IR Street Report - Premium -<Japanese Equity Report>

May 9, 2024

July 16, 2014

WATTS (TSE Standard, 2735) FY8/24 Q2 Operating Results
Significant year-on-year profit increase, supported by effective cost control measures.
Full-year forecasts upwardly revised reflecting continued strong performance.
<Brief summary><Overview of FY8/24 Q2 results>◼

Sales were 30,255 million yen (+2.4% YoY, +1.8% to the initial plan), and operating profit was 743 million yen (+173.4%, +209.8%). Sales
rose YoY mainly due to strong sales at existing stores. Profit items also increased significantly, supported by the effective cost control
measures such as the introduction of higher-priced products and the establishment of a lineup of low-cost 100-yen items to cope with the
weak yen. Operating profit increased by approximately 2.7 times YoY. Based on such strong performance, the Company has significantly
revised its Q2 and full-year forecasts upward.

◼

In H1, 100-Yen Shop sales were 103.3% YoY for all stores and 102.6% for existing stores alone. Store openings and closures generally
proceeded according to plan. Based on one of the themes for this fiscal year, "Improving profitability by closing unprofitable stores," theCompany mainly opened consignment-type stores with high profit margins, and more than 90% of new stores were of this format.
The strong same-store sales were partly due to a recovery from the previous year's frequent product shortages due to the modification anddiscontinuation of a large number of products. However, the increase in the proportion of higher-priced products improved the averagespend per customer by approximately 1.6 ppt. YoY and the customer number was 100.3% of the previous fiscal year, resulting in solid
same-store sales while maintaining the customer number.

◼

Gross margin for H1 improved by 0.6ppt. YoY to 38.4%. The figure for Q2 alone was 38.6%, the highest ever since FY8/22 after the
COVID-19 crisis. The three major factors include: an increase in the proportion of higher-priced products, a complete lineup of 100-yen
items that are profitable even at the current exchange rate level, and an increase in the proportion of lifestyle products at stores with highproportion of low-margin food items.

◼

SG&A expenses were 36.0% of sales, down approximately 1ppt. YoY. This was mainly due to higher gross profit, restrained utility costs
through government energy subsidies, increased openings of consignment-type stores and reduced personnel costs resulting from laborsavings and store rents. The operating profit margin also recovered from 0.9% in the same period of the previous fiscal year to 2.5% in thecurrent fiscal year, demonstrating that the Company has strengthened its business base to respond to the sharp rise in costs throughvarious cost control measures.

◼

There have been no major changes in the non-100-Yen Shop business, and the Company is working to improve profitability in response tosudden changes in the external environment. The Company is continuing to renovate stores of FLET'S, which have become subsidiaries,
in Japan, and develop new business models overseas.

FY8/24 full-year forecasts◼

Full-year forecasts were revised upward on March 28. The Company is forecasting sales of 60,200 million yen (+1.5% YoY), operating income of 1,050 million
yen (+68.9%), and net income of 620 million yen (+147.4%). The profit forecast seems conservative despite the fact that the Company achieved more than
70% of its forecast at the end of the first half. The reason for this cautious stance is based on the expectation of cost increases such as the increase in basesalaries, the provision for bonuses resulting from strong performance, and the elimination of government energy subsidies.

Stock price data (April 26, 2024 closing price)
Stock price

701 yenShares issued

13,458,800 shares

Market cap

9,743 million yen

PER (est.)

17.96 times

PBR (actual)0.79 times

Dividend yield forecast %2.14%

Performance (Figures for FY8/24 are the Company’s estimates)(Million yen)

Sales

YoY
(%)

OperatingprofitYoY(%)

Recurringprofit

YoY
(%)

Net
income

YoY
(%)

EPS
(¥)

Dividend
(¥)

ROE
(%)

FY8/2359,309

1.6

621

-37.7

648

-43.5

250

-67.9

18.46

15.0

2.1

FY8/24 (E)60,200

1.5

1,050

68.9

1,000

54.2

620

147.4

46.77

15.0

-

FY8/23 (Q2)29,550

3.7

271

-57.3

270

-60.1

292

-19.1

21.53

-

-

FY8/24 (Q2)30,255

2.4

743

173.4

749

176.6

436

49.2

32.90

-

-

1

Copyright © ＩＲSTREET. All Rights Reserved<Japanese Equity Report>

IR Street Report - Premium -May 9, 2024

July 16, 2014

<Overview of FY8/24 Q2 results>◼ Sales were 30,255 million yen (+2.4% YoY, +1.8% to the initial plan), and operating profit was 743 million yen (+173.4%,+209.8%). The growth in sales was attributable to the number of new store openings, which were generally in line with plans,strong same-store sales, and higher average spending per customer reflecting increased sales of higher-priced products. On the
profit side, gross margin for H1 improved significantly by 0.6ppt. YoY to 38.4%, reflecting the success of cost control measures
such as the introduction of higher-priced products and the establishment of a lineup of low-cost 100-yen items to cope with the
weak yen. The figure for Q2 alone was 38.6%, the highest since FY8/22 after the COVID-19 crisis. In terms of costs, over 90% of
new stores are in consignment-type format (a format for 100-Yen shops as a tenant in supermarkets or home centers), which is
the Company's strength. With this, personnel costs and rent were reduced, and the government energy subsidies also helped tolower SG&A expenses. As a result, operating profit and other profits rose significantly. In terms of profit margins, the operating
profit margin increased from 0.9% in the same period in the previous fiscal year to 2.5% in the current fiscal year, and therecurring profit margin was 2.5%. This is a significant increase of approximately 2.7 times compared to the same period in theprevious fiscal year, when profits were squeezed by responding to sudden changes in the external environment. Over the past
year, the Company appears to have established a business structure that can generate profits even at current exchange ratelevels through various cost control measures.

<Overview of 100-Yen Shop Business 1-Existing stores performing well; increased demand for 100-Yen shops also
contributed to the growth>◼ In the 100-Yen Shop business, the Company opened 87 new stores, compared with a plan of 90, and closed 53 stores,
compared with a plan of 65. Store openings proceeded almost as planned. However, the Company initially anticipated a certain
number of forced closures of consignment-type stores due to the closure of malls or supermarkets, but the number of suchclosures was limited as a result. Consequently, the number of closures was lower than originally planned. Of the 87 stores newly
opened, 80 are consignment-type format, with the remaining 7 being tenant-type. The consignment store format has theadvantage of high profitability while monthly sales are small. It appears that the Company is focusing on profitability by opening
mainly these types of stores, as was its policy stated at the beginning of the fiscal year.
◼ Same-store sales for H1 surpassed the previous year's level at 102.6%. In the same period of the previous fiscal year, samestore sales declined due to a large number of discontinued items as a result of soaring costs stemming from exchange rate
fluctuations and rising electricity bills, as well as the timing of the introduction of an automated ordering system. In this fiscal year,
the Company has already taken steps to address such product shortages and smoothly introduced higher-priced products,
resulting in a strong performance. While average spend per customer was strong at 102.8% YoY, partly due to the introduction ofhigher-priced products, it is noteworthy that the number of customers was also maintained the same level as the same period
last year at existing stores at 100.3%. In general, when a new store in the same industry opens in the neighborhood, the numberof customers at existing stores is negatively affected. In an environment where competitors in the same industry are also actively
opening new stores, maintain this level of customer numbers may reflect the steady demand for 100-yen stores and defensive
spending patterns due to rising prices.

•Source: The Company’s materials on financial results

2

Copyright © ＩＲSTREET. All Rights Reserved<Japanese Equity Report>

IR Street Report - Premium -May 9, 2024

July 16, 2014

<Overview of 100-Yen Shop Business 2-Building a Management Foundation to Respond to High Cost>◼ Gross profit for H1 was 11,629 million yen, and the gross profit margin improved by 0.6ppt. YoY to 38.4% and 38.6% for
Q2 alone, reaching a record high from FY8/22 after the COVID-19 crisis. There are three main factors for this growth: (1)Introduction of higher-priced products. The increase in the sales proportion of higher-priced products has led to anincrease in the average spend per customer; 2) improvements to 100-yen products. To combat the current higher costs,
the Company has developed a product lineup of 100-yen items that can secure a certain level of profit even at recent
exchange rate levels; (3) Improvements to the product mix. Some stores that became subsidiaries, such as FLET'S, hada higher proportion of food items with lower profit margins compared to lifestyle products. By shifting the product mix ofthese stores to focus more on lifestyle products, the Company was able to improve its profit margins significantly. Thischange has also resulted in a substantial increase in sales of both lifestyle products and food items, beginning to show
positive side effects.
◼ The SG&A was 10,886 million yen, accounting for 36.0% of sales. This was a 0.9 ppt improvement from 36.9% in thesame period last year. This improvement was primarily due to the aforementioned increase in gross profit, as well as
reduced rent and personnel expenses through opening mainly consignment-type stores, many of which are small scale,
Additionally, there was a reduction in utility expenses, including electricity charges, thanks to government energy
subsidies. Freight rates have increased slightly, but this is attributable to the acceleration of the introduction of higherpriced products. Since many higher-priced items are naturally larger than 100-yen items, transportation costs are slightly
higher. This could be seen as a risk associated with the increasing introduction of higher-priced products. However,given that the overall operating profit margin is improving despite the higher freight costs, the positive effect of higherpriced products on profit is still significant. In this respect, the Company appears to have found a new product mix model
to cope with increased costs.
◼ Higher-priced products accounted for 18.9% of total sales in the first half, with 4,266 items. This represents a significant
increase from 11.0% in the same period of the previous fiscal year. Initially, the Company had targeted a 20% proportionof higher-priced products, but in light of the current weaker-than-expected yen level, it is now forecasting that the ratio
may exceed 20% in some cases.
◼ Currently, the external environment, including foreign exchange rates, remains uncertain. Therefore, the Company willcontinue to implement the following cost control measures for the time being: (1) Opening consignment-type stores; (2)Continuing the introduction of higher-priced products; (3) Improving the product mix of 100-yen items. The best-sellingitems in the high-priced product category include non-woven masks, polyethylene cases, and other products priced in
the 200 yen to 300 yen range. In recent years, products related to "Oshikatsu" (a Japanese culture meaning the activityof supporting favorites such as anime characters, idols, or actors) have also become popular.
Best-sellinghigher-priced products
Non-woven masks

Polyethylene cases

Shoulder bag for storing plush toys

•Source: The Company’s materials on financial results

3

Copyright © ＩＲSTREET. All Rights Reserved<Japanese Equity Report>

IR Street Report - Premium -May 9, 2024

July 16, 2014

<Other Domestic Lifestyle Products Business: Opening of stores in collaboration with 100-Yen shops>◼ Buona Vita, a lifestyle product brand, opened 1 store and closed 3 stores in H1, bringing the total to 13 stores at the endof February. Same-store sales were 104.5% YoY, a strong performance driven by increased demand for outings as
COVID-19 restrictions eased. However, Buona Vita is currently operating at a loss due to soaring costs. Looking ahead,
the Company plans to generate profits by collaborating with 100-Yen shops to sell Buona Vita products within thesestores.
◼ Real, a discount store brand, opened 1 store in H1, bringing the total to 6 stores as of the end of February. The Company
will leverage its strength in product procurement to offer products at reasonable prices. Given the increase in consumers'
defensive spending patterns in response to recent price hikes, sales of such products remain strong. A new store in
Osaka, which opened last November, features a 760 square meters sales floor in a collaborative format with a discountstore Real and a 100-Yen shop section. The Company reported that sales were strong, reflecting the demand forreasonably priced products.
◼ Tokino:ne, a household items store divided into four zones (morning, afternoon, evening, and night) that offers products
suited to each time zone, remained unchanged at 2 stores. Tokino:ne is also promoting the development of sections
within 100-Yen shops to generate synergies. There are currently 200 such stores.
◼ The online shop has started an in-store pickup service at tenant-type stores nationwide. It offers not only 100-yen items
but also higher-priced items and exclusive products to increase its appeal. Due to the shipping costs, it is challenging to
make the online shop profitable on its own. However, through the in-store pickup service, the Company aims toencourage consumers who visit the stores to engage in "spot buying," thereby contributing to the overall 100-yen store
business.
◼ Overseas business remained stagnant with sales of 471 million yen, marking a 27.1% YoY decrease. Currently, theCompany is optimizing its store mix to adapt to sudden changes in the external environment. It has closed 5 stores inThailand and 3 stores in Peru. Additionally, the competitive situation is intensifying, with an increase in Chinesecompetitors offering low-priced products. In response, the Company is expanding its store network with a focus onwholesale while continuing to develop the Watts.up+ brand in Thailand, which specializes in higher-priced items.

▼ A new store in Osaka
FLET'S (100-Yen shop) and Real are adjacent to the same floor.

Buona Vita AEON TOWN Yūkarigaoka (Chiba)•Source: The Company’s materials on financial results

4

Copyright © ＩＲSTREET. All Rights Reserved<Japanese Equity Report>

IR Street Report - Premium -2024年5月9日

July 16, 2014

<Full-year forecasts and shareholder returns, etc.＞
FY8/24 full-year forecasts◼ On March 28, the Company revised its full-year forecasts upward. The revised forecasts indicate sales of 60,200 million yen(+1.5% YoY), operating profit of 1,050 million yen (+68.9% YoY), recurring profit of 1,000 million yen (+54.2% YoY), and net
income of 620 million yen (+147.4% YoY). This adjustment reflects the anticipation of sales growth and a significant increasein profits. The major revisions from the initial forecast stem from several factors. Firstly, various cost control measures haveyielded results surpassing initial expectations. Additionally, strong same-store sales have contributed to the positive outlook.
Despite the persistently challenging external environment, should the Company achieve its current target, it will signal the
successful culmination of its response to recent years' cost increases and a refinement of its profitability strategy.
◼ As of the end of Q2, the Company had achieved 50.3% of its full-year forecast for sales, 70.8% for operating profit, and70.3% for net income attributable to owners of parent, showing particularly strong progress on profits. Despite robust
performance in H1, the full-year forecast remains conservative, anticipating weaker performance in H2. The Company's
conservative forecast is primarily attributed to anticipated expenses in H2, including: (1) salary increases aligned with recent
momentum for wage hikes; (2) an increase in bonus allowances due to strong performance; and (3) the potential rise in utility
costs following the government's discontinuation of electricity subsidies in June of this year. While the removal of thesesubsidies will impact performance to a certain extent, the effect is expected to be limited to Q4 of the current fiscal year.
Despite these challenges, the Company's ongoing business restructuring efforts and its strong foundational support for
profitability in difficult environments suggest potential for further growth, contingent upon stable external conditions.

Initiatives for Sustainable Value Enhancement (to Improve PBR)
◼ The Company's P/B ratio at the closing price on April 26 stands at 0.79x, falling into the category often referred to as "PBR
below 1x." To address this, the Company has outlined strategies aimed at enhancing its financial position. These include: (1)enhancing ROE by bolstering profitability; (2) reducing the cost of equity by strengthening investor and public relations (its
CAPM-based cost of shareholders' equity is 4-5%). While we expect valuations to change in the future, the Company's
inventory tends to expand slightly after the introduction of higher-priced products. To improve ROE, it will be important topromote measures from two directions: improving profitability through higher-priced products and improving the turnover ratio
by optimizing inventory.

Dividend policy◼ The Company's basic policy is to pay stable dividends, and its "dividend payout ratio target of 20-30%" remains unchanged.

The annual dividend per share for FY8/24 is expected to be 15.0 yen, the same amount as the previous year, with a payout
ratio of 32.1%. The dividend yield at the closing price on April 26 was 2.14%.

Progress against full-year
forecasts as of H1•Source: The Company’s materials on financial results

Dividend results and forecasts

5

Copyright © ＩＲSTREET. All Rights Reserved<Japanese Equity Report>

IR Street Report - Premium -May 9, 2024

July 16, 2014

<Latest Press Releases>
The following are the major press releases disclosed by the Company during Q2 of FY8/24.
The Company held a financial results briefing for institutional investors on April 12. (Click on the image
below to check the news on the IRSTREET.)

IR news mail service
here
Registrations

封筒

IR news mail service
Registrations
here

Issuer: IR STREET (Finantec Co., Ltd.)This report was prepared solely for the purpose of providing information that is useful for reaching investment decisions. It is nota solicitation or other inducement regarding securities transactions or any other activities. Investors are always responsible formaking 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 this report was prepared and may berevised without prior notice. This report is copyrighted material of the issuer. Copying, selling, using, releasing to the public or
distributing this report to others without permission is prohibited by law.
If you have any Inquiries for this report, please contact by following address.

Inquiry E-mail: info@irstreet.com

6

Copyright © ＩＲSTREET. All Rights Reserved