<Japanese Equity Report>

IR Street Report - Premium -WATTS (TSE Prime, 2735)

WATTS (2735)

July 16, 2014

January 23, 2023

FY8/23 Q1 Operating Results <Update>

Sales were in line with the plan, driven by the strong new shop openings. Profit decreased due to a
decline in the gross margin caused by a steep rise in the cost of purchases, a rise in the proportion offood sales and overseas wholesale sales, and an increase in SG&A expenses as planned. Initiatives forkey measures are generally promoted as planned.

Highlights<Overview of FY8/23 Q1 results>◼ The Company reported sales of 14,699 million yen (107.1% YoY), operating profit of 62 million yen (22.7% YoY), and net incomeof 215 million yen (135.9% YoY). The progress rate against the Q2 forecasts is 49.6%, 16.6% and 98.0% respectively. Sales
were generally in line with the plan, but progress on operating profit appears to be challenging. However, net income exceeded
the plan due to the recording of income taxes deferred (gains) associated with the reorganization among consolidated
subsidiaries.
◼ 100-Yen shop same-store sales were 99.2% YoY (full-year plan: 100%), slightly below the plan. On the other hand, the numberof new shops opened was 66 (1H plan: 107), which was better than planned. Opening new shops, which is one of the key
measures for the current fiscal year, appears to be performing well, with the environment also continuing to be favorable. The
new shops are expected to contribute to sales from Q2 onward. The number of shops closed was 24 (1H plan: 62), which isbasically in line with the plan.
◼ The gross margin was 37.6% (-1.0ppt. YoY). The steep rise in the cost of purchases and an increase in the proportion of foodsales and overseas wholesale sales led to lower-than-expected results. On the other hand, the share of higher price products insales is gradually increasing, continuing to contribute to its profitability. Further, the Company's measures to revise prices oflimited number of 100 yen PB products to 150 yen and 200 yen, which were launched in October last year, have also trended
steadily, leading to an increase in gross profit. Maintaining gross margin is also a priority measure for the current fiscal year, andit can be expected to improve gross margin from 2Q onward.
◼ SG&A expenses were 37.2% (+0.6ppt. YoY). The increase in SG&A expenses was mainly due to a larger number of new shop
openings and renovations, as well as higher utility costs, but the Company has expected its increase. In Q1, the Company
renovated about 40 existing shops.
◼ With regard to the third key measure, completing the post-merger integration with OFR, the Company is reviewing shop
operations and product mix and researching roadside large-scale formats to maximize the effects of the integration. Currently,
the Company aims to improve profitability by renovating the roadside FLET'S shops to the Watts brand.
◼ The number of products listed on the online shop has been significantly expanded to approximately 19,000 items, with theintroduction of group brand items and limited items. Since the page views are increasing steadily, the online shop is expected tocontribute to overall sales in the future. The in-store pickup service was also launched at some shops.
◼ In overseas business, the performance appears to have bottomed out overall, with sales in Thailand, the Philippines, andSingapore exceeding the previous year's level, showing signs of recovery.
◼ The same-store sales in December were 101% YoY. Consumers are likely to continue to save money, which should provide a
tailwind for the 100-Yen shop business.

Stock price data (January 20, 2023 closing price)
Stock price

677 yenShares issued

13,898,800 shares

Market cap

9,409 million yen

PER (est.)

17.34 times

PBR (actual)0.77 times

Dividend yield forecast %2.22%

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

YoY(%)EPS(¥)

Dividend(Yen)ROE(%)

781-19.1

57.83

15.0

6.7-26.0

530-32.2

39.04

15.0

4.4

305-35.1

158-69.9

11.83

--

67-77.8

215

35.9

15.88

--Sales

YoY(%)

OperatingprofitFY8/22

58,34715.1

998-40.2

1,148-27.6

FY8/23(E)60,5003.7

920-7.9850

FY8/22(Q1)

13,726

8.1

277-43.6

FY8/23(Q1)

14,6997.1

62-77.3(Million yen)

Recurringprofit

1

YoY
(%)

Net
incomeCopyright © ＩＲSTREET. All Rights Reserved<Japanese Equity Report>

IR Street Report - Premium -WATTS (2735)

July 16, 2014

*Republished from the report issued at the beginning of the period (October 25, 2022).

January 23, 2023

FY8/23 full-year forecasts◼ The Company forecasts sales of 60,500 million yen (103.7% YoY), operating profit of 920 million yen (92.1% YoY), recurring
profit of 850 million yen (74.0% YoY), and net income of 530 million yen (67.8% YoY), expecting increases sales anddecreases in profits. In a tough external environment, it seems that the Company has no choice but to make a conservativeoutlook. It has set the following three key targets for the current fiscal year: (1) Maintain gross margin (2) Open new shops(3) Complete PMI with OFR.
◼ (1) The assumption for the gross margin is kept at the same level as FY8/22. The depreciation of the yen is unlikely to cometo a halt, but the Company plans to control gross margin by utilizing higher price products and promoting a "product mix"
pricing strategy through changes to selling prices.
◼ (2) It will continue its mass shop opening strategy this fiscal year, with plans to open 236 shops (including 200 consignmentshops), close 90 shops, with net increase of 146 shops. As 45 shops are already planned to be opened in September andOctober, it is making a strong start. Strong demand for shop openings appears to be continuing. It also plans to open 2 large
shops by utilizing OFR’s roadside formats on a trial basis.
◼ (3) The Company plans to improve profitability by completing the remaining PMI tasks, such as replacing former OFR
products with Watts products, integrating food ordering system and POS cash registers. The PMI tasks are mostly
completed, and this fiscal year is set to be a year of creating positive results.
◼ In addition to amortization of goodwill, costs of mass shop openings, investments in renovating existing shops including
FLET'S shops, and upfront investment costs such as the introduction of self-checkout registers to save labor, increases inutilities, personnel and other costs are inevitable. The SG&A-to-sales ratio is assumed to deteriorate by several percentage
points from the previous year.

◼ The Company's medium-term growth vision is to achieve a sales growth rate of 5% or more per year and an operating profit
margin of 3% or more. To achieve this, the development of large-scale roadside format, that will be opened this fiscal year, isan important pillar.

Medium-term points◼ Aiming to create pillars other than the 100-Yen shop business, the Company has been working to develop its overseas
business and lifestyle product business. However, business development has not progressed as expected due to the impactof the major external factor, the COVID-19 crisis. In response to this situation, the Company acquired OFR in the previous
fiscal year to create greater growth potential in its core 100-Yen shop business. With this acquisition, as OFR operates largescale roadside shops and consignment type shops nationwide, the Company aims to further expand its share in theconsignment shop market and establish a new format of large-scale roadside shops. It intends to build a new growth strategy
with such large-scale roadside shops. Synergy effects are greatly expected in the future.
◼ The external environment is a headwind reflecting the yen depreciation and soaring resource prices. This trend is not limited
to the 100-Yen shop industry and is also an issue for the overall retail industry. For the 100-Yen shop operators, even if it
becomes difficult to sell products for 100 yen, they can take measures to change the specifications of products or switch tohigher price products. Therefore, they will probably take a major position in the household goods market and will continue tobe chosen by consumers, if they can leverage a "comparative price advantage". The Company is promoting the mass shop
opening strategy to gain a foothold in the consignment-type 100-Yen shop market, where it has prominent know-how. Tocapture the overwhelming share in this area, the Company will increase the number of shops.

◆ The Company’s IR information page (within the “IR Street” website)(Japanese)http://www.irstreet.com/jp/brand.php?&content=brand_newsrelease&brand=238(English) http://www.irstreet.com/en/brand.php?&content=brand_newsrelease&brand=238
Issuer: IR STREET (Finantec Co., Ltd.)This report was prepared solely for the purpose of providing information that is useful for reaching investment decisions. This report is not a solicitation or otherinducement regarding securities transactions or any other activities. Investors are always responsible for making judgments required to reach final investment
decisions. The issuer of this report has no responsibility whatsoever regarding these investment decisions. All information in this report is current at the time thisreport was prepared and may be revised without prior notice. This report is copyrighted material of the issuer. Copying, selling, using, releasing to the public ordistributing this report to others without permission is prohibited by law.
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E-mail: info@irstreet.com info@irstreet.com

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