TEAR (2485) FY2026 Q1 Earnings Report

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Executive Summary

Revenue increased but profit declined in Q1, with deteriorating profitability being the key issue. Revenue grew to ¥5.77B (+6.3% YoY), but increases in the cost ratio and SG&A ratio caused Operating Income to decline to ¥0.45B (△17.7% YoY), Ordinary Income to ¥0.41B (△31.1% YoY), and Net Income to ¥0.23B (△41.6% YoY). Although the core Funeral Services Business generated higher revenue, its segment profit margin declined, highlighting a structural issue in which revenue growth is not translating into profit growth.

Factors Affecting Earnings

【Revenue】Revenue was ¥5.77B, up +6.3% year on year (+¥0.34B). By segment, the Funeral Services Business generated ¥5.10B (88.4% composition ratio, +1.4% YoY), while the Franchise Business generated ¥0.13B (△2.3% YoY). Other Businesses (including real estate and reuse) generated ¥0.55B, doubling from the previous year and becoming the primary driver of company-wide revenue growth. Growth in the core Funeral Services Business itself remained modest.

【Profit and Loss】The gross profit margin declined by approximately 0.8pt to 38.0% from 38.8% in the previous year. SG&A expenses increased to ¥1.74B, up +11.9% year on year, outpacing revenue growth, and the SG&A ratio rose to 30.1% from 28.6% in the previous year. As a result, the operating margin narrowed to 7.9% from 10.2%. The increase in non-operating expenses—primarily interest payments, which rose from ¥0.033B to ¥0.060B—exacerbated the decline in Ordinary Income, while the high effective tax rate of 44.8% also pressured Net Income. Revenue increased but profit declined.

Segment Analysis

The Funeral Services Business (88.4% composition ratio) generated revenue of ¥5.10B (+1.4% YoY) and segment profit of ¥0.86B (△11.3% YoY). Its profit margin declined by approximately 2.4pt from 19.2% to 16.8%, making the deterioration in profitability of the core business the primary factor weighing on company-wide profit. The Franchise Business generated revenue of ¥0.13B (△2.3% YoY), but segment profit increased to ¥0.02B (+20.0% YoY), with its profit margin improving from 11.5% to 14.1%. Other Businesses (including real estate and reuse) recorded substantial growth, with revenue of ¥0.55B (+101.5% YoY) and segment profit of ¥0.085B (+431.3% YoY), driving company-wide growth. However, company-wide expenses also increased to ¥0.48B (+9.8% YoY), increasing the burden of adjustments from total segment profit to consolidated Operating Income.

Key Financial Metrics

【Profitability】The operating margin was 7.9%, down approximately 2.3pt from 10.2% in the same period of the previous year, while the net profit margin also declined to 3.9% from 7.1%.【Cash Flow Quality】Comprehensive Income was ¥0.31B, exceeding Net Income of ¥0.23B, primarily due to a positive contribution of ¥0.08B from deferred hedge gains and losses. The divergence between Comprehensive Income and Net Income was attributable to valuation factors outside the core business.【Investment Efficiency】Annualized ROE was 10.4%, supported by the combination of a 3.9% net profit margin and financial leverage of approximately 3.2x, indicating a structure in which debt utilization contributes more significantly than profitability.【Financial Soundness】The Equity Ratio was 31.2%, almost unchanged from 30.9% in the previous year, while the current ratio was 99.3%, below 1x. Goodwill was ¥5.36B, representing 61.7% of net assets.

Cash Flow Analysis

Direct data from the statement of cash flows was not disclosed, but funding trends can be assessed from changes in the balance sheet. Cash and deposits were ¥4.37B, down from ¥4.54B at the end of the previous fiscal year, while short-term borrowings doubled from ¥0.29B to ¥0.58B. This movement suggests the possibility that short-term borrowings are being used to compensate for the decline in cash-generation capacity accompanying the decrease in Operating Income. Inventories increased from ¥0.11B to ¥0.18B, indicating growing funding needs in terms of working capital as well. There were no significant changes in either property, plant and equipment or intangible assets, suggesting that investment activities remained broadly maintenance-oriented.

Quality of Earnings

Deterioration in non-operating income and expenses amplified the decline in Ordinary Income, indicating a modest deterioration in earnings quality. Non-operating income decreased from ¥0.082B to ¥0.019B, while non-operating expenses increased from ¥0.038B to ¥0.063B, primarily due to higher interest payments (¥0.033B → ¥0.060B). These represent financial cost factors separate from the earnings power of the core business and explain why the decline in Ordinary Income (△31.1%) was greater than the decline in Operating Income (△17.7%). The effective tax rate was also high at 44.8%, reducing the conversion rate from Profit Before Tax to Net Income. Comprehensive Income (¥0.31B) exceeded Net Income (¥0.23B), but this difference was attributable to deferred hedge valuation and does not indicate a sustainable improvement in earnings power.

Earnings Forecasts and Guidance

Against the full-year forecasts, the progress rates for Revenue, Operating Income, and Net Income were 24.4%, 22.4%, and 21.5%, respectively, all below the simple quarterly run rate of 25%. Progress toward the Operating Income and Net Income targets was particularly slow. To achieve the full-year Operating Income forecast of ¥2.04B (+23.8% YoY), the operating margin must improve from the Q1 result of 7.9% to 8.6% based on the full-year forecast. Recovery in the profit margin of the core Funeral Services Business and continued revenue growth in Other Businesses will be key to achieving the full-year plan.

Shareholder Returns

The full-year dividend forecast is ¥23.0 per share, representing a planned increase from the previous year's dividend of ¥10 (actual results including the interim and year-end dividends). Based on the full-year Net Income forecast of ¥1.05B and 22.51 million shares outstanding, the calculated Payout Ratio is approximately 49.3%, below 60%. However, the Q1 Net Income progress rate was 21.5%, below the standard run rate, making achievement of the full-year earnings forecast a prerequisite for the dividend plan. No share repurchase has been disclosed.

Risk Factors

1. Declining profitability of the core Funeral Services Business: While revenue in the Funeral Services Business increased only +1.4% year on year, segment profit declined △11.3% and the profit margin fell from 19.2% to 16.8%. If the decline in the core business's profit margin continues, achieving the full-year Operating Income growth plan will become difficult.

2. Reliance on financial leverage and goodwill: The D/E ratio is 2.20x, while goodwill of ¥5.36B represents 61.7% of net assets; both exceed generally accepted cautionary levels. If the earnings power of acquired businesses falls below plan, goodwill impairment could erode equity.

3. Rising short-term liquidity and borrowing dependence: The current ratio was 99.3%, below 1x, and working capital was negative ¥0.043B. Short-term borrowings increased +97.6% from the previous year, confirming a rising dependence on short-term funding. Cash and deposits of ¥4.37B provide a certain buffer.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

The Company's profitability is below the industry median for both Operating Margin and Net Profit Margin, indicating relative weakness within the industry in terms of profitability.

Growth and Capital Efficiency

The revenue growth rate was also below the industry median, placing the Company relatively low within the industry in both growth and profitability.

※Source: Compiled by the Company

Key Takeaways from the Earnings

1. Revenue increased 6.3%, while Operating Income declined 17.7%, resulting in revenue growth but profit decline. Negative operating leverage has become evident due to the decline in the gross profit margin and the increase in the SG&A ratio (SG&A expenses +11.9% versus revenue growth of +6.3%).

2. Progress toward the full-year plan was 24.4% for Revenue, 22.4% for Operating Income, and 21.5% for Net Income, all below the standard run rate of 25%. The key to achieving the full-year plan will be whether the operating margin can improve from 7.9% in Q1 to the full-year forecast level of 8.6% from Q2 onward.

3. Goodwill represents 61.7% of net assets, and the D/E ratio is also high at 2.20x, indicating a financial structure with substantial use of debt. Recovery in the profit margin of the core Funeral Services Business and continued growth in Other Businesses will be key areas to monitor going forward, from the perspectives of both profitability and financial soundness.

Theoretical Share Price (Reference Value)

Sensitivity: ¥395–¥418 at ±1% for the cost of equity, and ¥406–¥407 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 52%). This value reflects that compression at face value; if these factors are temporary, the underlying earnings power may be higher.
• Goodwill represents a high proportion of net assets, and the assumptions would change materially if impairment were recognized.
• Net assets as of the end of the quarter are used, resulting in a timing difference relative to the full-year forecast.
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated solely from publicly disclosed data; this is not a forecast of the market share price or a recommendation of any specific investment action, and does not predict or guarantee future share prices.)

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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 benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own responsibility, and you should consult a professional as necessary.

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