Morningstar | Lawson's Better-Than-Expected Profits Boosted by Delay in Investment; No Fundamental Improvement
No-moat Lawson's second-quarter profits came in 12%-13% above our expectations and its interim guidance, thanks to cost-cutting and a delay in marketing investment. However, management's effort to lift per-store sales through increased evening/nighttime traffic has yet to bear fruit. Lawson has accordingly reduced its sales guidance by JPY 10 billion or 1.3% but kept its profit targets unchanged. We maintain our forecasts and fair value estimate of JPY 6,100. We reiterate our view that expanding per-store sales will remain a challenge amid intensified competition in the broader food space fueled by the increased threat from drugstores, which tend to use heavy discounts on processed foods to lure price-sensitive consumers, and the revival of some fast food chains.Operating profits fell 4% compared with our expectation of a 20% decline and a 22% decline in the first quarter. The better-than-expected profits (JPY 4 billion above guidance) are attributable to a delay in the JPY 2.5 billion marketing investment, JPY 1 billion cost savings in IT systems, and JPY 0.5 billion in cost-cutting. While the company expects another JPY 1 billion cost savings in IT systems in the second half after it has revised the implementation plan, the delayed marketing spending combined with the impact of the sales forecast cut and increased costs caused by natural disasters will boost costs by JPY 5 billion in the second half, offsetting the JPY 4 billion in profits saved during the first half.
The marketing spending could be a potential upside risk to our current forecasts. Lawson may underspend the marketing budget if the external environment, such as the weather, plays in convenience stores' favor. We also intend to watch the execution of the new supply-chain practices closely. Management has admitted that the new practices have not yet yielded results. Despite hot weather, same-store sales growth remains negative, deteriorating to a 1% decline during the second quarter compared with a 0.6% decline in the first quarter.
Lawson and its subsidiaries are mainly engaged in the operation of convenience store chains in Japan and overseas. As of Feb 28 2017, Co. maintains 12,575 stores in Japan and 1,156 stores in China, Thailand, Indonesia, the Philippines and the U.S. Co. is also engaged in the operation of a chain of small supermarkets that seeks to develop and manufacture high-value-added products, the sale of tickets for concerts, sports events, movies and others; the import and sale of compact discs and digital versatile discs; the provision of home delivery services of foods and daily goods through the Internet; the operation of multiplex theaters; and the financial and consulting businesses.
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Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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