ANNUAL REPORT About ADASTRIA

Transcription

1 ANNUAL REPORT About ADASTRIA

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3 "Change" "Challenge" "Collaboration" ANNUAL REPORT

4 CONTENTS 3 KEY STATISTICS 4 MESSAGE FROM THE MANAGEMENT 6 NEW MEDIUM-TERM MANAGEMENT PLAN "ACE18" 10 VALUE CHAIN 16 BRAND PROFILE 16 GLOBAL WORK 18 niko and LOWRYS FARM 21 studio CLIP/LEPSIM LOWRYS FARM 22 BRAND LINEUP 24 CORPORATE GOVERNANCE 25 INTERNAL CONTROL 26 BOARD OF DIRECTORS AND AUDIT AND SUPERVISORY BOARD MEMBERS 28 CORPORATE SOCIAL RESPONSIBILITY (CSR) 30 FINANCIAL SECTION 31 6-YEAR SUMMARY 32 MANAGEMENT S DISCUSSION AND ANALYSIS 35 RISK FACTORS 36 CONSOLIDATED FINANCIAL STATEMENTS 36 CONSOLIDATED BALANCE SHEET 38 CONSOLIDATED STATEMENTS OF INCOME/ CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 39 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 40 CONSOLIDATED STATEMENT OF CASH FLOWS 41 HISTORY 42 INVESTOR INFORMATION 43 CORPORATE DATA <Explanation of appropriate use of forecasts of financial results> The forward-looking statements in this document, including performance forecasts, are based on information available at the time of disclosure and on certain assumptions deemed to be reasonable by the Company. Actual results may differ materially from forward-looking statements due to a number of factors. <Other important matters> Figures within this document are presented rounded off to the nearest hundred million yen; percentages are calculated based on the original data. 2

5 KEY STATISTICS Millions of Yen Thousands of U.S. dollars *1 2012/2 2013/2 2014/2 2015/2 2015/2 For the year Net sales 115, , , ,588 $ 1,547,777 Operating income 12,361 9,717 5,762 5,981 50,150 Ordinary income 12,522 9,951 6,027 6,452 54,100 EBITDA 15,916 14,477 13,861 15, ,913 Net income (loss) 6,789 5,508 (4,731) 503 4,217 At year-end Total assets 62,771 63,410 78,841 83,742 $ 702,180 Net assets 41,191 38,598 44,786 46, ,665 Interest-bearing debt - 1,097 4,734 3,753 31,469 Free cash flow *2 2,042 1,380 (2,225) 1,690 14,170 Cash and cash equivalents at end of period 25,308 18,338 8,529 7,667 64,288 Depreciation and amortization 3,555 4,759 14,295 10,294 86,315 Capital expenditures 6,384 6,178 7,938 10,936 91,698 Reference indices Operating income margin (%) 10.7% 8.0% 3.8% 3.2% Return on equity (%) (11.3) 1.1 Return on assets (%) (6.7) 0.6 Shareholders' equity ratio (%) Dividend payout ratio (%) Per share data Earnings per share (yen, dollar) (206.42) $ 0.17 Net assets (yen, dollar) 1, , , , Cash dividends (yen, dollar) Other data (at fiscal year-end) Market capitalization 74,542 83,448 57,388 71,809 $ 602,121 Total number of stores , Domestic ,132 1,250 Overseas Total floor space (m 2 ) 154, , , ,525 Number of employees (Full-time) 2,507 3,045 4,546 4,852 *1 Calculated based on an exchange rate as of the end of February 2015 of US$1= *2 Free cash flow = cash flows from operating activities + cash flows from investing activities Net sales/ Operating income Ordinary income/ Net income (loss) Return on equity/ Return on assets Millions of Yen 200, , ,000 50,000 Net sales (left scale) Operating income (right scale) 12, , ,670 9, ,273 5, ,588 5,981 Millions of Yen 20,000 15,000 10,000 5,000 Millions of Yen 20,000 15,000 10,000 5,000 0 Ordinary income Net income 12,522 6,789 9,951 5,508 6,027 (4,731) 6, % (10) Return on equity Return on assets (6.7) /2 13/2 14/2 15/2 0 (5,000) 12/2 13/2 14/2 15/2 (20) (11.3) 12/2 13/2 14/2 15/2 ANNUAL REPORT

6 MESSAGE FROM THE MANAGEMENT Chairman & Chief Executive Officer (CEO) Michio Fukuda Integrating Product Planning and Production Management Functions to Arise as the New Adastria In March 2015, Adastria Holdings Co., Ltd., POINT INC., and TRINITY ARTS INC. consolidated into a single company, and on June 1, 2015, changed the company name to Adastria Co., Ltd. Furthermore, on September 1, 2015, Adastria Co., Ltd. absorbed the production planning and production management functions of N9&PG Co., Ltd., and started as the new Adastria. Implement Change Aiming for Further Development Adastria has, since our foundation, been able to respond flexibly to changes in the environment, and during the growth process has implemented changes on many occasions. Having started out as a menswear retail outlet, our first change was to develop measures against the spread of suburban men s clothing chain stores, and that resulted in us changing our line of business to become a men s casual clothing store, followed by several more instances of change. In 2013, the three retailers POINT, TRINITY ARTS and BABYLONE INC. and NATURAL NINE CO., LTD., which had been in charge of product planning and production management, integrated under the holding company Adastria Holdings Co., Ltd., and we strengthened our management base ahead of a fullscale attempt at taking on the global market. In order to ensure our ability to respond to a dramatically changing operating environment confronting a low birthrate and rapid aging, changing consumer behavior and the evolution of IT technologies, we judged that we need to attain a higher level of management efficiency and speedier decision-making. Therefore, the three companies merged in March 2015, and integrated N9&PG s product-related functions in September. With an even closer collaboration between the retail functions and planning and production functions, optimizing our value chain will enhance our corporate value. Working Toward Continued Profit Expansion In the fiscal year ended February 28, 2015, net sales were billion, a significant increase of 20.4% year on year due to factors including the effects of TRINITY ARTS becoming a consolidated subsidiary in September Operating income was 5.9 billion, up 4

7 Business Model Transitions Growth by converting our platforms in response to changes in the environment 1953 Foundation Period: Menswear retail store 1953 Established Fukudaya Clothes Store Inc. CHANGE: Enter the blank market in Mito 1973 Branch Policy Period: Men s Casual Clothing Store 1973 Opened VEGA, a men s casual clothing store CHANGE: Scrap the old framework and shift to chain store operations CHANGE: Chain Store Operation Period: Jeans and Casual Fashion Chain Stores 1984 Start turning POINT into chain stores Hints from an inspection tour in the United States. Concentrate management resources on blank markets Store Brand Growth Period: SPA Format Casual Fashion Chain Stores 1997 Start developing LOWRYS FARM as a store brand CHANGE: Globalization and market homogenization. Move to the next growth stage Management Integration Period: SPA Format and Becoming a Global Brand Chain Store 2013 Launch the holding company structure (N9&PG becomes a consolidated subsidiary) 2015 Merger of Adastria Holdings, POINT and TRINITY ARTS Company name changed to Adastria Co., Ltd. 3.8% as a result of a reduction in discount sales in spite of having booked a loss accompanying the change of business model for growth from the next fiscal year onward following a review of outlet functions and other factors. We attained net income of 503 million after extraordinary losses of 1.9 billion, comprising impairment loss, amortization of goodwill and loss on valuation of investment securities. We will push forward with carrying out the new medium-term management plan to secure further expansion of earnings. The New Medium-Term Management Plan ACE18 We have formulated the New Medium-Term Management Plan ACE18, set to conclude in the fiscal year ending February We cited three key C words associated with ACE18: Change, Challenge and Collaboration. For the three years of ACE18 we will enhance corporate value for the long term and proactively implement policies to respond to the needs of all of our stakeholders. We will strengthen storefront capabilities and strategically clarify each brand to polish sales power and brand strengths, as well as invest ideally to broaden frontlines in future growth markets. We will also build the SPA* 1 (specialty store retailer of private label apparel) framework of storeoriginating retail that will enable superior commercialization differentiating us from other companies, as well as further improve the accuracy of our OEM/ODM* 2 framework, enabling a system providing seasonal products of fine quality at a reasonable price. For the future growth of the Adastria Group, we need to foster a new corporate culture and atmosphere. With a base of sharing, collaboration and camaraderie in the Group, we will make the customer s happiness the objective of our actions moving toward further growth. *1 Specialty store retailer of private label apparel (SPA): A business model where we carry out all actions from planning to production and sales *2 Original Equipment Manufacturing (OEM)/Original Design Manufacturing (ODM): A business model where planning and production are outsourced to a business partner and we sell the supplied products. ANNUAL REPORT

8 NEW MEDIUM-TERM MANAGEMENT PLAN "ACE18" Adastria Change / Challenge / Collaboration for Evolution 2018 To spur its own evolution, Adastria is implementing the three Cs (Change, Challenge and Collaboration). We named the new medium-term management plan set to end in the fiscal year ending February 2018 "ACE18," which embodies our determination to respond to changes in the environment and to transform ourselves to be a leader in future growth markets. Challenges Facing Adastria Net Sales and Operating Income Over the Past 10 Years Environmental Recognition Millions of Yen 200, ,000 Net sales (left scale) Operating income (right scale) 12,287 15,772 12,960 16,910 15,329 12, , , ,588 Millions of Yen 20,000 15,000 Market Conditions > > > > Market contraction due to a low birthrate and aging society Era of the 10% consumption tax rate (Expected April 2017) Inbound tourism demand rises in line with Asian economic development and devaluation of the Japanese yen Infrastructure demand rises ahead of Tokyo hosting the 2020 Olympic Games 100,000 50, ,973 49,073 06/2 61,650 73,941 86,705 97, , ,058 9,717 5,762 5,981 07/2 08/2 09/2 10/2 11/2 12/2 13/2 14/2 15/2 10,000 5,000 0 Asia Production Society > > > > > > > Peak out of China s economic growth Growth of the ASEAN market Higher costs due to depreciation of the Japanese yen Costs will rise in ASEAN countries following China Changes and diversification of consumer tastes Dismantling of borders due to the evolution of IT technologies Rising labor costs due to the difficulties involved in employing human resources and increase in social security costs Adastria s net sales have continued to grow since our listing, deriving from growth in core brands and the launch of new brands, and the addition of companies by expanding the scope of consolidation. However, operating income peaked at 16,910 million in the year ended February Profit returned to growth in the fiscal year ended February 2015 for the first time in four years. The profit level in comparison with its peak, however, is still in the recovery stage. As customer needs rapidly diversified, it became difficult to differentiate from competing companies products and business models. Coupled with the rise in Japan of global SPA companies, this resulted in sales plan shortfalls and expanded discount losses. We, however, did not hesitate to continue investment to build our growth base and business model for the future. The operating environment will continue to be challenging for Adastria, given a low birthrate and aging population in Japan and a rise in production costs due to depreciation of the Japanese yen. As customer tastes diversify, national borders disappear in step with the evolution of IT, and inbound tourism demand rises, we will greet this changing environment by reforming ourselves to work toward a continuous recovery in profit levels. 6

9 Our Vision "Change" Make market sectors with growth potential the primary focus of operations "Challenge" Increase originality by transforming into a retail SPA centered on stores "Collaboration" Aim for activities that make customers happy by fostering a corporate culture of sharing, collaboration and camaraderie Basic Strategy Strategy 1 Enhance Core Brands Enhancing our core brands such as GLOBAL WORK and niko and into major global brands GLOBAL WORK niko and... GLOBAL WORK is being positioned for development on a global scale but focus is being placed on enhancing the power of the brand in Japan. We are aiming to enhance earning capabilities through unifying store visuals, enhancing product lineups and proactive promotions. niko and...will focus on the operation of large-scale flagship stores for a brand sufficiently capable of having a global outlook and continue to take on the challenge of developing overseas. We have also started development of new categories of business such as dining and furniture. Strategy 2 Aggressively target the middle-age and senior markets Expand the targeted customer segments of studio CLIP and LEPSIM LOWRYS FARM to reflect the ongoing change in Japan s demographics. Image of 2020 Female Demographics and New Market Formation studio CLIP Thousands 1,200 New Market Formation Zones Combining cassettes individually categorized by products such as kitchen goods and groceries, cafes and gardening, we create various types of stores. This also 0 Teens Full-time workers Married through to first child Middle-aged to senior age enables the opening of several stores with different product lineups in the same market area. * Source: "Population Estimates," Ministry of Internal Affairs and Communications Statistics Bureau ANNUAL REPORT

10 Basic Strategy Strategy 3 Reinforce the multi-brand strategy Highly sensitive, high price range, occasion Core market Young casual Upper casual Global Age Teen Middle-aged Mass market We will deepen the multi-brand strategy that is one of Adastria s strengths. Clarify brand positioning in each market sector to meet customer needs, differentiating from competitors. We focus our investment based on a select and concentrate strategy. Investment will center on brands led by GLOBAL WORK and niko and, which will be enhanced to global brands, and other core brands with growth potential in Japan, such as studio CLIP and LEPSIM LOWRYS FARM. We will trim not-so-profitable brands to improve their earnings capabilities and select and concentrate on investment for brands at their incubation stage. Strategy 4 Customer Base Expansion Utilizing the Internet Strategy 5 Add more lifestyle categories We will transform the Company s online website from an apparel sales site into a community site where customers gather. We will keep striving to cover more categories of business to meet customers diverse demands in their lifestyles (clothing, food and housing). Image of membership numbers Online Business Net Sales 14/2 15/2 18/2 21/2 We are moving ahead with development of new contents utilizing customer data via [.st], the Company s online website integrated in November By expanding and diversifying points of contact with customers, we pursue new retailing methods that will create synergetic effects between the website and bricks-and-mortar stores. 8

11 Build a Retail SPA Framework Centered on Stores We will build and elaborate a retail SPA framework, which is the backbone supporting the Company s growth, with the goal to sell seasonal merchandise with good quality at an affordable price. To accomplish the five basic strategies given in ACE18, we view raising the level of product planning, production structure and sales power at stores as key issues. First, we build an information cycle flow where trend and store information are rapidly incorporated into product planning. We then move ahead with planned production, visualize and strategically assemble the factory background and develop unique materials while evolving the Quality Control framework. We prioritize securing a self-production framework for our basic products. We will ultimately enable self-production of trend products by strengthening product planning power. We will train sales staff and develop them as lifestyle advisors who are capable of providing our customer with services in accordance with the lifestyles of individual customers to enhance values at store level. Our Objectives Moving ahead with the five basic strategies explained above we have set as numerical objectives for the fiscal year ending February 2018 net sales of 210 billion, operating income of 14.8 billion and an operating income margin of 7.0%. To achieve these objectives, it is essential that each brand attain its targeted profits and non-sales departments keep costs under control. We forecast that ROE will recover to a percentage in the mid-teens as the profit level improves. Aiming for these objectives, we have started on creation of a new corporate culture that will realize the three Cs of Change, Challenge and Collaboration. FY 2018 Net Sales 210 billion Operating Income Margin 7.0% 7.0% % 3.7% FY 2015 Results FY 2016 Forecast FY 2018 Targets Net sales billion billion billion Operating income 5.9 billion 7.0 billion 14.8 billion Operating income margin (%) 3.2% 3.7% 7.0% ROE 1.1% 5.2% 13.8% ANNUAL REPORT

12 VALUE CHAIN We utilize trend or store information as soon as possible in product development. Through an integrated framework at every step, starting from product planning, production management, and distribution to sales, we can provide value-added products to our customers. Trend Information Sales Store Information Sales framework to promote customer satisfaction Serving Customers Online Store Customers CRM *1 Customer Service Administrative Center Optimizing Value Chains On September 1, 2015, we transferred the production planning and production management functions of N9&PG Co., Ltd. to Adastria. In conjunction with this, N9&PG changed its name to Adastria Logistics Co., Ltd., signifying its remaining function as the hub of Adastria Group s logistics operations. In 2013, Adastria integrated under the Group s umbrella NATURAL NINE LTD., which has outstanding textile design and product planning functions as well as several bases in Asian countries. This move was a part of efforts to build a corporate group with a wide range of customers and unique product planning functions. Later, NATURAL NINE merged with Pogic Co., Ltd., another Adastria Group consolidated subsidiary in charge of logistics functions and was renamed N9&PG, assuming complete control of functions ranging from production to distribution, including those overseas, to accelerate the Adastria Group s supply-chain framework. As Group management made progress, other new challenges arose such as the necessity of selecting a product procurement method in alignment with brand characteristics and strengthening the quality control system and that the product planning and production management functions needed a closer relationship with the retailing functions. Therefore, the decision was made to merge production planning, production management and the retail function into one company as an appropriate step to optimize the value chain. With respect to distribution functions, with an eye to strengthening and developing overseas distribution functions, we deemed the promotion of these operations under a separate company to be the most appropriate course of action. Consequently, we enacted a complete organizational change to this end. Gathering the product planning and production management functions to further management efficiency and accelerate decision-making, Adastria, as the Group s core company, will promote optimization of the value chain in order to enhance its corporate value. 10

13 *1 CRM: Customer Relations Management *2 Merchandising: Product planning and merchandising planning *3 Visual Merchandising: Selling goods by displaying them and using visual expression Logistics Production Planning Highly efficient delivery vitalizing the market Distribution Imports and Exports Product development enabling differentiation Design Textiles Product planning reflecting sales information Brand Direction Merchandising *2 Patterning Production Management Visual Merchandising *3 Promotions Quality Control Adastria General Support Co., Ltd. Store Fixture Management Integrated support for each value chain function As of August 31, 2015 From September 1, 2015 Adastria Co., Ltd. N9&PG Co., Ltd. Group management administration Sales Product planning and production management Logistics Adastria General Support Co., Ltd. Business transfer Change of company name Adastria Co., Ltd. Planning, production and sales of items such as apparel and sundries, as well as Group management administration functions Adastria Logistics Co., Ltd. Logistics operations for the products of group companies Group management administration Sales Product planning and production management Logistics Adastria General Support Co., Ltd. Provides comprehensive support to each Group company Adastria Asia Co., Ltd. POINT (Shanghai) Co., Ltd. POINT TW INC. Adastria Asia Co., Ltd. Promotes the Group s overseas operations and conducts sales operations and store developments for Group brands in Hong Kong POINT (Shanghai) Co., Ltd. Conducts sales operations and store developments for Group brands in China Adastria Korea Co., Ltd. POINT TW INC. Conducts sales operations and store developments for Group brands in Taiwan Adastria Korea Co., Ltd. Conducts sales operations and store developments for Group brands in South Korea ANNUAL REPORT

14 VALUE CHAIN Trend Information Sales Logistics Production Planning Store Information Sales framework to promote customer satisfaction Highly efficient delivery vitalizing the market Product development enabling differentiation Product planning reflecting sales information Serving Customers Distribution Design Brand Direction Planning Customers Online Store Imports and Exports Textiles Merchandising *2 CRM *1 Patterning Visual Merchandising *3 Customer Service Production Management Promotions Quality Control Adastria General Support Co., Ltd. Administrative Center Store Fixture Management Integrated support for each value chain function To differentiate from competitors and realize superior product manufacture, we incorporate trend information and maintain a system capable of rapid product planning that immediately utilizes store information. We gain a grasp of trends going on and the needs of consumers, incorporate the brand director s vision and direction and have merchandisers and designers take down these items in product planning for each season. By having our own product planning functions we move ahead with planning and production that can start product planning for each season about one year promote planned production to realize high-quality product development. Planned material development and supplies enables us to acquire an economy of scale for brands with larger volumes. Meanwhile, we also engage in product planning in collaboration with conventional trading companies and bring a higher level of refinement to the OEM/ODM framework capable of delivering products to stores within a short lead time. By choosing a method suited to the particular characteristics of each brand, we can provide customers with products that have value within a necessary time frame. in advance, take time to make revisions and then Responsible for Ensuring a Watch Over All Production Processes with Our Own Eyes By having our own product planning functions, I think it gives us the significant benefit of being able to conduct visualization of every operation. By being able to communicate directly, face-to-face, at any time, we can interact in a way that enables gaining detailed and accurate information. And because we know the origins of the materials being used in the products that we have planned ourselves, what plants these were produced in and what sort of costs were involved in this process, everything is going on in an extremely GLOBAL WORK Chief Director Sales Div. #1 Deputy Executive General Manager Satoshi Numakura transparent manner, so we can take responsibility in delivery of products to our customers. 12

15 Trend Information Sales Logistics Production Planning Store Information Sales framework to promote customer satisfaction Highly efficient delivery vitalizing the market Product development enabling differentiation Product planning reflecting sales information Serving Customers Distribution Design Brand Direction Production Customers Online Store Imports and Exports Textiles Merchandising *2 CRM *1 Patterning Visual Merchandising *3 Customer Service Production Management Promotions Quality Control Adastria General Support Co., Ltd. Administrative Center Store Fixture Management Integrated support for each value chain function With a basis of product planning expressing the global outlook of a brand, designers and pattern-makers produce a specification sheet which will take shape as a product in a plant somewhere in Asia, often China, under a framework of strict production management. Those in charge of production management also gain an idea of the brand, its sales status and customer opinions, as well as whether specification sheets are being conformed to and information such as whether deliveries can be made by appointed deadlines as part of production planning that includes dealing with each Cambodia. Management of production and logistics takes place between the plants on-site and those in Japan, who are charged with the management of brands to reduce opportunity loss due to shortages or defective products, to realize a production management framework that enables customers to shop reliable products with satisfaction. We will expand production in the off-season and in ASEAN countries, aiming for a system that will enable a reduction in production costs while pursuing high quality. and every workplace. We have production management offices set up in China, South Korea, Vietnam and Holding an In-house Materials Exhibition Every Season To ensure that customers can get a feel for the attractions of our products, in addition to design and price, it is also important to seek differentiation from the materials development stage. At Adastria, materials development teams hold an in-house materials exhibition four times a year for those in charge of product planning for brands. These exhibitions provide a place for communication through proposals for materials based on a brand s characteristics, sharing of trend information from within Japan and overseas, and deepening of knowledge of materials or their background to enable people in An in-house materials exhibition for the season of spring and summer 2016 charge of both product planning and production to share the same standpoint for product development. ANNUAL REPORT

16 Trend Information Sales Logistics Production Planning Store Information Sales framework to promote customer satisfaction Highly efficient delivery vitalizing the market Product development enabling differentiation Product planning reflecting sales information Serving Customers Distribution Design Brand Direction Logistics Customers Online Store Imports and Exports Textiles Merchandising *2 CRM *1 Patterning Visual Merchandising *3 Customer Service Production Management Promotions Quality Control Adastria General Support Co., Ltd. Administrative Center Store Fixture Management Integrated support for each value chain function Adastria has five domestic logistics centers located at bases in Mito, Ibaraki-West, Fukuoka, Kobe and Fujioka. At domestic logistics centers, Adastria Logistics takes charge of inventory control and logistical processes with a system shipping 365 days a year, enabling timely and speedy delivery of products to stores where customers are waiting for them. An automatic order system ensures that as soon as a sale is made at a store a replacement product will be sent to the store on the following day, preventing opportunity loss by eliminating shortages at stores and enabling customers to always be greeted by a sales point that appears fresh. We are building a logistics base supporting our steadily growing online business. In May 2014, all delivery operations for online stores of Group brand products were concentrated at the Ibaraki-West Logistics Center instead of being carried out by multiple centers, as had been the case previously. Enabling delivery of products of multiple brands in the same packaging enhanced convenience for customers who go shopping at several of our brand stores. For importing operations, we regard cost control, as well as safety and reliability, as an important challenge, and thus promote concentrated shipments as a cost-cutting measure. We keep enhancing our logistics operation to meet our sales expansion responding to evolving technologies and diversified customer requirements. The Group s Largest New Logistics Center Is Now in Operation In May 2015, the Fujioka Logistics Center, the Group s largest logistics center, was newly established in Fujioka City, Gunma Prefecture, and the functions that had been performed by the old Takasaki Logistics Center and former Takasaki Returns Center operated by Adastria General Support were transferred there. The site has a total floor space of approximately 24,420 m 2 and ships products to stores for six brands, including niko and, as well as stock control and delivery of store fixtures and promotional tools; it also conducts operations such as categorizing product returns. The new center will raise Adastria Logistics Co., Ltd. Fujioka Logistics Center operational efficiency to a higher level. 14

17 Trend Information Sales Logistics Production Planning Store Information Sales framework to promote customer satisfaction Highly efficient delivery vitalizing the market Product development enabling differentiation Product planning reflecting sales information Serving Customers Distribution Design Brand Direction Sales Customers Online Store Imports and Exports Textiles Merchandising *2 CRM *1 Patterning Visual Merchandising *3 Customer Service Production Management Promotions Quality Control Adastria General Support Co., Ltd. Administrative Center Store Fixture Management Integrated support for each value chain function The Adastria Group currently has about 1,300 stores located around the world and has yearly about 38 million customers. We make much of the idea of store origination ; each instance of customer contact holds all the questions and answers we need. We value this philosophy and we consider our stores to be the starting point for all our actions and strategies. Our store staff members, as lifestyle advisors, respond to the diverse and ever-changing needs of each customer and propose products that meet their lifestyles. We conduct in-house training in major cities across Japan to enhance customer service capabilities of our store staff. Trainers are active store staff members, including those who have won prizes in a developer s customer service contests, and training programs consist of contents emphasizing practical application. We regard [.st], Adastria s online shopping site with over 3 million registered members as an important customer contact point. Customer information and sales trend data, visualized and analyzed, enable us to gain a grasp of customer sentiment, respond to their needs and move ahead with the development of new contents. Information obtained through communication with customers at stores is fed back rapidly and reflected in product planning and production management. After Products Have Been Handed Over to Customers I feel fulfilled when our customers think, I m glad I dropped by this store and I want to go back again. Our vital role is to imagine what happens after products have been handed over to customers and make proposals to them that will be a wonderful match for their lifestyles. To be able to do that, we try on new products, check materials and the feeling/fitness when worn, create styling notes and share product information among staff members. We also make weekly reports to the Headquarters regarding information obtained from conversations with customers and ideas niko and Store Manager Haruna Yasuhira for new products or actions. ANNUAL REPORT

18 BRAND PROFILE GLOBAL WORK Target: Men and women from their 20s to 30s, and kids from 2 to 6 Price zone: Upper popular Store locations: Shopping centers Standard store floor space: 495m 2 Number of domestic stores: 178 Number of overseas stores: 11 Mixing new basic tastes and seasonal trends, GLOBAL WORK offers fresh and comfortable fashion at reasonable prices to people all over the world. Domestic Sales and Number of Stores Billions of yen Net sales (left scale) Number of stores (right scale) Stores /2 11/2 12/2 13/2 14/2 15/2 0 16

19 Aiming for a Global Brand GLOBAL WORK marked its 20th anniversary in 2015 by turning its attention toward developing into a global brand and started to re-brand. Reviewing the natural taste that had been the brand s flavor, it began to move forward with synchronizing its visual identity, starting with the brand logo. The core philosophy behind this movement was to realize a place where customers can feel at ease. Aiming to become a brand enjoyed for all sorts of lifestyle times (anytime) in a variety of places around the world (anywhere) for all people regardless of race, gender and age (anyone), GLOBAL WORK is on the way to a breakthrough. Initiatives Going Forward The prime initiative is to continuously hone the precision of manufacturing, the brand s greatest asset. By establishing the SPA-format value chain model and through integrated operations from material development through to store Visual Merchandising and on to scenes where customers are wearing the product, we create a system that stably delivers products that satisfy customers. Then, through active relocation and increases in floor space and refurbishments, along with strengthened customer service operations, we provide comfortable spaces for our customers. With our vision to become a global brand, we are continuing rebranding efforts in a drive to enhance brand recognition Through cross promotions that link TV commercials and tie-ups with store displays, coupled with store openings targeting urban terminal locations with heavy passenger traffic, GLOBAL WORK is increasing its contact points with customers and seeks to further enhance its brand recognition. ANNUAL REPORT

20 BRAND PROFILE niko and... Target: Men and women from age 25 to 35 Price zone: Lower moderate Store locations: Shopping centers and fashion-business malls Standard store floor space: 264m 2 to 826m 2 Number of domestic stores: 116 Number of overseas stores: 13 No one on Earth is born complete. niko and... provides the joy of creating one's identity by adding [style] to people and their lives. Domestic Sales and Number of Stores Billions of yen 20 Net sales (left scale) Number of stores (right scale) Stores /2 11/2 12/2 13/2 14/2 15/2 0 18

21 Aiming to Be a Global Lifestyle Brand from Japan Today, it is common for people in the matured Japanese market to have a deep and refined appreciation for the lives they lead. People appreciate life surrounded by their likes and by spending their precious time with close friends. We view niko and as a brand that enriches customers lifestyles by providing not only things but also a state of being. We think that niko and becomes a real Global Lifestyle Brand when it can introduce and propose to the world the lifestyle that niko and coordinates, using the arrangement and proposal-generating capabilities for which Japan is renowned. Initiatives Going Forward Up until now, niko and has pioneered the lifestyle proposal-format brand concept, creating stores that harmoniously present both apparel and household goods. It has expanded store openings in urban areas in addition to suburban-style stores at an early stage. It now has more than 100 stores in Japan, and lifestyle proposals has become a familiar term to customers. Our large-scale flagship store, niko and TOKYO, will be the touchstone for the brand to expand into the world market. This flagship store that offers proposals for apparel, dining and living through avenues such as books, cafes and restaurants will continue taking on challenges to pave the way for overseas development. We keep strengthening branding of niko and by evolving merchandising and expanding new lineups, and making progress in developing the dining and furniture categories to respond to changing customer needs. ANNUAL REPORT

22 BRAND PROFILE LOWRYS FARM Target: Women from their 20s to 30s Price zone: Lower moderate Store locations: Fashion-business malls and roadside stores Standard store floor space: 165m 2 Number of domestic stores: 140 Number of overseas stores: 33 Theming on quality and relaxation, LOWRYS FARM proposes refreshing styling consisting of timeless basic items and seasonal trendy items for women in ordinary lifestyle. Domestic Sales and Number of Stores * Includes mikoa LOWRYS FARM Billions of yen 28 Net sales (left scale) Number of stores (right scale) Stores /2 11/2 12/2 13/2 14/2 15/2 0 20

23 BRAND PROFILE studio CLIP/LEPSIM LOWRYS FARM Today is your special day. Even though it's not a special day, I'd like to catch important things properly. Let's make this day unforgettable. I'd like to be able to come face to face with even small things. Honest feeling. Never forget to enjoy. That's what I want. In my home, there are a lot of small happiness, and by cherishing every piece Domestic Sales and Number of Stores of it, 'like' will become bigger and bigger. studio CLIP is always thinking. Billions of yen 20 Net sales (left scale) Number of stores (right scale) 19.6 Stores 200 Wish you have a good day every day Target: Women from their 30s to 40s /2 11/2 12/2 13/2 14/2 15/ Price zone: Middle moderate Store locations: Shopping centers, fashion-business malls and department stores Standard store floor space: 132m 2 to 330m 2 Number of domestic stores: 162 Styled on simplicity yet with a sense of freshness, LEPSIM LOWRYS FARM proposes a casual and unassuming style that blends naturally into daily life. Domestic Sales and Number of Stores Billions ofyen Net sales (left scale) Number of stores (right scale) Stores Target: Women from their 20s to 30s Price zone: Lower moderate 4 40 Store locations: Shopping centers 0 10/2 11/2 12/2 13/2 14/2 15/2 0 Standard store floor space: 198m 2 Number of domestic stores: 125 ANNUAL REPORT

24 BRAND PROFILE BRAND LINEUP JEANASIS RAGEBLUE Target: Women in their 20s Price zone: Moderate Store locations: Fashion-business malls and road-side stores Standard store floor space: 99m 2 Number of domestic stores: 84 Target: Men from 18 to 25 Price zone: Lower moderate Store locations: Fashion-business malls, road-side stores and shopping centers Standard store floor space: 165m 2 Number of domestic stores: 64 Heather HARE Target: Women in their 20s Price zone: Moderate Store locations: Fashion-business malls and shopping centers Standard store floor space: 66m 2 Number of domestic stores: 75 Target: Men and women from their 20s to 30s Price zone: Moderate Store locations: Fashion-business malls and road-side stores Standard store floor space: 99m 2 Number of domestic stores: 30 BARNYARDSTORM apart by lowrys Target: Men and women from 30 to 40 Price zone: Middle moderate Store locations: Department stores, station buildings and shopping centers Target: Women from 25 to 35 Price zone: Moderate Store locations: Fashion-business malls Standard store floor space: 99m 2 Number of domestic stores: 34 Standard store floor space: 99m 2 to 166m 2 Number of domestic stores: 35 BABYLONE repipi armario Target: Women from 25 to 35 Price zone: Better price Store locations: Fashion-business malls Standard store floor space: 66m 2 to 82m 2 Number of domestic stores: 27 Target: Girls from 11 to 15 Price zone: Lower moderate Store locations: Fashion-business malls, road-side stores and shopping centers Standard store floor space: 99m 2 Number of domestic stores: 34 22

25 BLISS POINT Andemiu Target: Men and women from their late 20s to 40s Price zone: Moderate Store locations: Road-side stores and shopping centers Standard store floor space: 495m 2 to 661m 2 Target: Women from 25 to 35 Price zone: Middle moderate Store locations: Station buildings and fashion-business malls Standard store floor space: 82m 2 to 165m 2 Number of domestic stores: 21 Number of domestic stores: 13 BAYFLOW Salon de la Trinite/Dissy Target: Men and women from their 30s to 40s Price zone: Middle moderate Store locations: Shopping centers, station buildings and fashion-business malls Standard store floor space: 264m 2 to 396m 2 Number of domestic stores: 18 Target: Women from their 30s to 40s Price zone: Better price Store locations: Fashion-business malls and station buildings Standard store floor space: 66m 2 to 132m 2 Number of domestic stores: 9 Me% mikoa LOWRYS FARM Target: Women from their late teens to early 20s Price zone: Lower moderate Store locations: Fashion-business malls and station buildings Standard store floor space: 33m 2 Number of domestic stores: 10 Target: Women from 25 to 35 Price zone: Lower moderate Store locations: In-station commercial facilities and station buildings Standard store floor space: 66m 2 Number of domestic stores: 18 * Number of stores is as of February 28, 2015 and also includes the online store. ANNUAL REPORT

26 CORPORATE GOVERNANCE Basic Philosophy We have built our corporate governance system on three pillars: 1) realizing clarity in management responsibility and prompt decision-making, 2) enhancing management transparency, and 3) ensuring sound and stable management. Moreover, as a company with operating companies such as Adastria Asia Co., Ltd. working beneath it, we oversee the entire Group s governance and Group strategic functions, bearing responsibility for explaining externally risk management for the entire Group. Organization Structure Form of Organization Representative Director Number of directors Number of audit and supervisory board members Independent officers Fiscal year ended February 28, 2015 Board of Directors meetings Status of meetings Fiscal year ended February 28, 2015 Audit and Supervisory Board meetings Status of meetings Number of meetings held A company with a board of company auditors Chairman & Chief Executive Officer (CEO) 6 (of whom 3 are outside directors) 4 (of whom 3 are audit and supervisory board members) 3 outside directors and 3 outside audit and supervisory board members 19 times Directors rate of attendance *1 91.2% Audit and supervisory board 98.2% members rate of attendance *2 List of statements deliberated Number of meetings held Annual budget, settlement of accounts, executive personnel issue, items related to the merger of Group companies and more 10 times Audit and supervisory board 100.0% members rate of attendance *2 List of statements deliberated Main meetings that audit and supervisory board members attend Policy for Determining Officer Compensation Accounting audit firm Examine the minutes of Board of Directors and executive meetings. Board of Directors meetings, Corporate Governance Committee, etc. Calculated within the scope of the upper limit approved by the General Meeting of Shareholders Directors Compensation Following investigation and deliberation by the Nomination and Compensation Committee on standards taking into account the scope of duties, responsibilities and factors related to performance, etc., the decision will be made by the Board of Directors. *1 Average attendance for each director *2 Average attendance for each corporate auditor Audit and Supervisory Board Members Compensation Decided following discussion with the corporate auditor Deloitte Touche Tohmatsu LLC Corporate Governance System General Meeting of Shareholders Appoint and dismiss Appoint and dismiss Appoint and dismiss Accounting audit firm Report Board of Directors Propose Appoint and dismiss Corporate Governance Committee Collaborate Audit Appoint, dismiss and supervise Audit and Supervisory Board Audit Representative Director Debate Nomination and Compensation Committee Collaborate Instruct Internal Audit Office Report Audit Instruct and disseminate Instruct and supervise Executive Committee (Deliberate on important issues in day-to-day operations) Propose Compliance Committee Disclosure Committee Audit Instruct Instruct and disseminate Each business division 24

27 INTERNAL CONTROL Basic philosophy and system We are further reinforcing our internal control system, based on the acknowledgment that it is an important responsibility of management to build and manage a system that ensures business execution in compliance with laws and regulations. Specific policies and status Compliance with laws, regulations and business ethics We have established Corporate Ethics Standards for all directors and employees to ensure compliance in business execution with laws and our corporate charter, so that accountability to society and corporate ethics is met. At the end of each fiscal year, directors sign declarations that they have met their obligations of prudence and good faith in business execution that complies with laws and regulations, and submit these declarations to the Audit and Supervisory Board. These declarations then become business execution policy for the board members to follow for the next fiscal year. In addition, in the event of any known or suspected violation of rules and regulations, or improper behavior, all directors and employees are required to inform the person in charge or a corporate auditor. Ensuring trustworthiness in financial reporting We have worked, well in advance, to take the appropriate measures to correspond with the application of the internal control reporting system to ensure "trustworthiness in financial reporting," as stipulated under the Financial Instruments and Exchange Law. The effectiveness of internal control was evaluated through company-wide internal control and business process assessments. As a result, we judged the Internal Control Over Financial Reporting of our company group to be effective. Risk management structure Adastria has stipulated risk management regulations and in the event of any Adastria Group company where there is a danger of loss, or the potential of such an occurrence, we respond promptly, and we will respond appropriately in the event of a natural disaster, system breakdown or any other emergency event that has companywide effects. Furthermore, the Adastria Group has a system to exhaustively and comprehensively manage risk and can maintain that system if need be while taking into account the scale of the company, characteristics of the business, design of the organization and other company traits and characteristics. ANNUAL REPORT

28 BOARD OF DIRECTORS AND AUDIT AND SUPERVISORY BOARD MEMBERS (As of May 28, 2015) Member of the Board of Directors Chief Operating Officer Masa Matsushita Member of the Board of Directors Representative Director, Chairman and CEO Michio Fukuda Member of the Board of Directors Senior Executive Officer Osamu Kimura Outside Member of the Board of Directors Hideki Kurashige Outside Member of the Board of Directors Tadamitsu Matsui Outside Member of the Board of Directors Satoshi Akutsu 26

29 Members of the Board of Directors Member of the Board of Directors Representative Director, Chairman and CEO Michio Fukuda May 1971 Fukudaya Clothes Store Inc. Director, Fukudaya Clothes Store Inc. (Currently Adastria Co., Ltd.) June 1982 Senior Managing Director, Fukudaya Clothes Store Inc. March 1993 Representative Director and President, POINT INC. (Currently Adastria Co., Ltd.) May 2010 Representative Director, Chairman of the Board of Directors and President, POINT INC. September 2013 Representative Director and Chairman of the Board of Directors, Adastria Holdings Co., Ltd. (Currently Adastria Co., Ltd.) May 2015 Representative Director, Chairman of the Board of Directors and Chief Executive Officer (CEO) Adastria Co., Ltd. (Current position) Member of the Board of Directors COO Masa Matsushita April 1989 A member of the Tokyo Bar Association Tokyo Aoyama Law Office (Currently Baker & McKenzie (Gaikokuho Joint Enterprise)) August 2003 Vice President, a member of the Board of Directors, General Electric Japan Ltd. (Currently GE Japan) September 2005 Executive Vice President, a member of the Board of Directors, FAST RETAILING CO., LTD. July 2010 Executive Vice President, a member of the Board of Directors, Siemens K.K. (Currently Siemens Japan K.K.) March 2011 Senior Corporate Officer, a member of the Board of Directors, KOKUYO Co., Ltd. May 2015 Chief Operating Officer (COO), a member of the Board of Directors, Adastria Co., Ltd. (Current position) Member of the Board of Directors Senior Executive Officer Osamu Kimura May 1990 Fukudaya Clothes Store Inc. December 2003 Representative Director, Par Avion Should Co., Ltd. March 2006 Representative Director, work design Inc. August 2007 Managing Director, Drop Inc. September 2011 Representative Director, TRINITY ARTS INC. (Currently Adastria Co., Ltd.) August 2013 Member of the Board of Directors, Adastria Holdings Co., Ltd. (Current position) Outside Member of the Board of Directors Hideki Kurashige January 1993 Representative director, Executive Vice President, IBM Japan, Ltd. May 2008 Representative Director and CEO, SIGMAXYZ Inc. April 2010 Representative Director Chairman, SIGMAXYZ Inc. April 2011 Director, Chairman, IT Frontier Corporation (Currently Tata Consultancy Services Japan, Ltd.) April 2013 Representative Director Chairman and President, SIGMAXYZ Inc. (Current Position) September 2013 Director, Adastria Holdings Co., Ltd. (Current position) Outside Member of the Board of Directors Tadamitsu Matsui June 1973 February 2008 September 2013 June 2014 June 2014 May 2015 Seiyu Store Co., Ltd. (Currently Seiyu GK) Representative Director, Chairman and Chief Executive Officer (CEO), Ryohin Keikaku Co., Ltd. Member of the Board of Directors, Adastria Holdings Co., Ltd. (Current position) Outside Director, Resona Holdings Inc. (Current position) Outside Director, OOTOYA Holdings Co., Ltd. (Current position) Outside Director, NEXTAGE Co., Ltd. (Current position) Outside Member of the Board of Directors Satoshi Akutsu May 1998 Obtained PhD in Management from the University of California, Berkeley June 2002 Assistant Professor, Hitotsubashi University International Corporate Strategy June 2006 Outside Director, NIFTY Corporation (Current position) March 2010 Outside Director, Otsuka Kagu, Ltd. (Current position) April 2010 Visiting Professor, Research Division, National Institute of Informatics Professor, Hitotsubashi University International Corporate Strategy (Current position) November 2012 Director, Japan Marketing Academy (Current position) September 2013 Director, Adastria Holdings Co., Ltd. (Current position) Audit and Supervisory Board Members Standing Audit and Supervisory Board Member (Outside) Shigeru Hirota Audit and Supervisory Board Member (Outside) Wataru Maekawa Audit & Supervisory Board Member (Outside) Tetsuro Yokoyama Audit & Supervisory Board Member Naoki Iwasaki ANNUAL REPORT

30 CORPORATE SOCIAL RESPONSIBILITY (CSR) Basic Philosophy The Adastria Group operates approximately 1,300 stores in Japan and around the world. The goal of our business is to make customers live in their own unique way through fashion. To make this happen, our first mission is to provide good products with good service. We feel that a relationship of trust with all stakeholders who support us is very important. To build this favorable relationship, we strive to carry out all the processes from manufacturing to product delivery in a socially responsible way. Also, to contribute to the development of a healthy society, our company is involved with CSR projects, utilizing our management resources for this purpose. In consideration of their relevance to our core business, we have set three priority themes for project involvement. Priority Theme 1 Protect the Environment A healthy global environment is necessary to carry out sound corporate activities. To contribute to sustainable development, we are engaged in action to help protect the planet s environment. Priority Theme 2 Make People Shine For a company to keep growing it requires the support of many people including employees, customers and partners. Through fashion, we re carrying out initiatives intended to provide more and more people with hope for the future. Priority Theme 3 Contribute to Communities Developing and marketing products requires interaction with local communities in regions inside and outside Japan. We re maintaining various support projects to vitalize regional communities and contribute to ongoing development. 28

31 REBAG PROJECT We are carrying out the REBAG PROJECT where customers who elect to use simple packaging with their purchases in consideration of the environment are rewarded with loyalty points. We promote the idea of customers using their own bags and by not distributing unneeded shopping bags we can contribute to resource saving and CO2 reduction. Supporting Women We aim to provide a work environment accessible to all employees and are engaged in a variety of activities aimed at enabling women to succeed. In the fiscal year ended February 2015, we launched the in-house Women's Workplace Committee, held lectures on women s careers and took part in the Women s Empowerment in Fashion event for enabling women to take an active role while working in fashionrelated fields. Use Business Activities to Continue Support for Disaster-stricken Regions We take part in the TOHOKU COTTON PROJECT, an enterprise undertaken by about 80 organizations mainly from the apparel industry that includes the rejuvenation of farming and employment creation among its objectives, and is centered on farmers in regions affected by the Great East Japan Earthquake. We are involved by sending volunteers to help with sowing seeds and harvesting, and use the cotton harvested in products we sell, providing continuous support through our main business. ANNUAL REPORT