Can a smaller loss despite declining revenue lead to a profitable first half?

FY2027-Q1 revenue was ¥1,651.746 million, down ¥322.567 million, or 16.3%, from ¥1,974.313 million in the year-earlier quarter. Meanwhile, the operating loss narrowed from ¥35.273 million to ¥8.422 million, and the operating margin improved by approximately 1.3 percentage points, from approximately -1.8% to -0.5%. Revenue declined while earnings improved at the same time, suggesting that cost controls and changes in the product mix began to benefit earnings before any recovery in sales volume.

On the earnings front, Q1 EBITDA was profitable at ¥9 million, exceeding the operating loss. The company attributes the narrower operating loss to an improved earnings structure driven by the shift to DTC, control of strategic investments such as advertising and sales promotion, and lower selling, general and administrative expenses. However, it is not yet clear whether positive EBITDA will offset depreciation and amortization sufficiently to produce positive operating income. FY2027-H1 will require a profit bridge showing not only operating income but also EBITDA, depreciation and amortization, and strategic investment.

The full-year plan calls for revenue of ¥7,992 million, operating income of ¥153 million, ordinary income of ¥138 million, and net income attributable to owners of the parent of ¥82 million. Q1 revenue represented 20.7% of the full-year forecast, 4.3 percentage points below the simple quarterly run rate of 25.0% that does not account for seasonality. Since operating earnings were a loss of ¥8 million, a simple half-year run rate would imply H1 revenue of ¥3,996 million and operating income of ¥76.5 million, but this is not the company’s plan after seasonal adjustments. The amount of profit accumulated in H1 will provide a basis for judging the scale of recovery required in the second half.

As of now, the company has announced that it will hold an FY2027-Q2 earnings briefing, but it has not yet disclosed H1 revenue, operating income, progress against the full-year forecasts, or the assumptions underlying its earnings forecasts. At the next results announcement, it will be necessary to distinguish, using revenue and gross margins by NB and DTC, whether the Q1 revenue decline reflects a temporary reaction to the drop in Royal Canin veterinary diet food sales or a structural decline accompanied by a shrinking customer base.