UNITED ARROWS LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥73.71B
• Operating Income: ¥2.38B
• Net Income: ¥1.13B
• Earnings per Unit (EPU): ¥40.84

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Unit Information

Distribution Information

Full Year Forecast

Disclaimer

This data was automatically extracted from XBRL files. Please refer to the original disclosure documents for accuracy.

AI Financial Analysis

Executive Summary

Verdict: Solid topline growth but disappointing profitability and cash generation in FY2026 Q2; earnings quality weakened and ROIC remains below target levels. Revenue grew 8.0% YoY to 737.1, signaling resilient demand and improved sell-through in the half. Gross profit reached 388.2 with a strong gross margin of 52.7%, consistent with a premium assortment/brand mix. However, SG&A rose to 364.4, driving operating income down 19.5% YoY to 23.8 and compressing operating margin to roughly 3.2%. Based on last year’s comparable revenue and operating income, the operating margin compressed by approximately 111 bps YoY (from ~4.3% to ~3.2%). Ordinary income declined 26.2% to 25.1 despite modest non-operating gains (net +1.30), indicating core pressure rather than financial items. Net income fell 40.6% to 11.3, further hit by a high effective tax rate of 42.1% that magnified the drop in profits. Earnings quality is weak: operating cash flow was -4.67 versus net income of 11.27, yielding an OCF/NI ratio of -0.41x, well below the >1.0x quality benchmark. Free cash flow appears negative given OCF was negative and capex totaled -41.01, implying cash needs were financed by an increase in financing cash flows (+15.97) and potentially working capital/liquidity. Balance sheet liquidity is adequate with a current ratio of 154.6% and positive working capital of 161.3, though cash on hand (29.4) is modest versus current liabilities (295.6), implying dependence on inventory turnover and short-term facilities. Leverage is moderate (D/E 0.91x) and interest burden limited (interest expense 0.15; coverage 158.5x), so solvency risk is low in the near term. ROE stands at 3.0% and ROIC at 3.6%, both below typical cost of capital, highlighting capital efficiency challenges. The profit shortfall appears driven by SG&A deleverage and a higher tax burden rather than gross margin deterioration. Forward-looking, sustaining revenue growth while tightening SG&A and normalizing the effective tax rate are key to restoring operating margin toward 4%+. Cash discipline (inventory, capex phasing) is critical to improve OCF and fund dividends without resorting to incremental debt. We will watch 2H seasonality, markdown intensity through winter sales, and any management actions on cost control to gauge recovery trajectory.

Profitability Analysis

ROE decomposition: ROE (3.0%) = Net Profit Margin (1.5%) × Asset Turnover (1.024x) × Financial Leverage (1.91x). The largest change vs last year is most plausibly in the net profit margin, given operating income fell 19.5% while revenue grew 8.0%, and the effective tax rate rose to 42.1%. Business drivers: SG&A inflation (labor, rent, logistics, and store opex) outpaced revenue growth, leading to operating margin contraction from ~4.3% to ~3.2% (~111 bps compression). Non-operating items were modest (+1.30 net), so core operations explain most of the decline, with tax-rate headwinds amplifying the drop to net income. Asset turnover at 1.024x is subdued for apparel retail, reflecting elevated asset base (including intangibles 54.8) and likely inventory levels (unreported), limiting ROE contribution. Financial leverage (1.91x) provided a small boost but remains moderate, not enough to offset margin pressure. Sustainability: SG&A deleverage is partly cyclical/operational; some elements (wages, rents) are structural and require productivity improvements to reverse. Tax rate should normalize closer to the low-30s over time absent one-offs, potentially aiding net margin recovery. Concerning trends: SG&A growth outpaced revenue, and OCF diverged sharply from net income (OCF/NI -0.41x), suggesting earnings quality and working capital efficiency issues that, if persistent, will cap ROE.

Growth Assessment

Revenue growth of +8.0% YoY to 737.1 indicates steady demand and/or higher average selling prices; however, profit growth lagged materially (OP -19.5%, NI -40.6%), indicating weak operating leverage. Gross margin at 52.7% remains healthy for a select-shop model, implying merchandising and mix were not the primary headwinds. The key headwind is SG&A intensity (49.4% of sales), which compressed operating margin to ~3.2%. Ordinary income fell more than operating income, suggesting limited buffer from non-operating gains; a 42.1% effective tax rate further depressed bottom-line growth. Near-term sustainability hinges on holiday/winter sales, markdown discipline, and store traffic; improvements in cost efficiency and tax normalization could support 2H rebound. Given ROIC at 3.6%, the current growth is not value-accretive without margin recovery or better asset turns. Outlook: expect management to prioritize expense control, inventory efficiency, and selective capex; topline should remain positive if consumer sentiment holds, but profitability recovery is the key swing factor.

Financial Health

Liquidity is adequate with current assets of 456.9 versus current liabilities of 295.6 (current ratio 154.6%, quick ratio 154.6%). No explicit warning triggers: Current Ratio > 1.0 and D/E = 0.91x (< 2.0). Cash and deposits (29.4) are low relative to payables (154.7) and short-term loans (39.0), implying reliance on inventory liquidation and ongoing cash conversion to meet near-term obligations. Maturity mismatch risk exists due to meaningful short-term debt (39.0) versus modest cash, but working capital is positive (161.3) and interest burden is light. Noncurrent liabilities are 48.0; long-term loans are unreported, limiting visibility on refinancing needs. Equity base is solid at 376.3, supporting solvency. No off-balance sheet obligations were disclosed in the provided data.

Cash Flow Quality

OCF/Net Income is -0.41x, flagging weak earnings quality and potential working capital drag or timing effects. With OCF at -4.67 and capex at -41.01, implied free cash flow for 1H is negative, indicating external funding was required (financing CF +15.97). This dynamic is not sustainable for dividends and capex if it persists; improvement in inventory turns and receivables/payables management is needed. Signs of manipulation are not evident from the disclosed numbers, but the divergence suggests elevated inventories or payment timing effects typical for apparel seasonality; inventories were unreported, limiting diagnosis. Interest coverage is very strong (158.5x), so operating cash generation, not financing cost, is the constraint.

Dividend Sustainability

The calculated payout ratio is 168.9%, implying distributions exceed earnings in the period; DPS and total dividend paid were unreported. Given negative OCF and sizable capex, dividend coverage from internal cash flow in 1H appears inadequate. Sustainability will require a 2H rebound in cash generation, reduction in capex cadence, or use of balance sheet capacity (debt/cash). With D/E at 0.91x and liquidity adequate, near-term payment is feasible, but maintaining an outsized payout without profit and OCF recovery would raise medium-term risk. Policy outlook likely hinges on full-year results; if tax rate normalizes and margins recover, payout can decline toward sustainability benchmarks (<60%).

Risk Assessment

Business Risks:

• Demand volatility for discretionary apparel impacting store traffic and average ticket
• Markdown and inventory obsolescence risk due to fashion cycles and seasonality
• Cost inflation in wages, rents, logistics pressuring SG&A ratio
• E-commerce competition and channel mix shifts affecting gross margin and store productivity
• Supply chain lead times and FX on procurement costs impacting margin

Financial Risks:

• Negative OCF versus positive net income (OCF/NI -0.41x) raising earnings quality concerns
• Short-term debt reliance (39.0) with modest cash (29.4) increases liquidity management demands
• High effective tax rate (42.1%) depressing net income and cash tax outflows
• ROIC at 3.6% below cost of capital, risking value dilution if not improved
• Potential pressure on dividend coverage given negative implied FCF in 1H

Key Concerns:

• Operating margin compression (~111 bps YoY) driven by SG&A deleverage
• Sustained negative FCF if inventory efficiency and capex do not improve
• Visibility constraints due to unreported line items (inventories, detailed SG&A breakdown)
• Dependence on 2H seasonal performance and markdown discipline to meet full-year targets

Investment Implications

Key Takeaways:

• Topline growth solid at +8.0% YoY, but profitability lagged materially
• Operating margin compressed to ~3.2% with SG&A at 49.4% of sales
• High effective tax rate amplified net income decline (-40.6%)
• OCF negative and capex heavy, implying negative FCF in 1H
• Balance sheet liquidity adequate; leverage moderate with strong interest coverage
• ROE 3.0% and ROIC 3.6% highlight capital efficiency challenges

Metrics to Watch:

• Same-store sales growth and sell-through in winter/holiday period
• SG&A ratio trajectory and cost control initiatives
• Gross margin and markdown rate
• Inventory levels and turnover (currently unreported)
• OCF recovery and working capital movements (payables, inventory, cash conversion)
• Effective tax rate normalization
• Capex cadence versus store productivity and digital investments

Relative Positioning: Within Japanese apparel retail, United Arrows maintains premium gross margins but currently trails best-in-class peers on operating margin, cash conversion, and capital efficiency; liquidity is acceptable and leverage moderate, but near-term performance depends on cost discipline and inventory management to restore mid-single-digit operating margins.

Disclaimer

This analysis was auto-generated by AI. Please note the following:

• No Guarantee of Accuracy: The accuracy and completeness of this analysis are not guaranteed. For accurate financial data, please refer to the original disclosure documents published on TDnet or other official sources
• Not Investment Advice: This analysis is for general informational purposes only and does not constitute investment advice under applicable securities laws. It is not a recommendation to buy or sell any specific securities
• At Your Own Risk: Investment decisions should be made at your own discretion and risk. We assume no liability for any losses incurred based on this analysis