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Morningstar | A Surprise in Lawson's Profit Rebound Fueled by Cashback Programs and Non-C-Store Subsidiaries

No-moat Lawson’s first-quarter profits came in above our expectation and the company’s internal target with operating revenue up 3.8% and operating profits up 12%. While we had anticipated positive results of the core C-store business, the robust profit growth posted by the food retailing chain and entertainment subsidies was a surprise. We have maintained our forecasts and the fair value estimate of JPY 5,500 because we suspect that the upward trend of same-store growth was largely inflated by the cashback offered by the QR code payment vendors. Additionally, a delay in investment and spending, skewered toward the second half, might cap profit growth of later quarters. We intend to review our estimates when we see strong evidence that the positive trend is sustainable without the help of cash rebate.

Same-store sales of the C-store business grew 1.3%, boosted by cigarette sales (contributing more than 1 percentage point) and new hit products. The same-store growth was most driven by a 2.6% increase in the basket price while customer traffic continued to fall. Gross margins fell 20 basis points as a result of increased sales contribution of the low-margin cigarettes.

The same-store sales trend has turned positive from April after it started providing with the third-party QR code payment services from late March. This is in line with the trend we have spotted in rival FamilyMart, another beneficiary of the 20% cash rebate offered by the QR code payment providers. Operating profits of the C-store business grew 9% as a result of positive sales performance and a marginal increase in store counts (net 24 stores). Moreover, a delay in marketing investment combined with reduced food disposal further boosted profits. While we acknowledge an increased number of hit items during the quarter, we believe impacts are limited given the sizable contribution of cigarette sales in the same-store store growth.

Seijo-Ishii, the premium food store chain, saw its same-store sales growth rise to 4.6% and profits increase 22% thanks to increased media coverage from the beginning of 2019. The products featured in the TV programs, mostly the private-label ready-to-eat foods, lured customers to the stores. Profits of the entertainment business also grew more than 50%, from a low base though, as a few hit movies and increased demand during the 10-day golden week holiday drove cinema and ticket sales. The demand fueled by media effects and hit titles as extended holidays, however, could be short-lived.