Medirom Healthcare Technologies Inc. — FY2020 Form 20-F
Reporting period: Fiscal year ended December 31, 2020; this is an annual report, not a standalone Q4 filing. Financial statements are audited and prepared under U.S. GAAP. Unless otherwise noted, amounts below are in Japanese yen (JPY).
Business context
Medirom operates and franchises relaxation salons in Japan and has an early-stage Digital Preventative Healthcare business. At year-end, it had 290 salons: 150 directly operated and 140 franchised. Approximately 63% of its salon network was in the Tokyo metropolitan area. Relaxation salons generated 99.2% of 2020 revenue; digital healthcare generated less than 1% and included the Lav app and the developing MOTHER Tracker wearable.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Total revenue | JPY3,341.6 million | JPY3,908.3 million |
| Operating income (loss) | JPY(746.1) million | JPY34.4 million |
| Net income (loss) | JPY(539.2) million | JPY17.3 million |
| Adjusted EBITDA | JPY(543.5) million; margin (16.3%) | JPY139.3 million; margin 3.6% |
| Operating cash flow | JPY(366.4) million | JPY7.9 million |
| Cash and cash equivalents at year-end | JPY1,439.7 million | JPY513.6 million |
Relaxation Salon revenue fell 14.2% to JPY3,315.9 million. Directly operated salon revenue was JPY2,026.8 million, nearly flat year over year, while franchise revenue fell to JPY1,289.1 million. Digital Preventative Healthcare revenue decreased 41.1% to JPY25.7 million. Cost of revenue was JPY2,912.7 million, or 87.2% of revenue, versus 75.7% in 2019. SG&A rose 22.6% to JPY1,068.5 million; impairment charges increased to JPY106.5 million.
Year-end total borrowings were JPY910.7 million, with a 1.33% weighted-average interest rate. Operating lease liabilities totaled JPY1,651.2 million. Current assets were JPY2,087.2 million and current liabilities JPY2,652.6 million. Management stated that available liquidity was expected to fund operations and obligations for at least 12 months, while noting uncertainty from COVID-19.
Changes versus 2019
- Revenue declined 14.5%, and the company moved from modest operating and net profits to substantial losses, largely reflecting pandemic-related salon disruption and fixed costs that did not fall as quickly as revenue.
- Operating cash flow swung from positive JPY7.9 million to negative JPY366.4 million. Cash nevertheless increased, primarily through IPO proceeds and new borrowing.
- Financing cash flow included JPY1,168.6 million of IPO proceeds and JPY775.0 million of long-term borrowing proceeds, partly offset by debt repayments and offering costs.
- The salon count increased by seven, but the mix shifted toward company-operated sites: directly operated salons rose from 107 to 150, while franchised salons declined from 176 to 140, in part as the company acquired and converted franchise locations.
- Sales per customer increased about 7% to JPY6,486 and the repeat ratio rose to 82.60% from 81.72%; the operating ratio fell to 48.20% from 50.36%.
Outlook, risks and unusual items
- COVID-19: Government-requested closures and reduced hours materially affected 2020 operations. The company received JPY111.6 million in employment-adjustment subsidies and negotiated temporary rent reductions. Salon gross revenue recovered to 96% of the prior-year level in December 2020, based on system-wide POS data. Further restrictions remained a risk at the report date.
- Strategy: Management described plans to grow through acquisitions, improve directly operated salon performance, expand franchising and pursue international opportunities, particularly in the United States and Asia. Its stated mid-term ambition was 1,000 salons; this is a goal, not a quantified near-term forecast.
- Digital business: MOTHER Tracker development and launch were delayed by COVID-19 and generated no revenue in 2020. The company gave no formal financial guidance in the provided filing text.
- Accounting change: Adoption of ASC 606 on January 1, 2020 changed the timing of franchise-fee recognition and reduced opening accumulated equity by JPY458.8 million. Comparative 2019 figures were not restated. The filing’s 2020 results under the prior method would have shown revenue of JPY3,186.9 million and net loss of JPY626.7 million, versus reported revenue of JPY3,341.6 million and net loss of JPY539.2 million.
- Controls and governance: Management concluded disclosure controls were ineffective because of a significant deficiency related to delays in closing the books while awaiting a third-party valuation report. Management said remediation efforts were ongoing. The CEO holds a Class A “golden share” with veto rights over specified matters.
- Other exposures: Risks include salon concentration in the Tokyo region, franchisee performance, therapist recruitment and labor costs, indebtedness and lease commitments, privacy and cybersecurity, and the uncertain profitability of digital healthcare. The company did not intend to pay dividends for the foreseeable future. It reported no material legal or administrative proceedings, while disclosing ordinary-course claims.
- Subsequent events: In 2021, the company acquired 18 salons from a franchisee and acquired SAWAN, an operator of the Ruam Ruam brand; these events occurred after the reporting period.
Investor facts to verify
- Track salon-level sales, customer visits and margins as operations normalize, and assess whether the 2020 loss and cash burn recur.
- Reconcile reported results with the ASC 606 adoption effect and understand how franchise fees will be recognized over expected contract lives.
- Review cash availability against debt maturities, lease liabilities, and the company’s reliance on financing and subsidies.
- Assess the economics and integration progress of acquired salons, the shift from franchised to directly operated sites, and progress toward the 1,000-salon goal.
- Monitor remediation of the disclosed financial-reporting deficiency and consider the CEO’s special voting rights and potential dilution from outstanding options.
- Verify MOTHER Tracker commercialization, customer demand and revenue contribution; the filing reports no 2020 device revenue and no formal financial guidance.