SUNDRUG CO.,LTD. FY2027 Q1 Earnings Report

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Executive Summary

Despite higher revenue, operating income declined due to an increase in the SG&A ratio, resulting in a higher-revenue, lower-profit quarter. Revenue was ¥2,153.3B (+3.7% YoY), operating income was ¥120.9B (-1.5%), ordinary income was ¥118.8B (-2.2%), and net income was ¥80.2B (+0.9%). Revenue remained solid, supported by higher sales in both the Drugstore and Discount Store Businesses. However, with the gross margin remaining flat, the SG&A ratio increased, causing the operating margin to decline to 5.6% (5.9% in the previous year). Net income achieved a slight increase due to a lower effective tax rate.

Factors Affecting Performance

【Revenue】Revenue increased 3.7% YoY to ¥2,153.3B. The Drugstore Business grew to ¥1,371.1B (+2.9%, composition ratio 59.3%), while the Discount Store Business increased to ¥940.5B (+4.5%, composition ratio 40.7%). Both businesses expanded, with the Discount Store Business recording the higher growth rate and leading the increase in revenue.

【Profit and Loss】Gross profit was ¥553.7B (gross margin 25.7%, nearly flat versus 25.7% in the previous year). However, SG&A expenses increased to ¥432.8B (SG&A ratio 20.1%, compared with 19.8% in the previous year), resulting in operating income of ¥120.9B (-1.5% YoY). Ordinary income was ¥118.8B (-2.2%), partly due to an increase in non-operating expenses, including ¥1.4B in interest expenses. Net income achieved a slight increase of 0.9% to ¥80.2B, partly due to a lower income tax burden. Extraordinary items were limited, consisting of extraordinary income of ¥0.9B and extraordinary losses of ¥0.6B, indicating that the results were primarily driven by recurring earnings. In conclusion, this was a quarter of higher revenue but lower profit.

Segment Analysis

Segment profit was ¥66.3B for the Drugstore Business (-3.1% YoY, profit margin 4.8%) and ¥54.6B for the Discount Store Business (+0.5%, profit margin 5.8%). Although the core Drugstore Business accounted for 59.3% of the revenue mix, it underperformed in terms of profit margin and recorded lower profit. Meanwhile, the Discount Store Business maintained increases in both revenue and profit, with a profit margin approximately 1.0pt higher than that of the Drugstore Business. Changes in the business mix, namely the increase in the Discount Store Business ratio, could become a positive factor for the Company-wide profit margin going forward.

Key Financial Metrics

【Profitability】The operating margin declined to 5.6% from 5.9% in the previous year, while the net profit margin was nearly flat at 3.7% (3.8% in the previous year). Although the gross margin of 25.7% was nearly unchanged from the previous year, the increase in the SG&A ratio to 20.1% was the primary cause of the decline in the operating margin.【Cash Quality】Inventories of ¥1,123.6B accounted for 24.1% of total assets, indicating that inventory levels remain high. Accounts payable of ¥776.4B declined from the previous year, suggesting a trend toward shorter supplier payment terms.【Investment Efficiency】ROE was 2.8%, and total asset turnover was approximately 0.46x (revenue/total assets), both at low levels. Inventory efficiency is one area where capital efficiency could be improved.【Financial Soundness】The equity ratio remained high at 61.5% (61.0% in the previous year). With current assets of ¥2,251.4B versus current liabilities of ¥1,228.0B, the current ratio was approximately 183%, indicating a sound position. Although the Company had long-term borrowings of ¥427.7B, its financial leverage remained conservative.

Cash Flow Analysis

Although direct data from the statement of cash flows has not been disclosed, an analysis of funding trends based on changes in the balance sheet indicates that cash and deposits declined by ¥91.8B to ¥613.5B from ¥705.2B in the previous year. Inventories increased to ¥1,123.6B from ¥1,100.7B, while accounts payable declined to ¥776.4B from ¥827.1B, potentially placing pressure on cash due to an increase in working capital. Property, plant and equipment increased to ¥1,518.0B from ¥1,484.9B, suggesting that store investments are continuing. The simultaneous accumulation of inventory and decline in accounts payable represent changes that require monitoring from the perspective of cash generation capacity.

Quality of Earnings

Extraordinary income of ¥0.9B and extraordinary losses of ¥0.6B were both immaterial relative to net income, indicating that earnings were primarily generated by recurring operating activities. Non-operating income was ¥2.2B, remaining below 0.1% of revenue, indicating low reliance on non-operating income. Although a gap exists between ordinary income of ¥118.8B and net income of ¥80.2B, this was primarily attributable to income taxes of ¥38.9B (an effective tax rate of approximately 32.7%), which is considered to be within the range of a normal recurring tax burden. Comprehensive income was ¥79.9B, nearly in line with net income of ¥80.2B. The impact of OCI items, such as valuation differences on other securities, was immaterial, and earnings quality was stable.

Earnings Forecast and Guidance

Progress against the full-year plan (revenue of ¥8,760.0B, operating income of ¥488.0B, ordinary income of ¥481.0B, and net income of ¥321.5B) was 24.6% for revenue, 24.8% for operating income, and 24.9% for net income in Q1, broadly in line with the simple average of 25%. Neither the earnings forecast nor the dividend forecast was revised as of the current quarter, and progress is considered to be in line with the plan. Trends in the SG&A ratio and inventory efficiency will be key factors affecting progress from the second half onward.

Shareholder Returns

Against the Company’s planned EPS of ¥274.87, the full-year dividend forecast is ¥132.00, resulting in a payout ratio of approximately 48%. The previous year’s dividend was at a comparable annualized level, indicating a stable dividend policy rather than a significant increase or decrease in dividends. While the conservative financial structure, reflected in an equity ratio of 61.5%, supports dividends, if the decline in the operating margin continues, improving SG&A and inventory efficiency will be key to expanding dividend capacity through earnings growth.

Risk Factors

1. Risk of deterioration in inventory efficiency: Inventories increased to ¥1,123.6B from ¥1,100.7B in the previous year, reaching 24.1% of total assets. Inventory stagnation could lead to future markdowns and disposal losses.

2. Risk of pressure on profitability from a rising SG&A ratio: The SG&A ratio increased to 20.1% from 19.8% in the previous year, with SG&A growth exceeding the revenue growth rate of +3.7%. The cost structure, including labor and logistics expenses, could continue to pressure the operating margin.

3. Risk associated with low capital efficiency: ROE was 2.8%, and total asset turnover remained at approximately 0.46x. Future expense recognition associated with maintaining the store network, including asset retirement obligations of ¥84.7B, could also constrain improvements in capital efficiency.

Industry Benchmark (Reference; Compiled by the Company)

Profitability and Returns

Profitability metrics exceeded the industry median, placing the Company in the upper tier of the industry.

Growth and Capital Efficiency

The revenue growth rate was below the industry median, indicating relatively weaker growth compared with industry peers.

※Source: Compiled by the Company

Key Points in the Earnings Results

1. While revenue remained solid, the increase in the SG&A ratio lowered the operating margin by approximately 30bp. It is necessary to monitor whether changes in the cost structure could become a turning point in the profitability trend.

2. Inventories accounted for 24.1% of total assets, while accounts payable declined from the previous year. The impact of changes in working capital efficiency on cash generation capacity will be an area of focus.

3. By segment, the Discount Store Business exceeded the Drugstore Business in terms of profit margin. The impact of changes in the business mix on the structure of Company-wide profitability will be a key point 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 were used (there is a timing difference from 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 / Mechanically calculated value based solely on 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 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 a professional as necessary.

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