The 2018 Skylark Group Management Policy

August, 2018

Status of New Store Openings and Efforts to Reinforce Existing Stores


On August 9, 2018, we announced the first half earnings result for FY2018. We are implementing the measures announced at the beginning of the year, including opening new stores and strengthening existing stores, as planned, and we will continue to work toward achieving the annual profit plan. Regarding shareholder returns, we will pay an interim dividend of 16 yen per share as planned.

In addition, our stock has been selected as a constituent of "JPX Nikkei Index 400" jointly calculated by Japan Exchange Group, Tokyo Stock Exchange Co., Ltd. and Nikkei Inc.. We will continue to manage our business considering capital efficiency and investors to maximize our corporate value.

Status of New Store Openings


We have declared a growth strategy that involves expanding the number of store openings from 2017 onwards, and to better satisfy increasingly diverse needs, we have accelerated store openings with a focus on the new store formats we have developed to date. In 2017, we opened a total of 97 new stores and have already opened 56 new stores in the first six months of 2018, making steady progress towards our goal of approximately 100 new stores per year. In the following section we will describe conditions for each store type.

(1) Shabuyo
In 2017 we opened 31 new locations for Shabu Shabuyo, the shabu-shabu (thin slices of meat parboiled in soup) specialty restaurant, and the new stores have steadily contributed to profits. From January to June of this year, we opened a cumulative total of 11 Shabu Shabuyo location, and these stores are expected to contribute to profits from the next period onwards. With its buffet style, Shabu Shabuyo allows customers to freely choose from an extensive menu of more than 30 types of vegetables and desserts in addition to quality meat procured using the purchasing power of the Skylark Group. The restaurant has been extremely well received by students and younger customers in addition to families, and at some stores located in urban areas, a large number of customers from younger demographics visit.

(2) Karayoshi
Karayoshi is a kara-age (deep-fried chicken) specialty shop that opened its first location in October last year. In 2018, we have opened a cumulative 21 locations, and when combined with the 4 new stores opened in 2017 and conversions from other store formats, the number of stores has expanded to 33 as of the end of June 2018. Karayoshi has grown into an extremely promising format that is highly profitable. In April, the store won a gold prize at the 9th Kara-age Grand Prix organized by the Japan Karaage Association, and our products continue to win the approval of customers for their flavor. Recently, we have conducted trial chicken wing sales and worked on improvements to the sauce, and have consistently made day-to-day efforts at improving the brand into one that will continue to please customers.

(3) La Ohana
La Ohana is a Hawaiian themed restaurant that opened its first location last year with the Yokohama-Honmoku Store. In March 2018, the Gontazaka Store was opened through a conversion from another brand. Over the past several years, a growing number of customers have placed an emphasis on enjoying their time spent at a store and having a relaxing space in addition to the food on offer. La Ohana is a brand designed to let customers have a close-up experience of Hawaii, a resort area that is familiar to and popular with Japanese of all ages. We believe that we have established a brand that offers spaces for various usage scenarios, from families all sitting together to communication between friends and customers looking for some quiet time to relax alone.

(4) Musashinomori Coffee
The cafe format Musashinomori Coffee opened its first location in 2015 and has steadily expanded the number of stores in the years since. We have opened 4 new stores in 2018, bringing the total to 21 as of the end of June 2018. The brand’s earnings structure has also taken root. The spacious interiors are based on the concept of a highland resort and include sofa seating designed for comfort and magazine racks. In this way we have aimed to provide a space where customers can relax in comfort for extended periods, and the brand has proven popular with customers. Moving forward we will continue to explore opportunities to open new stores to make the brand available to even more customers.

Our strengths lie in the overwhelmingly large scale of our operations, which has allowed us to develop a diverse array of store formats covering low and mid-level price ranges across multiple categories including Japanese, Western, Chinese and Italian cuisine. Going forward, we will continue with store openings at the rate of 100 per year as we aim to adapt to the rapidly-changing external environment and customer needs while optimizing the mix of in-house brands to suit the market.

Efforts to Reinforce Existing Stores


The environment surrounding the restaurant industry today continues to be severe. According to the Monthly Labour Survey for April released by the Ministry of Health, Labour and Welfare in June, real wages excluding the impact of price fluctuations fell 0.2% compared with the same month last year. With real wages falling and increases in the price of goods—especially gasoline and food—gaining speed, consumer confidence has worsened. The household finances of the young family demographic have been hit particularly hard, and this may have led to fewer opportunities for eating out.

To ensure that Skylark restaurants continue to be a favored destination for customers, at the beginning of this year we announced the management policy of “raising the operational quality of each individual store to improve customer satisfaction,” and we have made steady progress in this regard. In addition to adhering to our long-established basic policy of increased sales and profits, we will continue to invest in stores that satisfy customers as well as our valued employees.

(1) Investing in Existing Stores
A crucial element to developing a store that wins the approval of customers is giving them the ultimate store experience. In 2018, we will carry out the remodeling of around 200 stores (revamping designs to bring them up to date with the times). We are also conducting repairs on interior and exterior elements that appear to be deteriorating with age, planting additional greenery, improving the visibility of signs and other elements and enhancing the convenience of parking lots, all as part of a deeper commitment to investment and expenditure to improve our stores.

<Images of the GT Takahatafudo Store>


Gusto Takahatafudo Store: We repainted parking space lines and installed buffer stopping blocks.


Gusto Takahatafudo Store: We removed foliage in front of the store to improve the field of view and visibility from inside the store.

At our flagship Gusto stores, we installed power outlets and set up Wi-Fi environments at high-demand stores as part of efforts to accommodate various usage motivations that go beyond serving food as a restaurant.

(2) Measures to Reinforce Existing Stores
Complete Revamp of Pizza Dishes
Pizza is a popular menu choice at Gusto. After several years of research to develop products that will hold their own against what specialty pizza stores offer, we launched new pizza products at all Gusto stores from April this year. We invested around 800 million yen to retool the pizza production line at our Maebashi Plant, allowing the process of hand-kneading and stretching pizza dough traditionally performed by pizza chefs to be recreated through machinery. The authentic Neapolitan pizza with a sticky texture that Gusto serves at a low price has proven popular with customers and led to increased sales volume. We are currently conducting tests to establish a pizza delivery model for regional areas.

Improving the Steak Gusto Restaurant Format
In 2009, we opened the first Steak Gusto restaurant in Yamato, Kanagawa Prefecture, and as of the end of June 2018, this number has swelled to 138 locations. With the concept of serving steak with an included salad bar at reasonable prices, Steak Gusto has won the support of various customers, families in particular. However, with the recent meat boom, the number of specialty steak restaurants has increased, creating the need to offer new value that caters to what consumers want. To ensure that Steak Gusto enjoys continued support from customers, we must continually evolve, both in terms of hard product as well as our menu offerings and service. We have begun making improvements to the restaurant exteriors, moving from the conventional American western-style design to stylish stores with eye-catching neon signs.

The first Steak Gusto remodelings were carried out at the Kodaira Josui-Honcho (Tokyo), Kariya Imagawa-cho (Aichi), Zushi (Kanagawa) and Fukuoka-Shingu (Fukuoka) stores, and each were popular with customer. We will continue to test improvements ahead of implementing full-scale remodeling next year and beyond.


Remodeled Steak Gusto Kariya Imagawa-cho Store

(3) Investment in Employees
The most important management resource supporting the sustainable growth of Skylark is its human resources. On a daily basis, some 100,000 employees work across the approximately 3,000 stores of the Skylark Group. Due to the nature of businesses that provide table service, our employees are required to familiarize themselves with a wide range of operations from hygiene management, interacting with customers and cooking, all the while providing high-quality service to customers. For this reason, we make use of video-based training tools and continue to invest in educational approaches that can be easily learned by employees and which allow them to enjoy their work.

In the second half of 2018, we will perform a complete upgrade of mission-critical store systems for the first time in seven years. By improving the systems used when taking orders from customers, automating order placement and inventory control systems used in stores, enhancing support for increasingly diverse payment methods and enhancing the operational capabilities of each store, we hope to deliver an improved level of service to all customers.

Financial Policy


As of the end of March 2018, we have recorded “goodwill” of approximately 146.1 billion yen in the asset section of our balance sheet. Rather than the goodwill that would be generated if Skylark was to acquire another company, as is standard, this “goodwill” was generated when Bain Capital become a shareholder of Skylark. As Skylark uses International Financial Reporting Standards (IFRS), this goodwill remains in the asset section without depreciation, and is subject to periodic determinations for signs of impairment and impairment tests. While some stakeholders may be concerned over the impairment risk of this goodwill, as the cash flow maintained by our operations is extremely robust in relation to this goodwill and the goodwill distributed among each business format is supported by steady revenue on the part of each brand, we consider the risk of a large impairment to be extremely low.

As of the end of March 2018, Skylark had debts of 129.6 billion yen, the majority of which is an LBO loan taken out when Bain Capital become a shareholder in 2011. Based on our strong ability to generate cash flow, we will steadily repay the LBO loan, and also take out new loans in a flexible manner with the aim of procuring growth-oriented investment funds to accelerate store openings and improve our existing stores.
Similarly, as of the end of March 2018 the balance of net interest-bearing debt (long-term debt minus the balance of cash and deposits) was around 2.7 times that of adjusted EBITDA. Under current low interest rate conditions, the cost of loan-based funding is at an even lower level than returns to shareholders, and we believe that the current balance of the company’s debts are at a healthy level.

All for the Smiles of our Customers


Our corporate philosophy is “creating richness with value to society.” We will achieve our mission of “offering great-tasting food at affordable prices with good service in our clean restaurants to as many people as possible” by striving to create enjoyable stores that will enrich the life of our customers.

 

As we continue to pursue these initiatives, I ask for your continued patronage and support.

 

Makoto Tani
Chairman, President & Chief Executive Officer
SKYLARK HOLDINGS CO., LTD.

 
 

The 2018 Skylark Group Management Policy(Issued on April 2018)
The 2018 Skylark Group Management Policy(Issued on January 2018)