KOKUYO (7984) FY2026 Q2 Earnings Report

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Executive Summary

For the cumulative Q2 period of FY2026, the Company secured higher revenue and higher profit, supported by revenue growth centered on the Furniture Business. However, the gross margin and operating margin declined slightly from the previous year, indicating that the quality of revenue growth is primarily driven by scale expansion. Revenue was ¥2020.7B (+9.1% YoY), Operating Income was ¥190.3B (+7.6%), Ordinary Income was ¥204.3B (+17.1%, boosted by foreign exchange gains, interest income, and other items), and Net Income attributable to owners of the parent was ¥147.0B (+6.4%). The operating margin was 9.4%, approximately 0.2pt lower than in the same period of the previous year, indicating a slight dilution in unit profitability relative to revenue growth.

Factors Affecting Performance

【Revenue】Revenue was ¥2020.7B, up +9.1% YoY. The core Furniture Business posted the largest increase at ¥1011.4B (+10.1%), followed by the Stationery Business at ¥465.9B (+8.7%) and Business Supply Distribution at ¥574.1B (+8.1%). The Interior Retail Business was essentially flat at ¥118.0B (+0.2%).

【Profit and Loss】Operating Income was ¥190.3B (+7.6%), slightly below the 9.1% revenue growth rate, while the gross margin declined by approximately 16bp from the previous year to 40.7%. Although Business Supply Distribution recorded higher revenue, Operating Income declined to ¥23.4B (-12.1%), with its margin falling to 4.1%. Meanwhile, the Furniture Business maintained both higher revenue and higher profit, with Operating Income of ¥183.7B (+10.3%), driving overall profit growth. Ordinary Income exceeded Operating Income by ¥13.9B, primarily due to non-operating income such as foreign exchange gains of ¥6.1B. Net Income was ¥147.0B after recording extraordinary income including a gain on the sale of investment securities of ¥10.5B and income taxes and other taxes of ¥64.2B (effective tax rate: 30.3%). Overall, the Company achieved higher revenue and higher profit, but the profit growth rate lagged the revenue growth rate, leaving room for improvement in profitability.

Segment Analysis

The Furniture Business generated external revenue of ¥1011.4B (+10.1% YoY) and segment profit of ¥183.7B (+10.3%), with a margin of 18.2%. It represented the core of overall profit, accounting for approximately 72% of total reportable segment profit of ¥253.8B. The Stationery Business maintained stable profitability, with revenue of ¥465.9B (+8.7%), profit of ¥44.8B (+10.0%), and a margin of 9.6%. Business Supply Distribution recorded revenue of ¥574.1B (+8.1%) but lower profit of ¥23.4B (-12.1%), with its margin declining to 4.1%, resulting in higher revenue but lower profit. The Interior Retail Business was essentially flat in revenue at ¥118.0B (+0.2%), while profit improved to ¥4.6B (+12.4%). The adjustment for corporate expenses and other items was negative ¥63.4B, worsening from negative ¥58.8B in the previous year. Consequently, the ¥18.0B increase in total segment profit translated into only a ¥13.5B increase in consolidated Operating Income.

Key Financial Indicators

【Profitability】The operating margin was 9.4% and the net profit margin was 7.3%, both slightly below the levels in the same period of the previous year (operating margin: approximately 9.6%; net profit margin: approximately 7.5%). Annualized ROE remained at a favorable level of 11.4%. 【Cash Flow Quality】Operating Cash Flow (OCF) was ¥118.3B, equivalent to only 0.81x Net Income of ¥147.0B. The ¥186.1B decrease in accounts payable placed pressure on working capital, resulting in a low OCF/EBITDA (approximate) ratio. 【Investment Efficiency】Capital expenditures of ¥80.6B were 1.80x depreciation and amortization expense of ¥44.7B, indicating an investment phase exceeding maintenance investment. Free Cash Flow was ¥32.9B. 【Financial Soundness】The Equity Ratio was 74.6%, and interest-bearing debt was minimal at ¥35.8B. Cash and deposits of ¥984.3B substantially exceeded debt, resulting in a net cash position and a conservative financial base.

Cash Flow Analysis

OCF was ¥118.3B, up +38.4% YoY. However, it was only 0.81x Net Income of ¥147.0B, as the working capital outflow associated with a ¥186.1B decrease in accounts payable placed pressure on cash generation. Investing Cash Flow was an outflow of ¥85.4B, primarily reflecting ¥80.6B in capital expenditures and acquisitions of intangible assets, representing an investment intensity of 1.80x depreciation and amortization expense of ¥44.7B. As a result, Free Cash Flow (OCF + Investing Cash Flow) was ¥32.9B. Financing Cash Flow included an outflow of ¥161.3B, mainly attributable to ¥75.7B in share repurchases and dividend payments. Free Cash Flow alone did not fully cover shareholder returns, but the substantial cash and deposits of ¥984.3B provided support. Going forward, the reversal of the decrease in accounts payable and improvements in working capital efficiency will be important areas to monitor for the stable expansion of OCF.

Quality of Earnings

Non-operating income was ¥16.7B, equivalent to only 0.8% of revenue, indicating that most ordinary income is derived from the core business. Ordinary Income of ¥204.3B exceeded Operating Income of ¥190.3B by ¥13.9B. This difference was attributable to non-operating income, including foreign exchange gains of ¥6.1B, interest income of ¥2.1B, and dividend income of ¥2.0B, among other items, and forms part of the recurring earnings structure. Profit Before Tax of ¥211.7B exceeded Ordinary Income by a further ¥7.5B, reflecting the difference between extraordinary income, primarily a ¥10.5B gain on the sale of investment securities, and extraordinary losses of ¥3.3B. This net amount should be distinguished as a temporary factor. The primary reason for the gap between Ordinary Income and Net Income was income taxes and other taxes of ¥64.2B (effective tax rate: 30.3%). The fact that OCF was below Net Income was attributable to changes in working capital, specifically the decrease in accounts payable, and cash-generating capacity should be monitored as an accrual-related factor.

Earnings Forecasts and Guidance

The first-half progress rates against the full-year Company forecasts (Revenue: ¥3900.0B; Operating Income: ¥270.0B; Ordinary Income: ¥268.0B) were 51.8% for Revenue, 70.5% for Operating Income, 76.2% for Ordinary Income, and 72.4% for Net Income. Progress below Operating Income substantially exceeded the standard 50% level. However, because first-half profit included net extraordinary gains and losses centered on foreign exchange gains and gains on the sale of investment securities, it is difficult to regard all of the progress as a recurring upside. The Company left its earnings forecasts unchanged, incorporating the impact of higher raw material and logistics costs associated with the situation in the Middle East into its full-year forecasts. The full-year forecasts assume Revenue growth of +8.4%, compared with Operating Income growth of +2.9% and Ordinary Income growth of -1.6%, reflecting expectations of margin pressure in the second half.

Shareholder Returns

The dividend for Q2 was ¥12.25 per share, resulting in a first-half Payout Ratio of 36.8% based on Net Income attributable to owners of the parent of ¥147.0B. The full-year dividend forecast is ¥24.50 per share, and the full-year Payout Ratio, calculated based on the full-year Net Income forecast of ¥203.0B, is estimated at approximately 51.7%, within the generally sustainable guideline of less than 60%. In addition, the Company conducted ¥75.7B in share repurchases during the period. Total shareholder returns, including dividends and share repurchases, amounted to approximately ¥131.6B, equivalent to approximately 89.5% of first-half Net Income. The Company conducted a 1-for-4 stock split effective July 1, 2025, and the year-end dividend is stated on a post-split basis.

Risk Factors

1. Rising raw material and logistics costs: The Company has incorporated higher raw material and logistics costs associated with the situation in the Middle East into its full-year forecasts. The first-half gross margin declined by approximately 16bp YoY, and if price pass-through and procurement efficiency are insufficient, this could exert additional downward pressure on margins in the second half.

2. Declining cash conversion efficiency: OCF was only 0.81x Net Income, primarily due to the ¥186.1B decrease in accounts payable. If this reflects temporary settlement timing, a rebound improvement can be expected; however, if the trend continues, it could constrain capacity for investment and shareholder returns.

3. Declining profitability in Business Supply Distribution: While the business recorded higher revenue of ¥574.1B (+8.1%), Operating Income declined to ¥23.4B (-12.1%), with its margin falling to 4.1%. If the structure of higher revenue but lower profit continues, its impact on the overall margin may increase.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

The operating margin is slightly below the industry median, while the net profit margin exceeds the industry median. Overall profitability ranks from the middle to upper range within the industry.

Growth and Capital Efficiency

The revenue growth rate is slightly below the industry median, but the industry IQR is broad, and the growth rate is at a standard level within the industry.

※Source: Compiled by the Company

Key Points from the Earnings Results

1. The Company maintained higher revenue and higher profit, with Revenue up +9.1% and Operating Income up +7.6%. However, the slight declines in the gross margin and operating margin from the previous year indicate that revenue growth has not translated directly into margin improvement, making this a key point in the earnings results.

2. First-half profit progress against the full-year forecasts exceeded 70%, but because it included foreign exchange gains and gains on the sale of investment securities, recurring earnings power should be confirmed in light of cost trends in the second half.

3. The fact that OCF was below Net Income and cash conversion efficiency declined will be a monitoring point going forward in evaluating the balance with active shareholder returns, including share repurchases.

Theoretical Share Price (Reference Value)

Sensitivity: ¥580–¥613 at ±1% for the cost of equity; ¥596–¥596 at ±0.1 for ω.

Notes:

• Goodwill amortization of ¥0.2 per share has been added back to earnings (to reflect a non-cash expense and improve comparability with IFRS companies).
• Because Net Income progress against the full-year forecast (72%) exceeds the standard level (50%), forecast EPS has been adjusted upward within a maximum range of +10% (because companies with leading progress tend to exceed forecasts; the adjustment may be excessive for highly seasonal businesses).
• Because forecast ROE is below the cost of equity, the theoretical value is below Book Value per Share.
• Net assets as of the quarter-end have been 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 professionals as necessary.

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