Kojima (7513) FY2026 Q2 Earnings Report

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Executive Summary

The key point in this earnings announcement is that operating income grew faster than revenue, resulting in an improvement in the operating margin from the same period of the previous year. Revenue was ¥143.94B (+5.3% YoY), operating income was ¥4.07B (+18.4%), ordinary income was ¥4.22B (+14.4%), and net income was ¥2.82B (+13.2%). The principal factors behind operating income growth significantly outpacing revenue growth were the maintenance of the gross profit margin and the relative control of the SG&A expense ratio.

Factors Affecting Results

【Revenue】Revenue increased 5.3% YoY to ¥143.94B. It is progressing at a pace exceeding the full-year company forecast revenue growth rate of 4.0%, suggesting that demand during the first half remained firm.

【Profitability】Gross profit was ¥38.98B (gross profit margin: 27.1%), while SG&A expenses were ¥34.90B (SG&A expense ratio: 24.2%), resulting in operating income of ¥4.07B (operating margin: 2.8%, +30bp YoY). Non-operating income and expenses resulted in a net gain of ¥0.14B, making only a limited contribution to ordinary income. Extraordinary income and expenses also resulted in a net loss of only ¥0.01B, and net income was primarily supported by recurring operating profits. The difference between ordinary income and net income (approximately ¥1.40B) was attributable to income taxes and other taxes of ¥1.39B, implying an effective tax rate of approximately 33.0%. Revenue and profit both increased, and the fact that the profit growth rate exceeded the revenue growth rate can be viewed as a sign of improving profitability.

Key Financial Indicators

【Profitability】The operating margin was 2.8% and the net profit margin was 2.0%. Both improved from the same period of the previous year (operating margin: approximately 2.5%), although the absolute levels indicate a low-margin business structure. With a gross profit margin of 27.1% versus an SG&A expense ratio of 24.2%, the gap between the two is narrow, meaning that small fluctuations in the gross profit margin have a significant impact on the operating margin.【Cash Flow Quality】Operating Cash Flow (OCF) was only ¥0.70B, and the OCF/net income ratio was approximately 0.25x against net income of ¥2.82B, indicating weak cash generation relative to earnings. The primary factor was a ¥3.49B increase in inventories.【Investment Efficiency】ROE was 3.9%, which can be decomposed into a net profit margin of 2.0% × total asset turnover of approximately 1.20x × financial leverage of approximately 1.68x. Low profitability is the primary constraint on ROE.【Financial Soundness】The equity ratio was 59.6% and the current ratio was approximately 238% (current assets of ¥83.63B / current liabilities of ¥35.07B), both high, while interest-bearing debt was small at ¥5.81B. Accordingly, the financial foundation is generally solid.

Cash Flow Analysis

OCF was ¥0.70B, an improvement of +115.1% from the deficit recorded in the same period of the previous year, but cash conversion remained notably delayed relative to net income of ¥2.82B. In terms of working capital, inventories increased by ¥3.49B, trade receivables increased by ¥0.27B, and trade payables decreased by ¥0.24B, all of which exerted downward pressure on OCF. Investing Cash Flow was negative ¥1.02B, with capital expenditures of ¥1.22B continuing at approximately 1.6 times depreciation and amortization of ¥0.74B. Free cash flow, calculated as the sum of OCF and investing cash flow, was negative ¥0.32B. Financing Cash Flow was negative ¥3.22B, with dividend payments and repayments of long-term borrowings contributing to cash outflows. Cash and deposits remained substantial at ¥23.14B, a level capable of absorbing short-term working capital requirements; however, improving inventory turnover will be key to achieving sustained positive free cash flow.

Earnings Quality

Of net income of ¥2.82B, extraordinary income and expenses represented a net loss of ¥0.01B (gain on disposal of fixed assets of ¥0.02B and loss on retirement of fixed assets and other items of ¥0.02B), meaning that recurring business profits accounted for nearly all of net income. Non-operating income of ¥0.22B consisted of small items such as dividend income, with no apparent uplift from temporary factors. Meanwhile, OCF was significantly below net income, and the accrual gap between earnings and cash was primarily caused by the increase in inventories. Although earnings growth on the income statement was favorable, the cash flow support was somewhat weak, making it important to monitor inventory sell-through when evaluating earnings quality.

Earnings Forecast and Guidance

The full-year company forecast is revenue of ¥294.00B (+4.0% YoY), operating income of ¥8.20B (+11.9%), ordinary income of ¥8.50B (+9.9%), and net income of ¥5.30B (+12.5%). First-half progress rates were 49.0% for revenue, 49.7% for operating income, 49.6% for ordinary income, and 53.2% for net income, all close to the standard interim progress rate of 50%. Although the net income progress rate is slightly ahead, the impact of extraordinary income and expenses is small. Achievement of the forecast in the second half will depend on improvements in inventory turnover and recovery in OCF. In addition, a revision to the dividend forecast (an increase) was announced concurrently with this earnings release.

Shareholder Returns

The dividend at the end of Q2 was ¥0, while the full-year annual dividend forecast is ¥24 per share (following an upward revision). The payout ratio against forecast full-year EPS of ¥68.41 is approximately 35.1%, a level sufficiently covered by forecast full-year net income of ¥5.30B. The dividend at the end of the previous fiscal year included an ordinary dividend of ¥20 and a ¥2 commemorative dividend marking the company’s 70th anniversary. Accordingly, the ordinary dividend component and the temporary commemorative dividend component of the full-year forecast of ¥24 should be considered separately. First-half free cash flow was negative ¥0.32B, and it would be advisable to confirm the recovery in OCF during the second half when assessing the cash flow sustainability of the dividend source. Cash and deposits of ¥23.14B and the low level of interest-bearing debt support the company’s short-term dividend payment capacity.

Risk Factors

1. Declining inventory efficiency: Inventories were ¥40.55B, accounting for 33.8% of total assets, and annualized inventory days were approximately 71 days. In the consumer electronics retail business, which has rapid product cycles, inventory valuation losses from outdated models and markdowns could pressure the gross profit margin.

2. Structural vulnerability of the low operating margin: The operating margin was only 2.8%, and the narrow gap between the gross profit margin of 27.1% and the SG&A expense ratio of 24.2% leaves limited room to absorb price competition or increases in labor and logistics costs.

3. Divergence between earnings and cash flow: The OCF/net income ratio was approximately 0.25x, indicating that cash generation is lagging earnings growth. If working capital improvements are delayed, negative free cash flow could persist.

Industry Benchmark (For Reference; Company Analysis)

Key Takeaways from the Earnings Results

1. Operating income increased +18.4% against revenue growth of 5.3%, with first-half profit expanding at a faster pace than revenue. The operating margin improved from the same period of the previous year, and the balance between the gross profit margin and SG&A expense ratio remained favorable.

2. The OCF/net income ratio was approximately 0.25x, and free cash flow was negative ¥0.32B, indicating that cash generation was relatively weak compared with accounting earnings growth. The primary factor was the increase in inventories, making inventory turnover a key monitoring point.

3. The financial foundation was solid, with an equity ratio of 59.6% and a current ratio of approximately 238%, providing capacity to absorb temporary deterioration in working capital. Progress toward the full-year forecast remained broadly at standard levels.

Theoretical Share Price (Reference Value)

Sensitivity: ¥843–¥892 at ±1% for the cost of equity, and ¥865–¥869 at ±0.1 for ω.

Notes:

• Because forecast ROE is below the cost of equity, the theoretical value is below book value per share.
• Net assets as of the quarter-end are used (there is a timing difference relative to the full-year forecast).
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated solely from publicly disclosed data; this is not a forecast of the market share price or a recommendation of any specific investment action, nor does it forecast 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 benchmark is 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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AI Financial Analysis

Executive Summary

Kojima delivered a solid first-half FY2026 earnings result, with sales growth translating into faster operating-income growth despite a structurally thin retail margin. Revenue increased 5.3% year on year to ¥143.94bn. Operating income rose 18.4% to ¥4.07bn, outperforming revenue growth by 13.1 percentage points. Ordinary income increased 14.4% to ¥4.22bn. Net income rose 13.2% to ¥2.82bn, equivalent to EPS of ¥36.43. Gross profit increased to ¥38.98bn, while the gross margin edged down 11bp year on year to 27.1%. SG&A increased 3.8% to ¥34.90bn, materially below revenue growth, and the SG&A ratio declined by 43bp to 24.2%. This SG&A leverage more than offset modest gross-margin pressure and lifted the operating margin by 31bp to 2.8%. EBITDA increased to ¥4.82bn and the EBITDA margin was 3.3%, confirming modest but improving underlying operating leverage. The annualized DuPont ROE is 7.9%, driven by a 2.0% net margin, 2.397x annualized asset turnover and 1.68x financial leverage. The principal earnings-quality constraint is cash conversion: operating cash flow was only ¥0.70bn against ¥2.82bn of net income, or 0.25x. Cash generation was constrained primarily by a ¥3.49bn inventory increase, alongside a ¥0.27bn increase in trade receivables and a ¥0.24bn decline in trade payables. Free cash flow was negative ¥0.32bn after ¥1.22bn of capital expenditure. Inventory days of 71 days exceed the 60-day warning threshold, elevating markdown and working-capital risk in consumer electronics retail. Balance-sheet liquidity nevertheless remains strong, with a 238.5% current ratio, 122.8% quick ratio and ¥23.14bn of cash and deposits. Full-year guidance implies that first-half sales have reached 49.0% of plan, operating income 49.7%, ordinary income 49.6%, and net income 53.2%, leaving earnings modestly ahead of the normal 50% first-half run rate. The revised FY2026 dividend forecast of ¥24 per share implies a dividend payout ratio of approximately 35.1% based on forecast EPS of ¥68.41, which appears supportable if second-half operating cash conversion improves. The near-term investment debate is therefore less about reported profit momentum and more about whether inventory normalization converts the improved P&L into sustainable free cash flow.

Profitability Analysis

Annualized ROE of 7.9% decomposes into a 2.0% net profit margin, 2.397x annualized asset turnover and 1.68x financial leverage. Asset turnover is the principal positive structural contributor to returns, consistent with a high-volume electronics retailer, while the low net margin remains the binding constraint on ROE. The largest period-on-period operating change was margin leverage rather than sales growth alone: operating income grew 18.4% versus 5.3% sales growth. Gross margin declined from approximately 27.2% to 27.1%, a modest 11bp compression that may reflect product mix, pricing competition or promotional intensity. In contrast, the SG&A ratio declined from 24.7% to 24.2%, generating 43bp of cost leverage. Consequently, operating margin expanded from 2.5% to 2.8%, or 31bp. The EBIT margin of 2.8% remains below the 5% efficiency benchmark and leaves earnings sensitive to changes in gross margin, labor costs, rent and competitive pricing. The five-factor DuPont tax burden was 0.670, reflecting a 33.0% effective tax rate, while the interest burden of 1.032 indicates that non-operating income modestly exceeded net interest expense. Interest expense was only ¥0.06bn and EBIT interest coverage was 72.75x, so financing cost is not currently a material drag on profitability. The current earnings improvement appears operationally credible because SG&A grew more slowly than revenue, but durability depends on maintaining cost discipline without sacrificing sales competitiveness and on avoiding margin-eroding inventory clearance activity.

Growth Assessment

First-half revenue growth of 5.3% to ¥143.94bn exceeded the 4.0% full-year growth rate embedded in guidance, indicating a constructive sales start. Operating-income growth of 18.4% also exceeded the 11.9% full-year growth assumption, supported by SG&A leverage. Net income growth of 13.2% was broadly aligned with the 12.5% full-year forecast growth rate. First-half progress against full-year guidance was 49.0% for revenue, 49.7% for operating income, 49.6% for ordinary income and 53.2% for net income. Revenue and operating-income progress are within 10 percentage points of the standard 50% first-half benchmark, while net-income progress is 3.2 percentage points ahead. The earnings outperformance is modest rather than decisive, as the second half must still produce roughly ¥150.06bn of revenue and ¥4.13bn of operating income to achieve guidance. Gross-margin resilience will be central because a 2.8% operating margin provides limited room for pricing or promotional missteps. Inventory rose ¥3.47bn year on year to ¥40.55bn and represented 33.8% of total assets. The accompanying 71 annualized inventory days are elevated even for durable-goods retail and could indicate slower sell-through, seasonal stock accumulation or deliberate availability investment. Capital expenditure of ¥1.22bn exceeded depreciation and amortization of ¥0.74bn by 1.64x, indicating continued store, systems or operating-asset investment rather than underinvestment. Growth quality would improve materially if inventory growth moderates and operating cash flow tracks the higher earnings base in the second half.

Financial Health

Liquidity is strong: current assets of ¥83.63bn covered current liabilities of ¥35.07bn by 2.39x, and the quick ratio was 1.23x. Working capital was ¥48.56bn, providing a substantial operating liquidity buffer. Cash and deposits were ¥23.14bn, equal to 19.3% of total assets. Inventories were ¥40.55bn, larger than cash and accounting for 48.5% of current assets, making liquidity partly dependent on inventory realizability. Total liabilities were ¥48.54bn against total equity of ¥71.54bn, with equity representing 59.6% of total assets. Interest-bearing debt was ¥5.81bn, while debt-to-EBITDA was a conservative 1.21x, debt-to-capital was 7.5%, and EBITDA interest coverage was 86.0x. The reported debt-to-equity ratio was 0.68x and remains well below the 2.0x aggressive-leverage warning level. Short-term current portions of long-term loans were ¥2.19bn and were comfortably covered by cash and broader current assets, limiting maturity-mismatch risk. Long-term loans declined ¥1.08bn year on year to ¥5.81bn, reducing funding risk. Asset retirement obligations were ¥3.66bn, equal to approximately 7.8% of liabilities, above the 5% alert threshold. This elevated ARO ratio is consistent with a store-based retail footprint and leased-site restoration obligations, but it represents a meaningful fixed future cash obligation that should be monitored alongside store portfolio changes. Treasury stock became ¥1.77bn less negative year on year, changing from negative ¥0.48bn to negative ¥0.30bn; this 37.1% movement likely reflects a reduction in treasury-share holdings and modestly supports reported equity per share. Deferred tax assets of ¥4.39bn represent 3.7% of total assets and should remain supported by expectations of taxable income generation.

Notable B/S Changes

Treasury stock: improved by ¥1.77bn from negative ¥0.48bn to negative ¥0.30bn (+37.1%) — a reduction in treasury-share holdings modestly supports reported equity and book value per share.

Cash Flow Quality

Cash-flow quality is the principal weakness in the first-half result. Operating cash flow was ¥0.70bn, only 0.25x net income of ¥2.82bn, well below the 0.8x quality threshold. Cash conversion, measured as operating cash flow divided by EBITDA, was only 0.14x versus the 0.7x warning threshold. The immediate root cause was working-capital absorption rather than a collapse in accounting profitability: inventory increased by ¥3.49bn, trade receivables increased by ¥0.27bn, and trade payables declined by ¥0.24bn. Inventory days of 71 days reinforce the concern, exceeding the 60-day retail warning threshold and increasing the risk that future cash conversion requires discounting or markdowns. The low cash conversion is particularly important in electronics retail, where product cycles can be short and inventory values can fall quickly when models are superseded. The accruals ratio of 1.8% remains below the 5% benchmark, which is a mitigating factor and suggests the issue is primarily working-capital timing rather than broad accrual inflation. Operating cash flow improved substantially from a ¥4.63bn outflow in the prior-year first half, but the current ¥0.70bn inflow remains insufficient relative to profit. Capital expenditure was ¥1.22bn, or 1.64x depreciation and amortization, indicating investment intensity above asset consumption. As a result, free cash flow was negative ¥0.32bn. Negative first-half free cash flow is manageable given cash of ¥23.14bn and low debt, but it cannot become persistent if the company is to fund investment and shareholder returns from internally generated cash. Financing cash outflow of ¥3.22bn included ¥1.70bn of dividends paid and ¥1.50bn of long-term loan repayments, resulting in a ¥3.54bn reduction in cash. The key second-half test is whether inventory unwinds and operating cash flow rises above net income.

Dividend Sustainability

No interim dividend was paid for FY2026 Q2. The company has revised its full-year dividend forecast upward to ¥24 per share. Based on forecast EPS of ¥68.41, the implied dividend-only payout ratio is approximately 35.1%, below the 60% sustainability benchmark. This payout level is also below the prior fiscal-year total dividend of ¥22 per share, which included a ¥2 commemorative dividend, while the ordinary component was ¥20 per share. The forecast dividend appears affordable from forecast earnings and is supported by the company’s strong liquidity, low debt-to-EBITDA of 1.21x and high interest coverage. However, first-half free cash flow was negative ¥0.32bn because operating cash flow of ¥0.70bn did not fully cover ¥1.22bn of capital expenditure. Therefore, dividend sustainability depends more on a second-half recovery in cash conversion than on accounting earnings alone. With forecast net income of ¥5.30bn, expected aggregate dividends implied by ¥24 per share are roughly ¥1.86bn, leaving room for retained earnings if guidance is delivered. The payout policy appears prudent at the forecast level, but inventory normalization is the principal cash-flow condition to monitor.

Risk Assessment

Business risks include High priority — inventory and markdown risk: 71 annualized inventory days exceed the 60-day warning threshold, while inventories increased ¥3.47bn year on year to ¥40.55bn. Consumer electronics face rapid model obsolescence and intense promotional competition, so slower sell-through could pressure gross margin and cash flow., High priority — low-margin retail exposure: the 2.8% EBIT margin is below the 5% benchmark. A small deterioration in supplier terms, product mix, pricing, labor or logistics costs could disproportionately affect operating profit., Medium priority — consumer-demand and competitive risk: discretionary durable-goods purchases are sensitive to household confidence, inflation and competitor discounting, including online channels and large-format peers., Medium priority — operating-cost risk: first-half SG&A leverage was favorable, but labor-market tightness and store operating costs could reverse this benefit if sales momentum slows..

Financial risks include High priority — weak cash conversion: OCF/net income of 0.25x and OCF/EBITDA of 0.14x are materially below quality thresholds. The root cause is working-capital absorption, and the impact is negative first-half free cash flow despite rising reported profit., Medium priority — asset retirement obligations: AROs of ¥3.66bn are approximately 7.8% of total liabilities, above the 5% alert level. These obligations are typical for a store network but increase fixed cash requirements when sites are closed, relocated or restored., Low priority — refinancing risk: debt metrics are conservative, with debt/EBITDA of 1.21x, debt/capital of 7.5% and EBITDA interest coverage of 86.0x. The balance sheet can absorb normal operating volatility..

Key concerns include Whether second-half inventory sell-through reverses the ¥3.49bn first-half inventory build and restores operating cash flow., Whether gross margin can remain near 27.1% without deeper promotions or clearance activity., Whether SG&A discipline can be retained while maintaining store service, sales productivity and competitive positioning., Whether revised full-year operating-income guidance of ¥8.20bn is achieved with cash conversion that supports capital expenditure and the ¥24 per-share dividend..

Investment Implications

Key takeaways include First-half operating momentum was favorable: sales grew 5.3%, operating income grew 18.4%, and operating margin expanded 31bp to 2.8%., The earnings improvement was driven by SG&A leverage, as SG&A grew 3.8%, below the 5.3% sales growth rate, while gross margin slipped only 11bp., Reported earnings are ahead of the normal first-half pace for full-year net-income guidance, with 53.2% of forecast net income already achieved., The balance sheet is resilient, supported by a 238.5% current ratio, 1.21x debt/EBITDA and ¥23.14bn of cash and deposits., Cash-flow conversion is the central counterweight to P&L momentum: OCF/net income was 0.25x, free cash flow was negative ¥0.32bn, and inventory days were elevated at 71., The forecast ¥24 DPS implies a moderate 35.1% dividend payout ratio and appears earnings-supported, subject to improved second-half cash generation..

Metrics to watch include Inventory balance, annualized inventory days and any markdown-related gross-margin pressure., Operating cash flow relative to net income and EBITDA, particularly whether OCF/net income recovers above 0.8x., Gross margin and operating margin, given the low 2.8% EBIT-margin base., SG&A ratio, which improved to 24.2% and was the main driver of first-half profit outgrowth., Second-half progress toward ¥294.00bn revenue, ¥8.20bn operating income and ¥5.30bn net income guidance., Capital expenditure relative to depreciation and free-cash-flow recovery., Asset retirement obligations in relation to liabilities and store-network actions..

Regarding relative positioning, Kojima exhibits a financially conservative profile for a low-margin electronics retailer, with strong liquidity, low leverage and high interest coverage. Its 27.1% gross margin is within the general-retail benchmark range, but its 2.8% operating margin remains below the broad 5% efficiency benchmark and makes execution on inventory, promotions and operating costs especially important. The company’s high annualized asset turnover supports a 7.9% annualized ROE, but this return remains just below the 8% benchmark and is constrained by low net profitability and weak first-half cash conversion.