Don Quijote Holdings / 7532

COVERAGE INITIATED ON: 2010.01.06 LAST UPDATE: 2018.08.10

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: 2018.08.10 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 ------5 Monthly trends ------5 Quarterly trends and results ------6 Full-year company forecasts (Initial Estimates) ------13 Business ------31 Business description ------31 Strengths and weaknesses ------39 Market and value chain ------41 Strategy ------43 Historical financial statements ------45 Income statement ------62 Balance sheet ------63 Cash flow statement ------65 Other information ------66 History ------66 News and topics ------68 Top management ------72 Major shareholder ------73 Investor relations ------73 Company profile ------74

02/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 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 FY06/19 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Init. Est. Sales 232,778 260,779 300,660 404,924 480,856 487,571 507,661 540,255 568,377 612,424 683,981 759,592 828,798 941,508 1,000,000 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% 13.6% 6.2% Gross profit 53,448 60,354 73,123 108,709 127,240 123,506 129,074 139,543 149,807 161,018 181,741 201,893 218,580 243,991 260,000 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% 11.6% 6.6% 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% 25.9% 26.0% SG&A expenses 42,634 48,500 59,537 92,728 110,068 102,439 103,738 110,223 117,438 126,726 142,638 158,708 172,395 192,423 207,000 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% 11.6% 7.6% 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 51,568 53,000 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% 11.7% 2.8% 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%5.5%5.3% 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 57,218 58,000 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% 25.7% 1.4% 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%6.1%5.8% Net income 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 36,405 37,000 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% 10.0% 1.6% 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% 3.9% 3.7% 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 78,394 157,919 158,118 158,179 158,193 - EPS 112 158 149 131 124 147 168 257 273 275 147 158 209 230 234 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 1,836 - Dividend per share 131720222325283133364022263233 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 71,973 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 12,848 Inventories 39,447 44,400 50,962 67,411 70,651 74,452 81,582 83,641 85,997 89,105 94,580 117,400 123,969 135,781 Total current assets 61,193 79,742 97,151 116,580 123,802 128,198 134,515 138,816 143,391 158,834 175,981 195,977 227,585 244,125 Total assets 150,048 167,534 209,865 276,288 297,527 302,029 341,300 362,651 386,622 432,135 505,666 560,568 642,868 807,057 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 93,030 Total interest-bearing debt 65,208 55,238 75,727 112,954 126,725 116,244 133,580 133,342 126,506 134,531 167,507 186,499 211,068 332,712 Total liabilit ies 97,920 94,793 127,395 191,663 207,555 195,269 216,058 216,916 216,444 238,971 284,299 316,021 362,938 494,562 Shareholders' equity 52,128 72,064 81,717 84,899 92,096 107,407 127,087 146,590 167,233 187,637 209,682 231,788 258,282 291,337 Cash flow statement (JPYmn) Cash flows from operating activities 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 46,081 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 -164,443 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 17,644 116,083 Financial ratios 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% 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% 13.3% Equity ratio 34.7% 43.3% 39.2% 30.0% 29.9% 34.9% 36.2% 39.5% 43.0% 43.4% 42.0% 41.3% 40.3% 36.0% 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.

03/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Recent updates

Highlights

On August 10, 2018, Don Quijote Holdings Co., Ltd. announced earnings results for full-year FY06/18; see the results section for details.

On the same day, the company announced sales figures for July 2018; see Monthly trends section for details.

On July 10, 2018, the company announced sales figures for June 2018.

On June 11, 2018, the company announced sales figures for May 2018.

On May 25, 2018, Shared Research updated the report following interviews with the company.

For previous releases and developments, please refer to the News and topics section.

04/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Trends and outlook

Monthly trends

FY06/07 FY06/08 FY06/09 FY06/10 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 FY FY FY FY FY FY FY FY FY FY FY FY All st ores Sales 7.2% 6.5% 5.9% 6.1% 5.9% 6.2% 7.1% 6.6% 12.3% 112.3% 11.8% 12.2% Number of stores 135 148 150 162 169 185 200 217 242 243 292 313 Comparable stores Sales 0.4% -3.3% 0.5% -1.5% 3.4% 0.5% -0.1% 0.8% 4.6% 4.6% 2.6% 4.1% Customer count -0.7% -2.2% 4.5% 3.8% 3.1% -0.8% -0.5% 0.1% 1.9% 1.9% 2.2% 2.3% Customer spend 1.1% -1.2% -3.8% -5.1% 0.3% 1.3% 0.4% 0.7% 2.7% 2.7% 0.4% 1.8% Number of comparable stores 117 123 144 149 158 164 179 194 208 209 258 283 By product Electric appliances 4.0% -2.7% -4.8% -3.6% 5.1% -2.2% -0.5% -2.7% 4.8% 4.8% 10.5% 12.4% Household goods 10.4% 8.2% 9.8% 9.1% 7.9% 6.7% 7.9% 8.8% 14.8% 14.8% 18.2% 20.2% Foods 5.1% 10.9% 20.8% 14.4% 4.5% 7.3% 8.9% 13.1% 19.0% 19.0% 17.4% 16.2% Watches & fashion merchandise 7.0% 6.3% 0.0% 1.7% 4.3% 11.9% 11.2% 3.4% 8.8% 8.8% 2.7% 1.8% Sporting & leisure goods 13.3% 5.5% 4.1% 5.5% 8.2% 2.0% 8.3% 5.6% 7.1% 7.1% 3.7% 2.4% Other products -1.3% 0.1% 10.4% 21.7% 29.7% 10.9% -22.6% -1.1% -2.7% -2.7% -2.6% 1.5%

FY06/16 Jul Aug Sep Oct Nov Dec Jan Feb Mar AprMay 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 Electric 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 Nov Dec Jan Feb Mar AprMay 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 Electric 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 Nov Dec Jan Feb Mar AprMay Jun All st ores Sales 13.3% 11.8% 12.1% 8.4% 14.4% 12.1% 11.8% 11.8% 13.8% 10.3% 8.0% 10.5% Number of stores 294 293 294 296 301 303 304 304 306 306 308 313 Comparable stores Sales 5.2% 5.1% 6.4% 2.6% 5.9% 4.0% 3.0% 3.6% 5.2% 3.1% 1.6% 4.4% Customer count 4.0% 4.2% 5.5% 0.2% 5.4% 3.0% 1.3% 1.3% 2.5% 1.1% -0.6% 0.9% Customer spend 1.1% 0.9% 0.9% 2.4% 0.5% 0.9% 1.6% 2.3% 2.6% 1.9% 2.2% 3.5% Number of comparable stores 265 269 271 274 275 277 278 278 278 280 283 283 By product Electric appliances 11.9% 7.0% 2.1% 2.4% 8.9% 14.1% 9.8% 9.3% 9.4% 8.2% 7.6% 9.0% Household goods 27.1% 25.0% 24.5% 22.1% 28.2% 26.0% 25.3% 12.8% 16.6% 13.1% 9.5% 12.3% Foods 17.3% 17.3% 17.9% 14.5% 19.8% 17.9% 15.5% 15.1% 15.6% 12.4% 11.7% 15.3% Watches & fashion merchandise -1.8% -2.2% -1.1% -3.3% -1.7% -2.9% -2.5% 9.6% 12.0% 6.8% 4.1% 5.8% Sporting & leisure goods 6.8% 3.7% 4.6% -8.5% 5.7% 0.2% 2.4% 3.0% 7.8% 5.3% -1.8% -1.1% Other products 0.1% 2.2% -1.1% -1.1% 5.1% 3.4% -0.9% 1.6% -0.6% -1.0% 2.1% 4.6%

FY06/19 Jul Aug Sep Oct Nov Dec Jan Feb Mar AprMay Jun All st ores Sales 4.1% Number of stores 314 Comparable stores Sales 0.0% Customer count -1.1% Customer spend 1.2% Number of comparable stores 288 By product Electric appliances -1.6% Household goods 6.0% Foods 9.0% Watches & fashion merchandise 0.9% Sporting & leisure goods -3.6% Other products -0.2% Source: Shared Research based on company data

July 2018 July comparable store sales were up 0.04% YoY, and the company opened one new store. In the early part of the month, Japan sustained widespread damage in the 2018 Japan Floods. This was followed by a heat wave with record-high temperatures in the middle of the month, and stormy weather due to a typhoon making landfall in the last week of the month. Domestic consumption was affected by the weather conditions as people refrained from going out. Although comparable store customer traffic declined 1.1%, daily necessities such as food products and summer seasonal goods supported firm momentum. Turning to inbound demand, tourist traffic increased with related purchases centering on cosmetics/pharmaceuticals and consumables such as food products. As a result, duty-free sales rose substantially. Note that stores that were forced to close due to disaster impact are excluded from the comparable store figures.

05/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 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 FY06/19 YoY chg (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2 Q3 Q4 FY FY FY Init. Est. Est. Q1 Est. Q2 Est. Q3 % of FY Init. Est. Change FY Sales 186,642 197,803 185,102 190,045 201,327 216,367 202,293 208,811 223,433 239,397 240,326 238,352 759,592 828,798 941,508 880,000 890,000 920,000 935,000 100.7% 1,000,000 +58,492 +112,710 YoY 13.9% 10.9% 10.4% 9.2% 7.9% 9.4% 9.3% 9.9% 11.0% 10.6% 18.8% 14.1% 11.1% 9.1% 13.6% 6.2% 7.4% 11.0% 12.8% 6.2% Gross profit 49,678 53,263 49,193 49,759 54,224 56,416 53,265 54,675 59,268 60,908 60,439 63,376 201,893 218,580 243,991 232,000 234,200 240,000 242,000 100.8% 260,000 +16,009 +25,411 YoY 12.3% 12.4% 7.2% 12.6% 9.2% 5.9% 8.3% 9.9% 9.3% 8.0% 13.5% 15.9% 11.1% 8.3% 11.6% 6.1% 7.1% 9.8% 10.7% 6.6% GPM 26.6% 26.9% 26.6% 26.2% 26.9% 26.1% 26.3% 26.2% 26.5% 25.4% 25.1% 26.6% 26.6% 26.4% 25.9% 26.4% 26.3% 26.1% 25.9% 26.0% +0.1pp -0.5pp SG&A expenses 38,382 38,988 39,827 41,511 41,692 42,605 42,470 45,628 44,968 45,961 49,626 51,868 158,708 172,395 192,423 184,000 184,400 189,000 191,000 100.7% 207,000 +14,577 +20,028 YoY 13.6% 13.2% 11.8% 7.0% 8.6% 9.3% 6.6% 9.9% 7.9% 7.9% 16.8% 13.7% 11.3% 8.6% 11.6% 6.7% 7.0% 9.6% 10.8% 7.6% SG&A ratio 20.6% 19.7% 21.5% 21.8% 20.7% 19.7% 21.0% 21.9% 20.1% 19.2% 20.6% 21.8% 20.9% 20.8% 20.4% 20.9% 20.7% 20.5% 20.4% 20.7% +0.3pp -0.4pp Operating profit 11,296 14,275 9,366 8,248 12,532 13,811 10,795 9,047 14,300 14,947 10,813 11,508 43,185 46,185 51,568 48,000 49,800 51,000 51,000 101.1% 53,000 +1,432 +5,383 YoY 8.0% 10.2% -8.9% 52.3% 10.9% -3.3% 15.3% 9.7% 14.1% 8.2% 0.2% 27.2% 10.4% 6.9% 11.7% 3.9% 7.8% 10.4% 10.4% 2.8% OPM 6.1%7.2%5.1%4.3%6.2%6.4%5.3%4.3%6.4%6.2% 4.5% 4.8% 5.7% 5.6% 5.5% 5.5% 5.6% 5.5% 5.5% 5.3% -0.2pp -0.1pp Recurring profit 11,578 14,295 9,376 8,548 12,788 14,140 9,078 9,517 14,301 16,757 12,383 13,777 43,797 45,523 57,218 48,000 49,800 53,800 54,000 106.0% 58,000 +782 +11,695 YoY 7.0% 8.1% -12.8% 59.5% 10.5% -1.1% -3.2% 11.3% 11.8% 18.5% 36.4% 44.8% 9.1% 3.9% 25.7% 5.4% 9.4% 18.2% 18.6% 1.4% RPM 6.2%7.2%5.1%4.5%6.4%6.5%4.5%4.6%6.4%7.0% 5.2% 5.8% 5.8% 5.5% 6.1% 5.5% 5.6% 5.8% 5.8% 5.8% -0.3pp +0.6pp Net income 6,482 7,750 5,500 5,206 8,127 8,332 10,518 6,105 8,465 10,213 8,485 9,242 24,938 33,082 36,405 28,000 29,500 32,200 33,300 109.3% 37,000 +595 +3,323 YoY 5.6% 2.6% -13.9% 69.9% 25.4% 7.5% 91.2% 17.3% 4.2% 22.6% -19.3% 51.4% 7.7% 32.7% 10.0% -15.4% -10.8% -2.7% 0.7% 1.6% Net margin 3.5% 3.9% 3.0% 2.7% 4.0% 3.9% 5.2% 2.9% 3.8% 4.3% 3.5% 3.9% 3.3% 4.0% 3.9% 3.2% 3.3% 3.5% 3.6% 3.7% -0.2pp -0.1pp SG&A expenses 38,382 38,988 39,827 41,511 41,692 42,605 42,470 45,628 44,968 45,961 49,626 51,868 158,708 172,395 192,423 184,000 184,400 189,000 191,000 100.7% 207,000 +14,577 +20,028 Salaries and allowances 14,155 14,765 15,136 15,183 16,049 16,075 16,128 16,286 16,718 17,313 18,760 19,150 59,239 64,538 71,941 Rents 5,153 5,084 5,178 5,423 5,638 5,749 5,814 6,156 6,602 6,800 7,443 7,484 20,838 23,357 28,330 Commission paid 4,254 4,561 4,535 4,959 4,362 5,062 4,584 5,516 5,593 5,573 5,352 6,440 18,309 19,524 22,957 Depreciation 2,977 3,172 3,411 3,741 3,338 3,455 3,563 3,719 3,343 3,498 3,896 4,078 13,301 14,075 14,815 Other 11,843 11,406 11,566 12,206 12,305 12,264 12,381 13,951 12,712 12,777 14,175 14,716 47,021 50,901 54,380 YoY 13.6% 13.2% 11.8% 7.0% 8.6% 9.3% 6.6% 9.9% 7.9% 7.9% 16.8% 13.7% 11.3% 8.6% 11.6% 6.7% 7.0% 9.6% 10.8% 7.6% Salaries and allowances 18.2% 19.5% 17.9% 8.5% 13.4% 8.9% 6.6% 7.3% 4.2% 7.7% 16.3% 17.6% 15.8% 8.9% 11.5% Rents 13.4% 9.9% 6.2% 7.5% 9.4% 13.1% 12.3% 13.5% 17.1% 18.3% 28.0% 21.6% 9.2% 12.1% 21.3% Commission paid 16.2% 10.4% 15.4% 2.4% 2.5% 11.0% 1.1% 11.2% 28.2% 10.1% 16.8% 16.8% 10.5% 6.6% 17.6% Depreciation 14.1% 14.8% 12.0% 14.9% 12.1% 8.9% 4.5% -0.6% 0.1% 1.2% 9.3% 9.7% 14.0% 5.8% 5.3% Other 7.8%7.9%5.8%4.6%3.9%7.5%7.0%14.3%3.3%4.2% 14.5% 5.5% 6.5% 8.3% 6.8%

Retail FY06/16 FY06/17 FY06/18 FY06/16 FY06/17 FY06/18 YoY chg (JPYmn) Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2 Q3 Q4 FY FY FY Init. Est. Est. Q1 Est. Q2 Est. Q3 FY Sales 180,333 191,076 178,519 183,405 194,453 209,262 195,802 202,285 216,498 232,293 233,407 231,299 733,333 801,802 913,497 +111,695 Electric appliances 14,559 16,654 15,449 14,315 16,479 19,011 17,631 15,791 18,418 21,592 19,959 16,728 60,978 68,912 76,698 +7,786 Household goods 38,677 39,658 38,395 40,559 43,148 44,635 45,594 50,128 53,356 55,052 54,074 54,775 157,288 183,505 217,257 +33,752 Foods 56,799 61,652 60,800 62,964 63,874 70,110 69,410 71,159 73,231 80,326 79,188 78,820 242,215 274,553 311,565 +37,012 Watches & fashion merchandise 38,874 41,415 35,917 37,976 40,881 44,915 35,932 36,723 40,051 43,787 38,316 37,751 154,183 158,451 159,904 +1,453 Sports & leisure goods 14,690 15,209 10,188 11,634 15,016 15,428 10,684 12,468 15,803 15,276 11,470 12,398 51,722 53,596 54,946 +1,350 DIY goods 4,130 3,705 3,961 3,697 3,721 4,069 3,680 4,344 3,992 4,175 3,761 4,290 15,493 15,814 16,216 +402 Overseas 9,673 9,827 11,167 9,175 8,565 8,207 10,164 8,989 8,817 9,109 23,814 23,739 39,842 35,925 65,480 +29,555 Others 2,931 2,956 2,642 3,085 2,769 2,886 2,708 2,683 2,830 2,976 2,825 2,799 11,612 11,046 11,431 +385 YoY 14.1% 10.9% 10.5% 9.2% 7.8% 9.5% 9.7% 10.3% 11.3% 11.0% 19.2% 14.3% 11.1% 9.3% 13.9% Electric appliances 13.1% 1.6% 7.2% 8.7% 13.2% 14.2% 14.1% 10.3% 11.8% 13.6% 13.2% 5.9% 7.2% 13.0% 11.3% Household goods 14.1% 16.9% 15.9% 11.7% 11.6% 12.5% 18.7% 23.6% 23.7% 23.3% 18.6% 9.3% 2.2% 16.7% 18.4% Foods 16.5% 16.7% 16.8% 14.7% 12.5% 13.7% 14.2% 13.0% 14.6% 14.6% 14.1% 10.8% 16.1% 13.4% 13.5% Watches & fashion merchandise 7.3%4.7%2.9%3.2%5.2%8.5%0.0%-3.3% -2.0% -2.5% 6.6% 2.8% 8.8% 2.8% 0.9% Sports & leisure goods 31.1% 4.6% 2.3% 0.3% 2.2% 1.4% 4.9% 7.2% 5.2% -1.0% 7.4% -0.6% 40.5% 3.6% 2.5% DIY goods -10.7% -9.4% -8.5% 5.9% -9.9% 9.8% -7.1% 17.5% 7.3% 2.6% 2.2% -1.2% -6.3% 2.1% 2.5% Overseas 23.1% 19.1% 9.3% -1.0% -11.5% -16.5% -9.0% -2.0% 2.9% 11.0% 134.3% 164.1% 11.9% -9.8% 82.3% Others 15.6% 5.3% 1.7% 26.0% -5.5% -2.4% 2.5% -13.0% 2.2% 3.1% 4.3% 4.3% 16.5% -4.9% 3.5% Sales at comparable Don Quijote stores (a) 7.0% 3.9% 4.5% 2.8% 1.9% 2.4%2.6%3.2%5.6%4.1%3.9% - 4.5%2.6%4.1%0.5%1.8%2.7%3.5% Sales boost from duty-free sales (b) 4.0% 3.0% 2.2% 0.5% -0.3% 0.1% 0.8% 1.3% 1.6% - 2.3% - 2.4% 0.6% 2.2% (a) - (b) 3.0% 0.9% 2.3% 2.3% 2.2% 2.3% 1.8% 1.9% 4.0% 1.6% - 2.1% 2.0% 1.9% ％ of sales Electric appliances 8.1% 8.7% 8.7% 7.8% 8.5% 9.1% 9.0% 7.8% 8.5% 9.3% 8.6% 7.2% 8.3% 8.6% 8.4% -0.2pp Household goods 21.4% 20.8% 21.5% 22.1% 22.2% 21.3% 23.3% 24.8% 24.6% 23.7% 23.2% 23.7% 21.4% 22.9% 23.8% +0.9pp Foods 31.5% 32.3% 34.1% 34.3% 32.8% 33.5% 35.4% 35.2% 33.8% 34.6% 33.9% 34.1% 33.0% 34.2% 34.1% -0.1pp Watches & fashion merchandise 21.6% 21.7% 20.1% 20.7% 21.0% 21.5% 18.4% 18.2% 18.5% 18.8% 16.4% 16.3% 21.0% 19.8% 17.5% -2.3pp Sports & leisure goods 8.1%8.0%5.7%6.3%7.7%7.4%5.5%6.2%7.3%6.6% 4.9% 5.4% 7.1% 6.7% 6.0% -0.7pp DIY goods 2.3%1.9%2.2%2.0%1.9%1.9%1.9%2.1%1.8%1.8% 1.6% 1.9% 2.1% 2.0% 1.8% -0.2pp Overseas 5.4% 5.1% 6.3% 5.0% 4.4% 3.9% 5.2% 4.4% 4.1% 3.9% 10.2% 10.3% 5.4% 4.5% 7.2% +2.7pp Others 1.6% 1.5% 1.5% 1.7% 1.4% 1.4% 1.4% 1.3% 1.3% 1.3% 1.2% 1.2% 1.6% 1.4% 1.3% -0.1pp Duty-free as % of total sales (SR est.) 5.4%5.9%6.5%5.9%5.3%5.6%6.9% 7.1% 6.9% 8.1% 9.8% - 5.9% 6.2% 8.7% +2.5pp Operating profit 6,686 8,707 4,280 1,744 6,784 7,537 5,352 4,020 8,847 8,648 4,628 5,637 22,746 23,693 27,760 +4,067 YoY 3.1% 2.8% -24.3% 114.8% 1.5% -13.4% 25.0% 130.5% 30.4% 14.7% -13.5% 40.2% 6.2% 4.2% 17.2% OPM 3.7%4.6%2.4%1.0%3.5%3.6%2.7%2.0%4.1%3.7% 2.0% 2.4% 3.1% 3.0% 3.0% +0.1pp Number of stores 311 319 322 341 348 354 360 368 393 403 408 418 341 368 418 +50 New openings 69619106610312511403231 -1 Don Quijote 182 184 184 194 195 196 197 198 199 204 206 209 194 198 209 +11 MEGA and New MEGA 81 85 88 94 100 104 107 112 113 118 120 123 94 112 123 +11 MEGA 36 37 38 39 39 40 40 40 40 41 42 43 40 43 +3 New MEGA 45 48 50 55 61 64 67 72 73 77 78 80 72 80 +8 Picasso 18181820202020212121 21 23 20 21 23 +2 Kyo Yasu Do 233333444344 344 - Overseas 14 14 14 14 14 14 14 14 37 38 38 39 14 14 39 +25 DOit 12 13 13 14 14 15 16 17 17 17 17 18 14 17 18 +1 Nagasakiya 222222222222 222 - Tenant revenue Sales 4,720 5,018 4,953 5,090 5,114 5,236 5,100 5,109 5,232 5,454 5,228 5,381 19,781 20,559 21,295 +736 YoY 6.1% 10.9% 7.8% 9.9% 8.3% 4.3% 3.0% 0.4% 2.3% 4.2% 2.5% 5.3% 8.7% 3.9% 3.6% Operating profit 3,255 3,874 3,509 3,521 4,001 4,441 4,078 3,603 4,321 4,513 4,506 3,897 14,159 16,123 17,237 +1,114 YoY 14.1% 21.5% 4.7% 6.0% 22.9% 14.6% 16.2% 2.3% 8.0% 1.6% 10.5% 8.2% 11.4% 13.9% 6.9% OPM 69.0% 77.2% 70.8% 69.2% 78.2% 84.8% 80.0% 70.5% 82.6% 82.7% 86.2% 72.4% 71.6% 78.4% 80.9% +2.5pp Others Sales 1,589 1,709 1,630 1,549 1,760 1,869 1,391 1,417 1,703 1,650 1,691 1,672 6,478 6,437 6,716 +279 YoY 12.4% 15.6% 7.4% 7.5% 10.8% 9.4% -14.7% -8.5% -3.2% -11.7% 21.6% 18.0% 10.7% -0.6% 4.3% Operating profit 1,563 1,703 1,604 1,863 1,753 1,732 1,524 1,386 1,067 1,791 1,694 1,777 6,733 6,395 6,329 -66 YoY 31.3% 20.4% 19.4% 30.7% 12.2% 1.7% -5.0% -25.6% -39.1% 3.4% 11.2% 28.2% 25.3% -5.0% -1.0% OPM 98.4% 99.6% 98.4% 120.3% 99.6% 92.7% 109.6% 97.8% 62.7% 108.5% 100.2% 106.3% 103.9% 99.3% 94.2% -5.1pp OP adjustments -208 -9 -27 -156 -6 101 -159 38 65 -5 -15 197 -453 -26 242 +268 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

06/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Full-year FY06/18 results (out August 10, 2018)

▷ FY06/18: Strengthened foundations of existing businesses while maintaining a customer focus, and rolled out new businesses (post-GMS, Southeast Asia), which gained a certain degree of traction  The aggressive business approach aimed at medium- to long-term growth proved successful and drove a further increase in gross profit in Q4. Six stores jointly operated with Uny continued to perform well

 Enhancing moves to sustain and grow customer support ahead of scheduled October 2019 consumption tax hike. Driving growth in customer count and average spend per customer

 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

▷ New store openings: Leveraging the business’ strength of broad accessibility, from city centers to suburbs, the company opened 31 stores. From Q4, it accelerated openings of small-scale store formats adjacent to train stations

 In Q2, October saw the opening of a store in Toyohashi, Aichi (the largest domestic post-GMS store at 11,000sqm). In Q3, store nearly 10,000sqm opened in Himeji

 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 and Himeji stores) to the six stores it will operate jointly with Uny

 In Q4, the company strengthened small-scale store formats by setting up shops in locations vacated by pachinko halls, while also considering cannibalization vis-à-vis stores jointly operated with Uny. It is accelerating such efforts in Q1 FY06/19

▷ Comparable store sales growth: DQ sales up 4.1% (+1.9% excluding duty-free sales) and Nagasakiya 2.2% (+2.2% excluding duty-free sales). Continued increase in sales since September 2016 and in average spend per customer since May 2017

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

▷ Demand from inbound tourists: Success in boosting store appeal via pricing and products enabled company to capture demand

from foreign visitors. Also tapped into B2C2C demand ▷ Joint operations with Uny: Six co-branded stores performing well, with sales up 1.9x, customer traffic 1.7x, and gross profit 1.6x. Company taking full advantage of forte in non-food items

 Key themes for speeding up implementation of post-GMS strategy: success at the six jointly operated stores and human resource training with view toward future acceleration of store roll-out ▷ FY06/19: On track to achieve JPY1tn sales target of Vision 2020 (sales of JPY1tn, 500 stores, ROE of 15%) one year ahead of schedule, in FY06/19. After clearing the Vision 2020 targets, the company will aim for sales of JPY2tn and operating profit of JPY100.0bn, achieved through organic growth. Rather than expanding sales or the scale of the company, the priority is on attaining the operating profit target of JPY100.0bn  Also stepping up strategy to prepare for consumption tax hike. Sharp shift in store opening direction, with move away from traditional pace of 30–40 stores annually. Plans to open 20 or more stores, primarily small-scale, in light of potential addition of 20 stores jointly operated with Uny. Focus is on success of co-branded stores and human resources training, with view toward post-GMS strategy

07/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Consolidated earnings (JPYbn)

1,000 Sales YoY 16% 60 Operating profit YoY 40% 50 Recurring profit YoY 50%

900 14% 35% 50 800 14% 40 40% 12% 30% 700 32% 12% 40 11% 10% 25% 600 30 26% 30% 500 9% 8% 30 23% 20% 19% 8% 20% 400 6% 15% 20 16% 20% 6% 20 16% 13% 13% 300 14% 5% 4% 10% 9% 200 12% 10 7% 10% 4% 10 10% 10% 2% 5% 4% 100 6% 7% 0 1% 0% 0 0% 0 0% (JPYbn) FY06/09FY06/11FY06/13FY06/15FY06/17 (JPYbn)FY06/09FY06/11FY06/13FY06/15FY06/17 (JPYbn)FY06/09FY06/11FY06/13FY06/15FY06/17 Retail business performance (JPYbn) 250 Sales Operating profit Sales YoY (right axis) Operating profit YoY (right axis) 19% 20% 16% 200 15% 14% 14% 14% 15% 12% 11% 11% 150 11% 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 2.7% 2.4% 0.9% 0.5% 2.4%1.0% 2.0% 2.0%

0 0% Q1 Q3 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 FY06/18 (JPYbn) Source: Shared Research based on company data Results summary FY06/18: Strengthened foundations of existing businesses while maintaining a customer focus, and rolled out new businesses (post-GMS, Southeast Asia), which gained a certain degree of traction While most retailers suffer from weak consumption spending, as of August 10, 2018, Don Quijote has logged its 22nd consecutive month of positive growth in comparable store sales thanks to the success of its customer focus and high-priority initiative giving individual stores more autonomy under its aggressive business approach aimed at medium- to long-term growth. (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.) On a quarterly basis, the company has posted comparable store sales growth for 16 quarters in a row since Q1 FY06/15.

Don Quijote comparable store sales and gross profit growth

Change in inflationary uptrend in consumption Measures to raise customer turnover at the expense of profit margins post tax hike 10% 35% Raised food sales in percentage of total to attract customer (in line with popular demand) 8% 30% Emphasized price 6% competitiveness in anticipation 25% of change in cosumers' mindset Stole competitors' market share through measures to 4% increase customer count and number of items 20%

2% 15%

0% 10% Gross profit YoY (comp. stores) Sales YoY (comp. stores) -2% 5% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 FY06/16 FY06/17 FY06/18

Source: Shared Research based on company data

While strengthening the foundations of its existing businesses, Don Quijote also pursued new businesses in FY06/18. In August 2017, the company announced a capital and business alliance with FamilyMart Uny Holdings (FU-HD) with an eye toward its post-GMS strategy. In December of the same year, it launched the first Don Don Donki store in Singapore as a test case to help determine the direction for future business expansion in Southeast Asia. The FU-HD partnership is already paying off, while the Singapore store has sustained strong momentum beyond the initial excitement accompanying the launch of the store. Management has commented it is in the process of identifying a winning formula for its operations in Asia.

08/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Post-GMS strategy From late February 2018 through March, the six stores operated jointly with Uny, which were relaunched after remodeling, performed well despite opening shortly after the announcement of the business alliance. In March–July 2018, post-remodeling sales were up 1.9x from before (from JPY5.6bn to JPY10.9bn), customer traffic was up 1.7x (from 19,000 to 33,000), and gross profit was up 1.6x (from JPY1.4bn to JPY2.3bn). The company believes quick-paced implementation of its post-GMS strategy hinges on the success of these stores along with adequate human resource training ahead of future acceleration in store openings (both jointly operated ones and company’s own).

In light of the above, Don Quijote plans to roll out another 20 jointly operated stores in CY2019. Although it only holds a 40% stake in the newly established subsidiary that manages the jointly operated stores, it has deployed human resources to the subsidiary, thus assuming the risk of adverse impact on its existing stores. Management believes that if the targeted ROI cannot be reached and investment efficiency remains low, this will inconvenience its stakeholders, and it therefore plans to look at a range of options as it continues the capital and business alliance.

Next-generation convenience stores In June 2018, the Don Fami or Fami Don trial initiatives jointly implemented at three UF-HD FamilyMart stores performed well, mirroring the trend seen at stores jointly operated with Uny. In these trials, FamilyMart stores introduce roughly 2,800 products, including daily necessities and processed foods, based on suggestions by Don Quijote. The items are expected to “contribute to an exciting shopping experience” in physical stores. According to the company, post-remodeling sales have increased at least 25% from before. FamilyMart has reported that its average daily sales at existing stores declined JPY6,000 YoY to JPY512,000 in Q1 FY02/19. Given that convenience stores are racking their brains for strategies to tackle dwindling average daily sales, a 25% increase in sales can be regarded as an extraordinary achievement. Although these results will have only a modest direct impact on the company’s earnings, management is apparently considering various options to expand such initiatives. We intend to pay close attention to developments related to next-generation convenience stores.

Overseas expansion After rolling out its first Singapore store in December 2017, the company opened a second store in June 2018, and plans to open its first store in Bangkok, Thailand in the second half of the year. It intends to roll out about 30 stores by 2020. This is roughly the same scale as the company’s current presence in the US (37 stores). In terms of regional strategy, the company plans to further increase store numbers in Singapore (four locations currently under consideration), and has also hinted at potential expansion in other regions such as Philippines and Taiwan.

Don Quijote is starting to identify a winning formula as noted above, but lease agreements appear to be hampering an increase in store openings in emerging countries. The company has embarked on a long-term expansion of stores in the region, and aims to conduct operations accordingly. However, it says it is not uncommon for lease agreements in Southeast Asia to demand an increase in rent with each renewal. Since this is not conducive to stable profit growth, the company is eager to open stores on favorable lease terms. In other words, this means the stores for which openings have been confirmed have been secured on positive terms. We can also conclude that the profit growth in the domestic business is partly the result of the company’s ability to negotiate favorable lease terms.

The company has uncovered a winning formula consisting of three elements: a) importance of customer-centric marketing to local consumers while leveraging the “perception of Japanese value,” b) develop stores while considering cultural characteristics that are likely to keep customers longer in stores, and c) keep stores in the public eye by generating news. In addition, the company has also learned that “sundries do not sell.”

Toward FY06/19 FY06/19 simultaneously marks the 30th anniversary of the opening of Don Quijote’s first store in Fuchu City, Tokyo, and the 30th consecutive year of sales and profit growth. The company targets sales of JPY1tn (+6.2% YoY) and operating profit of JPY53.0bn (+2.8% YoY) as major milestones. In August 2015, it unveiled its Vision 2020 medium-term targets calling for sales of JPY1tn, 500

09/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

stores, and ROE of 15%. However, the company is on track to hit its sales target of JPY1tn one year ahead of schedule. On the profit front, Shared Research understands the company aims to steadily build up profits on a quarterly basis as before.

Don Quijote’s core policy on management and merchandise strategy is unchanged. Its store strategy assumes capital investment of JPY40.0bn, the rollout of 20 or more new stores, earnings expansion at stores jointly operated with Uny (projected equity-method profit of JPY5.0bn), and comparable store sales growth of 1.0% for the full year (1.0% for both 1H and 2H).

After achievement of Vision 2020 Beyond Vision 2020, the company targets sales of JPY2tn and operating profit of JPY100.0bn (for details, see the Q3 FY06/18 results section). However, it emphasizes its priority is on achieving the latter rather than the former. The company is not particularly focused on expanding sales or its overall scale, but it apparently targets meaningful sales stemming from natural growth. Management has indicated it is eager to achieve the operating profit target of JPY100.0bn during the tenure of President Ohara. It also commented such a figure has never been achieved by an “select shop-type” discounter like itself (a retailer that arranges manufacturer products in the secondary market and provides these to customers; also referred to as a vendor procurement-type retailer). The fact that it has never been achieved has apparently only increased the company’s drive to aim for such a target.

At the 1H results briefing, the company said it looked to its post-GMS strategy and overseas businesses to underpin its JPY2tn sales target. In addition, it presented six major development fronts that will support its growth strategy going forward, adding digital development to the original store format development, store development, merchandise development, organizational development, and human resources development.

Digital strategy The company’s digital strategy aims to find a balance between customer wants (analog aspects such as a hard-to-forget, vivid store interiors) and customer needs (digital aspects such as smartphone support and data utilization). The intent behind the hard-to-forget store interiors is to produce unique environments that excite customers by providing vivid sales floors. Such an approach is typically regarded as irrational and shunned by chain stores, making it difficult to copy by others. By combining this with the utilization of smartphones, the company aims to create hybrid stores that bring together analog and digital elements. It plans to roll out its first hybrid store in the Kanto area during 2018.

Note that the digital strategy is not only one of the company’s store formats, but essentially aims to keep Don Quijote in the minds of customers and thus encourage store visits in general. Accordingly, the company plans to strengthen its Majica membership platform, build a Majica Digital Platform on which it will provide access to applications such as Majica SNS, Majica Virtual STAFF, Majica Digital Parking, Majica Smart Check-in, Majica Store Map, Majica Chance, Majica Information Plus, Majica Price Down Auction, and Majica Check-out Bonus. In this way, it hopes to generate excitement for store visitors. The company will also automate cash registers (Majica Digital Lane, currently under trial at the Shibuya store), and eventually aims to build a system that can prevent shortages of products on shelves by leveraging facial recognition technology (Majica Shelf Management System).

Supplementary information on FY06/18 results The company summarized the key points for FY06/18 as follows: 1) strengthened aggressive management to capture market share, 2) strong customer traffic and sales supported by SNS, 3) steady progress with the development a diverse range of stores, 4) profit-centric strategy supported core operations as select shop-type discounter, bringing double-digit profit growth closer, 5) efficiency gains kept SG&A expenses in check, and 6) aggressively invested funds raised through debt instruments. This reflected a continuation of the strategy implemented through Q3.

10/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Comparable store sales

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

15%

10%

5%

0%

-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 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%

2.9% 3.0% 60 27% 80 2.5% 2.4% 3% 2.1% 2.0% 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 3.2 1.7 -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

Store openings and closures 24 New store openings Store closures Store count (right axis)

408 418 393 403 368 18 354 360 400 341 348 319 322 306 311 291 295 278 280 283 286 266 12 255 242 243 249 252 229 235 236 218 218 218 220 221 226 223 228 19

6 12 11 12 12 12 200 9 9 9 10 10 7 556 6 6 6 6 66 3 4 4 3 4 3 4 3 0 2 1 2 2 1 2 -1 -1 -1 -1 -1 -1 -1 -2 -2 -2 -2 -2 -2 -2 -2 -3 -3 -3 -3 -3 -3 -3 -3 -6 -5 0 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 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

Store count by format

450 408 418 393 403 400 360 368 38 39 341 348 354 37 38 322 14 14 350 306 311 319 14 14 291 295 14 278 280 283 286 14 14 14 300 266 14 14 118 120 123 249 252 255 14 14 14 14 107 112 113 229 235 236 242 243 14 14 94 100 104 250 3 3 3 3 3 81 85 88 3 3 3 71 75 77 62 64 65 68 25 24 25 27 200 52 54 56 56 57 23 23 23 24 25 44 46 45 49 18 18 18 20 21 21 14 13 14 14 15 15 15 17 150 12 12 13 14 14

100 183 182 184 184 194 195 196 197 198 199 204 206 209 150 154 156 157 157 161 163 165 165 172 172 174 172 173 175 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

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SG&A expenses

(JPYbn) 60 Salaries and allowances Rents Commission paid Depreciation Other 51.9 49.6 50 45.6 45.0 46.0 41.7 42.6 42.5 39.8 41.5 14.7 38.8 38.4 39.0 14.2 35.6 40 34.0 33.8 34.4 14.0 12.7 12.8 32.2 12.3 12.4 30.5 29.7 30.8 12.2 12.3 28.2 28.8 28.7 29.4 11.7 11.8 11.4 11.6 26.0 26.5 26.7 27.1 27.5 27.4 30 25.7 25.2 25.5 25.2 25.4 10.5 10.6 10.9 5.4 6.4 9.8 11.0 5.6 10.1 9.4 5.5 5.6 8.5 7.9 8.2 9.3 8.5 9.5 9.6 4.4 5.1 4.6 7.6 7.3 6.8 6.0 7.1 7.8 6.8 7.3 8.1 4.8 4.3 4.6 4.5 5.0 7.4 7.5 20 3.9 6.6 6.8 4.3 3.7 4.1 5.2 5.4 5.6 5.7 5.8 6.2 3.6 3.5 3.4 4.1 3.6 5.0 5.2 5.1 2.8 3.3 2.7 3.1 3.0 3.2 2.9 3.1 3.1 3.1 3.1 3.2 3.1 3.2 4.5 4.6 4.9 4.3 4.4 4.6 4.6 10 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 16.0 16.1 16.1 16.3 16.7 17.3 18.8 19.2 12.0 12.4 12.8 14.0 14.2 14.8 15.1 15.2 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 11.6 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 Inbound, % of sales (SR est., right axis) Retail food, % of sales (right axis) 9% 12% 9% 36% 8% 9% 8% 34%

7% 6% 7% 32%

6% 30% 6% 3%

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 Source: Shared Research based on company data

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

12 Don Quijote MEGA

10

8

6

4

2

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

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

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Full-year company forecasts (Initial Estimates)

FY06/17 FY06/18 FY06/19 Initial Estimates Difference (JPYmn) 1H 2H FY 1H 2H FY 1H 2H FY 1H 2H FY Sales 417,694 411,104 828,798 462,830 478,678 941,508 503,000 497,000 1,000,000 40,170 18,322 58,492 YoY 8.6% 9.6% 9.1% 10.8% 16.4% 13.6% 8.7% 3.8% 6.2% Gross profit 110,640 107,940 218,580 120,176 123,815 243,991 131,800 128,200 260,000 11,624 4,385 16,009 YoY 7.5% 9.1% 8.3% 8.6% 14.7% 11.6% 9.7% 3.5% 6.6% GPM 26.5% 26.3% 26.4% 26.0% 25.9% 25.9% 26.2% 25.8% 26.0% 0.2% -0.1% 0.1% SG&A expenses 84,297 88,098 172,395 90,929 101,494 192,423 102,300 104,700 207,000 11,371 3,206 14,577 SG&A ratio 20.2% 21.4% 20.8% 19.6% 21.2% 20.4% 20.3% 21.1% 20.7% 0.7% -0.1% 0.3% Operating profit 26,343 19,842 46,185 29,247 22,321 51,568 29,500 23,500 53,000 253 1,179 1,432 YoY 3.0% 12.6% 6.9% 11.0% 12.5% 11.7% 0.9% 5.3% 2.8% OPM 6.3%4.8%5.6%6.3%4.7%5.5%5.9%4.7%5.3%-0.5% 0.1% -0.2% Recurring profit 26,928 18,595 45,523 31,058 26,160 57,218 32,400 25,600 58,000 1,342 -560 782 YoY 4.1% 3.7% 3.9% 15.3% 40.7% 25.7% 4.3% -2.1% 1.4% RPM 6.4%4.5%5.5%6.7%5.5%6.1%6.4%5.2%5.8%-0.3% -0.3% -0.3% Net inco me 1 6 ,459 16,623 33,082 18,678 17,727 36,405 19,500 17,500 37,000 822 -227 595 YoY 15.6% 55.3% 32.7% 13.5% 6.6% 10.0% 4.4% -1.3% 1.6% 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.

13/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

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.

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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.

16/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

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. Capital expenditures 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 flows 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 Depreciation and amortization 5,395 7,398 8,898 9,823 9,908 10,474 11,051 11,408 13,003 15,092 15,952 Depreciation 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 (J 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 Result s vs. Init ial 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 Result s vs. Init ial 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 Result s vs. Init ial 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 Result s vs. Init ial 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

17/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 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.

18/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

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 Total retail 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% Electric 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 Oct Jan Apr 2014 2015 2016 2017 2018 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

19/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

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 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)

50 250 6% 40 200 55% 52% 30 150 4% 37% 44% 48% 48% 49% 41% 41% 20 100 12% 39% 15% 2% 11% 11% 16% 17% 17% 18% 32% 16% 11% 39% 10 50 11% 29% 38% 36% 25% 24% 25% 20% 17% 0%6% 49% 40% 84% 0 0 0% Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Q1 Q3 Q1 Q3 Q1 Q3 FY06/15 FY06/16 FY06/17 2014 2015 2016 2017 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 FY06/15 FY06/16 FY06/17 FY06/16 (千⼈) (RMB) 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.

20/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

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% Depreciation 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% Foods Household goods 8% 🌙 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% 910111213141516171819202122232412345678 FY06/15 FY06/16 FY06/17 (Hour) 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

21/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

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 15 306 311 291 295 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 221 226 223 228 229 12 9 7 218 218 218 220 6 6 6 66 14 4 9 4 4 5 3 6 3 6 3 200 2 2 552 2 12 1 4 1 10 10 10 9 0 8 -1 -1 -1 -1 -1 -1 -1 6 6 66 -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.

22/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 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

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% 6% Hokkaido 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

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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 Halloween 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 thorough cost store cutting Nov. 2014 MEGA Fukaebashi Synergies from 1st floor (food) and 2nd floor (non-food) layout attract customers despit e t argeting 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 WithReHome Post-HC Targeted at reform market; May roll out shop-in-shops Dec. 2015 MEGA Ayase Post-GMS Experimental, repurposed GMS May. 2016 City 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 Quijote Miyakojima First store on a resort island; aims to 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.

24/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

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 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.

25/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Trends it sales and earnings at DOit

12,000 18 10,781 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.

26/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

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.”

27/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

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.

28/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

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.

29/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

1) Product development: Changes in departmental organization

Old categories under seven departments New classification at Merchadise Development Headquarters Number of categories Electric appliances ■■■■ ■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■ Food and liquor Food-related Household goods ■■■■■■ ■■■■■■■■■■■■■■■■■■■■■■■■ Consumables ■■■■ ■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■ Trendy and select Fashion, elect ric appliances, brand-name goods Foods ■■■■■■■■ ■■■■■■■■■■■■■■■■■■■■■■■■ Brand-name goods ■■■ Consumables, hairdressing goods, healthy food, gardening goods, ■■■■■■■■■■■■■■■■■■■■■■■■■■■■■■ Lifestyle 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 la y out f or e ach tr ade a re a 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 la y out f or e a ch tr ade a re a Store

Store Unique purchase by Choose staple item store West Japan Sales HQs Branch 1 Store each store for its own trade area la y out f or e a ch tr ade a re a 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 MEGA Unique purchase by Choose staple item store East Japan Sales Sales Branch 1 Store Don Quijote each store for its own trade area la y out f or e a ch tr ade a re a 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).

30/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

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

31/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 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% 25.5% 25.0% 26.5% 25.6% 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% 26.7% 26.3% 27.3% 24.9% 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.

32/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 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 t ot a l 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% 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 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% 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

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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.

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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 418252727282323 Picasso 9 10 13 15 13 11 11 11 11 14 14 15 18 20 21 New MEGA Don Quijote 391728415572 MEGA Don Quijote 40403937363940 Overseas (the US) 4444433314141414 DOit 22 18 11 12 16 14 13 12 12 14 17 Nagasakiya 4931176543222 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 53464240403940383940 DOit 22 18 12 12 16 14 13 12 12 14 17 Lirack 3 4 Daishin Department Store 1 1 Don Quijote (USA) 444443333333 Marukai 11111111

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.

39/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

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 Establishment 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

YoY 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 Establishment 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 Establishment 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 Establishment 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.

40/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

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.

41/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

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 Ranking5143383322151514141313121110 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.

43/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 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 forecasts section.

44/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Historical financial statements

Q3 FY06/18 results (out May 8, 2018)

▷ Cumulative Q3: The aggressive business approach aimed at medium- to long-term growth continued to perform well, with gross profit and comparable store sales up. Six stores jointly operated with Uny off to strong start

 Enhancing moves to sustain and grow customer support ahead of scheduled October 2019 consumption tax hike. Driving growth in customer count and average spend per customer

 Upward revision: In light of Q3 results, company raises full-year sales, recurring profit, and net income forecasts. Operating profit forecast unchanged with eye on moves to expand customer support

 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

▷ New store openings: Leveraging the business’ strength of broad accessibility, from city centers to suburbs, the company opened 20 stores. Full-year plans call for opening 31 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). In Q3, store nearly 10,000sqm opened in Himeji

 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 and Himeji stores) to the six stores it will operate jointly with Uny

▷ Comparable store sales growth: DQ sales up 4.5% (+2.4% excluding duty-free sales) and Nagasakiya 2.7% (+2.7% excluding duty-free sales). Continued increase of customer traffic since September 2016 and average spend per customer since May 2017

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

▷ 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 ▷ Joint operations with Uny: Six stores carrying both companies’ names off to strong start with sales up 2.2x, customer traffic 1.9x, and gross profit 1.75x. Company taking full advantage of forte in non-food items  Key themes for speeding up implementation of post-GMS strategy: success at the six jointly operated stores and human

resource training with view toward future acceleration of store roll-out ▷ VISION 2020 (JPY1tn in sales, 500 stores, ROE of 15%): With chances of achieving targets under VISION 2020 improving, company sets new target of JPY2tn for sales and JPY100bn for operating profit through organic growth ▷ FY06/19: Stepping up strategy to prepare for consumption tax hike. Sharp shift in store opening direction, with move away from traditional pace of 30–40 stores annually. Plans to open 20 or more stores, primarily small-scale, in light of possible increase in stores jointly operated with Uny. Focus is on success of co-branded stores and human resources training, with view toward post-GMS strategy

45/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

Consolidated earnings (JPYbn)

700 Sales YoY 14% 45 Operating profit YoY 40% 50 48% Recurring profit YoY 50%

13% 600 12% 40 35% 40 40% 12% 35 500 10% 30% 10% 30 29% 25% 30 30% 400 9% 8% 25 8% 22% 20% 21% 300 6% 20 20 17% 17% 20% 7% 15% 21% 15 15% 200 5% 4% 16% 12% 10% 14% 10 11% 10 12% 10% 100 3% 2% 2% 2% 5 8% 5% 6% 1% 0 0% 4% 0 0% 0 0% FY06/09FY06/11FY06/13FY06/15FY06/17 (JPYbn)FY06/09FY06/11FY06/13FY06/15FY06/17 (JPYbn)FY06/09FY06/11FY06/13FY06/15FY06/17 (JPYbn) Retail business performance (JPYbn) 250 Sales Operating profit Sales YoY (right axis) Operating profit YoY (right axis) 19% 20% 16% 200 15% 14% 14% 15% 12% 11% 11% 150 11% 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% 2.7% 50 0.9% 0.5% 2.4% 1.0% 2.0% 2.0% 8.8 8.8 8.7 8.6 8.4 8.5 8.3 7.5 7.0 6.8 6.7 6.5 6.3 6.0 5.9 5.7 5.5 5.5 5.6 5.0 4.8 4.5 4.6 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 Q1 Q3 FY06/11 FY06/12 FY06/13 FY06/14 FY06/15 FY06/16 FY06/17 FY06/18 (JPYbn) Source: Shared Research based on company data Results summary Cumulative Q3: The aggressive business approach aimed at medium- to long-term growth continued to perform well, with gross profit and comparable store sales up. Six stores jointly operated with Uny off to strong start While most retailers suffer from weak consumption spending, as of May 8, 2018, Don Quijote has logged its 19th consecutive month of positive growth in comparable store sales thanks to the success of its high-priority initiative giving individual stores more autonomy under its aggressive business approach aimed at medium- to long-term growth. (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.) On a quarterly basis, the company has posted comparable store sales growth for 15 quarters in a row since Q1 FY06/15. Six stores operated with Uny got off to a strong start. The company believes quick-paced implementation of its post-GMS strategy hinges on the success of these stores along with adequate human resource training ahead of future acceleration in store openings (both jointly operated ones and company’s own).

Don Quijote pointed to the following key takeaways for Q3: 1) beating the competition in local markets by catering to regional customers; 2) very strong results from inbound tourists; 3) controlling SG&A expenses through improved productivity; 4) strong start to stores carrying both companies’ names; and 5) good results despite tough environment. These are discussed later, albeit not in the same order.

4 x 100 relay. CFO Takahashi had some interesting comments at the results briefing. He likened annual business activities to a 400m relay race. In Q1 the company got off to a strong start; in Q2 it maintained its lead; in Q3 it dropped the baton and cornered poorly; but in Q4, it has Usain Bolt (world record holder for 100m, 200m and 4 x 100m relay) to anchor the relay and was successful in passing the baton, so the shiniest medal awaits on the podium. The company is addressing the Q3 dropped baton issue (excess inventories of imported brands).

Beating the competition in local markets by catering to regional customers To prepare for the consumption tax hike scheduled for October 2019, the company is unrolling a strategy to win customer support (market share). This entails first growing customer numbers, then increasing number of items purchased to boost spend per customer and gross profit. In Q3, as Don Quijote pushed an aggressive management stance, further autonomy at the store level saw stores discounting too much in some respects, but with new products on sale in April, the company can tweak pricing. Still, these moves are helping to grow comparable store customer traffic, spend per customer, and gross profit. Detailed discussion follows.

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Enhancing moves to sustain and grow customer support ahead of consumption tax hike. Stepping up price competition, trade off of lower GPM for customer traffic and number of items purchased In cumulative Q3, GPM was down by 0.7pp, but sales and gross profit were up YoY in Q1, Q2, and Q3 as increases in customer traffic and number of items purchased per customer at comparable stores drove growth in average customer spend. These results reflect the company’s initiatives to expand customer support ahead of the consumption tax hike scheduled for October 2019, even if that meant trading off GPM.

The company said this was part of its moves to step up pricing pressure on the competition by consciously accepting a lower GPM 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 in Okinawa to the north in Hokkaido, there is not one region in Japan where its stores are beaten on price.

First, the company aims to get customer count (customer support), then increase number of items purchased per customer, driving gross profit growth. This is showing up in the increases in comparable store customer traffic (since September 2016) and average spend per customer (since May 2017) in monthly comparable store sales. That said, Shared Research understands that low-priced products, such as daily necessities where the company is pushing lower prices, are selling better than it expected. This is driving growth in the number of items purchased, but the company would like to also drive growth in mid-priced products. Also, there are some special factors at play in the gross profit margin. The company said the true decline in the GPM was a few tenths of a percentage point smaller than the stated 0.7pp.

Q3 GPM: Special factors included a) QSI: consolidated from Q3, its GPM is around 2pp higher than Japan, but the SG&A expense ratio is also high; b) Singapore; and c) product supply to stores jointly operated with Uny (low GPM, JPY3.1bn). Excluding these factors, margins would be 0.2pp higher than reported, according to the company. Also, the SG&A expense ratio would be 0.2pp better, and the operating profit margin would be 0.4pp higher than stated.

Strong employee motivation enables aggressive business approach 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.

Store autonomy growing The company attributes strong comparable store sales to the success of major organizational reforms undertaken in recent years with a view to expand autonomy of individual stores. The first of these moves, implemented in October 2015, centered on merchandising; the second, in April 2017, focused on store formats and locations. 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, in FY06/18 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 had already made two such awards as of 1H.

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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 achieving 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.

Post-GMS strategy will be one growth driver towards goal of JPY2tn in sales One step toward this new goal is Don Quijote's entrance into a capital and business alliance with Uny, Co., Ltd. and FamilyMart Uny Holdings (FU-HD) on November 2017, and the three companies' initial joint effort to convert six GMS stores to a new post-GMS format. The six stores underwent a remake, then opened for business with both the Uny and Don Quijote names on their signboard starting on February 23 and running through March 30. Per the company, in March and April, around the format change, sales were up by 2.2x, customer traffic by 1.9x, and gross profit by 1.75x, marking a strong start.

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 sees no benefit from the buying spree of inbound tourists, it has been able to maintain the loyalty of the families and seniors that comprise its core clientele and has continued to grow sales at existing stores and expand gross profit. (Comparable store sales at Nagasakiya has been growing YoY at least since January 2014—with the exception of reactionary falls to the April 2014 consumption tax hike that occurred in April 2014 and March 2015.)

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 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 trial-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.

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Don Quijote noted that 1H 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. This is also the case at the six stores jointly operated with Uny, where the share of food was 69% before the makeover, falling to 55% as sales have grown in the two months following. The company points to this as proof that its original post-GMS format is already in the process of being established.

Big boost from Don Quijote’s Toyohashi MEGA store 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 newness of the 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. 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

At FU-HD, the bright outlook for the six stores remodeled into the new post-GMS format has the motivation for the joint venture with Don Quijote running high (some staff among them do not fit the company culture). If the six stores do well, plans call for converting more GMS stores to the new format. 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 company is in the process of figuring out what GMS stores in the FU-HD group are like. Based on its belief that "slow and steady wins the race," Don Quijote plans to thoughtfully address any problems or issues. It particularly plans to focus on employee training. This is with a view to future development of stores co-branded with Uny as well as its own store rollout plans.

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. If the joint venture is a success, it opens up the door for Don Quijote to possibly pursue similar arrangements with other new partners. Don Quijote plans to open many new stores in locations that GMS stores have vacated. The company said that the two stores opened on former Ito Yokado premises (Toyohashi and Himeji) in FY06/18 had sales in the top one third of Nagasakiya MEGA stores. The company is confident of its experience-based strengths in revitalizing stores, and believes its post-GMS strategy will make major progress with steady strides. 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 the GMS stores generate annually. Details of the alliance with FU-HD are discussed later.

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.

Sales growth YoY at comparable stores (monthly)

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 Oct Jan Apr 2014 2015 2016 2017 2018 Source: Shared Research based on company data

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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 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 customers). According to the company, its management had to order to remodel the Singapore store immediately to improve operations. At its February 2018 results briefing, 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 noted that its Singapore store is still extremely busy and, with the Chinese New Year approaching, everyone is constantly worried about running out of stock.

The company said it was forecasting solid performance to continue after Q3, with sales remaining around JPY350–400mn per month. With roughly 80% of stock imported from Japan by sea, the company said it was starting to see issues of lost opportunities due to the accuracy of demand forecasting. That said, Don Quijote plans to deal with this by using its ability to adapt to change, which is one of its strengths. Note that excluding headquarters support and indirect expenses, at the store level the operations had already moved into the black as of March (maintaining this in April). However, store operations tend to be diluted as more stores are opened.

In June 2018 the company plans to open a second store in Singapore (about 1,320sqm or 400 tsubo) as well as a store in Bangkok, Thailand. The successful opening of its first store in Singapore gave momentum to the company’s plans for accelerated store openings overseas. According to the company, one of the biggest accomplishments of its overseas expansion was to prove that direct trades (excluding intermediaries) allowed massive price reductions. The company is looking to further enhance its image as a discount retailer in order to appeal to highly price-sensitive consumers. In FY06/19 the company plans to brush up its three currently operating stores. Subsequent developments bear watching.

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 has in mind more and more store openings in Southeast Asia in the future, anticipating this move could potentially lead to major success. It now believes that, if its post-GMS strategy and its expansion overseas succeed, achieving JPY2tn in sales and JPY100bn in operating profit would no longer be just a dream.

Upward revision FY06/17 FY06/18 Initial Est. FY06/18 Rev. Est. (as of Q1) FY06/18 Rev. Est. (as of Q2) FY06/18 Rev. Est. (as of Q3) Difference (JPYmn) 1H 2H FY 1H 2H FY 1H 2H FY 1H 2H FY 1H 2H FY 2H FY Sales 417,694 411,104 828,798 445,000 435,000 880,000 455,000 435,000 890,000 462,830 457,170 920,000 462,830 472,170 935,000 15,000 15,000 YoY 8.6% 9.6% 9.1% 6.5% 5.8% 6.2% 8.9% 5.8% 7.4% 10.8% 11.2% 11.0% 10.8% 14.9% 12.8% Gross profit 110,640 107,940 218,580 117,000 115,000 232,000 119,200 115,000 234,200 120,176 119,824 240,000 120,176 121,824 242,000 2,000 2,000 YoY 7.5% 9.1% 8.3% 5.7% 6.5% 6.1% 7.7% 6.5% 7.1% 8.6% 11.0% 9.8% 8.6% 12.9% 10.7% GPM 26.5% 26.3% 26.4% 26.3% 26.4% 26.4% 26.2% 26.4% 26.3% 26.0% 26.2% 26.1% 26.0% 25.8% 25.9% SG&A expenses 84,297 88,098 172,395 90,000 94,000 184,000 90,400 94,000 184,400 90,929 98,071 189,000 90,929 100,071 191,000 2,000 2,000 SG&A ratio 20.2% 21.4% 20.8% 20.2% 21.6% 20.9% 19.9% 21.6% 20.7% 19.6% 21.5% 20.5% 19.6% 21.2% 20.4% Operating profit 26,343 19,842 46,185 27,000 21,000 48,000 28,800 21,000 49,800 29,247 21,753 51,000 29,247 21,753 51,000 - - YoY 3.0% 12.6% 6.9% 2.5% 5.8% 3.9% 9.3% 5.8% 7.8% 11.0% 9.6% 10.4% 11.0% 9.6% 10.4% OPM 6.3%4.8%5.6%6.1%4.8%5.5%6.3%4.8%5.6%6.3%4.8%5.5%6.3%4.6%5.5% Recurring profit 26,928 18,595 45,523 27,000 21,000 48,000 28,700 21,100 49,800 31,058 22,742 53,800 31,058 22,942 54,000 200 200 YoY 4.1% 3.7% 3.9% 0.3% 12.9% 5.4% 6.6% 13.5% 9.4% 15.3% 22.3% 18.2% 15.3% 23.4% 18.6% RPM 6.4%4.5%5.5%6.1%4.8%5.5%6.3%4.9%5.6%6.7%5.0%5.8%6.7%4.9%5.8% Net in co me 1 6,459 16,623 33,082 15,500 12,500 28,000 16,900 12,600 29,500 18,678 13,522 32,200 18,678 14,622 33,300 1,100 1,100 YoY 15.6% 55.3% 32.7% -5.8% -24.8% -15.4% 2.7% -24.2% -10.8% 13.5% -18.7% -2.7% 13.5% -12.0% 0.7% Source: Shared Research based on company material

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

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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. Don Quijote also moved to manage more aggressively as it prepared for the October 2019 consumption tax hike.

Aggressive management is flowing through to comparable store results. In cumulative Q3, DQ sales were +4.5% (tax-free sales +2.1% and “fresh spending” +2.4%), Nagasakiya +2.7% (0.0%, +2.7%). In Q3 alone, DQ sales were +3.9% (+2.3%, +1.6%), seeing sales growth for 15 consecutive quarters starting in Q1 FY06/15. As a result, comparable store sales and gross profit rose while new stores opened, marking a 13.4% increase in sales in cumulative Q3 (+11.1% if newly consolidated QSI is excluded), 10.2% increase in gross profit, 0.4pp improvement in SG&A expense ratio, 7.9% increase in operating profit, and 0.7% increase in net income. Both sales and earnings finished higher, with earning setting a new record high.

In light of these brisk results, the company announced another upward revision to its full-year forecast at the end of Q3, following revisions at the end of both Q1 and Q2. The company left its operating profit forecast unchanged at JPY51.0bn, but increased its forecasts for sales from JPY920.0bn to JPY935.0bn, recurring profit from JPY53.8bn to JPY54.0bn, and net income from JPY32.2bn to JPY33.3bn. The company raised its forecast for equity affiliated earnings from Uny by around JPY500mn but views this as conservative.

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 Don Quijote 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 Don Quijote 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. At Q3, the company changed its assumption for comparable store sales growth to +3.5% for the full year (+0.6% in Q4) and store opening forecast to 31. The inclusion of Uny in consolidated results as an equity-method subsidiary, which started in Q3, had previously been expected to add about JPY2.0bn in 2H earnings, but the company appears to have bumped up this number by around JPY500mn in Q3.

Supplementary comments Capital and business alliance with FU-HD Decision to open six new co-branded stores In November 2017, Don Quijote completed investment in major GMS company Uny Co., Ltd. as planned, taking a 40% stake in the company, and made a decision to open six co-branded stores (two in Kanagawa, three in Aichi, and one in Mie Prefecture). The stores (existing Uny stores) were temporarily closed in January 2018 for refurbishment and reopened between February 23 and March 30, 2018. The rebranded stores basically followed the company’s NEW MEGA or MEGA-type formats using Don Quijote specifications for POS checkouts, fixtures, and fittings. Inventory and product range were also expanded significantly, showcasing the company’s areas of strengths. For example, cosmetics offerings were expanded to 100 shelves instead of the typical three, and the company stepped up the lineup of small electronics that are easy to carry home such as beauty appliances and smartphone accessories.

According to the company, in the two months of March and April, around the format change, sales were up 2.2x, customer traffic 1.9x, and gross profit 1.75x.The difference in sales breakdown from before the format change (food: 68.6%, household goods: 17.3%, clothing: 14.1%) and after (food: 55.4%, household goods: 36.9%, clothing: 7.7%) shows that the company is playing to its strengths in non-food items. The company signed the capital and business alliance agreement with FU-HD on August 24, 2017 (finalized on August 31), taking 40% stake in Uny on November 21. Don Quijote deserves credit for successfully reopening six remodeled stores in the co-branded format in just three short months after completing the deal.

The first new Don Quijote-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

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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 sales at each location could be achievable. At the six stores bearing both company names, sales were up by 2.2x, customer traffic by 1.9x, and gross profit by 1.75x in the first two months, suggesting results were in line with plans.

With the opening of this new format, the business and capital alliance 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

Flo or 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 Hoshikawa 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 a new store format The new co-branded stores take on a format similar to those of the MEGA and NEW MEGA stores that utilize pre-existing fixtures, since part of the goal is to open up stores in a short period of time. Merchandising is based on the standard Don Quijote system as well, which means 1) focusing on gross profit rather than the gross profit margin; 2) bringing customers into stores by offering the best local prices for food and making the money on non-food goods; and 3) devoting roughly 60% of the merchandise lineup to items that are regularly stocked and 40% to items that 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 for them. One big difference is that the foods stocked at the new co-branded stores will be centered on perishable foods (marine products, meats, agricultural products, and prepared foods) and will be handled by Uny, which has more experience in this area.

Of the six stores, four with nearly the same floor space as Don Quijote's NEW MEGA stores (3,000sqm to 5,000sqm) are effectively pursuing a 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). The new format calls for a reduction of non-food items to make room for fresh foods. 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.

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Don Quijote’s store formats Store format Space (sqm) No. of items Featured merchandise Main target customers

Daily necessities (clothes, food, MEGA Don Quijote 8,000–10,000 60,000–100,000 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

Focus on training UD Retail employees to prevent long-term deployment of its own personnel A newly established subsidiary called UD Retail will operate the six stores. Don Quijote and Uny each assigned 60–70 highly motivated and trained employees to UD Retail. That said, 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 co-branded stores, but will need to deploy more people assuming the conversion of 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 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.

The company signaled its intention to limit the opening of new stores in FY06/19 to around 20 primarily small-scale stores, 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. (The company is keen to open at least 20 stores.) Although this means slower sales growth due to cutting back on opening new stores (in terms of floor space and store numbers), the company thinks that its equity-method profit should increase if earnings of converted stores improve as expected.

As of May 2018, the number of stores to be jointly operated with Uny for FY06/19 was undetermined. Don Quijote said it planned to decide after discussions with the FU-HD group by around August 2018. If the existing six stores turn in favorable results, there is a good chance that the company will accelerate its format conversion plans. In FY06/19, new Don Quijote stores will be mainly small-scale, taking into consideration a possible 10–20 additional co-branded stores.

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 of fresh foods (sourcing capability including food selection, along with its connections to local producers) and apply that knowledge to other stores, especially its MEGA format stores.

At a presentation for the new store opening in Oguchi, Kanagawa Prefecture, Don Quijote emphasized that at these converted stores the focus will be on gross profit value rather than gross profit margin. The last pages of the company's briefing 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 these management principles were brought out before the opening of the first of the new stores was a promising sign, particularly as the materials appear to have been prepared by FU-HD.

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Large contribution from potential equity-method profit of Uny’s turnaround, already forecast to obtain return on investment in line with company’s ROIC Uny’s FY02/18 earnings were JPY712.8bn in operating revenues (JPY670.7bn for directly managed stores and JPY42.2bn for other operating revenues from tenants, etc.), operating profit of JPY19.9bn, and net income of JPY9.3bn. Operating profit adjusted for JPY42.2bn in other operating revenues is negative and can be interpreted as a JPY22.3bn loss stemming from net store losses and headquarter expenses. 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).

Don Quijote has spent around JPY20.0bn purchasing UD Retail shares, and at end-FY03/18 had lent it JPY74.0bn, for a total investment of nearly JPY100.0bn. Forecast equity-method profit for FY06/18 is around JPY3.0bn, and around JPY5.0bn is possible in FY06/19. Including interest payments on the loans, the estimated annual rate of return is 6% (excluding dividends). This means the forecast return on investment is roughly in line with the company’s ROIC (around 6%). That said, this calculation is nothing more than the return on investment at the current time, profit on operating revenue received from tenants, and does not include results from the co-branded stores operated with Uny. If these succeed, returns should increase further.

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 co-branded stores. Shared Research will be following developments closely, including progress of the rebranded stores and continuity of earnings performance.

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, sweets, fresh fish necessities, brand fashion, Deal with Key promotion tool cosmetics, sports and womenswear, competitors leisure goods, others innerwear, bags, others Source: Shared Research

Comparable store sales growth: DQ sales up 4.5% (+2.4% excluding duty-free sales) and Nagasakiya 2.7% (+2.7% excluding duty-free sales). 15th quarter of customer traffic growth since FY06/15 Comparable store sales were up 4.5% (+2.4% excluding duty-free sales), and customer traffic and average customer spend both increased, rising 3.0% and 1.5%, respectively. In Q3 alone, DQ sales were up 3.9% (+1.6% excluding duty-free). In addition to its aggressive business approach, 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 also proved effective, contributing to SG&A expense savings as a result of improved personnel efficiency. An analysis of 1H 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. We understand that Q3 trends were similar.

In FY06/17, the company did not relax price appeal on high-turnover items such as food products or daily goods. Still, it managed to achieve gross profit growth thanks to higher customer and merchandise turnover rates. 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 subsidiary Accretive Co. into an equity-method affiliate) in GPM was only 0.1pp in FY06/17. The fall stemmed from the company’s aggressive initiatives and inventory disposals of high-priced items (aggressive store openings and resulting higher composition of stores that traded off GPM to attract customers and boost recognition; disposal of excess inventory of high-priced items, due to policy changes in China), and the company thinks these moves will eventually help improve GPM in the future.

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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), continued rise in demand for relatively low-margin daily necessities, and growing sales to inbound tourists who purchase a high proportion of low-margin products, could have a negative impact on GPM.

One trade-off for the company’s dominant multi-store rollout is that it affects existing stores in the vicinity. This holds for stores co-branded with Uny and new store openings as well existing stores. However, it flows through to higher aggregate sales and gross profit for the new stores and comparable stores combined. Further, by taking appropriate measures, the impact of the rollout can be minimized. In fact, when Don Quijote opened the Shinjuku Tonanguchi store, with roughly double the floor space of the existing Shinjuku Higashiguchi store, in July 2017, comparable store sales turned negative for the latter, but it had absorbed the impact by the end of 2017.

Comparable store sales

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

15%

10%

5%

0%

-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. The trend continued in cumulative Q3 with comparable store sales growth of +2.7%.

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. In Q3, the company opened a large 9,824sqm store on a former Ito Yokado site in Himeji, which appears to be performing well. 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.

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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% 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 3.2 -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

New store openings: Leveraging the business' strength of broad accessibility, from city centers to suburbs, 20 stores opened, company projecting 31 or more openings for the full year The company opened 20 new stores in cumulative Q3 (10 DQs, 8 MEGA, 1 in south-eastern Asia, and 1 Kyo Yasu Do store) and plans to open 31 or 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 in Q1 (income statement consolidated from Q3). 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. In Q3 it reported sales of JPY12.9bn and operating profit of JPY220mn (margin of 1.7%). GPM is higher than the company’s, but it also has hefty SG&A expenses.

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, with sales of over JPY500mn, and trending at JPY350–400mn subsequently. There were also four store closures. The company has taken a strict approach to cutting losses, 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.

QSI: 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. Its contribution to Q3 consolidated results was JPY12.9bn in sales and JPY220mn in operating profit (1.7% OPM).

Don Don Donki: Don Quijote opened its first store in Singapore in December 2017 and plans on a second store in June 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.

New formats Don Quijote is working to develop trial formats in Japan as well. In addition to overseas stores mentioned previously, in FY06/18 Don Quijote has plans to open: in Q3, one New Kyo Yasu Do (discount store which targets small areas under HQ direction); and in Q4, its third DOit Pro (home renovation center for pros) in Kawagoe in April and a Picasso store converted to a Jonetsu Shokunin format in Kuki (June). The concept is “fashionable craftworkers,” and the presumed competitor is major work wear supplier Workman. The first DOit Pro store in Koganei Koen is doing well, while the second (in Iwatsuki) is undergoing

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improvement. Jonetsu Shokunin has been rolled out in the shop-in-shop format, but Kuki will be the first stand-alone roadside store (precisely speaking, it will be the second after the Kasai store, which is on the same site as a DQ store).

The shop-in-shop format DOit WithReHome in Omori-Sanno was closed in May 2018. The company plans a restart after transferring the functions to existing stores.

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.

FY06/19 Don Quijote plans to limit new store openings in FY06/19 to around 20 primarily small-scale stores, and keep large store openings to a minimum in light of the rollout of co-branded stores with Uny. (The company is still keen to open at least 20 stores.) There is an increasing number of prime locations available for small-scale stores due to the closure of pachinko halls. Good examples are: the Otsuka Kitaguchi (Picasso, June 2018), Ofuna (Picasso, June), Ikebukuro Kitaguchi (DQ, June), Shin Okubo-Ekimae (DQ, June), Meguro-Ekimae (DQ, August), and Gotanda (FY06/19) stores.

Store openings and closures 24 New store openings Store closures Store count (right axis)

408 393 403 368 18 354 360 400 341 348 319 322 306 311 291 295 278 280 283 286 266 12 255 242 243 249 252 229 235 236 218 218 218 220 221 226 223 228 19

6 12 11 12 12 200 9 9 9 10 10 7 556 6 6 6 6 66 3 4 4 3 4 3 4 3 0 2 1 2 2 1 2 -1 -1 -1 -1 -1 -1 -1 -2 -2 -2 -2 -2 -2 -2 -3 -3 -3 -3 -3 -3 -3 -3 -6 -5 0 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 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

Store count by format

450 408 393 403 400 360 368 38 38 341 348 354 37 350 322 14 14 306 311 319 14 14 14 286 291 295 14 300 278 280 283 14 14 14 255 266 14 14 118 120 242 243 249 252 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 24 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

100 183 182 184 184 194 195 196 197 198 199 204 206 150 154 156 157 157 161 163 165 165 172 172 174 172 173 175 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

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. Its strategy is 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.

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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 restrained spending, Don Quijote has responded to consumer trends by increasing its product lineup with 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 to expand private brand ratio to 15% by FY06/20. As of Q3, the ratio had not risen, due partly to an increase in inbound tourist demand (mainstay is national brands), but Don Quijote said the performance was solid, including the two casual apparel brands.

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 at 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 increased the number of stores that handled food and rolled out more NEW MEGA and MEGA stores, it became 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. In 1H FY06/18 inventory levels rose 18% YoY, but the company said it planned to reduce inventory by adding another metric to its inventory valuation system. As of Q3, it had more or less reached moderate levels. In Q4, procurement is earlier and the company plans to reduce slow-moving inventory. Don Quijote expects significant results, as it also plans to increase the number of stores that do not handle any imported brands (50–70 stores). It intends to 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 of sales) related to the acquisition of QSI, the cumulative Q3 SG&A expense ratio decreased by 0.4pp (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, the effects of restructuring conducted in October 2015 and April 2017 began flowing through to operations. In this manner, solid comparable store sales growth and improved man-hour efficiency helped keep a lid on personnel expenses, enabling the company to absorb increases in rent accompanying large store openings, acquisition costs (over JPY600mn in Q1 due to QSI acquisition), and increased fees for credit card commissions.

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SG&A expenses

(JPYbn) Salaries and allowances Rents Commission paid Depreciation Other 49.6 50 45.6 45.0 46.0 41.5 41.7 42.6 42.5 39.8 38.8 38.4 39.0 14.2 40 35.6 12.8 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 5.4 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 7.4 20 6.6 6.8 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 3.2 3.1 3.6 3.2 3.5 3.4 4.9 5.0 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 4.3 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 18.8 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) 9% Inbound, % of sales (SR est., right axis) 12% 9% 36% 8% 9% 8% 34%

7% 6% 7% 32%

6% 30% 6% 3%

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 FY06/10FY06/11FY06/12FY06/13FY06/14FY06/15FY06/16FY06/17FY06/18 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.

According to the company, in Q1, Q2, and Q3 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.

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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.

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, as appears to have been the case in Q2 and Q3.

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. Cumulative Q3 sales were JPY40.6bn, 8.3% of the total (over 10% in February 2018). 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 product lineup changes flexibly to reflect bestselling items sought by inbound tourists, recently, the sales composition of food and daily necessities has been rising. Note that this puts downward pressure on the private brand share and GPM due to the higher proportion of low-margin items and national brand products these customers purchase.

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.

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Duty-free sales-related indicators Customer count ('000; right axis) Sports and leisure goods Watches and fashion 50 Customer spend (JPY'000) 500 Foods Household goods 12% Electric appliances Duty-free, % of total sales (left axis) No. of tourists visiting Japan (10,000; right axis) 40 400 10%

8% 30 300 54％ 6% 20 200 54% 52% 55% 54% 4% 37% 44% 48% 41% 48% 49% 10 100 41% 12% 18％ 39% 11% 15% 17% 17% 18% 18% 18% 2% 32% 11% 16% 16% 11% 39% 11% 36% 29% 25% 19％ 6%0% 49% 40% 38% 25% 24% 20% 17% 18% 19％ 0 0 0% 84% Oct Apr Oct Apr Oct Apr Oct Apr 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

Purchasing 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) 600 400 1,800 350 1,600 500 300 1,400 400 250 200 1,200 300 150 1,000 200 100 800 100 50 0 600 0 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 FY06/15 FY06/16 FY06/17 FY06/18 FY06/15 FY06/16 FY06/17 FY06/18 ('000) (RMB) ('000) Source: Shared Research based on company data

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

12 Don Quijote MEGA

10

8

6

4

2

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

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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 FY06/18 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Sales 232,778 260,779 300,660 404,924 480,856 487,571 507,661 540,255 568,377 612,424 683,981 759,592 828,798 941,508 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% 13.6% CoGS 179,330 200,425 227,537 296,215 353,616 364,065 378,587 400,712 418,570 451,406 502,240 557,699 610,218 697,517 Gross profit 53,448 60,354 73,123 108,709 127,240 123,506 129,074 139,543 149,807 161,018 181,741 201,893 218,580 243,991 SG&A expenses 42,634 48,500 59,537 92,728 110,068 102,439 103,738 110,223 117,438 126,726 142,638 158,708 172,395 192,423 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 51,568 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% 11.7% 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 6,941 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 3,991 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 57,218 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% 25.7% Extraordinary gains 421 4,910 3,471 2,310 2,207 892 1,388 2,499 1,262 382 317 117 12,786 650 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 1,495 Pre-tax 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 56,373 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 17,529 Minority interests in income -27 - 31 165 316 300 573 892 913 2,582 3,784 4,617 6,015 2,439 Net income 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 36,405 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% 10.0% Capit al expenditures 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 56,061 Cash flow basis 14,197 17,513 19,399 23,172 25,577 28,641 29,859 30,944 34,646 36,881 46,661 48,603 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 -7,458 Depreciation and amortization 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 17,378 Depreciation 5,033 6,773 8,384 9,372 9,385 9,566 10,026 10,402 11,672 13,301 14,075 14,815 Amort izat ion of negative goodwill -452 -452 -1,119 -858 -857 -857 -857 -628 -342 -96 -86 -86 -86 EBITDA 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 68,946 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% 11.0% EBITDA margin 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% 7.3% 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 FY06/18 (JPYmn) Cons. 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 71,973 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 12,848 Purchased receivables ------6,7876,7616,7386,0095,4396,606-- Inventories 39,447 44,400 50,962 67,411 70,651 74,452 81,582 83,641 85,997 89,105 94,580 117,400 123,969 135,781 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 23,523 Current assets 61,193 79,742 97,151 116,580 123,802 128,198 134,515 138,816 143,391 158,834 175,981 195,977 227,585 244,125 Tangible fixed assets 62,979 58,767 74,738 102,551 114,378 123,734 154,870 169,336 186,094 212,723 262,127 292,052 310,766 347,913 Intangible fixed assets 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 28,247 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 31,606 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 46,494 Investments 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 88,629 186,772 Fixed assets 88,855 87,792 112,714 159,708 173,725 173,831 206,785 223,835 243,231 273,301 329,685 364,591 415,283 562,932 Total assets 150,048 167,534 209,865 276,288 297,527 302,029 341,300 362,651 386,622 432,135 505,666 560,568 642,868 807,057 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 93,030 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 21,404 Payables under securitized receivables------5,9127,0407,1477,152 7,262 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 50,190 Current liabilit ies 40,285 46,446 73,133 72,975 110,883 122,005 106,071 120,243 121,170 114,444 144,576 147,995 164,825 171,886 Long-term debt 55,985 44,938 46,468 96,762 76,163 54,580 93,949 84,296 80,014 74,330 87,846 121,553 159,528 291,942 LT payables under securitized receivables------34,34534,02324,876 19,366 12,104 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 18,630 Fixed liabilit ies 57,635 48,347 54,262 118,688 96,672 73,264 109,987 96,673 95,274 124,527 139,723 168,026 198,113 322,676 Tot al liabilit ies 97,920 94,793 127,395 191,663 207,555 195,269 216,058 216,916 216,444 238,971 284,299 316,021 362,938 494,562 Shareholders' equity 52,128 72,064 81,717 84,899 92,096 107,407 127,087 146,590 167,233 187,637 209,682 231,788 258,282 291,337 Valuation and translation adjustments - 511 534 -1,965 -3,257 -2,090 -3,482 -3,395 -889 -292 2,659 -260 771 -974 Share subscription rights - - - 3 1 - - - - - 13 23 98 345 Minority interests - 166 219 1,688 1,132 1,443 1,637 2,540 3,834 5,819 9,013 12,996 20,779 21,787 Net assets 52,128 72,741 82,470 84,625 89,972 106,760 125,242 145,735 170,178 193,164 221,367 244,547 279,930 312,495 Tot al liabilit ies and capit al 150,048 167,534 209,865 276,288 297,527 302,029 341,300 362,651 386,622 432,135 505,666 560,568 642,868 807,057 Shareholders' equity 52,128 72,575 82,251 82,934 88,839 105,317 123,605 143,195 166,344 187,345 212,341 231,528 259,053 290,363 Working capital 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 55,599 Interest-bearing debt 65,208 55,238 75,727 112,954 126,725 116,244 133,580 133,342 126,506 134,531 167,507 186,499 211,068 332,712 Net debt 50,153 27,446 37,563 74,573 84,162 74,510 98,549 99,105 94,808 91,841 117,790 143,605 134,638 260,739 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. Profit margins 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 Cons. 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% 25.9% (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% 20.4% 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% 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% 6.1% 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% 3.9% 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 FY06/18 Cons. 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% 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% 13.3% 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 FY06/18 Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Total asset turnover1.61.61.41.51.61.61.51.51.51.41.41.41.31.2 Inventory turnover4.54.54.54.45.04.94.64.84.95.15.34.84.95.1 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 71.1 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% 63.0% 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% 142.0% Equity ratio 34.7% 43.3% 39.2% 30.0% 29.9% 34.9% 36.2% 39.5% 43.0% 43.4% 42.0% 41.3% 40.3% 36.0% 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% 89.5% Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods.

63/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

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

Shareholder returns

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%.

64/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

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 FY06/18 (JPYmn) Cons. 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 46,081 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 -164,443 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 -118,362 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 17,644 116,083 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 17,292 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 -54,036 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 8,325 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 -8,664 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.

65/75 Don Quijote Holdings / 7532 RCoverage LAST UPDATE: 2018.08.10 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp

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).

News and topics

March 2018 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.

February 2018On February 21, 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

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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.

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%).

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.

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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.

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

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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.

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

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.

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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

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

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mentally fit. The improvement of the company’s management metabolism would then become a tradition that leads to prosperity, Yasuda said.

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 Represent at ive Direct or of affiliat e 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 ratio 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.

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Company profile

Company Name Head Office 2-19-10 Aobadai Meguro-ku Don Quijote Holdings 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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