Seven & I's Foodservice Growth Fortifying Our Investment Thesis; Cost Pressure a Near-Term Drag

Narrow-moat Seven & I beat its interim profit targets as expected, but the second-quarter profits somewhat fell short of our expectation due to weakness in the domestic non-c-store retail businesses. In contrast, the moaty c-store businesses in Japan (SEJ) and the U.S. (SEI), the key profit drivers in our long-term growth assumption, posted healthy growth thanks to improved foot traffic in Japan and solid fuel gross margins in the U.S. We have lifted our foreign exchange and fuel margin assumptions but reduce SEI’s same-store growth and merchandise margin projections, mainly for 2022, following management’s upward revision of the sales and profit guidance on the back of further yen depreciation. We think our second-half estimate of operating profits, more than 8% above the implied guidance, is achievable given Japan’s full tourism reopening from mid-October. The adjustments of our profit forecasts leave an immaterial impact on our fair value estimate of JPY 5,600. We view shares as fairly valued.