For sustainable growth
In 2018, all of us at the Skylark Group embarked on a new path to become an excellent company contributing to the development of cuisine.
In 2006, we initiated a management buyout and conducted a restructuring with Nomura Principal Finance, and since 2011 we have received funding from Bain Capital. Having made progress on further reforms, in November 2017 Bain Capital sold all of its shares in Skylark. This ended the support we have received from fund-based shareholders over the past eleven years.
I would like to express our sincere appreciation for the support and patronage we have received from all of our valued stakeholders to date, including customers, shareholders, investors, business partners and financial institutions.
Today, the global economic environment is undergoing significant changes, and at an accelerating pace. Japan also finds itself at the precipice of a new era, and with a changing economics, demographics and trends in consumption, the environment surrounding the restaurant industry will become increasingly challenging. While a consumption tax hike is planned for 2019, it is expected that a reduced tax rate will not be applied to restaurants. Similarly, although the Tokyo Olympics and Paralympics in 2020 are expected to produce economic benefits, market conditions thereafter are uncertain.
Under these circumstances, I would like to address the management themes we will tackle during the crucial 2018-2020 period that will affect our future growth.
Since I became president in 2008, we have revived the company’s performance through various reforms. Having restructured the management team and strengthened the management structure, I believe we have managed to establish extremely robust business foundations. As a result, in 2016 we generated 354.5 billion yen in sales and a record 31.2 billion yen in operating profit, and our operating profit margin for 2016 came in at a very high level of approximately 9%.
For Skylark Group restaurants to earn the continued support of customers in the future amid the harsh external environment of recent times, I believe we will need to return to our restaurant-oriented roots and make convincing investments in restaurants and employees. In addition to firmly adhering to the basic policy of increased sales and profits that we have continued to promote as a basic policy to date, we will pursue investment in restaurants that live up to customer standards and in our valued employees.
To develop restaurants that win the support of customers, it is essential for us to provide them with the ultimate dining experience. In 2018 we will undertake a remodeling effort (revamping designs to fit the times) on the scale of 200 locations, as well as more in-depth investments and expenditures aimed at equipment in need of repair, plateware, employee uniforms and so on. Making improvements to the operational status of each individual location translates into higher customer satisfaction, and I am sure this will result in growth for Skylark.
In terms of new restaurant openings based on our accelerated restaurant opening plan for 2017 to 2019, we opened 95 new restaurants in the first year and expect to open around 100 restaurants in 2018. Moving forward, we will continue to open new restaurants at the pace of 100 locations a year. In addition, amid the expanding home delivery market, we will place an even greater focus on our “Room Service” home delivery offerings. We previously offered Room Service primarily through our Gusto restaurants, but to make full use of management resources from the approximately 3,000 locations we currently maintain across Japan and our strength in being present across multiple business categories, we plan to achieve significant growth in this area through IT investment and the development of a mixed home delivery system.
Competition in the restaurant market is set to intensify to unprecedented levels. To maintain our competitive advantage, higher store productivity through IT utilization will be essential. In late 2018, Skylark will initiate a complete revamp of mission-critical store systems for the first time in seven years. The revamp should improve the system for taking orders from customers, bring automation to restaurant order placement and inventory control systems and enhance support for the growing number of payment methods, achieving greater convenience for customers and raising employee productivity in the process.
On the promotion front, in addition to the analog flyer-based promotional activities we have traditionally implemented, we will fuse our strong capabilities in customer data analysis with an IT digital promotion system to deliver information that is tailored to each customer. We will also evolve the mobile apps available for individual brands such as Gusto, Jonathan’s, Bamiyan and Syabuyo with the introduction of a Skylark App that can be used across multiple brands in Q1 2018. These measures to attract customers more efficiently will drive increased sales at our existing restaurants.
As of the end of September 2017, our long-term debt stood at around 129 billion yen, but majority of which is a leveraged buyout (LBO) loan taken out when Bain Capital became a Skylark shareholder in 2011. We have been steadily paying down this LBO loan leveraging our strong ability to generate cash flow while taking out new loans on a flexible basis to accelerate new restaurant openings and fund growth-oriented investments to develop better restaurants.
Similarly, as of the end of September 2017, the factor for net interest-bearing debt balance (balance of cash equivalents deducted from long-term debt) of approximately 116.2 billion yen divided by adjusted EBITDA was approximately 2.5 times. Under the current low interest environment, the cost of procuring funds through loans is even below the level of return to shareholders, and accordingly, we believe Skylark’s current debt balance is at a healthy level.
Together with debt, goodwill of more than 140 billion yen is recorded in the asset section of our balance sheet. This goodwill is not what would generally result from acquiring other companies, but as with the debt, was generated when Bain Capital became a Skylark shareholder. As Skylark employs international accounting standards (IFRS), this goodwill remains as a non-depreciating asset and is subjected to periodic evaluations for indications of impairment loss and impairment loss tests. Although some are concerned about the impairment loss risk of this goodwill, the cash flow maintained by Skylark businesses is very strong in relation to this goodwill. Moreover, on the goodwill distributed among each business category, since each business category is enjoying solid earnings, we believe there is an extremely low risk of substantial impairment loss.
Our corporate philosophy is “Creating Richness with Value to Society.”
Now, as we embark on a new start, we are committed to returning to our management roots, achieving our mission of “offering great-tasting food at affordable prices with good service in our clean restaurants to as many people as possible,” creating richness in our customers’ lives, and developing restaurants where customers can spend time in comfort.
I appreciate your continued support and hope that 2018 is a wonderful year for all of you.
President & Chief Executive Officer
Skylark Co., Ltd.