PEPPER FOOD SERVICE CO.,LTD. FY2025 Q3 Earnings Report

Financial Highlights

• Net Sales: ¥10.74B
• Operating Income: ¥-91M
• Net Income: ¥-186M
• EPS: ¥-3.09

Income Statement

Balance Sheet

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

FY2025 Q3 results indicate a fragile recovery on the top line but a relapse into losses at the bottom line. Revenue grew 2.9% YoY to 107.39, and gross profit reached 61.71 with a high gross margin of 57.5%. However, SG&A of 61.57 effectively consumed almost all gross profit, resulting in operating loss of -0.91 (operating margin -0.85%). Ordinary income was -0.90, but profit before tax swung to +0.15, implying meaningful extraordinary gains versus ordinary loss; despite this, reported net income deteriorated to -1.86, pointing to material extraordinary losses and/or tax effects after PBT. The reported effective tax rate was 366.7% (tax expense 0.55 on PBT 0.15), suggesting non-recurring tax adjustments (e.g., valuation allowance changes) rather than cash tax burden aligned with profitability. Operating margin compressed sharply YoY given operating income down 85.1% while sales rose 2.9%; exact basis points are not disclosed, but the swing to a loss implies at least triple-digit bps compression. Gross margin remains solid, but the lack of SG&A efficiency offset led to negative operating leverage. ROE deteriorated to -5.6%, driven by a negative net margin (-1.7%) despite still-healthy asset turnover (1.880) and moderate leverage (1.71x). Liquidity is adequate with a current ratio of 203% and cash/deposits of 21.79, and working capital of 17.74 provides a buffer for near-term obligations. Solvency optics are mixed: the reported D/E ratio of 0.75x is moderate, but interest coverage is deeply negative (-45.5x), underscoring earnings weakness rather than high funding costs. Retained earnings are extremely thin at 0.28, limiting capacity to absorb further losses and constraining shareholder return flexibility. Cash-flow data were not disclosed, limiting assessment of earnings quality and free cash flow sustainability. ROIC of -3.9% is below the 5% warning threshold, indicating value destruction at current earnings levels. Near-term focus must be on restoring operating profitability through SG&A discipline and mix/pricing, as gross margin alone is not enough. Forward-looking, stabilization requires visible cost actions, closure/format optimization, and same-store sales traction; without this, negative ROE/ROIC may persist despite adequate liquidity.

Profitability Analysis

ROE (-5.6%) decomposes into Net Profit Margin (-1.7%) × Asset Turnover (1.880) × Financial Leverage (1.71x). The dominant drag is the net profit margin turning negative despite modest sales growth, while asset turnover remains reasonably efficient and leverage moderate. Business-wise, SG&A (61.57) nearly equaled gross profit (61.71), erasing operating profit and leaving results reliant on non-operating/extraordinary items, which were unfavorable net after tax. The compression reflects negative operating leverage: modest revenue growth could not cover fixed/semi-fixed expenses amid wage and occupancy pressure typical in food service. This change appears cyclical and operational rather than structural to the balance sheet; sustainability hinges on cost control and comp momentum, not on further leverage. Watch for any pattern of SG&A growth outpacing revenue—data granularity is limited, but the FY25 Q3 snapshot indicates SG&A intensity at 57.3% of sales, too high for profitability.

Growth Assessment

Top-line growth was +2.9% YoY to 107.39, modest but positive. Gross profit margin of 57.5% indicates decent product-level economics, likely supported by pricing and menu engineering, but it did not translate to operating profit due to elevated SG&A. Operating income fell to -0.91 (-85.1% YoY), signaling deteriorated operating leverage. Ordinary income (-0.90) improved to PBT (+0.15) via extraordinary items, but below-the-line and tax factors erased those gains and led to NI of -1.86. Revenue sustainability depends on traffic recovery and pricing power; with no segment/store data disclosed, visibility is limited. Near-term outlook: prioritize same-store sales growth and cost normalization to regain at least low-single-digit operating margin; absent that, ROE/ROIC will remain negative.

Financial Health

Liquidity is solid: current assets 34.93 vs current liabilities 17.19 yield a current ratio of 203.2% and quick ratio of 203.2% (no material inventories reported). Cash and deposits are 21.79, covering 127% of current liabilities, indicating low near-term liquidity risk. Solvency: total liabilities 24.89 vs equity 33.32 gives moderate leverage (reported D/E 0.75x). Interest coverage is highly negative (-45.5x) due to operating losses rather than high interest burden (interest expense 0.02), so earnings repair is the key solvency lever. No red flag on Current Ratio (<1.0) or D/E (>2.0). Maturity mismatch risk appears low as current assets exceed current liabilities by 17.74. Off-balance sheet obligations were not disclosed; lease commitments and franchise-related obligations (common in the sector) may exist but are unavailable in this dataset.

Cash Flow Quality

Operating, investing, and financing cash flows were not disclosed, so OCF/NI and free cash flow cannot be assessed. In the absence of OCF, earnings quality is uncertain; negative NI alongside tax expense suggests non-cash tax effects (e.g., valuation allowance) may be influencing results. With cash of 21.79 and positive working capital of 17.74, liquidity covers near-term needs, but sustainability of any dividends/capex program cannot be verified. No clear signs of working capital manipulation can be inferred without cash flow details and inventory/payables turnover data.

Dividend Sustainability

Dividend-related data are unreported, and NI is negative (-1.86) with retained earnings only 0.28. Given the loss position, payout ratios and FCF coverage cannot be calculated. Balance sheet capacity for dividends is constrained by a very small retained earnings balance; unless profitability and OCF turn positive, sustained distributions would be challenging. Policy outlook likely prioritizes earnings recovery and balance sheet resilience over payouts in the near term.

Risk Assessment

Business Risks:

• Negative operating leverage: SG&A (61.57) nearly equals gross profit (61.71), keeping operating margin at -0.85%.
• Demand sensitivity to consumer sentiment and traffic normalization in casual dining/fast-casual formats.
• Input cost inflation (food commodities) and wage inflation pressuring margins despite pricing actions.
• Brand/store format relevance and unit economics of underperforming locations (potential need for closures/impairments).
• Execution risk in menu/pricing, marketing ROI, and labor scheduling needed to restore profitability.

Financial Risks:

• Interest coverage -45.5x due to operating losses, highlighting earnings fragility.
• Very low retained earnings (0.28) leaves limited buffer to absorb further losses.
• Tax volatility: effective tax rate 366.7% suggests valuation allowance or non-recurring tax items that can swing NI.
• Dependence on extraordinary items to move PBT positive, increasing earnings volatility.
• Limited disclosure of debt structure and leases; potential off-BS commitments may elevate fixed charges.

Key Concerns:

• ROE -5.6% and ROIC -3.9% indicate value destruction at current run-rate.
• Operating margin compressed materially YoY despite sales growth (+2.9%), implying cost controls are insufficient.
• Data gaps (no cash flow, no SG&A breakdown, no debt details) constrain visibility on durability of any recovery.
• Potential for additional impairments or restructuring charges if store optimization accelerates.

Investment Implications

Key Takeaways:

• Top-line growth (+2.9%) but operating loss (-0.91) underscores negative operating leverage.
• Gross margin is solid at 57.5%, but SG&A intensity (57.3% of sales) must decline to restore operating profit.
• ROE -5.6% is driven by negative net margin (-1.7%); asset turnover and leverage are not the binding constraints.
• Liquidity is adequate (current ratio 203%, cash 21.79), buying time for operational fixes.
• Earnings volatility is elevated given reliance on extraordinary items and tax swings (effective tax rate 366.7%).
• ROIC -3.9% below the 5% warning threshold indicates current investments are not covering the cost of capital.

Metrics to Watch:

• Same-store sales and average ticket/traffic split to gauge revenue quality.
• SG&A as % of sales and labor/occupancy components for cost discipline.
• Operating margin progression (targeting return to positive territory).
• Cash from operations and free cash flow once disclosed.
• Store portfolio actions (closures/impairments) and their P&L/Cash impact.
• Tax normalization and any valuation allowance updates.

Relative Positioning: Versus domestic casual dining peers, the company shows weaker profitability (negative operating margin, ROE, and ROIC) but maintains adequate near-term liquidity. Recovery depends on cost control and comp growth; until then, it trails peers with positive margins and cash generation.

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