CHICAGO--(BUSINESS WIRE)--RMB Capital (“RMB”), a Chicago-based investment advisory firm, is a long-term shareholder of Sanyo Shokai Ltd. (8011 JP, “Sanyo”) and owns more than 6% of the firm’s total outstanding shares. RMB proposed a slate for a new executive team that is highly qualified to turn around Sanyo’s operation. RMB is initiating the proxy solicitation at the annual general shareholders’ meeting scheduled in May, based on the following rationale:
(1) Management’s “Turnaround Plan” is totally absurd and without a sense of urgency
Current management asserts RMB’s proposal of a new executive team would disturb the execution of their “Turnaround Plan”. However, RMB believes the “Turnaround Plan” is unrealistic and needs to be revised completely, based on the problems identified below.
Revenue outlook: The “Turnaround Plan” expects revenue of 56.5 billion yen and 55 billion yen in fiscal year ending in February 2021 and February 2022, respectively, under the pre-COVID-19 scenario. Given Sanyo’s actual revenue was estimated at 58 billion yen last year, however, these assumptions look excessively optimistic. RMB believes a more realistic expectation for revenue is below 50 billion yen if Sanyo plans to close as many as 150 stores out of its total 1,050 stores, and drastically reduce its inventory level as well as its marketing expenses. Revenue would decline further if management revises its brand portfolio and further accelerates store closures.
Profit margin outlook: The “Turnaround Plan” expects to achieve unrealistic improvement in profit margins without a reasonable rationale. The planned 50.5% gross margin this year under the pre-COVID-19 scenario looks too optimistic given Sanyo’s historical gross margin had been much lower (46.4% in fiscal year ended in February 2020). Because Sanyo already built its inventory based on the previous plan for its spring and summer seasons, it would be difficult to clear existing inventory without markdown, as the firm did in the past. Any significant improvement in gross margin thus should be expected no sooner than the second half of this fiscal year. RMB believes the management is not being realistic about the business by setting the 50.5% gross margin target for the full year.
Loss-making operations: The “LOVELESS” brand has been losing revenue by double-digits in the past few years despite turnaround initiatives by the past management teams. RMB believes the “CAST:” brand, which was launched last year, should not have been started at all. Sanyo does not have time to spare in “observing the progress during fiscal year ending in February 2021”, and should shut them down completely or shrink their size significantly right now.
COVID-19 response: Observing the current development around COVID-19, the “SIM1” in the “Turnaround Plan”, which expects a complete recovery to the normal situation in September 2020, is impossible. Even the “SIM2”, which expects normalization in March 2021, looks too optimistic. Unless management considers an alternative “SIM3” scenario that expects even worse outcomes, Sanyo would easily go underwater if there is a further deterioration of economic conditions.
RMB believes management’s “Turnaround Plan” is totally absurd and ignores current reality. The management is not sincere in the face of its stakeholders, including shareholders, employees and trading partners.
(2) Sanyo lacks leadership to overcome the crisis
Sanyo had released many turnaround plans and failed to achieve them in the past 10 years, including “Mid-Term Vision 2009”, “Mid-Term Strategic Plan S-SHIFT 2012”, and “Sanyo Innovation Plan 2017”, even though the firm consistently observed the structural changes in Japan’s apparel industry and foresaw its own difficulties in losing the Burberry licensing contract (it was revised in 2009 and terminated in 2014). Sanyo had repeatedly promised to execute the same solutions, such as the selection and concentration of brands, the expansion of an electronic commerce (EC) channel, thorough execution of product planning and inventory management, and a reduction of markdown sales and improvement of gross margin. It failed to meet these promises each time. The “Turnaround Plan” by the current management does not demonstrate any new approach and repeats presenting the same unrealistic assumptions as past management teams did. RMB believes Sanyo’s turnaround initiatives will fail sooner rather than later with this latest “Turnaround Plan”.
What Sanyo critically lacks is a strong leadership to execute the issues that already became clear in the past 10 years. RMB believes allowing the incumbent Mr. Masayuki Nakayama stay as a representative vice president, without taking responsibility of the 4 consecutive loss-making years, will create a serious disruption at Sanyo and prevent the firm from building a realistic turnaround plan.
(3) A complete upgrade of the executive team is needed
As discussed, the “Turnaround Plan” shows the incumbent management team seriously lacks a sense of urgency. RMB believes this is because Mr. Nakayama is not resigning to take the responsibility of the failure. If he remains in the executive team, Sanyo cannot establish a strong leadership team to turn around its operation. RMB believes shareholders should elect Mr. Tetsuo Komori, who is an RMB nominee and has a strong track record of turning around many troubled businesses in Japan, and have the new team execute the reform plan. RMB supports Mr. Shinji Oe and Mr. Ikuro Kato, who are also nominees of the management, as qualified executive members, after interviewing them individually. RMB believes there is no risk of disturbing business operations at Sanyo with Mr. Komori, Mr. Oe, and Mr. Kato working as a team.
(4) RMB’s turnaround plan
RMB proposes the following turnaround plan under the new executive team.
- Analyze the current situation and build a new turnaround plan that is more aggressive than the management’s “Turnaround Plan”, and execute it swiftly under new president Komori’s leadership.
- Reduce the number of stores, potentially more than 150 as planned in the old plan. Expect further revenue decline depending on the COVID-19 development and further reduce expenses. Control inventory tightly and reduce markdown sales to improve margin.
- Completely exit loss-making operations such as LOVELESS and CAST:, or downsize them and shift to EC drastically.
- Focus on the key brands that are well recognized and generate premium values, such as EPOCA, AMACA, Paul Stuart, MACKINTOSH, and BLACK & BLUE LABEL. Reduce the number of stores and shift to EC channels for these brands as well.
- Strengthen the relationship with existing brand licensors. Discuss a growth plan including overseas operations with Mitsui & Co (the holder of Paul Stuart) and Yagi Tsusho (the holder of MACKINTOSH) via joint ventures and other partnership forms.
- Enhance corporate governance. Management’s board proposal includes candidates who have conflicts of interest and personal relationships with old executives. Invite truly independent directors to oversee the execution of the new turnaround plan.
About RMB Capital
Headquartered in Chicago, RMB Capital is an independent investment advisory firm that serves high-net-worth individuals and families as well as institutional investors. Its businesses include wealth management, family office services, asset management, and retirement plan consulting. Its asset management business specializes in long-term, concentrated, active investing strategies with coverage that spans the market-cap spectrum and the globe. To learn more about RMB, visit https://rmbcapital.com.