LEC,INC. FY2027 Q1 Earnings Report

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Executive Summary

Although revenue grew steadily, the quarter recorded higher revenue but lower earnings as increased SG&A expenses and temporary extraordinary losses weighed on profitability. Revenue increased to ¥18.71B (+7.9% YoY), while Operating Income declined to ¥0.70B (-45.8%), Ordinary Income to ¥0.94B (-28.0%), and Net Income to ¥0.41B (-39.5%). The primary factors were an increase in the SG&A ratio, extraordinary losses including an impairment loss on investment securities of ¥0.19B, and a higher effective tax rate. The deterioration in profitability is the key takeaway from these results.

Factors Affecting Business Performance

【Revenue】Revenue increased 7.9% YoY to ¥18.71B. As the Company operates in a single segment (the Daily Necessities, Sundries and Apparel Business), segment-specific drivers of changes have not been disclosed. However, gross profit also increased broadly in line with revenue to ¥5.71B (+7.8%), indicating resilient demand.

【Profit and Loss】The gross profit margin was 30.5%, broadly in line with the previous year and nearly flat. However, SG&A expenses increased substantially to ¥5.00B (¥3.996B in the previous year, +25.2%), causing the SG&A ratio to rise to 26.7% from 23.1%. As a result, the Operating Income margin deteriorated significantly to 3.8% from 7.5% in the previous year. At the Ordinary Income level, dividend income of ¥0.16B and foreign exchange gains of ¥0.02B contributed to Ordinary Income of ¥0.94B. However, extraordinary losses of ¥0.20B, primarily consisting of an impairment loss on investment securities of ¥0.19B, together with the high effective tax rate of 45.4%, compressed Net Income to ¥0.41B. Although revenue increased, profits declined substantially due to higher costs and temporary factors, leading to the conclusion that the Company achieved higher revenue but lower earnings.

Segment Analysis

The Company operates as a single segment, the Daily Necessities, Sundries and Apparel Business, and does not disclose segment-level results.

Key Financial Indicators

【Profitability】The Operating Income margin of 3.8% declined significantly from approximately 7.5% in the previous year, while the Net Income margin also narrowed to 2.2% from 3.9% in the previous year. 【Cash Quality】The Current Ratio was 306.7% and the Quick Ratio was 254.0%, indicating ample liquidity. While cash and deposits of ¥29.63B were secured, accounts receivable increased to ¥11.72B from ¥10.48B in the previous year, suggesting a lengthening collection cycle. 【Investment Efficiency】ROE remained low at 1.1%, primarily due to the decline in the Net Income margin and the low total asset turnover ratio, with total assets of ¥91.17B compared with revenue of ¥18.71B. 【Financial Soundness】The Equity Ratio improved to 42.5% from approximately 41.0% in the previous year, while long-term borrowings decreased by ¥6.5B to ¥31.25B from ¥37.75B, indicating an improving capital structure.

Cash Flow Analysis

Although detailed disclosure of the cash flow statement is not available, cash trends can be inferred from changes in the balance sheet. Cash and deposits totaled ¥29.63B, down ¥5.06B from ¥34.697B in the previous year, and the ¥6.5B reduction in long-term borrowings appears to have been a primary use of funds. Meanwhile, accounts receivable increased by ¥1.23B to ¥11.72B, and inventories remained high at ¥9.58B, suggesting that funds tied up in operating assets may have been a burden on cash generation. On-hand liquidity remains ample at ¥29.6B, and short-term funding concerns are limited. However, improving working capital efficiency will be an important factor determining future cash-generation capacity.

Quality of Earnings

Recurring earnings were supported by gross profit from product sales, while non-operating income included dividend income of ¥0.16B and foreign exchange gains of ¥0.02B. Non-operating income represented approximately 1.8% of revenue, a level that does not materially distort the earnings structure. However, an impairment loss on investment securities accounted for ¥0.19B of the ¥0.20B in extraordinary losses, representing nearly half of Net Income of ¥0.41B and having a significant negative impact on quarterly Net Income. The effective tax rate was high at approximately 45.4%, with income taxes and other taxes of ¥0.34B against Profit Before Tax of ¥0.75B. This was one factor behind the gap between the Net Income margin and the Ordinary Income margin (2.2% versus 5.0%). The recurrence of impairment losses and normalization of the tax burden will be key areas of focus in assessing future earnings quality.

Earnings Forecast and Guidance

Progress against the Full-Year plan was 26.6% for revenue (¥18.71B/¥70.50B), representing a standard level of progress, while progress was 16.8% for Operating Income (¥0.70B/¥4.20B), 22.4% for Ordinary Income (¥0.94B/¥4.20B), and 13.6% for Net Income (¥0.41B/¥3.00B), highlighting a notable lag on the profit side. Full-Year Operating Income is projected to increase 1.5% YoY, but progress as of Q1 is below the level required to meet that forecast. Controlling SG&A expenses in the second half and the non-recurrence of temporary losses will be key to achieving the plan. The Company made no revisions to either its earnings forecast or dividend forecast during the quarter.

Shareholder Returns

The Full-Year dividend forecast is ¥28 per share, representing an expected increase from the previous year's annual dividend, based on an accumulation from the ¥10-per-share range including the interim dividend. The Payout Ratio against the Company's planned EPS of ¥91.92 is approximately 30.5%, a conservative level. Given cash and deposits of ¥29.63B and an Equity Ratio of 42.5%, no significant concerns regarding dividend sustainability are evident. No disclosure regarding share repurchases was made, and this report evaluates shareholder returns based solely on the Payout Ratio. No revision was made to the dividend forecast during the quarter.

Risk Factors

1. Risk of deteriorating profitability due to higher SG&A expenses: The SG&A ratio increased to 26.7% from 23.1% in the previous year, a rise of +3.6pt, pushing the Operating Income margin down to 3.8%. If cost increases exceeding revenue growth of +7.9% continue, deterioration in operating leverage could become structural.

2. Volatility in Net Income due to extraordinary losses and a high tax burden: The impairment loss on investment securities of ¥0.19B was equivalent to approximately half of Net Income of ¥0.41B, while the effective tax rate was also high at 45.4%. These temporary and non-recurring factors are increasing volatility in quarterly results.

3. Deterioration in working capital efficiency: Accounts receivable increased to ¥11.72B from ¥10.48B in the previous year, while inventories remained high at ¥9.58B. Longer collection and inventory cycles could delay cash generation.

Industry Benchmarks (Reference; Company Estimates)

Industry Benchmark (manufacturing)

Profitability and Returns

The Company's profitability metrics are both below the industry median and near the lower bound of the IQR.

Growth and Capital Efficiency

The Revenue Growth Rate exceeds the industry median, placing top-line growth in a relatively favorable position within the industry.

※Source: Company estimates

Key Takeaways from the Earnings Results

1. While Revenue Growth Rate exceeded the industry average, the Operating Income margin and Net Income margin were significantly below the industry median, highlighting the weight of the cost structure as a profitability challenge.

2. Approximately half of the factor depressing Net Income consisted of the temporary item of an impairment loss on investment securities. This should therefore be evaluated separately from recurring earnings power.

3. While long-term borrowings were reduced by ¥6.5B and the Equity Ratio improved to 42.5%, the high levels of accounts receivable and inventories remain areas requiring ongoing monitoring from a working capital efficiency perspective.

Theoretical Share Price (Reference Value)

This is a reference range mechanically calculated solely from publicly disclosed data using a residual income model (Ohlson-type model with an explicit five-year fade). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: ¥1,108–¥1,173 at ±1% for the cost of equity, and ¥1,138–¥1,141 at ±0.1 for ω.

Notes:

• As forecast ROE is below the cost of equity, the theoretical value is below Book Value per Share.
• Net assets as of the end of the quarter 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 calculated somewhat higher.

(Calculation model: residual income model / Interest rate reference month: 2026-07 / This value does not forecast or guarantee a future share price)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings summary data. It does not recommend investment in any specific security. Industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own discretion and responsibility, after consulting a professional as necessary.

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