Don Quijote Holdings / 7532

R Don Quijote Holdings / 7532

COVERAGE INITIATED ON: 2010.01.06 LAST UPDATE: 2018.03.09

Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an “owner’s manual” to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at [email protected] or find us on Bloomberg.

Research Coverage Report by Shared Research Inc. Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.03.09 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

INDEX

How to read a Shared Research report: This report begins with the trends and outlook section, which discusses the company’s most recent earnings. First-time readers should start at the business section later in the report.

Key financial data ------3 Recent updates ------4 Highlights ------4 Trends and outlook ------6 Monthly trends ------6 Quarterly trends and results ------7 Full-year company forecasts (as of beginning FY06/18) ------23 Business ------41 Business description ------41 Strengths and weaknesses ------49 Market and value chain ------51 Strategy ------53 Historical financial statements ------55 Income statement ------74 Balance sheet ------75 Cash flow statement ------77 Other information ------78 History ------78 Results briefing summaries ------80 News and topics ------89 Top management ------93 Major shareholder ------94 Investor relations ------94 Company profile ------95

02/96 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.03.09 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Key financial data

Income statement FY06/05 FY06/06 FY06/07 FY06/08 FY06/09 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Est. Sales 232,778 260,779 300,660 404,924 480,856 487,571 507,661 540,255 568,377 612,424 683,981 759,592 828,798 920,000 YoY 20.7% 12.0% 15.3% 34.7% 18.8% 1.4% 4.1% 6.4% 5.2% 7.7% 11.7% 11.1% 9.1% 11.0% Gross profit 53,448 60,354 73,123 108,709 127,240 123,506 129,074 139,543 149,807 161,018 181,741 201,893 218,580 240,000 YoY 20.7% 12.9% 21.2% 48.7% 17.0% -2.9% 4.5% 8.1% 7.4% 7.5% 12.9% 11.1% 8.3% 9.8% GPM 23.0% 23.1% 24.3% 26.8% 26.5% 25.3% 25.4% 25.8% 26.4% 26.3% 26.6% 26.6% 26.4% 26.1% SG&A expenses 42,634 48,500 59,537 92,728 110,068 102,439 103,738 110,223 117,438 126,726 142,638 158,708 172,395 189,000 YoY 26.6% 13.8% 22.8% 55.7% 18.7% -6.9% 1.3% 6.3% 6.5% 7.9% 12.6% 11.3% 8.6% 9.6% Operating profit 10,814 11,854 13,586 15,981 17,172 21,067 25,336 29,320 32,369 34,292 39,103 43,185 46,185 51,000 YoY 1.9% 9.6% 14.6% 17.6% 7.5% 22.7% 20.3% 15.7% 10.4% 5.9% 14.0% 10.4% 6.9% 10.4% OPM 4.6% 4.5% 4.5% 3.9% 3.6% 4.3% 5.0% 5.4% 5.7% 5.6% 5.7% 5.7% 5.6% 5.5% Recurring profit 12,841 14,396 15,774 17,204 15,989 21,109 25,138 29,283 33,201 35,487 40,160 43,797 45,523 53,800 YoY 1.9% 12.1% 9.6% 9.1% -7.1% 32.0% 19.1% 16.5% 13.4% 6.9% 13.2% 9.1% 3.9% 18.2% RPM 5.5% 5.5% 5.2% 4.2% 3.3% 4.3% 5.0% 5.4% 5.8% 5.8% 5.9% 5.8% 5.5% 5.8% Net in co me 7,163 10,725 10,638 9,303 8,554 10,238 12,663 19,845 21,141 21,471 23,148 24,938 33,082 32,200 YoY 4.6% 49.7% -0.8% -12.6% -8.1% 19.7% 23.7% 56.7% 6.5% 1.6% 7.8% 7.7% 32.7% -2.7% Net margin 3.1% 4.1% 3.5% 2.3% 1.8% 2.1% 2.5% 3.7% 3.7% 3.5% 3.4% 3.3% 4.0% 3.5% Per share data (JPY, adjusted for stock splits) Shares issued (year end; '000) 66,033 71,338 71,845 72,022 72,022 72,095 77,031 77,135 77,864 78,394 157,919 158,118 158,179 - EPS 112 158 149 131 124 147 168 257 273 275 147 158 209 204 Book value per share 800 1,018 1,146 1,200 1,284 1,461 1,605 1,856 2,136 2,390 1,345 1,464 1,638 - Dividend per share 13 17 20 22 23 25 28 31 33 36 40 22 26 27 Balance sheet (JPYmn) Cash and cash equivalents 15,055 27,792 38,164 38,381 42,563 41,734 35,031 34,237 31,698 42,690 49,717 42,894 76,430 Accounts receivable 2,311 2,617 3,296 4,397 4,612 4,045 4,585 4,889 5,371 5,730 6,820 7,720 8,966 Inventories 39,447 44,400 50,962 67,411 70,651 74,452 81,582 83,641 85,997 89,105 94,580 117,400 123,969 Total current assets 61,193 79,742 97,151 116,580 123,802 128,198 134,515 138,816 143,391 158,834 175,981 195,977 227,585 Total assets 150,048 167,534 209,865 276,288 297,527 302,029 341,300 362,651 386,622 432,135 505,666 560,568 642,868 Accounts payable 22,671 26,197 28,684 39,172 41,062 42,670 42,430 44,793 48,036 55,118 60,556 70,194 85,661 Total interest-bearing debt 65,208 55,238 75,727 112,954 126,725 116,244 133,580 133,342 126,506 134,531 167,507 186,499 211,068 Tot al liabilit ies 97,920 94,793 127,395 191,663 207,555 195,269 216,058 216,916 216,444 238,971 284,299 316,021 362,938 Shareholders' equity 52,128 72,064 81,717 84,899 92,096 107,407 127,087 146,590 167,233 187,637 209,682 231,788 258,282 Cash flow statement (JPYmn) Cash flow s from operat ing act ivit ies 8,431 10,427 15,811 7,788 19,513 18,885 26,029 33,962 38,270 39,684 42,520 29,110 56,441 Cash flow s from invest ing act ivit ies -14,950 2,070 -24,924 -38,960 -29,855 -16,497 -44,789 -29,794 -23,293 -36,593 -52,641 -52,197 -40,593 Cash flow s from financing act ivit ies 12,669 227 19,487 31,368 14,316 -5,475 7,274 -4,637 -9,510 4,440 16,176 17,148 17,644 Financial rat ios ROA (RP-based) 8.6% 8.6% 7.5% 6.2% 5.4% 7.0% 7.4% 8.1% 8.6% 8.2% 7.9% 7.8% 7.1% ROE 15.3% 17.2% 13.7% 11.3% 10.0% 10.5% 11.1% 14.9% 13.7% 12.1% 11.6% 11.2% 13.5% Equit y rat io 34.7% 43.0% 38.9% 30.7% 31.0% 35.6% 37.2% 39.5% 43.0% 43.0% 43.0% 43.0% 43.0% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: The company executed a 2-for-1 stock split effective July 1, 2015.

03/96 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.03.09 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Recent updates

Highlights

On March 9, 2018, Don Quijote Holdings Co., Ltd. announced sales figures for February 2018; see the Monthly trends section for details.

On March 8, 2018, Shared Research updated the report following interviews with the company.

On March 2, 2018, the company announced the issuance of unsecured bonds totaling JPY20.0bn. The company plans to use the funds to repay loans and finance capex.

Corporate bonds issued by the company Issue date Bonds outstanding Interest rate Maturity date (year end; JPYmn) Don Quijote #57 Unsecured corporate bonds Nov. 29, 2013 600 TIBOR (6 months) Nov. 30, 2018 Don Quijote #58 Unsecured corporate bonds Nov. 29, 2014 3,000 TIBOR (6 months) Nov. 29, 2019 Don Quijote #7 Unsecured corporate bonds Dec. 04, 2012 15,000 0.85% Dec. 04, 2017 Don Quijote #8 Unsecured corporate bonds Mar. 12, 2015 20,000 0.55% Mar. 12, 2020 Don Quijote #9 Unsecured corporate bonds Mar. 12, 2015 10,000 0.80% Mar. 11, 2022 Don Quijote #10 Unsecured corporate bonds Mar. 10, 2016 10,000 0.33% Mar. 10, 2021 Don Quijote #11 Unsecured corporate bonds Mar. 10, 2016 10,000 0.73% Mar. 10, 2026 Don Quijote #12 Unsecured corporate bonds Mar. 21, 2017 10,000 0.39% Mar. 21, 2024 Don Quijote #13 Unsecured corporate bonds Mar. 08, 2018 10,000 0.21% Mar. 08, 2023 Don Quijote #14 Unsecured corporate bonds Mar. 08, 2018 10,000 0.48% Mar. 08, 2028 JAM #1 Unsecured corporate bonds Sep. 25, 2014 1,000 0.79% Sep. 24, 2021 JAM #2 Unsecured corporate bonds Sep. 25, 2014 650 0.68% Sep. 24, 2021 JAM #3 Unsecured corporate bonds Sep. 25, 2015 1,501 0.63% Sep. 22, 2022 JAM #4 Unsecured corporate bonds Sep. 30, 2015 2,100 0.32% Sep. 30, 2020 JAM #5 Unsecured corporate bonds Mar. 25, 2016 1,720 0.33% Mar. 24, 2023 JAM #6 Unsecured corporate bonds Sep. 21, 2016 2,375 0.18% Sep. 18, 2026 JAM #7 Unsecured corporate bonds Sep. 26, 2016 3,800 0.22% Sep. 25, 2026 JAM #8 Unsecured corporate bonds Sep. 26, 2016 1,860 0.37% Sep. 26, 2023 Other 600 Total 114,206 Source: Shared Research based on company data. *Status as of end-June 2017 excluding #13 and #14 unsecured bonds issued by Don Quijote.

On February 23, 2018, the company announced the opening of its first Don Quijote-Uny MEGA store in Oguchi, Kanagawa Prefecture. The new store (approximately 5,300sqm) is the product of a capital alliance between Don Quijote and FamilyMart Uny Holdings (TSE: 8208) in November 2017. Featuring the name of both Don Quite and Uny on its storefront, the new store is one of six such stores that will be opened by late-March at locations where FamilyMart Uny Holdings used to operate PIAGO stores. As the performance of this new format will tell us a lot about the potential success of Don Quijote's post-GMS strategy, Shared Research plans to keep a close watch on developments on this front going forward.

On February 9, 2018, the company announced sales figures for January 2018.

On February 6, 2018, the company announced earnings results for 1H FY06/18; see the results section for details.

04/96 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.03.09 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

On January 10, 2018, the company announced sales figures for December 2017.

On December 11, 2017, the company announced sales figures for November 2017.

For corporate releases and developments more than three months old, please refer to the News and topics section.

05/96 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.03.09 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Trends and outlook

Monthly trends

FY06/06 FY06/07 FY06/08 FY06/09 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY FY FY FY FY FY FY FY FY FY FY FY All st ores Sales 11.8% 7.2% 6.5% 5.9% 6.1% 5.9% 6.2% 7.1% 6.6% 12.3% 13.1% 11.8% Number of stores 122 135 148 150 162 169 185 200 217 242 270 292 Comparable stores Sales 2.9% 0.4% -3.3% 0.5% -1.5% 3.4% 0.5% -0.1% 0.8% 4.6% 4.5% 2.6% Customer count -0.4% -0.7% -2.2% 4.5% 3.8% 3.1% -0.8% -0.5% 0.1% 1.9% 0.5% 2.2% Customer spend 3.3% 1.1% -1.2% -3.8% -5.1% 0.3% 1.3% 0.4% 0.7% 2.7% 3.9% 0.4% Number of comparable stores 104 117 123 144 149 158 164 179 194 208 232 258 By product Elect ric appliances 12.2% 4.0% -2.7% -4.8% -3.6% 5.1% -2.2% -0.5% -2.7% 4.8% 9.4% 10.5% Household goods 12.9% 10.4% 8.2% 9.8% 9.1% 7.9% 6.7% 7.9% 8.8% 14.8% 10.3% 18.2% Foods 9.2% 5.1% 10.9% 20.8% 14.4% 4.5% 7.3% 8.9% 13.1% 19.0% 20.0% 17.4% Watches & fashion merchandise 14.0% 7.0% 6.3% 0.0% 1.7% 4.3% 11.9% 11.2% 3.4% 8.8% 8.7% 2.7% Sporting & leisure goods 7.2% 13.3% 5.5% 4.1% 5.5% 8.2% 2.0% 8.3% 5.6% 7.1% 19.9% 3.7% Other products -7.8% -1.3% 0.1% 10.4% 21.7% 29.7% 10.9% -22.6% -1.1% -2.7% 4.4% -2.6%

FY06/15 Jul Aug Sep Oct No v Dec Jan Feb Mar Apr May Jun All st ores Sales 9.1% 11.2% 12.3% 16.2% 16.1% 10.9% 13.6% 16.6% -3.5% 23.0% 18.2% 14.1% Number of stores 220 221 220 221 222 225 225 228 232 235 238 242 Comparable stores Sales 1.4% 2.3% 5.0% 8.3% 7.1% 4.3% 6.7% 9.4% -10.5% 14.2% 8.5% 4.4% Customer count 1.7% 0.6% 3.5% 5.2% 3.8% 0.0% 1.2% 5.6% -5.4% 5.3% 3.2% -0.2% Customer spend -0.2% 1.7% 1.5% 2.9% 3.1% 4.2% 5.4% 3.7% -5.4% 8.5% 5.1% 4.6% Number of comparable stores 196 196 196 195 196 200 203 204 205 205 207 208 By product Elect ric appliances -1.0% 3.1% 14.8% 15.8% 10.2% 13.8% 18.1% 15.0% -7.2% 23.4% 8.3% 4.3% Household goods 8.3% 10.7% 13.8% 15.9% 17.2% 11.0% 15.2% 19.4% -3.5% 32.4% 25.9% 21.2% Foods 21.0% 21.6% 24.0% 25.8% 23.4% 17.7% 19.1% 19.5% -4.3% 27.2% 17.6% 16.8% Watches & fashion merchandise 5.1% 5.4% 7.6% 9.1% 10.9% 5.3% 6.9% 12.6% -0.9% 19.5% 17.3% 13.4% Sporting & leisure goods 3.9% 3.5% 10.0% 12.0% 10.3% 5.5% 6.1% 8.7% -2.6% 9.4% 13.3% 8.2% Other products 14.1% 70.0% -43.7% 13.6% 28.8% 12.4% 5.4% 18.9% -3.8% -31.1% 7.1% -26.8%

FY06/16 Jul Aug Sep Oct No v Dec Jan Feb Mar Apr May Jun All st ores Sales 18.5% 17.3% 14.3% 17.8% 11.1% 10.8% 15.5% 15.7% 9.2% 14.8% 10.5% 10.6% Number of stores 245 245 245 246 247 250 249 249 253 262 263 270 Comparable stores Sales 8.1% 7.3% 5.3% 6.8% 2.4% 2.5% 5.9% 5.8% 1.9% 5.4% 1.3% 2.4% Customer count 2.0% 1.7% -0.9% 2.8% -1.8% 0.0% 2.0% 2.6% -0.8% 1.1% -1.8% -0.1% Customer spend 6.0% 5.5% 6.3% 3.9% 4.3% 2.6% 3.9% 3.1% 2.8% 4.2% 3.1% 2.5% Number of comparable stores 207 209 212 214 216 218 221 220 222 223 226 232 By product Elect ric appliances 17.4% 22.2% 8.0% 9.5% 7.3% 3.5% 8.6% 20.2% 10.7% 20.2% 17.7% 12.2% Household goods 25.6% 22.9% 20.5% 0.7% 2.4% -3.3% 7.7% 8.6% 1.9% 6.0% 1.4% 3.0% Foods 20.5% 20.1% 19.0% 23.3% 19.5% 22.0% 25.5% 23.4% 17.3% 23.3% 18.1% 17.5% Watches & fashion merchandise 14.0% 11.8% 11.2% 12.7% 8.5% 4.6% 12.5% 9.8% 4.1% 10.5% 8.3% 9.5% Sporting & leisure goods 8.6% 8.1% 1.9% 97.7% 33.7% 78.4% 38.9% 31.4% 23.9% 29.3% 17.3% 18.3% Other products 1.7% -26.7% -12.5% 10.9% -2.3% -5.8% -0.1% -5.6% -0.7% -10.5% -7.6% 6.6%

FY06/17 Jul Aug Sep Oct No v Dec Jan Feb Mar Apr May Jun All st ores Sales 12.8% 8.2% 13.1% 11.6% 11.6% 12.1% 12.2% 10.7% 12.4% 9.5% 10.6% 13.3% Number of stores 275 277 277 278 280 281 281 282 285 288 288 292 Comparable stores Sales 3.7% -0.4% 2.6% 2.2% 2.2% 2.6% 2.6% 2.1% 3.2% 2.1% 2.8% 5.1% Customer count 1.9% -1.1% 1.2% 0.7% 1.6% 2.5% 2.7% 1.6% 3.6% 3.1% 2.0% 4.5% Customer spend 1.8% 0.7% 1.3% 1.5% 0.6% 0.2% -0.1% 0.5% -0.4% -1.0% 0.7% 0.6% Number of comparable stores 236 239 236 238 239 240 244 244 245 247 258 258 By product Elect ric appliances 17.0% 10.0% 15.3% 14.1% 9.0% 7.8% 6.7% -2.4% 2.5% -4.2% -2.3% 8.0% Household goods 2.4% -1.8% 4.1% 16.5% 13.1% 12.9% 13.7% 25.1% 25.0% 23.1% 24.8% 25.4% Foods 19.6% 15.1% 20.0% 17.6% 16.6% 18.5% 18.9% 17.0% 20.1% 15.3% 17.0% 17.8% Watches & fashion merchandise 11.0% 7.2% 9.2% 8.0% 8.9% 9.5% 8.4% -5.0% -3.9% -4.2% -4.7% -2.1% Sporting & leisure goods 26.9% 18.9% 31.7% -3.7% 2.6% 5.9% 5.9% 4.3% 4.4% 4.3% 5.7% 12.5% Other products 7.9% 5.1% 7.9% -13.9% -6.4% 3.9% 1.0% 0.8% 7.3% 0.8% 1.8% 0.4%

FY06/18 Jul Aug Sep Oct No v Dec Jan Feb Mar Apr May Jun All st ores Sales 13.3% 11.8% 12.1% 8.4% 14.4% 12.1% 11.8% 11.8% Number of stores 294 293 294 296 301 303 304 304 Comparable stores Sales 5.2% 5.1% 6.4% 2.6% 5.9% 4.0% 3.0% 3.6% Customer count 4.0% 4.2% 5.5% 0.2% 5.4% 3.0% 1.3% 1.3% Customer spend 1.1% 0.9% 0.9% 2.4% 0.5% 0.9% 1.6% 2.3% Number of comparable stores 265 269 271 274 275 277 278 278 By product Elect ric appliances 11.9% 7.0% 2.1% 2.4% 8.9% 14.1% 9.8% 9.3% Household goods 27.1% 25.0% 24.5% 22.1% 28.2% 26.0% 25.3% 12.8% Foods 17.3% 17.3% 17.9% 14.5% 19.8% 17.9% 15.5% 15.1% Watches & fashion merchandise -1.8% -2.2% -1.1% -3.3% -1.7% -2.9% -2.5% 9.6% Sporting & leisure goods 6.8% 3.7% 4.6% -8.5% 5.7% 0.2% 2.4% 3.0% Other products 0.1% 2.2% -1.1% -1.1% 5.1% 3.4% -0.9% 1.6% Source: Shared Research based on company data

February 2018 February comparable store sales were up 3.6% YoY. The company did not open nor close a store during the month. February was extremely cold across Japan, and domestic sales was negatively affected in some regions as the sharp drop in temperature kept people from going outdoors. Still, robust demand for daily necessities such as foods and other daily goods drove overall sales. Duty-free sales exceeded 10% of overall sales for the first time. Steady visitor traffic from China and Taiwan was enough to offset the slowdown in visitors from South Korea during the PyeongChang Olympic Games.

06/96 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.03.09 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Quarterly trends and results

Quarterly performance FY06/16 FY06/17 FY06/18 FY06/16 FY06/17 FY06/18 FY06/15 FY06/16 FY06/17 FY06/18 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 1H 1H 1H FY FY FY Init. Est. Est. Q1 Est. Q2 Sales 186,642 197,803 185,102 190,045 201,327 216,367 202,293 208,811 223,433 239,397 384,445 417,694 462,830 683,981 759,592 828,798 880,000 890,000 920,000 YoY 13.9% 10.9% 10.4% 9.2% 7.9% 9.4% 9.3% 9.9% 11.0% 10.6% 12.3% 8.6% 10.8% 11.7% 11.1% 9.1% 6.2% 7.4% 11.0% Gross profit 49,678 53,263 49,193 49,759 54,224 56,416 53,265 54,675 59,268 60,908 102,941 110,640 120,176 181,741 201,893 218,580 232,000 234,200 240,000 YoY 12.3% 12.4% 7.2% 12.6% 9.2% 5.9% 8.3% 9.9% 9.3% 8.0% 12.3% 7.5% 8.6% 12.9% 11.1% 8.3% 6.1% 7.1% 9.8% GPM 26.6% 26.9% 26.6% 26.2% 26.9% 26.1% 26.3% 26.2% 26.5% 25.4% 26.8% 26.5% 26.0% 26.6% 26.6% 26.4% 26.4% 26.3% 26.1% SG&A expenses 38,382 38,988 39,827 41,511 41,692 42,605 42,470 45,628 44,968 45,961 77,370 84,297 90,929 142,638 158,708 172,395 184,000 184,400 189,000 YoY 13.6% 13.2% 11.8% 7.0% 8.6% 9.3% 6.6% 9.9% 7.9% 7.9% 13.4% 9.0% 7.9% 12.6% 11.3% 8.6% 6.7% 7.0% 9.6% SG&A rat io 20.6% 19.7% 21.5% 21.8% 20.7% 19.7% 21.0% 21.9% 20.1% 19.2% 20.1% 20.2% 19.6% 20.9% 20.9% 20.8% 20.9% 20.7% 20.5% Operating profit 11,296 14,275 9,366 8,248 12,532 13,811 10,795 9,047 14,300 14,947 25,571 26,343 29,247 39,103 43,185 46,185 48,000 49,800 51,000 YoY 8.0% 10.2% -8.9% 52.3% 10.9% -3.3% 15.3% 9.7% 14.1% 8.2% 9.2% 3.0% 11.0% 14.0% 10.4% 6.9% 3.9% 7.8% 10.4% OPM 6.1% 7.2% 5.1% 4.3% 6.2% 6.4% 5.3% 4.3% 6.4% 6.2% 6.7% 6.3% 6.3% 5.7% 5.7% 5.6% 5.5% 5.6% 5.5% Recurring profit 11,578 14,295 9,376 8,548 12,788 14,140 9,078 9,517 14,301 16,757 25,873 26,928 31,058 40,160 43,797 45,523 48,000 49,800 53,800 YoY 7.0% 8.1% -12.8% 59.5% 10.5% -1.1% -3.2% 11.3% 11.8% 18.5% 7.6% 4.1% 15.3% 13.2% 9.1% 3.9% 5.4% 9.4% 18.2% RPM 6.2% 7.2% 5.1% 4.5% 6.4% 6.5% 4.5% 4.6% 6.4% 7.0% 6.7% 6.4% 6.7% 5.9% 5.8% 5.5% 5.5% 5.6% 5.8% Net in co me 6,482 7,750 5,500 5,206 8,127 8,332 10,518 6,105 8,465 10,213 14,232 16,459 18,678 23,148 24,938 33,082 28,000 29,500 32,200 YoY 5.6% 2.6% -13.9% 69.9% 25.4% 7.5% 91.2% 17.3% 4.2% 22.6% 3.9% 15.6% 13.5% 7.8% 7.7% 32.7% -15.4% -10.8% -2.7% Net margin 3.5% 3.9% 3.0% 2.7% 4.0% 3.9% 5.2% 2.9% 3.8% 4.3% 3.7% 3.9% 4.0% 3.4% 3.3% 4.0% 3.2% 3.3% 3.5% SG&A expenses 38,382 38,988 39,827 41,511 41,692 42,605 42,470 45,628 44,968 45,961 77,370 84,297 90,929 142,638 158,708 172,395 184,000 184,400 189,000 Salaries and allowances 14,155 14,765 15,136 15,183 16,049 16,075 16,128 16,286 16,718 17,313 28,920 32,124 34,031 51,158 59,239 64,538 Rents 5,153 5,084 5,178 5,423 5,638 5,749 5,814 6,156 6,602 6,800 10,237 11,387 13,402 19,088 20,838 23,357 Commission paid 4,254 4,561 4,535 4,959 4,362 5,062 4,584 5,516 5,593 5,573 8,815 9,424 11,166 16,563 18,309 19,524 Depreciat ion 2,977 3,172 3,411 3,741 3,338 3,455 3,563 3,719 3,343 3,498 6,149 6,793 6,841 11,672 13,301 14,075 Other 11,843 11,406 11,566 12,206 12,305 12,264 12,381 13,951 12,712 12,777 23,249 24,569 25,489 44,157 47,021 50,901 YoY 13.6% 13.2% 11.8% 7.0% 8.6% 9.3% 6.6% 9.9% 7.9% 7.9% 13.4% 9.0% 7.9% 12.6% 11.3% 8.6% Salaries and allowances 18.2% 19.5% 17.9% 8.5% 13.4% 8.9% 6.6% 7.3% 4.2% 7.7% 18.9% 11.1% 5.9% 17.1% 15.8% 8.9% Rents 13.4% 9.9% 6.2% 7.5% 9.4% 13.1% 12.3% 13.5% 17.1% 18.3% 11.6% 11.2% 17.7% 6.9% 9.2% 12.1% Commission paid 16.2% 10.4% 15.4% 2.4% 2.5% 11.0% 1.1% 11.2% 28.2% 10.1% 13.1% 6.9% 18.5% 7.3% 10.5% 6.6% Depreciat ion 14.1% 14.8% 12.0% 14.9% 12.1% 8.9% 4.5% -0.6% 0.1% 1.2% 14.5% 10.5% 0.7% 12.2% 14.0% 5.8% Other 7.8% 7.9% 5.8% 4.6% 3.9% 7.5% 7.0% 14.3% 3.3% 4.2% 7.8% 5.7% 3.7% 12.3% 6.5% 8.3%

Ret ail FY06/16 FY06/17 FY06/18 FY06/16 FY06/17 FY06/18 FY06/15 FY06/16 FY06/17 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 1H 1H 1H FY FY FY Sales 180,333 191,076 178,519 183,405 194,453 209,262 195,802 202,285 216,498 232,293 371,409 403,716 448,791 659,931 733,333 801,802 Elect ric appliances 14,559 16,654 15,449 14,315 16,479 19,011 17,631 15,791 18,418 21,592 31,213 35,490 40,010 56,902 60,978 68,912 Household goods 38,677 39,658 38,395 40,559 43,148 44,635 45,594 50,128 53,356 55,052 78,335 87,782 108,408 153,879 157,288 183,505 Foods 56,799 61,652 60,800 62,964 63,874 70,110 69,410 71,159 73,231 80,326 118,451 133,985 153,557 208,578 242,215 274,553 Watches & fashion merchandise 38,874 41,415 35,917 37,976 40,881 44,915 35,932 36,723 40,051 43,787 80,289 85,796 83,838 141,668 154,183 158,451 Sports & leisure goods 14,690 15,209 10,188 11,634 15,016 15,428 10,684 12,468 15,803 15,276 29,899 30,444 31,079 36,812 51,722 53,596 DIY goods 4,130 3,705 3,961 3,697 3,721 4,069 3,680 4,344 3,992 4,175 7,835 7,790 8,167 16,535 15,493 15,814 Overseas 9,673 9,827 11,167 9,175 8,565 8,207 10,164 8,989 8,817 9,109 19,500 16,772 17,926 35,591 39,842 35,925 Others 2,931 2,956 2,642 3,085 2,769 2,886 2,708 2,683 2,830 2,976 5,887 5,656 5,806 9,966 11,612 11,046 Yo Y 14.1% 10.9% 10.5% 9.2% 7.8% 9.5% 9.7% 10.3% 11.3% 11.0% 12.4% 11.1% 5.9% 11.8% 11.1% 9.3% Elect ric appliances 13.1% 1.6% 7.2% 8.7% 13.2% 14.2% 14.1% 10.3% 11.8% 13.6% 6.7% 13.7% 12.7% 4.5% 7.2% 13.0% Household goods 14.1% 16.9% 15.9% 11.7% 11.6% 12.5% 18.7% 23.6% 23.7% 23.3% 15.5% 12.1% 23.5% 13.0% 2.2% 16.7% Foods 16.5% 16.7% 16.8% 14.7% 12.5% 13.7% 14.2% 13.0% 14.6% 14.6% 16.6% 13.1% 14.6% 15.5% 16.1% 13.4% Watches & fashion merchandise 7.3% 4.7% 2.9% 3.2% 5.2% 8.5% 0.0% -3.3% -2.0% -2.5% 6.0% 6.9% -2.3% 7.0% 8.8% 2.8% Sports & leisure goods 31.1% 4.6% 2.3% 0.3% 2.2% 1.4% 4.9% 7.2% 5.2% -1.0% 16.1% 1.8% 2.1% 6.4% 40.5% 3.6% DIY goods -10.7% -9.4% -8.5% 5.9% -9.9% 9.8% -7.1% 17.5% 7.3% 2.6% -10.1% -0.6% 4.8% -7.1% -6.3% 2.1% Overseas 23.1% 19.1% 9.3% -1.0% -11.5% -16.5% -9.0% -2.0% 2.9% 11.0% 21.0% -14.0% 6.9% 44.4% 11.9% -9.8% Others 15.6% 5.3% 1.7% 26.0% -5.5% -2.4% 2.5% -13.0% 2.2% 3.1% 10.2% -3.9% 2.7% 6.4% 16.5% -4.9% Sales at comparable Don Quijote stores (a) 7.0% 3.9% 4.5% 2.8% 1.9% 2.4% 2.6% 3.2% 1.9% 1.9% 2.1% 2.1% 4.6% 4.5% 2.6% Sales boost from duty-free sales (b) 4.0% 3.0% 2.2% 0.5% -0.3% 0.1% 0.8% 1.3% -0.3% -0.3% 2.0% 2.0% 2.4% 2.4% 2.0% (a) - (b) 3.0% 0.9% 2.3% 2.3% 2.2% 2.3% 1.8% 1.9% 2.2% 2.2% 0.1% 0.1% 2.1% 2.1% 0.6% ％ of sales Elect ric appliances 8.1% 8.7% 8.7% 7.8% 8.5% 9.1% 9.0% 7.8% 8.5% 9.3% 8.4% 8.8% 8.9% 8.6% 8.3% 8.6% Household goods 21.4% 20.8% 21.5% 22.1% 22.2% 21.3% 23.3% 24.8% 24.6% 23.7% 21.1% 21.7% 24.2% 23.3% 21.4% 22.9% Foods 31.5% 32.3% 34.1% 34.3% 32.8% 33.5% 35.4% 35.2% 33.8% 34.6% 31.9% 33.2% 34.2% 31.6% 33.0% 34.2% Watches & fashion merchandise 21.6% 21.7% 20.1% 20.7% 21.0% 21.5% 18.4% 18.2% 18.5% 18.8% 21.6% 21.3% 18.7% 21.5% 21.0% 19.8% Sports & leisure goods 8.1% 8.0% 5.7% 6.3% 7.7% 7.4% 5.5% 6.2% 7.3% 6.6% 8.1% 7.5% 6.9% 5.6% 7.1% 6.7% DIY goods 2.3% 1.9% 2.2% 2.0% 1.9% 1.9% 1.9% 2.1% 1.8% 1.8% 2.1% 1.9% 1.8% 2.5% 2.1% 2.0% Overseas 5.4% 5.1% 6.3% 5.0% 4.4% 3.9% 5.2% 4.4% 4.1% 3.9% 5.3% 4.2% 4.0% 5.4% 5.4% 4.5% Others 1.6% 1.5% 1.5% 1.7% 1.4% 1.4% 1.4% 1.3% 1.3% 1.3% 1.6% 1.4% 1.3% 1.5% 1.6% 1.4% Duty-free as % of total sales (SR est.) 5.4% 5.9% 6.5% 5.9% 5.3% 5.6% 6.9% 7.2% 6.9% 5.5% 6.2% Operating profit 6,686 8,707 4,280 1,744 6,784 7,537 5,352 4,020 8,847 8,648 15,393 14,321 17,495 21,417 22,746 23,693 YoY 3.1% 2.8% -24.3% 114.8% 1.5% -13.4% 25.0% 130.5% 30.4% 14.7% 2.9% -7.0% 22.2% -12.2% 6.2% 4.2% OPM 3.7% 4.6% 2.4% 1.0% 3.5% 3.6% 2.7% 2.0% 4.1% 3.7% 4.1% 3.5% 3.9% 3.2% 3.1% 3.0% Number of stores 311 319 322 341 348 354 360 368 393 403 319 354 403 306 341 368 New openings 6 9 6 19 10 6 6 10 3 11 15 16 14 33 40 32 Don Quijote 182 184 184 194 195 196 197 198 199 204 184 196 204 183 194 198 MEGA and New MEGA 81 85 88 94 100 104 107 112 113 118 85 104 118 77 94 112 Picasso 18 18 18 20 20 20 20 21 21 21 18 20 21 18 20 21 Kyo Yasu Do 2 3 3 3 3 3 4 4 4 4 3 3 4 - 3 4 Overseas 14 14 14 14 14 14 14 14 37 38 14 14 38 14 14 14 DOit 12 13 13 14 14 15 16 17 17 17 13 15 17 12 14 17 Nagasakiya 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 Tenant revenue Sales 4,720 5,018 4,953 5,090 5,114 5,236 5,100 5,109 5,232 5,454 9,737 10,349 10,686 18,200 19,781 20,559 YoY 6.1% 10.9% 7.8% 9.9% 8.3% 4.3% 3.0% 0.4% 2.3% 4.2% 8.5% 6.3% 3.3% 6.5% 8.7% 3.9% Operating profit 3,255 3,874 3,509 3,521 4,001 4,441 4,078 3,603 4,321 4,513 7,129 8,442 8,834 12,714 14,159 16,123 YoY 14.1% 21.5% 4.7% 6.0% 22.9% 14.6% 16.2% 2.3% 8.0% 1.6% 18.0% 18.4% 4.6% 95.4% 11.4% 13.9% OPM 69.0% 77.2% 70.8% 69.2% 78.2% 84.8% 80.0% 70.5% 82.6% 82.7% 73.2% 81.6% 82.7% 69.9% 71.6% 78.4% Others Sales 1,589 1,709 1,630 1,549 1,760 1,869 1,391 1,417 1,703 3,353 3,299 3,629 3,353 5,850 6,478 6,437 YoY 12.4% 15.6% 7.4% 7.5% 10.8% 9.4% -14.7% -8.5% -3.2% 79.4% 14.1% 10.0% -7.6% 11.3% 10.7% -0.6% Operating profit 1,563 1,703 1,604 1,863 1,753 1,732 1,524 1,386 1,067 1,791 3,266 3,485 2,858 5,372 6,733 6,395 YoY 31.3% 20.4% 19.4% 30.7% 12.2% 1.7% -5.0% -25.6% -39.1% 3.4% 25.4% 6.7% -18.0% 51.8% 25.3% -5.0% OPM 98.4% 99.6% 98.4% 120.3% 99.6% 92.7% 109.6% 97.8% 62.7% 53.4% 99.0% 96.0% 85.2% 91.8% 103.9% 99.3% OP adjustments -208 -9 -27 -156 -6 101 -159 38 65 -5 -217 95 60 -400 -453 -26 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

07/96 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.03.09 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

1H FY06/18 results (out February 6, 2018)

1H: Reflecting move to strengthen individual stores autonomy, comparable store sales continue to rise, logging 17th consecutive ▷ month of positive growth. With both sales and earnings rising, and earnings setting new record high, company again raises its forecast for the full year

 Individual store autonomy: Individual store autonomy greatly enhanced following major organizational reforms in October 2015 and again in April 2017; this has allowed company to bring together the collective expertise of roughly 400 individual store managers

 Upward revision: Following upward revision at end of Q1, company raises full-year forecast for sales by JPY30bn, gross profit by JPY5.8bn, and operating profit by JPY1.2bn; no change in comparable store sales assumption for 2H

 New store openings: Leveraging the business’ strength of broad accessibility, from city centers to suburbs, the company opened 15 stores. Full-year plans call for opening 30 stores plus six more stores to be jointly operated with Uny

 In Q2, October saw the opening of a store in Toyohashi, Aichi (the largest domestic post-GMS store at 11,000sqm). Sales are favorable; the company calls the store a highlight

 Company looking to accelerate the implementation of its post-GMS strategy by applying its post-GMS format expertise gained from revitalizing Nagasakiya stores (including Toyohashi store) to the six stores it will operate jointly with Uny

 Comparable store sales growth: DQ sales up 4.8% (+2.8% excluding duty-free sales) and Nagasakiya 3.1% (+3.1% excluding duty-free sales). Continued increase of customer traffic each month except August 2016

 As consumers seek savings, measures reducing margins in order to increase turnover were successful; increase in gross profit and improved man-hour efficiency contributed to increase in operating profit

 The company promoted a revitalization project to improve performance mostly at newer stores, succeeds at raising standard for comparable store growth

Demand from inbound tourists: Success in boosting store appeal via pricing and products enabled company to capture demand ▷ from foreign visitors. Also tapped into repeat demand Topic: Opened first store in Asia in Singapore in December 2017; December sales of JPY500mn exceed expectations, giving ▷ company the confidence to accelerate overseas expansion plans

 According to company president, Singapore store launch reminiscent of the company's early days. Built more confidence in DQ store format overseas; set to win highly price-sensitive customers through direct trades with local vendors Joint operations with Uny: Completed investment in Uny Co., Ltd., and decided to open six stores carrying both companies’ ▷ names starting from February. Anticipate roaring start after personnel are trained and stores are opened. Will focus on making six jointly operated stores a success to lay the groundwork for accelerating implemention of post-GMS ▷ strategy VISION 2020 (JPY1tn in sales, 500 stores, ROE of 15%): With chances of acheiving targets under VISION 2020 improving, ▷ company sets new target of JPY2tn for sales and JPY100bn for operating profit through organic growth

08/96 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.03.09 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Consolidated earnings (JPYbn)

500 Sales YoY 14% 35 Operating profit YoY 40% 35 Recurring profit YoY 80% 450 13% 12% 30 35% 30 70% 12% 70% 400 34% 30% 60% 350 11% 10% 25 25 28% 25% 50% 300 8% 20 20 8% 9% 250 20% 40% 21% 6% 15 15 200 15% 30% 150 4% 10 14% 10 30% 5% 5% 10% 20% 100 11% 10% 9% 2% 5 8% 5 17%16% 3% 5% 14% 15% 10% 50 2% 11% 8% 0 0% 0 3% 0% 0 4% 0% (JPYbn)FY06/10 FY06/12 FY06/14 FY06/16 FY06/18 (JPYbn)FY06/10 FY06/12 FY06/14 FY06/16 FY06/18 (JPYbn)FY06/10 FY06/12 FY06/14 FY06/16 FY06/18

Retail business performance (JPYbn)

250 Sales Operating profit Sales YoY (right axis) Operating profit YoY (right axis) 20%

16% 200 15% 14% 14% 15% 12% 11% 11% 11% 150 10% 10% 10% 10% 9% 10% 7% 8% 100 5.9% 5.9%5.8% 6% 5.1% 4.7% 4.9% 4.6%4.4% 4.6% 4.2% 4.1% 4.6% 4.1% 3.7%3.6% 3.4%3.7% 3.7% 4.0% 3.5% 3.7% 3.5%3.6% 3.7% 5% 50 2.4% 2.7% 0.5% 2.0% 0.9% 1.0% 8.8 8.8 8.7 8.6 8.5 8.4 8.3 7.5 7.0 6.8 6.7 6.5 6.3 6.0 5.9 5.7 5.6 5.5 5.5 5.0 4.8 4.5 4.3 4.3 4.3 4.0 1.7 1.3 5.4 0.8 0 0% Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 (JPYbn) FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 Source: Shared Research based on company data Results summary 1H: Reflecting move granting individual stores more autonomy, comparable store sales continue to rise, logging 17th consecutive month of positive growth. With both sales and earnings rising, and earnings setting a new record high, company again raises forecast for the full year While most retailers complain about weak consumption spending, as of February 23, 2018, Don Quijote has logged its 17th consecutive month of positive growth in comparable store sales thanks to the success of its high-priority initiative giving individual stores more autonomy. (The long stretch of positive comparable store growth would have been even longer had sales not dipped 0.2% in August 2016 as a result of the weather.) The company attributes the strong comparable store sales to the success of the major organizational reforms undertaken in recent years, the first, in October 2015, centering on merchandising and the second, in April 2017, giving individual stores greater autonomy to decide their format and the amount of floor space devoted to displays. By giving individual stores the autonomy to make their own decisions on critical matters such as these, Don Quijote got 400-some stores literally all taking different approaches to arranging their stores and selecting merchandise to beat the competition in their local market. And as individual stores prospered, Don Quijote essentially got a guidebook with roughly 400 different ways that individual stores can fight local competition that it can turn to in the future.

New measures to strengthen individual store autonomy: Rewards system To strengthen individual store autonomy, the company has hammered out a number of new measures, one of which is the introduction of a rewards system. Initiated in 2017, the rewards system hands out a special commemorative medal and jackets to the managers of stores that successfully drive out a given competitor from their local market. Those rewards are aimed at motivating store managers and encouraging them to aggressively take on local competitors. According to the company, it has already made two such awards.

Stepping up price competition, company trades GPM for increases in store traffic and increases in number of items purchased, and works to keeps employee highly motivated so they can make this happen Among the various measures the company initiated during 1H to improve its overall competitiveness was a decision to step up pricing pressure on the competition by consciously accepting a lower gross profit margin in return of increases in customer traffic and in the number of items bought per customer. By increasing its ability to offer discount prices, the company aims to expand its market presence nationwide and reinforce its image as a discount dry goods retailer. The company maintains that, from the south

09/96 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.03.09 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

in Okinawa to the north in Hokkaido, there is not one region in Japan where its stores are beaten on price. The company emphasized that what makes this possible is the autonomy it has granted individual store managers and the consistently high motivation of individual store employees. The high level of employee motivation stems in part from giving even part-time store employees the authority to make some merchandising decision so that they feel the same level of motivation as full-time employees. Don Quijote views its 40,000-some highly motivated employees as one of its major strengths.

Pushing ahead with workflow reforms to increase employee productivity, reduce employee turnover Since 2016 the company has been working hard on workplace reforms aimed at reducing the time needed for employees to perform various tasks. This caused a temporary increase in personnel costs but the efforts ultimately led to an increase in employee productivity and lower SG&A expenses ratio that has in turn been used to pay for a reduction in its gross margin on sales (which translates into increased price competitiveness). Reductions in the SG&A expense ratio at stores was driven in large part the increasing digitalization of administrative tasks. A good example is the switch to an SNS-based system for communicating with employees (rather than holding employee meetings) and setting up a direct negotiating system that would reduce the need for face-to-face negotiations. By drastically reducing the number of meetings and avoiding the creation of needless paper documents, the company was able to both increase store employee productivity and reduce SG&A expenditures.

The company has not experienced the labor shortage the industry faces. This is partly because its part-time employees are highly motivated. Of the new graduate hires joining in 2018, roughly 30% have experience working part-time at the company. Actively hiring employees who have worked part-time and understand the company’s culture means that the company can count on their contribution from day one. This hiring strategy has also led to a lower turnover rate, which has trended down since 2011; the rate in 2017 dropped to 10.3%, equivalent to one-third of the level in 2011 and about half of the level in 2014. According to the company, this is due in large part to dramatic increases in the authority of employees to make decisions at the store level, which along with various work-style reforms has created a virtuous cycle in supporting each store activities, and led to the increase in comparable store sales and improved profitability.

With chances of acheiving targets under VISION 2020 improving, company sets new target of JPY2tn for sales and JPY100bn for operating profit Sales and earnings have grown to the point where Don Quijote is within reach of the target laid out under its VISION 2020 plan: JPY1tn in sales, 500 stores, and an ROE of 15%. The company remarked that it is now evident that it is possible to achieve JPY2tn in sales and JPY100bn in operating profit through organic growth. The company backed this up by saying there was more than enough growth potential left in the domestic market. One step towards this new goal is Don Quijote's entrance into a capital and business alliance with Uny, Co., Ltd. and FamilyMart Uny Holdings on November 2017, and the three companies' initial joint effort to covert six GMS stores to a new post-GMS format. Plans call for the six stores to undergo a remake then open for business with both the UNY and Don Quijote names on their signboard starting on February 23 and running through March 30.

Post-GMS strategy will be one growth driver towards goal of JPY2tn in sales The company has absolute confidence that it can successfully reform the GMS store format. A big part of this confidence comes from the lessons the company learned from revitalizing the Nagasakiya chain. Despite the fact that the MEGA store format operated by Nagasakiya saw also no benefit from the buying spree by inbound tourists, it has been able to maintain the loyalty of the families and seniors that comprise its core clientele and continue growing sales at existing stores and increasing its gross profit.

Nagasakiya: At the time Don Quijote acquired the Nagasakiya chain, the largest Don Quijote store format was about 1,650sqm (500 tsubo) and its merchandising plan focused on young customers and late nights. Faced with handling the much larger stores of the Nagasakiya chain (around 6,600sqm or 2,000 tsubo), Don Quijote recognized that it needed to change its merchandising strategy to better accommodate the needs of families. At that time Don Quijote had absolutely no experience with fresh foods, meaning no experience in assessment of quality, procurement, or network of producers. It took time and wasn't easy, but Don Quijote eventually gained the experience and expertise in employee hiring and training, the use of tenants, and creating supplier networks in the four main areas of fresh foods (marine products, meats, agricultural products, and prepared foods). At the same time, Don Quijote also

10/96 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.03.09 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

devoted a lot of time to expanding its merchandise lineup in non-food areas, rethinking store layouts down to the width of individual aisles, moving into new types of goods, and establishing new relationships with a wide variety of vendors, all with the aim of creating stores that better appealed to family shoppers. All together, it took between three and five years for Don Quijote to bring the merchandising level of the MEGA stores operated by Nagasakiya up to the level of the old Don Quijote stores. It was a long process that involved a lot of trail-and-error before Don Quijote discovered how to bring its own distinctive touch to merchandising and find out what worked and what merely looked good but really had no impact, but its persistence ultimately led to the favorable results that the Nagasakiya chain is now showing.

Don Quijote noted that recent sales at the six GMS stores it will be remodeling and rebranding are 2.3x that of the average GMS store, with food sales comprising an average of only 55% of total sales versus roughly 80% at the average GMS store. (The best case is the Toyohashi store with only 40% of sales coming from foods.) The high proportion of sales accounted for non-food items at these stores means customers are not just shopping on the first floor, where food is, but are also going up to shop on the second and third floors where non-food goods are sold. The company points to this as proof that its original post-GMS format is already in the process of being established. At the new Don Quijote-Uny MEGA store opened on February 23 (in Oguchi, Kanagawa Prefecture), the company is looking to increase food sales in directly managed floor space by roughly 30% and roughly double the sales of non-food products, which together would mean more than a 50% increase in sales over the old PIAGO format. By greatly increasing the sale of non-food goods, the company aims to double the gross profit generated by the store, (and thinks even this goal is conservative).

At FU-HD, the bright outlook for the six stores that will be remodeled into the new post-GMS format has motivation for the joint venture with Don Quijote running high. If the six stores do well after the makeover, plans call for converting more GMS stores to the new format at the rate of about 20 to 25 stores a year. If the six stores fail to produce the results expected, more time will be needed to figure out the problem and how to solve it (by testing potential solutions, verifying results, and making refinements as needed). Also, with regard to the first six stores, the companies are in the process of figuring out which companies in the FU-HD group will operate GMS stores. Based on its belief that "slow and steady wins the race," Don Quijote plans to thoughtfully address any problems or issues. That said, within one year at the most Don Quijote expects a decision will be reached regarding the direction of the six stores in question and then appropriate arrangements can be made with the companies in the FU-HD group.

In short, the results at six stores will be an important test case that will influence the direction of Don Quijote's post-GMS strategy going forward. If the joint venture is a success, it opens up the door for Don Quijote to possibly pursue similar arranges with other new partners. Having already planned to open many new stores in locations that GMS stores have vacated, Don Quijote says its confidence its own expertise in revitalizing stores that comes from actual experience like this will give it an unwavering commitment to carrying out its post-GMS strategy. From the way management talks, we get the impression that the company is looking to capture a substantial portion of the JPY13tn in sales that GMS stores generate annually.

Domestic market: As Don Quijote turns its efforts towards getting its post-GMS strategy on track, the implementation of its post-home center and post-convenience store strategies will take lower priority. That said, the company is still planning to open up more stores in and around major metropolitan areas in order to increase its exposure to the tourist trade and, towards this end, is looking to set up shop in the space vacated by pachinko halls and other inner-city retail businesses.

Overseas expansion will be second growth driver towards goal of JPY2tn in sales Another growth driver that the company is eyeing to help it reach its goal of JPY2tn in sales is its overseas business. In December in 2017 the company opened its first store in Asia, Don Don Donki. Located in Singapore, the store got off to a roaring start, finishing well above plan with more than JPY500mn in sales in December despite being a relatively small store with only 1,455sqm (440 tsubo) in floor space. While sales were naturally elevated because this was the store's opening month, the company said total monthly sales at the Singapore store put it at 32nd place out of its entire chain of 403 stores; in terms of sales per unit of floor space, the Singapore store's December sales put it in 4th place (with sales of approximately JPY0.4mn per square meter, or JPY1.2mn per tsubo) and in terms of monthly customer traffic Singapore store was in 8th place (with 253,000

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customers). According to the company, its management had to order to remodel the Singapore store immediately to improve operations. Management said the crowds at its Singapore store reminded them of the company's early days when its stores were bustling with activity. The company also note that its Singapore store is still extremely busy and, with the Chinese New Year approaching, everyone is constantly worried about running out of stock.

Sometime during 2018 the company plans to open a second store in Singapore as well as a store in Bangkok, Thailand. The company points to the successful opening of its first store in Singapore set the stage for as the impetus for its decision to accelerate its store opening plans overseas. According to the company, one of the biggest merits of the overseas expansion was that it could show it is possible to lower prices further by engaging in direct transactions with local vendors. Going forward, the company is looking to further enhance its image as a discount retail in order to appeal to highly price-sensitive consumers. In Okinawa Prefecture, where the company has already opened stores not just on the main island of Okinawa but also on the outlying island of Miyako-jima, it is planning to open yet another store, this time on the island of Ishigaki-jima. The company commented that the location of new stores is not so much a part of a market dominance strategy as it has to do with logistics, and in this sense there is little difference between logistical support for a store in Miyako-jima and a store in Singapore.

The company said that as it started is thinking that the opening of more and more stores in Southeast Asia, it saw the possibility of transformational change and, as a result, it now believes that, if its post-GMS strategy and its expansion overseas succeed, that achieving JPY2tn in sales and JPY100bn in operating profit would no longer be just a dream.

Supplementary comments on 1H results Strategies implemented in FY06/14 and FY06/15 to capture demand from the two large market segments of families and inbound tourists produced solid results in FY06/15 and FY06/16, with continued progress in FY06/17. In 1H FY06/18 as well, external factors such as inclement weather and consumers’ desire for savings were still present, but the company proceeded with its policy of local store autonomy and an aggressive business approach to readily handle volatility at stores. The company faced the consumer spending environment with a balance between prioritizing increases in customer numbers and items sold, mainly to increase gross profit, even if it meant GPM would slightly suffer.

As a result, comparable store sales and gross profit rose while new stores opened, marking an 10.8% increase in sales (+11.1% if special factors are excluded), 8.6% increase in gross profit (+9.7%), 0.6pp improvement in SG&A expense ratio, 11.0% increase in operating profit (+14.2%), and 13.5% increase in net income (+16.8%). Both sales and earnings finished higher, with earning setting a new record high.

With the success of improved sales floor response, the revitalization project, and organizational reforms, comparable store sales increased at DQ and Nagasakiya (+4.8% and +3.1% respectively). DQ logged in 17th consecutive month of positive growth in comparable store sales.

Upward revision The strong, above-plan results led the company to follow the upward revision to its full-year forecast made at the end of Q1 with another upward revision following the end of Q2. The FY06/18 theme "Inaugural year of the Don Quijote Distribution Revolution" includes: a) digital strategy, b) overseas expansion, and c) post-GMS format store initiatives. As stated above, the progress of these initiatives are all favorable or bode well for the full-year performance.

Preliminary figures at the beginning of FY06/18 were JPY45.0bn in capital investment, at least 30 new stores (along with 24 store openings of QSI, Inc. in Hawaii), and full-year increase of 0.5% (0.6% in 1H, 0.4% in 2H) in DQ comparable store sales. With the revision made at the end of Q1, there was no change in the number of stores, but the company added the advancement of a business alliance with FamilyMart Uny Holdings to its store strategy and revised forecasts to a full-year increase of 1.8% (3.0% in 1H, 0.6% in 2H) in DQ comparable store sales. The forecast reversion that accompanied the release of 1H results raised only the sales and earnings forecast but did not change any other assumptions. The inclusion of Uny in consolidated results as an equity-method subsidiary, which started in Q3, is expected to add about JPY2.0bn in 2H earnings.

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Upward revision

FY06/16 FY06/17 FY06/18 Initial Est. FY06/18 Revised Est. (as of Q1) FY06/18 Revised Est. (as of Q2) Difference (JPYmn) 1H 2H FY 1H 2H FY 1H 2H FY 1H 2H FY 1H 2H FY 2H FY Sales 384,445 375,147 759,592 417,694 411,104 828,798 445,000 435,000 880,000 455,000 435,000 890,000 462,830 457,170 920,000 22,170 30,000 YoY 12.3% 9.8% 11.1% 8.6% 9.6% 9.1% 6.5% 5.8% 6.2% 8.9% 5.8% 7.4% 10.8% 11.2% 11.0% Gross profit 102,941 98,952 201,893 110,640 107,940 218,580 117,000 115,000 232,000 119,200 115,000 234,200 120,176 119,824 240,000 4,824 5,800 YoY 12.3% 9.8% 11.1% 7.5% 9.1% 8.3% 5.7% 6.5% 6.1% 7.7% 6.5% 7.1% 8.6% 11.0% 9.8% GPM 26.8% 26.4% 26.6% 26.5% 26.3% 26.4% 26.3% 26.4% 26.4% 26.2% 26.4% 26.3% 26.0% 26.2% 26.1% SG&A 77,370 81,338 158,708 84,297 88,098 172,395 90,000 94,000 184,000 90,400 94,000 184,400 90,929 98,071 189,000 4,071 4,600 SG&A rat io 20.1% 21.7% 20.9% 20.2% 21.4% 20.8% 20.2% 21.6% 20.9% 19.9% 21.6% 20.7% 19.6% 21.5% 20.5% Operating profit 25,571 17,614 43,185 26,343 19,842 46,185 27,000 21,000 48,000 28,800 21,000 49,800 29,247 21,753 51,000 753 1,200 YoY 9.2% 12.2% 10.4% 3.0% 12.6% 6.9% 2.5% 5.8% 3.9% 9.3% 5.8% 7.8% 11.0% 9.6% 10.4% OPM 6.7% 4.7% 5.7% 6.3% 4.8% 5.6% 6.1% 4.8% 5.5% 6.3% 4.8% 5.6% 6.3% 4.8% 5.5% Recurring profit 25,873 17,924 43,797 26,928 18,595 45,523 27,000 21,000 48,000 28,700 21,100 49,800 31,058 22,742 53,800 1,642 4,000 YoY 7.6% 11.2% 9.1% 4.1% 3.7% 3.9% 0.3% 12.9% 5.4% 6.6% 13.5% 9.4% 15.3% 22.3% 18.2% RPM 6.7% 4.8% 5.8% 6.4% 4.5% 5.5% 6.1% 4.8% 5.5% 6.3% 4.9% 5.6% 6.7% 5.0% 5.8% Net in co me 14,232 10,706 24,938 16,459 16,623 33,082 15,500 12,500 28,000 16,900 12,600 29,500 18,678 13,522 32,200 922 2,700 YoY 3.9% 13.2% 7.7% 15.6% 55.3% 32.7% -5.8% -24.8% -15.4% 2.7% -24.2% -10.8% 13.5% -18.7% -2.7% Source: Shared Research based on company material

Capital and business alliance with FU-HD Decision to open six new stores with combined name In November 2017, Don Quijote completed investment in major GMS company Uny Co., Ltd. as planned, taking a 40% stake in the company, as well as deciding to open six stores with a combined name (two in Kanagawa, three in Aichi, and one in Mie Prefecture). These are existing stores that will temporarily close in January 2018 and reopen between February 23 and March 30, 2018. The rebranded stores will basically be in the NEW MEGA or MEGA-type formats using Don Quijote specifications for POS checkouts, fixtures, and fittings, with a much larger inventory and product range.

With the opening of this new format, the company is looking to 1) create a format that combines Uny's traditional strength in fresh foods with its own expertise in non-food goods; 2) expand its customer base and become the top retailer in local markets by increasing its ability to offer unbeatable discounts and giving new meaning to the concept of customer service; and 3) helping consumers improve their quality of life by getting to know them and finding ways to help them with everyday planning and by lowering their cost of living.

Shared Research believes the success of the first six Don Quijote-Uny MEGA stores would lead to many more opportunities for Don Quijote to establish capital alliances with other retailers and would also lead to the earlier conversion of the remaining Uny stores to the new format. As the employees who gained experience at the new format were promoted, the format conversions of Uny stores would pick up steam and, because the burden on Don Quijote employees would be reduced, it would also speed up the rate at which Don Quijote was able to open its own new stores. Investors will also want to watch closely to see whether the competitiveness of the MEGA stores improves as a result of the application of Uny's expertise in fresh foods (marine products, meats, agricultural products, and prepared foods). In short, we believe it’s fair to say that the performance of six Don Quijote-Uny MEGA stores may be the key factor that determines whether Don Quijote reaches the JPY2tn sales goal under its post-GMS strategy.

Don Quijote-UNY MEGA stores

Floor space Nu mb er o f Car parking Bicycle parking MEGA Don Quijote UNY Opening (sqm) specialist shops space (units) space (units) Oguchi Yokohama, Kanagawa Feb. 23, 2018 5,300 9 127 275 Tokaidori Nagoya, Aichi Mar. 09, 2018 13,300 31 953 387 Zama Zama, Kanagawa Mar. 16, 2018 5,800 16 304 353 Hoshikaw a Kuwana, Mie Mar. 16, 2018 6,200 10 537 165 Toyota-motomachi Toyota, Aichi Mar. 23, 2018 12,300 28 482 157 Ko Toyokawa, Aichi Mar. 30, 2018 5,100 8 228 143 Source: Shared Research, based on company data

Establishing new store format The MEGA and NEW MEGA formats, being slotted into spaces previously occupied by other retailers, go a long way toward meeting the company's goal of opening up stores in a short period of time. With regard to merchandising, the formats will also initially apply the standard Don Quijote system, which means 1) focusing on the gross profit generated by store rather than on their gross profit margins; 2) bringing customers into stores by offering the best food prices in the area and making the money on non-food goods; 3) devoting roughly 60% of the merchandise lineup to items that are regularly stocked and 40% to items that

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are periodically rotated. Subsequently, the company says it will give individual stores the leeway to test and refine merchandising policies to see what works best at their particular location. One big difference will be the foods stocked at the new formats will consist mainly of the perishable foods (marine products, meats, agricultural products, and prepared foods) and will be handled by Uny, which has more experience in this area.

Because of this, the four of the six stores that have nearly the same interior floor space as Don Quijota's NEW MEGA store format (3,000sqm to 5,000sqm) will effectively be in new type of store format. The company's NEW MEGA format stores get about 35% of sales from food products but carry almost no fresh foods (though some may have a very small area devoted to fresh foods). In effective, NEW MEGA format stores are mainly dry goods stores that also sell food. By putting both the Don Quijote and Uny names on the storefront, the company is looking to use the Uny name and its lineup of fresh foods to create a new type of narrow-market format that will appeal to local consumers.

The first new Don Quijota-Uny MEGA store opened in Oguchi, Kanagawa Prefecture, on February 23. The company is looking for both the composition and volume of store sales to change greatly. Before the format conversion food sales were around 70% of store sales and non-food sales about 30%; after the conversion, the company is looking for sales to be equally split between foods and non-foods. In terms of sales volume, post-conversion the company is looking to increase food sales by about 30% and roughly double non-food sales for roughly a 50% increase in overall sales. With the introduction of its merchandising policies, as detailed above, Don Quijote is looking to boost overall food sales while increasing non-food sales even more. Its goal is to double the gross profit generated by the store by keeping the gross margin on foods relatively low but bringing in many more customers, which in turn is expected to lead to greater sales of non-food goods, which carry higher margins. In this manner, the company thinks the 50% increase in store sales target is conservative and indicates that the goal to double gross profit at each location could be achievable.

Don Quijote’s store formats

Store format Space (sqm) No. of items Featured merchandise Main target customers

Daily necessities (clothes, food, 8,000–10,000 60,000–100,000 MEGA Don Quijote housing) focusing on food and utility Housewives and families Clothing: mainly practical clothes 3,000–5,000 40,000–80,000 New MEGA Don Quijote Food: limited coverage of fresh food

Don Quijote 1,000–3,000 40,000–60,000 Amusement and variety

Younger generations and couples Specialize on selected items Small formats 300–1,000 10,000–20,000 (Picasso, Kyo Yasu Do, Eki/Sora Donki) (drugstore + convenience store + mini supermarket)

DOit 2,000–7,000 40,000–80,000 DIY-related and household goods Craftsmen and families

Employee training and knowledge-sharing A newly established subsidiary called UD Retail will operate the six stores. Don Quijote and Uny each plan to assign 60–70 highly motivated and trained employees to UD Retail. The employees assigned by Uny already started in-store training at Don Quijote’s MEGA stores back in November 2017, and of the employees assigned by Don Quijote, store managers and other middle management employees are working in the six stores, and employees have also been taking part in the in-store training.

Big boost from Don Quijote’s Toyohashi MEGA store At the Q1 FY06/18 results briefing, the company commented that sales could even double on average. In October 2017, the company opened a MEGA store in Toyohashi, Aichi Prefecture, in the former premises of the Ito Yokado Toyohashi Store, which had been a key tenant of a retail complex. Although partly due to the new store, the company noted that sales had roughly tripled from the previous tenant’s levels.

Dozens of Uny employees assigned to UD Retail are training at the Toyohashi MEGA store. Uny has a store in Toyohashi, which competes with other GMS stores in the city. We think Uny understands the benefits of converting to a Don Quijote MEGA store given the sharp sales increase of the Toyohashi MEGA store. We are positive on the combined-name stores, because we think

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they will help to spread Don Quijote’s management methods. It is also good that sales at Uny stores have not suffered as a result, as this stands as proof of the strong loyalty of many Uny customers

Focus on training UD Retail employees to prevent long-term deployment of its own personnel Sending skilled employees to work outside of the company puts pressure on Don Quijote’s store opening plans. The company has assigned 60–70 employees to the six combined name stores, but will need to deploy more people if it continues to convert Uny stores to MEGA stores at a rate of 20 stores per year. It plans to train more employees as well as expects those who gain experience at the six stores to apply their knowledge to future store format conversions. At the new Don Quijote-Uny MEGA stores, plans call for pairing one Uny employee with one Don Quijote employee in each area so that they share their expertise with each other over the course of six to twelve months. The ultimate goal is to train Uny employees to the point where they take over the management of all of the converted stores and can use Uny employees to train other Uny employees in the techniques they learned from Don Quijote.

The company commented that it may have to limit the opening of new stores in FY06/19 to around 20, because stores converting from Uny stores are all large stores requiring a large work force and substantial time, and this would adversely impact its own plans for opening large-scale stores. Although this means slower sales growth due to cutting back on opening new stores, the company thinks that its equity-method profit should increase if earnings of converted stores improve as expected. That said, if the six stores in question turn in favorable results, there is a good chance that the company will accelerate its format conversion plans. As staff gains experience, Don Quijote expects its own burden to be lightened, allowing it to once again step up the pace of new store openings and focus more on fortifying operations at its own existing store network. We would also note the possibility that Don Quijote will take many of the things learned from Uny in the area fresh foods (including food selection as other aspects of purchasing, along with its connections to local producers) and apply that knowledge to other stores, especially its MEGA format stores.

At the presentation highlighting the new store opening in Oguchi, Kanagawa Prefecture, Don Quijote emphasized that stores that had been converted to the new format it would be focusing on the amount of gross profit generated more than the gross profit margin. The last pages of the company's presentation materials also reiterated its dedication to the principle of putting the customer first, its desire to create a sales floor offering amazing bargains to consumers, its desire to empower employees and to make sure the right people are in the right position, and its desire to respond quickly to change. The fact that the company brought out these management principles before the first of the new stores was opened was a promising sign, as it shows the materials were put together under the guidance of FU-HD.

Improving six combined-name stores is priority, but large contribution from potential equity-method profit of Uny’s turnaround Uny’s FY02/18 earnings forecast is JPY704bn in operating revenues (JPY662.2bn for company-run stores and JPY41.8bn for other operating revenues from tenants, etc.), operating profit of JPY17.3bn, and net income of JPY11.2bn. Operating profit adjusted for JPY41.8bn in other operating revenues (i.e., store profit/loss - headquarters expenses) is negative and can be interpreted as a JPY24.5bn loss. Profits would improve substantially if unprofitable stores were to go into the black and generate enough profit to cover headquarters expenses (note: Nagasakiya’s OPM was 2.9% in FY06/17). The two companies are making progress with shared purchasing/delivery, and integrating e-money systems, but the key to success of the venture lies in turning around earnings performance of the six combined name stores. Shared Research will be following developments closely, including progress of the rebranded stores and continuity of earnings performance.

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Structure of Don Quijote–UNY MEGA stores

UNY store DQ general manager store manager

Merchandising division Indirect divisions

Food and Trendy and Lifestyle Cashiers Clean Crews Rising Crews Accountants liquor select

Food and beverages, Home interior, home Electric appliances, daily delica, liquor utilities, bicycles, smartphone Price Merchandise Expiration POP writers and wine, gifts, fresh carpenter's tools, accessories, shoes, checkers managers date checkers meat, vegetables, stationeries, daily imported cigarettes, necessities, sweets, fresh fish brand fashion, Deal with cosmetics, sports and Key promotion tool womenswear, competitors leisure goods, others innerwear, bags, others Source: Shared Research

Comparable store sales growth: DQ sales up 4.8% (+2.8% excluding duty-free sales) and Nagasakiya 3.1% (+3.1% excluding duty-free sales). Continued increase of customer traffic each month except August 2016

Comparable store sales were up 4.8% (+2.8% excluding duty-free sales), and customer traffic and average customer spend both increased, rising 3.7% and 1.1%, respectively. The company promoted a revitalization project to improve performance mostly at newer stores and succeeded at raising the standard for comparable store growth. Store-level organizational reforms in April 2017 proved effective, contributing to SG&A expense savings as a result of improved personnel efficiency. An analysis of customer spending shows an average decline of 2.8% in the amount spent on individual items but a 4.1% increase in the number of items purchased—a good indication that the company's decision to trade off a lower GPM for higher customer traffic and increases in the number of items purchased per customer is working as planned.

In FY06/17, without relaxing price appeal on high-turnover items such as food products or daily goods, the company sacrificed GPM for increasing the customer and merchandise turnover rates, with an upsurge in gross profit resulting from the higher merchandise turnover. Although GPM took a hit, ultimately this strategy contributed to a rise in gross profit, and the real decrease (removing the impact from the conversion of the Accretive Co. subsidiary into an equity-method affiliate) in GPM was limited to 0.1pp in FY06/17. Aggressive initiatives like continued store openings and inventory disposals of high-priced items (aggressively opening new stores leading to an increase in the ratio of stores that are in the phase of attracting customers and boosting their local profile but temporarily sacrificing GPM. Inventory disposal of excess inventory of high-priced items, due to policy changes in China) are expected to lead to an improved GPM in the future.

While the company initially forecast FY06/18 GPM to be flat YoY, in Q3 FY06/17 it completed a round of inventory disposal of high-priced items, made progress with inventory controls at existing stores, posted strong comparable store sales, and had said it was entering a phase to expect increase in both gross profit and GPM from Q4 FY06/17 onward. As of the end of 1H, the revised forecast called for the GPM to be down by 0.3pp (versus the previous forecast of a 0.2pp decline). We see this as an indication that the company is going on the attack with lower prices, as explained above (and plan to confirm this point during our upcoming interview with its management). The company essentially aims to expand gross profit, but it should be noted that accelerated pace of new store expansion (temporarily sacrifice profitability to draw customers and improve brand recognition) and continued rise in demand for relatively low-margin daily necessities could have a negative impact on GPM.

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Comparable store sales

20% Sales (comparable stores) Customer count (comparable stores) Customer spend (comparable stores) 15% 10%

-5%

-10%

-15% Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Source: Shared Research based on company data Nagasakiya: robust comparable store sales growth and continuous expansion of gross profits Nagasakiya, which operates MEGA stores that see little positive impact from overseas tourists, posted strong earnings and saw customer approval ratings improve primarily among families and senior citizens. As a result, comparable store sales increased 3.7% in Q1 (“fresh spending” at 3.7%) as favorable performance continued (FY06/17 saw increases of 2.4% YoY in Q1, 2.7% in 1H, 3.0% in cumulative Q3, and 2.9% for the full year ("fresh spending" at 2.9%). The same underlying trends extended through Q2 as well, with same store sales finishing Q2 up 2.7% and 1H up 3.1% YoY.

At MEGA stores, in FY06/16, foods made up 54.5% (DQ had 27.9%) of sales, miscellaneous household goods 16.5% (DQ had 25.7%) and household goods roughly 70% (DQ had roughly 50%). Shared Research views positively the fact the company was able to boost gross profit as well as GPM by offering a product lineup that addressed customer demand for daily necessities. Compared with GMS stores (where food accounts for 80% of sales), we see the difference in customer drawing power stemming from the sales of non-food items. As mentioned previously with regard to Nagasakiya, the company sees the aggressive rollout of its current price appeal strategy along with a post-GMS format as the future for DQ stores (improving profitability after capturing local market share and boosting profile).

Entering Q2, October saw the opening of a new store in Toyohashi, Aichi, the company’s largest domestic store at 11,000sqm. After opening in mid-October, the store got off to an excellent start, with sales exceeding expectations. Tenant revenue also increased considerably around the time of the opening. The company believes that, with the experience it has gained in revitalizing Nagasakiya and opening MEGA stores, it has learned from its failures and created a new type of store based on a pattern for success. This is likely to contribute to the development of post-GMS stores going forward.

The company has positioned the full-range discount store format (applied in the MEGA stores) as its main post-GMS format. In leveraging its ability to turn a profit on non-food items, the company can offer more competitive prices on food products, prompt increase in customer traffic, and boost sales and gross profit. We find the MEGA/New MEGA stores are the sole post-GMS format candidates of choice.

Nagasakiya earnings (left), consolidated gross profit (right)

(JPYbn) (JPYbn) Sales Operating profit OPM (right axis) Consolidated gross profit New store openings GPM (right axis) 3.8% 70 100 3.6% 4% 3.0% 2.9% 60 27% 80 2.5% 2.4% 3% 2.1% 2.0% 2.0% 50 1.6% 60 1.4% 2% 40 26% 0.9% 40 0.6% 1% 0.3% 0.4% 30 20 0% 20 25% 3.2 0.2 0.6 1.1 0.4 1.5 0.2 1.8 1.0 2.2 1.8 2.4 1.5 3.2 1.6 -1.3% 0 -1% 10 -1.1 -0.8 -20 -1.8% -2% 0 24% 1H 1H 1H 1H 1H 1H 1H 1H 1H Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY06/10FY06/11FY06/12FY06/13FY06/14FY06/15FY06/16FY06/17FY06/18 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 Source: Shared Research based on company material

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New store openings: Leveraging the business' strength of broad accessibility, from city centers to suburbs, 15 store opened in 1H, company projecting 30 or more openings for the full year The company opened 15 new stores in 1H (8 DQs, 6 MEGA, and 1 in south-eastern Asia) and plans to open 30 and more by the end of the fiscal year. It is actively taking advantage of low interest rates to push ahead with the development of new formats and has opened new stores in spaces formerly occupied by general merchandise stores and electronics mass retailers, where fixtures are available for reuse. The broad accessibility of this line of business, from city centers to suburbs, also acts as a strong point. It plans to continue looking into properties with pre-existing fixtures, while being particular about rolling out new stores. The company is taking advantage of its expertise taking over stores that once belonged to other retailers with all their furnishings intact to develop stores compatible with various location characteristics (regional characteristics, size, targeted areas and type of previous stores). With the acquisition of QSI, it added 24 stores in Hawaii. The company’s business scale in Hawaii (based on FY03/17 figures) is sales of USD634mn and floor space of 58,282sqm in 28 stores. The company opened its first store in Asia during Q2, and reports that the Don Don Donki store it opened in Singapore in December had a very good opening month.

There were four store closures, with the company taking a strict approach to cutting its losses by determining which stores had not generated results at the 14-month and 21-month marks. The two store closures in Q1 were the result of regional redevelopment, and two more (including one Kyo Yasu Do store) in order to improve overall business efficiency.

It takes time to make new stores profitable. Like Nagasakiya, in phase 1 the company pushes forward with boosting its profile in the local commercial area while thoroughly offering price appeal. In phase 2 it seeks to increase new customers and transition them into repeat customers, while decreasing the gap with rival stores or surpassing them. In phase 3 it aims to continue maintaining maximum cost performance for customers, improve the gross profit composition, and increase profitability. We will pay close attention to the profit contribution made by new stores as they transition into stage 3.

Store openings and closures

24 New store openings Store closures Store count (right axis) New stores, scrap 19 & build, solution 20 stores 403 393 18 New stores in 18 360 368 400 348 354 properties with pre- 341 16 existing fixtures 319 322 306 311 291 295 14 278 280 283 286 12 266 12 255 242 243 249 252 12 229 235 236 10 10 218 218 218 220 221 226 223 228 19 10 9 12 12 6 11 200 8 9 9 9 10 10 6 6 6 6 6 6 6 7 6 6 6 6 4 5 5 4 4 4 6 2 3 2 2 3 3 2 3 10 0 1 1 3 4 7 8 -1 -1 -1 -1 -1 -1 -1 5 5 6 -2 -2 -2 -2 -2 -2 2 4 4 4 -3 -3 -3 -3 -3 -3 -3 -3 -6 -5 0 0 1 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/16 FY06/17 FY06/18 Source: Shared Research based on company data

Outcome of various initiatives Organizational reform In September 2015, the company implemented organizational reforms designed to transfer authority from business divisions to the sales floor to strengthen the capabilities of individual stores. However, management and employees had different perceptions of how authority works under the new system, which led to “branch office sectionalism” that got in the way of improving the capabilities of individual stores. To resolve this problem and increase employee motivation, the company went ahead with another set of organizational reforms in April 2017 to reinforce the independence of individual stores and strengthen merchandizing. A structure of six sales departments and 52 branches replaced an 18-branch structure with the following objectives: 1) become more adaptable to change by replacing an organization divided by region into one divided by region and store format; and 2) boost employee motivation by tripling the number of branch office manager positions (note: Don Quijote promotes/demotes 20–30% of employees every year based on performance to bring fresh talent into the organization on a regular basis.

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According to the company, in both Q1 and Q2 FY06/18, an improvement in personnel efficiency per hour and sales growth contributed to SG&A expense cuts. Don Quijote believes that organizational development is an ongoing process and says it will continue to review its organization to change and adapt as necessary.

Organizational reform: The company implemented organizational reform in October 2015 centered on merchandise, moving from a seven-segment structure to a system with three categories and 160 intermediate classifications, aiming to a) look for individual stores to adopt their own business models, b) be more quickly in tune with changing trends, c) focus on high depth and narrow breadth in merchandise development, and d) combine small-scale and large-scale advantages. The organizational reform in April 2017 was centered on stores, moving from an 18-branch structure to a system of six sales departments and 52 branches, aiming to a) look for individual stores to adopt their own business models, b) foster next-gen management teams, c) conduct a round of organizational consolidation, and d) boost the motivation of young executive candidates.

Organizational reform

Don Quijote New MEGA Don Quijote Nagasakiya MEGA

East Japan Mid Japan West Japan East Japan West Japan Nagasakiya Sales Sales Sales Sales Sales MEGA Sales Department Department Department Department Department Department

9 branches 8 branches 12 branches 8 branches 8 branches 7 branches

Source: Shared Research based on company data.

As a result of these efforts, sales in September 2017 were up 60% from June sales. The GPM of these stores dropped for a time, because the company positioned them as reopening stores, improving their product range and discounting to raise their profile. Nonetheless, the measures proved effective, because underperforming stores turned profitable in three months. The company is optimistic that the effect of opening new stores will be greater, contributing to comparable store sales growth rates when new stores become existing stores 13 months after opening, as appears to have been the case in Q2.

Demand from tourists visiting Japan: Decline in large-volume purchases by brokers, attracting more overseas tourists to stores by changing the sales mix and improving price appeal. Overall demand remains favorable Customer numbers continued to grow even as the number of products eligible for duty-free stopped growing from October 2015 onward, and despite changes in Chinese government policies. The company has seen steady growth in general overseas tourist traffic at its stores since the beginning of 2016, and views demand from overseas tourists as entering a new stage (exceeded the previous year for 36 consecutive months after the start of the new tax exemption system). It sees the following changes:

Changes in exchanges rates and consumer sentiment in China due to policy revisions, including restrictions on cash ◤ withdrawals using UnionPay cards (in January 2016) and revisions to duties on goods purchased abroad (from April 2016);

Increase in demand from individuals and repeat customers, shifting away from previous demand from tour groups; ◤ Changes in product preferences from durable high-price and leisure goods to practical consumables. ◤ Further, recently Don Quijote stores have been attracting interests on SNS as places where tourists visiting Japan “spend money as part of an experience.” It is a highly popular shopping destination among tourists visiting Japan. As the company’s extensive

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product lineup changes flexibly to reflect bestselling items sought by inbound tourists, recently, the sales composition of food and daily necessities has been rising.

After bottoming out in summer 2016, average customer spend is showing a gradual improvement and is generally stable Like other retailers, Don Quijote saw a decline in average customer spend since January 2016 as a result of the drop in large-scale buying by a few brokers. However, after bottoming out in summer 2016, average customer spend showed gradual improvement. Although there was a slight deterioration in 1H, it has remained generally stable. Even assuming the exchange rate served as a temporary negative factor, as long as the tourists’ customer spend remains stable on a CNY basis, Don Quijote’s efforts to increase its price appeal and expand its merchandise selection could still enhance the appeal of its stores to tourists and may increase its market share. This, together with the steady rise in customer traffic, has left the company with no real concerns about trends in demand from overseas tourists.

Duty-free sales-related indicators

Customer count ('000; right axis) Electric appliances Household goods 50 Customer spend (JPY'000) 500 Foods Watches and fashion No. of tourists visiting Japan (10,000; right axis) 9% Sports and leisure goods Duty-free, % of total sales (left axis) 40 400 8% 7% 30 300 6% 5% 54% 52% 55% 54% 4% 37% 48% 20 200 44% 48% 41% 49% 3% 41% 12% 39% 15% 17% 17% 18% 18% 18% 10 100 2% 11% 11% 16% 16% 32% 11% 11% 39% 1% 38% 36% 29% 25% 20% 17% 18% 0%6% 40% 25% 24% 19％ 84% 49% 0 0 0% Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 20142015 2016 2017 2018 FY06/15 FY06/16 FY06/17 FY06/18 Source: Shared Research based on company data

Trends in buying by Chinese tourists

No. of tourists from China (left axis) Customer spend (CNY-based; average) China South Korea Taiwan Hong Kong Others Customer spend (CNY-based; median) 500 400 1,800 450 350 1,600 400 300 350 1,400 250 300 200 1,200 250 200 150 1,000 150 100 100 800 50 50 0 600 0 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 ('000) FY06/15 FY06/16 FY06/17 FY06/18 (RMB) ('000) FY06/15 FY06/16 FY06/17 FY06/18

Don Quijote, MEGA and NEW MEGA store openings (including scrap and build, and format changes)

12 Don Quijote MEGA

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down into processed foods (34.8%), fresh produce (29.6%), chilled groceries (21.0%), and non-food items (14.6%) and its OPM is around 4%. We note that the OPM may decrease due to the need to invest in fittings and other equipment.

Don Quijote opened its first store in Singapore in December 2017 and plans on a second store in summer 2018. In Thailand, the company plans to operate a retail facility with its new format store Don Don Donki as a core tenant in joint ventures with leading Thai paint manufacturer TOA Venture Holding Co., Ltd. and Nippon Parking Development (TSE:2353). Don Quijote has a 47.5% stake, TOA 47.5%, and NPD 5.0% in the company that owns the building; it also has a 60% stake and TOA 40% in the company that runs the facility.

GPM: successfully made food prices the most competitive in each area, increased length of customer visits, and encouraged impulse buying of non-food items In a difficult market environment, Don Quijote places more emphasis on increasing gross profit than increasing GPM. This allows it to sell products (such as food) at the most competitive prices in each region, drawing in customers. Increasing the appeal of stores in this way encourages customers to stay in stores longer, opening up opportunities for impulse purchases of non-food items. The company’s focus on drawing customers through competitive prices makes it difficult to focus on GPM.

GPM fell from aggressively opening new stores toward future survivor merits and from increasing price appeal of daily necessities Even as the media broadcast stories about deflation and cost-cutting, Don Quijote has responded to consumer trends by increasing its product lineup, which already had a focus on daily necessities, and by offering the lowest prices in each region. In order for each store to remain competitive in its respective commercial area, the company carefully tracks consumer trends within that area and the pricing strategies of competitors in order to implement precise sales promotion measures and refine its price controls. These efforts continue to be effective but it is likely that GPM was impacted by new store openings and inventory write-downs and disposals. However, note that the company has prepared a structure to be able to improve GPM as well as gross profit from Q4.

Private brand goods are extensive, and accounted for 11% of sales and 15.9% of gross profit in FY06/17. The company will adopt a line of private label apparel, emphasizing originality and trend-setting ideas, with an extremely limited range of goods. For FY06/18, the target demographic has been narrowed down to casual clothing with the bolstering of the two brands, "RESTORATION" and "ACTIVE GEAR". The company is aiming for an expansion to 15% by FY06/20.

Procurement: continued robust spot procurement, more options of procured goods Spot procurement continues to underpin the company’s gross profit. Spot procurement comes from excess wholesaler inventories located in metropolitan areas. In 1H, inclement weather caused comparable store sales from rival companies to fall YoY, likely increasing excess inventory. Don Quijote seems to be working on acquiring procurement deals with favorable conditions and is likely increasing its product options. Roughly 60% of the company’s procurement costs are for standard products, but as the company increases the number of stores that handle food and rolls out more NEW MEGA and MEGA stores, it is better positioned to negotiate procurement prices.

Inventory Cognizant of the issue of maintaining a sense of speed, the company curbed inventory levels in FY06/17, with efforts made to improve merchandise turnover. The inventory level rose 18% YoY in 1H FY06/18, but the company says it plans to reduce inventory levels by adding another metric to its inventory valuation system, and add yet another new valuation metric in FY06/19.

SG&A expenses up on store openings but increase appears to have run its course. New personnel hiring led to higher sales Although there was a one-time expense of JPY614mn (equivalent to 0.3pp) related to the acquisition of QSI in 1H, the full-year SG&A expense ratio decreased by 0.6pp (an improvement). The majority of the increase in expenses consisted of investments and initial costs, such as personnel costs for opening new stores, depreciation, and expenses for consumable goods. However, the rise in personnel costs seems to be winding down and man-hour productivity improved. This has ultimately improved competitiveness at the store level and led to higher sales. In addition, restructuring was conducted in October 2015 and April 2017, and that has been having a positive impact on operations.

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SG&A expenses

(JPYbn) Salaries and allowances Rents Commission paid Depreciation Other 50 45.6 45.0 46.0 41.5 41.7 42.6 42.5 39.8 38.8 38.4 39.0 40 12.8 34.4 35.6 14.0 12.7 34.0 33.8 32.2 12.2 12.3 12.3 12.4 30.5 29.7 30.8 11.4 11.6 28.2 28.8 28.7 29.4 11.7 11.8 30 26.5 26.7 27.1 27.5 27.4 10.9 25.7 26.0 25.2 25.5 25.2 25.4 10.5 11.0 10.6 9.4 9.8 5.6 5.6 8.5 9.5 10.1 9.6 5.5 7.3 8.1 8.5 7.9 8.2 9.3 5.0 4.4 5.1 4.6 7.6 7.3 6.8 6.0 7.1 7.8 6.8 4.8 4.3 4.6 4.5 6.6 6.8 20 4.3 4.1 3.9 5.6 5.7 5.8 6.2 4.1 3.6 3.7 5.1 5.2 5.4 3.1 3.2 3.1 3.6 3.2 3.5 3.4 5.0 5.2 2.8 3.3 2.7 3.1 3.0 3.2 2.9 3.1 3.1 3.1 4.6 4.5 4.6 4.9 4.3 4.4 4.6 4.4 4.4 4.4 5.1 4.5 4.5 4.5 4.6 4.5 4.4 4.6 4.2 4.3 4.3 4.3 4.3 10 17.3 14.2 14.8 15.1 15.2 16.0 16.1 16.1 16.3 16.7 11.3 11.6 12.0 12.4 12.8 14.0 9.0 8.9 8.6 8.6 8.5 8.7 8.8 9.0 9.2 9.2 9.4 9.8 9.8 9.9 9.9 10.0 10.2 10.6 0 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 Source: Shared Research based on company data

Salaries and allowances

Salaries and allowances, % of sales Salaries and allowances, % of sales Retail food, % of sales (right axis) Inbound, % of sales (SR est., right axis) 9% 8% 9% 36% 8% 6% 8% 34%

7% 4% 7% 32%

6% 30% 6% 2%

5% 28% 5% 0% Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18

Store count by format

450 393 403 400 360 368 38 341 348 354 37 322 14 14 350 306 311 319 14 14 14 286 291 295 14 300 278 280 283 14 14 14 255 266 14 14 118 242 243 249 252 14 14 14 14 100 104 107 112 113 229 235 236 3 14 94 250 3 3 3 3 77 81 85 88 3 3 3 68 71 75 62 64 65 24 25 25 25 200 49 52 54 56 56 57 23 23 23 44 46 45 15 18 18 18 20 21 21 14 13 14 14 15 15 17 150 12 12 13 14 14

100 183 182 184 184 194 195 196 197 198 199 204 150 154 156 157 157 161 163 165 165 172 172 174 172 173 175 50 0 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 Don Quijote Picasso MEGA and New MEGA DOit Nagasakiya Overseas

Source: Shared Research based on company data

For details on previous quarterly and annual results, please refer to the Historical financial statements section.

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Full-year company forecasts (as of beginning FY06/18)

FY06/15 FY06/16 FY06/17 FY06/18 Initial Est. (JPYmn) 1H 2H FY 1H 2H FY 1H 2H FY 1H 2H FY Sales 342,224 341,757 683,981 384,445 375,147 759,592 417,694 411,104 828,798 445,000 435,000 880,000 YoY 12.8% 10.6% 11.7% 12.3% 9.8% 11.1% 8.6% 9.6% 9.1% 6.5% 5.8% 6.2% Gross profit 91,634 90,107 181,741 102,941 98,952 201,893 110,640 107,940 218,580 117,000 115,000 232,000 YoY 13.0% 12.7% 12.9% 12.3% 9.8% 11.1% 7.5% 9.1% 8.3% 5.7% 6.5% 6.1% GPM 26.8% 26.4% 26.6% 26.8% 26.4% 26.6% 26.5% 26.3% 26.4% 26.3% 26.4% 26.4% SG&A 68,223 74,415 142,638 77,370 81,338 158,708 84,297 88,098 172,395 90,000 94,000 184,000 SG&A-to-sales ratio 19.9% 21.8% 20.9% 20.1% 21.7% 20.9% 20.2% 21.4% 20.8% 20.2% 21.6% 20.9% Operating profit 23,411 15,692 39,103 25,571 17,614 43,185 26,343 19,842 46,185 27,000 21,000 48,000 YoY 14.2% 13.8% 14.0% 9.2% 12.2% 10.4% 3.0% 12.6% 6.9% 2.5% 5.8% 3.9% OPM 6.8% 4.6% 5.7% 6.7% 4.7% 5.7% 6.3% 4.8% 5.6% 6.1% 4.8% 5.5% Recurring profit 24,044 16,116 40,160 25,873 17,924 43,797 26,928 18,595 45,523 27,000 21,000 48,000 YoY 13.8% 12.3% 13.2% 7.6% 11.2% 9.1% 4.1% 3.7% 3.9% 0.3% 12.9% 5.4% RPM 7.0% 4.7% 5.9% 6.7% 4.8% 5.8% 6.4% 4.5% 5.5% 6.1% 4.8% 5.5% Net in co me 13,694 9,454 23,148 14,232 10,706 24,938 16,459 16,623 33,082 15,500 12,500 28,000 YoY 5.1% 11.9% 7.8% 3.9% 13.2% 7.7% 15.6% 55.3% 32.7% -5.8% -24.8% -15.4% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

Views on FY06/18 Medium-term targets, positioning FY06/18 Medium-term goals with FY06/20 as the final year In August 2015, the company announced the goals of Vision 2020, Target 2020, Policy 2020, and Roadmap 2020. Goals include numerical targets in Vision 2020, expansion to 500 stores in Target 2020, and various initiatives in order to achieve these goals by FY06/20 in Roadmap 2020.

Having finished planting, looks to begin harvesting profits in FY06/18 while continuing along same strategic growth path Strategies implemented in FY06/14 and FY06/15 to capture demand from family and overseas tourist segments produced solid results in FY06/15. During FY06/16, ahead of the planned increase in consumption tax in April 2017, the company focused on enhancing, implementing, and expanding strategies to capture demand from families and tourists, steadily increase the number of stores, and further strengthen its management foundation.

Having finished planting the seeds for growth, the company began harvesting the profits in FY06/17. With the retail market shrinking, the company's stores all understood that their sales may decline if they only did what their competitors were doing. That is why every store the company operates identified a competing store that it used as a benchmark and then sought to continue growing by taking customers away from that store and other competitors. As a result, same-store sales rose 2.6% YoY (tax-free sales +0.66pp and “fresh spending” +2.0pp), up for the 12th consecutive quarter; per-customer spending increased (+0.4% YoY) over the full year, as did the number of customers (+2.2%). We give credit to DQ’s success in capturing inbound demand while maintaining solid growth of “fresh spending,” which grew 2.1pp in FY06/16. The company opened 32 new stores, exceeding the 30 stores initially planned, mainly in properties with pre-existing fixtures. This also contributed to earnings growth.

The basic strategy the company will follow in FY06/18 will be the same as last year. The company plans to step up its efforts to grow sales at existing stores while at the same time opening a large number of new stores, including store openings in properties with pre-existing fixtures.

Looking beyond Vision 2020 In FY06/18, the company plans to look beyond the numerical targets of its Vision 2020 medium-term plan (sales of JPY1tn, 500 stores, and ROE of 15%), which look within range if it maintains the current growth trajectory, and tackle themes that call for growth beyond these targets. Specifically, DQ is focusing on its digital strategy, overseas business expansion, and post-GMS strategy. These three themes are discussed below, starting with the post-GMS strategy. The company’s policy of cultivating consumption activity in physical stores (which accounts for 95% of retailing in Japan) in various ways to expand its business is unchanged.

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Post-GMS strategy The company positions the full-range discount store format (applied in the MEGA/New MEGA stores) as its main post-GMS format, seeing this may be the sole store format of choice post-GMS. In leveraging its ability to turn a profit on non-food items, the company can offer more competitive prices on food products, prompt increase in customer traffic, and boost sales and gross profit. In FY06/18, the company added to its plans another new post-GMS format achieved through the capital and business alliance with FamilyMart Uny Holdings (FU-HD; TSE1: 8028).

Business alliance with FU-HD On August 24, 2017, DQ announced a business and capital alliance with FU-HD. The company will take a 40% stake in Uny, FU-HD’s wholly-owned subsidiary operating the GMS business. The alliance entails changing the name of some Uny stores to a combined name; converting stores that Uny planned to close into DQ brand stores; operating FamilyMart stores in some DQ stores; collaboration in the development of digital solutions and use of big data; joint product development, purchasing, and sales promotion; streamlining logistics functions; working together in overseas markets and developing new business formats; personnel exchange; and financial and other services.

As of August 30, the two companies are still working on details, but we comment on what we consider to be key points of the alliance. Shared Research is focusing on the performance of six stores that will operate under a combined name, the application of digital solutions and big data in marketing, and cost improvement from joint product development, purchasing, and promotions and streamlining logistics.

Changing name of some stores to combined name (combining brands) Uny had 201 stores as of August 21, 2017. The two companies have agreed to convert six of them to combined-name/brand stores that they will operate together. Uny stores sell food on the first floor and have had the problem of not fully utilizing the second and third floors. Most stores rent spaces to tenants, but with a surplus of stores and spaces in the retail business, Uny was not always successful in renting to first-choice tenants. Bringing in DQ, which excels in selling non-food products, is expected to generate synergies, attracting more customers to Uny stores while increasing sales for DQ.

The six stores will carry the Don Quijote name (likely to be the MEGA format), but will retain Uny store names like APITA and PIAGO in signage in respect for local communities’ trust in, and familiarity with these brands nurtured over many years. The operation will be split into food (first floor, run by Uny) and non-food (second and third floors), mainly run by a team of employees assigned from DQ (10–20%) and Uny employees (80–90%). However, the concept of these stores will be “Don Quijote at Uny”, and they will not entirely adopt DQ’s strengths such as delegating authority (each store being responsible for its own management) and adapting to change, or its management structure (including HR system and incentives) refined over time such as the restructuring centered on merchandise (October 2015) and on stores (April 2017). These stores will be more challenging to convert than stores created from scratch, because the physical store already exists.

DQ commented that its intention was not to pressure these stores to convert to the Don Quijote style or to make changes in a hasty manner, but to spend time on the transition and seek positive results in about a year’s time. The company plans to appoint its own talented people to store manager and sales floor manager positions, which may have a negative impact on new store opening plans. DQ believes six stores will not make much difference, which is partly why it is only planning six. We think the company may select these stores to experiment with diverse locations and store formats. The company may split the six between the Kanto and Tokai regions.

Earnings contribution of the six stores will be in the form of equity-method profit (40% stake), because the stores will be operated by Uny.

Conversion of stores that Uny plans to close into DQ brand stores DQ plans to open new stores by taking over Uny stores that are due to close. As with any new store opening, the company will analyze the location and trade area before making the decision. It will not necessarily open stores in all stores that Uny intends to close.

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Running FamilyMart stores in Don Quijote stores The company plans to select around 50 of 70 stores whose checkouts process more than 5,000 transactions per day (mostly MEGA stores) to open FamilyMart stores either within the store or in the parking lot. From DQ’s point of view, it will be renting space to FamilyMart. DQ plans to open several such stores in FU-HD’s current fiscal year (FY02/18).

Collaboration in developing digital solutions and utilizing big data This collaboration is important in driving the company’s current focus on digital strategy. DQ plans to collaborate with FU-HD in developing digital solutions for store operations and introduce sales promotion and digital solutions that utilize big data.

DQ has its own Majica e-money service, whose users have increased steadily since its debut in March 2014 to exceed 5 million as of June 30, 2017. Majica members account for 28% of total sales, because their per-customer spending is higher than average. The company is also accumulating useful customer information and purchase history data from members.

Uny’s e-money service is called Uniko Card, whereas FamilyMart’s T Card service is run by Culture Convenience Club (CCC) Co., Ltd. An e-money service run by a separate company makes customer data less accessible. By offering DQ’s Majica platform to FU-HD, the two groups can accumulate substantial big data. For example, DQ’s retail business posted sales of JPY801.8bn in FY06/17, while FU-HD’s convenience store business (all chain stores) targets FY02/18 sales of JPY3.07tn and its GMS business (Uny) sales of JPY712.2bn for a total of JPY4.6tn. Further growth opportunities may arise as a result of utilizing the voluminous combined big data in marketing. The two companies are still in the discussion stage, and we will keep a close eye on future development.

Joint product development, purchasing, and sales promotion While the capital alliance portion of the partnership is DQ taking a 40% stake in FU-HD subsidiary Uny, the company will collaborate with the overall FU-HD group in product development, purchasing, and sales promotion. The company plans to take advantage of FU-HD’s economies of scale (JPY4.6tn in sales) and strengthen relationships with new suppliers, as it did with the Nagasakiya acquisition. DQ has already started on this strategy, which may lower the cost ratio of some products by 5pp. We are focusing on progress as it will likely strengthen DQ’s competitiveness, although we expect the effects to build up slowly over time.

Other In streamlining logistics, the company will likely begin improving the efficiency of delivery with Uny first considering the sheer number of convenience stores in the FU-HD Group (18,038 as of May 31, 2017). Measures such as improving the load factor of trucks should help lower costs.

For personnel exchange, talented DQ employees will be assigned to Uny as described in the “Changing name of some stores to combined name” section. According to the plan, 40% of Uny’s management team will come from DQ. We expect synergies from transferring DQ’s know-how to Uny and Uny’s experience with food to DQ.

Regarding financial and other services, the two companies plan financial services such as mutual use of loyalty point schemes, integrating their e-money/loyalty scheme services (see above), and a common customer ID system. They may also install ATMs in DQ stores.

Earnings impact Assuming the share transfer takes place as planned in November 2017, DQ will begin booking equity-method profit/loss in 2H FY06/18, with Uny’s Q4 (Nov-Feb 2018) consolidated in DQ’s Q3 (January-March) financial statement. Uny’s FY02/18 targets are operating revenues of JPY712.2bn (sales of directly managed stores JPY670bn, other operating revenues JPY42.2bn), GPM 23.7%, SG&A expenses JPY186.8bn, operating profit JPY14.5bn, and net income JPY8.6bn). It appears that Uny stores post a net loss adjusted for operating revenue from tenants. Although revenue from tenants will decrease after some Uny stores are converted to DQ stores, given that only six stores are to be converted and these stores are likely to increase their sales, we think the business is unlikely to post a loss.

25/96 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.03.09 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Overseas expansion The main points of overseas expansion in FY06/18 are the acquisition of QSI, Inc. and opening the first directly managed store in Singapore. Both projects are being led by DQ Group’s overseas business holding company Pan Pacific International Holdings Pte. Ltd. headed by DQ’s founding chairman and supreme advisor Takao Yasuda.

The Hawaii-based QSI is a long-time operator of the Times and Big Save supermarkets that serve both local residents and tourists. With 24 stores currently in operation, its earnings for FY09/16 amounted to USD436mn in sales and USD17.4mn in operating profit. Its total and net assets as of end-FY09/16 were USD140mn and USD39.5mn, respectively. The acquisition will increase the number of Don Quijote group stores in Hawaii to 29 stores, and the company expects to see a significant improvement in profitability from market shares gained. The company will also implement measures to bring down SG&A expenses such as increasing purchase volume to reduce product cost ratio, exchanging personnel and bolstering operational efficiency, and streamlining distribution. The company expects a market share of around 30%. We are positive on this development as a factor that will increase the company’s competitiveness.

As a consolidated subsidiary of the company, QSI will be at the core of Don Quijote’s overseas strategy for the US, which centers around Hawaii. The company understands that this addition will give a significant boost to the group’s overall enterprise value. Profit/loss consolidation is scheduled to begin from Q3 FY06/18, when QSI’s Q1 FY09/18 (October – December) earnings will be reflected in the company’s consolidated results.

DQ plans to open its first directly-managed store in Singapore in winter 2017 on the first and second basement floors of Orchard Central, a retail complex on Orchard Road. Although the store format will not be the same as DQ stores in Japan due to the restrictions of the building, the company aims to create a one-of-a-kind business format by stressing its Japanese identity. DQ plans to open a second store in FY06/18 with plans to open 10 or more in the longer term, with the possibility of franchising after it has established the store format.

Number of QSI stores (left), Product mix (right)

Daily necessities Others Maui 3.6% 2 Drugs 11.0% Grocery 26.0% Kauai 6

Oahu Other foods Fruit and 16 31.1% vegetables 13.6% Daily and frozen foods 13.5% Source: Shared Research based on company data.

Capital spending plans and financing For FY06/18 the company budgeted JPY45bn for capex (assuming 30+ new store openings), which is the same as the initial forecast for FY06/17 (finished at JPY45.4bn).

The company has taken advantage of the low interest rate environment for increasing the proportion of its interest-bearing debt accounted for by long-term borrowing. In July 2017, it borrowed JPY100bn (agreement concluded in March). This was a long-term loan with a final repayment date of July 2067, with a TIBOR-based floating interest rate in the first 10 years and the rate increased by 1.0pp thereafter. We assume the company plans to repay the loan in 5–10 years, since early repayment is not permitted in the first five years. Being a subordinated loan evaluated as having equity credit attributes of 50%, the company’s A+ investment rating will not be affected. As such, we will keep note of this arrangement as part of DQ’s financial strategy.

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Capital spending and depreciation

FY06/07 FY06/08 FY06/09 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 (JPYmn) Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Est. Capit al expendit ures 21,070 28,495 17,936 22,849 37,872 23,563 29,914 35,563 52,727 51,570 45,357 45,000 Cash flow s 14,197 17,513 19,399 23,172 25,577 28,641 29,859 30,944 34,646 36,881 46,661 Difference -6,873 -10,982 1,463 323 -12,295 5,078 -55 -4,619 -18,081 -14,689 1,304 Depreciat ion and amort izat ion 5,395 7,398 8,898 9,823 9,908 10,474 11,051 11,408 13,003 15,092 15,952 Depreciat ion 5,033 6,773 8,384 9,372 9,385 9,566 10,026 10,402 11,672 13,301 14,075 Difference 362 625 514 451 523 908 1,025 1,006 1,331 1,791 1,877 EBITDA 18,981 23,379 26,070 30,890 35,244 39,794 43,420 45,700 52,106 58,277 62,137 YoY 14.4% 23.2% 11.5% 18.5% 14.1% 12.9% 9.1% 5.3% 14.0% 11.8% 6.6% EBITDA margin 6.3% 5.8% 5.4% 6.3% 6.9% 7.4% 7.6% 7.5% 7.6% 7.7% 7.5% Source: Shared Research, based on company data

Interest-bearing debt Interest-bearing debt ( Total Current 1-2 years 2-3 years 3-4 years 4-5 years 5+ years FY06/13 126,506 46,492 17,419 23,595 13,550 17,650 7,800 Short-term 14,286 14,286 Bonds 69,120 20,480 5,740 17,000 9,800 16,100 Long-term 43,100 11,726 11,679 6,595 3,750 1,550 7,800 (Composition) 100.0% 27.2% 27.1% 15.3% 8.7% 3.6% 18.1% FY06/14 94,274 19,944 33,100 23,214 17,417 270 329 Short-term 2,197 2,197 Bonds 50,440 6,140 17,400 10,200 16,500 200 Long-term 41,637 11,607 15,700 13,014 917 70 329 (Composition) 100.0% 27.9% 37.7% 31.3% 2.2% 0.2% 0.8% FY06/15 126,444 38,598 29,469 19,266 3,637 23,940 11,534 Short-term 1,921 1,921 Bonds 81,430 18,740 11,540 17,540 1,540 20,840 11,230 Long-term 43,093 17,937 17,929 1,726 2,097 3,100 304 (Composition) 100.0% 41.6% 41.6% 4.0% 4.9% 7.2% 0.7% FY06/16 154,476 32,923 23,762 18,962 28,864 19,616 30,349 Short-term 1,680 1,680 Bonds 89,157 12,686 18,686 2,686 21,986 10,986 22,127 Long-term 63,639 18,557 5,076 16,276 6,878 8,630 8,222 (Composition) 100.0% 29.2% 8.0% 25.6% 10.8% 13.6% 12.9% Source: Shared Research, based on company data Note: Note: "Current" refers to the portion due within a year, while "1-2" refers to "due over one year, less than two years."

Company views on its forecast Our forecast is our commitment From FY06/10 onward, Don Quijote’s operating profit and recurring profit have come in above its initial forecasts. This is primarily due to the company’s view that its forecasts should serve as figures that it is comfortable committing to as opposed to simply a target. For FY06/18, the company forecasts a 0.6% YoY increase in same store sales in 1H, a 0.4% increase in 2H for a 0.5% sales growth over the full year.

Historical forecast accuracy

Results vs. Initial Est. FY06/08 FY06/09 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Sales Initial Est. 350,000 448,000 497,000 510,000 528,900 560,000 596,300 634,000 730,000 820,000 Results 404,924 480,856 487,571 507,661 540,255 568,377 612,424 683,981 759,592 828,798 Results vs. Initial Est. 15.7% 7.3% -1.9% -0.5% 2.1% 1.5% 2.7% 7.9% 4.1% 1.1% Operating profit Initial Est. 17,200 17,000 18,000 23,000 27,000 30,500 33,500 34,800 39,800 45,000 Results 15,981 17,172 21,067 25,336 29,320 32,369 34,292 39,103 43,185 46,185 Results vs. Initial Est. -7.1% 1.0% 17.0% 10.2% 8.6% 6.1% 2.4% 12.4% 8.5% 2.6% Recurring profit Initial Est. 18,000 18,000 17,800 22,000 26,800 30,300 34,000 35,600 40,800 45,500 Results 17,204 15,989 21,109 25,138 29,283 33,201 35,487 40,160 43,797 45,523 Results vs. Initial Est. -4.4% -11.2% 18.6% 14.3% 9.3% 9.6% 4.4% 12.8% 7.3% 0.1% Net income Initial Est. 10,650 10,300 10,000 11,600 14,000 20,000 21,500 21,500 23,300 26,800 Results 9,303 8,554 10,238 12,663 19,845 21,141 21,471 23,148 24,938 33,082 Results vs. Initial Est. -12.6% -16.9% 2.4% 9.2% 41.8% 5.7% -0.1% 7.7% 7.0% 23.4% Note: Figures may differ from company materials due to differences in rounding. Source: Shared Research based on company data

27/96 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.03.09 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Medium-term targets and company strategy Vision 2020 (targets) Sales of JPY1.0tn in FY06/20 Vision 2020 calls for sales of JPY1.0tn, 500 stores, and ROE of 15.0%––with particular emphasis on sales since the target of 500 stores could be achieved relatively easily by opening small-scale stores instead of MEGA stores. To achieve sales of JPY1.0tn, the company will not strive for scale, but will further strengthen initiatives targeting the family and overseas tourist segments while continuing to expand its store network. Don Quijote hopes this results in 8% sales growth as it targets sales of JPY1.0tn.

Vision 2020

(JPYbn) Number of stores Store openings (right axis) Sales ROE (right axis) 500 50 1,000 15%

400 40 800 14%

300 30 600 13%

200 20 400 12%

100 10 200 11%

0 0 0 10% FY06/11 FY06/14 FY06/17 FY06/20 FY06/11 FY06/14 FY06/17 FY06/20 Source: Shared Research, based on company data Capturing the family segment: strengthening non-food product sales “Those who control food control customer drawing power. Those who control non-food, control food.” In FY06/16, the company thinks market competition looks set to become even fiercer. In FY06/15, when its competitors were leaning toward enhancing food, the company worked to enhance its non-food as well as food offerings. In October 2014 the company opened a store in Fukaebashi, Osaka, which had food on the first floor and non-food items on the second floor. While customer bases are different for this store, it attracted more customers and generated synergistic effects. The company was successful in developing the difficult store format centered on food but also with strengthened non-food sales.

Success of store development efforts, including practice of building on successes and continuous refinement, led to opening of many new stores in spaces previously occupied by other mass retailers in FY06/16 The success of the Fukaebashi store provided crucial input for renovations to the Shinsekai store (February 2015; second floor), Minoo store (July 2015; first and second floors), and the flagship Nagoya store (July 2015, modified to MEGA after floor addition). From November 2015 onward, which will mark the one year anniversary of the Fukaebashi store opening, further expertise will have accumulated on seasonal layouts, product selection, and customer trends, adding further fuel for refinements. Having learned a great deal from the development of these stores, the company put the lessons to work as it pushed forward with a plan to open a large number of new stores in spaces that had previously been occupied by other volume retailers in FY06/16 onward.

Maximizing strength in non-food items The company plans to meet fierce competition in food head on, stating that those who control food can bring customers in, and those who control non-food items control food. Specific company strategy is to leverage its non-food items––whereby high gross profit margin non-food items account for roughly 70% of sales––to strengthen its price competitiveness in food (an extreme example: reduce the margin on its food products to nearly zero).

Offerings of food products at existing Don Quijote stores is progressing, but due to the small floor area compared to New MEGA stores (1,000 to 3,000sqm at Don Quijote stores vs. 3,000 to 5,000sqm at New MEGA stores), shifting from a Don Quijote store to a New MEGA store is difficult. Additional hurdles include installing refrigerated showcases for cold and frozen foods, and temperature management controls. Although difficult for small-scale stores that have a floor space of about 1,500sqm, stores from 2,000sqm upward have more possibilities, and installations of additional refrigerated showcases signal stronger focus on food.

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Sales by product category

% of total sales Yo Y FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 T ot al ret ail business 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 11.4% 17.2% 6.6% 5.2% 7.9% 11.8% 11.1% 9.3% Elect ric appliances 10.5% 11.1% 10.4% 9.8% 8.9% 8.3% 8.0% 8.3% -1.8% 10.1% -0.3% -0.5% -2.3% 4.5% 7.3% 13.0% Household goods 19.1% 21.4% 21.7% 22.1% 22.2% 20.1% 20.7% 22.1% 15.8% 16.8% 8.0% 6.9% 8.5% 13.0% 14.6% 16.7% Foods 23.4% 28.3% 28.6% 28.5% 29.5% 30.5% 31.9% 33.1% 32.1% 25.6% 7.5% 4.8% 11.6% 15.5% 16.1% 13.4% Watches & fashion merchandise 18.7% 21.2% 22.1% 23.0% 21.6% 21.6% 20.3% 19.1% 6.8% 18.4% 10.6% 9.4% 1.5% 7.0% 4.6% 2.8% Sports & leisure goods 5.4% 5.8% 5.7% 5.8% 5.6% 6.9% 6.8% 6.5% 6.8% 12.7% 3.9% 7.5% 4.7% 6.4% 9.3% 3.6% DIY goods 3.3% 3.3% 3.3% 3.0% 2.9% 2.4% 2.0% 1.9% -23.0% 4.0% 6.8% -3.4% 3.5% -7.1% -6.3% 2.1% Overseas 3.5% 3.0% 2.4% 2.4% 4.0% 5.2% 5.2% 4.3% -6.0% -10.3% -15.0% 6.1% 79.5% 44.4% 11.9% -9.8% Others 1.5% 2.0% 2.1% 1.6% 1.5% 1.5% 1.5% 1.3% 23.3% 36.4% 12.0% -17.8% 0.5% 6.4% 11.8% -4.9%

Breakdown of operating profit margins at existing stores by format (left), growth in existing stores and operating profit margin by store size (right)

Comparable store sales growth NEW MEGA (3,000-5,000sqm) MEGA (8,000-10,000sqm) 10% 9% 8% 8% 7% 6% 6% Over 8,000sqm 5% 2,000-3,000sqm 4% 4%

3% 3,000-5,000sqm 2% 1,000-2,000sqm 2% 5,000-8,000sqm 1% Less than 1,000sqm 0% 0% 4% 5% 6% 7% 8% 9% 10% -1% -2% OPM FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 Source: Shared Research, based on company data

Still aiming to boost sales to family segment, increase repeat business Don Quijote refers to the portion of same store sales growth excluding overseas tourist demand as “fresh spending” and aims to boost this further by drawing more customers from the family segment and increasing repeat business. Same store sales were up 4.5% YoY in FY06/16. Of this, 2.4pp was driven by overseas tourists and 2.1pp from fresh spending such as the family segment. In FY06/17, fresh spending maintained 2.0pp growth within 2.6% same-store sales growth.

Subsidiary Nagasakiya maintains same store sales growth without much overseas tourist demand Same store sales at subsidiary Nagasakiya (MEGA and Nagasakiya stores) were up 2.9% in FY06/17 despite 0.0pp contribution of demand from overseas tourists. In FY06/16, same store sales at Nagasakiya rose 4.3% with only 0.2pp of this attributable to demand from overseas tourists; in FY06/15, same-store sales at Nagasakiya grew 4.5% with only 0.1pp attributable to demand from overseas tourists. As shown in the figure below, this puts Nagasakiya well ahead of other retailer such as Aeon Retail and Ito Yokado, and shows how much difference this "fresh spending" by domestic customers really makes. Shared Research will be watching closely to see whether the company is able to maintain this momentum in FY06/18 and beyond.

Trends in sales at existing stores

Nagasakiya Japan Chain Stores Association AEON Retail Ito Yokado Uny 20% 16% 12% 8% 4% 0% -4% -8% -12% -16% Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul 2014 2015 2016 2017 Source: Shared Research based on company data

Overseas tourist demand: sending a low-price message Efforts to capture inbound tourist market shifting to price competition The operating environment affecting demand by tourists has been feeling the effects of change, including the appreciation of the yen, changes in Chinese government policy (including limits on cash withdrawals using UnionPay cards from January 2016 and revisions to import duties on goods purchased overseas from April 2016), and a drop in high-volume purchases by a few large professional buyers. Notwithstanding, Don Quijote is treating the current market, in which the winners are those that control

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tourism-related infrastructure such as tour buses and travel agents, as a kind of bubble, and intends to stay ahead of such competitors, especially when it comes to price competition.

Trends in inbound tourists and duty-free sales

Electric appliances Household goods Customer count ('000; right axis) Customer spend (JPY'000) Foods Watches and fashion merchandise 8% 60 Number of tourists visiting Japan (10,000; right axis) 300 Sports and leisure goods Duty-free sales, % of total sales (left axis)

50 250 6% 40 200 55% 52% 30 150 4% 37% 44% 48% 48% 49% 41% 41% 20 100 12% 39% 15% 18% 2% 11% 11% 16% 17% 17% 32% 16% 11% 39% 10 50 11% 29% 38% 36% 25% 24% 25% 20% 17% 6%0% 49% 40% 84% 0 0 0% Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Q1 Q3 Q1 Q3 Q1 Q3 2014 2015 2016 2017 FY06/15 FY06/16 FY06/17 Source: Shared Research, based on company data

As shown in the graph below, the average spend per Chinese tourist, measured in yuan, is still trending higher. Don Quijote sees its share of the inbound tourist market continuing to rise thanks to its reputation for offering a wide variety of attractive goods at reasonable prices. Taking into consideration the fact that tourist traffic at its stores is still growing, it is fair to conclude that Don Quijote’s efforts to capture ever more of the spending by overseas tourists are meeting continued success.

Trends in spending by Chinese tourists

No. of tourists from China (left axis) Customer spend over JPY100,000 (% of customer count) Customer spend (CNY-based; average) Customer spend over JPY100,000 (% of sales value) Customer spend (CNY-based; median) 30% 250 1,600

200 1,400 20% 150 1,200

100 1,000 10%

50 800 1.9% 0.6% 0 600 0% Q1 Q3 Q1 Q3 Q1 Q3 Q2 Q3 Q4

(千人) FY06/15 FY06/16 FY06/17 (RMB) FY06/16 Source: Shared Research, based on company data

The company believes some of the current winners are companies that spend heavily on sales promotions in cooperation with travel agents and tour bus companies. Don Quijote does not have any such costs, and is price competitive. Further, Don Quijote is targeting price-sensitive visitors to Japan through strengthening its price appeal at Chinese and English language POP displays on the shop floor, providing information via its staff, and actively utilizing SNS websites.

In the Tokyo area, Don Quijote aims to capitalize on its 24 hour operating schedule to attract customers during their free time during tours. By allowing customers to save money through its low price offerings and increasing customer satisfaction, the company aims to attract additional customers via word of mouth. The company does not expect these small steps to provide immediate returns, instead looking to gradually expand its business targeting overseas tourists over the next six months to two years.

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Earnings comparison: Don Quijote vs. LAOX

LAOX Don Quijote HD FY12/14 % of FY12/15 % of FY06/14 % of FY06/15 % of (JPYmn) 1H total 1H total FY total FY total Sales 20,230 100.0% 45,168 100.0% 612,424 100.0% 683,981 100.0% CoGS 14,860 73.5% 30,070 66.6% 451,406 73.7% 502,240 73.4% Gross profit 5,370 26.5% 15,098 33.4% 161,018 26.3% 181,741 26.6% SG&A expenses 5,076 25.1% 10,122 22.4% 126,726 20.7% 142,638 20.9% Sales commission, commission fee 1,678 8.3% 6,136 13.6% 15,442 2.5% 16,563 2.4% Salaries and allowances 864 4.3% 1,168 2.6% 43,695 7.1% 51,158 7.5% Rent 1,216 6.0% 1,097 2.4% 17,855 2.9% 19,088 2.8% Depreciat ion 216 1.1% 209 0.5% 10,402 1.7% 11,672 1.7% Others 1,101 5.4% 1,512 3.3% 39,332 6.4% 44,157 6.5% Operating profit 294 1.5% 4,976 11.0% 34,292 5.6% 39,103 5.7%

Breakdown of duty-free sales by product category and time of day

Sports and leisure goods Watches and fashion merchandise 14% 8% Foods Household goods Electric appliances Duty-free, % of total sales (left axis)  12% 7% 6% 10% 5% 55% 8% 52% 4% 37% 44% 48% 48% 49% 41% 6% 3% 41% 12% 39% 15% 2% 11% 11% 16% 17% 17% 18% 4% 32% 16% 11% 39% 11% 29% 1% 38% 36% 25% 24% 25% 20% 17% 0%6% 49% 40% 2% 84% 0% Q1 Q3 Q1 Q3 Q1 Q3 0% FY06/15 FY06/16 FY06/17 (Hour) 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 1 2 3 4 5 6 7 8 Source: Shared Research, based on company data

Tourists making duty-free purchases by country of origin (left and center) and duty-free sales (right)

Others Thailand Thailand Thailand, Singapore, Malaysia, Vietnam, Philippines, Indonesia 1.4% 1.4% 350 Hong Kong Hong Others Hong Others Taiwan Kong 10.5% Kong 11.8% 300 South Korea 6.2% 6.2% China China 250 Worldwide 29.9% China 200 42.4% Taiwan Taiwan 13.3% 150 13.3% 100

50 South South 0 Korea Korea Q1 Q3 Q1 Q3 Q1 Q3 38.7% 24.9% ('000) FY06/15 FY06/16 FY06/17

Average duty-free sales per customer by country of origin (JPY)

FY06/17 FY06/16 FY06/15 Domestic Domestic Domestic Duty-free average Duty-free… Duty-free… China China China

Korea Korea Korea

Taiwan Taiwan Taiwan

Hong Kong Hong Kong Hong Kong

Thailand Thailand Thailand Singapore, Singapore,… Singapore,… Malaysia Vietnam, Vietnam,… Vietnam,… Philippines,… Others Others Others

(JPY) 0 5,000 10,000 15,000 20,000 (JPY) 0 5,000 10,000 15,000 20,000 (JPY) 0 5,000 10,000 15,000 20,000 25,000 Source: Shared Research, based on Ministry of Tourism data

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Trends in overseas tourists traveling to Japan

8,000 120% 96% 7,000 90% 6,000 54% 44%48% 60% 5,000 42% 38% 40% 43%39% 29% 30% 27% 29%27% 22% 25%25% 21% 4,000 18%18% 19%17%15% 30% 11% 9% 9% 9% 14% 2% 3,000 -2% -16% -16% -13% -13% 0% 2,000 -27%-30% -31% -30% 1,000 -50% 0 -60% ('000) Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 Tourists visiting Japan Tourists visiting Japan (YoY) Source: Shared Research, based on Ministry of Tourism data Target 2020 (store expansion) New store openings from FY06/16 to FY06/20: Don Quijote format in first half, and MEGA stores in second half The company’s strategy for store openings can be broadly classified in terms of Don Quijote stores (catering primarily to unmarried customers), MEGA Don Quijote stores (catering primarily to homemakers and families), and other stores. As of end FY06/15, Don Quijote had 306 stores (183 Don Quijote stores, 77 MEGA stores, and 46 other stores), and the 500 stores target for end FY06/20 consists of 250 Don Quijote stores, 150 MEGA stores, and 100 other stores, for an increase of 194 stores, primarily of the Don Quijote and MEGA format.

The company plans to increase the number of Don Quijote and MEGA stores from a combined 260 stores at end FY06/15 to 400 stores at end FY06/20, an increase of 140 stores. During the first half of the plan, openings will likely consist of about 60% Don Quijote and 40% MEGA stores, whereas in the latter half of the plan, openings will likely consist of about 40% Don Quijote and 60% MEGA stores.

Store count at quarter-end and quarterly new store openings (left), breakdown of new store openings (right)

New stores, Scrap 20 360 368 400 348 354 19 & build, Solution 341 20 stores 319 322 306 311 15 291 295 18 New stores in 278 280 283 286 19 266 11 10 10 properties with pre- 249 252 255 9 16 10 235 236 242 243 existing fixtures 220 221 226 223 228 229 12 9 7 218 218 218 6 6 6 6 6 14 4 9 4 4 5 3 6 3 6 3 200 2 2 5 5 2 2 12 1 4 1 10 10 10 9 0 8 -1 -1 -1 -1 -1 -1 -1 6 6 6 6 -2 -2 -2 -5 -3 -3 -3 -3 -3 -3 -3 -3 6 -5 10 4 -10 0 7 6 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 2 4 4 5 4 5 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 New store openings Store closures Store count (right axis) FY06/16 FY06/17 Source: Shared Research, based on company data Store openings in Japan’s three major metropolitan areas have settled; first half of plan to concentrate on regional openings The company developed properties in prime locations throughout the Greater Tokyo Area from 2011 to 2012. Don Quijote made preparations to tap demand from overseas tourists via measures such as acquiring licenses and adding Wi-Fi to its stores from 2013 to 2014, primarily in the three major metropolitan areas. In 2014–2015, as property prices were expected to rise in the Greater Tokyo Area, and the company’s store network in Japan’s three major metropolitan areas had developed to a certain extent, the company shifted its focus to regional development. Results were already seen in FY06/15. There is not likely to be any change in this strategy during FY06/16 and FY06/17, but because there were a large number of vacant buildings suiting the company’s conditions in the Greater Tokyo Area, it has also increased the number of stores operating there. In August 2016, the company opened a store on the island of Miyakojima, Okinawa Prefecture, its first store on one of the outlying islands of Japan, so it expects to capture local consumer demand.

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New store opening area breakdown (left) and number of stores by area (right)

Three major metropolitan areas Others Three major metropolitan areas Others 20 160 140 15

120 10 100

5 80

- 60 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/08 FY06/10 FY06/12 FY06/14 FY06/16

Existing store growth and operating profit margin by geographic region

10% Comparable store sales growth Don Quijote and Nagasakiya (comparable stores) 10% 9% 8% Department stores, supermarkets (all stores) Kyushu and 8% Okinawa 6% 7% Hokkaido 6% 4% Hokuriku and 5% Koshinetsu 2% 4% 3% 0% Kanto Tohoku 2% Chugoku Tokai -2% 1% Hokkaido Tohoku Hokuriku Kanto Tokai Kinki Chugoku Kyushu and Kinki Shikoku and and 0% OPM Shikoku Okinawa 4% 5% 6% 7% 8% 9% 10% Source: Shared Research based on company data Note: “Three major metropolitan areas” refer to Tokyo, Saitama, Kanagawa, Chiba, Aichi, Kyoto, Osaka, and Hyogo Prefectures.

It generally takes between 18 months and three years to open a new store, a process that includes property development, contracts, and store openings. The company used to open Don Quijote stores in busy shopping areas and other prime locations.

Company position on new store types Don Quijote identified accelerating the creation new store types as one of the main challenges in FY06/16. In Target 2020, the company aims to expand its current network of 46 stores (stores excluding Don Quijote and MEGA Don Quijote, which include 14 Picasso, 4 Kyo Yasu Do, 12 DOit, 2 Nagasakiya, and 14 overseas stores) to a total of 100 stores. Although there are no detailed plans regarding this expansion, according to the company about half of these new openings could consist of Kyo Yasu Do stores, which target small areas.

Overview of new store openings in FY06/17 and outlook for FY06/18 In FY06/16, the company opened stores in a number of new formats, including a newly remodeled Kyo Yasu Do store (in July 2015), an Eki Donki stores (in October 2015), a DOit WithReHome store (in December 2015), a City DoIt! store (in May 2016), a Sora Donki store (in June 2016). Even within its existing MEGA store format, the company experimented with remodeling a store formerly occupied by a GMS retailer that had overbuilt, moving into a location in Ayase (Kanagawa) formerly occupied by Daiei in December 2015. Using that as a template, the company subsequently remodeled and opened two more stores, one in Tachikawa in February 2016 (this one also formerly occupied by Daiei) then another in Omori-Sanno in June 2016 (this one previously occupied by a Daishin Department Store).

The company continued fine-tuning these test-stores and experimented with more new formats in FY06/17. In August 2016, the company opened a store on the island of Miyakojima in Okinawa Prefecture. This is the first domestic store the company has opened on a secluded resort island. The store serves an area with only about 50,000 people, but the company believes it can generate sales comparable to its other stores that serve areas with 300,000 people. Logistics will likely be challenging, but we will be watching closely to see if the new store's commanding position in this small island market helps it improve profitability.

In April 2017, the company opened a store combined with a hotel like the Korakuen store in a prime location outside a railway station, targeting demand from overseas tourists, and relocated and expanded the Shibuya store in May. The former Shibuya store opened in December 1999 as the company’s first urban multi-store, and was operated to match location characteristics,

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including actively conducting events related to Holloween and Christmas. The floor space of the new store is significantly larger at about 5,500sqm, and it has been evolving in various aspects as an “innovative flagship store”, as the store: a) is Don Quijote’s first store to offer authentic fresh foods (discounted prices) in busy shopping areas; b) responds to demand from inbound tourists in the Shibuya region overall, an area where supply to meet such demand is lacking; c) contributes to regional revitalization; d) develops and offers “mobile foods,” which customers are able to take out (from July). The flagship MEGA Don Quijote Shibuya is also one of the stores opened in properties with pre-existing fixtures.

Recent openings of stores with new formats

FY06/15 Oct. 2014 Shin Kyo Yasu Do Post-convenience Small area, led by HQ; offering low prices via t horough cost store cutting Nov. 2014 MEGA Fukaebashi Synergies from 1st floor (food) and 2nd floor (non-food) layout attract customers despite targeting different segments Jan. 2015 Tokyo Central Costa Mesa US expansion Strategic store to expand business using the "Only One" concept Apr. 2015 DOit Pro Post-HC Store for professionals; candidate for format change from small- scale Don Quijote stores FY06/16 Oct. 2015 Eki Donki Antenna shop First store in a train station Nov. 2015 Halloween Town Yotteka NIGHT For holiday demand Temporary shop Dec. 2015 DOit W it hReHome Post-HC Targeted at reform market; May roll out shop-in-shops Dec. 2015 MEGA Ayase Post-GMS Experimental, repurposed GMS May. 2016 Cit y DOit ! Post-HC Office supplies; equipped with out-of-store sales team Jun. 2016 MEGA Omori-Sanno Post-GMS Opened on the former site of Daishin Department Store Jun. 2016 SORA DONKI Antenna shop First store in an airport FY06/17 Aug. 2016 Don Quijot e Miyakojima First st ore on a resort island; aims t o monopolize local demand Second store within a hotel, following Korakuen store; Apr. 2017 Don Quijote Abeno-tennoji expecting in-bound tourist demand as well. Renovated flagship store; relocated and expanded the May 2017 MEGA Don Quijote Shibuya company's first cit y-t ype mult iple floor st ore in Shibuya Source: Shared Research, based on company data Leveraging diverse retail formats as industry peers scale back Don Quijote’s strength lies in the diversity of its retail formats that allows the company to operate stores in various different locations. Don Quijote has taken advantage of acceleration in store closings by GMS, large-volume electronics retailers, and other large retailers that used to be expanding but are now retrenching. The company believes these store closings will continue in FY06/17, as the domestic market remains over-stored even as the overall volume of sales by brick-and-mortar stores continues to decline, hurt by not only unfavorable demographics but also rising sales through internet shopping websites. Don Quijote is benefiting further from the steady stream of location proposals that are now heading its way in response to its aggressive store opening plans, its past track record, and its willingness to consider properties that have been vacated by other large retailers. In choosing such properties, the company naturally ensures that they are financially viable and that they do not compete with other Don Quijote stores.

While the company believes there may be still too many look-alike stores in Japan, management sees plenty of room to open up stores as it considers the company’s business model to be quite unique. Store opening plans currently call for 30+ store openings in FY06/17. With help from a steady stream of new openings and lower costs by making use of spaces previously occupied by other retailers, the company aims to have a total of 500 stores in operation by 2020 under its medium-term business plan (Vision 2020). The fact that Don Quijote opened 40 stores in FY06/16 (including nine in the month of April) tells us it has the internal management resources to open a lot of new stores. The company opened 32 new stores in FY06/17, exceeding its initial store opening target of around 30 again. We expect the company to exceed its FY06/18 target of 30 new stores as well.

New Store Formats The company, in addition to opening stores applying current formats to existing buildings, is also developing new formats. Experimental stores include three Kyo Yasu Do outlets that cater to low-income earners. While these stores have a certain number of customers, their earnings do not appear to be stable. The company is using a top-down, standardized approach to manage these outlets and plans to continue working to fine-tune operations going forward.

Kyo Yasu Do: Top-down type low cost, low risk discount supermarkets Kyo Yasu Do stores were opened on an experimental level, but starting with the July 2015 remodeling of the Umejima Station store in Tokyo, the brand has been revamped as a discount supermarket, targeting customers in small areas looking for low-price

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products. The new Kyo Yasu Do format should benefit from an expected increase in demand for small stores accessible by bicycle that will accompany the aging and shrinking population of Japan, and an expected decrease in purchasing power due to higher insurance rates and taxes. This target audience differs from that targeted by traditional Don Quijote stores, and there is ample room for growth. Another notable feature is its top-down chain store model, operating under head office management.

According to the company, it seeks to create a store format that can achieve steady profits by working to keep operating costs low, despite a low-margin product lineup consisting primarily of foods and daily necessities. For example, to reduce shelf stocking time, shelves will be stocked by simply cutting the boxes that goods are shipped in, much like placing a box on a shelf, rather than manually stocking individual goods. Kyo Yasu Do will also reduce personnel costs by not operating late at night. Further, the company will adopt top-down chain store model for all stores, instead of allowing individual stores to adopt their own business models.

Although the Umejima Station store is a remodeled store, a new store opened in Fussa City, Tokyo, in September 2015 and another in Matsubushi (Saitama Prefecture) in November 2015. The company will continue to make improvements and refinements to this new format, aiming to create stores that are suited to each region. Areas planned for store openings are Tokyo and the three surrounding prefectures. Since the customer category differs from Don Quijote stores and the target areas are small, if Kyo Yasu Do is a success, store openings may accelerate and boost earnings.

However, the format is still in its infancy, and success is not guaranteed. Conversely, if it is a success, the number of new stores may grow past the initial target of 50 stores. If annual sales per store are JPY200mn, supposing it eventually achieves a scale on par with Don Quijote (500 stores), this would equate to annual sales for Kyo Yasu Do of JPY100.0bn. Given the company’s principle of being realistic and not being afraid to close stores, Shared Research views this initiative as an area of interest.

Gearing up to expand in home improvement market Although the home improvement market is contracting, the company believes that demand for home-oriented goods will increase, and is seeking ways to meet this shift in demand. Targeting the “post-home improvement store” market, many trial-and-error tests are under way. The company’s home improvement format, DOit, is looking to revive earnings while developing new formats, DOit Pro (April 2015) and DOit WithReHome (December 2015). After seeing sales plunge in the wake of the 2014 consumption tax hike, the company is seeking to diversify its revenue source and become less vulnerable to weather conditions at the same time. In May 2016 (Q4), the company opened City DoIt!, which sells office supplies, in Hinodecho, Kanagawa Prefecture.

Already DOit Pro has secured regular customers. But DOit WithReHome does not seem to be able to produce instant results due to its business structure. Even so, these two stores are enhancing the name recognition of other DOit stores. Shared Research will watch how this will play out. The success of the first DOit Pro store is a good example of how the company can improve the profitability of small-scale Don Quijote stores, and may also be a way for it to improve capital efficiency and reach the 15% ROE target set out in its medium-term business plan.

As the company continues to experiment with new formats in this area, investors will want to keep an especially close eye on 1) the degree to which the company improves business performance by converting Don Quijote stores to DOit Pro stores, 2) the rollout of DOit WithReHome shop-in-shops, and 3) how successful the outside sales team of City DoIt! is with growing its office products business.

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Trends it sales and earnings at DOit

12,000 10,781 18 10,544 10,385 9,893 10,175 10,124 9,924 9,542 9,494 10,000 8,942 9,171 15 8,267 8,291 8,112 8,240 8,468 8,000 12

6,000 9

4,000 6

2,000 968 3 540 529 634 569 452 552 206 231 154 268 125 333 233 390 28 0 0 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 (JPYmn) Sales Operating profit Store count (right axis) OPM (right axis, %) Source: Shared Research based on company data DOit Pro: With regular customer base, promising new format to replace small Don Quijote stores DOit Pro stores are designed to be post-home improvement store format stores, but they also offer the company a good way to change the format of some of its smaller (roughly 1,000sqm) Don Quijote stores. The first DOit Pro store was opened in Koganei Koen in April 2015, where the company had previously operated a small Don Quijote store (3,504sqm with a sales floor area of 1,428sqm). Following the makeover into a DOit Pro store, the location saw an eight-fold jump operating profit over the previous year. This gave the company the idea that DOit Pro would also be a good format to use when it came time to change the format from some of its smaller and older Don Quijote stores, and would greatly assist the company's efforts to raise ROE to 15%.

The DOit Pro format provides products and services for a target demographic of professional users in the construction and electrical installation industries. In-store flow is designed to allow quick selection of materials and equipment. The format was created for industry customers who need to find shopping items within a short period of time so that they could quickly load them on a truck even in poor weather. The first store has already established a loyal customer base and achieved profitability three months after opening. Based on the sharp jump in earnings following the makeover into a DOit Pro store, the company has deemed the transition a success.

DOit WithReHome The company's first DOit WithReHome store was opened in December 2015. The store is a hands-on showroom where three types of proposals are made: working with professionals, pure DIY, and reform by professionals. Construction methods, time, and cost are customized, and customers can select a plan that fits their needs. Management has high hopes for the new format, considering it a major innovation in an area where the company previously had no presence. The top store in Shimoochiai, Shinjuku (Tokyo) has a sales floor area of 984sqm, suggesting potential for new-store openings. The MEGA store in Omori-Sanno, which opened in June 2016 on the former site of a Daishin Department Store, will also be of interest as the site of one of the DOit WithReHome in-shops that the company plans to replicate elsewhere in the future.

City DoIt! City DoIt! has its own outside sales staff for soliciting business from small customers, and the 60-70% of sales derived in this manner have been strong enough to cause the company to hire more people. According to the Yano Research Institute, the domestic stationary and office supply market is worth about JPY460-470bn per year, with sales of office supplies coming to around JPY200-220bn, stationary products JPY160-170bn, and writing instruments JPY80-100bn. Making use its strengths that are not available through internet/catalogue sales, City DoIt! aims to increase its market share by building up its client network and increasing repeat business.

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City DoIt! Hinodecho store, DOit PRO Koganei-koen store, DOit WithReHome Shinjuku Shimoochiai store

Jonetsu Shokunin The company opened its first Jonetsu Shokunin store as a shop-in-shop in October 2014 and the group has since established a total of eight stores. Jonetsu Shokunin was designed to be not just another store that offered work clothes, but a store that offered fashionable work attire and, toward this end, also offers accessories and provides advice on how to accessorize and coordinate outfits. The company's first stand-alone Jonetsu Shokunin store was opened in April 216 in the Kasai area of Edogawa Ward (Tokyo).

Eki Donki Eki Donki is the company's new format designed for locations inside of train stations. The first Eki Donki was opened inside of the Osaka Station building in October 2015. Being located inside a station building, there are many safety regulations that force the company to redesign some of its traditional in-store trademarks, such as "compression displays" and POP displays, but the location also makes it a good antenna shop.

SORADONKI The company opened its first SORADONKI store inside of Haneda Airport in June 2016. At 107sqm, it is the smallest store the group operates. It serves as an antenna shop.

Jonetsu Shokunin store, Eki Donki store, and SORADONKI store

Source: Company photos

Overseas: expectations for new Tokyo Central store format Don Quijote is considering further expansion in the US and is focusing on the development of the new Tokyo Central store format. On January 22, 2015, it opened one of these stores in Costa Mesa, California. The store features a point-of-purchase adverting system developed in its Don Quijote stores. About a third of the California store is devoted to prepared food. This is in line with the company’s “Only One” concept, under which the retailer seeks to create original stores.

A breakdown of sales by product is shown in the following table. Compared to the conventional Marukai stores, the new store format carries more perishables and prepared foods. According to the company, customers increased 30–40% after the format change. Customers can see food being prepared and apparently appreciate being able to watch the process “live.”

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Marukai and Tokyo Central product sales composition

Non-food TOKYO CENTRAL MARUKAI items

Non-food items

Prepared Prepared side side dishes dishes General food

General food

Perishables Perishables

Source: Shared Research based on company data

There are still only four Tokyo Central stores (as of August 2016), but the company plans to convert an existing Marukai store with a kitchen into a Tokyo Central store. Starting with the second store, the stores and their product lineups were prepared while considering the successes and failures of the Costa Mesa store. The company plans to build a base for developing many stores using this trial-and-error process.

Although not included in the target of 100 new stores, the company is also developing a store format for inside shopping centers, which it will incorporate into future store openings. It plans to avoid large shopping centers in favor of medium and small centers with food courts, where a new Tokyo Central store could easily attract attention.

500 stores achievable with moderate rollout; accelerated acquisition of existing buildings possible during latter half of plan In Shared Research’s view, a moderate rollout for annual new store openings is about 10% of the total number of stores as of the end of the previous year, and at this rate, the number of stores at end FY06/20 will be slightly under 500 stores. Excluding availability of locations, Shared Research sees 500 stores as realistic. Additionally, due to consolidation of retail companies and restructuring, it is likely that the company will have greater opportunities to acquire existing properties. Although no such plans are factored into the company’s earnings forecast, we think an increase in the number of stores by small-scale M&A is a possibility

Policy 2020 Don Quijote’s corporate philosophy is to place customers first. Based on this principle, Policy 2020 seeks to develop organization, personnel, products, store formats, and stores.

Roadmap 2020 Roadmap 2020 comprises the required steps to achieve the goals of Vision 2020, spanning FY06/16–FY06/20. The foundation calls for adherence to placing customers first. In an environment where the company’s unique and competitive store network is expanding and the winners of capturing demand from inbound tourists will become increasingly apparent, it will implement specific steps in the themes outlined in the graphic below.

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Roadmap 2020

2015 2016 2017 2018 2019 2020

Unique and competitive store network

Disparity in capturing overseas tourist demand widens

Organizational restructuring and developing next-generation personnel

Stronger product revision and private brand development

Development of new store formats

Competition from consumption tax

Strict adherence to placing customers first

Source: Shared Research based on company data Internal restructuring Response to concerns The company plans to tackle points of concern head on. The company cited cost increases due to inflation as one source of concern and said that it was preparing some measures to deal with rising product prices, rents, construction costs and personnel expenses, and had a variety of initiatives planned.

Regarding “Organizational restructuring and developing next-generation personnel” as outlined in Roadmap 2020, Don Quijote continue to create an organization that places the heaviest emphasis on strengthening operations at the store level. The company has a five-year employment revision plan. In Phase 1, individuals would take stock of any meaningless or useless actions and improve their own efficiency. In Phase 2 and beyond, in order to prevent the company’s staff from being dominated by older workers, Don Quijote is considering plans to hire more staff with strong customer affinity and creating career advancement plans that allow self-expression. The company said that improved efficiency through such productivity enhancing measures would enable it to absorb cost increases.

Business Restructuring The company has undergone two major reforms in the past. The first organizational reform in October 2015 centered on merchandise, moving from a seven-segment structure to a system with three categories and 160 intermediate classifications, aiming to a) look for individual stores to adopt their own business models, b) be more quickly in tune with changing trends, c) focus on high depth and narrow breadth in merchandise development, and d) combine small-scale and large-scale advantages. The organizational reform in April 2017 is centered on stores, moving from an 18-branch structure to a system of six sales departments and 52 branches, aiming to a) look for individual stores to adopt their own business models, b) foster next-gen management teams, c) conduct a round of organizational consolidation, and d) boost the motivation of young executive candidates.

The company finds that their robust sales, which continued even after the consumption tax hike, can be attributable to factors including the successful combination of organizational, personnel, and merchandise development. This round of organizational reform centered on stores is based on the logic that expanding and maximizing "the full wisdom of the company's employees" will boost the physical fitness of the company. We will be paying attention to see if this serves as a further catalyst for growth.

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1) Product development: Changes in departmental organization

Old categories under seven departments New classification at Merchadise Development Headquarters Number of categories Elect ric appliances ■■■■ ■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■ Food and liquor Food-related Household goods ■■■■■■ ■■■■■■■■■■■■■■■■■■■■■■■■ Consumables ■■■■ ■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■ Trendy and select Fashion, electric appliances, brand-name goods Foods ■■■■■■■■ ■■■■■■■■■■■■■■■■■■■■■■■■ Brand-name goods ■■■ Consumables, hairdressing goods, healthy food, gardening goods, ■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■ Lifest yle Apparel ■■ interior goods, car accessories, toys and hobby items, other ■■■■■■■■■■■■■■■■■■■■■■■■■■■■■ Toys ■■■■

Change in product classification: Duties for spot procurement had been delegated from headquarters to merchandising planners at the store level (1,800 planners) in Q2 FY06/16. At the same time, the product classification system has been changed from seven primary and about 30 intermediate categories to three primary and roughly 160 intermediate categories. At the store level, managers are assigned to each category (multiple categories assigned depending on store size). The more specific classification is linked to the delegation of responsibilities for spot procurement. Staff can negotiate directly with suppliers via social networking sites.

Although there appeared to be initial confusion because of personnel who were not experienced in procurement, follow up from experienced staff appears to have mostly alleviated the issues. The company is pursuing both small- and large-scale merits to improve earnings.

Spot procurement was previously delegated to stores, with product strategy and merchandising handled at headquarters. However, many aspects of the two functions overlapped, making responsibilities and personnel evaluations complicated. To simplify internal processes, all functions were delegated to stores (“small-scale merits”). The company looks to continue pursuing large-scale merits for the roughly 60% of goods that it carries on a regular basis, leveraging relationships with suppliers to enjoy scale merits in spot procurement, while also seeing small-scale merits by giving stores procurement responsibilities.

While continuing to learn about operations through OJT, store staff begin to manage multiple product areas as they gain skills, and are eventually given more responsibilities. Sometimes responsibilities are given to temporary, part-time staff, ensuring effective utilization of personnel. The company was replacing the system, which had been in existence since 1993. Under the new system, the company gives more responsibilities to part-time workers to reduce the workload on permanent employees, raises the productivity of part timers, and meets current needs.

2) Organizational reform centered on stores

Spot it ems [40% of t otal] Staple items [60% of total] Three formats Six sales 52 branches MD and SPA Development HQs Spot products Store layout for 160 product categories Store Unique purchase by Choose staple item store East Japan Sales HQs Branch 1 Store each store for its own trade area layout for each trade area Store

Store Pure Unique purchase by Choose staple item store Central Japan Sales Branch 1 Store Don Quijote each store for its own trade area layout for each trade area Store

Store Unique purchase by Choose staple item store West Japan Sales HQs Branch 1 Store each store for its own trade area layout for each trade area Store

Store Unique purchase by Choose staple item store East Japan Sales HQs Branch 1 Store each store for its own trade area layout for each trade area New MEGA Store Don Quijote Store Unique purchase by Choose staple item store West Japan Sales HQs Branch 1 Store each store for its own trade area layout for each trade area Store

Store Unique purchase by Choose staple item store MEGA East Japan Sales Sales Branch 1 Store Don Quijote each store for its own trade area layout for each trade area Store

Source: Shared Research based on company data

Adherence to governance codes The company would of course strictly adhere to governance codes. Ohara said the true nature of governance was to manage in a way that maximizes the happiness of every stakeholder in what he termed (Gross Stakeholder Happiness or GHS).

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Business

Business description Main product categories

Reflecting its widening customer base, Don Quijote’s product mix has been changing in recent years (please refer to the table below) and evolving away from its original focus on variety goods and clothing.

Consolidated sales

FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 (JPYmn) FY FY FY FY FY FY FY (JPYmn) 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H Consolidated sales 507,661 540,255 568,377 612,424 683,981 759,592 828,798 Consolidated sales 289,644 278,733 303,322 309,102 342,224 341,757 384,445 375,147 417,694 411,104 DQHD and Don Quijote 346,559 368,109 394,261 423,232 480,838 544,809 609,414 DQHD and Don Quijote 201,796 192,465 211,643 211,589 243,856 236,982 279,751 265,058 311,673 297,741 DOit 19,435 20,719 20,048 19,879 17,438 16,403 16,708 DOit 10,124 9,924 10,385 9,494 9,171 8,267 8,291 8,112 8,240 8,468 Nagasakiya 124,377 135,816 135,683 143,449 150,639 157,101 165,700 Nagasakiya 69,553 66,130 71,287 72,162 77,149 73,490 79,453 77,648 84,010 81,690 Don Quijote USA (US) 15,226 13,186 13,985 17,341 19,676 21,055 18,703 Don Quijote USA (US) 6,434 7,551 8,186 9,155 9,011 10,665 10,452 10,603 8,876 9,827 Marukai Corp. (US) - - - 7,845 16,773 19,652 17,933 Marukai Corp. (US) - - 7,845 7,470 9,303 9,487 10,165 8,246 9,687 Japan Commercial Establishment 12,779 13,923 14,373 14,037 13,303 13,347 12,894 Japan Commercial Establishment 6,953 7,420 7,360 6,677 6,741 6,562 6,674 6,673 6,424 6,470 Accretive 581 2,731 2,888 2,967 3,800 4,834 1,698 Accretive 1,444 1,444 1,491 1,476 1,731 2,069 2,246 2,588 2,918 -1,220 Japan Asset Marketing - - 37 6,309 14,228 16,640 18,109 Japan Asset Marketing - 37 879 5,430 6,865 7,363 8,044 8,596 8,889 9,220 Operating profit 25,336 29,320 32,369 34,292 39,103 43,185 46,185 Operating profit 18,673 13,696 20,504 13,788 23,411 15,692 25,571 17,614 26,343 19,842 DQHD and Don Quijote 19,685 21,144 23,476 21,168 25,546 28,353 31,504 DQHD and Don Quijote 13,702 9,774 14,140 7,028 18,208 7,338 21,696 6,657 20,800 10,704 DOit 735 385 393 1,203 566 1,004 418 DOit 268 125 634 569 333 233 452 552 390 28 Nagasakiya 748 1,542 1,690 2,787 3,984 3,923 4,814 Nagasakiya 1,454 236 1,771 1,016 2,215 1,769 2,405 1,518 3,166 1,648 Don Quijote USA (US) 754 726 778 1,034 1,198 1,497 724 Don Quijote USA (US) 331 447 425 609 505 693 603 894 371 353 Marukai Corp. (US) - - - 415 449 784 579 Marukai Corp. (US) - - 415 167 282 216 568 212 367 Japan Commercial Establishment 548 1,166 1,049 1,067 2,085 2,464 3,054 Japan Commercial Establishment 380 669 524 543 1,079 1,006 1,132 1,332 1,466 1,588 Accretive 145 874 999 1,170 1,580 1,911 705 Accretive 424 575 660 510 792 788 1,007 904 937 -232 Japan Asset Marketing - - -220 2,523 5,843 6,970 7,395 Japan Asset Marketing - -220 291 2,232 2,844 2,999 3,362 3,608 3,806 3,589 YoY 20.3% 15.7% 10.4% 5.9% 14.0% 10.4% 6.9% YoY 8.5% 13.2% 9.8% 0.7% 14.2% 13.8% 9.2% 12.2% 3.0% 12.6% DQHD and Don Quijote 14.4% 7.4% 11.0% -9.8% 20.7% 11.0% 11.1% DQHD and Don Quijote 8.1% 15.4% 3.2% -28.1% 28.8% 4.4% 19.2% -9.3% -4.1% 60.8% DOit -51.3% -47.6% 2.1% 206.1% -53.0% 77.4% -58.4% DOit 16.0% -18.8% 136.6% 355.2% -47.5% -59.1% 35.7% 136.9% -13.7% -94.9% Nagasakiya - 106.1% 9.6% 64.9% 42.9% -1.5% 22.7% Nagasakiya 28.6% -42.6% 21.8% 330.5% 25.1% 74.1% 8.6% -14.2% 31.6% 8.6% Don Quijote USA (US) 5.0% -3.7% 7.2% 32.9% 15.9% 25.0% -51.6% Don Quijote USA (US) 14.5% 2.3% 28.4% 36.2% 18.8% 13.8% 19.4% 29.0% -38.5% -60.5% Marukai Corp. (US) - - - - 8.2% 74.6% -26.1% Marukai Corp. (US) ------32.0% 29.3% 101.4% -1.9% -35.4% OPM 5.0% 5.4% 5.7% 5.6% 5.7% 5.7% 5.6% OPM 6.4% 4.9% 6.8% 4.5% 6.8% 4.6% 6.7% 4.7% 6.3% 4.8% DQHD and Don Quijote 5.7% 5.7% 6.0% 5.0% 5.3% 5.2% 5.2% DQHD and Don Quijote 6.8% 5.1% 6.7% 3.3% 7.5% 3.1% 7.8% 2.5% 6.7% 3.6% DOit 3.8% 1.9% 2.0% 6.1% 3.2% 6.1% 2.5% DOit 2.6% 1.3% 6.1% 6.0% 3.6% 2.8% 5.5% 6.8% 4.7% 0.3% Nagasakiya 0.6% 1.1% 1.2% 1.9% 2.6% 2.5% 2.9% Nagasakiya 2.1% 0.4% 2.5% 1.4% 2.9% 2.4% 3.0% 2.0% 3.8% 2.0% Don Quijote USA (US) 5.0% 5.5% 5.6% 6.0% 6.1% 7.1% 3.9% Don Quijote USA (US) 5.1% 5.9% 5.2% 6.7% 5.6% 6.5% 5.8% 8.4% 4.2% 3.6% Marukai Corp. (US) - - - 5.3% 2.7% 4.0% 3.2% Marukai Corp. (US) - - - 5.3% 2.2% 3.0% 2.3% 5.6% 2.6% 3.8% Retail business Retail business Retail business 487,875 519,891 546,930 590,076 659,931 733,334 801,802 Retail business 278,988 267,942 292,323 297,753 327,361 332,570 371,409 361,925 403,715 398,087 Electric appliances 56,210 56,049 55,773 54,469 56,842 60,978 68,912 Electric appliances 29,043 26,730 28,095 26,374 29,346 27,496 31,213 29,765 35,490 33,422 Household goods 108,691 117,420 125,549 136,203 137,260 157,288 183,505 Household goods 64,117 61,432 68,861 67,342 73,530 63,730 78,335 78,953 87,782 95,723 Foods 143,569 154,385 161,871 180,619 208,541 242,215 274,553 Foods 80,440 81,431 85,721 94,898 101,616 106,925 118,451 123,764 133,985 140,568 Watches & fashion merchandise 107,833 119,246 130,476 132,395 147,462 154,183 158,451 Watches & fashion merchandise 67,825 62,651 69,281 63,114 73,164 74,298 80,290 73,893 85,796 72,655 Sports & leisure goods 29,564 30,728 33,022 34,588 47,310 51,722 53,596 Sports & leisure goods 17,790 15,232 18,666 15,922 19,835 27,475 29,899 21,823 30,444 23,152 DIY goods 16,668 17,798 17,193 17,794 16,535 15,493 15,814 DIY goods 8,694 8,499 9,040 8,754 8,718 7,817 7,835 7,658 7,790 8,024 Overseas 15,226 12,940 13,731 24,645 35,591 39,842 35,925 Overseas 6,314 7,417 8,032 16,613 16,113 19,478 19,500 20,342 16,722 19,203 Others 10,113 11,327 9,314 9,364 10,390 11,612 11,046 Others 4,765 4,549 4,626 4,738 5,040 5,350 5,886 5,726 5,656 5,390 YoY 17.2% 6.6% 5.2% 7.9% 11.8% 11.1% 9.3% YoY 4.6% 5.9% 4.7% 10.9% 12.8% 10.6% 12.3% 9.8% 8.6% 9.6% Electric appliances 10.1% -0.3% -0.5% -2.3% 4.5% 7.3% 13.0% Electric appliances -1.6% 0.8% -3.3% -1.3% 4.5% 4.3% 6.4% 8.3% 13.7% 12.3% Household goods 16.8% 8.0% 6.9% 8.5% 13.0% 14.6% 16.7% Household goods 5.4% 8.6% 7.4% 9.6% 6.8% -5.4% 6.5% 23.9% 12.1% 21.2% Foods 25.6% 7.5% 4.8% 11.6% 15.5% 16.1% 13.4% Foods 4.7% 4.9% 6.6% 16.5% 18.5% 12.7% 16.6% 15.7% 13.1% 13.6% Watches & fashion merchandise 18.4% 10.6% 9.4% 1.5% 7.0% 4.6% 2.8% Watches & fashion merchandise 10.3% 8.5% 2.1% 0.7% 5.6% 17.7% 9.7% -0.5% 6.9% -1.7% Sports & leisure goods 12.7% 3.9% 7.5% 4.7% 6.4% 9.3% 3.6% Sports & leisure goods 6.4% 8.7% 4.9% 4.5% 6.3% 72.6% 50.7% -20.6% 1.8% 6.1% DIY goods 4.0% 6.8% -3.4% 3.5% -7.1% -6.3% 2.1% DIY goods -4.4% -2.4% 4.0% 3.0% -3.6% -10.7% -10.1% -2.0% -0.6% 4.8% Overseas -10.3% -15.0% 6.1% 79.5% 44.4% 11.9% -9.8% Overseas 1.6% 10.3% 27.2% 124.0% 100.6% 17.2% 21.0% 4.4% -14.2% -5.6% Others 36.4% 12.0% -17.8% 0.5% 6.4% 11.8% -4.9% Others -18.8% -16.7% -2.9% 4.2% 8.9% 12.9% 16.8% 7.0% -3.9% -5.9% % of total sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% % of total sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Electric appliances 11.1% 10.4% 9.8% 8.9% 8.3% 8.0% 8.3% Electric appliances 10.0% 9.6% 9.3% 8.5% 8.6% 8.0% 8.1% 7.9% 8.5% 8.1% Household goods 21.4% 21.7% 22.1% 22.2% 20.1% 20.7% 22.1% Household goods 22.1% 22.0% 22.7% 21.8% 21.5% 18.6% 20.4% 21.0% 21.0% 23.3% Foods 28.3% 28.6% 28.5% 29.5% 30.5% 31.9% 33.1% Foods 27.8% 29.2% 28.3% 30.7% 29.7% 31.3% 30.8% 33.0% 32.1% 34.2% Watches & fashion merchandise 21.2% 22.1% 23.0% 21.6% 21.6% 20.3% 19.1% Watches & fashion merchandise 23.4% 22.5% 22.8% 20.4% 21.4% 21.7% 20.9% 19.7% 20.5% 17.7% Sports & leisure goods 5.8% 5.7% 5.8% 5.6% 6.9% 6.8% 6.5% Sports & leisure goods 6.1% 5.5% 6.2% 5.2% 5.8% 8.0% 7.8% 5.8% 7.3% 5.6% DIY goods 3.3% 3.3% 3.0% 2.9% 2.4% 2.0% 1.9% DIY goods 3.0% 3.0% 3.0% 2.8% 2.5% 2.3% 2.0% 2.0% 1.9% 2.0% Overseas 3.0% 2.4% 2.4% 4.0% 5.2% 5.2% 4.3% Overseas 2.2% 2.7% 2.6% 5.4% 4.7% 5.7% 5.1% 5.4% 4.0% 4.7% Others 2.0% 2.1% 1.6% 1.5% 1.5% 1.5% 1.3% Others 1.6% 1.6% 1.5% 1.5% 1.5% 1.6% 1.5% 1.5% 1.4% 1.3% Operating profit 19,821 22,008 25,327 24,381 21,417 22,746 23,693 Operating profit 14,779 10,548 17,055 7,326 14,954 6,463 15,392 7,354 14,320 9,373 DQHD and Don Quijote 19,685 21,144 23,476 21,168 25,546 28,353 31,504 DQHD and Don Quijote 13,702 9,774 14,140 7,028 18,208 7,338 21,696 6,657 20,800 10,704 DOit 735 385 393 1,203 566 1,004 418 DOit 268 125 634 569 333 233 452 552 390 28 Nagasakiya 748 1,542 1,690 2,787 3,984 3,923 4,814 Nagasakiya 1,454 236 1,771 1,016 2,215 1,769 2,405 1,518 3,166 1,648 Don Quijote USA (US) 754 726 778 1,034 1,198 1,497 724 Don Quijote USA (US) 331 447 425 609 505 693 603 894 371 353 Marukai Corp. (US) 415 449 784 579 Marukai Corp. (US) 415 167 282 216 568 212 367 YoY 21.7% 11.0% 15.1% -3.7% -12.2% 6.2% 4.2% YoY 14.4% 16.0% 15.4% -30.5% -12.3% -11.8% 2.9% 13.8% -7.0% 27.5% DQHD and Don Quijote 14.4% 7.4% 11.0% -9.8% 20.7% 11.0% 11.1% DQHD and Don Quijote 8.1% 15.4% 3.2% -28.1% 28.8% 4.4% 19.2% -9.3% -4.1% 60.8% DOit -51.3% -47.6% 2.1% 206.1% -53.0% 77.4% -58.4% DOit 16.0% -18.8% 136.6% 355.2% -47.5% -59.1% 35.7% 136.9% -13.7% -94.9% Nagasakiya - 106.1% 9.6% 64.9% 42.9% -1.5% 22.7% Nagasakiya 28.6% -42.6% 21.8% 330.5% 25.1% 74.1% 8.6% -14.2% 31.6% 8.6% Don Quijote USA (US) 5.0% -3.7% 7.2% 32.9% 15.9% 25.0% -51.6% Don Quijote USA (US) 14.5% 2.3% 28.4% 36.2% 18.8% 13.8% 19.4% 29.0% -38.5% -60.5% Marukai Corp. (US) - - - - 8.2% 74.6% -26.1% Marukai Corp. (US) ------32.0% 29.3% 101.4% -1.9% -35.4% OPM OPM 5.1% 3.8% 5.6% 2.4% 4.4% 1.9% 4.0% 2.0% 3.4% 2.3% DQHD and Don Quijote 5.7% 5.7% 6.0% 5.0% 5.3% 5.2% 5.2% DQHD and Don Quijote 6.8% 5.1% 6.7% 3.3% 7.5% 3.1% 7.8% 2.5% 6.7% 3.6% DOit 3.8% 1.9% 2.0% 6.1% 3.2% 6.1% 2.5% DOit 2.6% 1.3% 6.1% 6.0% 3.6% 2.8% 5.5% 6.8% 4.7% 0.3% Nagasakiya 0.6% 1.1% 1.2% 1.9% 2.6% 2.5% 2.9% Nagasakiya 2.1% 0.4% 2.5% 1.4% 2.9% 2.4% 3.0% 2.0% 3.8% 2.0% Don Quijote USA (US) 5.0% 5.5% 5.6% 6.0% 6.1% 7.1% 3.9% Don Quijote USA (US) 5.1% 5.9% 5.2% 6.7% 5.6% 6.5% 5.8% 8.4% 4.2% 3.6% Marukai Corp. (US) - - - 5.3% 2.7% 4.0% 3.2% Marukai Corp. (US) - - - 5.3% 2.2% 3.0% 2.3% 5.6% 2.6% 3.8%

Tenant revenue Tenant revenue Revenue 15,669 15,453 16,370 17,092 18,200 19,781 20,559 Revenue 8,154 8,216 8,348 8,744 8,972 9,228 9,737 10,044 10,349 10,210 YoY -0.4% -1.4% 5.9% 4.4% 6.5% 8.7% 3.9% YoY 3.6% 8.4% 2.4% 6.4% 7.5% 5.5% 8.5% 8.8% 6.3% 1.7% Operating profit 4,485 5,710 4,952 6,505 12,714 14,159 16,123 Operating profit 2,792 2,160 2,572 3,933 6,041 6,673 7,129 7,030 8,442 7,681 YoY 3.4% 27.3% -13.3% 31.4% 95.4% 11.4% 13.9% YoY -16.7% -8.4% -7.9% 82.1% 134.9% 69.7% 18.0% 5.3% 18.4% 9.3% OPM 28.6% 37.0% 30.3% 38.1% 69.9% 71.6% 78.4% OPM 34.2% 26.3% 30.8% 45.0% 67.3% 72.3% 73.2% 70.0% 81.6% 75.2%

Other business Other business Sales 4,117 4,911 5,078 5,256 5,850 6,478 6,437 Sales 2,502 2,576 2,651 2,605 2,892 2,958 3,299 3,179 3,629 2,808 YoY 150.3% 19.3% 3.4% 3.5% 11.3% 10.7% -0.6% YoY -0.2% 7.2% 6.0% 1.1% 9.1% 13.6% 14.1% 7.5% 10.0% -11.7% Operating profit 1,174 1,843 2,025 3,540 5,372 6,733 6,395 Operating profit 1,066 959 1,247 2,293 2,604 2,768 3,266 3,467 3,485 2,910 YoY 96.6% 57.0% 9.9% 74.8% 51.8% 25.3% -5.0% YoY -1.3% 25.7% 17.0% 139.1% 108.8% 20.7% 25.4% 25.3% 6.7% -16.1% OPM 28.5% 37.5% 39.9% 67.4% 91.8% 103.9% 99.3% OPM 42.6% 37.2% 47.0% 88.0% 90.0% 93.6% 99.0% 109.1% 96.0% 103.6%

Adjustments to operating profit -144 -241 65 -134 -400 -453 -26 Adjustments to operating profit 37 28 -370 236 -187 -213 -216 -237 95 -121 Source: Shared Research based on company data Note: Note: Product classifications changed starting in FY06/16

41/96 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.03.09 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Don Quijote discount sales breakdown by product

Electric appliances Household goods Foods Watches & fashion merchandise Sports & leisure goods Others 100% 8.0% 7.9% 7.6% 7.3% 7.7% 7.7% 7.5% 7.5% 7.6% 7.3% 7.4% 7.3% 7.0% 8.5% 7.9% 90% 10.1% 9.4% 9.3% 9.6% 9.8% 8.8%

80% 26.7% 25.5% 25.0% 26.3% 27.3% 26.5% 25.6% 24.9% 22.8% 19.3% 24.1% 24.7% 22.8% 22.6% 23.7% 25.5% 26.6% 27.5% 28.2% 28.1% 28.3% 70% 60% 18.0% 17.2% 17.2% 17.9% 15.7% 16.2% 18.5% 19.4% 19.6% 50% 20.0% 19.2% 20.2% 22.9% 24.7% 24.3% 24.5% 24.9% 26.4% 28.0% 29.8% 31.2%

40% 21.5% 22.1% 23.0% 23.8% 24.1% 24.2% 24.2% 30% 23.2% 22.4% 22.7% 23.4% 24.0% 24.8% 25.5% 25.9% 26.0% 26.1% 26.7% 27.2% 26.5% 20% 25.0% 26.4% 24.8% 23.5% 23.5% 23.3% 22.6% 10% 21.3% 20.7% 20.3% 20.4% 19.8% 18.3% 16.4% 14.9% 14.7% 13.4% 12.5% 11.4% 10.6% 10.1% 10.2% 0% FY06/97 FY06/99 FY06/01 FY06/03 FY06/05 FY06/07 FY06/09 FY06/11 FY06/13 FY06/15 FY06/17 Source: Shared Research based on company data Note: Product classifications changed starting in FY06/16

Several trends illustrate the evolution of the business in the past 10 years. Watches & fashion merchandise, daily goods, and sports & leisure goods were traditionally the main categories, but as stores became larger and opened outside of urban centers, the foods category came to play an important role (sports and leisure goods are now a minor part of the overall mix).

Electrical appliances’ proportion of sales down; food up Around 2000, sales were equally divided between electric appliances, household goods, and watches & fashion merchandise, with each representing 23.0-25.0% of total sales. Of these, watches & fashion merchandise carried the highest margin and was therefore the largest profit contributor. Foods only accounted for 17.2% of sales in the discount business in FY06/00; mostly dry groceries and no fresh produce. This proportion changed gradually as the company opened more regional stores, and then substantially following the Nagasakiya acquisition. By FY06/16, electrical appliances’ share of sales had fallen to 10.1%, while foods’ share had risen to 29.8%. Both miscellaneous household goods and watches & fashion merchandise also increased. In FY06/17, the main categories are foods, miscellaneous household goods, and watches & fashion merchandise.

Issue: developing the fresh produce category One of the biggest issues for the company is the development of the fresh produce category, one of the most difficult areas to pull-off. Quality fresh produce at competitive prices increases the frequency of customer visits and can be a key driver for many customers’ choice of where to shop. Food is lower margin than most other categories, and in fresh produce the inventory loss rates are quite high, often making fresh food a loss leader for supermarkets and GMS chains. Don Quijote stores’ late-night operating hours further complicates inventory management for this category, a reason why the company was never enthusiastic about the food business. Now, in order to grow, it has little choice but to move into this category. Unfortunately, the Nagasakiya acquisition did not bring along the desired expertise, so some innovative solutions are necessary.

Shared Research believes one such solution could be to acquire a supermarket firm strong in fresh produce. Another solution, one that the company has been trying to develop, is to partner with outside vendors who possess experience in fresh food sales and to incentivize them to sell food profitably.

The acquisition of Nagasakiya increased the percentage of tenant revenues in the overall revenue mix.

42/96 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.03.09 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Sales breakdown by product category

(JPYmn) FY06/05 FY06/06 FY06/07 FY06/08 FY06/09 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 Don Quijote sales 228,384 254,688 272,915 290,779 307,997 326,708 346,559 368,109 394,261 419,910 471,542 532,671 596,419 Retail 225,939 251,825 269,671 284,967 302,419 320,912 340,747 362,246 388,192 413,691 464,660 525,040 588,297 Electric appliances 45,870 51,469 53,495 52,042 49,526 47,704 50,124 48,608 48,379 47,095 49,416 53,082 60,127 Household goods 50,627 57,168 63,145 68,311 74,976 81,789 88,265 94,074 101,490 110,462 126,619 131,504 155,768 Foods 45,126 49,282 51,810 57,435 69,363 79,373 82,959 88,745 96,662 109,310 129,953 156,524 183,690 Watches & fashion merchandise 62,163 70,889 75,816 80,630 80,622 81,755 85,295 95,188 105,894 109,524 119,015 130,663 134,331 Sports & leisure goods 17,107 18,342 20,779 21,920 22,822 24,074 26,041 26,513 28,707 30,321 32,473 44,799 46,485 Others 5,047 4,675 4,626 4,631 5,110 6,217 8,062 9,119 7,060 6,980 7,184 8,467 7,897 Tenant revenue 2,445 2,863 3,243 5,812 5,578 5,796 5,813 5,862 6,070 6,219 6,882 7,631 8,122

YoY 20.0% 11.5% 7.2% 6.5% 5.9% 6.1% 6.1% 6.2% 7.1% 6.5% 12.3% 13.0% 12.0% Retail 19.3% 11.5% 7.1% 5.7% 6.1% 6.1% 6.2% 6.3% 7.2% 6.6% 12.3% 13.0% 12.0% Electric appliances 17.0% 12.2% 3.9% -2.7% -4.8% -3.7% 5.1% -3.0% -0.5% -2.7% 4.8% 7.6% 10.5% Household goods 15.5% 12.9% 10.5% 8.2% 9.8% 9.1% 7.9% 6.6% 7.9% 8.8% 14.8% 14.4% 18.2% Foods 23.1% 9.2% 5.1% 10.9% 20.8% 14.4% 4.5% 7.0% 8.9% 13.1% 19.0% 19.5% 17.4% Watches & fashion merchandise 23.4% 14.0% 7.0% 6.3% -0.0% 1.4% 4.3% 11.6% 11.2% 3.4% 8.8% 9.5% 2.7% Sports & leisure goods 14.1% 7.2% 13.3% 5.5% 4.1% 5.5% 8.2% 1.8% 8.3% 5.6% 7.1% 5.4% 3.7% Others 18.4% -7.4% -1.0% 0.1% 10.3% 21.7% 29.7% 13.1% -22.6% -1.1% -2.7% 13.2% -2.6% Tenant revenue 131.8% 17.1% 13.3% 79.2% -4.0% 3.9% 0.3% 0.8% 3.5% 2.5% 10.7% 10.9% 6.4%

% of total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Retail 98.9% 98.9% 98.8% 98.0% 98.2% 98.2% 98.3% 98.4% 98.5% 98.5% 98.5% 98.6% 98.6% Electric appliances 20.1% 20.2% 19.6% 17.9% 16.1% 14.6% 14.5% 13.2% 12.3% 11.2% 10.5% 10.0% 10.1% Household goods 22.2% 22.4% 23.1% 23.5% 24.3% 25.0% 25.5% 25.6% 25.7% 26.3% 26.9% 24.7% 26.1% Foods 19.8% 19.3% 19.0% 19.8% 22.5% 24.3% 23.9% 24.1% 24.5% 26.0% 27.6% 29.4% 30.8% Watches & fashion merchandise 27.2% 27.8% 27.8% 27.7% 26.2% 25.0% 24.6% 25.9% 26.9% 26.1% 25.2% 24.5% 22.5% Sports & leisure goods 7.5% 7.2% 7.6% 7.5% 7.4% 7.4% 7.5% 7.2% 7.3% 7.2% 6.9% 8.4% 7.8% Others 2.2% 1.8% 1.7% 1.6% 1.7% 1.9% 2.3% 2.5% 1.8% 1.7% 1.5% 1.6% 1.3% Tenant revenue 1.1% 1.1% 1.2% 2.0% 1.8% 1.8% 1.7% 1.6% 1.5% 1.5% 1.5% 1.4% 1.4%

GPM 23.7% 23.8% 24.7% 25.3% 24.9% 25.1% 24.9% 25.3% 26.0% 25.7% 26.1% 25.9% 25.8% Retail 22.9% 22.9% 23.8% 23.8% 23.6% 23.8% 23.6% 24.1% 24.8% 24.6% 25.0% 24.9% 24.7% Electric appliances 17.3% 17.3% 17.4% 17.8% 18.9% 19.1% 20.2% 21.7% 23.5% 24.6% 24.7% 27.8% 28.8% Household goods 25.7% 25.3% 26.4% 25.9% 25.3% 25.8% 25.4% 25.4% 25.6% 25.0% 26.0% 25.5% 28.5% Foods 17.7% 17.3% 17.2% 16.2% 15.5% 15.3% 15.2% 15.5% 15.6% 15.2% 16.0% 15.7% 15.2% Watches & fashion merchandise 26.0% 26.0% 27.5% 28.1% 28.8% 29.8% 28.7% 29.3% 30.0% 30.1% 30.4% 29.6% 28.6% Sports & leisure goods 33.0% 35.4% 36.4% 36.7% 36.2% 36.0% 36.5% 37.2% 37.6% 38.2% 39.2% 37.3% 34.1% Others 20.4% 20.4% 20.0% 20.1% 14.2% 17.3% 15.9% 16.0% 20.2% 21.7% 20.8% 25.6% 19.0% Tenant revenue 95.7% 96.4% 96.9% 98.3% 98.2% 98.7% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Note: Product classification scheme changed in FY06/16. Source: Shared Research, based on company data

Business model

Don Quijote is a mass-market discount retailer. Given Japan’s deflationary environment, it has been hard or impossible for retailers to raise prices: to grow sales, retailers have had to grow volume by selling more per store or by opening new stores. Don Quijote has been very successful in the latter. After opening its first store in Fuchu (Tokyo) in 1989, the company expanded its store network in the Tokyo Metropolitan area (Tokyo prefecture and adjacent prefectures of Kanagawa, Chiba, and Saitama). From December 2001, Don Quijote started expanding outside the Tokyo Metropolitan area and opening large scale stores. It also continued building its Tokyo store network to achieve a dominant position as a discount retailer. As a result, total sales grew rapidly while per-store and per-square-meter metrics fell (see table below). Selling more per store is a function of store size or better efficiency (higher inventory turnover). Retailers tend to focus on customer traffic as a key performance metric, due to the eventual stabilization of per-customer spend once a retail concept has been developed. Urban Don Quijote stores are high traffic, particularly busy between 6pm and 11pm. In suburban areas, the company compensates for lower customer traffic with lower capital outlays and lease payments for new stores and focuses on faster moving inventory items such as food and sundries.

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Group/Don Quijote retail business performance indicators

(JPYmn) FY06/05 FY06/06 FY06/07 FY06/08 FY06/09 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 Sales Retail (consolidated) 228,045 254,693 293,565 391,538 462,240 416,183 487,875 519,891 546,930 590,076 659,931 733,334 801,802 Don Quijote 228,384 254,688 272,915 290,779 307,997 326,708 346,559 368,109 394,261 419,910 471,542 532,671 596,419 YoY Retail (consolidated) 20.5% 11.7% 15.3% 33.4% 18.1% -10.0% 17.2% 6.6% 5.2% 7.9% 11.8% 11.1% 9.3% Don Quijote 20.0% 11.5% 7.2% 6.5% 5.9% 6.1% 6.1% 6.2% 7.1% 6.5% 12.3% 13.0% 12.0% Retail floor space (sqm) Consolidated (year end) 135,770 186,031 265,592 570,184 590,424 602,725 637,867 684,400 719,695 795,449 844,383 952,347 1,016,231 Consolidated (average) 126,979 152,326 205,814 279,520 339,550 475,389 613,435 651,179 699,612 752,132 811,000 878,015 Don Quijote (year end) 135,770 158,992 172,468 215,559 239,180 270,019 290,084 335,010 385,399 433,636 509,062 590,676 652,022 Don Quijote (average) 126,980 148,151 163,839 197,109 222,228 259,121 273,161 303,410 361,426 405,856 460,920 534,913 611,467 YoY Consolidated (year end) 16.5% 37.0% 42.8% 114.7% 3.5% 2.1% 5.8% 7.3% 5.2% 10.5% 6.2% 12.8% 6.7% Consolidated (average) 31.9% 20.0% 35.1% 35.8% 21.5% 40.0% 29.0% 6.2% 7.4% 7.5% 7.8% 8.3% Don Quijote (year end) 16.5% 17.1% 8.5% 25.0% 11.0% 12.9% 7.4% 15.5% 15.0% 12.5% 17.4% 16.0% 10.4% Don Quijote (average) 31.9% 16.7% 10.6% 20.3% 12.7% 16.6% 5.4% 11.1% 19.1% 12.3% 13.6% 16.1% 14.3%

Average number of employees Retail (consolidated) 5,172 6,011 6,997 8,315 9,202 10,498 13,142 14,308 15,085 16,517 18,684 22,276 Don Quijote 5,173 5,512 6,036 6,597 6,846 7,394 7,475 8,708 9,563 10,771 12,404 14,924 15,682 YoY Retail (consolidated) 19.6% 16.2% 16.4% 18.8% 10.7% 14.1% 25.2% 8.9% 5.4% 9.5% 13.1% 19.2% Don Quijote 19.6% 6.6% 9.5% 9.3% 3.8% 8.0% 1.1% 16.5% 9.8% 12.6% 15.2% 20.3% 5.1%

Number of stores Consolidated 107 126 161 223 218 220 228 242 255 283 306 341 368 Don Quijote 107 122 135 148 156 162 169 185 200 217 242 270 292 YoY Consolidated 15.1% 17.8% 27.8% 38.5% -2.2% 0.9% 3.6% 6.1% 5.4% 11.0% 8.1% 11.4% 7.9% Don Quijote 15.1% 14.0% 10.7% 9.6% 5.4% 3.8% 4.3% 9.5% 8.1% 8.5% 11.5% 11.6% 8.1%

Per employee (JPY '000, sqm) Sales (retail, consolidated) 44,092 42,371 41,956 39,861 40,603 39,644 37,123 36,336 36,257 35,725 35,321 32,900 Sales (Don Quijote) 44,150 46,209 45,211 44,079 44,992 44,188 46,361 42,274 41,228 38,985 38,015 35,692 38,033 Gross profit (Don Quijote) 11,161 11,218 11,101 11,528 10,710 10,720 10,030 9,931 9,256 9,794 Operating profit (Don Quijote) 2,066 2,118 2,172 2,239 2,128 2,328 2,633 2,428 2,455 1,965 1,631 1,369 1,434 Retail floor space 24.5 26.9 27.1 29.9 32.5 35.0 36.5 34.8 37.8 37.7 37.2 35.8 39.0 YoY Sales (retail, consolidated) 0.7% -3.9% -1.0% -5.0% 1.9% -2.4% -6.4% -2.1% -0.2% -1.5% -1.1% -6.9% -100.0% Sales (Don Quijote) 0.3% 4.7% -2.2% -2.5% 2.1% -1.8% 4.9% -8.8% -2.5% -5.4% -2.5% -6.1% 6.6% Gross profit (Don Quijote) 0.5% -1.0% 3.8% -7.1% 0.1% -6.4% -1.0% -6.8% 5.8% Operating profit (Don Quijote) -15.6% 2.5% 2.5% 3.1% -5.0% 9.4% 13.1% -7.8% 1.1% -20.0% -17.0% -16.1% 4.7% Retail floor space 10.3% 9.5% 1.0% 10.1% 8.6% 8.0% 4.3% -4.7% 8.5% -0.3% -1.4% -3.5% 8.8%

Per sqm of store space (JPY '000) Sales (retail, consolidated) 1,796 1,672 1,426 1,401 1,361 875 795 798 782 785 814 835 #DIV/0! Sales (Don Quijote) 1,799 1,719 1,666 1,475 1,386 1,261 1,269 1,213 1,091 1,035 1,023 996 975 Gross profit (Don Quijote) 426 408 411 374 346 317 315 307 284 266 267 258 251 Inventory (Don Quijote) 291 271 261 243 209 197 193 178 163 152 140 155 149 YoY Sales (retail, consolidated) -8.7% -6.9% -14.7% -1.8% -2.8% -35.7% -9.2% 0.4% -2.1% 0.4% 3.7% 2.6% #DIV/0! Sales (Don Quijote) -9.1% -4.4% -3.1% -11.4% -6.1% -9.0% 0.6% -4.4% -10.1% -5.2% -1.1% -2.7% -2.1% Gross profit (Don Quijote) -7.6% -4.1% 0.7% -9.1% -7.5% -8.3% -0.4% -2.6% -7.7% -6.2% 0.4% -3.4% -2.8% Inventory (Don Quijote) -3.3% -6.6% -3.7% -6.9% -14.2% -5.5% -2.1% -7.6% -8.5% -6.6% -8.0% 10.6% -3.9% Source: Shared Research based on company data

Invested capital per square meter of sales floor area dropped substantially following the Nagasakiya acquisition. Improving operating performance of the Nagasakiya stores through conversion into MEGA Don Quijote or New MEGA Don Quijote formats could boost not only sales and earnings, but also increase ROI.

Past rapid growth created challenges for the company’s business model as urban locations became harder to find and suburban store openings required a different product mix. Larger suburban stores led to lower capital efficiency, forced more focus on the less profitable Food segment and pushed the company toward a more conventional discount retail model, away from its amusement merchandising niche.

Expanding store counts through acquiring companies or individual stores can be a successful strategy thanks to low initial capital outlays (often just assumption of the target’s debt, at a fraction of the cost of building a similar new store base). Don Quijote’s acquisitions of DOit and Nagasakiya were examples of this. However, while DOit was a good fit and easy restructuring story, Nagasakiya has been a significant challenge.

Discount retailers tend to have low gross profit margins (20%-25%) and low SG&A expenses. The key to earnings growth is fast inventory turnover, maintaining stable gross profit margins, and controlling SG&A expenses. The traditional trade-off for retailers

44/96 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.03.09 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

is between higher inventory turnover with lower margin goods, or lower turnover with higher margin goods. All retailers need to keep fixed cost as lean as possible. Don Quijote found an innovative solution to address both inventory turnover and margins, as well as fixed costs. It uses a unique mix of standard discounted merchandise that is typically competitive and thus lower margin with highly profitable “spot” (opportunistically acquired “no-reorder” inventory) and novelty items. Don Quijote then crams an unusually large amount of inventory using its “compression display” technique into its store space, both increasing the probability customers will not leave empty-handed and lowering the fixed cost per inventory unit. This is further augmented with long opening hours and a focus on fast moving spot items. However, it remains to be seen if this strategy can be successfully transferred to regional stores and into the MEGA Don Quijote format. Company data shows inventory turnover fell as Don Quijote moved into regional markets in the early 00’s.

To compensate for declining inventory turnover, Don Quijote has focused on improving gross margins—a risky trade-off for a discount retailer. FY06/08’s jump in gross margin partially reflects the impact from high margin apparel at Nagasakiya and DIY goods at DOit. There was, however, also a visible jump in the SG&A-to-sales ratio to 22.9% in FY06/09 from 18.6% in FY06/06 (pre-acquisitions) due to the acquisition of inefficient DOit and Nagasakiya stores. Since FY06/09, the ratio has declined—to 20.9% in FY06/15—reflecting successful restructuring and integration of the acquired retailers.

Like other retailers, Don Quijote’s sales and earnings are seasonal—stores are busy at calendar year end and late summer. However, seasonality is not overly pronounced as Don Quijote operates across several categories and distinct markets.

Merchandising and inventory management Don Quijote employs a combination of merchandising techniques that differentiates it from most other retailers.

Compression display: Merchandise is intentionally crammed to the ceiling to lower visibility and create a maze-like ◤ environment (see Store Formats for details).

Mix of “staple” and “spot” items: Staple items are normal items easily available at other retailers, which are regularly ◤ replenished (and account for approximately 70% of products) and sold at competitive prices. Examples of staple items are basic food and household sundries. “Spot” items are bought on a one-off basis. They often include closeout and excess inventories acquired from wholesalers and manufacturers. Because of this, spot items can be priced unusually aggressively due to the low inventory cost, and attract consumer attention (essentially, “loss leaders” without the loss). Additionally, spot items simply can be unusual items unlikely to be sold by other retailers. Therefore, spot items possess an element of “discovery,” both in products and prices.

Large number of SKUs and an eclectically wide variety of categories: Large urban Don Quijote stores carry around ◤ 40,000 items each, from basic food and apparel to Rolex watches, TV sets, and novelty items. The unusually wide offering creates a “treasure hunt” atmosphere and allows for creative and flexible merchandising solutions. Merchandise sourcing has become mostly centralized as the company has grown larger.

These merchandising methods and the heterogeneous nature of items carried at different stores create substantial inventory management challenges. Indeed, it could be argued that Don Quijote is a unique inventory management specialist. Currently, inventory is managed both vertically via geographical areas and horizontally across product groups. Product groups have ultimate responsibility for managing inventory levels. Staple items are generally reordered automatically and managed at the SKU level. The system prevents stale inventory from appearing. At the same time, the company is keen not to over-control and over-regiment the process to allow for unique items and unique methods to survive and flourish.

45/96 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.03.09 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Don Quijote compression display

Source: Shared Research based on company data

Store formats/number of stores Don Quijote is a conventional brick-and-mortar retailer selling its merchandise in standalone stores. Its main formats are Don Quijote, MEGA Don Quijote, and New MEGA Don Quijote—large discount store formats created in response to its Nagasakiya acquisition. The company also has a shrinking number of Nagasakiya stores and several DOit stores.

Number of stores

FY06/03 FY06/04 FY06/05 FY06/06 FY06/07 FY06/08 FY06/09 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 Stores (year end; consolidated) 70 93 107 126 161 223 218 220 228 242 255 283 306 341 368 Don Quijote 57 65 69 80 89 110 116 126 149 157 165 174 183 194 198 PAW 4 18 25 27 27 28 23 23 Picasso 9 10 13 15 13 11 11 11 11 14 14 15 18 20 21 New MEGA Don Quijote 3 9 17 28 41 55 72 MEGA Don Quijote 40 40 39 37 36 39 40 Overseas (the US) 4 4 4 4 4 3 3 3 14 14 14 14 DOit 22 18 11 12 16 14 13 12 12 14 17 Nagasakiya 49 31 17 6 5 4 3 2 2 2 Others 6 1 Stores (year end; by company) Don Quijote (incl. Big 1) 70 93 107 122 135 148 156 162 169 185 200 217 242 270 292 Nagasakiya 53 46 42 40 40 39 40 38 39 40 DOit 22 18 12 12 16 14 13 12 12 14 17 Lirack 3 4 Daishin Department Store 1 1 Don Quijote (USA) 4 4 4 4 4 3 3 3 3 3 3 3 Marukai 11 11 11 11

Comparable stores (Don Quijote) 48 70 89 104 117 123 144 149 158 164 179 194 208 232 258 Comp. store sales (YoY) -1.8% -2.4% 2.0% 2.9% 0.4% -3.3% 0.5% -1.5% 3.4% 0.5% -0.1% 0.8% 4.6% 4.5% 2.6% Comp. store customers (YoY) 0.5% -2.8% 0.3% -0.4% -0.7% -2.2% 4.5% 3.8% 3.1% -0.8% -0.5% 0.1% 1.9% 0.5% 2.2% Comp. store average spend (YoY) -2.3% 0.4% 1.7% 3.3% 1.1% -1.2% -3.8% -5.1% 0.3% 1.3% 0.4% 0.7% 2.7% 3.9% 0.4% Source: Shared Research based on company data Note 1: Picasso, Essence, and Kyo Yasu Do stores are included in the “Picasso” figure. Note 2: Nagasakiya stores that have undergone a format change are classified as “MEGA” stores.

The parent company owned 217 stores as of the end of FY06/14 (including Picasso and PAW formats). Of the total store count, the regional stores (targeting stay-at-home mothers as their main customers) accounted for about 60% of the total. The consolidated company had 283 stores as of the end of FY06/14 vs. 255 as of the end of FY06/13.

Store formats Don Quijote (often referred to as “Donki”) This is the flagship format; stores are between 1,000-1,500sqm, normally with several floors. Merchandise is presented in “compression display” style—narrow passages and tall merchandise shelves packed with up to 40,000-60,000 SKUs (items) decorated with loud handwritten signs. The layout can be confusing for new customers and changes often. However, this sense of confusion is a calculated corporate strategy to draw repeat customers to merchandise that the store wants to emphasize. All available goods are on display, with no space provided for inventory storage.

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Don Quijote Roppongi Store

Source: Shared Research based on company data

Unlike most other Don Quijote stores, the Don Quijote Nakameguro Honten store (renovated in August 2012) has wide aisles, so customers can shop around using shopping carts. The aisles effectively guide customers, and a significant variety of merchandise more likely catches their eyes.

Don Quijote Nakameguro Honten Store

Source: Shared Research based on company data

The traditional format has been modified, though, for regional locations where core customers are stay-at-home mothers rather than time-killing 20-year-olds. This is arguably causing a drift toward a more mainstream retailing format. Moreover, the increasing ubiquity of Don Quijote stores has also caused some of the novelty value of the format to wear off. Don Quijote needs to stay original to continue successfully differentiating itself from competitors.

MEGA Don Quijote This is a new large store format aiming to bridge the gap between the quirky urban Don Quijote format and the conventional GMS/large supermarket format. The company has searched for some years for a model to target a broader market and more suburban clientele. The MEGA Don Quijote store concept emerged, when Don Quijote bought Nagasakiya (a failed GMS retailer with many stores in good locations): the first MEGA Don Quijote store opened in April 2008. It is an attempt to retain the concept of “amusement” while operating larger stores refurbished from existing Nagasakiya locations.

The MEGA Don Quijote store format is a family-oriented discount store. If the traditional Don Quijote store format is half discounted goods and half “entertainment,” then MEGA Don Quijote could be viewed as 4/5 deep discounted goods and 1/5 entertainment. As of the end of FY06/13, there were 56 MEGA Don Quijote stores. According to the company, assuming no additional investments, the cash flow payback period (including inventory investment) is about three years, delivering a store-level ROI of 30% (calculations are based on leased stores, i.e., no land investment; about 80% of MEGA Don Quijote stores were leased as of the end of June 2013). MEGA Don Quijote store sizes vary substantially, from 3,000sqm to 9,000sqm, as the format has replaced existing stores of other retailers that have vacated the premises or have been acquired by Don Quijote.

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In terms of product mix, MEGA Don Quijote stores are heavy on food (50.6% vs. 24.6% at Don Quijote). Watches and apparel are only 17.1% at MEGA but 27.4% at Don Quijote (the comparison is based on sales for FY06/13 at MEGA stores and Don Quijote stores; source: company data).

Essence This is a new store format the company started in FY06/12. With a sales floor area of 300-1,000sqm and 10,000-20,000 items, the small stores have a more specialized selection of items than Don Quijote stores. The company envisions the format as urban discount stores that contain aspects of drug stores, supermarkets, and convenience stores.

PAW (pronounced “pow”) This is a large shopping-mall-type format comprising Don Quijote and arcade game parlors as a core tenant, and other tenants including beauty salons, DVD rental services, etc. PAW was the first attempt by the company to manage larger stores. The model is effectively the same as the traditional Don Quijote format, but with added drawing power and revenues of tenants. Initially, PAW stores were an impressive success, growing to the total of 28 stores as of the end of FY06/08. PAW tenant structure has been affected as game arcades, the main tenants in most PAW stores, suffered from regulatory restrictions on hours of operations, access for minors, and payouts on redemption games. It seems likely to Shared Research that many PAW stores will be refitted with additional Don Quijote sales floors instead of game centers or transformed into MEGA Don Quijote format.

Picasso This is a small format targeting small catchment markets in the Metropolitan area; it is currently deemphasized. The company had high hopes for a new convenience store format combining discounted goods with ready-to-eat meals but found it difficult to generate enough customer traffic to achieve high profitability. The Picasso model store is 300-500sqm and requires a third of the investment needed for Don Quijote stores and carries roughly a quarter of Don Quijote store inventory.

DOit These stores are DIY/hardware stores. There were 13 DOit stores as of the end of FY06/13, down from 24 at the moment of acquisition. The average size of DOit stores was about 2,800sqm, 2-3x larger than normal Don Quijote stores. Shared Research estimates that some or all remaining DOit stores will be transformed into Don Quijote and MEGA Don Quijote formats over time.

Nagasakiya The company aims to rebrand Nagasakiya stores in the MEGA format. There were three Nagasakiya stores (GMS) as of the end of FY06/14.

Solution stores Starting in FY06/13, the company began opening “solution” stores, designed to contribute to shopping center revitalization. Shopping center developers etc. appear to often ask the company to open its stores in their facilities as anchor tenants, expecting revitalization effects for small and medium-sized shopping centers that have difficulty in attracting tenants. This means the company can often open stores under favorable terms and conditions.

Opening stores in such spaces means lower capex and quick store openings. In such strategic store openings, the company remains flexible in terms of floor area, considering 1,000-15,000sqm to be feasible. More specifically, the company sees around 2,000sqm as appropriate for Don Quijote stores and 3,000-5,000sqm for New MEGA Don Quijote stores.

Tokyo Central This is a new store opened in California in January 2015. The store, with its open kitchen and food court, features traditional Japanese culture, the latest trends in Tokyo, and a warm California ambiance. The shop also has a point-of-purchase advertising system developed in Japan. About a third of the store is dedicated to prepared food. A second shop opened in West Covina, California, in March 2015.

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Strengths and weaknesses

The original Don Quijote model’s strength was its ability to quickly turn substantial inventory in relatively small stores, allowing it to generate high returns and cash flows in a competitive domestic retail environment. Stores deliberately carry substantial inventory to keep customers interested. Inventory management is key, and stale inventory needs to be liquidated quickly. Flexible layout and discounting and delegating these decisions to the store level are key components of Don Quijote’s strategy. For customers, Don Quijote provides an unmatched variety of competitively priced products in a fun and exciting environment. Average spend per customer is higher than for comparable category specialists or general merchandisers.

Strengths

Sales floor: Don Quijote’s strength is found on the sales floor, where the retailer puts its management ideas into practice. ◤ Store employees must establish their own targets for sales, gross profit, and inventory turnover. (Store managers also set operating profit targets.) Thus, the number of customers and the volume of sales are crucial for staff members, who compete with one another to achieve their goals. Store employees assume a significant degree of responsibility. Shared Research believes that responsible employees create strong sales floors.

Strong brand as a fun and low-price shopping destination: The company has both cost and differentiation advantages ◤ versus its competitors. It has developed unique retail expertise, which would be extremely hard to replicate, and shown that it is capable of taking its retail technology into new markets.

Access to capital: As a listed company, Don Quijote has access to a variety of capital raising options. While obviously a ◤ feature shared by all listed retailers, this is an important distinction for the company as a large listed discount retailer. In the current consumption and demographic environment, general discounters are in a relatively advantageous position when it comes to absorbing underperforming general merchandisers and department stores. This is due to a large number of categories of goods they sell and flexibility in terms of adjusting categories they choose to emphasize, depending on location.

Weaknesses

Dependence of the original Don Quijote format on high traffic urban markets: The company has adapted its business ◤ to suburban locations with its MEGA Don Quijote format, but it remains to be seen if it can keep its unique identity.

An issue in the long run is whether the Don Quijote model can be exported to pursue growth overseas: It is ◤ conceivable that with some experimenting, the company could bring its model to densely populated markets of Asia. So far, the only overseas locations are four stores in Hawaii (Don Quijote USA)—the result of an opportunistic acquisition in January 2006. It has been a modest success, turning from a money losing operation initially to the OPM of 5.6% in FY03/13. An overseas expansion blueprint would be required to enable the firm to expand into overseas markets in earnest.

Legacy reputation problems: While the company has managed not to attract any controversy in the past few years, the ◤ reputation as a “trouble maker” will probably persist for some time. The irreverence of Founding Chairman and Supreme Advisor Yasuda, an iconoclastic business model, and loud self-promotion of the stores are unusual for the conservative Japanese society, and the company is likely to attract unusual levels of public scrutiny.

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Group companies, M&A, investments

The Don Quijote group consists of one holding company (Don Quijote Holdings Co., Ltd.), 39 consolidated subsidiaries, 13 unconsolidated subsidiaries, one equity-method affiliate, and one non-equity method affiliate, for a total of 55 companies. Performance by company

(JPYmn) FY06/06 FY06/07 FY06/08 FY06/09 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 Sales (consolidated) 260,779 300,660 404,924 480,856 487,571 507,661 540,255 568,377 612,424 683,981 759,592 828,798 DQHD and Don Quijote 254,688 272,915 290,779 307,997 326,708 346,559 368,109 394,261 423,232 480,838 544,809 609,414 DOit 4,590 27,522 23,859 19,723 19,435 20,719 20,048 19,879 17,438 16,403 16,708 Nagasakiya 63,768 122,928 120,915 124,377 135,816 135,683 143,449 150,639 157,101 165,700 DQ USA 19,321 20,168 18,395 17,266 15,226 13,186 13,985 17,341 19,676 21,055 18,703 Marukai Corp 7,845 16,773 19,652 17,933 Japan Commercial Est ablishment 7,248 12,695 12,779 13,923 14,373 14,037 13,303 13,347 12,894 Accretive 581 2,731 2,888 2,967 3,800 4,834 1,698 Japan Asset Marketing 37 6,309 14,228 16,640 18,109

Yo Y 12.0% 15.3% 34.7% 18.8% 1.4% 4.1% 6.4% 5.2% 7.7% 11.7% 11.1% 9.1% DQHD and Don Quijote 11.5% 7.2% 6.5% 5.9% 6.1% 6.1% 6.2% 7.1% 7.3% 13.6% 13.3% 11.9% DOit 499.6% -13.3% -17.3% -1.5% 6.6% -3.2% -0.8% -12.3% -5.9% 1.9% Nagasakiya 92.8% -1.6% 2.9% 9.2% -0.1% 5.7% 5.0% 4.3% 5.5% DQ USA 4.4% -8.8% -6.1% -11.8% -13.4% 6.1% 24.0% 13.5% 7.0% -11.2% Marukai Corp 113.8% 17.2% -8.7% Japan Commercial Est ablishment 75.2% 0.7% 9.0% 3.2% -2.3% -5.2% 0.3% -3.4% Accretive 370.1% 5.7% 2.7% 28.1% 27.2% -64.9% Japan Asset Marketing 16,951.4% 125.5% 17.0% 8.8%

Operating profit (consolidated) 11,854 13,586 15,981 11,893 16,287 19,821 22,008 25,327 24,381 21,417 22,746 23,693 DQHD and Don Quijote 11,674 13,111 14,769 14,565 17,210 19,685 21,144 23,476 21,168 25,546 28,353 31,504 DOit -372 -579 541 1,508 735 385 393 1,203 566 1,004 418 Nagasakiya 571 -69 -1,881 748 1,542 1,690 2,787 3,984 3,923 4,814 DQ USA -353 207 619 718 754 726 778 1,034 1,198 1,497 724 Marukai Corp 415 449 784 579 Japan Commercial Est ablishment 60 460 548 1,166 1,049 1,067 2,085 2,464 3,054 Accretive 145 874 999 1,170 1,580 1,911 705 Japan Asset Marketing -220 2,523 5,843 6,970 7,395

OPM 4.5% 4.5% 3.9% 2.5% 3.3% 3.9% 4.1% 4.5% 4.0% 3.1% 3.0% 2.9% DQHD and Don Quijote 4.6% 4.8% 5.1% 4.7% 5.3% 5.7% 5.7% 6.0% 5.0% 5.3% 5.2% 5.2% DOit -8.1% -2.1% 2.3% 7.6% 3.8% 1.9% 2.0% 6.1% 3.2% 6.1% 2.5% Nagasakiya 0.9% -0.1% -1.6% 0.6% 1.1% 1.2% 1.9% 2.6% 2.5% 2.9% DQ USA -1.8% 1.0% 3.4% 4.2% 5.0% 5.5% 5.6% 6.0% 6.1% 7.1% 3.9% Marukai Corp 5.3% 2.7% 4.0% 3.2% Japan Commercial Est ablishment 0.8% 3.6% 4.3% 8.4% 7.3% 7.6% 15.7% 18.5% 23.7% Accretive 25.0% 32.0% 34.6% 39.4% 41.6% 39.5% 41.5% Japan Asset Marketing -594.6% 40.0% 41.1% 41.9% 40.8% Source: Shared Research based on company data

Overseas operations

Don Quijote owns and operates three stores in Hawaii (currently Don Quijote USA) that it acquired from The Daiei, Inc. (TSE1: 8263). The company in July 2013 established a holding company for its overseas business, Pan Pacific International Holdings Pte. Ltd., as part of a plan to expand overseas. In September 2013, the company acquired Marukai Corporation, a California-based supermarket operator running two stores in Hawaii and nine stores in California. For FY06/14, the company will seek to improve profitability at existing Marukai stores and eventually achieve an operating profit margin of 2.9% in FY06/16.

US expansion via Marukai In January 2015, Don Quijote opened TOKYO CENTRAL Costa Mesa in California. The store features a point-of-purchase adverting system developed through its Don Quijote stores. About a third of the California store is devoted to prepared food. This is in line with the company’s “Only One” concept, under which the retailer seeks to create stores with unique features. A second store opened in March 2015 in West Covina, California, and the company plans to continue with efforts to remodel stores with TOKYO CENTRAL where possible, in order to expand its prepared food offerings.

Top advisor and founding chairman Yasuda to concentrate fully on overseas holding company The company, along with its Q2 FY06/15 earnings results, announced that founder Takao Yasuda, chairman and CEO, would step down. Yasuda will also resign as a director of Don Quijote’s domestic group companies, and will assume the titles of top advisor and founding chairman. He will become the head of an intermediate holding company to oversee the group’s international businesses, which is still in its infancy and requires guidance.

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Market and value chain Market overview Japan’s retail market is mature, cyclical, and in secular decline. One reason for this is Japan’s demographic shift: the population started to decline in 2007 and is expected to continue to shrink while gradually aging. Larger chains thus have to compete predominantly on price to attract a diminishing consumer base. But large chains have struggled to differentiate themselves from smaller rivals due to Japan’s fragmented supply chain, regional differences, and the factional nature of Japanese business that complicates growth through M&A and post-acquisition integration. Some of the most successful Japanese retailers focus on low prices, such as Don Quijote, Fast Retailing Co., Ltd. (TSE1: 9983), and Shimamura Co., Ltd. (TSE1: 8227), but for all successful ones a relentless focus on execution has been the key.

“Japan has too many stores” has been a popular refrain among industry observers. Indeed, the country has as many retail establishments as the US, despite a much smaller population. However, this comparison overlooks substantially different consumption patterns between Japanese and US consumers. Japan’s dense population and the habit of shopping locally and on foot has allowed small shops to survive, whereas in the US stores have necessarily grown larger to horizontally integrate different consumption needs. Nonetheless, while urban Japanese neighborhoods normally have a shopping street with multiple small specialty vendors, these vendors have been under attack from larger retailers since the 1960s. The domination of large chains has become more obvious in recent years, given they are better equipped to cope with deflation.

In Shared Research’s view, Japanese retailing’s real problem is easy access to capital. A large number of underperforming retailers, such as The Daiei, Inc. (TSE1: 8263), were kept afloat by banks under political pressure through the 1990s and into the 2000s. As the retail trade is a large employer plagued with an oversupply of labor, failures of retailers have negative social implications in terms of unemployment rates. There was therefore substantial political resistance to letting retailers fail. This stance combined with an era of ultralow interest rates and poor corporate control meant retailers that should have gone bankrupt could borrow very cheaply (at approximately 1.0%), generate even lower returns, and further destroy value. Dozens of zombie retailers thus stayed afloat, resulting in excess competition for emerging retailers and exacerbating deflationary trends.

As banks crawled out of the post-2002 banking crisis, their attitudes have changed. While still reluctant to allow bankruptcies, banks have forced underperforming firms to restructure and to improve their financial position. Troubled companies still pay low interest rates, but new loans come with pressure to deal with problems. Corporate failures and resulting job losses have also become more publicly acceptable and a wave of consolidation in retailing has begun.

The changes currently underway in Japanese retailing mirror what is occurring globally. For example, in the US several trends are present:

Price polarization has meant luxury brands with strong brand identity and low-price retailers have thrived at the expense of ◤ the middle-ground. High-end department stores strong in merchandising consolidated and survived. Discounters such as Wal-Mart Stores Inc. (NYSE: WMT), Target Corp. (NYSE: TGT), Costco Wholesale Corp. (NASDAQ: COST), and others thrived as mid-range retailers went extinct.

Concentration of market share among a handful of large retailers resulting in homogenization of products offered. ◤ The rise of online “long-tail” retailing. ◤

Recent trends in Japan are surprisingly similar to the US: department stores have consolidated, low-price chains dominate the retail environment, and mid-range GMS chains and specialty retailers struggle. While low-price specialty retailers such as Fast Retailing, Yamada Denki Co. (TSE1: 9831), and Nitori Co. (TSE1: 9843) have established a significant presence, in general merchandising a new model has been slow to appear. Major foreign players, such as Wal-Mart, Carrefour SA (NYSE Euronext Paris: CA), and Tesco Plc. (LSE: TSCO), have all stumbled in Japan. Local heavyweight Aeon Co. (TSE1: 8267) has been trying to evolve into a low-price general merchandiser. Nonetheless, Don Quijote’s MEGA Don Quijote model could theoretically fill a large gap in Japanese discount retailing. The company is already among the top 15 Japanese retailers by sales, according to its FY06/12 presentation materials.

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The company is Japan’s 11th largest retailer in terms of sales, according to its business results material distributed at its FY06/16 earnings briefing. At the same meeting, the company made remarks concerning its further growth potential. If the consumption tax is raised, the ratio of indirect tax would also rise. In the US, which has a high indirect tax ratio, most of the biggest retailers are discount stores. In Japan, Don Quijote is the number one discount retailer. But, it still ranks 12th in the industry. This means that there is still room for Don Quijote to grow. The company stated that a tax increase may hurt temporarily. However, the company added that the tax increase could actually be beneficial if the company responds to that challenge accordingly.

Don Quijote’s sales ranking (domestic retailers)

(JPYmn) FY06/04 FY06/05 FY06/06 FY06/07 FY06/08 FY06/09 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 Sales 192,840 232,778 260,779 300,660 404,924 480,856 487,571 507,661 540,255 568,377 612,424 683,981 759,592 828,798 Ranking 51 43 38 33 22 15 15 14 14 13 13 12 11 10 Source: Shared Research based on company data

Customers

Don Quijote has two overlapping but nevertheless distinct groups of customers:

Younger consumers in their 20s and 30s who often shop late at night and see shopping at Don Quijote as a sort of ◤ entertainment. These are the company’s traditional and core customer group.

Traditional day-time grocery buyers, mostly housewives, who shop primarily on price, freshness of produce and to some ◤ degree on convenience.

The importance of younger customers has been declining as the company has expanded regionally and into suburban locations, but loyalty of both groups of customers is low (switching costs are minimal) although this also depends on availability of alternative options in local markets.

Suppliers

Don Quijote buys from up to several thousand wholesalers. Generally, such suppliers have very little power vis-à-vis large retailers like Don Quijote.

Barriers to entry

While generally barriers to entry in the retail space are low, barriers to creating a successful competitive retailer like Don Quijote are extremely high, given the required operational know-how of the market. In general, Don Quijote has access to capital and enjoys economies of scale in its purchasing that can only be enjoyed by the top two dozen or so Japanese retailers. Operating a large scale national chain is complex, and Japan is also a challenging market itself.

Competitors

The company has multiple competitors. The most important competitors in urban areas are convenience stores at night and low-price specialty retailers in the daytime. In suburban regions, low-price supermarkets and other discounters are the main threat.

Japanese chain retailing is fragmented, highly competitive, and characterized by many local operations often driven not by profit maximization but by sustaining employment and other non-economic reasons, such as pride.

Don Quijote has a very competitive business model and has been successful in expanding from its original metropolitan night market to become a nationwide chain. One category though where the company is not particularly competitive is electronics, a field where size and price are the only differentiators, and specialists like Yamada Denki and Yodobashi Camera Co. (unlisted) set the standards.

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Strategy

Don Quijote’s strategy is growth through delivering what it calls CV+D+A (Convenience + Discount + Amusement) to its broad customer base. The focus is on opening or acquiring more stores (Convenience), low costs (Discount), while maintaining its unique identity of fun merchandising (Amusement). This is a partially differentiated strategy of cost leadership.

Turning crises into opportunities: taking customers and growing sales The company has a history of using strategies tailored to prevailing conditions, thus turning crises into opportunities for growth. In the wake of the global financial crisis of 2008, the company managed to drive up the customer count by focusing on sales to wealthy customers and to women. The company also successfully converted a crisis into a growth opportunity in 2011, when it grew customer count by focusing on sales to senior citizens following the earthquake and tsunami in Tohoku.

The company approached the consumption tax hike of April 2014 as an opportunity. Through competitive pricing of commodities, food products, and daily items, the company focused on expanding local market share. By sacrificing average spend per customer and gross profit margins, the company planned to increase customer count and take a greater share of the market. Following the consumption tax hike, the company’s focus on selling to family customers has also resulted in a higher customer count.

The company will also use a targeted approach in its New MEGA Don Quijote stores to acquire market share from specific stores in specific products. Similarly, the company will not compete with competitors as a whole, but against specific local retailers that are experiencing depressed sales within the vicinity of each store. Reflecting on its success in strengthening private brand development and sourcing skills, the company believes that it can beat the competition through low-cost operations.

Store opening strategy In the 1990s, the company focused on building its store network in the Tokyo metropolitan area—e.g., opening stores in Shinjuku, Shibuya, Kasai. In the early 2000s, the company added stores in regional cities (e.g., Fukuoka, Sapporo) while launching new store formats (e.g., smaller Picasso, PAW in shopping centers). In 2006, the company entered a new phase of growth through acquisitions, buying local stores in Hawaii, DOit home improvement store, and Nagasakiya GMS franchise. Post these acquisitions, the company remained successful in turning acquired businesses around until it shifted its focus to a new, larger store format, MEGA Don Quijote. In 2011, the company began developing another new format under the MEGA Don Quijote franchise, New MEGA Don Quijote. Since then, the company has developed larger Don Quijote stores (mainstay format) with 2,000sqm. sales floors and started accelerating store openings in locations outside the Tokyo metropolitan area. On September 30, 2013, the company added California-based supermarket operator Marukai Corporation to its group.

Store openings in Japan’s three major metropolitan areas have settled; first half of plan to concentrate on regional openings Looking at the company’s store openings from 2011 onward, under the plan to acquire property in prime locations throughout the greater Tokyo area, the company developed property in these locations from 2011 to 2012. At the same time, Don Quijote made preparations to capture demand from overseas tourists via measures such as acquiring licenses and adding Wi-Fi to its stores during the period from 2013 to 2014, primarily in the three major metropolitan areas. In 2014 to 2015, as property prices were expected to rise in the greater Tokyo metropolitan area, and the store network in Japan’s three major metropolitan areas matured, the company shifted its focus to regional development. Results were already felt in FY06/15. It is likely that during FY06/16 and FY06/17, Don Quijote will keep an eye on the three major metropolitan areas while maintaining its focus on regional development.

Generally, it takes between 18 months and three years to open a new store, through the property development, contractual, and store opening stages.

53/96 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.03.09 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

New store opening area breakdown (left) and number of stores by area (right)

Three major metropolitan areas Others Three major metropolitan areas Others 20 160 140 15

120 10 100

5 80

- 60 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/08 FY06/10 FY06/12 FY06/14 FY06/16 Source: Shared Research based on company data Note: “Three major metropolitan areas” refer to Tokyo, Saitama, Kanagawa, Chiba, Aichi, Kyoto, Osaka, and Hyogo Prefectures.

Concerning Don Quijote’s strategy for the medium term, please see the company’s FY06/17 forecast section.

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Historical financial statements

Q1 FY06/1 8 results (out November 6, 2017)

Q1: The company boosted comparable store sales 5.6% by further improving response to inclement weather and consumers’ ▷ desire for savings. Overall sales up 11% and operating profit up 14%

 New store openings: Leveraging the business’ strength of broad accessibility, from city centers to suburbs, the company opened three stores. As of Q1, it is targeting 15 store openings during 1H

 In Q2, October saw the opening of a store in Toyohashi, Aichi (the largest domestic post-GMS store at 11,000sqm). Sales are favorable; the company calls the store a highlight

 Comparable store sales growth: DQ sales up 5.6% (+4.0% excluding duty-free sales) and Nagasakiya 3.7% (+3.7% excluding duty-free sales). Continued increase of customer traffic each month except August 2016

 The company promoted a revitalization project to improve performance mostly at newer stores, succeeds at raising standard for comparable store growth

GPM: -0.4pp, but real decrease controlled at -0.2pp. Gross profit up on 0.1pp improvement in GPM and increased comparable ▷ store sales at DQ and Nagasakiya

 Making new stores profitable through three phases: improving brand recognition and customer draw in local markets, capturing and solidifying demand from repeat customers, and improving GPM

 Previously impacted from temporary increase in the ratio of stores in the start-up phase due to recent acceleration of new store openings. In 2H FY06/17, made progress with inventory disposal of high-priced items; strong comparable stores and

inventory control contributed; and foundation set to aim for improvements in gross profit and GPM from Q4 FY06/17

SG&A expenses: Controlling expenses to appropriate levels. Rise in personnel expenses winding down and man-hour ▷ productivity improved. M&A-related expenses (equivalent to 0.3pp) dealt with to improve SG&A-to-sales ratio by 0.6pp Demand from foreign tourists: Success in boosting store appeal via pricing and products enabled company to capture demand ▷ from foreign visitors. Also tapped into repeat demand Topic: Completed investment in Uny Co., Ltd., and decided to open six stores carrying both companies’ names. Started training ▷ personnel; planning on a sharp earnings recovery after stores open. Upward revision: Forecasts revised in light of Q1 performance. Moderate economic recovery providing strong tailwind ▷

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Consolidated earnings (JPYbn)

250 Sales YoY 15% 16 Operating profit YoY 35% 16 Recurring profit YoY 35%

14% 14 33% 30% 14 32% 30% 200 12% 12 12 12% 25% 25% 11% 10 10 25% 150 9% 23% 20% 20% 8 8 8% 8% 15% 15% 100 6% 6 6 15% 14% 14% 13% 13% 10% 12% 10% 4 11% 4 10% 50 4% 4% 3% 8% 3% 5% 7% 5% 2 6% 2 5% 3% 4% 0 1% 0% 0 0% 0 0% (JPYbn)FY06/10 FY06/12 FY06/14 FY06/16 FY06/18 (JPYbn)FY06/10 FY06/12 FY06/14 FY06/16 FY06/18 (JPYbn)FY06/10 FY06/12 FY06/14 FY06/16 FY06/18

Retail business performance (JPYbn)

250 Sales Operating profit Sales YoY (right axis) Operating profit YoY (right axis) 20%

16% 200 15% 14% 14% 15% 12% 11% 11% 150 10% 10% 10% 10% 9% 10% 7% 8% 100 5.9% 5.9%5.8% 6% 5.1% 4.9% 4.6%4.4% 4.6% 4.7% 4.2% 4.6% 3.7% 3.7% 3.7% 4.0% 4.1% 3.7% 3.6% 3.4% 3.5% 3.5%3.6% 3.1% 5% 50 2.4% 2.7% 0.5% 2.0% 0.9% 1.0% 8.8 8.7 8.5 8.4 8.3 7.5 7.0 6.8 6.8 6.7 6.5 6.3 6.0 5.9 5.7 5.6 5.5 5.5 5.0 4.8 4.5 4.3 4.3 4.3 4.0 1.7 1.3 5.4 0.8 0 0% Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 (JPYbn) FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 Source: Shared Research based on company data Results summary Q1: Boosted comparable store sales 5.6% by further improving response to inclement weather and consumers’ desire for savings. Overall sales up 11% and operating profit up 14% Strategies implemented in FY06/14 and FY06/15 to capture demand from the two large market segments of families and overseas tourists produced solid results in FY06/15 and FY06/16, with continued progress in FY06/17. In Q1 FY06/18 as well, external factors such as inclement weather and consumers’ desire for savings were still present, but the company proceeded with its aggressive business approach to readily handle volatility at stores. The company faced the consumer spending environment with a balance between prioritizing increases in customer numbers and items sold, mainly to increase gross profit, even if it meant GPM would slightly suffer.

As a result, comparable store sales and gross profit rose while new stores opened, marking an 11% increase in sales (+11.3% if special factors are excluded), 9.3% increase in gross profit (+10.4), 0.6pp improvement in SG&A-to-sales, 14.1% increase in operating profit (+17.3%), and 4.2% increase in net income (+10.6%). With the success of improved sales floor response, the revitalization project, and organizational reforms, comparable store sales increased at DQ and Nagasakiya (+5.6% and +3.7% respectively). It is worth noting that as the company focused on increasing gross profit in a difficult consumer spending environment, GPM improved 0.1pp at DQ and Nagasakiya. In light of the Q1 results, the company announced an upward revision of its FY06/18 forecasts.

The FY06/18 theme "Inaugural year of the Don Quijote Distribution Revolution" includes: a) digital strategy, b) overseas expansion, and c) post-GMS format store initiatives. Preliminary figures at the beginning of FY06/18 were JPY45.0bn in capital investment, at least 30 new stores (along with 24 store openings of QSI, Inc. in Hawaii), and full-year increase of 0.5% (0.6% in 1H, 0.4% in 2H) in DQ comparable store sales. With the revision, there was no change in the number of stores, but the company added the advancement of a business alliance with FamilyMart Uny Holdings to its store strategy and revised forecasts to a full-year increase of 1.8% (3.0% in 1H, 0.6% in 2H) in DQ comparable store sales.

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Upward revision

FY06/16 FY06/17 FY06/18 Initial Est. FY06/18 Revised Est. Difference (JPYmn) 1H 2H FY 1H 2H FY 1H 2H FY 1H 2H FY 1H 2H FY Sales 384,445 375,147 759,592 417,694 411,104 828,798 445,000 435,000 880,000 455,000 435,000 890,000 10,000 - 10,000 YoY 12.3% 9.8% 11.1% 8.6% 9.6% 9.1% 6.5% 5.8% 6.2% 8.9% 5.8% 7.4% Gross profit 102,941 98,952 201,893 110,640 107,940 218,580 117,000 115,000 232,000 119,200 YoY 12.3% 9.8% 11.1% 7.5% 9.1% 8.3% 5.7% 6.5% 6.1% 7.7% GPM 26.8% 26.4% 26.6% 26.5% 26.3% 26.4% 26.3% 26.4% 26.4% 26.2% SG&A 77,370 81,338 158,708 84,297 88,098 172,395 90,000 94,000 184,000 90,400 SG&A-to-sales ratio 20.1% 21.7% 20.9% 20.2% 21.4% 20.8% 20.2% 21.6% 20.9% 7.2% Operating profit 25,571 17,614 43,185 26,343 19,842 46,185 27,000 21,000 48,000 28,800 21,000 49,800 1,800 - 1,800 YoY 9.2% 12.2% 10.4% 3.0% 12.6% 6.9% 2.5% 5.8% 3.9% 9.3% 5.8% 7.8% OPM 6.7% 4.7% 5.7% 6.3% 4.8% 5.6% 6.1% 4.8% 5.5% 6.3% 4.8% 5.6% Recurring profit 25,873 17,924 43,797 26,928 18,595 45,523 27,000 21,000 48,000 28,700 21,100 49,800 1,700 100 1,800 YoY 7.6% 11.2% 9.1% 4.1% 3.7% 3.9% 0.3% 12.9% 5.4% 6.6% 13.5% 9.4% RPM 6.7% 4.8% 5.8% 6.4% 4.5% 5.5% 6.1% 4.8% 5.5% 6.3% 4.9% 5.6% Net in co me 14,232 10,706 24,938 16,459 16,623 33,082 15,500 12,500 28,000 16,900 12,600 29,500 1,400 100 1,500 YoY 3.9% 13.2% 7.7% 15.6% 55.3% 32.7% -5.8% -24.8% -15.4% 2.7% -24.2% -10.8% Source: Shared Research based on company material

Topics Decision to open six new stores with combined name; started in-store training In November 2017, Don Quijote completed investment in major GMS company Uny Co., Ltd. as planned, taking a 40% stake in the company, as well as deciding to open six stores with a combined name (two in Kanagawa, three in Aichi, and one in Mie Prefecture). These are existing stores that will temporarily close in January 2018 and reopen between late February and late March 2018. The rebranded stores will be in the MEGA format using Don Quijote specifications for POS checkouts, fixtures, and fittings, with a much larger inventory and product range. A newly established subsidiary called UD Retail will operate the six stores. Don Quijote and Uny each plan to assign 60–70 employees to UD Retail. The employees assigned by Uny started in-store training at Don Quijote’s MEGA stores in November, and of the employees assigned by Don Quijote, store managers and other middle management employees are working in the six stores, and employees are taking part in the in-store training. We can see that the company is planning to fully launch its new format when the six stores reopen.

Big boost from Don Quijote’s Toyohashi MEGA store We expect the six new stores to tailor their product mix and pricing to location and customer profile, like Don Quijote’s MEGA stores, and estimate that sales will be around 30% higher than current levels. At the Q1 FY06/18 results briefing, the company commented that sales could even double on average. In October 2017, the company opened a MEGA store in Toyohashi, Aichi Prefecture, in the former premises of the Ito Yokado Toyohashi Store, which had been a key tenant of a retail complex. Although partly due to the new store, the company noted that sales had roughly tripled from the previous tenant’s levels. Dozens of Uny employees assigned to UD Retail are training at the Toyohashi MEGA store. Uny has a store in Toyohashi, which competes with other GMS stores in the city. We think Uny understands the benefits of converting to a Don Quijote MEGA store given the sharp sales increase of the Toyohashi MEGA store. We are positive on the combined-name stores, because we think they will help to spread Don Quijote’s management methods. Given that the company is assigning capable employees to the new venture, they have the potential to create a solid sales floor with a team of motivated employees assigned by Uny.

Focus on training UD Retail employees to prevent long-term deployment of its own personnel Sending skilled employees to work outside of the company puts pressure on Don Quijote’s store opening plans. The company has assigned 60–70 employees to the six combined name stores, but will need to deploy more people if it continues to convert Uny stores to MEGA stores at a rate of 20 stores per year. It plans to train more employees as well as expects those who gain experience at the six stores to apply their knowledge to future store format conversions. The company commented that it may limit the opening of new stores in FY06/19 to around 20, because stores converting from Uny stores are all large stores requiring a large work force and substantial time. Although this means slower sales growth due to cutting back on opening new stores, the company thinks that its equity-method profit should increase if earnings of converted stores improve as expected.

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shared purchasing/delivery, and integrating e-money systems, but the key to success of the venture lies in turning around earnings performance of the six combined name stores. Shared Research will be following developments closely in late February through late March, including progress of the rebranded stores and continuity of earnings performance.

Supplementary explanation of results Comparable store sales growth: DQ sales up 5.6% (+4.0% excluding duty-free sales) and Nagasakiya 3.7% (+3.7% excluding duty-free sales). Continued increase of customer traffic each month except August 2016

20% Sales Customer count Customer spend

15%

10%

-5%

-10%

-15% Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Source: Shared Research based on company material

Comparable store sales were up 5.6% (+4.0% excluding duty-free sales), and customer traffic and average customer spend both increased. The company promoted a revitalization project to improve performance mostly at newer stores and succeeded at raising the standard for comparable store growth. Store-level organizational reforms in April 2017 proved effective, contributing to SG&A expense savings as a result of improved personnel efficiency. Also noteworthy is the gross profit increase and the improvement in GPM (DQ and Nagasakiya were both up 0.1pp).

While the company forecasts FY06/18 GPM to be flat YoY, in Q3 FY06/17 it completed a round of inventory disposal of high-priced items, made progress with inventory controls at existing stores, posted strong comparable store sales, and had said it was entering a phase to expect increase in both gross profit and GPM from Q4 FY06/17 onward. That has in fact been the result, as GPM was up 0.1pp at existing stores in Q1. The company essentially aims to expand gross profit, but it should be noted that accelerated pace of new store expansion (temporarily sacrifice profitability to draw customers and improve brand recognition) and continued rise in demand for relatively low-margin daily necessities could have a negative impact on GPM.

Nagasakiya: robust comparable store sales growth and continuous expansion of gross profits Nagasakiya, which operates MEGA stores that see little positive impact from overseas tourists, posted strong earnings and saw customer approval ratings improve primarily among families and senior citizens. As a result, comparable store sales increased 3.7% in Q1 (“fresh spending” at 3.7%) as favorable performance continued (FY06/17 saw increases of 2.4% YoY in Q1, 2.7% in 1H, 3.0% in cumulative Q3, and 2.9% for the full year ("fresh spending" at 2.9%)). GPM at existing stores was up by 0.1%; coupled with the increase in sales, this led to an increase in gross profit.

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able to boost gross profit as well as GPM by offering a product lineup that addressed customer demand for daily necessities. Similar to DQ stores, measures such as spot procurement that match regional and store characteristics have been a success. The company regards the aggressive rollout of its current price appeal strategy as the future for DQ stores (improving profitability after capturing local market share and boosting profile).

Nagasakiya earnings (left), consolidated gross profit (right)

(JPYbn) (JPYbn) Consolidated gross profit New store openings GPM (right axis) Sales Operating profit OPM (right axis) 3.8% 70 100 4% 3.0% 2.9% 60 27% 80 2.5% 2.4% 3% 2.1% 2.0% 2.0% 50 1.6% 60 1.4% 2% 40 26% 0.9% 40 0.6% 1% 0.3% 0.4% 30 20 0% 20 25% 0.2 0.6 1.1 0.4 1.5 0.2 1.8 1.0 2.2 1.8 2.4 1.5 3.2 1.6 -1.3% 0 -1% 10 -1.1 -0.8 -20 -1.8% -2% 0 24% 1H 1H 1H 1H 1H 1H 1H 1H Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 Source: Shared Research based on company material

New store openings: Leveraging the business' strength of broad accessibility, from city centers to suburbs, the company opened three stores. As of Q1, it is targeting 15 store openings during 1H The company opened three new stores in Q1 (two DQs and one MEGA) and plans to open 15 during 1H. It is actively taking advantage of low interest rates to push ahead with the development of new formats and has opened new stores in spaces formerly occupied by general merchandise stores and electronics mass retailers, where fixtures are available for reuse. The broad accessibility of this line of business, from city centers to suburbs, also acts as a strong point. It plans to continue looking into properties with pre-existing fixtures, while being particular about rolling out new stores. The company is taking advantage of its expertise taking over stores that once belonged to other retailers with all their furnishings intact to develop stores compatible with various location characteristics (regional characteristics, size, targeted areas and type of previous stores). With the acquisition of QSI, it added 24 stores in Hawaii. The company’s business scale in Hawaii (based on FY03/17 figures) is sales of USD634mn and floor space of 58,282sqm in 28 stores.

There were two store closures, with the company taking a strict approach to cutting its losses by determining which stores had not generated results at the 14-month and 21-month marks. The two store closures in Q1 were apparently the result of regional redevelopment.

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Store openings and closures

393 New stores, scrap 20 360 368 400 348 354 19 & build, solution 341 20 stores 319 322 306 311 15 291 295 18 New stores in 278 280 283 286 19 266 11 10 10 properties with pre- 249 252 255 16 9 10 235 236 242 243 existing fixtures 220 221 226 223 228 229 12 9 7 218 218 218 6 6 6 6 6 14 4 9 4 4 5 3 6 3 6 3 3 200 2 2 5 5 2 2 12 1 4 1 10 10 10 9 0 8 -1 -1 -1 -1 -1 -1 -1 6 6 6 6 -2 -2 -2 -2 -2 -5 -3 -3 -3 -3 -3 -3 -3 -3 6 -5 10 4 3 -10 0 7 6 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 2 4 4 5 4 5 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 0 1 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 New store openings Store closures Store count (right axis) FY06/16 FY06/17 FY06/18 Source: Shared Research based on company data

According to the company, in Q1 FY06/18, an improvement in personnel efficiency per hour and sales growth contributed to SG&A expense cuts. Don Quijote believes that organizational development is an ongoing process and says it will continue to review its organization to change and adapt as necessary.

Organizational reform

Don Quijote New MEGA Don Quijote Nagasakiya MEGA

East Japan Mid Japan West Japan East Japan West Japan Nagasakiya Sales Sales Sales Sales Sales MEGA Sales Department Department Department Department Department Department

9 branches 8 branches 12 branches 8 branches 8 branches 7 branches

Source: Shared Research based on company data.

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Project to revitalize existing stores The organizational reforms also included a change from a branch-based store support structure to a headquarters-based support structure for all stores. We assume this is a move to improve efficiency because of a labor shortage as a result of a large increase in the number of branch offices. The company also formed a project team to revitalize existing stores, because 22 of 72 stores opened in FY06/16 (40 stores) and FY06/17 (32 stores) did not attain initial earnings targets. Multiple teams worked together to turn around earnings performance mainly of relatively new stores. As a result of these efforts, sales in September 2017 were up 60% from June sales. The GPM of these stores dropped for a time, because the company positioned them as reopening stores, improving their product range and discounting to raise their profile. Nonetheless, the measures proved effective, because underperforming stores turned profitable in three months. The company is optimistic that the effect of opening new stores will be greater, contributing to comparable store sales growth rates when new stores become existing stores 13 months after opening.

After bottoming out in summer 2016, average customer spend is showing a gradual improvement and is generally stable Like other retailers, Don Quijote saw a decline in average customer spend since January 2016 as a result of the drop in large-scale buying by a few brokers. However, after bottoming out in summer 2016, average customer spend showed gradual improvement. Although there was a slight deterioration in Q1, it has remained generally stable. Even assuming the exchange rate served as a temporary negative factor, as long as the tourists’ customer spend remains stable on a CNY basis, Don Quijote’s efforts to increase its price appeal and expand its merchandise selection could still enhance the appeal of its stores to tourists and may increase its market share. This, together with the steady rise in customer traffic, has left the company with no real concerns about trends in demand from overseas tourists.

Duty-free sales-related indicators

Customer count ('000; right axis) Sports and leisure goods Watches and fashion merchandise 400 Foods Household goods Customer spend (JPY'000) 8% 60 Electric appliances Duty-free, % of total sales (left axis) No. of tourists visiting Japan (10,000; right axis) 350 7% 50 300 6% 40 250 5% 200 52% 55% 54% 30 4% 37% 44% 48% 48% 49% 41% 150 3% 41% 20 12% 39% 15% 100 2% 11% 11% 16% 17% 17% 18% 18% 32% 16% 10 11% 39% 50 11% 29% 1% 38% 36% 25% 24% 25% 20% 17% 18% 0%6% 49% 40% 84% 0 0 0% Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 2014 2015 2016 2017 FY06/15 FY06/16 FY06/17 FY06/18 Source: Shared Research based on company data

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Trends in buying by Chinese tourists

No. of tourists from China (left axis) Customer spend (CNY-based; average) China South Korea Taiwan Hong Kong Others Customer spend (CNY-based; median) 500 300 1,800 450 1,600 400 250 350 1,400 200 300

150 1,200 250 200 100 1,000 150 100 50 800 50 0 600 0 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 ('000) FY06/15 FY06/16 FY06/17 FY06/18 (RMB) ('000) FY06/15 FY06/16 FY06/17 FY06/18

Don Quijote, MEGA and NEW MEGA store openings (including scrap and build, and format changes)

12 Don Quijote MEGA

0 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 Source: Shared Research based on company data Supplementary explanation of results Overseas: Acquired shares in US company QSI, Inc.; opened stores in Singapore and Thailand In September 2017, the company acquired shares in QSI, Inc., which runs supermarkets in Hawaii, adding 24 stores to the group. Goodwill amortization is estimated at under JPY700mn per year over 29 years. QSI posted FY09/16 sales of USD436mn, breaking down into processed foods (34.8%), fresh produce (29.6%), chilled groceries (21.0%), and non-food items (14.6%) and its OPM is around 4%. We note that the OPM may decrease due to the need to invest in fittings and other equipment.

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Inventory Cognizant of the issue of maintaining a sense of speed, the company curbed inventory levels in FY06/17, with efforts made to improve merchandise turnover. Although the inventory level increased in Q1 FY06/18, the company says this was in response to the favorable performance of existing stores.

SG&A expenses up on store openings but increase appears to have run its course. New personnel hiring led to higher sales Although there was a one-time expense of JPY614mn (equivalent to 0.3pp) related to the acquisition of QSI in Q1, the full-year SG&A expense ratio decreased by 0.6pp (an improvement). The majority of the increase in expenses consisted of investments and initial costs, such as personnel costs for opening new stores, depreciation, and expenses for consumable goods. However, the rise in personnel costs seems to be winding down and man-hour productivity improved. This has ultimately improved competitiveness at the store level and led to higher sales. In addition, restructuring was conducted in October 2015 and April 2017, and that has been having a positive impact on operations.

SG&A expense

(JPYbn) Salaries and allowances Rents Commission paid Depreciation Other 50 45.6 45.0 41.5 41.7 42.6 42.5 39.8 38.8 38.4 39.0 40 35.6 34.0 33.8 34.4 14.0 12.7 32.2 12.2 12.3 12.3 12.4 30.5 29.7 30.8 11.4 11.6 28.2 28.8 28.7 29.4 11.7 11.8 30 26.5 26.7 27.1 27.5 27.4 10.9 25.7 26.0 25.2 25.5 25.2 25.4 10.5 11.0 10.6 9.4 9.8 5.6 8.5 9.5 10.1 9.6 5.5 7.3 8.1 8.5 7.9 8.2 9.3 5.0 4.4 5.1 4.6 7.6 7.3 6.8 6.0 7.1 7.8 6.8 4.8 4.3 4.6 4.5 6.6 20 4.3 3.7 4.1 3.9 5.6 5.7 5.8 6.2 4.1 3.6 5.2 5.1 5.2 5.4 3.1 3.1 3.1 3.1 3.1 3.2 3.1 3.6 3.2 3.5 3.4 4.9 5.0 2.8 3.3 2.7 3.0 3.2 2.9 4.6 4.6 4.5 4.6 4.6 4.2 4.3 4.3 4.3 4.3 4.3 4.4 10 4.4 4.4 4.4 5.1 4.5 4.5 4.5 4.6 4.5 4.4 14.2 14.8 15.1 15.2 16.0 16.1 16.1 16.3 16.7 11.3 11.6 12.0 12.4 12.8 14.0 9.0 8.9 8.6 8.6 8.5 8.7 8.8 9.0 9.2 9.2 9.4 9.8 9.8 9.9 9.9 10.0 10.2 10.6 0 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 Source: Shared Research based on company data

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Salaries and allowances

Salaries and allowances, % of sales Salaries and allowances, % of sales Retail food, % of sales (right axis) Inbound, % of sales (SR est., right axis) 9% 8% 9% 36% 8% 6% 8% 34%

7% 4% 7% 32%

6% 30% 6% 2%

Store count by format

393 400 368 354 360 37 341 348 14 350 319 322 14 14 306 311 14 14 291 295 278 280 283 286 14 14 14 300 266 14 14 249 252 255 14 14 14 14 107 112 113 235 236 242 243 14 94 100 104 250 229 3 3 3 14 85 88 3 3 3 3 77 81 3 64 65 68 71 75 56 57 62 23 23 24 25 25 200 49 52 54 56 21 21 23 44 46 45 15 17 18 18 18 20 14 13 14 14 15 15 150 12 12 13 14 14

198 199 100 174 175 183 182 184 184 194 195 196 197 150 154 156 157 157 161 163 165 165 172 172 172 173 50 0 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 Don Quijote Picasso MEGA and New MEGA DOit Nagasakiya Overseas

Source: Shared Research based on company data

Full-year FY06/17 results (out August 15, 2017)

FY06/17: Surpassed company targets for store openings, leveraged strengths to boost comparable store sales, marking 28th ▷ consecutive quarter of higher sales and operating profit. Announced dividend increase

 New store openings: Leveraging the business' strength of broad accessibility, from city centers to suburbs, the company exceeding targets to open 32 stores, primarily in furnished buildings vacated by other retailers

 Comparable store sales growth: DQ sales up 2.6% (+2.0% excluding duty-free sales) and Nagasakiya 2.9% (+2.9% excluding duty-free sales). Continued increase of customer traffic (+2.2%) excluding August 2016

 Measures reducing margins in order to increase customer turnover were successful; gross profit at comparable stores increased YoY each quarter

GPM: Real decrease controlled at -0.1pp. GPM fell from inventory disposal and aggressively opening new stores to ensure future ▷ survivor merits and from strengthening price appeal of daily necessities

 Making new stores profitable through three phases: improving brand recognition and customer draw in local markets, capturing and solidifying demand from repeat customers, and improving GPM

 Previously impacted from temporary increase in the ratio of stores in the start-up phase due to recent acceleration of new store openings. In 2H, strong comparable stores and inventory control contributed, as progress made with inventory disposal of high-priced items, preparing the foundation that will allow it to aim for improvements in gross profit and GPM

from Q4

SG&A expenses: Controlling expenses to appropriate levels. Excluding new store opening costs, cost management has been ▷ effective. Rise in personnel expenses winding down

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Demand from foreign tourists: Success in boosting store appeal via pricing and products enabled company to capture demand ▷ from foreign visitors. Also tapped into repeat demand FY06/18: Enhance various strategies to achieve the goals of Vision 2020 (sales of JPY1.0tn, 500 stores, and ROE of 15.0%). ▷ Conditions include opening over 30 new stores and increasing DQ comparable store sales by 0.5%.

Consolidated earnings (JPYbn)

900 Sales YoY 16% 50 Operating profit YoY 40% 50 Recurring profit YoY 50%

800 14% 45 35% 40 40 40% 700 12% 30% 35 32% 600 12% 11% 10% 30 25% 30 30% 500 9% 8% 25 23% 20% 19% 400 8% 20% 6% 20 15% 20 16% 20% 300 6% 16% 13% 13% 15 14% 5% 4% 10% 9% 200 4% 10 10% 10% 10 7% 10% 4% 2% 7% 5% 100 5 6% 0 1% 0% 0 0% 0 0% (JPYbn)FY06/09 FY06/11 FY06/13 FY06/15 FY06/17 (JPYbn)FY06/09 FY06/11 FY06/13 FY06/15 FY06/17 (JPYbn)FY06/09 FY06/11 FY06/13 FY06/15 FY06/17

Retail business performance (JPYbn)

250 20% 16% 200 15% 14% 14% 15% 12% 150 11% 10% 10% 10% 10% 9% 10% 7% 8% 100 5.9% 5.9% 5.8% 6% 5.1% 4.9% 4.6% 4.4% 4.6% 4.7% 4.2% 4.1% 4.6% 3.7% 3.6% 3.4% 3.7% 3.7% 4.0% 3.5% 3.7% 3.5% 3.6% 2.7% 5% 50 0.5% 2.4% 2.0% 1.0% 8.8

0.9% 8.7 8.5 8.4 8.3 7.5 7.0 6.8 6.7 6.5 6.3 6.0 5.9 5.7 5.6 5.5 5.5 5.0 4.8 4.5 4.3 4.3 4.3 4.0 1.7 1.3 0.8 5.4 0 0% Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 (JPYbn) Sales Operating profit Sales YoY (right axis) Operating profit YoY (right axis) Source: Shared Research based on company data Results summary Surpassed company targets for store openings, leveraged strengths to boost comparable store sales, marking 28th consecutive quarter of higher sales and operating profit. Announced dividend increase Strategies implemented in FY06/14 and FY06/15 to capture demand from the two large market segments of families and overseas tourists produced solid results in FY06/15 and FY06/16, with continued progress in cumulative Q3 FY06/17. Inclement weather and the consumer spending environment had a greater negative impact on individual consumption than the company anticipated, but it proceeded with its aggressive business approach to readily handle volatility. The company faced the consumer spending environment with a balance between prioritizing increases in customer numbers and items sold, mainly by increasing gross profit, even if it meant GPM would slightly suffer. As a result, comparable store sales and gross profit rose while new stores opened, marking an increase in sales (+9.1%) and operating profit (+6.9%) for the 28th consecutive quarter. Results far surpassed the company targets that had been revised upward in Q3.

The company emphasized the following points as highlights for FY06/17 results: 1) strengthening of unique proposals and management of individual stores, 2) more robust consumption from foreign tourists, 3) solid store development, including furnished buildings vacated by other retailers, 4) continued rise in gross profit, even with GPM tradeoffs, 5) controlling SG&A expenses to appropriate levels, and 6) financing through debt offerings with long term to maturity.

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Comparable store sales: DQ sales up 2.6% (+2.0% excluding duty-free sales) and Nagasakiya 2.9% (+2.9% excluding duty-free sales). Continued increase of customer traffic (+2.2%) excluding August 2016 Comparable store sales up 2.6% (+2.0% excluding duty-free sales), customer traffic up 2.2%, and average customer spend up 0.4%. Also noteworthy is the gross profit increase in each quarter (Q1 and Q2 up by less than 1%, Q3 and Q4 up by approximately 3%). The company has positioned the full-range discount store format (applied in the MEGA stores) as its main post-GMS format. In leveraging its ability to turn a profit on non-food items, the company can offer more competitive prices on food products, prompt increase in customer traffic, and boost sales and gross profit. We find the MEGA/New MEGA stores are the sole post-GMS format candidates of choice.

While the company forecasts FY06/18 GPM to be flat YoY, in Q3 FY06/17 it completed a round of inventory disposal of high-priced items, made progress with inventory controls at existing stores, posted strong comparable store sales, and had said that it was entering a phase to expect increase in both gross profit and GPM from Q4 onward. The company essentially aims to expand gross profit, but it should be noted that accelerated pace of new store expansion (temporarily sacrifice profitability to draw customers and improve brand recognition) and continued rise in demand for relatively low-margin daily necessities could have a negative impact on GPM.

Nagasakiya results (left); Consolidated GPM (right)

(JPYbn) (JPYbn) Consolidated gross profit New store openings GPM (right axis) Sales Operating profit OPM (right axis) 3.8% 100 4% 70 2.9% 3.0% 60 27% 80 2.5% 2.4% 3% 2.1% 2.0% 2.0% 50 1.6% 60 1.4% 2% 0.9% 40 26% 40 0.6% 1% 0.3% 0.4% 30 20 0% 20 25% 0.2 0.6 1.1 0.4 1.5 0.2 1.8 1.0 2.2 1.8 2.4 1.5 3.2 1.6 -1.3% 0 -1% 10 -1.1 -0.8 -20 -1.8% -2% 0 24% 1H 1H 1H 1H 1H 1H 1H 1H Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 Source: Shared Research based on company data Nagasakiya: robust comparable store sales growth and continuous expansion of gross profits Nagasakiya, which operates MEGA stores that see little positive impact from overseas tourists, posted strong earnings and saw customer approval ratings improve primarily among families and senior citizens. As a result, comparable store sales increased 2.4% YoY in Q1, 2.7% in 1H, 3.0% in cumulative Q3, and 2.9% for the full year ("fresh spending" at 2.9%). The rate of comparable store sales growth has been increasing since Q1. Gross profit likely continued to rise, with full-year sales and operating profit up 5.5% and 22.7% YoY, respectively.

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company regards the aggressive rollout of its current price appeal strategy as the future for DQ stores (improving profitability after capturing local market share and boosting profile).

New stores: more properties available due to retail companies’ restructuring; renovating existing stores and developing new formats The company had an initial full-year target of opening over 30 stores, but instead opened 32 stores. The company is actively taking advantage of low interest rates to push ahead with the development of new formats and has opened new stores in spaces formerly occupied by general merchandise stores and electronics mass retailers, where fixtures are available for reuse. Q1 saw ten new stores (six Don Quijote stores, four MEGA/NEW MEGA stores; of which five in properties with pre-existing fixtures), Q2 saw six (one Don Quijote, three MEGA/NEW MEGA, one Nagasakiya, one DOit store; of which three with pre-existing fixtures), Q3 saw six (one Don Quijote, three MEGA/NEW MEGA, one Kyo Yasu Do, and one DOit store; of which five with pre-existing fixtures), and Q4 saw ten (three Don Quijote stores, five MEGA/NEW MEGA stores, one Picasso store, and one DOit store; of which six with pre-existing fixtures). The broad accessibility of this line of business, from city centers to suburbs, also acts as a strong point. The company is starting to experiment with the format of its Kyo Yasu Do and DOit stores, but appears to be designing stores responding to issues at comparable stores.

The company is aware that there are more properties available due to restructuring by retail companies. It plans to look into these, while being particular about rolling out new stores. The company said it was also steadily renovating existing stores and developing new formats. The company is taking advantage of its expertise taking over stores that once belonged to other retailers with all their furnishings intact to develop stores compatible with various location characteristics (regional characteristics, size, targeted areas and type of previous stores).

There were five store closures, with the company taking a strict approach to cutting its losses. Two of the stores had not generated results at the 14-month and 21-month marks.

Store openings and closures

Versus company plan In Q3, the company made another upward revision to its earnings forecasts. Refer to the following for a summary of the upward revisions made in Q2 and Q3.

Overview of upward revision in Q3: The company once again revised up full-year earnings forecasts in Q3. There were special factors such as converting subsidiary Accretive Co. into an equity-method affiliate, JPY2.2bn in fees to receive financing through a JPY100.0bn subordinated loan, and the sale of fixed assets. Sales, operating profit, and net income were revised up by JPY2.0bn (0.2%), JPY500mn (1.1%), and JPY4.0bn (14.5%), respectively. The large rise in net income was due to a special factor (the sale of fixed assets). Recurring profit, however, was revised down by JPY700mn (1.5%), also due to special factors. The forecasts assume that comparable stores sales, which make up roughly 90% of the company’s sales and profits, are expected to be flat in Q4. The company says that it forecast carefully and conservatively, so as not to come up short of plan, and that it expects to continue aiming for an increase in sales.

Overview of upward revision in Q2: 1H saw sales exceed the company forecast by 0.6%, gross profit fall short by 0.8%, operating profit overshoot by 1.3%, while SG&A expenses were 1.4% below the company forecast. Gross profit was JPY860mn below forecast and GPM fell 0.4pp. Shared Research

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believes this was due to a roughly JPY1.8bn YoY increase in inventory write-downs, and to the strategy to offer lowest prices for daily necessities in each commercial area, primarily at new stores.

However, we believe there is no reason for concern as a) the inventory write-down was likely due to forex effects on imported brands for which there is not much of a real drop in value, b) it is leading to an increase in customer numbers and gross profit at comparable stores, and c) the company is coming out with measures to increase customer approval ratings in order to capture future survivor merits. The company appears to view these factors as temporary. The full-year plan has revised only net income, from JPY26.8bn previously to JPY27.5bn.

Revisions

FY06/16 FY06/17（as of Q3） FY06/17（as of Q2） FY06/17（as of Q1） FY06/17 Initial Est. (JPYmn) 1H 2H FY 1H 2H Est. FY Est . 1H 2H Est. FY Est . 1H Est. 2H Est. FY Est . 1H Est. 2H Est. FY Est . Sales 384,445 375,147 759,592 417,694 404,306 822,000 417,694 402,306 820,000 415,000 405,000 820,000 415,000 405,000 820,000 YoY 12.3% 9.8% 11.1% 8.6% 7.8% 8.2% 8.6% 7.2% 8.0% 7.9% 8.0% 8.0% 7.9% 8.0% 8.0% Gross profit 102,941 98,952 201,893 110,640 109,360 220,000 110,640 109,360 220,000 111,500 108,500 220,000 111,500 108,500 220,000 YoY 12.3% 9.8% 11.1% 7.5% 10.5% 9.0% 7.5% 10.5% 9.0% 8.3% 9.6% 9.0% 8.3% 9.6% 9.0% GPM 26.8% 26.4% 26.6% 26.5% 27.0% 26.8% 26.5% 27.2% 26.8% 26.9% 26.8% 26.8% 26.9% 26.8% 26.8% SG&A 77,370 81,338 158,708 84,297 90,703 175,000 84,297 90,703 175,000 85,500 89,500 175,000 85,500 89,500 175,000 SG&A-to-sales ratio 20.1% 21.7% 20.9% 20.2% 22.4% 21.3% 20.2% 22.5% 21.3% 20.6% 22.1% 21.3% 20.6% 22.1% 21.3% Operating profit 25,571 17,614 43,185 26,343 19,157 45,500 26,343 18,657 45,000 26,000 19,000 45,000 26,000 19,000 45,000 YoY 9.2% 12.2% 10.4% 3.0% 8.8% 5.4% 3.0% 5.9% 4.2% 1.7% 7.9% 4.2% 1.7% 7.9% 4.2% OPM 6.7% 4.7% 5.7% 6.3% 4.7% 5.5% 6.3% 4.6% 5.5% 6.3% 4.7% 5.5% 6.3% 4.7% 5.5% Recurring profit 25,873 17,924 43,797 26,928 17,872 44,800 26,928 18,572 45,500 26,200 19,300 45,500 26,200 19,300 45,500 YoY 7.6% 11.2% 9.1% 4.1% -0.3% 2.3% 4.1% 3.6% 3.9% 1.3% 7.7% 3.9% 1.3% 7.7% 3.9% RPM 6.7% 4.8% 5.8% 6.4% 4.4% 5.5% 6.4% 4.6% 5.5% 6.3% 4.8% 5.5% 6.3% 4.8% 5.5% Net in co me 14,232 10,706 24,938 16,459 15,041 31,500 16,459 11,041 27,500 16,000 10,800 26,800 14,500 12,300 26,800 YoY 3.9% 13.2% 7.7% 15.6% 40.5% 26.3% 15.6% 3.1% 10.3% 12.4% 0.9% 7.5% 1.9% 14.9% 7.5% Source: Shared Research based on company data Outcome of various initiatives Demand from tourists visiting Japan: Decline in large-volume purchases by brokers, attracting more overseas tourists to stores by changing the sales mix and improving price appeal Customer numbers continued to grow even as the number of products eligible for duty-free stopped growing from October 2015 onward, and despite changes in Chinese government policies. The company has seen steady growth in general overseas tourist traffic at its stores since the beginning of 2016, and views demand from overseas tourists as entering a new stage (exceeded the previous year for 33 consecutive months after the start of the new tax exemption system). It sees the following changes:

Increase in demand from individuals and repeat customers, shifting away from previous demand from tour groups; ◤ Changes in product preferences from durable high-price and leisure goods to practical consumables. ◤ Further, recently Don Quijote stores have been attracting interests on SNS as places where tourists visiting Japan “spend money as part of an experience”. It is a highly popular shopping destination among tourists visiting Japan. As the company’s extensive product lineup changes flexibly to reflect bestselling items sought by inbound tourists, recently, the sales composition of daily necessities has been rising.

After bottoming out in summer 2016, average customer spend is showing a gradual improvement Like other retailers, Don Quijote saw a decline in average customer spend since January 2016 as a result of the drop in large-scale buying by a few brokers. However, after bottoming out in summer 2016, average customer spend showed gradual improvement. Although the yen was weak, even assuming it served as a temporary negative factor, if the average tourist has a fixed budget for spending, this means Don Quijote’s efforts to increase its price appeal and expand its merchandise selection could enhance the appeal of its stores to tourists and may increase its market share. This, together with the steady rise in customer traffic, has left the company with no real concerns about trends in demand from overseas tourists.

68/96 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.03.09 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Duty-free sales-related indicators

Customer count ('000; right axis) Electric appliances Household goods Customer spend (JPY'000) Foods Watches and fashion merchandise 8% 60 Number of tourists visiting Japan (10,000; right axis) 300 Sports and leisure goods Duty-free sales, % of total sales (left axis)

Trends in buying by Chinese tourists

No. of tourists from China (left axis) Customer spend (CNY-based; average) China South Korea Taiwan Hong Kong Others Customer spend (CNY-based; median) 400

250 1,600 350

200 1,400 300 250 150 1,200 200

100 1,000 150 100 50 800 50

0 600 0 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 ('000) FY06/15 FY06/16 FY06/17 (RMB) ('000) FY06/15 FY06/16 FY06/17 Source: Shared Research based on company data New format and store development With regard to new format and new store development, the company has developed a wide variety of formats that give it the flexibility to tailor stores to suit a particular location, allowing it to move into spaces vacated by general merchandise stores or electronics mass retailers. The company is still polishing up its MEGA and NEW MEGA formats as post-GMS format stores; its new post-home improvement format stores include DOit Pro, DOit WithReHome, Joints Shokunin, and City DoIt!. The company is also considering whether to establish multiple stores as shop-in-shops. In FY06/18 the company is likely to slow down the pace of new store openings and focus on strengthening existing stores.

By switching over to these post-home improvement store formats, the company has also given itself a way to invigorate sales at locations where it has smaller (roughly 1,000sqm) Don Quijote stores that are growing old and are starting to lose some of their competitiveness. That said, the company has been prioritizing the rollout of stores in the Don Quijote, MEGA, and NEW MEGA formats.

Store openings in buildings with reusable fixtures The development of these new formats has allowed the company to accelerate its store openings. After acquiring the expertise to take over stores that once belonged to other retailers with all their fixtures intact (such as GMS and electronics mass retailers), the company's decision to start moving into spaces vacated by other retailers has been adding to earnings and cost savings. In Q1 FY06/17, of the 10 new stores, five were new stores opened in properties with pre-existing fixtures; of the six new stores in Q2 FY06/17, four had pre-existing fixtures; and of the six new stores in Q3 FY06/17, five had pre-existing fixtures. In Q4, the company plans to open MEGA Shibuya Honten (site previously occupied by a pachinko parlor) and DOit Nishi-Kawaguchi store (site previously occupied by a rental video chain store). For the full-year, Shared Research estimates the company will open 32 stores (including 20 in locations with pre-existing fixtures).

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Store count at quarter-end and new store openings per quarter (left), breakdown of new store openings (right, Shared Research estimates)

New stores, Scrap 20 360 368 400 348 354 19 & build, Solution 341 20 stores 319 322 306 311 15 291 295 18 New stores in 278 280 283 286 19 266 11 10 10 properties with pre- 249 252 255 16 9 10 235 236 242 243 existing fixtures 220 221 226 223 228 229 12 9 7 218 218 218 6 6 6 6 6 14 4 9 4 4 5 3 6 3 6 3 200 2 2 5 5 2 2 12 1 4 1 10 10 10 9 0 8 -1 -1 -1 -1 -1 -1 -1 6 6 6 6 -2 -2 -2 -5 -3 -3 -3 -3 -3 -3 -3 -3 6 -5 10 4 -10 0 7 6 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 2 4 4 5 4 5 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 New store openings Store closures Store count (right axis) FY06/16 FY06/17 Source: Shared Research based on company data

Store openings in regions with populations of 40,000 to 50,000 As more and more vacant premises appear nationwide, the company intends to promote development using the store models most suited to the size and location of premises and local characteristics. The company says it is opening new stores while carefully examining return on investment and being particular about details.

View on ROI for new stores: The company says it has been successful in recovering its investment in five years on average (three years for rental properties, 10 years for purchased properties), and is opening new stores in a way that will help it maintain this situation.

Q1 also saw the opening of a store on the island of Miyakojima, Okinawa Prefecture, the first store on one of outlying islands of Japan. On August 11, opening day, some 5,000 of the island’s nearly 50,000 residents visited the store. Don Quijote’s ability to develop stores in regions with populations of 40,000 to 50,000 is likely to serve it well going forward.

New store format depends on location characteristics In Q4, the company opened a stores integrated into a hotel (Abeno Tennouji-Ekimae store on April 21) in front of a metropolitan terminal station, and an innnovative flagship store (MEGA Don Quijote Shibuya Honten on May 12). Though the Abeno Tennouji-Ekimae store is only 2,000sqm, since it is integrated into a hotel (adjacent builidng is also a hotel) in front of a terminal station, the company is expecting to see demand from inbound tourists as the location offers easy access to the Kansai international airport. Abeno Tennouji-Ekimae store is the second store integrated into a hotel after the Korakuen store in Tokyo, and the West Japan Railway Group opened a hotel as a tenant on April 27.

MEGA Don Quijote Shibuya Honten relocated from the Shibuya store across the street. The former Shibuya store opened in December 1999 as the company’s first urban multi-store, and was operated to match location characteristics, including actively conducting events related to Holloween and Christmas. The floor space of the new store is significantly larger at about 5,500sqm, and it has been evolving in various aspects as an “innovative flagship store”, as the store: a) is Don Quijote’s first store to offer authentic fresh foods (discounted prices) in busy shopping areas; b) responds to demand from inbound tourists in the Shibuya region overall, an area where supply to meet such demand is lacking; c) contributes to regional revitalization; d) develops and offers “mobile foods,” which customers are able to take out (from July). MEGA Don Quijote Shibuya Honten is on a site that was vacated by other retailers.

Furthermore, in FY06/18 (Q1), the company opened the Shinjuku Tonanguchi store, its second in the Shinjuku area (on July 14, 2017). The floor space of this store will roughly double (approximately 2,000sqm) that of the present Shinjuku Higashiguchi store, and it should gradually see a rise in sales, including due to demand from inbound tourists.

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Don Quijote, MEGA and NEW MEGA store openings (including scrap and build, and format changes)

12 Don Quijote MEGA 10 8

0 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 Source: Shared Research based on company data

Supplementary explanation of results GPM: successfully made food prices the most competitive in each area, increased length of customer visits, and encouraged impulse buying of non-food items In a difficult market environment, Don Quijote places more emphasis on increasing gross profit than increasing GPM. This allows it to sell products (such as food) at the most competitive prices in each region, drawing in customers. Increasing the appeal of stores in this way encourages customers to stay in stores longer, opening up opportunities for impulse purchases of non-food items. The company’s focus on drawing customers through competitive prices makes it difficult to focus on GPM.

Inventory Cognizant of issue of maintaining a sense of speed, inventory levels were curbed in FY06/17, with efforts made to improve merchandise turnover. Inventory levels have been decreasing from Q2 FY06/17 onward, with the company remarking at a briefing that they wish to maintain security even while keeping the issue of speed in mind.

SG&A expenses up on store openings but increase appears to have run its course. New personnel hiring led to higher sales The full-year SG&A expense ratio decreased by 0.1pp (an improvement). The majority of the increase in expenses consisted of investments and initial costs, such as personnel costs for opening new stores, depreciation, and expenses for consumable goods.

71/96 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.03.09 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

There were also rises in costs for strengthening the lineup of food and other daily necessities at comparable stores, increasing hours to cope with rising demand from overseas tourists, and for hiring personnel. Selling costs also increased in line with the rise in sales. That said, the increase in sales offset all of these impacts, resulting in a 6.9% rise YoY in operating profit.

Although the company made a conscious decision to spend more on personnel and in other areas, the added spending ultimately improved its competitiveness at the store level and led to higher sales. However, restructuring and measures to secure additional personnel were conducted in FY06/16, and operations have begun to improve. The company is looking to increase profitability and absorb the additional expenses with the help of further organizational reforms. In addition, personnel expenses that outpaced sales will likely return to normal in FY06/17. The company says that, excluding new stores and natural increases, cost controls have been effective.

Business Restructuring The company implemented a major organizational shakeup in April 2017. The organizational reform in October 2015 centered on merchandise, moving from a seven-segment structure to a system with three categories and 160 intermediate classifications, aiming to a) look for individual stores to adopt their own business models, b) be more quickly in tune with changing trends, c) focus on high depth and narrow breadth in merchandise development, and d) combine small-scale and large-scale advantages. The organizational reform in April is centered on stores, moving from an 18-branch structure to a system of six sales departments and 52 branches, aiming to a) look for individual stores to adopt their own business models, b) foster next-gen management teams, c) conduct a round of organizational consolidation, and d) boost the motivation of young executive candidates.

Business Restructuring Spot it ems [40% of t otal] Staple items [60% of total] Three formats Six sales 52 branches MD and SPA Development HQs Spot products Store layout for 160 product categories Store Unique purchase by Choose staple item store East Japan Sales HQs Branch 1 Store each store for its own trade area layout for each trade area Store

Store Pure Unique purchase by Choose staple item store Central Japan Sales Branch 1 Store Don Quijote each store for its own trade area layout for each trade area Store

Store Unique purchase by Choose staple item store West Japan Sales HQs Branch 1 Store each store for its own trade area layout for each trade area Store

Store Unique purchase by Choose staple item store MEGA East Japan Sales Sales Branch 1 Store Don Quijote each store for its own trade area layout for each trade area Store

Source: Shared Research based on company data

The company finds that their robust sales, which continued even after the consumption tax hike, can be attributable to factors including the successful combination of organizational, personnel, and merchandise development. This round of organizational reform is based on the logic that expanding and maximizing "the full wisdom of the company's employees" will boost the physical fitness of the company. We will be paying attention to see if this serves as a further catalyst for growth.

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SG&A expense

(JPYbn) Salaries and allowances Rents Commission paid Depreciation Other 50 45.6 41.5 41.7 42.6 42.5 39.8 38.8 38.4 39.0 40 35.6 34.0 33.8 34.4 14.0 12.3 12.4 30.8 32.2 12.2 12.3 29.4 30.5 29.7 11.7 11.4 11.6 27.5 28.2 28.8 28.7 11.8 26.0 26.5 26.7 27.1 27.4 10.9 30 25.7 25.2 25.5 25.2 25.4 10.5 11.0 10.6 9.4 9.8 8.5 9.5 10.1 9.6 5.5 7.3 8.1 8.5 7.9 8.2 9.3 5.0 4.4 5.1 4.6 7.6 7.3 6.8 6.0 7.1 7.8 6.8 4.8 4.3 4.6 4.5 20 4.3 3.7 4.1 3.9 5.6 5.7 5.8 6.2 4.1 3.6 5.2 5.1 5.2 5.4 3.1 3.1 3.1 3.1 3.1 3.2 3.1 3.6 3.2 3.5 3.4 4.9 5.0 2.8 3.3 2.7 3.0 3.2 2.9 4.6 4.6 4.5 4.6 4.6 4.2 4.3 4.3 4.3 4.3 4.3 4.4 10 4.4 4.4 4.4 5.1 4.5 4.5 4.5 4.6 4.5 4.4 14.8 15.1 15.2 16.0 16.1 16.1 16.3 11.6 12.0 12.4 12.8 14.0 14.2 9.0 8.9 8.6 8.6 8.5 8.7 8.8 9.0 9.2 9.2 9.4 9.8 9.8 9.9 9.9 10.0 10.2 10.6 11.3 0 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 Source: Shared Research based on company data

Salaries and allowances

Salaries and allowances, % of sales Salaries and allowances, % of sales Retail food, % of sales (right axis) Inbound, % of sales (SR est., right axis) 9% 8% 9% 36% 8% 6% 8% 34%

7% 4% 7% 32%

6% 30% 6% 2%

5% 28% 5% 0% Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 Source: Shared Research based on company data

Store count by format

400 368 354 360 341 348 14 350 319 322 14 14 306 311 14 14 291 295 278 280 283 286 14 14 14 300 266 14 14 249 252 255 14 14 14 107 112 235 236 242 243 14 14 94 100 104 250 229 3 3 3 14 85 88 3 3 3 77 81 3 3 65 68 71 75 56 57 62 64 23 24 25 200 49 52 54 56 21 21 23 23 44 46 45 15 17 18 18 18 20 14 13 14 14 15 15 150 12 12 13 14 14

100 175 183 182 184 184 194 195 196 197 198 150 154 156 157 157 161 163 165 165 172 172 174 172 173 50 0 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 Don Quijote Picasso MEGA and New MEGA DOit Nagasakiya Overseas Source: Shared Research based on company data Majica: Average customer spend and number of members (Shared Research estimates)

Customer spend majica user spend No. of majica users majica sales, % of total sales (right axis) 6,000 30% 3,500 5,000 27% 3,000 4,000 24% 3,000 2,500 21% 2,000 2,000 1,000 18%

1,500 0 15% Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 (JPY) FY06/15 FY06/16 FY06/17 ('000) FY06/15 FY06/16 FY06/17 Source: Shared Research based on company data

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Income statement

Income statement FY06/05 FY06/06 FY06/07 FY06/08 FY06/09 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Sales 232,778 260,779 300,660 404,924 480,856 487,571 507,661 540,255 568,377 612,424 683,981 759,592 828,798 YoY 20.7% 12.0% 15.3% 34.7% 18.8% 1.4% 4.1% 6.4% 5.2% 7.7% 11.7% 11.1% 9.1% CoGS 179,330 200,425 227,537 296,215 353,616 364,065 378,587 400,712 418,570 451,406 502,240 557,699 610,218 Gross profit 53,448 60,354 73,123 108,709 127,240 123,506 129,074 139,543 149,807 161,018 181,741 201,893 218,580 SG&A expenses 42,634 48,500 59,537 92,728 110,068 102,439 103,738 110,223 117,438 126,726 142,638 158,708 172,395 Operating profit 10,814 11,854 13,586 15,981 17,172 21,067 25,336 29,320 32,369 34,292 39,103 43,185 46,185 YoY 1.9% 9.6% 14.6% 17.6% 7.5% 22.7% 20.3% 15.7% 10.4% 5.9% 14.0% 10.4% 6.9% Non-operating income 2,724 3,332 2,861 2,749 2,682 2,900 2,699 2,922 2,852 2,771 3,543 3,287 4,076 Non-operating expenses 697 790 673 1,526 3,865 2,858 2,897 2,959 33,201 1,576 2,486 2,675 4,738 Recurring profit 12,841 14,396 15,774 17,204 15,989 21,109 25,138 29,283 33,201 35,487 40,160 43,797 45,523 YoY 1.9% 12.1% 9.6% 9.1% -7.1% 32.0% 19.1% 16.5% 13.4% 6.9% 13.2% 9.1% 3.9% Extraordinary gains 421 4,910 3,471 2,310 2,207 892 1,388 2,499 1,262 382 317 117 12,786 Extraordinary losses 572 1,498 428 2,874 3,982 5,156 5,379 1,387 1,081 1,644 1,320 1,801 2,984 Pretax profit 12,690 17,808 18,817 16,640 14,214 16,845 21,147 30,395 33,382 34,225 39,157 42,113 55,325 Tax charges 5,554 7,083 8,148 7,172 5,344 6,307 7,911 9,658 11,328 10,172 12,225 12,558 16,228 Minorit y int erest s in income -27 - 31 165 316 300 573 892 913 2,582 3,784 4,617 6,015 Net in co me 7,163 10,725 10,638 9,303 8,554 10,238 12,663 19,845 21,141 21,471 23,148 24,938 33,082 YoY 4.6% 49.7% -0.8% -12.5% -8.1% 19.7% 23.7% 56.7% 6.5% 1.6% 7.8% 7.7% 32.7% Capit al expendit ures 17,573 13,297 21,070 28,495 17,936 22,849 37,872 23,563 29,914 35,563 52,727 51,570 45,357 Cash flow s 14,197 17,513 19,399 23,172 25,577 28,641 29,859 30,944 34,646 36,881 46,661 Difference -17,573 -13,297 -6,873 -10,982 1,463 323 -12,295 5,078 -55 -4,619 -18,081 -14,689 1,304 Depreciat ion and amort izat ion 4,441 4,740 5,395 7,398 8,898 9,823 9,908 10,474 11,051 11,408 13,003 15,092 15,952 Depreciat ion 5,033 6,773 8,384 9,372 9,385 9,566 10,026 10,402 11,672 13,301 14,075 Amort izat ion of negat ive goodw ill -452 -452 -1,119 -858 -857 -857 -857 -628 -342 -96 -86 -86 Operating profit before depreciation 15,255 16,594 18,981 23,379 26,070 30,890 35,244 39,794 43,420 45,700 52,106 58,277 62,137 YoY 9.9% 8.8% 14.4% 23.2% 11.5% 18.5% 14.1% 12.9% 9.1% 5.3% 14.0% 11.8% 6.6% OPM 6.6% 6.4% 6.3% 5.8% 5.4% 6.3% 6.9% 7.4% 7.6% 7.5% 7.6% 7.7% 7.5% Source: Shared Research based on company data

Historical earnings trends

Don Quijote enjoyed rapid growth since its establishment, and particularly after its listing, due to new store openings. Around 2000, this rapid growth raised controversy when local residents started protesting Don Quijote openings in their neighborhoods in the name of public order. Ideologically charged political groups and then media joined in. The company was late to respond and to recognize the reputational damage it was incurring. The conflict ended in about 6 months. This coincided with a shift away from central urban areas, where store real estate was increasingly expensive and hard to find, to suburban regions. Larger emphasis on regional stores meant that the company needed to learn how to sell food. These factors resulted in a visible decline in ROIC.

The company has learned its lessons from past events. Specifically, it has been building and managing new stores in full compliance with the Large Store Location Law implemented in June 2000 and paying attention to the needs of local residents. Additional internal measures were taken to improve store opening practices. Although resulting in higher costs, all these steps ensured that despite the increase in the number of stores from 27 in FY06/00 to 185 in FY06/12, there was not a single conflict with local communities over store openings.

From 2007, a trend toward more and stricter legislations emerged in a number of areas relevant to the retailing business. Among the notable changes were restrictions on interest charged by consumer lenders, changes in the Architectural Standards Law, enactment of the Three Community Building Laws (Machizukurisanpo; consisting of the Large Scale Retail Store Law, the Revised Urban Planning Law and Revitalization of City Centers Law), stricter rules under the Entertainment Business Control Law, and local legislation to prevent “public nuisance.” To minimize the impact of these changes, Don Quijote embarked on improving upon its traditional business model. The yen weakening in 2005 negatively impacted imports, and high commodity prices dampened domestic demand for jewelry and watches, which further complicated the situation. It is SR Inc.’s view that the company’s performance over recent years should be viewed through the prism of these challenges. Don Quijote itself believes it demonstrated the flexibility of its business model by successfully switching toward food and household goods.

The DOit and Nagasakiya acquisitions have masked Don Quijote’s sustained high profitability and ROIC. Once these underperforming parts are turned around, ROE close to 15% and ROIC close to 20% should be achievable.

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Balance sheet

Balance sheet FY06/05 FY06/06 FY06/07 FY06/08 FY06/09 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons Cons Cons Cons Cons Cash and deposits 15,055 27,792 38,164 38,381 42,563 41,734 35,031 34,237 31,698 42,690 49,717 42,894 76,430 Accounts receivable 2,311 2,617 3,296 4,397 4,612 4,045 4,585 4,889 5,371 5,730 6,820 7,720 8,966 Purchased receivables ------6,787 6,761 6,738 6,009 5,439 6,606 - Inventories 39,447 44,400 50,962 67,411 70,651 74,452 81,582 83,641 85,997 89,105 94,580 117,400 123,969 Others 4,380 4,933 4,729 6,391 5,976 7,967 6,530 9,288 13,587 15,300 19,425 21,357 18,220 Current assets 61,193 79,742 97,151 116,580 123,802 128,198 134,515 138,816 143,391 158,834 175,981 195,977 227,585 T angible fixed asset s 62,979 58,767 74,738 102,551 114,378 123,734 154,870 169,336 186,094 212,723 262,127 292,052 310,766 Int angible fixed asset s 2,421 2,460 2,514 3,284 2,960 2,721 6,461 10,266 11,974 15,356 17,529 17,005 15,888 Investment securities 6,029 7,285 9,180 9,703 12,055 6,297 4,362 3,779 5,137 4,414 6,425 5,736 7,539 Lease and guarantee deposit 13,121 14,713 18,918 37,716 36,846 33,674 33,303 32,286 31,762 30,963 32,817 35,645 40,474 Investment and other assets 23,455 26,565 35,462 53,873 56,387 47,376 45,454 44,233 45,163 45,222 50,029 55,534 88,629 Fixed assets 88,855 87,792 112,714 159,708 173,725 173,831 206,785 223,835 243,231 273,301 329,685 364,591 415,283 Total assets 150,048 167,534 209,865 276,288 297,527 302,029 341,300 362,651 386,622 432,135 505,666 560,568 642,868 Accounts payable 22,671 26,197 28,684 39,172 41,062 42,670 42,430 44,793 48,036 55,118 60,556 70,194 85,661 Short-term debt 9,223 10,300 29,259 16,192 50,562 61,664 39,631 49,046 46,492 19,944 38,598 32,923 25,022 Payables under securitized receivables ------5,912 7,040 7,147 7,152 Others 8,391 9,949 15,190 17,611 19,259 17,671 24,010 26,404 26,642 33,470 38,382 37,731 46,990 Current liabilit ies 40,285 46,446 73,133 72,975 110,883 122,005 106,071 120,243 121,170 114,444 144,576 147,995 164,825 Long-term debt 55,985 44,938 46,468 96,762 76,163 54,580 93,949 84,296 80,014 74,330 87,846 121,553 159,528 LT payables under securitized receivables ------34,345 34,023 24,876 19,366 Others 1,650 3,409 7,794 21,926 20,509 18,684 16,038 12,377 15,260 15,852 17,854 21,597 19,219 Fixed liabilit ies 57,635 48,347 54,262 118,688 96,672 73,264 109,987 96,673 95,274 124,527 139,723 168,026 198,113 Tot al liabilit ies 97,920 94,793 127,395 191,663 207,555 195,269 216,058 216,916 216,444 238,971 284,299 316,021 362,938 Shareholders' equity 52,128 72,064 81,717 84,899 92,096 107,407 127,087 146,590 167,233 187,637 209,682 231,788 258,282 Valuation and translation adjustments - 511 534 -1,965 -3,257 -2,090 -3,482 -3,395 -889 -292 2,659 -260 771 Share subscription rights - - - 3 1 - - - - - 13 23 98 Minorit y int erest s - 166 219 1,688 1,132 1,443 1,637 2,540 3,834 5,819 9,013 12,996 20,779 Net assets 52,128 72,741 82,470 84,625 89,972 106,760 125,242 145,735 170,178 193,164 221,367 244,547 279,930 Tot al liabilit ies and capit al 150,048 167,534 209,865 276,288 297,527 302,029 341,300 362,651 386,622 432,135 505,666 560,568 642,868 Shareholders' equity 52,128 72,575 82,251 82,934 88,839 105,317 123,605 143,195 166,344 187,345 212,341 231,528 259,053 W orking capit al 19,087 20,820 25,574 32,636 34,201 35,827 43,737 43,737 43,332 39,717 40,844 54,926 47,274 Interest-bearing debt 65,208 55,238 75,727 112,954 126,725 116,244 133,580 133,342 126,506 134,531 167,507 186,499 211,068 Net debt 50,153 27,446 37,563 74,573 84,162 74,510 98,549 99,105 94,808 91,841 117,790 143,605 134,638 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Interest-bearing debt and net debt include payables on securitized receivables.

As of end FY06/14, total assets stood at JPY432.1bn, including inventories of JPY89.1bn (see the inventory section under merchandizing for details). Land (JPY119.7bn), buildings (JPY77.1bn), leasehold deposits (JPY31.0bn), and other store-related assets comprised the bulk of fixed assets (total of JPY273.3bn).

Flexible use of a variety of different funding methods

In FY06/14, Don Quijote began obtaining funding by securitizing lease receivables, in order to manage and use real estate assets more efficiently. This process results in trust asset backed loans (ABL), with subsidiary Japan Asset Marketing (JAM) as the originator. The collateral is lease receivables that JAM holds against the borrowers—Don Quijote and other group companies. The Japan Credit Rating Agency assigned these asset backed loans an A rating. Funding from these ABLs is booked on the balance sheet as payables under fluidity lease receivables.

The company has used a wide variety of financing options since its IPO on JASDAQ in 1996. Post IPO, the company raised equity though a public offering twice, in 1998 and 1999.

It appears the company is placing an emphasis on debt financing over equity financing, for example, with the use of corporate bonds and asset backed loans as means of raising funds.

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Profit margin FY06/05 FY06/06 FY06/07 FY06/08 FY06/09 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. GPM 23.0% 23.1% 24.3% 26.8% 26.5% 25.3% 25.4% 25.8% 26.4% 26.3% 26.6% 26.6% 26.4% SG&A-to-sales ratio 18.3% 18.6% 19.8% 22.9% 22.9% 21.0% 20.4% 20.4% 20.7% 20.7% 20.9% 20.9% 20.8% OPM 4.6% 4.5% 4.5% 3.9% 3.6% 4.3% 5.0% 5.4% 5.7% 5.6% 5.7% 5.7% 5.6% RPM 5.5% 5.5% 5.2% 4.2% 3.3% 4.3% 5.0% 5.4% 5.8% 5.8% 5.9% 5.8% 5.5% Net margin 3.1% 4.1% 3.5% 2.3% 1.8% 2.1% 2.5% 3.7% 3.7% 3.5% 3.4% 3.3% 4.0% Financial ratios FY06/05 FY06/06 FY06/07 FY06/08 FY06/09 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. ROA (RP-based) 8.6% 8.6% 7.5% 6.2% 5.4% 7.0% 7.4% 8.1% 8.6% 8.2% 7.9% 7.8% 7.1% ROE 15.3% 17.2% 13.7% 11.3% 10.0% 10.5% 11.1% 14.9% 13.7% 12.1% 11.6% 11.2% 13.5% Financial ratios FY06/05 FY06/06 FY06/07 FY06/08 FY06/09 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Total asset turnover 1.6 1.6 1.4 1.5 1.6 1.6 1.5 1.5 1.5 1.4 1.4 1.4 1.3 Inventory turnover 4.5 4.5 4.5 4.4 5.0 4.9 4.6 4.8 4.9 5.1 5.3 4.8 4.9 Days of inventory 80.3 80.9 81.7 83.1 72.9 74.6 78.7 76.2 75.0 72.0 68.7 76.8 74.2 Quick ratio 43.1% 65.5% 63.2% 67.4% 47.9% 44.1% 49.9% 45.9% 47.4% 60.9% 56.3% 53.1% 62.9% Current ratio 151.9% 171.7% 132.8% 159.8% 111.7% 105.1% 126.8% 115.4% 118.3% 138.8% 121.7% 132.4% 138.1% Equity ratio 34.7% 43.0% 38.9% 30.7% 31.0% 35.6% 37.2% 39.5% 43.0% 43.0% 43.0% 43.0% 43.0% Net debt/Equity 96.2% 38.1% 46.0% 87.8% 91.4% 69.4% 77.5% 67.6% 56.7% 48.9% 56.2% 62.0% 52.1% Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods.

Per share data

Per share data (JPY) FY06/05 FY06/06 FY06/07 FY06/08 FY06/09 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Shares issued ('000; year end) 22,011 23,779 71,845 72,022 72,022 72,095 77,031 77,135 77,864 78,394 157,919 158,118 158,179 Treasury stock ('000; year end) 277 26 77 2,937 2,841 0 1 EPS 337 475 149 131 124 147 168 257 273 275 147 158 209 EPS (fully diluted) 288 422 138 122 124 138 164 257 272 273 147 158 209 Book value per share 2,399 3,055 1,146 1,200 1,284 1,461 1,605 1,856 2,136 2,390 1,345 1,464 1,638 Dividend per share 40 50 20 22 23 25 28 31 33 36 40 22 26 (Adjusted for stock splits) Shares issued ('000; year end) 66,033 71,338 71,845 72,022 72,022 72,095 77,031 77,135 77,864 78,394 157,919 158,118 158,179 EPS 112 158 149 131 124 147 168 257 273 275 147 158 209 Book value per share 800 1,018 1,146 1,200 1,284 1,461 1,605 1,856 2,136 2,390 1,345 1,464 1,638 Dividend per share 13 17 20 22 23 25 28 31 33 36 40 22 26 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: the company executed a 2:1 share split effective July 1, 2015

Don Quijote has been historically focused on growth and delivering shareholder returns through share price appreciation. Dividends have grown steadily since listing but the payout ratio has historically been unspectacular: 12.1% in FY06/13.

Don Quijote has conducted two share buybacks since listing, when the management perceived the share price to be too low. Active use of convertible bonds and, in earlier years, of equity financing meant the number of shares had been increasing; there were 30.0% more shares outstanding (adjusted for splits) at the end of FY06/13 compared with FY06/00. EPS increased 478.2% over the same period, a CAGR of 14.5%.

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Cash flow statement

Cash flow statement FY06/05 FY06/06 FY06/07 FY06/08 FY06/09 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cash flows from operating activities (A) 8,431 10,427 15,811 7,788 19,513 18,885 26,029 33,962 38,270 39,684 42,520 29,110 56,441 Cash flows from investing activities (B) -14,950 2,070 -24,924 -38,960 -29,855 -16,497 -44,789 -29,794 -23,293 -36,593 -52,641 -52,197 -40,593 Free cash flow (A +B) -6,519 12,497 -9,113 -31,172 -10,342 2,388 -18,760 4,168 14,977 3,091 -10,121 -23,087 15,848 Cash flows from financing activities 12,669 227 19,487 31,368 14,316 -5,475 7,274 -4,637 -9,510 4,440 16,176 17,148 17,644 Depreciation & amortization (A) 4,441 4,288 4,943 6,279 8,040 8,966 9,051 9,617 10,423 11,066 12,907 15,006 15,866 Capital expenditures (B) -12,738 -7,200 -12,503 -19,877 -18,001 -21,240 -37,568 -20,075 -28,204 -33,917 -47,412 -44,201 -40,256 Working capital changes (C) 2,320 1,733 4,754 7,062 1,565 1,626 7,910 - -405 -3,615 1,127 14,082 -7,652 Simple FCF (NI + A + B - C) -3,454 6,080 -1,676 -11,357 -2,972 -3,662 -23,764 9,387 3,765 2,235 -12,484 -18,339 16,344 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

Examining Don Quijote’s simple cash flows reveals no obvious pattern to the use or creation of cash—the figures can aptly be characterized as lumpy. Upon closer examination though, operating cash flows appear quite resilient, increasing at a compound rate of approximately 21% per period from FY06/00 through FY06/13. Financing cash flows have been an increasingly important source to meet the cash needs as the company has become a more aggressive acquirer.

It is important to note that the nature of Don Quijote’s operations has changed over the period in question, and therefore it is difficult to derive strong conclusions relating to operating cash flows. The increased awareness of “social” risks (fire safety, prevention of crime and public nuisance) and resulting measures affected Don Quijote’s early remarkable cash flow generation, as did the move into profitable but less efficient locations. Acquisitions in 2006 and 2007 brought a dramatic increase in the gross area of sales space, and the company has been working on improving cash flow generation of newly acquired stores. The results were clearly demonstrated by improvements in operating cash flows from FY06/11.

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Other information

History

Don Quijote was established in 1980 by the current chairman and its largest shareholder Takao Yasuda. Cleaning and restocking his single shop at night, Yasuda discovered that there was a demand for late night shopping that he could profitably meet while the competition was literally asleep. Even today, Don Quijote stores generate more than 50.0% of sales from 8pm onward. Yasuda opened his first Don Quijote (Donki) outlet in 1989 using two signature principles: late night opening hours and cramming in as many items as space would allow (“compression display”).

Other early features preserved to this day are handwritten ad-hoc point of purchase (POP) displays, a rich choice of variety goods ranging from parallel import Rolex watches to fancy dress costumes, and “spot” merchandise. 30-40% of items sold in Don Quijote stores are sourced from excess inventories in the retail market chain and inventory liquidations by wholesalers and other retailers. Buying these “spot” items allows the company to offer low prices but maintain high margins.

Another discovery made by Yasuda was young urbanites required shopping entertainment to kill time. Chaotic and fun, Don Quijote stores provided such entertainment. Its customers were “fun hunters” rather than the bargain hunters of conventional discount retailing. They would buy novelty products that other retailers were not carrying, allowing the company to earn higher margins and completing its business model—Convenience + Discounts+ Amusement (CV+D+A).

Initially, Don Quijote management gave chiefs of individual product sections at each store unprecedented freedom to make purchasing and merchandising decisions. They competed against their peers in other stores and other sections of their own store, stimulated by incentives and a transparent information flow system. This approach was partially changed in the recent years to a more centralized purchasing system but store staff still has a large degree of autonomy.

In 1996, Don Quijote listed on the JASDAQ market and in 2000 moved to the First Section of Tokyo Stock Exchange.

Don Quijote experienced some controversy in its early years as a listed company. When the company started opening bigger stores outside of night entertainment quarters, local residents vocally objected to the openings. Management eventually learned to deal with this issue by communicating with residents early on, compromising on details, and otherwise working to alleviate concerns. Don Quijote was also the victim of criminal incidents, which received substantial and sometimes unfavorable media attention. Problems subsided in late-2005 as the management learned from earlier PR mistakes. However, the non-conventional nature of the Don Quijote model will likely continue to draw public scrutiny, something that has sometimes affected its share price although had not dented its earnings.

The company rapidly expanded and had 27 stores in FY06/00 compared to seven at the end of FY06/97.

As part of the company’s search for a format that could be a competitor to convenience stores, FY06/01 saw the birth of the Picasso format, an experimental model for smaller markets. However, Picasso store openings were stopped at 15 stores in FY06/06, and they did not become a material earnings contributor. A large store format called PARO (“Purchase Amusement Rambling Oasis”) also emerged (later renamed PAW).

At the end of FY06/02, the company talked about a “Second Stage of Growth,” mentioning Don Quijote, Picasso, and PAW as three fully established formats. The company also started growing outside its core Tokyo market and opened stores nationwide in Osaka, Nagoya, Fukuoka and Sapporo.

In FY06/03, the company started selling drugs using pharmacists connected to consumers in the store by a videophone in an innovative attempt to bypass Japan’s strict pharmaceutical retailing legislation. While this service was well received by customers, it met objections from the Ministry of Health, Labor and Welfare, and after a prolonged debate the sales of drugs via videophone

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was allowed with some conditions. Ultimately, though, the service was terminated following April 2009’s revision to the Pharmaceutical Affairs Law.

In FY06/04, the company announced a new mid-term plan, called “7532” (in reference to Don Quijote’s exchange ticker code): 7.0% recurring profit margin, 500 yen in EPS, 300.0 billion yen in sales within 3 years, and double-digit top line and 20.0% earnings growth.

The company faced negative media coverage in FY06/05 when an arson attack on two of its stores in December 2004 killed three employees and injured another eight people. The company’s compression display policy was blamed as a factor behind the rapid spread of the fire, and also hampered victims’ escape. In response, the company implemented fire safety measures in excess of legal requirements and placed permanent guards on duty at its stores.

In August 2005, Don Quijote announced its intention to acquire a stake in Origin Toshu (now unlisted), a ready-made meal/boxed-lunch (bento) retailer. Don Quijote was eager to develop a convenience-store format but lacked expertise in ready-made meals; acquiring Origin would have given it access to this essential know-how. By February 2006, Don Quijote had accumulated a 47.8% stake in Origin in the open market. Origin saw the move as hostile. Ultimately, Aeon Co. (TSE1: 8267) emerged as a white knight with Don Quijote selling its shares at a considerable profit. The company’s convenience store ambitions though were later put on hold.

Also in 2005, the company stirred a minor controversy, which might serve as an illustration of its corporate culture: after the successful March 2005 opening of a store in Osaka with an integrated Ferris wheel, the company erected a half-pipe roller coaster on the roof of its Roppongi store, causing an outcry among some local residents who complained about noise pollution. The company closed the attraction.

In November 2006, the company became the sponsor of the corporate restructuring of DOit, a home improvement retailer with 24 stores in Saitama, Tokyo, and Kanagawa prefectures. Don Quijote took on the existing DOit debt for 14.9 billion yen. This translated into roughly 620 million yen investment per DOit store. Don Quijote gained access to a number of strong locations and acquired 9.0 billion yen (book value) worth of land. With the average floor space of 4,169sqm (vs. average of 1,175sqm. for Don Quijote at the time), some of DOit stores were ideal for large-scale Don Quijote stores. Don Quijote proceeded to restructure operations. The theme of FY06/07 was “Do It Myself!”—a word play on Do-It-Yourself.

DOit

Source: Shared Research based on company data

In FY06/08, the pace of M&A accelerated with the acquisition of Nagasakiya in October 2007, a large supermarket operator with 55 stores in 18 prefectures. Don Quijote bought the initial 86.0% stake from Kyoden (TSE2: 6881) and related parties. It eventually paid a total of 13.3 billion yen for 100.0% of Nagasakiya and assumed 3.0 billion yen in net debt. The acquisition gave Don Quijote 369,108sqm of sales floor space overnight. The total investment translated into roughly 44,000 yen per sqm of sales space. By comparison, a new Don Quijote or PAW store usually costs around 200,000 yen per sqm. The acquisition pushed the company into one of the 25 largest Japanese retailers by sales.

In FY06/09, the attention was on the Nagasakiya turnaround. MEGA Don Quijote emerged as a new future template for growth. It acquired Big One, a discounter with 7 stores in prefectures of Aichi and Gifu, buying 100% of shares for 2.3 billion yen.

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In FY06/11, the company began developing a new store format under the MEGA Don Quijote franchise, New MEGA Don Quijote. Also for its core Don Quijote format, the company began developing larger stores with a sales floor of 2,000sqm or larger. In this period, stores openings accelerated outside the Tokyo metropolitan area, while the company turned Fidec Corporation (company name changed to Accretive Co. on July 1, 2012; TSE1: 8423) into a subsidiary by underwriting a third-party offering of new shares.

In FY06/12, Don Quijote Shared Service Co., Ltd. was established (now a consolidated subsidiary) to provide shared back-office services to Don Quijote group companies.

In FY06/13, the company began opening stores as a means to help revitalize regional shopping centers. During this period, the company made The Earth Co. (company name changed to Japan Asset Marketing Co., Ltd. on July 2013) a subsidiary by underwriting a third-party offering of new shares.

In FY06/14, the company and Nagasakiya Co., Ltd. jointly established overseas holding company and headquarters Pan Pacific International Holdings Pte. Ltd. (PPI Holdings) in Singapore. The company also acquired Marukai Corporation (U.S.A.), a subsidiary of Marukai Corporation (Japan) and operator of 11 stores in Hawaii and California, through PPI Holdings’ subsidiary, Pan Pacific International & Co.

In August 2013, the company established Don Quijote Preparatory Co., Ltd. (now Don Quijote Co., Ltd.) by company split, with the aim of moving to a holding company structure. In December of the same year, the parent company changed its name to Don Quijote Holdings Co., Ltd. Don Quijote Preparatory Co., Ltd. also changed its name to Don Quijote Co., Ltd. and inherited the operations of the parent company (Don Quijote Holdings Co., Ltd.) via absorption-type split (with some exceptions).

Results briefing summaries FY06/14 results briefing summary (August 18, 2014) Speech by Chairman and CEO Takao Yasuda Don Quijote achieved 25 consecutive years of sales and profit growth.

Business conditions in FY06/15 are expected to be harsh. Subsequent to the consumption tax hike, customers are increasingly sensitive to pricing, and it will be necessary for the company to acquire and market products that are priced aggressively, while at the same time improving profitability by providing products with high added value. Don Quijote has achieved growth by finding ways to get through even the toughest of times, and it views the coming year as one that will be difficult, but also provide another chance for growth.

Market environment after the consumption tax increase and company initiatives After the consumption tax increased in April, the company worked to minimize any effects on sales. By providing products at price points that met customer expectations, Don Quijote was able to avoid a sharp drop in unit sales. As a result, sales at the company were on a relatively high level compared to other types of businesses. Although YoY comparable store sales were down in April, May and June were on par with the previous year, and July was up 1.4%.

During 2H FY06/14, GPM was down 0.5pp YoY to 25.9%, but this was according to plan. This was intentionally done in an effort to promote low prices to customers, and the company will work during FY06/15 to improve margins.

Yasuda has communicated his thoughts on the difficult business environment to his employees via the Harawata internal company newspaper. The cover story for April 2014 was “Fight for profitability!”, May 2014 was “Worry not about strategies; turn your dials to battle mode.”, and June 2014 was “The battle has entered the second stage! Tackle issues from multiple perspectives.” These headlines depict Yasuda’s wish for each employee to respond quickly to a constantly changing environment.

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Potential of overseas markets and foreign tourists Expanded duty free exemptions set to take effect from October 1, 2014 are expected to have a positive effect on sales. In order to capture demand from foreign tourists, the company established Japan Inbound Solutions, and plans to begin operations at this company in October. According to the company, about half of all foreign tourists visit a Don Quijote store during their stay in Japan, and with wider categories of duty free products available from October onward, the company will move to tailor its product selection to meet these new needs.

Concerning its overseas business, results at Marukai are improving after its consolidation, and comparable store sales at its Hawaii stores are strong. The company emphasized that Marukai is not and will not become a discount store in the future.

Don Quijote thinks that it can achieve large-scale growth through establishing new businesses overseas. As an example, it is currently testing two retail locations that provide “oriental mobile foods,” with an eye for further expansion.

Future retail and market environment Although mass media report that consumption and the markets are gaining traction, Yasuda does not believe that conditions are good, and instead thinks that conditions are getting progressively tougher. When comparing current economic data with the last consumption tax increase (1997), the average age of the head of household has risen by 6.4 years, average monthly consumption per household has declined by 13.3%, and inflation is at 1.6% (2014, data provided by government agencies, aggregated by the company).

However, during these 17 years, the company’s sales have grown by a factor of 38, and Don Quijote has found success in adversity, which it advertises as one of its strengths.

A contracting market will provide a catalyst for competitors to exit the market, and the pressure that internet sales are placing on traditional brick and mortar retailers will provide opportunities for Don Quijote to open stores in prime locations should they exit the market. As the market shrinks, there will be clear winners and losers, and the company thinks it can expand its share by quick adaptation, as it has in the past.

Speech by President and COO Koji Ohara Introduction by Chairman Yasuda President Ohara was an employee of the first Don Quijote store, and advanced his career in tandem with the company’s growth, being a key person in the company’s success. He worked to startup businesses within the company other than retailing, and was active in establishing many subsidiaries that now support the entire group.

Improving margins via the Don Quijote way FY06/15 will be a difficult year, and quick adaptation to change will be essential. Don Quijote will utilize all resources at its disposal to make the year a success. By staying on top of the constantly changing environment, Ohara will work to ensure a 26th consecutive term of sales and profit growth.

Don Quijote’s strengths lie in its ability to balance product selection and pricing, but the sales composition of low cost products has been rising since the consumption tax hike. Through targeted discounting, customer count and unit sales are up. However, the company will make efforts during FY06/15 to create a sales environment that will encourage sales of high margin, value added products to bolster its sales and profitability.

In order to create a higher sales composition for value added products, the president established a special team which spans various departments within the company, which is tasked with the function of reassessing product marketing and pricing to enhance overall merchandising strength. As of August 19, the company’s GPM has already recovered to 26.7%.

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Moving toward a new Don Quijote Don Quijote is a discount retailer with a comprehensive product lineup, but during harsh times, carrying many types of products is not enough to succeed on its own. In order to provide products to customers that deliver value, the company is restructuring its value added and distinctive merchandising. For instance, in order to capitalize on the company’s strength in small-category merchandising, it will be necessary to create higher quality and more original private brand products. As part of this initiative, Don Quijote is working on a late August launch of private label apparel for varying small categories.

With the intent of creating a new Don Quijote, the president established the trend editorial office on July 1, with himself at the helm. The company views providing products that customers need as a top priority, and is aiming to provide more refined added value, a higher margin merchandising mix, and private label apparel, with new products under this initiative planned for introduction in 2H FY06/15.

New store openings Don Quijote has received a number of offers for solutions openings, due to a surplus of floor space and vacancies at shopping centers.

For the next five to six years, the company projects that it will open between 20 and 30 stores per year on a constant basis. Don Quijote thinks that there is room for growth to about twice the number of stores it currently operates, spread evenly across all store types. Currently, there is about one Don Quijote store per 500,000 people, but according to the company’s analysis, about 100,000 people are required to maintain profitability at one store. Due to various outside circumstances, it is unrealistic to expect to multiply the number of stores by a factor of five, but for the medium term, the company thinks that 500 stores, or about twice the current 283 stores, is an achievable goal.

Concerning location, Don Quijote will explore openings close to mass transit stations, solutions openings at vacant suburban standalone stores, and MEGA Don Quijote openings at former GMS locations. In particular, the company is looking to use the example of the MEGA Don Quijote opening in Shinkawa, Hokkaido Prefecture last year as a model. Upon further revision, it will use this model for new openings at vacant GMS buildings.

FY06/14 earnings summary Overview In line with 25 consecutive periods of growth in sales and profits, cumulative customer count also hit 260mn people. The company aims to hit 300mn people during FY06/15. Sales in FY06/14 were bolstered by repeat customers, particularly families, who were attracted to low prices in areas such as food after the consumption tax hike. The company also worked to lower costs, and was able to effectively cancel out the 3% increase in the consumption tax.

Don Quijote recognizes that there is a tradeoff between customer count, unit sales, and GPM. As a general principle, the company will work to increase unit sales to secure profits, and improve profitability.

Concerning cash flows, in addition to cash flows from operating activities, the company acquired JPY43.0bn through asset backed loans utilizing its existing assets. The amount of the company’s stock owned by foreign entities remains high at 62.5%, and Don Quijote thinks that tough questions and comments from investors will lead to improvement in corporate governance.

FY06/14 results Sales were JPY612.4bn (+7.7% YoY). Comparable store sales were higher than expected at +0.8% YoY, thanks primarily to a rush in demand prior to the consumption tax hike. Stores in urban areas were up by 6.5%, the result of strong sales to foreign tourists. Repeat customers, particularly families, boosted sales at Nagasakiya by 5.7%.

By product, foods (+11.6% YoY) were a strong contributor, supported by rush demand prior to the consumption tax hike and a strong need for affordable commodity goods after the tax went into effect. Household goods sales increased by 8.5%; sales of daily necessities were especially robust.

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Overseas, sales were JPY24.7bn (+79.5% YoY). Consolidation of Marukai was a contributing factor, and comparable store sales at three stores in Hawaii were up by 2.7% on a dollar basis.

GPM varied significantly between the first and second halves of the year, and was down by 0.1pp for the full year. During 1H FY06/14, preparation for the consumption tax hike and concentration on improving margins yielded a 0.4pp improvement in GPM. However, promotion of lower prices in commodities such as food and household goods to meet customer needs after the consumption tax hike caused a 0.5pp reduction during 2H.

SG&A expenses were up by 7.9% YoY, but thanks to increased sales, the SG&A to sales ratio was on par with the previous year. Primary expenses included those associated with the opening of 22 new stores (expenses for personnel, supplies and consumables, and other initial costs), and temporary staffing expenses to coincide with the consumption tax increase. Fees paid were up by 15.6% due to the recording of one-time expenses of JPY1.1bn in association with business restructuring.

Under its strategy of opening stores in prime locations, the company opened 22 new stores, centered on the mainstay Don Quijote and New MEGA Don Quijote store types. This brought the domestic store total to 269 stores, with locations in 43 of the 47 prefectures. Through consolidation of Marukai Corporation, which has 11 Japanese food supermarkets in Hawaii and California, the overseas store total was 14 stores.

FY06/15 outlook and future measures FY06/15 The company will strive to achieve 26 consecutive years of higher sales and profits. Comparable store sales are projected to be on par with FY06/14 (+1.0% YoY in 1H, -1.1% in 2H). The company is planning for the opening of 25 new stores, alongside initiatives such as strengthening development of urban stores, increasing profitability at MEGA locations, and test marketing of small-scale stores.

To improve profitability, the company will also work to strengthen sales in value added discount products.

Increasing market share in the comprehensive retailing market A large contributor to higher sales during FY06/14 was repeat family customers at Nagasakiya stores. Don Quijote will move to increase its market share in the comprehensive supermarket genre through its MEGA stores.

Drawing on the success of its MEGA Don Quijote in Shinkawa, Hokkaido last year, which utilized a building left vacant by a major GMS, the company plans to use this model for subsequent MEGA openings as well. According to the company, the Shinkawa store is close to Sapporo, and there are many other GMS stores in the area. However, the store was a success thanks to the Don Quijote merchandising strategy and product differentiation. The company plans to keep an eye on store closings to capture opportunities for further solutions openings.

MEGA Don Quijote stores have a high sales composition of foods, and its emphasis on fresh foods is one of the factors of its success. However, putting too much emphasis on fresh foods discourages customers from carrying the merchandise into other areas of the store to take their time shopping for other goods, such as clothing. Finding a way to tackle the issue of having fresh foods and other products in the same store is one that Don Quijote sees as a priority.

1H FY06/14 results briefing summary New store openings in Q2 (October-December) In October, the company opened three new stores: Don Quijote Hiyoshi in Yokohama, Don Quijote Hirosaki in Aomori Prefecture, and MEGA Don Quijote Kariba Interchange in Yokohama, with a retail floor space of about 4,000sqm. In November, the company opened five new stores: Don Quijote Shinonome in Tokyo, Don Quijote Kichijoji Station in Tokyo, Don Quijote Kokusaidori in Okinawa, MEGA Don Quijote Uruma in Okinawa, and MEGA Don Quijote Tondabayashi in Osaka Prefecture. In December, the company successfully opened four new stores: Don Quijote Shinkawa in Sapporo, Hokkaido, which will be managed by

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Nagasakiya; MEGA Don Quijote Higashikurume as a large store in West Tokyo; Picasso Koiwa Station as a small store near Koiwa Station in Tokyo; and Don Quijote Asakusa, which will be a flagship store for the company’s strategy of establishing stores in prime locations in the Greater Tokyo Area. The company aims to take a considered but bold approach to store development, focusing on the Don Quijote format in cities with a large potential customer base, and the MEGA format in regional cities.

Earnings results for 1H FY06/14 Don Quijote Holdings Co., Ltd. posted strong consolidated earnings for cumulative Q2 FY06/14 as the company continued to carry out its customer-friendly business strategy. The company’s group operations—Don Quijote, MEGA Don Quijote, DOit, and the Hawaii stores—successfully pursued their community-based approach. The group was reorganized under a holding company in December 2013.

Three points First, Don Quijote Group has created a new business strategy to boost earnings before a planned increase in the consumption tax. Specifically, the company developed MEGA Don Quijote, which caters to families mostly in regional cities. The strategy seems to be working. The company is also building MEGA Don Quijote stores in the Greater Tokyo area. During Q2 (October-December), stores were opened at prime locations in Tokyo’s Kichijoji and Asakusa areas. The company plans to open more outlets in Tokyo and the surrounding area toward 2020 as Japan prepares to host Olympic Games. The Greater Tokyo area is likely to grow and more foreign tourists are expected to arrive.

Second, the company made changes to its sales mix and optimized it. The result is an increased profit.

Third, the company reorganized its group operations. The reorganization was made with a foresight, looking toward 10 to 20 years down the line and beyond. The changes were made only recently, but the effects are already being observed.

Sales for cumulative 2Q were JPY303.3bn (+4.7% YoY), with each group company posting an increase in earnings. However, sales fell somewhat short of forecast because of a change in the company’s product mix. By product, sales of household appliances were sluggish. At the same time, some luxury items may have gone beyond the customers’ price range due to currency fluctuations.

In September 2013, Don Quijote acquired Marukai Corporation, which operates 11 stores in Hawaii and California. The company had planned to consolidate Marukai in cumulative Q2. However, Marukai’s financial year has also been changed to match that of Don Quijote USA’s, which ends in March. As a result, Marukai’s earnings will not be included in the group results until Q3. Don Quijote had expected Marukai to contribute JPY3.5bn to the group’s earnings in 1H.

The group had 278 stores as of the end of the quarter. Gross profit was JPY81.1bn (+6.4% YoY), with a gross profit margin of 26.7% (+0.4 percentage point YoY). The company disposed of many products as it sought to improve its product mix and increase items that are more profitable. The company took an extra JPY758mn charge for inventory disposal in December 2013. Consequently, gross profit margin for 2Q (October-December) somewhat declined.

Consolidated SG&A expenses were JPY60.6bn (+5.3% YoY), while SG&A to sales ratio was 20.0% (+0.1 percentage point YoY). The company posted a one-time charge totaling JPY760mn linked with the opening of 13 new stores and the business reorganization (commissions and taxes).

By product category, an increase in sales of daily items, food products, and low-value-added items drove the company’s overall earnings. These items were featured at MEGA Don Quijote stores to attract more families. An increase in sales at MEGA Don Quijote, the company’s number two business after Don Quijote stores, means that the group was successful in serving families and housewives.

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Sales of household appliances fell 3.3% on the year. However, gross profit rose 3.7% after the company reduced the number of high-priced items on display while increasing products that are more profitable and that have a higher turnover rate. Gross profit margin rose 1.6 percentage points to 23.8%.

The overseas operations were significantly influenced by changes in exchange rates, with sales of JPY8bn (+27.2% YoY). The yen, which traded 79 against the dollar in FY06/13, weakened to 99 during the cumulative Q2 FY06/14.

Assets totaled JPY440.8bn (JPY386.6bn at the end of June 2013). Fixed tangible assets rose as the company opened new stores. Cash and cash equivalent rose to JPY55.4bn, an increase of JPY23.7bn from the end of June 2013, after the company raised funds with the use of the group’s existing tangible fixed assets as part of a business reorganization plan. The company raised JPY31bn through asset-backed securities, improving its debt-equity ratio to 0.63, an improvement of 0.24 from 12 months earlier. The company’s outstanding balance of interest-bearing liabilities totaled JPY116.5bn.

Profit structure of MEGA Don Quijote MEGA Don Quijote, which caters to families, was created with Nagasakiya as its base. The unit’s operating profit margin at the store level rose to 5.1% from 4.6% a year earlier. Operating profit margin of NEW MEGA Don Quijote, which began in April 2011, rose to 8.5% from 5.6%. An increase in the profit margin has given the company confidence to survive increasing competition in the area of low-value-added products even after the consumption tax is raised.

Private brand products The ratio of the company’s private-band products against its overall sales rose to 13.4% in Q2.

Medium- and long-term strategy and measures for the current financial year It is not clear what impact an increase in the consumption tax would have on the company’s business. However, the company seeks to succeed under any circumstances with its ability to respond to changes in a flexible manner. Don Quijote is able to offer attractive prices. The company has also grown to the point where it can now open many different types of stores, such as urban-style shops and roadside outlets. There are positive external factors, such as the 2020 Tokyo Olympic Games that are likely to increase the number of foreign tourists. The company stated, therefore, that it would expand its operations at a much faster rate in the coming years.

As for the possibility of an upward revision to its FY06/14 forecast, the company stated that the forecast was like a “catcher who winked” (meaning that it is extremely conservative).

Speech of Senior Vice President & COO Koji Ohara The group’s business development, centered on Don Quijote Co., Ltd., revolves around four areas: stores, store format, products, and human resources.

Store development The company plans to expand its store network by building mostly large-scale outlets throughout Japan. The company will implement merchandizing and pricing strategies specifically geared toward each location as part of an effort to become a formidable retail player.

Product development The company will communicate its passion to its customers. It is not enough just to offer ordinary private brand products. The company will develop original fashion brands that customers really want.

Development of store format The company will seek to develop businesses that would complement its core operations while improving core businesses at the same time.

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Development of human resources The company has been emphasizing informal, on-the-job training in which employees are forced to compete with one another. Now, the company plans to develop a more structured human resource program.

Speech of Chairman Takao Yasuda Japan’s consumption tax will be raised in stages, with the first increase scheduled for April 1, 2014. The tax hike is a significant development, possibly plunging the entire industry in turmoil. However, such turmoil could prove to be a great opportunity for a company like Don Quijote. Yasuda points out the company’s three strengths that may allow it to thrive after a tax increase:

First, Don Quijote is immune to volatile changes and able to respond to new challenges in a flexible manner. Yasuda declined to disclose details. However, he said the company would have a variety of measures to attract customers after the tax increase is implemented in the spring.

Second, Don Quijote is highly flexible when it comes to pricing. Don Quijote has unusually high profitability among discount retailers that directly procure merchandise because the company has a good gross profit mix and flexible pricing. These strengths may allow the company to minimize a decline in profitability when the tax goes up.

Third, Don Quijote is one of the very few general discounters in Japan. A tax increase would magnify the strength of discounters. Most retailers in Japan are general merchandise stores or department stores. Don Quijote is the biggest general retail discounter in Japan, and the 15th largest retailer in terms of sales. When the consumption tax goes up, none of this would matter because the country’s retail industry will undergo major transformation. That could prove to be the biggest opportunity for Don Quijote. The six biggest retailers in the world are general discounters. In Japan, general merchandise stores and department stores occupy the 10 biggest spots; no single discounter is on the top-10 list. One reason for this could be a high rate of indirect tax– what is known as the consumption tax in Japan – in industrialized nations of the West. Japan’s consumption tax is now the lowest in the industrialized world. However, it will be raised gradually. That would provide a boost to the country’s general discounters.

Transition to a holding company Don Quijote was reorganized into a holding company on December 2, 2013. The move was inevitable as competition heats up in the retail industry. When the consumption tax is raised, retailers need strength to survive. That means mergers and acquisitions to expand operations. The establishment of a holding company is essential for a quick and flexible decision-making process and business implementation as the company pursues acquisition targets, including those outside Japan. That way, each group company will be able to maintain its independence. Don Quijote adopted the holding company structure for this reason.

The company created three sections in early January 2014 as it continued to pursue major reorganization efforts.

Price & Inventory Control Room (This section is aimed at improving the ratio of gross profit to inventory investment by ◤ maintaining proper prices and inventory.)

Theory Book Editorial Room (This section maintains a collection of the company’s own business theories designed to eliminate ◤ unreasonable expectations, inconsistencies, and waste when delegating management responsibilities to individual stores.)

Space Creation Room (This section helps the company with new store designs, flow planning, and layouts. ◤

The company has already begun to cater to families and housewives through a new store format called MEGA Don Quijote. This new customer segment is becoming the company’s new “blue ocean.” The company will create a new way of managing its operations through the three newly created sections. Don Quijote, which began as an individually managed store, is now incorporating elements of chain-store management to perfect its operations, while other chain stores are learning from individually managed stores. These two different approaches may ultimately lead to the same goal. However, Don Quijote’s traditional expansion method, which involves the delegation of responsibilities to individually managed stores, has not been easy. The company has been intentionally avoiding the traditional chain store approach in favor of individually operated model. Now, Don Quijote is breaking this taboo and incorporating useful elements of chain store management; this is not too difficult to do.

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This is the company’s greatest strength as it seeks to expand in the future. This would provide the company with a great growth opportunity.

FY06/13 results briefing summary Video clips (Don Quijote showed video clips of its distribution facilities that supported the company’s 24 consecutive years of sales and profit growth.)

Full-year earnings summary

Don Quijote achieved 24 consecutive years of sales and profit growth without implementing any advertising through the ◤ mass media thanks to strong support from loyal customers. The company, which has enjoyed extremely strong growth up until now, aims to achieve further sales and profit growth for another consecutive term.

Earnings across the board—sales to net income—exceeded prior-year levels and the company forecast. ◤ A favorable sales mix and an expansion in gross profit contributed to profit growth. ◤ The company opened 16 stores in FY06/13—seven Don Quijote stores, eight New MEGA stores, and one small-scale store ◤ (Kyo Yasu Do). Of these stores, four were opened at the premises previously occupied by another store operator with the aim of revitalizing an existing shopping center. The company closed three stores to streamline operations—DOit, Nagasakiya, and Essence—with the result that the company had 255 stores at the end of the fiscal year.

Gross profit margin was 24.6%, a 0.6 percentage point increase from a year earlier, due to effective sales of high margin ◤ products.

SG&A expenses rose due to costs associated with new store openings and an increase in electricity costs as a result of a power ◤ shortage. However, the company absorbed these expenses attributable to an increase in gross profit and gross profit margin. The company did experience some difficulties following the global financial crisis triggered by the collapse of Lehman Brothers. Still, profit grew twofold since then.

Sales of household appliances fell below a year earlier, when there was special demand for digital broadcasting-related ◤ electronics equipment. Even so, gross profit increased following the company’s emphasis on smaller items such as smartphone-related products. The company sought to increase sales of household goods with seasonal flavors. As for food items, the company tried to offer best prices through various cost-cutting efforts even as material prices surged. Sales of watches and fashion products grew strongly, the effects of foreign exchange fluctuations notwithstanding, after the company offered competitive prices as the market prices were on the rise.

In Q4, the company increased the number of Don Quijote stores to 200. In July, the company established a holding company ◤ in Singapore. In Q1 FY06/14, the company opened a store in Marugame City in Shikoku, southwestern Japan. At the same time, a Nagasakiya store in Musashi Koganei was converted to New MEGA and reopened in July.

Comparable store sales at Don Quijote shops fell 0.1%. However, gross margin rose. ◤ Net income fell in Q1 YoY after a special gain for the corresponding period a year earlier. However, the company posted an ◤ increase in sales and profit for all other quarters.

Breaking down performance by quarter, the company benefitted from a recovery in demand for lifestyle products in Q1, while ◤ a sudden plunge in temperatures caused an increase in sales of winter goods. In Q3, the company struggled with unfavorable weather and the fact that a year earlier was a leap year. Still, sales of spring products rose after cherry blossoms bloomed early. The company, which finished the fiscal year with a strong profit increase in Q4, seeks further business expansion.

The company has been moving up in a ranking of retailers in terms of sales. It also ranked 9th in terms of market valuation ◤ (based on the closing price of August 15, 2013).

Profitability of New MEGA stores have been steadily rising, with operating profit margin rising to 6.4%, an increase of 2.8 ◤ percentage points from 3.6% a year earlier (based on comparable store data). The company appears likely to achieve its operating profit margin target of 7%.

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The company is expanding in regional areas. The company is applying the know-how acquired in the Tokyo metropolitan ◤ areas to its store operations in regional areas, resulting in an operating profit margin in regional areas that exceeds that of the Tokyo area. As announced in July, the company plans to reorganize itself into a holding company structure (the holding company is ◤ tentatively called Don Quijote Holdings). The company also established Pan Pacific International Holdings Pte. Ltd. in July as part of an effort to expand overseas. At the same time, Marukai Corporation, which operates businesses in Hawaii and California, will become a group company in September (two stores in Hawaii and nine in California).

Private-brand products are increasing as a percentage of the company’s overall sales. Products developed in collaboration ◤ with business partners are increasing, contributing to sales and profit.

Full-Year forecasts: The company will be responsive to any changes brought about by an increase in the consumption tax and ◤ strengthen its product strategy to offer high-valued items at a discount. The company plans to allocate 35 billion yen for capital investments, including reserve funds, and open 20 stores (of which nine will be opened in urban areas). During this fiscal year, the company plans to open shops in both regional and urban areas, and targets an increase in comparable store sales of 0.1% from a year earlier. The company will procure funds through borrowing, and does not have any plan to sell shares. Shared Research believes that the company’s earnings forecasts for this fiscal year appear extremely conservative.

Speech by Chairman Takao Yasuda Don Quijote began operations 35 years ago as Dorobo Ichiba. There were 100,000 small discount stores nationwide at that time, but many of them went out of business. However, Dorobo Ichiba was successful because we stayed open until midnight and offered a variety of eye-catching products to draw customers. The result was Don Quijote, which opened its first shop in 1989.

I have three questions to ask: Why was Don Quijote the only store that survived competition and was able to grow it business? ◤ In the retail industry, a successful business model often spawns imitators. However, Don Quijote is one of a kind. Why is it that ◤ nobody tried to imitate Don Quijote?

Don Quijote is the only store in the world where toilet paper and Rolex watches can be purchased within the same premises. ◤ Instant ramen and Louis Vuitton are also available within the same shop. How can the company expand with this type of store operations?

That’s where the essence of Don Quijote as a miracle company lies. I could answer these questions. But I won’t do so today because we don’t have enough time. (Please read my book, Jonetsu Shonin.)

I do believe that we can have 25 straight years of sales and profit growth. If the consumption tax is raised, sales could decline from April and beyond. But there will also be a spike in demand before the tax increase. So, these two factors will cancel each other out. The question is what will happen in the next fiscal year (FY06/15). If we achieve an increase in sales and profit for the next fiscal year—even though it won’t be easy—I believe we can have 30 straight years of earnings growth. It’s not that we have any secret weapon up our sleeves for the next fiscal year. But so far, we have responded to various challenges in a variety of ways. As a result, we have evolved.

If the consumption tax is raised, the ratio of indirect tax would also rise. In the U.S., which has a high indirect tax ratio, six out of 10 of the biggest retailers are discount stores. In Japan, Don Quijote is the number one discount retailer. But, it still ranks 13th in the industry. This means that there is still room for Don Quijote to grow. A tax increase may hurt temporarily. But that could actually help us if we respond to that challenge accordingly.

Q3 FY06/13 results briefing summary The company showed video clips of four new stores opened during Q3 (January-March).

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Don Quijote Kobe Nishi Store, which has a sales floor of 1,600 square meters, contributes to shopping center revitalization efforts. MEGA Don Quijote Kinokawa Store in Wakayama Prefecture, which has a sales floor of 3,400 square meters, is the company’s second shop in Wakayama. The store features a huge toy section to attract customers with children. MEGA Don Quijote Iizuka Store is the company’s first MEGA store in Kyushu. It has a sales floor of 2,860 square meters. Don Quijote Takaoka Store is the company’s second outlet in Toyama Prefecture. With a floor space of 2,590 square meters, it caters to customers of various generations.

The company then briefed on its Q3 results. Earnings beat target and revised a Q3 record; the company upwardly revised annual estimates. ◤ The company expects an increase in sales and profits for 24 years in a row. ◤ The company says optimal product mix helped improve profitability. ◤ At New MEGA stores, the company had increased number of repeat customers. Demand for value-added products, as well as ◤ for daily necessities, rose.

SG&A expenses involving new store openings were offset by improved gross profit margin. ◤ The company reduced inventory and improved its product turnover. ◤

The company coped with strong price competition by offering better products at competitive prices. Comparable store sales at Don Quijote fell 0.7% after demand surged in July 2012 in connection with the introduction of terrestrial digital broadcast services. Sales also fell because there were fewer business days during the period. Even so, gross profit rose 0.8%. At Nagasakiya MEGA, comparable store sales rose 0.9% and gross profit rose 2.8%.

Air cleaners and car-washing products rose in part because of PM 2.5 air pollution. Sales of seasonal products, such as those related to Halloween, Christmas, and hay fever, and cherry viewing, increased after the company put these items early. Costs rose due to an increased in utilities fees. However, these expenses were offset by an improvement in product mix. The company will make The Earth CO. (TSE Mothers: 8922) a consolidated subsidiary from Q4 by acquiring newly issued shares. Any short-term impact on the company’s earnings may be limited.

The company opened 13 stores during the first three quarters. It plans to open three more in Q4. Of these 16 stores, eight are Don Quijote shops and others are New Mega outlets. Most of these stores will open at major commercial centers in regional areas. The company upwardly revised its annual forecasts. It expects an operating profit increase of 6.8% YoY. The company is confident that it can meet the target.

News and topics

August 2017 On August 24, 2017, the company announced that it had reached a basic agreement with FamilyMart UNY Holdings Co., Ltd. (TSE1: 8028) regarding a capital and business alliance between the two groups.

As announced on June 13, 2017, the two companies have been in talks about a business alliance, and at this time reached a basic agreement intended to strengthen both groups by leveraging their strengths and expertise. They have also agreed upon a capital alliance that involves a portion of the shares of UNY Co., Ltd. (FamilyMart UNY Holdings’ wholly owned subsidiary) being transferred to Don Quijote Holdings. The two companies concluded a letter of intent dated August 24, 2017, and plan to conclude a contract regarding the capital alliance around the end of August or early in September. The share transfer would then occur in November.

Details of capital alliance Prior to the transfer, FamilyMart UNY Holdings holds 200,000 shares (100%) of UNY Co., Ltd. After the transfer of 80,000 shares, FamilyMart UNY Holdings will have 120,000 shares (60%) and Don Quijote Holdings 80,000 shares (40%).

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Overview of business alliance

Cooperation in retail business: Some UNY stores will be converted to double brand stores; UNY stores scheduled to close will be ▷ developed under the Don Quijote brand; Family Marts will be deployed at Don Quijote stores; and the two companies will cooperate on the development of digital solutions and the use of big data Joint product development and procurement and joint sales promotions ▷ Streamlined distribution functions ▷ Cooperation on development of overseas markets and new business formats ▷ Personnel exchanges ▷ Financial and other services ▷

The company believes the impact of this move on full-year FY06/18 consolidated earnings will be negligible.

June 2017 On June 29, 2017, the company announced that the group’s overseas operations holding company Pan Pacific International Holdings Pte. Ltd., through its subsidiary Pan Pacific International & Co., has entered into a stock purchase agreement to acquire the shares of QSI, Inc. (Hawaii). The agreement was signed on June 27, 2017, and completion of the stock purchase is slated for the end of August 2017. The acquisition value has not been disclosed.

Reasons for the acquisition The Hawaii-based QSI is a long-time operator of the Times and Big Save supermarkets that serve both local residents and tourists. With 24 stores currently in operation, its earnings for FY09/16 amounted to USD436mn in sales and USD17.4mn in operating profit. Its total and net assets as of end-FY09/16 were USD140mn and USD39.5mn, respectively.

The acquisition will increase the number of Don Quijote group stores in Hawaii to 29 stores, and the company expects to see a significant improvement in profitability from market shares gained. To maximize profits, the company will aim to bring down SG&A expenses by increasing purchase volume to reduce product cost ratio, encouraging personnel exchange and improving operational efficiency, and streamlining distribution for higher efficiency. As a consolidated subsidiary of the company, QSI will be at the core of Don Quijote’s overseas strategy for the US, which centers around Hawaii. The company understands that this addition will give a significant boost to the group’s overall enterprise value.

Profit/loss consolidation is scheduled to begin from Q3 FY06/18, when QSI’s Q1 FY09/18 (October – December) earnings will be reflected in the company’s consolidated results.

Number of QSI stores (left), Product mix (right)

Daily necessities Others Maui 3.6% 2 Drugs 11.0% Grocery 26.0% Kauai 6

Oahu Other foods Fruit and 16 31.1% vegetables 13.6% Daily and frozen foods 13.5% Source: Shared Research based on company data.

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On June 13, 2017, the company announced that it has begun talks with FamilyMart UNY Holdings Co., Ltd. (TSE1: 8028) on a potential business alliance between the two company groups.

Background and objective The mainstay businesses of FamilyMart UNY Holdings are convenience stores (CVS) and general merchandise stores (GMS). Meanwhile, Don Quijote Holdings operates stores of various formats: notably the Don Quijote discount stores (DS) known for their diverse and extensive product lineup, the MEGA Don Quijote discount stores with a focus on lifestyle goods targeting families, and the DOit home-improvement centers.

The two holding companies understand that amid a challenging environment in the retail industry, it is crucial for retailers to improve their product development and purchasing capabilities, diversify technologies and sales channels in response to changing consumer needs, and optimize pricing. They also understand that a higher level of business efficiency is called for such as streamlined store operations and distribution.

According to Don Quijote Holdings, the two companies decided to go into talks regarding a potential business alliance, sharing the thinking that they compete in few areas since their mainstay businesses do not overlap, and that they would be able to implement inter-group collaborations leveraging business resources and individual strengths of the CVS, GMS and DS formats and expect synergistic effects from such initiatives.

The two companies intend to discuss and review the points outlined below. They plan on laying out the details of the business alliance within six months and work toward conclusion of a business alliance agreement.

Collaboration in the retail business: making joint efforts in infrastructure building and store development; experimental joint ▷ operation and mutual utilization of stores Joint product development and purchasing: aiming to develop attractive products by sharing product development knowledge ▷ of the two company groups whose product characteristics and customer bases are different and to reduce costs and achieve efficiency through bolstered purchasing capability Logistics: streamlining distribution functions such as speeding up delivery of goods to stores ▷ Joint development of overseas markets and new businesses: collaborating in the overseas markets where the two companies ▷ operate; integrating their business resources to develop new store formats

March 2017 On March 7, 2017, the company announced that it had signed an agreement to receive financing through a JPY100.0bn subordinated loan. The equity content of the loan is expected to be assessed at 50% (Japan Credit Rating Agency, Ltd.)

The total amount of the subordinated loan is JPY100.0bn, the contract date is March 7, 2017, the loan execution date is July 3, 2017, and the final repayment date is July 3, 2067 (Note that from July 3, 2022, the company will have the option of repaying in advance of the final repayment date, all or part of the principal on each interest payment date). The applicable interest rate from July 3, 2017 to July 3, 2027 shall be the variable rate based on three-month JPY TIBOR; variable rate stepped up by 1.00% will be applied from July 3, 2027. Though the subordinated loan is a form of debt, since credit rating agencies recognize it as having a certain equity component, there is no risk of share dilution. The company believes the loan will help to substantively strengthen its financial structure.

The company has taken advantage of the low interest rate environment for increasing the proportion of its interest-bearing debt accounted for by long-term borrowing.

91/96 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.03.09 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

February 2017 On February 20, 2017, the company announced that it submitted a shelf-registration statement for bond issuance to the Kanto Local Finance Bureau on the same day. The company plans to issue bonds worth JPY100bn during a period between February 28, 2017 and February 27, 2019. Don Quijote will use the money to invest in equipment and facilities, pay back loans, and redeem existing bonds. The company will also make financial investments or provide loans.

December 2016 On December 14, 2016, the company announced it is accepting a tender offer by Fuyo General Lease Co., Ltd (TSE1: 8424) for common shares in Don Quijote’s consolidated subsidiary Accretive Co., Ltd (TSE1: 8423).

Don Quijote and Fuyo General Lease reached an agreement for Fuyo General Lease Co., Ltd to purchase 16,287,100 shares (voting rights: 38.0%) of the 21,072,600 shares (voting rights: 49.17%) held by Don Quijote at a price of JPY520 per share. Accretive is expected to be removed from consolidation if the tender offer is completed. However, Don Quijote aims to make Accretive an equity-method affiliate after the tender offer and is considering acquiring Accretive’s shares after the completion of the tender offer. The results of the tender offer will be announced on January 20, 2017, and the payments will start January 26, 2017.

Don Quijote stated the following reasons for concluding the agreement: (1) Accretive is in a position where it no longer requires business support, (2) for Accretive to grow further and increase its enterprise value, it is a prudent choice for Accretive to develop a growth strategy under a new parent company that possesses similar expertise in the finance industry, (3) after examining several candidates since July 2016, Don Quijote believes Fuyo General Lease is the most capable to satisfy the 2nd reason.

Don Quijote plans to book an extraordinary gain in Q3 from the sale of the shares. While the impact on consolidated earnings vary depending on the number of shares actually sold, the company expects this sale to have minor impact. Further, Don Quijote Co., Ltd. plans to acquire all the shares of Accretive’s consolidated subsidiary Storecrews Co., Ltd. on January 26, 2017 or on a separate date decided by both companies. Don Quijote stated that the impact on consolidated results will be minor.

Accretive’s earnings (JPYmn)

(JPYmn) FY03/14 FY03/15 FY03/16 (JPYmn, JPY) FY03/14 FY03/15 FY03/16 Operating revenue 2,932 3,346 4,276 Net assets 3,963 5,429 7,391 Operating profit 1,110 1,448 1,845 Total assets 19,644 20,895 21,460 Recurring profit 1,143 1,486 1,851 Book value per share 92.4 126.7 170.9 Net income 1,177 1,456 1,730 Earnings per share 27.4 34.0 40.4 Dividend per share 2.3 3.6 Source: Shared Research based on company data

92/96 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.03.09 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

June 2016 On June 14, 2016, the company announced an upward revision to its year-end dividend forecast. The company plans to increase the year-end dividend from the initial forecast of JPY15 to JPY17 per share, resulting in a full-year dividend increase from JPY 20 to JPY22 per share.

With this increase, the real dividend per share, taking in account the stock split, has risen for 13 consecutive years since FY06/04. The total dividend payout has also increased for 19 consecutive years since FY06/98, the year after the initial public offering (IPO) in FY06/97.

Top management

Founding Chairman and Supreme Advisor Takao Yasuda created in Don Quijote one of Japan’s more unusual and successful retailers. As such, he can be viewed as the main driver behind the company’s success. Yasuda is known for his no-nonsense, open conversational style and his passion for his company and the retail business.

Yasuda’s willingness to challenge conventional wisdom and Don Quijote’s non-orthodox business model has in the past created image problems for the company. Beginning around 2005 though the company has become much more aware about its public image, and public perception regarding the company appears to have improved. For example, its store openings no longer draw local opposition compared to its early days. Nevertheless, the company and its management are different from many more traditional Japanese companies, and that will continue to affect its image and possibly create polarized views.

Founder Takao Yasuda, chairman and CEO, steps down Yasuda also resigns as a director of domestic group companies, focus on overseas operations as top advisor and founding chairman The company, along with its Q2 FY06/15 earnings results, announced that founder Takao Yasuda, chairman and CEO, would step down. Yasuda will also resign as a director of Don Quijote’s domestic group companies, and will assume the titles of top advisor and founding chairman. He will become the head of an intermediate holding company to oversee the group’s international businesses. The group’s day-to-day foreign operations are managed by Kenji Sekiguchi, president of Marukai Corporation.

Completes the process of delegating responsibilities that spurred growth Yasuda stated that he would step down while he was still physically and mentally fit. This is necessary, according to Yasuda, in order for the company to continue to grow on a long-term basis. Yasuda stated that it would be best him to retire now that the company was set to post an increase in sales and profits for 26 years in a row and that the company had just overcome the consumption tax increase. Yasuda added that he had also completed the process of delegating management responsibilities.

Yasuda urges company executives to emulate him, study Genryu, a book on management philosophy Yasuda urged Don Quijote executives to emulate him and study Genryu, a book of management philosophy published by the company in April 2011 (a revised edition was published in September 2013). Don Quijote will become a formidable company if it produces more managers like Yasuda, he said.

Improvement of 'management metabolism' may become company tradition Yasuda has complete trust in Koji Ohara, president and COO. Yasuda stated that Ohara would be instrumental as the next CEO in ensuring the company’s growth. However, Yasuda urged Ohara to find a successor of his own while he is still physically and mentally fit. The improvement of the company’s management metabolism would then become a tradition that leads to prosperity, Yasuda said.

93/96 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.03.09 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

President Ohara's history

Feb. 1993 Joined Don Quijote (current Don Quijote Holdings); after being head of merchandise sections at Fuchu store (the company's first store), served as launch manager of Kisarazu, Makuhari, and Ichihara stores Sep. 1995 Director and Head of Sales Division 2, Don Quijote (current Don Quijote Holdings) Jan. 2005 President and Representative Director of affiliate REALIT Apr. 2009 President and Represent at ive Direct or of affiliat e Japan Commercial Est ablishment Sep. 2009 Director and CIO, Don Quijote (current Don Quijote Holdings) Jul. 2012 President and Representative Director, Don Quijote Shared Services Apr. 2013 Vice President, Director and COO, Don Quijote (current Don Quijote Holdings) Nov. 2013 Vice President, Representative Director and COO, Don Quijote Holdings Dec. 2013 President and Representative Director, Don Quijote Jul. 2014 President, Representative Director and COO, Don Quijote Holdings Chairman and Representative Director, REALIT Jul. 2015 President, Representative Director and CEO, Don Quijote Holdings Apr. 2017 President and Representative Director, Doit Source: Shared Research based on company data

Major shareholder

Shareholding Top shareholders rat io La Mancha 11.38% Credit Suisse AG Hong Kong Trust a/c Clients for DQ WINDMOLEN B 9.80% Japan Trustee Services Bank, Ltd. (Trust account) 6.00% Anryu Shoji Co., Ltd. 5.23% State Street Bank and Trust Company 505001 4.64% The Master Trust Bank of Japan, Ltd. (Trust account) 3.46% JP Morgan Chase Bank 380055 3.37% Yasuda Scholarship Foundation 2.28% State Street Bank and Trust Company 505225 2.15% The Bank of New York Mellon 140044 1.94% Source: Shared Research based on company data (As of June 2017)

Foreign investors represent a large percentage of shareholders, 70.0% as of end-FY06/17.

Investor relations

IR department reports directly to the CFO. The company organizes quarterly results meetings. The company briefs on its earnings for Q1 and Q3 periods. For Q2 and Q4, the company’s chairman attends the meeting to discuss earnings and management strategy.

IR Policy The company seeks to be thorough in discussing its earnings and gain trust of investors. The company makes realistic earnings forecasts and tries to avoid long-term projections that are difficult to achieve. The company analyzes its financial conditions and constantly makes necessary adjustments to earnings forecasts.

94/96 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.03.09 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Company profile Company Name Head Office 2-19-10 Aobadai Meguro-ku Don Quijote Co., Ltd. Tokyo, Japan 153-0042 Phone Listed On

+81-3-5725-7532 Tokyo Stock Exchange 1st Section Established Exchange Listing September 5, 1980 December 17, 1996 Website Fiscal Year-End http://www.donki-hd.co.jp/en/ June IR Contact IR Web - http://www.donki-hd.co.jp/en/ir/

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