Evaluation and analysis of results for the fiscal year ended December 2023
In the fiscal year ended December 2023, we achieved results exceeding our expectations at the beginning of the year.
The main reasons for this were increased sales due to price increase impact and increased frequency of customer visits amid recovery in consumption. Despite increased costs under inflation, we returned to profitability through recovery in sales and improvement of gross profit and costs at existing stores.
In May of last year, COVID-19 was recategorized to a Category V infectious disease, and from the middle of June, we carried out campaigns at Gusto that contributed significantly to an increase in guest count. However, the number of store employees had been reduced through the pandemic, and unfortunately, we were unable to provide sufficient table service to our customers. To quickly address such issues, we immediately reacted and, from September, we increased hiring to 140% the level of the previous year to strengthen personnel, and set a standard for 20 hours of training per person. From October, we undertook a major renewal of our Grand Menus. For each brand, we introduced “good value-for-money menus” that reflect the latest consumption trends. We created fun selections for customers by expanding low-priced side menus, cutting the prices of alcohol, and offering set menus at reasonable prices, while also suggesting “one more item” orders o boost the number of plates ordered and the average check. By enhancing the variety of small menus, we also planned to boost the frequency of visits through enhanced usability for different occasions.
Through such activities, existing store sales were 118.4% the level of the previous year. Moreover, through improvement of gross margins through price increases, reduction of food loss at stores, and measures implemented in cross-divisional cost reduction projects, we maintained having a top-level gross profit margin in the industry despite a 0.5-point decline from the previous year to 67.6%.
Although selling, general and administrative expenses increased, we have effectively achieved significant cost control through the initiatives of Group-wide profit improvement projects. We solidly eliminated unreasonable, unnecessary and uneven expenses at all stores, cut utility expenses by about 6% and tableware and consumables expenses by about 10% (excluding net increases due to sales increases), and have become able to properly manage working hours at stores in line with stable recovery in sales.
We opened 27 new stores and undertook brand conversions at 41 stores. Of the 27 new stores, 7 opened overseas, including Syabu-Yo, Yokohama Steakhouse, and Musashinomori Coffee in Taiwan and Syabu-Yo in Malaysia. We also carried out renovations at 104 stores. Looking at new brands developed in anticipation of the post-pandemic period, by the end of December 2023 we had opened a second Hachiro Soba store and a 13th Yumcha Terrace Tohsai store. Both have been well received by customers. We plan to solidify the profit structure of the brands as new candidates for store openings and brand conversions in the future.
To summarize FY2023, we view the year as one in which we prepared a business foundation for growth.
Growth strategy under our Medium-Term Management Plan
Skylark Group is tackling KPIs for the four growth strategies in our Medium-Term Management Plan: New store openings, Existing store growth, Overseas expansion, and Pursuit of M&A.
I believe there is considerable room for new store openings in Japan. While Skylark Group has expanded primarily through roadside sites in non-urban areas, we are planning to open stores in station-front areas in large cities and regional cities, including commercial districts in metropolitan areas. Last year, sales at station-front area stores were 2 to 2.5 times of the brand average, and moving Gusto and Bamiyan stores from roadside sites in non-urban areas to station-front areas offers potential for growth. We also believe that in regions with populations exceeding 100,000, we can open multiple brands.
We are increasing our store development staff to prepare for the opening of 100 stores per year. We will also strengthen hiring and training activities to secure store managers.
We believe that increasing our guest count is important for existing store growth. This year, based on factors including an upswing after the lifting of COVID-19 restrictions in May 2023, we have set targets of a 6% increase in guest count and a 1% increase in average check as well as 1% annual average increase in guest count and 2-3% annual average increase in average check as KPIs for FY2027. To achieve these targets, it is important that we enact measures to increase guest count, including menu revisions, operational measures, and incentives for store managers. We are currently focusing on increasing the number of guests we serve on weekends and holidays throughout the year. We believe it is important that customers can feel the quality of our service.
We will also actively promote brand conversions and store renovations as measures with considerable impact in boosting guest count and sales.
In overseas expansion, we now operate in three overseas countries: Taiwan, Malaysia, and the United States. Our 72 stores in Taiwan have been centered around Grazie Gardens and Syabu-Yo, but we have opened four stores in new brands, Musashinomori Coffee and Yokohama Steak. We began operation of a new central kitchen last year, preparing a foundation for expanded store openings. We plan to open stores at a pace of 10 per year, achieving 100 stores by 2027.
In Malaysia, we have opened 4 stores in Kuala Lumpur, with solid results. We plan a fifth store in Penang, located some distance from Kuala Lumpur. We hope to make Malaysia a stepping stone for expansion into Indonesia, the Philippines, and other Southeast Asian countries.
We have one store in the United States, in Chicago. The COVID-19 pandemic delayed opening of the store by about two years, but it has steadily grown in performance, with sales of 700 million yen forecast for this year. The United States is a market where we expect double the guest count and triple the average check of Japan. If we are able to generate solid results in 3 to 5 stores, I believe that rapid expansion through franchising will be possible.
Our basic policy concerning M&A is to not ask for the impossible. We will make decisions only in areas in which we are able to maximally leverage the know-how and infrastructure of Skylark Group, without considering actions such as hostile acquisitions in pursuit of scale. What we seek from partners are solid concepts and customer support, regardless of company size, commercial area, or region. By building win-win relationships with partners, we hope to dispel growth-inhibiting factors such as shortages of labor or funding, and thereby grow together. We expect to undertake 3 to 5 cases of M&A through 2027, mainly with regional companies and startups.
We envision total M&A expenses of about 50 billion yen. As our M&A strategy is not included in the numerical targets of our Medium-Term Management Plan, realization of M&A cases will be an upside to the current targets.
Improvement of capital efficiency
We have adopted IFRS accounting standards and have decided to use ROE as an indicator for management efficiency due to the risks of misunderstanding associated with ROA. In the Medium-Term Management Plan that we recently announced, we plan to raise our ROE target from the current 3% to 9-10% in FY2027. Taking investment in human resources, M&A, and cost improvements into account, we hope to achieve a continued ROE of 10% or greater in the future. I am convinced that investments in human resources will create good service, boost guest count and average check, and enhance our company earnings, allowing us to create a virtuous cycle leading to increased employee wages. This year, we are carrying out a wage increase of 6.22% per person and investment of about 4 billion yen in employee development and training, which we expect will contribute to the company’s earnings. We are also considering making ROIC (return on invested capital) a management indicator in the future.
Looking at the management of risks such as inflation and rising interest rates, exchange rate risk certainly carries a considerable impact. Depreciation of the yen by one yen to the dollar leads to cost increases of about 100 million yen. The impacts of interest rate risks are limited in the short term as interest rates are fixed. We have received an A- credit rating, which makes it possible for us to raise funds in the corporate bond market.
In terms of risk management, soaring labor costs will have the greatest impact. We assume increases of 4 billion to 5 billion yen every year. As I’ve noted, however, as a restaurant chain, we believe in the importance of practicing a financial strategy that views human resources as investments.
Our future outlook and shareholder returns
In our outlook for FY2024, we continue to assume increases in sales and profit. We expect sales of 375.0 billion yen (an increase of 20.2 billion yen), business profit of 17.0 billion yen, operating profit of 15.0 billion yen, profit before tax of 12.0 billion yen, and profit attributable to owners of the parent company of 7.5 billion yen. As of the announcement of this annual guidance, we had not anticipated the price increase we implemented in April of this year. Taking this into account, we believe that we will be able to achieve results for operating profit exceeding our guidance. We receive questions from investors about the downward trend in our gross profit margin. We believe that unless the weak yen, the situation in Ukraine, and other aspects of the economic environment stabilize, it will be difficult to return quickly to our earlier 70% gross profit margin. Our current gross profit margin stands at about 67%. We are securing a sufficient gross profit amount, and are placing our emphasis on striking a balance between gross profit amount and gross profit margin. We will continue working to improve our gross profit margin while carefully watching changes in consumption trends.
In the area of shareholder returns, amid recovery in business performance, we paid out a dividend of 7 yen per share. We will continue aiming for a stable dividend payout, maintaining a payout ratio of 30% or more, balanced against profit. At the same time, we recognize that our shareholder benefits are at a good level compared to those of our competitors, and we will continue the benefits at the current level. There are also questions of whether the company will buyback its own shares to increase ROE with the aim of capital efficiency. Our approach at present is to increase returns (profit) rather than reduce equity (capital). We believe that Skylark Group has tremendous potential for growth. In terms of the balance between investment for growth and payment of dividends, we are planning to allocate capital at a ratio of about 7 to 3.
As noted earlier, the receiving of an A- credit rating has boosted our creditworthiness, expanded our financing options, and created capacity for growth investments. Based on a robust financial foundation, we will solidly execute the growth strategy of our Medium-Term Management Plan and push forward toward achieving our goals.
I look forward to the continued patronage and support of our stakeholders.