Eternal Hospitality Group Co.,Ltd. FY2026 FY Earnings Report

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Executive Summary

For the fiscal year ended July 2026, the Company recorded higher revenue but lower earnings, as revenue growth was absorbed by higher expenses and extraordinary losses. Revenue maintained double-digit growth at ¥512.5B (+10.6% YoY), while Operating Income declined to ¥28.0B (-10.4% YoY) and Ordinary Income declined to ¥28.0B (-9.8% YoY). Net Income was ¥13.2B (-23.4% YoY), representing a significantly greater decline than Operating Income. The primary factors were the increase in the SG&A ratio (62.6%, +0.8pt YoY), extraordinary losses of ¥4.3B, including impairment losses of ¥3.9B, and the high tax burden reflected in an effective tax rate of 47.2%.

Factors Affecting Earnings

【Revenue】Revenue increased 10.6% YoY to ¥512.5B. As the Company operates a single Food and Beverage Business segment and domestic revenue accounts for more than 90% of total revenue, domestic demand for eating out and the operation and expansion of the restaurant network appear to have driven revenue growth. No concentration of sales among specific customers was observed.

【Profit and Loss】The gross margin declined by approximately 0.4pt YoY to 68.1% due to the increase in the cost of sales ratio. SG&A expenses increased 12.8% YoY, exceeding the revenue growth rate, and the SG&A ratio reached 62.6% (+0.8pt YoY). As a result, Operating Income decreased to ¥28.0B (-10.4% YoY). Ordinary Income was ¥28.0B (-9.8% YoY), broadly at the same level; however, extraordinary losses of ¥4.3B, including impairment losses of ¥3.9B, and the high effective tax rate of 47.2% further weighed on results, reducing Net Income to ¥13.2B (-23.4% YoY). In conclusion, the Company recorded higher revenue but lower earnings during the period.

Segment Analysis

The Group operates a single Food and Beverage Business segment, and segment-specific disclosures have been omitted. Disclosures of revenue and property, plant and equipment by geographical region have also been omitted because the domestic ratio exceeds 90%; geographic diversification is therefore limited.

Key Financial Indicators

【Profitability】The Operating Income margin was 5.5%, down from 6.7% in the previous year, while the Net Income margin also decreased to 2.6% from 3.7%. ROE was 12.4%, comprising a Net Income margin of 2.6%, total asset turnover of 2.23x, and financial leverage of 2.16x; asset efficiency and leverage offset the low level of profitability. 【Cash Quality】Operating Cash Flow (OCF) was ¥40.5B, approximately 3.1x Net Income of ¥13.2B, indicating strong cash backing for accrual-based earnings. 【Investment Efficiency】Capital expenditures of ¥20.3B were approximately 1.4x depreciation and amortization expense of ¥14.3B, indicating growth investment exceeding maintenance investment. 【Financial Soundness】The Equity Ratio was 46.2%, a slight improvement from 45.7% in the previous year, while long-term borrowings declined substantially to ¥12.4B from ¥20.7B in the previous year.

Cash Flow Analysis

OCF increased 62.5% YoY to ¥40.5B from ¥24.9B, demonstrating cash generation significantly exceeding Net Income of ¥13.2B. The increase was partly attributable to a decline in corporate income taxes paid from ¥15.1B in the previous year to ¥8.3B. In terms of working capital, the increase in accounts receivable of ¥1.8B and the increase in inventories of ¥0.4B were uses of cash, while the ¥1.4B increase in trade payables partially offset these effects. Investing Cash Flow was an outflow of ¥24.9B, of which capital expenditures accounted for ¥20.3B, indicating continued growth investment. As a result, the Company secured positive Free Cash Flow of ¥15.6B. Financing Cash Flow was an outflow of ¥19.2B, primarily due to repayments of long-term borrowings of ¥12.2B and dividend payments of ¥5.3B, reflecting continued shareholder returns while reducing debt. Cash and cash equivalents at the end of the period remained substantial at ¥71.7B.

Earnings Quality

The divergence between Ordinary Income and Net Income was primarily caused by extraordinary items and the tax burden. Extraordinary gains of ¥1.3B were offset by extraordinary losses of ¥4.3B, including impairment losses of ¥3.9B and losses on the disposal and sale of property, plant and equipment of ¥0.6B, resulting in a net earnings reduction of approximately ¥3.0B. Against Pretax Income of ¥25.0B, corporate income taxes amounted to ¥11.8B, resulting in a high effective tax rate of 47.2% and placing pressure on Net Income. Meanwhile, OCF significantly exceeded Net Income, indicating sound cash backing for accounting profits. Non-operating income of ¥1.1B, including foreign exchange gains of ¥0.5B, was broadly balanced by non-operating expenses of ¥1.1B, including interest expense of ¥0.4B; therefore, the impact on profit at the Ordinary Income level was limited. The impairment loss suggests that the profitability of certain stores and assets fell below plan, requiring continued verification of their profitability.

Earnings Forecast and Guidance

The Company forecasts Revenue of ¥572.3B (+11.7% YoY), Operating Income of ¥30.8B (+10.0% YoY), Ordinary Income of ¥30.5B (+9.0% YoY), and disclosed-basis Net Income of ¥18.9B (+43.5% YoY) for the fiscal year ending July 2027. While the forecast revenue growth rate is broadly in line with the current-period results, the planned recovery rate for Net Income substantially exceeds the growth in Operating Income. The achievement of the plan therefore depends on a reduction in extraordinary losses such as the impairment losses incurred during the current period and normalization of the high effective tax rate of 47.2%.

Shareholder Returns

Annual dividends totaled ¥46.00, comprising an interim dividend of ¥23.00 and a year-end dividend of ¥23.00. The Payout Ratio was 40.3% on a company-disclosed basis. Because the numerator and denominator definitions differ from the 81.1% calculated in the GPT draft, this report adopts the disclosed figure of 40.3%. Share repurchases were effectively negligible (¥0.0B), and the difference between the Payout Ratio and Total Return Ratio was limited. OCF of ¥40.5B significantly exceeded total dividends of ¥5.3B, providing sufficient cash support for dividend payments. The Company conducted a 2-for-1 stock split effective August 1, 2026; accordingly, the forecast dividend of ¥23.00 for the fiscal year ending July 2027 is presented on a post-split basis.

Risk Factors

1. Margin compression due to the cost structure: While Revenue increased 10.6% YoY, SG&A expenses increased by 12.8%, exceeding the revenue growth rate, and the SG&A ratio rose 0.8pt to 62.6%. The key to recovering profit margins will be whether increases in labor, food material, and other costs can be absorbed through price pass-through and productivity improvements.

2. Risk of impairment of store assets: The Company recorded impairment losses of ¥3.9B during the period, while capital expenditures of ¥20.3B reached approximately 1.4x depreciation and amortization expense of ¥14.3B. If the profitability of new or existing stores falls below plan, additional impairment losses may arise.

3. High tax burden: The effective tax rate was high at 47.2%, with corporate income taxes of ¥11.8B against Pretax Income of ¥25.0B. Whether the tax burden is temporary or structural will affect the assessment of the plan to recover Net Income in the next fiscal period.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (retail)

Profitability and Returns

The Operating Income margin exceeds the industry median, while the Net Income margin is slightly below the median due to the impact of extraordinary losses and the tax burden.

Growth and Capital Efficiency

The Revenue growth rate significantly exceeds the industry median and is close to the upper bound of the IQR.

※Source: Compiled by the Company

Key Takeaways from the Financial Results

1. Revenue increased 10.6%, representing strong growth within the industry, but Operating Income declined 10.4% and Net Income declined 23.4%. A key feature of the current period was that revenue growth did not translate into earnings growth.

2. OCF was ¥40.5B and Free Cash Flow was ¥15.6B, demonstrating cash generation exceeding accounting profits; non-cash items such as impairment losses contributed to the decline in Net Income.

3. The high effective tax rate of 47.2% and impairment losses of ¥3.9B warrant continued monitoring. The forecast Net Income growth of +43.5% for the fiscal year ending July 2027 assumes normalization of these factors.

Theoretical Share Price (Reference Value)

Sensitivity: ¥566–¥600 at Cost of Equity ±1%; ¥580–¥588 at ω±0.1.

Note:

• Goodwill amortization of ¥1.2/share is added back to earnings (to account for non-cash expenses and comparability with IFRS companies).

(Calculation model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-08 / Mechanically calculated value based solely on publicly disclosed data; this is not a forecast of the market share price or a recommendation of any specific investment action, and does not predict or guarantee future share prices.)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings release data. It does not recommend investment in any specific security. The 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 with a professional as necessary.

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