TSI ties with Development Bank of Japan, readies M&A fund

TSI Holdings is one of Japan’s most establishment apparel houses, with links across government and industry, providing a support network that has helped it through the tumultuous years of merger and rationalisation. These links became more transparent last month when the Development Bank of Japan acquired a stake and became its key advisor on future M&A – for which TSI now has a sizeable fund.

Last month TSI signed a joint venture with Development Bank of Japan (DBJ). DBJ’s purchase of a 5.82% stake formalises its role as the de facto advisor to TSI for M&A, overseas expansion, market intelligence at home and overseas, and for new projects. DBJ will also potentially provide funds for “large scale acquisitions”. It may also acquire more stock in the company over the next six months, taking its share to 10%.

Why an apparel group needs the DBJ as its advisor is a question partly answered in TSI’s latest medium term plan. This calls for sales of ¥201 billion through FY2017, up from ¥180 billion in FY2014, and an increase in operating profit to ¥14 billion, up from just ¥900 million last year. A significant chunk of the new sales will come from M&A, and the DBJ will be an advisor.

TSI’s current problem is lack of focus, and it needs this to grow profits again, but if it cuts retail chains and brands it will lose turnover. M&A will fill this gap.

And the gap will be big. TSI Holdings has been busy in the last few years slashing and burning its way through its haphazard and unwieldy portfolio of stores and brands. From 2012-2014 TSI cut 900 stores and 19 brands in ongoing consolidation following the merger of Tokyo Style and Sanei International. This year it will close down another nine brands, and some 300 more stores will be closed by 2017. At the beginning of September it announced 528 voluntary redundancies.

TSI hopes this tough love policy will help increase profits again, and finally deliver the kind of return on capital that investors have been demanding. It says that closure of loss making units alone will increase operating profits by ¥3.5 billion in the next two years, and reducing overhead and other expenses will save another ¥2.5 billion. Work on supply chains – increasing direct from factory supply from 10% to 30% – will bring in ¥3 billion in annual savings, and increasing e-commerce to 20% of sales will add a further ¥1.5 billion in profit.

But reduction in store numbers will also of course mean a further fall in turnover. The existing business will contract to sales of around ¥160 billion. To fill this, TSI will open a net 290 stores through FY2017 for its better brands, and buy new businesses. New stores should add ¥26 billion and M&A another ¥15 billion, bringing sales up to ¥201 billion. And M&A will not just be about fashion; TSI sees diversification as the best solution to the lack of growth in the Japanese population, and plans investments in restaurants, hotels, beauty, health and home fashion, as well as a major drive overseas. It has allocated ¥20 billion to make this happen.

It is this emphasis on M&A at home and overseas that explains the tie with the DBJ. The immediate effect of the deal was to bolster TSI’s capital by ¥5.5 billion and TSI says it will add ¥4.5 billion of this to its M&A pot, as well as invest in IT systems to the tune of ¥1 billion and build up its e-commerce operations. This means an M&A fund of close to ¥25 billion. Add in the large loans the DBJ has already said it is willing to stump up and TSI’s shopping budget begins to look interesting.

For now, the culling of brands and stores continues to impact TSI’s sales and bottom line. Sales for 1Q2015 fell 5% to ¥44 billion and operating profit fell 35%.

With many brands now closed down, TSI has more funds to spread over a smaller number of key brands. It is particularly hopeful about the prospects for Stussy, Pearly Gates, Caraway Apparel and Margaret Howell, as well as retail chains such as Rosebud and Nano Universe. TSI also recently signed an exclusive import and license deal with Sunspel Menswear, the long-established British clothing manufacturer and clothier to the James Bond franchise.

For the full year, TSI expects sales up a fraction to ¥181 billion and operating profit of ¥2.4 billion.

TSI and Cath Kidston part ways

Cath Kidston will end its partnership with TSI Holdings from this month. TSI subsidiary Sanei International originally signed a five year deal with the UK accessories brand in 2010, taking over from United Arrows which had held the rights since 2002. The partnership will be replaced by a 100% subsidiary with the aim to increase store investment and brand marketing.

There are currently 31 stores in Japan as well as four outlet stores, up from six when TSI took over distribution from United Arrows. All except one will pass to the new company.