Seven & I Earnings: Moaty C-Store Operations Lift Profits; 204-Store Deal in the U.S. Ramps Up M&A

Narrow-moat Seven & I looks set to beat its full-year profit guidance. Despite a challenging operating environment in Japan and the U.S., where inflation continues to outpace wage increases, third-quarter operating profits grew 5.5% year on year, thanks to rigorous cost-control measures and firm fuel margins of the U.S. C-store operations (SEI) as well as margin expansion of the domestic C-store business (SEJ). We view shares, trading at a 14% discount to our fair value estimate of JPY 6,800, as undervalued. While we remain upbeat about the upside of transforming the U.S. C-stores to destination retailers through expansion of fresh food growth, the growth for 2024 could be capped if currency or fuel margins turn into headwinds. The U.S. Food and Drug Administration’s ban on menthol cigarettes, the U.S. recession, and other near-term downside risks may weigh on its short-term share performance.