EUR 850.00 For Business Accounts Only

Morningstar | Increased Capital Expenditure and Fierce Competition Depress Lawson's Profits; Shares Fairly Valued. See Updated Analyst Note from 15 Apr 2019

No-moat Lawson’s fourth-quarter profits came in somewhat above our expectation and the company’s guidance, but the outlook for 2019 remains gloomy with flat profits. Increased investment for the C-store labor-saving technologies and equipment will continue to depress profits while we expect the same-store growth to stay scarce. The results echo our thesis that Lawson is in an inferior position to compete with the top two players and the pressure to expand the chain size could jeopardize C-store profitability.

We have reduced our fair value estimate to JPY 5,500 from JPY 6,100 after raising capital expenditure and lowering profit projections by 4%-5% for the explicit forecast period. Shares are fairly valued after a 12% plunge following the dividend cut, with a 5% upside to our fair value estimate. Our profit and earnings forecasts are a touch above the company guidance.

Despite the efforts to lift sales during evening/night time, it failed to grow same-store sales which declined by 0.2% during the quarter. We expect another marginal decline in 2019 compared with the company’s target of 1% growth, assuming that fierce competition and consumers’ frugal behavior post-tax hikes will depress customer traffic. Capital expenditure will decrease by 30% year on year due to a cut in new store openings to 700 doors, down from more than 1000 in 2018. Due to deteriorated profitability of the C-store business, management has decided to slowdown the pace of openings while raising the number of store closure to 700 doors from the previous 300-400 level. We expect continued investment will pump up capital expenditure over the midterm and increase our projections by 10% beyond 2020.

We take the strategy to channel resources to the existing stores as a positive and expect closure of underperforming stores to reduce costs. Yet, Lawson appears to be under pressure to catch up to rival FamilyMart’s size, which may force management to resume store expansion when it sees profit recover. Management intends to encourage the franchisees to run multiple stores by lowering the fee charge, believing such strategy will facilitate its goal to expand the size of the chain. To have the same franchisees running stores in an area not only reduces competition but smooth shift arrangement when franchisees have access to a larger pool of staff. On the contrary, we do not think that Lawson will see sizable cost savings by adding another 2,000 stores to reach the level of FamilyMart’s 16,000. Indeed, FamilyMart’s profit improvement is driven by closure of a large number of underperforming stores and a catch-up of Circle K Sunkus’ per store sales to the level of FamilyMart’s, rather than cost savings through adding another 4,500 stores.


As we had highlighted, a high dividend yield at 3.8% was a key support to Lawson’s share price and a failure to recover C-store profits could trigger dividend cut as a payout ratio at 90% is not sustainable. Management has announced a revised dividend policy after revealing that it does not expect a recovery in profit in 2019. The unexpected 40-plus% dividend cut, down to JPY 150 from JPY 255, sent the share price down more than 12% on the following trading day. Management has set a payout ratio at 50% with minimum distribution of JPY 150 per share to secure capital for C-store investment.