Thinking Points

  • Atsugi (TSE: 3529) is one of Japan’s best known brands for women’s undergarments, particularly with stockings, and also operates a real estate business.
  • Over the last decade, Textile segment performance, which includes women’s undergarments, has come under pressure as the retail environment rapidly moves toward e-commerce.
  • While the company is in the middle of restructuring its business to respond to deteriorating performance, there has been no sign of fundamental improvement so far.
  • At 898 yen per share, the company trades at 68% of adjusted NCAV with a market capitalization of 14,224 million yen ($133 million USD).
  • Investors can expect an investment CAGR of between 3.1% and 9.1%, inclusive of dividends, over a 5 to 8 year period.

Introduction

Atsugi (TSE: 3529) primarily manufactures and sells undergarments for women. Secondarily, the company has a real estate business, renting out part of its HQ building as well as buildings in other areas. Atsugi reports through three segments: Textiles, Real Estate, and Other:

Source: Company filings

The company’s textile business has been under pressure since 2008, with shrinking operating margins. While the textile business remained profitable for the most part, it produced losses in fiscal 2015, then again in 2019. Atsugi wrote-off 710 million yen ($6.6 million USD) of inventory and disposed of 160 million yen ($1.5 million USD) of work-in-process inventory and finished goods toward the end of fiscal 2019.

The business & environment

Atsugi was founded in 1947 in Kanagawa prefecture, southwest of central Tokyo. Although the company manufactured socks at the time of founding, its main product was whaling ropes. In 1952, Atsugi started manufacturing seamless stockings and tights. This marked the beginning of its focus on undergarments.

By 1961, the company started developing its own direct distribution channels with aims to buildout nationwide. It  expanded its product lineup to include lingerie and foundation garments in 1964, then added pantyhose to the lineup in 1968. The pantyhose was a hit, and the company continued expanding its pantyhose production lines through 1970. At one point, Atsugi was selling pantyhose through vending machines.

Today, the company is among the most well known undergarment brands in Japan. It maintains its own production and distribution network, and the management team generally considers this to be a competitive advantage. Unlike Fast Retailing (TSE: 9983) or Nitori Holdings (TSE: 9843), which maintains its own production, distribution, and store network, Atsugi does not have its own store network.

Separate from its textile business, Atsugi also produces nursing care equipment like wheelchairs, beds, and portable toilets, which accounts for less than 1% of annual revenues. Additionally, the company rents out office space in its Kanagawa HQ building as well as a couple of other company facilities.

Source: Company filings

* Until fiscal 2009, real estate revenues were included in the Other segment.

Revenue performance has remained mostly consistent over the last decade, with the exception of fiscal 2019. The company attributes the decline to weakening inbound tourist demand. This comment poses the question of how stable Atsugi’s consumer demand actually is, mainly because Textile revenues declined by 9.1% from fiscal 2018 to 2019 amid record-level tourism in Japan.

During fiscal 2019, Atsugi wrote-off 710 million yen ($6.6 million USD) of inventory and disposed of 160 million yen ($1.5 million USD) of work-in-process inventory and finished goods. Additionally, the company booked one-time losses of 2,600 million yen ($24.2 million USD) as it is consolidating its logistics operations and production network.

For fiscal 2020, the company expects 22,000 million yen ($205 million USD) in revenues and 700 million yen ($6.5 million USD) in operating income. In its medium term plan, the company aims to achieve revenues of 23,000 million yen ($214 million USD) and operating income of 1,200 million yen ($11.2 million USD) by the end of fiscal 2021.

Shareholders

As of fiscal 2019 (ending March 31st, 2019), Atsugi had 17,319,568 shares issued and 1,286,017 shares in treasury, putting outstanding shares at 16,033,551.

Here are the major shareholders:

Source: Company filings & Nikkei

The company does not offer equity compensation to the management team.

With the exception of fiscal 2014 and 2015, Atsugi has consistently repurchased 1+% of outstanding shares since 2011. Additionally, it has maintained dividend per share of 30 yen since fiscal 2010.

Financials & Valuation

  • Atsugi is one of Japan’s best known brands for women’s undergarments, particularly with stockings, and also operates a real estate business.
  • Over the last decade, Textile segment performance, which includes women’s undergarments, has come under pressure as the retail environment rapidly moves toward e-commerce.
  • While the company is in the middle of restructuring its business to respond to deteriorating performance, there has been no sign of fundamental improvement so far.
  • At 898 yen per share, the company trades at 68% of adjusted NCAV with a market capitalization of 14,224 million yen ($133 million USD).
  • Investors can expect an investment CAGR of between 3.1% and 9.1%, inclusive of dividends, over a 5 to 8 year period.

Atsugi is one of the few leading women’s undergarment brands in Japan. In recent years, however, the company has experienced difficulty growing revenues meaningfully. In fact, its Textile segment revenues declined sharply by 9.1% from fiscal 2018 to 2019.

Moreover, the company disposed of 870 million yen ($8.1 million USD) in inventory during fiscal 2019. As a result, the company reported operating losses for fiscal 2019. In an attempt to right-size its organization, Atsugi consolidated its logistics operations and closed three satellite factories, recording a 2,600 million yen ($24.2 million USD) one-time loss in the process.

While consolidating operations will help Atsugi return to profitability in the near to medium term, the company still faces a longer term revenue problem. For its medium term plan, Atsugi aims for 23,000 million yen ($214 million USD) in revenues by the end of fiscal 2021, compared to 21,869 million yen ($204 million USD). The company points to strengthening its socks & inner-wear offerings, increasing the ratio of direct retail sales, and expanding overseas sales, but none has materialized meaningfully so far.

Without a tangible solution to the revenue problem, Atsugi’s operating business quality is somewhere between poor and medium quality. What helps the company is its Real Estate segment, which consistently generates a profit of about 400 million yen ($3.7 million USD). With this in mind, fair value ought to be between 80% and 100% NCAV.

Source: Company filings


At 898 yen per share, Atsugi trades at 116% of NCAV with a market capitalization of 14,224 million yen ($133 million USD). Adjusted for investment security holdings, the company trades at 68% of NCAV. Without sustainable improvement in operating performance, at least to 2018-levels, the company will not be able to maintain its recent share repurchase and dividend payout scale.

Taking this into consideration, along with Textile segment operating profit between 0 and 100 million yen ($930K USD), investors can expect an investment CAGR of between 3.1% and 9.1%, inclusive of dividends, over a 5 to 8 year period.

Source: Company filings

The bottom line

Atsugi is among the top brands in women’s undergarments in Japan. Despite this, the company’s operating performance has suffered in recent years, resulting in an operating loss for fiscal 2019. While Atsugi has taken steps that will help it return to profitability over the near to medium term, its underlying revenue problem remains. At 898 yen per share, investors can expect an investment CAGR of between 3.1% and 9.1%, inclusive of dividends, over a 5 to 8 year period. Keep in mind, however, that without a tangible solution to the revenue problem over the long-term, the company’s business performance, and consequently its share price, may not improve.


Kenkyo Investing
Kenkyo Investing

Kenkyo Investing applies a value investing approach to Japanese equities, providing insights that are often unavailable to non-Japanese speakers.