Sanrio Company (8136) FY2026 Q3 Earnings Report

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Executive Summary

In addition to revenue and profit growth, this earnings period demonstrated progress toward higher profitability, with profit growth significantly outpacing revenue growth. Revenue was ¥1,431.9B (+36.7% YoY), Operating Income was ¥624.0B (+51.8%), Ordinary Income was ¥634.6B (+48.7%), and Net Income was ¥439.1B (+29.4%). The expansion of royalty revenue was the primary driver, raising the Operating Income margin to 43.6%; however, Net Income growth did not reach the level of Operating Income growth due to an increase in the effective tax rate.

Factors Affecting Earnings

【Revenue】Revenue was ¥1,431.9B, up +36.7% YoY. By region, Japan recorded ¥852.4B (+34.1%), Europe ¥79.6B (+128.4%), Asia ¥288.7B (+57.6%), and South America ¥22.8B (+98.5%), all demonstrating strong growth, while North America remained at ¥188.4B (+3.2%). Royalty revenue increased to ¥705.2B (¥506.2B in the previous year, +39.3%), accounting for 49.2% of Revenue. The expansion of licensing revenue, which offers high gross margins and limited inventory exposure, was the primary factor behind the increase in Revenue.

【Profit and Loss】Operating Income was ¥624.0B (+51.8%), representing growth 15.1pt above the Revenue growth rate. With a gross margin of 78.4% (cost ratio of 21.6%) and an SG&A ratio of 34.8%, the expansion of high-margin licensing revenue absorbed fixed costs, expanding the Operating Income margin to 43.6% (39.2% in the previous year). Ordinary Income was ¥634.6B (+48.7%), with non-operating income and expenses remaining a modest net surplus, indicating a profit structure centered on the core business. Net Income was ¥439.1B (+29.4%), slowing relative to growth at the operating level; this resulted from the increase in the effective tax rate to 30.7% and does not indicate deterioration in core business profitability. Extraordinary loss of ¥0.8B (including impairment loss of ¥0.1B) was immaterial, with a limited impact on current-period profit. Overall, the Company achieved revenue and profit growth, while a trend of improving margins was confirmed.

Segment Analysis

Segment profit margins were 37.0% in Japan, 42.9% in Asia, 31.1% in North America, 29.7% in Europe, and 26.9% in South America, all at high levels. Japan led overall profit with segment profit of ¥406.0B, representing the largest contribution, while Asia posted the highest profit margin at 42.9% despite a Revenue scale of ¥349.0B. Although North America’s Revenue growth was limited to 3.2%, segment profit increased +13.1% YoY, demonstrating progress in improving profitability; its profitability outpaced Revenue growth, which is a notable characteristic. Europe and South America have relatively small Revenue scales but are maintaining strong growth and corresponding profit margins, indicating broader geographic diversification.

Key Financial Metrics

【Profitability】The Operating Income margin of 43.6% and Net Income margin of 30.5% were both at high levels, with SG&A absorption progressing against the backdrop of a 78.4% gross margin.【Cash Flow Quality】Inventory days were approximately 99 days, which is relatively long, making the trajectory of ¥112.3B in product inventory and the sustainability of the 78.4% gross margin key points for future monitoring.【Investment Efficiency】ROE was 31.8%, primarily attributable to the high Net Income margin, with low reliance on financial leverage. Total asset turnover was restrained by the high cash and deposits ratio, which represented 51.0% of total assets.【Financial Soundness】The Company had a strong liquidity position, with an Equity Ratio of 65.6% and current assets of ¥1,534.8B versus current liabilities of ¥480.6B. Interest-bearing debt (approximately ¥80.7B in total for short- and long-term debt) was substantially below cash and deposits of ¥1,072.0B.

Cash Flow Analysis

Although the statement of cash flows has not been disclosed, funding trends can be assessed from changes in the balance sheet. Cash and deposits stood at ¥1,072.0B, representing 51.0% of total assets. Although this declined from ¥1,189.8B in the previous year, the Company continues to maintain ample liquidity. Accounts receivable increased to ¥294.6B, while inventories increased to ¥112.3B, confirming an accumulation of working capital associated with Revenue expansion. Retained earnings increased to ¥1,214.8B, indicating progress in retaining current-period profit internally. Meanwhile, the increase in capital surplus (from ¥46.6B to ¥167.3B) and the increase in treasury shares suggest that uses of funds involving changes in the capital structure occurred. Overall, although working capital increased in line with business expansion, the financial foundation remains sound.

Earnings Quality

The majority of Ordinary Income of ¥634.6B was derived from Operating Income of ¥624.0B. Non-operating income of ¥14.9B (including interest income of ¥0.8B and foreign exchange gains of ¥0.8B) was small at 1.0% of Revenue, indicating no reliance on temporary income. Extraordinary income was ¥0.0B and extraordinary loss was ¥0.8B (impairment loss of ¥0.1B), both extremely immaterial. Accordingly, the impact of one-time items on Net Income was limited, and earnings quality was derived from the core business. Meanwhile, corporate income taxes of ¥194.7B were recorded against Profit Before Tax of ¥633.8B, resulting in an effective tax rate of approximately 30.7%, up from the previous year. This was the primary factor limiting Net Income growth (+29.4%) below Operating Income growth (+51.8%). Comprehensive income was ¥414.0B, slightly below Net Income of ¥439.1B, with valuation items such as foreign currency translation adjustments of -¥11.2B and valuation difference on securities of -¥5.7B acting as downward factors. This divergence was primarily attributable to translation differences on overseas assets and does not impair the earnings power of the core business.

Earnings Forecasts and Guidance

The full-year company forecast is Revenue of ¥1,906.0B (+31.5% YoY), Operating Income of ¥751.0B (+45.0%), and Ordinary Income of ¥764.0B (+42.9%). The Q3 cumulative progress rates were 75.1% for Revenue, 83.1% for Operating Income, and 83.0% for Ordinary Income, clearly exceeding the standard 75% progress level on a profit basis. While the full-year Operating Income margin assumed in the Company’s plan is 39.4%, the Q3 cumulative margin was 43.6%, exceeding the plan by 420bp. Even assuming a certain decline in the Q4 profit margin, the Company appears to have sufficient cushion to achieve its plan.

Shareholder Returns

The Q2 dividend was ¥31.00 per share, while the full-year forecast dividend is ¥66.00. Based on forecast EPS of ¥215.84, the forecast Payout Ratio is 30.6%, below the generally cited sustainability benchmark of approximately 60%. Q3 cumulative Net Income reached 84.0% of the full-year forecast, indicating ample dividend coverage from earnings. Interest-bearing debt remained at approximately ¥80.7B against cash and deposits of ¥1,072.0B, providing strong financial support for continued dividend payments.

Risk Factors

1. Inventory accumulation risk: Inventories increased to ¥112.3B, up +55.0% YoY, and a lengthening of inventory days has been observed. Fluctuations in demand for character products could damage the 78.4% gross margin through markdowns or impairment losses.

2. Reliance on royalty revenue: Royalty revenue was ¥705.2B, accounting for 49.2% of Revenue. The Company faces a structural risk whereby the sustainability of the popularity of major IPs and the terms of license contract renewals could affect profitability.

3. Refinancing considerations related to the short-term debt structure: Cash and deposits of ¥1,072.0B are substantial relative to short-term borrowings of ¥45.4B, and no immediate liquidity concern arises. Nevertheless, continued monitoring of the maturity profile of liabilities remains useful.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (trading)

Profitability and Returns

Profitability is substantially above the industry median, reflecting a level consistent with an asset-light licensing revenue model.

Growth and Capital Efficiency

The Company’s growth rate is outstanding within the industry, with the expansion of overseas licensing operations generating growth substantially above the industry average.

※Source: Compiled by the Company

Key Earnings Highlights

1. Against Revenue growth of +36.7%, Operating Income increased +51.8%, achieving profit growth above Revenue growth and confirming the emergence of operating leverage accompanying the expansion of royalty revenue.

2. Progress rates against the full-year company forecast were 83.1% for Operating Income and 83.0% for Ordinary Income, exceeding the standard 75% progress level. Even if the Q4 profit margin declines relative to plan, there remains a certain level of cushion for achieving the full-year plan.

3. Inventories increased +55.0% YoY. In contrast to the strong income statement, inventory turnover will be a key area to monitor in assessing future cash conversion and the maintenance of the gross margin.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,157–¥1,230 at ±1% for the Cost of Equity, and ¥1,174–¥1,222 at ±0.1 for ω.

Notes:

• Net assets as of the end of the quarter are used (there is a timing difference from the full-year forecast).
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(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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AI Financial Analysis

Executive Summary

Sanrio delivered a very strong FY2026 Q3 cumulative result, led by broad-based overseas and domestic licensing growth and substantial operating-margin expansion. Revenue rose 36.7% year on year to ¥143.19bn. Operating income increased 51.8% to ¥62.40bn, outpacing revenue growth by 15.1 percentage points. Ordinary income rose 48.7% to ¥63.46bn. Profit attributable to owners increased 29.3% to ¥43.68bn. Gross margin improved to 78.4% from 77.0% in the prior-year period, an expansion of approximately 140bp. Operating margin expanded to 43.6% from 39.2%, a particularly strong 440bp improvement. The operating result reflects high incremental profitability from character licensing and a favorable mix rather than merely top-line expansion. SG&A expense increased approximately 26.0%, materially slower than revenue growth, demonstrating positive operating leverage. Net margin, however, declined by around 170bp to 30.5% because the prior-year period included a ¥2.08bn gain on sale of investment securities, while the current period had only ¥0.01bn of extraordinary income. The current-period tax rate was 30.7%, compared with a lower effective rate in the prior year, also moderating net-income growth relative to operating-income growth. Interest income of ¥0.81bn exceeded interest expense of ¥0.13bn, consistent with the company’s sizeable net cash position. Japan remained the principal earnings base, while Europe and Asia delivered the strongest percentage expansion in regional profit. Q3 cumulative revenue has reached 75.1% of full-year guidance, broadly in line with the normal 75% seasonal benchmark. Operating-income and owner-attributable-profit progress of 83.1% and 84.0%, respectively, are more than 8 percentage points ahead of the normal Q3 benchmark, indicating either conservative guidance or a need for a meaningful Q4 profit deceleration. Balance-sheet liquidity remains exceptionally strong, although the rise in finished-goods inventory and the inventory-day alerts warrant monitoring. The FY2026 outlook is supported by licensing momentum and operating leverage, but the sustainability of current margins depends on continued character demand, regional monetization and disciplined inventory management.

Profitability Analysis

The reported annualized ROE is 42.2%, decomposed under the provided DuPont analysis into a 30.5% net profit margin, 0.909x asset turnover and 1.52x financial leverage. The dominant driver of this very high annualized ROE is profitability rather than balance-sheet leverage: the 30.5% net margin is exceptional and leverage is moderate. EBIT margin was 43.6%, while the interest burden of 1.016x indicates net interest income and very limited financing pressure. The tax burden was 0.689, slightly below the 0.70 normal benchmark, reflecting the 30.7% effective tax rate. Gross margin expanded by approximately 140bp and operating margin by 440bp, showing that revenue growth translated efficiently into earnings. Cost of sales increased approximately 28.3%, below revenue growth of 36.7%, and SG&A rose approximately 26.0%, further evidencing favorable cost absorption. The lower growth rate in net income versus operating income is principally attributable to the prior-year ¥2.08bn gain on sale of investment securities and a higher current tax burden, rather than a deterioration in core operations. Japan is the core business by segment operating-income contribution, generating ¥40.60bn of segment profit, or about 63% of aggregate segment profit before corporate costs. On segment total-sales bases, Japan posted a 37.0% segment margin, Europe 29.7%, North America 31.1%, South America 26.9%, and Asia 42.9%. Asia’s high margin and Japan’s scale reinforce the attractiveness of the licensing-led model, although regional mix changes can influence consolidated margins. The annualized nature of ROE should be kept in mind when comparing it with full-year returns.

Growth Assessment

Growth was geographically diversified rather than concentrated in one market. Japan external revenue rose 34.1% year on year to ¥85.24bn and segment profit increased 48.8% to ¥40.60bn. Europe external revenue increased 128.4% to ¥7.96bn and segment profit increased 163.6% to ¥2.40bn, making it the fastest-growing major overseas region. North America external revenue rose 3.2% to ¥18.84bn, while segment profit rose 13.1% to ¥5.89bn; this indicates margin improvement despite relatively modest sales growth. South America external revenue increased 98.5% to ¥2.28bn and segment profit increased 59.2% to ¥0.62bn. Asia external revenue rose 57.6% to ¥28.87bn and segment profit rose 72.1% to ¥14.98bn. Consolidated royalty revenue increased 39.3% to ¥70.52bn and represented 49.2% of consolidated external revenue, underscoring the importance of high-margin IP monetization. Full-year guidance calls for revenue of ¥190.60bn, operating income of ¥75.10bn and owner-attributable profit of ¥52.00bn. Q3 cumulative progress is 75.1% for revenue, 83.1% for operating income, 83.1% for ordinary income and 84.0% for owner-attributable profit. Revenue progress is in line with the 75% seasonal benchmark, whereas profit progress is ahead of benchmark, supported by margin expansion. The implied Q4 guidance requires revenue of ¥47.41bn, operating income of ¥12.70bn and owner-attributable profit of ¥8.32bn. This implied Q4 operating margin is about 26.8%, below the Q3 cumulative 43.6%, which leaves scope for guidance outperformance if current royalty and regional momentum persists, but may also reflect expected seasonal costs or management conservatism.

Financial Health

Liquidity is exceptionally robust. The current ratio is 319.4% and the quick ratio is 296.0%, both well above healthy benchmarks. Current assets of ¥153.48bn exceed current liabilities of ¥48.06bn by ¥105.42bn. Cash and deposits total ¥107.20bn, equal to 51.0% of total assets and 23.62x short-term loans. Reported interest-bearing debt is ¥8.07bn, consisting of ¥4.54bn of short-term loans and ¥3.53bn of long-term loans, equivalent to only about 5.9% of total equity. Debt/capital is 5.5%, and interest coverage is an extremely strong 469.16x. The reported 0.52x debt-to-equity ratio remains below the 1.0x conservative benchmark, while the direct loan-to-equity relationship is substantially lower because the company has significant equity. There is no current-ratio warning and no aggressive-leverage warning. The 56.3% short-term debt ratio triggers the refinancing-risk alert because more than half of loans mature within one year; however, this maturity concentration is well covered by cash, and therefore presents limited near-term liquidity risk. Total liabilities declined 23.8% year on year to ¥72.24bn, supported in part by a reduction in convertible bond-type bonds with subscription rights from ¥28.31bn to ¥7.27bn. Equity increased 28.1% to ¥137.87bn and the equity ratio improved to 65.5% from 52.9%. Accounts receivable rose 31.7% to ¥29.46bn, slower than revenue growth, which is not indicative of disproportionate collection stretching. Accounts payable rose 81.8% to ¥9.86bn, providing working-capital support but requiring monitoring to ensure supplier-payment practices remain stable. Contract liabilities were broadly stable at ¥6.21bn, supporting visibility on certain advance customer receipts.

Notable B/S Changes

Accounts payable: +¥4.44bn (+81.8%) to ¥9.86bn - provides working-capital funding, but should be monitored alongside inventory growth and supplier-payment trends. Inventories: +¥3.99bn (+55.0%) to ¥11.24bn - growth exceeded revenue growth and is consistent with elevated inventory-day alerts; monitor sell-through, markdown and valuation risk. Intangible assets: +¥1.91bn (+53.0%) to ¥5.50bn - still only 2.6% of total assets, limiting balance-sheet concentration risk. Treasury stock: -¥7.20bn (-40.8%) to negative ¥24.83bn - indicates significant capital allocation to share repurchases or related equity actions; assess through total return ratio. Short-term loans: -¥2.38bn (-34.4%) to ¥4.54bn - reduces gross short-term borrowing despite the 56.3% short-term share of the remaining loan balance. Accounts receivable: +¥7.10bn (+31.7%) to ¥29.46bn - increase was below revenue growth, which is relatively constructive for collection discipline. Retained earnings: +¥28.24bn (+30.3%) to ¥121.48bn - reflects strong earnings accumulation and reinforces dividend and balance-sheet capacity. Long-term loans: -¥1.50bn (-29.8%) to ¥3.53bn - further lowers leverage and contributes to the strong solvency profile.

Cash Flow Quality

The income statement supports strong underlying earnings quality: operating income of ¥62.40bn was generated from core operations, while extraordinary items were immaterial, comprising ¥0.01bn of gains and ¥0.79bn of losses. The ¥0.07bn impairment loss is also immaterial relative to operating income. Interest income of ¥0.81bn is supported by a ¥107.20bn cash balance and is therefore more recurring than a typical one-off investment gain. Finished-goods inventory increased 55.0% to ¥11.24bn, faster than revenue growth, and the two inventory-day alerts of 108 days and 99 days exceed the stated 90-day and 60-day thresholds. The root cause of the inventory concern is that inventory expansion has outpaced sales growth, potentially reflecting stock build for merchandise demand, product launches or slower sell-through. This is more relevant for Sanrio’s consumer-product and merchandise activities than for pure licensing revenue, because licensed royalties require less inventory intensity. The impact is a potential future need for markdowns, write-downs or lower cash conversion if sales momentum in physical products softens. The 81.8% increase in accounts payable partly offsets the inventory-related working-capital build on the balance sheet, but the durability of this offset should be monitored. The ¥2.08bn prior-year gain on sale of investment securities means the current period’s lower net-income growth understates the improvement in recurring operating performance.

Dividend Sustainability

The company has declared an interim Q2 dividend of ¥31.00 per share, and full-year guidance indicates a dividend of ¥66.00 per share. Based on guided EPS of ¥215.84, the indicated full-year dividend payout ratio is approximately 30.6%. This is comfortably below the 60% sustainability benchmark and leaves substantial earnings retention capacity. The interim ¥31.00 dividend is already 47.0% of the indicated full-year dividend. The provided Q2-based calculated payout ratio of 18.1% also indicates a conservative distribution burden relative to cumulative earnings. Retained earnings increased 30.3% year on year to ¥121.48bn, and cash and deposits total ¥107.20bn, supporting financial flexibility for dividends. Treasury stock increased in absolute negative value by ¥7.20bn to negative ¥24.83bn, signaling material capital-allocation activity; this should be evaluated as part of total shareholder returns rather than the dividend-only payout ratio. The indicated dividend policy appears well supported by profitability, liquidity and retained earnings.

Risk Assessment

Business risks include Character-IP and licensing demand risk: nearly half of external revenue is royalty revenue, so consumer relevance, partner marketing activity and franchise momentum directly affect earnings., Regional execution risk: Europe and Asia are growing rapidly, but high growth can normalize as distribution, licensing and promotional investments mature., North American growth risk: external revenue growth was only 3.2%, materially below consolidated growth, making recovery in this important ¥18.84bn revenue region a key operational issue., Merchandise inventory risk: finished goods increased 55.0% and inventory days of 108 and 99 exceed alert thresholds; slower sell-through could pressure margins through markdowns or write-downs., Foreign-exchange and international partner risk: overseas operations and licensing contracts expose earnings to currency movements and regional consumer conditions..

Financial risks include Refinancing-risk alert: 56.3% of loans are short term, above the 40% alert threshold, although cash of ¥107.20bn and cash/short-term-debt coverage of 23.62x materially mitigate this risk., Working-capital risk: accounts payable increased 81.8%, partly funding the 55.0% inventory increase; a reversal in payable timing could reduce cash conversion., Capital-allocation risk: treasury stock rose by ¥7.20bn in absolute value, and the scale and recurrence of buybacks should be assessed against earnings retention and investment requirements..

Key concerns include The principal near-term operating risk is whether elevated inventory is matched by sustained physical-product demand., FY2026 guidance implies a Q4 operating margin of about 26.8%, significantly below the 43.6% Q3 cumulative margin; the eventual outcome will clarify the degree of guidance conservatism and the durability of current margins., The current period’s strong operating growth should be assessed separately from the prior-year securities-sale gain, which depressed the apparent year-on-year growth rate of net income..

Investment Implications

Key takeaways include Revenue growth of 36.7% and operating-income growth of 51.8% demonstrate strong operating leverage., Operating margin reached 43.6%, up approximately 440bp year on year, driven by favorable gross-margin expansion and controlled SG&A growth., Japan remains the earnings anchor, while Asia and Europe are the major incremental growth contributors., The company has substantial balance-sheet capacity, with ¥107.20bn of cash, a 319.4% current ratio and only ¥8.07bn of reported loans., Inventory growth and elevated inventory days are the key balance-sheet operating indicators to watch..

Metrics to watch include Royalty revenue growth and royalty revenue as a proportion of external revenue, Japan, Europe, Asia and North America segment revenue and segment-profit growth, Finished-goods inventory growth, inventory days and any inventory valuation charges, Accounts payable growth relative to inventories and revenue, Q4 operating margin relative to the implied 26.8% guidance margin, Treasury-stock movements and total return ratio.

Regarding relative positioning, Sanrio exhibits an asset-light, IP-led earnings profile with exceptionally high margins, high annualized ROE and a net-cash balance-sheet character. Its profitability is primarily driven by licensing economics and operating leverage rather than financial leverage, differentiating it from lower-margin consumer-product businesses. The key relative sensitivity is the durability of global character demand and merchandise inventory discipline.