Retail sector
SECTOR REVIEW
Recovery, growth and valuation revisions
■ Outlook for retail stocks in our coverage: Approximately every three
months, we will review our sub-sector ratings, provide updates on major
topics and review the stocks in our coverage. In this report, we confirm our
medium- to long-term investment view of the sector and drop coverage of
three companies (see our company reports issued on 11 June).
■ Sector stance: We retain our MARKET WEIGHT stance on the retail sector.
However, we are constantly reviewing our investment stance on both the
sector and individual stocks. Our main scenario for personal consumption
through March was for a deep recession and deflation. However,
subsequent changes in the situation mean we have pushed back the worstcase
scenario, and we now expect the focus of attention to shift to future
earnings recovery and a recovery from the worst conditions. The main
changes in the investment environment are: (1) a change in the environment
as government economic stimulation measures and expectation of a
bottoming out of the real economy lead to a change in the investment
environment and (2) the impact of changes in corporate strategy in terms of
products and sales promotion activity.
■ Previously, our top picks were companies such as Fast Retailing and the
convenience stores, for which we expected to see relatively strong earnings
despite the recession, but from April we changed our investment ratings on
all these stocks. We became more bearish on these issues, but became
more bullish on the companies where we expect to see earnings recovery. In
real terms, these are Yamada Denki and Shimamura. We retain our bullish
stance on K’s Holdings, ABC-Mart, Nitori and Sundrug on the back of
expected earnings recovery, long-term growth and low valuations.
■ Five keywords: In terms of future investment in the retail industry, the most
important factors by individual time scale are the five points outlined below.
In the near term, they are sector rotation in the equity market, forex rates
and short-term business results. Over the medium term they are “earnings
recovery” and over the medium to long term (beyond six months) they are
financial durability, growth and the ability to open new stores and valuations.
For details of each item, please see the main body of the report.
■ Stocks to watch: Our top picks are Shimamura and Yamada Denki. We
retain our bullish stance on K’s Holdings, Nitori, ABC-Mart and Sundrug. We
have also reviewed the stocks under coverage.
Table of contents
Sector stance: overview/conclusion 3
Maintain MARKET WEIGHT stance; gradually revising our evaluation of individual
stocks 3
Difficult performance since the beginning of the year 3
Five keywords 5
Catalysts by time scale 6
Earnings outlook for retail sector 6
Outlook by sub-sector 8
Stocks to watch 8
1. Prospects for a deep recession appear to have receded 9
Overview of the investment environment 9
Macroeconomic outlook 9
Currently deflation, bottoms out after 2H 9
Still cautious on employment conditions 10
2. Five investment viewpoints 11
(1) Short-term investment viewpoint: defensive qualities, forex and the current situation
11
(2) Medium-term investment viewpoint: analysis of roadmap for earnings recovery 12
Expect important changes such as a recovery in earnings 12
Need to keep an eye on customer traffic recovery 13
Position of individual companies within the earnings recovery process 14
“Degree of preparations” for initiatives 16
Outline of eco point system almost fixed, and there should be a major contribution to
earnings 16
“Next recovery stocks” still showing no signs of recovery? 19
(3) Long-term viewpoint: sustainability of financial position and cost structure 19
Concentration on durability in difficult business environment 19
Results of analysis of break-even point 19
Focus on financial durability 21
(4) Ability over the medium to long term and opening new stores 22
Ambitions and reconsideration of growth potential 22
Factors that can improve gross profit margin 22
Factors that can improve SG&A costs 22
Clear signs of improvement 22
Taking the steps to improve costs 23
Trend in large store openings in Japan 23
Evaluation of medium- and long-term outlet expansion, and growth potential of
leading retailers 27
(5) Revaluation of retail sector 29
Reconsideration of valuations 29
Margins at individual major retailers and correlation with valuations 31
Our valuation method 33