GUNZE LIMITED FY2026 FY Earnings Report

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Executive Summary

For the fiscal year ended March 2026, Revenue was ¥1,309.2B (YoY ▲¥62.0B ▲4.5%), Operating Income was ¥48.8B (YoY ▲¥30.4B ▲38.4%), Ordinary Income was ¥49.2B (YoY ▲¥32.6B ▲39.9%), and Net income attributable to owners of parent was ¥5.1B (YoY ▲¥41.7B ▲89.1%), resulting in lower revenue and profits. Operating margin was 3.7%, deteriorating by ▲2.0pt YoY, and gross margin fell to 30.5%, down ▲1.0pt YoY. Net income declined sharply due to recording special losses of ¥45.3B, including ¥33.1B of restructuring expenses, and the effective tax rate rose to 48.9%. The Apparel Business swung to an operating loss of ¥13.3B, while the Functional Solutions Business maintained solid performance with Operating Income of ¥72.3B (+0.4%), which supported corporate earnings.

Drivers of Performance

[Revenue] Revenue was ¥1,309.2B, a decrease of ▲4.5% YoY. By geography, Japan was ¥1,033.9B (prior year ¥1,090.5B) and Overseas was ¥275.3B (prior year ¥280.7B), both down. By segment, the Functional Solutions Business had the largest revenue at ¥475.4B (YoY ▲8.9%) but declined from the prior year; the Apparel Business also fell to ¥586.0B (YoY ▲3.6%). Meanwhile, the Medical Business ¥132.0B (YoY +1.9%) and Life Create Business ¥125.3B (YoY +4.4%) grew, but their smaller scale could not offset the company-wide revenue decline. Gross margin was 30.5%, down ▲1.0pt YoY, suggesting worse product mix and discounting pressure.

[Profit & Loss] Gross profit was ¥398.8B (gross margin 30.5%), SG&A was ¥349.9B (SG&A ratio 26.7%), resulting in Operating Income of ¥48.8B (operating margin 3.7%). SG&A ratio was roughly flat YoY, but lower gross margin caused operating margin to deteriorate by ▲2.0pt. Non-operating income was ¥9.5B (dividend income received ¥1.6B, foreign exchange gains ¥0.2B, etc.), and non-operating expense was ¥9.1B (interest expense ¥0.8B, foreign exchange losses ¥0.3B, etc.), yielding Ordinary Income of ¥49.2B (YoY ▲39.9%). Special gains were ¥7.5B (gain on sale of fixed assets ¥3.1B, etc.), while special losses totaled ¥45.3B (restructuring expenses ¥33.1B, impairment losses ¥4.6B, loss on disposal of fixed assets ¥3.5B, etc.), compressing Profit before tax to ¥11.4B. After deducting income taxes of ¥5.6B (effective tax rate 48.9%) and non-controlling interests of ¥0.8B, Net income attributable to owners of parent was ¥5.1B (net margin 0.4%), a substantial decrease of ▲89.1% YoY. One-off restructuring costs and high tax burden materially reduced bottom-line earnings. In conclusion, the company experienced both revenue and profit decline, driven by weaker core earnings and one-time charges.

Segment Analysis

The Functional Solutions Business (Revenue ¥475.4B, YoY ▲8.9%) generated Operating Income of ¥72.3B (YoY +0.4%), a margin of 15.2%, and is the core business contributing approximately 148% of consolidated Operating Income. The Medical Business (Revenue ¥132.0B, YoY +1.9%) recorded Operating Income of ¥14.7B (YoY ▲39.3%), margin 11.2%; despite revenue growth, cost increases drove profit decline. The Apparel Business (Revenue ¥586.0B, YoY ▲3.6%) swung to an operating loss of ¥13.3B (prior year operating income ¥3.7B, YoY ▲277.2%), with a margin of ▲2.3%, indicating severe underperformance. Slower inventory turnover, discounting pressure, and weakened product competitiveness are likely causes of the loss. The Life Create Business (Revenue ¥125.3B, YoY +4.4%) delivered Operating Income of ¥12.3B (YoY +24.7%), margin 9.8%, sustaining revenue and profit growth. Consolidated Operating Income of ¥48.8B was driven by Functional Solutions and Life Create, partially offsetting the Apparel deficit.

Key Financial Metrics

[Profitability] ROE was 1.4% (prior year 3.9%), a steep decline primarily due to deterioration in net margin to 0.4% (prior year 3.4%). Operating margin was 3.7% (prior year 5.8%) and gross margin was 30.5% (prior year 31.5%), indicating weaker profitability; high-margin Functional Solutions (margin 15.2%) was diluted by Apparel’s loss (▲2.3%). [Cash Quality] Operating Cash Flow (OCF) was ¥172.7B, 33.9x Net income ¥5.1B, supported by depreciation of ¥72.6B, inventory decrease ¥53.6B, and receivables decrease ¥24.7B — non-cash items and working capital improvements contributed. OCF/EBITDA was 1.42x indicating healthy cash conversion, though the low Net income inflates this ratio. [Investment Efficiency] Capex of ¥125.5B was 1.73x depreciation ¥72.6B, evidencing active growth investment. Total asset turnover was 0.85x (prior year 0.86x), nearly flat, indicating stable asset efficiency. [Financial Soundness] Equity Ratio was 74.0% (prior year 75.6%), Current Ratio 250.6%, Quick Ratio 181.5%, showing very strong liquidity. Interest-bearing debt was ¥61.4B, Debt/EBITDA 0.51x, and interest coverage 62.6x, indicating high debt tolerance. Cash and deposits were ¥99.4B versus short-term borrowings of ¥8.8B, implying very low liquidity risk.

Cash Flow Analysis

OCF was ¥172.7B (YoY +49.2%), increased significantly by adding back before-tax profit ¥11.4B, depreciation ¥72.6B, restructuring expenses ¥33.1B and other non-cash items; working capital contributed via inventory decrease ¥53.6B and receivables decrease ¥24.7B, partially offset by a decrease in trade payables ¥9.3B. Payments for income taxes were ¥7.2B, receipts of interest and dividends ¥2.7B, and interest payments ¥0.7B, resulting in an OCF subtotal of ¥191.1B. Investing Cash Flow was ▲¥115.8B, driven by acquisition of tangible and intangible fixed assets ▲¥121.5B, offset by proceeds from sales ¥6.7B, sale of investment securities ¥13.9B and purchases ¥▲13.6B, reflecting aggressive Capex. Financing Cash Flow was ▲¥63.2B, with dividend payments ▲¥63.1B and share buybacks ▲¥50.1B offset partly by long-term borrowings raised ¥53.0B and repayments ▲¥26.1B, with short-term borrowings increases partially supplementing. Free Cash Flow was positive ¥56.9B (OCF ¥172.7B − Investing CF ¥115.8B) but internal cash generation fell short of total shareholder returns of about ¥113.4B, so some was funded from existing cash and the balance sheet. Working capital efficiency: Days Sales Outstanding (DSO) 63 days, Days Inventory Outstanding (DIO) 77 days, Days Payable Outstanding (DPO) 28 days, giving CCC of 112 days (worsening YoY); although inventory was reduced, the cash conversion cycle remains long.

Quality of Earnings

The divergence between Ordinary Income ¥49.2B and Profit before tax ¥11.4B (▲77%) is mainly due to one-off factors: special losses of ¥45.3B (including restructuring expenses ¥33.1B, impairment losses ¥4.6B, loss on disposal of fixed assets ¥3.5B). Non-operating items were almost neutral, with non-operating income ¥9.5B (dividend income ¥1.6B, FX gains ¥0.2B, etc.) and non-operating expenses ¥9.1B (interest expense ¥0.8B, FX losses ¥0.3B, etc.) offsetting each other. Special gains ¥7.5B (gain on sale of fixed assets ¥3.1B, etc.) were also recorded, but the scale of special losses significantly depressed final profit. OCF ¥172.7B vs Net income ¥5.1B yields OCF/Net income ratio of 33.9x, extremely high because Net income was compressed by one-time losses; accruals are ▲10.9% ((OCF − Net income)/Total assets) and sit on the healthy side. Recurring earnings power is shown by Operating Income ¥48.8B and Ordinary Income ¥49.2B; excluding one-off items, earnings quality appears stable. The effective tax rate of 48.9% is high, suggesting valuation adjustments to deferred tax assets and increased tax burden from group reorganization, indicating room for normalization. Comprehensive income was ¥43.4B, exceeding consolidated Net income ¥15.4B, aided by OCI gains such as ¥2.1B foreign currency translation adjustments and ¥29.5B actuarial gains related to retirement benefit plans; the gap with Net income is mainly due to pension asset valuation gains, which do not directly translate into cash generation.

Forecasts & Guidance

The company plan for the fiscal year ending March 2027 projects Revenue ¥1,320.0B (YoY +0.8%), Operating Income ¥88.0B (YoY +80.3%), Ordinary Income ¥84.0B (YoY +70.7%), and Net income attributable to owners of parent ¥52.0B. The implied operating margin is 6.7%, an improvement of +3.0pt vs this year and above the prior-year level (5.8%). The large recovery in Operating Income is expected to reflect a reversal of the ¥33.1B restructuring expenses recorded this year, narrowing of the Apparel loss, and stable performance in Functional Solutions. The forecast assumes a modest revenue increase (+0.8%) but a substantial +80% operating profit improvement, implying benefits from fixed-cost absorption and cost-structure reforms; achieving this will require gross margin recovery and a turnaround in Apparel. The dividend forecast is annual ¥0, but this is stated on a post-stock-split basis (1 share → 2 shares effective April 1, 2025), and the substantive dividend policy will be disclosed separately.

Shareholder Returns

An interim/final dividend totaling ¥216 per share at year-end (ordinary dividend ¥147 + special dividend ¥69) was paid, amounting to ¥63.31B. The payout ratio relative to Net income attributable to owners of parent ¥5.09B was about 1,244%, extremely high; dividend funding came from retained earnings and internal reserves. Additionally, share buybacks of ¥50.1B were executed, bringing total shareholder returns to approximately ¥113.4B. Coverage of total returns by Free Cash Flow ¥56.9B was 0.50x, meaning returns far exceeded internally generated cash and were partly financed by cash on the balance sheet and long-term borrowings (¥53.0B raised). The dividend policy appears to rely heavily on special dividends; the forecast for FY2027 shows a dividend forecast of ¥0 (post-split basis), so the sustainability of dividends requires separate assessment. Even limiting to the ordinary dividend ¥147 would amount to about ¥46.5B annually, which exceeds this year’s Net income substantially; assuming forecast Net income ¥52.0B next year, sustainability improves, but continuation of special dividends depends on earnings and FCF.

Risk Factors

1. Risk of continued Apparel losses: The Apparel Business swung to an operating loss of ¥13.3B, with DIO of 77 days and prolonged inventory turnover, discounting pressure, and weakening product competitiveness becoming apparent. This year’s inventory reduction of ¥53.6B shows efforts to compress inventory, but revenue decline and gross margin ▲1.0pt indicate weak demand and markdown losses. Going forward, consumption trends and intensified EC competition could widen the deficit or delay a return to profitability.

2. Risk from deteriorating working capital efficiency: CCC at 112 days is worsening YoY, with DSO 63 days and DIO 77 days indicating a long cash collection cycle. Although inventory compression progressed, during revenue downturns receivables and inventory stagnation can re-emerge and hinder sustainable OCF generation. Seasonal fluctuation and obsolescence risk in Apparel inventory remain concerns that could pressure gross margin and increase markdowns.

3. Risk of delayed realization of restructuring effects: The company recorded ¥33.1B of restructuring expenses, and the FY2027 plan (+80% Operating Income) assumes visible benefits from reforms; however, execution delays or insufficient cost reductions could make achieving a 6.7% operating margin difficult. The pace of Apparel loss reduction, progress in fixed-cost cuts, and Functional Solutions’ ability to pass through prices are key, and adverse external conditions raise downside risk to the plan.

Industry Benchmark (Reference, Company Data)

Profitability & Returns

Profitability lags the industry median, with Apparel losses and one-off expenses depressing margins.

Growth & Capital Efficiency

Revenue growth is well below the industry median, impacted by declines in core Apparel and Functional Solutions segments.

※Source: Company compilation

Key Points from the Financial Results

1. Contribution of Functional Solutions and progress of restructuring: With Operating Income ¥72.3B and margin 15.2%, the Functional Solutions Business’s strength in contributing about 148% of consolidated operating profit is a key strength and central to achieving the company’s plan of +80% Operating Income next year. Realization of the benefit from the ¥33.1B restructuring charge recorded this year and visible fixed-cost reductions are essential to reach an operating margin of 6.7%; quarterly progress and the pace of Apparel loss reduction should be monitored.

2. Scope to improve working capital efficiency and sustainability of inventory compression: Inventory was reduced by ¥53.6B and OCF was strong at ¥172.7B, but CCC of 112 days indicates the cash recovery cycle remains long; during sales recovery, receivables and inventory could re-expand. Shortening DIO from 77 days and maintaining/improving DSO 63 days are keys to improving ROIC and sustaining FCF; gross margin recovery (reduced markdowns) and SG&A flexibility directly impact profitability improvement.

3. Sustainability of shareholder returns and financial flexibility: Total returns of ¥63.3B in dividends + ¥50.1B buybacks = ¥113.4B far exceed FCF ¥56.9B and were supplemented by retained cash and long-term borrowings. Assuming next year’s Net income forecast ¥52.0B, dividend sustainability improves, but continuation of special dividends is uncertain and contingent on earnings and FCF. With an Equity Ratio of 74.0% and interest-bearing debt ¥61.4B, financial capacity is solid, enabling simultaneous growth investment and returns, but maintaining current high levels of returns requires recovery in operating margin and FCF generation.

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This report is an AI-generated earnings analysis based on XBRL financial statement data. It does not constitute a recommendation to invest in any particular security. Industry benchmarks are reference information compiled by the company from public financial statements. Investment decisions are your responsibility; consult a professional advisor as necessary.