HARD OFF CORPORATION (2674) FY2027 Q1 Earnings Report

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Executive Summary

In FY2027 Q1, revenue and earnings increased owing to higher revenue from the core reuse business and an improvement in the SG&A ratio, while extraordinary income, including gains on the sale of investment securities, significantly boosted net income. Revenue was ¥11.25B (¥8.65B in the same period of the previous year, YoY +30.0%), operating income was ¥1.06B (¥0.79B, YoY +34.4%), ordinary income was ¥1.06B (¥0.84B, YoY +26.7%), and net income attributable to owners of the parent was ¥1.46B (¥0.55B, YoY +165.7%). Operating profit growth was supported by the expansion of external customer revenue in the reuse business alongside disciplined cost control. However, the sharp increase in net income was primarily attributable to the temporary factor of a ¥1.16B gain on the sale of investment securities. Accordingly, operating income and ordinary income should be prioritized when evaluating recurring earnings power.

Factors Affecting Results

【Revenue】Revenue was ¥11.25B, up +30.0% year on year. The core reuse business led consolidated growth, generating external customer revenue of ¥10.79B (95.9% of the total, YoY +31.6%). The franchise (FC) business recorded external customer revenue of ¥0.43B, down slightly by YoY -3.4%, but maintained high profitability with a segment profit margin of 53.1%.

【Profit and Loss】Operating income was ¥1.06B, with an operating margin of 9.4% (up +30bp from 9.1% in the previous year). The gross profit margin declined to 68.6% from 69.1%, a decrease of approximately 50bp, but the SG&A ratio improved to 59.2% from 60.0%, an improvement of approximately 80bp, supporting operating profit growth. Ordinary income was ¥1.06B (YoY +26.7%), with non-operating income and expenses roughly balanced. Net income of ¥1.46B (YoY +165.7%) was primarily attributable to extraordinary income of ¥1.16B, including a ¥1.16B gain on the sale of investment securities. Profit before tax of ¥2.22B reached approximately 2.1 times ordinary income. In conclusion, the Company achieved higher revenue and earnings; operating profit growth was based on business expansion and cost discipline, while the sharp increase in net income was attributable to temporary factors.

Segment Analysis

The reuse business was the core contributor to consolidated results, recording revenue of ¥10.79B (YoY +31.6%), segment profit of ¥1.75B (YoY +33.9%), and a profit margin of 16.2%. The FC business recorded revenue of ¥0.57B (YoY +9.0%; external customer revenue alone was ¥0.43B, YoY -3.4%), segment profit of ¥0.30B (YoY +6.9%), and a high profit margin of 53.1%, although its contribution to consolidated revenue was limited. Corporate expenses (adjustments) increased from ¥0.798B in the previous year to ¥1.013B, absorbing part of the increase in the combined profits of the two businesses. The structure of consolidated growth remains dependent on expansion in the scale of the reuse business.

Key Financial Indicators

【Profitability】The operating margin improved to 9.4% from 9.1% in the same period of the previous year, an improvement of +30bp, while the net profit margin rose significantly to 12.9% from 6.3%. However, the latter included a temporary boost from the gain on the sale of investment securities. The gross margin was 68.6%, down -50bp from 69.1% in the previous year, while the SG&A ratio improved by -80bp to 59.2% from 60.0%, indicating that cost discipline contributed to operating profit growth. 【Cash Flow Quality】Although operating cash flow (OCF) statement data has not been disclosed, inventories of ¥11.56B accounted for 36.1% of total assets, making the liquidity of inventory a key factor in capital efficiency. 【Investment Efficiency】Annualized ROE was 29.2%, but recurring ROE excluding the impact of the ¥1.16B gain on the sale of investment securities included in profit before tax is likely to be lower. Net assets of ¥19.99B against total assets of ¥32.03B, together with an equity ratio of 62.4%, indicates a balance between capital efficiency and financial soundness. 【Financial Soundness】The equity ratio of 62.4% declined slightly from 63.9% in the same period of the previous year but remains high. The interest-bearing debt structure, centered on short-term borrowings of ¥5.91B, indicates a relatively high degree of dependence on short-term funding.

Cash Flow Analysis

As disclosed data from the cash flow statement is not included in this report, cash flow trends are analyzed based on changes in the balance sheet. Cash and deposits increased to ¥3.77B from ¥3.31B in the same period of the previous year, while inventories rose slightly to ¥11.56B, up +3.2% year on year, indicating that inventory investment in the reuse business absorbed part of the Company’s funds. Short-term borrowings increased by +16.1% to ¥5.91B from ¥5.09B in the same period of the previous year, suggesting that inventory investment and working capital requirements are being funded through short-term financing. Accounts payable were small at ¥0.12B, indicating that the Company’s business model does not obtain most procurement funding through accounts payable; therefore, reliance on internal funds or borrowings is likely to increase as inventory expands. Overall, the funding structure is characterized by inventory accumulation accompanying business expansion and an increase in short-term borrowings, with the speed of inventory sales and monetization influencing capital efficiency.

Earnings Quality

Net income of ¥1.46B for the quarter included extraordinary income of ¥1.16B, mainly consisting of the ¥1.16B gain on the sale of investment securities, and therefore needs to be evaluated separately from recurring business earnings. Non-operating income was ¥0.03B, including ¥0.01B in dividend income, while non-operating expenses were ¥0.03B, including ¥0.02B in interest expenses; these were broadly balanced. Ordinary income of ¥1.06B was therefore primarily an extension of operating income. Meanwhile, profit before tax of ¥2.22B reached approximately 2.1 times ordinary income, and absent extraordinary income, profit before tax would likely have been close to ordinary income. Comprehensive income was ¥0.85B, representing a gap of approximately ¥0.61B from net income attributable to owners of the parent of ¥1.46B. The primary cause was valuation differences on securities of -¥0.62B. This reflects fluctuations in the market prices of securities held. In evaluating earnings quality, it should be noted that, in addition to assets sold during the period, valuation changes in the remaining securities affected net assets.

Earnings Forecast and Guidance

The full-year earnings forecast is revenue of ¥45.70B (YoY +16.4%), operating income of ¥4.05B (YoY +19.6%), and ordinary income of ¥4.10B (YoY +17.5%), with no revisions during the quarter. Q1 progress rates were 24.6% for revenue, 26.1% for operating income, and 25.9% for ordinary income, all exceeding the simple quarterly-equivalent progress rate of 25%. Meanwhile, the net income progress rate was high at 44.1% against the full-year forecast of ¥3.30B; however, caution is warranted against overestimating full-year net income progress because it includes the ¥1.16B gain on the sale of investment securities. On an operating income and ordinary income basis, progress is slightly ahead of plan, indicating steady progress toward achieving the full-year targets.

Shareholder Returns

The full-year dividend forecast is ¥92.0 per share, with no revision to the forecast during the quarter. Based on the full-year EPS forecast of ¥237.19, the payout ratio is 38.8%, remaining below 60%. Based on the number of shares outstanding excluding treasury shares, the annual total dividend is estimated at approximately ¥1.28B, implying dividend coverage of approximately 2.6 times against the full-year forecast of net income attributable to owners of the parent of ¥3.30B. Net income of ¥1.46B for the quarter exceeds the planned annual dividend amount; however, because it includes a gain on the sale of investment securities, it would not be appropriate to assess dividend sustainability based solely on quarterly profit. Data on share repurchases has not been disclosed, and the analysis is based on the payout ratio calculated from dividends alone.

Risk Factors

1. Inventory Obsolescence Risk: Inventories were ¥11.56B, accounting for 36.1% of total assets, and annualized inventory days were approximately 299 days, significantly exceeding the general retail benchmark of approximately 60 days. Even taking into account the longer sales period characteristic of used products, there is a risk of valuation losses on slow-moving inventory and deterioration in gross profit margins due to markdown sales.

2. Dependence on Short-Term Funding: Of interest-bearing debt of ¥6.33B, short-term borrowings amounted to ¥5.91B, resulting in a short-term debt ratio of 93.3%. Cash and deposits of ¥3.77B represented only 0.64 times short-term liabilities, indicating a structure highly sensitive to refinancing conditions and changes in the lending stance of financial institutions.

3. Business Concentration Risk: The reuse business accounts for 95.9% of external customer revenue, and consolidated results are highly dependent on demand trends for this single business, competition in purchasing used goods, and consumer demand for used products. Corporate expenses increased from ¥0.798B in the previous year to ¥1.013B, potentially putting pressure on profit margins if business growth slows.

Industry Benchmark (Reference; Company Analysis)

Industry Benchmark (retail)

Profitability and Returns

The Company’s operating margin and net profit margin both significantly exceed the industry median, placing its profitability in the upper tier of the industry.

Growth and Capital Efficiency

The revenue growth rate also significantly exceeds the industry median, positioning the Company among the industry’s high-growth companies.

※Source: Company analysis

Key Takeaways from the Financial Results

1. The operating margin of 9.4% (YoY +30bp) reflects the offsetting of a decline in the gross margin (-50bp) by an improvement in the SG&A ratio (-80bp), with cost discipline contributing to earnings growth. Whether this structure is sustainable will depend on improvements in product mix and inventory turnover.

2. The sharp increase in net income (YoY +165.7%) was primarily driven by the extraordinary factor of the ¥1.16B gain on the sale of investment securities. Even in terms of full-year progress, net income (44.1%) is well ahead of operating income and ordinary income (approximately 26%). Operating income and ordinary income progress should be emphasized when assessing underlying full-year earnings power.

3. Annualized inventory days were approximately 299 days, while asset retirement obligations were ¥1.25B, accounting for 10.4% of total liabilities. Both represent structural characteristics that may tie up funds or create future funding requirements. Inventory management and developments in the restructuring of the store network are expected to affect future profitability.

Theoretical Stock Price (Reference Value)

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 is 44%, exceeding the standard level of 25%, forecast EPS has been adjusted upward within a maximum range of +10% (because companies whose progress is ahead of plan tend to exceed their forecasts; the adjustment 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).
• 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 / This is a mechanically calculated value based solely on publicly disclosed data and is not a forecast of the market price or a recommendation of any specific investment action, nor does it predict or guarantee future stock 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 discretion and responsibility, after consulting a professional as necessary.

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