GUNZE LIMITED FY2027 Q1 Earnings Report

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Executive Summary

The Company reported a significant increase in earnings for Q1, despite lower revenue, as improvements in gross margin and SG&A efficiency more than offset the decline in sales. Revenue was ¥31.37B (-2.7% YoY), Operating Income was ¥3.39B (+87.6%), Ordinary Income was ¥3.42B (+86.0%), and Net Income attributable to owners of the parent was ¥2.64B, representing a return to profitability from a loss of ¥-1.47B in the same period of the previous year (YoY +279.2%). The decline in revenue was primarily attributable to lower sales in the Apparel Business (-9.8%) and Medical Business (-7.0%); however, higher margins in the Functional Solutions Business and company-wide cost efficiencies improved the Operating Income margin to 10.8%, up +5.2pt from 5.6% in the previous year. The absence of the prior-year impact of an extraordinary loss of ¥3.50B, including ¥3.43B in restructuring costs, also contributed to the increase in earnings.

Factors Affecting Business Performance

【Revenue】Revenue was ¥31.37B, a decline of -2.7% YoY. By segment, the Functional Solutions Business posted higher revenue of ¥12.35B (+7.3%, composition ratio 39.4%), and the Life Create Business recorded revenue of ¥3.06B (+1.3%, composition ratio 9.8%). In contrast, the Apparel Business reported lower revenue of ¥13.32B (-9.8%, composition ratio 42.5%), while the Medical Business posted revenue of ¥2.92B (-7.0%, composition ratio 9.3%). The declines in these two businesses were the primary drivers of the Company-wide revenue decrease.

【Profit and Loss】Operating Income was ¥3.39B (+87.6%). The gross margin improved to 36.7% from 32.9% in the previous year, an increase of +3.8pt, while the SG&A ratio declined to 25.9% from 27.3%, a decrease of -1.4pt. As a result, the Operating Income margin improved by +5.2pt to 10.8% from 5.6% in the previous year. Ordinary Income was ¥3.42B (+86.0%), with non-operating income and expenses roughly balanced (net +¥0.04B). Extraordinary income and expenses were limited to a net expense of -¥0.02B (extraordinary income of ¥0.07B and extraordinary loss of ¥0.09B), resulting in a limited impact. In contrast, the Company recorded an extraordinary loss of ¥3.50B in the same period of the previous year, including ¥3.43B in restructuring costs, resulting in a net loss of ¥-1.47B. The base-period effect therefore also contributed to the significant increase in Net Income. Net Income attributable to owners of the parent was ¥2.64B, representing a return to profitability (YoY +279.2%). In conclusion, the earnings increase was centered on improved profitability without revenue growth and can be characterized as higher earnings despite lower revenue.

Segment Analysis

The Functional Solutions Business generated revenue of ¥12.35B (+7.3%) and Operating Income of ¥2.53B (+59.7%), with a margin of 20.4%, the highest level among all businesses. It became the main driver of Company-wide earnings through higher revenue and profit. The Apparel Business posted lower revenue of ¥13.32B (-9.8%), but Operating Income increased substantially to ¥1.18B (+226.4%, margin 8.9%), indicating the effects of structural reforms and improved profitability. The Life Create Business recorded revenue of ¥3.06B (+1.3%) and Operating Income of ¥0.32B (+30.5%, margin 10.5%), representing moderate increases in both revenue and profit. The Medical Business reported revenue of ¥2.92B (-7.0%) and Operating Income of ¥0.31B (-41.7%, margin 10.8%), with both revenue and profit declining. It was the only one of the four businesses to experience a deterioration in earnings.

Key Financial Indicators

【Profitability】The Operating Income margin was 10.8%, improving from 5.6% in the previous year, while the Net Income margin, based on income attributable to owners of the parent, turned profitable at 8.4% from -4.6% in the previous year. ROE was 2.4%, remaining at a level calculated by dividing Net Income attributable to owners of the parent of ¥2.64B by average equity. 【Cash Quality】Days sales outstanding were approximately 68 days (64 days in the previous year), while inventory turnover days were approximately 85 days (80 days in the previous year). The cash conversion cycle consequently lengthened slightly to approximately 118 days (114 days in the previous year). 【Investment Efficiency】Total asset turnover on a quarterly basis was 0.20x, and the low efficiency of asset utilization was one factor behind the limited improvement in ROE. 【Financial Soundness】The Equity Ratio was 71.1% (74.1% in the previous year), while the current ratio and quick ratio were 218.1% and 161.0%, respectively, indicating that the Company maintained a strong financial base. Interest-bearing debt, comprising short-term borrowings, long-term borrowings, and commercial paper, totaled approximately ¥0.194B, a low level relative to total assets and equity, indicating conservative financial leverage.

Cash Flow Analysis

As cash flow statement data has not been disclosed, cash flow trends are analyzed based on changes in the balance sheet. Cash and deposits were ¥10.92B, an increase of +¥0.99B (+10.0%) from the end of the previous fiscal year, indicating an increase in the liquidity buffer. Meanwhile, accounts receivable were ¥23.31B, an increase of +¥0.75B, while inventories were ¥18.58B, a decrease of -¥0.53B. Working capital items therefore reflected an increase in receivables offset by a decrease in inventories. Accounts payable were ¥7.55B, an increase of +¥0.39B, indicating some capacity for cash management on the procurement liabilities side. In terms of short-term funding, the balance of commercial paper increased from ¥2.00B at the end of the previous fiscal year to ¥7.50B. This appears to reflect the Company’s response to seasonal working capital needs, although the change in short-term funding dependence warrants monitoring.

Earnings Quality

The increase in earnings for the current period was primarily driven by improvement at the operating profit level, indicating relatively high earnings quality. Non-operating income totaled ¥0.38B, including ¥0.10B in dividend income, while non-operating expenses totaled ¥0.34B, including ¥0.03B in interest expenses, leaving the two broadly balanced. Ordinary Income of ¥3.42B was therefore close to Operating Income of ¥3.39B. Extraordinary income and expenses amounted to a small net expense of -¥0.02B, and the effective tax rate, calculated as corporate income taxes and other taxes of ¥0.74B against Profit Before Tax of ¥3.40B, was 21.7%, a standard level. Comprehensive Income was ¥2.88B, slightly exceeding Net Income attributable to owners of the parent of ¥2.64B. This difference was largely attributable to foreign currency translation adjustments of +¥0.43B, partially offset by adjustments related to retirement benefits of -¥0.17B and valuation differences on securities of -¥0.06B. As the Company recorded a net loss in the same period of the previous year due to a large extraordinary loss, including restructuring costs, the return to profitability in the current period reflects both the absence of temporary factors and improvements in the core business.

Earnings Forecast and Guidance

The Q1 progress rates against the Company’s full-year forecasts were 23.8% for revenue (¥31.37B against ¥132.0B), 38.5% for Operating Income (¥3.39B against ¥8.80B), 40.7% for Ordinary Income (¥3.42B against ¥8.40B), and 50.8% for Net Income attributable to owners of the parent (¥2.64B against ¥5.20B). Compared with a simple quarterly linear progress rate of 25%, revenue was slightly below pace, while all profit indicators were tracking ahead. The Company’s full-year forecasts call for revenue growth of +0.8%, Operating Income growth of +80.3%, and Ordinary Income growth of +70.7% YoY. The current quarter therefore represents a start broadly in line with this earnings growth scenario. No revisions were made to the earnings forecast or dividend forecast during the quarter.

Shareholder Returns

The annual dividend forecast is ¥216 (ordinary dividend of ¥147 and special dividend of ¥69), unchanged from the previous fiscal year’s actual dividend, with no revision to the dividend forecast during the current quarter. Based on the Company’s forecast EPS of ¥165.89, the Payout Ratio is approximately 130.2%, representing a level of shareholder returns exceeding annual earnings. Nevertheless, retained earnings of ¥65.62B, an Equity Ratio of 71.1%, and cash and deposits of ¥10.92B indicate substantial internal reserves and a strong financial base. The sustainability of the current level of shareholder returns, including the ¥69 special dividend, should be monitored together with the realization of full-year earnings. No disclosure regarding share repurchases was made, and the return indicator is evaluated solely based on the Payout Ratio.

Risk Factors

1. Declining profitability in the Medical Business: The Medical Business reported revenue of ¥2.92B (-7.0%) and Operating Income of ¥0.31B (-41.7%), making it the only one of the four businesses to experience a decline in profit. Although its margin remained at 10.8%, the decline in fixed-cost absorption accompanying lower revenue could affect future margins, warranting close monitoring.

2. Lengthening working capital cycle and inventory risk in the Apparel Business: Inventory turnover days lengthened slightly to approximately 85 days (80 days in the previous year), while the cash conversion cycle increased to approximately 118 days (114 days in the previous year). The Apparel Business, which accounts for 42.5% of revenue, is susceptible to seasonality and changes in trends, and changes in inventory levels could affect future gross margins.

3. High Payout Ratio: Against the annual dividend forecast of ¥216, the Payout Ratio based on the Company’s forecast EPS is approximately 130.2%, exceeding annual earnings. Although the current level is supported by substantial internal reserves and a conservative financial base, the sustainability of the shareholder return policy should be considered if earnings fall below expectations.

Industry Benchmark (Reference; Compiled by the Company)

Profitability and Return

Growth and Capital Efficiency

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. Structure of profitability improvement: As the gross margin improved by +3.8pt and the SG&A ratio improved by -1.4pt, the Operating Income margin increased from 5.6% to 10.8%. The reversal of the prior-year extraordinary loss, which included restructuring costs of ¥3.43B, also contributed to the significant increase in earnings.

2. Concentration of earnings across segments: The Functional Solutions Business (margin 20.4%) and the Apparel Business’s return to profitability drove Company-wide earnings, while the Medical Business was the only segment to report lower profit, widening the earnings disparity within the business portfolio.

3. Front-loaded full-year progress: Against the full-year forecasts, revenue progress was 23.8%, while Operating Income and Net Income progress were ahead at 38.5% and 50.8%, respectively, confirming improvement in profitability relative to plan.

Theoretical Share Price (Reference Value)

This is a mechanically calculated reference range based solely on publicly disclosed data using a residual income model (Ohlson-type model with an explicit five-year fade period). It is not a forecast of the market share price or a recommendation to take any specific investment action.

Sensitivity: ¥2,963–¥3,124 at cost of equity ±1%; ¥3,030–¥3,049 at ω±0.1.

Notes:

• As progress in Net Income against the full-year forecast (51%) exceeds the standard level (25%), forecast EPS has been adjusted upward within a maximum range of +10% (because companies tracking ahead of plan tend to outperform their forecasts; the adjustment may be excessive for businesses with strong seasonality).
• As forecast ROE is below the cost of equity, the theoretical value is below book value per share.
• Net assets as of the end of the quarter are used; there is a timing difference relative to the full-year forecast.

(Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-07 / This value does not predict or guarantee future share prices)

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This report is an earnings analysis document automatically generated by AI through analysis of 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 disclosed earnings data. Investment decisions should be made at your own responsibility, after consulting a professional as necessary.

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