Financial Summary

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Recent Updates

Highlights

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

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

On January 6, 2011, the company announced 1H FY05/12 results: click here to go directly to the 1H FY05/12 results section.

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

On January 5, 2012, the company released monthly sales data for December 2011.

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

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

Trends of Comparable-Store Sales, YoY
(Source: Company Data Processed by SR Inc.)

Note: Village Vanguard uses stores that have been in operation for 13 months for its comparable store sales data.

Trends of All-Store Sales, YoY(Source: Company Data Processed by SR Inc.)

1H FY05/12 Results (Announced on January 6, 2011; please refer to table above)

The company maintained its FY05/12 forecast.

1H sales were up 9.1% YoY at 20.2 billion yen, while operating profit increased 6.7% to 1.5 billion yen. Recurring profit meanwhile rose 8.5% to 1.6 billion yen with net income for the period coming in at 751 million yen, an increase of 32.6%.

Sales fell slightly short of the company forecast (-0.5%) but operating profit came in 3.4% above forecast; recurring profit was 5.4% above forecast, and net income 4.7% above forecast. With regards to operating profit, at the parent-level, Village Vanguard's came in 7.4% below plan. However, Titicaca operating profit came in 60.8% above plan and thus offset the poor performance of the Village Vanguard unit.

Village Vanguard (Parent-level)

While 1H sales climbed 5.7% YoY to 18.2 billion yen, operating profit dropped 9.3% to 1.2 billion yen.

Although sales rose this was a result of store openings, indeed, sales fell short of the forecast 18.3 billion yen. The company explained this was primarily due to comparable stores sales continuing to slump YoY even after the start of FY05/12.

The company remarked lower comparable store sales were due to existing stores losing some of their charm and it was looking to deal with this by improving the product offering at each store. Concrete examples of such measures include improving product display and Point of Purchase (POP) advertising for goods.

The company has been implementing a strategy of stimulating sales by providing customers with more enjoyable in-store environments to increase the likelihood of purchases. Consequently, it has been key to the company’s performance that its stores appeal to customers. In the past, opening stores with new looks and a diverse appeal on a three to four year cycle helped drive the company’s growth.

However, use of sales data-analysis to position products on the sales floor in the order of sales volume caused the company to overemphasize popular items and from around 2007 this strategy caused its stores and product line-ups to lose their diversity. As a result, comparable store sales also slumped.

As a result of various strategies carried out over the preceding several years, by FY05/11 the company’s product line-up had regained its diversity and comparable store sales had recovered; however, going into FY05/12 comparable stores sales reverted to their sluggishness.

The company has launched various new initiatives in a bid to shake off the recent slump in comparable store sales. Since October 2011, it switched to an area manager system that splits domestic operations into four blocks made up of 34 areas, compared to the previous two blocks. The company said it hoped this would facilitate the sharing of information and personnel regionally and improve sales activities, as previously know-how and experience tended to stay within individual stores.

Additionally, the company opened a store in the central Shibuya shopping district of Tokyo on November 18, 2011, its tenth stand-alone store in the capital. The company has said it hopes opening the Shibuya stand-alone store will foster competition among its other nine stand-alone Tokyo stores, as well as between its stand-alone and in-store locations, and so raise the performance bar across all stores.

In contrast to in-store locations that rely on the appeal of the building as a whole to draw in customers rather than just their own appeal, the extent to which a stand-alone store is able to attract customers is solely dependent on its own efforts.

Moreover, in Tokyo there is fierce competition among stand-alone retail stores and as a result, the company allocates its most competent store managers to them to make them highly appealing to customers. Consequently, it expects them to be role models that its other stores will imitate.

The Shibuya store achieved sales of about 30 million yen in its first month. Considering that the company’s Shimo-Kitazawa flagship store was recording sales of approximately 15 million yen when it was first launched and then went on to achieve monthly sales of around 50 to 60 million yen, the company commented that this was an acceptable start.

The decline in operating profit was due to a 145 million yen inventory writedown, an increase in personnel costs associated with the growth in store numbers and a rise in the cost-to-sales ratio associated with the company’s internal sourcing team. Consequently, operating profit was below the forecast of 1.3 billion yen.

The company had already incorporated inventory write-downs into its initial forecast. These write-downs stemmed from previous sales strategies where the company had accumulated large volumes of inventory in the past and which had now become ‘dead stock’ and needed to be written down in value. The company indicated it was anticipating further inventory write-downs will be required going into FY05/13 and onwards; it is forecasting an inventory write-down of around 155 million yen for 1H FY05/13 and of about 100 million yen in 1H FY05/14.

One factor behind operating profit falling below forecast was a rise in the cost-to-sales ratio associated with the company’s internal sourcing team. Shipment volumes derived from the internal sourcing teams, which are effectively internal wholesaling teams, have been gradually increasing YoY. While this is as the company intended, it has brought about the unintended problem of a higher cost-to-sales ratio.

The sourcing teams have three product-purchase channels:

1. Products sourced directly from the manufacturer – the percentage of products from this source has risen and this channel has a relatively high cost-to-sales ratio.
2. Products purchased domestically
3. Imported products

Categories 2 and 3 are both purchased in single-large batches (and sent to warehouses). Delivery costs are incurred for manufacturer-sourced products as these items are delivered straight to the stores.

The company has attempted to counter its previous flawed focus on sales data to drive the product line-up by attempting to increase variety via sourcing products directly from manufacturers. However, this has increased the number of products its handles and driven up its cost-to-sales ratio. The company has commented it believes it can reduce its cost-to-sales ratio while increasing product variety and thus eradicate this new problem in the near future.

Titicaca Results

1H sales were up 51.9% YoY at 2.0 billion yen and operating profit rose 112.9% to 383 million yen. A number of large stores had been opened since 2H FY05/11 and this contributed to the increase in sales. In addition, non-discounted seasonal clothing sales were solid, resulting in comparable store sales rising by 11.6% YoY, the company said. The SG&A expense to sales ratio was kept in check (specifically costs at head office) and this too also contributed to increased profitability, the company noted. A broadening of the company’s customer base, as a result of merchandising techniques implemented since the acquisition of Titicaca, has been the driver of the robust sales performance of existing stores. These initiatives include measures to iron out seasonality in sales (strong summer sales; weak winter sale) for its ethnic apparel range that it has sold since FY05/11.

Sales were 3.0% above plan (or 56 million yen) and by store type comparable store sales were 0.8% above plan (8 million yen) while new store sales were 5.1% above plan (27 million yen), and wholesale and franchise sales were 25.1% above plan (18 million yen).

Operating profit exceeded the company forecast by 60.8% (145 million yen) underpinned by not only by higher sales but also by the gross profit margin (GPM) coming in at 68.4%, compared to a forecast 63.0%. The product mix though appeared to have deteriorated due to an increase in the percentage of general merchandise sales and a decrease in apparel (the GPM for apparel is between 60-70% and approximately 40% for general merchandise). However, this was offset by the beneficial impact from a strong yen and ongoing strong sales of apparel despite its lower weighting in the sales mix.

Store Network

At Village Vanguard (parent), the company opened 18 new stores in 1H (including its stand-alone store in Shibuya) and closed three stores. Total store-count at end-1H FY05/12 came to 380 stores of which 358 were directly run and 22 franchise stores.

At Titicaca, the company opened 11 new stores during 1H, and closed one store. Total store-count at end-1H FY05/12 came to 73 stores of which 71 were directly run and 2 franchise stores.

The consolidated group store count as of end-1H FY05/12 was 456 of which 432 were directly run and 24 were franchise stores.

Despite poor comparable-store sales at the parent-level, as of the start of 2012 the company was continuing to pursue new store openings, although at a slower pace than before. The company explained the rationale for this was profitability of new stores has been higher than that of existing stores and it would stick with this strategy of new store openings as long expansion does not cause personnel-related problems.

Q1 FY05/12 Results (Announced on October 7, 2011)

Sales were up 8.5% YoY at 10.2 billion yen and operating profit rose 9.1% to 853 million yen. Recurring profit meanwhile increased 11.0% to 878 million yen with net income coming in at 404 million yen, a 50.9% increase.

Sales came in slightly below the company forecast (-0.4%) but operating profit was 4.8% above forecast; recurring profit 5.5% above forecast, and net income 3.7% above forecast.

At the parent-level, Village Vanguard sales rose 5.9% YoY to 9.3 billion yen and operating profit was up 2.2% at 755 million yen. While sales rose this was a function of store openings; comparable store sales actually fell 3.0% YoY. The company commented lower comparable store sales were the result of existing stores losing some of their charm and it was looking to deal with this and raise the attraction of existing stores. Concrete examples of such measures include improving product displays and Point of Purchase (POP) advertising for goods.

SR Inc met with the company on October 12, 2011. The company remarked that while sales were weak at the Village Vanguard business it was still able to meet its operating profit target due to SG&A cost controls. However, it noted the weak sales performance at Village Vanguard stores was caused by of a loss of innovation at the stores.

As part of moves to push into new markets, the company plans to open a standalone store in the Tokyo shopping district of Shibuya on November 18, 2011: this will be its ninth standalone store in Tokyo. The company hopes opening a standalone Shibuya store will underscore management’s pro-active stance, as well as stimulate competition between store managers. The company was hoping that in appointing top-grade personnel to run the Shibuya store it can foster competition among staff at its other eight standalone Tokyo stores. It also plans to use the competitive situation between its nine Tokyo stores as a trigger to conduct evaluations of store managers elsewhere. Finally, if the Shibuya store succeeds in raising results above the company’s expectations it will also consider developing more standalone stores in Tokyo’s other major shopping districts.

Titicaca Results

Sales grew 42.6% YoY to 827 million yen and operating profit was up 63.3% at 109 million yen. A number of large stores had been opened since 2H of the previous FY and this contributed to the increase in sales, meanwhile comparable store sales were brisk; up 8.3% YoY for the period, the company noted. The SG&A expense to sales ratio was kept in check (specifically costs at head office) and this too also contributed to increased profitability, the company said.

Among the nine stores opened by Titicaca between April and August 2011, seven were large-format stores of 165 square meters or more. Large-format stores of 165 square meters and higher have operating profit margins about 2.1% higher than stores below the 165 square-meter threshold, according to the company. Consequently, the company said it intends to strengthen its opening of large-format stores and develop a product lineup tailored to the format.

As part of the growth strategy full-time dedicated area managers will also be introduced; the Village Vanguard unit already has the same scheme in place for its stores. By raising the number of Dedicated Area Managers, i.e. those who are not simultaneously tied to managing a single store, these individuals can increase the time spent on touring stores in their areas and make it easier to detect and avoid operational business risks. For FY05/12, the company was planning on making two of its area managers full time Dedicated Area Managers. An issue that needed to be addressed was staff training for the purpose of appointing new store managers, which as of end-Q1 FY05/12 made a full-fledged introduction of the Dedicated Area Manager scheme difficult. Although a full rollout of the scheme will likely occur going forwards.

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

Full Year (FY05/12) Outlook

The company has forecasted FY05/12 consolidated sales to rise 9.7% YoY to 43.7 billion yen. At the segment level the company is projecting parent sales of 39.7 billion yen (+6.5% YoY), and 3.8 billion yen (+48.9% YoY) for Titicaca. FY05/12 operating profit is expected to grow 6.6% YoY to 3.7 billion yen with the parent operating profit forecast to increase 3.4% YoY to 3.5 billion yen and Titicaca’s operating profit forecast to rise 37.1% YoY to 324 million yen.

The company estimated FY05/12 parent comparable store sales will decline 1.4% YoY (1H: −1.9%; 2H: –0.9%). The company commented its comparable store sales projections were based off the most recent comparable store sales trends. The company plans to open 25 new stores while closing two: a net increase of 23 stores.

With regards to the pace of annual new store openings, i.e. 20 odd stores, the company commented, “Normally, we would like to open 40–50 stores, but given comparable store sales have decreased from the previous year, we should not aim to expand our organizational scale.” This implies if the comparable store sales trend turns positive, the company may revise its store opening plan.

The company has put forward three themes for FY05/12:

1) Creating stores customers want to visit every day;

2) Enhancing product variety through greater contribution to sales by sourcing teams; and

3) Inventory control.

Because the latter two points above were already corporate themes pre-FY05/11, the below discussion covers only the first point: Creating stores customers want to visit every day.

According to the company’s analysis, average daily sales per store have been on a downward trend since FY05/09; this decline has been greater on weekdays than on weekends and national holidays. The ratio of average daily sales per store on weekends and national holidays to weekdays was 91.4% for FY05/11, up from 83.2% in FY05/11 indicating the sales difference between weekends/national holidays and weekdays has been widening over the period.

The company believes the reason for the increasing difference in weekday and weekend/holiday sales is a change in stores’ selling style from a store atmosphere-focused approach to a strategy where stores have become dependent on specific merchandise groups for sales. Stores that are crowded every day tend to stock a greater number of items and provide a cheerful atmosphere that encourages customers to buy — resulting in an accordingly stable sales pattern. On the other hand, ”weekend-earner stores” tend to depend more on particular character goods and certain specific merchandise groups, resulting in higher sales volatility.

The company’s policy is to improve steadily and constantly results every year, hence, it aims to increase those stores that are busy day-in, day-out and leverage their cheerful atmosphere to enhance sales, while decreasing the “weekend-earner” stores.

The company started this effort from May 2011. Initially, the company’s store managers have applied themselves to creating a `cheerful store atmosphere’ at their stores. This should in turn increase stores’ loyal customer base; the frequency of repeat visits to stores (making Village Vanguard a “book store where customers can play”) and lead to stronger sales. Effectively, the company’s current efforts are an attempt to return to its roots.

An overview of the company’s results shows that while it realized steady and high growth until FY05/08 its growth rate has been trending downward since FY05/09. It is common for growth companies to experience slowdowns in their growth rate once they hit a certain scale. SR Inc. believes an important step toward overcoming such a situation for Village Vanguard is to enhance store managers’ capabilities. Consequently, SR Inc. believes that much rides on the success or failure of the company’s current efforts from the standpoint of its mid- and long-term outlook.

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Business Description

Village Vanguard’s core business is the operation of retail stores which are characterized by a large variety of merchandise on display and a unique store atmosphere which results in an ‘exciting’ shopping experience. The range of merchandise includes novelty items, books, clothing, and entertainment media such as CDs, DVDs and games, with an average price of approximately 1,000 yen. There are some relatively higher-priced items for sale (prices upward of 10,000 yen) such as watches and electronics, but the bulk of revenues are variety goods (see store and product examples).

Business Model

Village Vanguard has developed a unique model for running its business that is different from many other retailers. The company doesn’t use a “template” store design that is copied for each location. Instead, many of the retailing decisions (purchasing, merchandising mix, shelf organization) typically made at high levels in an organization are delegated to store managers.

The effect of giving each store manager responsibility and autonomy is that aggregate company performance is the result of substantial diversification across the store network. Store managers must closely watch customers to see what they buy in order to make effective purchasing and merchandising decisions; the extent to which store managers “know their customer” becomes a differentiating factor and an alternative to a conventional centralized sales and marketing approach. Different managers observe customers differently,　thus making possible for each store to answer its unique customer needs.

Sales for the company sells can be divided into multiple categories: SPICE (general variety merchandise), Books, New Media (CDs, DVDs), Other. (Titicaca,a consolidated subsidiary which sells ‘ethnic’ accessories and clothing has a different merchandise mix). The following pictures show product examples:

Source:Company Data Processed by SR Inc

The image above not only illustrates the different products (books, CDs, and other gifts) the company sells, but also the company’s marketing approach. Note that the items in the display above all share a ‘bar’ theme.

Source:Company Data Processed by SR Inc

The SPICE category (variety merchandise) has been the largest contributor of sales with this category responsible for 72.9% of FY05/11 consolidated sales. Sales breakdown by category and YoY growth is presented below:

Although specific GPMs are not disclosed for each category, the company has provided indications of relative gross profitability:

• SPICE (variety merchandise): Relatively high GPMs (above the average consolidated GPM)

• Books: GPMs relatively low

• NM (new media, DVDs, CDs etc.): GPMs relatively low

• Other (royalties from franchises etc.): GPMs relatively high

Analyzing the GPM for specific product categories is not helpful in understanding the mechanics of how Village Vanguard operates its business. Store managers are instructed to exclusively focus their efforts on determining what products will sell, and not profit margins or financial efficiency ratios. The maintenance of competitive gross margins is made possible through the company’s unique price setting and purchasing agreements with its suppliers.

Merchandise purchasing is up to store managers with the wholesale purchasing ratio from headquarters limited to a certain extent. Store managers don’t cut prices points to trigger consumers to buy. They rely on information from wholesalers to determine what the “best average retail prices” are in the market that will see the merchandise sell relatively well. With a relatively “fixed” retail price per item, discussions with wholesalers focus on the GPM that the store will earn, which is in turn determined by the price from the wholesaler. The margin agreement between the store and wholesaler applies to all of the products that the store buys from the wholesaler.

Individual store managers are clearly an important component of the company’s business model. Employment practices at the company have been created to ensure that only the most passionate and enthusiastic individuals rise through the ranks. Substantially all of the hiring for stores is performed at the store – the company’s customers see advertisements in stores and become employees. Employees are initially hired as “temporary workers” (arubaito) and are paid the lowest wage required by law. The relatively “low” wage paid by the company has a screening effect – if workers aren’t satisfied with working at the store, they are unlikely to remain with the company for very long. Employees can apply to become full-time company employees after one year, however ‘new’ full-time employees have an average of 4 years part-time experience before being approved as full-time company employees.

Store managers are selected from the ranks of full-time employees, and thus on average have significant experience working in the stores, and know what “works” to drive sales. The next rank for promotion in company is full-time Area Manager, of which there are 30 of (as of end-FY05/11), and in this position a person would operate his or her own store while overseeing the administration of operations at 10 other stores. Full-time Area Managers visit each store about 3 times a week and give advice to store managers. The next rank up is the position of Block Manager, of which there are 8 people (FY05/09 year end), who are stationed at the corporate headquarters and administer the stores they are responsible for in their blocks. The structure of the operations department is then capped by one individual who oversees all operations. Up until February 2010, area managers (approximately 70 persons) were "playing managers" overseeing 5-6 stores while also running their own stores. Under that system, the area managers selected from among successful store managers could continue to deliver outstanding performance at their own stores. However, they would not visit other stores they were responsible for frequently enough to ensure direct and continuous management. For that reason, starting from June 2010, 30 dedicated area managers were appointed which substantially boosted the frequency of management visits to individual stores (previously once a month to three times a week).

Discounting prices to move merchandise is not part of the company culture. When a store manager takes on inventory, it sells eventually (even if it’s old) by means of creating an atmosphere within the store to stimulate a purchase decision by customers. Creating the “right” atmosphere can be as simple as rearranging products on shelves to spur impulse sales. Store managers take great pride in their management and sales skills, and tend to have strong rivalries.

Main Business Segments

Village Vanguard’s consolidated accounts are comprised of the parent company and its wholly owned subsidiaries: Titicaca, Village Vanguard (Hong Kong) Ltd. and Village Vanguard Webbed Co. (its e-commerce business). Titicaca stores are similar to Village Vanguard stores in their marketing approach (creating an exciting shopping atmosphere), but sell different merchandise - general goods and clothing from Latin America featuring ethnic styles.

Store operations reported under the parent company include the “Village Vanguard”, “QK”, “new style” and “Village Vanguard Diner”:

• The core format is the flagship “Village Vanguard, The Exciting Bookstore” store. Village Vanguard stores can be classified into two categories: those opened inside shopping malls in suburban areas and those in standalone premises. The type of purchases made by customers in these stores is best described impulsive – these goods aren’t staple goods consumed in daily life. Merchandise varies widely per store, and target customers enjoy the shopping experience.
• The QK store format targeted toward children which is aimed at creating a similar ‘exciting’ shopping experience for children.
• Stores operating under the “new style” marquee sell mainly lifestyle and other general merchandise goods. The format is more refined than core Village Vanguard stores, positioned to appeal 30-somethings with unique tastes.
• Village Vanguard Diner – a hamburger restaurant chain, featuring an American-style 1950’s diner motif.

Along with physical store locations, the company operates a web site that sells books, CDs, and accessories (approximately 2,500 items).

SPICE (Variety Merchandise)

SPICE (variety merchandise) is the dominant component of the company’s consolidated sales (72.9% for FY05/11) and given the segment’s gross profit margins are above the consolidated average, it also accounts for a high proportion of the company’s profitability in absolute terms. The company’s overall profitability is therefore dependent on the performance of this segment. There are two purchasing methods for products under the SPICE segment, resulting in two different gross profit margin levels. Each store manager has 100% responsibility for purchasing decisions, choosing between purchasing through headquarters (via the company’s internal sourcing teams) or from external suppliers. It appears purchasing through headquarters leads to a 10% higher gross profit margin than purchasing through external suppliers.

Procurement through the head office accounted for 28.7% of merchandise sales FY05/11. The remaining 71.3% of sales was purchased from outside suppliers. It is suggested that there is a gap of some 10% points in margins between the two. Simply speaking, if all goods were bought from the HQ sourcing team, then SPICE’s gross profit margins could by about 10% points. However, in view of the company’s business model that would be impossible. As previously noted, the decision on what items are purchased by each store is completely delegated to store managers, and a system has been established whereby each store manager only buys merchandise which match the promotion strategy of the store in question. From the store managers’ perspective, the internal sourcing team of the company’s head office is no more than just one of a number of suppliers from which they can do their purchasing. On top of the fact that each store has different sales promotion strategies, the strategies often change quickly; any sole supplier (the company’s sales promotion department in this case) could not account for increasing proportion beyond a certain level in terms of overall procurement of merchandise.

In April 2010, the company added a second internal sourcing team as a measure to improve gross profit margins and increase variation in merchandise sold at Village Vanguard stores. The company set a goal to gradually increase the ratio of products purchased through headquarters to total sales, which was 21.0% in FY05/10, to 30% by FY05/12.

Books

Sales of Books have been a declining proportion of total sales. Books were 26.4% of total sales in FY05/03, and were 11.0% of total sales in FY05/11. During the same period, SPICE (variety merchandise) grew in proportion of sales by 7.5% (from 65.4% in FY05/03 to 72.9% in FY05/11). This change in mix does not represent a shift in the company’s overall image of being an “Exciting Bookstore”. Village Vanguard promotes book sales because of following reasons: 1) Books can be easily browsed and offer an reason for customers to enter the stores (increasing store traffic); 2) customers stay longer in stores, which enhances sales of SPICE and other product categories; 3) Books have a tendency to see stable sales, potentially offsetting sales volatility in other products; 4) inventory risk is relatively low for books – any unsold books can be returned to the publisher through a unique “resale” system in Japan.

NM

NM is an abbreviation for New Media, and consists of sales of CDs, DVDs, etc. The category was responsible for 7.8% of the total sales in FY05/11. Village Vanguard’s sales of NM do not compete with specialized music stores. Goods sold in this category are usually unique titles or special themes to complement other merchandise – NM product displays are integrated with other products on the shelves.

Other

1.9% of the total sales in FY05/11. The “Other” category represents royalty income from franchise stores is essentially a 100% gross profit category (there are no CoGS for associated with collecting royalty revenues).

Titicaca (Consolidated Subsidiary)

Titicaca contributed 6.4% of FY05/11 consolidated sales. The company specializes in the import and sale (retail and wholesale) of “ethnic” merchandise and clothing sourced in South America, arguably a niche market too small for large players to enter. The business sources its supplies in South America and other relatively low-cost emerging market countries and sells them at developed country prices, so the gross profit margins tend to be high. The number of stores Titicaca could expand to is estimated at up to 100, from 62 stores at end-FY05/11. Titicaca is likely to gradually contribute to an improvement of the sales mix with the company.

Store Network

At the end of FY05/11, the store network had the total of 430 stores:

• Directly-operated: 343 stores

• “Village Vanguard”: 296 stores
• “QK”: 5 stores
• “new style”: 32 stores
• “Village Vanguard Diner”: 10 stores

• Franchised: 25 stores
• Titicaca: 64 stores (62 directly-managed, 2 franchised)
• Village Vanguard Hong Kong: 3 stores

The company operates in city-centers and suburban locations across Japan, with stores opened within “fashion buildings” and in shopping malls, and ones in independent buildings classed as standalone stores.

The Typical Store

The company does not buy the real estate for its stores; it leases all of them. Typical store characteristics are below:

• Cash deposit on lease: 5 million yen
• Floor space: 300 square meters (90 tsubo)
• Investment in inventory: 50 million yen
• Investment in fittings and equipment such as furniture and fixtures: 15 million yen
• Monthly sales: 10 million yen (120 million yen annually)
• Monthly depreciation expense on fittings and equipment: 0.3 million yen (3.6 million yen annually)
• Monthly operating profit: 1.66 million yen (20 million yen annually), operating profit margins 17%
• ROI: approximately 35% (operating profit of 20 million yen plus depreciation of 3.6 million yen) / (deposit of 5 million yen plus inventory investment of 50 million yen and plus equipment investment of 15 million yen)
• Investment payback period: Approximately 3 years
• Number of SKUs: approximately 40,000
• Employees: one full-time employee, 6 or 7 part-time employees

At shopping mall stores where rent is proportional to sales, marginal profitability should be inevitably low. The only way to improve ROI is to increase the efficiency of assets. However, in order to do so, investment in inventory must be lowered while maintaining or increasing sales, which is an almost impossible task. Rent at standalone stores on the other hand remains fixed, giving the benefit of a relatively high marginal profitability. However, the rent payment is a big burden for new stores whose sales are starting from low levels, and thus they often only barely break-even in the first year. However, after three years or so, they see increasing sales while benefiting from the effect of high marginal profitability, often resulting in higher returns than shopping mall stores.

Village Vanguard: Merchandise Display(Source: Company Presentation Materials Processed by SR Inc.)

Village Vanguard: Shopping Mall Store(Source: Company Presentation Materials Processed by SR Inc.)

Village Vanguard: Standalone Store Front(Source: Company Presentation Materials Processed by SR Inc.)

Store Development Village Vanguard operated 430 stores on a consolidated basis as of end-FY05/11.

Financing for new store openings is dependent upon the expected ROE as well as the overall equity ratio. If ROE is above 15% and the equity ratio is beneath 50%, equity financing will be used to finance investments. If ROE is beneath 15% and the equity ratio is relatively high, bank financing will be used.

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Market & Value Chain

Market Overview

According to the Company, there are approximately 2,500 shopping malls across Japan and of these, approximately 500 are suitable for opening its main store model (directly-operated stores in shopping malls). At the end of May 2009, the company had already opened just under 300 stores in shopping malls, but according to the company’s estimates there is room to almost double the number of in-mall stores.

As of the end of May 2011, there were only about 30 standalone stores, so the potential for opening new standalone stores could be considered greater than the potential for opening new shopping mall stores. However, the risk involved in opening standalone stores is potentially greater than stores located in shopping malls, as each vicinity and location must be initially evaluated for its potential to attract customers, so in comparison to shopping mall stores, where a certain level of customer draw is guaranteed, the speed of new standalone store openings is of necessity going to be slower.

Customers

The company’s main target customers are males and females roughly in the 10-40 age range, and the merchandise they stock is not for practical use at work or school, but focused instead on those which mostly have a high amusement factor.

Barriers to Entry

Village Vanguard’s new stores require an average of around 70 million yen in start-up investment, and with a similar investment and a small amount of working capital one could open up and operate a similar kind of store. And supposing one had access to much more investment capital there would be no barriers to entry to setting up a similar style of chain store. However, whether those stores could continue to evolve would be quite a different matter, and that is where the barriers to entry exist.

The evolution of Village Vanguard has been a function of constantly changing the interiors and merchandise displays in the stores and constantly devising ways to increase sales. It is not unusual that a store will change so much within three that it looks like a completely different store. And the fact that over 300 stores each use unique methods to differentiate themselves is one of the company’s strengths, and can be considered another barrier to entry. There is no uniform store model for competitors to attack; the constantly shifting marketing approach incorporates an element of defense against potential entrants.

Competitive Environment

There is a high level of originality in the company’s business model, and in that narrow sense it has no peers, but looking at a wider sample of general merchandise stores its competitors include Zakkaya Bulldog Co. (Jasdaq 3331), Passport Co. (Jasdaq 7577), and Bals Corp. (TSE 2738). Although the peer companies are also retailers, it is difficult to find direct comparison companies for Village Vanguard. The company’s sales methods are of a different nature to all of these peers, and from a business model point of view, the company cannot be directly compared with these peers.

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Strategy

"One and Only"

Under the catchphrase “Exciting Bookstore”, Village Vanguard has developed its business centered on the “Village Vanguard” stores, which retail a variety of books, comics, CDs, DVDs, imported toys, interior goods and apparel. By continually providing its customers with creative “One and Only” atmospheres that have not previously been seen in the marketplace, the company aims to move from the standard retail selling methodology of offering “merchandise to buy”, to providing “enjoyment of the merchandise-buying experience.”

In order to be able to respond to the changing needs of its customers, men and women in the 10-30 year age range, Village Vanguard considers it important to let staff who are in direct contact with customers to be able to choose and order merchandise. The choices of what kinds of merchandise and what amounts are purchased are not made at head office as centralized buying decisions to buy in volume, but staff at each store decide what merchandise and amounts to stock and do the actual ordering.

The resulting different “personalities” of each store that has resulted from the variations in stocked merchandise ordered is the biggest defining characteristic of the chain. For example, a store in a train station shopping complex where school students gather might be decorated whimsically, whereas another store within a shopping mall may be designed to attract families, and a standalone store may be designed to highlight the features of that particular region.

When the company used internally generated data to find “top selling items” and focus on sales of these products, the result was a net negative. Although purchasing and sales effectiveness increased temporarily, it was discovered that uniformity developed across the stores and the sales ability of the staff deteriorated. Watering down the uniqueness of the individual stores produced a negative result and a trend of declining performance. Seeing this result, coming into FY05/10, the company stopped this particular use of sales data, and has no plans to make use of this strategy again.

Since FY05/11 the company has been trying to shift from an increasing reliance on ‘merchandise goods’, such as character products, and been striving to return to its original goal of “creating stores that entertain customers.”

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Historical Financial Statements

Summary

FY05/11 Results

Village Vanguard released FY05/11 results on July 15, 2011 (see the table above).

Results were largely in line with the company’s upwardly revised FY05/11 forecast the company issued on July 05, 2011: click here to go directly to the FY05/11 upward revision section

Sales increased 8.6% YoY, although comparable-store sales at Village Vanguard were down 0.2% partly due to the impact from March 2011’s Tohoku earthquake. But new store openings and strong sales at its Titicaca subsidiary drove higher overall sales.

Operating profit meanwhile was up 5.7% YoY. SG&A costs rose 11.4% YoY owing to higher expenses relating to increasing the headcount at its area manager and internal sourcing teams. Consequently, the company’s operating profit margin declined to 8.8% from 9.0% in FY05/10. However, an improvement in inventory losses and sales effectiveness both contributed to the rise in operating profitability.

Net income, however, came in 8.3% lower YoY as the company booked 481 million yen in extraordinary losses (vs. an extraordinary loss of 144 million yen in FY05/10) due to the application of accounting standards for asset retirement obligations , which resulted in a 261 million yen extraordinary loss, as well as 56 million yen in extraordinary losses relating to the Tohoku earthquake.

Comparing the company’s full year FY05/11 results with its revised forecast of January 7, 2011, sales were in line with estimates; exceeding projections by 0.3% on a consolidated basis. Strong sales at Titicaca (+8.9% vs. plan) offset weaker sales at the parent company, which slightly fell short of projections (−0.2% vs. plan). Operating profit on a consolidated basis came in 14.3% above the company forecast with operating profit for Village Vanguard (parent) exceeding plan by 12.8% and 34.0% for Titicaca.

The main reason for parent sales coming in below projections was Q4 comparable store sales fell short of expectations due to the Tohoku earthquake. The company believed Q4 comparable store sales would fall 0.7% YoY, instead they were down 5.2% (with a 7.9% decline in March, when the earthquake hit). The company found earthquake-related store closures led to a decline of 250–300 million yen in sales. Nonetheless, full-year operating profit came in above projections aided by gross profit coming in 0.9% above plan and SG&A expenses 2.0% below plan. SG&A expenses were kept below plan because travel expenses for area managers and other employees were lower than expected, as were utilities costs following the removal of incandescent light bulbs from stores for fire prevention purposes.

Titicaca Results

FY05/11 results for ethnic goods-focused Titicaca were strong: comparable store sales were up 16.3% YoY (vs. plan of +9.4% YoY). The company commented attempts to expand Titicaca’s product lines contributed to the strong sales. Namely, by adding more basic fashion articles to Titicaca’s usual ethnic Latin American product mix it enhanced the store’s lineup and expanded its customer base. Another driver for strong sales was the company’s focus on opening new stores in shopping centers that match the Titicaca store concept.

(Based on April 4, 2011 interview)

Comparable store sales were impacted by the March 11 earthquake and tsunami due to factors such as rolling blackouts and altered business hours.

Although sales initially plunged following the earthquake, they subsequently recovered and were back to normal levels as of April 4. Selected comments from the company are below (for further store details please see the company website for daily updates).

• As of April 4, the company temporarily closed nine stores, and was unsure when it would reopen five of them.
• As of April 4, 38 stores (out of a consolidated total of 413 stores) were operating under shorter opening hours due to electricity shortages following the earthquake.
• Comparable store sales fell 8.1% YoY in March 2011. However, stores unaffected by the earthquake (operating under regular business hours) increased comparable store sales by 1.3% YoY in March. Stores affected by the quake or operating under shortened business hours saw comparable store sales fall by 24.8% YoY.
• Stores whose business hours were affected by power outages experienced a 72% YoY fall in comparable store sales on the first day (March 14, 2011) when rolling blackouts were implemented. However, since March 26, sales rebounded and were higher when compared YoY, and sales were up 5% YoY as of April 4.

According to the company, March sales fell short of forecasts by approximately 280 million yen. Although the environment is uncertain, SR Inc. thinks that the company’s longer-term prospects are unchanged, given its positioning as an entertainment store.

After factoring in the company’s Q3 performance, which came in ahead of company forecasts, and the positive comparable store sales trend, SR Inc. thinks that the company could reach its FY05/11 targets. Although the environment is uncertain, SR Inc. thinks that the company’s longer-term prospects are unchanged, given its positioning as an entertainment store.

Note: Impact of acquisition on financial statements

The company acquired all shares of Titicaca to make it a consolidated subsidiary on May 25th, 2007. There was no material impact on the parent’s FY05/07 income statement from the consolidation, but the change in the consolidated balance sheet reflects the new accounting treatment.

A Change in Earnings Trends

Beginning in FY05/01, results were in a strong uptrend for 7 years. Sales grew at an average annual rate of 26.5%, while operating profit grew at a rate of 27.9%, recurring profit grew at 29.1%, and net profit grew at 27.6%, with limited volatility from year to year. However, in FY05/10, sales rose by 10.3%, operating profit rose by 5.9%, recurring profit increased by 5.9% and net profit grew by 7.7%, similar to growth levels in FY03/09 but clearly different from earlier periods of strong growth. Obviously, earnings trends have changed.

Q3 FY05/11 Results

Village Vanguard released Q3 FY05/11 results on April 1, 2011.

Sales for Q3 increased 9.9% YoY, new store openings were primarily behind this: Village Vanguard opened 20 new stores on a net basis in the third quarter. Among existing stores sales increased by 0.8% as the company transitioned some of its store managers into Dedicated Area Managers – previously area managers had dual roles as both individual store as well as area managers.

A further core strategy - the implementation of separate internal sourcing and operational development teams – has resulted in more products being shipped to stores and expanding the range of products on offer, however, this has not yet translated into increased sales at the stores, according to the company.

Operating profit rose 8.7% YoY but the company’s operating profit margin contracted 0.1% to 9.3% YoY due to higher SG&A costs associated with the roll-out of the area manager employee system, and creation of the business development & internal sourcing teams. Nonetheless, operating profit beat the company forecast by 14.5% on the back of increased sales and cost controls.

Net profit was down 7.3% YoY due to a 368 million yen loss stemming from application of new accounting standards for asset retirements (extraordinary losses for the same period last financial year totaled 97 million yen).

Titicaca Results

Cumulative Q3 FY05/11 same store sales at subsidiary, ethnic and general-goods store Titicaca were up 18.8% YoY (company forecasts were for 12% growth). The main reason behind the better-than-forecast sales performance was the broadening of the unit’s sales offerings. Looking at existing store sales trends by product category, "clothing" registered particularly strong growth with monthly sales registering an average 31% growth rate between July and December 2010. The company’s strategy has been to add basic fashion essentials to the existing ethnic Latin American design line-up in order to successfully grow its customer base.

At end-Q3 FY05/11 the company had a group store network of 413 shops (388 directy managed and 25 franchise stores). The Village Vanguard format had 354 stores with 331 directly managed and 23 franchise stores.

Performance of Twin Internal Sourcing Teams: The company had hoped the splitting of the internal sourcing team into two competing units would improve the quality and speed of product releases and also feed through into gross margin improvement by reducing cost of sales. However, this has not been borne out by cumulative Q3 FY05/11 results however, there were signs in Q3 that this initiative was finally beginning to bear fruit, according to the company.

E-Commerce Business: from April 2011 the E-Commerce business, Village Vanguard Webbed Co. will be separated into a stand-alone subsidiary. The company hopes by separating the unit and making it a standalone business it will help speed up business decisions and empower employees at the unit. The product turnover for the E-Commerce business from June 2010 to December 2010 was 200 million yen and contributed 0.7% of group sales. The company is targeting 5 billion yen in sales by FY05/14 from the unit, equivalent to 10% of projected group sales, and hopes to make the business a go-to e-commerce and social media site for consumers looking for unique and fun items sold not only by the company but also users of the platform.

At the end of Q3 the group had a total store network of 413 stores (of which 388 were directly managed, and 25 were franchise stores) while Village Vanguard operated 354 of these stores (of which 331 were directly managed and the remaining 23 were franchise stores).

Q2 (1H) FY05/11 Results

Village Vanguard released Q2 (1H) FY05/11 results on January 7, 2011. At the same time, the company announced an upward revision to its FY05/11 forecasts and expected dividend payment. As a percentage of the full year revised company estimates, FY05/11 Q2 (1H) results were as follows:

• Sales: 46.6% (FY forecast: 39.7 billion yen)
• Operating profit: 45.9% (FY forecast: 3.1 billion yen)
• Recurring profit: 46.4% (FY forecast: 3.1 billion yen)
• Net income: 39.8% (FY forecast: 1.4 billion yen)

1H sales were up 9.3% YoY. The increase was mainly due to store openings (net increase of 13 stores during the 1H). The company commented that comparable store sales exceeded the originally expected 1.5% by 0.2%, while new store sales ended up lower than expected. The company attributed strong comparable store sales to efforts from the introduction of dedicated area managers and internal sourcing teams, both in place since 2H FY05/10. About 80% of all area managers had declining comparable store sales in their territories when the area manager system was introduced (March 2010). This ratio declined to 24% by December 2010, highlighting the success of the initiative. Following the introduction of the internal sourcing teams, the number of suppliers has grown and the variety of products offered by internal sourcing teams has increased. However, the weight of such products in the actual store sales has been below expectations. What this essentially means is that while stores bought more merchandise from the internal teams, it hasn’t been selling particularly well.

Operating profit increased 4.0% YoY, lagging the growth in sales. The company increased SG&A spending by 706 million yen (+12.4% YoY), mostly on higher labor costs (changes in the way area managers cover territory), and higher travel and transportation expenses for internal sourcing teams. Despite higher SG&A expenses, operating profit exceeded previous estimates by 25%. The company attributed this to stronger than expected sales, lower than expected SG&A spending, and lower inventory losses (which were 0.6% below the company’s initial expectations on the back of tighter inventory control measures).

Performance of Titicaca

(Note that the Japanese version of this table has cumulative quarterly data according to the Japanese reporting convention employed by the company).

Titicaca’s comparable store sales increased by 16.7% in the 1H (vs. 5.0% budgeted). The company attributed strong comparable store sales to robust sales of heavy clothing items such as coats, in the fall-winter season. While 1H of FY05/10 saw poor sales of fall-winter apparel, in FY05/11 Titicaca management got enough merchandise on the shelves in time for the demand spike. Five new stores opened in 1H also performed strongly as the focused its store openings on shopping center locations best fitting its ethnic branding concept.

The parent store network at Q2 end was 347 stores (323 stores were directly managed, 24 franchise). At the group level, there were 403 stores (377 directly managed, 26 franchise).

Q1 FY05/11 Results

Village Vanguard released Q1 FY05/11 results on October 1, 2010. As a percentage of the 1H company forecast, Q1 numbers were as follows:

• Sales: 51.3% (18.2 billion yen vs. 1H forecast of 9.4 billion yen)
• Operating profit: 69.7% (1.1billion yen vs. 1H forecast of 782 million yen)
• Recurring profit: 70.4% (1.1 billion yen vs. 1H forecast of 791 million yen)
• Net income: 59.8% (448 million yen vs. 1H forecast of 268 million yen)

The company indicated that Q1 results were more or less on-track with internal estimates and there was no change to the 1H and full year forecasts. The parent store network at Q1 end was 335 stores (311 stores were directly managed, 24 franchise). At the group level, there were 388 stores (362 directly managed, 26 franchise).

Sales were up 8.4% YoY. The company indicated that the increase reflects introducing dedicated area managers and setting up 2 internal sourcing teams, both of which have been in place since 2H FY05/10. Although the company expects both changes to have positive effects, as of Q1 only the dedicated area managers have made a meaningful impact. About 80% of all managers had declining comparable store sales when the area manager system was introduced (March 2010), but this ratio declined to 40% by August 2010. Following the introduction of the internal sourcing teams, the number of suppliers has grown and the variety of products offered by internal sourcing teams has increased. The company commented that through Q1, results from the internal sourcing teams have been less than expected. As a percentage of total sales, products purchased by internal teams are beneath the company’s targets, and store managers are buying a smaller proportion of new merchandise from internal sourcing teams than in Q1 FY05/10.

Operating profit was down 2.2% YoY. This was due to higher labor costs stemming from a change in the way area managers cover their territory and higher travel and transportation expenses for the internal sourcing team. That being said, operating profit exceeded the company’s plan by 11.5%. This was mainly due to lower travelling costs for dedicated area managers and lower costs for utilities (a total impact of around 50 million yen).

Performance of Titicaca

Titicaca’s results were strong in Q1, with 11.5% growth in comparable store sales. Titicaca started to manage stores by format (with certain dedicated area managers focusing on specific store types) and focus on opening new stores in shopping centers. According to the company, these steps drove Q1 sales to 579 million yen (9.3% above budget) and operating profit to 66 million yen (88.1% above budget).

At the end of Q1, there were 50 Titicaca stores (48 directly managed; 2 franchise). In terms of store expansion, the company plans to open 8 and close 3 stores in FY05/11 vs. the increase of 51 stores in FY05/10 (49 directly managed; 2 franchise).

Full Year FY05/10 Results

The company announced FY05/10 Q4 and full year results on July 16, 2010.

Sales were 36.65 billion yen (+10.3% YoY), operating profit 3.31 billion yen (+5.9% YoY), recurring profit 3.36 billion yen (+5.9% YoY), net income 1.83 billion yen (+7.7% YoY).

As a percentage of the revised company forecast, the results were as follows:

• Sales: 97.4% (vs. forecast of 37.64 billion yen)
• Operating profit: 95.0% (vs. full year forecast of 3.48 billion yen)
• Recurring profit: 95.4% (vs. full year forecast of 3.52 billion yen)
• Net income: 92.7% (vs. full year forecast of 1.98 billion yen)

The parent store network at FY05/10 end was 334 stores (34 opened, 12 closed; all Village Vanguard format). 309 stores were directly managed, 25 franchise. New store openings slowed compared to FY05/09 to 34 stores (32 directly managed and 2 franchise). Closures were 12 (6 directly managed and 6 franchise).

At the group level, there were 385 stores (358 directly managed, 27 franchise).

Sales growth momentum further weakened in FY05/10 due to continued stagnant economic condition and decelerated pace of new store openings. Comparable store sales for the fiscal year decreased 4.9% YoY. The company sees the uniformity of stores as the main reason for sluggish comparable store sales and started taking countermeasures to restore the uniqueness of each store in FY05/10; introducing dedicated area managers and setting up 2 teams in the sales promotion department. The company had been managing the store network using 70 so called "playing managers" with management oversight over 5-6 stores in addition to direct responsibilities for their own store. However, starting in June 2010, the company introduced a new system where 30 out of those 70 were appointed as area managers responsible exclusively for guiding and managing the store managers. The second new initiative was to split the internal sourcing team (a department that procures for the entire company functioning as an internal wholesaler) into two competing units. By making these units freely compete with each other the company hopes to increase the variation of merchandise and the percentage of products sourced internally, boosting overall gross profitability. According to the company, the gross profit margins of SPICE merchandise sourced internally are approximately 55% compared to 45% for goods bought from outside wholesalers. Internally sourced merchandise accounted for 21% of the total sales and the company plans to boost the weight to 27.5% by FY05/11 end and 30% by FY05/12 end.

The operating profit grew only 5.9% in FY05/10 compared to 10.3% increase in total sales. This was due to lower profitability of comparable stores and higher labor costs due to area manager system change (as discussed above) and higher travel and transportation expenses for the reinforced internal sourcing team.

Q3 FY05/10 Results

Village Vanguard released Q3 FY05/10 results on April 2, 2010. As a percentage of the full year company forecast, the cumulative Q3 numbers are as follows:

• Sales: 72.2% (27.2 billion yen vs. full year forecast of 37.6 billion yen )
• Operating profit: 73.3% (2.6 billion yen vs. full year forecast of 3.5 billion yen)
• Recurring profit: 73.5% (2.6 billion yen vs. full year forecast of 3.5 billion yen)
• Net income: 71.0% (1.4 billion yen vs. full year forecast of 2.0 billion yen)

The company indicated that Q3 sales were more or less on-track with internal estimates. Comparable same store sales continued to decline during the quarter (see Monthly Trends). However, the company indicated that comparable store sales possibly bottomed out, saying that February was above plan, and weakness in March was in part due to one less Sunday vs. last year (impacting about 3% of a 6% decline).

The company further indicated that gross profit margins for directly managed stores increased from 40.1% in Q2 to 41.1% in Q3. The increase reflects changes in product mix not including inventory loss (inventory is taken only twice a year). SG&A expenses were below budget. Q3 Operating profit rose +4.5% YoY, comprised of a 695 million yen positive contribution from new stores, offset by a decline of 268 million yen from comparable stores. Operating profit margin was unchanged. Recurring profit for the quarter was better than budget. Net profit for the quarter was 641 million yen, +6.0% YoY.

The parent store network at Q3 end was 325 stores (4 opened, 3 closed; all Village Vanguard format). 300 stores were directly managed, 25 franchise. At the group level, there were 374 stores (347 directly managed, 27 franchise).

There was no change in the full year estimate.

The company indicated that full year results should be broadly in-line with company expectations. Q4 sales estimates appear aggressive (+20.3% YoY, see table above) but SR Inc. understands that if sales end up lower than implied in the forecast, this could be offset by conservative cost assumptions to clear the earnings target.

Performance of Titicaca

According to the company, comparable store sales at Titicaca continued to increase. Total sales growth was less than the company’s own aggressive plan. The company suggested that along with increasing sales, an improvement in overall profits is expected going forward.

In terms of store expansion, the company increased its estimate of store openings for FY05/10 (+2). At the end of Q3, there were 49 Titicaca stores (47 directly managed; 2 franchise).

Q2 (1H) FY05/10 Results

“In line with company expectations”. Operating/recurring profit ahead of the budget. No full year revision. Negative comparable store trend unchanged.

Village Vanguard reported Q2 FY05/10 results on January 8, 2010. The results were characterized by the company as more or less in line with expectations. The FY05/10 full year forecast was not revised. There were 370 stores at the group level at the end of Q2 (340 directly managed and 30 FC stores). At the parent the store count was 326 stores (299 directly managed and 27 FC).

Although sales for Q2 were up 10.9% YoY, declining comps remain an issue for the short term outlook. The comps figure for December was a 3.4% decline, but a less severe decline than had been observed in previous months. The company indicated that although December comps were better than internal expectations, it could be premature to draw specific conclusions from the performance of a single month. Cumulative comparable store sales for the 1H (Q2) were -6.5% YoY.

Despite plans to reduce the loss ratio (mentioned after Q1), it was reported at 3.7% for 1H - an unplanned increase from 3.4% observed during 1H of FY05/09.

Operating profit for the Q2 rose 46.5% YoY to 548 million yen, with total 1H operating profit increasing 22.0% to 1.3 billion yen. Operating profits of 606 million yen from new stores were offset by a decline of 252 million yen from comp stores (107 million yen loss on store closures and 145 million yen of lower profitability). Other notable items affecting OP were group expenses of 170 million yen (expenses such as staff increases and other miscellaneous items), and 31 million yen of sales related to franchise and related operations.

Net profit for the quarter was 299 million yen, a 39.7% increase YoY. The 1H net profit was 761 million yen (an increase of 21.2% YoY). Assuming a tax rate of 45.0%, there was little difference between pre-tax profit and recurring profit (an approximate 9 million yen extraordinary loss).

Sales for the parent company were up 9.6% YoY for Q2, and cumulative 1H sales of 16.1 billion yen were up 13% YoY. Operating and recurring profits measured on both a quarterly and cumulative basis were above budget; net profit for the quarter had a slightly negative bias when compared to company estimates.

The company provided additional comparable store sales data which has been reproduced below.

(Source: Company Data Processed by SR Inc.)

(Source: Company Data Processed by SR Inc.)

Existing comps – stores included in the comparable store data before the fiscal year began

New comp stores – stores which were included in the comparable store data since the start of the fiscal year (essentially new stores added as they matured to 13 months of sales)

Total comp stores – comparable store data of existing and new comp stores (an aggregate figure)

The data provided by the company shows a change in the performance of new comparable store sales from FY05/09 to FY05/10. New comparable stores added in FY05/09 had positive YoY sales growth, increasing overall comparable store sales. Stores added in FY05/10 had the reverse effect, negative YoY sales growth, which lowered total figures.

(Source: Company Data Processed by SR Inc.)

The parent store network at the end of 1H was 326 stores. During Q2, there were 8 new stores opened, with 2 closures (all Village Vanguard format).

Performance of Titicaca

Due to weak sales trends, the full sales for Titicaca were slightly beneath the announced plan; however profits were above plan and the operating profit margin improved during Q2 on a YoY basis.

At the end of 1H, there were 46 Titicaca stores (44 directly managed and 2 franchised).

Q1 FY05/10

Slightly over budget on better than planned sales. Comparable store sales still negative YoY.

The company reported Q1 FY05/10 results on October 2, 2009. Sales were up 17.5% YoY on a consolidated basis. The parent sales, at 8.27 billion yen, were about 1% better than the budget, according to the company. Despite SG&A being about 1.0% higher than planned, the operating profit was about 3.0% better than the budget. Overall the gross profit margin and SG&A appear to have been controlled well. The issue remains comparable store sales, which dropped 6% in Q1 FY05/10. The company made a conscious decision to sacrifice short term performance if necessary to restore the unique nature of individual stores by limiting the access of store managers to company-wide sales information (therefore forcing them to listen to their local customers and make individual merchandising decisions). Negative numbers were expected and should be viewed in the context of the strategy of preserving the unique business model. Titicaca, a subsidiary, saw weaker than expected sales (especially in June) but it was compensated by strong cost controls with operating profit exceeding the budget by 16.9%. The company had 360 stores on consolidated basis as of Q1 FY05/10 end. There were 11 new Village Vanguard stores opened and 1 closed during the quarter.

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Income Statement

Until August 2008 there had been a 91 consecutive month run during which monthly YoY comparable-store sales grew. On the other hand, new store development costs had been incurred each year. Such costs had been more than compensated for by ongoing expansion of contribution from comparable-store sales increases, having had resulted in steady and high earnings growth for the company as a whole. However, halfway through in FY05/09, monthly comparable-store sales took a dive into negative growth, and for the full term comparable-store sales managed only a 0.2% increase, contributing less to earnings than the average of previous years. Further, the demand for new shopping mall stores driven by developers rushing to beat the implementation of revisions to the “Three Urban Development Laws” gave rise to many more new store openings than in an average year, and new store opening costs mounted. A striking example was when 6 different types of store were opened simultaneously in Aeon Lake Town in Saitama, while at the same time other stores was opened in a nearby shopping mall. Up to then when a new store has opened staff from nearby stores have been called in to help out with the openings, but with this concentration of new stores in one area, many staff had to be employed from temp agencies, which ramped up opening costs. As a result, the ratio of SG&A expenses to sales reached 32.0% for FY05/09, an unprecedented high level. Thus, it was inevitable that earnings growth in FY05/09 was relatively lower compared to previous years.

Gaps Between Company Estimates and Results

It is possible to analyze the differences between initial Company Estimates and results over the last 7 years (FY05/04 to FY05/10). For the 5 years until FY05/08, sales and earnings without exception surpassed initial Company Estimates. In FY05/09, however, they were exceeded by 2.4% in sales while they fell short of in operating profit by 1.9%, recurring profit by 1.5% and net profit by 4.0%. In FY05/10, the company did not meet its initial sales or profit projections, mostly due to sluggish comparable store sales. Both sales and operating profit for FY05/11 exceeded initial estimates. This is partly because the company had learned from the previous two financial periods and prepared conservative estimates — mainly with regard to expenses.

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Balance Sheet

Equity

Using the FY05/02 term as a base period, looking back at the changes that have occurred until FY05/11, the company’s total assets have grown from 7.4 billion yen to 29.0 billion yen, while the equity ratio has grown from 17.1% to 54.4%. This build-up of equity has been partly a result of equity financing, but the main reason has been a consistently stable and high ROE. From FY05/09 to FY05/11, when the rate of earnings growth was relatively slack, the ROE remained above 10% (although the lowest level compared to past results). According to the company, as long as it can maintain an equity ratio of 50%, it doesn’t give excessive focus to free cash flow, and will take advantage of any good opportunities to invest in opening new stores.

Importance of Stock Control

The largest item in the company’s assets is its inventory, representing 58.4% of total assets in FY05/11. In contrast, tangible assets represented only 8.8%. Village Vanguard has avoided the ownership of the premises that contain its stores and even its head office, so its main tangible assets are represented by the fixtures and equipment in its stores (value of around 15 million yen per store). The exposure to inventory risk is a major feature of the company’s business model – the company addresses this through its unique marketing capabilities. As a result, the way the company controls its inventory is a major issue, but the fact that it has control over its inventory is one of its strengths. In line with its adoption of the “Accounting Standards for Inventory Asset Valuation” in FY05/08, the company posted an inventory valuation loss of 269 million yen at the extraordinary level, and at the same time posted 202 million yen in valuation losses at CoGS. When compared with gross profit of 11.2 billion and the inventory assets of 10.9 billion yen, the absolute value of the loss is not significant. In FY05/09, FY05/10 and FY05/11, the negative impact was limited to 79 million yen, 183 million yen and 334 million yen at CoGS.

Liabilities on the balance sheet have historically been characterized by a larger portion of short-term liabilities compared to fixed obligations. The quick ratio as of end-FY05/11 indicated the company had liquid assets (excluding inventory) on hand to satisfy 67.7% of its current liabilities.

Fixed liabilities are essentially all long term debt.

Number of Shares Outstanding

As of the end of FY05/11, the number of shares outstanding was 38,468 (with no treasury shares).

The company’s capital raising policy is to limit financing through equity to cases when the company should achieve ROE of over 15%. Otherwise, it chooses to finance through debt. Present conditions showed a FY05/11 ROE of 11.2%, so the likelihood of an equity offering in the short-term is small. Moreover, when looking at the past, the scale of the equity finances tapped by the company has been limited to the minimum amount needed, so it is difficult to envisage that in future the holding ratios among the existing shareholders are likely to be diluted much.

Shareholder Returns

Village Vanguard began making cash dividend payments to shareholders in FY05/06. After adjustments associated with stock splits, the dividend has remained at 1,400 yen per share through FY05/09. The payout ratio had been kept low, possibly to keep earnings on the balance sheet to fund new stores development; from FY05/06 to FY05/09 it ranged between 3-5%. However, the FY05/10 and FY05/11 dividends were for 2,800 yen per share. The company explained that new store openings have slowed somewhat compared to the past and this had freed up cash for potential dividend payments.

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Cash Flow Statement

Existing Stores Consistently Generating Cash

The company’s equity ratio rose above 50% in FY05/05 and has stayed at over 50% ever since. The company’s policy is that it would allow a negative free cash flow should this be necessary to open new stores in attractive locations. The aggressive store expansion resulted in net outflow in free cash flows over the past 6 years, excluding FY05/08 and FY05/10. The existing stores continued to generate cash but the capital expenditures in the new stores, including the inventory, were in excess of those cash flows. The company nevertheless managed to maintain an equity ratio of over 50%.

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Other Information

History

Founded in 1986

Village Vanguard’s current Chairman, Keiichi Kikuchi, founded a small private bookstore in November 1986 in Tenpaku Ward, Nagoya, and began selling books and variety merchandise (at the time, the sales breakdown was 60% books, 40% merchandise). Following that, in October 1988, he set up Village Vanguard Ltd., and in June 1991 opened the first franchised store, Store No. 5 (now closed). In terms of store type, the company’s first shopping mall store, the Seikatsu-Souko Nagoya store (directly operated, now closed), was opened in April 1995.

In terms of regions, the first store in the Kansai region, the Kobe Harbourland store (directly operated), opened in September 1996. The first Village Vanguard store in Kanto, the Rhythm store (franchise, now closed), opened in June 1997, followed by the first store in Hokkaido, the Sapporo store (franchise, now closed), opened in August 1997. The first store in Kyushu, the Laforet Ogura store (directly operated), opened in November 1997. A flagship store was opened in April 1998 in Shimo Kitazawa, Setagaya Ward in Tokyo, within Marche Shimo Kitazawa.

• May 1998: Changed company structure and company name to Village Vanguard Co., Ltd.
• Mar 1999: Opened 50th store (including directly-operated stores and franchised stores), the Parade Shizuoka Kawai store, in Kawai, Shizuoka City, Shizuoka Prefecture (franchised store, now closed)
• Jun 2000: Opened first store on Shikoku Island, the Laforet Matsuyama store, in Ichibancho, Matsuyama-City, Ehime Prefecture (directly operated, now closed)
• Sep 2000: Opened 50th directly-operated store, the Hachinohe Rec store, in Mikka-machi, Hachinohe City, Aomori Prefecture
• Sep 2001: Opened 100th store (including directly operated stores and franchised stores), the Sapporo Paseo store, in Kita Ward, Sapporo City, Hokkaido
• Nov 2002: Changed registered head office address from 526 Tsukuda, Nagahisate-machi Oo-aza, Aichi-gun, Aichi Prefecture to 2-1313 Chouhai, Nagahisate-machi, Aichi-gun, Aichi Prefecture
• Feb 2003: Opened first restaurant business, Diner Asagaya (directly operated)
• Apr 2003: Registered as OTC tradable stock with Japan Securities Dealers Association (The Japan Securities Dealers Association made a changeover to the Jasdaq Securities Exchange, Inc. in December 2004)
• Jan 2004: Changed registered head office address from 2-1313 Chouhai, Nagahisate-machi, Aichi-gun, Aichi Prefecture to 12-1 Kamikamota, Nagakude-aza, Nagahisate-machi, Aichi-gun, Aichi Prefecture
• Apr 2004: Opened 100th directly-operated store, the Aeon Asahikawa Nishi store, in Asahikawa City, Hokkaido.
• Nov 2005: Opened 150th directly-operated store, the Aeon Mito store, in Mito City, Ibaraki.
• Nov 2006: Opened 200th directly-operated store, Diner Nishiogi, in Tokyo’s Suginami Ward.
• May 2007: Purchased 100% of outstanding shares of Titicaca Ltd. (a consolidated subsidiary), making the company a 100%-owned subsidiary, and changed the company structure from a “yugen” limited private company to an unlisted “kabushiki” limited company.
• Sep 2009: Village Vanguard (Hong Kong) Ltd. forms a joint venture with Era-Bee Ltd.

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News & Topics

October, 2011

On October 7, 2011, the company announced Q1 FY05/12 results:click here to go directly to the Q1 FY05/12 results section.

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

September, 2011

On September 7, 2011, the company announced its board of directors had decided to postpone the implementation of changes in its articles of incorporation to allow stock splits to September 30, 2011, rather than September 20, 2011 as originally announced.

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

With regards to the delay, the company cited shortcomings in its internal control systems. The board of directors decided to take responsibility for this matter and have adopted the following measures:

• Chairman Keiichi Kikuchi to take a 50% pay cut for three months

• President Atsunori Shirakawa to take a 30% pay cut for three months

• Director Toshio Yoshioka to resign on September 30, 2011.

August 2011

On August 22, 2011, the company announced its board had passed a resolution to change its articles of incorporation to allow share splits and implemented a split.

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

The move will go into effect on September 20, 2011, resulting in a two for one split (the total number of shares issued rising to 76,936 from 38,468).

Additionally, the full-year dividend per share forecast was adjusted with the split to 1,400 yen per share from 2,800 yen.

July 2011

On July 15, 2011, the company announced FY05/11 results: click here to go directly to the FY05/11 results section.

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

On July 5, 2011, the company announced upward revisions to its forecast for FY05/11.

(For original PDF announcement of upwards revision in Japanese language only, please click here.)

The revisions were as follows:

• Sales: 39.8 billion yen (vs. previous forecast of 39.7 billion yen)
• Operating profit: 3.5 billion yen (vs. previous forecast of 3.1 billion yen)
• Recurring profit: 3.6 billion yen (vs. previous forecast of 3.1 billion yen)
• Net income: 1.7 billion yen (vs. previous forecast of 1.4 billion yen)

Sales at the parent level were expected to come in as planned owing to the impact from the Tohoku earthquake in March 2011. On the other hand, comparable store sales at subsidiary Titicaca were up 16.3% YoY resulting in significant sales growth and triggering the company’s upward revision. The company also commented that expectations for higher operating profit were driven by an improvement in inventory loss rates and keeping expenses in check.

The company also released sales data for June 2011.

April 2011

The Trends & Outlook section was most recently updated on April 7, 2011, incorporating the impact of the March 11, 2011 Tohoku earthquake.

On April 1, 2011, Village Vanguard released Q3 FY05/11 results.

February 2011

On February 17, 2011, Village Vanguard announced that the company decided to set up a new affiliate and transfer its e-commerce (EC) business to the affiliate. The company would set up the affiliate, Village Vanguard Webbed, on March 1, 2011. The company said it would transfer the EC business to the affiliate on April 1, 2011. Village Vanguard had 169 million yen of sales (and 2 million yen of operating profit) in its EC business in FY05/10.

January 2011

On January 7, 2011, Village Vanguard released Q2 FY05/11 results. At the same time, the company announced an upward revision to its FY05/11 earnings and dividend forecasts.

October 2010

Village Vanguard released Q1 FY05/11 results on October 1, 2010.

July 2010

On July 16, 2010 the company announced FY05/10 full year results. The company also announced an upward revision to its expected dividend payment for FY05/10 from 1,400 yen to 2,800 yen. The dividend commemorates the opening of its 300th directly managed store.

June 2010

On June 1, 2010 the company announced that Atsunori Shirakawa (executive director) would be the president and Keiichi Kikuchi (president) would become the chairman, effective August 27, 2010.

April 2010

The company released Q3 FY05/10 results on April 2, 2010.

January 2010

Q2 (1H) FY05/10 results were announced on January 8, 2010.

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Major Shareholders

The company’s largest shareholder is the founder and current Chairman Keiichi Kikuchi, with 23.1% of shares outstanding held in his name, while 5.6% are listed under the name of Makiko Kikuchi, for a total combined interest of 28.7% (as of end of May 2011).

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Top Management

Keiichi Kikuchi, born in 1948, holds the company’s top management position. After entering Nippon Jitsugyo Publishing in 1973 he transferred to Owada Books in 1978, and in 1986 established a private store from which the company would be created. Then, in May 1998, he assumed the office of president of Village Vanguard Co., Ltd. He became chairman in August 2010.

President Atsunori Shirakawa (born in 1967) was employed at Kokusai Securities (present-day Mitsubishi UFJ Securities) and Japan Asia Investment, before joining the company in March 2003. He became the managing director in August 2006 and president in August 2010.

Director Hitoshi Kinami (born in 1973) also worked previously at Japan Asia Investment, and is currently President of Titicaca.

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Employees

There were 307 full-time employees at the parent company level, with 2,481 temporary workers. The company had 420 full-time staff and 2,695 temporary workers on a consolidated basis. (As of May 2011)

Average age, length of employment, and salary in FY05/11 were as follows (parent company basis):

• Average age: 32.5
• Average length of employment with the company: 4.3 years
• Average salary: 4.6 million yen

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Investor Relations

Biannual Results Meeting

Company holds results meeting twice a year. After releasing Company’s Q2 and/or Q4 results, a presentation directed at institutional investors follows where primarily Chairman Kikuchi along with President Shirakawa and Chief Administrative Officer Yoshioka discuss details of the results and their estimates, and respond to questions.

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By the Way

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Latest Q&A

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