NAFCO Co.,Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥90.99B
• Operating Income: ¥1.83B
• Net Income: ¥813M
• EPS: ¥33.07

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Segment Information

Full Year Forecast

Disclaimer

This data was automatically extracted from XBRL files. Please refer to the original disclosure documents for accuracy.

AI Financial Analysis

Executive Summary

Verdict: FY2026 Q2 shows a profit rebound with materially improved earnings versus last year, but profitability remains thin and capital efficiency is weak. Revenue was 909.93, generating gross profit of 317.55 (gross margin 34.9%) and operating income of 18.33, up 106.5% YoY. Ordinary income rose 89.1% YoY to 17.10, and net income increased 134.8% YoY to 8.13, implying a net margin of 0.9%. Operating margin stands near 2.0% (18.33/909.93), reflecting tight operating leverage as SG&A of 312.14 nearly consumed gross profit. Non-operating income was modest at 1.50, and non-operating expenses were 1.33, with interest expense of 0.90 covered strongly by EBITDA (interest coverage 20.4x). Cash generation was robust: operating cash flow reached 51.42, more than 6x net income, indicating conservative accounting and/or favorable working capital. Liquidity is solid with a current ratio of 162% and cash of 185 nearly matching short-term loans of 183.55, mitigating near-term refinancing risk. Solvency is strong with D/E of 0.46x and an implied equity ratio around 69%, providing ample balance sheet cushion. However, capital efficiency is weak: ROE is only 0.5% and ROIC is 0.8%, far below a 5–8% retail benchmark, suggesting underutilized assets and/or depressed margins. Profit before tax of 5.49 is notably below ordinary income of 17.10, implying sizable extraordinary losses; yet reported net income of 8.13 exceeds PBT after tax, indicating data inconsistencies or tax effect peculiarities. Margin trend analysis in basis points cannot be quantified due to missing prior-period revenue, but the sharp YoY profit growth suggests operating margin likely expanded materially. The implied free cash flow (OCF minus capex) appears positive given capex of 16.25, supporting balance sheet strength even if dividends increased. Dividend data are not disclosed, and the calculated payout ratio of 212.5% looks anomalously high relative to earnings and may reflect data gaps or special items; sustainability should be reassessed once official DPS is confirmed. Forward-looking, the company’s near-term resilience is supported by cash generation and conservative leverage, but structural upside requires sustained gross margin discipline and SG&A control to lift ROIC above the cost of capital. Monitoring extraordinary items, working capital trends, and any pricing/inventory actions will be key to validating the profit recovery.

Profitability Analysis

ROE decomposition (DuPont): ROE 0.5% = Net Profit Margin (0.9%) × Asset Turnover (0.408x) × Financial Leverage (1.45x). The low ROE is primarily driven by a very thin net margin and low asset turnover, while leverage is modest and not a major driver. Without prior-period DuPont splits, the most material driver of the YoY improvement in profits is inferred to be margin expansion at the operating level (operating income +106.5% YoY) rather than leverage changes. Business context: SG&A of 312.14 is almost equal to gross profit of 317.55, leaving just ~5.4 in operating spread before D&A, so even small gross margin improvements or SG&A efficiencies can swing operating profit significantly. Sustainability: the recovery appears partly sustainable if gross margin discipline holds and cost controls persist; however, the thin base makes results sensitive to demand and pricing. Concerning trend flags: (1) SG&A intensity remains very high (SG&A/revenue ~34.3%), close to gross margin, which constrains operating leverage; (2) ROIC at 0.8% indicates the core business is not earning its cost of capital; (3) Extraordinary items likely depressed PBT, adding volatility to bottom-line metrics.

Growth Assessment

Revenue scale reached 909.93; YoY revenue growth is not disclosed, but profit growth was strong with operating income +106.5% and net income +134.8% YoY. The improvement likely stems from better gross margin management and/or tighter expense control rather than top-line acceleration. Operating margin is approximately 2.0%, still low for sustainable growth without further efficiency gains. Ordinary income growth (+89.1%) suggests broader profitability improvement beyond purely operating drivers, though extraordinary losses weighed on PBT. EBITDA of 47.83 (margin 5.3%) indicates limited buffer for negative shocks; further SG&A optimization is needed to translate sales into profit. Outlook: near-term growth will hinge on maintaining gross margin in a competitive retail environment and managing labor/utility costs; any deterioration in demand or price competition could quickly compress the fragile margin. With ROIC at 0.8%, capital redeployment and disciplined capex will be important to improve returns. Given robust OCF, the company has flexibility to fund selective initiatives, but evidence of sustainable same-store sales growth and better inventory turns (not disclosed) is needed to underwrite continued profit growth.

Financial Health

Liquidity appears healthy: current ratio 162% and quick ratio 162% (inventories not disclosed but current assets are ample). There is no warning trigger (current ratio well above 1.0). Working capital is strong at 345.25. Short-term loans of 183.55 are nearly covered by cash and deposits of 185.00, limiting maturity mismatch risk; accounts payable of 226.05 are manageable relative to current assets of 902.28. Solvency is conservative with D/E 0.46x; implied equity ratio is approximately 69% (1,540.84/2,231.25). Interest coverage is strong at 20.37x, indicating comfortable capacity to service debt. Noncurrent liabilities are modest at 155.35, and long-term loans were not disclosed. No off-balance sheet obligations are reported in the provided data. Overall, balance sheet strength is a positive offset to low profitability.

Cash Flow Quality

OCF/Net Income is 6.32x, signaling high earnings quality and favorable cash conversion, likely driven by working capital inflows and non-cash D&A (29.50). With capex of 16.25, implied free cash flow is positive (approximately 35.2) even after investment spending. Financing cash outflow of -17.77 suggests debt repayment and/or dividends, but the dividend amount is not disclosed. There are no overt signs of working capital manipulation in the data, but lack of inventory details limits depth of analysis. Given strong OCF relative to NI, cash flow appears sufficient to fund maintenance capex and likely ordinary dividends, with capacity to reduce debt or build cash.

Dividend Sustainability

Dividend details are not disclosed, and the reported calculated payout ratio of 212.5% appears anomalously high versus EPS of 33.07 and NI of 8.13. Without DPS or total dividends paid, payout assessment is uncertain. From a cash perspective, implied FCF (OCF 51.42 minus capex 16.25) would comfortably cover a typical dividend if the actual payout is moderate; however, a >200% payout would not be sustainable over time given low ROE/ROIC. Policy outlook: given the weak capital efficiency and need to improve ROIC, management would be incentivized to keep payouts balanced with reinvestment and balance sheet prudence. Reassess once official DPS is disclosed for FY2026.

Risk Assessment

Business Risks:

• Thin operating margin (~2.0%) leaves earnings highly sensitive to gross margin compression or cost inflation.
• Competitive intensity in home improvement/DIY retail could pressure pricing and traffic.
• Potential extraordinary losses (gap between ordinary income and PBT) introduce bottom-line volatility.
• Dependence on consumer demand cycles and seasonal categories; inventory risks not assessable due to non-disclosure.
• Execution risk in SG&A control given SG&A nearly equals gross profit.

Financial Risks:

• Short-term debt exposure (183.55) requires rollover discipline, albeit largely offset by cash (185.00).
• Low ROIC (0.8%) vs cost of capital risks long-term value erosion if not improved.
• Data inconsistency between PBT (5.49), tax (2.03), and net income (8.13) complicates assessment of tax burden and bottom-line resilience.

Key Concerns:

• Sustained ROIC below 5% benchmark, with current ROE only 0.5%.
• High SG&A intensity limiting operating leverage.
• Unclear dividend policy and anomalous calculated payout ratio (>200%) raise sustainability questions.

Investment Implications

Key Takeaways:

• Earnings rebounded strongly YoY with operating income +106.5% and net income +134.8%.
• Margins remain thin: operating ~2.0%, net 0.9%; SG&A nearly equals gross profit.
• Cash generation is robust (OCF 51.42; OCF/NI 6.3x), supporting liquidity and flexibility.
• Balance sheet is strong (current ratio 162%, D/E 0.46x, implied equity ratio ~69%).
• Capital efficiency is weak (ROIC 0.8%, ROE 0.5%), requiring structural improvement.
• Extraordinary items likely weighed on PBT; bottom-line volatility remains a watchpoint.
• Dividend sustainability unclear; reported payout metric appears inconsistent with fundamentals.

Metrics to Watch:

• Same-store sales growth and traffic trends (not disclosed).
• Gross margin and SG&A ratio trajectory (bps changes).
• Inventory levels and turnover to assess working capital durability.
• Extraordinary gains/losses and reconciliation from operating to net income.
• Capex plans versus OCF to gauge FCF and payout capacity.
• ROIC progression toward or above 5–8% thresholds.

Relative Positioning: Versus domestic home improvement peers, Nafco currently exhibits stronger liquidity and conservative leverage but weaker capital efficiency and thinner margins. The near-term cash flow profile is supportive, yet structural returns lag sector leaders, placing the company in a defensive but return-challenged position until margin and asset turn improve.

Disclaimer

This analysis was auto-generated by AI. Please note the following:

• No Guarantee of Accuracy: The accuracy and completeness of this analysis are not guaranteed. For accurate financial data, please refer to the original disclosure documents published on TDnet or other official sources
• Not Investment Advice: This analysis is for general informational purposes only and does not constitute investment advice under applicable securities laws. It is not a recommendation to buy or sell any specific securities
• At Your Own Risk: Investment decisions should be made at your own discretion and risk. We assume no liability for any losses incurred based on this analysis