Tabio (2668, JP) · Tabio believes that this would be the case for sock & hosiery market and the divergence would be an opportunity for the unique retailer to enhance market penetration

METRICAL INC. Suite 3113, 28-10 Ebisu 2 chome, Shibuya-Ku, Tokyo 150-0013 Japan Phone: +81-3-4405-6223 Email: [email protected] http://www.metrical.co.jp/

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Date:11/5/2017

Tabio(2668,JP) Recommendation:OUTPERFORMExchange:TSE SharePrice:JPY1,102(11/2/2017)Sector:Retail TargetPrice:JPY1,549MarketCap:JPY7.5billion P/E:70.2x(2/18CE)P/B:1.4x(2/16act) Div.Yield:2.7%(2/18CE)

‘Kutsushitaya’store

‘Tabio’store

Highlight–AcceleratingE-Commercewillimproveearningsstructure-METRICALinitiatesTabio(2668,JP)asOUTPERFORMfor12-monthhorizon,targetingatJPY1,549,whichis29%higherthanitsclosingpriceonNovember2nd2017.TheSocks&HosieryspecialtyretailerisimprovingitsstoresaleaftersufferingsoggystoresaleforafewyearsbackedbynewstrategicplanofintroductionofOmni-Channelmarketingandenhancedmerchandizingstrategy.TabiofinallystartedOmniChannelsaleinOctober2017aftercarefulplanningforafewyears,combiningitsrealstoresaleandon-linesale.Tabioaimsatpickingitse-Commercesaleupfrom3.9%ofitssalesforFY2/2017to10%forFY2/2020,expandingitsOmnichannelsale.METRICALexpectsthiswillimprovetheOPmarginto3.7%forFY2/2018(E),4.3%forFY2/2019(E)and5.1%forFY2/2020(E)from3.1%forFY2/2017.Thehigherprofitabilitywillimproveitsfinancialstabilityfromrelativelystablepositivecashflowsandbalancesheetfurther.Onvaluation,currentlyP/EbasedonthecompanyguidanceforFY2/2018(CE)is70.2xbutMETRICALexpectsittodeclineto41.4xforFY2/2018(E)andto17.2xforFY2/2019(E)and13.9xforFY2/2020(E).Additionally,examiningcashfloworEBITDA,itsvaluationlooksmoreattractive.EV/EBIDAforFY2/2017isexpectedtodeclinefrom8.4xforFY2/2017to8.0xforFY2/2018(E),6.6xforFY2/2019(E)and5.8xforFY2/2020(E).TheriskthatOmnichannelexpandsontracktoitstargetwouldremain,butthetargetof10%forFY2/2020isnotashighasunachievablelevelandisverylikelytomovehigher,asotherretailersintroducesimilarstrategyandcustomersaregettingusedtoit.BusinessDescriptionTabiowasfounded1968byNaomasaOchi(chairmanatpresent)andhasopenedsocks&hosieryspecialtyoutlets‘Kutsushitaya’and‘Tabio’asdirectrunandfranchise(FC)storesacrossthenationwideandexpandeditsdirectrun‘Tabio’storestooverseasmarketinUKandFrance.Socks&hosieryaresellingatawiderangeofretailerssuchasdepartmentstores,supermarketandothershopsandmustbeanecessaryitembutmanyshopsarelikelytofocusmoreonpricethanqualityorfashion.However,apersonwhoismoresensitivetofashiontendstofocusonhis/herbottomsfromtopsandlooksforitsqualityorsenseoffashion.Tabiohasfocusesonsuchaneedandprovidedhigh-qualityofmade-in-Japanproductsatitsspecialtystores.Asshownthe


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chartonleft,thesalesofwomen’ssocksaccountsfor57.8%,hosieryaccountsfor14.3%andmen’ssocksaccountsfor18.5%asof2017.Thisisslightlydifferentfromthedomesticsalesbyproductthatshows36.4%forwomen’ssocks,18.7%forhosieryand32.9%formen’ssocks(pleaseseethechartonleft).Tabio’ssalessignificantlyreliesonwomen’sitemsthanmen’sone,althoughthecompanyhasreinforcedmen’sitems,raisingfrom4.5%forFY2/2011to18.5%ofitstotalsalesforFY2/2017.IndustryOverviewandCompetitivePositioningIndustryOverviewThedomesticsock&hosierymarkethasnotgrownandlow-pricedimportshaveincreasinglycomeintothemarket,asshownthechartsontheleft.Forinstance,inparticularlysockscategory,theimportsaccountsfor88.5%ofshipmentinJapan,accordingtodatabyTabio.Duetodeflationeconomy,thelow-pricedimportsareincreasingyearbyyear,whereasdomesticproductionhasbeenshrinkingduetolackofsuccessoroffactoryownersaswellashighersaleprice.Also,ittookyearsforthehosierymarketbeforetherecoveryinthisyearasyoungwomendonotliketowearhosieryforapastyears.Onthismarkettrend,manyretailershavefocusedonsellinglow-pricedgoods,asthesalepricehasnotincreasedduetosoggyconsumerspendingunderdeflationenvironmentinJapan.However,theconsumerbehaviorischangingandislikelytobedivergingrightnow.Consumersarereluctanttospendmoneyforeverydaycommoditygoodsandlookingforashopthatofferslowerprice,whereastheyoftenspendforluxurygoodsorservicesonspecialevent.SoTabiobelievesthatthiswouldbethecaseforsock&hosierymarketandthedivergencewouldbeanopportunityfortheuniqueretailertoenhancemarketpenetrationinitsdifferentiationstrategy.Tabiouniquelyfocusesonhigh-quality(andhigh-priced)made-in-Japanproductsthroughitsspecialtystores.Onlythecompanycanprovidemade-in-Japanproducts,asthecompanycontactswithallfactoriesinJapanforproducinghigh-qualitysocks&hosieryexclusively.CompetitivePositioningBuyers(Middlerisk):Consumerexpenditureisverylikelytocontinueslowertorecoverduetoslowgrowthofrealwageandincreaseinsecurityinsurancecostledbyacceleratingagingsociety.Allconsumerdonotspendforlow-pricedcommoditygoods.Asmentionedearlier,theyspendmoneyforluxurygoodsorserviceonspecialoccasion.Lately,suchaconsumerbehaviourisoftensaidastheconsumptionischangingfrom‘what’basedto‘need’based.Deflationeconomyisaheadwindforthecompany,butspreadof‘need’basedconsumtionwouldbeatalewindforthecompany,ascustomersotherthanapersonwithasenseofhigh-fashinaremorelikelytobuyhigh-qualitysock&hosieryonspecialoccasion.ThiswouldbeverifiedasthesaleofTabiostoreatGinza-SixthatisperformingwellinapopularluxuriousshoppingbuildinginGinza.Consumerswhovisittheluxurybuildingtendtobuyhigh-qualitysocksfortheirownorgiftforspecial.


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Suppliers(Low-Middlerisk):TabioisonlythecontractorwithJapan’ssocksandhosierymkers.TheproductwillbesuppliedtoonlythecompanybutthereisariskthatitwouldnotbeeasytoraiseproductionfromotherregionincaseofnaturalcasualityinthefactoriesinJapan.Additionally,lackofsuccessoroffactoryownerwouldbeanotherriskforthesupplyofgoods.Duetoqualityofgoods,itrequiressometimetoprepareforincreaseproductionbyinstallationofmachineandtrainingofproductionprocess.Competition(Low-Middlerisk):Tabioisonlythehigh-pricedmaid-in-Japansocks&hosieryspecialtyretailer,differentiatingotherretailersinmarket.Competioonriskshouldbelowifthecompanycandeliveritsvaluetocustomerssuccessfully.TheissueishowTabiocandeliverthevaluetocustomersasnotmanyconsumersknowTabiorightnow.NewEntry(Lowrisk):DuetolimitedproductioncapacityoffactoriesinJapanallofwhichcontractwiththecompanyrightnow,thereishighbarrierfornewentrant.Tabioisestablishingpremiumbrandinthemarketsegment.Substitution(Middlerisk):TheriskwouldbecomehigherifhighqualitysockandhosieryatlowerpriceareprovidedfromotherproductionregionthanJapan.Thereisnotalternativeatthismoment.Ontheotherhand,retailchannelwouldbesubstitutedgoingforward.E-Commercechannelwillbeincreasingfromrealstoresaleeventually.TabiohasjustresumedOmni-chanelbycombiningbothfunctionofe-Commerceandrealstore,beforeonlineshoppingofsockandhosieryisinfullswinginnearfuture.BusinessOutlookNewstrategy:OmniChannelandmerchandizingTheexistingstoresaleofdirectrunstoresof‘Kutsushitaya’and‘Tabio’finallyturnedpositiveinYoYgrowthfromsoggysaleintheprevious2years(pleaseseethetablebelow).Thecompanyclosedunprofitable13FCstoresand3FCsforFY2/2017and1HFY2/2018respectively.Thisshouldaffectpositivelytotheexistingstoresale.Inaddition,inthis3QthecompanyresumesOmnichannelsaleandenhancesmerchandizing.TabioplanstodevelopsmalloutletsatnearterminalstationthatiseasieraccessforacustomerwhousesOmnichannelandpickitemsupattheoutlet.Atthesametime,itsexistingtabletbasedcustomersupportthathasbeenprovidedatallstores3yearsbeforewasupgradedas‘TabioSEARCH.’ThenewITsupporthelpstoshowpopularitems,searchanitemfromwiderangeofitemsandspecifydeliveryoptionforOmni-channelservice.Thecompanyprojectse-Commercesaletoraisefrom3.9%ofitsstoresaleforFY2/2017to4.8%forFY2/2018and10%forFY2/2020byintroducingOmni-channelsale.Thisexpectsstoresaletoenhancesynergically.Inmerchandizing,Tabioplanstoredesign16outlets,adoptingVMD(VisualMerchandizing)andenhancetodevelopmentproductsthatencouragecustomertobuyitems.


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CompanyOutlookforFullYearFY2/2018Tabiopostedfullyearoutlook.Salewillbeup2.5%YoYtoJPY16,269millionandOP,RPandNPareexpectedtofell3.0%YoYtoJPY475million,1.7%YoYtoJPY494millionand54.3%YoYtoJPY107millionrespectively,assumingitsexistingstoregrows+1.9%YoYfrom-5.8%YoYofthepreviousyear.METRICALforecastforFY2/2018BasedonpositiveoutlookofmonthlysaleasshownthetableaboveandactualstoresalefromMarchtoSeptemberis+2.5%YoY,METRICALexpectsthestoresaletomoveslightlyhigherthancompanyprojectionto+2.9%YoYfortheyear.Assuminge-Commencesaleincreasestoslightlyhigherthancompanyprojectionto5.0%fortheyear,salesareexpectedtorise5.0%YoYtoJPY16,668millionandOP,RPandNPareexpectedtogain9.1%YoYtoJPY533million,7.9%YoYtoJPY541millionand96.2%YoYtoJPY181millionrespectively(seethetableonappendix).Mid-TermOutlookMid-temoutlookisexpectedbasedonmodestexistingstoresaleYoYandstableexpansionofe-Commercesalethatassumesinlinewithcompanyprojectionto10%forFY2/2020(pleaseseethetablebelow).salesareexpectedtorisetoJPY16,996millionandOP,RPandNPareexpectedtogaintoJPY731million,JPY729millionandJPY432millionrespectivelyforFY2/2019(E),assuminge-Commerceexpandsto7.6%ofthesalesand9FCstoresareclosed.ForFY2/2020(E)salesareexpectedtorisetoJPY17,629millionandOP,RPandNPareexpectedtogaintoJPY898million,JPY896millionandJPY539millionrespectively,assuminge-Commerceexpandsto10.0%ofthesalesand9FCsareclosed.(seethetableonappendix).Asthenumberofoutletsisassumednottoincrease,thesalesareexpectedtogrowatmodestpace,buttheincreaseofe-Commercesalewillpulltheprofitmarginhighersteadily(Pleaseseethetableonleft).


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ValuationTherewouldbesomeroomofrevaluationfortheshareprice.OnSum-of-the-Partsvaluation,NAVisestimatedtobeJPY1,549forFY2/2018(E)andJPY1,647ashareforFY2/2020(E).EV/EBITDAlooksattractivevaluation,decliningfrom8.4xforFY2/2017to8.2xforFY2/2018(E),6.6xforFY2/2019(E)and5.8xforFY2/2020(E),whichshowscheaperthanP/Ebasedoncompanyprojectionof70.2xforFY2/2018(CE).EvenexaminingP/E,itwouldbedecliningontheMETRICALexpectationforFY2/2018(E).to44.4x.Sum-of-thePartsValueSum-of-the-Parts(SOTP)valueisbusinessvalueofeachbusinesssegmentthatusesnormalizedEBIT,EBITDAandFCFfromFY2/2012toFY2/2018(E),addedtonetcashandlong-terminvestmentsecuritiesandland.SOTPvalueisestimatedtobeJPY1,549ashare(28%higherthanclosingpriceofNovember2nd2017)forFY2/2012(E)andisestimatedtobeJPY1,647ashare(32%discountofclosingpriceofNovember2nd2017)forFY2/2020(E),asshowntablebelow.NAVs: NAVs:

Retail 1,117 7xEBITDA Retail 1,148 7xEBITDA- -

Cash 433 1xBook Cash 501 1xBookInvestment - 0.75xBook Investment - 0.75xBookLand 130 0.75xBook Land 130 0.75xBookDebt (131) 1xBook Debt (131) 1xBookMinority - 1xBook Minority - 1xBookTotalSOTPNAV JPY1,549 71.2% TotalFutureNAV JPY1,647 66.9%

FutureNAVFY2/2020(E):SumofthepartsNAVFY2/2018(E):

EV/EBITDAEV/EBITDAforFY2/2018(E)isestimatedtobe8.0xandwillcomedownto6.6xforFY2/2019(E)and5.8xforFY2/2020(E).Consideringbusinessoutlookinprospectiveexpansionofe-CommerceorOmnichannelsale,EBIDA


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isexpectedtoacceleratealongsidetheriseinprofitmargins.EV/EBITDAforFY2/2019(E)at6.6xwouldnotlookexpensiveonhistoricalbasis.

Feb-18(E) Feb-13 Feb-14 Feb-15 Feb16 Feb-17 Feb-18(E) Feb-19(E) Feb-20(E)56.94% Avg.Mkt.Cap JPY0 JPY6,369 JPY8,144 JPY8,096 JPY7,507 JPY7,507 JPY7,507 JPY7,507

3.20% EV (JPY1,786) JPY4,476 JPY5,718 JPY6,171 JPY5,360 JPY5,451 JPY5,261 JPY4,988

3.16% EV/EBITDA 0.00 6.09 6.40 6.53 8.37 7.97 6.59 5.75

41.37 *EV(LTInvestment+Land)(JPY2,968) JPY3,294 JPY4,536 JPY4,989 JPY4,178 JPY4,269 JPY4,079 JPY3,806

65.98 *EV/EBITDA -2.75 3.15 3.56 4.03 4.66 4.53 3.58 2.91

1.32 EV/EBIT -4.42 6.07 6.08 6.69 8.54 8.00 5.58 4.24

2.72% EV/FCF -2.00 11.56 5.97 -25.07 8.61 37.52 10.36 7.97

FinancialAnalysisTabiodoesnotneedlargeinvestmentasthecompanyhasnoproductionfacilityanditsinvestmentismainlyfocusesonstore.Theinvestmentofe-Commerceisnotrelativelylargeforsystemdevelopmentexpensesofweb-site,applicationetc.Theriseinprofitabilitywillimproveitsfinancialstabilityfromrelativelystablepositivecashflowsandbalancesheetfurthergoingforward(pleaseseethetablebelow).

ROA,ROEandOPmarginof4companiesintheindustryisshownthetablebelow.

Gunze(3002,JP) Atsugi(3529,JP) Naigai(8013,JP) Tabio(2668,JP)ROA 1.8% 1.2% 2.2% 2.5%ROE 2.9% 1.4% 3.5% 4.0%OPM 3.1% 4.5% 2.7% 3.1%(Source)Tabio(FY2/2017),Gunze(FY3/2017),Atsugi(FY3/2017),Naigai(FY1/2017) InvestmentRisksSlowerconsumerspending(VeryLikely,MiddleRisk)Consumerspendinghasbeenflatformorethanadecadeandisunlikelytogrowatfasteronthedecreaseofpopulation.Thiswouldputdownwardpressureonentireretailindustryinthiscountry.However,consumerspendingismorelikelytobedivergingandchangingfrom‘what’basedto‘need’basedspendingonspecialoccasion,althoughbudget-mindandenvironmental-mindhasspreadoverconsumers.Theexpanding‘need’basedspendingwouldincreasetheopportunityforthecompanywhichprovidepremiumsocksandhosiery.


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Naturalcasualty(Likely,Middle-HighRisk)Naturalcasualtysuchasearthquake,floodandtyphooncomesacrossalloverthiscountry.Tabiodoesnotoperatefactorybutwouldhaveproblemofprocurementofproductsiffactoriesaredamaged.However,allfactoriesareinonlyaplaceandthecompanyholds3-monthinventory.Theissuewouldbehowlongthesupplychainwillrecover.Innovationinindustry(LessLikely,Middle-HighRisk)Duetodifferentiationstrategyinthenichemarket,premiumsocks&hosieryretailerisonlythecompanyandtherewouldbelessriskofnewentryandnoonecouldproducesuchahigh-qualitymadeinJapanproductsotherthanTabiorightnow.However,incasetechnologywouldmakesomeoneproducehigh-qualitysocksandhosierywithoutskillfulmanufacturingprocessinfuture.

AkiMatsumoto,[email protected]


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Appendix


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Documents

Tabio (2668, JP) · Tabio believes that this would be the case for sock & hosiery market and the divergence would be an opportunity for the unique retailer to enhance market penetration