ZETT CORPORATION FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥29.15B
• Operating Income: ¥516M
• Net Income: ¥384M
• EPS: ¥19.66

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend 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: Mixed quarter—solid top-line growth but profitability compressed and cash conversion was weak. Revenue grew 7.0% YoY to 291.46, evidencing resilient demand or successful price/mix, while gross profit reached 50.32 and operating income declined 11.2% YoY to 5.16. Operating margin was approximately 1.77%, implying compression versus last year’s estimated 2.13% (about -36 bps). Net income fell 17.6% YoY to 3.84, with net margin at roughly 1.32% versus about 1.71% a year ago (around -39 bps). Ordinary income was 6.27, down 11.2% YoY, and non-operating income of 1.12 (dividends 0.25, interest 0.20) contributed meaningfully to the earnings bridge. EBITDA was 5.86, suggesting limited buffer to absorb further cost inflation or mix deterioration. The effective tax rate was elevated at 38.6%, which exacerbated net profit compression. Return metrics remained modest: ROE calculated at 2.6% (via NPM 1.3% × asset turnover 0.916 × leverage 2.17x), and ROIC reported at 5.4%, below the 7–8% management KPI range typical for high-quality operators. Liquidity is ample with a current ratio of 165% and quick ratio of 139%, supported by cash and deposits of 90.35 and limited interest-bearing debt. However, operating cash flow was just 0.37 against net income of 3.84 (OCF/NI = 0.10x), flagging a notable earnings quality concern. While capex was modest at 0.35, OCF barely covered it, tightening internally funded flexibility. The payout ratio is calculated at 94.2%, which appears aggressive given weak cash conversion and profit compression. Balance sheet strength reduces solvency risk, but reliance on non-operating income (non-operating income ratio 29.2%) and high tax burden heighten earnings volatility. Forward-looking, sustaining revenue momentum while restoring margins via SG&A discipline and gross margin management, and improving cash conversion will be critical. Management’s ability to lift ROIC toward 7–8% and right-size payout to cash generation will shape medium-term equity value accretion.

Profitability Analysis

ROE decomposition: ROE 2.6% = Net Profit Margin 1.3% × Asset Turnover 0.916 × Financial Leverage 2.17x. The largest drag is the low net margin, which fell YoY (approx. -39 bps), while asset turnover at ~0.92x is reasonable for a distributor/wholesaler model and leverage is moderate. Operating margin compressed to ~1.77% from 2.13% YoY (-36 bps), indicating cost pressure (cost of sales, freight, or promotional spend) and/or SG&A intensity outweighing revenue growth. Non-operating income (1.12) cushioned ordinary income, highlighting partial dependence on financial income amid weaker core profitability. Business reason: likely mix shifts, price-cost lag, and ongoing SG&A (rent 1.24 reported; broader SG&A breakdown unreported) against mid-single-digit top-line growth. Sustainability: Without concrete cost actions or pricing power, recovering the ~36 bps operating margin erosion may be challenging; non-operating contributions (dividends/interest) are not core and may fluctuate with market rates and holdings. Concerning trend flags: Revenue grew 7.0% while operating income fell 11.2%, implying negative operating leverage; SG&A growth versus revenue growth cannot be confirmed due to missing YoY SG&A details, but the margin outcome suggests overhead did not flex favorably.

Growth Assessment

Top-line growth of 7.0% to 291.46 indicates steady demand and/or effective sell-through. However, profit growth was negative: operating income -11.2% and net income -17.6%, reflecting margin compression and a high tax rate. Gross margin stands at 17.3%; YoY direction is unknown given lack of prior gross profit disclosure. Ordinary income declined despite non-operating support, signaling underlying core profit pressure. EBITDA of 5.86 implies limited headroom, and with OCF lagging NI, growth is not translating to cash. Outlook hinges on restoring operating margin via pricing, procurement efficiencies, and tighter SG&A control. Given ROIC at 5.4%, incremental growth should prioritize returns uplift rather than pure scale. Near term, expect earnings sensitivity to cost inputs and FX (imported goods exposure) with potential seasonal volatility in sports goods. Absent visible cost actions, profit growth sustainability is uncertain despite decent revenue trajectory.

Financial Health

Liquidity is solid: current ratio 164.9% and quick ratio 138.7%, with current assets 253.05 vs current liabilities 153.48 and cash 90.35 providing ample coverage. No warning on current ratio (<1.0) or D/E (>2.0); reported D/E is 1.17x on a total liabilities basis, while interest-bearing debt is very low (short-term 1.01, long-term 1.98), implying low financial risk from borrowing costs. Maturity mismatch risk appears limited given the significant net working capital (working capital 99.57) and minimal short-term loans. Equity is 146.40, capital base is robust relative to debt. Off-balance sheet obligations are not disclosed; no information on leases beyond rent expense or guarantees, so hidden leverage cannot be assessed. Overall solvency is strong; the key constraint is earnings quality, not balance sheet capacity.

Cash Flow Quality

OCF/Net Income is 0.10x (0.37 vs 3.84), a clear quality flag indicating profits are not converting to cash this period. Potential drivers include working capital investment—receivables 92.21 and inventories 40.14 are sizable; absent YoY deltas, we cannot quantify the change, but the cash outcome implies a build or slower collections. Free cash flow is not fully calculable due to unreported investing CF, but OCF only marginally covers reported capex of 0.35, leaving little room for dividends or debt reduction without drawing on cash. No signs of aggressive working capital release; rather, the opposite. With EBITDA 5.86 and low debt, liquidity is not stressed, but repeat periods of low OCF would pressure internal funding. Earnings quality is weak this quarter; monitoring reversal of working capital outflows is essential next quarter.

Dividend Sustainability

Calculated payout ratio is 94.2%, which is high relative to the benchmark (<60%) and misaligned with OCF (0.37) this period. FCF coverage is not calculable due to missing investing CF, but OCF barely covering capex implies limited internal coverage for dividends. Given modest profitability (ROE 2.6%, ROIC 5.4%) and reliance on non-operating income, sustaining a ~94% payout risks crowding out reinvestment or eroding cash reserves if cash conversion does not improve. Policy outlook: a more balanced payout aligned to cash generation would enhance resilience; absent that, dividend stability depends on working capital normalization and margin recovery.

Risk Assessment

Business Risks:

• Margin pressure from procurement costs and price-cost lag, evidenced by ~-36 bps operating margin compression.
• Demand volatility and seasonality in sporting goods impacting inventory and discounting.
• FX exposure on imported merchandise (USD/CNY) affecting gross margin.
• Product/brand mix shifts reducing gross margin or requiring higher promotion.
• Reliance on non-operating income (29.2% ratio) to support ordinary income.

Financial Risks:

• Weak cash conversion (OCF/NI 0.10x) increasing reliance on cash reserves.
• High calculated payout ratio (~94%) relative to cash flow, risking cash leakage.
• Potential working capital build (receivables/inventory) tying up liquidity.
• Market risk on investment securities (37.31) that could lead to valuation losses.
• Elevated effective tax rate (38.6%) dampening net earnings.

Key Concerns:

• Sustained operating margin below 2% constraining ROE/ROIC improvement.
• Ordinary income dependence on dividends/interest in a soft operating backdrop.
• If OCF weakness persists, self-funding for capex and dividends could tighten despite a strong balance sheet.
• Limited disclosure on SG&A composition and investing CF reduces visibility on structural costs and FCF.

Investment Implications

Key Takeaways:

• Revenue up 7.0% YoY to 291.46 but operating income down 11.2% to 5.16, indicating negative operating leverage.
• Operating margin compressed ~36 bps to ~1.77%; net margin fell ~39 bps to ~1.32%.
• OCF/NI at 0.10x highlights weak earnings quality this quarter.
• Balance sheet is conservative with minimal interest-bearing debt and strong liquidity.
• ROE 2.6% and ROIC 5.4% are below desirable thresholds; returns improvement is a key medium-term task.
• Payout ratio ~94% appears aggressive relative to current cash generation.
• Non-operating income (1.12) is a meaningful earnings contributor, adding volatility.

Metrics to Watch:

• OCF/NI ratio and working capital movements (AR and inventory days).
• Gross margin and SG&A-to-sales ratio for signs of margin recovery.
• Operating margin trend vs pricing and procurement initiatives (bps changes).
• ROIC progression toward 7–8% and ROE improvement.
• Dividend payout vs FCF once investing CF is disclosed.
• Effective tax rate normalization.
• Contribution from non-operating income and any changes in investment securities.

Relative Positioning: Within Japanese sporting goods wholesalers/distributors, the company exhibits solid liquidity and low leverage but lags peers on profitability and ROIC. Dependence on non-operating income and weak cash conversion this quarter place it in a more defensive posture compared with operators demonstrating higher operating margins and steadier OCF.

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