Company Reports

Narrow-moat Seven & i Holdings, or 7&i, again guides for slight profit growth, just a 2% increase in operating profit for fiscal 2024 (ending February 2025), given tough business environments for the domestic and US C-store operations in addition to a sizable increase in the groupwide investment and expenses. We consider the expense assumption aggressive and expect management to raise or beat the profit guidance. Meanwhile, we welcome its endeavor to review an option to deconsolidate the superstore business, although the plan to list the unit is likely to face a bumpy road ahead. After fine-tuning our assumptions and taking the 3-for-1 stock split into account, our fair value estimate is JPY 2,300 (previously JPY 6,800). The near-term inflation headwinds do not alter our view that transforming the US C-stores through foodservice expansion will drive 7&i’s midterm growth. We view shares, trading at an 11% discount to our intrinsic value, as undervalued.

The convenience store operations under the 7-Eleven banner have been a key driver of Seven & i Holdings' growth. After accelerating its domestic store expansion and adding more than 7,600 stores between 2011 and 2018, management has embarked on overseas expansion, setting off from North America and now making inroads to other markets, including Vietnam and Australia. Management is pinning hope on foodservice and private-label growth, a key strategic initiative to boost per-store sales, to replicate its Japan success globally. Meanwhile, it has singled out food as the sole focus of the superstore business undergoing a major restructuring through 2025.

The convenience store operations under the 7-Eleven banner have been a key driver of Seven & i Holdings' growth. After accelerating its domestic store expansion and adding more than 7,600 stores between 2011 and 2018, management has embarked on overseas expansion, setting off from North America and now making inroads to other markets, including Vietnam and Australia. Management is pinning hope on foodservice and private-label growth, a key strategic initiative to boost per-store sales, to replicate its Japan success globally. Meanwhile, it has singled out food as the sole focus of the superstore business undergoing a major restructuring through 2025.

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.

Narrow-moat Seven&I’s announcements of an acquisition of 7-Eleven’s Australian, or SEA, operations from the licensee and JPY 110 billion share repurchase program were a surprise. We expected acquisitions to be resumed after 2024 and a share repurchase program of JPY 30 billion to JPY 40 billion. We think 7&I will be able to leverage the experiences gained from the Speedway acquisition to achieve revenue energies through improved product lineups. The acquisition and share buyback will have an immaterial impact on our fair value estimate of JPY 6,800, indicating 16% upside from the close price of Dec. 1. Despite the upside of transforming the U.S. C-stores to destination retailers through expansion of the fresh food business, the U.S. Food and Drug Administration’s ban on menthol cigarettes, a U.S. recession, and yen appreciation are near-term downside risks that could weigh on its share performance.

Narrow-moat Seven&i 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.

We raise our fair value estimate of narrow-moat Seven & i to JPY 6,800 from JPY 6,300, after adjusting our foreign exchange assumptions and factoring in the impact of the department store divestiture, which completed on Sept. 1, 2023. Management raised full-year operating profit guidance by JPY 12 billion or 2.3%, but reduced net profit by JPY 55 billion or 19.3%, to reflect favorable currency movement, the strength of the domestic C-stores, and extraordinary losses concerning the divestiture. We foresee resources released from the divestiture will be used to accelerate C-store expansion and reinforce the firm's moat in fresh food and private label products. Meanwhile, the JPY 80 billion in proceeds, mostly from the borrowing repayment from the department store subsidiary, and more than JPY 20 billion tax savings, should be used for Seven & i’s debt repayment apart from dividend hikes. We view shares, trading at a 12% discount to our renewed intrinsic value, as undervalued. Gasoline margins and foreign exchange movement are the key swing factors to the near-term profits.

The domestic convenience store operations under the 7-Eleven banner have been a key driver of Seven & i Holdings' growth. After accelerating its domestic store expansion and adding more than 7,600 stores between 2011 and 2018, management has shifted its focus from quantity back to quality of store operations and profitability. Management intends to fix the widened variance in store performance resulting from massive new store openings and lift the targeted return on investment from the current 11% to 15%. It has lowered its new store opening target to less than half of 2018's level to 600-plus stores while accelerating closures of the underperforming stores.

Narrow-moat Seven & i’s first-quarter results will likely come as a disappointment to the market, as a correction in fuel dollar margins dragged on overall profits, as we had predicted. We maintain our forecasts and JPY 6,300 fair value estimate, implying that the shares are fairly valued. Our profit forecasts for fiscal 2023 remain a touch below management's guidance, given our less optimistic expectation for near-term growth in the U.S. market.

Narrow-moat Seven & i’s guidance for a small profit growth—merely 1.3% for operating profit for fiscal 2023 ending February 2024—was less of a surprise, as we expected correction in fuel margins of the U.S. convenience store business might weigh on profits. Nevertheless, the guidance of profit loss for the underperforming Ito-Yokado superstore business is a disappointment, which may escalate the dissatisfaction of shareholders who have been demanding a spin off or divestiture of the unit. On the other hand, the announcement of strategic reorganization of the financial service business, in an attempt to expedite monetization of digital data, is welcomed. We reduce our profit estimates by 2%-3% after incorporating the recent fuel margin trend and revised currency assumptions in our projections, but raise our fair value estimate to JPY 6,300 from JPY 5,700 to reflect improved free cash flow and increased time value of money. As we have stressed, growing the C-stores into destination retailers through food-service expansion will be a key growth engine. We view shares as undervalued, implying 12% upside to our new fair value estimate.

The domestic convenience store operations under the 7-Eleven banner have been a key driver of Seven & i Holdings' growth. After accelerating its domestic store expansion and adding more than 7,600 stores between 2011 and 2018, management has shifted its focus from quantity back to quality of store operations and profitability. Management intends to fix the widened variance in store performance resulting from massive new store openings and lift the targeted return on investment from the current 11% to 15%. It has lowered its new store opening target to less than half of 2018's level to 600-plus stores while accelerating closures of the underperforming stores.

The domestic convenience store operations under the 7-Eleven banner have been a key driver of Seven & i Holdings' growth. After accelerating its domestic store expansion and adding more than 7,600 stores between 2011 and 2018, management has shifted its focus from quantity back to quality of store operations and profitability. Management intends to fix the widened variance in store performance resulting from massive new store openings and lift the targeted return on investment from the current 11% to 15%. It has lowered its new store opening target to less than half of 2018's level to 600-plus stores while accelerating closures of the underperforming stores.

Narrow-moat Seven & i Holdings raised its full-year profit guidance to a level largely in line with our forecasts, thanks to a solid rebound in the same-store growth of the moaty domestic convenience store business (SEJ), firm fuel margins, and rigorous cost control in the U.S. C-store arm (SEI). The results echo our thesis that Seven & i’s capability to develop quality private-label products—a key moat source—and expansion of the fresh food business in the United States will lead long-term growth. However, growth for 2023 could be capped if currency or fuel margins turn into a headwind. We have maintained our profit projections but marginally raised our fair value estimate to JPY 5,700 per share from JPY 5,600 to reflect the increased time value of money and adjustment of capital expenditure. We view the shares as fairly valued.

The domestic convenience store operations under the 7-Eleven banner have been a key driver of Seven & i Holdings' growth. After accelerating its domestic store expansion and adding more than 7,600 stores between 2011 and 2018, management has shifted its focus from quantity back to quality of store operations and profitability. Management intends to fix the widened variance in store performance resulting from massive new store openings and lift the targeted return on investment from the current 11% to 15%. It has lowered its new store opening target to less than half of 2018's level to 600-plus stores while accelerating closures of the underperforming stores.

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.

It is no surprise that narrow-moat Seven & I revised up its full-year guidance on the back of the yen weakness, although escalating utility costs offset some profit increase. The strong operating profit growth, up 32% year on year, was boosted by expanded gasoline dollar margins (gross profit of fuel per gallon in dollar terms) in addition to the Speedway consolidation (full three months). We have further raised our operating profits by 6% to reflect the new yen rate of JPY 125 (company guidance JPY 127) for 2022. On the other hand, we have also increased our tax projection to reflect a more gradual kick-in of tax benefits of the Speedway deal. The adjustments, combined with increased time value of money, leave an immaterial impact on our fair value estimate of JPY 5,600.

Narrow-moat 7&I’s operating profit miss, 3% short of its guidance and nearly 5% short of our estimate for fiscal 2021 ending February 2022, was broad-based across all business segments except the overseas convenience store, or c-store, business. The shortfall was attributable to the omicron surge and commodity inflation in addition to yen weakness. The operating profit guidance for fiscal 2022, indicating nearly 11% growth year on year, is uninspiring as sizable IT investment is likely to weigh on profits through 2023. Yet, our thesis that the transformation of U.S. c-stores to destination retailers through food-service expansion will lead the group’s mid- to long-term growth, remains intact. We have maintained our fair value estimate of JPY 5,600 after adjusting our profit estimates, lowering the projections for 2022 and 2023 but raising forecasts for 2024 and beyond, to reflect the impact of IT investment. While we cut our profit estimates for 2022 by more than 10%, they remain a touch above guidance. The shares are trading in line with our intrinsic value and we prefer to wait for more attractive entry points to own the name.

The domestic convenience store operations under the 7-Eleven banner have been a key driver of Seven & i Holdings' growth. After accelerating its domestic store expansion and adding more than 7,600 stores between 2011 and 2018, management has shifted its focus from quantity back to quality of store operations and profitability. Management intends to fix the widened variance in store performance resulting from massive new store openings and lift the targeted return on investment from the current 11% to 15%. It has lowered its new store opening target to less than half of 2018's level to 600-plus stores while accelerating closures of the underperforming stores.

Nikkei’s reporting of potential divesture of the struggling department store business has sent narrow-moat 7&I’s share prices higher as the slow restructuring progress has been a major frustration for investors. According to Nikkei, 7&I is hoping to sell the business for at least JPY 200 billion, compared with the book value of about JPY 160 billion composed of mainly land and buildings. We estimate the divesture will lift our fair value estimate by nearly JPY 200 to JPY 5,600 at a transaction price of JPY 200 billion. The bidding process is said likely to take place in February 2022 with at least a couple of foreign private equity funds participating. We believe values of properties including land of four store locations in the Greater Tokyo area will decide the selling price.

Narrow-moat Seven & I revised up its full-year guidance as expected but the operating profit target was 2.5% above our estimates thanks to robust growth posted by the U.S. c-store business (SEI), a key driver in our long-term growth assumption. In contrast, continued weakness spotted in the moaty domestic c-store business (SEJ), in part due to slow recovery of foot traffic across Japan’s retail industry, remains a key concern. We project more than 20% growth in operating profits in 2022, led by the U.S. c-store business, despite cost inflation and prolonged COVID-19 impacts. We do not think the pandemic has eroded the firm's moat underpinned by its capability of private-label development and expect the revamp of product lineup and normalized foot traffic will lead to sales recovery.