and ST HD Co.,Ltd. FY2027 Q1 Earnings Report

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Executive Summary

For Q1 of FY ending March 2027, Revenue was 803.2B (YoY +28.5B +3.7%), Operating Income was 78.8B (YoY +22.7B +40.5%), Ordinary Income was 80.5B (YoY +26.2B +48.4%), and Net Income was 39.2B (YoY -4.5B -10.3%). The operating stage delivered a significant improvement in profit, with the operating margin improving to 9.8% (prior 7.2%) up +2.6pt; however, recognition of special losses of 13.0B and a high effective tax rate of 41.9% resulted in a decline in Net Income, producing a pattern of higher revenue, higher operating profit, but lower net profit. Gross margin improved to 57.9% (+1.3pt from 56.6% prior), and SG&A ratio declined to 48.1% (-1.3pt from 49.4% prior), indicating effective operating leverage. By segment, Apparel & Accessories related businesses accounted for 95.2% of Revenue, and growth in that segment (+3.9%) drove the overall increase. Progress against the full-year plan stood at Revenue 25.6%, Operating Income 45.8%, Ordinary Income 46.8%, and Net Income 37.2%, indicating front-loaded progress on profitability.

Drivers of Performance

[Revenue] Revenue was 803.2B (YoY +3.7%) and remained solid. By segment, the core Apparel & Accessories related business led with 764.96B (composition ratio 95.2%, YoY +3.9%), and Others (Food & Beverage) was 38.86B (composition ratio 4.8%, YoY +1.6%). The revenue increase in Apparel & Accessories is presumed to have been driven by product mix optimization and store network efficiency. Accounts receivable were 233.8B, up +46.4% from 159.7B a year earlier, and Days Sales Outstanding (DSO) extended to 106 days, indicating a lengthening collection cycle.

[Profitability] Cost of goods sold was 338.4B (cost ratio 42.1%), resulting in gross profit of 464.7B (gross margin 57.9%), an improvement of +1.3pt from 56.6% in the prior year. SG&A was 386.0B (SG&A ratio 48.1%), up only +3.7B in absolute terms from 382.3B (SG&A ratio 49.4%) in the prior year, and grew at a lower rate than revenue (+3.7%), resulting in a -1.3pt decline in the SG&A ratio. Consequently, Operating Income was 78.8B (Operating margin 9.8%), a substantial increase of +40.5% from 56.0B (Operating margin 7.2%) in the prior year. Non-operating items contributed net +1.7B, with foreign exchange gains of 1.0B contributing, while foreign exchange losses of 2.4B and interest expense of 0.6B were incurred, resulting in Ordinary Income of 80.5B (+48.4%). After recording special losses of 13.0B (including impairment losses of 0.7B), Profit before Income Taxes was 67.5B (+25.6%), and after deducting income taxes of 28.3B (effective tax rate 41.9%), Net Income was 39.2B (-10.3%). In conclusion, while the operating stage achieved higher revenue and profit, special losses and high tax burden resulted in higher revenue but lower net income.

Segment Analysis

The core Apparel & Accessories related segment achieved segment profit of 81.2B (prior 54.5B, YoY +49.2%), a large increase, and the segment operating margin improved to 10.6% (prior 7.4%). Others (Food & Beverage) reported segment loss of 0.7B (prior loss 0.2B), widening the deficit, but its 4.8% revenue share limits its overall impact. The company’s disclosure framework aligns consolidated segment profit total with Ordinary Income, and the earnings improvement in the core business clearly drove consolidated results.

Key Financial Metrics

[Profitability] Operating margin improved to 9.8% (prior 7.2%), up +2.6pt, with both gross margin +1.3pt and SG&A ratio -1.3pt contributing. Net profit margin was 4.9% (prior 5.6%), down -0.7pt, compressed by special losses and a high effective tax rate of 41.9%. ROE was 4.7% (prior 5.4%), declining, but operating improvements appear structural and sustainable. [Cash Quality] DSO was 106 days, Days Inventory Outstanding (DIO) was 325 days, and Cash Conversion Cycle (CCC) was 282 days, indicating significant room to improve working capital efficiency. Accounts receivable increased by +74.1B YoY, outpacing revenue growth, and the extended collection cycle was observed. [Investment Efficiency] Annualized Total Asset Turnover was 0.546x, and Equity Turnover was 0.965x annualized, indicating asset efficiency at standard levels. [Financial Soundness] Equity Ratio was 56.9% (prior 58.5%), healthy, with D/E ratio of 0.76x and interest-bearing debt ratio of 6.7% maintaining low leverage. However, short-term borrowings of 60.0B comprise all interest-bearing debt, making the short-term debt ratio 100%. Current ratio was 148.6%, and Quick ratio was 95.4%, indicating short-term liquidity is generally secured but immediate liquidity is somewhat tight. Interest Coverage was 135.8x, signaling very high ability to service interest.

Cash Flow Analysis

Operating Cash Flow data is undisclosed, but funding trends are analyzed from the balance sheet movements. Accounts receivable increased by +74.1B YoY, far outpacing revenue growth (+28.5B), expanding cash tied up in working capital. Inventory was 301.4B, down -3.8B from 305.3B prior, showing slight improvement in inventory management, but the DIO of 325 days suggests lingering stock retention. Cash and deposits were 261.5B (prior 249.1B, +12.4B), and together with maintaining short-term borrowings of 60.0B, liquidity on hand was secured. Tangible fixed assets increased to 254.7B (prior 247.3B, +7.4B), indicating continued capital expenditures. Retained earnings rose to 786.0B (prior 768.0B, +18.0B), strengthening the capital base. Despite large operating profit gains, the sharp rise in accounts receivable has delayed cash conversion; improving collections and inventory efficiency will be key to FCF generation.

Quality of Earnings

Compared with Ordinary Income of 80.5B, Net Income was 39.2B, reflecting divergence due to special losses of 13.0B (including impairment losses of 0.7B) and high tax burden (effective tax rate 41.9%). Non-operating items netted +1.7B, with forex gains of 1.0B contributing but forex losses of 2.4B also occurring, so FX impact was limited. Non-operating income was 2.5B (0.3% of Revenue), minor, indicating low dependence on non-core income. Comprehensive income was 38.6B (Net Income 39.2B), almost identical, and changes in accumulated other comprehensive income were small (foreign currency translation adjustments -0.2B, valuation differences on available-for-sale securities -0.1B, deferred hedge gains/losses -0.2B), suggesting qualitative stability of equity. Special losses appear largely one-off, and the operating improvement (Operating Income +40.5%) indicates qualitative enhancement of core earnings. If tax burden normalizes and one-off losses are smoothed, the gap between Ordinary Income and Net Income should narrow, improving the quality of final profit.

Guidance / Forecast

The full-year plan remains: Revenue 3,140.0B (YoY +3.2%), Operating Income 172.0B (YoY +4.1%), Ordinary Income 172.0B (YoY +2.2%), Net Income 105.0B, EPS 227.63, Dividend 45.00. Progress at the end of Q1 was Revenue 25.6%, Operating Income 45.8%, Ordinary Income 46.8%, and Net Income 37.2%, showing front-loaded progress in operating and ordinary stages. The excess progress in Operating Income is due to gross margin improvement and SG&A efficiency, and these structural improvements support full-year achievement. Net Income progress at 37.2% lags due to special losses and high tax rate, but if tax normalization and smoothing of special losses proceed into H2, final profit progress may accelerate. There is no revision to the earnings forecast at this time, and the company appears confident in achieving the plan.

Shareholder Returns

Full-year dividend forecast is 45.00 (breakdown between interim and year-end not disclosed), giving a Payout Ratio of 19.8% against forecast EPS 227.63, a conservative level. The prior year dividend was also 45.00, indicating a maintained dividend policy. No share buyback has been disclosed; shareholder returns are concentrated on dividends. Payout Ratio of 19.8% is below industry average, indicating a preference to prioritize retained earnings. With Retained Earnings 786.0B and Cash & Deposits 261.5B, capital capacity is ample and dividend sustainability is high. Strengthening Operating Cash Flow could create future scope for dividend increases. Despite a reduction in Net Income this term, the dividend was maintained, confirming a focus on stable dividends.

Risk Factors

1. Business Concentration Risk: Apparel & Accessories related business accounts for 95.2% of Revenue, indicating very high dependence on a single business. If fashion trends change, consumer preferences shift, or competition intensifies causing revenue decline in this business, the impact on consolidated results would be direct and large. A limitedly diversified portfolio reduces resilience to risk.

2. Working Capital Management Risk: Accounts receivable surged to 233.8B, up +46.4% YoY, and DSO extended to 106 days. If this reflects relaxed credit control or changes in customer composition, concerns over higher bad debt risk and cash flow deterioration arise. Inventory also shows DIO 325 days and retention tendencies, posing risks of obsolescence and valuation losses. Prolonged CCC of 282 days reduces capital efficiency and impairs FCF generation quality.

3. Short-term Debt Concentration Risk: All interest-bearing debt of 60.0B is short-term borrowings, making the short-term debt ratio 100% and concentrating maturities in the near term. Changes in borrowing conditions or stress in financial markets could complicate refinancing and manifest liquidity risk. Although leverage is low, the concentrated debt composition constrains financial flexibility.

Industry Benchmark (Reference — Company Compilation)

Profitability & Returns

Operating margin exceeds the industry median by +6.4pt, placing profitability among the upper ranks in the industry.

Growth & Capital Efficiency

Revenue growth rate trails the industry median by -4.0pt, indicating a slower growth pace than the industry average.

※ Source: Company compilation

Earnings Highlights to Watch

1. Structural improvements at the operating level are progressing: gross margin +1.3pt and SG&A ratio -1.3pt both contributed to Operating Margin of 9.8% (prior 7.2%, +2.6pt). Operating Income growth of +40.5% YoY demonstrates the realization of positive operating leverage, reflecting cost efficiency and product mix optimization. Operating Income progress of 45.8% against the full-year plan is front-loaded, confirming reinforcement of the earnings base.

2. Net Income declined YoY by -10.3% due to special losses of 13.0B and a high effective tax rate of 41.9%, but these are largely one-off in nature. With sustained operating improvements, if tax normalization and smoothing of special losses occur in H2, final profit is likely to converge toward the trend in Ordinary Income. Payout Ratio of 19.8% and ample capital capacity support dividend sustainability.

3. Improvement in working capital management is the next focal point. Accounts receivable increased by +74.1B YoY to extend DSO to 106 days, and inventory retention signals at DIO 325 days are observed. Shortening CCC of 282 days would improve operating cash flow quality and strengthen FCF generation. Concentration of short-term borrowings of 60.0B constrains financial flexibility, but low leverage (D/E 0.76x) and a strong capital base (Equity Ratio 56.9%) keep refinancing risk within manageable bounds.

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This report is an AI-generated earnings analysis document created by analyzing XBRL financial statement data. It is not a recommendation to invest in any specific security. Industry benchmarks are reference information compiled by the company from public financial statements. Investment decisions should be made at your own responsibility, and, if necessary, consult a professional advisor.