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Climate Volatility Will Impact Retail Sales, But TOPVALU BESTPRICE Could Draw More Customers Ahead

WA
Consensus Narrative from 8 Analysts

Published

January 26 2025

Updated

January 29 2025

Narratives are currently in beta

Key Takeaways

  • Record high temperatures affecting retail segments may pressure future Aeon revenue growth due to sales pattern impacts.
  • Digital transformation investments could affect net margins short-term, necessitating further operational adjustments to manage increased labor costs.
  • Enhanced pricing strategies and promotional efforts, alongside digital transformation, bolster Aeon's sales and productivity with potential for sustained revenue and profit growth.

Catalysts

About Aeon
    Operates in the retail industry in Japan, China, ASEAN countries, and internationally.
What are the underlying business or industry changes driving this perspective?
  • Aeon's retail segments, including GMS, Supermarket, and Health & Wellness, have faced challenges due to record high temperatures impacting seasonal product sales, which could pressure future revenue growth as climate unpredictability may continue to affect sales patterns.
  • The company's initiative to strengthen price appeals through its TOPVALU BESTPRICE brand to attract more customers could result in compressed gross profit margins as price reductions might not fully translate into increased sales volume.
  • Aeon's investment in digital transformation to enhance productivity and manage labor costs, such as implementing self-checkouts and electronic shelf tags, might not yield immediate returns, affecting short-term net margins and necessitating further operational adjustments.
  • The increase in labor costs, with wage hikes for part-time workers, could impact net income if sales growth and productivity gains from digital initiatives do not sufficiently offset these costs, thereby affecting overall profitability.
  • The declining gross profit margin in the Food Products division amidst ongoing price increases highlights potential future challenges in maintaining profit levels if consumer spending does not rise correspondingly, impacting both revenue and earnings.

Aeon Earnings and Revenue Growth

Aeon Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?
  • Analysts are assuming Aeon's revenue will grow by 2.1% annually over the next 3 years.
  • Analysts assume that profit margins will increase from 0.1% today to 0.6% in 3 years time.
  • Analysts expect earnings to reach ¥63.9 billion (and earnings per share of ¥74.65) by about January 2028, up from ¥10.7 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ¥38.0 billion.
  • In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 46.9x on those 2028 earnings, down from 299.0x today. This future PE is greater than the current PE for the JP Consumer Retailing industry at 12.8x.
  • 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 5.67%, as per the Simply Wall St company report.

Aeon Future Earnings Per Share Growth

Aeon Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?
  • Aeon's efforts to strengthen pricing strategies and enhance customer attraction through initiatives like TOPVALU BESTPRICE have resulted in increased customer numbers and a rebound in sales, potentially leading to higher revenues and gross profit improvements.
  • The financial services division's growth in operating profit, supported by expanding card revenues and financial revenues, indicates a stable revenue stream that could bolster overall earnings, even amidst challenges like fraudulent card usage costs.
  • The Shopping Center Development segment's robust performance and increased customer traffic, especially during events like Aeon Black Friday, suggest strong demand and potential for ongoing revenue growth in specialty store sales.
  • Enhanced productivity and cost control through digital transformation initiatives, like implementing electronic shelf tags and self-checkout systems, are expected to optimize operating margins by reducing administrative costs and improving work efficiency.
  • Successful sales promotions and initiatives, such as the Aeon Black Friday sale, have led to significant year-on-year growth in net sales and same-store sales, indicating a potential uplift in Aeon's financial performance and revenue outlook.

Valuation

How have all the factors above been brought together to estimate a fair value?
  • The analysts have a consensus price target of ¥2968.75 for Aeon 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 ¥3900.0, and the most bearish reporting a price target of just ¥1650.0.
  • In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥10646.4 billion, earnings will come to ¥63.9 billion, and it would be trading on a PE ratio of 46.9x, assuming you use a discount rate of 5.7%.
  • Given the current share price of ¥3722.0, the analyst's price target of ¥2968.75 is 25.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  • 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.

How well do narratives help inform your perspective?

Disclaimer

Warren A.I. is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by Warren A.I. are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that Warren A.I.'s analysis may not factor in the latest price-sensitive company announcements or qualitative material.

Read more narratives

Fair Value
JP¥3.0k
26.0% overvalued intrinsic discount
Analyst Price Target Fair Value
Future estimation in
PastFuture-71b11t2014201720202023202520262028Revenue JP¥10.6tEarnings JP¥63.9b
% p.a.
Decrease
Increase
Current revenue growth rate
2.43%
Food and Staples Retail revenue growth rate
0.15%