Revenue up, but operating profit halved; gross margin recovery after the price increase is the focus

Consolidated first-quarter revenue was ¥24.636 billion, up ¥849 million from ¥23.787 billion in the same period of the previous year. However, operating profit fell to ¥811 million, down ¥911 million from ¥1.722 billion, with the decline reaching 52.9%. Ordinary profit was ¥893 million, while profit attributable to owners of the parent was ¥583 million, down 49.7% and 53.8% year on year, respectively. The operating margin on revenue declined by approximately 3.9 percentage points, from approximately 7.2% in the same period of the previous year to approximately 3.3%, indicating that top-line growth has not flowed through to profit.

The earnings supplementary materials identify an approximately ¥400 million positive impact from higher revenue, offset by approximately ¥600 million from the higher cost ratio in the domestic MOS BURGER business, approximately ¥100 million from overseas operations and other factors, approximately ¥300 million in M&A-related expenses, and approximately ¥100 million in higher payment fees. In other words, the first-quarter profit decline was not simply a result of weak sales caused by insufficient customer traffic. Costs including raw materials, transaction-related expenses and sales promotion expenses exceeded the increase in revenue and put pressure on profit. EBITDA was also ¥1.9 billion, down 29.3% year on year, indicating continued weakness in earnings power before depreciation and amortization.

The full-year forecasts were left unchanged at revenue of ¥110.0 billion, operating profit of ¥5.75 billion, ordinary profit of ¥5.7 billion and profit attributable to owners of the parent of ¥3.6 billion. The company said it had incorporated higher costs into its full-year plan and had implemented a price revision in July, so it had not changed its forecasts. However, the effect of the price revision had not yet fully emerged as of the first quarter. The key will be whether the price revision can improve both average spend per customer and the cost ratio without reducing customer traffic.

The first-quarter materials did not disclose actual gross and operating margins, and the increase in raw material costs was presented mainly as rough estimates by factor rather than as a total amount. At the next earnings release, gross margin, the cost ratio of the domestic MOS BURGER business, customer traffic and average spend per customer at existing stores after the price revision, and the selling, general and administrative expense ratio should be reviewed. If operating profit does not build substantially from ¥811 million in the first quarter to the six-month cumulative result, the likelihood of achieving full-year operating profit of ¥5.75 billion will decline.