TSURUHA HOLDINGS INC. FY2027 Q1 Earnings Report

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Executive Summary

Cumulative results for FY2026 (year ending Feb) Q2 reported Revenue of ¥6368.9 B (YoY +¥3643.6 B +133.7%), Operating Income of ¥242.3 B (YoY +¥117.6 B +94.3%), Ordinary Income of ¥243.9 B (YoY +¥113.3 B +86.8%), and Net Income of ¥140.9 B (YoY +¥21.3 B +17.9%). While Revenue more than doubled, Operating Margin declined to 3.8% (prior 4.6%) down 0.8pt, and Net Margin worsened to 2.2% (prior 4.4%) down 2.2pt, revealing a structure where cost absorption has not kept pace with scale expansion. Progress against full-year guidance (Revenue ¥25550.0 B, Operating Income ¥994.0 B, Ordinary Income ¥981.0 B) is broadly standard at Revenue 24.9%, Operating Income 24.4%, Ordinary Income 24.9%, while Net Income is running ahead at 32.5%.

Drivers of Performance

[Revenue] Revenue was ¥6368.9 B, a large increase YoY of +¥3643.6 B (+133.7%). This is attributed mainly to resilient demand in the drugstore market plus consolidation of the scope of consolidation and expansion of the store network. Gross margin held almost flat at 30.1% (prior 30.2%), but Cost of Goods Sold rose to ¥4451.5 B (prior ¥1901.2 B), a 2.3x increase, and gross profit in absolute terms expanded to ¥1917.4 B (prior ¥824.1 B), also 2.3x. Due to product mix and capitalization of point costs, gross margin declined only slightly, suggesting limited benefit from scale expansion.

[Profitability] SG&A was ¥1675.1 B (prior ¥699.4 B), up 2.4x, and SG&A ratio rose 0.6pt to 26.3% (prior 25.7%). Fixed costs such as personnel, logistics, and rent increased more than Sales, limiting operating leverage. Operating Income was ¥242.3 B (prior ¥124.7 B, +94.3%), with Operating Margin declining 0.8pt to 3.8% (prior 4.6%). Non-operating income/expense was a net +¥1.6 B (non-operating income ¥16.2 B, non-operating expense ¥14.6 B); interest income ¥2.2 B and subsidy income ¥3.3 B contributed, while interest expense increased to ¥11.6 B (prior ¥5.0 B), 2.3x, increasing interest burden. Ordinary Income was ¥243.9 B (prior ¥130.6 B, +86.8%), Ordinary Margin deteriorated 1.0pt to 3.8% (prior 4.8%). Extraordinary items were net +¥7.9 B (extraordinary gains ¥15.5 B, extraordinary losses ¥7.6 B); gains on sale of investment securities ¥11.6 B (prior ¥66.8 B) markedly decreased from prior year, reducing reliance on one-time gains. Profit before income taxes was ¥251.8 B (prior ¥186.7 B, +34.9%), with income taxes ¥110.9 B (effective tax rate 44.0%) imposing a heavy tax burden compressing Net Income to ¥140.9 B (prior ¥119.6 B, +17.9%). In conclusion, revenue and profit increased, but rising SG&A ratio and high tax burden substantially deteriorated Net Margin.

Key Financial Metrics

[Profitability] Operating Margin 3.8% (prior 4.6%) and Net Margin 2.2% (prior 4.4%) both declined year-on-year. ROE is 1.6% (annualized) indicating low capital efficiency. Although Gross Margin was maintained at 30.1%, the rise in SG&A ratio to 26.3% (prior 25.7%) pressured Operating Margin. Interest coverage is 20.8x (Operating Income ¥242.3 B ÷ interest expense ¥11.6 B), indicating strong ability to cover interest, but this is a large drop from prior 249.3x, reflecting increased interest burden. [Cash Quality] Accounts receivable ¥1405.9 B (equivalent to 40.3 days on annualized Sales of ¥12737.8 B), Inventory ¥3156.8 B (129.4 days on annualized COGS ¥8903.0 B; prior-year basis ¥11830.0 B equals 97.5 days) — inventory days worsened, revealing heavier working capital. Accounts payable ¥4264.5 B equals 175 days of COGS, indicating dependence on trade payables as a funding source. [Investment Efficiency] Total asset turnover 0.38x (annualized Sales ¥12737.8 B ÷ Total Assets ¥16883.9 B), and Return on Assets (Operating Income basis) 1.4% (Operating Margin 3.8% × Asset Turnover 0.38) indicate low capital efficiency. Goodwill ¥4484.2 B (50.0% of Net Assets) and intangible assets ¥4632.8 B (51.6% of Net Assets) mean intangibles comprise the majority of capital; scope for improving turnover via tangible assets is limited. [Financial Soundness] Equity Ratio 53.2% (prior 53.1%) remains stable. Current Ratio 128.6% (Current Assets ¥7262.6 B ÷ Current Liabilities ¥5648.3 B), Quick Ratio 72.7% ((Current Assets − Inventory) ÷ Current Liabilities) indicate generally healthy short-term liquidity. Interest-bearing debt totals ¥2024.2 B (Long-term borrowings ¥1195.3 B, current portion of long-term borrowings ¥142.9 B, lease liabilities (current + non-current) ¥686.0 B), with Debt/Equity 0.23x and Debt/Capital 11.8%, representing a conservative capital structure.

Cash Flow Analysis

Since the cash flow statement data is not disclosed, funding trends are analyzed from balance sheet movements. Cash and deposits increased by ¥284.8 B to ¥2306.1 B (prior ¥2021.3 B), improving liquidity. Accounts receivable ¥1405.9 B (prior ¥1224.8 B) increased ¥181.1 B, Inventory ¥3156.8 B (prior ¥3079.2 B) increased ¥77.6 B — working capital increases associated with rapid Sales expansion absorbed funds. Accounts payable ¥4264.5 B (prior ¥3755.9 B) rose ¥508.6 B, so expansion of trade payables partly funded operations. Interest-bearing debt increased to Long-term borrowings ¥1195.3 B (prior ¥988.6 B), +¥206.7 B; current portion of long-term borrowings ¥142.9 B (prior ¥413.9 B) decreased ¥271.0 B, indicating adjustment of the maturity profile. Fixed assets were largely unchanged at ¥9621.3 B (prior ¥9685.7 B), suggesting large-scale capital expenditure was restrained. Net assets increased slightly by ¥18.4 B to ¥8975.5 B (prior ¥8957.1 B), consistent with Net Income ¥140.9 B less cash dividend payments (mid-term cash dividend estimated at around ¥600 B) over the period.

Quality of Earnings

Quality of earnings is reverting to core business dependency. Operating Income ¥242.3 B is the core of recurring earnings, and net non-operating items +¥1.6 B are minor. Extraordinary items were net +¥7.9 B (0.1% of Sales), with gains on sale of investment securities ¥11.6 B as the main one-time gain, which fell materially from ¥66.8 B prior, reducing one-time gain dependence. Impairment losses ¥2.4 B and loss on retirement of fixed assets ¥0.7 B were also small. Of non-operating income ¥16.2 B, interest income ¥2.2 B, subsidy income ¥3.3 B and others ¥5.6 B comprised the bulk; non-operating expense ¥14.6 B was mainly interest expense ¥11.6 B. The decline from Ordinary Income ¥243.9 B to Net Income ¥140.9 B (a reduction of ¥103.0 B) reflects income taxes ¥110.9 B and attributable profit to non-controlling interests ¥6.2 B; a high effective tax rate of 44.0% compressed Net Income. Comprehensive Income ¥110.3 B was ¥30.6 B below Net Income ¥140.9 B, mainly due to valuation losses on other securities of −¥30.1 B. The divergence between Comprehensive Income and Net Income is a transient valuation factor and is judged to have limited impact on the quality of recurring earnings.

Forecasts & Guidance

Full-year guidance remains Revenue ¥25550.0 B (YoY +76.1%), Operating Income ¥994.0 B (YoY +57.7%), Ordinary Income ¥981.0 B (YoY +55.5%), Net Income ¥415.0 B, EPS ¥91.62. Progress at the Q2 cumulative level is Revenue 24.9%, Operating Income 24.4%, Ordinary Income 24.9%, which lies on the standard 25% line and can be seen as a smooth start. Net Income progress 32.5% (¥140.9 B ÷ ¥415.0 B) is ahead, but timing differences in tax effects and one-time items in Q2 may have contributed, so a return to standard progress in the second half is expected. Operating Margin for the full-year guidance is 3.9% (¥994.0 B ÷ ¥25550.0 B), and the Q2 cumulative Operating Margin 3.8% is almost aligned, implying the same margin assumptions are maintained for the second half. Considering the stock split (1:5 effective 2025-09-01), the full-year dividend effectively equates to annual ¥248.5 (pre-split equivalent). Based on forecast EPS ¥91.62 (post-split) × 5 = ¥458.1 (pre-split equivalent), the payout ratio would be approximately 54%, though consistency with the full-year EPS forecast needs confirmation.

Shareholder Returns

The period-end dividend per share for the period is planned at ¥24.00 (post-split basis). A 1:5 stock split was executed on 2025-09-01; the pre-split period-end dividend equates to ¥115.00, and annual dividend is ¥248.50 (interim ¥133.50 + year-end ¥115.00). Annual dividend on a post-split basis is not presented by simple summation, but the effective annual ¥248.50 (pre-split) corresponds to a payout ratio of about 54% against forecast EPS ¥91.62 × 5 = ¥458.1 (pre-split equivalent). Note that the full-year EPS forecast ¥91.62 is on a post-split basis, so care is required when comparing to the pre-split EPS ¥458.1. With cash and deposits ¥2306.1 B and estimated Operating Cash Flow generation, dividend continuity is judged to be high. No share buybacks were disclosed, so total shareholder return is limited to dividends. The dividend level requires comparison with historical practice, but there is room for dividend increases in line with profit growth.

Risk Factors

1. Inventory aging and valuation loss risk: Inventory ¥3156.8 B equals 129.4 days on annualized COGS ¥8903.0 B, a deterioration of 31.9 days from prior 97.5 days. This appears driven by inventory build-up accompanying rapid Sales growth; worsening turnover increases the risk of markdowns and valuation losses. Inventory-to-Sales ratio is 49.6% (prior 113.0%) which superficially appears improved, but this is a denominator effect from higher Sales, and inventories remain high in absolute terms. If prolonged beyond seasonality, this could further depress gross margins.

2. Structural increase in SG&A ratio: SG&A ratio rose to 26.3% (prior 25.7%), a 0.6pt increase, with fixed costs such as personnel, logistics, and rent increasing faster than Sales. Wage inflation and sustained high logistics costs are structural, making short-term improvement difficult. Despite Sales more than doubling, Operating Income rose only +94.3%, indicating weak operating leverage. If realization of integration benefits (improved purchasing terms, inventory optimization) is delayed, there is risk of prolonged stagnation of Operating Margin in the 3% range.

3. Goodwill impairment risk and continued low capital efficiency: Goodwill ¥4484.2 B represents 50.0% of Net Assets ¥8975.5 B, indicating high dependency on intangibles from M&A. Goodwill/Operating Income multiple versus annual Operating Income (full-year forecast ¥994.0 B) is 4.5x, implying substantial time to recoup. If integration synergies fall short of plans, impairment risk could materialize, further eroding Net Assets and capital efficiency. Currently ROE 1.6% and ROA (Operating Income basis) 1.4% indicate low capital efficiency, and preserving goodwill value is a precondition for capital policy.

Industry Benchmark (reference, company compilation)

Profitability & Return

Operating Margin exceeds the industry median 3.4% by 0.4pt and is at a standard level within retail. Net Margin matches the median, placing profitability at a mid-range within the sector.

Growth & Capital Efficiency

Revenue growth of 133.7% significantly outpaces the industry median 7.7%, reflecting conspicuous scale expansion from consolidation of the scope of consolidation and store network expansion. Growth stands out within the sector.

※ Source: Company compilation

Key Points from the Earnings

1. Revenue is progressing on track with full-year guidance, and the scale-expansion strategy driven by consolidation of scope and store network expansion is paying off. Progress rates for Operating Income and Ordinary Income are around 25%, supporting a high probability of achieving full-year forecasts. However, Operating Margin fell to 3.8% from 4.6% last year, with structural SG&A ratio increases (26.3% vs 25.7% prior) weighing on margins. Whether SG&A absorption and normalization of inventory turnover proceed in the second half will determine potential improvement in full-year margins.

2. Capital efficiency remains low, with ROE 1.6% and ROA 1.4%, indicating significant room for improvement. Goodwill ¥4484.2 B (50.0% of Net Assets) and high reliance on intangibles mean realization of M&A synergies is key to improving capital efficiency. Worsening inventory days to 129.4 days (prior 97.5 days) suggests declining working capital efficiency; inventory optimization and stronger receivables collection are prerequisites to boosting Operating Cash Flow generation. The dividend is effectively annual ¥248.50 (pre-split equivalent) with an implied payout ratio around 54%, a sustainable level, and there is potential for dividend increases in line with profit growth.

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This report is an earnings analysis document automatically generated by AI analyzing XBRL financial statement data. It does not constitute a recommendation to invest in any specific security. Industry benchmarks are reference information compiled by the firm based on public financial disclosures. Investment decisions are your responsibility; consult a professional as necessary.