SUNDRUG CO.,LTD. FY2027 Q1 Earnings Report

Quick View

Executive Summary

The key takeaway for the quarter is that revenue increased while profit declined, indicating that revenue growth has not translated into profit growth. Revenue was ¥2,153.3B (+3.7% year on year), Operating Income was ¥120.9B (-1.5%), Ordinary Income was ¥118.8B (-2.2%), and Net Income was ¥80.2B (+0.9%). Both the Drugstore Business and Discount Store Business secured revenue growth; however, the Operating Income margin declined by approximately 30bp from the same period of the previous year to 5.6%, indicating challenges in absorbing costs.

Factors Affecting Results

【Revenue】Revenue was ¥2,153.3B, representing a 3.7% year-on-year increase. The Drugstore Business generated ¥1,371.1B (+2.9%), while the Discount Store Business generated ¥940.5B (+4.5%). Both businesses drove revenue growth, with the Discount Store Business posting the relatively higher growth rate.

【Profit and Loss】Operating Income was ¥120.9B, down 1.5% year on year, while Ordinary Income was ¥118.8B, down 2.2%. Although the gross margin was maintained at 25.7%, the SG&A expense ratio was 20.1%, and the company was unable to fully absorb the increase in revenue, resulting in a decline in Operating Income. Non-operating income and expenses resulted in a net excess of expenses of ¥2.1B, including interest income of ¥0.3B versus interest expense of ¥1.4B, slightly widening the decline in Ordinary Income. Special gains and losses resulted in a net gain of only ¥0.3B, and their impact on Profit Before Tax was limited. Net Income increased 0.9% year on year to ¥80.2B, due to the effective tax rate declining slightly to 32.7% from the previous year, offsetting the declines at the operating and ordinary income levels. In conclusion, the quarter was characterized by higher revenue but lower profit.

Segment Analysis

The Drugstore Business recorded Revenue of ¥1,371.1B (+2.9% year on year) and Operating Income of ¥66.3B (-3.1%), with a margin of 4.8%, down from approximately 5.0% in the same period of the previous year. As the core business, accounting for 54.8% of total Operating Income, its profit decline despite revenue growth has a significant impact on consolidated profitability. The Discount Store Business recorded Revenue of ¥940.5B (+4.5%) and Operating Income of ¥54.6B (+0.5%), with a margin of 5.8%. It exceeded the Drugstore Business in both revenue growth and margin, although its margin declined slightly year on year. Both businesses secured revenue growth while experiencing margin contraction, making cost-structure efficiency a common challenge.

Key Financial Indicators

【Profitability】The Operating Income margin of 5.6% and Net Income margin of 3.7% both declined by several dozen bp from the same period of the previous year. Although the gross margin was maintained at 25.7%, the SG&A expense ratio of 20.1% put downward pressure on profitability. 【Cash Quality】Non-operating income was small at 0.1% of Revenue, and special gains and losses amounted to a net gain of only ¥0.3B; therefore, Net Income has a low degree of dependence on temporary factors. 【Investment Efficiency】With an Equity Ratio of 61.5%, ROE was 2.8% on a cumulative quarterly basis. Although this represents a reasonable level on an annualized basis, it is relatively low on a standalone quarterly basis. 【Financial Soundness】The current ratio was approximately 183%, while long-term borrowings were ¥427.7B. With an Equity Ratio of 61.5%, the company maintains a substantial capital buffer, and financial leverage remains at a conservative level.

Cash Flow Analysis

As cash flow statement data were not disclosed, cash trends are analyzed based on changes in the balance sheet. Cash and deposits were ¥613.5B, down from ¥705.2B in the same period of the previous year, while inventories were ¥1,123.6B, representing an increase year on year. Accounts payable were ¥776.4B, down from ¥827.1B in the same period of the previous year, and the reduction in trade payables is considered one factor contributing to the decline in cash balances. Total assets were ¥4,652.9B, down from the previous year, while Net Assets were ¥2,862.7B and remained broadly flat, indicating that liabilities were reduced.

Quality of Earnings

The difference between Operating Income of ¥120.9B and Ordinary Income of ¥118.8B resulted from a net excess of expenses of ¥2.1B, as non-operating expenses of ¥4.3B exceeded non-operating income of ¥2.2B. Since non-operating income was small at 0.1% of Revenue, the recurring earnings structure is close to operating profit and loss. Special gains and losses consisted of special gains of ¥0.9B, including a gain on the sale of investment securities of ¥0.3B, offset by special losses of ¥0.6B, including impairment losses and losses on the disposal of fixed assets, resulting in a net gain of only ¥0.3B and a limited impact on Profit Before Tax. The divergence between Ordinary Income and Net Income was attributable to the effective tax rate of 32.7%, with no apparent dependence on one-off tax effects. Comprehensive Income was ¥79.9B, nearly in line with Net Income of ¥80.2B. As changes in valuation differences on available-for-sale securities and other items were limited, the divergence between Net Income and Comprehensive Income was small.

Earnings Forecast and Guidance

The full-year forecast is Revenue of ¥8,760.0B (+4.0% year on year), Operating Income of ¥488.0B (+4.2%), and Ordinary Income of ¥481.0B (+4.1%). There were no revisions to the earnings forecast or dividend forecast for the quarter. Progress toward the full-year forecast was 24.6% for Revenue, 24.8% for Operating Income, and 24.7% for Ordinary Income, all close to the standard level of 25%, indicating that Q1 was broadly on plan. However, as Operating Income declined year on year during the quarter, improvement in profit margins from Q2 onward will be required to achieve the full-year Operating Income growth plan.

Shareholder Returns

The full-year dividend forecast is ¥132.00 per share. Based on the full-year EPS forecast of ¥274.87, the forecast Payout Ratio is approximately 48.0%, and there was no revision to the dividend forecast for the quarter. Compared with the previous year’s dividend of ¥65 (part of the total interim and year-end dividend on a combined basis), the company appears to be on a dividend-increase trend. However, as there was no disclosure regarding share repurchases as of the quarter-end, the assessment is based solely on the Payout Ratio derived from dividends.

Risk Factors

1. Declining inventory efficiency: Inventories were ¥1,123.6B, up from ¥1,100.7B in the same period of the previous year, and annualized inventory turnover days were approximately 64 days, above the general benchmark for retailers. A mismatch in demand forecasts or the accumulation of seasonal products could put pressure on the gross margin.

2. Higher revenue but lower profit in the core business: The Drugstore Business, which accounts for 54.8% of Operating Income, reported a 2.9% year-on-year increase in Revenue, while segment profit declined 3.1%. Changes in the competitive environment or procurement conditions could have a significant impact on consolidated profit.

3. Increase in the SG&A expense ratio: The SG&A expense ratio was 20.1%, up from approximately 19.8% in the same period of the previous year. If increases in costs such as labor and logistics expenses continue, achieving the full-year Operating Income growth plan (+4.2%) will become more difficult.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Return

In terms of profitability, both the Operating Income margin and Net Income margin exceed the industry median, indicating a relatively high level of profitability.

Growth and Capital Efficiency

The Revenue growth rate was below the industry median, indicating relatively moderate growth.

※Source: Compiled by the Company

Key Takeaways from the Financial Results

1. The quarter resulted in higher revenue but lower profit, with Revenue up 3.7% versus Operating Income down 1.5%. The focus going forward will be margin recovery rather than revenue expansion. In particular, the Drugstore Business, which accounts for more than half of Operating Income, recorded a decline in profitability despite revenue growth.

2. Progress toward the full-year plan was broadly standard at 24.6% for Revenue, 24.8% for Operating Income, and 24.9% for Net Income. However, achieving the full-year Operating Income growth plan (+4.2%) will require improvement in SG&A efficiency from Q2 onward.

3. Inventories increased from the same period of the previous year, making inventory efficiency a structural area of focus that could affect the gross margin and cash-generation capacity going forward.

Theoretical Share Price (Reference Value)

Sensitivity: ¥2,533–¥2,680 at ±1% for the cost of equity, and ¥2,601–¥2,610 at ±0.1 for ω.

Notes:

• Net Assets as of the quarter-end are used (there is a time-period mismatch with the full-year forecast).
• As 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 / This is a mechanically calculated value based solely on publicly disclosed data; it 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.)

---

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, and after consulting a professional as necessary.

---End of Report---

---

AI Financial Analysis

Executive Summary

Sandrug delivered a solid sales-led FY2027 Q1, although operating profit growth lagged revenue and reflected modest margin pressure. Consolidated revenue increased 3.7% YoY to ¥215.3bn. Operating income declined 1.5% to ¥12.1bn, while ordinary income fell 2.2% to ¥11.9bn. Profit attributable to owners nevertheless increased 0.9% to ¥8.0bn, supported by a lower effective tax rate of 32.7% versus the prior-year quarter. Gross profit rose 3.8% to ¥55.4bn, broadly tracking sales growth. The gross margin improved by approximately 4bp YoY to 25.7%, indicating that merchandise margin was broadly maintained. However, SG&A expenses increased 5.4% YoY to ¥43.3bn, faster than revenue growth. Consequently, the SG&A ratio rose by roughly 33bp to 20.1%. The operating margin compressed by approximately 30bp to 5.6%. The drugstore business remained the core business by segment profit contribution, generating ¥6.6bn of segment profit, or about 55% of consolidated operating income. Discount-store revenue grew more quickly than drugstore revenue, but both segments experienced lower segment margins. The annualized DuPont ROE was 11.2%, a good level under the stated benchmarks and driven principally by strong asset turnover rather than aggressive leverage. Liquidity remains sound, with a 183.3% current ratio and ¥61.4bn of cash and deposits. The principal operational alert is inventory days of 64 days, above the 60-day warning threshold, despite inventory having risen only 2.1% YoY. Full-year guidance was maintained, and Q1 progress of 24.6% in sales, 24.8% in operating income, and 24.9% in net income is essentially in line with the normal 25% first-quarter run rate. Achieving full-year operating-income guidance of ¥48.8bn, up 4.2% YoY, nonetheless requires a return to positive operating-profit growth after the Q1 decline. The forecast annual dividend of ¥132 per share implies a 48.0% dividend payout ratio against forecast EPS of ¥274.87, which appears balanced with retained earnings and the present capital structure.

Profitability Analysis

The annualized DuPont ROE of 11.2% decomposes into a 3.7% net profit margin, 1.851x asset turnover, and 1.63x financial leverage. Asset turnover is the primary structural driver of returns, consistent with a high-volume drugstore and discount retail model. The 3.7% net margin remains relatively thin, making earnings sensitive to small movements in gross margin, labor, logistics, and store operating costs. Gross margin improved modestly by around 4bp YoY to 25.7%, which is within the 25-35% general-retail benchmark range. In contrast, SG&A grew 5.4%, exceeding the 3.7% revenue increase by approximately 1.7 percentage points. This unfavorable operating leverage drove a roughly 30bp decline in operating margin to 5.6%, from approximately 5.9% a year earlier. The core drugstore segment reported external revenue of ¥121.3bn, up 3.0% YoY, while segment profit fell 3.1% to ¥6.6bn; its segment margin declined about 35bp to 5.5%. The discount-store segment reported revenue of ¥94.0bn, up 4.5% YoY, and segment profit increased 0.5% to ¥5.5bn; its margin declined about 23bp to 5.8%. Thus, the faster-growing discount-store format provided revenue momentum, but did not fully offset profit pressure in the larger drugstore operation. The tax burden factor was 0.673, below the 0.70 normal benchmark, but it improved from the prior-year quarter as tax expense declined to ¥3.9bn. The interest burden factor was a strong 0.985, and interest coverage was 88.9x, indicating that financing costs have little influence on operating profitability. Extraordinary items were immaterial: extraordinary income of ¥0.9bn and extraordinary loss of ¥0.6bn resulted in a net gain of only ¥0.3bn. JGAAP goodwill of ¥1.3bn is just 0.5% of equity, so goodwill amortization and acquisition-accounting effects are unlikely to be material determinants of reported earnings.

Growth Assessment

Revenue growth of 3.7% was underpinned by both operating segments, with the discount-store business growing 4.5% and the drugstore business growing 3.0%. The broad-based sales increase supports the resilience of the company's everyday-consumption retail formats. Gross profit increased 3.8%, slightly faster than sales, confirming that the primary Q1 earnings constraint was not a broad deterioration in gross merchandise margin. Instead, SG&A expansion limited conversion of sales growth into operating profit. Net income rose 0.9%, but this was below revenue growth and was assisted by a lower tax charge rather than an improvement in operating earnings. The maintained full-year sales forecast of ¥876.0bn calls for 4.0% YoY growth, close to the Q1 growth rate. Q1 sales progress is 24.6%, only 0.4 percentage points below the standard 25% first-quarter pace. Q1 operating-income progress is 24.8% against the ¥48.8bn full-year plan, also effectively on pace. Q1 net-income progress is 24.9% against the ¥32.2bn forecast, similarly in line with seasonality. The guidance therefore does not require an unusual acceleration in sales, but it does imply margin recovery because full-year operating income is forecast to rise 4.2% YoY after a 1.5% Q1 decline. Key determinants of that recovery will be whether SG&A growth normalizes relative to sales and whether inventory can be converted without elevated markdowns. The 64 inventory days signal that sales growth should be assessed alongside stock productivity and merchandise turnover in subsequent quarters.

Financial Health

Financial health is sound, supported by a 61.5% equity ratio and total equity of ¥286.3bn. The current ratio of 183.3% is comfortably above the 1.5x healthy benchmark and does not indicate a short-term liquidity warning. Working capital was ¥102.3bn, providing a substantial current-asset buffer. The quick ratio was 91.8%, slightly below the 1.0x benchmark, reflecting the inventory-intensive nature of the retail model rather than a broad liquidity shortfall. Cash and deposits of ¥61.4bn covered the current portion of long-term loans of ¥5.2bn by a wide margin. Accounts payable of ¥77.6bn also provide meaningful operating financing, consistent with retail purchasing cycles. Long-term loans were ¥42.8bn, and debt-to-capital was a conservative 13.0%. The reported debt-to-equity ratio of 0.63x remains well below the 2.0x warning threshold. Interest coverage of 88.9x demonstrates ample capacity to service interest obligations. Total liabilities represented 38.5% of total assets, leaving the balance sheet predominantly equity financed. Long-term loans increased modestly YoY, but the increase was small relative to equity and operating scale. Asset retirement obligations of ¥8.5bn are relevant to the leased/store-network footprint and should be monitored alongside future store portfolio changes.

Notable B/S Changes

Total assets: -¥10.2bn (-2.1%) YoY to ¥465.3bn, primarily reflecting lower current assets despite continued property investment. Cash and deposits: -¥9.2bn (-13.0%) YoY to ¥61.4bn - liquidity remains ample, but the decline should be assessed alongside inventory and funding movements. Accounts receivable: -¥2.8bn (-8.5%) YoY to ¥29.6bn - reduces receivable exposure and partly offsets the working-capital burden from higher inventory. Inventories: +¥2.3bn (+2.1%) YoY to ¥112.4bn - stock rose while reported inventory days reached 64, elevating merchandise-turnover and markdown risk. Property, plant and equipment: +¥3.3bn (+2.2%) YoY to ¥151.8bn - consistent with continued store and logistics asset investment; fixed-asset productivity remains important. Accounts payable: -¥5.1bn (-6.1%) YoY to ¥77.6bn - lower supplier financing contributed to the reduction in current liabilities. Long-term loans: +¥0.7bn (+1.7%) YoY to ¥42.8bn - a modest increase that remains manageable relative to equity and the 13.0% debt-to-capital ratio. Income taxes payable: -¥4.2bn (-49.0%) YoY to ¥4.3bn - a major reduction in current liabilities that contributed to the improvement in the current ratio. Current liabilities: -¥11.2bn (-8.4%) YoY to ¥122.8bn - the decline improved the current ratio to 183.3%. Total equity: +¥0.3bn (+0.1%) YoY to ¥286.3bn - capital remains robust, with the equity ratio improving to 61.5% from 60.1%.

Cash Flow Quality

The earnings mix was predominantly operating in nature, as operating income of ¥12.1bn was substantially larger than the net ¥0.3bn extraordinary gain. The difference between ordinary income of ¥11.9bn and net income of ¥8.0bn was mainly attributable to ¥3.9bn of income tax expense, consistent with the 32.7% effective tax rate. Net income growth of 0.9% was weaker than revenue growth and did not reflect an expansion in operating profitability. Inventory increased by ¥2.3bn YoY to ¥112.4bn, while inventory days of 64 days exceeded the 60-day retail warning threshold. The root cause of this alert is that stock held relative to the annualized cost-of-sales run rate is elevated for a high-frequency drugstore and discount retail model. This level can be partly consistent with a broad SKU assortment, seasonal procurement, and store-network operations, but it raises the risk that future sales conversion may require more promotional activity or markdowns. The impact on the earnings thesis is that reported gross-margin resilience may be harder to sustain if inventory productivity does not improve. Accounts receivable declined by ¥2.8bn YoY and trade payables declined by ¥5.1bn YoY, making inventory the principal working-capital item to monitor. Cash and deposits decreased by ¥9.2bn YoY to ¥61.4bn, while the company retained ample liquidity relative to debt maturities.

Dividend Sustainability

The full-year dividend forecast is ¥132 per share, unchanged under the disclosed forecast revision status. Against forecast EPS of ¥274.87, the implied dividend payout ratio is 48.0%. This is below the 60% sustainability benchmark and leaves room for earnings retention. The forecast dividend is also supported by retained earnings of ¥280.2bn, equivalent to the overwhelming majority of total equity. Q1 EPS of ¥68.53 represents 24.9% of forecast full-year EPS, closely matching the normal first-quarter pace. The maintained dividend forecast is therefore consistent with the maintained earnings plan at this stage. Dividend capacity is further supported by the conservative 13.0% debt-to-capital ratio and strong interest coverage. The key factor for ongoing sustainability is preservation of operating margins and inventory discipline, since the retail model operates with a relatively thin net margin. No share repurchase amount is provided, so assessment is confined to the dividend payout ratio rather than a total return ratio.

Risk Assessment

Business risks include Inventory productivity risk: inventory days of 64 exceed the 60-day warning threshold. Elevated stock levels can increase markdown, shrinkage, obsolescence, and cash-conversion risk if sell-through weakens., Margin recovery risk: operating margin declined about 30bp YoY to 5.6% because SG&A increased 5.4%, faster than sales growth. The full-year operating-income plan requires this cost/revenue relationship to improve., Consumer and competitive risk: drugstore and discount-store formats are exposed to price competition, promotional intensity, changes in household purchasing behavior, and online retail substitution., Store-network cost risk: property, plant and equipment totaled ¥151.8bn and asset retirement obligations totaled ¥8.5bn, leaving earnings exposed to store productivity, occupancy economics, and portfolio optimization costs..

Financial risks include Liquidity is solid overall, but the 91.8% quick ratio indicates that liquid-asset coverage of current liabilities is below 1.0x without inventory conversion., Cash and deposits declined ¥9.2bn YoY, while long-term loans increased ¥0.7bn. Neither movement currently threatens solvency, but their direction warrants monitoring if inventory remains elevated., The effective tax rate of 32.7% remained a material deduction from pre-tax profit; the Q1 net-income increase benefited from a lower tax charge rather than operating-income growth..

Key concerns include High priority: inventory days of 64. The likely impact is pressure on future cash conversion or markdown requirements if stock rotation does not normalize., High priority: the gap between 3.7% revenue growth and negative 1.5% operating-income growth. This indicates unfavorable operating leverage during the quarter., Medium priority: both operating segments saw segment-margin compression, including the core drugstore business, suggesting that cost pressure was not isolated to one format., Medium priority: management's maintained full-year operating-income growth forecast requires a reversal of the Q1 operating-profit trend..

Investment Implications

Key takeaways include Sales growth was broad based, with discount-store revenue growing 4.5% YoY and drugstore revenue growing 3.0% YoY., The Q1 earnings profile was mixed: gross margin held at 25.7%, but SG&A growth outpaced revenue and reduced operating income by 1.5%., Annualized ROE of 11.2% is supported by high asset turnover and moderate financial leverage., Balance-sheet risk is contained, with a 183.3% current ratio, 13.0% debt-to-capital, and 88.9x interest coverage., The maintained forecast is broadly supported by normal Q1 progress rates, but operating-margin improvement is necessary to meet the full-year profit target., The forecast ¥132 DPS implies a sustainable-looking 48.0% dividend payout ratio..

Metrics to watch include Inventory days and absolute inventory growth, particularly the ability to reduce the current 64-day level., Gross margin and markdown-related indicators as measures of inventory quality., SG&A growth relative to revenue growth and the operating-margin trajectory., Drugstore segment margin, given its position as the largest contributor to segment profit., Discount-store segment profit conversion, given its faster revenue growth., Cash and deposits, long-term loan balances, and trade-payable trends., Progress toward the ¥48.8bn full-year operating-income forecast..

Regarding relative positioning, Sandrug displays a financially conservative, high-turnover retail profile: gross margin is within the general-retail benchmark range, annualized ROE is in the good 10-15% range, and leverage is restrained. Relative to the operating benchmark of above 8% for a good operating margin, however, the 5.6% operating margin remains modest and makes execution on SG&A discipline and inventory turnover particularly important.