NICHIRYOKU (7578) FY2026 Q3 Earnings Report

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Executive Summary

The quarter was characterized by a simultaneous deterioration in core business profitability and a return to a bottom-line profit due to gains on the transfer of a business, making it essential to assess the quality of earnings. Revenue was ¥13.6B (down -18.8% YoY), Operating Income was ¥-3.2B (deteriorating from ¥-0.8B in the previous year), and Ordinary Income was ¥-3.6B (deteriorating from ¥-1.1B in the previous year). Meanwhile, Net Income was ¥6.1B (turning profitable from ¥-1.3B in the previous year, YoY +559.1%). The primary factor boosting Net Income was a ¥10.7B gain on the transfer of a business, in stark contrast to the ¥3.2B operating loss in the core business.

Factors Driving Earnings Fluctuations

【Revenue】Revenue was ¥13.6B, representing a -18.8% decline YoY. By segment, Funeral generated revenue of ¥8.1B and Operating Income of ¥2.4B (margin of 29.3%), serving as the core of earnings. Meanwhile, CemeteryBusinessOutdoor (¥4.4B revenue, margin of -4.6%) and CemeteryBusinessIndoor (¥1.2B revenue, margin of -35.8%) both recorded operating losses. In addition to the company-wide revenue decline, the gross profit margin fell to 68.6% from 70.3% in the previous year, indicating headwinds in terms of business mix and costs.

【Profit and Loss】Despite the decline in revenue, SG&A expenses of ¥12.6B remained approximately at the previous year's level and barely decreased, causing the SG&A ratio to rise sharply to 92.4%. This high fixed-cost burden was the primary factor behind the expansion of the Operating Loss to ¥3.2B. Ordinary Loss also expanded to ¥3.6B; however, the company recorded a ¥10.7B gain on the transfer of a business as extraordinary income, resulting in Profit Before Tax of ¥7.2B and Net Income of ¥6.1B. In conclusion, the core business experienced declines in both revenue and profit at the operating and ordinary income levels, while the return to a bottom-line profit was attributable to a temporary extraordinary gain.

Segment Analysis

By segment operating results, Funeral was the only profitable segment, generating revenue of ¥8.1B and Operating Income of ¥2.4B (margin of 29.3%), and effectively supporting company-wide earnings. CemeteryBusinessOutdoor (¥4.4B revenue and ¥0.2B operating loss) and CemeteryBusinessIndoor (¥1.2B revenue and ¥0.4B operating loss, margin of -35.8%) both recorded losses. In addition to the sum of segment profits, a company-wide expense adjustment of -¥4.8B is applied, creating a structure in which the heavy allocation of company-wide fixed costs further depresses consolidated operating results.

Key Financial Metrics

【Profitability】The Operating Income margin deteriorated significantly to -23.8% (from -4.8% in the previous year), while the gross profit margin also declined to 68.6% (from 70.3% in the previous year). Net profit margin and ROE (annualized) were high at 44.6% and 15.1%, respectively; however, this resulted from reliance on the ¥10.7B gain on the transfer of a business and does not reflect earnings power based on operating activities. 【Cash Earnings Quality】The gap between Net Income of ¥6.1B and Operating Loss of ¥3.2B is substantial, indicating low earnings recurrence. 【Investment Efficiency】With Total Assets of ¥75.6B against Revenue of ¥13.6B, asset efficiency remains low. 【Financial Soundness】The Equity Ratio improved to 70.7% (from 61.3% in the previous year), indicating a strong capital buffer. However, Current Assets of ¥9.2B were below Current Liabilities of ¥19.6B, confirming a shortage of short-term funds and requiring attention from a short-term liquidity perspective.

Cash Flow Analysis

As the company does not disclose a cash flow statement, funding trends are analyzed based on changes in the balance sheet. Cash and deposits increased to ¥4.2B, a substantial increase from ¥1.1B in the previous year. Meanwhile, long-term borrowings declined to ¥0.5B, suggesting that debt reduction or reclassification to current liabilities has progressed. Current Liabilities of ¥19.6B significantly exceeded Current Assets of ¥9.2B, making the management of near-term obligations—including Short-term Borrowings of ¥5.5B and Long-term Borrowings Due Within One Year of ¥8.5B—a key funding focus. Net Income of ¥6.1B was generated by the gain on the transfer of a business and must be distinguished from recurring operating cash-generation capacity.

Earnings Quality

The primary factor behind Net Income of ¥6.1B was the ¥10.7B gain on the transfer of a business recorded as extraordinary income, creating a substantial divergence from the ¥3.2B Operating Loss. Regarding non-operating gains and losses, non-operating expenses of ¥0.4B—including ¥0.4B in interest expense—exceeded non-operating income of ¥0.1B, and the interest burden further depressed Ordinary Income amid an operating deficit. Corporate income taxes of ¥1.1B were recorded against Profit Before Tax of ¥7.2B, resulting in a normal tax burden. However, given that the source of pre-tax profit was a temporary extraordinary gain, the high Net Profit Margin and ROE for the period do not indicate sustainable earnings power. The quality of earnings should therefore be assessed primarily based on the Operating Loss in the core business.

Earnings Forecast and Guidance

The full-year company forecast calls for Revenue of ¥25.0B (up +11.5% YoY), Operating Income of ¥2.1B, Ordinary Income of ¥1.2B, and Net Income of ¥9.9B. The cumulative progress rate for Revenue was 54.4%, below the standard 75%, while cumulative Operating Income was negative, with a loss of ¥3.2B. Therefore, achieving the full-year forecast requires the company to generate more than ¥5B in standalone Operating Income in Q4. The Net Income progress rate was 61.2%; however, cumulative Net Income includes the ¥10.7B gain on the transfer of a business and must be evaluated separately from the pace of recovery in the core business.

Shareholder Returns

The Q2 dividend was ¥0 per share, and the full-year dividend forecast is also ¥0, indicating that the no-dividend policy continues. The Payout Ratio against Net Income of ¥6.1B was 0%; however, this Net Income depended on the gain on the transfer of a business, while the core business remains in an operating loss position. Given the Current Ratio of 46.8% and the high degree of reliance on short-term liabilities, the current capital allocation situation appears to prioritize recovery of operating earnings power and short-term fund management over dividends.

Risk Factors

1. Declining operating earnings power: While Revenue declined -18.8% YoY, SG&A expenses remained approximately at the previous year's level, causing the SG&A ratio to rise to 92.4%. If demand recovery is delayed, there is a risk that the Operating Loss will continue.

2. Vulnerable short-term liquidity: The Current Ratio was 46.8%, below 1x, and Current Liabilities of ¥19.6B exceeded Current Assets of ¥9.2B by ¥10.4B. The combined total of Short-term Borrowings of ¥5.5B and Long-term Borrowings Due Within One Year of ¥8.5B accounted for 91.5% of short-term liabilities, making refinancing and repayment arrangements critical to funding management.

3. Reliance on temporary gains: The primary factor behind Net Income of ¥6.1B was the ¥10.7B gain on the transfer of a business, which differs substantially from the core business earnings power indicated by the ¥3.2B Operating Loss. There is a risk of a contraction in the business foundation and delayed recovery following the transfer.

Industry Benchmark (For Reference; Company Analysis)

Industry Benchmark (retail)

Profitability and Returns

The Operating Income Margin was substantially below the industry median, indicating weak core business earnings power, while the Net Profit Margin was significantly above the industry median due to the gain on the transfer of a business.

Growth and Capital Efficiency

The Revenue Growth Rate was substantially below the industry median, clearly indicating a contractionary trend compared with peers.

※Source: Company analysis

Key Earnings Highlights

1. The return to a bottom-line profit was attributable to the ¥10.7B gain on the transfer of a business, while the core business continued to record an Operating Loss of ¥3.2B and an Operating Income Margin of -23.8%, indicating continued deterioration in earnings power.

2. Although the Equity Ratio of 70.7% indicates a strong capital buffer, the Current Ratio of 46.8% and short-term debt ratio of 91.5% indicate room for improvement in short-term liquidity. The status of funding management will therefore be a key monitoring point.

3. Against the full-year Operating Income forecast of ¥2.1B, cumulative results are an operating loss. The degree of core business recovery in Q4 will determine whether the full-year forecast can be achieved.

Theoretical Share Price (Reference Value)

Sensitivity: ¥228–¥242 at Cost of Equity ±1%, and ¥233–¥236 at ω±0.1.

Notes:

• Normalized EPS calculated based on Ordinary Income and other figures is used to exclude the impact of temporary gains and losses (company forecast EPS is ¥57.7).
• As 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).

(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, 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, after consulting with professionals as necessary.

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