and ST HD (2685) FY2027 Q1 Earnings Report

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Executive Summary

Although the first quarter of FY2027 recorded higher revenue and earnings, net income declined compared with the increase in operating income, making it necessary to assess the quality of earnings separately. Revenue was ¥80.32B (+3.7% YoY), Operating Income was ¥7.88B (+40.5%), and Ordinary Income was ¥8.05B (+48.4%), demonstrating a notable improvement in core-business profitability. However, Net Income remained at ¥3.92B (-10.3%). This divergence was primarily attributable to the recognition of an extraordinary loss of ¥1.30B and an increase in the effective tax rate to 41.9%, and does not indicate a decline in operating-stage earnings power.

Factors Affecting Performance

【Revenue】Revenue increased 3.7% YoY to ¥80.32B. The core Apparel and General Merchandise-Related Business led growth at ¥76.45B (composition ratio: 95.2%, YoY +3.8%), while Other Businesses (including food service) remained at ¥3.87B (YoY +1.6%).

【Profit and Loss】Operating Income was ¥7.88B (YoY +40.5%), benefiting simultaneously from an improvement in the gross profit margin to 57.9% (+1.3pt from 56.6% in the previous year) and a decline in the SG&A ratio to 48.1% (-1.3pt from 49.4% in the previous year). Ordinary Income also rose 48.4% YoY to ¥8.05B, fully reflecting the increase in core-business earnings. Meanwhile, Net Income was ¥3.92B (YoY -10.3%), with a significant decline from Ordinary Income due to an extraordinary loss of ¥1.30B (¥0.05B in the previous year) and an effective tax rate of 41.9% (income taxes of ¥2.83B against Profit Before Tax of ¥6.75B). In conclusion, this quarter’s results represent higher revenue and earnings at the Operating Income and Ordinary Income levels, while one-time factors and the tax burden reduced final earnings at the Net Income level.

Segment Analysis

The Apparel and General Merchandise-Related Business achieved revenue of ¥76.45B (YoY +3.8%), segment profit (on an Ordinary Income basis) of ¥8.12B (YoY +49.2%), and a profit margin of 10.6% (improving 3.2pt from 7.4% in the previous year), delivering earnings growth exceeding revenue growth. Meanwhile, Other Businesses (Food Service Business) recorded revenue of ¥3.87B (YoY +1.6%) and a segment loss of ¥0.07B (compared with a loss of ¥0.02B in the previous year), with the deficit expanding and partially offsetting the earnings contribution from the core business. It should be noted that segment profit is calculated on an Ordinary Income basis and differs from the definition of consolidated Operating Income.

Key Financial Indicators

【Profitability】The Operating Income margin improved to 9.8% from 7.2% in the previous year, with contributions from both the gross profit margin of 57.9% (56.6% in the previous year) and the SG&A ratio of 48.1% (49.4% in the previous year). The Net Income margin declined to 4.9% from 5.6% in the previous year due to the extraordinary loss and high tax burden. 【Cash Earnings Quality】There was a divergence between Ordinary Income of ¥8.05B and Net Income of ¥3.92B, primarily due to the extraordinary loss of ¥1.30B and income taxes of ¥2.83B (effective tax rate: 41.9%). Accounts receivable were ¥23.38B, increasing 46.4% YoY and substantially outpacing revenue growth. 【Investment Efficiency】ROE (annualized) was high at 18.7%; however, as this is an annualized figure based on Q1 results, its sustainability for the full year must be verified in subsequent quarters. 【Financial Soundness】The Equity Ratio was 56.9% (58.3% in the previous year). Against cash and deposits of ¥26.15B, interest-bearing debt consisted solely of short-term borrowings of ¥6.00B, indicating a stable financial base.

Cash Flow Analysis

As a cash flow statement has not been disclosed, funding trends are analyzed based on changes in the balance sheet. Cash and deposits were ¥26.15B, an increase of ¥1.24B from ¥24.91B in the same period of the previous year, and remained substantially above short-term borrowings of ¥6.00B. Meanwhile, accounts receivable were ¥23.38B, increasing ¥7.41B (+46.4%) from the previous year, substantially outpacing revenue growth (+3.7%); this may indicate that cash collection has not kept pace with the recognition of earnings. Inventories were ¥30.14B, slightly lower than the previous year (-¥0.38B), indicating that inventory accumulation has been restrained. Electronically recorded obligations decreased ¥2.12B from the previous year, indicating a change in the composition of trade payable settlements. Overall, cash levels improved from the previous year, but the sharp increase in accounts receivable warrants close monitoring of future collection trends from the perspective of working capital efficiency.

Earnings Quality

At the Operating Income and Ordinary Income levels, high-quality earnings growth was confirmed, driven by recurring factors including the improvement in the gross profit margin and the decline in the SG&A ratio. At the Net Income level, however, one-time factors weighed on results. The extraordinary loss of ¥1.30B (¥0.05B in the previous year) included an impairment loss of ¥0.07B and increased substantially from the previous year; this one-time expense caused the decline from Ordinary Income to Profit Before Tax. In addition, the effective tax rate of 41.9% (income taxes of ¥2.83B / Profit Before Tax of ¥6.75B) was high compared with the previous year, preventing the increase in Ordinary Income from being fully passed through to final earnings. Other operating income of ¥0.25B included a foreign exchange gain of ¥0.10B, but this was small at 0.3% of revenue and was not the primary driver of the increase in Ordinary Income. Accordingly, while core-business earnings power has improved, the decline in Net Income resulted from non-recurring factors—namely, the extraordinary loss and tax burden—and these factors should be evaluated separately.

Earnings Forecast and Guidance

The full-year earnings forecast remains unchanged at revenue of ¥314.00B (YoY +3.2%), Operating Income of ¥17.20B (YoY +4.1%), and Ordinary Income of ¥17.20B (YoY +2.2%) (no revision to the earnings forecast for the current quarter). Q1 progress rates were 25.6% for revenue, 45.8% for Operating Income, and 46.8% for Ordinary Income, with earnings progress substantially exceeding revenue progress. This high level of progress reflects improved core-business profitability; however, apparel retail is significantly affected by seasonality, and caution is required when extrapolating the Q1 pace directly to the full year.

Shareholder Returns

The full-year dividend forecast is ¥90.00 per share (no revision to the dividend forecast for the current quarter), representing a planned increase on a full-year basis from the previous year’s dividend of ¥45 (interim). Based on the full-year EPS forecast of ¥227.63, the forecast Payout Ratio is approximately 39.5%, below the generally accepted guideline for sustainability. The company holds treasury shares valued at ¥6.06B (approximately 5.4% of shares issued), but there is no disclosure of additional acquisitions during the current period. Therefore, the Payout Ratio and Total Return Ratio should be evaluated separately. Cash and deposits of ¥26.15B provide financial support for continued dividend payments.

Risk Factors

1. Inventory liquidation risk: Inventories of ¥30.14B account for 20.5% of total assets, and annualized inventory days of approximately 81 days are relatively long for the retail industry. Weak sales of seasonal products could place pressure on maintaining the 57.9% gross profit margin through markdowns and inventory write-downs.

2. Increase in accounts receivable and working capital efficiency: Accounts receivable increased 46.4% YoY (¥23.38B), substantially exceeding the revenue growth rate of +3.7%. The impact of changes in sales-channel composition and collection periods on working capital efficiency requires monitoring.

3. High tax burden and recurrence of extraordinary losses: The effective tax rate of 41.9% and extraordinary loss of ¥1.30B (¥0.05B in the previous year) reduced the conversion of Ordinary Income of ¥8.05B into Net Income of ¥3.92B. Whether these non-recurring factors recur will affect future Net Income levels.

Industry Benchmark (Reference; Prepared by the Company)

Industry Benchmark (retail)

Profitability and Returns

The company is substantially above the industry median, with profitability at a high level within the industry.

Growth and Capital Efficiency

The revenue growth rate is below the industry median, indicating a relatively moderate pace of revenue growth.

※Source: Prepared by the Company

Key Takeaways from the Earnings Results

1. Operating Income growth of +40.5% versus revenue growth of +3.7%, driven by gross profit margin improvement (+1.3pt) and a decline in the SG&A ratio (-1.3pt), represents the central fact of the earnings results: operating leverage.

2. The direction of Ordinary Income (+48.4%) and Net Income (-10.3%) reversed, with the non-recurring factors of an extraordinary loss of ¥1.30B and an effective tax rate of 41.9% weighing on final earnings. This is the defining structure of the current earnings results.

3. While the segment profit margin of the core Apparel and General Merchandise-Related Business improved to 10.6% from 7.4% in the previous year, the long inventory turnover period and sharp increase in accounts receivable (+46.4%) warrant observation in assessing future gross profit margins and funding efficiency.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,968–¥2,083 at ±1% for the cost of equity, and ¥2,019–¥2,032 at ±0.1 for ω.

Notes:

• Because Net Income progress against the full-year forecast (37%) exceeds the standard (25%), forecast EPS has been adjusted upward within a maximum range of +10% (because companies progressing ahead of forecast tend to exceed forecasts. In businesses with strong seasonality, the adjustment may be excessive).
• Net assets as of the quarter-end 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 higher.

(Calculation model: Residual Income Model (Ohlson type; explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated solely from publicly disclosed data; this is not a forecast of market share prices or a recommendation of any specific investment action, and does not predict 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, after consulting a professional as necessary.

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