SEC Filing Summary
Reporting entity: Yoshitsu Co., Ltd. (Nasdaq: TKLF), a Japanese retailer and wholesaler of beauty, health, sundry and other products. The filing identifies Tokyo Lifestyle Co., Ltd. as a wholly owned subsidiary renamed Kaika International Co., Ltd. in August 2022; this is not a standalone Tokyo Lifestyle quarterly filing.
Reporting period: Annual report for the fiscal year ended March 31, 2023, with comparisons to fiscal 2022 and 2021. The filing does not provide standalone 2022 Q4 results. Financial statements are prepared under U.S. GAAP. Amounts below are in U.S. dollars unless stated otherwise.
Financial Performance and Liquidity
| Metric | FY ended March 31, 2023 | FY ended March 31, 2022 |
|---|---|---|
| Revenue | $169.7 million | $234.8 million |
| Gross profit / margin | $29.4 million / 17.3% | $43.7 million / 18.6% |
| Operating income | $0.8 million | $7.3 million |
| Net income (loss) | $(8.0) million | $3.9 million |
| Cash from (used in) operations | $(25.7) million | $(7.0) million |
| Cash at year-end | $1.8 million | $18.3 million |
| Short-term borrowings | $60.6 million | $40.3 million |
| Long-term borrowings | $13.1 million | $22.6 million |
- Year-end current assets were $106.6 million and current liabilities $98.0 million, leaving working capital of approximately $8.6 million, down from $45.1 million a year earlier.
- Accounts receivable, net, rose to $89.4 million from $41.0 million; the filing attributes slower collections to pandemic-related shipment delays and payment processing. Management reported that about 33.4% of the March 2023 receivables balance had subsequently been collected and expected most of the remainder to be collected by September 30, 2023.
- Assets totaled $146.7 million, liabilities $117.4 million and shareholders’ equity $29.3 million at March 31, 2023.
Material Changes Versus Prior Period
- Revenue declined 27.7%, primarily reflecting lower online sales and services, partially offset by growth in franchise and wholesale revenue. Online stores and services revenue fell 83.1% to $20.7 million; franchise stores and wholesale revenue rose 37.9% to $137.4 million.
- Channel mix shifted substantially: franchise and wholesale revenue increased to 81.0% of total revenue from 42.4%, while online stores and services fell to 12.2% from 52.0%. In August 2022, the company outsourced overseas online-store operations and began selling to those operators as wholesale customers, changing how some revenue was classified.
- China-market revenue fell to $86.7 million, or 51.1% of total revenue, from $197.6 million, or 84.2%. Japan domestic-market revenue rose to $72.2 million from $22.0 million.
- Gross margin contracted by 1.3 percentage points. Selling, general and administrative expenses decreased 21.5% to $28.6 million, but operating income dropped 88.7% to $0.8 million.
- Operating cash outflow widened to $25.7 million, and cash declined by $16.5 million. Short-term borrowings increased, while long-term borrowings declined.
Outlook, Risks and Unusual Items
- Management outlook: Management expected revenue and net income to increase in FY2024 versus FY2023, citing China’s easing of COVID-related restrictions, operating-efficiency measures, and a greater emphasis on franchise growth. It stated that cash, operating cash flow, available bank facilities and promised support from the controlling shareholder and a related party were expected to cover needs for at least 12 months from the financial statements’ issuance. These are expectations, not guarantees.
- Growth plans: The company described plans to open 10 directly operated stores in Japan and 10 in Hong Kong over three years, and to add 15 franchise stores across several markets. It also estimated $8 million to $10 million for a shopping app and related logistics facilities. The filing also reports that, after year-end, the company agreed to sell Kaika International and its 40% interest in Palpito to a related party; both sales closed July 1, 2023 for approximately $38,000 and $301,000, respectively.
- Liquidity and refinancing: The $60.6 million syndicated short-term loan was due in September 2023 and carried a TIBOR-plus-0.70% rate. Management expected renewal based on past experience, but renewal was not assured. Loan covenants include financial and operational restrictions; despite the FY2023 loss, the company said it had not received a default or acceleration notice as of the filing.
- Consumption-tax examination: A Japanese tax examination relating to July 2018–December 2021 export documentation resulted in a $6.6 million charge for additional and delinquent tax. The company recorded approximately $16.6 million net consumption tax payable and approximately $23.7 million in compensation receivable from suppliers and customers. It said installment-payment approval was pending and expected compensation collections to offset the tax cash burden; collection and collectability remain important uncertainties.
- Other key risks: Dependence on China-related sales, large and slower-collecting receivables, reliance on short-term bank financing, supplier and franchisee concentration, currency movements, competitive pressure, leases, and product-liability exposure. The company disclosed that it does not carry product-liability insurance.
- Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at March 31, 2023, citing insufficient U.S. GAAP/SEC reporting personnel and IT general-control weaknesses involving access, password management, IT operations and cybersecurity. Remediation was planned; the auditor did not attest to internal controls.
- Audit and contingencies: The FY2023 consolidated financial statements received an unqualified audit opinion. The auditor did not express an opinion on the full FY2022 and FY2021 statements as presented, but audited the retrospective adjustments for common-control acquisitions. The company reported no material ongoing legal proceeding.
Most Important Facts for Investors to Verify
- Whether the September 2023 short-term borrowing was renewed or repaid, and whether any covenant requirements were triggered.
- Actual subsequent collections of the $89.4 million net receivables balance and the $23.7 million consumption-tax compensation receivable, as well as the tax authority’s decision on installment payments.
- Whether FY2024 revenue, net income and operating cash flow improved as management forecast, especially as China sales and channel classification changed.
- Progress in remediating the disclosed financial-reporting and IT-control weaknesses.
- Effects of the July 2023 related-party divestitures on reported business scope, revenue and comparisons with prior periods.