Aeon : Q&A Session at the First Quarter Financial Results Briefing for the Fiscal Year Ending Feb. 28, 2025

Q&A Session at the First Quarter Financial Results Briefing for the Fiscal Year Ending February 28, 2025

July 12, 2024

Shikata: Executive Officer, Strategy

Egawa: Executive Officer, Finance and Business Management

Q1 Could you provide details on the shortfall in operating profit? Specifically, we would like to understand the extent of the shortfall: was the profit reduced from a forecasted increase, or was the original forecast not very strong, resulting in a minor shortfall?

A1 Egawa: Operating profit decreased by 3.6 billion yen compared to last year. Additionally, since the annual budget was set at a higher level, the downward from the forecast amounts to 3.6 billion yen plus α.

Q2 What business segments fell short of projections, and which performed well?

A2 Egawa: The segments that saw an upswing were the Financial Services and Shopping Center Development Business. The Financial Services Business performed well due to an increase in the balance of domestic receivables. The Shopping Center Development Business was up due to AEON Mall's record-high operating profit. On the downside, the GMS, Supermarket, and Health and Wellness Business did not achieve the expected operating profit and performance.

Q3 What changes do you see in how GMS and SM are catching up with consumer spending and its continuity? Additionally, could you elaborate on the differences in each category regarding low prices and value-added services?

A3 Egawa: In March, the numbers were favorable due to the trend from the same period last year, but the numbers declined continuously in April and May. Despite our efforts to expand market share through pricing strategies and strengthen sales promotions using loyalty points, we believe that consumers' frugal mindset has impacted sales and gross profit margins. From July onward, we are promoting various events and expanding sales of TOPVALU products, which have high gross profit margins. Internally, we are also discussing ways to produce lower-cost products, reduce procurement costs, and minimize expenses. The focus is on leveraging our scale, especially in the expanding lower tier, while addressing both upper and lower tiers of consumption. For cost reduction, it is important to utilize functional companies, and we aim to compensate for the first quarter's delay by focusing on this area in the second quarter.

Q4 Concerning the failure to meet the operating profit targets for GMS and SM, the prioritization of promotions over margins led to sluggish sales growth in the latter half of the first quarter. Delving deeper, was the need for lower prices stronger than expected, impacting the margin mix? Or was the plan to boost sales through enhanced promotions unsuccessful in achieving the anticipated growth?

A4 Shikata: In the first quarter, the consumption environment continued to cool down due to inflation and price hikes. Rising food prices increased the Engel's coefficient, and increased energy costs burdened household budgets, leading to significant fluctuations in spending per special occasions and daily life. The challenge of striking a balance became apparent: sales recovered during promotions but dropped when they were absent. After price policy adjustments failed and sales fell in April and May, we changed our strategy in June and stabilized the number of customers with fixed price tax breaks and month-end sales.

In the retail industry, maintaining customer numbers is crucial for improving profitability. We aim for customers to make a habit of shopping at AEON Group stores. Our strategy of prioritizing customer numbers over gross profit has been successful, with customer counts at or above last year's levels. In the second quarter, the challenge is to link market share to profit. We aim to enhance profitability throughout the year by strengthening our product lineup for the Bon holiday period and bonus season.

Q5 The weak yen is expected to cause food manufacturers to raise prices, leading to higher purchase costs on your end. We are concerned about margin control and expenses in the second half and beyond. You mentioned that expenses are currently lower than planned. Regarding margin control, will you temporarily compress margins and then improve them in the second half of the year?

A5 Shikata: Cost increases for the second half of the year are within our expectations. Strengthening PB products is particularly important. We are currently preparing new products and our strategy is to increase the number of customers while maintaining gross profit by balancing red TOPVALU and yellow BESTPRICE. We will attract customers through price-sensitive PB products and, in the latter half of the year, renew the red TOPVALU to improve gross profit. Given the disparity in the PB composition within the group's GMS and SM, raising this ratio is another crucial strategy for the second half of the year.

Q6 AEON Retail Co., Ltd.'s gross profit margin is flat year-on-year. While some companies saw a decrease in their gross profit margins in the first quarter, it seems that AEON has managed to maintain its margin. Is the gross profit margin lower than planned due to the

intensified point sales promotions?

A6 Egawa: AEON Retail Co., Ltd. did not increase its gross profit margin as much as anticipated. With costs expected to rise this fiscal year, our basic strategy is to raise the gross profit margin. We faced challenges in achieving our annual target of a 0.5 percentage point increase in the first quarter. While point-of-sale promotions are crucial for boosting sales, they are challenging to manage as they directly impact the gross profit margin. We aim to attract customers and improve the gross profit margin by consistently implementing TOPVALU sales promotions and reducing costs.

Q7 From the second quarter onward, will the main focus be on improving the product mix to ensure gross profits do not decline in both amount and rate while also strengthening the response to low prices?

A7 Egawa: Our policy is not to lower gross profit, but to raise it. We will employ various methods to improve gross profit, such as enhancing order accuracy and refraining from changing sales prices to sell out. Even under challenging circumstances, we aim to increase gross profit margins while promoting the use of functional companies that benefit from economies of scale.

Q8 Could you tell us about the progress of SG&A expenses in the first quarter compared to the plan? Although the impact of the wage increase was as expected, I feel that the increase in personnel expenses and sales promotion expenses is significant. General expenses have also increased. How does this compare to the plan?

A8 Egawa: Major costs, such as labor and electricity, are under control as expected. The overall increase in costs is within our expectations, and we do not believe immediate action is necessary currently. We will monitor costs closely as we proceed with the closing of accounts for the current fiscal year and firmly control those areas that can be managed.

Q9 In the adjustments section of the segment information, is the 2.8 billion yen decrease in operating profit from the previous year due to the return of profits from functional companies to the operating companies? Or is the decrease primarily due to the higher- than-expected increase in the cost of raw materials?

A9 Egawa: In this quarter, the operating profit recorded in the adjustment section decreased because the profits of functional companies were returned to the operating companies. For the major companies included in the adjustment section, we expect a decrease of about 8 billion yen for the full year, as the first quarter comparison showed a decrease of about 2 billion yen.

Q10 I am concerned about TOPVALU's strategy for the second half of the year. In the past, when you launched a strategy to expand TOPVALU, business performance deteriorated due to an unusually large number of TOPVALU products on store shelves, some of which were unattractive. Since then, the company has changed its policy and strengthened the management of its brand lines, but there is still concern about a repeat of past failures.

A10 Shikata: In response to customer feedback that the distinction between yellow BESTPRICE and red TOPVALU was unclear, we have changed our development direction to clarify the value each brand offers. With many events scheduled for the second half of the year, we are developing "occasion" type products tailored to specific events. For example, during the Christmas season, we will introduce oven-ready products that provide the value of enjoying a full-fledged Christmas party at home. For daily shopping, we will offer yellow BESTPRICE products that emphasize price appeals. In fresh foods, we are also promoting TOPVALU, and sales of TOPVALU Gurinai, which are organic products, are growing. We aim to make the presence of TOPVALU a clear value for our customers.

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