<Japanese Equity Report>

IR Street Report - Premium -August 1, 2023

July 16, 2014

WATTS (TSE Prime, 2735) FY8/23 Q3 Operating Results
Announced a revision to the full-year forecasts. Despite the continued challenging
environment, the pace of opening shops has been robust.
<Brief summary>
Overview of FY8/23 Q3 results◼

Sales were 44,431 million yen (+2.2% YoY) and operating profit was 370 million yen (-59.1%), showing an increase in sales and a decline inprofits. Although new shop openings are robust, profits continue to decline in response to cost increases, such as rising raw material prices.
Based on the current situation, the Company announced revisions to its full-year business forecasts concurrently with the Q3 performance
announcement. The revised forecast calls for sales of 59,000 million yen (-2.5% from the initial forecast) and operating profit of 400 million
yen (-56.5%).

◼

The pace of opening shops has been robust; it has already opened 73% of its full-year target. In June, the number of new shop openings
was 31, a record-high monthly count, driven by an increase in opening requests. On the other hand, the number of shop closures increased
to 82. These closures were attributed to the necessary closure of unprofitable shops and the discontinuation of shops in tenants to beclosed. Furthermore, the Company is progressively introducing higher price products, expanding from 2,169 items in 1H to a total of 2,808
items at the end of Q3.

◼

The gross margin stood at 37.7% for the nine months, maintaining the same level as in 1H at 37.8%. The rise in raw material prices and theprolonged yen's depreciation have continued longer than expected. In this situation, responding to price increase requests from suppliers isbecoming unavoidable. However, through measures such as a review of the product mix, the Company has managed to maintain its grossmargin at the level of 1H of the year. As is well known, some costs such as utility prices have also been on an increasing trend.

◼

In the overseas business, the Company is progressing with a shift towards more profitable models, such as closing unprofitable shops inThailand while expanding wholesale operations.

Application for the Standard Market/Announcement of share buybacks◼

Following the TSE's market restructuring, the Company is currently listed on the Prime Market. However, on July 10, it announced that itwould apply for a transfer to the Standard Market. Although it has not met the criteria for maintaining a listing on the Prime Market from theoutset, it finally decided to apply for the listing on the Standard Market. This choice arises from the challenge of fulfilling market
capitalization and other criteria due to recent revisions to business forecasts. Given the current situation, it can be said that this is a realisticdecision. At the same time, the Company decided to abolish the shareholder benefit program. The Company intends to focus on returning
profits to shareholders through dividends to fairly return profits to shareholders. The dividend amount will remain unchanged.

◼

At the same time, the Company announced a large-scale share buyback of up to 300 million yen. It intends to take flexible measures toreturn profits to shareholders in the future, based on dividend payments.

Stock price data (July 26, 2023 closing price)
Stock price

641 yenShares issued

13,898,800 shares

Market cap

8,909 million yen

PER (est.)

58.01 times

PBR (actual)0.72 times

Dividend yield forecast %2.34%

Performance (Figures for FY8/23 are the Company’s estimates)
Sales

YoY
(%)

OperatingprofitFY8/22

58,34715.1

998-40.2

1,148-27.6

FY8/23(E)59,000

1.1

400

-59.9

400

FY8/22(Q3)

43,476

13.4

905-37.8

FY8/23(Q3)44,431

2.2

370-59.1(Million yen)

YoY
(%)

RecurringprofitYoY(%)

EPS(Yen)Dividend(Yen)781-19.1

57.83

15.0

6.7-65.2

150-80.8

11.05

15.0-988-31.7

518-48.4

38.44--372-62.3

306-40.9

22.55

--1

YoY(%)

NetincomeROE(%)

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IR Street Report - Premium -August 1, 2023

July 16, 2014

<Overview of FY8/23 Q3 results – The business environment still remains challenging＞◼ Sales were 44,431 million yen (+2.2% YoY) and operating profit was 370 million yen (-59.1%), showing an increase in sales
and a decline in profits. As for sales, same-store sales are somewhat weak as a result of factors such as large-scale shop
openings and revisions to the product mix of shops acquired through M&A, which have also affected the operations ofexisting shops, while the pace of opening shops has been robust. As for profits, external factors like a weaker yen and steep
rises in utility expenses have squeezed its profits. However, the Company continues to focus on medium and long-term
growth through initiatives like shop renovations and the opening of large-scale shops; the trend of overall cost increases hasremained consistent since Q2, resulting in a significant YoY decline in profits. In line with these circumstances, it hasannounced a revision to its full-year forecasts concurrently with the Q3 performance announcement (details to follow).

<Overview of the 100-Yen shop Business- No significant change from 1H. The Company received
many requests for opening a 100-yen shop.>◼ In the 100-Yen shop business, the Company opened 172 shops, compared with the plan of 236 shops, and closed 82shops, compared with the plan of 90 shops. The pace of opening shops has been robust, as the number of shops in June
2023 was 31, hitting a record high. Most shops are opened based on consignment, which is its forte, and they received
many requests for opening a 100-yen shop handling miscellaneous goods in commercial facilities from enterprises that
operate the facilities, so the number of shops opened increased. On the other hand, the number of shops closed is about
90% of the annual plan as of the end of Q3. In most cases, they closed unprofitable shops and shops in tenants to beclosed, and this trend is projected to continue in Q4, so it seems that we need to keep in mind the possibility that thenumber of shops closed will exceed the planned number.
◼ Same-store sales decreased YoY in every month of Q3 (March to May). Considering the situation in which even Seria Co.,
whose market cap is the largest in the 100-yen shop industry, saw a YoY decrease in same-store sales this year, we cannot
deny the fact that the entire industry was placed in a predicament due to the skyrocketing of costs. In addition, the demandfor hygiene products, such as face masks, is declining, which is a negative factor, as the coronavirus crisis is subsiding
partially because of the reclassification of COVID-19 into class-5 infectious diseases in May. The Company is reforming its
shops while reviewing the strategy of opening many shops and the lineup of products, remodeling shops, and so on. Suchreform has been producing some effects on the operation of existing shops since 1H of FY 8/23, but they are taking somemeasures while reconsidering the staffing at each shop.
◼ The number of higher-priced products increased significantly from 2,169 in 1H to 2,808 at the end of Q3, and the ratio ofsales of higher-priced products reached 9.5%, indicating steady adoption.

Tips: What is the consignment-type model (for opening shops)?
The consignment-type model is one of the shop opening models
at which Watts excels. In this model, the products of Watts are
sold at a section for miscellaneous goods in tenants, such as aleading supermarket. The cashiers of the tenants collectpayments for the products of Watts, so Watts does not need tostation their staff in the tenants. Accordingly, they can reduce
operational costs. Watts and tenants can develop win-win
relationships, because a rich product lineup of Watts is expected
to attract customers.

Positioning ofshop-opening models
Monthly sales
Large

Tenantmodel

Profitability

Low[Characteristics of the consignment-type model]HighIt is unnecessary to station staff or install fixtures or fittings, socosts for opening and operating a shop are lower than those in
the tenant model.
Revenue per shop is low, but profitability is higher than that of
the tenant model, because costs can be curtailed.
・Some know-how is required for periodically visiting shops,dealing in products, etc. This could become an entry barrier.

2Consignmenttype model

Small
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IR Street Report - Premium -August 1, 2023

July 16, 2014

<Full-year Business Forecasts- Revised considering the current situation>
FY8/23 full-year forecasts◼ Considering the situation in which the effects of external factors, such as soaring costs, are lingering while the performanceof the core business of operating 100-yen shops has been slow, the Company announced the revision to the full-yearbusiness forecasts on July 10. The revised forecast calls for sales of 59,000 million yen (+1.1% YoY; -2.5% from the initialforecast), operating profit of 400 million yen (-59.9% YoY, -56.5% from the initial forecast), recurring profit of 400 million yen(-65.2%, -52.9%), and net income of 150 million yen (-80.8%, -71.7%), indicating the growth of sales and the decline in profit.
Sales are expected to increase, but it seems that the environment surrounding profit remains harsher than expected. Under
these circumstances, the Company is remodeling shops and revising the product lineup for improving profitability, and thisterm will become an investment period in which they will proceed with the reform of shops. As they expect the effects of shop
remodeling and are starting to see the possibility of opening a multi-purpose shop combining a 100-yen shop and a different
model, we would like to expect their medium/long-term growth.
◼ As of Q3, progress against full-year business forecasts was 75.3% for sales and 92.6% for operating profit. This forecast wasrevised in Q3, so it is unlikely that annual results will be significantly different from this forecast. Net income attributable toowners of parent in the cumulative third quarter is 306 million yen, exceeding the forecast amount of 150 million yen, butthere is a possibility that they will post impairment loss on unprofitable shops. Accordingly, it is projected that annual results
will be almost in line with the forecast.
<Shareholder Returns- Dividends remain unchanged despite the abolition of the shareholder benefit program, andannouncement of share buybacks>
Abolition of the shareholder benefit program◼ The Company offered a shareholder benefit program. Shareholders holding 200 or more shares received a coupon of 2,200
yen (including tax), which is available at the Company’s online shop. This time, the Company announced the abolition of thisplan on July 10 in order to promote the fair return of profits to all shareholders. It should be noted that since the plan would
be abolished in the middle of the fiscal period, the shareholder benefit program will not be offered to shareholders in thecurrent fiscal year ending August 2023 (shareholders with a record date at the end of August). On the other hand, through theabolition, the Company will be able to eliminate tens of millions of yen in benefit program costs, which have been recorded asentertainment expenses, from the next fiscal year.
Dividend policy◼ The Company’s basic policy is to pay a stable dividend. The Company says “We consider 20-30% of the payout ratio.”
Despite the revision to the business forecasts but through the abolition of the shareholder benefit program, the Company
maintained the dividend at 15 yen per share, in line with its initial forecast. Accordingly, the payout ratio was 135.7%. As
stated in the release announcing the abolition of the shareholder benefit program, the Company’s policy of “concentrating on
returning profits through dividends” can be seen. The dividend yield is 2.34% based on the closing price on July 26, 2023.
Announcement of share buybacks◼ On July 10, the Company announced a share buyback. The repurchase is intended to improve capital efficiency and enrichshareholder return and will be the Company’s largest-ever share buyback, with a maximum repurchase amount of 300 million
yen. The repurchase period is from July 14, 2023 to March 29, 2024. The Company intends to retire the shares acquired
through this buyback. They said, “We would like to take flexible measures based on dividends, to return profits toshareholders in the future.”<Topic- Application for listing on the Standard Market of TSE>
◼ On July 10, the Company announced its application for listing on the Standard Market of TSE. Although the Company iscurrently listed on the Prime Market of TSE, it has fallen far short of the criteria for maintaining its listing status on the marketin terms of total market value (5.27 billion yen as of the end of August 2022, while to the criteria demand at least 10 billionyen). The Company has decided to apply for the listing on the Standard Market because of the risk of delisting in the future if
it fails to meet the criteria for maintaining its listing status on the Prime Market, and because it has determined that it is bestto ensure an environment in which shareholders can hold and trade Watts’ shares with peace of mind.

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IR Street Report - Premium -August 1, 2023

July 16, 2014

<Latest Press Releases>
The Company's major press releases disclosed since the Q2 of FY8/23 are as follows.
(Click on the image below to check press releases on the IRSTREET.)◆IR news mail service◆IR information page of theCompany(Jump to the IR STREET)

Registrations
here

https://www.irstreet.com/new/en/brand/index.php?&contents=brand_whatsnew&brand=238

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Inquiries:
E-mail: info@irstreet.com

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