7&i: Despite Near-Term Fuel Margin Squeeze, Food-Service Expansion Remains Growth Driver

Narrow-moat Seven & i’s 3382 guidance for a small profit increase—merely 1.3% for operating profit for fiscal 2023 ending February 2024—was less of a surprise, as we expected correction in fuel margins of the U.S. convenience store business might weigh on profits. Nevertheless, the guidance of a profit loss for the underperforming Ito-Yokado superstore business is a disappointment, which may escalate the dissatisfaction of shareholders who have been demanding a spinoff or divestiture of the unit. On the other hand, the announcement of strategic reorganization of the financial-service business, in an attempt to expedite monetization of digital data, is welcomed. We reduce our profit estimates by 2%-3% after incorporating the recent fuel margin trend and revised currency assumptions in our projections, but raise our fair value estimate to JPY 6,300 from JPY 5,700 to reflect improved free cash flow and increased time value of money. As we have stressed, growing the C-stores into destination retailers through food-service expansion will be a key growth engine. We view shares as undervalued, implying 12% upside to our new fair value estimate.

The strategies presented at the earnings briefing and renewed business segment disclosure suggest the superstore and financial-service businesses, seeing ties to the C-store operations, will remain in the group while specialty store and restaurant operations are the future divestiture targets. A speed-up of the integration of the retail and financial businesses is critical to reinforcing its moat, the capabilities of offering quality and good value of private-label and proprietary food products, and monetizing the consumer data collected through the transactions of its retail business. It appears that directing marketing resources to the app has improved returns, with marketing spending being nearly halved over the past three years. More details on financial strategies will be provided on May 12 when Seven Bank reports earnings.