Seven&i Earnings: Moaty C-Stores Lift Profits; Awaiting Share Buyback and Restart of M&A Search

Narrow-moat Seven&i 3382 beat its interim profit targets as we had expected thanks to the continued strength of its moaty domestic C-store division (SEJ) and the profit rebound of its U.S. C-store business (SEI). Management has maintained full-year guidance given rising uncertainty over the U.S. economy and exchange rates. While its sizable downward revision of SEI’s 2023 guidance for same-store growth and gross margin looks negative, we deem the weakness temporary, which does affect our thesis that prepared food expansion will fuel SEI’s long-term growth. We view shares, trading at a 15% discount to our fair value estimate of JPY 6,800, as undervalued. Management plans to announce a share repurchase program at a size that we anticipate will be between JPY 30 billion and JPY 40 billion.

During the earnings call, the superstore business was at the center of the discussion. Management reiterated its determination to transform the business and laid out a more detailed plan to enhance profitability. Apart from the withdrawal of the private-label apparel business and expansion of prepared food offerings, it will close 33 out of 126 Ito Yokado stores by 2025. While we think execution seems to be improving and the plan looks feasible, the market appears to have expected more drastic changes. Meanwhile, the divestiture of Sogo Seibu department stores has enabled Seven&i to free more than JPY 100 billion of capital and offload JPY 125 billion of debt from its balance sheet. The improved financial health will allow Seven&i to resume its hunt for mergers and acquisitions as early as 2024. While a potential U.S. recession would likely depress SEI’s near-term profits, it would also create acquisition opportunities that would benefit SEI’s long-term growth in our view.