| Metric | Current | Prior | YoY |
|---|---|---|---|
| Revenue | ¥693.5B | ¥661.3B | +4.9% |
| Operating Income | ¥41.8B | ¥39.9B | +4.9% |
| Ordinary Income | ¥52.3B | ¥50.5B | +3.6% |
| Net Income | ¥41.7B | ¥40.4B | +3.3% |
| ROE | 14.2% | 14.9% | - |
FY2026 Q3 results show Watami achieving revenue of 69.3 billion yen (YoY +4.9%), operating income of 4.2 billion yen (+4.9%), ordinary income of 5.2 billion yen (+3.6%), and net income of 4.2 billion yen (+3.3%). The company maintained a gross profit margin of 55.8% while managing SG&A expenses at 49.8% of revenue. Operating cash flow of 4.8 billion yen represents 1.15x net income, confirming cash-backed earnings quality. The company holds cash and deposits of 37.7 billion yen against total assets of 70.5 billion yen, providing substantial liquidity with a current ratio of 238.4%. Investment securities increased significantly to 6.9 billion yen from 0.7 billion yen YoY (+907%), representing a notable shift in asset allocation. Free cash flow of 3.7 billion yen supports the conservative dividend policy of 10 yen per share (payout ratio 10.3%).
Revenue growth of 4.9% to 69.3 billion yen was driven by domestic restaurant operations expanding 10.7% and overseas operations growing 9.5%, partially offset by a slight decline in the food catering business for elderly people segment (-0.2%). Geographic revenue breakdown shows Japan contributing 60.8 billion yen, Southeast Asia 7.8 billion yen, and the United States 0.7 billion yen. The restaurant segment achieved revenue of 28.0 billion yen (+10.7%) with operating income of 1.8 billion yen, improving from the prior year's 1.2 billion yen. The food catering business for elderly people, the company's largest segment, generated revenue of 30.9 billion yen (-0.2%) with operating income of 3.6 billion yen (-7.8%), representing the core business with an 11.6% operating margin. Overseas operations recorded revenue of 8.2 billion yen (+9.5%) but reported an operating loss of 0.02 billion yen, deteriorating from a profit of 0.2 billion yen in the prior year. This overseas loss represents a non-recurring factor related to impairment losses of 0.8 billion yen on store assets planned for closure.
Cost of sales increased 4.3% to 30.7 billion yen, resulting in gross profit of 38.7 billion yen (+5.2%) and maintaining the gross margin at 55.8%. SG&A expenses rose 5.4% to 34.5 billion yen, growing faster than revenue and constraining operating leverage. The SG&A ratio expanded slightly to 49.8% from 49.2% YoY, indicating structural cost pressures from labor and rent expenses. Operating income grew 4.9% to 4.2 billion yen with an operating margin of 6.0%, unchanged from the prior year.
Non-operating income of 1.8 billion yen included interest income of 0.6 billion yen, dividend income of 0.1 billion yen, and foreign exchange gains of 0.5 billion yen, collectively adding 2.5% to revenue. Non-operating expenses of 0.7 billion yen primarily consisted of interest expenses of 0.4 billion yen, resulting in ordinary income of 5.2 billion yen (+3.6%). The gap between operating income (4.2 billion yen) and ordinary income (5.2 billion yen) represents a 24.9% uplift, significantly driven by financial income and FX gains.
Extraordinary losses of 0.1 billion yen included impairment losses of 0.1 billion yen and disposal losses, leading to profit before tax of 5.1 billion yen. Income tax expense of 0.9 billion yen resulted in net income of 4.2 billion yen (+3.3%), representing a net margin of 6.0%. This follows a revenue up/profit up pattern, though profit growth lagged revenue growth due to SG&A expense expansion and overseas segment challenges.
The Food Catering Business for Elderly People segment is the core business, contributing revenue of 30.9 billion yen (44.6% of total) with operating income of 3.6 billion yen at an 11.6% margin. Despite a slight revenue decline of 0.2% YoY, this segment maintains the highest profitability margin across all divisions. The Restaurant segment generated revenue of 28.0 billion yen (40.4% of total) with operating income of 1.8 billion yen at a 6.4% margin, showing strong momentum with revenue growth of 10.7% YoY and profit improvement of 52.2%. The Overseas segment recorded revenue of 8.2 billion yen (11.8% of total) but reported an operating loss of 0.02 billion yen (-0.2% margin), marking a deterioration from prior year profitability of 0.2 billion yen due to impairment charges. The Environment segment contributed revenue of 2.1 billion yen with operating income of 0.2 billion yen at a 10.3% margin, maintaining stable operations. The Agriculture segment recorded revenue of 0.8 billion yen with a minimal operating loss of 0.01 billion yen. Notable margin disparity exists between the high-margin Food Catering Business (11.6%) and the Restaurant segment (6.4%), with overseas operations currently unprofitable.
[Profitability] ROE of 14.2% is robust for the retail sector, driven by a financial leverage ratio of 2.40x and asset turnover of 0.98x. Operating margin of 6.0% remained stable YoY, while net profit margin of 6.0% reflects efficient tax management with an effective tax rate of 18.1%. The company's DuPont decomposition shows ROE = 6.0% net margin × 0.98 asset turnover × 2.40 leverage, indicating profitability is supported by moderate leverage utilization. EBIT margin of 6.0% aligns with operating margin, showing consistency in core operational profitability. [Cash Quality] Cash and equivalents of 37.7 billion yen provide strong liquidity, covering short-term debt 6.12 times and representing 53.5% of total assets. Short-term investment securities of 1.1 billion yen supplement liquid assets. Operating cash flow of 4.8 billion yen represents 1.15x net income, confirming high-quality earnings conversion. [Investment Efficiency] Asset turnover of 0.98x indicates efficient asset utilization. Capital expenditure of 2.2 billion yen exceeded depreciation of 1.7 billion yen by 1.26x, signaling growth-oriented investment. Investment securities increased dramatically to 6.9 billion yen from 0.7 billion yen YoY, representing a significant portfolio shift that warrants monitoring for valuation volatility. [Financial Health] Equity ratio of 41.7% reflects a balanced capital structure. Current ratio of 238.4% and quick ratio of 230.6% demonstrate robust short-term solvency. Debt-to-equity ratio of 0.77x and debt-to-capital ratio of 43.5% indicate moderate leverage. Net debt of 22.6 billion yen against EBITDA of 5.9 billion yen yields a net debt/EBITDA ratio of 3.82x, which is elevated but manageable given strong cash generation. Interest coverage ratio of 14.82x provides substantial cushion for debt service.
Operating cash flow of 4.8 billion yen declined 7.6% YoY but exceeded net income of 4.2 billion yen by 1.15x, confirming earnings quality. The subtotal before working capital changes was 5.7 billion yen, including depreciation of 1.7 billion yen. Working capital changes showed receivables increasing 0.9 billion yen (cash outflow), inventory decreasing 0.02 billion yen (minimal impact), and payables increasing 0.5 billion yen (cash inflow), collectively consuming 0.4 billion yen. Income taxes paid of 1.1 billion yen and interest paid of 0.4 billion yen were offset by interest and dividends received of 0.6 billion yen. Investing cash flow of negative 1.1 billion yen consisted primarily of capital expenditures of 2.2 billion yen, exceeding depreciation by 26% and indicating expansion-phase investment. Financing cash flow of negative 7.0 billion yen reflects debt reduction and dividend payments, demonstrating disciplined capital allocation. Free cash flow of 3.7 billion yen (operating CF 4.8 billion yen minus investing CF 1.1 billion yen) provides ample coverage for dividends and maintains financial flexibility. The company's cash position increased to 37.7 billion yen, strengthening the balance sheet and providing substantial cushion against short-term liabilities of 20.4 billion yen with a coverage ratio of 1.85x.
Ordinary income of 5.2 billion yen versus operating income of 4.2 billion yen reflects a non-operating net contribution of approximately 1.0 billion yen, representing 19.2% of operating income and 1.5% of revenue. This uplift comprises interest income of 0.6 billion yen, dividend income of 0.1 billion yen, and foreign exchange gains of 0.5 billion yen, offset by interest expenses of 0.4 billion yen. The non-operating income composition shows recurring elements (interest and dividends totaling 0.7 billion yen) and potentially volatile FX gains. Non-operating income at 2.6% of revenue is material but not excessive, consisting primarily of financial income from the company's substantial cash holdings and investment securities portfolio. Operating cash flow of 4.8 billion yen exceeding net income of 4.2 billion yen by 15% indicates healthy earnings quality with minimal accrual concerns. The accrual ratio of negative 0.9% (calculated as net income minus operating CF divided by average assets) confirms cash-backed profitability. Extraordinary losses of 0.1 billion yen from impairment represent 2.4% of operating income and are related to store closures, qualifying as non-recurring items. The comprehensive income of 3.1 billion yen versus net income of 4.2 billion yen shows a reduction of 1.1 billion yen due to foreign exchange translation adjustments of negative 1.1 billion yen, indicating unrealized losses on foreign operations not reflected in P&L but affecting equity. Overall earnings quality is solid with sustainable recurring income components, though FX volatility and investment securities valuation changes warrant monitoring.
Revenue progress of 76.2% and operating income progress of 90.9% versus full-year guidance indicate strong execution through Q3. The Q3 progress rate for operating income significantly exceeds the standard 75% benchmark by 15.9 percentage points, suggesting potential for guidance upside or conservative initial forecasting. Full-year revenue guidance of 91.0 billion yen implies Q4 revenue of 21.7 billion yen, representing a 16.7% decline from Q3 run rate of 23.1 billion yen per quarter, which appears conservative given current momentum. Operating income guidance of 4.6 billion yen for the full year implies Q4 operating income of 0.4 billion yen, substantially lower than the Q3 quarterly average of 1.4 billion yen, indicating expected seasonal weakness or planned investments in Q4. No forecast revision was announced this quarter despite the ahead-of-schedule progress, maintaining the original guidance of ordinary income 5.3 billion yen (+0.1% YoY) and net income guidance implying EPS of 87.76 yen. The conservative approach to guidance maintenance suggests management prudence regarding Q4 variables including cost pressures and overseas segment performance stabilization.
Annual dividend of 10.00 yen per share consists entirely of year-end payment with no interim dividend. Based on basic EPS of 94.80 yen, the payout ratio is 10.3%, representing a conservative distribution policy focused on retained earnings accumulation. Retained earnings increased 101% YoY to 6.5 billion yen, indicating strong internal capital buildup. No share buyback activity was disclosed for the period, resulting in total shareholder return ratio equal to the dividend payout ratio of 10.3%. The dividend is well-covered by free cash flow of 3.7 billion yen, with FCF providing 8.56x coverage of estimated annual dividends of approximately 0.4 billion yen. The company's substantial cash position of 37.7 billion yen and strong operating cash flow of 4.8 billion yen support dividend sustainability even with the elevated debt/EBITDA ratio of 3.82x. The low payout ratio indicates significant room for potential future dividend increases as the company balances growth investment, debt management, and shareholder returns. A separate class A preferred stock carries an annual dividend of 4,011,397.26 yen per share for FY2025, with forecast of 4,000,000.00 yen for FY2026, representing fixed obligations to preferred shareholders.
Consumer discretionary spending risk poses significant exposure as the restaurant segment (40.4% of revenue) and food catering services are sensitive to economic downturns, consumer confidence deterioration, and competitive intensity. Revenue volatility could compress margins given the high fixed cost base reflected in the 49.8% SG&A ratio. Overseas expansion and M&A integration risk is evidenced by the overseas segment's operating loss of 0.02 billion yen and impairment charges of 0.8 billion yen on underperforming stores. The acquisition of SONNY SUSHI COMPANY added goodwill in the prior year, and ongoing overseas investments carry execution risks including cultural integration, regulatory compliance, and profitability achievement. The current overseas segment negative margin of -0.2% indicates turnaround challenges. Operating leverage constraint from elevated fixed costs represents structural risk, with SG&A expenses at 34.5 billion yen (49.8% of revenue) growing 5.4% YoY and outpacing revenue growth of 4.9%. Labor costs and rental expenses in the restaurant and catering businesses are relatively inflexible, limiting margin expansion potential and exposing the company to profitability pressure if revenue growth decelerates or reverses.
Investment securities valuation volatility risk has escalated materially with the investment portfolio increasing to 6.9 billion yen from 0.7 billion yen YoY (+6.2 billion yen or +907%). This dramatic expansion represents 9.8% of total assets and 23.5% of equity, creating substantial exposure to mark-to-market fluctuations that could impact other comprehensive income and equity. The comprehensive income adjustment showed valuation difference on securities of 0.04 billion yen this period, but larger swings could occur with market volatility. Debt service capacity risk is indicated by net debt/EBITDA of 3.82x, which approaches the elevated threshold of 4.0x typically associated with higher financial risk. While interest coverage of 14.82x provides current cushion, the combination of moderate leverage (debt/equity 0.77x) and total debt of 22.6 billion yen creates vulnerability if EBITDA contracts or interest rates rise materially. Interest expense of 0.4 billion yen consumes 9.6% of operating income. Foreign exchange exposure affects both operational results and comprehensive income, with FX gains of 0.5 billion yen contributing 12.7% of ordinary income this period and FX translation adjustments creating unrealized losses of 1.1 billion yen in comprehensive income. The overseas segment representing 11.8% of revenue generates exposure to Southeast Asian and US dollar currencies, introducing earnings volatility from exchange rate movements beyond management control.
[Industry Position] (Reference - Proprietary Analysis)
Watami's financial performance shows distinctive characteristics relative to retail industry peers. Profitability metrics reveal ROE of 14.2% significantly exceeds the industry median of 2.9% (IQR: 0.5%-7.4%), positioning the company in the upper quartile for equity returns. This outperformance stems from effective leverage utilization (2.40x vs. industry median 1.76x) and solid net margin of 6.0% versus industry median of 2.2%. Operating margin of 6.0% also surpasses the industry median of 3.9%, indicating above-average operational efficiency despite elevated SG&A costs.
Financial health indicators present mixed positioning. The equity ratio of 41.7% falls below the industry median of 56.8%, reflecting the company's more aggressive capital structure with higher leverage. However, the current ratio of 238.4% substantially exceeds the industry median of 1.93x, demonstrating superior short-term liquidity management. Net debt/EBITDA of 3.82x contrasts with the industry median of -0.41x (net cash position), indicating Watami carries more leverage than typical retail peers.
Growth and efficiency metrics show revenue growth of 4.9% outpacing the industry median of 3.0%, confirming above-average top-line momentum. Asset turnover of 0.98x aligns closely with the industry median of 0.95x, indicating comparable asset efficiency. Operating working capital management and inventory turnover data were not fully disclosed, limiting direct comparison on working capital efficiency metrics where industry medians show 32 days for operating WC turnover and 96 days for inventory turnover.
The company's elevated debt profile and leverage-driven ROE differentiate it from the predominantly net-cash retail peer group, while superior profitability margins and liquidity ratios demonstrate operational strength.
(Industry: Retail (n=16), Comparison: FY2025 Q3 period, Source: Proprietary analysis)
Key Takeaways from Earnings - Significant Characteristics and Trends:
Sustained revenue growth momentum with operating leverage opportunities. The company achieved 4.9% revenue growth with stable operating margin of 6.0%, demonstrating resilient demand across core segments particularly in domestic restaurants (+10.7%) despite slight softness in elderly catering (-0.2%). The gross margin of 55.8% provides cushion for margin expansion if SG&A ratio compression can be achieved through operational efficiency initiatives. The combination of market share gains and stable pricing power positions the company for continued top-line growth.
Cash generation strength with conservative capital allocation creates financial flexibility. Operating cash flow of 4.8 billion yen covering 1.15x net income, combined with free cash flow of 3.7 billion yen and cash holdings of 37.7 billion yen, establishes robust financial capacity. The conservative dividend payout ratio of 10.3% and substantial retained earnings accumulation (+101% YoY) indicate management is prioritizing balance sheet strength and reinvestment capacity. This financial flexibility supports potential accelerated shareholder returns or strategic investments while maintaining the ability to navigate economic uncertainties.
Investment portfolio shift and overseas expansion introduce new performance drivers and volatility sources. The dramatic increase in investment securities to 6.9 billion yen from 0.7 billion yen represents a strategic portfolio diversification that could generate incremental returns but adds valuation risk. The overseas segment's current losses and impairment charges indicate near-term challenges, but the long-term growth potential from international expansion, including the SONNY SUSHI COMPANY acquisition, provides revenue diversification beyond mature domestic markets. The debt/EBITDA ratio of 3.82x is manageable given current cash generation but requires monitoring as overseas investments mature and potentially before leverage can be reduced through EBITDA growth.
This report was automatically generated by AI analyzing XBRL earnings data as an earnings analysis tool. This is not a recommendation to invest in any specific security. Industry benchmarks are reference information compiled from publicly available earnings data. Please make investment decisions at your own responsibility and consult professionals as needed.