St.Cousair CO.,LTD. Q3 FY2025 earnings call

Overall Financial Performance

• 3rd quarter cumulative consolidated net sales: 14.648 billion yen, up 2.4% YoY
• Gross profit: 5.112 billion yen, down 6% YoY, gross margin 34.9% (down 3.1pp YoY) due to raw material price inflation and changes in sales channel mix, partially offset by price adjustments, cost reduction initiatives, and franchise wholesale price optimization
• Operating profit: 614 million yen, down 6% YoY, operating margin 4.2% (improved from 2.6% guided previously)
• Quarterly net profit: 302 million yen, down 58.2% YoY due to impairment losses from the closure of MeKEL Nagano Wakazuri store
• For the standalone Oct-Dec 2024 3rd quarter accounting period: gross margin improved to 35.3% (only 0.4pp below YoY), operating margin rose 0.5pp YoY to 7% driven by selling, general and administrative (SG&A) expense compression

SG&A Expense Status

• Total SG&A increased 3.3% YoY to 4.497 billion yen
• Personnel expenses: up 2.8% YoY to 1.812 billion yen driven by base salary increases
• Packaging and transportation costs: up 10.3% YoY to 984 million yen driven by outsourcing of shipping operations and increased warehouse and transport costs
• Depreciation: up 27% YoY to 160 million yen driven by capital investment for the first MeKEL location and new product development lab

Existing Store Trends

• Kuze Fuku Shoten existing store customer count and average transaction value have recovered since hitting a bottom in April 2024. For the Oct-Dec 2024 quarter, customer count was flat YoY (100%) and average transaction value was up 1% YoY (101%)

• Retail Stores (combined Direct Owned + Franchise): Total sales increased 3% year-over-year (YoY) for the 3rd quarter cumulative period. Direct owned store sales decreased 2.4% YoY, while Franchise store sales increased 8% YoY; the difference is driven by format conversions from direct owned to franchise stores. As of the end of the 3rd quarter, total store count reached 175 (12 for St. Cousair, 163 for Kuze Fuku Shoten), a net increase of 4 stores from the end of March 2024.
• EC: Sales increased 13.6% YoY for the 3rd quarter cumulative period, driven by stronger sales of seasonal limited products and growing pre-orders for the New Year holiday season.
• Wholesale (ホールセール): Sales continued to be impacted by weak performance of certain products at major retail chain partners and delayed sales timelines, but the YoY decline has narrowed due to expanded product lineups and ongoing promotional activities. The company is allocating resources to recover the wholesale business.
• Global: For the 3rd quarter cumulative period, sales increased 64.6% YoY. By region: United States sales grew 62.6% YoY to 932 million yen; Taiwan sales grew 49.5% YoY to 426 million yen; other regions (South Korea, Canada, Mexico, Hong Kong) grew 341.8% YoY to 86 million yen. The Q3 2024 (Oct-Dec) YoY sales decline in the US is due to pulling forward sales to Q2, and the recently acquired Bonnie's Jams business will be reflected in Q4 results.

• Management upwardly revised the full-year 2025 March fiscal year guidance, driven by higher-than-expected sales from retail stores and EC, a smaller-than-expected sales decline in the wholesale segment, and recognized foreign exchange gains from currency market movements.
• Progress against the revised full-year guidance as of the 3rd quarter cumulative period: 74.8% for net sales, 78.5% for operating profit, 79.9% for ordinary profit, and 87% for net profit attributable to parent company shareholders.
• Management will continue operations to deliver results that exceed the revised full-year guidance in the 4th quarter.
• Management is currently developing medium-term plans and budgets for future fiscal years, with a strategic focus on maintaining strong performance in domestic retail and EC, recovering the wholesale business, and accelerating growth in the global business centered on North America.

• Persistent raw material price inflation, along with higher utility, logistics, and packaging costs continue to pressure gross margins.
• Wholesale business remains impacted by weak performance of legacy products at key retail partners, with full recovery still ongoing.
• Global business (especially US operations) faces warehouse infrastructure bottlenecks that require additional capital investment to support growth.
• The Q3 US sales decline was partially timing-related from pulling sales forward to Q2, but ongoing expansion requires continued investment in infrastructure and sales teams.

Q: What are the drivers of the recent recovery in Kuze Fuku Shoten existing store sales after last year's price hike, and is this recovery sustainable? / A: Management notes the recovery trend started after the April bottom, driven by two key in-store initiatives: active in-store tasting promotions for core dashi products, and expanded rollout of seasonal limited products in response to customer requests that encourage repeat visits. Management also notes that customers have broadly accepted the price hike under current inflation conditions, reducing excessive purchase withholding that supported the gradual sales recovery.

Q: What factors are driving the improving trend in wholesale performance, and what initiatives are working? / A: The narrowing sales decline is driven by two main actions: development of new product lines (especially expanded confectionery product offerings) that have driven sequential sales growth starting in Q3, and product modification based on customer feedback. For example, the popular Shichimi Nameko product was reconfigured from a single large jar to a two smaller jar set to improve storage convenience, which has received very positive customer response.

Q: What is the outlook and expansion plan for global business going forward? / A: The company will continue to aggressively expand global business, with a focus on two core regions. For Asia, it will maintain its current strong growth trajectory while diversifying to reduce reliance on a small number of large retail partners. For the US, infrastructure is now sufficiently developed for aggressive expansion: the recently acquired Bonnie's Jams has an existing nationwide distribution network of 5,000 stores, which will be leveraged for cross-selling of Kuze Fuku & Sons and Portlandia Foods products. The company will invest to resolve warehouse bottlenecks, and strengthen internal sales teams and external wholesale partner networks to accelerate growth.

Q: What are the priority geographic expansion areas for the US business? / A: Management identifies large, high-potential markets centered on existing hubs: Oregon, Seattle, Southern California, Chicago, Texas, and suburban New York. The company will leverage the overlapping but complementary distribution networks of its three brands (2,000 stores for Kuze Fuku & Sons, 5,000 for Bonnie's Jams, 3,000 for Portlandia Foods) to expand distribution via cross-selling and add new SKUs to existing partner locations.