The 2018 Skylark Group Management Policy

April, 2018

To Enhance the Corporate Value

Upon the Conclusion of the General Meeting of Shareholders

At the 7th Annual General Meeting of Shareholders held on March 29, 2018, approximately 1,800 shareholders attended, significantly surpassing the number of the previous year. The proceedings went smoothly, and the proposals were approved and passed. I take this opportunity to express my sincere gratitude to our shareholders for their continuing support.

With the approval at the General Meeting of Shareholders, our management consists of a total of eight directors and three corporate auditors. Of the eight directors, four are outside directors (including three independent outside directors), and I believe that this is a well-balanced structure from the perspective of corporate governance. We will continue to strive to enhance our governance.

Upon the conclusion of the General Meeting of Shareholders, let me brief you on the summary of financial results for 2017 and the management policies in 2018, focusing on what I mentioned at the meeting.

Overview of Financial Results for 2017


In 2017, sales increased 1.4%, or around 4.9 billion yen, from the previous year, to 359.4 billion yen. Same-store sales achieved 100% of the year-ago level, and an increase in sales at 97 new restaurants opened in 2017 contributed to the rise in sales. However, operating profit declined 10.1% from the previous year, to 28.1 billion yen, and net income was 15.5 billion yen.

Taking the decline in profits seriously, management will push forward with efforts to achieve sustainable growth more vigorously by operating restaurants that will be supported by customers.

There were three factors for the decline in profits in 2017: (1) A decline in profits due to a fall in sales in the fourth quarter, (2) a rise in the unit price of personnel expenses (for part-time and temporary employees), and (3) an increase in allowance for costs due to the enhancement of the shareholder special benefit plan.

 

(1)  Decline in profits due to a fall in sales in the fourth quarter

In 2017, same-store sales achieved 100% of the year-ago level in the full year but declined 2.6% year on year for the three months of the fourth quarter.

For the purpose of improving the operation quality of restaurants in the fourth quarter 2017, we took steps such as reducing the number of discount coupons, reviewing the frequency of menu revisions and reducing the number of tableware items. In particular, as a result of significantly reducing the number of different kinds of discount coupons, which have a strong impact on sales, from 300 to one tenth that number, same-store sales for the three months in the fourth quarter declined year on year, and this became a factor for the decline in profits. However, I think that these measures were necessary to improve customer satisfaction by stabilizing store operation and boosting the retention rate and store operation skills of employees. We took these measures because we thought that it would be important to solidly increase the operation quality of restaurants, as a first step to enable the Company to make a fresh start in 2018.

We reduced the number of discount coupons issued until February 2018 but have returned it to the same level as in a year ago in March 2018, after taking the impact on store operation fully into account. As a result, same-store sales have recovered to a year-on-year increase of 2.5% in March.

 

(2)  A rise in the unit price of personnel expenses (for part-time and temporary employees)

While personnel expenses have been increasing every year due to rises in the minimum wage and recruitment costs, we have succeeded in securing human capital as planned. We will respond to the rising personnel expenses through the measures we are promoting now, such as the provision of manuals, the improvement of the work environment and the improvement in the retention rate through the reduction of the work load of restaurant staff.

 

(3)  An increase in allowance for costs due to the enhancement of the shareholder special benefit plan

To further deepen shareholder understanding of the Company through their visit to many of our restaurants, we provide them with meal tickets twice a year based on the number of shares they hold. As a result of enhancing this benefit plan for shareholders by a factor of three in 2017, the allowance for costs increased in our accounting. However, I am very glad to see so many shareholders visit the restaurants of the Skylark Group and enjoy their meals as a result of the benefit plan.

 

While profits declined in 2017, operating profit at about 28.1 billion yen is still at the top of the industry, and both the operating margin of about 8% and adjusted ROE of about 14% are among the highest in the industry.

※Due to change in accounting policies under IFRS9, we made retroactive adjustment of financial results of FY2017.

Our Strength


Our strength lies in the fact that we have four management resources, namely (1) an overwhelming business scale, (2) diverse brand portfolio, (3) a vertically integrated platform and (4) a strong core of table service staff, as well as a management style of responding quickly and appropriately to changes in the external environment.

 

(1)  An overwhelming business scale

We operate approximately 3,000 directly managed restaurants across the country including those of Gusto, which operates restaurants in all prefectures, as well as Jonathan's and Bamiyan, among others. Taking advantage of this unparalleled business scale, we purchase good ingredients at appropriate prices and stably provide customers with great-tasting food at affordable prices.

 

(2)  Diverse brand portfolio

We have launched diverse brands of Japanese food, Western food and Chinese food, etc., and approximately 400 million customers visits our restaurants annually. Recently, we have been providing a brand lineup to meet the stronger orientation toward specialty brands in both the mid- and high-unit price range and the low unit price range by developing and launching a total of eight new brands. Our brand portfolio is able to respond to diverse customer needs, which enables us to open new restaurants and change brands tailored to market needs, and this strategy makes a significant contribution to our earnings.

 

(3)  A vertically integrated platform

Our supply chain system engages in all processes from product development to the procurement of ingredients, manufacturing, logistics and cooking end-to-end. Our system of processing cooking ingredients at our own centralized kitchens in 10 locations across the country and delivering fresh cooking ingredients every day to our restaurants nationwide through our own logistics network has resulted in many benefits, including the agility to open restaurants in different parts of the country.

 

(4)  A cluster of table service staff

At the Skylark Group’s restaurants, approximately 100,000 employees provide services every day. All employees are experts in table service restaurants and educated under a unified personnel system. Therefore, we are able to assign employees in line with the opening of new restaurants and the change of brands quickly and flexibly.

 

The management style of adopting specific measures promptly based on the four management resources (business infrastructures) above by sensitively reading changes in the external environment is a characteristic of Skylark.

In the last five years, we implemented a brand change at about 300 restaurants to respond to changes in demographics in a region where our restaurants are located, and we renovated the store interiors and exteriors (remodeling) to address changes in the lifestyle of consumers at about 1,500 restaurants. We will continue to take these approaches. In the home delivery business, which continues to achieve sales growth of nearly 10% annually, we will continue to achieve further growth by building the multiple-brand area delivery system, which we are currently testing, and by encouraging the use of IT systems.

Management Policies in 2018


The global economic environment is changing dramatically, at a speed that is accelerating. Japan is also reaching a milestone, with its economic environment and demographic and consumer trends all changing, and the conditions surrounding the food service industry are also expected to grow increasingly severe. The consumption tax is due to be raised in 2019, and the food service industry is expected to be outside the scope of the reduced tax rate. While the Tokyo 2020 Olympic and Paralympic Games are expected to bring significant economic effects in that year, the outlook for the market after that is uncertain.

2018 is the first year of the very important period of 2018 to 2020, which will influence growth in the future.

Let me discuss our management policies in this important year 2018.

 

1. Stably achieving higher sales and profits

The basic policy for 2018 and beyond is to consistently achieve higher sales and profits. Our operating margin of about 8% is among the highest in the food service industry. In 2018, we aim to create restaurants that will be appreciated by regional residents by investing in our restaurants and employees while standing firm on our policy of higher sales and profits.

 

2. Improving customer satisfaction by increasing the operation quality of individual restaurants

I believe that improving the operation quality of our restaurants is the very essence of improving customer satisfaction, which will result in the growth of the Company. To maintain our competitive advantage in the food service industry which is growing increasingly severe, it is essential to increase store productivity using IT. We will completely overhaul the mission-critical systems at our restaurants in the second half of 2018 for the first time in seven years. We will increase customer convenience and the productivity of employees by improving the terminal to receive orders from customers, automating the order and inventory management systems at restaurants and accommodating diversified payment means.

 

3. Improving the work-life balance by facilitating the working environment for employees

To remain a restaurant supported by customers even in this severe external environment, we will continue to invest in our employees, who are important assets for the Company. We have acquired the Kurumin mark certification from the Ministry of Health, Labour and Welfare in 2016 as a company that supports childcare and the Tomonin mark certification from the MHLW in 2017 as a company that promotes the simultaneous pursuit of work and nursing care. In addition to the extension of retirement age to 65, the extension of employment age to 70, the expansion of the region-specific employment system, and the shortening of late-night opening hours, all of which we have already implemented, we are promoting the introduction of a store operation video manual. Through these initiatives, we will improve the work-life balance by facilitating the working environment for employees.

 

Based on the above initiatives, we plan to achieve a stable increase in sales and profits in 2018, forecasting sales of 373.8 billion yen (growth rate 4.0%), operating profit of 28.7 billion yen (2.1%) and net income of 17.2 billion yen (10.6%). In terms of shareholder return, we plan to pay the annual dividend per share of 38 yen by maintaining the policy of paying dividends, with 40% of adjusted net income as a target. We will also continue to implement the current system of shareholder benefits.

Financial Policy


As of the end of December 2017, goodwill of approximately 146.1 billion yen is recorded in assets on the balance sheet. This goodwill was not generated as a result of acquiring other companies, which is a typical way of recording goodwill, but was generated when Bain Capital Partners LLC became our shareholder. Because we have adopted the International Financial Reporting Standards (IFRS), this goodwill will remain in assets without being amortized, and we are regularly assessing the indicators for impairment and conducing impairment tests. While some are worried about the impairment risk of this goodwill, cash flows generated from our businesses are very solid against the goodwill, and we think that the risk of a large impairment of goodwill is extremely low, given that it is prorated to each brand and that revenue in each brand remains firm. 

 

Borrowings as of the end of December 2017 are about 129.2 billion yen, most of which are LBO loans that were raised when Bain Capital Partners LLC became a shareholder in 2011. We are taking out new loans in a flexible manner for the purpose of raising funds for investment in growth to accelerate the opening of new restaurants and create better restaurants, in addition to steadily repaying the LBO loans based on our strong cash flow creation capability.

The ratio that is obtained by dividing the balance of net interest-bearing debt (long-term borrowings minus the balance of cash and deposits) by adjusted EBITDA is around 2.6 times as of the end of December 2017. I believe that the balance of our borrowings is at a sound level, given that the funding costs for borrowings are lower than returns to shareholders under the current environment of low interest rates.

 

Following an increase in capital, the equity ratio as of the end of December 2017 is 40.0%, up 4.1 percentage points from previous year. Adjusted ROE is 14.1%, maintaining a high 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 Co., Ltd.

 
 

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