EFTA01148966.pdf

J.P.. Morgan Japan Equity Research 12 December 2013 Overweight Seven & i Holdings (3382) 3382.T, 3382 JT Price: 113,755 Seven-Eleven Japan's Aggressive Moves, Steady A Price Target: 84,800 Progress on Omni-Channel Strategy Previous: $4,400 Raisingprice target to Y4,600, reiterating Overweight rating Japan Adjusting our earnings estimates and price target, still bullish: We adjust Retail our forecasts and raise our price target from ¥4,400 to ¥4,600 (see page 2 for palm Murata AC valuation details). We raise our assumptions for the convenience store, financial services, and restaurant segments and lower our assumptions for the superstore segment. We slightly lower our FY2014 profit growth estimate because demand Bloomberg JPMA MURATA <GO, is likely to decline after the consumption tax hike. We adjust our consolidated JPMorgan Securities Japan Co.. Ltd. estimates and expect operating profit to rise 7% on an adjusted basis (15% on a Price Pot/einem* nominal basis) in FY2013 and 6% in FY2014. We consider the stock attractive MOO relative to other large retail stocks, in light of profitability, growth, and IMO valuation, and see 22% upside potential. We maintain our bullish stance. 3 MN • Earnings outlook reassuring, mainly in convenience store business: We ZOO expect operating profit in 3Q to grow 7.6% on an adjusted basis and 17.7% on a 2.110 nominal basis. As in 2Q, likely sales shortfalls for Ito-Yokado (IY) and the Pat Vint; MPH itpli 0.443 department store business will probably be offset by the convenience store and - max Am pike 00 TOPIX (robasoci) financial services segments, resulting in solid consolidated earnings. Improved YTD 1m 3m 12m profit growth in the convenience store segment should have a particularly Abe 50.7% GA% 4.2% 53.8% Rel 100% 0.9% -01% -5.3% strong impact in 3Q onward, with a slight slowdown in the rise in Seven-Eleven Japan's adjusted SG&A costs, following a peak in IQ, and solid results in dollar terms for 7-Eleven, Inc. The post-consumption tax hike outlook is uncertain, but we expect solid profit growth in FY2014, with structurally stable growth for Seven-Eleven Japan, driven by the meeting of normal-use demand from middle- aged and older consumers and women, offsetting likely profit declines for Ito- Yokado and the department store business. • Series of forward-looking strategic financial moves: Following the December 2 announcement of a tender offer for Nissen Holdings, the company announced the acquisition of stakes in Bamey's Japan (on December 4) and Tenmaya (on December 10). For Seven & i, these companies complement its omni-channel strategy, and the stake in Tenmaya is probably aimed at boosting its market share in local areas. We think these moves represent solid progress on the company's forward-looking, longer-term strategy. The three deals are likely to amount to a total investment of more than V2I billion, which the company expects to cover with cash or other liquid assets. • Potential catalysts: (1) Reassessment of the growth and profitability of the convenience store business, (2) a dividend hike or expectations that RoE will reach management's target, and (3) steps to bolster IY and department stores. Seven & I Holdings Co., Ltd. (Reuters: 3382.7, Bloomberg: 3382 JT) 2012/2 201312 201412 E 2015/2 E 2016/2 E Company Data °paroling Revenue (V mn) 4186344 4,991,642 5,625,600 5.890.000 6,178,600 Price (V) 3,755 Operating ProM (V mn) 292.060 295,685 340,800 360.200 388,800 Date Of Price 11 Dec13 Recurring Profit (V rim) 293.171 295,836 341,200 360.800 389,600 Market Cap (V bn) 3,328.59 Net Profit rm) 129.838 138,064 181,300 193.400 211,100 Shares 0/S (mn) 886 EPS (V) 141.0 156.3 205.2 2181 238.9 52-week Range (V) 4,115-2,371 PIE(x) 25.6 24.0 18.3 17.2 15.7 TOPIX 1,250.45 PIBV (x) • 1.1 1.6 1.5 DPS 70.00 EWEBITDA (x) 7.6 1.3 6.6 6.3 5.9 Dividend Yield 1.9% Source: Company data. Mantel. J.P. Morgan estimates. ROE 9.3% See page 18 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. Asa result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.jpmorganmarkets.com EFTA01148966 Dairo Murata Japan Beult/ Research 12 Dezember 2013 J.P.Morgan Seven & i Holdings (3382) Company Profile Investment Thesis Risk Analysis Yokado was established in 1951. A holding company was Upside Scenario to Target Price/Rating established in 2005 through the swap of tommon stock • End of bear market prompts reassessment of share among Seven-Elcven Japan, Ito-Yokado, and Denny's Japan. valuations The group encompasses seven business arens. The • Growing customer base continues to drive stronger-than- convenience store business rolled out the "meal solution" expected earnings in the CVS segment concept to attract customers in the 30 and over segments, • Clarification of growth strategy and stronger-than- expanding its Seven Premium offerings and taking other expected eamings at SEI measures. The superstore and department store businesses • Enhanced shareholder return policies aimed at attaining aro currently undergoing structural reform. 10% RoE target OP Composition by Segment, FY2012 • Improved eamings at Ito-Yokado and department store segment via cost cutting and new product strategies • Expansion of group synergies through development of private-label merchandise Downside Scenario to Target Price/Rating • Increased competition in the CVS segment • Stalled recoveries in the Ito-Yokado and department store segments due to deterioration in the operating environment and/or a slowdown in cost-cutting initiatives • Concems about the company's ability to manage the group and execute its strategies Source: Company date. Operating Profit Forecasts: J.P. Morgan versus Consensus Valuation V billan We change the horizon of our price target from December J.P. Morgan Consensus 2013 to December 2014 and now use our FY2014 rather FY2013E 340.8 344.2 than FY2013 estimates. We base our price target on a P/E of FY2014E 360.2 367.7 21x, derived from the eight-year average P/E of 18x for 18 Source: J.P. Morgen esunates. Bornberg. major retailers and the stock's average P/E relative to the Assumptions 8 Sensitivity Metrics (Impact on FY2013 Profits) group of I.2x over the past five years, during which time Factor Cuwent Charme Impact eamings experienced both strong and weak years and the Total chaIn convenience store business was clearly on a growth path. Assurnption OP aalet WS rate 98.0 41 40.6 bn SEJ SSS 0.8% 1.0% 842.3 bn V6.8 bn IY SSS .3.5% 1.0% 810.2 to V2.6 bn Source: J.P. Morgen esunates Peer Valuations Based on Bloomberg Consensus Bloomberg Market Cap P/E(x) PANS) ROE(%) Company name Ticker Currency Price Date (Smn) 13E 14E 15E 13E 14E 15E 13E Lawson Inc 2651 JT JPY 7.720 Dec-11 7.529 21.0 19.4 17.9 3.17 - 2.97 2.78 15.5 Sem 8I Holdings 3382 JT JPY 3,755 Dec-11 32.364 19.0 17.6 16.1 1.62 1.53 1.44 8.7 FamilylAan 8028 JT JPY 4.645 Dec-11 4.412 18.9 17.3 16.2 1.75 1.65 1.55 9.4 Casey's GS CASY.O USD 70.27 Dec-10 2,704 19.0 17.8 17.1 3.81 3.27 20.8 Alimentation Cootte Tard ATD/B CN CAD 76.82 Dec-10 13.678 18.2 16.4 14.4 3.69 3.04 2.52 21.2 Source: Bbomberg. Note: fAarketcaps are seceblei usng torex reifes es of Dec 10. 2 EFTA01148967 Dairo Murata Japan Equity Research J.P.Morgan 12 December 2013 Figure 1: Consolidated Earnings Forecasts Operating revenue Operating profit Recurring profit Net profit V mn YoY% Ymn YoY% Ynn YoY% V mn YoY% 2113 Full year Actual 4,991,642 4.3 295.685 1.2 295.836 0.9 138.064 6.3 2./14 Full year JP1/1E New 5,625,600 12.7 340,800 15.3 341,200 15.3 181,300 31.3 JPME Old 5.620.600 12.6 340,800 15.3 341,200 15.3 181.300 31.3 CcE 5.640.000 13.0 340,000 15.0 337.000 13.9 170.000 23.1 Consensus E 5 658 237 13.4 344,219 16.4 343.995 16.3 174,885 26.7 2/15 Full year JPIA E New Al 5,890,000 4.7 360,200 52 360,87:0 5.7 193,400 62 JPM E Old 5.884.800 4.7 361,700 6.1 362.300 6.2 194,300 7.2 Consensus E 5.857.350 3.5 367.769 6.8 368.525 7.1 188,739 7.9 2/16 Full year MIME New ■ 6,178,600 4.9 388,10 7.9 389,600 8.0 211,100 9.2 JPIA E Old 6,161,400 4.7 395.000 92 395,800 9.2 214.800 10.6 Consensus E 6.025.563 2.9 392,590 6.7 397.402 7.8 206.095 92 Source: Cavern/ data. Mcomberg consensus.J.P. Morgan summates. Laying groundwork for future with capital tie-up strategy Following the December 2 announcement of a tender offer for Nissen Holdings, the company announced a number of strategic financial moves, including the acquisition of stakes in Barney's Japan and Tenmaya. For Seven & i, these companies complement its omni-channel strategy, and the stake in Tenmaya is probably aimed at boosting its relatively low market share in local areas of western Japan (except Seven-Eleven Japan's). The three companies' contributions would be limited, given Seven & i's size, but the forward-looking strategy, encompassing omni-channel retailing and other aspects, is a step forward. The three deals am likely to amount to a total investment of more than ¥21 billion, which the company plans to cover with cash and other liquid assets. Nissen consistent with (mini-channel strategy Nissen is Japan's largest mail order company, with annual sales of ¥I76.6 billion. Seven & i's disclosures show a tender offer price of ¥410 and plans to acquire up to 50.1% of the voting rights, or 30,786,000 shares. The deal would be worth ¥12.6 billion, implying a P/B of 0.8x (based on FY6/13 data). Nissen would not contribute much earnings in the near term; it expects to be unprofitable in the fiscal year through December 2013. If the acquisition goes as planned, Nissen would be a consolidated subsidiary starting next fiscal year. Seven & i said the investment is aimed at cooperation in terms of finding new customers, marketing, promotion, expanding the product lineup, developing products, manufacturing/retailing (SPA), and using supporting operations, such as logistics, systems, and billing/payments. Nissen has a base of about 32 million customers, mainly those in their 30s and 40s with families. Specific possibilities for product development include distinctive clothing and other products, and possibilities for marketing/promotion and supporting operations include the development of websites for smartphone access and e-commerce technologies. Potential benefits for Nissen include an expanded product lineup, new customers, and enhanced logistics and IT systems. 3 EFTA01148968 Dairo Murata Japan Equity Research 12 December 2013 J.P.Morgan It remains to be seen to what extent synergies are generated and earnings rebound as part of the company's omni-channel strategy, one of its most important longer-term strategies. Barney's Japan likely to generate synergies with department store business Seven & i plans to acquire 49.9% of Barney's Japan (127,800 shares) from Tokio Marine Capital, a fund unit of the Tokio Marine group. The deal is reportedly valued at around ¥6 billion, according to the December 4 Nihon Keizai Shimhun (the company did not disclose a figure). Barney's Japan generated ¥19.5 billion in sales and was profitable in FY2012. It would become an equity-method affiliate starting next fiscal year, but its impact on Seven & i Holdings' earnings would be limited. Its strengths and resources that might be useful for Seven & i include (I) the ability to develop very fashionable, high-quality clothing; (2) a base of prime customers, mainly fashionable, well-to-do consumers; and (3) a strong brand image and prime store locations. The department store segment is likely to benefit from direct synergies. However, online sales of fashionable clothing are rapidly gaining market share and the addition of differentiated, high value-added products to its product line through this deal is likely to become an increasingly important aspect of the company's omni-channel strategy Partnership with Tenmaya would bolster dominance in Chugoku region Seven & i unit Ito-Yokado plans to acquire 20% (2.31 million shares) of Tenmaya for an undisclosed amount, but the value would be about ¥3 billion based on Tenmaya's current share price. If the acquisition proceeds as planned, Tenmaya would become an equity-method affiliate starting next fiscal year, but we think its contribution to earnings would be limited. The investment's strategic implications include market share gains in the Chugoku region and the effective use of resources in such areas as logistics and IT systems, personnel development, product purchasing, and financial-related businesses. The strategic ties arc likely to strengthen longer term. Start of initiatives on omni-channel strategy, the most important longer-term strategy Challenges include e-commerce profitability and increased synergies E-commerce accounts for just over 4% of Japan's total retail market. This percentage is lower than in other countries but is likely to rise gradually. A growing number of established major retailers are launching full-fledged online initiatives and aiming to use both established brick-and-mortar stores and the online channel (omni-channel strategy). It is not difficult for retailers to set up their own sites or participate in existing online shopping malls, but it is a challenge for them to let consumers know about the advantages of both channels and generate decent earnings. Specific financial issues include intense price competition online (particularly in the area of commodity products), shipping charges (in many cases, retailers raise prices to all for free shipping), and the fees for participating in online 4 EFTA01148969 Dairo Murata Japan Equity Research 12 December 2013 J.P.Morgan shopping malls. For companies selling from their own websites, obtaining knowhow related to website development and operation will be a critical issue. Among established major retailers, Seven & i is pursuing an online strategy that has some relative strengths in terms of advantages for customers, operational efficiency, and overall group capabilities (competitiveness and offerings of original products). In search of strengths in the last mile We think the group has a clear advantage in terms of logistics infrastructure for the last mile, getting goods to customers' homes. For example, deliveries to homes in the areas of Seven-Eleven Japan's approximately 16,000 stores around the country could be done jointly with the stores rather than handled solely by the headquarters. The company is working with Toyota to develop small electric vehicles for deliveries from Seven-Eleven Japan stores to nearby homes and is also leasing or partially subsidizing stores' costs for electric bicycles and motorbikes. We think the company has advantages and the lead over other major retailers in terms of product and logistics projects and specific initiatives. Figure 2: 7&l Steadily Expands Its Omni-Channel Strategy Seven Net Shopping Name of Websee Main products Sales Net Supermarket Fresh food. food. bewrage. comrrodoes. pet product 40 blIcn JPY Seven Net Books. Stage:mos. &books. CODVD. general. toys SenenAleel Berm. deicatessen. ready made meal. fresh food 60 ham JPY e.depast Fashion. cosmebcs. Irtencr goods Madan Honpo Open. tow. babes' near. mammy dohng 43. Order Data EC Citstributkan Center niltribldat I base ri Karm-area 150 bases across Japan I Sago/550BU Itovokado stows Seven Eleven Japan stores gicebuituro flagship store) Net Supermarket Seven Net. Sewn-Meal etlec.art llmced prcduds e lecar. Delivery Delivery OTC OTC Customers Source: Company data Note. FY2012 Wes are JP. Morgan essmate. Image used will perrrisson. EFTA01148970 Deiro Murata Japan Equity Research 12 December 2013 J.P.Morgan Consolidated 2H results likely to be solid We expect operating profit in 3Q to grow 7.6% on an adjusted basis and 17.7% on a nominal basis. As in 2Q, likely sales shortfalls for Ito-Yokado (IY) and the department store business will probably be offset by the convenience store and financial services segments, resulting in solid consolidated earnings. Seven-Eleven Japan's aggressive moves on store openings, products, and costs In the convenience store segment, Seven-Eleven Japan's key indicators, such as same-store sales, new-store openings, and gross margin, are all solid. Same-store sales have benefited from the meeting of demand for normal use, with strengthened offerings of private-labeled products, contributions from coffee and other strategic, new products, and aggressive promotional moves. Its strengths relative to the other two majors are growing. New-store openings are on track to slightly exceed 1,500 for the full year. The company is uniformly bolstering its dominance, mainly in the three major urban areas. The number ofnew stores in FY2014 is likely to top 1,600, as indicated by management. New stores' daily sales in 2Q slipped 5% YoY to V552,000 mainly because of a shift in the timing of new-store openings, according to management (new stores' daily sales tended to be high because of grand opening sales at the many new stores opened late in the fiscal year, but this year the new-store openings have been more spread out). The investment in each new store is sizable, with no overemphasis on Rol, but the company looks for strategically important locations. For example, it is developing stores along major roads in the Setagaya area and stores with large parking lots. We think gross margins are on track to improve by 0.5ppt YoY, as management expects, thanks to (I) an improved product mix from fast foods and (2) integrated lineups of core products. SG&A rose 13% on an adjusted basis in 2Q, partly because of electricity rate increases in the summer. We think the increase will slow somewhat in 2H onward. 7-Eleven, Inc. is likely to swing to double-digit operating profit growth (dollar terms) in 2H on an absence of the one-time factors in 1H. The growth in yen terms should be stronger than management expects because the yen has been weaker than management's assumption of V924. Slight weakness for Ito-Yokado and department store business likely to be offset by convenience store and financial services businesses As a result, we expect nominal operating profit growth of 17.7% (adjusted growth of 7.6%) in the convenience store segment in 3Q. As in 1H, Ito-Yokado's profit contributions are likely to be low because of weak food and clothing sales (the latter in October). The department store business is likely to fall slightly short again. However, we expect offsets from strong results in the convenience store and financial services businesses to result in solid consolidated results. Improved profit growth in the convenience store segment should have a particularly strong impact in 3Q onward, with a slight slowdown in the rise in Seven-Eleven Japan's adjusted SG&A costs, following a peak in IQ, and solid results in dollar 6 EFTA01148971 Dairo Murata Japan Equity Research 12 December. 2013 J.F!Morgan terms for 7-Eleven, Inc. The post-consumption tax hike outlook is uncertain, but we expect solid profit growth in FY2014, with structurally stable growth for Seven- Eleven Japan, driven by the meeting of normal-use demand from middle-aged and older consumers and women, offsetting likely profit declines for Ito-Yokado and the department store business especially after the consumption tax hike. Figure 3: Quarterly Results and J.P. Morgan Forecasts V million. % 2113 2114 1H 2H Full yea 10 20 1H 113' 30E 30E' 40E 2HE Ful yew E SEJ SSS 2.0% 1.5% 1.3% 0.9% 2.5% 1.7% 1.6% 1.5% 1.5% 1.6% of which tobacco -0.3% -0.5% 4.4% 1.0% -1.6% -0.3% -1.0% 0.0% -0.7% -0.5% of which excl. tobacco 2.3% 2.0% 2.2% -0.1% 4.7% 2.3% 0.6% 1.0% /.3% 1.8% SEJ product gross margin 30.0% 30.0% 30.0% 30.7% 30.5% 30.6% 30.8% 30.0% 30.4% 30.5% SE INC SSS 3.7% 2.1% 2.9% 0.7% 2.5% 1.6% 4.9% 1.9% 3.4% 2.5% FOREX rate (P/L, 14=4) 79.8 79.9 79.6 92.5 99.0 95.7 50.3 126.2 88.3 92.0 IY SSS -4.3% 4.3x -4.3% .44% -22% -3.6% -2.5% -5.0% -2.0% -2.8% IY product gross margin 29.5% 30.3% 29.9% 30.3% 29.3% 29.8% 30.1% 31.1% 30.6% 30.2% YoY change -0.4% 0.8% 0.2% 0.3% 4.2% 0.3% 4.6% 0.3% 0.3% Sogo SSS -1.5% 4.314 -2.4% 4.8% -1.6% -1.2% 4.3% 9.5% 1.6% 0.2% Salt SSS 1.3% 0.5% 0.9% 1.0% 1.2% 1.1% -7.0% 14.0% 3.5% 2.3% Operating profit (old basis) 147,195 148,490 295,685 Operating profit (new basis) 73,692 90,891 164,583 150,520 81.500 74,500 94,717 176.217 340.800 %YoY -2.0% 4.7% 1.2% 9.5% 13.8% 11.8% 2.3% 17.7% 7.6% t9.5% 18.7% 15.3% CVS 116,505 105,259 221,764 53,196 75,579 128,775 121,758 65.000 61,500 58,725 123,725 252,500 %YoY 6.1% 0.4% 3.3% 5.5% 14.3% 10.5% 4.5% 16.15 19.1% 17.5% 13.9% SEJ 100.048 86,115 186,763 49,298 82,036 111,334 104,317 51.000 46.666 97.666 209.000 %YoY 2.7% 1.2% 2.0% 8.6% 13.5% 11.3% 4.3% 134'5 11.8% 12.6% 11.9% SEI 17.766 20,409 38,175 5.696 15,082 20,778 16.000 14.222 30.222 51.000 %YoY 35.9% 3.8% 16.8% 0.7% 24.6% 17.0% 36.15 64.4% 48.1% 33.6% Other, goodwill -1,309 -1.865 -3,174 -1.798 -1.539 4.337 -2.CCO -2.163 -4,163 -7,500 Superstore 9,264 16,227 25,491 7,408 4,402 11,810 6,989 4.900 2,500 17,990 22,890 34,700 %YoY -56.0% 42.5% -21.4% 8.1% 82.4% 27.5% -24.6% 35.5% 42.6% 41.1% 36.1% Ito Yokado 728 8,291 9,009 2,721 -118 2.603 -297 1 580 9.097 10.597 13.200 %YoY -88.0% 841% -14.6% 16.7% - 257.6% - 134.4% 19.1% 28.0% 46.5% York Benimaru 5.836 6.018 11,854 3.182 3,321 6.503 5,803 2.400 5.097 7,497 14.000 %YoY -39.1% 11.9% -20.7% 7.4% 15.6% 11.4% -0.6% 16.0% 29.1% 24.6% 18.1% Other, goodwill 2,700 1.928 4,628 1,505 1.199 2.704 1.483 1.000 3.796 4,796 7,500 Department store 1,288 8,743 8,029 872 -1,222 -550 485 -1.000 9,850 8,850 8,300 %YoY 41.9% -12.8% -19.3% -41.5% 20.4% 31.2% 3.4% Sogo Seibu 2,219 7,821 10,040 1217 286 1.563 863 0 8,937 8,937 10,500 %YoY •27.7% 4.3% -10.0% 8.4% -71.9% -29.6% -61.1% 7.8% 14.3% 4.6% Other, goodwill -933 -1.078 -2,011 -605 -1.508 -2.113 -1,548 -1.000 913 -87 -2,200 Food services 451 270 721 286 579 865 777 100 735 835 1,700 Financial services 18,595 18,830 37,425 11,220 11,636 22,856 21,247 11,500 10,700 8,044 19,544 42,400 %YoY 14.1% 7.7% 10.8% 29.9% 16.9% 22.9% 14.3% 121% -6.2% 3.8% Others 1.094 1.161 2.255 910 -83 827 434 1.000 427 373 1,200 Sources: Company data. J.P. Morgan essmates 7 EFTA01148972 ()Biro Murata Japan Equity Research 12 December 2013 J.P.Morgan Figure 4: Quarterly Results and Company Guidance million. % V13 2/14 1H 2H Full yea 10 20 1H 1H' 2HCoE 2HCoE' Full tern CoE Operating revenue 2,450,662 2,540,980 4,991,642 1,364,939 1,442,725 2,807,664 2,832,336 5,640,000 4.0% 4.6% 4.3% 13.1% 16.0% 14.6% 11.5% 110% Operating profit 147,195 148490 295.685 73,692 90.891 164.583 150,520 175,417 164,680 340,000 %YoY -2.0% 4.7% 1.2% 9.5% 13.8% 11.8% 2.3% 18.1% 10.9% 15.0% OP margin 6.01% 5.84% 5.92% 5.40% 6.30% 5.86% 6.19% 6.03% <OP by Segment> CVS 116,505 105,259 221,764 53,196 75.579 128.775 121,758 120,225 -121.758 249,000 %YoY 6.1% 0.4% 3.3% 5.5% 14.3% 10.5% 4.5% 14.2% -215.7% 12.3% Superstore 9.264 16,227 25,491 7,408 4.402 11,810 6,989 27,790 -6.989 39,600 %YoY -56.0% 42.5% -21.4% 8.1% 82.4% 27.5% -24.6% 71.3% -143.1% 55.3% Department store 1.286 6,743 8,029 672 -1.222 -550 -685 9.450 685 8,900 %YoY 41.9% -12.8% -19.3% -41.5% -992.0% -142.8% -153.3% 40.1% 49.8% 10.8% Food services 451 270 721 286 579 865 777 535 -777 1,400 Financial services 18.595 18,830 37,425 11.220 11.636 22,856 21,247 18,544 -21.247 41,400 %YoY 14.1% 7.7% 10.8% 29.9% 16.9% 22.9% 14.3% -1.5% -212.8% 10.6% Others 1,094 1,161 2,255 910 -83 827 434 -1,127 314,766 -300 Non-operating income 5,573 5,491 11,064 3.907 4.161 8,074 Non-operating expenses 5.642 5,271 10,913 3,918 3.921 7,845 Non-operating profit -69 220 151 -11 241 230 -3,230 -3.003 Recurring profit 147,128 148,710 295,836 73,881 91,132 184,813 172,187 337.000 %YoY -2.5% 4.5% 0.9% 10.1% 13.6% 12.0% 15.8% 13.9% RP margin 6.00% 5.85% 5.93% 5.40% 6.32% 5.87% 6.08% 5.98% Extra-ordinary PA. -16.114 -17,000 -33,114 -6,281 -1.513 -13,860 Pretax profit 131,012 131,110 262,722 67,394 83.559 15R953 Tax expense 51.818 53,022 110,840 26,791 34.316 61,107 Tax rate 44.1% 40.3% 42.2% 39.8% 41.1% 40.5% Minority mterest 6.282 7,536 13,818 3.170 3.324 6,494 Net profit 66,912 71,152 138,064 37,433 45,919 83,352 88,848 170.000 %YoY 26.8% -7.1% 6.3% 14.9% 33.8% 24.6% 21.8% 23.1% NP margin 2.73% 2.80% 2.77% 2.74% 3.18% 2.97% 3.08% 3.01% Scums: Ccenpanydata. 8 EFTA01148973 Dego Murata Japan Equity Research 12 December 2013 J.F!Morgan Figure 5: Consolidated Earnings Results and Estimates (Full Year) V million. % FY2111 FY2J12 FY2113 FY2114E FY2(15E FY2/16E Operating Revenue 5,119,739 4,786,344 4,991,642 5,625,600 5.890,000 6.178.600 YoY % 0.2% -6.5% 4.3% 12.7% 4.7% 4.9% SEJ SSS 2.2% 6.7% 1.3% 0.5% 0.5% 0.8% IY SSS -2.5% -2.6% -4.3% -3.5% -3.5% -2.0% Goodwill amortization 16,145 12,915 14,430 17,500 17,800 18.200 EBITDA 391,912 444,969 465,781 514,300 541,800 580.600 YoY % 3.7% 13.5% 4.7% 10.4% 5.3% 7.2% Operating profit (old basis) 243,346 292,060 295,685 Operating profit (new basis) 262,500 315,000 318,900 340,800 360,200 388.800 YoY % 7.4% 20.0% 1.2% 6.9% 5.7% 7.9% As a % of Sales 4.75% 6.10% 5.92% 6.06% 6.12% 6.29% OP by segment (new basis. JPM assumption) CVS operations 205,100 225,100 232,400 252,500 270,200 292.100 YoY % 6.4% 9.8% 3.2% 8.6% 7.0% 8.1% Superstore operations 17,300 34,900 27,600 34,700 34,400 38.100 YoY % 102% 101.7% -20.9% 25.7% -0.9% 10.8% Department store operations 5,622 9,948 8,029 8,300 8,300 9.300 YoY % 311.6% 76.9% -19.3% 3.4% 0.0% 12.0% Food Services -193 -95 721 1,700 1,300 1.500 Financial Services 30.500 36,400 40,300 42.400 44,500 46.700 Other -1,611 1,360 2,255 1,200 1,500 1500 Non.operating income and expenditure -439 1,111 151 351 551 751 Non-cveraling income 10,390 10,150 11.064 11,264 11.464 11.664 Interest and dividends received 6,048 5,801 6,123 6,323 6.523 6.723 Non-operating expenses 10,829 9,039 10.913 10,913 10.913 10.913 Interest payable. etc 5.258 4.114 5.113 5.263 5.413 5.563 Recurring profit 242,907 293,171 295,836 341,200 360,800 389.600 YoY % 7.0% 20.7% 0.9% 15.3% 5.7% 8.0% As a % of Sales 4.74% 6.13% 5.93% 6.07% 6.13% 6.31% Extraordinary profit 22,655 10,428 2,147 2,000 2.000 2.000 Extraordinary loss 42,271 72,782 35261 28,000 28.000 28.000 Pretax profit 223,291 230,817 262,722 315,200 334,800 363,600 Tax 102,298 90,251 110.839 119.340 126.200 136.600 Tax rate 45.8% 39.1% 42.2% 39.7% 39.5% 39.3% Minority Interest 9,031 10.722 13.818 14.518 15.218 15.918 Net profit 111,962 129,838 138,064 181,300 193,400 211,100 YoY % 149.5% 16.0% 6.3% 31.3% 6.7% 9.2% Asa % 04 sates 2.19% 2.71% 2.77% 3.22% 3.28% 3A2% Dividend paid 50,570 54,780 56.550 61.850 67.150 74.220 a of shares outstanding ('000) 887.109 883,492 883.553 883.553 883.553 881553 Treasury shares (term-end. '000) 0 0 0 0 0 EPS (V) 126.2 147.0 156.3 205.2 218.9 238.9 BPS (il) 2.033.3 2,130.5 2 229.5 2,357.7 2.500.5 2.655.5 DPS (V) 57.0 82.0 64.0 70.0 76.0 84.0 Payout ratio 45.2% 42.2% 41.0% 34.1% 34.7% 35.2% Sources:Calvary data J.P. Morgan FOAMS. 9 EFTA01148974 Dairo Murete Japan