OHSHO FOOD SERVICE (9936) FY2027 Q1 Earnings Report

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Executive Summary

The first quarter reported lower revenue and lower earnings, with increased SG&A expenses amid declining revenue being the primary cause of the significant earnings decline. Revenue was ¥28.21B (-4.9% YoY), Operating Income was ¥1.42B (-52.8%), Ordinary Income was ¥1.61B (-48.4%), and Net Income attributable to owners of the parent was ¥0.99B (-53.7%). While Revenue declined, SG&A expenses increased to ¥17.51B (+2.5% YoY), and the SG&A ratio rose to 62.1% (57.6% in the same period last year), which was the primary factor driving the Operating Income margin down to 5.0% (10.1% in the same period last year).

Factors Affecting Performance

【Revenue】Revenue was ¥28.21B, representing a 4.9% YoY decline. As the Company operates a single segment (Chinese Cuisine Business), segment-specific factors behind the change have not been disclosed. However, since Cost of Sales declined less than Revenue, at ¥9.29B (-3.2% YoY), the gross profit margin decreased slightly to 67.1% (67.7% in the same period last year).

【Profit and Loss】As SG&A expenses increased to ¥17.51B (+2.5% YoY) despite the decline in Revenue, the SG&A ratio rose by +450bp to 62.1% (57.6% in the same period last year), while Operating Income declined by 52.8% to ¥1.42B and the Operating Income margin fell by -510bp to 5.0% (10.1% in the same period last year). Ordinary Income of ¥1.61B was supported to a certain extent by Non-operating Income of ¥0.26B, including Dividend Income of ¥0.09B. The decline from Ordinary Income to Net Income was primarily attributable to Income Taxes and Other Taxes of ¥0.59B. The effective tax rate was relatively high at 37.3%, and the tax burden on Profit Before Tax of ¥1.58B further suppressed Net Income growth. Extraordinary Losses consisted solely of Loss on Disposal of Fixed Assets of ¥0.03B, an immaterial amount with limited impact on performance. Accordingly, the first quarter resulted in lower revenue and lower earnings.

Key Financial Indicators

【Profitability】The Operating Income margin was 5.0%, down -510bp from 10.1% in the same period last year, while the Net Income margin also declined to 3.5% (7.2% in the same period last year). The primary causes of the decline in profitability were increased SG&A expenses and a slight deterioration in the gross profit margin.【Cash Quality】Operating Cash Flow (OCF) was ¥1.53B, or 1.55 times Net Income of ¥0.99B, indicating sound earnings backing. However, OCF/EBITDA was only 0.67 times, as payments of Income Taxes and Other Taxes of ¥1.48B and changes in working capital constrained cash conversion.【Investment Efficiency】ROE was 1.5%, with the decline in the Net Income margin directly leading to lower capital efficiency.【Financial Soundness】The Equity Ratio improved slightly to 77.0% (76.5% in the same period last year), while the Current Ratio remained high at 182.9%. Against Cash and Deposits of ¥22.81B, total Interest-bearing Debt was limited to ¥2.50B (Long-term Borrowings of ¥0.50B and Current Portion of Long-term Borrowings of ¥2.00B), maintaining a conservative financial base close to a net debt-free position.

Cash Flow Analysis

Operating Cash Flow was ¥1.53B (-48.8% YoY), or 1.55 times Net Income of ¥0.99B, maintaining cash generation that supports earnings quality. In terms of working capital, the ¥0.70B decrease in trade receivables made a positive contribution, while the ¥0.20B decrease in trade payables and the ¥0.09B increase in inventories had negative effects. Payments of Income Taxes and Other Taxes of ¥1.48B also compressed OCF. Investing Cash Flow was -¥1.28B, including Capital Expenditures of ¥0.84B, which remained approximately in line with Depreciation and Amortization of ¥0.86B, suggesting an allocation focused mainly on replacement investments. Free Cash Flow was positive at ¥0.25B, while Financing Cash Flow was -¥1.97B, primarily due to Dividend Payments of ¥1.47B. In the same period last year, the Company conducted Share Repurchases of ¥14.49B, resulting in Financing Cash Flow of -¥16.57B and a substantial cash outflow. In contrast, no Share Repurchases were conducted in the current first quarter, significantly reducing cash outflows from financing activities.

Earnings Quality

In addition to OCF exceeding Net Income (1.55 times), Extraordinary Gains and Losses in the first quarter consisted solely of Loss on Disposal of Fixed Assets of ¥0.03B, with an immaterial net impact, indicating only a limited temporary divergence from the recurring earnings structure. The ¥0.62B difference between Ordinary Income of ¥1.61B and Net Income of ¥0.99B was primarily attributable to Income Taxes and Other Taxes of ¥0.59B. The effective tax rate of 37.3% represented a relatively heavy burden against Profit Before Tax of ¥1.58B. Non-operating Income of ¥0.26B included Dividend Income of ¥0.09B, meaning that non-operating income supported a certain portion of Ordinary Income. Comprehensive Income was ¥0.58B, below Net Income of ¥0.99B, due in part to mark-to-market fluctuations related to other securities and pensions, including a Valuation Difference on Available-for-Sale Securities of -¥0.30B and Adjustments Related to Retirement Benefits of -¥0.10B.

Earnings Forecasts and Guidance

Progress toward the Full-Year plan in Q1 was 23.2% for Revenue, 13.0% for Operating Income, 14.6% for Ordinary Income, and 13.9% for Net Income, all below the simple progress benchmark of 25%. The delay was particularly pronounced for the profit figures, and achieving the Full-Year plan (Revenue of ¥121.36B, +3.9% YoY, and Operating Income of ¥10.95B, +5.2% YoY) will require improved profitability from Q2 onward. As of the end of the quarter, no revisions had been made to the earnings forecast or dividend forecast.

Shareholder Returns

The Full-Year dividend forecast is ¥56 per share, implying a Payout Ratio of approximately 41.5%, calculated using the Full-Year Net Income forecast of ¥7.096B. Dividend payments during the first quarter amounted to ¥1.47B, a level covered within OCF of ¥1.53B. Although Share Repurchases of ¥14.49B were conducted in the same period last year, no Share Repurchases were conducted in the current first quarter, resulting in a substantial year-on-year reduction in total returns combining dividends and share repurchases.

Risk Factors

1. Profitability risk from a higher SG&A ratio: The SG&A ratio rose by +450bp to 62.1% (57.6% in the same period last year), while the Operating Income margin declined by -510bp to 5.0% (10.1% in the same period last year). The fixed-cost characteristics of expenses have become apparent amid declining revenue, and continued sluggish revenue growth could result in continued earnings pressure.

2. Risk of future cash outflows from asset retirement obligations: Asset Retirement Obligations were ¥2.62B, accounting for 13.6% of Total Liabilities of ¥19.16B. Future cash outflows associated with facility renewals and other activities will occur, requiring monitoring in financial planning.

3. Dependence on non-operating income at the Ordinary Income level: Non-operating Income of ¥0.26B included Dividend Income of ¥0.09B, with non-core income supporting a certain proportion of Ordinary Income of ¥1.61B. As the Operating Income margin of the core business declines, the sustainability of this composition will depend on the recovery of the core business margin.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Return

In terms of profitability, the Company is above the industry median, although attention should be paid to the declining trend from the previous year.

Growth and Capital Efficiency

The Revenue growth rate was substantially below the industry median, with the Company experiencing declining revenue while the industry is on a growth trajectory.

※Source: Compiled by the Company

Key Points from the Earnings Results

1. The Operating Income margin declined significantly to 5.0% from 10.1% in the same period last year, and Q1 progress toward the Full-Year plan was also below the standard 25%, with Operating Income at 13.0%. The scope for profitability improvement from Q2 onward will be key to achieving the Full-Year plan.

2. OCF was maintained at 1.55 times Net Income, indicating that earnings quality itself remained sound. However, OCF/EBITDA was only 0.67 times, as tax payments and working capital movements slowed cash conversion.

3. The Company maintains a financial base close to a net debt-free position, with an Equity Ratio of 77.0%, a Current Ratio of 182.9%, Interest-bearing Debt of ¥2.50B, and Cash and Deposits of ¥22.81B. Its financial condition leaves room for flexible capital policies such as the ¥14.49B Share Repurchase conducted in the previous year.

Theoretical Share Price (Reference Value)

This is a mechanically calculated reference range based solely on publicly disclosed data using a residual income model (Ohlson-type model with an explicit 5-year fade). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: ¥1,246–¥1,318 at Cost of Equity ±1%, and ¥1,280–¥1,283 at ω±0.1.

Notes:

• Net assets as of the end of the quarter are used (there is a time lag relative to the Full-Year forecast).
• As Net Assets include Non-controlling Interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-06 / This value does not forecast or guarantee the future share price)

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This report is an earnings analysis document automatically generated by AI through analysis of XBRL earnings summary data. It does not recommend investment in any specific issue. Industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own discretion and responsibility, after consulting professionals as necessary.

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AI Financial Analysis

Executive Summary

FY2027 Q1 was a weak earnings start, with a modest sales decline translating into a disproportionate contraction in operating and net profit. Revenue fell 4.9% year on year to ¥28.214bn. Operating income declined 52.8% to ¥1.415bn, while ordinary income decreased 48.4% to ¥1.608bn. Net income fell 53.7% to ¥0.988bn. The operating margin compressed by 500bp year on year to 5.0% from approximately 10.1% in the prior-year quarter. Net margin contracted by 370bp to 3.5% from 7.2%. Gross profit declined 5.6% to ¥18.924bn, broadly tracking the revenue reduction. However, SG&A increased 2.5% to ¥17.509bn, creating substantial negative operating leverage and accounting for the sharp profit compression. EBITDA decreased to ¥2.279bn and the EBITDA margin was 8.1%, indicating that depreciation add-backs only partly mitigate the weaker operating result. Operating cash flow of ¥1.530bn exceeded net income by 1.55x, supporting accrual quality despite weaker earnings. Free cash flow remained positive at ¥0.255bn after ¥0.844bn of capital expenditure. Cash conversion, defined as OCF/EBITDA, was low at 0.67x and merits monitoring because only two-thirds of EBITDA converted to operating cash flow. The balance sheet remains conservatively positioned, with a 182.9% current ratio, ¥22.812bn of cash and deposits, and reported debt/EBITDA of 0.22x. Full-year company guidance still calls for 3.9% revenue growth and 5.2% operating-income growth, but Q1 operating-income progress is only 12.9% versus a standard 25% pace. This makes a material acceleration in sales and, especially, SG&A absorption necessary over the remaining quarters. The forecast annual dividend of ¥56 per share implies a manageable 41.5% dividend payout ratio against forecast EPS of ¥135.09.

Profitability Analysis

Annualized ROE is 6.2%, below the 8% concern threshold, and the DuPont decomposition is net profit margin of 3.5% × asset turnover of 1.354x × financial leverage of 1.30x. The principal constraint is profitability rather than leverage: the 3.5% net margin is below the 5-10% range generally viewed as sound, while leverage remains modest. The Q1 operating-margin decline to 5.0% from approximately 10.1% a year earlier is the most consequential change in the earnings model. Revenue decreased 4.9%, whereas SG&A rose 2.5%, demonstrating negative operating leverage in the restaurant network. Gross margin was 67.1%, so the earnings deterioration appears driven more by the inability to absorb personnel, store and other operating costs than by a major collapse in gross-margin structure. EBITDA margin was 8.1%, which remains above the 5.0% EBIT margin due to ¥0.864bn of depreciation and amortization. The tax burden was 0.627, equivalent to a 37.3% effective tax rate, and reduced the conversion of pre-tax income to net income. The interest burden of 1.113 reflects net non-operating income rather than financial stress; interest expense was only ¥0.009bn and interest coverage was 157.22x. Non-operating income of ¥0.261bn, including ¥0.094bn of dividend income, supported ordinary income relative to operating income but is not large enough to offset the core operating decline. Extraordinary items were immaterial, comprising a ¥0.034bn loss on disposal of fixed assets and a ¥0.001bn gain on asset sales. The sustainability of any profit recovery therefore depends primarily on restoring restaurant sales growth and improving fixed-cost absorption, rather than on non-operating items or balance-sheet leverage.

Growth Assessment

The top line contracted 4.9% year on year in Q1, making current-quarter momentum inconsistent with the full-year revenue-growth forecast of 3.9%. Q1 revenue represents 23.3% of the ¥121.357bn full-year sales forecast, 1.7 percentage points below the standard 25% Q1 progress rate. Q1 operating income represents only 12.9% of the ¥10.951bn full-year operating-income forecast, 12.1 percentage points below the standard pace and therefore a significant execution gap. Net income progress is 13.9% of the ¥7.096bn full-year forecast, also indicating that the earnings recovery is weighted heavily toward subsequent quarters. Management has not revised either earnings or dividend guidance, which indicates continued confidence but leaves a high required run-rate for the remainder of the year. The company operates in a single Chinese-food business segment, so results are directly exposed to the performance of the domestic restaurant operation without segment diversification. For a restaurant operator, the most relevant operational risks to the recovery are customer traffic, average ticket, food-input costs and labour-cost absorption. The low inventory balance of ¥0.184bn limits inventory-obsolescence exposure, but it also means earnings sensitivity is concentrated in daily store-level sales and cost execution. Capital expenditure of ¥0.844bn was almost equal to depreciation of ¥0.864bn, with a 0.98x capex/depreciation ratio indicating broadly maintenance-level reinvestment rather than an unusually aggressive expansion cycle. Near-term growth quality should be judged by whether revenue turns positive while SG&A growth moderates below sales growth.

Financial Health

Financial health is strong. Current assets of ¥27.847bn exceeded current liabilities of ¥15.229bn, producing working capital of ¥12.618bn and a current ratio of 182.9%. The quick ratio was similarly robust at 181.6%, supported principally by ¥22.812bn of cash and deposits. Cash represented 27.4% of total assets, providing substantial liquidity flexibility. Total liabilities were only 23.0% of total assets, while total equity was ¥64.181bn. The reported debt-to-equity ratio was 0.30x, well below the 2.0x level that would indicate aggressive leverage. Debt/EBITDA of 0.22x, debt/capital of 0.8%, EBITDA interest coverage of 253.22x and EBIT interest coverage of 157.22x indicate minimal debt-service risk. Current liabilities include ¥2.000bn of current maturities of long-term loans, but the cash balance and current asset coverage indicate no maturity mismatch risk. Long-term loans declined by ¥0.500bn year on year to ¥0.500bn, reflecting deleveraging. Asset retirement obligations were ¥2.615bn, equal to 13.6% of total liabilities and therefore material relative to the liability base. This elevated ARO ratio is typical of a restaurant estate with leased or operated premises requiring restoration obligations, but it raises the fixed obligation associated with maintaining and closing sites. The ARO is not a near-term financing concern given the liquidity position, but it increases exposure to store rationalization and restoration-cost inflation. Intangible assets increased 52.5% year on year to ¥0.810bn, but remained only 1.0% of total assets, so intangible-asset concentration is low. Property, plant and equipment of ¥40.707bn, or 48.8% of assets, underscores the capital-intensive nature of the store network and makes site productivity important.

Notable B/S Changes

Intangible assets: +¥0.279bn (+52.5%) to ¥0.810bn — percentage growth is high, but the balance remains only 1.0% of total assets; concentration and impairment risk appear limited at the current scale. Long-term loans: -¥0.500bn (-50.0%) to ¥0.500bn — reflects deleveraging and further strengthens an already conservative debt profile. Cash and deposits: -¥1.715bn (-7.0%) to ¥22.812bn — reduced by dividend payments, loan repayment and investing outflows, but remains a substantial liquidity buffer. Investment securities: -¥0.446bn (-10.0%) to ¥4.001bn — together with negative securities valuation OCI, this indicates some market-value pressure, though exposure is only 4.8% of total assets. Asset retirement obligations: +¥0.017bn to ¥2.615bn — the balance is significant at 13.6% of liabilities and should be monitored as a store-network closure and restoration-cost obligation.

Cash Flow Quality

Operating cash flow was ¥1.530bn, exceeding ¥0.988bn of net income and producing an OCF/net-income ratio of 1.55x. This is a positive earnings-quality signal and is corroborated by a negative 0.7% accruals ratio, which does not indicate aggressive accrual-based profit recognition. Operating cash flow nevertheless declined sharply from ¥2.989bn in the prior-year quarter, broadly reflecting the lower earnings base. Cash conversion of 0.67x was below the 0.7x alert threshold, meaning EBITDA of ¥2.279bn was not fully converted into operating cash during the quarter. The root cause is that operating cash flow was reduced by ¥1.478bn of income taxes paid, despite a positive pre-tax earnings result. This is particularly relevant because the company also experienced a ¥0.203bn reduction in trade payables, which consumed cash, although a ¥0.697bn reduction in trade receivables provided an offsetting cash benefit. The low cash-conversion alert therefore reflects tax and working-capital timing more than a failure of net income to convert into cash. Its impact is to limit internally generated cash available for dividends and discretionary expansion during a period of weaker profits. Capital expenditure was ¥0.844bn, nearly matching depreciation and amortization of ¥0.864bn. Free cash flow was positive at ¥0.255bn, but its small size leaves limited quarterly headroom after routine reinvestment. Investing cash outflow was ¥1.275bn, exceeding capex due to other investing activity, and financing cash outflow was ¥1.971bn, including ¥1.470bn of dividends paid and ¥0.500bn of loan repayments. Consequently, cash and cash equivalents declined by ¥1.715bn during Q1 to ¥22.812bn, while remaining ample relative to operating needs.

Dividend Sustainability

The full-year dividend forecast is ¥56 per share, unchanged from the company forecast. Against forecast EPS of ¥135.09, the implied dividend payout ratio is 41.5%, below the 60% sustainability benchmark. This payout level appears supportable by the company’s strong liquidity, low reported leverage and substantial equity base. However, Q1 free cash flow was only ¥0.255bn, while cash dividends paid were ¥1.470bn, so quarterly free cash flow did not cover the cash dividend outflow. The mismatch is not by itself evidence of an unsustainable policy because dividend-payment timing is not aligned with quarterly earnings generation and cash reserves are substantial. Sustained coverage will nonetheless require operating cash flow to improve alongside the company’s planned second-half earnings acceleration. No share repurchases were recorded in Q1, so the relevant capital-return measure is the dividend payout ratio rather than a total return ratio. The key determinant of dividend resilience is whether operating margins recover from the Q1 5.0% level toward the level required to achieve the full-year forecast.

Risk Assessment

Business risks include Restaurant demand risk: Q1 sales fell 4.9% year on year; weaker customer traffic or average ticket would make the full-year 3.9% sales-growth forecast difficult to achieve., Cost absorption risk: SG&A increased 2.5% while revenue declined, causing a 500bp operating-margin contraction. Persistent labour, utility, rent and store-operating cost inflation would continue to pressure margins., Single-business concentration: The group operates only in the Chinese-food business, leaving earnings directly exposed to domestic restaurant-market conditions., Store-network asset productivity risk: PPE represents 48.8% of total assets and asset retirement obligations are material, increasing sensitivity to underperforming locations, closure costs and restoration obligations., Consumer and competitive risk: discretionary dining demand is sensitive to consumer confidence, food-price inflation, labour availability and competition from other restaurant formats and takeout options..

Financial risks include Low cash-conversion risk: OCF/EBITDA of 0.67x is below the 0.7x alert threshold. While tax payments and working-capital movements explain part of the weakness, continued low conversion would constrain self-funded investment and distributions., Guidance execution risk: Q1 operating-income progress of 12.9% is 12.1 percentage points below the standard 25% Q1 pace, requiring a substantial profit recovery during the remainder of the year., Asset retirement obligation risk: AROs of ¥2.615bn equal 13.6% of liabilities. This ratio is meaningful for a restaurant operator and could raise cash requirements if store closures or renovation activity increase., Market-value risk on investment securities: comprehensive income of ¥0.583bn was below net income because other comprehensive income was negative ¥0.405bn, including a negative ¥0.305bn valuation movement on securities..

Key concerns include The principal near-term concern is negative operating leverage, not balance-sheet solvency., The large gap between Q1 actual operating-income progress and full-year guidance raises the required pace of margin recovery., Cash flow remains positive and net income is cash-backed, but low OCF/EBITDA conversion warrants monitoring., Material restoration obligations should be evaluated alongside store-network productivity and capital-allocation needs..

Investment Implications

Key takeaways include Q1 sales and profits declined, with operating income down 52.8% and net income down 53.7%., Operating-margin compression to 5.0% was driven by SG&A growth exceeding revenue growth., Cash earnings quality remains reasonable on an OCF/net-income ratio of 1.55x, although EBITDA cash conversion was weak at 0.67x., Liquidity and leverage metrics are strong, providing capacity to absorb a temporary earnings downturn., Full-year guidance implies a pronounced recovery after Q1, making subsequent revenue and cost trends decisive..

Metrics to watch include Quarterly revenue growth relative to the 3.9% full-year growth forecast, Operating margin and SG&A growth relative to sales growth, Operating-income progress versus the ¥10.951bn full-year forecast, OCF/EBITDA cash conversion and free cash flow after maintenance capex, Cash balance, dividend cash outflow and asset retirement obligation trends, Capital expenditure relative to depreciation and store-asset productivity.

Regarding relative positioning, The company is financially conservative, with high liquidity, very low debt burden and exceptionally strong interest coverage. Operationally, however, the Q1 5.0% operating margin and annualized 6.2% ROE are below stronger profitability benchmarks, positioning the central analytical issue as margin recovery and execution rather than financial leverage.