Thinking Points

  • Jichodo (TSE: 3597) primarily designs and manufactures men’s workwear and secondarily makes men’s casualwear, medical wear, and safety shoes.
  • The company got its start in uniforms and workwear, but expanded into men’s casual wear, medical wear, and safety shoes to increase its total addressable market.
  • Its inventory strategy consists of keeping a large amount of inventory and shipping out quickly, shifting inventory risk from retailers to Jichodo, thereby reducing the burden on retailers.
  • At 7,080 yen per share, Jichodo trades at 87.5% of adjusted NCAV with a market capitalization of 20,412 million yen ($188 million USD)
  • Investors can expect an investment CAGR of between 7.5% and 14.8%, inclusive of dividends, over the next 5 to 8 years.

Introduction

Jichodo (TSE: 3597) is an apparel maker mostly known for designing and manufacturing workplace uniforms. Secondarily, the company makes men’s casualwear, medical lab coats, and safety shoes. The company runs a single segment operation and does not breakdown revenues by products category.

Source: Kenkyo Investing, based on company data

The company sells under brand names such as Jichodo, Jawin, Z-Dragon, or its legacy brand tomoe SAKURA. While Jichodo is primarily focused on workwear apparel, the company has increasingly developed its medical wear offerings in recent years to counter the decrease in total addressable market for its workwear offering.

The business & environment

Jichodo was established in 1924 by Idehara Yasutaro in Hiroshima. The company started out by manufacturing both student uniforms and workwear. In 1955, Jichodo suspended production of student uniforms and shifted focus to menswear. 

In order to expand sales channels for men’s dress slacks, the  company setup an office in Tokyo in 1968. In the following ten years, Jichodo proceeded to build a factory, open an office in Osaka, and setup a logistics facility.

The company spent much of the 1990s setting up overseas operations, with facilities in Thailand and China (which were later sold off). More recently, Jichodo started manufacturing and selling medical wear in 1999 and safety shoes in 2005. 

Source: Company website

Jichodo’s revenues took a hit during the 2008-2010 global financial crisis and has not fully recovered. Interestingly, however, the company still managed to generate operating profits above pre-crisis levels:

Source: Kenkyo Investing, based on company data

Without disclosing details, Jichodo notes that the company is heavily dependent on imports, particularly from China. Many of its transactions are pegged to either the US Dollar or Chinese Yuan. 

Interestingly, when the Japanese Yen strengthened considerably in 2016, the company’s operating profit increased 31.7% YoY while its net income decreased 76.9% YoY due to losses of 1,866 million yen ($17.2 million USD) on foreign currency forward exchange contracts. 

More recently, operating profits dipped from 2018 to 2019 despite the 11.5% YoY increase in revenues. The company mainly attributes this to a partial change in shipping method (from sea to air) for materials and products between overseas factories and the company, which increased shipping costs by 270 million yen ($2.5 million USD). Additionally, the company spent 100 million yen ($919K USD) for repairing and/or disposing of old equipment.

From an operating performance standpoint, the company has been able to maintain more-than-healthy margins, even through the global financial crisis when it posted 9.9% margins. Jichodo appears more susceptible to major fluctuations in currency exchange rates than the economic cycle.

Another one of Jichodo’s greater risks is its inventory strategy, which consists of stocking high levels of inventory to avoid stock outs. As of Q1 FY06/20, the company carried 17,133 million yen ($158 million USD) in finished inventory. In comparison, 2019 revenues were at 19,360 million yen ($178 million USD). 

Interestingly, the inventory strategy was first implemented by current board chairman Gunzo Idehara back in the 1970s. The company had built its distribution capabilities to quickly ship-out products when the industry standard was for retailers to carry large amounts of inventory to avoid stockouts.

The inventory strategy was introduced in the 1970s, back when retailers were primarily responsible for carrying inventory. This was an initiative pushed by Gunzo Idehara (current board chairman)

For FY06/20, the company expects revenues of 19,800 million yen ($182 million USD, +2.3% YoY) and operating profit of 2,800 million yen ($25.7 million USD, +9.9% YoY). As of Q1 FY06/20, Jichodo delivered revenues of 4,628 million yen ($42.6 million USD, +6.5% YoY) and operating profit of 473 million yen ($4.4 million USD, -13.1% YoY). The company attributed the operating profit decline to an increase in cost of materials, increase in logistics costs due to inventory buildup, and an increase in advertising expenses.

Shareholders

As of Q1 FY06/20 (ending September 30, 2019), Jichodo has 3,230,701 shares issued and 347,642 shares in treasury, putting outstanding shares at 2,883,089. 

Here are the major shareholders:

Source: Kenkyo Investing, based on company and Nikkei data

The founding Idehara still maintains about a 36.4% stake in Jichodo. Moreover, 4 of the 11 board seats are occupied by Idehara family members. Investors sensitive to family controlled businesses may want to look elsewhere.

With that said, shareholder return efforts have been good. Jichodo not only pays out healthy dividends, but it also regularly repurchases shares. Between FY06/10 and FY06/19, the company spent 2,192 million yen ($20.2 million USD) on repurchases. 

On a per share basis, revenues and operating profits grew 2.7% and 4.8%, respectively, between FY06/10 and FY06/19.

According to FY06/10 filings, Jichodo had 853 shareholders. In FY06/19, the company had 906 shareholders. The delisting criteria for Section 2 of the Tokyo exchange is less than 400 shareholders, with a one year grace period. Hence, the company may be open to further repurchases.

The company offers no equity compensation to the management team.

Financials & Valuation

  • Jichodo primarily designs and manufactures men’s workwear and secondarily makes men’s casualwear, medical wear, and safety shoes.
  • The company got its start in uniforms and workwear, but expanded into men’s casual wear, medical wear, and safety shoes to increase its total addressable market.
  • Its inventory strategy consists of keeping a large amount of inventory and shipping out quickly, shifting inventory risk from retailers to Jichodo, thereby reducing the burden on retailers.
  • At 7,080 yen per share, Jichodo trades at 87.5% of adjusted NCAV with a market capitalization of 20,412 million yen ($188 million USD)
  • Investors can expect an investment CAGR of between 7.5% and 14.8%, inclusive of dividends, over the next 5 to 8 years.

Jichodo got its start by designing and manufacturing workwear, but expanded into men’s casual wear, medical wear, and safety shoes to address a greater market. The company operates a rather unique inventory strategy of intentionally keeping large amounts of inventory to prevent stockouts and maintaining distribution capabilities of quick delivery. 

Due to the strategy, much of the company’s assets comes in the form of finished goods inventory. In Q1 FY06/20, the company carried finished goods inventory worth 88.5% of FY06/19 revenues. In other words, while the company may be trading below NCAV, it has high working capital requirements and likely less excess cash than most deep value investors expect. With that said, the company maintains a more-than-healthy operating business which profitably weathered through the 2008-2010 global financial crisis.

As mentioned earlier, however, the company proactively repurchases shares. What’s more, Jichodo generally maintains a dividend payout ratio above 30%. For FY06/20, the company plans to payout 864 million yen ($7.9 million USD) in dividends, or 44.5% of forecasted net income. This comes out to a forward dividend yield of 4.2%.

At 7,080 yen per share, Jichodo trades at 96.6% of adjusted NCAV with a market capitalization of 20,412 million yen ($188 million USD). Adjusted for long-term investment holdings, the company trades for 87.5% of NCAV.

Overall, with a healthy operating business and a solid history of shareholder returns, 120% to 150% of adjusted NCAV ought to be a good range for fair value. With this assumption, investors can expect an investment CAGR of between 7.5% and 14.8%, inclusive of dividends, over the next 5 to 8 years.

The bottom line

Jichodo is an established apparel maker mainly specializing in workwear, but also making men’s casual wear, medical wear, and safety shoes. The company takes an interesting approach to inventory management, stocking up inventory for the purpose of easing the burden for its customers. At 7,080 yen per share, investors can expect an investment CAGR of between 7.5% and 14.8%, inclusive of dividends, over the next 5 to 8 years.


Kenkyo Investing
Kenkyo Investing

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