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After father-daughter saga, Otsuka Kagu seeks partner

Japanese furniture chain in talks with room rental service and Taiwanese group

Otsuka Kagu President Kumiko Otsuka at a showroom in Tokyo. She won control of the company from her father, the founder, after a bitter proxy battle ended in 2015. 

TOKYO -- Four years after an ugly fight broke out between the founder and his daughter over the direction of the Japanese furniture chain, Otsuka Kagu is at a crossroads. Faced with dwindling sales, the company faces a stark choice between cultivating overseas markets and diversifying into new fields.

The company on Tuesday reported a net loss of 2 billion yen ($18 million) for the six months ended June 30, for a third straight year of first-half red ink. With sales significantly down, Otsuka warned investors of "events or circumstances" that raise doubts about its ability to continue as a going concern.

Sales slid 12% on the year to 18.8 billion yen as revenue slumped at large stores. Traffic at large locations reliant on bulk purchases fell by double digits. 

On top of a shrinking domestic market, the public squabbling by President Kumiko Otsuka and her founder father, Katsuhisa Otsuka, eroded the brand image, depressing customer traffic and sales.

Katsuhisa gave Kumiko control of Otsuka in 2009 but stayed on as chairman and top shareholder, holding on to an 18% stake. With the father constantly looking over the daughter's shoulder, the relationship quickly deteriorated.

Kumiko's effort to take the company in a new direction by making it less a high-end store did not sit well with Katsuhisa, who fired her in 2014. The ensuing proxy fight ended with the daughter wresting control from the father in March 2015.

The battle continued in the courtroom in 2016, when Kumiko lost a lawsuit by Katsuhisa over the redemption of corporate bonds.

After taking control, Kumiko shifted Otsuka's focus from high-end products to more affordable items like those found at Ikea and compatriot Nitori Holdings and eliminated the membership model her father built, aiming to broaden the customer base. But those efforts have yet to translate into better earnings.

The company expects a 3.4 billion yen net loss for the year ending December, an improvement from the 7.2 billion yen loss from the previous fiscal year. 

The warning to investors stems in part from Otsuka's poor operating cash flow, which came to negative 2 billion yen in the first half. The company took out 800 million yen in bank borrowings, its first in roughly two decades, boosting cash and cash equivalents by about 1.2 billion yen from the end of March to 2.2 billion yen.

But unless Otsuka regains the ability to generate income, it will have to keep burning through assets to stay afloat.

Otsuka will have to branch out from its current business model to survive. It could remain a furniture specialist and expand abroad. Exploring this route, Otsuka is in talks with Taiwan's Abico group for a partnership that would provide an entryway into China and the rest of Asia. 

Otsuka also has the choice of expanding its partnership with Tokyo-based conference room renter TKP -- its third-largest shareholder, with nearly a 7% stake. The company could shed its mantle as a furniture vendor and attract customers by combining its business with conference room rental services.

Depending on whom Otsuka chooses as a partner, it could greatly alter its direction.

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