CAWACHI LIMITED FY2027 Q1 Earnings Report

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Executive Summary

Q1 of the fiscal year ending March 2026 secured modest increases in both revenue and earnings, as operating leverage from SG&A expense control took effect. Revenue was ¥719.8B (¥710.2B in the same period of the previous year, YoY +1.3%), while Operating Income was ¥14.5B (¥12.5B, YoY +15.9%), with the earnings growth rate exceeding revenue growth. Ordinary Income was ¥17.1B (YoY +6.2%), and Net Income attributable to owners of the parent was ¥11.0B (YoY +5.5%). The primary driver of earnings growth was expense control, which supported operating-led earnings growth as the SG&A ratio declined to 20.6% from 20.9% in the previous year, a decrease of -0.28pt, while the gross margin remained broadly flat at 22.6% (前年比 -0.02pt).

Factors Affecting Business Performance

【Revenue】Revenue increased 1.3% year on year to ¥719.8B. The Group operates as a single retail segment handling pharmaceuticals, cosmetics, sundries, general foods, and other products. Although details by segment are not disclosed, steady performance in existing businesses supported growth.

【Profit and Loss】Operating Income was ¥14.5B (YoY +15.9%), and the Operating Income margin improved to 2.01% from 1.76% in the previous year, an improvement of +0.25pt. While the gross margin remained broadly flat at 22.6% (-0.02pt), the SG&A ratio declined to 20.6% from 20.9% in the previous year, a decrease of -0.28pt, becoming the primary driver of earnings growth. Non-operating income and expenses contributed a net positive ¥2.6B, resulting in Ordinary Income of ¥17.1B (YoY +6.2%); however, the contribution was small at 0.5% of revenue, indicating that operating improvements were the main driver. Extraordinary losses of ¥0.15B, primarily losses on disposal of fixed assets, were temporary and had a limited impact. The gap of -35.6% between Ordinary Income of ¥17.1B and Net Income of ¥11.0B was primarily attributable to a tax burden reflecting an effective tax rate of approximately 35%, while distortions from non-operating and extraordinary items were limited. Both revenue and earnings finished above the previous year, resulting in higher revenue and earnings.

Key Financial Indicators

【Profitability】The Operating Income margin of 2.0% and Net Income margin of 1.5% both improved from the previous year (+0.25pt and +0.06pt, respectively), although the levels themselves remained low. ROE was 1.0%; among the three components—Net Income margin, total asset turnover, and financial leverage—the primary factor this period was the improvement in the Net Income margin.【Cash Quality】Accounts receivable turnover days were approximately 66 days, while inventory turnover days were at a level equivalent to approximately 231 days, indicating that working capital retention could affect the efficiency of cash generation. Cash and deposits increased 17.1% year on year to ¥446.3B, strengthening on-hand liquidity.【Investment Efficiency】Intangible assets accounted for a limited 2.4% of total assets, and the risk of impairment related to goodwill and M&A is small. Property, plant and equipment amounted to ¥893.8B, remaining broadly flat from the previous year (-1.7%), while capital expenditures remained under control.【Financial Soundness】The Equity Ratio was 56.7% (58.0% in the previous year). Current assets of ¥965.5B versus current liabilities of ¥641.3B resulted in a current ratio of 150.6%, within a sound range. Interest-bearing debt, including long-term borrowings of ¥106.1B, was limited, and the financial structure remained conservative.

Cash Flow Analysis

Although detailed disclosure of the cash flow statement is unavailable, the changes in the balance sheet indicate that cash and deposits increased by ¥65.2B (+17.1%) year on year to ¥446.3B, suggesting an increase in on-hand liquidity. Meanwhile, accounts receivable and notes receivable decreased by ¥28.4B year on year to ¥129.9B, suggesting tighter credit and collection management or an increase in the proportion of cash sales. Inventories amounted to ¥353.2B, increasing slightly from the previous year, making improvement in inventory efficiency a future challenge. Accounts payable and notes payable increased by ¥29.8B year on year to ¥448.6B, indicating working-capital cash management through adjustments to procurement and payment terms. Property, plant and equipment decreased only slightly, suggesting that capital investment remained restrained. Taken together, cash generation during the period can be interpreted as having led to an increase in the cash balance despite some retention of working capital.

Quality of Earnings

Most of current-period earnings consisted of recurring operating and non-operating income and expenses. Extraordinary losses were limited to ¥0.15B, primarily losses on disposal of fixed assets, and the impact of temporary factors was limited. Non-operating income was ¥3.5B, or 0.5% of revenue, and consisted mainly of recurring items such as dividend income and interest income; therefore, the contribution of non-operating factors to earnings enhancement was small. Net Income of ¥11.0B compared with Ordinary Income of ¥17.1B represented a gap of -35.6%, attributable to the tax burden reflecting an effective tax rate of approximately 35%, rather than distortion in the earnings structure itself. However, the increasing trend in inventories and the levels of accounts receivable and inventory turnover days suggest that working capital retention could emerge as markdown losses or valuation losses from an accrual perspective. This requires monitoring when assessing earnings quality.

Earnings Forecast and Guidance

Progress against the Full-Year plan was 25.3% for Revenue, at ¥719.8B/¥2,850.0B; 28.4% for Operating Income, at ¥14.5B/¥51.0B; 28.5% for Ordinary Income, at ¥17.1B/¥60.0B; and 36.7% for Net Income, at ¥11.0B/¥30.0B. Compared with simple equal quarterly progress of 25%, both revenue and earnings were slightly ahead of the linear plan, particularly Net Income, which was ahead by +11.7pt. This appears to have been supported by expense control and a stable contribution from non-operating income and expenses. The Full-Year plans for Operating Income and Ordinary Income call for declines of -24.8% and -24.0%, respectively, from the previous year. Their different direction from the earnings growth trend in Q1 may indicate that the plan assumes changes in the cost structure from the second half onward. No revisions were made to the earnings forecast or dividend forecast during the quarter.

Shareholder Returns

The company’s announced Full-Year dividend forecast is ¥50.00 per share, with no revision during the quarter. The Payout Ratio against forecast EPS of ¥134.32 is approximately 37.2%, generally consistent with the earnings scale. In addition, the company has disclosed plans to pay a year-end dividend for the fiscal year ending March 2026 consisting of an ordinary dividend of ¥80.00 plus a ¥20.00 commemorative dividend marking its 65th anniversary. Attention should be paid to future disclosures regarding the breakdown and updates to the Full-Year dividend forecast. No information on share repurchases has been disclosed, and shareholder returns appear to be centered on dividends. Financially, the foundation for shareholder returns remains stable, with an Equity Ratio of 56.7% and cash and deposits of ¥446.3B.

Risk Factors

1. Inventory Retention Risk: Inventories amounted to ¥353.2B, increasing from the previous year and suggesting lower turnover efficiency. This could pressure the gross margin (currently 22.6%) through increased markdown and disposal losses.

2. Credit and Collection Risk: Although accounts receivable and notes receivable decreased by ¥28.4B year on year to ¥129.9B, the level of turnover days leaves room for collection delays to become apparent if promotional activity or credit sales increase.

3. Labor and Cost Inflation Risk: The provision for bonuses increased substantially by +60.5% year on year, and higher personnel expenses from the second half onward could reverse the improving trend in the SG&A ratio (currently 20.6%).

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

Growth and Capital Efficiency

Source: Compiled by the Company

Key Points from the Financial Results

1. The Operating Income margin improved to 2.01% from 1.76% in the previous year, an improvement of +0.25pt. The primary driver was not maintenance of the gross margin but the -0.28pt decline in the SG&A ratio. The sustainability of expense control will determine future trends in profit margins.

2. Inventories increased and turnover efficiency showed a declining trend. The working-capital efficiency of inventories and accounts receivable is an important structural issue to monitor and a key to the next improvement in profitability.

3. Progress against the Full-Year plan was broadly in line with the linear plan for Revenue and Operating Income (25.3% and 28.4%, respectively), while Net Income was ahead at 36.7%. The pace of progress may normalize depending on cost trends in the second half.

Theoretical Share Price (Reference Value)

This is a mechanically calculated reference range based solely on publicly disclosed data using a residual income model (Ohlson-type model with an explicit 5-year fade). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: 4,086円〜4,322円 for a ±1% change in the Cost of Equity, and 4,171円〜4,221円 for a ±0.1 change in ω.

Notes:

• Because progress in Net Income against the Full-Year forecast (37%) exceeds the standard level (25%), forecast EPS has been adjusted upward within a maximum range of +10% (because companies ahead of schedule tend to exceed their forecasts; adjustments may be excessive for businesses with strong seasonality).
• Because forecast ROE is below the Cost of Equity, the theoretical value is below Book Value Per Share.
• Net assets as of the quarter-end are used (there is a timing difference from the Full-Year forecast).

（Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-06 / This value does not forecast 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, where necessary, after consulting with a professional.