HEIWADO CO.,LTD. FY2027 Q1 Earnings Report

Financial Highlights

• Net Sales: ¥112.20B
• Operating Income: ¥2.57B
• Net Income: ¥1.21B
• EPS: ¥23.99

Income Statement

Balance Sheet

Profitability Ratios

Year-over-Year Comparison

Share Information

Segment Information

Full Year Forecast

---

AI Financial Analysis

Executive Summary

FY2027 Q1 was a mixed quarter: top-line grew solidly, but margins compressed and bottom-line declined sharply due to higher operating costs and an unusually heavy tax burden. Revenue increased 3.4% YoY to 1,121.99 (100M JPY), with gross profit up to 305.82 and operating income down 12.7% to 25.71. Ordinary income fell 16.8% to 27.74 and net income declined 45.3% to 11.86. Gross margin edged down by 21 bps to 27.3%, and the operating margin compressed by 42 bps to 2.3%. Ordinary income margin contracted by 60 bps to 2.5%, while net margin dropped 94 bps to 1.1%. SG&A ratio rose 30 bps to 33.7%, outpacing gross margin performance and signaling negative operating leverage. Non-operating balance remained a small net positive (income 2.91 vs expenses 0.88), helping offset weaker operations at the margin. Extraordinary items were a modest net loss (loss 1.58 vs income 0.85), shaving profit before tax only slightly. The effective tax rate surged to 55.2%, compressing the tax burden factor to 0.439 and constituting a major driver of the net profit decline. DuPont shows ROE at 0.6%, with the main drag being net margin; asset turnover improved slightly and leverage was stable. Liquidity remains tight with a current ratio of 0.70 and negative working capital of -261.23, though leverage is conservative (D/E 0.59x, debt/capital 9.6%). Inventory days are elevated at roughly 107–108 days, which, alongside a higher SG&A ratio, weighed on working capital and profitability. Segment data show strong improvement in retail segment profit YoY, but larger eliminations/adjustments reduced consolidated ordinary income. Against full-year guidance, revenue progress is roughly on track, but operating and net income progress rates lag standard seasonality. Near-term focus should be on normalizing the tax rate, improving inventory turns, and reining in SG&A to restore margin momentum.

Profitability Analysis

ROE (0.6%) = Net Profit Margin (1.1%) × Asset Turnover (0.357) × Financial Leverage (1.59x). The largest YoY change is the deterioration in net profit margin (from ~2.0% to 1.1%), driven by operating margin compression (2.7% → 2.3%), a 30 bps higher SG&A ratio, and an elevated effective tax rate (55.2%). Asset turnover improved slightly (Sales/Assets: 0.347 → 0.357) as revenue growth outpaced asset growth, while financial leverage (Assets/Equity: ~1.58x) was essentially flat. Business-wise, rising personnel and store operating costs, alongside slower gross margin, created negative operating leverage. The high tax rate further reduced after-tax profitability. These cost pressures are partially structural in retail (labor, utilities), but some relief is possible through mix optimization, procurement, and cost controls; the tax rate spike appears more situational than structural, suggesting partial reversibility. A concerning trend is SG&A growth outpacing revenue growth (+4.3% vs +3.4%), indicating cost discipline needs to tighten to prevent further erosion of operating margin.

Growth Assessment

Revenue grew 3.4% YoY to 1,121.99, supported by the retail segment (+3.4%), and smaller gains in retail-related (+2.9%) and other businesses (+2.7%). Gross profit increased to 305.82, but gross margin softened by 21 bps, implying modest merchandise mix or price-cost pressure. Operating income declined 12.7% YoY to 25.71 as SG&A rose 4.3% to 378.33, lifting the SG&A ratio by 30 bps and creating negative operating leverage. Ordinary income fell 16.8% to 27.74 despite a positive net non-operating contribution, reflecting weaker core profitability and larger eliminations/adjustments at the segment consolidation level. Net income dropped 45.3% to 11.86 due to the steep effective tax rate and lower pretax profit. Segment-profit data indicate robust improvement in the retail segment YoY, suggesting underlying store operations and services improved, but consolidated results were dampened by eliminations. Outlook hinges on stabilizing gross margin, tightening SG&A, and normalizing the tax rate to convert modest sales growth into earnings growth.

Financial Health

Liquidity is tight: Current ratio 0.70 and quick ratio 0.46 signal reliance on trade credit and short-term funding. Working capital is negative at -261.23 (100M JPY), and current liabilities (878.88) exceed current assets (617.65), indicating a maturity mismatch that must be actively managed. Refinancing risk is present: short-term loans are 112.55 with a short-term debt ratio of 53.8%, though cash of 199.54 provides 1.77x coverage of short-term loans. Solvency remains conservative with D/E at 0.59x, debt/capital 9.6%, and strong interest coverage of 61x, aided by low interest expense. Total interest-bearing debt is modest at 209.21 relative to assets (3,140.44) and equity (1,980.73). Asset retirement obligations are 89.16, representing 7.7% of liabilities, which are long-dated but should be incorporated into long-term cash planning. No off-balance sheet obligations were noted.

Notable B/S Changes

Cash and Deposits: -32.7 (億円) (-14%) - Lower cash cushion; monitor liquidity alongside short-term debt. Short-Term Loans: +19.8 (億円) (+21%) - Higher reliance on short-term funding, elevating rollover risk. Long-Term Loans: -22.9 (億円) (-19%) - Deleveraging on the long end, increasing duration mismatch. Property, Plant & Equipment: +243.1 (億円) (+1%) - Continued investment/asset revaluation; supports owned-store model. Land: +165.8 (億円) (+1.7%) - Incremental increase enhances collateral but ties up capital. Provision for Bonuses: +16.4 (億円) (+101%) - Higher accrued personnel costs contribute to SG&A pressure. Income Taxes Payable: -12.6 (億円) (-43%) - Payment timing reduced current tax liabilities. Investment Securities: +5.62 (億円) (+9.8%) - Modest increase in financial assets. Inventories: +10.0 (億円) (+5.0%) - Higher inventory levels consistent with elevated DIO; watch markdown risk.

Cash Flow Quality

Accruals quality cannot be assessed without operating cash flow disclosure. Extraordinary items were small (net -0.73), and non-operating income was minor relative to revenue (0.3%), indicating earnings are primarily driven by core retail operations. Working capital dynamics are tight given elevated inventory and higher accounts payable; sustaining free cash flow will require improving inventory turns and maintaining disciplined capex.

Dividend Sustainability

DPS is 33 yen with no revision. Based on full-year EPS guidance of 198.16, the implied payout ratio is approximately 16.7%, which is conservative. Q1 EPS was 23.99, and the quarterly result does not jeopardize the annual dividend under current guidance. Balance sheet leverage is conservative, supporting dividend continuity. Sustained coverage will depend on delivering H2 earnings recovery and maintaining capex discipline.

Risk Assessment

Business risks include Elevated inventory days (~107–108) increase markdown and obsolescence risk, pressuring gross margin., Retail competition and pricing pressure can cap gross margin and necessitate higher promotions., Cost inflation (labor, utilities, logistics) risks further SG&A ratio expansion and margin squeeze., Execution risk in store operations and merchandising mix affecting traffic and basket size..

Financial risks include Low liquidity (current ratio 0.70) and negative working capital create refinancing and liquidity management risk., High short-term debt dependence (short-term debt ratio 53.8%) increases rollover risk despite cash coverage., High effective tax rate (55.2%) depresses net profitability and increases earnings volatility., Asset retirement obligations (7.7% of liabilities) represent long-term cash outflows tied to store network..

Key concerns include Operating margin below 3% leaves little buffer against shocks., Progress toward full-year operating and net income guidance is below seasonal run-rate, requiring 2H catch-up., Segment eliminations/adjustments materially reduced consolidated ordinary income despite stronger segment profit..

Investment Implications

Key takeaways include Top-line growth (+3.4% YoY) is intact, but margin compression drove a 12.7% decline in operating income., Tax rate spike to 55.2% was a major factor behind the 45% drop in net income., Retail segment profit improved strongly YoY, but larger eliminations reduced consolidated ordinary income., Liquidity is tight (current ratio 0.70), though leverage is conservative (D/E 0.59x, interest coverage 61x)., Inventory days (~107–108) and a higher SG&A ratio are priority areas for improvement., Guidance: revenue on track, but operating income (18% progress) and net income (12%) lag standard seasonality..

Metrics to watch include Same-store sales growth and gross margin mix, SG&A ratio trajectory and labor cost efficiency, Inventory days and markdown rates, Effective tax rate normalization, Current ratio and short-term debt rollover profile, Segment profit vs elimination adjustments impact on ordinary income.

Regarding relative positioning, A regional general merchandise retailer with low operating margins and conservative leverage; asset-heavy with substantial owned real estate, offering balance sheet strength but lower capital efficiency versus leaner, rent-heavy peers.