Expert on Japan Retail and Consumer Markets, JapanConsuming

Michael Causton

Expert on Japan Retail and Consumer Markets

Real Insight on Japanese Consumer Markets

JapanConsuming

JapanConsuming is a specialist research firm producing intelligence on Japanese retail and consumer markets. Founded in 2000, JapanConsuming has become the leading provider of insights on Japanese retailers and consumer trends to retailers, brands, government agencies and investors. As well as a highly regarded monthly report on the market, JapanConsuming produces in-depth reports on retail sectors, seminars on key trends and telephone consulting to investors on trends and retailers.

JapanConsuming was founded by Michael Causton and Roy Larke. 

Equity Bottom-Up

<p>It hasn’t been easy selling clothing in the last six months or even in the months before, unless, that is, you are <a href="https://www.smartkarma.com/entities/workman-co-ltd" target="_blank" data-smartkarma-citation="entities:8467:1" rel="noopener">Workman Co Ltd (7564 JP)</a>.</p>
<p>The workwear to sports retailer delivered six straight months of sales growth peaking at 44% year-on-year thanks to low price cost performance, relentless expansion of private brands and investment in new franchisees.</p>
<p>Workman's share price is up more than 3x since we first recommended the retailer in late 2018 but we have been fans of the company for more than a decade for its disciplined focus on low-cost operations, merchandise quality and efforts to understand and produce for its core customer target.</p>
<p>It also helps that Workman is a franchise operation and one that, like Benetton and McDonald's and other successful franchises over time, buys the land its franchisees operate stores on. The franchise deal keeps costs way lower than competitors and also means personnel costs are for the most part variable while its competitors face fixed staff costs – a huge advantage especially now.</p>
<p>These are core qualities for a retailer and in all aspects, Workman continues to improve. Sales have risen as much as 44% a month since March and as explained below, there are very strong reasons to expect both sales and profit margins to grow much, much further. The share price may have dipped in recent days but the fundamentals remain strong: more growth is to come.</p>

It hasn’t been easy selling clothing in the last six months or even in the months before, unless, that is, you are Workman Co Ltd (7564 JP).
The workwear to sports retailer delivered six straight months of sales growth peaking at 44% year-on-year thanks to low price cost performance, relentless expansion of private brands and investment in new franchisees.
Workman's share price is up more than 3x since we first recommended the retailer in late 2018 but we have been fans of the company for more than a decade for its disciplined focus on low-cost operations, merchandise quality and efforts to understand and produce for its core customer target.
It also helps that Workman is a franchise operation and one that, like Benetton and McDonald's and other successful franchises over time, buys the land its franchisees operate stores on. The franchise deal keeps costs way lower than competitors and also means personnel costs are for the most part variable while its competitors face fixed staff costs – a huge advantage especially now.
These are core qualities for a retailer and in all aspects, Workman continues to improve. Sales have risen as much as 44% a month since March and as explained below, there are very strong reasons to expect both sales and profit margins to grow much, much further. The share price may have dipped in recent days but the fundamentals remain strong: more growth is to come.

Japan's Retail Star: Workman Thrives in Crisis

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Thematic (Sector/Industry)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/156/586/original/2020-09-02_15-03-28.png?1599026640" class="editor-image img-responsive" data-smartkarma-image-id="156586"></figure>
<div class="content-caption">Source for all charts: Japan Analytics</div>
<p><strong>NEV IN JAPAN</strong> - Japan has a reputation for being the world's leading market for finding listed companies with negative Enterprise Value (NEV). Based on a sample of 842,133 traded months for the 3,826 currently-listed non-financial companies in our universe since 1993, NEV-traded months represent 8%. One thousand and eleven companies have spent at least one month with a negative EV and the average NEV 'period' is just over two years.  The number of NEV companies has varied over the last thirty years, from only one in 1994 (Sanyu Construction 1841 JP) to a peak of 437 in 2009 - 15.4% of the universe. In the last two years, the percentage has doubled to 10% or 366 companies, most of which are small-cap.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/156/590/original/2020-09-02_15-13-33.png?1599027223" class="editor-image img-responsive" data-smartkarma-image-id="156590"></figure>
<p><strong>50 BPS</strong> -Accordingly, the aggregate (inverted) value of NEV stocks is ¥2.5 trillion or just 50 basis points of the aggregate of the universe. Nevertheless, the current value is at the upper end of the thirty-year range. We have excluded four non-financial companies - Z Holdings, Rakuten, Japan Post, and Sony - as they have financial subsidiaries on their balance sheets.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/156/595/original/2020-09-02_15-36-40.png?1599028611" class="editor-image img-responsive" data-smartkarma-image-id="156595"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/156/866/original/2020-09-03_16-43-25.png?1599119017" class="editor-image img-responsive" data-smartkarma-image-id="156866"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/156/596/original/2020-09-02_15-37-56.png?1599028687" class="editor-image img-responsive" data-smartkarma-image-id="156596"></figure>
<p><strong>NEV 'BUYS'</strong> - Brief periods, and occasionally extended, when higher-quality companies dip into NEV are often good long-term buying opportunities as shown above with <a href="https://www.smartkarma.com/entities/temp-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:1428:1" rel="noopener">Persol (2181 JP)</a>, <a href="https://www.smartkarma.com/entities/toei-animation-co-ltd" target="_blank" data-smartkarma-citation="entities:18641:1" rel="noopener">Toei Animation (4816 JP)</a>  and <a href="https://www.smartkarma.com/entities/hakuhodo-dy-holdings-inc" target="_blank" data-smartkarma-citation="entities:8736:1" rel="noopener">Hakuhodo DY (2433 JP)</a>. </p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/156/623/original/2020-09-02_17-57-38.png?1599037069" class="editor-image img-responsive" data-smartkarma-image-id="156623"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/156/625/original/2020-09-02_18-04-05.png?1599037457" class="editor-image img-responsive" data-smartkarma-image-id="156625"></figure>
<p><strong>NEV 'TRAPS'</strong> - Conversely, NEV can persist for years, 'trapping' both value investors and activists, particularly where management remain 'cloth-eared' such as <a href="https://www.smartkarma.com/entities/tokyo-broadcasting-system" target="_blank" data-smartkarma-citation="entities:12981:1" rel="noopener">Tokyo Broadcasting System (9401 JP)</a> and <a href="https://www.smartkarma.com/entities/toppan-printing-co-ltd" target="_blank" data-smartkarma-citation="entities:11875:1" rel="noopener">Toppan Printing (7911 JP).</a></p>
<div class="content-highlight">
<p>In the <strong>DETAIL</strong> section below, we will review the current large-cap NEV companies, as well the most persistent and the largest peak to trough NEV ranges and make some specific stock recommendations.</p>
</div>


Source for all charts: Japan Analytics
NEV IN JAPAN - Japan has a reputation for being the world's leading market for finding listed companies with negative Enterprise Value (NEV). Based on a sample of 842,133 traded months for the 3,826 currently-listed non-financial companies in our universe since 1993, NEV-traded months represent 8%. One thousand and eleven companies have spent at least one month with a negative EV and the average NEV 'period' is just over two years.  The number of NEV companies has varied over the last thirty years, from only one in 1994 (Sanyu Construction 1841 JP) to a peak of 437 in 2009 - 15.4% of the universe. In the last two years, the percentage has doubled to 10% or 366 companies, most of which are small-cap.

50 BPS -Accordingly, the aggregate (inverted) value of NEV stocks is ¥2.5 trillion or just 50 basis points of the aggregate of the universe. Nevertheless, the current value is at the upper end of the thirty-year range. We have excluded four non-financial companies - Z Holdings, Rakuten, Japan Post, and Sony - as they have financial subsidiaries on their balance sheets.



NEV 'BUYS' - Brief periods, and occasionally extended, when higher-quality companies dip into NEV are often good long-term buying opportunities as shown above with Persol (2181 JP), Toei Animation (4816 JP)  and Hakuhodo DY (2433 JP). 


NEV 'TRAPS' - Conversely, NEV can persist for years, 'trapping' both value investors and activists, particularly where management remain 'cloth-eared' such as Tokyo Broadcasting System (9401 JP) and Toppan Printing (7911 JP).

In the DETAIL section below, we will review the current large-cap NEV companies, as well the most persistent and the largest peak to trough NEV ranges and make some specific stock recommendations.


🇯🇵 JAPAN • Looking for Value in Negative Enterprise Value

Event-Driven

<p>Itochu's plans for Familymart are about a lot more than control – it has had effective control for years anyway.</p>
<p>There is a much bigger story: the fact that food is the one last hold out of traditional distribution practices with multiple layers of importers, wholesalers and a fragmented retail sector, resulting in gross inefficiencies. </p>
<p>Japan's biggest trading companies, particularly <a href="https://www.smartkarma.com/entities/itochu-corp" target="_blank" data-smartkarma-citation="entities:18448:1" rel="noopener">Itochu Corp (8001 JP)</a> and <a href="https://www.smartkarma.com/entities/mitsubishi-corp" target="_blank" data-smartkarma-citation="entities:20668:1" rel="noopener">Mitsubishi Corp (8058 JP),</a> have been major beneficiaries of this system, capturing margins at all stages of the channel, from raw material imports to retail. </p>
<p>Pressure on the food sector to modernise has been building for a decade and this is now happening in the form of retailers building to national scale to finally take on this supply-side dominance and also learning to source direct, cutting out wholesalers. The trading companies know this and are themselves beginning to build what are in effect vertically integrated food distribution businesses, at the same time as pivoting themselves as the main suppliers to Japan's biggest food-based retailers.</p>
<p><strong>Itochu and Mitsubishi are spearheading this change. This rivalry in the food sector between the two venerable trading firms is as important as the rivalry between their proxies in convenience store retailing, Familymart and Lawson.</strong></p>
<p>Absorbing Familymart is the basis for a much bigger consolidation of Itochu's interests which include stakes in numerous food retailers as well as role as the biggest food wholesaler when all its subsidiaries are taking into account.</p>
<p>Sadly, current Familymart shareholders won't benefit from this consolidation nor the likely spike in operating margins as some of the fat in food distribution is finally cut.</p>
<p>In Japan, where food prices have been kept so high for so long by entrenched interests (Japanese love food but the 24% of consumption budgets spent on food (much, much higher than most  equivalent markets) is much more about high prices than being a gourmet nation), the potential to cut costs is staggeringly large.</p>
<p>Even within CVS retailing, Itochu will likely benefit from the continued growth of the big three retailers – despite format saturation.</p>
<p>For the sector as a whole, 2019 saw the highest average daily sales per store so far of ¥590,794, a 12.1% increase on 2010. In the same decade, total store numbers increased by 33.4%, but total sales increased by 50.2%.</p>
<p><strong>CVS have not just expanded in number, but their position and ability to exploit the market have improved dramatically too. Based on METI figures, CVS market share of retailing has expanded from 6% to 8.4% in the same period.</strong></p>
<p><strong>In other words, saturation is important but not that important because CVS are finding new ways to expand both their share of retailing and influence.</strong></p>

Itochu's plans for Familymart are about a lot more than control – it has had effective control for years anyway.
There is a much bigger story: the fact that food is the one last hold out of traditional distribution practices with multiple layers of importers, wholesalers and a fragmented retail sector, resulting in gross inefficiencies. 
Japan's biggest trading companies, particularly Itochu Corp (8001 JP) and Mitsubishi Corp (8058 JP), have been major beneficiaries of this system, capturing margins at all stages of the channel, from raw material imports to retail. 
Pressure on the food sector to modernise has been building for a decade and this is now happening in the form of retailers building to national scale to finally take on this supply-side dominance and also learning to source direct, cutting out wholesalers. The trading companies know this and are themselves beginning to build what are in effect vertically integrated food distribution businesses, at the same time as pivoting themselves as the main suppliers to Japan's biggest food-based retailers.
Itochu and Mitsubishi are spearheading this change. This rivalry in the food sector between the two venerable trading firms is as important as the rivalry between their proxies in convenience store retailing, Familymart and Lawson.
Absorbing Familymart is the basis for a much bigger consolidation of Itochu's interests which include stakes in numerous food retailers as well as role as the biggest food wholesaler when all its subsidiaries are taking into account.
Sadly, current Familymart shareholders won't benefit from this consolidation nor the likely spike in operating margins as some of the fat in food distribution is finally cut.
In Japan, where food prices have been kept so high for so long by entrenched interests (Japanese love food but the 24% of consumption budgets spent on food (much, much higher than most  equivalent markets) is much more about high prices than being a gourmet nation), the potential to cut costs is staggeringly large.
Even within CVS retailing, Itochu will likely benefit from the continued growth of the big three retailers – despite format saturation.
For the sector as a whole, 2019 saw the highest average daily sales per store so far of ¥590,794, a 12.1% increase on 2010. In the same decade, total store numbers increased by 33.4%, but total sales increased by 50.2%.
CVS have not just expanded in number, but their position and ability to exploit the market have improved dramatically too. Based on METI figures, CVS market share of retailing has expanded from 6% to 8.4% in the same period.
In other words, saturation is important but not that important because CVS are finding new ways to expand both their share of retailing and influence.

Keeping It in the Family: Why Familymart Is Worth so Much More to Itochu

<div>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/144/786/original/2020-07-08_06-33-57.png?1594157660" class="editor-image img-responsive" data-smartkarma-image-id="144786"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/144/788/original/2020-07-08_06-35-53.png?1594157763" class="editor-image img-responsive" data-smartkarma-image-id="144788"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/144/790/original/2020-07-08_06-48-56.png?1594158549" class="editor-image img-responsive" data-smartkarma-image-id="144790"></figure><div class="content-caption">Source • Japan Analytics</div>
<p><strong>DESTINATION BLUES</strong> - Destination malls are proving to be this century's department stores, for which COVID-19 has proved to be an unwelcome 'kicker', while turnover leases add volatility to the mix. The foreign shareholder ratio and the Relative Price Score both peaked in 2014, despite the 455 increase in operating profits in the last five years. The revised profit target of ¥30 billion is less than that achieved in FY2008 when revenues were one-third current levels.  Residual returns have been negative since FY2019-Q2; our model suggests the shares are still overvalued at 0.82x book.</p>
<p style="text-align: center;"><strong>DAILY STATS</strong></p>
</div><hr><div><p style="text-align: center;"><strong>14 Quarterly Results</strong></p></div><div><ul>
<li>
<strong>Results Score</strong>: 6 Positive / 1 Neutral / 7 Negative</li>
<li>
<strong>Average Results Score Change:</strong>-0.6</li>
<li>
<strong>Average % Change in Revenue:</strong> -3.7% Quarter YoY* / +1.4% Rolling TTM YoY</li>
<li>
<strong>Average Operating Profit Margin Change:</strong> -2.4ppt</li>
</ul></div><hr><div><p style="text-align: center;"><br><strong>8 Annual • 7 Interim Forecasts/Revisions</strong></p></div><div><ul>
<li>
<strong>Annual Forecast/Revision Score:</strong> 4 Positive / 1 Neutral / 3 Negative</li>
<li>
<strong>Interim Forecast/Revision Score Change:</strong> 2 Positive / 1 Neutral / 3 Negative</li>
<li>
<strong>Average Forecast/Revision Score Change:</strong> -5.9</li>
</ul></div>


Source • Japan Analytics
DESTINATION BLUES - Destination malls are proving to be this century's department stores, for which COVID-19 has proved to be an unwelcome 'kicker', while turnover leases add volatility to the mix. The foreign shareholder ratio and the Relative Price Score both peaked in 2014, despite the 455 increase in operating profits in the last five years. The revised profit target of ¥30 billion is less than that achieved in FY2008 when revenues were one-third current levels.  Residual returns have been negative since FY2019-Q2; our model suggests the shares are still overvalued at 0.82x book.
DAILY STATS
14 Quarterly Results

Results Score: 6 Positive / 1 Neutral / 7 Negative

Average Results Score Change:-0.6

Average % Change in Revenue: -3.7% Quarter YoY* / +1.4% Rolling TTM YoY

Average Operating Profit Margin Change: -2.4ppt
 8 Annual • 7 Interim Forecasts/Revisions

Annual Forecast/Revision Score: 4 Positive / 1 Neutral / 3 Negative

Interim Forecast/Revision Score Change: 2 Positive / 1 Neutral / 3 Negative

Average Forecast/Revision Score Change: -5.9


🇯🇵 JAPAN • Results & Revisions 7th July - Aeon Mauled

<p style="text-align: center;"><strong><a href="https://www.smartkarma.com/entities/shimadzu-corp" target="_blank" data-smartkarma-citation="entities:17679:1" rel="noopener">Shimadzu (7701 JP)</a> </strong></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/134/696/original/2020-05-21_06-44-37.png?1590011097" class="editor-image img-responsive" data-smartkarma-image-id="134696"></figure><div class="content-caption">Source • Japan Analytics</div><div><p>In the<strong> DETAIL</strong> below, we shall review yesterday's announcements:-</p></div><div><ul>
<li>The balance between positive/neutral/negative of the 771 results announcements was 32:10:35. The average change in Results Score was -0.6.</li>
<li>For the 44 revisions/initial forecasts, the split was 15:4:25, and the average Forecast/Revision Score was -4.2. 51% of companies reporting full-year results chose to make current year forecasts. </li>
</ul></div>

Shimadzu (7701 JP) Source • Japan AnalyticsIn the DETAIL below, we shall review yesterday's announcements:-
The balance between positive/neutral/negative of the 771 results announcements was 32:10:35. The average change in Results Score was -0.6.
For the 44 revisions/initial forecasts, the split was 15:4:25, and the average Forecast/Revision Score was -4.2. 51% of companies reporting full-year results chose to make current year forecasts. 


🇯🇵 JAPAN • Results & Revisions 20th May - Shimadzu, Amada, Funai Soken, Kobe Bussan

Japan

KOBE BUSSAN CO., LTD. is a supermarket franchise store operator which mainly deals in foods stuffs.  The Company also has direct-run stores.

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Kobe Bussan (3038 JP)

Japan's Retail Star: Workman Thrives in Crisis

It hasn’t been easy selling clothing in the last six months or even in the months before, unless, that is, you are Workman. The workwear to sports...

Michael Causton

🇯🇵 JAPAN • Looking for Value in Negative Enterprise Value

NEV IN JAPAN - Japan has a reputation for being the world's leading market for finding listed companies with negative Enterprise Value (NEV)....

Campbell Gunn

Keeping It in the Family: Why Familymart Is Worth so Much More to Itochu

Itochu's plans for Familymart are about a lot more than control – it has had effective control for years anyway. There is a much bigger story: the...

Michael Causton

🇯🇵 JAPAN • Results & Revisions 7th July - Aeon Mauled

DESTINATION BLUES - Destination malls are proving to be this century's department stores, for which COVID-19 has proved to be an unwelcome...

Campbell Gunn

🇯🇵 JAPAN • Results & Revisions 20th May - Shimadzu, Amada, Funai Soken, Kobe Bussan

Shimadzu (7701 JP) In the DETAIL below, we shall review yesterday's announcements:- The balance between positive/neutral/negative of the 771...

Campbell Gunn

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