KUSURI NO AOKI HOLDINGS CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥279.81B
• Operating Income: ¥13.49B
• Net Income: ¥9.64B
• EPS: ¥97.71

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend 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

Verdict: Solid top-line growth with modest profit expansion, but margins compressed and leverage elevated; cash generation outpaced accounting profit, partially offsetting execution and balance sheet risks. Revenue rose 15.2% YoY to 2,798.1, while operating income increased 6.7% YoY to 134.9 and net income grew 11.8% YoY to 96.4, indicating healthy demand but reduced operating efficiency. Gross profit reached 736.6 with a gross margin of 26.3%, though operating margin slipped to 4.82%. Operating margin compressed by about 39 bps YoY (from 5.21% to 4.82%), reflecting SG&A deleverage amid rapid expansion and cost pressure. Net margin edged down roughly 10 bps YoY to 3.45% despite higher non-operating income and a normal tax rate. ROE printed at 7.2% (DuPont-consistent), below the >10% ‘good’ benchmark and near the <8% concern threshold. Cash flow quality was strong: OCF was 178.5, 1.85x net income, with an accruals ratio of -2.1%, signaling earnings backed by cash. However, cash conversion relative to EBITDA was slightly below the 0.9x benchmark at 0.88x, suggesting working capital intensity. Capital allocation skewed to growth and buybacks: CapEx was 150.7 (2.2x depreciation), and share repurchases were 227.0, dwarfing the conservative dividend payout (~13.9% payout ratio on annualized 14 yen DPS). Leverage is the key swing factor: Debt/EBITDA at 5.5x is in high-yield territory and sits alongside a D/E of 1.90x, though interest coverage remains strong (24–36x). Liquidity is adequate but not robust for retail: current ratio 1.36x and quick ratio 0.83x, implying reliance on inventory and payables. Inventory of 622.5 and payables of 684.9 indicate a typical retail working capital model but elevate exposure to demand swings and markdown risk. Given industry dynamics (drugstore price competition, labor cost inflation, and reimbursement revisions in dispensing), low EBIT margin (4.8%) provides limited cushion against shocks. Forward-looking, growth investments and store ramp-up can support revenue, but sustained margin recovery and deleveraging are needed to improve ROE and reduce financial risk. Overall, the quarter confirms growth resilience with healthy cash backing, tempered by margin compression and elevated leverage that shape the risk-reward profile.

Profitability Analysis

ROE (7.2%) decomposes into Net Profit Margin (3.4%) × Asset Turnover (0.725) × Financial Leverage (2.90x). The most notable pressure comes from margin: operating margin declined ~39 bps YoY to 4.82%, and net margin slipped ~10 bps to 3.45%. Business drivers include promotional intensity, higher labor/logistics costs, and new-store ramp costs that lifted SG&A faster than operating income growth. Asset turnover at 0.725 suggests a capital-intensive expansion phase (CapEx/Depreciation 2.21x), which typically suppresses turnover in the near term as new assets are onboarded before reaching mature productivity. Financial leverage remains high (D/E 1.90x; Debt/EBITDA 5.5x), amplifying ROE despite thin margins. Sustainability: margin headwinds could ease if procurement and mix (private label, food vs. RX/OTC balance) improve and stores mature; however, pricing competition and wage inflation pose ongoing risks. The leverage boost to ROE is not a durable quality driver and increases risk sensitivity. Concerning trend: operating costs appear to be growing faster than operating profit (revenue +15.2% vs operating income +6.7%), implying negative operating leverage this quarter.

Growth Assessment

Top-line growth was strong at +15.2% YoY, consistent with aggressive store openings and possibly higher basket sizes; same-store metrics were not disclosed. Profit growth lagged revenue (OP +6.7%, NI +11.8%), indicating mix and cost pressures, albeit aided by non-operating items and a normal tax rate. Gross margin held at 26.3%, but operating margin fell to 4.82% on SG&A deleverage. CapEx at 2.21x depreciation signals continued footprint and infrastructure expansion, which should support future sales but temporarily drags asset turnover and margins during ramp. EBITDA margin was 7.3%, providing some buffer, but below best-in-class retail benchmarks. Outlook hinges on store maturation, procurement improvements, and cost containment; absent mix upgrades, earnings may trail sales growth. With OCF solid and dividends conservative, the company has capacity to sustain growth investments, though high leverage constrains flexibility if macro or competitive conditions weaken.

Financial Health

Liquidity: current ratio 1.36x (adequate but below 1.5x benchmark), quick ratio 0.83x (below 1.0), highlighting dependence on inventory conversion. No explicit warning threshold is breached (Current Ratio is not <1.0). Working capital is positive at 420.7; cash of 580.0 provides a cushion against current liabilities of 1,184.3, but payables are sizable at 684.9. Solvency: D/E 1.90x (elevated but not above the 2.0x explicit warning threshold), Debt/Capital 45.5%, and Debt/EBITDA 5.5x indicate a leveraged profile. Interest coverage is strong at 24.0x (EBIT-based) and 36.2x (EBITDA-based), mitigating near-term servicing risk. Maturity mismatch risk appears limited: short-term loans are minimal (1.5) versus cash of 580.0, and the short-term debt ratio is 0.1%; the bulk of borrowings are long-term (1,108.9), aligning with long-lived assets. No off-balance sheet obligations were disclosed in the data provided.

Cash Flow Quality

OCF/Net Income of 1.85x indicates strong earnings quality. Accruals ratio of -2.1% is supportive, and interest coverage is ample. Cash conversion (OCF/EBITDA) at 0.88x is slightly below the 0.9x ‘excellent’ mark, implying working capital intensity consistent with retail expansion and inventory build. CapEx/Depreciation at 2.21x reflects growth investment; while strategically sound, it reduces near-term free cash availability. While Free Cash Flow was not reported, OCF (178.5) broadly covers ordinary dividends (low payout) but not the combination of CapEx (150.7) and buybacks (227.0) without incremental financing. No overt signs of working capital manipulation are evident; the strong OCF vs. NI and modest accruals support quality.

Dividend Sustainability

The implied annual DPS is 14 yen (Q2 7.0 + YE 7.0), translating to an estimated payout ratio of ~13.9%, which is conservative. With OCF at 178.5, ordinary dividends are well-covered even in the context of elevated CapEx. However, total shareholder returns including buybacks (227.0) exceed internally generated cash, relying on financing amid a leveraged balance sheet. Policy outlook likely prioritizes growth CapEx and steady dividends over aggressive buyback continuity unless leverage moderates or OCF strengthens further.

Risk Assessment

Business Risks:

• Margin pressure from price competition in drugstore retailing and ongoing promotional intensity
• Labor and logistics cost inflation pressuring SG&A and store profitability
• Store ramp-up risks delaying margin and turnover normalization amid rapid expansion
• Merchandise mix risk (OTC/Rx/food/beauty) affecting gross margin trajectory
• Potential reimbursement and dispensing fee revisions impacting pharmacy income

Financial Risks:

• High leverage: Debt/EBITDA 5.5x and D/E 1.90x increase sensitivity to earnings volatility
• Sub-1.0 quick ratio indicates reliance on inventory conversion for liquidity
• Buyback outlays outpacing OCF, increasing dependence on external financing
• Refinancing and interest rate risk despite currently strong interest coverage

Key Concerns:

• Low operating efficiency: EBIT margin at 4.8% provides limited shock absorption
• Asset turnover subdued by expansion, weighing on ROE (7.2% below 8% threshold)
• Inventory and payables balance exposes the company to demand fluctuations and markdown risk
• Data limitations on same-store sales, investing cash flows, and SG&A detail constrain diagnostic depth

Investment Implications

Key Takeaways:

• Robust sales growth (+15.2% YoY) with modest profit growth; margins compressed
• ROE at 7.2% is below comfort thresholds due to low margin and turnover, partially offset by leverage
• Cash-based earnings strong (OCF/NI 1.85x; negative accruals), supporting dividend capacity
• Leverage elevated (Debt/EBITDA 5.5x), constraining capital allocation flexibility
• CapEx intensity (2.21x depreciation) supports growth but weighs on near-term FCF and ROE

Metrics to Watch:

• Same-store sales growth and traffic vs. ticket decomposition (not disclosed)
• Gross margin by category and private brand mix
• SG&A ratio and labor cost per sales; store maturation curve
• Inventory days and markdown/shrink trends; DPO vs. DIO balance
• Debt/EBITDA trajectory, OCF/EBITDA conversion, and net leverage
• CapEx cadence vs. new store returns and ROIC progression
• Pharmacy reimbursement changes and their impact on segment profit

Relative Positioning: Within Japan’s drugstore retail cohort, the company demonstrates above-peer revenue growth momentum but operates with thinner EBIT margins and higher leverage than conservative peers. Strong interest coverage and cash generation are positives, yet the combination of low operating margin and elevated Debt/EBITDA places it toward the higher-risk, growth-focused end of the spectrum.

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