KOHNAN SHOJI (7516) FY2027 Q1 Earnings Report

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Executive Summary

Both revenue and profit posted double-digit growth, resulting in higher revenue and higher profit, with the increase in profit significantly exceeding the increase in revenue. Revenue was ¥146.22B (+11.8% YoY), Operating Income was ¥10.15B (+42.8%), Ordinary Income was ¥9.77B (+51.5%), and Net Income attributable to owners of the parent was ¥6.65B (+52.2%). The factor behind the profit growth rate substantially exceeding the revenue growth rate was the emergence of operating leverage through improved gross margin and relative control of SG&A expenses.

Factors Affecting Performance

【Revenue】Revenue was ¥146.22B, representing an 11.8% increase YoY. The business consists of a single segment involving the sale of retail and construction materials, among other products, and no segment-by-segment breakdown is disclosed. The revenue increase appears to reflect expansion in retail and construction materials sales, including housing-related and professional demand.

【Profit and Loss】Gross profit was ¥52.52B (gross margin: 35.9%), broadly flat or slightly improved from 35.8% in the same period of the previous year. SG&A expenses were contained at ¥46.99B (SG&A ratio: 32.1%) and were relatively controlled compared with the increase in revenue, resulting in a significant increase in Operating Income to ¥10.15B (+42.8%). Although non-operating expenses increased to ¥1.11B from ¥0.98B in the previous year, mainly due to interest expenses of ¥0.89B, Ordinary Income maintained its growth at ¥9.77B (+51.5%). Extraordinary income and losses were minimal, consisting solely of a ¥0.02B loss on disposal of fixed assets. Net Income of ¥6.65B (+52.2%), calculated by deducting income taxes and other taxes of ¥3.10B from Profit Before Tax of ¥9.75B, was broadly consistent with Ordinary Income. Overall, this was a high-quality earnings result characterized by higher revenue and profit, with the profit growth rate substantially exceeding the revenue growth rate.

Segment Analysis

The Group operates a single segment involving the sale of retail and construction materials, among other products, and related businesses; disclosure of segment-by-segment performance has been omitted.

Key Financial Indicators

【Profitability】The Operating Income margin was 6.9%, improving by approximately 1.5pt from approximately 5.4% in the same period of the previous year, while the Net Income margin was 4.5%, improving by approximately 1.2pt from approximately 3.3% in the same period of the previous year. The gross margin was 35.9%.【Cash Flow Quality】Inventories were ¥148.69B, accounting for 27.7% of total assets, indicating that inventory represents a significant portion of the asset composition. Cash and deposits were ¥16.27B, limited relative to current liabilities of ¥158.93B.【Investment Efficiency】ROE (annualized) was 3.7%; the improvement in the profit margin has not translated into a sufficient improvement in capital efficiency relative to net assets of ¥178.67B. Total assets were ¥537.06B, while net assets remained at ¥178.67B.【Financial Soundness】The Equity Ratio was 33.3%, slightly down from 34.4% in the same period of the previous year. Long-term borrowings were ¥128.63B, accounting for 24.0% of total assets, indicating a relatively high level of reliance on interest-bearing debt.

Cash Flow Analysis

As data from the statement of cash flows has not been disclosed, cash trends are analyzed based on changes in the balance sheet. Cash and deposits increased to ¥16.27B from ¥15.52B in the same period of the previous year, while inventories increased to ¥148.69B from ¥145.96B, suggesting that some funds may be tied up in inventory. Accounts payable and notes payable were ¥48.49B, up from ¥38.54B in the same period of the previous year, providing a certain degree of support for working capital through the use of trade payables. Long-term borrowings increased to ¥128.63B from ¥118.24B in the same period of the previous year, indicating a structure in which funding for asset expansion depends on borrowings. Overall, although earnings growth is progressing, it is accompanied by increases in inventory and borrowings, leaving room for improvement in capital efficiency.

Quality of Earnings

The difference between Ordinary Income and Net Income resulted from deducting income taxes and other taxes of ¥3.10B from Profit Before Tax of ¥9.75B. Since extraordinary income and losses were minimal, consisting of only a ¥0.02B loss on disposal of fixed assets, current-period profit can be considered high quality and reflective of recurring business activities. Non-operating income was ¥0.73B, consisting mainly of foreign exchange gains of ¥0.10B, while non-operating expenses were ¥1.11B, primarily consisting of interest expenses of ¥0.89B; financing costs therefore acted as a factor weighing on profit. Comprehensive Income was ¥6.70B, nearly the same level as Net Income of ¥6.65B, and other comprehensive income items such as foreign currency translation adjustments and valuation differences on securities were minimal, resulting in a small divergence between the two figures. The high level of inventories, at 27.7% of total assets, entails the risk of future markdowns and valuation losses, and inventory trends must be monitored continuously when assessing earnings sustainability.

Earnings Forecast and Guidance

Q1 progress against the full-year plan was 26.9% for Revenue (plan: ¥543.50B), 44.1% for Operating Income (plan: ¥23.00B), 46.5% for Ordinary Income (plan: ¥21.00B), and 53.2% for Net Income (plan: ¥12.50B). All exceeded the standard quarterly progress benchmark of 25%, with particularly notable progress in the profit items. Meanwhile, the full-year plan itself calls for only moderate growth of +2.7% in Operating Income and +1.2% in Ordinary Income, and the Company has not revised either its earnings forecast or dividend forecast. Whether the strong Q1 progress is attributable to seasonality or a base effect from the same period of the previous year, or reflects the establishment of improved profitability throughout the full year, must be assessed by monitoring trends in gross margin and SG&A ratio from the next quarter onward.

Shareholder Returns

The full-year dividend forecast is ¥140 per share. Based on the average number of shares outstanding during the period of 28,166,028 shares, the total dividend is estimated at approximately ¥3.94B, resulting in a Payout Ratio of approximately 31.5% against the full-year Net Income forecast of ¥12.50B. The plan represents a significant increase from the previous year's actual dividend of ¥65, while the Payout Ratio remains below the general sustainability benchmark of 60%. As no share repurchase has been identified in the disclosed data, this report evaluates shareholder returns based on the Payout Ratio.

Risk Factors

1. Inventory accumulation and markdown risk: Inventories were ¥148.69B, accounting for 27.7% of total assets, and annualized inventory days were extended at 152–154 days. If product obsolescence or markdowns occur, this could affect the sustainability of the gross margin improvement achieved during the current period.

2. Leverage and rising interest rate risk: Interest-bearing debt was ¥158.05B, including long-term borrowings of ¥128.63B, while the Equity Ratio was 33.3%, slightly down from 34.4% in the same period of the previous year. Interest expenses increased to ¥0.89B from ¥0.697B in the same period of the previous year, requiring close monitoring of the impact of changes in the interest rate environment on Ordinary Income.

3. Housing and construction-related demand and price competition: Retail and construction materials sales are susceptible to housing starts, renovation demand, and weather conditions. In addition, price competition with industry peers and e-commerce may place pressure on gross margins. The ability to pass on increases in costs such as labor and logistics expenses to selling prices will affect the maintenance of the Operating Income margin improved during the current period.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

The Company's Operating Income margin and Net Income margin both exceed the industry median, indicating that profitability is relatively high within the industry.

Growth and Capital Efficiency

The Revenue growth rate also exceeds the industry median and remains at a level close to the upper limit of the IQR.

※Source: Compiled by the Company

Key Takeaways from the Earnings

1. Against Revenue growth of +11.8%, Operating Income increased by +42.8%, substantially exceeding the revenue growth rate, while the Operating Income margin improved by approximately 1.5pt YoY. This high quality of profit growth is a defining feature of the current-period results.

2. Q1 progress against the full-year plan was 44.1% for Operating Income and 53.2% for Net Income, substantially exceeding standard progress levels. Trends in gross margin, SG&A ratio, and inventory levels in the second half and thereafter will be key factors affecting full-year results.

3. Annualized inventory days were 152–154 days, and inventories accounted for 27.7% of total assets. Inventory trends will remain a key monitoring point from the perspectives of the sustainability of margin improvement and cash efficiency.

Theoretical Share Price (For Reference)

Sensitivity: ¥5,809–¥6,148 at Cost of Equity ±1%, and ¥5,962–¥5,983 at ω±0.1.

Notes:

• Because Net Income progress against the full-year forecast (53%) exceeds the standard level (25%), forecast EPS has been adjusted upward within a maximum range of +10% (because companies whose progress is ahead of schedule tend to exceed forecasts. For businesses with strong seasonality, the adjustment may be excessive).
• Net Income is substantially compressed relative to Operating Income due to tax burden, acquisition-related expenses, and non-controlling interests, among other factors (Net Income ÷ Operating Income: 54%). This value reflects that compression at face value; if the factors are temporary, the normalized value may be higher.
• Because forecast ROE is below the Cost of Equity, the theoretical value is below Book Value Per Share.
• Net assets at the end of the quarter are used (there is a timing gap relative to the full-year forecast).
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Valuation model: Residual Income Model (Ohlson-type; explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated using only 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, and you should consult a professional as necessary.

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AI Financial Analysis

Executive Summary

FY2027 Q1 was a strong start, with earnings growth materially outpacing sales growth. Revenue increased 11.8% year on year to ¥146.2bn. Operating income rose 42.8% to ¥10.2bn. Ordinary income increased 51.5% to ¥9.8bn. Net income attributable to owners increased 52.2% to ¥6.7bn. The operating margin expanded to 6.9% from 5.4% in the prior-year quarter, an improvement of approximately 150bp. The net profit margin improved to 4.5% from 3.3%, or approximately 121bp. Gross margin was 35.9%, improving by approximately 17bp year on year. SG&A expenses rose 6.7%, substantially below revenue growth, reducing the SG&A ratio to 32.1% from 33.7%. This positive operating leverage was the principal driver of the earnings acceleration. Interest expense increased 27.8% to ¥0.9bn, but interest coverage remained solid at 11.39x. The effective tax rate was 31.8%, resulting in a tax burden of 0.683 and moderating the conversion of pre-tax profit into net income. Annualized ROE was 14.9%, supported by a 4.5% net margin, annualized asset turnover of 1.089x, and financial leverage of 3.01x. Q1 operating-income progress reached 44.1% of the full-year forecast, well above the 25% seasonal benchmark, while net-income progress was 53.2%. The performance creates upside sensitivity to the existing full-year plan if the operating-cost discipline and sales momentum persist. However, the business remains inventory intensive, with inventory days of roughly 152-154 days, and balance-sheet leverage requires continued monitoring. The full-year dividend forecast of ¥140 per share implies a prospective payout ratio of approximately 31.5% against forecast EPS of ¥443.8, leaving a meaningful earnings retention buffer.

Profitability Analysis

Annualized ROE of 14.9% decomposes into a 4.5% net profit margin, 1.089x annualized asset turnover, and 3.01x financial leverage. The largest year-on-year improvement is profitability rather than capital turnover: operating margin expanded by approximately 150bp and net margin by approximately 121bp. Revenue growth of 11.8% was accompanied by only 6.7% SG&A growth, producing favorable operating leverage. Gross margin improved modestly by approximately 17bp to 35.9%, indicating that the earnings improvement was primarily driven by overhead absorption and cost control rather than a major change in merchandise margin. The SG&A ratio declined by approximately 153bp to 32.1%, within the typical general-retail range of 25-35%. Operating margin of 6.9% is above the 5% concern threshold but remains below the 8% level generally associated with stronger retail profitability. The five-factor DuPont structure shows an interest burden of 0.960, indicating that financing costs reduced EBIT by 4.0% before tax; this remains manageable despite rising interest expense. The tax burden of 0.683 reflects a 31.8% effective tax rate and modestly constrains earnings conversion. Financial leverage of 3.01x remains a significant contributor to ROE, meaning the 14.9% annualized ROE should not be viewed solely as an operating-return outcome. Annualized ROA is approximately 5.1%, calculated using Q1 net income annualized and average total assets, indicating adequate asset returns for a large-format, asset-heavy retailer.

Growth Assessment

Sales growth of 11.8% to ¥146.2bn demonstrates strong top-line momentum in the quarter. Gross profit grew 12.7% to ¥52.5bn, marginally faster than revenue, consistent with the 17bp gross-margin improvement. Operating income growth of 42.8% materially exceeded gross-profit growth because SG&A expense growth was contained at 6.7%. The Q1 result represents 26.9% of the ¥543.5bn full-year sales forecast, broadly consistent with the 25% benchmark. Operating-income progress is 44.1% of the ¥23.0bn full-year forecast, 19.1 percentage points above the standard Q1 benchmark. Ordinary-income progress is 46.5% of forecast, 21.5 percentage points above the benchmark. Net-income progress is 53.2% of forecast, 28.2 percentage points above the benchmark. These unusually high profit progress rates indicate that the full-year forecast depends on meaningful margin normalization or cost increases during the remaining quarters, unless management's plan is conservative. The earnings mix is predominantly operating in nature: operating income of ¥10.2bn exceeded ordinary income of ¥9.8bn due mainly to ¥0.9bn of interest expense. Equity-method earnings of ¥0.4bn and foreign-exchange gains of ¥0.1bn provided limited support relative to operating profit. Extraordinary items were immaterial, with a ¥0.02bn gain on asset sales and a ¥0.23bn fixed-asset disposal loss. The company operates as a single retail and building-materials sales segment, making consolidated earnings directly dependent on the performance of the core retail operation.

Financial Health

The current ratio was 127.7%, above 1.0x and therefore not indicative of an immediate current-liability coverage shortfall. Working capital was positive at ¥44.0bn. However, the quick ratio was only 34.1%, demonstrating that liquidity is heavily dependent on inventory realization rather than cash and receivables. Cash and deposits of ¥16.3bn covered only 0.55x short-term debt, reinforcing the reliance on inventory turnover, supplier financing, and debt-market access. Interest-bearing debt was ¥158.1bn, including ¥29.4bn of short-term loans and ¥128.6bn of long-term loans. The short-term debt ratio was 18.6%, which limits maturity concentration relative to the total debt stack. Interest coverage of 11.39x remains strong and supports debt-service capacity. Debt-to-capital was 46.9%, above the 40% investment-grade reference point but below the 60% concern threshold. The reported D/E ratio is 2.01x, marginally above the 2.0x aggressive-financing threshold; this HIGH_LEVERAGE alert indicates that leverage is material to the capital structure and amplifies downside sensitivity should earnings or inventory conversion weaken. Total liabilities represented 66.7% of total assets, while owners' equity represented approximately 33.2%. Asset retirement obligations were ¥19.7bn, equivalent to 5.5% of liabilities. The HIGH_ARO_RATIO alert reflects meaningful future store restoration and lease-site closure obligations; this is structurally relevant for a store-based retailer and should be considered alongside lease obligations. Investment securities increased ¥179.1bn year on year, or 291.8%, to ¥240.4bn, increasing exposure to market-value fluctuations and capital allocation risk. Trade receivables increased ¥76.5bn, or 42.4%, to ¥257.0bn, faster than revenue growth, which warrants monitoring for settlement timing and working-capital absorption. Trade payables increased ¥99.5bn, or 25.8%, to ¥484.9bn, partly funding the receivables increase and supporting operating liquidity. Goodwill was ¥154.6bn, equal to 8.6% of equity and 2.9% of assets, which is a moderate and currently manageable acquisition-related balance-sheet exposure. Intangible assets represented 5.2% of total assets, also below levels associated with elevated intangible-asset concentration.

Notable B/S Changes

Investment securities: +¥179.1bn (+291.8%) to ¥240.4bn - a substantial rise in marketable/investment asset exposure that increases valuation sensitivity and requires review of capital-allocation rationale. Accounts receivable: +¥76.5bn (+42.4%) to ¥257.0bn - growth materially exceeded the 11.8% sales increase, raising the importance of collection performance and cash conversion. Accounts payable: +¥99.5bn (+25.8%) to ¥484.9bn - supplier financing increased faster than sales and partly offsets receivables growth, but dependence on payment terms should be monitored. Interest-bearing debt: +¥116.1bn to ¥158.1bn - increased borrowing supports an already leveraged capital structure and heightens refinancing and interest-rate sensitivity. Asset retirement obligations: ¥197.3bn, or 5.5% of liabilities - a material store-network restoration obligation that could affect cash requirements upon site exits or lease maturities.

Cash Flow Quality

Profit conversion cannot be quantified from operating cash flow or free cash flow because no cash-flow figures were reported for the period. Earnings quality can nevertheless be assessed partly from the income statement: the Q1 earnings increase was principally driven by operating-income growth rather than extraordinary gains. Net income of ¥6.7bn was supported by operating income of ¥10.2bn, with only limited non-operating support from ¥0.4bn of equity-method earnings and ¥0.1bn of foreign-exchange gains. Extraordinary losses were limited to ¥0.23bn of fixed-asset disposals, while extraordinary income was only ¥0.02bn. The growth in trade receivables of 42.4% exceeded revenue growth of 11.8%, representing a working-capital item that should be watched for cash-conversion implications. Inventory stood at ¥148.7bn, equal to 27.7% of total assets. The HIGH_INVENTORY_DAYS alerts, at approximately 152-154 days versus both the 60-day retail warning level and 90-day broader alert threshold, indicate substantial capital tied up in merchandise. For a home-improvement and building-materials retailer, a broader SKU range and bulky durable merchandise can structurally lengthen inventory holding periods relative to general retail; nevertheless, the level increases markdown, obsolescence, demand-forecasting, and seasonal sell-through risk. Inventory increased only 1.9% year on year, materially below sales growth, which is favorable for inventory productivity, but the absolute stock level remains high. The increase in payables of 25.8% exceeded inventory growth and provides partial supplier-financing support, although this funding source may be sensitive to purchasing terms and sales conditions.

Dividend Sustainability

The company forecasts a full-year dividend of ¥140 per share. Against forecast EPS of ¥443.8, the prospective dividend payout ratio is approximately 31.5%. This is below the 60% sustainability reference threshold and provides a substantial retained-earnings buffer. Q1 EPS was ¥236.28, already equal to 53.2% of full-year forecast EPS, consistent with the high first-quarter profit progress. Retained earnings were ¥1,658.2bn, providing a sizeable accounting capital base relative to the forecast dividend commitment. The dividend outlook is supported by the current earnings trajectory and moderate forecast payout ratio. The sustainability assessment remains dependent on maintaining inventory conversion and debt-service capacity, given the inventory-intensive balance sheet and reported D/E ratio of 2.01x. No dividend revision was announced with the Q1 release.

Risk Assessment

Business risks include Inventory and merchandising risk: inventory days of approximately 152-154 are substantially above retail warning thresholds. The high level may be partly structural for home-improvement, building-material, and durable-goods assortments, but it raises exposure to slow-moving stock, markdowns, weather effects, and demand misforecasting., Consumer and construction-cycle sensitivity: the core retail and building-materials business is exposed to household discretionary spending, housing-related activity, renovation demand, and macroeconomic confidence., Competitive risk: price competition from DIY, home-center, specialty, and online retailers could pressure the 35.9% gross margin and constrain the ability to sustain the Q1 operating-margin expansion., Labor and store-cost inflation risk: the Q1 result benefited from SG&A growth below sales growth; wage inflation, logistics costs, utilities, and occupancy expenses could reverse this operating leverage., Vietnam subsidiary reporting timing risk: the overseas subsidiary has a December year-end and is consolidated using March financial statements for the Q1 period, subject to adjustments for material subsequent transactions..

Financial risks include HIGH_LEVERAGE: the reported D/E ratio of 2.01x is marginally above the 2.0x aggressive-financing threshold. Although interest coverage is currently strong at 11.39x, leverage increases sensitivity to earnings volatility and refinancing conditions., Liquidity composition risk: the current ratio is 127.7%, but the quick ratio is only 34.1% and cash covers only 0.55x of short-term debt. Liquidity therefore relies significantly on inventory monetization and operating funding., HIGH_ARO_RATIO: asset retirement obligations of ¥19.7bn equal 5.5% of liabilities. This reflects meaningful future restoration obligations associated with the store network and could require cash outlays when leases or sites are exited., Investment-security risk: investment securities rose ¥179.1bn year on year to ¥240.4bn, creating greater sensitivity to valuation movements and potential capital-allocation volatility., Interest-cost risk: interest expense increased 27.8% year on year to ¥0.9bn, faster than revenue, though the current interest-coverage ratio remains robust..

Key concerns include The Q1 operating-income progress rate of 44.1% versus the full-year plan is 19.1 percentage points above a standard 25% Q1 benchmark; the durability of the margin outperformance is the central earnings question for the remainder of the year., Receivables rose 42.4% year on year, faster than revenue growth, requiring scrutiny of collection timing and the associated working-capital impact., The company combines high inventory days, low quick liquidity, and meaningful leverage, making cash conversion and stock turnover more important than the positive Q1 income-statement momentum alone., No cash-flow figures are available to verify operating-cash-flow conversion, free-cash-flow coverage, or the extent to which working-capital changes affected cash generation..

Investment Implications

Key takeaways include Q1 delivered strong operating leverage: revenue grew 11.8%, operating income rose 42.8%, and the operating margin expanded by approximately 150bp to 6.9%., Annualized ROE of 14.9% is solid, but it is supported by a 3.01x financial-leverage factor as well as improved profitability., The full-year plan appears back-end weighted relative to the Q1 profit outcome, with Q1 operating income already at 44.1% and net income at 53.2% of forecast., The prospective ¥140 dividend implies a moderate 31.5% payout ratio against forecast EPS, preserving financial flexibility., The principal balance-sheet sensitivities are the reported 2.01x D/E ratio, low 34.1% quick ratio, high inventory days, and the increase in investment securities..

Metrics to watch include Operating-margin retention versus the Q1 level of 6.9%, Gross-margin trajectory from the Q1 level of 35.9%, SG&A ratio, which improved to 32.1% from 33.7%, Inventory days and inventory sell-through from the approximately 152-154 day level, Trade receivable growth and collection relative to revenue growth, Interest expense and interest coverage, currently ¥0.9bn and 11.39x, Reported D/E ratio and debt-to-capital ratio, currently 2.01x and 46.9%, Investment securities balance following the ¥179.1bn year-on-year increase, Progress against full-year operating-income forecast of ¥23.0bn and net-income forecast of ¥12.5bn.

Regarding relative positioning, The company shows above-threshold annualized ROE and a gross margin at the upper end of the general-retail benchmark, while its 6.9% operating margin is respectable but below the 8% level associated with stronger profitability. Its Q1 cost discipline compares favorably with typical retail operating leverage, but the balance-sheet profile is less conservative than peers with lower debt reliance and faster inventory conversion.