Karula Co.,LTD. FY2026 Q3 Earnings Report

Financial Highlights

• Net Sales: ¥5.74B
• Operating Income: ¥288M
• Net Income: ¥262M
• EPS: ¥45.52

Income Statement

Balance Sheet

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Full Year Forecast

AI Financial Analysis

Executive Summary

Verdict: A mixed Q3 with resilient top-line growth but noticeable margin compression and softer bottom-line, resulting in decent ROE but rising execution demands into Q4. Revenue grew 3.9% YoY to 57.37, showing steady demand. Operating income declined 14.6% YoY to 2.88, pulling operating margin down to 5.0% from 6.1% a year ago. Net income fell 20.5% YoY to 2.62, taking net margin to 4.6% from 6.0% in the prior period. Gross margin remained high at 69.5%, consistent with a restaurant/retail service model where most labor and store costs reside in SG&A. The SG&A ratio was elevated at 64.4%, indicating operating deleverage despite sales growth. Non-operating items were largely neutral (non-op income 0.68 vs expenses 0.69), with interest expense modest at 0.21 and interest coverage healthy at 13.7x. The effective tax rate was unusually low at 8.6%, supporting net profit despite weaker operating leverage. ROE printed at 11.9% (good by benchmark), driven by moderate leverage (2.54x) and asset turnover of 1.02, partially offset by the softer net margin. Liquidity is adequate with a current ratio of 132% and quick ratio of 116%; cash and deposits of 13.75 cover 95% of current liabilities, limiting short-term stress. Leverage remains manageable with D/E at 1.54x and debt/capital at 43.6% (slightly above investment-grade threshold), comprised mainly of long-term borrowings. Notable balance sheet moves include higher cash (+36.7% YoY) and receivables (+56.5% YoY), alongside higher payables (+27.3% YoY), consistent with scale and operating activity. Earnings quality cannot be fully assessed as cash flow statements were not disclosed; therefore, OCF/NI and FCF coverage are unavailable. Dividend policy appears conservative with an 11.5% payout ratio (YE dividend 5 JPY, no interim), preserving balance sheet flexibility. Forward-looking, the key to stabilizing ROE above 10% will be regaining operating margin via cost control (labor, utilities, rent) and maintaining mid-single-digit sales growth. While no Quality Alerts were flagged in the data, our independent review highlights margin compression and slightly elevated leverage versus best-practice thresholds as areas to monitor.

Profitability Analysis

DuPont 3-factor decomposition: ROE (11.9%) = Net Profit Margin (4.6%) × Asset Turnover (1.022) × Financial Leverage (2.54x). The weakest component this quarter is the net margin, which fell from roughly 6.0% last year to 4.6% despite revenue growth. Asset turnover at ~1.0 indicates a capital-intensive footprint relative to sales, typical for restaurant operators with significant PPE. Financial leverage at 2.54x is a meaningful contributor to ROE, but it also raises sensitivity to profit volatility. The 5-factor view shows tax burden at 0.913 (beneficially low ETR), interest burden at 0.996 (minimal drag from financing costs), and EBIT margin at 5.0% (below the 8–15% ‘good’ benchmark). The component that changed most vs last year is the margin, as evidenced by operating profit declining 14.6% while sales rose 3.9%, implying operating deleverage and higher SG&A intensity. This likely reflects wage inflation, utilities, and store-level fixed costs outpacing pricing/mix benefits—a common theme in the sector. The tax rate tailwind (8.6%) appears supportive but may be one-time or cyclical (loss carryforwards/credits) and should not be relied upon structurally. Sustainability: margin recovery hinges on pricing, mix upgrades, and cost efficiency; without these, ROE would depend more on leverage than on true economic returns. Watch for any signs of SG&A growth outpacing revenue; with a 64.4% SG&A/sales ratio, the room for operating leverage exists if top-line accelerates or costs normalize.

Growth Assessment

Top-line growth of 3.9% YoY indicates steady demand resilience. However, operating income declined 14.6% YoY, pointing to negative operating leverage as costs grew faster than sales. Non-operating items were neutral; thus, core operating trends drove the earnings decline. Gross margin remained robust at 69.5%, implying merchandise/COGS discipline, but SG&A absorption deteriorated. Near-term growth sustainability will depend on maintaining comps and average ticket while addressing labor and energy costs. Given the small scale, incremental sales improvements can translate into meaningful operating leverage if SG&A normalization occurs. The unusually low ETR (8.6%) bolstered net income; normalization to a mid-20s tax rate would be a headwind absent margin recovery. Pipeline drivers to watch include store productivity, menu pricing power, and cost containment initiatives.

Financial Health

Liquidity: Current ratio 132% (adequate but below the 150% best-practice benchmark) and quick ratio 116% indicate sufficient near-term coverage. No warning on current ratio since it is above 1.0. Cash and deposits of 13.75 cover 95% of current liabilities (14.46), with additional support from receivables and inventories (total current assets 19.14), limiting maturity mismatch risk. Solvency: D/E at 1.54x (moderate) and debt/capital at 43.6% (slightly above the <40% investment-grade guideline). Interest-bearing debt is predominantly long-term (17.07), reducing refinancing pressure. Interest coverage is strong at 13.7x, supported by low interest costs. Equity increased to 22.10 from 19.76 YoY, reflecting retained earnings accumulation. Off-balance sheet obligations were not disclosed; as a restaurant operator, lease commitments may be material under JGAAP classification in notes—lack of disclosure is a limitation. Overall, financial health is acceptable with manageable leverage and adequate liquidity, but improvement toward a >150% current ratio and <40% debt/capital would strengthen resilience.

Notable B/S Changes

Cash and Deposits: +3.69 (+36.7%) - Strengthened liquidity, provides buffer against operating volatility. Accounts Receivable: +0.60 (+56.5%) - Reflects higher activity or timing; monitor collection efficiency and DSO. Accounts Payable: +0.38 (+27.3%) - In line with procurement scale; watch for supplier term changes. Retained Earnings: +2.33 (+33.0%) - Profit retention bolstered equity, supporting solvency metrics.

Cash Flow Quality

Cash flow statements were not disclosed, so OCF/Net Income, FCF, and CapEx intensity cannot be assessed. As such, we cannot flag OCF/NI < 0.8 even if it existed—data is unavailable. Working capital movements on the balance sheet (AR +56.5%, AP +27.3%, cash +36.7%) suggest active operations; however, without OCF we cannot determine whether cash generation kept pace with earnings. Given the low payout ratio, dividends are unlikely to strain cash even in a weaker OCF scenario, but confirmation awaits CF disclosure. No clear signs of working capital manipulation can be inferred from the limited data.

Dividend Sustainability

Declared dividends imply a conservative payout: year-end DPS of 5 JPY and no interim, resulting in an estimated payout ratio of 11.5%. With net income of 2.62 (hundred million JPY basis) and strong cash balance (13.75), coverage appears comfortable. FCF coverage cannot be calculated due to missing OCF/CapEx, but balance sheet liquidity and modest absolute cash outlay (~¥30 million) provide a cushion. Policy appears geared toward retention and balance sheet reinforcement given recent earnings volatility. Barring a sharp downturn, current dividend levels look sustainable; any increase should be contingent on margin recovery and visibility on OCF.

Risk Assessment

Business risks include Margin pressure from rising labor and utilities costs driving SG&A deleverage, Sensitivity to consumer demand and discretionary spending trends, Input cost volatility (food commodities) impacting gross-to-operating margin conversion, Execution risk on pricing and menu mix to offset cost inflation, Store network productivity risk (traffic, ticket size, regional demand).

Financial risks include Moderate leverage (D/E 1.54x; debt/capital 43.6%) increasing exposure to earnings volatility, Potential normalization of tax rate from 8.6% to mid-20s could reduce net income, Liquidity below best-practice benchmark (current ratio 132%) leaves less buffer for shocks, Interest rate risk on refinancing of long-term loans.

Key concerns include Operating margin compression (down ~110 bps YoY) amid only modest sales growth, Net margin decline to 4.6% (below 5–10% ‘good’ range), reducing earnings resilience, Limited disclosure on cash flows and SG&A breakdown, obscuring cost drivers, Small scale increases sensitivity to localized demand shocks.

Investment Implications

Key takeaways include Top-line growth solid at +3.9% YoY, but operating deleverage pressured profits, ROE at 11.9% remains in the ‘good’ range, aided by leverage and low tax rate, Liquidity adequate; leverage manageable but slightly above ideal capital structure metrics, Dividend policy conservative with ~11.5% payout, preserving cash, Key swing factor is restoring operating margin via cost control and pricing execution.

Metrics to watch include Operating margin trajectory and SG&A ratio, Same-store sales (traffic vs ticket) and store productivity, Labor cost ratio and utilities as % of sales, OCF and FCF once disclosed; CapEx needs vs maintenance, Effective tax rate normalization, Debt/EBITDA and interest coverage trend.

Regarding relative positioning, Within small-cap Japanese restaurant/retail peers, Karula shows steady sales and acceptable ROE but thinner operating margins and slightly higher debt/capital than best-practice benchmarks; upside depends on cost normalization and comp momentum.