and ST HD (2685) FY2027 Q2 Earnings Report

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Executive Summary

For the six months ended August 2026, operating income increased on improved gross margin and controlled SG&A expenses, while net income attributable to owners of the parent edged down due to higher extraordinary losses and tax expenses. Revenue was ¥152.11B (+1.9% YoY, +¥2.77B), operating income was ¥10.73B (+34.6% YoY, +¥2.76B), and ordinary income was ¥11.07B (+42.0% YoY). Interim net income attributable to owners of the parent was ¥5.95B (△0.6% YoY). The operating margin widened to 7.1%, up 1.8pt from 5.3% in the prior-year period. The main driver of the income increase was an improvement in gross margin from 55.2% to 56.5%. A defining feature of these results is that operating income growth did not translate into higher net income.

Factors Behind Performance Changes

【Revenue】Revenue increased modestly by +1.9%. The core Apparel and Miscellaneous Goods Business generated ¥144.1B (+1.9%), accounting for approximately 94.7% of consolidated revenue. Other businesses, including food service, generated ¥8.01B (+1.1%). Growth was moderate, with profit expansion driven more by improved profitability than by higher sales.

【Earnings】Gross profit was ¥86B, representing a gross margin of 56.5%. SG&A expenses were ¥75.26B (+1.2%), below the rate of revenue growth, and the SG&A ratio declined to 49.5%. As a result, operating income increased by +34.6%. Non-operating income was ¥0.51B, including a foreign exchange gain of ¥0.22B. Ordinary income was ¥11.07B.

Meanwhile, extraordinary losses totaled ¥1.43B, exceeding extraordinary income of ¥0.13B. Extraordinary losses included impairment losses of ¥0.13B and disaster-related losses of ¥0.07B, which were one-off factors. Profit before income taxes was ¥9.77B, and income taxes were ¥3.82B, resulting in an effective tax rate of approximately 39.1%, up from approximately 21.9% in the prior-year period. This drove the gap between operating income growth and the decline in net income. In summary, revenue and operating income increased, while final net income edged down.

Segment Analysis

Segment profit for the Apparel and Miscellaneous Goods Business was ¥11.11B (+42.9%), with a margin of 7.7%. This profit figure reflects the allocation of corporate expenses, and the improvement in profitability was concentrated in the core business. The Other Business (food service) swung from a profit of ¥0.013B in the prior-year period to a loss of ¥0.043B, with a margin of △0.5%. Its scale is small, and its impact on consolidated results is limited. Segment profit is measured on an ordinary income basis.

Key Financial Metrics

【Profitability】Annualized ROE was 13.8%, the operating margin was 7.1%, and the gross margin was 56.5%. The net margin was 3.9%, essentially flat versus approximately 4.0% in the prior-year period. Improvements at the operating level have not flowed through to the net margin.【Cash Flow Quality】Operating Cash Flow (OCF) was ¥8.63B (△13.8% YoY), or 1.45 times net income attributable to owners of the parent. However, OCF before changes in working capital was ¥13.16B, reduced by a ¥2.69B decrease in trade payables and a ¥1.63B increase in trade receivables. Income tax payments also increased to ¥4.47B from ¥2.7B in the prior-year period.【Investment Efficiency】Capital expenditures were ¥3.35B, or 0.54 times depreciation and amortization of ¥6.18B. Including ¥1.61B in acquisitions of intangible assets, investment totaled approximately ¥4.96B, or approximately 0.80 times depreciation and amortization.【Financial Soundness】The equity ratio rose to 62.3% from 58.3% in the prior-year period. Cash and deposits were ¥24.99B, while interest-bearing debt remained below ¥0.1B. The current ratio was 166.6%.

Cash Flow Analysis

OCF declined to ¥8.63B from ¥10.02B in the prior-year period, but free cash flow remained positive at ¥3.04B. In working capital, a decrease in inventories generated ¥1.16B in cash. Conversely, an increase in trade receivables resulted in an outflow of ¥1.63B, while a decrease in trade payables resulted in an outflow of ¥2.69B. Investing Cash Flow was △¥5.6B, including capital expenditures of ¥3.35B and acquisitions of intangible assets of ¥1.61B. Spending decreased from investing cash flow of △¥8.89B in the prior-year period. Financing Cash Flow was △¥3.19B, primarily due to dividend payments of ¥2.09B and lease liability repayments of ¥1.1B. In the prior-year period, financing cash flow was +¥0.39B, supported by short-term borrowings. Cash and cash equivalents were ¥24.87B, essentially unchanged. The company can fund investment and dividends from internal resources, and working capital trends will determine OCF levels going forward.

Earnings Quality

The ¥2.76B increase in operating income was the primary contributor to the increase in ordinary income, while non-operating income accounted for only approximately 0.3% of revenue. The ¥0.22B foreign exchange gain is variable, but limited in scale. Net extraordinary losses were ¥1.29B, with non-recurring items such as impairment and disaster-related losses weighing on net income. The difference between ordinary income of ¥11.07B and net income of ¥5.95B reflects extraordinary items and income taxes of ¥3.82B. OCF was 1.45 times net income, confirming cash backing for earnings. Comprehensive income was ¥5.88B, close to net income, and the effects of foreign currency translation adjustments of ¥0.09B and deferred hedge losses of △¥0.14B were limited. However, the year-on-year decline in OCF indicates that working capital trends warrant close monitoring.

Earnings Forecast and Guidance

The full-year forecast remains unchanged: revenue of ¥314B (+3.2% YoY), operating income of ¥17.2B (+4.1%), ordinary income of ¥17.2B (+2.2%), and net income attributable to owners of the parent of ¥10.5B (+10.5%). Interim progress against the full-year forecasts was 48.4% for revenue, 62.4% for operating income, 64.3% for ordinary income, and 56.7% for net income. Profit progress exceeding 50% indicates that earnings were weighted toward the first half. The operating income required in the second half to meet the forecast is ¥6.47B, approximately ¥4.26B less than in the first half. The impact of seasonality and inventory clearance, to which the second half is more exposed, should be considered.

<section name="SHAREHOLDER_RETURNS"> The interim dividend was ¥45 per share, unchanged from ¥45 in the prior-year period. The full-year dividend forecast is ¥90. The payout ratio against forecast full-year EPS of ¥227.63 is approximately 39.5%, excluding share buybacks. Dividend payments in the first half were ¥2.09B, within free cash flow of ¥3.04B. The company repurchased ¥0.64B of treasury shares in the prior-year period but made no repurchases in the current period. Cash reserves are ample, providing a stable source of shareholder returns.

Shareholder Returns

The interim dividend was ¥45 per share, unchanged from ¥45 in the prior-year period. The full-year dividend forecast is ¥90. The payout ratio against forecast full-year EPS of ¥227.63 is approximately 39.5%, excluding share buybacks. Dividend payments in the first half were ¥2.09B, within free cash flow of ¥3.04B. The company repurchased ¥0.64B of treasury shares in the prior-year period but made no repurchases in the current period. Cash reserves are ample, providing a stable source of shareholder returns.

Risk Factors

1. Inventory risk: Inventories were ¥29.42B, accounting for 21.3% of total assets, and inventory turnover days were approximately 81 on an annualized basis. If seasonal merchandise requires markdowns, the gross margin of 56.5%, which improved this period, could come under pressure.

2. Business concentration risk: The Apparel and Miscellaneous Goods Business accounts for 94.7% of revenue and nearly all segment profit. The business is susceptible to consumer trends and weather conditions. The food service business swung to a loss of ¥0.043B.

3. Working capital and cash conversion risk: OCF declined from ¥13.16B before changes in working capital to ¥8.63B. Trade receivables rose +10.8% (+¥1.73B), exceeding revenue growth. Electronically recorded obligations also decreased by ¥3.07B, and cash movements require ongoing monitoring.

Industry Benchmarks (Reference; Compiled by the Company)

Profitability and Returns

The operating margin exceeds the upper end of the industry IQR of 5.9%, while the net margin is close to the IQR upper bound of 4.2%.

Growth and Capital Efficiency

Revenue growth is below the median but is positioned toward the lower end of the IQR.

※Source: Company compilation

Key Points to Watch

1. The operating margin widened by 1.8pt YoY to 7.1%, exceeding the industry median. The main driver was improved gross margin, while revenue growth was modest at 1.9%; the sustainability of profitability improvements will therefore be a key focus.

2. Net income declined △0.6% despite higher operating income. Extraordinary losses of ¥1.43B and an increase in the effective tax rate to 39.1% were contributing factors. Whether these recur in the second half will affect the level of final net income.

3. OCF was 1.45 times net income, but declined △13.8% YoY. Against a strong financial base, with an equity ratio of 62.3% and cash of ¥24.99B, trends in inventories and trade receivables will determine cash generation.

Theoretical Share Price (Reference Value)

Sensitivity: At a cost of equity ±1%, ¥1,961–¥2,074; at ω ±0.1, ¥2,013–¥2,022.

Notes:

• Goodwill amortization of ¥3.9 per share is added back to earnings (to account for a non-cash expense and comparability with IFRS companies).
• Net assets at the quarter-end 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 somewhat overstated.

(Valuation model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-08 / Mechanically calculated using only 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 release data. It does not recommend investment in any specific security. Industry benchmarks are reference information compiled by the company based on publicly available earnings data. Investment decisions are your own responsibility; consult a professional as necessary.

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