Financial Summary

Recent Updates

Highlights

On February 3, 2012, Paris Miki announced January 2012 sales figures: click here to go directly to monthly sales charts.

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

On January 4, 2012, the company announced December 2011 sales figures.

On December 2, 2011, the company announced November 2011 sales figures.

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

Source: Company Data Processed by SR Inc.

Source: Company Data Processed by SR Inc.

January 2012

Comparable store sales -2.7% YoY; all store sales -2.9% YoY.

December 2011

Comparable store sales -4.1% YoY; all store sales -4.6% YoY.

November 2011

Comparable store sales -1.3% YoY; all store sales -1.7% YoY.

October 2011

Comparable store sales -2.7% YoY; all store sales -3.5% YoY.

September 2011

Comparable store sales -2.7% YoY; all store sales -4.2% YoY.

August 2011

Comparable store sales -1.6% YoY; all store sales -2.6% YoY.

July 2011

Comparable store sales +1.2% YoY; all store sales -0.2% YoY.

June 2011

Comparable store sales -0.2% YoY; all store sales -1.3% YoY.

May 2011

Comparable store sales +2.7% YoY; all store sales +2.4% YoY.

April 2011

Comparable store sales +3.6% YoY; all store sales +2.3% YoY.

Quarterly Trends

1H/Q2 FY03/12 Results (Announced on November 11, 2011; please refer to tables above)

Sales increased by 0.1% YoY to 31.6 billion yen. Operating profit fell 51.7% YoY to 744 million yen. 366 million yen in inventory write-downs (vs. 170 million yen a year earlier), a 2.4% YoY decline in the gross profit margin to 67.6% and a 0.3% rise to 65.3% in the SG&A expense-to-sales ratio were the main contributors to the decline in operating profit. The company explained inventory write-downs caused the supply-demand balance for its products to collapse, which in turn caused inventory levels to rise. While sales promotion expenses decreased 1.8% YoY, this was not enough to compensate for the 6.6% rise in advertising and publicity expenses and overall SG&A expenses increased 0.5% YoY.

Top-line came in on par with the company forecast of 31.6 billion yen, but operating profit fell 1.2 billion yen short of, or 62.2% below, projections (2.0 billion yen forecast for operating profit). The operating profit miss was due to issues at the mainstay Miki format. Despite the opening of new stores, closing down of unprofitable Miki stores was ongoing and this led to lower YoY sales in aggregate. In addition, costs for store refurbishment and renovations came in above plan, which brought operating profit in lower than expected.

The company however maintained its full year outlook remarking that it expected its new product offerings aimed at the end-of-year period would contribute towards overall results. Its new product offering strategy is based on the following:

• Making each store more aware of their target-customer bases and ensuring they respond more precisely to their needs
• Launching a flagship store retailing all the company’s products
• Introducing iPads at all stores as a custome communication tool
• Increasing trading of physical gold at stores, such as purchasing gold off customers and increasing sales of gold eye glasses
• Developing products with specialized functions

1H performance for the domestic and overseas segments was as follows:

Domestic

Sales were off 0.6% YoY at 28.5 billion yen and the company opened 9 and closed 16 stores domestically in Q2 to give it a total domestic store network of 947 stores (store count at end-FY03/11 was 954 stores). Store sales declined 0.7% YoY given the decline in total store count, however, comparable store sales were up slightly at 0.2% YoY, which was relatively subdued when compared to sales performance at new stores.

Domestic sales by product category were:

• Frames: 9.4 billion yen (-2.9% YoY)
• Lenses: 14.2 billion yen (-1.3% YoY)
• Sunglasses: 1.3 nillion yen (-5.3% YoY)
• Contact lenses: 940 million yen (-6.1% YoY)
• Hearing aids: 2.6 billion yen (+9.7% YoY)

Operating profit for the segment declined 51.2% YoY to 838 million yen. Lower selling prices for products were behind a fall in gross profit margin.

At the company level, results were quite poor at Paris Miki Inc. due to inventory write-downs. In addition, the performance of Kimpo-do Co., which mainly operates stores within department stores, fell slightly below forecast as post-Tohoku earthquake there had been reduced opening hours and extra holidays at department stores in conjunction with rolling power cuts.

Kimpo-do’s goal for FY03/12 is to increase sales at its department store-based stores. In November 2011 it opened its new Kyobashi flagship store along Chuodori in Kyobashi, Tokyo. The store floor space is around 198 sq/m versus the usual 66 sq/m and Kimpo-do’s head office functions have been relocated to the site, making it easier to supervise the store. The services provided by the Kyobashi flaghship store will be expanded to its department-store based shops as the company further improves the services its stores offers.

Overseas

Sales were up 3.8% YoY at 3.3 billion yen, and the segment posted an operating loss of 98 million yen (vs. a 125 million yen operating loss a year earlier).

The company closed two of its Australian stores in Q2 FY03/12, restructured local store operations and hired better personnel; these measures enabled it to slightly reduce losses. As of November 2011, the company had to close one of its six stores in Thailand due to the flooding there and reduce opening hours at a further three Thai stores. The company noted that rising labor costs in Asia means that even if its increases sales it will be difficult for the company to generate profits in the region.

Q1 FY03/12 Results

On August 12, 2011, the company released Q1 FY03/12 results.

Sales were up 1.0% YoY at 15.2 billion yen. Operating profit decreased 97.9% YoY to 10 million yen. 204 million yen in inventory write-downs (vs. 92 million yen a year earlier) and a 2.5% YoY decline in the gross profit margin to 67.4% from 70.1% were among the main factors behind the drop in operating profit.

Domestic

Sales increased 1.1% YoY to 13.7 billion yen. The company opened five and closed four stores domestically to give it a total domestic store network of 955 stores. Comparable store sales were up 1.6% YoY, which was relatively subdued when compared to sales performance at new stores.

As for sales volumes and unit prices, the numbers of pairs sold increased 6.6% while the average unit price declined 5.3% to 27,783 yen a pair. With regards to the decline in unit price, the company usually conducts promotional and discounting activities every Q1 but last year did not really do so, thus for Q1 FY03/12 on a YoY basis the average unit price appeared to have declined but the move was more due to lack of discounting in the previous year. Indeed, the average unit price for Q1 FY03/10 was a similar 27,637 yen.

However, a notable point was the increase in inventory: on a consolidated basis inventory rose by 716 million yen from end FY03/11 to 10.7 billion yen (on a YoY basis inventory was up 1.4 billion yen). As mentioned earlier though, the company wrote-down existing inventory in Q1 and promotional and marketing activities had limited effect.

Domestic sales by product category were:

• Frames: 4.5 billion yen (-1.0% YoY)

• Lenses: 6.9 billion yen (+0.2% YoY)

• Sunglasses: 562 million yen (+2.8% YoY)

• Contact lenses: 461 million yen (-5.9% YoY)

• Hearing aids: 1.2 billion yen (+8.3% YoY)

Operating profit for the segment dropped 86.3% YoY to 79 million yen. Lower selling prices for products and other factors caused a fall in gross profit margin.

At the company level, while results were quite severe for Paris Miki Inc., Kimpo-do Co. results continued to hold up well, the company commented.

Overseas

Sales fell 3.5% to 1.6 billion yen, and the segment posted an operating loss of 72 million yen (vs. a 47 million yen operating loss a year earlier).

The Australian store count was unchanged from Q4 FY03/11 at 16 stores. According to the company, it was continuing to dispose of its stores so the negative earnings impact would diminish as it reduced its store presence there. Since end FY03/11 the company has added three new stores to its Korean operations taking it to a total of 29 stores there, and in China it closed a net two stores (opened two stores; closed four stores) to take its store network there to 138. With regards to its Chinese operations, the company commented in order to position itself for future growth it was in the midst of relocating one store. The company is also not sticking to selling just eyeglasses, it hopes to address customer needs by stocking a large array of products at its stores, such as hearing aids and accessories.

The company maintained its 1H and FY03/12 forecast. However, SR Inc. notes the company is forecasting an operating profit of 2.0 billion yen for 1H FY03/12 and 2.1 billion yen for the full year and yet it posted a weak start in Q1: an operating profit of 10 million yen. In addition, going into Q2 conditions continued to be tough - sales for all stores during July were off 0.2% YoY. How the company tackles 1H FY03/12 will require close attention.

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

Full Year (FY03/12) Outlook

The company forecast sales to grow 0.8% YoY to 60.6 billion yen. The forecast is based on assumptions of 15 store openings and 30 closures domestically, giving the company a domestic network of 939 domestic stores by end-FY03/12 vs. the 954 stores it operated as of end-FY03/11. The company is predicting YoY increases in total store sales and comparable store sales of 0.5% and 1.5%, respectively.

The company expects comparable store sales to increase driven by an expansion of its RakuRakuKun series, refurbishment of its existing large-format stores and steady sales promotion activities at individual stores.The company has said it is making its stores more aware of their target-customer bases, pushing stores to differentiate themselves according to business category, and sharpening store’s planning capabilities.

It pointed to the following examples of stores carrying out the above points:

• Its Shibuya store has been aiming for customers in their twenties to thirties, who tend to be more fashion conscious than average customers.
• Key suburban stores have changed their interior and exterior designs and enhanced product lineups in a bid to capture a broader span of customers.
• Opt LABEL and OPTIQUE PARIS MIKI (the company’s low-price formats) have moved to target customers in their twenties to forties who mainly shop at shopping malls.

The company also expects to cut SG&A expenses by 1.3% YoY by closing unprofitable stores. Combined with the above measures the company is forecasting operating profit to grow 96.4% YoY to 2.9 billion yen. Although the company does not break out domestic and overseas operations operating income forecasts separately, it has said it expects its overseas operations to post operating losses and so operating profits will be generated by domestic operations.

By 1H FY03/12 the company had achieved the following against its full year forecast:

• Sales: 52.1% of FY03/12 forecast met
• Operating profit: 35.7% of FY03/12 forecast met
• Recurring profit: 33.0% of FY03/12 forecast met
• Net Income: 21.3% of FY03/12 forecast met

While comparable stores sales were solid in Q1 FY03/12 (+1.6% YoY) they subsequently lost momentum in Q2 (-1.0% YoY). On a monthly basis, October comparable store sales were off 2.7% YoY, having declined for three consecutive months since August 2011.

Base effects will also make Q3 FY03/12 difficult: in Q3 FY03/11 the sales growth rate at all domestic stores increased an impressive 11.0% YoY. Moreover, the company has typically recorded an operating loss in 2H. Based on meetings with the company, SR Inc. believes it will be difficult for it to achieve its forecasts. However, the company was intending to launch a range of sales campaigns as it strives to achieve its FY03/12 forecast.

Longer Term Outlook

This company does not provide a medium-term management plan.

The company's sales peaked in FY03/02 at 84.0 billion yen, and then spiraled downward, slumping to 56.3 billion yen in FY03/10. However, as of end-FY03/11 it looked like this downtrend may now have bottomed out. Not only did the company post a 6.8% YoY increase in sales for FY03/11 to 60.1 billion yen, it was also forecasting a 0.8% YoY rise in sales for FY03/12 to 60.6 billion yen.

Jin Co. (Jasdaq 3046), Meganetop Co. (TSE 7541), and the company all posted increases in comparable store sales in calendar 2010. On the other hand, comparable store sales continued to decline YoY for rivals such as Meganesuper Co., Aigan Co. and regional operators. Given this it appears as if the industry will polarize into two groups. Whether Paris Miki will emerge victorious in the eyeglasses market was uncertain as of June 2011, but FY03/12 looks set to be a turning point in predicting who winners will be.  

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Business

Business Description

Paris Miki is the largest eyewear retailer in Japan by sales and the number of stores. It has the largest store network in Japan (954 as of FY03/11 end), despite steady losses of market share since 2004. Company stores sell eyeglasses (79.7% of FY03/11 sales), as well as contact lenses (3.3% of FY03/11 sales), hearing aids (8.0% of FY03/11 sales), and sunglasses (4.5% of FY03/11 sales). (Other segment makes up for the remaining 3.9%) The company’s business is largely based in Japan (90.4% of FY03/11 sales), although there are overseas operations (10.4% of FY03/11 sales), in Europe, Asia, and the US.

Typical Store Description

The types of domestic stores can be divided into 3 main categories: Paris Miki and Megane no Miki brands (core store format - 864 stores at the end of FY03/11), Kimpo-do (mainly selling inside department stores - 24 stores at the end of FY03/11), and Opt LABEL/OPTIQUE PARIS MIKI (low-price format - 66 stores at the end of FY03/11).

The company sells glasses using two main store formats: Paris Miki/Megane no Miki, and Opt-Label/Opt-Gout. The Paris Miki and Megane no Miki stores are the same format; Paris Miki is mostly used in the Tokyo/Kanto region, whereas Megane no Miki is typically found in Kansai. The company usually rents its stores – only about 10 store locations are owned.

The stores are mostly directly managed (844 out of 989, as of FY03/10). The company had 145 franchise stores (as of FY03/10); directly managed stores are the preferred structure.

Store layout is straightforward: most of the space is used for displaying inventory for sale (stores carry approximately 1,200 units). The average store size is approximately 100 square meters, and staffed with 4 people. Stores are standalone, tenant-in-building, or located inside shopping malls (the split as of FY03/11: standalone 49.5%, tenant-in-building 12.7%, malls 37.8%).

The stores are mostly directly managed (812 out of 954, as of FY03/11). The company had 142 franchise stores (as of FY03/11); directly managed stores are the preferred structure.

Paris Miki/Megane no Miki stores

Many existing stores have “castle” exteriors featuring towers (see images below), a legacy design from early efforts to create a unique look. The castle-themed design was an important part of the company’s early success (see History), but the company has been experimenting with new formats and store displays to reflect new marketing efforts. Paris Miki has engaged French design firm Malherbe (a retail architecture and design specialist) to help renew its store network. The experimental refurbishing done in FY03/10 resulted in an outcome that remodeling does contribute to sales positively; the company refurbished over 100 stores during FY03/11. For the brand image-wise, it was confirmed by the store at Seijyogakuen station evoking a Parisian apartment. Remodeling is expected to unify the brand image.

Interior and exterior images of existing stores (the castle-theme) and some new store designs are shown below:

Opt-Label/OPTIQUE PARIS MIKI stores

The Opt-Label/ OPTIQUE PARIS MIKI store is a 3-price store format (offering 5,800 yen; 8,800 yen and 12,800 yen price points) developed by the company in response to low-priced competitors entering the market. The shops carry only private-brand frames, and prices are displayed inclusive of lens costs. The stores have mainly been opened in shopping malls.

Paris Miki / Megane no Miki and Kimpo-do stores target consumers with average and above average discretionary income; the typical price per pair of eyeglasses in FY03/11 was 33,970 yen per pair (vs. industry average of approximately 25,000 yen). Opt-Label / Opt-Gout stores target price- and fashion- sensitive consumers; the average eyeglasses purchase in FY03/11 was 11,967 yen.

Store Network (as of FY03/11)

Domestic stores: 954 (81.0% of sales)

Overseas stores: 222 (19.0% of sales)

China: 140

Australia: 16

Other Asia: 56

United States: 6

Europe: 4

Total Stores: 1,176

Overseas sales were 6.2 billion yen in FY03/11; the majority of which came from Asia.

Business Model

Eyeglasses (Frames and Lenses 79.7% of FY03/11 sales)

Eyeglasses are the core product that the company sells. The company uses two pricing methods: lenses and frames priced separately, or a fixed price for a complete set of glasses.

The majority of frames sold by the company, two-thirds (FY03/10; retail sales basis), are private brands designed internally (examples include Au, Iki, Etos, 8vo, and Edge). Both set and separate pricing is used in Paris Miki / Megane no Miki stores. The price range for the bulk of frames sold separately is roughly 15,000 yen to 40,000 yen. At the same time, the prices for a standard model of the gold frame Au series are 30,000 yen to 880,000 yen, with the majority of Au frames in the 100,000-300,000 yen range.

For lenses, the price for lenses is determined by such factors as thickness, weight etc. Prices start at 3,000 yen and reach just under 150,000 yen for the most expensive ones.

The frame and lens packages (product group called Very3) are offered at three levels: 10,500, 17,800, and 24,800 yen.

At Opt-Label/OPTIQUE PARIS MIKI, there are three price levels for a frame + lens set (5,800 yen; 8,800 yen and 12,800 yen).

Domestic unit price growth has been in decline. According to data provided by the company, the average unit price (frame and lenses) was 38,171 yen in FY03/00 and has fallen to 29,873 yen as of FY03/11 – a decline of 27.8%. Possible reasons for the price decline can be attributed to both the introduction of the less expensive Opt-Label/OPTIQUE PARIS MIKI stores, and price erosion at the main stores.

The unit price declines that started in FY03/02 were due to product mix changes caused by the development of the low price Opt-Label format. Further unit price erosion in FY03/09 was caused by introduction of the Very3 product series in all of Paris Miki stores. This was done in response to the price competition in the eyewear retailing sector.The YoY rise in unit price in FY03/11 was largely due to the consolidation of the high-end Kimpo-do store format.

The level of inventory turnover varies between stores located in high-traffic shopping malls and stores located in suburban areas. Stores inventory is managed by a POS system. The company has a distribution center in Himeji that holds approximately 700,000 units of frames inventory; individual stores hold approximately 1,200 frames each. The inventory mix at each store is largely determined by individual store managers with guidance from the headquarters. Gross profit margin tends to be higher in lenses than frames.

Gross profit margins for frames and lenses are generally better than the company average of 68.4%; lenses tend to carry margins higher than frames.

Sunglasses (2.8% of FY03/11 sales)

Sunglasses sold in stores can be considered as complementing the core eyeglass product; the product is not expected to contribute significantly to the overall sales.

Sunglasses sold in stores are popular “national” brands (e.g. Police, Ray-Ban) with prices typically ranging from 5,000 to 20,000 yen. Gross profit margins for sunglasses are generally lower than the company average of 68.4%.

Contact lenses and accessories (3.3% of FY03/11 sales)

The company sells contact lenses as complements to the main product, eyeglasses. Contact lenses are relatively easy to sell (no display space required, no fashion trend risk) and are likely to remain in the mix. Prices range from 3,800 to 32,000 yen per pair. Gross profit margins for contact lenses are generally lower than the company average; approximately between 30% and 40%.

Hearing Aids (8.0% of FY03/11 sales)

The hearing aid business is relatively new for the company and represents an area of potential growth. Paris Miki carries hearing aids in approximately 800 of its stores (as of FY03/10), and hearing aids have been increasing as a proportion of total sales since the company began reporting separate sales (FY03/05 through FY03/10).

Prices for hearing aids vary widely: from 35,000 yen to 480,000 yen per unit. Gross profit margins for hearing aids are generally lower than the company average of 68.4%.

Cost Structure

Paris Miki’s cost structure is largely determined by labor and rent. During the period of FY03/00 through FY03/10, employee and rent expenses have averaged 72.4% of SG&A. Labor is the largest single cost, historically over 50% (FY03/00 through FY03/11).

Rental expense has averaged 20.7% of SG&A from FY03/11 to FY03/10. The rental expense for standalone stores is directly negotiated with the landowner; stores located in shopping malls normally pay a fixed rent (the rent is variable for the department stores and for some shopping centers).

Profitability Snapshot, Financial Ratios

Paris Miki’s operating profit margin during the periods between FY03/00 and FY03/07 averaged 13.4%. Declining sales and the fixed cost nature of the labor expenses caused OPM to decline to 6.1% in FY03/08, further to a loss of -1.4% in FY03/09, and -1.0% in FY03/10. EBITDA margins (operating profit plus depreciation) have remained positive over the same period although falling operating profit has caused EBITDA margin to fall to 1.5% in FY03/10 (an 18.9% decline from the peak of 20.4% in FY03/02). In FY03/11 the company posted operating profit of 1.1 billion yen while EBITDA margin improved to 4.3%.

ROE has been declining from FY03/00 through FY03/09, but since FY03/10 has been improving.

A comparison between Paris Miki and peers is shown below:

Paris Miki’s operating, recurring, and net profit margins have historically been higher than peers. The company’s fixed cost burden contributed to an underperformance of OPM in FY 2009 and FY 2010.

Strengths, Weaknesses

Strengths:

• A large number of stores (nationwide store network). Due to its size, the company can arguably enjoy economies of scale and should be able to invest in systems and such initiatives as nationwide advertising campaigns. Until recently, it was the only company capable of this in Japan. Currently, it can be argued that Megane Top developed capabilities similar to Paris Miki. However, given small relative market shares of the largest competitors, the size advantage gives both companies leverage over smaller rivals.
• Well trained, experienced staff. Paris Miki store personnel are arguably some of the best in the industry. The company has been investing in training over the years and emphasized focus on customer service. Despite several years of weakening performance, SR Inc. felt that Paris Miki employees retained a high level morale and motivation. However, it seems vital that the sense of direction for the company is regained soon, lest a state of apathy and inertia develop.
• Some brand strength. While even the company itself does not perceive itself or its stores as a singular brand (as evidenced by multiple store designs and even different store names), there is probably a high degree of recognition of words “Miki” and “Paris Miki” as related to the notion of eyeglasses (“Megane”). Omnipresence of its stores in suburbs and cities of the most populated areas of Japan and years of advertising in the past have surely contributed to establishing a certain brand image. This is a strong base to build from. Again, it seems likely that the past few years were a relative setback as dynamic competitors emerged. Those competitors have easily recognizable brand attributes (single brand name such as Zoff or JINS, distinct store design, in some cases aggressive advertising) and clear message (low price and cool designs at acceptable quality). Paris Miki brand must have been negatively impacted as it tried to be everything for everyone, offering stores that lack personality and emphasize functional aspects of retailing (buying eyeglasses with a wide selection of frames and lenses at varying prices) over emotional ones (modern design, easy-to-understand prices, few confusing options)
• Financial strength. The company had 20.0 billion yen of cash on the balance sheet (as of FY03/11), a reserve dwarfing any of its competitors. While a strong balance sheet can be sometimes be a double-edged sword (it can breed complacency and prevent a sense of crisis from developing in time), in times of competitive wars it is better to be rich than poor. (It can be noted that of the largest competitors Aigan is smaller but also cash rich, Megane Top is cash poor but its financial position has been recovering dramatically).

Weaknesses:

• Confused market positioning. Arguably the largest weakness for the company. Its stores in most cases fail to answer the core questions – “who is the target customer?” and “what is the company trying to sell/tell that customer?” The message is unclear. It offers an excellent quality product, its staff is professional and service oriented, its stores are conveniently located. However, by not sharpening its message and brand image, it might end up ‘stuck in the middle’ – excelling in parts but mediocre as a whole. Since FY03/11, the company has become more conscious of this and strived to ensure each store is more aware of its target-customer base, has differentiated itself according to business category, and sharpened its planning capabilities. As of June 2011 it was too early to tell whether these efforts had paid off, but SR. Inc thinks it is worth closely monitoring these efforts during FY03/12.
• The problem of positioning leads to the problem of branding. Another weakness of Paris Miki is a lack of store design uniformity. The company has an excellent opportunity, given its size and financial strength, to increase the power of its brand and mute out competitors. However, at the beginning of 2010, it would be all but impossible to do effectively. The stores are called Paris Miki in some locations and Megane no Miki in others. The store design can be best described as haphazard, and while the distinctive fake castle designs are visible and recognizable, few people would call them beautiful or modern. It appears to SR Inc. that the problem of uniformity needs to be addressed urgently. While refurbishment expenses may fail to generate cash returns overnight (and the company has been successfully managed for cash flows over the years), without unifying the formats the cash cow that is Paris Miki may grow old and stop producing milk (stop attracting customers and see further performance deterioration leading to ever lower cash flows).
• Not offering Value. Value has been a major theme in the retailing worldwide in the past 10-20 years. A lowest possible price for a quality that is understood and demanded by the consumer is one definition of Value. Another expression of Value could be to offer customers a positive emotional experience and enhance their daily lives through unique, cool, or otherwise valuable products and services. “The price as value” is the easiest to understand and pursue, both for consumers and the firm. This is probably why the discount retailers are the biggest and fastest growing type in any branch of retailing (JINS, Zoff and Megane Ichiba are clearly such examples). However, there are many examples of great success achieved through other forms of “value innovation”. Paris Miki has been emphasizing the notion of Omotenashi (a uniquely Japanese notion of hospitality) and developing interesting customer solutions such as computerized individual eyeglass design. However, the company seems to have been unable to develop such initiatives into a distinct model that would resonate with the consumer. Instead, it drifted while watching dynamic rivals who compete on “price as value” basis steal market share.
• Issues described above and rapidly changing market environment led to some degree of confusion and to a weak business momentum. This qualifies as a weakness as it makes more difficult for the company to invest in growth and act confidently. Comparing the situation to a war, the company has lost the initiative and is avoiding big battles. It is fighting local skirmishes while risking losing the war.
• Large degree of autonomy at the store level. The company essentially operates a network of semi-autonomous stores guided by the headquarters, but which are pretty much left to their own devices in terms of execution (at least at territorial level). Such a leadership structure has contributed to the successful expansion in the past but SR Inc. questions if the current competitive situation demands a different approach. The company has moved to change this system trying to create a more centralized “federal” organizational structure. SR Inc. has taken a positive view towards these changes, but believes whether or not an overhauled system can function smoothly needs to be monitored closely.

Group Companies

Paris Miki – the core company of the group; eyewear retailing. 100% subsidiary of Paris Miki Holdings.

Kimpo-do – the eyeglasses retailer acquired in FY03/10; 24 stores at domestic department stores such as Takashimaya and Isetan. 100% subsidiary of Paris Miki Holdings. Through this acquisition, the company is planning to expand into higher-priced glasses.

Great Construction – store construction and property management company that supports the group’s retailing business. 100% subsidiary of Paris Miki Holdings.

Create 3 - On February 3, 2011, subsidiary Paris Miki MD Inc. changed its name to Create 3. Paris Miki MD had previously acquired the assets of Fukui Kouki Ltd. following its bankruptcy proceedings. Fukui Kouki’s assets include factories, buildings and eyeglass frame manufacturing equipment.

Overseas subsidiaries:

PARIS MIKI S.A.R.L. －corporate entity for the French store network

PARIS-MIKI INTERNATIONAL GmbH －corporate entity for the German store network

PARIS-MIKI LONDON LTD. －corporate entity for the United Kingdom store network

PARIS-MIKI OPTICAL (CHINA) Co.,Ltd.－corporate entity for the China store network

SHANGHAI PARIS MIKI OPTICAL CO. LTD. – corporate entity for the China store network

SHANGHAI PARIS MIKI TRADING CO. LTD.－corporate entity for the China store network

OPTIQUE PARIS-MIKI (S) PTE. LTD. –corporate entity for the Singapore store network

OPTIQUE PARIS MIKI (M) SDN BHD －corporate entity for the Malaysia store network

PARIS MIKI OPTICAL TAIWAN., LTD. CO －corporate entity for the Taiwan store network

PARIS MIKI OPTICAL (THAILAND) LTD. －corporate entity for the Thailand store network

DIANE OPTICAL INC. –corporate entity for the South Korea store network

PARIS MIKI OPTICAL INTERNATIONAL LTD. －corporate entity for the Hong Kong store network

PARIS MIKI AUSTRALIA PTY. LTD. –corporate entity for the Australian store network

MIKI, INC. – corporate entity for the Hawaii store network

(SEATTLE BRANCH) －corporate entity for the Seattle store network

KIMPO-DO (MALAYSIA) SDN BHD

Group Strategy

Paris Miki was transformed into Paris Miki Holdings, Inc. in April, 2009. The company indicated that the main reason for the reorganization was to create a corporate structure that would streamline new business initiatives.

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Market & Value Chain

Market Overview

Eyeglasses

The eyeglasses retailing market in Japan is approximately 390 billion yen (according to 2010 market survey data compiled by research firm Gankyo). Survey data indicates that there were around 16 million eyeglasses sold during 2009 at an average price of 25,000 yen. Both the number of eyeglasses sold and the average unit price have been in decline from 2001 through 2009 (chart below).

Source: Gankyo Data Processed by SR Inc.

The repurchase cycle varies by age group. Generally speaking, the age related deterioration in eyesight (worsening visual accommodative response) starts in late 30s. This necessitates replacement purchases of eyeglasses every 2 or so years, as visual acuity deteriorates. With age it becomes harder to focus on objects at various distances. To address this problem, varifocal/progressive lenses (lenses with a gradient of the lens power) are frequently used. According to the company, the switch to progressive lenses is a positive stimulus for purchases of new eyeglasses, as consumers are buying eyeglasses for continuous use (because they can use these eyeglasses in all situations) and that increases the importance of the fashion component. This should lead consumers to buy multiple pairs according to their fashion choices. Simply speaking, varifocal eyeglasses are worn all the time. That is why more people would want to look good wearing them, compared to when they just pull eyeglasses for reading out of their pockets every now and then.

In terms of price, the eyeglasses market in Japan could be divided into three main categories. Typically, more expensive glasses are sold in department stores. The top level of the market has fewer market participants and volume than other segments. The majority of the market competes at prices between 15,000 and 30,000 per pair (the average market price was 26,000 yen in 2008). The lowest tier of the market is characterized by relatively low prices; less that 10,000 yen per pair.

Hearing Aids

Paris Miki estimates that hearing aid usage per capita is approximately 25% of other developed countries.

The two main types of hearing aids sold in Japan are analog and digital (referring to the sound processing technology). The market has grown by approximately 50% from 1990 to 2008, with growth stabilizing from 2003 to 2008. The hearing aid market could be entering a secular growth trend, due to Japan’s aging population (see Market Growth below).

Source:Gankyo Data Processed by SR Inc.

Market Growth

Demographic trends projected by the Ministry of Health, Labour, and Welfare appear favorable for the eyeglasses market. A large proportion of the population will be within the 40-60 age range in 2011, creating a secular growth trend in terms of units. However, it remains an open question whether a rising volumes would offset lower prices in a market that has been exhibiting clear deflationary characteristics for a number of years. At the same time, it is possible that market participants could benefit from the demand created by shift in older consumers’ perception of eyeglasses as a fashion item and not just a functional tool.

Source:Ministry of Health, Labor, and Welfare.

Suppliers

Frames – just under 70% of frames sold by Paris Miki are private brands, developed within the company and manufactured externally (mostly domestically, however some are manufactured in China). SR Inc understands that the company uses approximately 50 different suppliers to source frames.

Lenses - Suppliers include: Hoya (TSE 7741), Seiko (TSE 8050), Tokai optical (unlisted), Nikon Essilor (unlisted; subsidiary of French company Essilor). The company indicated that overall sourcing is roughly equally divided between the suppliers. SR Inc. understands that the company enjoys economies of scale for lens purchases compared to smaller retailers.

Contact lenses – Main suppliers include: J&J, Coopervision, Bosch and Lomb, Menicon.

Hearing Aids – Main suppliers include: Oticon, GN Resound Corporation, Siemens.

Barriers to Entry

The 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 are relatively 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

The market participants can be categorized into two main groups: specialized retail chains (such as Paris Miki), and smaller stores that sell eyeglasses, sometimes along other products (such as watches and jewelry). The company estimates the latter represent roughly 70% of the market – the oligopolization of the market by large retail chains is hardly progressing.

The current competitive landscape is the result of two phases of intense price competition that began with the entrance of Intermestic Inc.’s (Unlisted) 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: 5,000 yen, 7,000 yen, and 9,000 yen. Consumers were attracted to Zoff’s low-price stores, and the business rapidly grew. It is interesting to note that Intermestic Inc. was not a eyeglass retailer or manufacturer when it started Zoff, an example of outsider providing an innovative solution in the market where the existing players are unwilling or unable to do so. Most incumbents were quick to launch low-priced stores in response to Zoff’s early success (Paris Miki launched the Opt-Label format in September, 2001). Intermestic Inc. was boasting approximately 90 stores as of the beginning of 2010, mostly concentrated in the Kanto region.

Zoff offered extremely low prices. These low prices were made possible by the following factors: private brand (no royalties), fewer models (less inventory), and frames manufactured in China. Low prices did not come without a cost – supply chain issues created quality concerns which eventually spread to other low-cost shops as consumers associated low prices with low quality.

Since 2009 though JIN Co. (Hercules 3046) has had the most impact on the competitive landscape; the company used a radical pricing method to attract customers - a single price setting with no extra charges. The prices were 4,990, 5,990, 7,990 and 9,990 yen (the most expensive eyeglasses were less than 10,000 yen). JIN entered the eyeglasses market in April 2001 and from the beginning saw eyeglasses as a fashion item but it was the introduction of the new pricing system that led to exponential growth in sales and the company operated 90 stores as of end-February 2011.

Other than two companies listed above, Megane Center (unlisted) launched a one-price store format called 20,000-Yen-Doh in 2005. The store offered a complete set of glasses for 20,000 yen when the average industry price was approximately 29,000 yen (data according to Gankyo). Megane Top (TSE 7541) launched a similar one-price concept in 2006 under the Megane Ichiba brand (lenses and frames for 18,900 yen). Megane Top’s price point was approximately 30% less than the average industry price of 28,000 yen when the shops opened. The company grew the store base and gradually converted its entire store network to the one-price store format. Although one price level of 18,900 yen is advertised, the company has been offering discounts up to 15,750 yen.

Other competitors include Megane Super (Jasdaq 3318) and Aigan (TSE 9854). Both companies have struggled in the wake of low-price competitors.

The largest competitors are compared below:

Substitutes

The main substitutes for eyeglasses are contact lenses and corrective laser surgery. The surgery was yet to be considered a mainstream alternative as of June 2011. The contact lenses market is mature and while some fluctuations in the market share between the contacts and eyeglasses might occur based on technological innovation and design, the relationship should probably considered a stable one. It would appear that the aging population will benefit the eyeglass market due to more complex vision related and medical needs older consumers typically have.

Switching costs for contact lenses are low (an ophthalmologist writes a prescription before the first purchase). Costs for laser surgery are relatively high, but prices in the market are trending lower – SR Inc. estimates that eye surgery in Japan can range between approximately 100,000 and 400,000 yen (the average price for glasses in FY03/09 was approximately 25,000 yen according to Gankyo).

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Strategy

From 2000 until around mid-2010 Paris Miki went through several periods of searching for an appropriate strategy. These include experimenting with a franchise model, reactive expansion of low-price formats, and bringing in outsiders into the management team. The period from 2007 till 2010 is best characterized as a period of relative confusion. The company was unable to reach an internal consensus on its store and branding strategy, instead it responded to tectonic shifts in the business environment with moves such as closures of unprofitable stores and introduction of experimental store designs.

During the difficult operational period Paris Miki found itself in, it operated a strategy of:

1. “Think and act local.” Stores and territories have a significant degree of autonomy and try to deal with competitive challenges as they arrive in their local markets. That means that acting on a company level takes time.
2. “Don’t spend money unless absolutely necessary.” Managing for cash flows has long been a trademark approach of Paris Miki and it served it well. Whether the tradition of financial conservatism became a financial inertia remains to be seen.
3. “Experimenting with new approaches is encouraged if absolutely necessary.”
4. “Give the customers good service and a good product and they will come back.”

SR Inc. thinks since mid-2010 the company has begun to emerge from the rut it had found itself in. The company was reluctant to compete on price but eventually made the decision to get more aggressive on pricing and introduced the frame+lenses sets at all of its stores (10,500 yen, 17,800 yen, 24,800 yen). At the same time, Paris Miki has also started to communicate to consumers its “value is not just the price alone” proposition. It started selling higher priced items with clearly defined functional benefits, a RakuRakuKun series (“Mr. Easy-Easy”), such as Golf RakuRakuKun, and will continuously expand by introducing new series. The company commented during the result meeting in May 2011 that it was clarifying its business lines while segmenting and classifying its store types by category. The company was intending to target customers based on income and age brackets (Paris Miki for middle-aged and senior adults; Optique Paris Miki for young adult segment; and department store (Kimpo-do) for the wealthy).

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Historical Financial Statements

Earnings Results Discussion for the Year Preceding Current Fiscal Year (For Reference Purposes)

FY03/11 Results

On May 13, 2011, the company released FY03/11 results.

Sales were up 6.8% YoY at of 60.1 billion but this fell short of company forecasts for 60.7 billion in sales. Operating profit meanwhile came in at 1.1 billion yen (vs. a 543 million yen operating loss in FY03/10), which beat the company forecast of 912 million yen. The company cited cost reviews and reductions in SG & A expenses as the driving force behind the better-than-expected operating profit performance.

Domestic

Sales were up 8.2% YoY at 54.3 billion yen. The company opened 13 stores domestically and closed 48 during FY03/11 leaving it with a net 954 domestic stores. This is a decline of 35 stores vs. the 989 it operated at end-FY03/10. Nonetheless, sales were up YoY with comparable store sales up 1.9% YoY and top-line contribution from the newly consolidated (from January 2010) Kimpo-do store format.

The company said the rebound in comparable store sales was due to:

• Developing and launching functional product lines, such as the RakuRakuKun series (golf and fishing focused eyewear)
• Store refurbishments
• Decentralizing more power to stores allowing them to independently plan promotions and change store displays.

Domestic sales by product category were:

• Frames: 18.4 billion yen (+7.0% YoY)
• Lenses: 27.4 billion yen (+5.8% YoY)
• Sunglasses: 1.9 billion yen (+22.7% YoY)
• Contact lenses: 1.9 billion yen (+4.9% YoY)
• Hearing aids: 1.2 billion yen (+8.0% YoY)

Domestic operating income came in at 1.4 billion yen (vs. an operating loss of 398 million yen in FY01/10). In addition to the above factors that helped sales growth a further reason for improved operating profit was SG&A expenses only increased 3.7% YoY following the consolidation of Kimpo-do. The company was able to cap SG&A at reasonable levels by closing unprofitable stores and other measures: the SG&A expenses to sales ratio was 67.6% down 2.0% YoY.

Overseas

Overseas sales were down 3.8% YoY at 6.2 billion yen, resulting in an operating loss of 319 million yen for overseas operations (vs. a 328 million yen operating loss in FY03/10).

In Australia, by end-2010 the company operated 16 stores down from 24 at end-March 2010 as it continued to close unprofitable shops. The issue of how to improve operational efficiency was one of the challenges that the company has been trying to address.

Over in China sales remained lackluster as operating expenses increased, particularly, personnel costs and the company found it difficult to generate profits. At end-March 2011, the company had 140 stores in China, with 11 store openings and 21 closures over FY03/11.

Q3 FY03/11 Results

On February 10, 2011, the company released FY03/11 Q3 results.

Q3 cumulative sales grew 8.7% YoY, mainly due to the contribution of good performance from newly consolidated subsidiary Kimpo-do and growth in comparable store sales (in a positive trend since June 2010). Operating profit grew 273.2% YoY to 1.4 billion yen. SR Inc. speculates that increased operating profit was due to the combination of increased sales and reduced SG&A cost of Paris Miki, the main subsidiary.

The company's full year earnings forecasts were unchanged and it commented that progress in Q3 was generally in line with expectations. While Kimpo-do slightly exceeded forecasts, overseas operations in Australia and elsewhere were marginally below expectations. Performance of Paris Miki, the main subsidiary, was roughly as anticipated.

Kimpo-do continued to perform strongly in Q4 with the stores at Shinjuku Isetan and Nihonbashi Takashimaya performing particularly well. Conversely, conditions were relatively tough at stores in regional locations and the company said that correcting this disparity could be problematic. Of the 24 stores within Japan, it refurbished the Shinjuku Isetan, Tachikawa Takashimaya, and Shinjuku Takashimaya stores in FY03/11, and said that it will refurbish 4 to 5 stores in FY03/12.

Overseas, the company had 24 stores in Australia at the end of March 2010, but by the end of December 2010 this number fell to 16 because it continued to close unprofitable stores. The issue of how to improve its operational efficiency (hence profitability) has been one of the challenges that the company is trying to address. In China, although sales were sluggish, spending increased, particularly for personnel. This created operating conditions that made it difficult for the company to generate profits. The company said that once it completes the current round of store closures, it intends to increase the number of store openings‚ particularly for large-scale stores.

Some of the measures Paris Miki is implementing are as follows:

1. Pursuing synergy effects from the transfer of assets from the iPROS Corporation, carried out in January 2011
2. Increasing sales of the new HPC (High-contrast Premium Coat) lenses launched in February 2011
3. Pushing forward with store refurbishments

Through implementing measure 1), the company acquired assets owned by iPROS, including factory facilities and glasses-frame manufacturing equipment. Specifically, this asset transfer enabled it to acquire technology for creating metal molds using a 3D production system, dramatically reducing the lead time for glasses production from about five months to a little over a month. The company intends to use the synergy effects generated through the collaboration of this technology with the RakuRakuKun series and ESMOD (fashion design school) in its various production and sales initiatives. The product in measure 2) is a colorless and transparent coating that reflects blue light (the visible-region blue light often found in LEDs and other lighting) that causes glare or flickering effects. The company is the first in the world to launch this product. In measure 3), the company has been refurbishing stores since the start of FY03/11 and will continue in FY03/12.

Q2 FY03/11 Results

On November 11, 2010, the company released FY03/11 Q2 (1H) results. At the same time, the company released an upward revision to its FY03/11 earnings forecasts. As a percentage of the full year revised company estimates, FY03/11 Q2 (1H) results were as follows:

• Sales: 52.0% (vs. FY estimate of 60.7 billion yen)
• Operating profit: 169.1% (vs. FY estimate of 912 million yen)
• Recurring Profit: 144.2% (vs. FY estimate of 1.1 billion yen)
• Net Income: 800 million yen (vs. FY estimate of a net loss of 19 million yen)

Both sales and operating profit exceeded the initial company estimates. Sales exceeded the budget by 180 million yen and operating profit was over by 540 million yen. The company mentioned that stronger than expected monthly sales from July 2010 were behind the 1H performance. Total store sales were +7.6% YoY in 1H. One of the reasons that monthly sales were strong was higher than expected sales at Kimpo-do stores. The company explained that this was due to store refurbishment, enhanced employee incentives, and marketing efforts. Another factor boosting sales was performance of existing stores; 1H comparable store sales exceeded company targets and were +0.6% YoY. Sales from overseas locations were slightly lower than expected for 1H. The company identified the continuing economic downturn in Australia and elsewhere as the main factor affecting operations overseas.

Comparable store sales growth entered positive territory in June 2010 and had been positive for 6 consecutive months through November 2010. The company commented that refurbishing stores, the RakuRakuKun series (“Mr. Easy-Easy”), and the combined effects of smaller initiatives such as ESMOD (fashion design school) and collaboration with Ray-Ban were behind the sales improvement.

Going forward, the company plans to continue refurbishing stores and add to the popular RakuRakuKun series. The company plans to refurbish 160 stores, and plans to have about 70 done in 1H FY03/11. The company plans to refurbish the remaining approximately 90 stores between 2H FY03/11 and FY03/12. Paris Miki began offering RakuRakuKun series for bicycles in early November 2010 with additional types planned.

The revised FY03/11 forecast was as follows:

• Sales: 60.7 billion yen (previous forecast: 60.5 billion yen)
• Operating profit: 912 million yen (previous forecast: 371 million yen)
• Recurring profit: 1,108 million yen (previous forecast: 454 million yen)
• Net loss: 19 million yen (previous forecast: net loss of 244 million yen)

The company explained that the change in forecasts were due to the 1H results. The company revised FY03/11 forecast only as much as 1H results exceeded initial 1H estimates.

Store Network: The numbers of stores at Q2 FY03/11 end was 976 (opened 7 and closed 20).

Q1 FY03/11 Results

Q1 FY03/11 results were released on August 12, 2010. As a percentage of the revised 1H company estimate, the Q1 numbers were as follows:

• Sales: 48.1% (vs. 1H estimate of 31.4 billion yen)
• Operating profit: 48.1% (vs. 1H estimate of 1,001 million yen)
• Recurring profit: 53.7% (vs. 1H estimate of 944 million yen)
• Net income: -161 million yen (vs. 575 million yen)

Sales grew 6.2% YoY, mainly due to the contribution from newly consolidated subsidiary Kimpo-do. Quarterly comparable store sales improved from -7.0% to -1.6% YoY. Sales of Kimpo-do, which mainly sells inside department stores, are showing a strong recovery and comparable store sales improved to +8.0% vs. the initial plan of +7.2%.

The company forecasted a slight decline in consolidated gross profit margin due to a change in the sales mix (fewer lenses, which are more profitable), however, the gross profit margin for the quarter was 70.1%, slightly higher than forecast. SG&A increased +3.6% YoY from consolidation of Kimpo-do, but at the main subsidiary, Paris Miki, SG&A expenses such as advertising were reduced, lowering the SG&A to sales ratio for the quarter from 68.6% to 66.9% YoY (an improvement of 1.7%), and operating profit grew about 5.2x YoY.

Q1 domestic sales by main products:

Frames: 4.6 billion yen (+5.9% YoY)

Lenses: 6.9 billion (+2.7% YoY)

Sunglasses: 546 million yen (+9.0% YoY)

Contact Lenses: 489 million yen (8.4% YoY)

Hearing Aids: 1.2 billion yen (+8.0% YoY)

Sales of RakuRakuKun series were strong. The company added fishing eyeglasses to the series on June 14.

When discussing changes in the product mix, the company mentioned that customers were buying more “full sets” of eyeglasses vs. replacement lenses. This change (buying frame + lenses) was the reason that sales of lenses grew +2.7% YoY, lower than total sales.

According to the company, results of overseas operations were in line with expectations. South Korean operations are steady, and although the Australian operations are generating losses as anticipated, the company is continuing with its plan to close stores and reduce the workforce.

The company revised 1H full year net income estimates downward. Sales, operating profit, and recurring profit estimates were unchanged. The revised net income forecast is as follows:

• 1H: 575 million yen (275 million yen below previous forecast of 851 million yen)
• Full Year: -244 million yen (275 million yen below previous forecast of 31 million yen)

The revision was due to an expected extraordinary loss related to asset retirement obligations of 219 million yen (new accounting standards came into effect in FY03/11). The company recorded losses for obligations of company-owned properties during the quarter.

Comparable store sales were positive for two consecutive months: June (+3.2% YoY) and July (+3.4% YoY). Sales including discounts of up to 90% for some products (held from June 18 through the end of August) seem to have helped generate customer traffic. The company also held a special promotion with Ray-Ban in six of its stores (Shibuya, Shinsaibashi, Tokyo-Bay, Shin-Misato, Kyoto, and Kawasaki) for between three to five days. The company is also trying to revitalize each store by delegating power; the company has set aside its “rules” on promotion and store displays and is giving more freedom to each store manager. The company commented that these measures (separately not so significant) are generating achievements in combination and helping to boost morale for people working in stores. In the interview with SR Inc. in mid-August, the company commented that business conditions through mid-August had not been as strong as June and July, but were within a satisfactory level. SR Inc. thinks that the 1H forecast may be within reach if the positive trend in comparable store sales continues through August and September. However, if the company misses the 1H forecasts, meeting the full year forecast may be more difficult, since the budget includes a gradual recovery in sales YoY toward the 2H.

Store Network:

The numbers of stores at Q1 end was 988 (opened 6 and closed 7). The FY03/11 estimate is for 949 stores (open 20 and close 60). About 30 stores were refurbished, seemingly slower pace than initially expected. The company is starting a test refurbishment for standalone stores (it already has a prototype for tenant-in-building stores, the Seijyogakuen station store). Once the design model for standalone is completed, the company plans to work on full-scale refurbishment for standalone stores.

Full Year FY03/10 Results

The company announced FY03/10 Q4 and full year results on May 14, 2010. The result was in line with the company’s estimate revision announced on May 11.

Sales were 56.3 billion yen (-2.5% YoY), operating loss of 543 million yen (vs. a loss of 800 million yen in FY03/09), recurring loss of 172 million yen (vs. a loss of 1.0 billion yen in FY03/09), net loss 233 million yen (vs. a loss of 3.2 billion yen in FY03/09).

Though operating profit slightly improved YoY, the result didn’t move into the black due to low comparable store sales and cost reductions from reorganizing loss-making store had yet to contributing to operating profit. Net income improved by 3.0 billion yen in FY03/10, due provisions for store closings and extraordinary impairment losses which were booked in FY03/09. The consolidation with Kimpo-do on January 29th, 2010 contributed slightly in sales but not profit.

Store Network

The company’s store network was 989 stores at the end of FY03/10, a net reduction of 31 stores. There were 50 store openings including the stores acquired from Kimpo-do (23 stores) and 81 store closings.

There were 233 overseas stores (2 less stores YoY). 3 stores were opened in Singapore, 1 store opening in Korea, and 5 store closings in Australia, and 1 store closing in Malaysia.

Update on overseas operations

China. The company opened 7 stores, but closed 7 stores in FY03/10 (total of 150). The sales for China in FY03/10 were approximately 2.5 billion yen. The company commented that in a “good” year, the China business would generate operating profit of 100-150 million yen. The company sees China as an important growth opportunity, saying that it is still in early stages of development. The readily available information on the Chinese market is sketchy but competition is present. Apart from a number of local companies, Luxottica-owned LensCrafters was reported to have as much as 270 stores across China as of March 2008; Luxottica also acquired at least 3 mid-size local retailers in 2005-2006.

Paris Miki is planning to open 8 stores during FY03/11 which includes a large-scale retail store (678 square meters) opened in May 2010. The large-scale store format includes a gold boutique. The company sees gold as a potentially growing trend and plans to increase stores that sell both glasses and gold.

Australia. Rationalizing the store network continues. The company closed 5 stores during FY03/10, and is planning 6 more store closures in FY03/11. The competitive environment changed dramatically in 2003 when Luxottica acquired the OPSM chain and combined the stores with its insurance and optometrist school businesses. That gave it an advantage over Paris Miki that has to compete with OPSM in the same shopping malls, many of them managed by Westfield Group.

Q3 FY03/10 Results

Q3 FY03/10 results were released on February 10, 2010. As a percentage of the full year company forecast, the Q3 numbers were as follows:

• Sales: 73.8% (vs. full year forecast of 58.1 billion yen)

• Operating profit: 98% (vs. 386 million yen)

• Recurring profit: 104.9% (vs. 610 million yen)

• Net income: 571 million yen (vs. -596 million yen)

The company indicated that Q3 performance was broadly in-line with expectations, due in part to increased promotional activities, but this was unlikely to offset 1H results. Domestic sales in Q3 were 38.4 billion yen (-5.6% YoY), operating profit of 547 million yen (+26.8% YoY). Overseas sales were 4.8 billion yen (-10.5% YoY), operating loss of 167 million yen (vs. operating loss of 6 million yen for cumulative Q3 FY03/09).

Q3 cumulative domestic sales by main products:

Frames: 13.1 billion yen (-4.4% YoY)

Lenses: 19.8 billion (-6.7% YoY)

Sunglasses: 1.3 billion yen (-9.7% YoY)

Contact Lenses: 1.4 billion yen (-5.2% YoY)

Hearing Aids: 3.3 billion yen (+4.9% YoY)

In terms of the business conditions, the company indicated in mid-February (SR Inc. interview) that the average price per pair was relatively stable but the customer count was weak. FY03/10 comparable store estimate is -0.8% YoY (Q2 cumulative results -5.5% YoY).

The “percentage of achievement” numbers above can be misleading as Q4 is normally a money-losing quarter. Substantial advertising promotion expenses ahead of seasonally important Q1 impact the operating profit while sales are the lowest in Q4. Sales will be marginally helped by partial contribution from Kimpo-Do (acquired in January 2010).

Based on the sales trends versus expectations and the cumulative results through Q3, it seems to SR Inc. that FY03/10 is likely to be below the company forecast. While FY03/10 forecast was unchanged at the time of the Q3 announcement, it is probably reasonable to assume that the company might record another small full year operating loss in FY03/10. SR Inc.’s believes that non-operating and extraordinary items could be lower than initially expected, making for a smaller miss on the net income level compared to the operating profit level.

Store Network:

The numbers of stores at Q3 end was 1,003. The FY end estimate is for 965 stores (open 25 and close 80). Company data indicated an acceleration of store closures in Q4 FY03/10 (from 70 mentioned at Q2 end to 80 at Q3 end). This was due to successful negotiations with landlords. Associated costs were budgeted at around 900 million yen for FY but (400 million yen as per original budget used in earnings forecast). Note that the number of store openings also went up by 10 (from 15 to 25) as the company was taking advantage of local opportunities (competitors closing shops in shopping centers, the latter eager to replace at lower rent).

The company indicated that it expects to close approximately 40 stores in FY03/11, with a likely budget of about 500 million yen for the related charges.

Q2 (1H) FY03/10 Results

Q2 (1H) results were released on November 12, 2009. Results for the 1H were: sales 29.4 billion yen (-7.3% YoY); operating profit of 678 million (-27.6% YoY); recurring profit of 876 million yen (-18.9% YoY); net income of 588 million yen (+113.4% YoY).

The gross profit margin for 1H was 68.8%, slightly lower than the 69.1% reported for 1H FY03/09 and lower than historic levels of over 72.2% (see Income Statement discussion). Factors affecting the gross margins included a 415 million yen inventory valuation loss and marginally higher costs of goods sold. The SG&A / sales ratio increased slightly YoY from 66.2% to at 66.5% despite a decline in SG&A expenses. The company eliminated 1.5 billion yen from the cost structure; the majority through reduced wage expenses of 797 million yen, with the balance of 369 million yen through decreasing promotion and rental expenses).

Operating profit was 678 million yen (-27.6% YoY). Operating profit margin declined 0.7% YoY (from 3.0% in 1H FY03/09 to 2.3% for 1H FY03/10).

Recurring profit was 876 million yen for 1H. RPM declined from 3.4% to 3.0% YoY. Net income was 588 million yen (+113.4% YoY).

Store Network:

The company’s domestic store network was 1,004 stores, a net decline of 6 stores during Q2. Franchise stores were reduced by 3 locations to 146.

Paris Miki reported 233 overseas stores. There were no overseas shops closed during Q2, and one store was opened (in Korea).

Q1 FY03/10 Results

Paris Miki announced consolidated Q1 results on August 14, 2009. Key data was as follows: sales 14.2 billion yen (an 8.4% decline YoY); operating profit of 93 million yen (-51.7% YoY); recurring profit of 185 million yen (+29.6% YoY); net income of 183 million yen (+663.6% YoY).　

SG&A expenses declined 7.5%, a slower rate than the sales decline.

Store Network:

The company reported a domestic store network of 1,010 stores, a decline of 10 stores during the Q1. The total number of franchise stores was 149 (a decline of 4).

The company’s overseas network was 232 stores, representing a net reduction of 3 stores during the Q1.

Opened: Singapore (2 stores)

Closed: Australia (2 stores), China (2 stores). Malaysia (1 store)

Income Statement

Paris Miki’s top-line sales grew to a peak of just under 84 billion yen in FY03/02 and then declined pretty much every year for a cumulative peak-to-trough decline of 33.0% as of FY03/10. Gross profit margins declined steadily, to 68.7% in FY03/10 from the peak of 74.3% in FY03/02.

Sales, General, and Administrative expenses have been largely determined by wages (the largest cost), rental expense, and advertising (including promotion) expenses (see Cost Structure discussion in Business Description). From FY03/00 through FY03/10, these three expense categories have accounted for over 80% of SG&A.

Operating profit margins have averaged 10.8% from FY03/00 until FY03/10. The company had an operating loss in FY03/09 driven by the sales drop of 9.6% YoY and the weight of fixed costs (mostly labor and rent) in the cost structure. The company has been reducing SG&A costs, but not fast enough: the company marked two consecutive years of operating losses in FY03/09 and FY03/10 because SG&A reduction didn’t match the slowdown in sales.

The company has historically generated non-operating income either through interest generated on its substantial cash position (see Balance Sheet discussion) or from dividends or rents collected. The impact of non-operating income and expenses can be illustrated in the spread between operating profit and recurring profit margin: RPM has exceeded OPM for each year from FY03/00 until FY03/09 (non-operating expenses of 845 million yen in FY03/09 offset non-operating gains of 612 million yen, worsening the operating loss of 800 million yen).

The company has recognized some sizeable extraordinary losses during the period under review. In FY03/01 and FY03/02, extraordinary losses were mainly the result of accounting changes related to pension fund (defined benefit) obligations. The company discontinued the pension plan during FY03/03, and recognized a one-time charge of 3.2 billion yen. Extraordinary losses of 2.3 billion yen during FY03/05 were the result of inventory write down charges of approximately 2.0 billion yen. Impairment losses and expenses related to store closures were the main components of a 1.7 billion yen extraordinary loss recorded in FY03/09.

Paris Miki has recognized relatively robust net profit margins from FY03/00 until FY03/09, when the company suffered its first loss since going public in 1995. NPM has averaged 6.7% during the period under review, with a maximum of 9.7% (in FY03/02).

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Balance Sheet

Paris Miki’s Balance Sheet has been characterized by small amounts of debt and high levels of cash during the period under observation (FY03/00 to FY03/10). The company has been in a substantial net cash position (total interest bearing debt - cash) from FY03/00 to FY03/10. The equity ratio has been increasing – from 72.1% in FY03/00 to 77.9% in FY03/11.

Assets

Assets on the company’s balance sheet have historically been cash (and equivalents) and inventories given that Paris Miki does not normally own its stores. The balance sheet is highly liquid as illustrated by relatively high quick ratio (cash, inventories, and receivables as a proportion of total current liabilities).

Inventory on the balance sheet is closely monitored by a POS system installed in the stores, and from discussions with the company, SR Inc. considers inventory valuation to be reasonable. The company uses an algorithm whereby inventory valuation is calculated based on inventory age and other factors. Since the method was adopted in 2006, the company believes that the value of the inventory on the balance sheet is estimated reasonably.

Non-current assets on the balance sheet are predominantly deposits for leases for the retail store network (fixed term land leaseholds). The fixed-term land leaseholds are depreciated by a declining balance method during the useful life.

Depreciable assets on the balance sheet are related to store openings and refurbishments.

Liabilities

Liabilities on the company’s balance sheet are effectively current accounts payable. Paris Miki has had no meaningful amounts during the periods from FY03/00 through FY03/11.

Shareholders’ Equity

The shareholders’ equity portion of the balance sheet reflects the company’s history of reinvesting earnings back into the company. Changes in shareholder equity have been largely determined by net profits and dividends; there have been no instances of notable valuation charges or similar adjustments.

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Cash Flow Statement

Operating cash flows have been somewhat volatile; there were two instances of negative operating cash flow during the periods under review. Negative operating cash flow in FY03/03 was a result of an increase in inventories (1.2 billion yen) and taxes paid (6.6 billion yen).

Investment cash flows have reflected the company’s expansion and securities investment activities. Paris Miki opened approximately 250 stores (net) between FY03/00 to FY03/10; leasehold deposits and capital expenditures are the dominant components of investment cash flow.

Financial cash flows have been defined by cash dividend payments and share buybacks. Cash used for dividend payment and buybacks are shown below:

Simple free cash flow (net income adjusted for depreciation and amortization, subtracting capital expenditures and additions to working capital) has been relatively robust over FY03/00-FY03/08 period. Higher sales generally produced higher cash flow, as in FY03/00-FY03/02 period. Simple free cash flow in FY03/04 coincides with the end of the company’s capital expenditure cycle; store growth slowed from FY03/04 to FY03/11.

Simple free cash flow was negative in FY03/09, due in part to a net loss for the period of 3.2 billion yen.

The company’s cash conversion cycle is shown below.

The cash conversion cycle for Paris Miki has been on an increasing trend from FY03/00 through FY03/11. The spread between inventory and payable turnover has had the largest impact on the cash conversion cycle. Payables turnover has been increasing, indicating that the company was paying suppliers more quickly in FY03/11 vs. FY03/00, which explains the overall increase in the cash conversion cycle.

Paris Miki has used a POS system to manage inventory since 1990. Despite the ability to efficiently track and reorder the inventory, the inventory cycle is an average of 180 days. SR Inc. questions if this is the optimal use of company’s capital. The company has a warehouse for inventory, but also maintains relatively high levels at its shops. Increasing free cash flow by improving inventory turnover would allow the company to invest the cash into more productive purposes (refurbishing stores or marketing, for example). Currently, the HQ merchandising department is providing guidance regarding the inventory, however for the most part the inventory is kept at experience-based (and rarely questioned) levels that are perceived by store managers as necessary to satisfy “customers’ needs”.

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Other Information

History

The roots of the company can be traced back to 1930, when the founder Yoshio Tane opened a small watch shop called Seikakudo Tokeiten in Himeji City, in the Hyogo Prefecture. Miki Tokeiten Inc. was founded in Himeji in early 1950; the company sold clocks and watches, jewelry, and eyeglasses. The company changed its name to Megane no Miki (“A Miki store of glasses”) in 1960. Store growth was predominantly in the Hyogo Prefecture; brand recognition outside of the prefecture was limited.

Growth of the business accelerated notably in 1973, when Tane opened a Miki-branded store in Paris, close to the Mitsukoshi department store. The concept was simple: Japanese tourists shopping at Mitsukoshi would see the Miki store, which would help create the association between the company and a sophisticated European image. Execution of the marketing strategy began in Japan during 1974 with the creation of the Paris Miki company (later to merge with Megane no Miki of Kansai region and renamed Paris Miki) to open retail stores in the Tokyo area. The store design was an effective component of the overall effort: the “towers” of the castle façade were easily identifiable by customers and could be seen from far away, rising above low-rise structures of the Japanese towns.

The company listed on Jasdaq in 1995, and was listed on the second section of the TSE in 1996. The company’s stock was moved to the first section of the TSE in 1998.

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News & Topics

November 2011

On November 11, 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 announcement in PDF format, please click here.)

August 2011

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

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

March 2011

On March 14, 2011, the company made an announcement regarding the March 11 Tohoku earthquake.

Damage situation report:

• Damage occurred to both company stores and fixtures in Tohoku (northeastern Japan) and Kanto (around Tokyo).
• The company was gathering information on recent events and recovery efforts, but the situation remained uncertain given the difficulty in communicating with the worst affected regions.

Impact on Financial Performance

While both the earthquake and scheduled electricity outages caused the company to shorten operating hours at some stores, it was assessing the impact on earnings and said it would release details if it became clear that earnings would be impacted.

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

November 2010

On November 11, 2010, Paris Miki released FY03/11 Q2 (1H) results. At the same time, the company released an upward revision to its FY03/11 earnings forecasts.

August 2010

The company announced a downward revision to its FY03/11 earnings forecast and released Q1 FY03/11 results on August 12, 2010.

May 2010

On May 11, 2010, Paris Miki announced a downward revision to its forecast for FY03/10 earnings. The main reason for the revision was that cost-cutting from store closures hasn’t had an impact yet, and comparable store sales were below estimates. Contribution from Kimpo-Do (acquired in January) is included in consolidated results, but due to acquisition costs, has yet to make a contribution to profit.

The revised forecast:

• Sales 56.3 billion yen (vs. 58.1 billion yen in the previous forecast)
• Operating loss 543 million yen (vs. previous forecast loss of 386 million yen)
• Recurring loss 172 million yen (vs. previous forecast loss of 610 million yen)
• Net loss of 233 million yen (vs. previous forecast loss of 596 million yen)

January 2010

Paris Miki announced the completion of the Kimpo-Do Optical acquisition on January 29, 2010.

November 2009

The company announced the acquisition of Kimpo-Do Optical on November 19, 2009, making the company a wholly-owned subsidiary. The following additional details regarding Kimpo-Do:

• Capital: 601 million yen
• Employees: 236 (as of August 31, 2009)
• Sales: 3.2 billion yen (as of August 31, 2009)
• Store count: 26 (1 overseas location in Malaysia)

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Top Management

Hiroshi Tane, President of Paris Miki Holdings, is the oldest son of the company’s founder; born in 1931. Tane joined the company in 1950 at the age of 19, and was made an Executive Director in 1957. Tane became the company CEO in 1986 and Chairman in 1988.

Jiro Nagata, Vice President of Paris Miki Holdings, President of Kimpo-Do Optical, born in 1944; joined the company in 2007.

Junichi Kaga, Vice President of Paris Miki Holdings, born in 1954; joined the company in 1977. Responsible for overseas operations.

Fumihiko Nakao, President of Paris Miki Co., Ltd., born in 1961; joined the company in 1984.

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Employees

At the end of FY03/11, the company employed 5,936 employees (4,282 full-time, 1,654 part-time).

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Major Shareholders

The largest shareholder is Hiroshi Tane, the President of the company. In addition to direct holdings, his ownership is represented through Lunettes Inc., Codomo Limited.

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Investor Relations

The company holds Q2 and full year results meetings, and maintains an IR website in both English and Japanese.

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By the Way

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Latest Q&A

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