Company Reports

No-moat Pan Pacific International Holdings’ fiscal third-quarter results exceeded our estimates for revenue and operating profit, thanks to strong momentum in the domestic retail portfolio, while the overseas business remained under pressure. Strong tax-free and private-label sales drove gross margin expansion, while control in operating expenses further lifted operating margins. We lifted our 2024 revenue and operating profit projections by 1% and 4%, respectively, and increased our 2025-28 earnings forecasts by 2% due to the higher revenue base. We expect a lower operating margin in fiscal 2025 as government subsidies on utility costs cease, and we assume tax-free sales will decline as tourist arrivals peak out after this year’s rush. As a result, we have raised our fair value estimate to JPY 2,970 per share from JPY 2,840; this implies 21 times 2024 price/earnings, 11 times enterprise value/EBITDA, and a 0.7% dividend yield. We continue to view the shares as overvalued.

Pan Pacific International Holdings established its footprint in Japan through Don Quijote, its chain of discount retail stores, which attract foot traffic through the abundance of closeout products and constantly changing assortment of products. Discount store buyers have more flexibility versus general merchandise stores in procurement and decision-making to source the most suitable products for local communities where stores are located, enhancing their market position.

Pan Pacific International Holdings established its footprint in Japan through Don Quijote, its chain of discount retail stores, that attract foot traffic through the abundance of closeout products and constantly changing assortment of products. Discount store buyers have more flexibility in procurement, versus general merchandise stores, and their decision-making power to source the most suitable products for local communities where stores are located, enhances the firm's market position.

No-moat Pan Pacific International Holdings, or PPIH, reported fiscal second-quarter 2024 (year-ending June 2024) results that exceeded our profit estimates, thanks to robust tax-free and private label sales. Management also reduced operational expenses for the general merchandise store segment, which drove a higher operating margin for the company. Management lifted its full-year guidance, primarily for the profit expectations. Before earnings, we had forecast operating profit to exceed management’s guidance and continue to expect the same for the updated guidance.

We reinitiate coverage of Pan Pacific International Holdings with a no moat rating and fair value estimate of JPY 1,940. We think the company has a considerable presence in discount store and general merchandise store formats in Japan, together with a popular retail banner in the North American and Asian markets. But we no longer see traces of a cost advantage that underpinned our previous narrow moat rating due to the declining revenue mix of closeout products while private-label sales are still small. We think PPIH has to compete with other retailers, including drug stores and supermarkets, in the fresh grocery, branded, and private-label categories. Our fair value estimate implies 16 times fiscal 2024 (ending June 2024) price/earnings, which is roughly in line with the average for Japanese retailers. We think PPIH’s shares are overvalued and do not see a strong reason for a notable valuation premium versus its peers.

Pan Pacific International Holdings established its footprint in Japan through Don Quijote, its chain of discount retail stores, that attract foot traffic through the abundance of closeout products and constantly changing assortment of products. Discount store buyers have more flexibility in procurement, versus general merchandise stores, and their decision-making power to source the most suitable products for local communities where stores are located, enhances the firm's market position.

We are dropping coverage of Pan Pacific International Holdings. We provide broad coverage of more than 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

Flexibility is the essence of Pan Pacific’s business model and is an underlying strength supporting its price leadership. As an early entrant to the fringe off-price retail market, PPIH built its success on Japan’s deflationary economy. Deep discounts offered by a broad array of off-price items lure consumers who trade down on commoditized products and seek bargains. A unique store concept with a mazelike layout and densely stocked shelves enhances the treasure-hunt shopping experience and draws many foreign tourists, whose spending made up around 7% of the group’s sales.

It is no surprise that narrow-moat Pan Pacific International Holdings (PPIH, previously called Donki) again raised its full-year profit guidance. It delivered another quarter of solid profit growth, posting 1% growth in sales and 12.7% growth in operating profit thanks to a more favorable business mix and cost cut efforts. Although the new guidance is in line with our estimates, we have upped our profit forecasts specifically for fiscal 2021 ending in June by 3%, anticipating that cost savings will continue through the second half. The adjustment is offset by a lift in estimates of minority interests as Asia profits advanced more rapidly than expected, which has an immaterial impact on our fair value estimate of JPY 2,000.

Narrow-moat Pan Pacific International Holdings (PPIH, previously called Donki) is off to a good start in its new fiscal year, reporting nearly 10% growth in operating profit despite a tough comp from Don Quijote’s storewide sale event last September and a surge in the last-minute demand before the October 2019 sales tax hike. Although profits came in above our expectation and seem ahead of the company’s internal targets, the strength looks mainly related to the pandemic. We have made no change in our forecasts or our fair value estimate of JPY 2,000, implying 14% downside from the current price. Our profit forecasts for fiscal 2021 ending June are 4%-5% above guidance.

Narrow-moat Pan Pacific International Holdings, or PPIH, beat its full-year guidance as we had expected but the results came in 1%-4% above our projections. The company also hiked the dividend by more than 30% to JPY 15 from JPY 11.50 per share. As usual, management has taken a conservative stance, guiding a marginal 1.3% increase in operating profits for fiscal 2021 ending in June given obliterated tourism sales and high comparison hurdles resulting from the last-minute demand prior to the October tax hike as well as stock-pilling demand amid the pandemic outbreak.

Flexibility is the essence of Pan Pacific’s business model and is an underlying strength supporting its price leadership. As an early entrant to the fringe off-price retail market, PPIH built its success on Japan’s deflationary economy. Deep discounts offered by a broad array of off-price items lure consumers who trade down on commoditized products and seek bargains. A unique store concept with a mazelike layout and densely stocked shelves enhances the treasure-hunt shopping experience and draws many foreign tourists, whose spending makes up around 7% of the group’s sales.

Flexibility is the essence of Pan Pacific’s business model and is an underlying strength supporting its price leadership. As an early entrant to the fringe off-price retail market, PPIH has built its success on Japan’s deflationary economy. Deep discounts offered by a broad array of off-price items lure consumers who trade down on commoditized products and seek bargains. A unique store concept with a mazelike layout and densely stocked shelves enhances the treasure-hunt shopping experience and draws many foreign tourists, whose spending makes up around 7% of the group’s sales.

We are raising the fair value estimate of narrow-moat Pan Pacific International Holdings, or PPIH (previous Donki) to JPY 1,950 from JPY 1,750 after our discussion with management and better-than-expected same-store sales growth. We think PPIH’s sourcing capability, a key element of its moat sources, was reinforced during the pandemic crisis in which it was able to secure sought-after daily supplies to keep customers coming back to the stores. Additionally, the extensive range of product offerings which enables one-stop shopping also worked in PPIH’s favor during the pandemic as consumers cut trips to the stores. Nevertheless, we view the stock as overvalued, trading at a 20% premium to our fair value estimate.

Narrow-moat Pan Pacific International Holdings reduced its full-year guidance after its core discount store chain, Don Quijote, posted a double-digit decline in comparable-store sales for the second month in a row. The downward revision was triggered by a sharp drop in foreign tourist demand. Despite the headwind, we think PPIH’s sourcing capability, a key element of its moat sources, was reinforced during the pandemic crisis, during which it was able to secure sought-after daily supplies. We have marginally revised our same-store growth assumptions mainly for Donki, which has little impact on our fair value estimate of JPY 1,750 per share. Our revised full-year profit forecast remains a touch above the company’s guidance for fiscal 2020 ending June.

Flexibility is the essence of Pan Pacific’s business model and is an underlying strength supporting its price leadership. As an early entrant to the fringe off-price retail market, PPIH has built its success on Japan’s deflationary economy. Deep discounts offered by a broad array of off-price items lure consumers who trade down on commoditized products and seek bargains. A unique store concept with a mazelike layout and densely stocked shelves enhances the treasure-hunt shopping experience and draws many foreign tourists, whose spending makes up around 7% of the group’s sales.

Narrow-moat Pan Pacific International Holdings (PPIH, previously known as Donki) beat its interim guidance and revised up its full-year guidance as we had expected but the degree of upward revision, nearly 6% in operating profits, is somewhat greater than our expectation even though the revised targets are based on relatively conservative assumptions. The positive earnings surprise came from Uny, the acquired general merchandize store chain. We have revised our margin assumptions mainly on Uny to reflect expectations of earlier margin normalization of the GMS chain, which has little impact on our fair value estimate of JPY 1,750. Our revised full-year profits are now a touch above the company’s guidance for fiscal 2020 ending June. We will continue to monitor the development of margin expansion of the GMS chain and the converted dual brand stores, as well as the same-store sales trends. The shares are trading close to our fair value estimate and thus we view the shares as fairly valued.

Flexibility is the essence of Don Quijote’s business model and is an underlying strength supporting its price leadership. As an early entrant to the fringe off-price retail market, Donki has built its success on Japan’s deflationary economy. Deep discounts offered by a broad array of off-price items lure consumers who trade down on commoditized products and seek bargains. A unique store concept with a mazelike layout and densely stocked shelves enhances the treasure-hunt shopping experience and draws many foreign tourists, whose spending makes up more than 5% of the group’s sales.

We are raising our fair value estimate of narrow-moat Pan Pacific International, or PPIH, to JPY 1,750 from JPY 1,625 to reflect an improved profit outlook for Uny, the acquired general merchandize store chain. Uny’s same-store sales have outperformed those of its peers and Don Quijote stores post-tax hikes, trending at 0.5% decline during the October quarter compared with a more than 3% decline of peers and 4% decline of Don Quijote (discount format). Moreover, a sizable drop in personnel costs might help lift profits. We thus raised our earnings projection by 2%-4% for the explicit forecast period and stage-two EBI growth to 3.3% from 3%.

Narrow-moat Pan Pacific International Holdings (PPIH, previous Donki) got off to a good start in fiscal 2020 ending in June with a 46% growth in operating profits (13% excluding impacts of Uny acquisition). Thanks to better-than-expected performance of its discount store businesses (Donki), management has revised up the full-year profit guidance by 3%. The revised profit target is now a touch above our forecasts. In the past, management tended to guide conservatively and revise up profits quarter by quarter. However, it failed to do so after sales to foreign tourists slowed down and the acquisition of Uny increased difficulty to control profits, in our opinion. We have made no change in our forecasts and our fair value estimate of JPY 1,625.