Financial Summary

Recent Updates

Highlights

On May 11, 2012, Yellow Hat announced full year FY03/12 results: click here to go directly to the FY03/12 results section.

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

On May 8, 2012, the company raised its FY03/12 year-end per-share dividend forecast by 2 yen for a total of 14 yen. With this upward revision, annual per-share dividend will be 24 yen.

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

For corporate releases and developments more than three months old please refer to the News & Topics section.

Trends

Quarterly Trends

FY03/12 Results (Announced on May 11, 2012; please refer to the table above)

Sales increased by 8.7% YoY to 103.1 billion yen. The company noted it had implemented various measures across its operations, enhanced sales at existing stores and boosted its store count; a combination that resulted in sales growth.

The domestic store count as of end-FY03/12 was 530 stores, of which the breakdown was:

• Directly-Managed Stores: 26
• Subsidiary-Managed Stores: 103
• Franchise Stores: 401

The company also operated 15 stores overseas. In addition to these, the company operates 15 Montecarlo stores in Japan: 11 subsidiary-managed stores and 4 franchise stores.

Breaking down top-line by sales channel, the Wholesale channel posted a 13.6% YoY rise in sales to 64.2 billion yen while the Retail Sales channel experienced a 0.2% decline to 31.5 billion yen. However, this performance was the result of the company cutting back on its directly managed store network but meanwhile raising its franchise store count.

Operating profit was up 41.3% YoY at 6.2 billion yen. In addition to the above factors only a slight YoY rise (6.0%) in SG&A expenses contributed to the robust figures. Recurring profit was up 38.5% YoY to 7.2 billion yen. Net income surged 80.2% YoY to 5.2 billion yen.

Q3 FY03/12 Results (Announced on February 3, 2012; please refer to the table above)

The company maintained its FY03/12 forecast.

Cumulative Q3 sales increased by 8.9% YoY to 81.1 billion yen. The company noted it had implemented various measures across its operations, enhanced sales at existing stores and boosted its store count; a combination that resulted in sales growth.

The domestic store count as of end-Q3 FY03/12 was 516 stores, of which the breakdown was:

• Directly-Managed Stores: 26
• Subsidiary-Managed Stores: 93
• Franchise Stores: 397

The company also operated 16 stores overseas. There was a net increase of 16 domestic stores (19 stores opened; three stores closed) and a decrease of one overseas store since end-FY03/11. Of the 19 stores opened domestically, 18 were fully furnished properties.

Breaking down top-line by sales channel, the Wholesale channel posted a 15.5% YoY rise in sales to 52.7 billion yen while the Retail Sales channel experienced a 2.1% decline to 22.9 billion yen. However, this performance was the result of the company cutting back on its directly managed store network but meanwhile raising its groupwide store count.

Cumulative Q3 operating profit was up 46.3% YoY at 5.3 billion yen. In addition to the above factors a 1.3% YoY decline in SG&A expenses also contributed to the robust figures.

1H/Q2 FY03/12 Results (Announced on November 4, 2011; please refer to the table above)

The company upwardly revised its 1H FY03/12 forecast on November 2, 2011.

1H sales were up 10.6% YoY at 48.3 billion yen. The company remarked it had implemented various measures across its operations, enhanced sales at existing stores and increased its store count, all of which contributed towards the growth in sales.

The domestic store count as of end-1H FY03/12 was 510 stores, of which the breakdown was:

• Directly-Managed Stores: 24
• Subsidiary-Managed Stores: 87
• Franchise Stores: 399

The company also operated 16 stores overseas. There was a net increase of 10 domestic stores (12 stores opened; two stores closed) and a decrease of one overseas store since end-FY03/11. Of the 12 stores opened domestically, 11 were fully furnished properties.

1H operating profit increased 101.7% YoY to 2.9 billion yen. In addition to the above factors a 0.7% YoY decline in SG&A expenses also contributed to the solid performance.

Q1 FY03/12 Results

On August 4, 2011, Yellow Hat announced Q1 FY03/12 results (see table above) and announced an upward revision to its 1H and FY03/12 forecast..

Sales were up 12.3% YoY at 23.6 billion yen. The company noted it had implemented various measures across its operations, enhanced sales at existing stores and increased its store count, which contributed towards the increase in sales.

Breaking down sales by item category at Yellow Hat group stores (directly-managed, subsidiary-managed, and franchise stores), tires and products compatible with terrestrial digital television (digital tuners, GPS navigators with digital TV tuners, etc.) witnessed good demand. The demand for products compatible with terrestrial digital television increased following the termination of analogue television broadcasting in July 2011.

The domestic store count as of end-Q1 FY03/12 was 503 stores, of which the breakdown was:

• Directly-Managed Stores: 23
• Subsidiary-Managed Stores: 85
• Franchise Stores: 395

The company also operated 16 stores overseas. There was a net increase of three domestic stores (5 stores opened; 2 stores closed) and a decrease of one overseas store since end-FY03/11. Of the 5 stores opened domestically, 4 were fully furnished properties.

Operating profit increased by roughly 3.2 times YoY to 894 million yen, which was driven by the increase in top-line but also by a 1.7% YoY decrease in the SG&A-to-sales ratio. 273 million yen was recorded as non-operating income due to reversals in allowances for doubtful accounts and consequently recurring profit grew roughly 330% YoY to 1.8 billion yen.

The company revised its 1H and FY03/12 forecast. However, the upgrade was not driven by fundamental factors rather it was due to changes in the way credit-related fees are booked. Q1 FY03/12 sales results were 50.3% of the 1H FY03/12 forecast, but both operating profit (at 81.2%) and recurring profit (at 101.7%) came in at high proportion of the 1H forecast.

1H FY03/12 Forecast

• Sales: 47.0 billion yen (vs. previous forecast of 46.9 billion yen)
• Operating profit: 1.6 billion yen (vs. previous forecast of 1.5 billion yen)
• Recurring profit: 1.8 billion yen (same as previous forecast)
• Net income: 1.0 billion yen (same as previous forecast)

FY03/12 Forecast

• Sales: 100.3 billion yen (vs. previous forecast of 100.0 billion yen)
• Operating profit: 4.8 billion yen (vs. previous forecast of 4.5 billion yen)
• Recurring profit: 5.3 billion yen (same as previous forecast)
• Net income: 3.0 billion yen (same as previous forecast)

FY03/11 Results

Yellow Hat announced FY03/11 results on May 12, 2011 (see table above).

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

The company also hiked its dividend to 10 yen for 2H FY03/11 from its original forecast of 8 yen resulting in a total FY03/11 dividend of 18 yen vs. its projected 16 yen dividend.

The company upwardly revised its FY03/11 forecast twice, in November 2010 and in February 2011. Actual FY03/11 sales figures, however, came in slightly below forecasts but operating profit exceeded projections by 12.3%. The company attributed the better than expected operating profit numbers to various measures including cost controls. The Tohoku earthquake damaged some distribution centers, facilities and stores, and the company also set aside 252 million yen of provisions for disaster related losses out of a total 2.7 billion yen in extraordinary losses for the period. Net income meanwhile was up 76.6% YoY at 2.9 billion yen, exceeding the company forecast.

The company’s core business of store-based sales totaled 111.5 billion yen (+4.6% YoY) for the period. Breaking down the performance by item: tire sales were +13% YoY, hubcaps/aluminum wheels +18% YoY, audio-visual and communication products and car-computers -3%YoY, and batteries +12% YoY, demonstrating overall strength in the product areas the company has been focusing on.

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Full Year (FY03/13) Outlook

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Future Outlook

The company has not published a mid-term plan. However, the three drivers of the future performance of the company are:

• Internal initiatives (see Strategy section for more details)
• The impact of a shrinking domestic market for car parts
• The effects of decline in the number of such indirect competitors such as gas stations and car dealerships.

If parts sales by car dealerships and gas stations continue to decline at the rate seen in FY03/10 (gas station parts sales fell 10.7% YoY; car dealerships parts sales fell 5.6% YoY), it would mean that by FY03/13 the combined sales for those two channels would be lower by about 170 billion yen and by around 270 billion yen by FY03/15.Considering that sales of car parts declined at an annualized rate of 4.4% from FY03/00 through FY03/10, lower sales by car dealerships and gas stations could result in a supply-demand gap, namely about 56 billion yen in excess demand through FY03/13 and about 82 billion yen through FY03/15. While these are rough calculations, the extent to which the company can fill this supply-demand gap - i.e., increase its overall market share - will drive future sales (see Market Overview section for details on market scale).

SR Inc. understands that a Nomura Securities Co. analyst published on May 20, 2011 forecasts of the company’s earnings from FY03/11 to FY03/14 which may be of interest to readers.

FY03/12 Nomura Securities forecast:

• Operating profit of 4.7 billion yen
• Net Income of 3.1 billion yen

FY03/13 Nomura Securities forecast:

• Operating profit of 5.2 billion yen
• Net Income of 3.4 billion yen

FY03/14 Nomura Securities forecast:

• Operating profit of 5.5 billion yen
• Net Income of 3.5 billion yen

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Business

Business Description

Yellow Hat sells car parts to wholesalers and retail customers, and is involved in property rentals and subleasing store locations to franchisees. The company is second among domestic car parts store chains in terms of sales after Autobacs Seven Co. (TSE 9832), hereafter referred to as Autobacs.

Car Parts Sales (92.8% of sales in FY03/11)

Yellow Hat’s main business is sales of car parts and accessories. Sales for this business fall into four categories:

• Corporate wholesaling to non-consolidated franchise companies
• General wholesaling to home centers
• Retail sales to consolidated companies
• Retail sales by individual stores directly operated by Yellow Hat (see diagram below).

The segment has two divisions: wholesale and retail. In FY03/11 wholesale contributed 64.1% of segment sales and retail 35.8%.

To understand the scale of company operations, it is better to look at retail sales of the broadly defined Yellow Hat Group (which includes directly managed stores, subsidiary-managed stores, and franchisee stores), rather than just the sales number shown on Yellow Hat’s Consolidated Income Statement.

Products and Services

As of FY03/10, the breakdown of store sales was as follows: 25% tires, 24% audio-visual, 14% service (labor for tire and oil changes, vehicle inspections etc.), 7% car accessories, 6% oil, 5% chemicals, 4% batteries, 4% wheels, and 11% other.

SR Inc. understands that gross profit margins are high for tires and consumables (batteries, oil, etc.) and low for durable goods, like audio-visual equipment.

The company says that compared to competing service stations and car dealerships, Yellow Hat has lower purchase prices for products, made possible by economies of scale. Also, when compared to manufacturers' tire shops, Yellow Hat naturally carries a wider range of products from multiple manufacturers.

As is the custom in the industry - with the exception of durable goods, such as audio-visual products, electronics, etc. - unsold inventory may often be returned to the dealer in exchange for newer models. For example, replacing unsold summer tires with winter tires. Thus, inventory risk is relatively low compared to other industries.

Source:Company processed by SR Inc.

Source:Company processed by SR Inc.

Stores

The standard Yellow Hat storefront is relatively small, located on a property of around 3,300 square meters with a sales floor of around 495 square meters with each store serving a market of about 30,000-40,000 people in the surrounding 3-5 kilometer radius. Stores carry around 7,000-8,000 items.

As of FY03/11, the store network comprised 500 domestic and 17 overseas stores. The breakdown of domestic stores by operator was 29 directly operated stores, 89 stores operated by subsidiaries, and 382 stores operated by group companies (non-consolidated franchisee companies). See the table below for further details.

Franchise Stores

Once a franchise contract is established between Yellow Hat Ltd. and a franchisee Yellow Hat Ltd. provides franchisees the right to conduct business using the company’s corporate branding, and supplies the franchisee with the company’s operational know-how. In exchange, franchise stores purchase products from Yellow Hat. Apart from the usual branding benefits for the franchisees, i.e. the ability to sell goods using a highly recognized nameplate, they can take advantage of Yellow Hat’s considerable buying power. Yellow Hat Ltd. also provides other assistance, like store management training, sales comparisons with other stores, and marketing support (running advertising campaigns, etc.).

Yellow Hat franchisees do not pay royalties as is typical with most franchise store operations. Indeed, the relationship between franchisees and the company more closely resembles that between a retailer and a wholesaler. As a result, the only real difference between directly managed stores (operated by both Yellow Hat and its subsidiaries) and franchise stores is that in some cases, franchise stores have discretion to step outside the predetermined retail format, for example, by selling cars on the same lot. Historically, directly operated stores tended to fill geographic gaps in areas where there were no franchise stores. However, the company has most territories covered by franchisees and the role of directly managed retail stores has been declining.

Stores Openings and Closings

While the company has internal guidelines regarding closures of unprofitable stores, in many cases the company will attempt to revitalize the store (by changing the management team etc.) first and only close it as a last resort.

As the Yellow Hat store format is suited for expansion into smaller sales regions the company and its partners can quickly exploit store opening opportunities to replace closed gas stations and car dealerships.

Overseas Business

Yellow Hat operates stores in China and Taiwan via JVs, both through directly managed and franchise stores under contracts similar to those used in Japan. The operating results show up below the operating line as income from affiliates. The company also has franchise contracts in Korea, Saudi Arabia, and the United Arab Emirates, as opposed to direct investments by the company itself in these countries. Revenue sources are commissions, royalty payments, and wholesale sales. The company does not specifically disclose earnings from its overseas businesses, but SR Inc. estimates the effects of equity in net income of affiliates in FY03/10 was negligible at about 30 million yen.

Comparison to Autobacs

Autobacs has a larger sales floor and greater sales per store than Yellow Hat and also more stores in the Tokyo Metropolitan and Kinki regions. Yellow Hat stores are smaller; a format suited for targeting smaller markets, such as regional cities. SR Inc. estimates that two main factors contributed to these differences:

• Autobacs moved into retail early on and aggressively expanded in the key metropolitan areas of Kanto and Kinki.
• Autobacs derives royalty revenues from franchisees, which are linked to the levels of sales and it is therefore incentivized to push for the expansion of large-scale stores to maximize retail revenues.

Yellow Hat’s relative competitive advantage may be in the ability of its stores to survive in smaller and weaker markets (they carry fewer SKUs allowing stores to localize the offering more effectively) and its long experience of running retail operations in such markets. For instance, the product offering can be reduced to focus primarily on consumables, i.e., items that need to be replaced periodically, such as tires, oil etc. This allows it to lessen the negative impact of falling car accessory sales, i.e., discretionary items, providing higher resistance in the shrinking market environment. Also, the company’s retail experience in those markets may allow it react quickly and open new stores where local car dealers and service stations recently closed shop. SR Inc. notes that while its main direct competitor (Autobacs) had tried to develop smaller, low-cost store format, judging from delays with store openings (as of August 2011) it appeared that the attempt to penetrate smaller markets was proving difficult.

Property Rental Business (7.2% of sales in FY03/11)

Sales and profits received by the company from renting land and buildings to group companies are recognized in this segment.

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Strengths & Weaknesses

Strengths

• Management not constrained by founding family considerations. In many Japanese companies even after the founders or their family officially withdraw from management they continue to exert considerable influence on the way the business is run and create serious corporate governance issues. In Yellow Hat’s case, however, the founder and his family made a smooth and complete exit from management and are not involved in the company’s affairs. SR Inc. feels this allows the management team to run the company at their discretion and in the interest of profit maximization (unlike some owner-managed companies that struggle to balance growth aspirations against inheritance considerations). Management now has the opportunity and freedom to take the company to the next level, although it is now up to them to deliver on this.
• Management team track record. Results have shown a dramatic recovery since President Horie took over in October 2008. While the positive results through to FY03/11 do not guarantee future success they can be seen as a promising sign. Judging by several major initiatives implemented in rapid succession since Horie’s appointment, management has demonstrated it can act quickly.
• Ability to survive and prosper in a structurally declining market. In a shrinking market, growth accrues to the surviving companies as they absorb share from perished rivals. SR inc. believes that as a large company with a nationwide store network, Yellow Hat can enjoy economies of scale from centralized buying, while its experience and know-how in operating in smaller markets presents future store network expansion opportunities.

Weaknesses

• Shrinking domestic market. The Japanese market for car parts has been in decline. Organic growth is therefore only possible through market share gains vis-à-vis competitors or through other channels such as car dealers and service stations, which are themselves struggling to increase the number of sales locations.
• Limited control over operations of franchisees. Yellow Hat gives franchisees considerable discretion when it comes to managing their stores. While this arguably better motivates individual partners, such a model likely makes it difficult to coordinate and synchronize operations at the network level. If a competitor exerting stronger control over its store network were to launch an organized attack on the markets where Yellow Hat has high share it could potentially undermine the company’s business base (although it should be noted that as of May 2011 such a threat was more theoretical than real).
• Relatively weak in densely populated areas. The company has relatively few stores in metropolitan areas with large car populations. At the end of FY03/11, of all cars in Japan 21.1% were registered in Southern Kanto and 16.9% in the Kinki/Shikoku area (Source: Automobile Inspection & Registration Information Association). At the same time, only 9.8% of domestic Yellow Hat stores were in Southern Kanto. The number for Kinki was low as well at 10.8%. SR Inc. believes this has been due to the historically competitive situation in these markets, i.e., the presence of a large and aggressive rival with a model better suited for big markets. However, in order to grow its overall market share the company may want to find ways to establish a stronger position in Southern Kanto and Kinki going forward. The declining number of car dealers and service stations in these areas might provide the chance for Yellow Hat to grow.

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Cost Analysis

Operating Profit, SG&A

Two points characterize the trend in the company's SG&A spending:

• The SG&A to sales ratio began to decline from FY03/08 after having increased and then peaking out in that year.
• The rate of decline in both FY03/09 and FY03/11 was large, which was largely due to changes in management approach during these years (executed by various management teams).

While the company had regional-authority type group management centered on regional subsidiaries up until FY03/05, it then shifted to concentrated management in FY03/06; the 22 subsidiaries operating Yellow Hat stores were consolidated into one company in FY03/06. One result of the consolidation was an increase in costs, mainly personnel costs. Under the new group-management approach, salaries that were previously set based on regional comparisons now had to be inevitably increased (as now staff in different locations were working for the same entity). This obviously led to substantial operational inefficiency. The company returned to regional-authority type group management under President Horie (appointed in October 2008), and the company started transferring directly operated stores back to subsidiaries and to franchisees. This mainly drove a substantial decline in the SG&A to sales ratio in FY03/09-FY03/10.

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Group Companies

As of end-March 2011, the Yellow Hat Group was made up of Yellow Hat Ltd., 20 subsidiaries (19 domestic; one foreign) and five affiliates (three domestic; two foreign).

Yellow Hat Ltd.

Wholesale sales to the company's retail subsidiaries, affiliated companies, and franchisees (which the company calls “group companies”). Yellow Hat Ltd. also runs directly managed stores and a rental property business.

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Market & Value Chain

Market Overview

The size of the market for domestic car parts in FY03/10 was around 1.8 trillion yen (excluding some vehicle maintenance business like inspections), according to trade magazine AM Network (all figures used in this section are based on AM Network findings, except where stated otherwise). Considering the market was around 2.7 trillion yen in FY03/00 it means it has contracted by about 4.4% per year since FY03/00. Reasons for this include the economic recession, peaking out of vehicle ownership, and a drop in the number of car enthusiasts.

To respond to this decline in the car parts market, since 2000 the company diversified into nursing care, home center retailing, and car sales. However, it failed to make these businesses profitable. Under new management the company has refocused resources back towards its core competence of car parts with the goal of increasing market share while improving profitability. Also, by enhancing sales of tires and consumables, the company has been putting emphasis on satisfying recurring demand from ordinary car owners rather than focusing on the more one-off needs of new car buyers.

There are certain structural market dynamics that could play to Yellow Hat’s advantage. First, other competitors’ share of the car parts market is shrinking. In FY03/11 car dealerships sold 38.1% of total car parts, and service stations sold about 11.2%, however, following the financial crisis of 2008 car dealerships have been facing tougher economic conditions and lower sales of new vehicles. There were 15,430 domestic car dealerships at end-FY03/11, vs. 16,700 at end-FY03/04. Service stations are in a similar situation due to a double whammy of excess competition and reduced frequency of refueling by consumers driven by higher oil prices and better fuel efficiency of new cars. As a result, the profitability of service stations has rapidly deteriorated leading to rapid consolidation – at end-FY03/11 there were 29,001 domestic service stations down from 53,000 at end-FY03/04. It seems plausible that if the two abovementioned segments of the retailing market continue to shrink companies like Yellow Hat should benefit as they fill the demand gap.

The second market factor affecting Yellow Hat is that car parts stores, similar to those operated by the company, are also facing tough challenges. In addition to national chains, such as Yellow Hat and Autobacs, there are local chains and independent shops that sell car parts, which have also been declining in number in recent years (see table above). Even relatively large operators lack the scale to prosper, or even survive, and the trend towards industry consolidation will probably continue. In FY03/09 Yellow Hat acquired Autotech stores from ICS Co. (unlisted; a subsidiary of ITOCHU Corp. (TSE 8001)) and incremental growth through acquisitions of competitors’ operations seems to be a distinct possibility in the future.

Barriers to Entry

Barriers to entry for the car parts sales business are low – anyone, theoretically, could start such a business. However, due to the highly competitive nature of Japan’s very saturated and mature market new entrants must offer some unique differentiating factors vs. established players in order to survive. This represents a serious challenge and SR Inc. thinks that there will be few new entrants. In other words, the current market would be easy to enter but hard to persevere in.

Competition

There are multiple competitors in the car parts market, including: Autobacs Seven Co. (TSE 9832), JMS (unlisted, Toyota-group company), Driver Stand Co. (unlisted), Autowave Co. (Jasdaq 2666), Auto R’s Co. (unlisted) and Montecarlo Co. (Jasdaq 7569). Autobacs and Yellow Hat have the overwhelming market share and Autobacs, the larger of the two, is the company’s direct competitor.

Indirect competitors, i.e., companies with different business models but offering some of the same products, include tire shops, home centers, service stations (gas stations), and car dealers.

The internet also represents a significant channel for car parts and accessories. Yellow Hat estimates that up to one third of such products sales are now web-based. SR Inc. notes that for many car related products (tires, oil, to some extent car electronics and installable accessories) buying online would only suit hardcore enthusiasts. This is because once the product is bought it has to be properly installed/applied to one’s car. This renders two main features of internet shopping - convenience and cost - less valuable; one has to go to a mechanic to have tires replaced, and would likely be charged for installation. Therefore, until someone solves the problem by offering both extremely cheap products online and easily accessible and cheap physical service points, it seems likely to SR Inc. that the internet shopping will be a limited incremental threat going forward.

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Strategy

The company has not published a mid-term plan. However, it has identified the basic strategic directions it wants to follow:

• Concentrate resources on the car parts business, both wholesale and retail but with an emphasis on the wholesale area. Increase the number of stores, boost wholesale sales, improve gross profit margins. Emphasize tire sales, increase the weight of consumables (batteries, oil), and focus on car navigation and digital TV car appliances within its overall sales mix.
• Grow its shaken (obligatory motor-vehicle inspection) service business. Expand shaken service infrastructure, strengthen marketing to get more shaken business, work to improve pit service profitability.
• Increase management efficiency. Revive store operations, improve asset utilization efficiency, revamp its organizational structure, strengthen its financial position, and boost the earning power of its overseas business etc.
• Build a dynamic company. Improve internal communication, etc.

Concentrate resources on the car parts sales business. The company had already focused management resources on the auto part sales business by FY03/10. The steps to boost earnings going forward include growing the number of stores; increasing wholesale revenues from outside the group (e.g. home centers); focusing on higher margin consumables, shaken service, etc.

The company is planning to increase the number of stores at a pace of 20 to 30 per year from FY03/11 onward, mostly by taking over properties vacated by car dealerships (closed stores with furnishings and specialty equipment remaining) or acquiring competitors’ stores.

For non-group wholesale revenues growth (sales to retailers other than Yellow Hat store owners), the company is targeting 10 billion yen in sales over an unspecified ‘medium term’. Noting that home center sold 97.5 billion yen of car parts and accessories in FY03/11, the company aims to increase its share of wholesale sales to home centers.

The gross profit margin for tires and consumables is higher than for other products, and the company is keen to shift its sales mix so that the weight of such profitable items that also sell repeatedly to the same customer over time (a concept known in Japanese business practice as “stock revenues” as opposed to one-off “flow” revenues) increases. This segment of the business is even more important as traditional sellers, such as car dealerships and service/gas stations, close locations. The demand for tires and other consumables is relatively stable and the company wants to become the main purveyor in areas deserted by these indirect competitors.

To revive store operations, the company has been transferring directly operated stores to franchisees and trying to leverage its existing store network through such new initiatives as offering rental cars.

Overseas, the company is considering additional investments to accelerate store openings in China as car ownership levels continue to grow. The company is reluctant though to take risks in other countries, emphasizing careful and slow expansion elsewhere through licensing and other similar agreements.

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Other Information

History

The company was founded in 1961 by Hidesaburo Kagiyama as a car parts wholesale business called Royal. In 1982 the first Yellow Hat group store opened, and from 1990 the number of stores grew rapidly (December 1992: 200 stores, April 1995: 300 stores, March 1997: 400 stores). In 1997 the company listed on the TSE 1st Section and changed its name to Yellow Hat Ltd. In the mid-2000s, efforts toward diversification and unifying subsidiary sales companies ended in failure and the company posted substantial losses for two consecutive years in FY03/08-FY03/09. After President Horie took over in October 2008, the company began to work to diversify its subsidiary sales companies by region, and focus management resources on its core business.

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News and Topics

February 2012

On February 3, 2012, the company released Q3 FY03/12 results.

December 2011

On December 2, 2011, the company announced it would turn Montecarlo Co. (Jasdaq 7569) into a wholly owned subsidiary via a share swap.

At board meetings on December 2, 2011, both companies agreed to the following:

• Acquisition of Montecarlo preferred shares by Yellow Hat
• Conversion of Montecarlo into a Yellow Hat consolidated subsidiary via conversion of the preferred shares into common shares
• Via a share swap Yellow Hat will become the parent company and Montecarlo a wholly owned subsidiary with Montecarlo shareholders receiving common shares in the parent

Montecarlo operates auto products wholesale and retail operations with a strong geographic footprint in the Chugoku region of western Japan (centered around Hiroshima). Sales at the company peaked in FY03/00 and have trended down ever since, this combined with the recent economic recession has resulted in operational performance coming under pressure.

Montecarlo’s FY03/11 financial performance was as follows:

• Sales: 9.0 billion yen
• Operating loss: 106 million yen
• Recurring loss: 167 million yen
• Net loss: 280 million yen
• Total assets: 6.8 billion yen
• Shareholder’s equity: 424 million yen
• Interest-bearing liabilities: 5.3 billion yen

Given the current operational circumstances, Yellow Hat will dispose of some of Montecarlo’s interesting bearing debt and existing store network; and apply its operational knowhow and financial strength to the company as part of its turnaround.

The schedule for the transaction is as follows:

• December 5, 2011: Montecarlo preferred shares transferred to the company
• December 12, 2011: Conversion of Montecarlo preferred shares into common shares
• February 27, 2012: Montecarlo to be delisted
• March 1, 2012: Effective date of the share swap

The impact of this transaction on the company’s FY03/12 results is currently being assessed and will be released once known.

November 2011

On November 21, 2011, the company announced that it had reached a basic agreement with Idemitsu Kosan Co. (TSE 5019) for wholesaling of auto products, retail sales and product development. As part of efforts to solidify the relationship Idemitsu Kosan is considering taking an equity stake in the company (as of the time of the release the method by which this stake would be acquired was undecided).

On November 4, 2011, the company released 1H/Q2 FY03/12 results.

On November 2, 2011,the company announced an upward revision to its 1H and full-year FY03/12 forecast. In addition, it also hiked its forecast dividend payout.

The 1H revision was as follows:

• Sales: 48.3 billion yen (vs. previous forecast of 47.0 billion yen)
• Operating profit: 2.9 billion yen (vs. previous forecast of 1.6 billion yen)
• Recurring profit: 3.5 billion yen (vs. previous forecast of 1.8 billion yen)
• Net income: 2.7 billion yen (vs. previous forecast of 1.0 billion yen)

The full year revision was as follows:

• Sales: 101.2 billion yen (vs. previous forecast of 100.3 billion yen)
• Operating profit: 6.2 billion yen (vs. previous forecast of 4.8 billion yen)
• Recurring profit: 7.0 billion yen (vs. previous forecast of 5.3 billion yen)
• Net income: 4.5 billion yen (vs. previous forecast of 3.0 billion yen)

The company remarked that the upward revision was due to cost controls and demand for products compatible with terrestrial digital television following the termination of analogue television broadcasting in July 2011, as well as post-quake recovery demand, coming in above expectations. The company raised its forecast interim dividend to 12 yen per share (from 10 yen per share) and full year dividend payout to 22 yen per share (from 20 yen per share).

August 2011

On August 4, 2011,the company released Q1 FY03/12 results and announced an upward revision to its 1H and FY03/12 forecast.

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Major Shareholders

Koei Planning LLC and Nakahara Shoji LLC are real-estate companies run by Koichiro Kagiyama, the previous president of the company and the member of the founding family. The direct and indirect ownership ratio including shares in the name of Koichiro Kagiyama is 20.2%. Other shareholders include the company’s employee shareholding plan.

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Comments by President Horie

Profile of President Yasuo Horie

Born in 1952 in Kyoto, President Yasuo Horie joined Yellow Hat in 1976. Before being appointed President in October 2008, he served as Director and Manager of Sales Management and Executive Director.

President Horie's comments from an interview with SR Inc. in November 16, 2010 follow:

Since Being Appointed President

• “Among the measures I have taken to improve business performance, the one that had the most effect was the return of our retail operations to the original subsidiary-driven setup. The previous management team brought all directly managed stores into the parent company. I have split them back into local subsidiaries.”
• “I have worked to infuse new energy into the company and I feel that the staff motivation is very high right now.”

Growth Going Forward

• “I believe we are close to the time when this company will be one of few survivors in this winner-take-all market. We will be one of the default destinations where people will come to change their tires or have a shaken (an obligatory motor-vehicle inspection). We can be a growth company but the market is not giving us enough credit because we are seen as “auto-parts related”, and therefore ex-growth.”
• “Our total sales numbers have been declining but this is due to downsizing direct retail operations. Now the weight of retail sales in our mix has declined and the company should start seeing growth in overall sales. Sales should grow even if we simply continue to execute our current strategies. However, growth could accelerate if new initiatives are successful. One thing I can say is that we have a number of new things lined up to accelerate growth two to three years out.”
• “Our competition is not so much peer companies but rather regional tire shops, gas stations and car dealers. The products and services we sell are cheaper than those of car dealers and gas stations.”
• “The company has retail shops nationwide. The idea is to sell the products customers need and to provide a store to which they feel comfortable coming. Our regional stores mostly carry consumables whose sales are little affected by the decline in car use by young people (which has been affecting competitors’ metropolitan locations).”
• “The number of gas stations will continue to decrease. There are simply too many of them, but on top of that vehicle mileage continues to improve, incrementally reducing demand. The number of car dealers will also decrease as fewer new cars are sold.”

Founding Family

• “They are still a major shareholder, but they are not a controlling entity. The family has completely withdrawn from the management.”
• “Our company is an extremely rare example of the founding family smoothly removing itself from management.”

Share Price

• “I believe the current (November 16, 2010) valuation is low.”
• “Both myself and other employees own shares through the employee shareholding plan. I believe the management must own the shares in the company they manage.”
• “We do not disclose a mid-term plan; however, we do have one which was created with shareholders’ interests taken into account.”

Dividends

• “We do not plan to lower dividends.”
• “I thought of a 2% dividend yield as an appropriate level. However, the market environment has been changing and it is may be the time to review what the appropriate level should be.”

(Note) May 12, 2011’s FY03/11 results announcement included the following statement regarding dividend policy: In principle, the company emphasizes a consolidated Dividends On Equity (DOE) policy, in which dividends are paid out in a regular and stable fashion, while also dispersing profits based on consideration of annual profits: the DOE ratio is set at a level of 1.2%.

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By the Way

ETC - Electronic Toll Collection System, the ETC project allows cars installed with ETC cards and in-vehicle ETC devices to make payments using their ETC card when passing through toll gates. In-vehicle ETC devices are sold at auto dealers, automotive parts stores and repair shops. For more details on ETC please see the English language ETC website here.

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