H2O Retailing : FINANCIAL REPORT 2022

H2O RETAILING CORPORATION

FINANCIAL REPORT 2022

Profile

Hankyu Department Stores, Inc. was established in 1929 in Umeda Osaka, as the world's first railway terminal department store by Mr. Ichizo Kobayashi, the founder of the Hankyu Corporation. Helped by the ability of a railway terminal to attract customers, the store grew together with the Umeda area, and a succession of stores in other areas were subsequently opened. In 1947, the Company was spun off from Hankyu Corporation and the Hankyu Department Stores Group was formed.

On 1st October 2007, Hankyu Department Stores, Inc. changed its name to H2O RETAILING CORPORATION and became a holding company in accordance with the management integration between Hankyu Department Stores, Inc. and Hanshin Department Store, Ltd.

On 1st June 2014, H2O RETAILING CORPORATION had a management integration with Izumiya, Co., Ltd.

On 1st October 2017, the Group purchased the businesses of Sogo Kobe and Seibu Takatsuki stores from Sogo & Seibu Co., Ltd.

On 15th December 2021, H2O RETAILING CORPORATION had a management integration with Kansai Super Market Ltd.

Currently, the Group consists of 45 subsidiaries and 8 affiliates that operate retail businesses, including its core department store operations, supermarket operations and shopping centre operations.

Contents

General Business Conditions	01
Corporate Governance System	18
Five-Year Summary	52
Consolidated Balance Sheets	53
Consolidated Statements of Operations	55
Consolidated Statements of Comprehensive Income	56
Consolidated Statements of Changes in Net Assets	57
Consolidated Statements of Cash Flows	58
Notes to the Consolidated Financial Statements	60
Corporate Data	129

General Business Conditions

1. Management Analysis of Financial Position, Business Performance and Cash Flows

The future information contained in these materials reflects judgements made at the end of fiscal year ended 31st March 2022.

From the current fiscal year, Hankyu Kitchen Yell Kansai, Inc., EveryD.com, Inc. and Hankyu Sennan Green Farm, which were previously included in the Other Businesses segment, were transferred to the Supermarket Business segment, and Oi Development Co., Ltd., which was also included in Other Businesses segment, was transferred to the Shopping Centre Business segment. HANKYU B&C Planning Co., Ltd. and Hankyu Freds Co., Ltd., which were included in the Other Businesses segment, were absorbed by Hankyu Bakery Co., Ltd. that is in the Supermarket Business segment on 1st April 2021. Year-on-year comparisons are shown based on the results for the previous fiscal year, which have been reclassified into the new reportable segments.

Following the management integration through a share exchange with Kansai Super Market Ltd. (*1) on 15th December 2021, Kansai Food Market Ltd., Kansai Super Market Ltd. and Kansai Super Premium Co., Ltd. were included in the Supermarket Business segment, and consolidated financial results included the operating results for the fourth quarter of above three companies.

(1) Accounting estimates that significantly affect the consolidated financial statements

In preparing the Group's consolidated financial statements, management makes various estimates that affect the reported amounts of assets and liabilities as of the balance sheet date, the disclosure of contingent assets and liabilities, and income and expenses for the reporting period.

Out of these accounting estimates, items deemed to contain a risk of significantly affecting the consolidated financial statements for the next fiscal year are described in "Notes to the Consolidated Financial Statements (Significant Accounting Estimates)" in the Consolidated Financial Statements. In addition, assumptions used to reflect the impact of COVID-19 in these estimates, which are applicable across accounting estimates, are described in "Notes to the Consolidated Financial Statements (Additional Information)" in the Consolidated Financial Statements.

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(2) Business Performance for Reporting Period Consolidated business performance for the fiscal year

									(Millions of yen)
		March 2020	March 2021		March 2022 Cumulative
		Cumulative	Cumulative	Amount	YOY	Change	Versus		Change
		Amount	Amount	forecast
	Department Store	473,225	347,768	385,095	110.7%	+37,327	100.3%	+1,095
	Business
	Supermarket Business	354,115	292,754	327,205	111.8%	+34,451	100.6%	+2,005
	Shopping Centre Business	8,725	65,024	42,879	65.9%	(22,145)	98.6%	(620)
	Other Businesses	61,222	33,651	32,928	97.9%	(722)	101.9%	+628
Consolidated gross sales	897,289	739,198	788,108	106.6%	+48,910	100.4%	+3,108
Net sales	897,289	739,198	518,447	-	-	100.7%	+3,447
	Department Store	11,486	(1,903)	939	-	+2,843	469.5%	+739
	Business
	Supermarket Business	(2,503)	4,086	5,326	130.3%	+1,239	106.5%	+326
	Shopping Centre Business	4,141	(757)	391	-	+1,149	-	+391
	Other Businesses	2,903	(1,516)	(3,409)	-	(1,892)	-	+190
	Consolidation adjustment	(4,856)	(4,347)	(2,506)	-	+1,840	-	+93
Operating income (loss)	11,171	(4,438)	740	-	+5,179	-	+1,740
Ordinary income (loss)	11,831	(2,907)	2,346	-	+5,253	469.3%	+1,846
	Extraordinary income	1,707	3,049	27,032	886.3%	+23,982
	Extraordinary losses	22,875	24,172	13,792	57.1%	(10,380)
Profit (loss) attributable to	(13,150)	(24,791)	9,872	-	+34,663	89.7%	(1,127)
owners of parent

*1. Actual results in the year ended 31st March 2022 represent figures based on the previous reportable segments.

*2. The Company has applied "Accounting Standard for Revenue Recognition" from the beginning of the year ended 31st March 2022 and changed the method of recording net sales, etc. based on agreements in which purchase is recognised at the time of sales of merchandise. Because net sales have been affected significantly, YOY comparisons and YOY changes have not been provided. Figures which are equivalent to net sales up to the previous fiscal year excluding the effects of changes in accounting policies are shown as consolidated gross sales.

• Net sales

The Company has applied "Accounting Standard for Revenue Recognition" (ASBJ Statement No. 29, 31st March 2020) and other standards from the beginning of the current fiscal year. Consolidated net sales for the fiscal year ended 31st March 2022 was ¥518,447 million. Consolidated gross sales, which is equivalent to net sales up to the previous fiscal year excluding the effects of changes in accounting policies, amounted to ¥788,108 million. Net sales on a real basis increased by 6.6% from the previous fiscal year, despite the closure of stores due to the declaration of the state of emergency and restrict of operations occurred as in the previous fiscal year.

• Operating income / ordinary income

Despite the impact of the COVID-19, net sales recovered from the previous fiscal year, operating income was ¥740 million (operating loss of ¥4,438 million in the previous fiscal year). Ordinary income was ¥2,346 million (ordinary loss of ¥2,907 million in the previous fiscal year).

Department Store Business

In late April 2021, a state of emergency was declared. Some stores were completely closed, and stores including both

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Hankyu and Hanshin main stores shifted to operating only in the daily necessities section (43 days at 4 stores in Osaka Prefecture, including both Hankyu and Hanshin main stores and 29 days at 6 stores in Hyogo Prefecture). In August, a state of emergency declared again as the infection had spread. Some stores were refrained from holding events and restricted entry to the food floor. From October, demand for fashion and gift items became active as opportunities to go out and to meet people increased. However, COVID-19 affected throughout the fiscal year, like in January 2022, with a decrease in store visits, especially among seniors and families, due to the infection spread that occurred again.

Hanshin Umeda Main Store, which had been reconstructed, pre-opened on 8th October 2021 and full-opened from the first floor to the ninth floor on 8th December (fully opened including basement food floor on 6th April 2022). New Hanshin Umeda Main Store has strengthened its proposals for all scenes of eating and food floor expanded from three to four floors. Customer response to the new value of the experience was high, resulting in a wide range of customers visiting the store.

As results of the above, consolidated gross sales was ¥385,095 million, increased by 10.7% year on year and operating income was ¥939 million (operating loss of ¥1,903 million in the previous fiscal year). Hankyu Hanshin Department Store recorded an extraordinary loss of ¥3,819 million, including personnel expenses, rent and depreciation expenses during the period of closure.

Supermarket Business

Consolidated gross sales was ¥327,205 million, increased by 11.8% year on year and operating income was ¥5,326 million, increased by 30.3% year on year.

Although Izumiya Co., Ltd. increased sales due to the transfer of the Super Centre food division, its profit decreased due to the decrease in sales at existing stores (sales at existing stores decreased by 2.7% year on year) in reaction to the previous fiscal year's demand for eating at home and increase of cost.

Izumiya celebrated its 100th anniversary by selling commemorative merchandise and holding events in collaboration with the local community under the theme of "thankfulness" and "relationship." Super Centre stores, including Yao and Yawata stores, had renovation of transforming to Shopping Centre model and sales were affected during the renovation construction period. On the other hand, due to the impact of re-emergence of COVID-19, performance of stores in small commercial areas were good. Selling, general and administrative expenses increased due to an increase in sales commission in line with cashless payment ratio.

Hankyu Oasis Co., Ltd. decreased in sales and increased operating income by improvement of gross margin. Hankyu Oasis Co., Ltd. worked to strengthen its ability to respond to the market with a basic policy of transforming itself into a highly profitable company. Existing stores sales decreased by 0.5% year on year (number of customers decreased by 0.1% and average spend per customer decreased by 0.5% year on year. Although the number of customers was on par with the previous fiscal year, average spend per customer was slightly lower than the previous fiscal year due to a decrease in the number of items purchased per visit. Sannomiya store in April 2021 and Oyodo Minami store in March 2022 newly opened and 4 stores were renovated to change the MD to meet the changing in commercial areas and to introduce sweets sold in department stores. Selling, general and administrative expenses decreased from the previous fiscal year due to the efforts to restrain the purchase price of consumable supplies.

For Kansai Super Market Business (*2), net sales for the fourth quarter (January to March, 2022) was ¥31,042 million and operating income was ¥1,391 million. Kansai Super Market Business worked to realize a "total solution

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