Interview with the President

Could you please provide us with an overview of the fiscal year ended March 31, 2018?

In the fiscal year under review, we sought to entrench our basic product policies, which are central to our product strategies, throughout the Company while also setting prices that struck the appropriate balance between price and value. At the same time, we took steps to stabilize sales by redoubling our efforts to address business demand and ceremonial demand that is less susceptible to temperature fluctuations.

As far as our business performance is concerned, the favorable trend in online sales continued. In addition, the men's casual line as well as all women's lines performed well at UNITED ARROWS LTD. while COEN CO., LTD. achieved substantial improvements in performance, thanks to the benefits of structural reforms.

Accounting for these and other factors, consolidated net sales increased 6.1% year on year, to ¥154.4 billion, while ordinary income was up 14.4%, to ¥10.7 billion.

How was progress under the Medium-Term Vision?

In the fiscal year under review, the first year under the Medium-Term Vision, we made progress guided by the Group policy of pursuing "an early improvement in profitability." Our efforts prioritized improvements in the gross margin and inventory efficiency, reductions in the selling, general and administrative expenses to sales ratio, and income growth from higher online sales. Specific measures included withdrawing from unprofitable businesses and closing underperforming stores, expanding the application of eight-season merchandising to heighten inventory efficiency, and taking steps to reduce the amount of opportunities lost due to the proactive supply of inventories for online sales.

We achieved improvements in the gross margin and inventory efficiency. These improvements were accomplished by decreasing the volume of products supplied at the start of each season to adopt a product procurement cycle that allows for merchandising practices to be adjusted flexibly as the season progresses.

The selling, general and administrative expenses to sales ratio was relatively unchanged from the previous fiscal year as we moved ahead with strategic investments with an eye to the medium to long term. These investments counteracted the benefits of higher sales, improved balances of inventory assets, and increased inventory efficiency. At the same time, we revised various business processes. The benefits of these efforts are anticipated to appear in our performance going forward.

Meanwhile, growth in online sales is driving steady improvements in earnings. We recognize this growth as reflecting the favorable response from customers to the increased convenience facilitated through the integration of House Card program members with online store accounts and integration and renewal of the UNITED ARROWS ONLINE STORE and brand sites.

Due to these accomplishments, we were able to achieve all of the numerical targets set for the first year of the Medium-Term Vision. I therefore feel confident in the progress made under this vision.

What major initiatives will you undertake in the fiscal year ending March 31, 2019?

The Group's policy for the fiscal year ending March 31, 2019 will be to "thoroughly promote medium-term strategies," based on which we aim to further improve earnings and establish growth foundations. In addition, we will continue efforts to identify and evaluate underperforming businesses and stores and ensure a sound earnings structure as we simultaneously move forward with investment for medium- to long-term growth.

Meanwhile, we have revised our organizational structure to bring the Company's business units in line with the strategies of the Medium-Term Vision. This reorganization entailed our moving away from the prior four business divisions, namely UNITED ARROWS, BEAUTY&YOUTH, green label relaxing, and small business units, to a structure comprising two business units. Specifically, we established Business Unit I, which is responsible for trend-conscious markets centered around UNITED ARROWS and BEAUTY&YOUTH, and Business Unit II, which is responsible for basic trend-conscious markets centered around green label relaxing. Store brands previously contained in small business units have been assigned to the appropriate business unit. Under this new organizational structure, we will enhance our efforts in trend-conscious markets while honing our strengths in areas spanning from product procurement and manufacturing to in-store customer service. Meanwhile, we will open additional stores in basic trend-conscious markets to address the growth anticipated in these markets.

Growth investments in the fiscal year ending March 31, 2019, will be directed toward introducing radio frequency identification, or RFID, systems*1 and toward reorganizing distribution centers to further medium- to long-term growth. RFID systems are already in place at green label relaxing and COEN, where they are contributing to reductions in the amount of labor associated with inventory- and shipment-related procedures. We plan to progressively introduce these systems in all businesses in order to boost efficiency in the operation of brick-and-mortar stores and thereby improve the work environment for sales staff. In the future, we will endeavor to maintain a more in-depth understanding of product trends so that we can take advantage of merchandising analyses. As for the reorganization of distribution centers, we have already opened a state-of-the-art distribution center equipped with a large-scale material handling system.*2 The introduction of this large-scale system has served to lower the amount of people required to operate this facility, effectively reducing distribution costs, while also enabling us to secure the distribution capacity needed to respond to future changes in the retail market and in the distribution industry. I believe these investments are guaranteed to produce returns that will support medium- to long-term growth.

*1 Systems that identify products when tags with embedded IC tags are scanned by a reading device

*2 Systems that support the conveyance of articles within warehouses as well as the processes of storing and shipping articles

What steps has the Company been taking in terms of corporate governance?

We aim to realize ongoing, long-term improvements in corporate value through continuous effort to strengthen corporate governance. Initiatives to strengthen corporate governance to date have included steadily increasing the number of outside directors that are also designated as independent directors as well as initiatives based on Japan's Corporate Governance Code. In addition, we transitioned to the Company with Audit and Supervisory Committee structure described in the Companies Act and established the Nomination and Compensation Committee in 2016. And since the establishment of this committee, we have continued to be proactive in these efforts. In 2017, for example, we revised our director remuneration system to better link remuneration to medium- to long-term performance.

Furthermore, the number of internal directors was increased by two in 2018. This step was taken to more closely link management and execution in order to facilitate swifter responses to the changing times. In conjunction with the recent change in organizational structure, we will have the representatives of business units participate in management so that we can identify and address issues in a timelier manner. We will also involve younger generations in management to make the Board of Directors more diverse and to encourage such generations to act while sharing a vision for medium- to long-term growth.

Is there any message that you would like to convey to stakeholders?

The Medium-Term Vision is generating clear benefits in terms of performance by guiding us to address the issues and challenges identified when formulating the vision. Looking ahead, we will advance reforms to our corporate culture and human resources systems through a concerted effort to build the foundations on which we will achieve medium- to long-term growth. These reforms will include re-disseminating the Company Policy, invigorating communication within the organization, examining the potential introduction of job rotation systems, and revising evaluation systems. In addition, we will conduct surveys and investigations to examine the possibility of expanding into non-apparel business domains and into overseas markets in pursuit of future growth. For example, COEN, which has been solidifying platforms for renewed growth through structural reforms, began serving Taiwan through the COEN online store in April 2018. In this manner, we are implementing measures for solidifying the foundations for accomplishing the goals of the Medium-Term Vision. We also plan to conduct forward-looking investment and take other steps to establish a robust management platform.

As we work toward achieving our goals, we welcome your high expectations of the Group's business strategies going forward and kindly request your continued support and understanding