RENAISSANCE,INCORPORATED FY2027 Q1 Earnings Report

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Executive Summary

In the current quarter, operating income turned profitable, primarily due to revenue growth and an improvement in the gross profit margin. However, the impact on net income was limited by the heavy interest burden and high effective tax rate. Revenue was ¥164.1B, up +5.4% year on year, while operating income improved from a loss of ¥-2.8B in the same period of the previous year to ¥3.6B. Ordinary income was ¥1.6B (+131.3% YoY), and net income was ¥0.7B (+47.4% YoY). The gross profit margin improved from 4.3% in the same period of the previous year to 8.1%, serving as the primary driver of the return to operating profitability. However, interest expense of ¥2.2B accounted for more than 60% of operating income, limiting the extent of improvement at the ordinary income and net income levels.

Factors Affecting Performance

【Revenue】Revenue increased to ¥164.1B, up +5.4% year on year. The core Sports Club and Related Businesses generated ¥146.6B (+4.8% YoY), accounting for 89.4% of total revenue, while the Nursing Care Rehabilitation Business recorded high growth of ¥9.0B (+64.0% YoY). In contrast, the Home Fitness Business declined to ¥8.4B (-17.1% YoY), reflecting significant variation in performance among the businesses.

【Profitability】Operating income turned positive, improving from a loss of ¥-2.8B in the same period of the previous year to ¥3.6B, while the operating margin improved from -1.8% to 2.2%. The primary drivers were a 380bp improvement in the gross profit margin and restrained growth in SG&A expenses (+1.8%, with the ratio to revenue declining to 5.9%). Ordinary income remained at ¥1.6B (+131.3% YoY), as interest expense of ¥2.2B substantially offset the benefit of the improvement in operating income. Net income was ¥0.7B (+47.4% YoY), with the effective tax rate of 51.4% acting as a drag. Revenue and profit both increased.

Segment Analysis

Total segment profit was ¥14.1B, of which the Sports Club and Related Businesses contributed ¥12.2B (+159.3% YoY; profit margin of 8.3%), making it the core business and accounting for 86.3% of the total. The Nursing Care Rehabilitation Business turned profitable at ¥0.4B, compared with a loss of ¥0.3B in the same period of the previous year. The Home Fitness Business posted ¥1.6B (-40.2% YoY), representing a decline in profit, although its profit margin of 18.6% was the highest among the segments. Against total segment profit, adjustments for goodwill amortization and corporate expenses were substantial at ¥-10.5B, leaving consolidated operating income at ¥3.6B. Corporate expenses increased from ¥9.6B in the same period of the previous year to ¥10.2B, making head-office cost management a key challenge in reflecting improved segment profitability in consolidated earnings.

Key Financial Metrics

【Profitability】The operating margin improved to 2.2% (compared with -1.8% in the same period of the previous year), while the net profit margin was 0.5%. Annualized ROE was 3.1% and annualized ROA was approximately 0.5%, indicating low capital profitability. 【Cash Quality】Cash and deposits were ¥87.8B, equivalent to 1.5 times short-term borrowings of ¥57.0B, indicating that the Company maintains the ability to cover short-term borrowings with cash. However, the current ratio was 73.7%, below 100%, and working capital was negative ¥49.3B. 【Investment Efficiency】Total asset turnover was approximately 1.14 times, while goodwill was ¥15.1B, equivalent to only 15.8% of net assets, indicating limited concentration of M&A-related assets. 【Financial Soundness】The equity ratio was 16.6%, and the debt-to-equity ratio was high at approximately 5.0 times. Interest coverage was 1.61 times against interest expense of ¥2.2B, indicating limited capacity to service interest payments.

Cash Flow Analysis

As disclosure of cash flow statement data is limited, fund flows are analyzed based on changes in the balance sheet. Cash and deposits were ¥87.8B, up from ¥85.7B at the end of the same period of the previous year, indicating that short-term financial capacity has been maintained. Meanwhile, other current liabilities increased by ¥18.2B (+26.0%), pushing up total current liabilities and resulting in negative working capital of ¥49.3B. Property, plant and equipment amounted to ¥251.1B, indicating high capital intensity for a facility-based operating business. Fixed liabilities, including long-term borrowings of ¥66.2B and lease liabilities of ¥135.5B, accounted for a central portion of the capital structure. Although the cash balance itself remains stable, the high proportion of short-term liabilities indicates a funding structure premised on continuous refinancing.

Earnings Quality

The improvement in profit during the current quarter was primarily attributable to a recurring improvement in the gross profit margin of the core business. Special losses were limited to a small ¥0.1B loss on disposal of property, plant and equipment, indicating limited impact from one-time factors. Non-operating income was small at ¥0.3B, while interest expense of ¥2.2B accounted for the majority of non-operating expenses of ¥2.3B. Consequently, ordinary income did not fully reflect the benefit of the improvement in operating income. Against pretax income of ¥1.5B, income taxes and other taxes of ¥0.8B were recorded, resulting in a high effective tax rate of 51.4%. This also includes tax-rate fluctuations resulting from a pretax loss in the same period of the previous year; the normalized tax rate should therefore be monitored going forward. Comprehensive income was ¥0.6B, broadly in line with net income of ¥0.7B, although a slight gap arose due to other comprehensive income items, including foreign currency translation adjustments of ¥-0.1B.

Earnings Forecast and Guidance

Q1 progress against the full-year forecast was 24.1% for revenue (full-year forecast of ¥680.0B), 20.1% for operating income (¥18.0B), 18.0% for ordinary income (¥9.0B), and 14.8% for net income (¥5.0B). Revenue progress was broadly in line with the standard 25%, whereas progress for operating income and below was below the standard level. The delay in net income progress reflects the fact that the operating margin remains at 2.2%, as well as the impact of high interest expense and the high effective tax rate. The earnings forecast was revised during the current quarter. Based on the revised forecast, key challenges will be sustaining profitability in the core businesses and limiting downside in the Home Fitness Business.

Shareholder Returns

The full-year forecast dividend per share is ¥13.0, and the forecast payout ratio based on forecast EPS of ¥25.38 is approximately 51.2%. There was no revision to the dividend forecast during the current quarter. Given annualized ROE of 3.1%, interest coverage of 1.61 times, and a debt-to-equity ratio of approximately 5.0 times, the payout ratio itself is below 60% and not excessive. However, dividend sustainability is structurally dependent on continued recovery in operating income and the extent to which the interest burden can be restrained.

Risk Factors

1. Interest burden and refinancing risk: Against interest expense of ¥2.2B, operating income was ¥3.6B, and interest coverage remained at only 1.61 times. With a current ratio of 73.7% and negative working capital of ¥49.3B, the capital structure is premised on the continued procurement and refinancing of short-term funds.

2. Variation in profitability among businesses: While the core Sports Club and Related Businesses account for 86.3% of segment profit, the Home Fitness Business is slowing, with revenue down -17.1% and profit down -40.2%. Variation among businesses is increasing the sensitivity of consolidated performance.

3. High leverage and tax burden: The debt-to-equity ratio is high at approximately 5.0 times, while the Debt/Capital ratio is also high at 56.3%. In addition, the effective tax rate of 51.4% means that only approximately half of pretax income is converted into net income, constraining the transmission of operating improvements to bottom-line earnings.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (it_telecom)

Profitability and Returns

Both the operating margin and net profit margin are substantially below the industry median, indicating that profitability is relatively low within the industry.

Growth and Capital Efficiency

The revenue growth rate is also below the industry median, indicating that the pace of revenue growth is somewhat low within the industry.

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. The turn from an operating loss in the same period of the previous year to operating profitability, together with a 380bp improvement in the gross profit margin, demonstrates an improvement in the earnings structure of the core business. Increased profit in the core Sports Club and Related Businesses and the return to profitability of the Nursing Care Rehabilitation Business led the overall improvement.

2. The operating margin of 2.2% and annualized ROE of 3.1% remain low relative to the industry median and historical levels. The highly leveraged structure, characterized by interest expense of ¥2.2B and interest coverage of 1.61 times, is constraining the transmission of operating improvements to net income.

3. While full-year revenue progress is broadly at a standard level, progress rates for operating income and net income are below the standard 25%. Sustaining profitability in the core businesses and limiting downside in the Home Fitness Business will be key to achieving the full-year forecast.

Theoretical Share Price (Reference Value)

Sensitivity: ¥432–¥457 at ±1% for the cost of equity, and ¥442–¥446 at ±0.1 for ω.

Notes:

• Net income is substantially compressed relative to operating income due to the tax burden, acquisition-related expenses, and non-controlling interests, among other factors (net income ÷ operating income 28%). This value reflects that compression at face value; if these factors are temporary, the underlying earnings power may be higher.
• Because forecast ROE is below the cost of equity, the theoretical value is below book value per share.
• Net assets as of the end of the quarter are used; there is a timing difference relative to the full-year forecast.
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Model: Residual Income Model (Ohlson-type; explicit 5-year fade) / Interest rate reference month: 2026-07 / This is a mechanically calculated value based solely on publicly disclosed data. It is not a forecast of the market share price or a recommendation of any specific investment action, and does not forecast or guarantee the future share price.)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings summary data. It does not recommend investment in any specific security. The industry benchmark is reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own discretion and responsibility, after consulting with a professional as necessary.

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