HARD OFF CORPORATION Co.,Ltd. FY2027 Q1 Earnings Report

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Executive Summary

This quarter saw higher revenue and earnings, accompanied by an increase in operating income. Net income increased particularly significantly due to the recognition of gains on the sale of investment securities. Revenue was ¥11.25B (+30.0% YoY), operating income was ¥1.06B (+34.4%), ordinary income was ¥1.06B (+26.7%), and net income attributable to owners of the parent was ¥1.46B (+167.8%). The primary driver of revenue growth was the expansion of the Reuse Business, while the increase in operating income reflected operating leverage resulting from an improvement in the SG&A expense ratio. The sharp increase in net income was temporarily boosted by the recognition of ¥1.16B in extraordinary income, consisting of gains on the sale of investment securities.

Factors Affecting Results

【Revenue】Revenue was ¥11.25B, representing a 30.0% increase year on year. The core Reuse Business led growth with revenue of ¥10.79B (+31.6%), accounting for 95.9% of company-wide revenue. The Franchise (FC) Business recorded modest revenue growth of 9.0% to ¥0.57B, remaining small in scale compared with the Reuse Business.

【Profit and Loss】Operating income was ¥1.06B (+34.4%), and the operating margin improved to 9.4% from 9.1% in the same period of the previous year, a +0.3pt improvement. While the gross margin declined to 68.6% from 69.1% in the previous year, the SG&A expense ratio improved to 59.2% from 60.0%, a -0.8pt improvement. Operating leverage emerged as the increase in SG&A expenses (+¥1.47B) was smaller than the increase in revenue (+¥2.60B). Ordinary income increased 26.7% to ¥1.06B, securing earnings growth at a level close to that of the core business. However, as ¥1.16B in extraordinary income, including ¥1.16B in gains on the sale of investment securities, was recognized as a one-time factor, profit before tax increased to ¥2.22B, and net income attributable to owners of the parent reached ¥1.46B (+167.8%). Extraordinary losses were negligible at ¥0.00B. In addition to higher revenue and earnings, this quarter benefited substantially from a one-time gain in extraordinary income, which significantly increased net income.

Segment Analysis

The Reuse Business generated revenue of ¥10.79B (+31.6%), operating income of ¥1.75B (+33.9%), and an operating margin of 16.2%. Accounting for 95.9% of company-wide revenue and generating the majority of segment profit, it is the core business. The Franchise (FC) Business generated revenue of ¥0.57B (+9.0%), operating income of ¥0.30B (+6.9%), and a high operating margin of 53.1%, although its revenue mix was only 5.1% and its scale remained small. Given the significant difference in profitability between the segments, changes in the business mix could affect the company-wide gross margin and operating margin.

Key Financial Metrics

【Profitability】The operating margin improved to 9.4% from 9.1% in the same period of the previous year, a +0.3pt improvement. The net profit margin, based on net income attributable to owners of the parent, rose substantially to 12.9% from 6.3% in the previous year. However, the increase in the net profit margin was largely attributable to the one-time contribution of ¥1.16B in gains on the sale of investment securities; the operating margin of 9.4% more closely reflects recurring earnings power. 【Cash Quality】Although there is no separate disclosure of cash flow statement classifications, cash and deposits increased to ¥3.77B from ¥3.31B in the previous year. The decrease in investment securities (-¥1.00B) and increase in short-term borrowings (+¥0.82B) served as sources of funds, while inventories remained high at ¥11.56B, indicating continued investment of working capital in inventory. 【Capital Efficiency】The total asset turnover ratio, on a quarterly basis, was 0.35x, ROE was 7.3%, and estimated ROIC was 3.1%; in each case, the significant inventory burden restrained capital efficiency. 【Financial Soundness】The equity ratio declined to 62.4% from 63.9% in the previous year, a -1.5pt decrease, although liquidity was secured with a current ratio of 185.1%. Of interest-bearing debt of ¥6.60B, short-term borrowings and current portions totaled ¥6.18B, accounting for more than 90%. While the cash-to-short-term interest-bearing debt ratio was 0.61x, requiring monitoring of refinancing conditions, the interest coverage ratio was 44.3x, indicating strong resilience to interest expense.

Cash Flow Analysis

As there is no separate disclosure of the cash flow statement for the quarter, funding trends are assessed based on changes in the balance sheet. Cash and deposits were ¥3.77B, an increase of ¥0.46B (+14.0%) from ¥3.31B in the same period of the previous year. Sources of funds included the sale of investment securities, reflected in a ¥1.00B decline in the balance to ¥3.22B and the recognition of ¥1.16B in gains on sale as extraordinary income, as well as an increase of ¥0.82B in short-term borrowings to ¥5.91B. Meanwhile, inventories remained high at ¥11.56B, and the continued investment of working capital in inventory weighed on cash generation. Property, plant and equipment increased by ¥0.39B, indicating continued investment in stores and equipment. Overall, this was a period in which the cash balance was increased through asset sales and short-term financing; improvement in inventory turnover will determine the company’s underlying cash-generation capacity.

Quality of Earnings

Recurring earnings power for the quarter is represented by operating income of ¥1.06B and an operating margin of 9.4%. Non-operating income was ¥0.03B, including ¥0.01B in dividend income, while non-operating expenses were ¥0.03B, including ¥0.02B in interest expense. Both were small, and the difference between ordinary income of ¥1.06B and operating income was limited. However, the recognition of ¥1.16B in extraordinary income, consisting of ¥1.16B in gains on the sale of investment securities, resulted in profit before tax of ¥2.22B and net income attributable to owners of the parent of ¥1.46B, causing net income to significantly exceed ordinary income. As this excess resulted from the non-recurring event of an asset sale, its recurrence in subsequent periods is limited. In addition, inventories had increased to ¥11.56B, and the potential divergence between the timing of profit recognition and cash generation warrants attention from an accrual perspective.

Earnings Forecast and Guidance

Progress against the full-year plan was 24.6% for revenue (¥11.25B/¥45.70B), 26.1% for operating income (¥1.06B/¥4.05B), 25.9% for ordinary income (¥1.06B/¥4.10B), and 44.1% for net income (¥1.46B/¥3.30B). Against a simple progress benchmark of 25%, revenue, operating income, and ordinary income were generally tracking in line with expectations, while net income was significantly ahead of schedule due to the early recognition of ¥1.16B in gains on the sale of investment securities. As of the quarter, the Company had revised neither its earnings forecast nor its dividend forecast. Toward the full year, the key focus will be the accumulation of operating earnings in light of the reversal of the extraordinary income benefit.

Shareholder Returns

The Company disclosed an annual dividend forecast of ¥92 and a full-year EPS forecast of ¥237.19, implying a payout ratio of 38.8%. Based on average shares outstanding during the period of 13,913 thousand shares, total annual dividends are estimated at ¥1.28B, which is sufficiently covered by the full-year net income forecast of ¥3.30B. As of the quarter, there had been no revision to the dividend forecast. There was no new disclosure regarding share repurchases, and shareholder returns are appropriately evaluated on a payout-ratio basis. Given cash and deposits of ¥3.77B, there appears to be no concern regarding the Company’s short-term dividend payment capacity.

Risk Factors

1. Declining Inventory Efficiency: Inventories were ¥11.56B, compared with ¥11.20B in the previous year, accounting for 36.1% of total assets. The total asset turnover ratio, on a quarterly basis, was low at 0.35x, and inventory accumulation could affect asset efficiency and the risk of future valuation losses.

2. Dependence on Short-Term Funding and Refinancing: Of interest-bearing debt of ¥6.60B, short-term borrowings and current portions amounted to ¥6.18B, accounting for more than 90%. The ratio to cash and deposits of ¥3.77B was only 0.61x. The Company has a high degree of dependence on short-term funding, and changes in refinancing terms or the interest-rate environment could affect funding costs.

3. Dependence on One-Time Gains: Of net income of ¥1.46B, ¥1.16B was attributable to extraordinary income from gains on the sale of investment securities. This created a significant divergence from ordinary income of ¥1.06B. If similar asset sales do not continue, net income could fluctuate in subsequent periods.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

The Company’s operating margin and net profit margin are substantially above the median for the retail industry.

Growth and Capital Efficiency

The revenue growth rate is substantially above the industry median, placing the Company in the high-growth category within the industry.

※Source: Compiled by the Company

Key Points from the Financial Results

1. The operating margin improved to 9.4%, up +0.3pt from the previous year, primarily due to a decline in the SG&A expense ratio (-0.8pt). The emergence of operating leverage suggests the sustainability of profitability improvements during a period of revenue growth.

2. The significant increase in net income (+167.8%) was primarily attributable to the one-time gain of ¥1.16B on the sale of investment securities. An assessment based on recurring earnings power—an operating margin of 9.4% and ordinary income of ¥1.06B—more closely reflects underlying performance.

3. The substantial inventory burden, consisting of inventories of ¥11.56B and a total asset turnover ratio of 0.35x, together with dependence on short-term borrowings accounting for more than 90% of interest-bearing debt, represents a structural issue requiring ongoing monitoring with respect to capital efficiency and refinancing management.

Theoretical Share Price (Reference Value)

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

Sensitivity: ¥1,747–¥1,849 at ±1% for the cost of equity, and ¥1,788–¥1,810 at ±0.1 for ω.

Notes:

• Since net income progress against the full-year forecast (44%) exceeds the standard benchmark (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).
• Net assets as of the end of the quarter are used (there is a timing difference relative to the full-year forecast).
• As net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-07 / 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 through analysis of XBRL earnings summary data. It does not recommend investment in any specific security. Industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own responsibility, after consulting professionals as necessary.

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