NISHIMATSUYA CHAIN (7545) FY2027 Q2 Earnings Report

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Executive Summary

Revenue increased in the first half, but SG&A expenses grew faster than gross profit, resulting in lower operating income. Revenue was ¥102.64B (+5.8% YoY), Operating Income was ¥7.03B (down 3.7%), and Ordinary Income was ¥7.38B (down 1.7%). Net income attributable to owners of the parent was ¥4.99B (+0.5%), supported by lower extraordinary losses and a reduced tax burden. SG&A expenses increased by ¥1.95B against a ¥5.66B increase in revenue, and the operating margin declined to 6.9% from 7.5% in the prior-year period. Operating Cash Flow (OCF) was ¥5.61B, down 34.2% YoY, indicating a divergence between earnings growth and cash generation.

Factors Affecting Results

【Revenue】Revenue was ¥102.64B, up 5.8% YoY, in line with the full-year forecast revenue growth rate of +6.0%. The increase in revenue was ¥5.66B. Segment data are not available, so the breakdown of factors driving the increase cannot be confirmed.

【Income and Expenses】The gross margin declined to 34.8% from 35.1% in the prior-year period, while the SG&A ratio rose to 27.9% from 27.5%. SG&A expenses increased 7.3% YoY, exceeding revenue growth, and the operating margin was 6.9%. Ordinary Income exceeded Operating Income by ¥0.35B, as non-operating income of ¥0.37B (including dividend income of ¥0.13B and foreign exchange gains of ¥0.06B) exceeded non-operating expenses of ¥0.02B. Extraordinary losses totaled ¥0.12B, primarily impairment losses of ¥0.12B, down from ¥0.16B in the prior-year period. Income taxes declined to ¥2.27B from ¥2.41B in the prior-year period, and Net Income edged up. Overall, revenue increased while income declined at the operating and ordinary income levels, with final profit remaining broadly flat. The ability to absorb higher expenses will be a key factor for future margins.

Key Financial Metrics

【Profitability】The operating margin was 6.9% (7.5% in the prior-year period), the gross margin was 34.8%, and the SG&A ratio was 27.9%. Annualized ROE was 9.9%, and basic EPS edged up to ¥83.50 from ¥82.79 in the prior-year period. A decline in the net margin offset an improvement in total asset turnover, leaving ROE broadly flat.【Cash Quality】OCF was ¥5.61B, or 1.12x net income attributable to owners of the parent. OCF subtotal before changes in working capital was ¥6.68B, from which an increase in trade receivables of ¥1.11B and a decrease in trade payables of ¥1.74B were deducted. Cash backing for earnings remains in place, but OCF declined from ¥8.52B in the prior-year period.【Investment Efficiency】Capital expenditure on property, plant and equipment was ¥1.33B, approximately 1.45x depreciation expense of ¥0.91B. Free cash flow (FCF) was ¥3.14B, below ¥7.35B in the prior-year period.【Financial Soundness】The Equity Ratio was 61.8% (61.3% at the end of the prior-year period). The current ratio was 212.4%, and cash and deposits of ¥75.08B exceeded current liabilities of ¥57.17B. Dependence on interest-bearing debt is low, with interest paid totaling just ¥0.01B.

Cash Flow Analysis

OCF was ¥5.61B (down 34.2% YoY), with changes in working capital being the primary driver of the decline. An increase in trade receivables resulted in a cash outflow of ¥1.11B, while a decrease in trade payables resulted in a cash outflow of ¥1.74B. In contrast, a decrease in inventories provided a cash inflow of ¥0.68B. Income taxes paid were ¥1.24B, down from ¥2.17B in the prior-year period. Investing CF was △¥2.47B, including ¥1.33B for capital expenditure on property, plant and equipment and ¥1.06B for time deposits. Financing CF was △¥1.57B, primarily reflecting dividend payments of ¥0.96B and share repurchases of ¥0.5B. FCF was ¥3.14B, approximately 2.2x the combined ¥1.46B in dividends and share repurchases. Cash and cash equivalents at period-end were ¥74.52B, up from ¥72.93B at the end of the prior-year period. The extent of OCF recovery, in addition to ample cash on hand, will determine capacity for shareholder returns.

Earnings Quality

Of Ordinary Income of ¥7.38B, non-operating income was ¥0.37B, primarily comprising dividend income of ¥0.13B and foreign exchange gains of ¥0.06B, and represented a modest approximately 5% of Ordinary Income. Accordingly, earnings are primarily generated by core operating income. The only extraordinary loss was an impairment loss of ¥0.12B, which is considered a one-off factor. The effective tax rate was 31.2%, down from 32.6% in the prior-year period, contributing to the slight increase in Net Income. OCF was 1.12x Net Income, indicating cash backing for earnings from an accrual perspective (the difference between earnings and OCF). However, OCF declined from the prior year due to changes in working capital. Comprehensive income was ¥3.28B, ¥1.71B below Net Income. The main factor was a △¥1.63B change in the valuation difference on securities, indicating that net assets are exposed to market price fluctuations.

Earnings Forecast and Guidance

The full-year forecast is Revenue of ¥205B (+6.0% YoY), Operating Income of ¥12.54B (+26.1%), Ordinary Income of ¥13B (+23.0%), and Net Income attributable to owners of the parent of ¥8.38B (+22.3%). First-half progress against the full-year forecast was 50.1% for Revenue, 56.1% for Operating Income, 56.8% for Ordinary Income, and 59.6% for Net Income. To achieve the full-year forecast, the company will need Revenue of ¥102.36B and Operating Income of ¥5.41B in the second half. The second-half operating margin required is approximately 5.3%, below the first-half margin of 6.9%. Although progress toward the Operating Income forecast is high, first-half Operating Income declined YoY, creating a gap with the full-year income growth target. There was no revision to the earnings forecast for the current quarter; only the dividend forecast was revised.

Shareholder Returns

The Q2 dividend was ¥17 per share, and the full-year dividend forecast is ¥33 per share. First-half dividend payments totaled ¥0.96B, and share repurchases were ¥0.5B, for a combined total of ¥1.46B. The Total Return Ratio relative to net income attributable to owners of the parent of ¥4.99B was 29.2%. The dividend-only Payout Ratio was 19.2%. First-half FCF of ¥3.14B was approximately 2.2x shareholder returns, which were funded by OCF. The forecast dividend of ¥33 represents 23.6% of the full-year forecast EPS of ¥139.78. Although OCF has declined, cash and deposits of ¥75.08B provide support for shareholder returns.

Risk Factors

1. Inventory efficiency risk: Inventories were ¥35.98B, representing 22.1% of total assets. Annualized inventory days were high at 98 days, and missing the sales window could necessitate markdowns. The gross margin has already declined by approximately 0.3pt from the prior-year period.

2. Margin risk from rising expenses: SG&A expenses increased 7.3% YoY, exceeding the 5.8% increase in Revenue. The operating margin fell by 0.6pt to 6.9%, indicating that revenue growth is not translating easily into earnings. The full-year forecast Operating Income growth rate of +26.1% also depends on expense control in the second half.

3. Cash generation and valuation difference risk: OCF declined 34.2% YoY, primarily due to changes in working capital. In addition, the valuation difference on securities decreased by ¥1.63B, and Comprehensive Income was ¥1.71B below Net Income. The impact of market prices of held securities on net assets should also be noted.

Industry Benchmark (Reference; Compiled by the Company)

Profitability and Returns

Both the operating margin and net margin are above the upper end of the industry IQR.

Growth and Capital Efficiency

Revenue growth is slightly above the industry median and within the IQR.

Source: Company compilation

Key Points from the Results

1. Despite revenue growth, the operating margin declined to 6.9%, as a lower gross margin coincided with a higher SG&A ratio. However, the margin remains above the retail industry median of 3.1%.

2. OCF declined 34.2% YoY, but remained at 1.12x Net Income. Cash and deposits of ¥75.08B and an Equity Ratio of 61.8% provide a solid financial foundation. Changes in working capital and inventory days are key items to monitor going forward.

3. Against the full-year Operating Income forecast of ¥12.54B, first-half progress was 56.1%. Operating Income of ¥5.41B is required in the second half, and the extent to which rising expenses can be absorbed will determine the likelihood of achieving the forecast.

Theoretical Share Price (Reference)

Sensitivity: At a ±1% change in the Cost of Equity, ¥1,574–¥1,667; at a ±0.1 change in ω, ¥1,617–¥1,621.

Notes:

• As forecast ROE is below the Cost of Equity, the theoretical value is below Book Value Per Share.
• Net assets as of quarter-end are used (there is a timing difference relative to the full-year forecast).
• As net assets include non-controlling interests, the theoretical value may be somewhat overstated.

(Valuation model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-08 / Mechanically calculated using only publicly disclosed data; it is not a forecast of market share prices or a recommendation to take 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 analysis of XBRL earnings release data. It does not recommend investing in any specific security. Industry benchmarks are reference information compiled by the company based on publicly available earnings data. Investment decisions should be made at your own responsibility and, where appropriate, in consultation with a professional.

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