner averaging about 7,000 yen.
The direct costs associated with Hotel & Restaurant operations include fresh food and beverages, labor, and fixed facility expenses. The company offers standardized menus between guest houses, allowing the company to realize volume discounts for food purchases. Gross margins are the lowest in this segment (ranging between 44% and 48% from FY12/05 to FY12/09).
Profitability
Operating margin information is not provided on per-segment basis. From data provided by the company, it seems that operating profit is largely determined by the impact of fixed costs related to facilities. SG&A expenses have declined from 52% of sales in FY12/04 to 40% in FY12/09. Rent and depreciation expenses are the largest components of fixed costs, so facility utilization is a key factor to profitability. Novarese’s reported guest house utilization has historically been high (65%-70%).
Recurring and net profit margins for Novarese have changed proportionally with operating profit margins during the FY12/04 to FY12/09 periods (when considering tax rates relatively constant). Non-operating income and expense items and extraordinary gains and losses have been generally been minor when compared to operating profit figures.
Comparison data prepared by the company is included below for reference. Note that the ROA calculation provided by Novarese uses recurring profit in the numerator, as opposed to the more popular net income figure.
Future Expansion Possibilities
Growth possibilities for Novarese include both domestic opportunities (the company’s focus) and overseas expansion. The company indicated that development an overseas business will begin during FY12/10, with an initial focus on China.
Growth in the Dress and Hotel & Restaurant segments is closely related to the Wedding Production segment – their growth is dependent on the number of wedding facilities. For Novarese to increase domestic top-line sales, more guest house and ‘revival’ facilities will need to be added to continue the “exclusive wedding” model.
Target areas for new guest house facilities require a population of a minimum of 300,000 people, within a 20-km radius of a major train station or other transportation hub. According to government census data, there are about 75 cities in Japan that have sufficient population. Considering the 16 guest house and ‘revival’ locations in operation by Q2 FY12/10 end, Novarese appears to have room to grow. Discussions with the company suggest about 4 new wedding facilities per year (3 Novarese-branded guest houses and 1-2 revival projects), and 2-3 new dress shops. The initial plan for FY12/10 was calling for 3 Novarese-branded guest houses and 1 dress shop (opening of one of the guest houses was delayed to FY12/11).
SR Inc. speculates that this growth plan could be realistic despite the perceived unfavorable demographic situation in Japan. These are macro factors that support the argument in favor of continued growth trajectory:
- Changing consumer preference in favor of guest houses. A 2009 survey conducted by wedding magazine Zexy found that the popularity of the guest house format is growing: from 3.8% of all weddings in 2003 to 19.1% in 2008. Guest house weddings are becoming a larger portion of the total wedding market.
- Waiting to get married. Couples in Japan are waiting longer to get married (data according to the Ministry of Internal Affairs and Communications). The economic importance of the shift to a later marriage is that couples have higher levels of discretionary income and when they marry they want their own more mature and sophisticated taste reflected in the event. Novarese’s weddings are targeted to appeal to this consumer.
[edit] Market & Value Chain
Market Overview
The Japanese wedding market has been in decline from a peak of 1.1 million weddings per year in the early 1970s to the 730,000 marriage applications filed in 2008. Examining the marriage rate per 1,000 people, the marriage rate is in decline along with absolute levels.
Available venues for weddings are the traditional “kekkonshiki jo” wedding halls, guest houses, and either hotels or restaurants. Examining the 2008 market, 33% of weddings were held in hotels, 28% wedding halls, restaurants accounted for 9%, and guest house weddings accounted for 19% (source – Zexy Wedding Trend Report, 2008).
The traditional “kekkonshiki jo” facility is set up to allow for efficiency of operation, as opposed to the exclusive focus that is commonly associated with guest house weddings. Multiple weddings can be held at the “kekkonshiki jo” per day, with facilities almost overlapping between different wedding parties. The format and style of the reception is typically pre-set by the hall operator. Dining options are limited; food preparation is handled in a central kitchen to maximize throughput.
The guest house wedding concept grew out of a response to the stagnation of options in the wedding market, namely the narrow choices between traditional wedding halls, hotel banquet rooms, or restaurants. Early entrants created facilities that offered unique atmospheres bordering on fantasy or popular amusement themes. As the guest house concept moved into the mainstream acceptance, consumers began to demand more refined choices, creating the opportunity for companies such as Novarese to define the market.
Along with a change in preferences, consumers themselves have been changing – Japanese couples have been waiting longer to marry. Data provided by the Ministry of Internal Affairs and Communications indicates that the average marriage age was for males was 25.9 and for females was 23 in 1950, versus for males 30.2 and for female 28.5 in 2008. The social phenomenon is widespread to the extent that the phrase “ban kon” (evening wedding) has entered common use.
The social impact of delaying marriage exacerbates an already declining population, but the economic impact is that couples have more discretionary income to spend on their wedding. Novarese’s brand image is centered on appealing to this demographic which is becoming the majority.
Customers
Novarese indicated that its target customers earn approximately 8 to 10 million yen per year (the average per household income in 2008 was 4.8 million yen, according to the Ministry of Internal Affairs and Communications Statistics Bureau).
The market dynamics can be accurately described by the competitive layout and the limited substitutes available - there are few barriers to entry.
Competitive Environment
Peer companies:
- Take And Give. Needs (TSE 4331) – Direct competitor in domestic guest house market. Founded 1998, first entrant in the guest house wedding market. Majority of offerings are domestic weddings.
- Best Bridal (Mothers 2418) –Competitor in guest house market. Established in 1995, offers domestic and destination weddings.
- Watabe Wedding (TSE 4696) –Competitor in guest house market. Founded in 1953, mostly focused on destination weddings; a recent entrant to the guest house wedding market.
Other competing choices:
- “Kekkonshiki jo” – the traditional wedding hall. Most independently operated or small chains.
- Hotels – dominant venue for weddings in Japan; a ‘non controversial’ choice with little flexibility.
Take And Give.Needs, Best Bridal, and Watabe Wedding are Novarese’s peer companies in the domestic guest house market. Take and Give.Needs has historically been the largest guest house wedding producer; however a contrast seems to be emerging between YoY total wedding conducted figures for Novarese its peers. Novarese’s YoY growth has been persistently positive while share has consistently increased.
Substitutes
Possible substitutes for a domestic wedding are an overseas wedding (popular choices for Japanese couples include Bali, Hawaii, Guam, and similar tropical destinations).
SWOT Analysis
Strengths
- Novarese’s facilities are new – the number of guest houses has nearly doubled since FY12/06. As of the end of FY12/09 the majority of guest house facilities are less than 4 years old (75% of guest house facilities were built after FY12/05).
- The guest house wedding format is an emerging trend in response to traditional venue choices, and the newness of Novarese’s facilities complements the market’s development. To maintain the fresh image, Novarese plans to refurbish its facilities approximately every 3 to 5 years.
- Financial strength – Novarese’s equity ratio is 52% (FY12/09),versus 33% for Take And Give. Needs (the largest domestic guest house wedding operator; data from FY12/10 1H results) and 32% for Best Bridal (data from 1H FY12/09 results). Novarese’s relatively conservative balance sheet management should provide favorable access to capital to fund future expansion.
Weakness
- Novarese is a smaller operator in the guest house market and execution risk at individual facilities is material, given the relatively small total number of facilities. One underperforming facility could have an impact on overall profitability. In order to reduce this risk, the company is sticking to ‘one facility one banquet’ format. This weakness is further reduced through store expansion and management’s emphasis on training.
- Novarese is positioned as a niche wedding producer at the higher end of the guest house wedding market. The company’s brand attempts to convey the images of ‘modern’ and ‘cool’, exclusivity and sophistication, largely through print and word of mouth from customers. Other competitors could create product offerings with similar hints of modern style which would weaken Novarese’s unique product offering.
[edit] Historical Financial Statements
Detailed Results Discussion of FY12/09 (For Reference Purposes)
The company released FY12/09 results on January 29, 2010.
Sales for the year were 10.6 billion yen (+13.4% YoY), exceeding initial estimates by 2.9%.
Operating profit was 1.8 billion yen (+20.2% YoY), exceeding initial estimates by 8.9%.
Recurring profit was 1.8 billion yen (+19% YoY), exceeding initial estimates by 10.1%.
Net income was 962 million yen (+20.9% YoY), exceeding initial estimates by 11.0%.
Sales exceeded 10 billion yen, a first for the company. Growth was driven by YoY gains in all of the company’s businesses: sales in the Wedding Production segment rose 14.2% YoY to 4.1 billion yen, sales in the Dresses segment rose 14.6% YoY to 2.2 billion yen, and sales rose 12.1% YoY to 4.3 billion yen.
Increased sales in the Wedding Production segment were a result of a rise in the number of weddings conducted, increased facility utilization levels, and an increase in per couple and per guest spending. Novarese conducted 2,421 weddings during FY12/09, an increase of 12% YoY. The company indicated that facility utilization for year was 67.1% (+3.4% YoY). Couples spent an average of 3.9 million yen per wedding, and although per-guest spending was flat (53,408 yen for FY12/08 vs 53,880 yen for FY12/09), the average number of guests rose slightly from 71 to 72 guests. The company indicated that the average spend per couple was helped by increased due to additional services offered (photos, flowers, etc).
The company mentioned that price levels had remained mostly stable, however the average spend per couple started showing some signs of weakness in Q4. Although broad price cuts were not being offered, the company indicated that in areas with weaker economies some prices were being reduced.
Increased sales in the Dresses segment were due to higher prices and increases in the number of couples served (3,653, +9.9% YoY). Both orders received and the backlog declined YoY; orders dropped by 2.5% and the backlog dropped by 7.9%.
Increased sales in the Hotel and Restaurant segment were a result of higher sales of food for weddings (3.4 billion yen, +13.3% YoY) and banquets (847 million, +7.4% YoY). Gross profit margin for the segment increased slightly (1.6%), a result of volume discounts from suppliers. The company indicated that the Nagano hotel began to generate cash flow after opening hours were reduced to save costs.
SG&A expenses were generally contained; the SG&A / sales ratio increased 1 percentage point, however the main components of SG&A (rent, advertising, and wage expenses) were in similar proportion to sales as FY12/08.
Operating profit rose to 1.8 billion yen; operating profit margin increased by approximately 1% due to higher in gross profit margin. Operating profit growth was unchanged YoY.
Recurring profit increased to 1.8 billion yen. Recurring profit growth YoY slowed from 21% in FY12/08 to 19% in FY12/09. The balance of non-operating income and expense was approximately 30 million yen, in-line with the company’s history of low non-operating items.
Net income grew 21% YoY to 962 million yen; net profit margin increased to 9.1% from 8.5% in FY12/08.
Q3 FY12/09 Results
Novarese announced Q3 results on October 30, 2009. Sales for the period were 2.2 billion yen; operating profit was 161 million yen (up 12.2% YoY); recurring profit was 168 million yen (up 8.9% YoY); net income was 64 million yen (down 21% YoY).
Q2 (1H) FY12/09 Results
Novarese announced Q2 (1H) results on July 31, 2009. Sales for the period were 4,994 million yen (a 22.2% increase YoY); operating profit was 798 million yen (a 50.1% increase YoY), recurring profit was 814 million yen (up 47.8% YoY), and net income was 439 million yen (a 44.6% increase YoY).
[edit] Income Statement
Novarese’s costs are largely defined by the fixed costs associated with the wedding facilities. Gross margins are largely constant on an aggregate on segment-based basis. Operating margins are only disclosed at the aggregate level.
Novarese’s top-line sales figures are available dating back to FY12/01 – YoY growth has been both high and volatile during FY12/01 to FY12/04, however this can be explained by the declining marginal impact on sales provided by store openings (base effect) and the rapid expansion of store locations.
Profitability ratios have been mostly stable. Gross profitability has been strong from FY12/04 – a median of 57.3% within a tight range of 55% and 59%. Operating, recurring and net profit margins appear to have become more stable since FY12/04 – the median OPM has been 16.1% (between 7% and 17%); median RPM was 16.1% (between 7% and 17%); median NPM was 8.5% (between 3% and 9%).
Segment gross profit is highest by percentage in the Dress segment – the median GPM has been 82% with little variation. The Wedding Production and Hotel & Restaurant segment median GPM have been 52% and 46%, respectively, from FY12/04 to FY12/09. Contribution to gross profit has been stable – Wedding Production, Dress, and the Hotel & Restaurant segments have all contributed nearly 33% of total gross profit.
Historical Performance vs. Estimates
Results in FY12/09 exceeded the company’s initial estimates for operating, recurring, and net profit. An increase in gross profit margin (GPM increased approximately 2% from FY12/08) led to a higher OPM on a YoY basis.
[edit] Balance Sheet
Assets on Novarese’s balance sheet are mainly fixed assets related to facilities used in the Wedding Production segment. Net fixed assets in FY12/09 have grown by 5x when compared to FY12/04 (from 970 million yen to 4.9 billion yen). Novarese’s current assets are mainly cash and equivalents, inventory requirements are low – understandable due to the lead time between planning a wedding and the event itself.
The large expansion of fixed assets was largely in 2006 and 2007. During the 2-year period, there were 7 wedding facilities opened, along with 6 dress shops.
Liabilities on the balance sheet are characterized by a higher proportion of current liabilities. The mismatch between current assets and liabilities is somewhat less if the liabilities related to advances from customers are removed. The current ratio (current assets / current liabilities) has ranged between 0.39x and 0.79x from FY12/04 to FY12/09. A comparison of the actual and adjusted current ratios is provided below.
Overall balance sheet leverage has been in decline. Equity gearing (the ratio of assets to equity) has been reduced substantially from a high of 5.39x in FY12/04 to 1.90x in FY12/09. Considering the dramatic change of capital structure taking place on Novarese’s balance sheet, the volatility in the current ratio could be explained as the simple result of less debt being used to finance assets (debt maturing in less than 1 year can skew the current ratio).
Per Share Data
Novarese’s dividend policy is to maintain a target payout ratio. It has increased from 5.8% in FY12/06 to 10.4% in FY12/09. During the FY12/09 results meeting, the company indicated that eventually the target payout ratio could increase to about 20%, achieved through small incremental increases.
[edit] Cash Flow Statement
Cash flow from operations has largely reflected reported income and the depreciation effect. With the exception of FY12/05, the proportion of CFO explained by accounting earnings with the depreciation add-back has averaged over 75%.
The depreciation expense per year deserves consideration. The lease term for land and buildings is between 15 and 20 years, however the current depreciation schedule is based on an expected useful life of 41 years for new guest houses, and 15 years for ‘revival’ facilities and facilities inside existing buildings. Changes in accounting rules expected within the next 2-3 years may no longer allow a depreciable life longer than the lease term, so the company will have to recognize an adjustment. The impact of such depreciation standard changes is an estimated 30-50 million yen of additional yearly expense. There have been no official announcements with specific detail, so Novarese appears to be waiting for clarity before taking any steps to restate.
Cash flows used for investments consist mainly of purchases of property and capital improvements for new facilities supporting the core Wedding Production business. Examining performance since FY12/04 to FY12/08, the largest CFI outflows were in FY12/06 and FY12/07. 3 guest house facilities were opened in FY12/06 along with 4 Dress locations and 1 Tie-up store, and FY12/07 saw 8 new facilities added.
Cash flows for financing have been mostly outflows from FY12/04 until FY12/08 – with the notable exception in FY12/06 when the company experienced a 1.3 billion yen inflow (a net 507 million yen of long term debt was raised as well as 778 million yen was raised in the IPO). Since the IPO in FY12/06, Novarese has had net cash outflows from debt financing, reducing the total interest bearing debt on the balance sheet.
[edit] Other Information
[edit] News & Topics
[edit] Major Shareholders
Takeharu Asada (President and founder) is the largest shareholder. As of FY12/09, he controlled over 50% of company stock through direct and indirect ownership.
The company split its stock 2:1 on July 1, 2009 (Announced on June 10, 2009).
Discussions with the company lead SR Inc. to speculate that the Novarese may seek to list on the first section of the Tokyo Stock Market sometime in the near future.