Seven & i Earnings: U.S. Convenience Stores’ Contracting Fuel Margins Depress Profits

Narrow-moat Seven & i’s 3382 first-quarter results will likely come as a disappointment to the market, as a correction in fuel dollar margins dragged on overall profits, as we had predicted. We maintain our forecasts and JPY 6,300 fair value estimate, implying that the shares are fairly valued. Our profit forecasts for fiscal 2023 remain a touch below management’s guidance, given our less optimistic expectation for near-term growth in the U.S. market.

Despite solid profit growth in Japan, overall operating profit fell 20% year on year owing to the sizable contraction of gasoline dollar margins (gross profit of fuel per gallon in dollar terms) in the United States. While retail fuel margins appear to have rebounded in the April-June quarter, we are skeptical that the current level can continue, especially if the U.S. economy enters a recession. Volatile fuel profits highlight the importance of Seven & i transforming its U.S. stores to destination retailers through the expansion of foodservice offerings. Such a transformation is our key investment thesis for Seven & i’s long-term growth.

First-quarter operating profit of JPY 4.8 billion was 5.5% below the company target. Profits of the domestic entities including SEJ (Japan convenience stores), supermarkets, and financial services exceeded the company’s internal targets. On the other hand, the overseas convenience store business saw profits plunge 52% due to a slump in fuel margins and increased goodwill amortization as a result of yen weakness. Whether management is able to recuperate the profit shortfall will largely hinge on the U.S. economic outlook, in our view.