Medirom Healthcare Technologies Inc. annual report, Q4 FY2023

Full document

Medirom Healthcare Technologies Inc. — FY2023 Form 20-F

Reporting period: Fiscal year ended December 31, 2023; the annual report was filed June 18, 2024. This is an annual filing, not a standalone 2023 fourth-quarter report. Financial statements are prepared under U.S. GAAP and presented principally in Japanese yen (JPY).

Business context and key results

Medirom operates relaxation salons, luxury hair salons and digital preventative healthcare services, primarily in Japan. At year-end, its network comprised 314 relaxation salons, including 217 directly operated (which includes investor-owned salons managed by Medirom) and 97 franchised.

  • Revenue: JPY 6.828 billion, down 1.8% from JPY 6.954 billion in 2022.
  • Operating result: Operating loss of JPY 391.6 million, versus operating income of JPY 97.0 million.
  • Net income: JPY 115.0 million, down from JPY 149.0 million. The result included a JPY 94.4 million income-tax benefit and a JPY 413.7 million gain from salon sales.
  • Adjusted EBITDA: JPY 306.3 million versus JPY 380.5 million in 2022. The filing gives inconsistent 2023 margin figures: 4.5% in its results table and 4.2% in the narrative; 2022 margin was 5.5%.
  • Costs and margins: Cost of revenue rose 4.1% to JPY 5.259 billion, or 77.0% of revenue versus 72.6% in 2022. SG&A increased 8.6% to JPY 1.960 billion, or 28.7% of revenue versus 26.0%.
  • Cash flow: Cash used in operating activities was JPY 631.7 million; investing activities used JPY 328.6 million; financing activities provided JPY 461.2 million. Cash and cash equivalents fell to JPY 106.3 million from JPY 605.5 million.
  • Debt and liquidity: Borrowings totaled JPY 1.552 billion, including JPY 1.052 billion of bank loans and JPY 500 million of convertible bonds. Operating lease liabilities were JPY 2.098 billion. Current assets of JPY 1.759 billion were below current liabilities of JPY 3.561 billion. The auditor highlighted substantial doubt about the company’s ability to continue as a going concern.

Material changes versus 2022

  • Relaxation Salon revenue increased 1.5% to JPY 6.060 billion. Directly operated salon revenue rose, supported by higher prices and value-added services; franchise revenue declined as the franchised network contracted.
  • Luxury Beauty revenue fell 4.6% to JPY 567.7 million. ZACC served fewer customers after a top stylist resigned and its stylist count declined, partly offset by higher revenue per customer.
  • Digital Preventative Healthcare revenue decreased 48.1% to JPY 200.4 million, primarily due to delays in developing REMONY and the MOTHER Gateway device. This segment remained loss-making.
  • Operating performance weakened as cost of revenue and SG&A increased despite slightly lower total revenue. Interest expense rose to JPY 36.9 million from JPY 9.8 million.
  • The reported net profit included a newly recorded salon-sale gain. The company also reported a JPY 413.7 million gain from sales of salons following a change in accounting treatment for certain sale-and-repurchase transactions.

Outlook, risks and other notable matters

  • Funding and going concern: Management said year-end cash would not cover operating costs, capital expenditure and debt service for the 12 months following the audit opinion, and that additional capital was required. Its plans include salon sales, financing and debt refinancing; management cautioned that funding may not be available on acceptable terms or at all. The auditor’s opinion on the financial statements was unqualified but included a going-concern emphasis.
  • Subsequent financing and transaction: After year-end, Medirom refinanced a JPY 200 million short-term loan with a JPY 300 million loan maturing September 30, 2024, and renewed a JPY 200 million credit facility through May 30, 2025. In April 2024, it announced a non-binding memorandum to acquire Japan Gene Medicine Corporation for a proposed JPY 2.4 billion, subject to a definitive agreement, financing, due diligence and other conditions.
  • Operational and market risks: The company cited salon concentration in the Tokyo metropolitan area, therapist recruitment and wage inflation, franchisee performance, long-term lease commitments, competition, foreign-exchange exposure, and reliance on third-party components and manufacturers for wearable devices.
  • Controls and reporting: Management concluded disclosure controls and internal control over financial reporting were ineffective due to material weaknesses involving journal-entry approvals, management review evidence and timely updating of controls. The report was filed after the stated Form 20-F deadline; management cited audit delays and acknowledged future filing delays remain possible.
  • Other: Medirom reported no material cybersecurity incident in 2023 and no material legal proceedings. It does not intend to pay dividends in the foreseeable future. The company said it believed it was not a PFIC for 2023, while noting that status requires annual reassessment.

Most important facts for investors to verify

  1. Whether salon disposals, refinancings or new financing provide sufficient liquidity to address the going-concern uncertainty and working-capital deficit.
  2. The underlying operating performance apart from salon-sale gains and the tax benefit, including the correct 2023 Adjusted EBITDA margin (4.5% in the table versus 4.2% in the narrative).
  3. Progress in remediating the disclosed internal-control weaknesses and the company’s ability to file future reports on time.
  4. Whether the proposed JGMC acquisition proceeds, how it would be funded, and the resulting effects on debt, dilution and liquidity.
  5. Whether salon pricing and expansion can offset higher labor and operating costs without further weakening repeat visits, utilization or margins.