Aeon Co Ltd (Aeon) is set to announce its fiscal fourth quarter and full-year results on May 10. For the quarter, we expect earnings to come in higher year-over-year on the back of strong top-line growth. However, competitive pressure in the Japanese retail market might limit the stock’s upside potential.
Aeon’s top-line growth for the fiscal fourth quarter is expected to be driven by strong performance across its key operating segments – supermarkets, convenience stores, and department stores. Supermarkets account for more than 60% of the company’s revenues, and we expect this segment to post robust sales growth in the fiscal fourth quarter on the back of favorable demand trends. Although competitive pressure might limit growth in the convenience store segment, it is expected to post a significant increase in profitability on account of cost-saving initiatives undertaken by the company. The department store segment is likely to report flat year-over-year sales growth in the fiscal fourth quarter as competition from e-commerce companies continues to hurt brick & mortar retailers. Moreover, higher depreciation and amortization costs are expected to weigh on the segment’s bottom line. Overall, we expect Aeon’s top line to increase 6% year-over-year in the fiscal fourth quarter.
Bottom-line performance is likely to be supported by strong top-line growth and cost-saving initiatives undertaken by management. Moreover, a favorable move in the yen is expected to have a positive impact on the company’s bottom line as a large portion of its expenses are denominated in yen. We expect earnings per share (EPS) for Aeon to come in at JPY 28 ($0.26) in the fiscal fourth quarter, up 8% from JPY 26 ($0.24) reported a year ago.
We believe that Aeon’s stock is likely to benefit from strong quarterly results and cost-saving initiatives undertaken by management. However, competition from e-commerce companies might limit upside potential over our review period (ending August 2019). Consequently, we currently have a Neutral rating on Aeon with a 12-month price target of JPY 350 ($3.17).