REGAL CORPORATION FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥9.90B
• Operating Income: ¥-624M
• Net Income: ¥-319M
• EPS: ¥-102.91

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Segment 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: Weak FY2026 Q2 with operating loss and strained cash conversion despite healthy gross margin and positive comprehensive income. Revenue was 99.05 (−3.8% YoY), with gross profit of 47.69, delivering a relatively resilient gross margin of 48.1% for a footwear/apparel manufacturer. Operating income deteriorated to −6.24 (−87.4% YoY), implying an operating margin of −6.3% as SG&A of 53.93 exceeded gross profit. Ordinary income was −4.39 (−57.8% YoY), partly cushioned by non-operating income of 2.87, mainly dividend income of 2.75 from investment securities. Net income printed at −3.19 but improved YoY by 14.2%, indicating lower bottom-line losses versus the prior year despite weaker operations. Total comprehensive income swung strongly positive at 16.07, suggesting sizable valuation gains in securities captured in OCI, not in recurring profit. Cash conversion was weak: operating cash flow (OCF) was −1.24 versus net income of −3.19 (OCF/NI = 0.39x), flagging earnings quality and working capital strain. Liquidity is mixed—current ratio is healthy at 151.1%, but the quick ratio is low at 66.9% due to high inventories (74.19) and dependence on short-term loans (62.58). Leverage is moderate with D/E at 0.98x, but interest coverage is deeply negative (−10.76x), highlighting near-term earnings pressure relative to interest costs. ROE was −2.3% on a DuPont basis, driven by a −3.2% net margin and low asset turnover (0.361), while leverage (1.98x) modestly amplified losses. ROIC of −3.1% is below the 5% warning threshold, underscoring value destruction at current returns on invested capital. Dividend sustainability is uncertain: dividends were not disclosed, and FCF cannot be fully assessed given unreported investing CF; however, OCF was negative and capex totaled −2.19, while buybacks of −2.55 reduce financial flexibility. Margin trajectory YoY (bps) cannot be quantified due to missing prior-year margin data; directionally, operating margin clearly compressed given the steep decline in operating income. Forward-looking, reliance on non-operating dividend income and OCI gains is risky in a volatile market environment; normalization in demand, inventory discipline, and SG&A control are necessary to restore profitability. Key watchpoints include inventory turnover, retail sell-through of dress/casual shoes, and potential cost pass-through. With short-term borrowings elevated and interest expense at 0.58, sustained operating losses could stress refinancing if conditions tighten. Overall, the quarter highlights structural cost and demand challenges that must be addressed for a durable recovery.

Profitability Analysis

ROE decomposition (DuPont): ROE = Net Profit Margin × Asset Turnover × Financial Leverage = (−3.2%) × 0.361 × 1.98 ≈ −2.3%. The largest drag is the net margin (operating loss of −6.3% and ordinary loss of −4.4), overwhelming modest leverage and low asset turnover. Business drivers: (1) Revenue decline (−3.8% YoY) likely on soft footwear demand (office/dress categories under pressure), (2) SG&A at 53.93 exceeded gross profit (47.69), reflecting weak operating leverage and limited cost absorption, and (3) non-operating dividend income (2.75) partially offset losses but is non-core. Sustainability: Gross margin at 48.1% is defensible if pricing and mix hold, but the current net margin is unsustainable without SG&A reduction and improved volume. Asset turnover at 0.361 is depressed by high inventories (74.19), suggesting room to improve via inventory normalization and better sell-through. Red flags: SG&A (53.93) exceeds gross profit, indicating negative operating leverage; interest expense (0.58) is meaningful versus EBITDA (−3.79), constraining flexibility.

Growth Assessment

Top-line contracted 3.8% YoY to 99.05, consistent with soft discretionary demand and a still-slow normalization in formal footwear. Profit quality is weak: operating loss (−6.24) despite a near-50% gross margin signals an elevated fixed-cost base and insufficient volumes. Non-operating dividend income (2.75) is a key earnings cushion but volatile and market-dependent. Without disclosed segment data, sustainability by channel/category is unclear, but the inventory level implies continued sell-through risk if demand stays soft. Near-term outlook hinges on: (1) inventory rightsizing, (2) SG&A reduction or productivity gains, and (3) stabilizing store traffic and wholesale reorders. Absent a demand recovery or material cost takeout, margin normalization will be gradual. Potential tailwinds include seasonal demand uplift and selective price/mix optimization; headwinds include consumer sentiment, raw material and logistics costs, and competitive discounting.

Financial Health

Liquidity: Current ratio 151.1% (healthy), but quick ratio 66.9% (sub-1.0) signals reliance on inventories to meet obligations. Working capital stands at 45.02, supported by inventories (74.19) and cash (27.04), but current liabilities are sizable at 88.10, notably short-term loans (62.58). Solvency: D/E is 0.98x (moderate), with total liabilities 135.53 and total equity 138.64. Interest coverage is −10.76x, a warning that current earnings do not cover interest. Maturity mismatch: Short-term borrowings (62.58) exceed cash (27.04) and receivables (18.24), implying dependence on inventory conversion and/or refinancing; elevated refinancing risk if operating losses persist. No off-balance sheet obligations were disclosed in the provided data.

Cash Flow Quality

OCF was −1.24 versus net income of −3.19 (OCF/NI 0.39x), below the 0.8 benchmark and indicative of weak cash earnings and potential working capital drag. With capex of −2.19, implied FCF (OCF − capex) is approximately −3.43 before other investing flows (investing CF not disclosed), suggesting internal cash generation was insufficient to fund both investment and shareholder returns. Financing CF was −7.89, including share repurchases of −2.55; absent disclosed dividends and debt flows, the outflow still indicates cash return and/or repayments despite negative OCF. Working capital signs: High inventories relative to sales point to possible overstock; without detailed WC bridges, we cannot confirm deliberate pull-forward or payables management. Overall, earnings quality is weak and dependent on non-operating dividends and OCI gains rather than core operations.

Dividend Sustainability

Dividend details were not disclosed; the calculated payout ratio (−76.4%) is not meaningful given the net loss. Cash coverage appears thin: OCF was negative (−1.24) and capex was −2.19, implying negative FCF before any undisclosed dividends. Share repurchases of −2.55 consumed additional cash, reducing flexibility to maintain distributions. With negative ROE (−2.3%) and ROIC (−3.1%), sustaining or increasing dividends would require either a swift operating recovery or use of balance sheet capacity. Given moderate leverage (D/E 0.98x) but weak interest coverage, conservative capital returns are prudent until OCF improves. Policy outlook likely hinges on inventory normalization and SG&A control; absent clear improvement, dividend upside appears constrained.

Risk Assessment

Business Risks:

• Demand softness in formal/dress footwear and discretionary consumer pullbacks
• High inventory level (74.19) creating markdown and obsolescence risk
• Margin pressure from fixed-cost SG&A base exceeding gross profit
• Dependence on non-operating dividend income (2.75) to cushion losses
• Potential input cost volatility (leather, logistics) and pricing competition

Financial Risks:

• Negative interest coverage (−10.76x) amid ongoing operating losses
• Short-term borrowing reliance (62.58) vs low quick assets, raising refinancing/liquidity risk
• Negative OCF (−1.24) and implied negative FCF pre-investing details
• Market valuation risk on investment securities driving OCI volatility and equity value
• ROIC (−3.1%) below cost of capital, signaling value destruction

Key Concerns:

• Earnings quality flagged by OCF/NI of 0.39x (<0.8)
• Operating margin of −6.3% with SG&A above gross profit
• Inventory turnover/aging risk potentially requiring discounting
• Sustainability of shareholder returns given cash outflows (buybacks −2.55)
• Sensitivity to macro/retail traffic and channel mix

Investment Implications

Key Takeaways:

• Core operations weak: operating loss (−6.24) despite a 48.1% gross margin highlights cost/volume mismatch
• Cash conversion strained: OCF −1.24 with implied negative FCF after −2.19 capex
• Balance sheet moderate but liquidity depends on inventory conversion; quick ratio 66.9%
• Non-operating dividends (2.75) and OCI gains drove reported cushioning, elevating profit volatility
• ROE −2.3% and ROIC −3.1% point to near-term value erosion absent a turnaround

Metrics to Watch:

• Inventory levels and turnover days; markdown rate
• SG&A trajectory vs revenue growth (operating leverage)
• OCF and FCF progression; OCF/NI > 1.0 threshold
• Interest coverage improvement and short-term debt rollovers
• Gross margin resilience (mix/pricing) and store/wholesale sell-through

Relative Positioning: Within Japanese footwear/apparel peers, the company exhibits weaker operating leverage and cash conversion, heavier reliance on non-operating income, and higher inventory intensity; a recovery case requires demonstrable inventory normalization and SG&A control to converge toward peer profitability.

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