H2O Retailing / 8242 COVERAGE INITIATED ON: 2020.04.30 LAST UPDATE: 2020.04.30 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. H2O Retailing / 8242 RCoverageCoverage LAST UPDATE: 2020.04.30 Research Coverage Report by Shared Research Inc. | https://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. Executive summary ----------------------------------------------------------------------------------------------------------------------------------- 3 Key financial data ------------------------------------------------------------------------------------------------------------------------------------- 5 Recent updates ---------------------------------------------------------------------------------------------------------------------------------------- 6 Highlights ------------------------------------------------------------------------------------------------------------------------------------------------------------ 6 Trends and outlook ----------------------------------------------------------------------------------------------------------------------------------- 7 Monthly sales ------------------------------------------------------------------------------------------------------------------------------------------------------- 7 Quarterly trends --------------------------------------------------------------------------------------------------------------------------------------------------- 9 Medium-term management plan -------------------------------------------------------------------------------------------------------------------------- 20 Business ------------------------------------------------------------------------------------------------------------------------------------------------ 26 Business model --------------------------------------------------------------------------------------------------------------------------------------------------- 26 Market trends ---------------------------------------------------------------------------------------------------------------------------------------- 45 Strengths and weaknesses ------------------------------------------------------------------------------------------------------------------------------------ 53 Historical performance and financial statements ------------------------------------------------------------------------------------------ 55 Income statement ----------------------------------------------------------------------------------------------------------------------------------------------- 55 Balance sheet ----------------------------------------------------------------------------------------------------------------------------------------------------- 56 Cash flow statement -------------------------------------------------------------------------------------------------------------------------------------------- 57 Profitability analysis --------------------------------------------------------------------------------------------------------------------------------------------- 57 Historical performance ---------------------------------------------------------------------------------------------------------------------------------------- 58 Other information ---------------------------------------------------------------------------------------------------------------------------------- 63 History -------------------------------------------------------------------------------------------------------------------------------------------------------------- 63 News and topics ------------------------------------------------------------------------------------------------------------------------------------------------- 64 Major subsidiaries ----------------------------------------------------------------------------------------------------------------------------------------------- 64 Corporate governance and top management --------------------------------------------------------------------------------------------------------- 65 Policy on shareholder returns ------------------------------------------------------------------------------------------------------------------------------- 65 Major shareholders --------------------------------------------------------------------------------------------------------------------------------------------- 66 Profile ---------------------------------------------------------------------------------------------------------------------------------------------------------------- 66 02/67 H2O Retailing / 8242 RCoverageCoverage LAST UPDATE: 2020.04.30 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp Executive summary Business overview ◤ H2O is a retailer that mainly operates department stores (Hankyu Department Stores and Hanshin Department Stores) and supermarkets (such as Izumiya and Hankyu Oasis). The company operates 16 department stores, mainly along the Hankyu Railway and Hanshin Electric Railway lines. It also has 186 supermarkets and superstores (called general merchandise stores or GMSs in Japan) in the Kansai region (as of October 2019). The company follows an area dominance strategy targeting the Kansai region. Kansai has around 20mn consumers and includes the prefectures of Osaka (population of 8.8mn), Hyogo (5.5mn), and Kyoto (2.6mn). H2O’s strategy is to have consumers make as many of their everyday purchases as possible at its supermarkets and enjoyable, non-routine shopping at its department stores. While being affected by a structural decline in department store sales amid competition from specialist stores, the company aims to make the retail spaces at its department stores unique. In this way, H2O aims to attract more customers in the Kansai region, as well as to increase the number of visitors from other parts of Japan and overseas. ◤ H2O was created through the 2007 merger of Hankyu Department Stores and Hanshin Department Stores. Their respective predecessor companies were the Hankyu Market (now Hankyu Main Store), which opened in Osaka’s Umeda district in 1925, and Hanshin Mart (now Hanshin Umeda Main Store), which opened in 1933. Hanshin Electric Railway is H2O’s largest shareholder, with an 11.9% stake, followed by Hankyu Hanshin Holdings (TSE1: 9042), which holds an 8.4% stake. Effectively, Hankyu Hanshin Holdings, the parent company of Hanshin Electric Railway, therefore holds a 20.3% stake in H2O (making it an equity-method affiliate). H2O, Hankyu Hanshin Holdings, and Toho (TSE1: 9602) together form the Hankyu Hanshin Toho Group. The group’s business interests span urban transport, real estate, hotels, department stores, supermarkets, and entertainment. ◤ H2O has four business segments: the Department Store, Supermarket, Shopping Center Management, and Other businesses. In FY03/19, sales were JPY926.9bn, with these segments accounting for 53.4%, 39.7%, 0.9%, and 6.0%, respectively. Operating profit was JPY20.4bn. The Department Store and Shopping Center Management businesses generated operating profits of JPY17.9bn and JPY4.3bn, respectively, while the Supermarket business posted an operating loss of JPY438mn. (The Other business generated operating profit of JPY5.0bn. Adjustments to operating profit [elimination of intra-segment transactions] were JPY6.3bn.) Driven by sales at Hankyu Main Store, performance in the Department Store business remains robust. However, the company struggles with a difficult business climate in the Supermarket business. Although H2O is working to expand this business through Izumiya, which became a wholly owned subsidiary in 2014, Izumiya’s GMS business format exposes it to competition from specialty stores. The company is restructuring operations through such measures as shifting to sales of daily necessities, drugs, and cosmetics via a joint venture. ◤ H2O’s long-term business plan, GP10, espouses a “Kansai dominance strategy.” This strategy centers on the Department Store business (non-routine purchases) and the Supermarket business (routine purchases) and extends to the operation of commercial facilities and hotels. Through its S-point loyalty program, H2O forms alliances with prominent service providers in the region. By working with these partners, H2O aims to operate integrated consumer businesses, boosting its regional market share and increasing its points of contact with consumers. Trends and outlook ◤ In FY03/19, sales were JPY926.9mn (+0.5% YoY), operating profit was JPY20.4bn (-10.3% YoY), and net income was JPY2.2bn (-85.2% YoY). Sales reached a record high for the second straight year, but losses in the Supermarket business sapped profitability. By segment, the Department Store business (including the Kobe/Takatsuki business) generated JPY17.9bn in operating profit, the Supermarket business produced an operating loss of JPY438mn,