Takashimaya Co., Ltd. (8233) - SR Research Report

Takashimaya Co., Ltd. (8233) - SR Research Report

Takashimaya Co., Ltd. (8233) - SR Research Report

SR Research Report 2014/5/1 Takashimaya Co., Ltd. (8233) Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an “owner’s manual” to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at sr_inquiries@sharedresearch.jp or find us on Bloomberg.

Takashimaya Co., Ltd. (8233) - SR Research Report

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 2/65 SR Research Report Contents Recent updates . . 4 Highlights . . 4 Trends and outlook . . 5 Business . . 15 Business description . . 15 Market and value chain . . 31 Strategy . . 36 Historical Financial Statements . . 41 Summary . . 41 Income statement . . 52 Balance sheet . . 54 Statement of cash flows . . 56 Other information . . 57 History . . 57 News & Topics . . 58 Major shareholders . . 61 Top management . . 61 Employees . . 61 Dividends and shareholder benefits . . 61 Investor relations . . 62 By the way . . 63 Company profile . . 64

Takashimaya Co., Ltd. (8233) - SR Research Report

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 3/65 SR Research Report Income Statement FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 FY02/15 (JPYmn) Cons. Cons. Cons. Cons. Cons. Est. Total Sales (Sales and Other Operating Revenue) 877,762 869,476 858,123 870,333 904,180 900,000 YoY -10.1% -0.9% -1.3% 1.4% 3.9% -0.5% Gross Profit 267,946 262,664 260,612 264,646 214,673 213,000 YoY -9.9% -2.0% -0.8% 1.5% -18.9% -0.8% GPM 30.5% 30.2% 30.4% 30.4% 23.7% 23.7% Operating Profit 13,428 18,173 21,099 25,476 29,099 31,000 YoY -45.9% 35.3% 16.1% 20.7% 14.2% 6.5% OPM 1.5% 2.1% 2.5% 2.9% 3.2% 3.4% Recurring Profit 16,764 22,484 24,355 29,866 33,350 34,000 YoY -40.1% 34.1% 8.3% 22.6% 11.7% 1.9% RPM 1.9% 2.6% 2.8% 3.4% 3.7% 3.8% Net Income 7,709 13,849 10,895 16,540 18,716 20,500 YoY -34.4% 79.6% -21.3% 51.8% 13.2% 9.5% Net Margin 0.9% 1.6% 1.3% 1.9% 2.1% 2.3% Per Share Data Number of Shares 330,827 330,827 330,827 330,827 330,828 EPS 23.4 42.0 33.0 50.1 56.7 62.1 EPS (Fully Diluted) 22.1 39.1 30.7 46.6 51.2 Dividend Per Share 10.0 10.0 10.0 10.0 10.0 10.0 Book Value Per Share 871.1 897.9 915.9 998.6 1,085.8 Balance Sheet (JPYmn) Cash and Equivalents 59,011 70,503 76,124 69,495 106,451 Total Current Assets 239,816 265,878 262,394 236,263 332,121 Tangible Fixed Assets, net 381,943 381,920 375,748 378,755 394,436 Other Fixed Assets 143,921 142,838 135,975 146,688 146,864 Intangible Assets 19,416 26,451 29,799 28,979 28,716 Total Assets 785,098 817,088 803,917 790,687 902,139 Accounts Payable 85,684 87,248 87,297 87,883 95,901 Short-Term Debt 24,593 14,083 39,811 19,172 47,301 Total Current Liabilities 302,444 304,198 322,910 294,645 335,599 Long-Term Debt 95,962 117,679 87,667 79,674 120,227 Total Fixed Liabilities 191,411 211,789 173,525 160,597 201,627 Total Liabilities 493,855 515,988 496,436 455,243 537,227 Net Assets 291,239 301,099 307,481 335,443 364,912 Interest-Bearing Debt 120,555 131,762 127,478 98,846 167,528 Cash Flow Statement (JPYmn) Operating Cash Flow 23,428 20,645 31,921 44,141 40,582 Investment Cash Flow -10,508 -13,240 -16,356 -28,470 -30,389 Financing Cash Flow 14,817 7,673 -8,210 -32,931 64,391 Financial Ratios ROA 2.2% 2.8% 3.0% 3.7% 3.8% ROE 2.7% 4.7% 3.6% 5.2% 5.0% Equity Ratio 36.6% 36.3% 37.6% 41.7% 39.7% Figures may differ from company materials due to differences in rounding methods; ROA is based on recurring profit. Throughout this report, line item "sales" means "sales and other operating revenue" defined by the company. Source: Company data

Takashimaya Co., Ltd. (8233) - SR Research Report

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 4/65 SR Research Report Recent updates Highlights On May 1, 2014, Takashimaya released monthly store sales data for April 2014; please see the monthly trends section for further details. On April 22, 2014, SR updated comments on the company’s FY02/14 full-year earnings based on interviews with management; please see the results section for further details. On April 10, 2014, SR updated comments on the company’s FY02/14 full-year earnings based on the company’s results briefing.

On April 8, 2014, the company announced FY02/14 full-year earnings results. On April 1, 2014, the company released monthly store sales data for March 2014; please see the monthly trends section for further details. On March 3, 2014, the company released monthly store sales data for February 2014. For corporate releases and developments more than three months old, please refer to the News & Topics section.

Takashimaya Co., Ltd. (8233) - SR Research Report

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 5/65 SR Research Report Trends and outlook Monthly trends Store sales in April 2014 were down significantly, at -13.6% YoY across Takashimaya (parent) stores and 18 domestic subsidiary department stores, owing to subdued spending following the rush of demand to beat the sales tax hike on April 1. Quarterly trends and results All Store Sales Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb FY02/12 Takashimaya (Parent) -15.6% -1.9% -3.5% 0.8% 0.1% -1.1% -1.6% -0.1% -1.7% 0.9% -1.8% 0.7% Domestic Department Stores (18 Stores) -16.8% -0.9% -2.8% 0.6% 0.8% -1.2% -1.9% 0.3% -1.4% 0.3% -1.8% -1.0% Corporate Business 14.7% -22.0% -22.3% 3.5% -19.2% 3.1% -4.9% -11.8% -11.5% 14.4% -0.9% 16.8% Cross-Media Business 2.7% -0.3% 5.3% 6.7% 1.0% -13.6% 1.8% 1.5% -6.6% 6.7% -5.3% -0.3% FY02/13 Takashimaya (Parent) 16.5% 2.8% -0.2% -0.9% -1.9% 0.6% 1.9% -1.0% 2.4% -2.7% -2.2% -0.3% Domestic Department Stores (18 Stores) 16.9% 1.9% -0.7% -0.5% -3.0% -0.6% 1.1% -1.6% 1.6% -2.6% -2.9% 0.3% Corporate Business 0.1% 23.6% 9.0% -2.5% 31.5% 20.0% 26.1% 10.3% 21.8% -7.8% 5.2% -5.6% Cross-Media Business 13.4% -10.3% -3.8% -11.7% -1.4% 22.3% 0.9% 3.6% 7.1% -0.8% 13.8% -6.1% FY02/14 Takashimaya (Parent) 2.9% -1.3% 2.5% 8.9% -3.6% 0.4% 1.9% -2.6% 2.2% 1.8% 4.1% 3.7% Domestic Department Stores (18 Stores) 4.9% -0.5% 1.0% 7.8% -4.0% 0.3% 2.6% -2.3% 3.0% 1.8% 4.1% 3.9% Corporate Business 29.1% -11.5% 20.7% 38.8% 6.0% -3.0% 3.7% -4.2% -5.9% 11.7% 7.5% 3.0% Cross-Media Business -1.8% 4.5% 11.3% 0.6% 3.9% 13.2% -18.3% -5.3% -11.2% -7.0% -0.7% -5.8% FY02/15 Takashimaya (Parent) 32.3% -13.2% Domestic Department Stores (18 Stores) 31.7% -13.6% Corporate Business 55.4% Cross-Media Business 5.4% Source: Company data processed by SR Inc. Figures may differ from company materials due to differences in rounding methods. Quarterly Performance (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 % of FY FY Est. Sales 207,348 212,482 209,350 241,153 214,007 221,284 212,900 255,989 100.0% 904,000 YoY 6.5% -1.3% 2.3% -0.9% 3.2% 4.1% 1.7% 6.2% 3.9% GP 64,459 64,786 63,734 71,667 66,093 67,004 65,031 74,940 . YoY 6.7% -1.0% 1.5% -0.4% 2.5% 3.4% 2.0% 4.6% GPM 31.1% 30.5% 30.4% 29.7% 30.9% 30.3% 30.5% 29.3% SG&A 58,574 60,547 59,482 60,566 59,999 61,941 59,725 62,304 YoY 2.9% 1.1% 0.0% -4.2% 2.4% 2.3% 0.4% 2.9% SG&A / Sales 28.2% 28.5% 28.4% 25.1% 28.0% 28.0% 28.1% 24.3% OP 5,884 4,240 4,251 11,092 6,094 5,062 5,317 12,626 100.3% 29,000 YoY 68.7% -24.0% 28.1% 27.3% 3.6% 19.4% 25.1% 13.8% 13.9% OPM 2.8% 2.0% 2.0% 4.6% 2.8% 2.3% 2.5% 4.9% 3.2% RP 6,374 5,366 5,445 12,681 7,715 5,777 6,151 13,707 102.6% 32,500 YoY 47.0% -16.8% 36.5% 32.4% 21.0% 7.7% 13.0% 8.1% 8.8% RPM 3.1% 2.5% 2.6% 5.3% 3.6% 2.6% 2.9% 5.4% 3.6% NI 3,860 2,744 2,501 7,435 4,016 3,598 2,995 8,107 106.9% 17,500 YoY 125.6% -25.1% 71.3% 83.2% 4.0% 31.1% 19.8% 9.0% 5.8% NPM 1.9% 1.3% 1.2% 3.1% 1.9% 1.6% 1.4% 3.2% 1.9% Figures may differ from company materials due to differences in rounding methods. Source: Company data FY02/14 FY02/13 FY02/14

Takashimaya Co., Ltd. (8233) - SR Research Report

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 6/65 SR Research Report FY02/14 results (out April 8, 2014; see table above) Sales and operating profit met targets. Recurring profit and net income outperformed targets by 2.6% and 6.9% respectively. Consolidated sales for FY02/14 totaled JPY904.2bn (+3.9% YoY). In the department store segment, sales were up 3.6% YoY to JPY798.1bn. Operating profit was up 17.5%, to JPY14.0bn. Sales of lifestyle goods such as furniture and high-end items such as select apparel/accessories and jewelry were robust, thanks partly to a rise in personal assets caused by a buoyant stock market (wealth effect). The company worked to attracted customers through fall and spring promotions across its store network and television advertising in December 2013. The company focused on quality products, such as increasing the number and volume of products in its in-house cashmere knit collection, and introducing the STYLE & EDIT range in the Tamagawa branch. Sales of differentiated merchandise grew 5.9% YoY, to JPY32.8bn.

Year-on-year changes in store sales for each main merchandise category were as follows: menswear and goods -0.6%, women’s wear and goods +0.2%, children’s wear and goods -0.9%, other apparel +2.6%, cosmetics +2.5%, art works and jewelry +14.8%, other accessories -3.4%, furniture +7.0%, home appliances +48.8%, other household goods +0.8%, and foods +0.0%. Robust sales of jewelry and other high-priced items was particularly notable. Driven by the weakening of the yen, there was an increase in the number of foreign tourists, and sales of duty-free goods rose 73% YoY, to JPY7.2bn.

Gross profit margin at the parent level (cumulative) fell to 25.10%, from 25.41% in FY02/13. This was the result of strong sales of low-margin high-end items such as select apparel/accessories and jewelry. The SG&A-to-sales ratio at the parent level was down to 25.0% from 25.8% the previous year. Thus, full-year consolidated operating profit was up 14.2%, to JPY29.1bn. In overseas operations, Takashimaya Singapore held sales promotions to mark the store’s expansion and remodeling as well as its 20th anniversary. The store strengthened measures targeting cardholders and tourists, while the weaker yen also had a positive impact. Sales were JPY50.0bn (+25.9% YoY) and operating profit was JPY3.9bn (+8.8% YoY). Takashimaya Shanghai, which opened in December 2012, continued to refrain from advertising, and the store’s profile among consumers appears to be lacking. As a result, sales were JPY5.2bn and operating loss was JPY1.5bn (company forecasts were for sales of JPY6.0bn and operating loss of JPY1.2bn).

In the contract and design segment, sales were JPY20.6bn (+8.5% YoY) and operating profit was JPY11.1bn (+27.9%). The renovation business grew, and there was a healthy supply of orders for hotels and commercial facilities. In the real estate segment, sales were JPY36.8 (+8.7% YoY) and operating profit was JPY8.4bn (+8.0%). The company streamlined its sales operations, while the Tamagawa Shopping Center, Kashiwa Station Mall, and Nagareyama Otakanomori Shopping Center all reported healthy revenues. In the finance segment, revenue was JPY11.9bn (+2.2% YoY) and operating profit was JPY4.1bn (+14.3%). Takashimaya Credit Co., Ltd. reported 4% growth in revenues from card transactions, while annual membership revenue also increased.

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 7/65 SR Research Report In the other businesses segment—such as the cross media business—sales were JPY36.8bn (+2.9% YoY) and operating profit was JPY1.7bn (+30.8%). In the cross media business, online sales rose, particularly for key promotions. However, catalog sales fell as the company cut circulation to improve efficiency. Takashimaya Service Co. turned profitable, thanks to efforts to streamline operations and cut CoGS. The company plans to implement various marketing strategies with the aim of creating linkages between its brick-and-mortar stores and its online retailing activities. As of end-FY02/14, the ratio of brands sold both in actual stores and online (including those approved by suppliers) was 60%. The number of registered online members stood at 1.44 million (compared with 1.18 million at end-FY02/13). The company released a medium-term management plan that covers a period through FY02/19. Sales: JPY920.0bn (FY02/14: JPY904.2bn) Operating profit: JPY48.0bn (FY02/14: JPY29.1bn) ROE: 6.3% (FY02/14: 5.4%) Capital-to-asset ratio: 49.4% (FY02/14: 39.7%) Interest-bearing liabilities: JPY140bn (FY02/14: JPY167.5bn) Investment amount: JPY300.0bn (FY02/14: JPY35.4bn) For details on previous quarterly and annual results, please refer to the historical financial section.

The following is a summary of the company’s earnings briefing held on the same day: Shigeru Kimoto, who has recently become president, expresses his goals for the company Takashimaya should improve the profitability of its domestic department stores. There is still room for profit growth for department stores in Japan. Kimoto believes that the company’s town development projects will contribute to earnings. Takashimaya will engage in town development projects using the expertise of Toshin Development Co., Ltd., a consolidated subsidiary.

Earnings for FY02/14 Sales were JPY904.2bn (+JPY33.8bn YoY), reaching the JPY900bn level for the first time since FY02/09. Earnings increased at domestic department stores as the economy recovered. Sales also rose at Takashimaya Singapore and other major subsidiaries. Operating profit was JPY29.1bn (+JPY3.6bn YoY), recurring profit was JPY33.4bn (+JPY3.5bn YoY), and net income was JPY18.7bn (+2.2bn YoY). The profits rose due to an increase in sales even as gross profit margin fell and expenses of new foreign operations increased. Gross profit margin declined because of an increase in the sales composition of low-profitable products, such as accessories and jewelry. Medium-Term Management Plan Sales: JPY920bn  Domestic department stores: JPY730bn  Domestic group companies: JPY160bn  Overseas operations: JPY95bn

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 8/65 SR Research Report Operating profit: JPY48bn  Domestic department stores: JPY21bn  Domestic group companies: JPY19bn  Overseas operations: JPY8bn ROE: 6.3% Capital-to-asset ratio: 49.4% Interest-bearing liabilities: JPY140bn Investment amount: JPY300bn Takashimaya emphasized the following points: Domestic department stores  The company will improve its competitiveness by establishing community-based stores; each store will have its own unique operations (Shinjuku and Tachikawa stores for this fiscal year). (The goal is to increase sales by JPY45bn and operating profit by JPY8bn) Takashimaya’s town development concept takes the company beyond the confines of its own stores. The company seeks to make shopping more convenient and fun by taking into consideration the viewpoint of the entire town. This new perspective will be reflected in the company’s merchandising, customer service, and sales.

Efforts for FY02/15 Shinjuku, Tachikawa stores: Town development projects will begin at its Shinjuku and Tachikawa stores, which will serve as models for other stores. Tamagawa, Kashiwa stores: These stores are located inside shopping centers. They will be renovated so that their department-store services will be enhanced. Nihonbashi store: The store will be renovated along with the redevelopment of the Nihonbashi district. The planned renovation is in line with the company’s town development concept. Omiya, Sakai stores: These stores will offer a variety of services that a town would need.  Takashimaya will pursue omni-channel retailing efforts and take other steps to improve efficiency. The company will implement changes to cope with an increase in the consumption tax. (Sales increase of JPY25bn and operating profit increase of JPY3bn)  Takashimaya will seek to increase operating profit by JPY17bn through cost-cutting efforts. Such efforts are necessary to cope with an increase in the consumption tax. Domestic group operations  Takashimaya will pursue group-wide town development projects led by Toshin Development and create a synergy with department store operations. (Sales increase of JPY160bn and operating profit increase of JPY19bn) Overseas operations  Stores will be established in ASEAN and China. (Sales increase of JPY95bn and operating profit increase of JPY8bn)

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 9/65 SR Research Report Plan for FY02/15 Sales: JPY900bn (-0.5% YoY) Operating profit: JPY31bn (+6.5% YoY) Recurring profit: JPY34bn (+1.9% YoY) Net income: JPY20.5bn (+9.5% YoY) Toshin Development is seeking to increase sales and profits through the development of areas around existing shopping centers. Takashimaya Singapore is also expected to increase sales thanks to promotion efforts and a floor expansion. However, domestic department stores will see their sales and profits decline due to an increase in the consumption tax; sales are expected to decline on a consolidated basis, as well. However, Takashimaya plans to raise profits by overcoming the effects of a consumption tax increase. The company will strengthen its sales efforts while reducing SG&A expense. At the parent level, Takashimaya will seek to increase the sales composition of profitable items, such as women’s clothes and accessories. The company targets product profit margin of 25.09% (almost unchanged from 25.10% a year earlier).

Sales at department stores rose 32% in March (forecast: +22%) as consumers increased purchases before the consumption tax was raised. April sales fell 25% (forecast: -14%) as of April 7. The company expects sales to decline 5.6% in May and 3.8% in June. The company stated that it would cautiously observe the effects of the consumption tax increase that took place in April. The company will seek to increase sales to tourists and wealthy domestic clients by making its sales floor and merchandising more attractive.

Takashimaya will seek to reduce operating expenses by JPY7.3bn to cope with the effects of an increase in the consumption tax (through a reform of its expense structure).  Labor costs: JPY1.1bn (job cuts: JPY500bn; a reduction in overtime: JPY200mn)  Advertising costs: JPY700mn (promotion events, flyers: JPY600mn)  General costs: JPY2bn (operation costs: JPY600mn; repair costs: JPY200mn; utilities: JPY100mn)  Accounting costs: JPY3.5bn (acquisition of fixed assets: JPY3.4bn) Takashimaya also seeks to increase profits at group companies by 2bn as follows:  Toshin Development: JPY900mn (through increased rent income and reduced rent payments)  Takashimaya Service: JPY400mn (through more efficient use of workers and the standardization of outsourced duties)  Others: JPY700mn (the restructuring of operations, internalization of certain duties)

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 10/65 SR Research Report FY02/15 outlook Sales and gross profit At domestic department stores, factoring in the effects of extra demand in the lead-up to the increase in consumption tax rate (March) and the fallback in demand following the increase (April onward), sales are forecast to decline 1.0% YoY (down JPY7.4bn). The impact on sales of the consumption tax increase is FY02/15 Forecast (JPYmn) 1H 2H Full-Year 1H 2H Full-Year Sales 435,291 468,889 904,180 433,000 467,000 900,000 YoY 3.7% 4.1% 3.9% -0.5% -0.4% -0.5% CoGS 302,193 328,917 631,111 687,000 Gross Profit 133,097 139,972 214,673 213,000 YoY 3.0% 3.4% -18.9% -0.8% GPM 30.6% 29.9% 23.7% 23.7% SG&A 121,940 122,029 243,969 241,400 SG&A / Sales 28.0% 26.0% 27.0% -1.1% Operating Profit 11,156 17,943 29,099 11,700 19,300 31,000 YoY 10.2% 16.9% 14.2% 4.9% 7.6% 6.5% OPM 2.6% 3.8% 3.2% 2.7% 4.1% 3.4% Recurring Profit 13,492 19,858 33,350 13,000 21,000 34,000 YoY 14.9% 9.6% 11.7% -3.6% 5.8% 1.9% RPM 3.1% 4.2% 3.7% 3.0% 4.5% 3.8% Net Income 7,614 11,102 18,716 8,500 12,000 20,500 YoY 15.3% 11.7% 13.2% 11.6% 8.1% 9.5% Figures may differ from company materials due to differences in rounding methods. Source: Company data Company Estimates FY02/14 Results FY02/14 Sales Forecast by Store (in million of yen) Sales Chg YoY Nihombashi 129,901 3.0% Yokohama 135,370 2.7% Konandai 10,634 0.2% Shinjuku 66,081 3.7% Tamagawa 42,468 3.7% Tachikawa 17,778 -1.9% Omiya 11,722 -7.4% Kashiwa 36,394 -0.7% Osaka 120,685 0.6% Sakai 15,171 -1.4% Kyoto 85,191 1.6% Senboku 20,178 -1.2% Parent Total 691,580 1.7% Okayama Takashimaya 18,760 4.1% Gifu Takashimaya 16,002 1.8% Yonago Takashimaya 6,363 0.3% Takasaki Takashimaya 15,105 0.7% Total (including domestic subsidiaries) 748,440 2.1% Figures of Osaka and Kyoto stores include those of Wakayama and Rakusai stores, respectively. Sales of the Corporate and Cross-Media segments are attributable to each location. Figures may differ from company materials due to differences in rounding methods. Source: Company data, SR Inc. Research

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 11/65 SR Research Report expected to be -0.9% in 1H and -3.7% in 2H, or -2.3% over the full year (down JPY16.4bn). Other factors expected to affect sales include a general trend of rising sales of +JPY5.7bn, a fallback in sales of high-priced items (after a strong increase in FY02/14) of –JPY2.7bn, a boost from refurbishments of +JPY5.4bn, decrease in sales due to temporary store closures for renovations of –JPY2.7bn, and a rebound from the adverse effects of poor weather in FY02/14 (typhoons, heavy snowfalls) of +JPY4.4bn. In addition, the company plans to further intensify its efforts to boost merchandise appeal, and forecasts sales of differentiated merchandise of JPY34.6bn (FY02/14: JPY32.8bn). The company also forecasts sales of duty-free goods of JPY10.0bn (FY02/14: JPY7.2bn).

Takashimaya Singapore is expected to be bolstered by a store-wide refurbishment and floor-area expansion, a drive for new card members, sales promotions and campaigns targeting tourists. As a result, sales are forecast at JPY52.8bn (+5.6% YoY). At Takashimaya Shanghai, which opened in December 2012, the company plans to expand its price range and merchandise lineup, and broaden its target market to cover such segments as families, office workers and Japanese customers. Sales are forecast at JPY5.9bn (FY02/14: JPY5.2bn) and operating loss is forecast at JPY1.7bn (FY02/14: loss of JPY1.5bn).

The company also expects other main subsidiaries to record strong growth, and forecasts consolidated sales in FY02/15 of JPY900.0bn (-0.5% YoY). With regard to parent-only gross profit margin (GPM), while the company anticipates increases in the product mix of high-margin goods, such as women’s wear and other accessories, it also expects a slow-down in high-priced merchandise categories that grew substantially in FY02/14. Consequently, GPM is forecast to be largely in line with FY02/14 (25.10%), at 25.09%. According to the company’s forecasts, the impact of changes in the product mix is expected to be just +0.01% (FY02/14: -0.13%). The company’s assumptions for parent-only GPM appear somewhat conservative in light of the fallback in high-priced merchandise factored into the sales forecasts.

SG&A In domestic department stores, although salary expenses are expected to be down driven by a lower staff count and a reduction in overtime, personnel expenses are forecast to increase byJPY400mn due to retirement benefits and statutory employee benefits. Advertising expenses have been thoroughly reviewed centering on promotion events and advertisements, and are forecast to decrease by JPY1.4bn. In general expenses, although operational expenses and commissions are expected to be reduced, depreciation expenses and maintenance expenses associated with the acquisition of the Shinjuku and Tachikawa stores are forecast to drive a JPY1.8bn increase in general expenses. Accounting expenses are forecast to fall by JPY4.3bn centering on lower rent expense due to the acquisition of the Shinjuku and Tachikawa stores. Consolidated SG&A is forecast at JPY241.4n (-1.1% YoY), and the SG&A-to-sales ratio is expected to be 28.7% (-0.1 percentage point YoY).

Operating profit (operating profit margin) The anticipated increase in profit at domestic department stores and profit growth at subsidiaries, such as Toshin Development and Takashimaya Singapore, are forecast to drive consolidated operating profit higher by JPY1.9bn, to JPY31.0bn. The operating profit margin is expected to be 3.7% (FY02/14: 3.4%).

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 12/65 SR Research Report Recurring profit Driven by the increase in operating profit, consolidated recurring profit is forecast to rise JPY600mn, to JPY34.0bn (+1.9% YoY). Net income In addition to recurring profit, the company forecasts gains on sale of fixed assets, leading to a YoY increase of JPY1.8bn in consolidated net income, to JPY20.5bn (+9.5% YoY). Capital expenditure and depreciation expense Consolidated capex in FY02/15 is forecast at JPY127.0bn (FY02/14: JPY35.4bn). Major capex items are the acquisition of land lease rights and buildings for the Shinjuku store amounting to JPY105.6bn (corresponding figure of JPY700mn in FY02/14), JPY2.8bn for restaurant refurbishment and equipment renewal at the Nihombashi store (JPY3.9bn), and JPY1.7bn for refurbishment of the select apparel and accessories sales space and equipment renewal at the Yokohama store (JPY1.6bn). Depreciation expense is forecast at JPY18.2bn (FY02/14: 18.4bn).

Future Outlook As numerical targets for FY02/19, the company is aiming to generate sales of JPY920.0bn (comparison with FY02/14: +JPY15.8bn), and operating profit of JPY48.0bn (JPY18.9bn). The company assumes that the Japanese economy will grow gradually over the period, with personal consumption expanding by JPY29tn over five years through FY02/19 (annual growth rate of 2%). Takashimaya expects structural trends to cause sales to contract JPY39.0bn over the five years and consumption tax increases to cause a similar sales contraction of JPY44.0bn, for a total contraction of JPY83.0bn. While the company expects the aforementioned factors to cause a JPY83.0bn domestic sales contraction over five years (domestic department stores: -JPY75.0bn, domestic group businesses: -JPY8.0bn), it is also aiming to generated JPY45.0bn in additional sales driven by strategic marketing initiatives at domestic department stores, giving sa net decline of JPY30.0bn in the domestic department store business. In other domestic businesses, strategic marketing initiatives are expected to boost sales by JPY28.0bn, leading to a net sales increase of JPY20.0bn over five years. In overseas operations, the ASEAN business is forecast to grow sales by JPY23.0bn, and the China business is expected to grow sales by JPY9.0bn, for overall overseas sales growth of JPY32.0bn.

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 13/65 SR Research Report The company’s estimate of the impact of the consumption tax increase is based on trends recorded after the previous increase (1997), which saw a 4.6% decrease in department store sales. However, in 1997 the Japanese economy was stagnant and suffered the effects of several major bankruptcies (Yamaichi Securities, Hokkaido Takushoku Bank, etc.) around that time. SR believes that the fall in department store sales after the 1997 consumption tax increase was unlikely to be fully attributable to the tax increase alone, and hence the company’s forecast appears somewhat conservative. The company has expressed its intention to manage operations tightly based on its recognition that market conditions are likely to remain harsh. This indicates that the company sees its forward estimates as conservative. Although domestic department store sales are expected to decline, at the profit level, over the five years through FY02/19, the company forecasts operating profit to increase by JPY10.0bn. Factors expected to drive this increase include improved competitiveness based on developing strong relationships in local markets and building a store-based business model, and pursuing an omni-channel retailing strategy. Takashimaya also anticipates a JPY5.0bn increase in operating profit from other domestic group businesses, and in overseas operations forecasts a JPY4.0bn operating profit increase. Overall, operating profit is projected to rise JPY18.9bn, or a 65% increase compared with FY02/14. Based on the aforementioned profit increase, ROE is forecast to rise from 5.4% in FY02/14, to 6.3% in FY02/19. During the same period, there is unlikely to be any major change to Takashimaya’s policy on shareholder return. The company anticipates that during the three years starting from FY02/15, there will be natural attrition to its headcount of approximately 200 employees per year.

Medium-Term Targets (in billion of yen) FY02/14 FY02/19 Sales 904 920 Operating Profit 29 48 Operating Profit Margin 3.4% 5.2% Return on Equity (ROE) 5.4% 6.3% Equity Ratio 39.7% 49.4% Interest-bearing Debt 168 140 Figures may differ from company materials due to differences in rounding methods Source: Company data, SR Inc. Research

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 14/65 SR Research Report Over the five years through FY02/19, the company plans to carry out capital expenditure totaling JPY300.0bn. In the domestic department store business, Takashimaya plans to spend JPY50.0bn on strategic marketing initiatives, JPY120.0bn on structural reform measures to deal with the consumption tax increases (including JPY105.6bn for land lease rights and buildings at the Shinjuku store), and JPY20.0bn for facilities-related investment (safety and environmental investments), to give a total of JPY190.0bn. The remaining JPY110.0bn will be used as follows: domestic group companies JPY60.0bn, China JPY3.0bn, and ASEAN JPY47.0bn.

Department Store Operations (billion yen) Domestic Department Store Business (Cumulative 5 Years) Investment Sales Change OP Change Strategic marketing inititatives 58 28 8 Toshin Development: enhance existing shopping centers, develop surrounding areas and promote the use of group assets through strengthened relationships with department stores 50 8 4 Group companies: strategies centered on contributing to the department store business 6 10 3 M&A and alliances: tie-ups with companies from other sectors to meet customer needs 2 10 1 Cost reductions - - 1 Facilities investment (safety, environmental) 2 - - Impact of the consumption tax increase - -8 -4 Total 60 20 5 Overseas Business (Cumulative 5 Years) Investment Sales Change OP Change ASEAN business 47 23 2.5 Takashimaya Singapore: establish a strong competitive position in ASEAN 3 5 - Saigon Center: planned opening in 2016 5 6 - Third and fourth store openings: likely from 2017 onward 19 6 1 M&A and capital tie-ups: likely from 2016 onward 20 6 1.5 China business 3 9 1.5 Takashimaya Shanghai: implement various measures to expand sales 3 9 1.5 Total 50.0 40.0 5.0 Figures may differ from company materials due to differences in rounding methods Source: Company data, SR Inc. Research OP Change is compared to FY02/14

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 15/65 SR Research Report Business Business description Department store model Of the company's 18 stores, only the Wakayama store is not a large-sized department store. The government’s Census of Commerce defines a department store as a store with product lineups for apparel, food, and household items that each constitute 10% or more and less than 70% of the total lineup, and where more than 50% of sales space is for face-to-face sales. This distinguishes it from a general merchandise store (GMS), which is defined as having 50% or less of its sales floor area assigned for face-to-face sales. Large-sized department stores are those with sales floor areas of 3,000sm or more (6,000sm or more in designated wards in Tokyo and government-designated major cities), while other department stores are those of less than 3,000sm.

Hiraba and shouka: different accounting treatments. In department stores merchandise is sold at hiraba (the space designed by the company) or at boutique-type shops (unlike tenants at shopping centers [SCs], Takashimaya staff manage these shops). Hiraba sales at Takashimaya provide about 60% of total (domestic department store) sales. There are three typical transaction types—purchase-as-sold consignment sales, consignment sales, and outright purchase sales. The Japanese term for the main transaction method is shouka (purchase-as-sold), generally translated as consignment sales. Confusion can arise from the second method employed in the relationship, itaku hanbai, also translated as consignment sales. Despite common translation, the two methods have different accounting treatments. The former (purchase-as-sold) presumes that title is not transferred to a department store until actual sale, ie, it is never booked as department store inventory; the latter “consignment sales” implies the goods become department store inventory (returnable to the manufacturer if unsold). The outright purchase method common in the US (department stores purchase inventory and assume inventory risk) is minor for the Japanese department stores (it is called kaitori, outright purchase). For the department stores cost-of-goods-sold is always the wholesale price with the COGS ratio about 10% lower for the outright purchase transaction (= about 10% higher gross profit margin, GPM). The outright purchase sales at Takashimaya account for about 5-10% of sales, purchase-as-sold 20-25% and itaku consignment around 70%. This split tallies with the industry average. On a typical sales floor, about 20% of the sales staff are company employees (including non-full time employees) and the remaining 80% are suppliers’ personnel, who sell all of the consignment merchandise on the sales floor they are responsible for, regardless of the supply method. By product group GPMs are the highest for men’s accessories at around 40%, followed by menswear, sporting goods, kimono, womenswear, and women’s accessories. The GPM for luxury brands is slightly above 20% and for foodstuffs just under 20%.

While other department store operators (where the bulk of sales come from the main store) tend to rely on the main store buyers for purchasing across the store network, Takashimaya with its multiple flagships has buyers at each individual store. At a typical store, food is selling at the basement floor, cosmetics, shoes, handkerchiefs, and similar goods – at the first, apparel – at the second and higher floors, followed by household and other non-fashion items. In many cases, the top floor has restaurants and event spaces to generate a “shower effect”, ie, to drive customers to the top floor and then shower them down to the shops selling apparel and accessories on the upper floors.

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 16/65 SR Research Report Department store sales tend to mirror GDP growth. The short-term sales trends in Takashimaya’s department store segment, shown in the chart below, tend to be highly correlated with business sentiment and GDP growth. Long-term growth has been below the GDP growth rate as specialty stores and other emerging competitors took market share. In 2001 Shinjuku store sales (+2.7% YoY) and Kashiwa store sales (+9.4% YoY), both enjoying visible effects from renovations, contributed to performance. In 2003 and 2004, apparel sales were stagnant as the department store sector slumped as a whole due to economic slowdown.

For details of the real estate business model, please see the discussion on Toshin Development in this report. Business segments Parent sales are reported in three business segments: department store (93.2% of total sales in FY02/14); corporate (4.2%); and cross-media (2.6%). Corporate includes sales of products for corporate sales promotions and company uniforms. Cross-media carries out the company’s mail order and online business (e-commerce). Consolidated segments: Department stores: Includes 14 parent stores, four subsidiary stores and Takashimaya Singapore. FY02/14 sales were JPY798.1bn (up 3.6% YoY) and operating profit was JPY14.0bn (up 17.5% YoY). Real estate: Mostly comprises Toshin Development, managing shopping centers. Revenues accrue from fixed rental charges and sales-linked revenues. A characteristic of the company’s shopping centers is a high percentage (more than 90%) of fixed rental income in segment sales. Only 10% comes from sales-linked fees. Sales in FY02/14 were JPY36.8bn (up 8.7% YoY) and operating profit was JPY8.4bn (up 8.0% YoY).

Contract and design: Mainly subsidiary Takashimaya Space Create. It undertakes each stage of the production process for commercial facilities and multipurpose facilities, from basic concept development through to design, planning and post-opening operations. The company started a renovation business from FY02/13. In September 2001, the head office of the Takashimaya contract and design segment was

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 17/65 SR Research Report integrated with Takashimaya Kosakusho, another subsidiary. Sales in this segment in FY02/14 were JPY20.6bn (up 8.5% YoY) and operating profit was JPY1.1bn (up 27.9% YoY). Finance: This segment is the operations of Takashimaya Credit, which carries out operations required for its credit card business. It collaborates with Credit Saison, to which it outsources processing and other operations. Card commissions from Takashimaya stores provide a little less than 30% of segment sales, card commissions from other stores 30%, annual fees 20%, and cashing (interest) fees 20%. More than 60% of the company’s department store sales are made using the in-house credit card. Finance segment sales in FY02/14 were JPY11.9bn (up 2.2% YoY) and operating profit was JPY4.1bn (up 14.3% YoY). Others: This segment includes the cross-media business (mail order and online operations). In FY02/13, the company made SELECT SQUARE, an operator of a fashion mall-type online mail order website, a subsidiary. Others segment sales in FY02/14 were JPY36.8bn (+2.9% YoY) and operating profit was JPY1.7bn (+30.8% YoY).

Department stores The table below shows FY02/14 department store sales by product category, including the four domestic department store subsidiaries. Apparel provided 32.6% of total sales, within which womenswear

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 18/65 SR Research Report contributed 20.8%. Food also constituted a large percentage of the total at 28.9%. The data is practically unchanged from the previous year, apart from sales of luxury items such as art, jewelry, and precious metals, mainly spurred by higher stock prices since end 2012. Store network Domestically the company has 18 stores within its department store segment—14 parent stores (eight stores in Kanto region; six stores in the Kansai region) and four stores owned by subsidiaries. It holds a 100% equity position in each of its subsidiaries of Gifu Takashimaya, Yonago Takashimaya, and Takasaki Takashimaya, and a 66.6% equity position in Okayama Takashimaya. Equity method affiliates are JR Nagoya Takashimaya (equity position 33.4%) and Iyotetsu Takashimaya (33.6%). In FY02/14, in terms of sales by store, the Yokohama store contributed JPY135.4bn, followed by the Nihombashi store (JPY129.9bn), the Osaka store (JPY120.7bn), and the Kyoto store (JPY85.2bn). Renovations at its Osaka store contributed favorably to a 1.8% YoY rise in sales. Overall sales growth rates at its stores in Kanto were higher than those of its Kansai stores, mainly as a result of recovery from depressed levels following the Tohoku earthquake.

Sales by Product and Service (including four domestic department store subsidiaries) (Million Yen) Sales % of Total Sales % of Total Sales % of Total Menswear, goods 50,202 6.9% 50,495 6.9% 50,309 6.7% Womenswear, goods 154,336 21.1% 155,118 21.1% 155,268 20.8% Children's wear, goods 20,368 2.8% 19,671 2.7% 19,460 2.6% Other apparel 17,915 2.5% 18,133 2.4% 18,490 2.5% Apparel total 242,822 33.3% 243,418 33.1% 243,529 32.6% Personal items 103,352 14.2% 106,357 14.5% 110,255 14.7% Cosmetics 41,251 5.7% 41,978 5.7% 42,991 5.8% Art works, jewelry 27,282 3.7% 29,755 4.0% 34,205 4.6% Other accessories 19,994 2.7% 18,853 2.6% 18,237 2.4% Accessories total 88,528 12.1% 90,587 12.3% 95,434 12.8% Furniture 13,336 1.8% 12,581 1.7% 13,439 1.8% Home appliances 1,923 0.3% 1,956 0.3% 2,851 0.4% Other household goods 42,701 5.8% 42,276 5.7% 42,653 5.7% Household goods total 57,961 7.9% 56,814 7.7% 58,944 7.9% Fresh produce 42,247 5.8% 42,508 5.8% 42,568 5.7% Confectionery 55,146 7.5% 54,787 7.4% 55,260 7.4% Deli foods 57,739 7.9% 56,467 7.7% 56,461 7.5% Other foods 60,509 8.3% 62,185 8.5% 62,158 8.3% Foods total 215,643 29.5% 215,949 29.4% 216,449 28.9% Restaurants, cafes 12,885 1.8% 13,316 1.8% 13,875 1.9% Services, others 8,553 1.2% 8,887 1.2% 9,323 1.2% Total 729,746 100.0% 735,332 100.0% 747,812 100.0% Figures may differ from company materials due to differences in rounding methods. Source: Company data, SR Inc. Research FY02/14 FY02/13 FY02/12

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 19/65 SR Research Report Prior to the Second World War, the company had only three stores (in Kyoto, Osaka, and Nihombashi) but it became Japan’s largest department store chain in the post-war period. In 1989, it became the world’s first department store operator to achieve sales in excess of JPY1tn. Takashimaya now has 18 domestic stores, each with its own characteristics, customer needs, and product lineups. While the domestic operating environment is tough, management wants to maintain the existing stores, considering their contributions to local economies.

The company is advancing into overseas markets with Takashimaya Singapore (100% equity), Shanghai Takashimaya (100%), and Dayeh Takashimaya (50.0%). Takashimaya Singapore is located on Orchard Road, Singapore’s largest commercial area, and in addition to being a shopping center with 130 specialty stores it is one of the area’s landmarks. Dayeh Takashimaya of Taipei is a big suburban department store capitalized by local developer Dayeh Development Co Ltd. Floor area (m²) Sales (million yen) Chg YoY Ownership Nihombashi 50,508 129,901 3.0% 100.0 Yokohama 55,699 135,370 2.7% 100.0 Konandai 14,311 10,634 0.2% 100.0 Shinjuku 53,727 66,081 3.7% 100.0 Tamagawa 24,056 42,468 3.7% 100.0 Tachikawa 16,732 17,778 -1.9% 100.0 Omiya 12,503 11,722 -7.4% 100.0 Kashiwa 29,207 36,394 -0.7% 100.0 Osaka 68,401 120,685 0.6% 100.0 Sakai 19,507 15,171 -1.4% 100.0 Kyoto 60,184 85,191 1.6% 100.0 Senboku 20,781 20,178 -1.2% 100.0 Okayama Takashimaya 19,771 18,760 4.1% 66.6 Gifu Takashimaya 24,640 16,002 1.8% 100.0 Yonago Takashimaya 16,904 6,363 0.3% 100.0 Takasaki Takashimaya 19,456 15,105 0.7% 100.0 JR Tokai Takashimaya Co., Ltd. 56,246 110,000 33.4 Iyotetsu Takashimaya Co., Ltd. 43,000 33.6 Figures may differ from company materials due to differences in rounding methods. Sales of Wakayama and Rakusai stores included in those of Osaka and Kyoto stores. Source: Company data, SR Inc. Research Overseas Floor area (m²) Opening Ownership Singapore 57,400 1993 100.0 Taipei 38,000 1994 50.0 Plan Shanghai 40,000 Dec. 2012 100.0 Vietnam 10,000 2015 100.0 Shanghai Takashimaya is owned by Takashimaya (25%), Singapore Takashimaya (50%), and Toshin Development Co., Ltd. (25%). Singapore Takashimaya and Toshin Development are both fully owned subsidiaries of Takashimaya. Singapore Takashimaya plans to fully own Vietnam Takashimaya. Source: Company data, SR Inc. Research

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 20/65 SR Research Report Main domestic stores The Nihombashi store first opened in Kyobashi. The store moved to Nihombashi upon the 1933 completion of the current main building by Nippon Life Insurance that also occupied the building. From 1952 to 1965, a series of building extensions and renovations were done, and in 1963 Nippon Life Insurance vacated the building. In 2009, the building became the first department store to be designated as one of Japan’s Important Cultural Properties. It is the most important of Takashimaya’s stores, and most representative of its retail strategy, with a large percentage of affluent customers. As an example of its special status, the Nihombashi store uses its special wrapping paper with a picture of the store itself, in addition to the rose motif paper used by the other stores. It has a sales floor space of 50,508sm and recorded sales of JPY129.9bn in FY02/14.

The Yokohama store was initially a joint venture with Sagami Railway and opened in the Sotetsu Joinus Building, a train station building owned by Sagami Railway. It is currently the Takashimaya Group’s number one store in terms of sales and profits. At one point it was Japan’s largest department store in terms of sales floor area. The renovation of the store will be completed in the fall of 2013. It had a sales floor area of 55,699sm and recorded sales of JPY135.4bn in FY02/14. In FY02/13, the company spent JPY4.4bn renovating its Yokohama store. Despite its strength to attract customers, the old store had a large number of small stairs and uneven floor levels, making it hard for people in wheelchairs, customers using baby buggies and seniors. The renovation is aimed at making the store barrier-free and improving overall layout.

Dayeh Takashimaya (Taipei) Source: Company data, SR Inc. Research Nihombashi Store FY02/04 FY02/05 FY02/06 FY02/07 FY02/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 Sales (Million Yen) 153,946 154,604 159,028 162,584 159,081 146,473 130,795 127,092 124,242 126,124 129,901 YoY -6.7% 0.4% 2.9% 2.2% -2.2% -7.9% -10.7% -2.8% -2.2% 1.5% 3.0% Sales Floor Area (m2 ) 49,457 50,499 50,499 50,481 50,481 50,390 50,555 50,508 50,508 50,508 50,508 Figures may differ from company materials due to differences in rounding methods.

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 21/65 SR Research Report The Osaka store, registered as the company’s head office, is linked to the Namba Station of the Nankai Electric Railway (OSE1: 9044) and was originally known as Nankai Takashimaya. The Nankai Building that the Takashimaya store occupies is owned by Nankai Electric Railway. Following the expansion and renovation completed in March 2011, the 68,401m2 store posted JPY120.7bn in sales in FY02/14 (including sales from Wakayama store). The goal of the renovation was to create a pleasant shopping space where items are easy to see and buy. An entrance that leads directly to the Namba Station platform has been newly built on the third floor, while part of the sales floor on the first-level basement previously used by Mitsubishi Tokyo UFJ Bank has been moved to the second floor. The main building and the TE annex have become more integrated and it is easier for customers to move between the Nankai Namba Station and the adjacent commercial facilities of Namba City and Namba Parks. In FY02/13, the company strengthened its womenswear and women’s accessories lineups to combat the reopening of the renovated Hankyu Umeda, the main competitor.

The Kyoto store is the birthplace of Takashimaya and its first regional store. In October 1950, the store moved from the location of the first ever Takashimaya store, in Karasuma Takatsuji, to its current site in Kawaramachi Shijo. Part of the current building is owned by the Hankyu Hanshin Toho Group. The store has a sales floor area of 60,184sm and in FY02/14 it recorded sales of JPY85.2bn (including sales from the Rakusai store). The Shinjuku store is at Shinjuku Station (a major Tokyo railway station) South Exit. It was completed in 1996 as part of the redevelopment of the freight marshaling yard of the former Japan National Railway. Yokohama Store FY02/04 FY02/05 FY02/06 FY02/07 FY02/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 Sales (Million Yen) 174,469 166,217 170,872 159,892 159,471 148,988 135,489 134,029 131,794 131,776 135,370 YoY -0.5% -4.7% 2.8% 1.1% -0.3% -6.6% -9.1% -1.1% -1.7% -0.0% 2.7% Sales Floor Area (m2 ) 69,745 69,617 69,508 54,223 54,223 53,467 56,073 56,073 55,699 55,699 55,699 Figures may differ from company materials due to differences in rounding methods. FY02/03-FY02/06 includes Konandai Store sales.

Source: Company data, SR Inc. Research Osaka Store FY02/04 FY02/05 FY02/06 FY02/07 FY02/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 Sales (Million Yen) 172,251 163,558 162,967 142,543 139,535 124,371 107,898 114,907 117,890 119,997 120,685 YoY -3.1% -5.0% -0.4% -1.0% -2.1% -10.9% -13.2% 6.5% 2.6% 1.8% 0.6% Sales Floor Area (m2 ) 93,791 90,854 90,869 68,931 66,834 65,804 64,070 72,869 72,978 72,712 68,401 Figures may differ from company materials due to differences in rounding methods. Includes Wakayama Store sales. FY02/04-FY02/06 includes Sakai Store sales. Source: Company data, SR Inc. Research Kyoto Store FY02/04 FY02/05 FY02/06 FY02/07 FY02/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 Sales (Million Yen) 108,540 103,522 101,555 103,415 104,193 98,236 90,364 85,370 83,878 83,866 85,191 YoY -2.1% -4.6% -1.9% 1.8% 0.8% -5.7% -8.0% -5.5% -1.7% -0.0% 1.6% Sales Floor Area (m2 ) 68,231 68,231 67,904 68,316 68,316 68,316 68,314 67,985 60,527 60,184 60,184 Figures may differ from company materials due to differences in rounding methods. Includes Rakusai Store figures.

Source: Company data, SR Inc. Research

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 22/65 SR Research Report The store suffered substantial losses through 2006 under the burden of annual rental payments. When the original lease expired in 2007, the company acquired some of the underlying properties leading to a substantial rent reduction. Takashimaya then embarked on a JPY10.0bn overhaul. The company now owns 40% of the 53,727m2 store (FY02/14 sales: JPY66.1bn). In FY02/14, the company acquired a portion of the 60% of the property it did not yet own, giving it property rights equivalent to 5,254 shares out of a total of 9,000 shares. The lease agreement with the landlord, a fund affiliated with Tokyu Land Corporation, on the remaining 60% will expire in 2027 (premature cancellation allowed from end March 2017). The company hopes to cut the rent through continuous negotiations. Sales of luxury products increased in FY02/14, driven by a recovery in the stock market, which contributed to a rise in personal assets (wealth effect).

The Tamagawa store opened in 1969 and it is the core tenant of the Tamagawa Takashimaya shopping center. The store was the first successful full scale suburban department store in Japan and continues to be the company’s flagship in the Jonan area (that includes Tokyo wards of Setagaya, Meguro, and Ota). In November 2003, in conjunction with the extension of the shopping center’s South Building, the store was renovated to expand the food and fashion merchandise floors and thus increase its drawing power. Another renovation took place in fall 2011 and centered on the womenswear and food retail space. The store has a sales floor of 24,056m2 and in FY02/14 it recorded sales of JPY42.5bn. The Tachikawa store is another store in the Tokyo area. It was originally located in front of the North exit of the JR Tachikawa Station, but was moved to the FaretTachikawa building within an urban redevelopment area. Subsequently competition with Isetan Tachikawa (opened by Isetan near the Takashimaya’s original location) pushed the store’s sales to second place after its rival. The sales floor area shrank in February 2011 when Otsuka Kagu, a furniture retailer, took the seventh floor and a part of the eighth floor of the building, and in April when a Uniqlo store opened on the sixth floor. The 16,732m2 Tachikawa store had sales of JPY17.8bn in FY02/14. Also in the same area, the company’s Toshin Development subsidiary opened Wakaba Keyaki Mall in 2006, a development on the former site of the company’s Wakaba Tachikawa distribution center.

Shinjuku Store FY02/04 FY02/05 FY02/06 FY02/07 FY02/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 Sales (Million Yen) 82,690 79,540 79,908 77,947 76,840 76,107 67,835 66,088 61,678 63,701 66,081 YoY 0.0% -3.8% 0.5% -2.5% -1.4% -1.0% -10.9% -2.6% -6.7% 3.3% 3.7% Sales Floor Area (m2 ) 54,694 54,694 53,960 53,946 53,946 53,908 53,882 53,882 53,727 53,727 53,727 Figures may differ fromcompany materials due to differences in rounding methods. Source: Company data, SR Inc. Research Tamagawa Store FY02/04 FY02/05 FY02/06 FY02/07 FY02/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 Sales (Million Yen) 44,241 46,329 47,663 49,137 49,719 46,754 42,301 41,781 40,515 40,936 42,468 YoY 1.0% 4.7% 2.9% 3.1% 1.2% -6.0% -9.5% -1.2% -3.0% 1.0% 3.7% Sales Floor Area (m2 ) 23,121 24,012 24,012 24,012 24,012 24,012 24,012 24,012 24,007 24,007 24,056 Figures may differ from company materials due to differences in rounding methods. Source: Company data, SR Inc. Research Tachikawa Store FY02/04 FY02/05 FY02/06 FY02/07 FY02/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 Sales (Million Yen) 31,345 29,000 28,881 28,519 27,721 24,758 21,243 19,840 17,347 18,117 17,778 YoY -0.8% -7.5% -0.4% -1.3% -2.8% -10.7% -14.2% -6.6% -12.6% 4.4% -1.9% Sales Floor Area (m2 ) 28,181 25,120 25,120 25,160 25,160 25,160 25,160 20,295 16,738 16,738 16,732 Figures may differ from company materials due to differences in rounding methods.

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 23/65 SR Research Report The Kashiwa store opened in 1973 in Kashiwa, Chiba Prefecture. In 1992, the store reopened in the Kashiwa Station Mall and has been developed as a railway station department store in a building owned by Tobu Railway (TSE1: 9001). A new 12-story building was opened in October 2008. The company renovated its foods section in FY02/12, and renovated the luxury apparel/accessories floors in FY02/13. The 29,207sm store had sales of JPY36.4bn in FY02/14.

The Senboku store in Sakai city, another Takashimaya store in Osaka Prefecture, opened in 1974 in the Panjo Shopping Center in front of Senboku Newtown Station (managed by Panjo Co Ltd, a subsidiary of Osaka Prefectural Urban Development Co Ltd). It is linked to the shopping center’s 100-plus specialty stores and has a sales floor area of 20,781m2 . The store had sales of JPY20.2bn in FY02/14. JR Nagoya Takashimaya in Nagoya, Aichi Prefecture, opened in March 2000 as a joint venture with Central Japan Railway Company (TSE1: 9022). The company has an equity position of 33.4% in the store and so it is an equity method affiliate. Sales are substantial at around JPY110.0bn a year. It has a sales floor area of 56,246sm, but this is set to increase to approximately 87,000sm with the opening of additional floor space in the Nagoya Station Building in 2017. This would put it on a par with the Matsuzakaya Nagoya store, now Japan’s largest by sales floor area. Store openings The company appears to be focusing its domestic store openings on the shopping centers developed by subsidiary Toshin Development. Sites such as Wakaba Keyaki Mall in Tachikawa and Nagareyama Otaka-no-Mori SC that Takashimaya has developed during the past five to six years have continued to perform strongly, becoming community shopping centers used on a daily basis by local residents. The company is planning to redevelop its Nihombashi store, aiming at FY03/19 completion. It is working with Toshin Development to construct a new, city-type shopping center that will feature a new main building. Sales floor area will increase by 12,000sm. In addition to a renovated cultural hall and other measures to upgrade the site’s cultural-communication functions, the company intends to integrate the SC with the surrounding area and offices.

Overseas, the Shanghai store opened in December 2012. It is neighboring the Gubei Business Zone, a large-scale business area for 70,000 office workers, and one of the most exclusive residential areas in Shanghai. The sales floor area of approximately 40,000sm (from the basement to the seventh floor) includes an extensive product lineup, from foods and apparel to daily household items. It is the largest Japanese department store in China with Takashimaya investing approximately JPY4.0bn. Kashiwa Store FY02/04 FY02/05 FY02/06 FY02/07 FY02/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 Sales (Million Yen) 43,342 41,449 41,134 41,192 42,884 40,713 37,189 37,121 36,670 36,646 36,394 YoY -2.5% -4.4% -0.8% 0.1% 4.1% -5.1% -8.7% -0.2% -1.2% -0.1% -0.7% Sales Floor Area (m2 ) 26,844 26,856 26,844 29,619 29,517 29,517 29,517 29,517 29,207 29,207 29,207 Figures may differ from company materials due to differences in rounding methods. Source: Company data, SR Inc. Research Senboku Store FY02/04 FY02/05 FY02/06 FY02/07 FY02/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 Sales (Million Yen) 24,973 23,739 23,554 24,107 24,193 23,221 21,571 20,932 20,681 20,419 20,178 YoY -2.4% -4.9% -0.8% 2.3% 0.4% -4.0% -7.1% -3.0% -1.2% -1.3% -1.2% Sales Floor Area (m2 ) 21,349 21,349 21,349 21,349 21,349 21,349 21,349 21,253 20,811 20,811 20,781 Figures may differ from company materials due to differences in rounding methods.

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 24/65 SR Research Report The store is at the intersection of Shanghai’s Hongqiao Road and Yi Li Road. Takashimaya was the second Japanese department store to advance into China, after Mitsukoshi Isetan Holdings. The sales floor area will exceed that of Isetan’s Shanghai department store on the Nanking West road (of about 15,000sm). Shanghai Takashimaya is set to have substantial drawing power—the area is home for many affluent local Chinese as well as Japanese and other foreign residents. It will also directly connect with the subway stations on Line 10 and Line 15 (both under construction). Sales are expected to reach JPY5.9bn in FY12/14,, with a forecast operating loss of JPY1.7bn in FY12/15.

In 2016 the company plans to open its Vietnam Takashimaya (provisional name) store within the large-scale multipurpose development project, Saigon Centre, located in Ho Chi Minh City. It will be 100% owned by the company’s subsidiary, Takashimaya Singapore Co Ltd. In addition, Toshin Development has reached an agreement with a subsidiary of Keppel Land to acquire a 22.7% share in the Saigon Centre Phase 2 development. Toshin Development Singapore and Keppel Land’s subsidiary signed an agreement to establish a shopping center management JV in December 2012. The company aims to achieve early profitability through participation in three businesses: the department store, shopping center operation and real estate operations.

Shanghai Takashimaya Plan Opening Dec-2012 Investment Approx. 4.0 billion yen Personnel 185 (local hire: 180) 1st Year Sales Target 13 billion yen (annualized) Location Gubei-Hongqiao district Site Area Approx. 22,000 m2 Total Floor Area Approx. 120,000 m2 Department Store Area Approx. 60,000 m2 Office Area Approx. 60,000 m2 Parking Approx. 960 Source: Company data, SR Inc. Research Saigon Centre Plan Phase 1 Opening 1996 Site Area 2,730 m2 Total Floor Area 39,300 m2 Commercial Area 5,500 m2 Office Area 12,800 m2 Serviced Apartments 89 rooms Phase 2 Opening 2016 Site Area 8,354 m2 Total Floor Area 142,500 m2 Commercial Area 50,000 m2 Department Store Area 15,000 m2 Office Area 40,000 m2 Serviced Apartments 200 rooms Source: Company data, SR Inc. Research

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 25/65 SR Research Report Main subsidiaries Takashimaya Singapore (100% owned) Established in 1993, Takashimaya Singapore was probably the most successful Japanese-affiliated department store outside of Japan in 2012. Initially the subsidiary struggled under a heavy capex burden, working to build the customer base from zero. The store initially targeted Japanese residents of Singapore and foreign tourists. The Asian currency crisis of 1997 dealt this strategy a major blow. By streamlining the business (the number of staff was cut from 650 to 370) and switching to catering to Singaporeans, Takashimaya Singapore made money in 1998. By 2007 it had recouped accumulated losses. Tourists account for roughly 20% of total sales.

In FY02/14, the store had sales of JPY50.0bn (up 25.9% YoY) and operating profit of JPY3.9bn (up 8.8% YoY). The company has carried out store-wide renovations and floor space expansion, is undertaking promotions to increase card membership and sales, and is implementing programs to boost the number of tourist visitors to the store. As a result, the company forecasts sales of JPY52.8bn (up 5.6%) and operating profit of JPY4.1bn (up 4.4%) for FY02/15. Toshin Development (100% owned) Toshin Development was established in 1963 for the development of the first real suburban-type shopping center (SC) in Japan. During the period of high economic growth, Tamagawa Takashimaya SC opened as a pioneering retailer and subsequently has continued to innovate and grow, maintaining its position as one of Japan’s leading suburban shopping facilities. Over the years former executives of the Takashimaya parent company were appointed to lead Toshin Development (with some exceptions), and the company remained an integral part of the Takashimaya Group. In February 2012, former Takashimaya Managing Director Toshiaki Seki was appointed as the president of Toshin Development. In FY02/14, Toshin Development recorded sales of JPY33.5bn (up 4.5% YoY) and operating profit of JPY6.9bn (up 4.5% YoY). For FY02/15, it is targeting sales of JPY33.8bn (up 0.7% YoY) and operating profit of JPY7.5bn (up 8.4% YoY). Toshin Development is characterized by a high OPM (around 20%) and a high percentage of fixed real estate revenue (earnings stability).

SC business is underpinned by real estate leasing and retailing. SC business requires real estate Takashimaya Singapore Source: Company data, SR Inc. Research

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 26/65 SR Research Report management expertise (to maximize the function of infrastructure and systems from a long-term perspective) and retail knowledge (to grasp location characteristics and changing consumption behaviors to promote flexible operations). Toshin Development tackles land and building development with a broader concept of urban development, and its business model encompasses attracting prime tenants, managing properties and tenants, and receiving rental revenues. Toshin Development performs extensive market surveys to enable consumer needs-oriented merchandising and higher profitability. Its comprehensive capability in SC management has made possible the growth of Toshin Development’s SC portfolio.

Besides Tamagawa Takashimaya SC, Toshin Development manages sites that include Kashiwa Takashimaya SM, Nagareyama Otaka-no-Mori SC, and Shinjuku Takashimaya Times Square. Of these, the only property it fully owns is Tamagawa SC. Toshin Development’s main properties are listed below. Toshin Development Singapore, with planned participation in the Saigon Centre project, operates Takashimaya Singapore SC. Helped by strong consumption in Singapore and synergy with the Takashimaya Singapore department store, Toshin Development Singapore is enjoying solid rental revenue.

Facility Location Sales Floor Area Tenants Parking Opening Tamagawa Takashimaya SC Setagaya-ku, Tokyo 83,600 m2 Tamagawa Takashimaya store + 340 specialty shops 2,000 Nov-69 Kashiwa Takashimaya Station Mall Kashiwa, Chiba 50,595 m2 Kashiwa Takashimaya store + 185 specialty shops 1,500 Apr-92 Shinjuku Takashimaya Times Square Shibuya-ku, Tokyo 29,950 m2 8 specialty shops + 33 restaurants/cafes Oct-96 Nagareyama Otaka-no-Mori SC Nagareyama, Chiba 41,120 m2 135 specialty shops 1,900 Mar-07 Wakaba Keyaki Mall Tachikawa, Tokyo 6,947 m2 Open mall centered on grocery stores 300 Mar-06 Tachikawa Garden Tables Tachikawa, Tokyo 1,661 m2 11 specialty shops + 2 relaxation salons Mar-05 Konandai Grass Court Konan-ku, Yokohama 997 m2 3 restaurants/cafes + hair salon Nov-05 Takashimaya Higashi Bekkan Naniwa-ku, Osaka 4,170 m2 Bridal salon + café May/Oct-05 Namba Parks Naniwa-ku, Osaka 4,300 m2 28 specialty shops Apr-07 Namba Dining Maison Chuo-ku, Osaka 7,400 m2 35 restaurants/cafes Mar-10 Hakata Riverain/Eeny Meeny Miny Mo Hakata-ku, Fukuoka 25,919 m2 Brand shops, etc. Mar-99 Singapore Takashimaya SC Orchard Road, SG 57,400 m2 Singapore Takashimaya store + 130 specialty shops 1,100 Oct-93 Source: Company data, SR Inc. Research Tamagawa Takashimaya SC Source: Company data, SR Inc. Research

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 27/65 SR Research Report Other major subsidiaries Takashimaya Space Create Co Ltd (100% owned) belongs to the contract & design segment, undertaking interior work and renovations for the company and its consolidated subsidiaries (20% of total orders) and for third parties (boutique-type shop and hotel operators, 80%). Takashimaya Credit Co Ltd (66.6% owned) undertakes credit card operations for the parent. Good Live Co Ltd (100% owned) wholesales foodstuffs and other items to the company and consolidated subsidiaries. Cost structure Costs are mainly costs of goods sold (COGS), personnel, rent, and advertising. Its GPM is about average for the industry. The SG&A-to-sales ratio is above average for the peer group. Specifically, the company’s rental costs are high and depreciation costs are low, highlighting the fact that Takashimaya tends to own less real estate compared with competitors. Its advertising and point system promotion costs are high and there is scope for cutting. In FY02/13 the company changed its award points for food purchases, and its point system promotion costs as a percentage of sales were 1.97% (2.25% FY02/12). Personnel expenses are higher than at Daimaru or Matsuzakaya highlighting the fact that Takashimaya has refrained from restructuring through voluntary retirement programs. Through FY02/17, the number of employees reaching retirement age will increase naturally and that should help to lower the weight of personnel expenses in SG&A to a level comparable to that of its competitors. This underpins expectations for a higher OPM.

Under International Financial Reporting Standards (IFRS), when a consignment transaction occurs, the department store would not be seen as the main executor of the transaction but as an agent. This means that under those standards, the revenues (sales) would be recorded at net and not the current gross level. In other words, the currently recorded gross profit for “purchase-as-sold” consignment transaction would disappear with only outright purchasing gross profit left. Overall this would lead to a substantial drop in reported revenues and gross profit but have no bearing on operating profit. Percentage to Sales (Parent, FY02/14) Sales COGS Personnel Advertising (Point System Promotion) Shipment Labor Utility Repair Depreciation Rent Other OP 100.0% 74.9% 8.5% 3.6% 2.0% 1.1% 3.1% 1.0% 0.4% 1.8% 3.8% 2.1% 1.6% Figures may differ from company materials due to differences in rounding methods. Source: Company data, SR Inc. Research Parent OPM FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 Takashimaya 2.39% 2.75% 1.60% 0.50% 1.10% 0.95% 1.14% 1.60% Mitsukoshi Isetan 2.60% 2.80% Mitsukoshi 1.66% 1.30% 0.12% -1.41% 0.13% Isetan 4.80% 5.03% 3.40% 2.51% 2.92% Daimaru Matsuzakaya 1.57% 1.77% 2.34% 2.90% Daimaru 4.42% 4.01% 2.31% 1.21% Matsuzakaya 2.23% 2.77% 2.20% 1.50% Note: Takashimaya, Mitsukoshi and Isetan book other operating revenue. Due to this, their GPMs minus SG&A-to-sales ratios do not match with their OPMs. Source: Company data, SR Inc. Research

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 28/65 SR Research Report Profitability snapshot, financial ratios The company’s parent GPM forecast for FY02/15 was 25.09% (+0.01 points YoY). The consolidated GPM forecast stood at 25.38%. While GPMs were stable (at around 26%) over the past three to four years, the mostly fixed SG&A expenses stayed high as shown below, creating strong operating leverage. Consolidated SG&A-to-sales ratios were some 29-30%, and this fluctuation is largely attributable to changes in sales, instead of SG&A expenses. Operating profit margins (OPMs) at the parent have been below 3% and even below 1% in the recent past, driven by sales fluctuations. The company is targeting consolidated ROE above 6% in the medium term, compared with 5.4% achieved in FY02/14. The equity ratio stood at 39.7% in FY02/14, and the company is targeting 49.2% by FY02/19, the final year of the medium-term plan.

20.0% 22.0% 24.0% 26.0% 28.0% 30.0% 32.0% 34.0% 36.0% FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 SG&A-to-Sales Ratios (Parent) Takashima ya Mitsukoshi Isetan Mitsukoshi Source: Company data, SR Inc. Research FY13 Personnel Advertising (Point System Promotion) Depreciation Rent Other Total Takashimaya 8.50% 3.61% 1.99% 1.80% 3.75% 7.30% 25.01% Mitsukoshi Isetan 9.52% 1.76% n/a 1.56% 2.48% 11.21% 26.53% Daimaru Matsuzakaya 4.73% 2.80% 1.69% 1.26% 2.62% 7.00% 20.90% Figures may differ from company materials due to differences in rounding methods Source: Company data, SR Inc. Research Parent FY02/07 FY02/08 FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 FY02/14FY02/15 (CE) GPM 27.32% 27.09% 26.73% 26.24% 25.81% 25.64% 25.41% 25.10% 25.09% SG&A-to-Sales 26.25% 25.63% 26.48% 27.19% 26.13% 26.16% 25.75% 25.00% 24.80% OPM 2.39% 2.75% 1.60% 0.50% 1.10% 0.95% 1.14% 1.60% 1.80% Figures may differ from company materials due to differences in rounding methods GPM minus SG&A-to-Sales not equivalent to OPM due to Other Operating Revenue Source: Company data, SR Inc. Research

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 29/65 SR Research Report Five of the company’s stores provided 80% of profits, the most profitable being Yokohama followed by Kyoto, Tamagawa, Kashiwa, and Nihombashi. Prior to its renovation the Osaka store was the second most profitable store but higher depreciation charges after the renovation pushed it down. Profit Margins FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 (million yen) Cons. Cons. Cons. Cons. Cons. Gross Profit 218,056 212,249 208,245 209,700 217,000 GPM 26.34% 25.91% 25.84% 25.72% 25.85% Operating Profit 13,428 18,173 21,099 25,476 29,099 OPM 1.5% 2.1% 2.5% 2.9% 3.2% EBITDA 29,207 34,396 38,499 44,016 47,430 EBITDA Margin 3.3% 4.0% 4.5% 5.1% 5.2% Net Profit Margin 0.9% 1.6% 1.3% 1.9% 2.1% Financial Ratios FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 Cons. Cons. Cons. Cons. Est.

ROA 2.2% 2.8% 3.0% 3.7% 3.9% ROE 2.7% 4.7% 3.6% 5.2% 5.4% Total Asset Turnover 1.14 1.09 1.06 1.09 1.07 Inventory Turnover 13.8 14.8 15.6 15.9 16.3 Days of Inventory 26.4 24.6 23.3 22.9 22.4 Working Capital Requirement 59,734 72,581 71,980 49,329 50,009 Current Ratio 79.3% 87.4% 81.3% 80.2% 99.0% Quick Ratio 55.5% 64.6% 63.1% 59.2% 78.4% OCF / Current Liabilities 0.08 0.07 0.10 0.14 0.13 Net Debt / Equity 22.2% 25.3% 21.6% 8.7% 16.7% OCF / Total Liabilities 0.0 0.0 0.1 0.1 0.1 Cash Cycle (days) 15.9 19.5 21.6 16.4 10.8 Changes in Working Capital 5,073 12,847 -601 -22,651 680 Figures may differ from company materials due to differences in rounding methods. Due to gross operating profit elimination, gross profit figures shown above do not match with those shown on the cover.

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 30/65 SR Research Report Strengths and weaknesses Strengths  Strong support from core senior affluent customers: Since its start as a store selling kimono fabrics, for many years the company has placed importance on history and culture. Known for its rose-motif wrapping paper, it has many faithful customers and among domestic department stores only Mitsukoshi can rival the power of its brand, to the extent that the name Takashimaya has become synonymous with gifts. It is known as the department store used by the Japanese royal family and is one of Japan’s most prestigious department store operators, much as Harrods is in the UK. It is also well known for the events it holds (cultural, historical, artistic, kimono-related).  Strength of the store network and group’s development capability: The company’s competitors tend to be heavily reliant on their main store (eg, Isetan’s reliance on Shinjuku, Mitsukoshi’s on Nihombashi, and Matsuzakaya’s on Nagoya). In contrast, Takashimaya’s store network is more balanced and has several core stores in several regions (Nihombashi, Yokohama, Shinjuku, Osaka, and Kyoto). Moreover, the company has a number of stores that are a part of its own shopping center developments and has a track record of developing (via Toshin Development) commercial properties that are integrated with local communities.

 Strong presence in Asia: The image held of Japan-affiliated department stores outside of Japan is that they can only attract as customers tourists or Japanese living overseas who want to buy gifts. But the company’s Singapore store was the first Japanese department store to adopt a localization strategy and to attract non-Japanese customers. In fact, in Asia many people think that Takashimaya is a Singaporean store, not a Japanese one. In future the company is likely to use the brand power of Takashimaya Singapore in its store openings in Asia.

Weaknesses  Demographic change: The number of seniors—the company’s main customers, often affluent—will decline over the long term.  Continual capex requirement: Department stores are generally laden with capex centered on existing store renovations. The ROI in such investments is not necessarily high, but competition forces department store operators to make such investments. Profitability would worsen without such capex.  Itaku hanbai (consignment sales): This implies the goods become department store inventory (returnable to the manufacturer if unsold). The entire Japanese department store industry has traditionally avoided risks in procurement. In this way, the industry overall has mitigated inventory risks. However, risks in procurement could become valuable information. Avoiding such risks can result in a slower response to consumer needs and an over-reliance on existing suppliers.

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 31/65 SR Research Report Market and value chain Market overview Long-term secular decline. The Japanese retail market is mature and in a long-term secular decline driven by adverse demographic trends. Japan’s population started to decline in 2007 and the twin trends of a declining birthrate and an aging population show no signs of abating. In this environment where overall consumer spending is dropping, many big retailers found that they had no choice but to adopt a low price strategy to survive (although Wal-Mart`s experiences in Japan suggest that that low prices alone are not the solution).

Consolidating and getting bigger does not seem to provide the answer either. Japan’s supply chain has traditionally been very fragmented, partly due to varying local needs (particularly in food). Many national retailers found that differentiating themselves from entrenched local competition is not easy—the situation often leads to deflationary stalemate, supported by low interest rates and easily available financing. The ability to raise money at a close-to-zero cost goes a long way in supporting barely profitable companies. SR thinks easy money is the main problem. Three interlinked factors play a role here—political pressure, the role of banks, and monetary policy.

Cutting jobs is extremely sensitive. Retailers are major employers. People who lose their jobs in restructurings are often older employees, many of whom have rigid company-specific skills, making it hard for them to seek re-employment. In Japan therefore, potentially more than elsewhere, restructurings lead to a rise in structural unemployment and personal hardship. Older people are not only more numerous but also more politically active as voters. Ultra-low interest rates make economically suboptimal decisions tenable. Compared with the US or UK, Japanese banks have traditionally played and continue to play a disproportionally important role. In deciding whether to allow businesses to fail, no other outside stakeholders come close. In an environment where corporate governance is not centered on shareholders, the Japanese banks have incentives to support the status quo. Political pressures make other choices difficult. Premium pricing or deep discounting. The changes underway in the Japanese retail industry broadly reflect the trends seen across the world. Most successful companies increasingly seem to fall into one of the two opposing pricing strategies—luxury branding and premium prices, or deep discounting. Those retailers stuck in the middle of these pricing and branding extremes, and unable to go either way, generally perish.

In the US, upscale department stores with strength in merchandising have survived through integration and reorganization. Discounters such as Wal-Mart, Target, and Costco have grown rapidly. Meanwhile, a large number of retailers in the middle found it hard to compete and went extinct. Online retailers are shaking up the industry. Sector shakeout. Japan is seeing similar trends. The department stores were caught up in a wave of integration and reorganization. Low price retail chains strengthened their push for market dominance. In September 2007, Matsuzakaya Holdings and Daimaru integrated to create J. Front Retailing (TSE1: 3086). In October 2010, Hanshin Department Store and Hankyu Department Store integrated to create H2O Retailing (TSE1: 8242). In April 2008, Mitsukoshi and Isetan integrated to create Isetan Mitsukoshi Holdings (TSE1: 3099).

Isetan Mitsukoshi Holdings, which became the leading company in the industry by size, provided support to the now bankrupt Marui Imai of Hokkaido and also, in October 2009, acquired Iwataya Department

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 32/65 SR Research Report Stores, a medium-sized chain. Six unprofitable stores were closed, including Mitsukoshi Ikebukuro. Takashimaya announced a capital and business tie-up with H2O Retailing in 2008. This was widely expected to be a prelude to a full-blown merger but in March 2010 negotiations stopped and the relationship continues to be limited although the parties still own stakes in each other (around 10%). There were 290 department stores operating nationwide in 2009, falling to 242 at end-February 2014. Nationwide sales in 2013 for existing department stores increased by 1.6% YoY to JPY6.22tn, the second consecutive annual rise, according to the Japan Department Stores Association. This increase was driven by such factors as the recovering economy, which pushed up stock prices and employee bonus payments, as well as demand ahead of the rise in the consumption tax rate. Due to the declining population, Japan’s retail market looks set to keep contracting. However SR considers that one possible area of growth is the increase in the number of foreign tourists, particularly from China. Chinese visitor numbers are trending north.

Boosting tourism. According to the Japan National Tourism Organization (JNTO), when the restrictions on issuing visas were relaxed for Chinese nationals in July 2010, Chinese visitor numbers for the month jumped 140% YoY and were up 40% for the full year in 2010. It is also thought that the restrictions will be further relaxed in future. Chinese visitor numbers were slightly down in the first half of 2011 in the aftermath of the earthquake, but following the easing of visa restrictions in September, the number once again began to trend upwards and in November 2011, it increased 30% YoY. In 2013, underpinned by the weaker yen, the number of Chinese visitors broke through the 10 million mark for the first time, to reach 10.36 million (+24.0% YoY).

As a percentage of the country’s total population, Japan receives a low number of tourists from China relative to other Asian countries. Simply calculated, if Japan’s percentage of visitors from China increased to the same level as Thailand, its Chinese visitors would be over 3x the current number, or about 3.5mn people. Similarly, if it increased to the same percentage as Taiwan or South Korea, there would be 50x as many Chinese visitors, around 60mn people. Closures Extension/Renovation Jan-2010 Okazaki Matsuzakaya Mar-2010 Tokyu Kichijoji Mar-2010 Isetan Kichijoji Aug-2010 Kintetsu Kamihoncho May-2010 Asakusa Matsuya (floor area reduction) Sep-2010 Ginza store opened with extended floor area Aug-2010 Matsuzakaya Nagoya (for renovation) Oct-2011 Hankyu MEN'S TOKYO Aug-2010 Hankyu Shijogawara Apr-2012 Matsuzakaya Nagoya Dec-2010 Yurakucho Seibu Oct-2012 Hankyu Umeda Main Store Mar-2011 Meitetsu Head Store Young Annex Nov-2012 Daimaru Tokyo Jan-2012 Sogo Hachioji Apr-2013 Grand Front Osaka Feb-2012 Kintetsu Hirakata Jun-2013 Abeno Harukas Kintetsu Main Store Mar-2012 Kobe Hankyu Mar-2012 Shinjuku Mitsukoshi ALCOTT Mar-2013 Tokyu Toyoko (East) Openings Mar-2011 Hakata Hankyu May-2011 JR Osaka Mitsukoshi Isetan Apr-2012 Tokyu ShinQs (Shibuya) May-2012 Tobu Tokyo Solamachi Source: Various data, SR Inc. Research

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 33/65 SR Research Report Takashimaya is well placed to benefit from the increase in foreign visitors to Japan. In June 2011, the Japan Tourism Agency established its Foreign Visitor 30mn Program, aiming to achieve 30mn foreign visitors to Japan. The program’s interim goals are for 15mn visitors by 2013 and 20mn by 2020. According to the agency, the average length of stay in Japan by foreign visitors is 6.4 days (2008). Therefore, assuming that the number of foreign visitors to Japan increases by 10mn people, then based on the calculation of 10mn people x 6.4 days/365 days, the Japanese population would increase by 175,000 people per day. Tourists gravitate towards the big urban areas of Tokyo, Osaka, Kyoto, and Kanagawa. Almost all foreign tourists visit one of these cities (as they can visit more than one city, the total percentage exceeds 100%).The total population of these areas is around 25mn people, therefore the higher visitor numbers would increase the population by 0.7% (175,000/25mn). In particular, popular areas such as Shinjuku, Ginza-Nihombashi, Yokohama, and Osaka may enjoy substantially higher incremental traffic. Moreover, foreign visitors tend to spend more than local residents. Takashimaya has many stores in these areas. Its stores are well known for their cultural events and traditional Japanese items such as kimonos and ornaments that are popular with tourists. Despite the company downplaying the potential impact, SR believes that Takashimaya is well placed to benefit from the increase in foreign visitors to Japan.

Visitors to Japan by Country (Person) 2005 2006 2007 2008 2009 2010 2011 2012 2013 CAGR South Korea 1,747,171 2,117,325 2,600,694 2,382,397 1,586,772 2,439,816 1,658,067 2,044,249 2,456,165 4.3% Taiwan 1,274,612 1,309,121 1,385,225 1,390,228 1,024,292 1,268,278 993,972 1,466,688 2,210,821 7.1% China 652,820 811,675 942,439 1,000,416 1,006,085 1,412,875 1,043,245 1,429,855 1,314,437 9.1% Hong Kong 298,810 352,265 432,042 550,192 449,568 508,691 364,864 481,704 745,881 12.1% Thailand 120,238 125,704 89,532 82,177 177,541 214,881 144,969 260,859 453,642 18.1% Singapore 94,161 115,870 167,481 191,881 145,224 180,960 111,354 142,255 189,280 9.1% Malaysia 78,173 85,627 151,860 167,894 89,509 114,519 81,516 130,288 176,521 10.7% Indonesia 58,974 59,911 64,178 66,593 63,617 80,632 61,911 101,498 136,797 11.1% India 58,572 62,505 67,583 67,323 58,918 66,819 59,354 69,097 75,095 3.2% Source: Japan National Tourist Organization (JNTO) data, SR Inc. Research (1,000 people) % of Population Population Visitors to Japan India 0.01% 1,236,686 75 China 0.09% 1,350,695 1,214 Thailand 0.68% 66,785 454 Singapore 3.56% 5,312 189 South Korea 4.91% 50,004 2,456 Taiwan 9.48% 23,320 2,211 Hong Kong 10.43% 7,155 746 Source: JNTO and World Bank data, SR Inc. Research Population in 2010, Visitors in 2010

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 34/65 SR Research Report The ratio of visitors to Japan versus Japan’s population is small. Compared with the fellow island nation of Australia that sees visitor numbers equal to about one-fourth of its population, Japan’s ratio is one-third of that, ie, visitor numbers are equal to only around 8% of Japan’s population. Customers Takashimaya’s customers are 70% female and 30% male and tend to be in their 40s or older. The company is particularly popular with affluent senior customers. Gaisho (Japanese term for external customers) sales account for about 20% of total sales, about equal to sales associated with Takashimaya Gold Card members.

2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Foreign Visitors to Japan Source: JNTO data, SR Inc. Research (Person) Foregin Visitors Increase (Person) Average Length of Stay (Day) Increase in Visitors per Day (Person) 10,000,000 6.4 175,342 Source: JNTO data, SR Inc. Research Population Visitos/Total Visitios Tokyo 13,196,000 60.3% Osaka 8,861,000 26.1% Kyoto 2,632,000 24.0% Kanagawa 9,058,000 17.8% Total for Above Cities 24,689,000 110.4% Source: JNTO (2011) /Ministry of International Affairs and Communications data (October, 2013) , SR Inc. Research Visitors to Australia (1,000 people) 2010 2011 2012 Population Visotors to Japan (1,000 people) 2010 2011 2012 2012 Population 5,885 5,875 6,127 22,940 8,611 6,218 8,368 10,364 127,298 vs. Population 26.4% 26.3% 26.7% vs. Population 6.8% 4.9% 6.5% 8.1% Source: JNTO, Australian Bureau of Statistics and World Bank data, SR Inc. Research Japan-Australia Comparison (Inbound Visitors)

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 35/65 SR Research Report The company’s Nihombashi store customers tend to be older and more affluent. The Yokohama and Shinjuku stores serve a wide variety of commuters passing through those major railway hubs. While the Futako-Tamagawa store attracts affluent residents of the Jonan area, its clientele counts more families and is substantially younger compared with Nihombashi. The company notes that its Kansai stores (the area dominated by old established local players) are seen by locals as being less upscale and sophisticated compared with major rivals. This is in sharp contrast to the perception of Takashimaya in Greater Tokyo.

Barriers to entry High barriers. When limiting the analysis to the department store sector, barriers to entry are formidable: department stores must open in city centers so as to attract customers and it is not easy to find sites in these locations with the required area more than 50,000sm. Brand power is vital. With these formidable barriers, in the last few decades there have been no new entrants into the department store market. However, barriers to entry are considerably lower if alternative forms of retailers or specialty stores are included. In recent years these specialty stores have been competing against department stores.

Competition In the narrowest sense, competition within the department store market is easing. This is because the total number of stores is decreasing as unprofitable stores are closed and as department store operators have been merging with each other. This trend is likely to continue. However, in the broader sense, department stores’ competitors are no longer just other department stores, but include a diverse number of retailers, including specialty stores with a wide product range and e-commerce retailers. Specialty stores are growing in strength and diversity. The competition also includes shopping centers, especially urban ones managed by real estate developers like Mitsui Fudosan (TSE1: 8011) and Mitsubishi Estate (TSE1: 8802).

The competitive environment is also affected by the development of areas surrounding department stores and changes in the movement of rail passengers. For instance, direct connection between the Tokyu Toyoko and Fukutoshin lines began in March 2013 making it easier for passengers using Toyoko Line to travel in the direction of Shinjuku and Ikebukuro. As a result, it is possible that shoppers who have previously stopped at Shibuya will continue to Shinjuku. Shinjuku Takashimaya is located at the south exit of Shinjuku Station, where infrastructure-related construction work is underway as a cooperative venture between the Ministry of Land, Infrastructure and Transport (MLIT) and East Japan Railway (TSE1: 9020). This project includes maintenance of traffic junctions, such as the areas south of the Koushu Road. Currently, the National Route No. 20 (Koushu Road) that passes in front of the South exit has a daily traffic volume of about 60,000 vehicles and 140,000 pedestrians and due to this huge volume, lacks space for people to stop and relax. Moreover, the Koushu Road overbridge that was built in 1925 needs to be repaired and there have been safety concerns about its ability to withstand an earthquake. After is has been redeveloped, it is possible that pedestrians will end up being redirected toward Shinjuku Station’s South exit. The Shinjuku Station South Exit Development Building is scheduled to open in the spring of 2016.

Tokyu Corporation (TSE1: 9005) has developments underway in Shibuya and in April 2012 opened Shibuya Hikarie, a large-scale entertainment facility. In 2019 Sagami Railway and Tokyu Corporation will open a directly connecting line between their respective lines, which will have some effect on sales at the

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 36/65 SR Research Report Yokohama store. Another trend in the competitive environment is a shift toward larger-scale stores among department stores and other type of retailers. For instance, a large-scale redevelopment project is underway in the area around Osaka Station. In May 2011 Osaka Station City was opened. The Hankyu Department Store reopened in the Hankyu Umeda building in Osaka’s Kita Ward in the second half of November 2012 with a sales floor area of 80,000sm, 1.3x larger than prior to the rebuilding.

Strategy Conventional department store model. Among the company’s competitors, J Front Retailing (TSE1: 3086), which manages the Daimaru and Matsuzakaya stores, is pursuing a unique strategy among the Japanese department stores. It is attempting to escape from the traditional department store model, making PARCO (TSE1: 8251) into a subsidiary by increasing its equity holdings to 65% through a public offering. Its goal is to realize a low-cost new department store model, which entails attracting as tenants specialty stores able to pull in customers and capture a younger market.

Takashimaya does not believe this is the right approach as it requires different personnel and different retailing knowledge. The company is committed to the conventional department store model. Takashimaya’s motto is “unchanging yet new” and it likes tradition. Instead of implementing sweeping reforms, the company’s strategy has been to attract customers to its tenants’ stores by developing the areas surrounding its stores and to participate in a range of development projects that will support the growth of its department stores (strengthening its SC operations by redeveloping its Nihombashi store and adjacent land (urban redevelopment).

While the company had some tie-ups in Japan with domestic department stores, it had been passive compared with peers. Domestic strategy: shopping centers At the Tamagawa store, the company plans to develop the existing shopping center to improve the area’s amenities and enhance the community’s appeal. The company plans to open Ivy Place and Marronnier Court on adjacent properties. At Nagareyama Otaka-no-Mori shopping center, the company plans to open an annex. The company’s medium-term shopping center strategy includes the Nihombashi store redevelopment project, with reopening scheduled for FY02/18. The main building will be left unchanged due to its Important Cultural Properties designation, but Toshin Development is planning to turn the main building and an additional 12,000sm sales floor into a new, city-type shopping center supporting culture (with a fully redesigned event hall). Toshin Development plans to participate in this project. Takashimaya is spending JPY15.0bn on the project. It will not need to raise additional funds as the company will acquire the commercial space through a land-space equivalent exchange (ie, the land owned by the company in the city block will be exchanged for a proportional percentage of commercial space).

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 37/65 SR Research Report Domestic strategy: department stores The company sees its domestic department stores as creating “towns,” which become the commercial focus of a local community. Hence, Takashimaya aims to further develop and strengthen this position. This town-creation concept goes beyond the department store itself to encompass the overall community. The concept strives to make the shopping experience more convenient and enjoyable, and is reflected in the merchandise lineup, service and sales methods. Together with Toshin Development, which develops shopping centers, the company will focus on fusing shopping center development with community and town development for specific stores. At other stores the department store itself becomes the core of a “town.” This town development will be adapted to the needs of each store and its surrounding community, and hence be different for all 18 stores.

To bolster its earnings base, the company plans to refurbish its major stores, centering on the Nihombashi and Yokohama stores. The company’s basic approach to renovations is that they are mostly a way of improving the shopping experience with an eye towards the competitive situation of each store. This means that in some cases, the renovations are a defensive measure and will not necessarily generate sufficient return on investment. However, doing nothing could lead to losing customers to competition, and SR believes that this type of defensive renovation is adequate.

In terms of product development, the company plans to expand its shop spaces based on original buying Nihombashi Store Redevelopment Plan FY02/13 FY02/14 FY02/15 FY02/16 FY02/17 FY02/18 FY02/19 Main Building (Renovation & Reuse) Site Next to Main Building Source: Company data, SR Inc. Research Main Building renovation (rooftop greenery, cultural hall renovation, etc.) Sales Capability Enhancement 2 bil yen Old Building Old Building Demolition Interior Work Construction Start Completion& Handover Opening

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 38/65 SR Research Report and merchandise arrangement, increase differentiation of merchandise and coordination among merchandise to restructure its in-house designed spaces, and introduce new merchandising based on research of market needs. The company also plans to strengthen its marketing programs targeting customer segments less affected by the tax increase, such as wealthy customers and foreign tourists. Specifically, for wealthy customers, to create loyalty among the new generation of customers the company will promote family card membership. To attract inbound tourists, the company plans to increase convenience through such measures as introduction of free WiFi and acceptance of China Union Pay card. The company is aiming for increased profitability at its online business by streamlining website subsidiary SELECT SQUARE (370,000 members) with Takashimaya Fashion Mall (1,07,000 online members as of the end of February 2014). The company will mobilize approximately 4.0mn members (Takashimaya Credit Card, Takashimaya Saison Card, and Takashimaya Point System) that the company had acquired in its department stores in order to increase the registered online member numbers. The company is aiming to strengthen its competitiveness in the fashion market through its online stores supported by the brick-and-mortar stores.

According to research published by Japan’s Ministry of Economy, Trade and Industry (METI), the e-commerce (B2C) market in calendar 2012 totaled JPY9.5tn, up 12.5% from JPY8.5tn in calendar 2011. E-commerce accounted for 3.11% of total retail sales in Japan in 2011 compared with 2.83% a year earlier. When considering the comparable figure in the US (about 5% according to the US Census Bureau and eMarketer.com), SR believes the Japanese e-commerce market has scope to expand, although population density and consumption behavior are different.

According to METI, the e-commerce market for clothing and accessories reached JPY175.0bn, up 21.5% YoY in 2012. This market grew approximately 3.0x during the past five years (2007 to 2012), and accounted for 1.33% of total clothing and accessory sales in Japan in 2012 (1.12% in the previous year). Takashimaya Group Fashion Website Source: Company data, SR Inc. Research

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 39/65 SR Research Report Takashimaya is implementing an omni-channel retailing strategy, improving its information base (products, customers, and information and communication technology [ICT]) to enhance customer satisfaction by providing value-added products, customer services and sales, and floor space. Omni-channel retailing is very similar to an evolution of multi-channel retailing, but is concentrated more on a seamless approach to consumer experience through all available shopping channels, ie, mobile internet devices, computers, bricks-and-mortar, television, catalog and so on. The company is strengthening its information system to track customers across all channels (ie, in store and online), aiming to tie in-house card users with online consumers. For example, for customers who are unable to come to stores during opening hours, the company plans to promote online purchases of products offered in stores. Takashimaya is developing a new type of store with the use of ICT to provide customers with a new type of shopping experience combining the features of brick-and-mortar and virtual shops. For example, the Interactive Hanger service displays product photos and videos that allow a customer to select a hanger and offers clothing coordination.

1.25% 1.52% 1.79% 2.08% 2.46% 2.83% 3.11% 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% - 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 2006 2007 2008 2009 2010 2011 2012 E-Commerce Market B to C Internet Share Source: Ministry of Economy, Trade and Industry data, SR Inc. Research (Billion Yen) Source: Company data

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 40/65 SR Research Report Overseas strategy Overseas the company intends to invest JPY50bn in Asia up to FY02/19 and to accelerate its business development on two axes, in China and the ASEAN region. It is aiming to expand its business in Asia by using the management resources of Takashimaya Singapore and the expertise of Toshin Development, with the goal of increasing operating profit by JPY4.0bn by FY02/19 compared with FY02/13. Takashimaya Shanghai, which opened in December 2012, will work to build a stable operating base at an early stage by implementing various strategies to grow sales. This includes boosting its merchandise lineup and expanding its customer target. Starting with the planned opening of the Saigon center in 2016, the company plans to open its third and fourth ASEAN stores from 2017 onward. The company aims to have eight stores in the Asia region (three in China, one each in Taiwan, Singapore and Vietnam, and two more stores in ASEAN).

In its overseas shopping center business, the company is set to open a store within the Saigon Centre in Ho Chi Minh City and is planning to develop the land adjacent to Takashimaya Shanghai.

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 41/65 SR Research Report Historical Financial Statements Summary Q3 FY02/14 results (out December 26, 2013; see table above) The company maintained its forecasts. In cumulative Q3 (first nine months of the financial year) sales were JPY648.2bn (+3.0% YoY). Parent-level gross profit margin was 25.26% compared with 25.50% a year earlier. The slight year-on-year decline was due to strong sales of low-margin luxury items such as select apparel and accessories. Parent-level SG&A-to-sales ratio was 25.51%, down from 26.23% a year earlier. Takashimaya stated that the company reduced expenses, particularly labor costs, by more than expected. As a result group operating profit in cumulative Q3 was JPY16.5bn (+14.6% YoY). By segment, department store sales were JPY573.0bn (+3.1% YoY) and operating profit was JPY6.6bn (+37.1% YoY). In October, sales of winter clothes were sluggish due to lingering high temperatures. Inclement weather caused by typhoons also kept many shoppers at home. However, sales picked up in November after temperatures fell. The company’s seasonal campaigns, such as television commercials on autumn sales, seem to have paid off. Sales of high-priced items, such as select apparel and accessories, also continued to rise.

By product category, changes in store sales were as follows for the September-November period (numbers in parenthesis are cumulative data for Q3): Menswear +0.8% (+0.3%); men’s goods +1.9% (+1.2%); womenswear -2.5% (-1.7%); women’s goods -0.4% (+0.4%); select apparel +5.8% (+7.4%); accessories +13.7% (+17.8%); everyday items +1.9% (+2.0%); foods +1.6% (+0.3%). Sales of high-priced items, such as select apparel and accessories, were strong. Sales of womenswear were weak, partly owing to little change in fashion. The number of foreign tourists increased amid a weak yen. Sales of duty-free products rose 80% YoY during Q3 (September-November). Overseas, Takashimaya Singapore increased sales by 26% and operating profit by 12.5% after the company strengthened its sales promotion efforts targeting card members and tourists. The weak yen also boosted the company’s overseas earnings when repatriated into yen. The Shanghai store, which opened in December 2012, suffers from a lack of publicity because the company has been holding back on advertising. Takashimaya has been keeping the store’s expenses in check, with operating losses stable at around JPY900mn—in line with company forecast. In contract and design, Takashimaya Space Create Co saw its sales decline from a year earlier, when it won a large contract for a commercial facility project. Expenses for an expansion of renovation operations also increased. Accordingly segment sales were JPY13.5bn (-7.7% YoY) and operating profit was JPY360mn (-36.3% YoY). Real estate segment sales were JPY26.7bn (+6.6% YoY) and operating profit was JPY6.2bn (+5.5% YoY). The company expanded its Tamagawa store and began full operations of the Nagareyama Otaka-no-Mori shopping center. Rent income from tenant shops also increased. Finance segment sales were JPY8.8bn (+1.5% YoY) and operating profit was JPY2.7bn (+0.3% YoY). The company increased spending to strengthen its credit control capabilities. However these expenses were offset by an increase in the number of gold card members and the volume of purchases.

In the others segment, sales were JPY26.1bn (+3.4% YoY) and operating profit was JPY680mn (+133.5% YoY). In the cross-media business, catalog sales declined while online sales continued to rise. The company plans to coordinate the operations of its brick-and-mortar stores and online stores. Per Takashiyama physical stores and online shops shared 50% of the brands (end Q3).

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 42/65 SR Research Report The company, which had been in talks to buy Times Square Building (Sendagaya district, Tokyo’s Shibuya Ward), agreed to pay JPY1.05bn for the property. Ownership may cut the company’s rent payments by JPY4bn (though the company faces depreciation expenses). Takashimaya is in talks to buy a portion of the building that houses its Tachikawa store. These purchases are part of an effort to reduce costs, as a planned increase in Japan’s consumption tax may dampen consumer spending. The company also held stakes in the buildings housing its Omiya, Takasaki, and Kashiwa stores (December 2013). In the long term Takashimaya may purchase an entire building. The company said that it plans to close its Wakayama store by end August 2014. Employees of the store, which has annual sales of a little more than JPY2bn, will be transferred to other stores.

1H FY02/14 results (out October 10, 2013; see table above) Consolidated sales for 1H FY02/14 totaled JPY435.3bn (+3.3% YoY) and operating profit reached JPY11.2bn (+10.2% YoY). The department store segment saw sales of JPY385.4bn (+3.3% YoY), mainly on strong sales of luxury goods like jewelry, in turn helped by the strong stock market. Sales per customer increased approximately 3% YoY. Sales at large department stores grew steadily, due to an upgraded women’s fashion floor (women’s clothing and accessories) as part of a complete renovation of the Yokohama store (sales increased 2.4% YoY). The Nihombashi store (+3.3% YoY) held special events to commemorate its 80th anniversary of operations, which contributed to the sales increase. The Osaka store (-0.6% YoY) worked on the layout improvement and renovation to match the part return of Nankai Kaikan Building, but faced severe competition due to the opening of new commercial facilities nearby. Yen depreciation saw an increase in foreign tourists, driving a 70% YoY increase in duty free sales. The rate of increase further accelerated in September, with duty free sales for the month climbing 80% YoY. The Shinjuku store recorded a 3.2% YoY rise in sales driven by an increase in foreign tourists. The 5.6% drop in sales at the Omiya store was due to the letting of space to a tenant, resulting in a reduction of just under 30% in the store’s retail area. However, the overall effect on earnings looks to be positive as the store will receive tenant income and its enhanced drawing power meant the decrease in sales was small.

Gross profit margin at the parent level was 25.22%, a 0.25 percentage point reduction over the previous year, mainly attributable to a change in product mix due to strong sales of low gross profit margin products, namely specialty apparel and accessories, and luxury goods such as jewelry items. Sales of high-margin private brands were JPY19.7bn, slightly firmer than the company’s full-year forecast of JPY42.0bn for the category. The SG&A-to-sales ratio at the parent level improved 0.6pp over the previous year to 25.9%, due to a reduction in pension liabilities (JPY1.1bn) coupled with higher sales. Overseas: Takashimaya Singapore achieved strong sales, supported by the Chinese New Year and Easter seasonal sales promotions, brisk demand for ladies accessories and food products, coupled with favorable yen depreciation on translation. Shanghai Takashimaya, which opened in December 2012, appeared to be struggling due to lack of market visibility after the company refrained from advertising activities. As a result, operating profit for the department store segment totaled JPY4.4bn (+18.7% YoY). Contract and design: sales were JPY9.1bn (+8.8% YoY) and operating profit was JPY400mn (+49.3% YoY). Orders for commercial facilities and hotels increased at Takashimaya Space Create Co Ltd. Real estate: increased floor space at its Tamagawa shopping center and acquisition of profitable properties contributed to sales and profit growth. Toshin Development Singapore Pte Ltd recorded sales and profit growth due to increased rental income from the renewal of leases from specialty stores,

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 43/65 SR Research Report coupled with a favorably weaker yen. As a result segment sales were JPY17.8bn (+6.8% YoY) and operating profit was JPY4.1bn (+6.0% YoY). Finance: an increase in the volume of credit card transactions at Takashimaya Credit Co Ltd due to a recovery in consumer spending, coupled with an increase in annual fees from credit cards, resulted in segment sales of JPY5.9bn (+1.4% YoY) and operating profit of JPY2.0bn (+2.5% YoY). Others: cross-media business was brisk, supported by internet, catalogue and television media. As a result segment sales were JPY17.1bn (+7.8% YoY) and operating profit was JPY390mn (+143.0% YoY). Approximately 35% of this segment’s sales were via the internet. The number of registered online members grew steadily, reaching 950,000 at end 1H FY02/14 (860,000 at end FY02/13). In November 2013, the company plans to introduce digital color fitting using a “web fitting room” (customers can try on various colors virtually) on a pilot basis at the Shinjuku store to coincide with the launch of its cashmere collection. The company wants to build links between sales at brick-and-mortar stores and online stores. The company revised upward its full-year FY02/14 earnings forecasts based on 1H results: Sales: JPY904.0bn (initial forecast JPY897.0bn) Operating profit: JPY29.0bn (JPY28.0bn) Recurring profit: JPY32.5bn (JPY30.0bn) Net income: JPY17.5bn (JPY16.7bn) October 10, 2013 results meeting summary 1H FY02/14 review Sales were JPY15.5bn YoY higher. Economic recovery drove domestic department store sales JPY5.3bn higher YoY, while sales at main subsidiaries grew steadily (eg, +JPY5.0bn YoY at Takashimaya Singapore). Versus company estimates, sales were JPY4.3bn higher due to robust performance of domestic department stores (+JPY1.0bn versus estimate) and Takashimaya Singapore (+JPY2.5bn versus estimate). SG&A expenses were JPY1.0bn lower versus plan. Operating profit was JPY1.0bn higher than estimate due to better-than-expected sales and additional SG&A reductions. Full-year FY02/14 outlook The company expects domestic department store sales to increase JPY13.1bn YoY due to Yokohama store renovation, an increase in affluent customers, and rush demand before sales tax increase. Takashimaya plans to increase consolidated sales by JPY33.7bn YoY, likely helped by main subsidiaries (eg, Toshin Development, Takashimaya Singapore, Takashimaya Space Create). Takashimaya expects non-consolidated gross profit margin to drop slightly to 25.28% from 25.41% in FY02/13 as it anticipates higher sales of high-margin luxury items (eg, womenswear, menswear) and reductions in discount sales. Domestic department stores aim for JPY0.6bn additional reductions in SG&A expenses. SG&A expenses at main subsidiaries are expected to increase JPY7.0bn YoY due to investments in new businesses. Shanghai Takashimaya (opened December 2012) is suffering low recognition. The company accordingly lowered the Shanghai store’s annual sales target to JPY6.0bn from JPY8.0bn. Operating profit at Shanghai Takashimaya, however, is likely to be in line with the initial company estimate (-JPY1.2bn YoY, of which JPY0.2bn is due to forex impact) thanks to the introduction of fixed rent contracts with tenants and low-cost operations.

Strategy Japan In 2H FY02/14, Takashimaya intends to strengthen its earnings base by accurately adjusting to changes in

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 44/65 SR Research Report consumption behavior. More specifically, the company will enhance in-store selling power, merchandising, and customer strategies while accelerating an “omni-channel” initiative, the core of its growth strategy. Takashimaya aims to capture rush demand before the planned sales tax increase and maintain profitability after the tax hike. In enhancing in-store selling power, the company will focus on large stores (eg, Osaka, Kyoto, Nihombashi, Shinjuku, Yokohama).

The omni-channel initiative involves linking sales activities both at stores and online. The company intends to increase online purchases by organizational customers (target: 80,000 users). Takashimaya plans to more effectively control merchandise, such as by handling the same brands both at stores and online (target: 50% of all the brands are commonly carried at both channels). In addition, the company will improve the usability of its online sales platforms while developing a social application to counter increasing online-to-offline (O2O) purchases.

Overseas Singapore Takashimaya will likely enjoy the benefits of a larger sales floor (reopened October 4, 2013), which will probably increase store sales and profitability by JPY1.0bn and JPY0.2bn, respectively. The Singapore store intends to strengthen merchandising, especially for womenswear (pulls in more customers) and select and new brands. Assumed forex rate: SGD1:JPY76.98 (previously JPY67.80). Shanghai Takashimaya needs better consumer recognition. The company will strengthen transit advertising, and become more aggressive in promotions linked to national/regional events and festivals. Also, for localized pricing, the company will continue to cooperate with local partners. At the Saigon Centre project, Takashimaya is eyeing the opening of retail facilities in 1H 2016. To facilitate local preparations, the company established local subsidiary Vietnam Takashimaya Co Ltd. Planned sales tax hike Based on the impact of the previous tax hike, the planned tax hike will likely reduce operating profit by JPY19.0bn, according to the company. The company will stay focused on cost reductions while monitoring management resources. This will enable Takashimaya to secure profitability even with declining sales. Q1 FY02/14 results (out June 28, 2013) Consolidated sales for Q1 FY02/14 totaled JPY214.0bn (+3.2% YoY) and operating profit reached JPY6.1bn (+3.6% YoY). The department store segment achieved sales of JPY189.1bn (+3.1% YoY), mainly on strong sales of luxury goods such as jewelry items, that were spurred by the strong stock market. Sales per customer apparently rose around 4% from a year earlier. Sales at large department stores grew steadily, due to an upgraded women’s fashion floor (women’s clothing and accessories) as part of a complete renovation of the Yokohama store (sales increased 2.3% YoY). Sales at the Osaka store were flat (+0.02% YoY), helped by improvements in floor layout and renovations despite a reduction in sales floor space in the Nankai Kaikan Building as part of a new commercial facilities development project in Osaka’s Umeda district. Sales of duty-free items grew approximately 80% YoY, attributable to a rise in the number of foreign visitors encouraged by the weaker yen. Gross profit margin at the parent level was 25.46%, a 0.12 percentage point reduction over the previous year, mainly attributable to a change in product mix due to strong sales of low gross profit margin products, namely specialty apparel and accessories, and luxury goods such as jewelry items. SG&A-to-sales at the parent level improved 0.3 percentage points over the previous year to 26.02%, due to a reduction in pension liabilities coupled with higher sales. Retirement-related expenses are expected to decline JPY1.8bn for the full-year due to expiration of a 10-year depreciation period on retirement liabilities.

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 45/65 SR Research Report Overseas sales were strong, supported by Chinese New Year and Easter seasonal sales promotions at Takashimaya Singapore, and a favorable impact from the foreign currency due to a weak yen. Shanghai Takashima opened in December 2012, and, as expected, recorded an operating loss of around JPY250mn (JPY900mn full-year estimated operating loss). As a result, operating profit for the department store segment totaled JPY2.7bn (+8.0% YoY). Contract and design: sales were JPY4.3bn (-8.5% YoY) and operating profit was JPY20mn (-56.0% YoY). The decline in segment sales and operating profit was mainly attributed to the completion of a large-scale order at Takashimaya Space Create Co Ltd booked in the previous year. Nevertheless, this segment performed as the company had forecast.

Real estate: sales were JPY8.8bn (+6.0% YoY) and operating profit was JPY2.2bn (+10.3% YoY). Results were stronger than forecast, helped by favorable business conditions at the Tamagawa store, Kashiwa store, and Nagareyama Otaka-no-Mori shopping center. Finance: sales were JPY3.0bn (-0.6% YoY) and operating profit was JPY1.1bn (-1.1% YoY), affected by a decline in financial revenues (the company reduced the amount of cash advance available for cardholders following the 2008 global financial crisis), despite an increase in the volume of credit card transactions at Takashimaya Credit Co Ltd due to a recovery in consumer spending. Others: sales were JPY8.8bn (+12.3% YoY) and operating profit was JPY60mn (operating loss of JPY120mn in the previous year). Sales in the cross-media business increased, supported by internet, catalogue, and television media. The company recorded stable growth in membership, and the number of registered online members reached 890,000 in Q1 (860,000 a year earlier), while SELECT SQUARE members totaled 330,000 (320,000 a year earlier).

At the non-operating level, the company booked a JPY740mn currency gain from foreign currency deposits, and contributed to a recurring profit of JPY7.7bn (+21.0% YoY). SR believes that Takashimaya achieved overall strong earnings in Q1. The company has not revised its forecasts, but interim earnings appear to be slightly stronger than forecast. Sales performance continued to be strong in Q2, supported by favorable demand for luxury goods, coupled with apparel items (July 2013). Takashimaya started its summer clearance season on June 28 (last year it started its summer clearance sale on July 1), contributing to high growth and resulting in monthly sales increasing by 7.8% YoY in June. Sales at its nine stores in the Kansai region grew 7.7% YoY, while its nine stores in the Kanto region saw sales rise by 7.9% YoY. A rise in visitors from overseas and favorable spending by high net worth shoppers contributed to a double-digit sales growth at its Shinjuku store (+12.8% YoY) and Tamagawa store (+10.2% YoY).

FY02/13 Results (out April 9, 2013) Takashimaya’s consolidated sales for FY02/13 totaled JPY870.3bn (+1.4% YoY). In the department store segment, sales of clothes, such as women’s apparel, were sluggish due to increasing competition, bad weather, and different timings of summer clearance sales for many shops. Even so, sales exceeded a year-earlier level for three years in a row after the company renovated its Osaka store. Sales of luxury products, such as jewelry, rose amid the stock market recovery.

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 46/65 SR Research Report Gross profit margin at the parent level (cumulative) was 25.41%, compared with 25.64% in FY02/12. That is because the corporate segment received a large-scale, low-margin order. An unfavorable change in sales mix was another factor. Sales grew for low-margin products (eg, select apparel and accessories), while sales of jewelry and other luxury items expanded. Profitability of food products fell in reaction to an increase in sales of high-margin products, such as water and preserved food, immediately after the March 11, 2011 earthquake. Sales of high-margin private brands were JPY36.0bn, slightly short of the company’s forecast of JPY38.0bn.

SG&A-to-sales at the parent level improved to 25.8%, compared with 26.2% a year earlier, after the company reduced customer loyalty points (JPY2.6bn) and implemented other cost-cutting measures. As a result, operating profit totaled JPY25.5bn for FY02/13 (+20.7% YoY). The department store segment generated sales of JPY770.1bn (+1.0% YoY). Among core stores, the Osaka store saw 1.8% YoY higher sales due to the continuing effects of renovation. Segment operating profit totaled JPY11.9bn (+19.9% YoY).

In contract and design, sales and operating profit totaled JPY19.0bn (+11.2% YoY) and JPY868mn (+300.1% YoY), respectively. Takashimaya Space Create Co Ltd enjoyed a recovery in interior work demand, particularly from luxury brands. It also received a large-scale order at a development project in Osaka’s Umeda district. Real estate segment sales were JPY33.9bn (+5.0% YoY) while operating profit totaled JPY7.8bn (+8.0% YoY). Business at Tamagawa, Kashiwa, and Nagareyama Otaka-no-Mori shopping centers was brisk. Cost-cutting efforts also paid off.

In finance sales were JPY11.7bn (+1.2% YoY) and operating profit was JPY3.6bn (+12.3% YoY). Takashimaya Credit Co increased the volume of its credit-card transactions by acquiring new customers and encouraging existing members to shop more. It also took various cost-cutting measures, including a reduction in bad-debt and outsourcing expenses. In the others segment, sales were JPY35.7bn (+3.7% YoY) while operating profit was JPY1.3bn (+407.0% YoY). Sales in the cross-media business rose, supported by a rise in food sales after the company used dedicated product buyers for its online operations. Sales of gift items also increased. Takashimaya Service Co maintained its push to improve its efficiency and reduced its operating loss.

Extraordinary losses fell to JPY3.7bn from JPY5.3bn, supported by foreign currency gains of JPY1.2bn. Consequently net income totaled JPY16.5bn (+51.8% YoY). Sales fell 0.5% short of the company’s full-year forecast. However, operating profit, recurring profit, and net income exceeded forecast by 1.9%, 8.6%, and 22.5%, respectively. FY02/13 An increase in sales at group companies could not make up for a decline in sales at domestic department stores. As a result, consolidated sales missed the company’s estimate by JPY4.2bn. Efforts to attract customers (eg, Yokohama store renovation) were not enough. Group companies did fairly well. Operating profit exceeded forecast by more than JPY500mn after the company reduced overtime pay, outsourcing fees, and advertising expenses. Recurring profit exceeded forecast by more than JPY5.5bn thanks to a better-than-expected operating profit and a gain from foreign-currency deposits caused by a weaker yen.

FY02/14 plan The company does not expect any growth in the domestic market because uncertainties remain in the global market. Still, sales are likely to rise by JPY1.0bn due to rush demand before a planned

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 47/65 SR Research Report consumption tax hike. A renovation at the Yokohama store may also help. Comparable store sales in March rose 5% YoY. However, the company added that its FY02/14 estimates did not factor in recent performance. The company will target more elderly shoppers and seek to cater to various age brackets. It will pursue a differentiated merchandising strategy to generate sales of JPY42.0bn from such merchandise (JPY36.0bn in FY02/13). A weaker yen may also bring in more foreign tourists, and the company accordingly projects a JPY2.0bn rise in sales to those customers. Profit margin in merchandise sales is likely to rise to 25.28% (25.41% in FY02/13) because the company will increase sales of high-margin products (eg, apparel for men and women). The company intends to reduce discount sales. As for SG&A expenses, the company expects pension expenses to decrease by about JPY2.2bn. The 10-year depreciation of pension liabilities will end, cutting the expenses by JPY1.8bn. At the same time, the value of the pension assets will likely increase by JPY400mn thanks to a recovery in the stock market. Shanghai Takashimaya (opened in December 2012) cut its initial-year sales target to JPY8.0bn from JPY13.0bn. However, it will probably meet its operating loss target of JPY900mn due to various cost cutting efforts and the introduction of fixed-rent contracts with tenants. For its overseas business, the company appears to assume the same level of forex rates as in 2012. Based on the above, the company expects consolidated sales of JPY897.0bn (+3.1% YoY) and operating profit of JPY28.0bn (+9.9 YoY). Long-term plan Market: 1) The company, cognizant of the fact that a long-term decline in department-store sales is a structural issue, expects sales in the industry to decline by 1.7% annually over five years (FY02/14-FY02/18). 2) The company expects a planned consumption tax hike to reduce sales by 4.6%. This estimate was made based on the experience of a 1997 tax increase. The effects of 1) and 2) imply that sales may decline by JPY83.0bn and operating profit may fall by JPY19.0bn in five years. Strategy: The company targets sales of JPY900.0bn (+JPY30.0bn from FY02/13) and operating profit of JPY40.0bn (+JPY15.0bn) for FY02/18. The company said that it will improve competitiveness by emphasizing local needs, expanding overseas businesses, and cutting costs by overhauling administrative operations.

SR questions whether there is a causal link between the past consumption tax increase and the concomitant sales decline. It is possible that the sales decline may have been caused by the bankruptcies of Japanese financial institutions that took place at that time. Q3 FY02/13 results (out December 27, 2012) The company maintained its forecasts. In cumulative Q3 sales were JPY629.2bn (+2.3% YoY). The department store segment experienced harsher competition due to large-scale renovations at competing stores and new shopping center openings. Still, weak performance a year earlier due to the earthquake disaster and robust sales of luxury items (eg, select apparel and accessories) prompted higher year-on-year sales.

Parent-level gross profit margin was 25.50% (25.77% a year earlier). The slight year-on-year decline was due to a large-scale, low-margin order in the corporate segment and an unfavorable change in the mix of merchandise sold, ie, strong sales of relatively low-margin luxury items (eg, select apparel, accessories) and lower margins of foods (high-margin items, such as mineral water and preserved food, sold well last year post the earthquake). The company appeared to be behind schedule in expanding the

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 48/65 SR Research Report lineup of merchandise developed in-house. Parent-level SG&A-to-sales ratio was 26.23%, down from 26.40% a year earlier. For the full year, the parent expected to reduce sales promotion costs by JPY2.2bn by lowering the point award percentage from 8% to 1% for food and beverage items, and the company commented that it was steadily cutting these costs as planned. As a result, group operating profit in cumulative Q3 was JPY14.4bn (+16.1% YoY).

By segment department store sales were JPY555.6bn (+1.7% YoY). Among core large stores, the renovated Osaka store saw higher sales year-on-year. At the Yokohama store, where partial renovation was completed in October 2012, the company strengthened sales of menswear, men’s accessories, and sporting goods in the sales space for which it is responsible for the layout. Segment operating profit was JPY4.8bn (-0.7% YoY) due to lower margins. In contract and design Takashimaya Space Create Co Ltd enjoyed a recovery in interior work demand, particularly from luxury brands. Accordingly segment sales were JPY14.6bn (+26.8% YoY) and operating profit was JPY569mn (JPY103mn loss a year earlier).

Real estate segment sales were JPY25.1bn (+3.5% YoY) and operating profit was JPY5.9bn (+4.2% YoY). Strong results were due to the robust performance of shopping centers (eg, Tamagawa, Kashiwa, Nagareyama Otaka-no-Mori) and favorable results at Toshin Development Singapore (strong sales at specialty shops and rent revisions). Finance segment sales were JPY8.6bn (+0.4% YoY) and operating profit was JPY2.7bn (+20.8% YoY). Card commissions showed stronger trends year-on-year. The company cut costs via stricter credit management to reduce bad debt costs. In the others segment sales were JPY25.3bn (+3.7% YoY) and operating profit was JPY291mn (JPY435mn loss a year earlier). In the cross-media business the company increased the number of brands (eg, food, cosmetics) it sells online which led to an increase in orders. The company strengthened collaboration with SELECT SQUARE Co Ltd to increase online sales.

The company was confident about meeting its full-year operating profit target on better-than-expected performance at consolidated subsidiaries and ongoing efforts to cut SG&A expenses, despite department store sales potentially falling short of its 2H estimate (+1.0% YoY). On December 19, 2012, the company opened the Shanghai store, and the store appeared to be having constant customer traffic without major problems (January 2013). Q2 (1H) FY02/13 results (out October 9, 2012) Sales in 1H hit JPY419.8bn (+2.4% YoY). Performance in the department stores segment was robust, rebounding year-on-year on weak performance last year due to the earthquake disaster and helped by strong sales of luxury items (eg, select apparel and accessories). However, sales were slightly off compared with the initial estimate (JPY424.0bn). Sales and customer numbers were both down year-on-year due to unseasonable weather conditions in June, fewer holidays, brands starting bargain sales on different dates, and insufficient announcements about these bargain sales. According to the company lower customer numbers hurt sales of full-price merchandise.

The company said that renovation work impacted performance at the Yokohama store, adding that floors being renovated made store layouts confusing, giving some shoppers the impression that adjacent areas were temporarily closed.

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 49/65 SR Research Report Parent-level gross profit margin was 25.47%, 0.36 percentage points shy of the 25.83% estimate. The company attributed this to a large-scale, low-margin order in the corporate segment and an unfavorable change in the mix of merchandise sold, ie, strong sales of low-margin luxury items (eg, select apparel, miscellaneous goods, accessories)—and lower margin food. Lower food margins stemmed from a high base. In the previous year, food margins were higher due to robust sales of higher margin products (mineral water and preserved food) post the earthquake last year. The parent-level SG&A-to-sales ratio was 26.50%, largely unchanged year-on-year. Streamlined labor outsourcing and repair costs resulted in a JPY1.3bn decline in SG&A expenses. However, advertising and general affairs (eg, store renovation, system development, utilities) costs rose. The decrease in sales promotion costs following the change in the point award percentage from 8% to 1% for food and beverage items was an immaterial JPY180mn in Q1 but about JPY1.0bn in 1H. Operating profit in 1H was JPY101.2bn (+11.6% YoY), above the initial estimate of JPY100.0bn. Despite the parent’s stagnant operating profit, subsidiaries Toshin Development and Takashimaya Credit supported overall profitability. Toshin Development posted operating profits of JPY3.9bn (+6.0% compared with estimate) thanks to robust sales at its shopping centers (eg, Tamagawa, Kashiwa, Nagareyama Otaka-no-Mori). Takashimaya Credit, meanwhile, booked operating profits of JPY1.9bn (+11.3% compared with estimate) thanks to stricter credit management to cut bad debt costs and other efforts to reduce SG&A expenses. 1H net income was JPY6.6bn (+22.8% YoY), exceeding the initial estimate (JPY6.0bn).

The company revised its full-year FY02/13 forecasts. The sales forecast was revised down to JPY874.5bn (+1.9% YoY) from the initial forecast of JPY880.0bn. However, operating profit and net income forecasts were raised to JPY25.0bn (+18.5% YoY) and JPY13.5bn (+23.9% YoY), respectively, from the initial forecasts of JPY24.0bn and JPY13.0bn. By segment, the operating profit forecast for the department store segment was revised down to JPY11.5bn (+16.2% YoY) from the initial forecast of JPY11.8bn. Meanwhile, operating profit forecasts for the contract and design, real estate, and finance segments were raised to JPY600mn (2.8x YoY), JPY7.7bn (+6.6% YoY), and JPY3.6bn (+11.6% YoY), respectively, from initial forecasts of JPY400mn, JPY7.3bn, and JPY3.4bn.

Plans for Shanghai Takashimaya are behind schedule. The property handover from a local developer has been delayed by about four months due to problems relating to construction standards. The company accordingly pushed back the opening from fall 2012 to December 2012. Q1 FY02/13 results (out June 25, 2012) The company maintained 1H and full-year forecasts. Sales were up 6.5% YoY at JPY207.3bn, operating profit rose 68.7% to JPY5.9bn, recurring profit rose 47.0% to JPY6.4bn, and net income hit Sales Operating Profit Recurring Profit Net Income EPS (Million Yen) Revised Forecast 874,500 25,000 27,500 13,500 40.9 Previous Forecast 880,000 24,000 26,500 13,000 39.4 Revised / Previous -0.6% 4.2% 3.8% 3.8% 3.9% Year Earlier Period 858,123 21,099 24,355 10,895 33.0 Revised / Year Earlier 1.9% 18.5% 12.9% 23.9% 23.9% Source: Company data, SR Inc. Research Figures may differ from company materials due to differences in rounding methods.

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 50/65 SR Research Report JPY3.9bn (up 2.25x). Sales were 48.9% of 1H estimate (47.5% a year earlier), 58.8% for operating profit (38.5%), and 55.4% for recurring profit (40.2%). Parent-level gross profit margin was 25.58%, down 0.13 percentage point from 25.71% in Q1 FY02/12. The company expected to see higher sales year-on-year of high-margin products (eg, womenswear, menswear) and, consequently, a higher GPM, especially as sales of low-margin foods rose in the post-quake period of Q1 FY02/12. But these apparel products did not sell as expected, and the company added it promoted sales of popular products regardless of their margin levels, resulting in a lower GPM.

Parent-level SG&A-to-sales ratio was 26.32%, down 0.74 point from 27.06% in Q1 FY02/12, thanks to higher sales as well as lower personnel expenses, taxes and public charges. The decrease in sales promotion costs following the change in the point award percentage from 8% to 1% for food and beverage items was around JPY180mn, a small amount. However, from Q2 FY02/13 onward, sales promotion costs are likely to drop further and faster thanks to the 1% point award percentage. The company is making progress as planned to meet the FY02/13 target of reducing sales promotion costs by JPY2.4bn.

In the department stores segment, sales were up 5.6% YoY at JPY183.5bn and operating profit was up 2.18x YoY at JPY2.5bn. The year-on-year rebound impact on sales from the March 2011 quake fell slightly short of the initially expected JPY10.0bn. Sales growth was more apparent at the company’s stores in the Kanto region (Shinjuku store: +14.5%; Tachikawa store: +12.3%; Yokohama store: +9.5%; Nihombashi store: +9.2%). The sales surge at the Shinjuku store came off a low base (fewer customers and foreigners visited the store in Q1 FY02/12). Overseas Takashimaya Singapore saw higher sales and profit year-on-year as planned, helped by the robust Singaporean economy.

Contract and design segment sales were up 75.2% YoY at JPY4.7bn and operating profit hit JPY35mn (JPY230mn operating loss in Q1 FY02/12). The better performance was thanks to a recovery in orders at subsidiary Takashimaya Space Create Co Ltd for interior work and renovation projects for luxury brands. Real estate segment sales rose by 6.4% YoY to JPY8.3bn and operating profit rose by 6.0% at JPY2.0bn. Strong results were thanks to a robust performance at shopping centers (Tamagawa, Kashiwa, Nagareyama Otaka-no-Mori) and favorable results at Toshin Development Singapore (strong sales at specialty shops and rent revisions).

Finance segment sales rose by 1.2% YoY to JPY3.1bn and operating profit rose by 32.8% to JPY1.1bn. Card commissions showed stronger trends year-on-year on low base effect due to the 2011 earthquake. The company cut costs by virtue of stricter credit management to reduce bad debt costs. Overall the department stores segment enjoyed higher profitability thanks to lower costs, despite weak apparel sales. SR understands that all subsidiaries performed well. Monthly performance in July 2012 seemed to be weak as many brands delayed the start of seasonal sales campaigns (in recent years, many brands moved up their sales campaigns). With the campaigns fully rolling from July 2013, monthly performance is expected to see a boost. According to the company, about 40% of all brands sold at its department stores began sales campaigns from July 1 as in previous years, and the remaining 60% (mainly major apparel makers) delayed their campaigns. SR believes that the company’s Q1 FY02/13 performance was strong. The company, however, intends to monitor July sales trends before reviewing its forecasts. The company plans to take the same strategy (ie, delaying sales campaigns) in winter if the strategy proves successful this summer.

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 51/65 SR Research Report FY02/12 results (out April 6, 2012) Consolidated sales were down JPY11.4bn (1.3%) YoY, JPY3.3bn below forecast. This was mainly due to a JPY10.0bn decrease in revenues due to the effects of the earthquake. Gross profit margin also deteriorated by 0.07 percentage point, as the weight of food sales increased following the earthquake. The company cut SG&A expenses by JPY5.0bn YoY, JPY2.4bn more than the initially forecast. This was mainly thanks to a JPY3.4bn cut in personnel costs through a reduction in employee numbers and group-wide efforts to reduce overheads. As a result operating profit increased by JPY2.9bn (up 16.1% YoY), JPY1.1bn (5.5%) above the forecast. The company upwardly revised its forecasts during the fiscal period and the above figures reflect the company’s performance relative to these revised forecasts. By store, the Osaka store was initially expected to increase sales by 9.1% YoY following its renovation, but it only achieved a 3.8% increase. Elsewhere, sales at the Shinjuku store fell by 6.7% (lower customer counts due to JR Shinjuku Station South Gate reconstruction) as it received fewer foreign visitors and sales at the Tachikawa store fell by 12.6%. Note that its sales floor area decreased with a new tenant entering the 6th, 7th and 8th floors of its building, thereby reducing its sales floor area). Among the company’s subsidiaries Toshin Development performed strongly, with sales rising JPY2.6bn and operating profit rising to JPY700mn, both in line with forecasts. The main factors behind the increase domestically: completion of the Tamagawa Takashimaya SC renovation project and opening of the Futako-Tamagawa Dogwood Plaza (March 2011). Overseas the change in the financial period used by its Singapore SC resulted in a longer period for the recording of recurring profits (from October of the previous year).

Takashimaya Singapore recorded an increase in both sales and profits as it benefited from strong consumption driven by the robust Singapore economy. The strong yen prompted sales to be JPY400mn below the (yen) forecast. In Singapore dollars the performance was in line with forecasts. Operating profit was better than forecast in both currencies. Takashimaya Credit sales declined by JPY400mn, mainly due to a lower transaction balance in the aftermath of the 2011 earthquake. However, it was able to offset this decline by reducing its allowance for bad debt and reviewing its outsourcing costs. As a result, its operating profit was up by JPY1.1bn YoY. Takashimaya Credit sales and other operating revenue fell short of plan by JPY100mn but operating profit came in above plan by JPY300mn.

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 52/65 SR Research Report Income statement Income Statement FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 (JPYmn) Cons. Cons. Cons. Cons. Cons. Sales 877,762 869,476 858,123 870,333 904,180 Department Store 786,987 777,478 762,827 770,089 798,079 YoY -10.5% -1.2% -1.9% 1.0% 3.6% Contract & Design 15,737 17,451 17,097 19,010 20,622 YoY -24.4% 10.9% -2.0% 11.2% 8.5% Real Estate 29,401 29,434 32,259 33,863 36,804 YoY -0.6% 0.1% 9.6% 5.0% 8.7% Finance 10,916 11,689 11,514 11,655 11,911 YoY 5.5% 7.1% -1.5% 1.2% 2.2% Others 34,718 33,421 34,424 35,714 36,762 YoY -3.4% -3.7% 3.0% 3.7% 2.9% Total Sales 877,762 869,476 858,123 870,333 904,180 YoY -10.1% -0.9% -1.3% 1.4% 3.9% CoGS 609,816 606,812 597,511 605,687 631,111 Gross Profit 267,946 262,664 260,612 264,646 214,673 YoY -9.9% -2.0% -0.8% 1.5% -18.9% GPM 30.5% 30.2% 30.4% 30.4% 23.7% SG&A 254,517 244,489 239,512 239,169 243,969 SG&A / Sales 29.0% 28.1% 27.9% 27.5% 27.0% Operating Profit 13,428 18,173 21,099 25,476 29,099 YoY -45.9% 35.3% 16.1% 20.7% 14.2% OPM 1.5% 2.1% 2.5% 2.9% 3.2% Non-Operating Income 5,667 6,460 5,239 6,157 5,734 Non-Operating Expenses 2,331 2,150 1,983 1,766 1,483 Recurring Profit 16,764 22,484 24,355 29,866 33,350 YoY -40.1% 34.1% 8.3% 22.6% 11.7% RPM 1.9% 2.6% 2.8% 3.4% 3.7% Extraordinary Gains 1,184 10,500 185 - 286 Extraordinary Losses 5,549 7,527 5,265 3,686 4,116 Tax Charges 4,327 11,201 7,868 8,949 10,029 Implied Tax Rate 34.9% 44.0% 40.8% 34.2% 34.3% Minority Interests 362 407 511 690 8 Net Income 7,709 13,849 10,895 16,540 18,716 YoY -34.4% 79.6% -21.3% 51.8% 13.2% Net Margin 0.9% 1.6% 1.3% 1.9% 2.1% Figures may differ from company materials due to differences in rounding methods. Source: Company data

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 53/65 SR Research Report Full-year forecast and possible scenarios Business sentiment has a big impact on the company. When the stock market is advancing, sales of high-priced items like artwork and jewelry tend to increase. So, depending on economic trends, results may differ from the initial forecasts. In the last 10 years, operating profit was higher than the forecast on five occasions. SR thinks the FY02/13 targets are realistic. The company sees the forecasts as the absolute minimum that it needs to achieve. A low OPM (around 2%) amid operating leverage means that a small sales increase can lead to a big increase in profits.

SG&A Breakdown FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 (million yen) Cons. Cons. Cons. Cons. Cons. Advertising 22,896 22,891 23,779 22,835 23,640 Provision for Point Card Certificates 3,742 3,828 3,517 3,136 3,316 Shipment/Labor 26,422 26,874 26,061 26,519 27,009 Consumables 3,849 4,097 3,714 3,371 3,569 Provision for Bad Debt 1,402 1,818 698 385 227 Director Bonuses and Salary 76,505 69,919 67,614 66,686 67,266 Provision for Director Bonuses Retirement Benefit Expense 8,306 7,780 7,406 6,814 4,581 Provision for Director Retirement 81 72 69 74 70 Employee Benefit 15,071 13,912 13,183 13,464 13,484 Utilities 11,031 11,097 11,083 12,031 13,069 Commissions 2,960 1,937 1,778 2,842 3,399 Rent 39,906 37,725 37,616 37,157 40,256 Machinery Lease 1,944 1,593 1,355 1,093 927 Depreciation 15,647 16,099 17,281 18,405 18,198 Amortization of Goodwill 187 187 187 206 206 Other 24,559 24,652 24,171 24,151 24,752 Subtotal 254,517 244,489 239,512 239,169 243,969 Figures may differ from company materials due to differences in rounding methods. Source: Company data, SR Inc. Research Initial CE vs. Results FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 (million yen) Cons. Cons. Cons. Cons. Cons.

Sales (Initial CE) 896,000 846,500 846,800 880,000 897,000 Sales (Results) 877,762 869,476 858,123 870,333 904,180 Initial CE vs. Results -2.0% 2.7% 1.3% -1.1% 0.8% Operating Profit (Initial CE) 15,000 15,000 16,000 24,000 28,000 Operating Profit (Results) 13,428 18,173 21,099 25,476 29,099 Initial CE vs. Results -10.5% 21.2% 31.9% 6.2% 3.9% Recurring Profit (Initial CE) 17,000 17,000 18,500 26,500 30,000 Recurring Profit (Results) 16,764 22,484 24,355 29,866 33,350 Initial CE vs. Results -1.4% 32.3% 31.6% 12.7% 11.2% Net Profit (Initial CE) 7,500 8,000 8,500 13,000 16,700 Net Profit (Results) 7,709 13,849 10,895 16,540 18,716 Initial CE vs. Results 2.8% 73.1% 28.2% 27.2% 12.1% Figures may differ from company materials due to differences in rounding methods. Source: Company data, SR Inc. Research

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 54/65 SR Research Report Balance sheet Balance Sheet FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 (JPYmn) Cons. Cons. Cons. Cons. Cons. ASSETS Cash and Equivalents 56,011 55,503 61,124 69,495 106,451 Marketable Securities 3,000 15,000 15,000 - 43,099 Accounts Receivable 102,200 121,263 121,414 98,978 106,671 Allowance for Doubtful -497 -562 -877 -577 -439 Inventories 43,218 38,566 37,863 38,234 39,239 Deferred Tax Assets 7,281 5,160 6,989 6,601 7,221 Other Current Assets 28,599 30,944 20,880 23,529 29,876 Total Current Assets 239,816 265,878 262,394 236,263 332,121 Buildings 162,591 160,020 155,348 154,003 157,381 Equipment, Plant 8,990 8,814 8,357 8,160 9,667 Land 201,608 208,772 208,682 213,057 223,296 Lease Asset 986 2,456 2,611 2,939 2,615 Construction in Progress 7,766 1,856 750 594 1,476 Total Tangible Fixed Assets 381,943 381,920 375,748 378,755 394,436 Investments 79,394 79,528 77,474 96,100 105,890 Deferred Tax Assets 17,840 16,655 13,467 7,131 4,292 Deposits Made 42,760 43,613 42,082 41,288 34,420 Other 8,741 7,830 7,358 4,962 5,029 Allowance for Doubtful -4,816 -4,790 -4,406 -2,794 -2,768 Total Other Fixed Assets 143,921 142,838 135,975 146,688 146,864 Leasehold 11,354 11,354 11,404 11,414 11,414 Goodwill 859 764 669 745 631 Other 7,203 14,332 17,725 16,819 16,670 Total Intangible Assets 19,416 26,451 29,799 28,979 28,716 Total Fixed Assets 545,282 551,209 541,522 554,423 570,017 Total Assets 785,098 817,088 803,917 790,687 902,139 LIABILITIES Accounts Payable 85,684 87,248 87,297 87,883 95,901 Short-Term Debt 24,593 14,083 39,811 19,172 47,301 Lease Obligations 125 500 652 856 923 Income Taxes Payables 3,202 3,035 4,177 4,045 7,822 Advance Received 77,020 76,871 75,713 77,022 78,125 Gift Certificate 59,489 77,174 63,070 57,174 54,498 Deposits 22,309 21,248 26,178 25,545 24,505 Provision for Point Card Certifiticates 3,742 3,828 3,517 3,136 3,260 Allowance for Losses on Removal - 341 - Other Current Liabilities 26,275 19,866 22,495 19,812 23,264 Total Current Liabilities 302,444 304,198 322,910 294,645 335,599 Long-Term Debt 95,962 117,679 87,667 79,674 120,227 Lease Obligations 860 1,955 1,967 2,109 1,715 Reserve for Retirement Allowance 55,383 51,889 49,763 43,648 42,098 Deferred Tax Liabilities 67 121 103 109 360 Deferred Tax Liabilities on Revaluation 9,838 9,838 8,630 8,721 8,721 Other Fixed Liabilities 29,301 30,307 25,395 26,336 28,506 Total Long-Term Liabilities 191,411 211,789 173,525 160,597 201,627 Total Liabilities 493,855 515,988 496,436 455,243 537,227 SHAREHOLDER EQUITY (NET ASSETS) Issued Capital 56,025 56,025 56,025 56,025 56,025 Reserves 45,085 45,085 45,085 45,085 45,085 Retained Earnings 174,741 185,272 193,362 206,440 221,857 Treasury Stock -514 -528 -531 -536 -549 Valuation/Translation Difference, etc 12,060 10,383 8,211 22,413 35,775 Minority Interests 3,842 4,861 5,328 6,015 6,718 Total Shareholder Equity (Net Assets) 291,239 301,099 307,481 335,443 364,912 Working Capital 59,734 72,581 71,980 49,329 50,009 Interest-Bearing Debt 120,555 131,762 127,478 98,846 167,528 Net Debt 64,544 76,259 66,354 29,351 61,077 Source: Company data Figures may differ from company materials due to differences in rounding methods.

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 55/65 SR Research Report Characteristics One characteristic of all department stores: inventory accounts for a small proportion of total assets. For Takashimaya in FY02/14 the proportion of inventory in total assets was 4.3%. Land and buildings constitute a high percentage, and in FY02/14 made up 42% of Takashimaya’s total assets. At the other extreme on the balance sheet are specialty retailers, such as Fast Retailing (Uniqlo). According to its FY08/13 financial statements, Fast Retailing’s inventory assets constitute 19% of total assets, with land and buildings 7%.

The company estimates that it has around JPY60.0bn of unrealized profits in its land and real estate. It only holds an unrealized loss in its Shinjuku store, of which it owns 40%, but the unrealized profits provided by the stores listed below contribute to the positive balance. According to the company, its Nihombashi store value was estimated at approximately JPY100.0bn (based on the posted land price of the surrounding area) in 2007, before the 2008 global financial crisis. Store Real Estate Ownership Land Book Value (Million Yen) Nihombashi 100% 45,608 Tamagawa 100% Shinjuku 40% 58,724 Osaka 28% 5,463 Kyoto 50% 14,240 Tachikawa 50% Toshin Development 36,457 Source: Company data, SR Inc. Research Note: Tamagawa and Tachikawa stores are owned through subsidiary Toshin Development Co., Ltd.

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 56/65 SR Research Report Statement of cash flows At FY02/14 net interest-bearing debt was around JPY61.0bn and operating cash flow was approximately JPY40.5bn. In FY02/14, the company raised JPY65.5bn from the issuance of warrant bonds. It plans to use the funds raised to acquire a portion of the land and buildings of the Shinjuku store that it does not already own. Apart from transactions related to the Shinjuku store, the company plans to make annual capex of around JPY40.0bn during the period of its medium-term plan. Hence, further fund raising is unlikely. Cash Flow Statement FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 (JPYmn) Cons. Cons. Cons. Cons. Cons.

Operating Cash Flow (1) 23,428 20,645 31,921 44,141 40,582 Investment Cash Flow (2) -10,508 -13,240 -16,356 -28,470 -30,389 Free Cash Flow (1+2) 12,920 7,405 15,565 15,671 10,193 Financial Cash Flow 14,817 7,673 -8,210 -32,931 64,391 Depreciation & Amortization (A) 15,779 16,223 17,400 18,540 18,331 Capital Expenditures (B) -16,441 -16,441 -15,709 -20,425 -34,546 Working Capital Changes (C) 5,073 12,847 -601 -22,651 680 Simple FCF (NI + A + B - C) 1,974 784 13,187 37,306 1,821 Source: Company data Figures may differ from company materials due to differences in rounding methods. Cash Conversion Cycle FY02/10 FY02/11 FY02/12 FY02/13 FY02/14 Cons. Cons. Cons. Cons. Est.

Accounts Receivable Turnover 8.73 7.78 7.07 7.90 8.79 Days in Accounts Receivable 41.82 46.90 51.61 46.21 41.51 Inventory Turnover 13.84 14.84 15.64 15.92 16.29 Days in Inventory 26.37 24.60 23.34 22.93 22.40 Payables Turnover 6.97 7.02 6.85 6.92 6.87 Days in Payables 52.33 52.01 53.31 52.78 53.15 Cash Conversion Cycle (days) 15.86 19.49 21.64 16.36 10.77 Source: Company data Figures may differ from company materials due to differences in rounding methods.

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 57/65 SR Research Report Other information History Founding to the Meiji era In 1831, the founder, Iida Shinshichi, opened a clothing and cotton cloth store in Kyoto. In 1888, the store exhibited a number of items at international exhibitions and received numerous prizes. This led to the store winning the title “Purveyor to the Imperial Household Ministry” in 1897 (the purveyor system is now abolished). In 1896, Kyoto Minami (South) store unveiled an innovative show window, which became the prototype for show windows in modern department stores. Two years later, the Osaka store was opened in Shinsaibashisuji, Minami Ward, Osaka Prefecture, and the Nihombashi store (Nishikonyamachi, Kyobashi Ward, Tokyo) in 1900.

In 1910, the company set up the Takashimaya pavilion at the London Japan-UK Expo, exhibiting products that included a velvet yuzen-print wall hanging and Are Yuudachi by the artist Takeuchi Seihou, winning four honorary prizes. Photo courtesy of the company Taisho to early-Showa era In 1919, Takashimaya Gofukuten KK was established. In 1922, the company constructed and opened a new store (10,000sm) at Nagahoribashi, Minami Ward, Osaka. Made of reinforced concrete and with seven floors above ground and one below ground, it represented the start of Takashimaya’s modern method of store management. In 1930, the company started using the corporate name Takashimaya Co Ltd. Three years later, the company built and opened a new store on the high street of Nihombashi, Tokyo, with two floors below ground and eight above ground (about 27,500sm), gaining recognition. Post-WWII period In 1949, the company’s stock was listed on the Osaka Securities Exchange and the Tokyo Stock Exchange. In 1952, the company adopted the rose design for its paper wrapping and the rose mark became the symbol of Takashimaya. Four years later, the company held an Italian Fair at each store, the first such international fair held in post-war Japan. In 1958, a new Takashimaya store was opened on 5th Street, New York, the first Japanese department store outside of Japan. In the following year, the company signed a licensing agreement with Pierre Cardin; with this agreement, Takashimaya became the first Japanese company to enter into an agreement with a foreign designer. In the same year, the Yokohama Takashimaya store opened after the extension and renovation of the Takashimaya store in the Yokohama Station building (opened in 1956). With this, the company established large stores in prime locations of major cities, forming the foundation for its store network today.

Growth period In 1963, the company established Toshin Development Co Ltd (now a consolidated subsidiary), and six years later Toshin Development opened Tamagawa Takashimaya SC as Japan’s first large-scale suburban

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 58/65 SR Research Report shopping center. In the 1970s, the company opened Tachikawa, Omiya, Kashiwa, Wakayama and Senboku stores. In 1989, Takashimaya Group sales (fiscal 1988) exceeded JPY1tn. Recent years In 1993, the company opened its first store in Asia in Singapore, followed by the Taipei store in 1994, accelerating overseas expansion. In 1995, the company established Yokohama Takashimaya Co Ltd, Gifu Takashimaya Co Ltd, Senboku Takashimaya Co Ltd, Okayama Takashimaya Co Ltd, and Yonago Takashimaya Co Ltd and newly opened the Yokohama, Tamagawa (former Yokohama Takashimaya Tamagawa store), Konandai (former Yokohama Takashimaya Konandai store), Gifu, Senboku, Okayama, Tsuyama (Tsuyama City, Okayama Prefecture; closed in 1999), and Yonago stores (the Yonago store became a subsidiary in 2003 and the Okayama and Gifu stores in 2004).

In 1996, the company introduced the Takashimaya card point system, the first time such a system had been used in the department store industry. In the same year, the company opened the Takashimaya Times Square in Shinjuku. In 2000, the JR Nagoya Takashimaya was opened jointly with Central Japan Railway Company. In 2006, the Nihombashi Takashimaya store was given historic building status by the Tokyo Metropolitan government, followed by the 2009 designation as one of Japan’s Important Cultural Properties. Photo courtesy of the company In 2008, the company agreed on a business and capital tie-up with H2O Retailing, with the aim of eventually merging two companies. However, the merger plan was abandoned with continued business tie-up.

2011: the company’s 180th founding anniversary. 2012: opened Shanghai Takashimaya, its first store in China. News & Topics January 2014 On January 23, 2014, the company announced changes in directors as follows: Change in directors (effective February 1, 2014) - Koji Suzuki new position: chairman of the board of directors (representative director); current position: president (representative director); - Shigeru Kimoto new position: president (representative director); current position: managing director; - Yasuhito Matsumoto

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 59/65 SR Research Report new position: director; current position: senior managing director (representative director). On the same day, the company announced the acquisition of fixed assets. The company has settled on the acquisition of Mitsubishi UFJ Trust and Banking Corporation’s share (trust beneficiary right) of the land and building of the TM Building, in Tachikawa, for JPY12.0bn. This settlement is further to the company’s release on December 26, 2013, stating that it had begun deliberations about the purchase of these assets. The company was discussing the issue with SIA KING 2 Co., Ltd., the trust beneficiary of Mitsubishi UFJ Trust and Banking Corporation’s share. This marks an attempt by the company to keep the land and building rental costs of the Tachikawa store low. November 2013 On November 26, 2013, the company announced it had finalized details for the issuance of zero-coupon convertible bonds maturing in 2018 and 2020.

Zero-coupon convertible bonds maturing in 2018 Conversion price: JPY1,445 Dilutive effect: 14.03% Zero-coupon convertible bonds maturing in 2020 Conversion price: JPY1,345 Dilutive effect: 14.03% On November 25, 2013, the company announced plans to issue zero-coupon convertible bonds maturing in 2018 and 2020. The company plans to use all the funds raised through these convertible bond issuances—approximately JPY65.5bn—for the acquisition of a part of the co-owner's share in the land and building of its Shinjuku Store in the form of beneficiary interests held under trust. Target date for acquisition: end March 2014. Takashimaya co-owns the land and building of its Shinjuku Store.

Zero-coupon convertible bonds maturing in 2018 Total par value of bonds: JPY40.0bn plus total par value of alternate convertible bonds Date of issuance: December 11, 2013 Redemption method and date: 100% par value amount redeemed on December 11, 2018 Conversion price: to be determined Dilutive effect: not yet determined since the conversion price has yet to be determined Zero-coupon convertible bonds maturing in 2020 Total par value of bonds: JPY25.0bn plus total par value amount of alternate convertible bonds Date of issuance: December 11, 2013 Redemption method and date: 100% par value amount redeemed on December 11, 2020 Conversion price: to be determined Dilutive effect: not yet determined since the conversion price is yet to be determined On November 21, 2013, the company began talks regarding property acquisition. Takashimaya co-owns the land and building of its Shinjuku Store. To reduce its rental burden at the Shinjuku Store, the company began talks regarding the acquisition of a part of the co-owner's share in the

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 60/65 SR Research Report land and building in the form of beneficiary interests held under trust. Overview of property Property: Times Square Building Location: Shibuya-ku, Tokyo Site area: 19,281.26sm (square meters) Total floor area: 160,573.74sm (Building A); 13,902.70sm (Building B) Bid price: some JPY100bn (without tax) Takashimaya has signed a statement to confirm the beginning of the talks with the co-owner (Tokyu Land Corp). The co-ownership that Takashimaya intends to acquire has been held under trust (beneficiary: Times Square LLC).

December 2012 On December 14, 2012, the company announced its decision to participate in a real estate development project in Vietnam. According to the company, subsidiary Toshin Development Co Ltd signed an agreement to acquire a 33.4% stake in a subsidiary of Singapore-based real estate developer Keppel Land Limited. The Keppel Land subsidiary holds a 68% stake in the Saigon Centre Phase 1 development project (Ho Chi Minh, Vietnam). The 33.4% stake will translate into about a 22.7% stake in the building that was completed through the Phase 1 project.

This building opened in 1996. Another building under development through the Phase 2 project, which Toshin Development joined in February 2012, will connect to the Phase 1 building in lower floors (commercial area). Combined, the Phase 1 and 2 buildings will have a total commercial area of approximately 55,000sm. Toshin Development subsidiary (Toshin Development Singapore) and Keppel Land’s subsidiary plan to establish a shopping center management joint venture in the commercial area. June 2012 On June 25, 2012, the company announced plans to form a business tie-up with SELECT SQUARE Co Ltd. The company will underwrite 59,741 shares (66.27% of all outstanding shares) to be issued by Saigon Centre Plan Phase 1 Opening 1996 Site Area 2,730 m2 Total Floor Area 39,300 m2 Commercial Area 5,500 m2 Office Area 12,800 m2 Serviced Apartments 89 rooms Phase 2 Opening 2015 Site Area 8,354 m2 Total Floor Area 142,500 m2 Commercial Area 50,000 m2 Department Store Area 15,000 m2 Office Area 40,000 m2 Serviced Apartments 200 rooms Source: Company data, SR Inc. Research

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 61/65 SR Research Report SELECT SQUARE through a third-party allotment. SELECT SQUARE operates an online apparel shopping site, and its FY03/12 sales were JPY1.8bn. The company will promote cross-selling for about 700,000 members of its online stores and about 300,000 members of the SELECT SQUARE site, aiming to achieve its online business sales of JPY10.0bn as early as possible (JPY4.0-5.0bn in FY02/12). Major shareholders Top management The company’s chairman and representative director is Koji Suzuki (born 1945). He joined the company in 1968 and in 1995 was appointed a director and became the head of the Central Management Planning Office. After serving in a number of senior positions, he was appointed president and representative director in 2003, and then chairman and representative director in 2014. President and representative director Shigeru Kimoto (born 1956) joined Yokohama Takashimaya Co., Ltd. in 1979. In 2010, he was appointed head of the Shinjuku store and an executive officer of the company. In 2011, he became a managing director of the company, vice-president of planning and head of the restructuring office. In 2014 he was appointed to his current position. Employees On a consolidated basis, the company had 7,858 full-time employees at end February 2012 and employed an average of 9,651 part-time workers during the course of a year. On a parent basis, the company had 5,192 full-time workers and a yearly average of 5,718 part-time workers. The average age and average length of employment for its full-time workers in FY02/12 and on a parent basis are shown below. Average age: 43.8 years Average length of employment: 22.1 years Dividends and shareholder benefits The company has made stable dividend payments to shareholders. Up to FY02/05, it paid dividends of JPY7.5 per share and since then gradually increased the amount to JPY10 per share in FY02/13 (payout As of February 28, 2013 Top Shareholders Amount Held H2O RETAILING CORPORATION 10.00% Japan Trustee Services Bank, Ltd. (Trust account) 9.59% The Master Trust Bank of Japan, Ltd. (Trust account) 5.29% Nippon Life Insurance Company 4.29% Takashimaya Kyoeikai 2.32% Takashimaya Employee Stock Ownership Plan 1.70% Sotetsu Holdings, Inc. 1.45% Deutsche Bank Group 1.07% Trust & Custody Services Bank, Ltd. (Trust Account) 0.86% SSBT OD05 OMNIBUS ACCOUNT-TREATY CLIENTS 0.85% Source: Company data, SR Inc. Research

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 62/65 SR Research Report ratio 19%). The company has not repurchased its own shares for some time. The company’s individual investors can also enjoy shareholder benefits, a practice widely used by Japanese companies. Takashimaya issues a shareholder benefit card twice a year, at the end of February and August, to all shareholders who own at least 1,000 shares at that moment. The card provides the holder with a 10% discount on designated products for purchases made in cash at Takashimaya stores, within the total upper purchase limits listed below: From 1,000 shares to 2,999 shares: up to JPY500,000 From 3,000 shares to 9,999 shares: up to JPY1.5mn Over 10,000 shares: up to JPY2.5mn Depending on the card held, up to three people can attend free of charge the cultural events held at any Takashimaya store.

Investor relations The company holds results briefings twice a year (April and November). Per Share Data (Yen) FY02/09 FY02/10 FY02/11 FY02/12 FY02/13 Cons. Cons. Cons. Cons. Cons. No. of shares (Thousands) 330,827 330,827 330,827 330,827 330,827 Earnings Per Share 35.6 23.4 42.0 33.0 50.1 EPS (Fully Diluted) 34.5 22.1 39.1 30.7 46.6 Dividend Per Share 10.0 10.0 10.0 10.0 10.0 Book Value Per Share 843.8 871.1 897.9 915.9 998.6 Payout Ratio 28.1% 42.8% 23.8% 30.3% 19.9% Source: Company Data, SR Inc. Research

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 63/65 SR Research Report By the way Hiraba The Japanese term for the space operated by the department store itself and selling a mix of merchandise from several manufacturers Shouka The Japanese term for purchase-as-sold transaction method, generally translated as consignment sales. Confusion can arise in the relationship with itaku hanbai transaction method, also translated as consignment sales. Despite common translation, the two methods have different accounting treatments. The former (purchase-as-sold) presumes that the title is not transferred to a department store until actual sale, ie, never booked as department store inventory; the latter consignment sales implies the goods become department store inventory (returnable to the manufacturer if unsold). Gaisho The Japanese term for external customers. A traditional sales method in Japan’s department store industry where department store sales clerks visit the homes of loyal customers or the offices of loyal companies to take their orders, like a personal shopping service.

Takashimaya Co., Ltd. (8233) 2014/5/1 http://www.sharedresearch.jp/ Copyright (C) 2013 Shared Research Inc. All Rights Reserved 64/65 SR Research Report Company profile Company Head office Takashimaya Co Ltd 5-1-5 Namba Chuo-ku Osaka, Japan 542-8510 Phone Listed on +81-6-6631-1101 Tokyo Stock Exchange 1st Section Established Exchange listing August 20, 1919 May 16, 1949 Website Fiscal year-end http://www.takashimaya.co.jp/store/foreign/index.html February IR phone IR web +81-3-3668-7253 http://www.takashimaya.co.jp/corp/english/index.html

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