Yoshitsu Co., Ltd. (TKLF) CEO Mei Kanayama on Q2 2022 Outcomes – Earnings Name Transcript

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Yoshitsu Co., Ltd. (NASDAQ:TKLF) Q2 2022 Earnings Conference Call March 29, 2022 8:00 AM ET

CompanyParticipants

Mei Kanayama – Chief Executive Officer

Youichiro Haga – Principal Accounting & Chief Financial Officer

Conference Call Participants

Operator

Good day, ladies and gentlemen. Thank you for standing by and welcome to Yoshitsu’s First Half of Fiscal Year 2022 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. This conference is being recorded today, Tuesday, March 29, 2022. If you have any objections, you may disconnect at this time.

Joining us today from Yoshitsu are the company’s Principal Executive Officer, Mr. Mei Kanayama; the company’s Principal Accounting and Financial Officer, Mr. Youichiro Haga. Before we continue, I would like to remind you that some information discussed on this call will contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined by the as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks and uncertainties. The company undertakes no obligation to update forward-looking statements to reflect subsequent occurring events or circumstances or changes in its expectations, except as may be required by law. Although the company believes that the expectations expressed in these forward-looking statements are reasonable, it cannot assure you that such expectations will turn out to be correct, the company cautions investors that actual results may differ materially from anticipated results and encourages investors to review other factors that may affect its future results in the company’s registration statements and in its other filings with the SEC.

With that, I will now turn the call over to Mr. Mei Kanayama, the company’s Principal Executive Officer. His opening remarks will be delivered in English by the company’s IR representative. Mr. Kanayama, please go ahead.

Mei Kanayama

[Foreign Language]

Thank you, operator and everyone, for joining Yoshitsu’s First Half of Fiscal Year 2022 Earnings Conference Call today. On our call today, I will give an overview of our performance for the first half of fiscal year 2022. Then our Principal Accounting and Financial Officer, Mr. Youichiro Haga will share the details of the company’s financial review.

Lastly, we’ll conduct a Q&A session to take your questions.

[Foreign Language]

We gave significant effort to deliver solid financial results of the first half of fiscal year 2022 with a total revenue of USD 112.3 million, up 34.8% year-over-year along with our increased global market coverage and customer base. Although our business was negatively impacted by the ongoing COVID-19 pandemic, challenges to global supply chain and the travel restrictions, our online stores posted an impressive revenue of USD 62.3 million, up 111.6% from the same period of last year. We achieved steady growth in franchise stores and wholesale customers, marking an increase of 34.2% in revenue. Given the current market conditions, our physical store sales suffered, while we had upgraded the strategic focus on overseas online markets, minimizing the impact of store sales to the overall financial performances. We cannot achieve these results without our dedicated team. I’m so proud of them and appreciate for their support and execution during the COVID-19 pandemic. Their hard work allows us to grow our business and to execute strategic plans to propel our future growth.

[Foreign Language]

As of February 28, 2022, we had 10 directly operated physical stores in Japan, 24 online stores, nine franchise stores in the U.S., four franchise stores in Canada, four franchise stores in Hong Kong, one franchise store in the UK. And around 140 wholesale customers in Japan and other countries.

[Foreign Language]

I’m very confident about the future of Yoshitsu and expect to see improvements in our financial metrics and the effective controlling our costs as the market gradually reverse from the COVID-19 pandemic. Moreover, we are focusing on global expansion, especially in some key regions like Europe, North America and Southeast Asia. Following our recent cooperation with a well-known company in North America, we are on the right track to make a push to expand in this area. Beyond this aspect, we are planning to manufacture and sell our private label products in five years to further expand our product offerings.

[Foreign Language]

Thank you for your continued support to the company. Next, I will turn the call over to our Principal Accounting and Financial Officer, Mr. Youichiro Haga for a closer review of our financials of the first half of fiscal year 2022 on behalf of the management team. Mr. Haga, please go ahead.

Youichiro Haga

Thank you, Mr. Kanayama. Good morning, everyone. On behalf of the management team, I will provide a brief financial overview of the first half of fiscal year 2022. I — as the COVID-19 pandemic continued spreading, we encountered a surge in various costs and the shortage of staff. However, we tackled these challenges and achieved record revenue with our strong effort.

Total revenue at 34.8% to $112.3 million for the six months ended September 30, 2021 from $83.3 million for the same period of last year. The increase was due to the increased revenue from online stores, franchise stores and wholesale customers which was partially offset by the decrease in revenue from directly operated physical stores. Revenue from directly operated physical stores down by 74.5% to $5.2 million for the six months ended September 30, 2021. The decrease was mainly due to the state of emergency declared by the Japanese government in April 2021 in response to the COVID-19 pandemic. Almost all of the company’s physical stores were temporarily closed from late April 2021 to the end of May 2021.

After company’s physical stores reopened in June 2021, most of the company’s physical stores remained closed on Saturdays or Sundays and opening hours were reduced every weekday. After July 2021, most of the company’s physical stores resumed their business with working hours reduced by one to two hours day. The company’s business was still negatively affected during the first half of the fiscal year 2022. Revenue from online stores up by 111.6% to $62.4 million for the six months ended September 30, 2021. The increase was due to the growing popularity of the online shopping, given that the e-commerce industry has been rapidly expanding in recent years.

In order to seize, the opportunities, the company expanded its online store network by opening new stores on multiple popular and reputable third-party e-commerce marketplaces in overseas regions while improving the efficiency of its supply chain and storage and inventory management.

Revenue from franchise stores and wholesale customers, up by 34.2% to $44.7 million for six months ended September 30, 2021. The increase was mainly due to the increased sales to overseas franchise stores and wholesale customers offset by a slight decrease in the company’s Japanese domestic wholesale. With improvement of the company’s supply chain and storage and logistic capacity, the company added two new franchise stores and increased sales to oversees wholesale customers, on per customer basis during the first half of the fiscal year 2022.

Gross profit increased by 24.1% to $18.3 million for the six months ended September 30, 2021. Overall gross margins were 16.3% for the same period. Operating expenses increased by 23.5% to $13.7 million for the six months ended September 30, 2021. The increase was due to the increase in shipping expenses, transaction commissions, consulting and professional service fees, promotion and advertising expenses and payroll employee benefit expenses and bonus expenses.

Net income up by 4.5% to $2.4 million for the first half of the fiscal year 2022. Basic and diluted earnings per share was $0.09 for the same period. As of September 30, 2021, the company had cash of several million dollars. As of September 30, 2021, the company had accounts receivable balance due from third parties and related parties of $47.8 million and $5.2 million, respectively. The balance as of September 30, 2021, have been fully collected as of March 21, 2022. The corrected balances of such receivables provide cash available for use and the company’s operations as working capital if necessary. As of September 30, 2021, the company has merchandise inventories of $35.3 million which the company believes can be sold quickly based on its analysis of the current trend in demand for its products.

For the six months ended September 30, 2021, net cash used in operating activities was $19.7 million. Net cash used in investing activities was $1.6 million. Net cash provided by financing activities was $11.9 million. We feel very positive about our overseas e-commerce business and eye on achieving 120% increase in our revenue in fiscal year 2022.

We remain confident in our business and the potential to grow but we might expect to see heightened transportation cost and operating expense given to the current market conditions.

Now, I would like to turn the discussion over to the operator for any questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Conor Lee from Street Trader [ph]. Please go ahead.

Unidentified Analyst

Hi, morning. Thanks for taking my questions. According to the company’s IPO prospectus, you officially mentioned to open new directly-operated stores and add franchise stores. So what is the current development and the progress on these two aspects?

Unidentified Company Representative

Thank you for your question. Please allow me to translate your question.

[Foreign Language]

Mei Kanayama

[Foreign Language]

The company is actively looking for suitable new store locations and is currently negotiating with several reputable real estate as well. In the next few months, our new store will be open in the Tokyo metropolitan area.

[Foreign Language]

Actually, we opened the new franchise store in December last year in Canada. In addition, we are proceeding with plans to open franchise stores in Australia, North America and Southeast Asia.

[Foreign Language]

The company is preparing for tourists to return to Japan and is working on attracting more local citizens by actively developing new stores and renovating old ones. We strive to satisfy our customers’ shopping and ensure they feel the joy of the shopping. That’s all, thank you.

Unidentified Analyst

Okay, thank you.

Operator

The next question comes from Liscon Lau [ph], a private investor. Please go ahead.

Unidentified Analyst

Good morning, everyone. As a private investor, I have a question for the management team. Consider the current worldwide supply chain issues, what is the potential impact to our business. That’s it, thank you.

Unidentified Company Representative

Thank you for your question, sir. Please wait a moment.

[Foreign Language]

Mei Kanayama

[Foreign Language]

I don’t think there were any significant negative effects on our business. I will let our CFO to clarify in detail. [Foreign Language].

Youichiro Haga

[Foreign Language]

Although the impact of the pandemic has slowed down the globalization of the business, the company still achieved a new high in overseas turnover. As of December of this fiscal year, the cumulative sales of our overseas wholesales, including our franchise stores exceeded JPY8.4 billion, accounting for about 40% of the total sales of the same period. And compared with the same period of the previous year, sales increased by about 25%. And during the same period, the cumulative sales of the overseas online stores exceeded JPY10 billion, accounting for about 49% of the total sales in the same period, an increase of about 17% compared with the sales — excuse me, with the sales ratio of the same period of the previous year. This shows that supply chain issues have not had any worse negative impact on the company. That’s all, thank you.

Unidentified Analyst

Thank you for your answer.

Operator

The next question comes from Penny Wong from Sense Gain Capital [ph]. Please go ahead.

Unidentified Analyst

Hi, company. I just reviewed the company’s balance sheet and would like to know that what causes the increase of the company’s long-term borrowings? Thank you.

Unidentified Company Representative

Thank you for your question, ma’am. [Foreign Language].

Mei Kanayama

[Foreign Language]

The company’s long-term borrowing increased by JPY840 million at the end of August 2021, actually, is the warehouse construction cost. We have concentrated several warehouses in one place to save rent management fees, personnel costs and other expenses. We believe this move can help the company reduce costs and increase gross profit in the long run. That’s all, thank you.

Unidentified Analyst

Okay, thank you.

Operator

The next question comes from Emma Smith [ph], a Private Investor. Please go ahead.

Unidentified Analyst

Good morning, Yoshitsu team, congratulations for achieving such encouraging financial performance. However, compared to the same period last year, the gross margin decreased by 1.4% to 16.3%. So what’s the plan for Yoshitsu to improve your gross margin? Thank you.

Unidentified Company Representative

Excuse me, may I beg your pardon?

Unidentified Analyst

Can you hear me now?

Unidentified Company Representative

Yes, yes, please.

Unidentified Analyst

Okay. So congratulations for achieving such encouraging financial performance. So however, compared to the same period last year, the gross margin decreased by 1.4% to 16.3%. So my question is, what’s the plan for Yoshitsu to improve your gross margin? Thank you.

Unidentified Company Representative

[Foreign Language]

Mei Kanayama

[Foreign Language]

The COVID-19 pandemic caused the decline in gross profit margin and the decline in our gross profit margin was mainly due to the increased promotion activities and price discounts and increased operating expenses of online stores.

[Foreign Language]

We consider this as an investment for our company to secure products from suppliers, increase our brand awareness, improve our customer services and attract more customers.

[Foreign Language]

We are still trying to build more partnerships with manufacturers and expand our business to reach more customers. At the same time, we’re opening sales channels, off-line and online.

[Foreign Language]

With the COVID-19 pandemic stabilization, I believe that we will see the improvements in our gross profit margin. I am very confident about the future of Yoshitsu. That’s all thank you very much.

Unidentified Analyst

Okay, thank you.

Operator

Seeing no further questions, let me turn the call over to the company’s IR representative from Ascent Investors Relations for closing remarks.

Unidentified Company Representative

Thank you very much for joining this conference call. If you have any questions, please contact us through e-mail at ir@ystbek.co.jp, will reach our IR Counsel, Ascent Investors Relations, at tina.xiao@ascent-ir.com. Management will respond to your questions as soon as possible. We appreciate your interest and support in Yoshitsu and look forward to speaking with you again next time.

Operator

Thank you again for attending Yoshitsu’s first half of fiscal year 2022 earnings conference call. This concludes our call today and we thank you all for listening in. Goodbye.

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