HARD OFF CORPORATION (2674) FY2026 Q3 Earnings Report

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Executive Summary

The quarter was characterized by higher revenue but lower profit, with revenue expansion failing to translate into profit growth. Revenue maintained double-digit growth at ¥282.0B (+13.7% YoY), while Operating Income declined to ¥24.2B (-4.5%) and Ordinary Income declined to ¥25.3B (-6.1%). Meanwhile, Net Income attributable to owners of the parent increased to ¥17.9B (+2.4%), with non-operating factors supporting bottom-line earnings. Growth in the core Reuse Business was the primary driver, but the +16.1% increase in SG&A expenses exceeded revenue growth, resulting in deterioration in operating leverage.

Factors Affecting Performance

【Revenue】Revenue was ¥282.0B, maintaining double-digit growth of +13.7% YoY. By segment, the Reuse Business was the core growth driver, increasing +13.9% YoY to ¥266.6B and accounting for 94.6% of total revenue, while the Franchise Business made a complementary contribution, increasing +8.0% YoY to ¥17.6B. Both businesses are on a revenue growth trajectory, but the growth driver remains dependent on the inventory-based Reuse Business.

【Profit and Loss】Operating Income declined 4.5% YoY to ¥24.2B. The gross margin edged down to 68.4% from 68.8% in the same period of the previous year, while the SG&A ratio increased by approximately 1.2pt to 59.8%. The +16.1% YoY increase in SG&A expenses exceeded the +13.7% revenue growth rate, which was the primary cause of the deterioration in the Operating Income margin to 8.6% from 10.2% in the previous year. Segment adjustments (company-wide expenses) also deteriorated from ¥22.8B in the previous year to ¥25.7B, putting pressure on consolidated earnings. Ordinary Income declined 6.1% YoY to ¥25.3B. Net Income, however, increased 2.4% YoY to ¥17.9B, due to the temporary factor that extraordinary income of ¥1.8B, including a gain on step acquisitions, exceeded extraordinary losses of ¥0.9B, including impairment losses of ¥0.9B. The increase in Net Income does not reflect actual operating performance; the conclusion of higher revenue but lower profit more accurately captures the underlying situation.

Segment Analysis

The Reuse Business accounted for the core of the consolidated business, with revenue of ¥266.6B (+13.9% YoY), segment profit of ¥39.6B (+3.8%), and a 14.9% profit margin. The Franchise Business generated revenue of ¥17.6B (+8.0% YoY) and segment profit of ¥9.8B (+0.7%), with a high profit margin of 55.5% but a small scale. In both businesses, segment profit growth lagged revenue growth, indicating challenges in the existing businesses’ ability to absorb costs. The decline in consolidated Operating Income was primarily attributable to the deterioration in segment adjustments, mainly company-wide expenses, from -¥22.8B in the previous year to -¥25.7B in the current period, despite profit growth in both businesses.

Key Financial Indicators

【Profitability】The Operating Income margin was 8.6%, narrowing by approximately 1.6pt from 10.2% in the same period of the previous year, while the Net Income margin declined by approximately 0.7pt to 6.3% from 7.0% in the previous year. Annualized ROE was 12.5%, decomposed into a 6.3% Net Income margin, total asset turnover of 1.2x, and financial leverage of 1.64x. The high gross margin of 68.4% and asset efficiency supported ROE.【Cash Flow Quality】The increase in Net Income resulted from extraordinary income of ¥1.8B, including gains on step acquisitions, exceeding extraordinary losses of ¥0.9B, while Operating Income declined. Accordingly, earnings quality depends more on temporary factors than on operating performance.【Investment Efficiency】Total asset turnover was 1.2x, reflecting a structure in which inventory efficiency in the Reuse Business determines overall efficiency.【Financial Soundness】The Equity Ratio remained high at 61.0%, but declined from 71.3% in the previous year. Short-term borrowings increased +118.0% YoY to ¥6.43B, raising the short-term component of interest-bearing debt. Interest coverage remains high, and there are no concerns regarding near-term debt-servicing capacity.

Cash Flow Analysis

Although detailed disclosure of the statement of cash flows is not available, funding trends can be assessed from changes in the balance sheet. Cash and deposits increased to ¥3.67B from ¥3.01B in the previous year, while short-term borrowings increased by ¥3.48B YoY to ¥6.43B, suggesting that short-term borrowings are being used to fund demand associated with inventory buildup and the acquisition of goodwill related to the conversion of Econos Co., Ltd. into a consolidated subsidiary. Inventories were ¥11.11B, accounting for 35.6% of total assets, indicating that merchandise inventory in the Reuse Business is the primary use of funds. The current ratio was 175.8%, indicating liquidity headroom, but the quick ratio remained at 63.1%, reflecting a high degree of dependence on non-cash assets, mainly inventories.

Earnings Quality

The increase in Net Income for the current period to ¥17.9B (+2.4% YoY) resulted from extraordinary income of ¥1.8B, primarily gains on step acquisitions, exceeding extraordinary losses of ¥0.9B, including impairment losses of ¥0.9B, while Operating Income declined (-4.5% YoY). Earnings quality therefore has a high degree of dependence on non-recurring factors. Non-operating income of ¥1.5B, including dividend income of ¥0.8B, exceeded non-operating expenses of ¥0.4B and made a positive contribution to recurring earnings. The step-up from Operating Income to Ordinary Income and Profit Before Tax is limited, but the recovery from Ordinary Income to Net Income was attributable to extraordinary gains and losses. Accordingly, recovery in operating earning power will be the key to sustainability from the next period onward.

Performance Forecast and Guidance

Progress toward the full-year revenue forecast of ¥360.0B was 78.3%, exceeding the standard progress rate of 75%, indicating a solid pace toward achieving the revenue plan. In contrast, progress toward the full-year Operating Income forecast of ¥35.5B was 68.2%, while progress toward the Ordinary Income forecast of ¥36.6B was 69.2%; both were below the standard progress rate. Achieving the full-year Operating Income plan in Q4 will require an Operating Income margin of approximately 14.5% over the remaining period, representing an improvement from the 8.6% recorded cumulatively for the current period. Progress toward the full-year Net Income forecast of ¥24.5B was 72.7%, but this level includes contributions from extraordinary gains and losses, so the degree of operating improvement will determine future progress.

Shareholder Returns

The dividend at the end of Q2 was ¥0 per share, while the full-year dividend forecast is ¥78 per share. Based on the average number of shares outstanding during the period of 13,900,151 shares, the estimated annual total dividend is approximately ¥1.08B, resulting in a Payout Ratio of approximately 44.3% against the full-year Net Income forecast of ¥24.5B. This Payout Ratio is calculated by dividing dividends alone by Net Income and is distinct from the Total Return Ratio, which includes share repurchases. With net assets of ¥19.03B and retained earnings of ¥13.83B, the Company has sufficient accounting capacity to pay dividends.

Risk Factors

1. Inventory accumulation risk: Inventories were ¥11.11B, accounting for 35.6% of total assets, a substantial level even taking into account the inventory characteristics specific to reused goods. Prolonged inventory turnover or valuation losses could place pressure on the gross margin.

2. Short-term funding dependence risk: Short-term borrowings increased +118.0% YoY to ¥6.43B and account for the majority of interest-bearing debt. Relative to cash and deposits of ¥3.67B, the level of short-term borrowings is high, resulting in relatively high sensitivity to changes in interest rates and the funding environment at refinancing.

3. Risk of front-loaded costs and deteriorating operating leverage: SG&A expenses increased +16.1% YoY, exceeding the +13.7% revenue growth rate, and the Operating Income margin narrowed by approximately 1.6pt. Segment adjustments, including company-wide expenses, also deteriorated, making stronger cost discipline in Q4 necessary to achieve the full-year Operating Income forecast.

Industry Benchmark (Reference; Company Analysis)

Key Points from the Financial Results

1. Revenue maintained double-digit growth of +13.7% YoY, but Operating Income declined -4.5% YoY, with the separation of revenue growth from profit growth representing the structural characteristic of the current period.

2. The increase in Net Income (+2.4%) was attributable to the contribution of extraordinary income, including gains on step acquisitions, while operating earning power declined from the previous year. Evaluating performance solely based on changes in Net Income could create an impression that differs from the underlying reality.

3. Following the conversion of Econos Co., Ltd. into a consolidated subsidiary, goodwill increased +578.4% YoY to ¥1.09B. The earnings contribution and integration progress following the acquisition will continue to be monitored as factors affecting future consolidated profit margins.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,462–¥1,547 at Cost of Equity ±1%, and ¥1,500–¥1,508 at ω±0.1.

Notes:

• Net assets as of the end of the quarter are used (there is a timing difference from the full-year forecast).
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat high.

(Calculation model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated using only publicly disclosed data; this is not a forecast of the market share price or a recommendation of any specific investment action, and 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 financial results 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 financial results data. Investment decisions should be made at your own discretion and responsibility, after consulting with a professional as necessary.

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