EUR 850.00 For Business Accounts Only

Morningstar | Lawson's Efforts to Lift per-Store Sales yet to Deliver Results; Shares Overvalued

No-moat Lawson’s third-quarter profits came in largely in line with our expectation. While management claims that sales during evening/night time have improved by 3% after enriching product offerings through a revamp of its supply chain, its efforts to lift overall per-store sales has yet to bear fruit. It appears that day-time sales have been affected after the deliveries center on the evening offerings. Same-store sales failed to turn positive, seeing a 0.3% decline. We have marginally adjusted our assumptions but maintained the fair value estimate of JPY 6,100, implying a 10% downside. We reiterate our view that expanding per-store sales will remain challenging amid fierce competition in the broader food space with drug stores increasing assortment of processed foods at attractive prices while fast food restaurants fighting for a share in the expanding home-meal-replacement market.

The trend of gross margins of C-stores turned negative, falling about 10 basis points, during the quarter. It appears that margins of some outperforming product categories, such as rice meal boxes and rice balls, saw a drop in margins. The company’s efforts to lift margins may remain difficult given rising input costs including ingredients and labors. Consumers are also looking for products offering good value which tend to offer lower margins. We also suspect that the change of delivery time to accommodate the strategy of strengthening evening/night time ready-to-eat assortment may have boosted vendors’ labor costs which need to be shouldered by Lawson.

The banking business kicked off in October appears to have a tough start. Despite the marketing efforts, it contributed to a marginal increase in the ATM transactions. The number of ATM transactions per machine was experiencing a decline. While the launch of banking services has deterred the downward trend, it seems unlikely to draw customer traffic, especially when the government is promoting cashless payment and the demand for cash withdrawals will fall, a concern we have raised to its decision to invest in the banking services.

A high dividend yield at 3.7% has been a key support to Lawson’s share price. Given a payout ratio at 90%, the market seems concerned over a cut in dividends. Management reiterates its commitment to stable dividends. We think the management expects the payout ratio to fall back to 70% when impacts of increased investment cycle in 2019. However, if profits fail to rebound, we expect the management will be forced to reconsider a dividend cut.