Expanding Proprietary Products And 7NOW Will Drive Operational Efficiency

Key Takeaways

• Strategic optimization and asset sales aim to enhance long-term profitability by focusing on higher-margin, higher-growth areas starting in 2025.
  
• Cost reduction and global expansion efforts are projected to drive revenue growth and significantly enhance earnings by improving operational efficiency.
  
• Restructuring, operational vulnerabilities, and slow adaptation to consumer trends threaten profits and growth amid economic pressures in major markets like the US and Japan.

Catalysts

Operates convenience stores, superstores, department stores, supermarkets, and specialty stores.

• The strategic streamlining of low-profit businesses and the sale and leaseback of assets are expected to enhance long-term profitability and boost net margins as the company focuses resources on higher-margin, higher-growth areas starting in 2025.
  
• The emphasis on expanding proprietary product lines, which have higher margins than national brands, and enhancing delivery services like 7NOW, are likely to drive revenue growth and improve overall net margins by leveraging more profitable segments.
  
• The cost leadership initiatives targeting a $500 million reduction by the end of 2024 and a projected reduction in operating expenses as a percentage of sales should significantly enhance earnings by improving operational efficiency.
  
• The global expansion efforts, including consolidation of recent acquisitions like in Australia, and investments in new strategic markets, are expected to drive both top-line revenue growth and operational income, with a focus on doubling profits by 2030.
  
• The planned structural optimization and potential IPO of the superstore business are likely to unlock shareholder value and improve financial returns on equity, as the business segments become more strategically aligned and operationally independent.

Seven & i Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Seven & i Holdings's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.0% today to 2.2% in 3 years time.
• Analysts expect earnings to reach ¥253.2 billion (and earnings per share of ¥97.63) by about January 2028, up from ¥106.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ¥341.1 billion in earnings, and the most bearish expecting ¥184.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.9x on those 2028 earnings, down from 60.9x today. This future PE is greater than the current PE for the JP Consumer Retailing industry at 25.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.0%, as per the Simply Wall St company report.

Seven & i Holdings Future Earnings Per Share Growth

Risks

• Significant special losses due to restructuring initiatives, such as store closures and system integration, which could continue to put pressure on net profit margins.
  
• Declining operating income in key segments like the domestic and overseas convenience store (CVS) business, affecting overall earnings stability and growth prospects.
  
• The inflationary environment and changes in consumer sentiment could lead to declining revenues and pressure on gross margins, particularly in key markets like the United States and Japan.
  
• Impact from one-time issues such as the CrowdStrike outage affecting sales at Speedway stores in Q3 2024, which illustrates vulnerabilities in operational systems that can disrupt revenues and profit margins.
  
• Challenges in adapting quickly to changes in consumer preferences and competition, such as the slow initial response to consumer demands in Japan, could result in lost market share and impact long-term revenue growth.

Valuation

• The analysts have a consensus price target of ¥2520.91 for Seven & i Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥3000.0, and the most bearish reporting a price target of just ¥2000.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥11536.7 billion, earnings will come to ¥253.2 billion, and it would be trading on a PE ratio of 29.9x, assuming you use a discount rate of 5.0%.
  
• Given the current share price of ¥2490.0, the analyst's price target of ¥2520.91 is 1.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.