WACOAL HOLDINGS CORP.

Evaluation of the Fiscal Year's Business Results and Market Conditions

In the fiscal year under review, ended March 31, 2009, net sales and earnings unfortunately were below our initial targets. Although our performance was comparatively solid in the first half of the fiscal year, from the second half the worldwide economic crisis that began in the United States, coupled with a worsening of the real economy, significantly affected business results. Reflecting a rapid loss of consumer confidence as personal income stagnated and the job market worsened, the domestic retail industry, Wacoal's mainstay sales channel, saw sales of fall and winter lineups slump, centered on department stores and general merchandising stores. Similarly, the women's fashion apparel industry faced very tough conditions, with the exception of certain low-price products.

We were unable to meet our targets mainly because of lackluster performances by core operations—women's innerwear operations in Japan and operations in the United States. In Japan, the high-value-added brand Gra-P for mature to senior consumers and the specialty-store luxury brand Salute posted year-on-year increases in sales. Overall, however, sales were sluggish for such brassieres as the Wacoal-brand LALAN brassiere, which was the centerpiece of a marketing campaign. In the United States, a deteriorating business climate and falling consumer spending depressed sales at department stores carrying our lineups, which affected operations. Other negative factors in the fiscal year included volatile foreign exchange rates and diminishing shipments of licensed products accompanying the cancellation of a manufacturing and sales contract for DKI and DKNY designer brands.

Meanwhile, new Style Science lineups featuring exercise functionality, which has been a focus of our sales promotion efforts in recent years, sold favorably. In the fiscal year, we introduced women's Cross Walker, using the same name as that used for the men's lineup, and sales of both lineups increased. Further, SPA (specialty store retailer of private label apparel) operations performed well thanks to a lowering of median prices and mainstay customers who are young and more willing to spend, even in the current recession, than those in established wholesale channels. Similarly, mail-order operations performed steadily thanks to solid mail-order catalog sales and Internet sales. Also, the Wellness Business grew sales of CW-X conditioning sportswear, mainly to sports chain stores and specialty stores.

Progress under the Medium-Term Management Plan and CAP21

Started April 2007, our three-year Medium-Term Management Plan sets net sales of ¥194.0 billion and operating income of ¥16.4 billion as numerical targets for its final year, which is the year ending March 2010. However, given the volatility of recent business conditions, I think that achieving those targets will be difficult. Nonetheless, we will likely achieve the key task of moving SPA operations into the black earlier than expected. Moreover, initiatives to expand operations by venturing into new business areas are producing benefits. For example, we are harnessing the development of Cross Walker to expand men's innerwear operations dramatically. Further, we have almost completed integrating the manufacturing operations of the Wacoal brand and Wing brand, which is creating a structure for even higher earnings. That initiative is enabling us to consolidate varieties and colors for Wacoal-brand products, which lowers inventory loss and thereby reduces the cost of sales as a percentage of net sales.

Also, because business conditions in Japan and overseas have transformed since we began the CAP21 (Corporate Activation Project 21) growth strategy three years ago, meeting its numerical targets—net sales of ¥200 billion and operating income of ¥18 billion in the fiscal year ending March 2011—will be challenging. Nevertheless, over those three years we engaged in M&A transactions, which is a key element of CAP21. The inclusion of Peach John Co., Ltd., as a wholly owned subsidiary is steadily producing benefits by allowing us to develop a new customer base and market. Guided by CAP21, Wacoal will continue initiatives for new growth. At the same time, we will set new medium to long-term targets in light of progress under CAP21 and trends in business conditions. At this juncture, I believe our task is to lay foundations in readiness for the growth that will come with economic recovery. We must see the current tough businessconditions as an opportunity to clarify pressing tasks and make decisive forays into growth areas.

One such initiative was making Lecien Corporation a wholly owned subsidiary through a share exchange in August 2009. Lecien manufactures and sells women's innerwear under its own brand and on an OEM basis mainly for general merchandising stores. Also, the company designs and manufactures high-quality lace. Before that merger, the Wacoal Group's business relationship with Lecien involved only the outsourcing of some production for SPA brands and Peach John. Lecien will provide a stable supply of lace and other raw materials and will help reduce the Wacoal Group's purchasing costs. Further, the addition of Lecien will give the Wacoal Group access to an even wider variety of sales methods and channels. Primarily rolling out products for high-volume markets, Lecien will complement the strengths of Wacoal Corp. in high-value-added lineups with advanced functionality for career women and upward and the strength of Peach John in fashionable, reasonably priced products for young women through to young career women.

The Strengthening of Our Platform for Future Growth

In order to build a growth platform for the future, Wacoal will take on the challenges of new business areas by undertaking product development based on its unique research and development and advancing M&A activities and SPA operations.

Mindful that its products are the source of its competitiveness, Wacoal has created appealing products with unique value by always trying to identify what customers see as providing real value and conscientiously manufacturing products accordingly. In recent years, such efforts have produced a series of high-value-added hit products that have contributed significantly to Wacoal's business results.
Examples include the Style Science Cross Walker lineup, which is highly attuned to current market trends, Shakitto Bra, and Sugoi. Even in a mature market such as women's innerwear, products that offer customers value can invigorate the market and grow sales.

Therefore, our subsidiary Peach John still has considerable scope for growth. To tap this potential, we are developing a system for the development of products that are even more competitive. Also, to complement mail-order catalog sales and Internet sales, which have been Peach John's mainstay sales channels, we will step up the company's sales through directly managed stores. December 2008 saw the opening of Peach John's first overseas store in Hong Kong. Since then, the store's sales have been brisk, surpassing its initial targets. Using that store as a bridgehead, we will open another store in Hong Kong and develop a store network in China. And, with a view to creating synergies with Wacoal Corp., we will move forward with measures that effectively combine the differing expertise that both companies have evolved for their respective customer bases. For example, the companies will collaborate in product development and mail-order catalog sales to cater to the wide range of customer preferences and heighten both companies' brand value.

In the SPA operations of Wacoal Corp., for the time being we will focus on achieving profitability rather than expansion. Specifically, we will partly reorganize and streamline SPA operations. At the same time, SPA operations will expand lineups and raise efficiency by carrying more products in the low-to-medium price range. Further, we will use OEM as well as in-house production to reduce costs. After shortening lead times from planning to marketing in order to move SPA shops quickly into the black, we will once again increase shop openings.

The Strengthening of Overseas Operations

Strengthening and expanding overseas operations is an important pillar of the Wacoal Group's growth strategy. In mainstay U.S. operations, we have been rolling out original Wacoal Luxe brand products as a luxury lineup for high-end department stores since the cancellation of a manufacturing and sales contract for licensed products for DKI and DKNY designer brands. The Wacoal Luxe brand has earned high acclaim from our business customers, and sales have outperformed initial targets. We also brought to market our sexy and fashionable b.tempt'd by Wacoal brand from January 2009. Based on those two brands, we will take more aggressive measures, such as increasing sales channels to encompass specialty retail stores as well as department stores and entering countries nearby the United States.
Although the sales of U.S. operations have decreased due to slumping consumption and the ending of a contract for licensed products, I am confident that these operations will become more profitable in the near future with the changeover from licensed products to our high-margin brand products.

In China, the most promising market, we will expand operations even further. In order to cater to a wider customer base, we are already selling through a three-brand system comprising the mainstay Wacoal brand, amphi for younger customers, and the high-value-added brand Salute. Also, in the fiscal year we advertised on a larger scale than before to increase name recognition of the Wacoal brand in China. Looking ahead, our goal is to grow in step with the pace of market expansion by increasing the number of stores carrying our products.

In other areas of Asia, from October 2008 we launched sales in Vietnam, the site of some of our production bases, and sales have been encouraging. Vietnam's market has the potential to grow significantly as the lifting of regulatory restrictions on foreign capital in the retail industry allows inflows of foreign capital. Closely monitoring that trend, we will expand operations in Vietnam as appropriate in order to supply products from nearby Asian countries.
Worldwide, the Wacoal Group's companies will achieve growth and profitability by analyzing business conditions in their respective countries to gain a firm grasp of issues while using the resources of other Group companies effectively—including those of joint venture companies—to build networks that offset the weaknesses of individual countries.

Outlook

Given the lack of clarity in global economic trends, there is concern that the economic recession may deepen. In Japan, personal spending is likely to continue declining. While in both Japan and overseas, market conditions are expected to be difficult. However, we aim to maintain sales at approximately their current level by continuing to market appealing products and brands. As a result, for the current fiscal year we expect year-on-year declines of 0.7% in net sales, to ¥171.0 billion; 28.9% in operating income, to ¥7.2 billion, due to slumping U.S. operations and an increase in retirement benefit payments resulting from impairment of pension assets; and 27.0% in net income, to ¥3.8 billion. That forecast assumes a foreign exchange rate of US$1=¥97, but foreign exchange fluctuations could significantly affect consolidated business results because U.S. operations account for a large share of Wacoal's consolidated revenues and earnings.

Despite the tough business conditions, Wacoal will redouble efforts to discover what customers see as real value so that it can develop products that are even more appealing and advance business results.
As we move forward with those initiatives, I ask our shareholders and other investors for their continued understanding and support.

August 2009

Yoshikata Tsukamoto
Representative Director