Brief Japan: Japan Department Store Apparel Sales Down 35% in a Decade and more

In this briefing:

1. Japan Department Store Apparel Sales Down 35% in a Decade
2. Japanese Supermarket Consolidation Likely and Soon
3. Japan: Upcycle Intact
4. Naspers: Softbank Buyback a Guide for Naspers?
5. 🇯🇵 JAPAN: Winter Results & Revisions Scores – Market Composite & Sector Review – Chilling

1. Japan Department Store Apparel Sales Down 35% in a Decade

Last month, the Japan Department Store Association (JDSA) announced a 1.1% drop in sales at department stores for calendar year 2018, with sales also down 0.8% on a same-store basis.

This was a reasonable result in a year when there were many store closures, both permanent and temporary, and slow traffic due to extreme weather events, and of course the background trend of an ageing consumer base.

However, the underlying trend remains clear: apparel sales continue to fall, down more than a third in a decade. Meanwhile, cosmetics has seen its share of sales double.

Since apparel accounts for 30% of department store sales on average and as much as 50% for regional stores, this is a serious weakness. With competition from speciality chains and online intensifying yet further and department stores themselves cutting space for apparel, there is unlikely to be any respite.

For this reason, and with further store closures planned in the next few years, the department store sector will continue to contract.

2. Japanese Supermarket Consolidation Likely and Soon

Signs of consolidation in the supermarket sector have come and gone over the past decade, but recent events suggest there will now be a sustained increase.

Traditionalists, and the wholesalers, who control the sector, point to the positives of greater variety and local food differentiation; yet these are what have kept the sector so fragmented and inefficient.

However, with falling populations and a shift to online buying gradually gaining momentum, as well as encroachment from other sectors such as drugstores, the time is ripe for bigger fish to start eating up the many, many tiddlers. 

3. Japan: Upcycle Intact

Following 3Q’s contraction, economic activity rebounded in the final quarter of 2018 led  by investment spending. Global trade tensions and the planned increase in the consumption tax in 2019 are headwinds but we expect the Japanese economy to sail through. The investment upcycle remains intact underpinned by rising profits and consumption spending well supported by easy monetary and fiscal policy. We reiterate our overweight call on Japanese equities.

4. Naspers: Softbank Buyback a Guide for Naspers?

Recently, Softbank’s (9984 JP) shares jumped +18% after announcing a $5.5bn share buyback. Using Smartkarma’s holdco monitor, the discount to NAV had widened to around 55% prior to the announcement but is now sitting around 40-45%. There were a few key reasons for the buyback: (1) the Softbank Corp (9434 JP) (KK) IPO netted $20bn, giving the company the flexibility to do the buyback, and (2) Softbank is taking a more disciplined approach to further platform investments.

Both these arguments are also available to Naspers (NPN SJ) management and a move to buy back 5% of market cap is feasible and we believe would narrow the discount. The question is whether management are listening. They have been dismissive of buybacks in the past but this could change.

5. 🇯🇵 JAPAN: Winter Results & Revisions Scores – Market Composite & Sector Review – Chilling

CHILLING – A winter chill has descended over the Japanese equity market. As we covered in our Insight on market aggregate earnings Japan: Winter Results & Revisions Flash the net income of corporate Japan peaked on 26th December, However, reported earnings are a lagging indicator, and in this instance, the ‘lag’ was almost one year, with the Total Market Capitalisation (excluding REITs) peaking on 23rd January 2018. Our preferred, and often leading, indicators are the All-Market Composite Results Score – a measure of the trend and momentum in quarterly corporate earnings the All-Market Composite Forecast/Revision Score – which measures the trend and rate of change in company initial forecasts and revisions. The Results Score peaked on 1st February 2018, seven trading days after the market peak and is now one year into an extended period of decline. The Forecast/Revision Score is slowing peaked out on 27th October 2017, three months ahead of the market and the Results Score – demonstrating the reliability of company forecasts, as opposed to ‘consensus’, as a leading indicator of future earnings. Revisions have continued to ‘lead’ on the way down and 0.55 points ‘ahead’.   

TURNING NEGATIVE? – Subtracting the Forecast/Revision Score from the Results Score shows the extent of the lag in the latter. The relationship has been relatively stable of over one year; however, as we ‘roll’ into the next fiscal year’s forecasts in May, we can expect the difference to move closer to zero as both scores turn negative. As the cycle bottoms out, the revisions will recover ahead of results, and the difference will also become negative, setting the stage for the next upswing in later 2019 or early 2020.  

On each of the three occasions since 2006 when the Results Score has fallen below ‘4’, it has subsequently fallen below zero. In 2012, the decline was muted by the advent of the Bank of Japan (BOJ)’s policy of weakening the currency. The current score of 2.14 suggests we are continuing on a path to zero and below.  Failing a currency move through ¥115 (see below), the Results Score should turn negative by the time the full-year results are announced next May. We also expect a high degree of caution in forecasting, especially on the Auto sector which is overshadowed by the prospect of US tariffs. The announcement of the closer of Honda Motor (7267 JP)‘s car plant in Swindon in the UK is not a good portent.  

BEAR MARKET RALLY & THE YEN – Total Market Value has recovered by 13.8% since Christmas Day and is currently at the same level as when we published our Autumn review – SloMo Slowdown. With earnings and revisions heading lower, the implied expectation is for some or all of – a further central bank easing, a resolution of current trade tensions, and a weakening of the Yen. The last has been the ‘get-out-of-jail’ card for Japanese equities. Our chart compares the year-on-year percentage change in the US$/¥ exchange rate with a lag of six months to the Combined Results and Revision Score (with each sore being equally-weighted). The last eight turning points for the rate of change of the cross rate, have coincided with directional changes in earnings and revisions momentum. The recent weakness in the currency suggests a more stable market – at least until the late spring.