WATT MANN (9927) FY2026 Q3 Earnings Report

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Executive Summary

Although revenue increased, the Company posted higher revenue but lower earnings as profitability from its core business declined; however, Net Income increased due to the recognition of extraordinary income. Revenue was ¥64.2B (+3.5% YoY), Operating Income was ¥3.7B (▲18.6% YoY), and Ordinary Income was ¥3.9B (▲16.2% YoY), while Net Income increased significantly to ¥4.0B (+44.1% YoY). The main driver of revenue growth was the expansion of the New Goods EC Business, but this business experienced a substantial decline in earnings, and the increase in Net Income was largely attributable to the recognition of ¥2.2B in extraordinary income.

Factors Affecting Earnings

【Revenue】Revenue was ¥64.2B, representing a +3.5% increase YoY. By segment, the core Reuse Business generated ¥39.7B (61.8% of total revenue, +1.1% YoY), while the New Goods EC Business generated ¥24.5B (38.2% of total revenue, +7.6% YoY), with the New Goods EC Business driving revenue growth.

【Profit and Loss】Operating Income was ¥3.7B (▲18.6% YoY), and the Operating Margin was 5.8%, down approximately 1.6pt from 7.4% in the previous year. The Gross Margin declined to 43.7% from 45.9%, a decrease of approximately 2.2pt, which could not be fully offset by the improvement in the SG&A Expense Ratio (37.9%, ▲0.6pt YoY). By segment, Operating Income from the Reuse Business improved to ¥6.0B (+6.0% YoY; 15.2% margin), while the New Goods EC Business recorded ¥0.3B (▲77.4% YoY; 1.3% margin), a sharp decline that was the primary cause of the decline in consolidated earnings. Although the decline in Ordinary Income continued, with Ordinary Income at ¥3.9B (▲16.2% YoY), Profit Before Tax was ¥6.1B and Net Income was ¥4.0B (+44.1% YoY) due to the recognition of ¥2.2B in extraordinary income (including the reduction in impairment losses compared with the same period of the previous year). Thus, despite declines in Operating Income and Ordinary Income, Net Income increased, indicating that extraordinary factors boosted final earnings despite higher revenue but lower operating profit. In conclusion, the Company posted higher revenue but lower earnings.

Segment Analysis

The Reuse Business remains the core contributor to consolidated earnings, with Revenue of ¥39.7B (61.8% of total revenue, +1.1% YoY), Segment Profit of ¥6.0B (+6.0% YoY), and a 15.2% margin, which improved from 14.5% in the previous year. The New Goods EC Business increased revenue to ¥24.5B (38.2% of total revenue, +7.6% YoY), but Segment Profit declined substantially to ¥0.3B (▲77.4% YoY), and the margin deteriorated to 1.3%, a decrease of approximately 5.0pt from 6.4% in the previous year. Corporate expenses also increased to ¥2.6B YoY, placing pressure on consolidated Operating Income together with the decline in total segment profit. The deterioration in the profitability of the New Goods EC Business, which drove revenue growth, was the primary cause of the decline in consolidated profitability.

Key Financial Indicators

【Profitability】The Operating Margin was 5.8%, down approximately 1.6pt from 7.4% in the same period of the previous year, while the Gross Margin declined to 43.7% from 45.9%. The Net Profit Margin was 6.2%, exceeding the Operating Margin; however, this was due to the recognition of extraordinary income and does not represent the earning power of the core business. 【Cash Flow Quality】Although Operating Cash Flow (OCF) and Investing Cash Flow have not been disclosed, Inventories stood at ¥14.2B (27.9% of total assets), and annualized Inventory Days were high at 108 days. Inventories and Accounts Receivable (¥2.9B, +19.8% YoY) increased at a faster pace than Revenue, requiring attention to the conversion of earnings into cash. 【Investment Efficiency】Annualized ROE was 14.5%; however, given the core-business Operating Margin of 5.8%, excluding extraordinary income, sustainable returns on capital must be evaluated excluding extraordinary factors. 【Financial Soundness】The Equity Ratio was 71.9%, improving from 67.2% in the previous year, while Long-Term Borrowings declined 28.9% to ¥1.6B from ¥2.2B in the previous year, indicating a conservative financial structure.

Cash Flow Analysis

As Operating Cash Flow, Investing Cash Flow, and Financing Cash Flow have not been disclosed, cash trends are analyzed based on changes in the balance sheet. Cash and Deposits declined by ¥1.9B (▲10.4%) YoY to ¥16.6B, while the Current Ratio remained high at approximately 306.4%, indicating substantial short-term liquidity. Long-Term Borrowings were reduced by ¥0.6B (▲28.9%) to ¥1.6B, and the repayment of interest-bearing debt appears to have been one factor behind the decline in cash. In terms of working capital, Inventories increased by ¥0.9B (+6.8%) to ¥14.2B, and Accounts Receivable increased by ¥0.5B (+19.8%), while Accounts Payable declined by ¥0.7B (▲18.2%). The accumulation of inventories and trade receivables, together with the reduction in trade payables, is increasing the funding burden of working capital. Accordingly, it is necessary to confirm, together with inventory turnover trends, whether the ¥4.0B increase in Net Income for the current period is directly translating into an improvement in Operating Cash Flow.

Quality of Earnings

Net Income of ¥4.0B increased significantly by +44.1% YoY, but the primary reason was the recognition of ¥2.2B in extraordinary income rather than non-operating income. This contrasts with the decline in core-business earnings, reflected in Operating Income of ¥3.7B (▲18.6% YoY) and Ordinary Income of ¥3.9B (▲16.2% YoY). The extraordinary income appears to have been driven partly by the reduction in impairment losses on fixed assets recorded in the same period of the previous year, from ¥0.4B to ¥0.02B in the current period, and therefore has a strongly non-recurring nature. Non-operating income was small at ¥0.2B, primarily consisting of foreign exchange gains, and its impact on Ordinary Income was limited. The fact that the Net Profit Margin of 6.2% exceeded the Operating Margin of 5.8% indicates that factors outside the core business boosted final earnings; evaluating profitability solely on the level of Net Income may therefore give a more optimistic impression than warranted by the underlying performance. In addition, Inventories and Accounts Receivable increased at a faster pace than Revenue, requiring attention to the cash-conversion capacity of earnings from an accrual perspective.

Earnings Forecast and Guidance

The full-year plan calls for Revenue of ¥90.5B (+8.0% YoY), Operating Income of ¥7.4B (+26.8% YoY), and Ordinary Income of ¥7.4B (+24.2% YoY). As of the Q3 cumulative period, progress rates were 70.9% for Revenue, 50.5% for Operating Income, and 53.1% for Ordinary Income, approximately 4pt, 25pt, and 22pt below the standard progress benchmark of approximately 75%, respectively. To achieve the plan, Q4 alone would require Operating Income of approximately ¥3.7B, which would be roughly the same magnitude as cumulative Q3 Operating Income. No revision to the earnings forecast was made during the current quarter, while the dividend forecast was revised as described below.

Shareholder Returns

The Q2 dividend was ¥0 per share, and the policy was revised, in conjunction with the opinion statement regarding the MBO announced on 2026-02-13, to not pay a year-end dividend for FY2026 on the condition that the tender offer is successfully completed. Accordingly, the full-year dividend forecast is ¥0 per share, resulting in an effective Payout Ratio of 0%. Net assets of ¥36.6B, Cash and Deposits of ¥16.6B, and interest-bearing debt of ¥2.5B indicate potential capacity to pay dividends; however, it should be noted that the no-dividend policy for the current period is not driven by earnings but is a capital policy decision premised on the MBO.

Risk Factors

1. Inventory Accumulation Risk: Annualized Inventory Days were 108 days, and Inventories increased to ¥14.2B (+6.8% YoY), outpacing Revenue growth (+3.5%). Inventory accumulation may lead to markdown sales or the recognition of valuation losses.

2. Deterioration in New Goods EC Business Profitability: While Revenue increased by +7.6% YoY, Segment Profit declined by ▲77.4% YoY, and the margin fell sharply to 1.3% from 6.4% in the previous year. If revenue growth continues not to lead to an improvement in consolidated profitability, the impact on the earnings structure is a concern.

3. Increase in Working Capital: Inventories (+6.8%) and Accounts Receivable (+19.8%) increased, while Accounts Payable declined by ▲18.2%, indicating a rising funding burden from working capital. Cash and Deposits declined by ▲10.4% YoY, requiring close monitoring of the impact on Operating Cash Flow.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (retail)

Profitability and Returns

Both the Company’s Operating Margin and Net Profit Margin exceed the industry median, indicating that profitability is relatively high within the industry.

Growth and Capital Efficiency

The Revenue Growth Rate is slightly above the industry median but has not reached the industry IQR upper limit of 10.3%, leaving growth at a mid-range level within the industry.

※Source: Compiled by the Company

Key Points from the Earnings Results

1. Although Revenue continued to increase, both Operating Income and Ordinary Income declined by double digits, and it should be noted that the increase in Net Income (+44.1%) was attributable to ¥2.2B in extraordinary income. The earning power of the core business is reflected in the decline in the Operating Margin to 5.8% from 7.4% in the previous year.

2. By segment, the Reuse Business performed well, with increases in both revenue and earnings and an improved margin. In contrast, the New Goods EC Business, which drove revenue growth, saw its margin decline sharply to 1.3% from 6.4% in the previous year, making it the primary cause of the consolidated earnings decline. Future earnings improvement will depend on the restoration of profitability in the New Goods EC Business.

3. While financial soundness remained conservative, with an Equity Ratio of 71.9% and a 28.9% reduction in Long-Term Borrowings, changes in working capital were evident, including Inventory Days of 108 days. In addition, the policy was revised to eliminate the year-end dividend conditional on completion of the MBO, placing the Company in a situation that differs from the continuity of ordinary shareholder returns.

Theoretical Share Price (Reference Value)

Sensitivity: ¥446–¥473 at Cost of Equity ±1%, and ¥458–¥461 at ω±0.1.

Note:

• Net assets as of the quarter-end are used (there is a timing discrepancy 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 values based solely on publicly disclosed data; these are not forecasts of the market share price or recommendations for specific investment actions, and do 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 summary 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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