Seven & i Holdings Co Ltd
TSE:3382
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Seven & i Holdings Co Ltd
Earnings Call Analysis
Q1-2025 Analysis
Seven & i Holdings Co Ltd
The first quarter of fiscal year 2024 saw mixed results for Seven & i Holdings. The company reported revenue from operations of JPY 2.7347 trillion, representing a 3.2% increase year-on-year. However, operating income declined by 27.6% to JPY 59.3 billion, and net income dropped by 49.3% to JPY 21.3 billion. These results were primarily influenced by the increase in depreciation, amortization of goodwill, and currency depreciation. Despite the revenue growth, the decline in profits highlights significant challenges that the company needs to address.
One of the key areas of concern for Seven & i Holdings is its core business in convenience stores. In both Japan and the U.S., the company experienced a decline in customer purchases due to the rapid progression of inflation and the termination of various COVID-related subsidies. In Q1 2024, the performance did not meet expectations. For instance, in the U.S., 7-Eleven’s same-store sales fell by 4.1%, partly due to consumers' reduced purchasing power. The company's strategy to avoid passing on increased costs to consumers led to a 2% decline in gross profit margins, translating to a $178 million decrease in gross profit.
Looking forward, Seven & i Holdings is focusing on multiple strategic initiatives to counteract current challenges. In the U.S., the company is making significant investments in store enhancements, including food and beverage modernization and the expansion of its 7NOW delivery service. The rollout of RIS 2.0 and DEX technology to Speedway stores is expected to standardize operations and improve efficiency. Moreover, expanding proprietary products and optimizing the cost structure are also on the agenda, with the company targeting $725 million in delivery sales for the year.
The Superstore segment in the Tokyo metropolitan area has shown promising results. Both the metropolitan Superstore business and York-Benimaru achieved their budget in the first quarter of 2024. The company aims to achieve JPY 55 billion in EBITDA by 2025, with efforts shifting from cost structure reform to improving sales and profitability. Ongoing transformations and concrete action plans are expected to enhance corporate value and drive long-term growth.
Seven & i Holdings is actively introducing new products to attract and retain customers. In Japan, initiatives such as expanding the Seven the Price product lineup and launching new items like smoothies and fresh baked bread have already shown positive results. For example, customer counts increased by 1.1% and item purchases improved by 0.9% after implementing these strategies in selected areas. These efforts will be expanded to other regions, aiming to sustain customer growth and integrate the brand more deeply into consumers’ lives.
The company has formulated concrete action plans to enhance long-term growth and corporate value. Key actions include restructuring to improve capital efficiency, increasing transparency, and enhancing investor engagement. These steps are overseen by the Board of Directors, ensuring rigorous monitoring and implementation. A focus on aligning strategies with investor expectations aims to foster a conducive environment for sustained growth and profitability.
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[Interpreted] Thank you. Good afternoon once again. I am Maruyama from Seven & i Holdings. Thank you very much for your continuous understanding and support. I'd like to express my heartfelt gratitude and thank you also for attending this briefing. Let me now explain FY 2024 Q1 results.
Next page, please, Page 2. This is the executive summary for today. First, the consolidated financial results for Q1 FY 2024 was down on both operating income and net income basis. However, this is in line with our planned level.
Japan and U.S. CVS business, which is the main driver for the group's performance. As customers' consumption behavior changed due to external environment and consumer sentiment demand due to inflation, we took various measures, including the improvement of customer count, but could not produce the expected results, which is shown in the Q1 results. The response to the continuous changes that we always focus on was not sufficient. However, the reasons are clear, and we are now changing and revising our measures and taking new measures. So I will explain that later.
In metropolitan Superstore business fundamental reform, this is progressing as planned. And the focus of the transformation is now shifting from cost structural reform to sales and profit improvement. A concrete action plan to maximize our corporate and shareholder value of our group, which was announced on April 10, is now being examined on concrete terms now. So let me explain one by one.
Page 3, please. This shows the progress of our strategic initiatives in our medium-term management plan. The new outcome is on April 16, we completed the acquisition of Sunoco Stripes. On the other hand, we completed the sales of Nissen Holdings on July 1. Our strategic initiative to become the world's top-class retail group centering on food will be executed steadily and expeditiously.
Please turn to Page 4. This is today's agenda. The second point of the main business strategy. North American convenience store business will be explained by SEI President, Mr. Stan Reynolds. And the other points will be explained by myself.
So first, agenda on Q1 results of FY 2024. Page 6, please. These are the highlights of the consolidated performance. Revenue from operation was JPY 2.7347 trillion, 103.2% year-on-year or 100.5% of the plan. Operating income was JPY 59.3 billion, 72.4% year-on-year, minus JPY 22.6 billion from the previous term or 98.3% of the plan. Net income was JPY 21.3 billion, 50.7% year-on-year or JPY 20.7 billion minus compared to the previous term, 105.9% against the plan. Although our revenue increased, it was a significant decline in profit. The impact of ForEx was plus JPY 400 million at the operating profit level. As for EBITDA, there was impact of increase in depreciation, amortization of goodwill and depreciation of yen and was 93.8% year-on-year and 99.4% of the plan.
Please turn to Page 7. This slide shows the breakdown by segment of the consolidated operating revenues, operating profit and EBITDA and the comparison with the previous year. Now Overseas CVS numbers are the numbers after the amortization of goodwill, JPY 30.5 billion.
Please turn to Page 8. On this slide, I will explain the main factors behind the decrease in profit. First, let me look back at the major trends in both Domestic and U.S. convenience business performance in fiscal year 2023. In the first year -- in the first quarter of fiscal year 2023, due to the smooth progress of price pass-through of products since October 2022, year-on-year same-store sales in both Japan and U.S. increased significantly. However, due to the rapid progression of inflation, consumers' purchasing appetite declined significantly from the third quarter of fiscal year 2023. In the U.S., in particular, the termination of various subsidy and support measures for COVID also had an impact in -- and same-store sales year-on-year turned negative from September onward.
The biggest challenge, both in Japan and the U.S. is to recover the number of customers. In the first quarter of 2024, SEI aimed to increase sales by increasing the number of customers without passing on increased cost to product prices in order to attract more customers. As a result, the chart on the left side of this slide shows the results of sales and gross profit. The light orange bar graph shows the results of merchandise sales in the first quarters of 2022, 2023 and 2024. This year's merchandise sales did not reach the 2023 level but was able to grow more than 2022. However, because we did not pass on cost to customers, the gross profit margin declined by approximately 2%, resulting in a $178 million decrease in gross profit, as shown in the dark orange bar graph.
Fuel margin in 2024 was higher than in fiscal year 2023, although it was not as high as in fiscal year 2022 when it reached an all-time high. The largest reason for SEI's decline in performance is that pricing measure aimed at increasing sales by attracting more customers did not show expected results. However, SEI has already changed its strategy to optimize prices, and both same-store sales year-on-year and merchandise gross profit margins are improving.
As shown in the dark green bar graph on the right, impact on SEJ was not as big as on SEI. So gross merchandise profit margin increased, but SG&A expenses increased mainly due to an increase in advertising expenses if you look at the breakdown. The sales promotion we conducted to aim at growth in revenues have not shown results as expected, and our operating income, as a result, decreased. We have already made changes to this policy and are taking measures to improve the situation. The decrease in net income, which exceeded the decrease in operating income, was mainly due to an increase in extraordinary losses and the impact of tax effects, both of which are onetime factors.
Next, please turn to Page 9. This shows the comparison from the original plan at the beginning of the year by segment. Operating profit and EBITDA was below the plan in the Domestic and Overseas convenience store business as well as Financial services. However, SST business and Others increased the plan. And all in all, we were short by JPY 1 billion and JPY 1.2 billion, but mostly in line with the plan.
We'd now like to invite Mr. Reynolds to explain the business of SEI. Mr. Reynolds, please.
Thank you. So I'd like to start by briefly reminding you about the U.S. economy and the consumer. Inflation continues to put pressure on the U.S. economy and has held above 3% for 38 consecutive months, with a cumulative impact of 20% higher than in 2020. To control inflation, the Fed is expected to keep interest rates higher for longer. The labor market is also showing signs of cooling, keeping more people unemployed for longer, and GDP growth is expected to slow to 2.4% in 2024.
So these economic conditions are putting pressure on the consumer, with prices of essentials such as rent, food and gas all rising faster than wages. Households are spending an additional $780 per month due to rising costs and have $900 per month less to spend based on reduced COVID and other government benefits. With less money to spend, Americans continue to accumulate higher levels of credit card debt, causing the behavior to focus more on value for every dollar spent.
Next slide, please. The last quarter of 2023 and the beginning of this year had more economic challenges than expected, which directly impacted our customers and stores. This resulted in a challenging first quarter with negative 4.1% same-store sales, negative 2.6% excluding cigarettes. We invested heavily on promotions in Q1 to drive traffic. And while our overall sales performance fell short of our expectations, we have seen month-to-month improvement. We are focused on new product introduction, value offers and continued growth of our 7NOW delivery business. We're also investing in our stores with food and beverage modernization and exterior refresh investments. Finally, we're focused on rollout of RIS 2.0 and DEX to Speedway stores to enable a differentiated product assortment.
Next slide, please. Growing our proprietary products has been and continues to be a top priority for SEI. To accelerate our growth, we are strategically investing in store enhancements in the second half of this year. This includes our food and beverage modernization program that offers our customers a wider assortment of hot food and specialty coffee. Stores with these new platforms significantly outperform legacy stores as early results have shown a 9% lift in 2-month sales over the last year for 15 stores receiving elements of this new platform. We are planning a rollout across both banners to over 2,500 stores in 2024.
In 2023, we targeted underperforming stores in the Louisville, Kentucky market for enhanced execution and exterior updates. In 2024, we plan to scale this operational focus to 4,000 stores across both 7-Eleven and Speedway banners. Further, to help meet customer demand for innovative, high-quality food products, we have partnered with WARABEYA Virginia. The facility opened in September last year and supports over 1,300 stores. We have seen a significant increase in both sales and units for WARABEYA categories and continue to expand assortment with innovative new item launches through the year.
Next slide, please. We launched our private brand business with the mission of delivering high-quality, differentiated products, bringing value to customers all while achieving a better margin and penny profit. Our growing private brand team has a clear strategic focus and holistic execution plan to grow our private brand portfolio to offer high-quality products at a great value for our customers. Through identifying our customers' changing needs and creating a robust product pipeline, we are launching 215 new items in 2024 at a 51% average margin. New items being launched the rest of this year include 7-Select Rehydrate, new package nuts and seed products, Fusion Energy and a Prosseco, which we believe will resonate with our customers.
Next slide, please. Our final strategic focus area that I would like to share with you is the acceleration of our 7NOW delivery program. We have a significant strategic advantage with our delivery business. We are close to the customer with a store within 2 miles of 50% of the U.S. population, and we can deliver a wide variety of products within 30 minutes. These competitive advantages enabled us to achieve strong performance in Q1 2024, with delivery sales up 30% year-over-year, contributing $312 and 20 transactions per store a day, representing 3.1% of overall SEI merchandise sales and 5.7% of stores that have 7NOW delivery.
We're also growing the mix of our proprietary products in our delivery business to over 21% of total sales, up 130 basis points year-over-year. Pizza, taquitos and wings being the top-selling proprietary products within this category. As a leader in the C-store delivery space, we will continue to build on this momentum. Throughout the rest of the year, we aim to continue to expand to Speedway stores, increase food sales on the platform, expand our Gold Pass membership and expand restaurant delivery, targeting $725 million in delivery sales this year.
Next slide, please. We are also leaning in heavily on optimizing our cost structure. We increased our target for 2024 from $350 million to $500 million. SEI will continue to optimize spending and improve our profitability by focusing on merchandise cost of goods sold, store labor and operating expenses, financial fees, fuel logistics and repairs and maintenance. We're also focused on the rollout of RIS 2.0 and DEX. This will not only enable retailer initiative across Speedway but will also standardize our technology, reporting and operations across the entire network and the back-office support systems. We recently successfully completed the RIS 2.0 and DEX rollout across all 7-Eleven stores, and we are targeting to complete all Speedway store conversions by mid-2025.
I'll turn it back to you, Mr. Maruyama.
[Interpreted] Next, I will talk about CVS business in Japan and Superstore operation first quarter results.
Page 18, please. First, the Japan CVS business initiatives. 7-Eleven Japan's challenges are, for short term, respond to consumers' mindset to defend their lives due to changes in the economic environment. In other words, price strategy. And our medium- to long-term challenge is for the sustainable growth, 7-Eleven will blend in or be integrated into customers' lives. In other words, the recovery in the visit frequency and customer counts. To counter these 2 challenges, we conducted an advanced implementation in Hokkaido. So let me brief on that.
First of all, response to consumers' mindset to defend their lives. We reinforced Seven the Price products line up to -- with lower price points developed in super sector. And furthermore, we also aimed to appeal products with high customer touch point like rice balls through sales promotions so that customers who visit us will experience our strength, taste quality, freshness of new product, rich product lineup and increase the number of items purchased and customers.
As a result, as you see on the right side, compared to before the implementation in May, we saw a 0.9% improvement in the number of items purchased and sales, and number of customers also increased by 1.1%. These initiatives, in accordance with the situation of the region, is -- will be deployed to other regions.
Page 19, please. This slide shows from the medium to long-term perspective, capturing new customer segments and the new product initiatives to increase our number of customers using smoothie and fresh baked breads as an example. By introducing new products, customers will experience them. And especially with smoothie and fresh baked breads, many females use this. For fresh baked breads, it's a product that we learned from [ SHIPS ] store. The number of customer increase with changes in customer segment will be an important impact for the long-term growth. The existing counter food with relatively high margin will be pursued, and we will grow this business to increase the margin further and launch counter food new products at high frequency to appeal to broad-based customers. The smoothie will be introduced to all stores that can introduce this in the first half, and the fresh baked bread will be expanded to 3,000 stores in FY '24 to expand learning from [ SHIPS ] store.
Next, Page 20. This is the delivery service that is growing steadily as new growth driver, 7NOW. Upper left, sales trend graph shows with high convenience of 7NOW app and development of delivery infrastructure, 7NOW sales is growing steadily. And now that we have a good prospect for nationwide deployment in FY '24, we carried out measures to improve recognition using TV commercials first in Hokkaido. As you can see on the upper right graph, new users grew steadily, and the total number also remained at a high level. And the new -- growth in new customers is not cannibalizing with the physical store sales as customers are using physical stores and 7NOW for different purposes. 7NOW sales is an add-on sales.
Please turn to Page 21. This shows the 7NOW competitive advantage as for products. As shown on the left, almost all top-selling items are -- also, we will be able to respond to needs for immediate consumption, such as spicy fried chicken and fried chicken with soy sauce as well as stocking needs for natural or mineral water and milk. Both can be dealt with. As for services, these products can be delivered within 20 minutes at the shortest, and 7-Eleven stores will be stock location so that inventory can be confirmed at a real-time basis, and we can also customize the advertisement for individual customers using apps. However, we would like to further enhance our competitiveness by developing more 7NOW proprietary products as well as lengthening, expanding the operating time.
Next, please turn to Page 22. This shows the Superstore business' EBITDA of 2024 first quarter. In the first quarter of 2024, the Tokyo metropolitan areas Superstore business as well as Superstore business including York-Benimaru, have both achieved the budget. Tokyo metropolitan area superstore business will -- is aiming at achieving JPY 55 billion in 2025, and we'll execute our transformation.
Please turn to Page 23. This slide is what we showed you last October. This is the fundamental transformation road map update. The overall progress is in line with the plan. As you can see on the upper right, the -- there are 1,028 items that have already materialized effects, positive effects. And the -- more than 70% of have led to improvement -- our measures for improving sales and profit and our shifting from cost structure transformation to improving revenue and profit. As for major KPIs, we are able to reduce our SG&A more than our plan. On the other hand, the productivity of stores have decreased slightly. However, this is a tentative impact due to remodeling of stores. And the targeted numbers have been achieved as planned.
Lastly, please turn to Page 24. I would like to talk about the action plan implementation situation that we announced on April 10. Based on the recommendation by the Strategic Committee, we have decided on 3 action plans after having a discussion in the Board of Directors meeting. One, formulation of concrete action plans to accelerate growth, be it changes to the group structure that will enhance our long-term growth in corporate value and see enhancement of investor engagement. We will clarify the time line for implementation. And under the monitoring by the Board of Directors, we are working on the specific initiatives and discussions.
As on the right-hand side, we have the items being listed as status of initiatives up to date. For example, in the North American Convenience store business, we will focus on improvement of capital efficiency as well as a quantitative acceleration of growth and are having specific discussions. For the specific content and the specific progress, we would like to provide you with an explanation in the second quarter financial results explanation.
This concludes my explanation. Thank you very much.
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]