Annual Report 2007

Evolving
Annual Report 2007
Year ended February 28, 2007

Corporate Planning Office,East Tower, Gate City Osaki
11-2, Osaki 1-chome, Shinagawa-ku,
Tokyo 141-8643, Japan
http://www.lawson.co.jp/
Published in August 2007.
©1997–2007 LAWSON, INC. All rights Reserved.

B-(2)-060001

This annual report was produced using “Kanbatsu
White,” which contains 70% Japan-made pulp,
including 10% clear-cut lumber.

Printed in Japan

Consolidated Financial Highlights

Corporate Data

LAWSON, INC. and Subsidiaries
Years Ended February 28, 2007, 2006 and 2005

For the Year:Net sales of all stores
Total operating revenues
Operating income
Income before income taxes andminority interests
Net income
Per Share Data (yen and dollars):
Net income
Cash dividends

Percent
ChangeThousands of
U.S. Dollars*

2007

2006

2005

2007/2006

2007¥1,386,630
283,053
44,513¥1,361,731
268,058
43,867¥1,329,077
254,395
42,941

1.8%
5.6%
1.5%

$11,707,447
2,389,843
375,827

36,84820,98338,72322,02536,04020,435

–4.8%
–4.7%

311,111
177,161¥

At Year-end:
Total assets
Total equity

Millions of Yen

202
100

¥

¥ 398,258
199,493216
90¥¥ 375,107
175,184

198
70

–6.5%
11.1%

¥ 356,310
160,282

6.2%
13.9%

$

1.70
0.84

$ 3,362,530
1,684,339

ENGLISH COMPANY NAMEESTABLISHEDLAWSON, INC.

April 15, 1975

ADDRESSCAPITAL

Tokyo Headquarters:¥58,506,644,000

East Tower, Gate City Osaki
11-2, Osaki 1-chome, Shinagawa-ku,

AUTHORIZED SHARESTokyo 141-8643, Japan

409,300,000

NUMBER OF EMPLOYEESSHARES ISSUED

3,614 (Consolidated) (As of February 28, 2007)

104,600,000

BUSINESS ACTIVITIESSHAREHOLDERS

Development of LAWSON convenience

40,904store franchise chain

MAJOR SHAREHOLDERS
NET SALES OF ALL STORESFinancial Data:
Return on equity (ROE)
Payout ratio

11.3%
49.6%

13.1%
41.8%

13.0%
35.3%

Number of Percentage ofSharesTotal Shares
Held
Held

¥1,386.6 billion (Consolidated) (Fiscal 2006)

–1.8
7.8

15,00060

20,00010,00040

1. Mitsubishi Corporation
32,089,300
2. Japan Trustee Services Bank, Ltd.
(Trust Account)
7,769,000
3. Marubeni Foods Investment Co., Ltd.
5,939,500
4. The Master Trust Bank of Japan, Ltd.
(Trust Account)
5,910,300
5. Trust & Custody Services Bank, Ltd.
(Securities Investment Trust Company)
2,610,800
6. NTT DoCoMo, Inc.
2,092,000
7. MELLON BANK N.A. AS AGENTFOR ITS CLIENT MELLON OMNIBUS
US PENSION
1,401,868
8. The Nomura Trust & Banking Co., Ltd.
(Trust account)
1,194,900
9. STATE STREET BANK AND TRUSTCOMPANY 505103
1,126,896
10. The Sumitomo Trust & Banking Co., Ltd.
(Trust account B)
1,093,300

10,0005,000

20

STOCK EXCHANGE LISTINGSNUMBER OF STORESStore Network:
Total number of stores in Japan
Franchised storesCompany-owned stores

8,564 (Consolidated) (As of February 28, 2007)
8,564
8,093
471

8,366
7,958
408

8,077
7,731
346

2.4%
1.7%
15.4%

OPERATING AREA
All 47 prefectures in Japan; Shanghai, PRC*The U.S. dollar amounts represent translations of Japanese yen at the approximate exchange rate at February 28, 2007, of ¥118.44=$1.

(Joint Venture)
Operating income andOperating income ratio

Net income and ROE

Cash dividends per share
and Payout ratio(Millions of Yen)

(Millions of Yen)

(Yen)

50,00025,000100
49.6

40,00020,000

13.0

13.1
80

41.8

11.3
30,000

3.2

35.3

3.2

3.2

30.7
7.4
5.7
5.7
2.5
2.0

1.3
1.1
1.1
1.0

Tokyo Stock Exchange (1st Section)
0

2005

2006

2007

Operating income
Operating income ratio (%)

0

2005

Net income
ROE (%)

2006

2007

0

2005

2006

2007

Cash dividends per share
Payout ratio (%)*Operating income ratio=Operating
income/Net sales of all stores

Osaka Securities Exchange (1st Section)

STOCK TRANSFER AGENT
Mitsubishi UFJ Trust and Banking Corporation
4-5, Marunouchi, 1-chome, Chiyoda-ku, Tokyo 100-8212, Japan

Forward-looking Statements
This annual report contains forward-looking statements about the future plans, strategies, beliefs and performance of LAWSON and its subsidiaries. These forwardlooking statements are not historical facts. They are expectations, estimates, forecasts and projections based on information currently available to the company andare subject to a number of risks, uncertainties and assumptions, which, without limitation, include economic trends, competition in the Japanese convenience store
industry, personal consumption, market demand, the tax system and other legislation. As such, actual results may differ materially from those projected.

LAWSON, INC. ANNUAL REPORT 2007

(As of February 28, 2007)

LAWSON, INC.

ANNUAL REPORT 2007

67

Contents

page

page

Message to
02 A LAWSON
Stakeholders
In this year’s letter to stakeholders, the president discusses what isrequired to achieve sustained medium- to long-term growth.
Broadly speaking, President and CEO Niinami believes twoelements are key: valuing and developing human resources, andconstantly keeping in mind coexistence with society.

11

Regular
LAWSONThe conventional LAWSON store
has been the Company’s mainstay
convenience store format since
its establishment in 1975.

page

13

Store
10 LAWSON’s
Format Strategy

page

By developing store formats suited to age demographics andregional needs and leveraging its existing infrastructure, LAWSON
will be able to more accurately provide the products and services
that customers want in specific areas.

NATURALLAWSONLAWSON developed thisformat to attract more female
customers. The first store
opened in the fiscal year
ended February 2002. Thisvalue-added format isdesigned around the key
words “beauty,” “health,” and“convenience.”

page

14

LAWSONSTORE100

page

This format weds the CVS and minisupermarket format, based on thetheme of “supporting time saving,
simplicity, and convenience ineveryday life.” One of the featuresof the LAWSON STORE100 is its
lineup of perishable foods.

page

15

LAWSON
PLUS
This format was conceived to attract
middle-aged, elderly and female
customers, while maintaining thecore customer base of the conventional format. These stores are createdthrough the remodeling of existing
LAWSON stores, mainly signage,interior décor, fixtures and fittings,
and merchandise assortments.

1 6 Corporate Governance

LAWSON is working to maximize its corporate value in order to berecognized as a company that is important to all stakeholders.

page

21

Corporate Social Responsibility
LAWSON is proactively addressing and resolving issues from thestandpoint of CSR to live up to its corporate philosophy—realizing“Happiness and Harmony in Our Community.”

page

23 Financial Section

page

Corporate Auditors
66 Directors,
and Executive Officers

page

67 Corporate Data
LAWSON, INC.

ANNUAL REPORT 200701

A Message to LAWSON Stakeholders

Evolving to Meet Changing
As President and CEO, I have continuously asked myself since my appointment whatis necessary for LAWSON, INC. to achieve sustainable growth over the medium tolong term. Broadly speaking, two elements are required—valuing and developing
human resources, and constantly being conscious of coexistence with society.
The chain store industry in Japan has a history of growth by opening a large number of stores, driven by the strong leadership and charisma of founders based on astandardized model. At the same time, there has been a tendency to think of personnel expenses only as costs and thus to neglect employee development, leading to a
dearth of successors. Also, business expansion hasn’t always taken as much notice ofthe cost of capital as perhaps it should have. I think that these issues and the market
saturation caused by mass openings of conventional convenience stores (CVS) of thesame type probably led to the slump in existing store sales at CVS chains and slower
corporate growth in recent years.
In this annual report, we intend to clarify the issues and strategies that LAWSON
must tackle and execute by reflecting on the nearly 30-year history of the Japanese
CVS industry, from its growth phase to the present day. In other words, we will lookat the past and present as the basis for where the industry must head in the future.

02 LAWSON, INC. ANNUAL REPORT 2007

CVS Chronicle —Overview—GrowthPhase 1

CVS growth phasedriven by a pioneer
company

Phase 2Phase 3

CVS stagnation

Looking Back Over the 30 Yearsof Japan’s CVS Industry
Phase 1The period of approximately 20 years from 1975

Re-accelerationof growth· · ·to the second half of the 1990s was the dawningof the CVS industry and, at that same time, aphase of strong growth. At that time, consumers

If there is
no change· · ·Distance convenience,time convenience,
optimal merchandise

had few options available to them, with retail

Saturation of
conventional CVS format
targeting core users

stores rarely close to their neighborhoods.
Naturally, they welcomed the convenienceoffered by stores that operated 24 hours a day
and the convenience in terms of being within

1975

Latter 1990s

2007

walking distance of their homes. Men in their 20s(CY)

to 30s, in particular, embraced the convenience
store concept because 24-hour trading matched
an era when young people were more active at night. These men became the core customers oftoday’s CVS.
The number of stores increased rapidly as customer convenience was enhanced. Convenience
stores differentiated their merchandise assortments from other formats by functioning also as manufacturers. For example, they created integrated manufacturing and sales systems that enabled themto develop and sell private brand boxed lunches, rice balls and other products. Furthermore, besides
functioning as general stores and mini-supermarkets, convenience stores aggressively introduced
ticket sales and other services, including financial services such as bill settlement and ATMs.

Needs

The existence of a standardized model used nationwide was a major factor behind the ability to
rapidly open chain stores. At the same time, the franchise system, whereby store management was
outsourced, also drove the

CVS Industry Life Cycle in the Past Growth Stage

rapid pace of convenience
store openings.

GrowthIn addition to this business
Phase 1framework, a large number ofhighly motivated franchised

Growth driven by various service and product additions

store owners also supported

Financialservicesthe growth of the CVS industry. These shopkeepers estab-

Books
and
stationery
shop

lished the foundations for

Ticketservices
Postalservicesstores closely linked to theneeds of local communities by

Tobaccoshop

Supermarket

operating stores 24 hours a
day in all areas of the country.
Liquorshop

1975

Grocery
Shop

Latter 1990s (CY)LAWSON, INC. ANNUAL REPORT 200703

Phase 2
Phase 2, the 10 years from the second half of the 1990s to the present, was a period of slow growth.
The CVS industry, which had grown dramatically for the past two decades, witnessed competition
to open stores in a drive to expand sales, as CVS operators became preoccupied with trying to reap
economies of scale. This resulted in an excess of same-type stores with little differentiation whose coretarget was men in their 20s and 30s. With the middle-aged, elderly and women viewing the atmosphereand merchandise assortments of such stores as unattractive, convenience stores found their customer
bases became lopsided. In addition, as CVS operators over-concentrated on the scale of their operations, they focused little effort on innovation in terms of adding value to their businesses throughproduct development and the introduction of new services. Yet this was a decade when they really
had to work hard to enhance and promote the attractiveness of the convenience store format itself.

CVS Industry Life Cycle in the Phaseof Industry Stagnation
GrowthPhase 2
CVS industry stagnation

LAWSON
Challenge 2004

Second half of 1990s

LAWSON
Challenge 2007

2007 (CY)The competition fanned by mass store openings led to slower growth in existing store sales, andconsequently increased the risk of poorer earnings at existing franchised stores. The continuous cycleof opening and closing large numbers of stores also resulted in poorer capital efficiency among the
major CVS operators.

04 LAWSON, INC. ANNUAL REPORT 2007

Trends in No. of Domestic Stores and Store Openings and Closuresat Top Four CVS Chains*
Fiscal years ended February 28 and 29(stores)

LAWSON
No. of stores

2003

2004

2005

2006

2007

7,625

7,821

8,077

8,366

8,564

Store openings

502

625

711

717

700

Store closures

611

429

455

428

502

Seven-Eleven Japan
No. of stores

2003

2004

2005

2006

2007

9,690

10,303

10,826

11,31011,735Store openings

930

904

904

891

832

Store closures

300

291

381

407

407

FamilyMart
No. of stores

2003

2004

2005

2006

2007

5,593

5,770

5,994

6,284

6,501

Store openings

501

456

532

606

586

Store closures

359

279

308

316

369

Circle K
No. of stores

2003

2004

2005

2006

2007

2,710

2,651

2,855

2,891

2,898

Store openings

230

200

193

196

187

Store closures

103

259

143

160

180

SunkusNo. of stores

2003

2004

2005

2006

2007

2,257

2,200

2,273

2,263

2,205

Store openings

188

160

153

139

119

Store closures

69

217

80

149

177

*Source: Data released by each company

Given the declining birthrate and aging society in Japan, it has become increasingly important for
the CVS industry to expand its customer base by providing products and services aimed at the
middle-aged, elderly and women, who have not traditionally been core customers. We realize that it is
not possible to acquire new customer bases with homogenized, nationally uniform merchandise assortments resulting from standardization, as they will not fulfill customer needs any more. Moreover, itappears that the middle-aged, elderly and women have a greater need to shop within walking distancerather than by car compared to young men. Given this, we would expect convenience stores to be able
to display the strength inherent in their handy locations to attract such customers.
Amid the changing industry environment, we have responded to these structural changes among consumers. We have striven to increase the number of customers through the expansion of our customer baseby creating store formats and conducting merchandising matched to individual locations. Guiding these
efforts have been two medium-term management plans: LAWSON Challenge 2004 (fiscal 2002 to 2004)
and LAWSON Challenge 2007 (fiscal 2005 to 2007). We have executed strategy in line with these plans.
Under LAWSON Challenge 2004, we dealt with negative legacies by closing unprofitable storesthat were the result of the dramatic expansion in the scale of operations in the past and taking otheractions. In parallel, we took steps to strengthen human resources by opening training centers, forexample. In addition, we have focused our efforts on the basics, such as the Three Challenge
Practices for store management guidance, as we worked to build a platform for the creation of
stores suited to the individual needs of customers in each location.

LAWSON, INC. ANNUAL REPORT 200705

The Three Challenge Practices are points that franchised store owners, employees, andstore crew (part-time workers) must pay particular attention to in running LAWSON stores.
They are (1) ensuring merchandise assortments are matched to individual store locations,(2) serving customers courteously, and (3) keeping stores and surrounding areas clean.

Under LAWSON Challenge 2007, which began in fiscal 2005, we have promoted improved merchandise assortments through the use of “store charts” and the “Mystery Shopper” program. To
increase the number of customers through the expansion of our customer base and respond todiverse customer needs, we are developing three formats—regular LAWSON stores, NATURALLAWSON, and LAWSON STORE100. Furthermore, we have positioned growth in gross profit at existing stores, net increase in the number of stores, the improvement of earnings at affiliated companies,
M&As, and the buyback and cancellation of treasury stock as earnings drivers. We also established theconsolidated management targets of an average of 10% EPS growth over the 3 years of the plan and
ROE of 15% in fiscal 2007, the final year of the plan, and endeavored to achieve these targets.
An important tool for franchised store owners to make decisions, “store charts” include
analysis of marketing and management on an individual store basis. Through the use of
these “store charts,” each store is able to promote merchandise assortments and orderingthat is matched to the individual characteristics of each store location.
The “Mystery Shopper” program is a system where an undercover researcher who is acompany employee with a thorough knowledge of convenience store operations andmerchandise assortments, objectively and quantitatively evaluates LAWSON stores from acustomer’s perspective. The results are fed back to LAWSON’s Head Office and franchiseowners. In fiscal 2004, LAWSON established subsidiary BestPractice Inc. and commissioned it to carry out these surveys.

Nevertheless, the impact of structural factors, namely, competition among similar convenience stores ofthe major CVS operators and intensifying competition across sectors such as with supermarkets and othersectors, has been far greater than we envisaged. Moreover, growth in existing store gross profit, which we
had expected to drive earnings, has fallen short of our targets. Amid the continued aging of society,mainly in regional areas, the importance of merchandise assortments and services that attract middle-aged
and elderly customers has increased. However, it has taken time to carry out research and development
regarding stores that can cater to these needs (LAWSON PLUS, described later). Furthermore, upfront
investment to cope with the dramatic changes in the operating environment, such as the “Mystery Shopper” program, training centers, new formats (NATURAL LAWSON and LAWSON STORE100), and sales
promotion activities aimed at expanding customer bases, were higher than anticipated.
Training centers train crews and franchised store owners. This training is wide-ranging andincludes training for leader crew candidates and franchise owners according to their yearsof experience. They are linked to the introduction of the Mystery Shopper program andwere established at all regional headquarters in fiscal 2004.

As a result of the above factors, when announcing our business results for the fiscal year ended
February 28, 2007, we revised the earnings targets for the final fiscal year of LAWSON Challenge
2007 and lowered the management targets for the plan, as shown on page 07.

06 LAWSON, INC. ANNUAL REPORT 2007

LAWSON Challenge 2007 (FY2005 to FY2007) Mid-term ReportManagement targets: EPS growth of 10% on average over 3 years
and ROE of 15%

Overview of FY2005 and FY2006: Deterioration in operating
environment exceeded expectations➔Increased medium-term business development, personnel
development and franchise owner support

1<Sluggish growth in existing
store markups>■ Large number of store openings bymajor CVS chains■ Stiffer competition across businessmodels, e.g., from supermarkets

3<Investments withmedium-term outlook>■ Nationwide development of perishable foods and daily delivered
products system■ Increased investment in personnel
development

2<Subsidiaries taking longer than
expected to contribute to earnings>■ Impact of upfront investments needed
to quickly launch subsidiaries operating
new formats■ Impact of so-called “grey zone interest
rates” on LAWSON CS Card due tostrict application of the Interest Limitation Law stemming from a change ingovernment consumer finance policy

4

Nevertheless, I firmly believethat our upfront investments
during this period to drive an
increase in the number ofcustomers through the expansion of our customer basewere vital for Phase 3 (discussed in the next section)—that is, sustainable growth<FC owner support>over the medium to long term.

■ Strengthened sales promotions■ Owner support system

In the section entitled“LAWSON’s Store Format
Strategy” from page 10, we
discuss in detail the development of new formats that

Revised targets

LAWSON has promoted as

FY2007 forecasts: 2.3% average EPS growth over 3 years
and ROE of 11.1%

part of its strategy under
LAWSON Challenge 2007.

Phase 3
In Phase 2, we implemented management policies based on the two medium-term management plans:
LAWSON Challenge 2004 and LAWSON Challenge 2007. However, looking back now, I firmly believe thefollowing points.
First, the reason for the stagnant growth in the CVS industry in recent times is certainly not a reflectionof a dwindling need for the convenience store model itself. Rather, it has resulted from too many stores ofthe same type. And, if anything, the degree of importance placed on convenience in terms of location isincreasing the value of irreplaceable CVS networks in an aging society.
Second, the major CVS operators, including LAWSON, are still cash rich and have strong balance
sheets. Therefore, as long as they endeavor to improve their capital efficiency, they will probably havesufficient management resources needed to return to a growth phase.
Third, whether CVS operators are able to return to a growth phase will certainly hinge on how well they
use their management resources while emphasizing capital efficiency and whether they are able to promote innovation in their operations.
In other words, I believe that Phase 3 will be an era when the quality of the medium- to long-term
growth strategies of each company will be increasingly called into question.
Accordingly, in Phase 3, LAWSON will further strengthen and promote the measures implemented inPhase 2.
In Phase 2, we made upfront investments to develop new formats and in other areas in a bid to
expand our customer base. I believe that these measures, which stole a march on other major CVS
operators, will surely differentiate LAWSON and put us back on a growth trajectory. As the industry
number 2 CVS chain operator, it is unlikely that we would prevail if we adopted the same strategies andmethods as that of the industry leader. Instead, our greatest theme will be innovation. By trying various
new approaches in a way that makes the best utilization of the convenience of location, which is the
LAWSON, INC. ANNUAL REPORT 2007

07

CVS Merchandise Cycle in the New Growth Stage
GrowthPhase 3greatest strength of convenience stores, andNew growth stage driven
by LAWSON

collaborating with other sectors, we will
increase corporate value and build an

Emphasis on
capitalefficiency
ROE target:
15%
Without innovationof existing stores· · ·unshakeable position in the CVS industry.
Furthermore, based on an awareness ofcapital cost, we will continue to emphasize ROE
and focus on capital efficiency in all aspects ofstrategic management execution. To that end,
we aim to improve the earnings of existing
franchised stores by implementing measures torevitalize existing stores that are centered onincreasing the number of customers through the2007

expansion of our customer base.
More specifically, we will pursue the following
strategies.
First, we will strengthen the capabilities of individual stores to respond to customer needs and in theprocess expand our customer base of women, the middle-aged and elderly. We will achieve this byoffering more fresh products, daily delivered foods, and locally targeted products, that is, merchandise
utilizing ingredients that suit the preferences of local customers, and products in tune with local needs.
These products will be developed based on an analysis of “store charts.”
Second, in addition to utilizing “store charts,” we aim to create merchandise assortments that are evenmore closely matched to local needs by leveraging our expertise, accumulated in our operations of the
NATURAL LAWSON and LAWSON STORE100 formats, for our regular LAWSON stores.
Third, as a means of enhancing recognition among women, the middle-aged and elderly customers, wewill convert regular LAWSON stores into the LAWSON PLUS format.
Fourth, we aim to increase our card
users by increasing the membership base

Improving Capital Efficiencyof LAWSON PASS, our point card with acredit function, and the point card MY
LAWSON POINT as well as strengthening
our sales promotion to make more effec-

Open highly
profitable storesand improveearnings at
existing stores
to reduce store
closures

High ROI

Retire treasury
shares andincrease
dividends

Proactive
return of
profits toshareholders

tive use of these cards. These measures
will realize customer relationship management* and ultimately help us to better
match merchandise assortments to theindividual characteristics of each location.
Finally, to reinforce the use of individual“store charts,” we will actively develop
human resources and recruit employees
to strengthen our management support
capabilities for franchise owners.

08 LAWSON, INC. ANNUAL REPORT 2007

M&As
Improveexisting
store earnings

Cash
Alliances

Thus, by promoting measures that emphasize the reinforcement of existing stores rather than new
store openings, I intend to break the negative spiral of opening and closing stores in large numbers to
improve capital efficiency so as to fulfill the expectations of shareholders. Our numerical goal in thiscontext is to create a company that can deliver ROE of 15% in the future.
*Customer Relationship Management: Providing services tailored to individual needs by compiling and analyzing data concerning acustomer’s purchasing behavior, gender, age, and other characteristics.

Conclusion
I believe it is vital as a business executive to havea global management philosophy that emphasizes capital efficiency. It is equally important topractice a Japanese-style management philoso-

Annual Cash Dividends and Payout Ratio(¥) ■ Cash dividends
Payout ratio

(%)

100

50.0

75

37.5

50

25.0

25

12.5

phy that strives for coexistence with society andthat focuses on employee satisfaction. The
entrepreneur Eiichi Shibusawa, who is known as
the “father of Japanese capitalism,” summed thisup effectively in his book “Confucius Analectsand Abacus.” As he said, I think that management which skillfully balances a Japanese-style0

corporate culture with global economic rational-

00

01

02

03

04

05

06

07

0

Consolidated fiscal years ended February

ism is the source of stable, long-term growth.
As CEO of LAWSON, I will strive to create a balance between the achievement of short-term earnings targets and the realization of sustained medium- to long-term growth. In regards to investments
in businesses, I will focus on ROE and by implementing management that is committed to generating
return exceeding the cost of capital, I aim to achieve earnings over a three- to five-year time frame.
On the other hand, I also intend to realize long-term growth through the promotion of our corebusinesses while constantly remaining aware of the need for coexistence with society.
In addition, we will use our cash reserves to make upfront investments with a medium- to long-term
focus that will enable us to deliver high ROE in the future. At the same time, we will actively return
profits to shareholders through the retirement of treasury shares and higher dividends, balancing thiswith the need to invest in our future.
With a core focus on increasing shareholder value, we will emphasize frank communication withthe securities market and make efforts to deepen understanding regarding our management visionand strategies, as well as their current status and issues. I look forward to your continued support inthese endeavors.

August 2007

Takeshi Niinami
President and Chief Executive Officer

LAWSON, INC. ANNUAL REPORT 200709

LAWSON’s Store Format Strategy

Format Strategy

LAWSON is striving to provide merchandiseand services that customers require in individual locations by developing store formats

As of February 28, 2007, LAWSON had
three store formats—regular LAWSON,
NATURAL LAWSON, and LAWSONSTORE100. In addition, as a remodeled
format of regular LAWSON stores, wethat match merchandise and layout toadded LAWSON PLUS from the fiscal

customers’ ages and needs and utilize existingyear ended February 28, 2007. In thisinfrastructure.

LAWSON’s store formats.

section, we provide an overview of
The basis of LAWSON’s strategy is to open the optimal format

Middle-aged and Elderly

for the location—that is, to match

LAWSON PLUS

the needs of local customers. We
analyze customer needs based on

LAWSON STORE100

factors such as age and gendercomposition, regional characteris-

NATURAL LAWSON

tics, and differences in living
environments in each area andthen open stores using the format

Regular
LAWSON

best suited to the location.
LAWSON bases its decision onwhich format to use on individual

Men

Women

“store charts” (analysis of individual store information). In otherwords, when we open a newstore, we decide which format issuitable, and if existing-store
earnings decline, we change theformat (e.g., from a regular
LAWSON store to the NATURALLAWSON format). Alternatively,
we may remodel it into theYounger Customers

LAWSON PLUS format, or try to
improve the results of an existing
store without changing the

10 LAWSON, INC. ANNUAL REPORT 2007

Regular
LAWSONStoresformat by enhancing quality (Q), service

Regular LAWSON Stores(S), and cleanliness (C) and reinforcing

What Is themerchandise assortments suited to local

Regular LAWSON Format?

night), this format has grown for about
30 years since its conception.
The strength of this format lies in thecustomers. When we previously only had

Since our establishment in 1975, theexistence of a dense store network in thea single store format, the regular

regular LAWSON format has been

vicinity of areas where people live, work or

LAWSON, we either had to close or

positioned as our mainstay store format.

are otherwise active. The convenience inrelocate stores when store earnings wereAs a rule, the store concept color,

terms of time and distance in a small

weak. However, our multiple format

including the signboard and the logo,commercial area have become thestrategy enables us to continue provid-

has a blue tone. Operating hours are 24

strength of the convenience store format.

ing products and services to customers

hours a day, in principle, apart from

Furthermore, this format is differentiatedin pre-existing locations.

locations where there are time restric-

from other retail formats by the conve-

tions such as some office buildings.

nience of merchandise assortments

Specifically, while promoting thecreation and maintenance of individual

The main customer target is men in

carefully selected from a wide range of“store charts,” franchise owners andtheir 20s and 30s. By responding to

product categories and types so as to meet

LAWSON supervisors (management

needs generated by changes in lifestyle

the varying needs of customers, ranging

guidance staff) work together to analyze

patterns of mainly young men (increas-from daily necessities to emergency-use

the customer base and regional charac-

ingly working and going out late at

items, even in a limited retail space.

teristics of store locations. In addition, by

Through TV commercials and otherusing the information obtained frommedia, LAWSON has created a familiar“store charts,” they decide whether

brand image in the form of “the ‘hot’

merchandise assortments will be able tostation in the neighborhood.” Further-fulfill local customer needs.

more, LAWSON’s network is broad;In terms of the profitability of each

LAWSON became the first national chain

format, we believe that the format thatin the CVS industry to have stores in all

best matches the needs of local custom-

47 prefectures in Japan in 1997. Otherers as well as the surrounding commer-

strengths include innovative measures,cial area of each unique store will be theevident in the Onigiriya series of rice

most profitable one for the franchiseballs brand and the Gohantei boxedowner and LAWSON.

lunch brand.

LAWSON’s new format strategy thus
involves opening formats that suit theindividual characteristics of each location, providing maximum convenience tocustomers in that particular location.

LAWSON, INC.

ANNUAL REPORT 2007

11

Happy Child-Raising Project
Miffy-themed campaign gifts

Challenges Faced by the1] We will develop merchandise assort-high earnings are projected due toRegular LAWSON Format

ments matched to the individual

captive markets. These locations

The regular LAWSON format has driven

characteristics of each location by

include hospitals, stations, and post

LAWSON’s growth for three decades.

strengthening franchise owners’ store

offices.

But existing store sales have continued

management capabilities andto struggle due to such factors asenhancing utilization of “store charts.”

charts” and promote improvements

5] To encourage the use of “store

2] As regards head office management

in merchandise assortments matchedindustry and changing lifestyles.

policy, we will delegate authority toto local areas, we will reinforce the

LAWSON recognizes three challenges

LAWSON’s seven regional headquar-development of store supervisors andfacing this format.

ters (Hokkaido, Tohoku, Kanto, Chubu,

1] The market is saturated with conven-

Kinki, Chugoku and Shikoku, and

6] We will promote the use of LAWSON

tional CVS due to major chains

Kyushu). Spearheaded by these

PASS and MY LAWSON POINT.

opening large numbers of stores.

headquarters, we will endeavor to

Aiming to have six million members

provide a detailed response to regional

by February 29, 2008, we will continue

among young men, but less appeal-needs in terms of merchandise,

to work to acquire new cardholders

ing to women, the middle-aged andmanagement and product develop-

while creating loyal existingelderly.

ment, and to improve the ability ofcardholders through sales promotions,competition with like stores in the CVS

2] This format has a strong image

other personnel.

store supervisors to offer management

including the provision of attractive

particular are suffering from competi-

guidance to franchise owners.

points programs and privileges.

tion from supermarkets, drug stores

3] We will introduce and reinforce

Moreover, by promoting customer

3] Roadside convenience stores in

products that match local preferences

relationship management (CRM)

and needs, health-oriented products,

based on card data, we will strengthen

Future Measures for theand perishable and daily delivered

merchandise assortments matched toRegular LAWSON Format

foods for housewives, middle-aged

regions and individual stores.

and other business models.

To overcome these issues, we are giving
top priority to increasing the number ofand elderly customers.
4] We will strengthen

customers to improve the trend inalliances withexisting store sales. We will do this bycorporations as we

As of February 28, 2007

maintaining the support of our corecontinue to open

Launch of business format

April 1975
Men in their 20s and 30s

customers, while working to attract otherstores in specialCore customer target

customers to our stores. Six specificlocations where

measures will be implemented.

Female customer ratio(estimated)

Approx. 30%

Store-opening area

Nationwide

Number of items handled

Approx. 2,800

Private brand product ratio Approx. 30%
Sales area per store

Approx. 35 tsubo**A Japanese measurement equivalent to 3.306 square
meters per tsubo

Total number of stores in Japan
Franchise ratio

12 LAWSON, INC. ANNUAL REPORT 2007

8,384

96.4%

NATURALLAWSONStoresNATURAL LAWSON Stores
What Is the
NATURAL LAWSON Format?

Future Measures for the
NATURAL LAWSON Format
We have adopted the stance that

Aiming to acquire more women custom-

NATURAL LAWSON should be devel-

ers, we opened the first NATURAL

oped as an entirely new format. To

LAWSON store in July 2001. These

achieve this, we have promoted innova-

value-added-type outlets are based ontions in product development and store

the key words “beauty,” “health,” andconcept, without being constrained by“convenience.” NATURAL LAWSON

past successes. And these stores havestores broke the conventional conve-

been operated by a company that is anience store image. Our intention was towholly owned LAWSON subsidiary. Fivecreate stores that encourage more

years after the format was launched andwomen to enjoy shopping at our stores.

100 stores later, we believe that the

For example, the concept color of stores

NATURAL LAWSON brand has become

and the logo is burgundy red while store

firmly established in terms of distinctive

interiors and merchandise assortments

merchandise and the store concept.

are also intentionally different from

Going forward, we are determined toregular LAWSON stores. There are threecapture more synergies by making

specific points of differentiation.

better use of the LAWSON Group’s

1] A stronger range of health-oriented

infrastructure.

products, including boxed lunches

naturalBeat stores provide products
such as bread, muffins, and soups thatare healthy. They do not use additives
such as synthetic seasonings, preservatives, and colorings or geneticallymodified ingredients. As of March 31,
2007, naturalBeat had 10 stores operating in the Tokyo metropolitan area. The
company was established in 2004.

NATURAL LAWSON image—that is, they

We intend to strengthen the manage-appeal to health-conscious customers

featuring ingredients such as black

ment capabilities of existing storesand the preferences of women. Throughrice and brown rice.

through collaboration with LAWSON

these measures, we will raise the profit-

regional headquarters. And by further

ability of existing stores and promote thelineup of fresh bread baked on thestrengthening cooperation withfranchising of directly operated stores.

premises.

LAWSON’s head2] The majority of stores provide a3] The stores actively promote NATU-

office development
As of February 28, 2007

RAL LAWSON brands and alliances

division, we will openwith other business formats that havestores with a strong

a close affinity. Examples include

focus on store earn-

naturalBeat (sales of healthy sand-ings. Moreover, wewiches), Vinos Yamazaki (specialty

will step up thewine stores), Ef Agri Systems (sale ofdevelopment of

Female customer ratio

fruit and vegetables), and Motoya

products that rigor-(estimated)

Express (mobile coffee shops).

ously comply with theStore-opening area

Launch of business format
Core customer target

July 2001
Working womenin their 20s and 30s
and health-conscious
customers

Approx. 45%
Office and residential
districts

Number of items handled

Approx. 2,500

Ratio of common productswith regular LAWSONApprox. 60%

Total number of stores

100

Franchise ratio

5%

LAWSON, INC.

ANNUAL REPORT 2007

13

LAWSON
STORE100
StoresLAWSON STORE100 Storeson simplicity, with a single price of ¥105

What Is the(including consumption tax) for most

LAWSON STORE100 Format?

products—this is particularly reassuring

We developed the LAWSON STORE100

for elderly people. We have also devel-

format to build up expertise within theoped a private brand called Value Line.

LAWSON Group in response to growing

The number of items in this series has

needs for fresh foods in small commer-

grown and some are now also being

cial areas stemming from changes in thesold at regular LAWSON stores.

structure of families in recent years,
including the trend toward the nuclear

Future Measures for thefamily and the aging of society. The first

LAWSON STORE100 Format

LAWSON STORE100 was opened in

In the two years since the launch of thisMay 2005. This format weds the CVS

format in 2005, a total of 80 LAWSON

and mini-supermarket formats, based on

STORE100 stores have been opened. By

the theme of “supporting savings ofbuilding purchasing channels for perish-

living expenses, simplicity, and conve-

able foods and accumulating expertisea view to integrate both businesses innience in everyday life,” and features

regarding methods of handling suchthe future as well. Actual customer data

perishable foods. Whereas generalmerchandise within the Group, we estab-shows that SHOP99 has stronger sup-merchandizing stores (GMS) and foodlished a nationwide distribution channel

port from housewives, the middle-aged

supermarkets are used by large families

for perishable foods in February 2007.

and elderly than general CVS chains, andto buy groceries in bulk on the weekend,

The same month, LAWSON formed anits strengths lie in expertise in the

LAWSON STORE100 stores are used byequity-based business alliance with

development and sale of perishable

housewives busy with child-rearing andNinety-nine Plus Inc., a pioneer in fresh

foods and daily delivered foods.

elderly people who tend to buy only

food convenience stores that operates

what they need each day. Consequently,

the SHOP99 chain. As a result, both

LAWSON STORE100’s merchandising iscompanies are sharing

distinguished by sales of perishable

their expertise in the

foods and daily delivered foods in small

fresh food CVS

quantities and conveniently sizedbusiness, and we will

packages. The pricing strategy is based

initiate measures with

As of February 28, 2007
Launch of business format

May 2005

Core customer target

Housewives, themiddle-aged and elderly

Female customer ratio(estimated)

Approx. 40%

Store-opening area

Residential districts
and near stations

Number of items handled

Approx. 4,500

Number of Value Line SKUs 320
Ratio of common products

14 LAWSON, INC. ANNUAL REPORT 2007

with regular LAWSONApprox. 10%

Total number of stores

80

Franchise ratio0%LAWSON
PLUS
StoresLAWSON PLUS Stores
What Is theStrengths of the
LAWSON PLUS Format

LAWSON PLUS Format?

We aim to differentiate the LAWSONThe LAWSON PLUS format is based on

PLUS format from conventional CVS by

the remodeling of existing LAWSON

making use of the expertise we havestores, mainly in terms of signage,

built up through NATURAL LAWSON ininterior décor, fixtures and fittings, andproducts such as freshly baked breadmerchandise assortments. This format isand healthy foods and also throughdesigned to attract business from new

LAWSON STORE100 in perishable andcustomer bases, namely, the middle-

daily delivered foods.

aged, elderly and women, while main-

The central strategies of LAWSON

taining the core customer base of men

PLUS are to develop products that are

aged in their 20s and 30s.

appealing to new customers, including

Challenges for Fiscal 2007

the middle-aged and elderly and

We are aiming for a 15% to 20% improve-

remodeling existing stores. Based on an

women, based on an analysis of “store

ment in sales as a result of LAWSON PLUS

analysis of “store charts,” we selectcharts,” and to conduct merchandisingconversions. In fiscal 2007, our target is tostores with a high percentage of women,that enables an assortment of products

remodel 700 to 800 stores. At present, we

middle-aged and elderly customers insuited to the preferences of customers in

believe that about 30% of all stores can

the surrounding commercial area. Thesethe area concerned.

improve sales by being converted to the

There are certain conditions forstores must also have a “Mystery Shopper”

To enhance the effectiveness of these

LAWSON PLUS format. Fiscal 2007 will berank of B+ or higher. LAWSON PLUS

strategies, we are changing the signboard,the first year of full-fledged LAWSON

stores are increasing their handling ofinterior décor, fixtures and fittings, and

PLUS remodeling, and we therefore

perishable and daily delivered foods,

other items from the conventional

position it as an important year that holds

frozen foods, and delicatessen items, in

LAWSON format. In particular, the color of

the key to the future success of theaddition to products handled by regular

the signboard has been changed from the

LAWSON PLUS store format.

LAWSON stores.

conventional “blue” to a

The LAWSON PLUS format was estab-color with a warm tone

lished in fiscal 2006 based on the resultsthat is called “sunriseof several trials, including that of senior-color*.” This color

friendly LAWSON stores and introducing

symbolizes the new rise

perishable foods at stores in urbanof our traditional blue

areas. The number of LAWSON PLUS

regular LAWSON store

Core customer

Centered on conventional

stores in a broad sense, including all of

through its evolution

targetmainstay customer base (men inthese, was 77 as of February 28, 2007.

into a store that is moretheir 20s and 30s) and extend-

appreciated among not

ing to all customers in general

only the traditionalin the area concerned, including

customer groups,
namely men in their 20s*The sunrise color symbolizes a new start, as if thesun were rising above the horizon (the LAWSON
signboard in this case).

Launch of business Trial started in 2005, full-scale
formatdevelopment from fiscal 2007
(first store with sunrise color
sign opened in January 2007)

housewives, the middle-aged
and elderly
Store-opening area Large cities as well as urban andand 30s, but also theresidential districts in regional

new customer groups

areas

mainly the middle-aged,
elderly and women.

LAWSON, INC.

ANNUAL REPORT 200715

Corporate Governance

Basic Policy on Corporate GovernanceIn order to be recognized as a company that has meaning for each of our stakeholders, namely, customers,
franchise owners, store crew (part-time workers), business partners, employees, shareholders and society, we
engage in business activities to maximize our corporate value. For this, not to mention promoting directors’
and employees’ compliance with laws, regulations, the Articles of Incorporation and the like, we believe that
it is essential to strengthen corporate governance by enhancing the soundness and transparency of ourmanagement processes, through acting with consideration for others, based on our “Corporate Philosophy”
and “the Lawson Code of Ethics”, as well as the active disclosure of information.
A diagram of our operational organization, management supervision systems and internal control system
are presented on page 17.

Corporate Governance System (As of May 25, 2007)
ITEM

DESCRIPTION

Corporate organization:

Company with a Board of Corporate Auditors

Chairman of the Board of Directors:

Outside director

Number of Directors:

7 (including 3 Outside Directors)

Number of Board of Directors meetings
in FY06:

15 (including 3 extraordinary meetings)

Outside Directors’ attendance rate
at Board of Directors’ meetings in FY06:

78% (including extraordinary meetings)

Number of Corporate Auditors:

4 (including 3 Outside Corporate Auditors)

Outside Corporate Auditors’ attendance
rate at Board of Directors’ meetings
in FY06:

93% (including extraordinary meetings)

Major committee meetings attended
by Corporate Auditors:

Board of Directors meetings, Executive Committee meetings,
Compliance and Risk Management Committee meetings,
Asset Management Committee meetings and Enforcement
Evaluation Committee meetings

Number of Board of Corporate Auditors
meetings in FY06:

14 (including 2 extraordinary meetings)

Attendance rate at Board of Corporate
Auditors meetings in FY06:

97% (including extraordinary meetings)

Average age of Directors andCorporate Auditors:

54

Independent Auditor:

Deloitte Touche Tohmatsu

Internal Audit Division:

Internal Audit Office

Overview of the internal control system:■ We focus on the following five areas, in accordance with the Fiscal
2007 Basic Policy on Development and Operation of Internal Control
System, as revised in February 2007:
1 ] Corporate governance supervised by the Board of Directors andBoard of Corporate Auditors, including outside members2] Development of compliance and risk management-related
regulations, and education and training in these issues
3] Internal audits by the Internal Audit Office4] Establishment of internal control systems for the Group
5] Enhancing the effectiveness of audits by Corporate Auditors
through a system of reporting to Corporate Auditors andother means

Compliance system:■ Appointment of an executive responsible for compliance and risk
management (Chief Compliance Officer (CCO))■ Appointment of compliance officers at all headquarters departments and seven regional headquarters■ Monthly meeting of Compliance and Risk Management Committee,
chaired by the CCO, to identify compliance issues and assess risk
exposure and to deliberate on ways to prevent illegal or improper actions

Support system provided for Outside
Directors and Corporate Auditors:■ As a rule, the secretariat of the Board of Directors distributes theagenda one week in advance of Board meetings, and is also
responsible for other measures, such as sharing information on risk
and other important matters.

16 LAWSON, INC. ANNUAL REPORT 2007

Compensation for directors:■ The Compensation Committee, which is made up entirely of outside
directors and outside corporate auditors, determines compensation
for directors and presents its recommendations to the Board of
Directors for final approval.
■ Approximately 30% of annual compensation is linked to businessresults.
■ Compensation paid to all directors is reported in the Annual Report
filed pursuant to the Securities and Exchange Law of Japan andBusiness Report.
■ Other compensation includes stock-compensation-type stock
options that can be exercised (exercise price: ¥1) after a director
retires, and conventional stock options with an exercise price set, inprinciple, at the market price of the Company’s stock on the day ofallocation.

Special factors with an important bearing
on corporate governance:■ Mitsubishi Corporation holds 31.0% of the Company’s voting rights,
including indirectly held rights. LAWSON is treated as an equitymethod affiliate by Mitsubishi Corporation.
■ Our consolidated subsidiary LAWSON TICKET INC. is listed on the
JASDAQ market. LAWSON respects its independence as a publicly
listed company.

Disclosure policy:■ Basic Principles for Information Disclosure are presented on our IR site:
http://www.lawson.co.jp/company/e/corporate/disclose.html■ The Company discloses material information, including presentationmaterials used in meetings to announce business results, in both
Japanese and English, on the IR site, without delay.

Corporate Governance System (As of May 25, 2007)

General Meeting of Shareholders

Consultation

Compensation
Committee

ProposalAppointment / dismissal

Appointment / dismissal

Board of Directors
Outside directors 3
In-house directors 4
Total
7

Board of Corporate
Auditors
Audit/
Outside auditors 3 dismissal
In-house auditors 1
Total
4

Appointment /dismissal /supervision

Audit

Proposal /reportAudit

Appointment / dismissal

Certified Public
Accountant(independent
auditor)Account auditing

Operational Organization
CEO

Director in charge of audit
Executive Committee
Meeting

Internal Audit Office

CCO
Compliance and Risk
Management Committee

Internal audit and guidance for
improvement

Executive Officers
Serving concurrently as
directors
3
Executive officers
16
Total
19
Headquarters

Comments

Legal Counsel

Proposal and promotion ofcompliance and risk management
measures

Regional headquarters
Investment

Subsidiaries and affiliates

LAWSON, INC. ANNUAL REPORT 200717

Directors and Corporate Auditors
TAKESHI NIINAMI
President and CEO

Takeshi Niinami became President of LAWSON in May 2002,
subsequent to Mitsubishi Corporation’s February 2000 acquisition of an equity stake in the Company. Before coming to
LAWSON, Mr. Niinami worked in Mitsubishi Corporation’s
restaurant business and has been a representative director of
SODEX CORPORATION (currently LEOC Japan Co., Ltd.), a
company specializing in the foodservice business, and an
outside director of Kentucky Fried Chicken Japan Ltd.

YOSHIYUKI YAHAGIMember of the Board,
Executive Vice President,
Chief Financial Officer (CFO)

After a long stint at Mitsubishi Corporation, where he worked
mainly in business administration, investments and loans management and risk management, Mr. Yahagi was appointed teamleader of the No. 1 Investment and Loans Team, Controller Office.
He also served as Asst. Manager, Internal Audit Dept. He wasappointed a Member of the Board, Executive Vice President andChief Financial Officer (CFO), as well as put in charge of the
Corporate Planning Office and Human Resources Office at
LAWSON in May 2007. As CFO, he is responsible for LAWSON’s
capital and financial policy. He is also in charge of management
planning, business administration and human resources.

TORU MORIYAMA
Member of the Board andSenior Executive Vice
President

Toru Moriyama was appointed General Manager, Merchandizing & Logistics Division, Senior Executive Vice President andMember of the Board in May 2006. In this capacity he is theexecutive in charge of merchandising and logistics, core
operations of the Company. Prior to joining LAWSON, Mr.
Moriyama had a long career at Mitsubishi Corporation, mainlyin the marine products business. His posts included those ofManager, Tuna Unit, Foods (Products) Division and Manager,
Chubu Block, Living Essentials.

MANABU ASANOMember of the Board, SeniorVice President, Chief
Compliance Officer (CCO)

After joining LAWSON, he worked as General Manager, Store
Development Department; General Manager, Chubu LAWSON
Branch; and as assistant Chief Risk Management Officer (CRO).
He was subsequently appointed a Member of the Board,
Senior Vice President and Chief Compliance Officer (CCO) in
May 2006, and is also in charge of General Affairs and Internal
Audit. As the executive responsible for compliance and risk
management and for audit operations, Mr. Asano supervises
the Company’s internal control systems.

18 LAWSON, INC. ANNUAL REPORT 2007

1.

2.

3.
1. HIROSHI TASAKA
Member of the Board

2. REIKO OKUTANIMember of the Board

3. TAKEHIKO KAKIUCHI
Member of the BoardOUTSIDE DIRECTORSLAWSON’s outside directors include experts from academia and business managers.
They advise the Company and provide opinions on a range of issues, from overallbusiness strategy development, M&As and capital strategy, including the distribution of
profit to shareholders, as well as other important management issues. Their advice,provided from an independent, external perspective, is derived from their experience,
insights and knowledge.
The three current outside directors are Professor Hiroshi Tasaka of the Graduate
School of Tama University and Representative of Sophia Bank, a think-tank; Reiko
Okutani, President, The R Co., Ltd.; and Takehiko Kakiuchi, General Manager, Living
Essentials Group CEO Office, Mitsubishi Corporation.

4.

5.

6.

4. MUNEHIKO NAKANOStanding Corporate Auditor

5. KENJI YAMAKAWA
Standing Corporate Auditor

6. TETSUO OZAWA
Corporate Auditor

7. HIROSHI KUWATA
Corporate Auditor

7.

CORPORATE AUDITORS
Three of the four corporate auditors are outside auditors. The corporate auditors
conduct audits with an emphasis on the Internal Control System Basic Policy, in order toassure that LAWSON lives up to the trust society has placed in us, and to assure soundand steady growth.
Our outside corporate auditors are Munehiko Nakano (standing corporate auditor), a
former Mitsubishi Corporation executive; Tetsuo Ozawa, a lawyer; and Hiroshi Kuwata,
General Manager, Risk Management Dept., Mitsubishi Corporation.

(As of May 25, 2007)

LAWSON, INC. ANNUAL REPORT 2007

19

LAWSON’s Corporate Philosophy and Code of Conduct
LAWSON assures that all corporate activities conform to its corporate philosophy, and that the Company’s
management and employees work together as a team for the realization of the goals defined in it. In seeking to live up to our corporate philosophy, we ensure that all of our actions are grounded in our sharedvalues, no matter what changes may take place in the operating environment. Our code of conduct requires
employees to accept responsibility for reflecting our values and standards through their actions.

CORPORATE PHILOSOPHY
Happiness and Harmony in Our Community

CODE OF CONDUCTActing with utmost consideration for others
Challenging with innovative ideas and actions
Having a strong will to attain the objectives

We promise to make LAWSON a place where:

FRANCHISEOWNERScan achieveself-fulfillment
and enjoy theirachievements

COMMUNITIESSTORE CREW

feel safer and moresecurecan grow and develop
as individuals

CUSTOMERS
feel they can drop in
anytimeSHAREHOLDERS
BUSINESSPARTNERS

can contributeto society indirectly
and achieve theirfinancial goals

can turn their dreams
into reality

EMPLOYEES
can have pridein their work and besocially aware

LAWSON believes that honoring these commitments
to its stakeholders will translate into higher corporate value.

20 LAWSON, INC. ANNUAL REPORT 2007

Corporate Social Responsibility

LAWSON firmly believes that proactively addressing and resolving issues
from the standpoint of social responsibility to live up to our corporate
philosophy of realizing “Happiness and Harmony in Our Community,” willraise our corporate value and, accordingly, shareholder value. This willbring benefits to all stakeholders and contribute to protection of the
Earth’s environment.

Major Initiatives in FY2006
Greenification Activities
LAWSON Green Fund activities were instigated in 1992. Donations to the LAWSON Green Fund, including
contributions from LAWSON headquarters, totaled ¥2.29 billion as of the end of February 2007. Funds
donated at stores throughout Japan are provided to the National Land Afforestation Promotion Organization, which promotes tree planting, thinning, undergrowth clearance and other forestry activities. In fiscal
2006, franchise owners, store managers, crews and LAWSON headquarter staff participated in over 80
events. Our afforestation activities (planting and arboriculture) in 1,528 locations inJapan, covering 4,510 hectares, have benefited more than 11.27 million trees*.
*The figures for the area covered and number of trees are estimates based on the amountof donations received by the Green Fund and the history of fund activities.

Green Fund Donations■ Green Fund(Millions of Yen)

■ Disaster Relief Fund

500

400

300

200

100

0
1992

1993

1994

1995

1996

1997

1998

1999

2000 2001

2002 2003 2004 2005 2006

FY

LAWSON, INC. ANNUAL REPORT 200721

Food Waste Recycling Measures (Using Waste Oil, Making Animal Feed and Fertilizer)
LAWSON is working to improve the precision of its merchandise ordering system in order to minimize foodwaste, in addition to implementing the following three initiatives.
1. LAWSON started recycling waste oil (edible oil) in January 2006, and we have now built a national waste
oil collection system. As of the end of March 2007, 86% of LAWSON stores were recycling waste oil.
2. 900 stores in metropolitan Tokyo, Nagoya and elsewhere in Japan recycle food waste by converting it
into animal feed and fertilizer.
3. Organic waste is dewatered and dried using a processor to reduce volumes at some stores. In fiscal
2006, approximately 60 stores were using organic waste processors.
The combined effect of these three methods helped LAWSON to achieve a food waste recycling level of
25% on an all-store basis as of March 31, 2007.
Japan’s Food Recycling Law requires that food product recycling levels must reach at least 20% by fiscal
2006. In the year to March 2007, LAWSON achieved an average recycling level of 36% at Company-operated
stores. The recycling level for all stores, including franchised stores, was 18%.

Customer Input
In 2005, as part of the program to commemorate our 30th anniversary, we invited customers to share theirideas on the theme of “The Convenience Store of the Future” and selected the top prize on November 12of that year. This award was handed to an entry titled “Convenience stores that support raising kids.” In
March 2006, we set up an in-house project team and in July 2007, via our web site, we started soliciting
people’s suggestions on how convenience stores could provide support for families raising children.
Based on the input received, in December 2006 we opened
the first Happy LAWSON store on a 6-month trial basis in
Nihonbashi, Tokyo. The merchandise, service information andknow-how gained through the operation of this store will be
used to develop stores that meet the requirements of families
raising children. On two occasions during fiscal 2006, we ran
the “Happy Child-Rearing Project.” LAWSON donated one yenfor every Miffy-themed picture plate customers received. The
donations were used to provide picture books and daily-use
articles to ZENBOKYOU, a social welfare organization that01

supports single mothers and their children.

01 Fertilizer made from food waste
02 Happy LAWSON, Nihonbashi store**The Nihonbashi store closed in June 2007 and a newstore (Yamashita Koen Store, Yokohama) opened in July.

22 LAWSON, INC. ANNUAL REPORT 200702

Financial Section

page

24 Overview of the CVS Sector
and Selected Financial Data

page

26 Consolidated Eight-Year Summary

page

28 Management’s Discussion and Analysis

page

44 Consolidated Balance Sheetspage

46 Consolidated Statements of Income

page

47 Consolidated Statementsof Changes in Equity

page

48 Consolidated Statementsof Cash Flows

page49 Notes to Consolidated
Financial Statements

page

65 Independent Auditors’ Report
LAWSON, INC. ANNUAL REPORT 200723

Overview of the CVS Sector and Selected
Financial Data
CVS Share of the Total Retail Market(Billions of Yen, %)150,000
4.5

5.0

4.8

5.4

5.5

2003

2004

5.3

5.4

5.5

100,000

50,0000Years ended December 31■ Total retail industry annual sales■ CVS sector annual sales
CVS share (%)

1999

2000

2001

2002

¥141,528¥139,435¥136,808¥132,280

6,383

6,680

6,846

6,980

7,096

4.5%

4.8%

5.0%

5.3%

5.4%

2005

2006

¥135,055¥135,257

7,289

7,360

7,399

5.5%

5.4%

5.5%

¥132,446 ¥133,712

Share of CVS Market Held by Top Four Chains (Sales)(Billions of Yen, %) (Net sales of all stores)

7,500

73.6

74.5

75.4

76.4

77.0

77.8
78.7

79.2

5,000

2,500

0

February 28 and 29

2000

2001

2002

2003

2004

2005

2006

2007

■ LAWSON¥1,221¥1,275¥1,286¥1,294¥1,288¥1,329¥1,362¥1,387■ Seven-Eleven Japan

1,964

2,047

2,114

2,213

2,343

2,441

2,499

2,534

■ FamilyMart

783

843

899

932

954

998

1,032

1,069

■ Circle K

391

447

467

485

480

503

505

497

■ Sunkus

342

366

393

406

403

403

394

376

Total

4,701

4,978

5,159

5,330

5,468

5,674

5,792

5,863

(Share) (%)
CVS industry

73.6%

74.5%

75.4%

76.4%

77.0%

77.8%

78.7%

79.2%

¥6,383¥6,680¥6,846¥6,980¥7,096¥7,289¥7,360¥7,399CVS industry figures are for previous calendar years ended December 31.

YoY Rate on Existing Store Sales, Average Number of Customers andAverage Purchase Value per Customer in Existing Stores
(%)

105

100

95

YoY rate on existing store sales

2000

2001

2002

2003

2004

2005

2006

2007

99.6

98.3

98.4

98.1

97.5

99.7

97.5

98.2

99.0

100.1

99.1

98.2

100.2

99.7

98.3

100.0

Average number of customers and average purchase value per customer in existing stores
Number of customers
–
–
–
98.2
Average purchase value per customer–

24 LAWSON, INC. ANNUAL REPORT 2007

–

–

99.9

Operating Income, Operating Income Ratio and Net Income(Millions of Yen, %)50,00040,000
3.3

3.2

3.2

30,000

2.8

2.6

3.2

3.2

2.9

20,00010,0000■ Operating Income
Operating Income Ratio■ Net Income

2000

2001

2002

2003

2004

2005

2006

2007

¥40,185¥41,279¥36,363¥34,107¥38,087¥42,941¥43,867¥44,513

3.3%

3.2%

2.8%

2.6%

2.9%

3.2%

3.2%

3.2%

¥15,011¥16,368¥16,123¥ 8,861¥18,571¥20,435¥22,025¥20,983

13.0

13.1

Net Income per Share and ROE(Yen, %)

250
16.8
200
12.1

11.9
150

11.3

9.8

100

5.9

50

0

■ Net Income per Share
ROE

2000

2001

2002

2003

2004

2005

2006

¥143

¥148

¥146

¥82

¥176

¥198

¥216

2007

¥202

16.8%

11.9%

9.8%

5.9%

12.1%

13.0%

13.1%

11.3%

Cash Dividends per Share and Payout Ratio(Yen, %)

120
49.8

49.6
41.8

90
35.3
28.2
60

23.3

23.7
11.9

30

0

■ Cash Dividends per Share
Payout Ratio

2000

2001

2002

2003

2004

2005

2006

¥17

¥35

¥41

¥41

¥41

¥70

¥90

2007

¥100

11.9%

23.7%

28.2%

49.8%

23.3%

35.3%

41.8%

49.6%

LAWSON, INC. ANNUAL REPORT 200725

Consolidated Eight-Year Summary
LAWSON, INC. and Consolidated Subsidiaries
Years Ended February 28 and 29

For the year:
Operating revenues
Franchise commission from franchised stores . . . . . . . . . . .
Net sales from Company-operated stores . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating revenues . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from operating activities . . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities . . . . . . . . . . . . . . . . . . . .
Capital expenditure(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization(3) . . . . . . . . . . . . . . . . . . . . . . .
At year-end:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ratio of interest-bearing debt . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total number of stores(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of employees (full-time) . . . . . . . . . . . . . . . . . . . . . .

Per share data:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payout ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial data:
ROE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ROA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net sales of all stores:
Net sales by store category
Franchised stores(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Company-operated stores . . . . . . . . . . . . . . . . . . . . . . . .
Net sales by product category(5)Processed foods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fast foods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Daily delivered foods . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-food products . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net sales of all stores . . . . . . . . . . . . . . . . . . . . . . . . . .

¥

2007

2006

2005

¥174,325
75,151
33,577
283,053
44,513
20,98347,596(31,754)(736)
49,822
21,352¥170,785
66,027
31,246
268,058
43,86722,02546,933(55,282)(7,795)54,417
20,896¥162,963
63,802
27,630254,395
42,941
20,43547,329(33,297)(13,836)
46,873
19,641¥398,258
199,49349.0%––
75,5478,564
3,614¥375,107
175,18446.7%––
60,4418,366
3,585¥356,310
160,282
45.0%––
76,585
8,077
3,391

202
100
49.6%

¥

216
90
41.8%

¥

198
70
35.3%

11.3%
5.4%

13.1%
6.0%

13.0%
5.7%

¥1,311,479
75,151¥1,295,704
66,027¥1,265,275
63,802¥ 705,155
324,993
155,575
200,907¥1,386,630¥ 682,006
312,289
150,917
216,519¥1,361,731¥ 665,687
297,369
148,134
217,887¥1,329,077

Notes: 1. The U.S. dollar amounts represent translations of Japanese yen at the approximate exchange rate at February 28, 2007, of ¥118.44=$1.
2. Effective from annual report 2006, the composition of capital expenditure has changed to also include leases, investments and advances, andconstruction assistance guarantees. Please refer to page 39 for details.
3. Including depreciation and amortization of intangible fixed assets.
4. Shanghai stores are not included because SHANGHAI HUALIAN LAWSON CO., LTD. was excluded from the scope of consolidation from April 2005.
5. These figures, as reported by franchised stores, are unaudited.

26 LAWSON, INC. ANNUAL REPORT 2007

¥Millions of Yen

Thousands of
U.S. Dollars (1)

2004

2003

2002

2001

2000

2007

¥153,910
67,47924,212
245,601
38,087
18,57137,424(40,621)(14,364)
48,303
18,499¥149,032
80,954
20,348250,334
34,107
8,861
33,860(3,787)(7,247)75,82816,071¥141,621
101,353
13,142
256,116
36,363
16,12344,804(44,031)(58,236)
59,81016,328¥135,237
132,921
12,061
280,218
41,27916,36852,793(54,696)
18,70732,651
16,021¥124,587
149,458
17,808291,853
40,18515,011
67,790121,758(92,521)30,70315,017$1,471,842
634,507283,494
2,389,843
375,827
177,161
401,857(268,102)(6,214)
420,652
180,277¥354,831
154,31743.5%––
76,3897,967
3,402¥342,599
151,86444.3%––
93,994
7,721
3,462¥342,934
149,827
43.7%
3,140
0.9%
71,2697,824
3,817¥387,236
178,448
46.1%
23,530
6.1%
128,655
7,749
4,170

¥339,413
95,932
28.3%
71,81721.1%
111,753
7,432
4,234

$3,362,530
1,684,339

Yen

U.S. Dollars(1)

176
41
23.3%

¥

82
41
49.8%

¥

146
41
28.2%

¥

148
35
23.7%

¥

143
17
11.9%

637,850

$

1.70
0.84

12.1%
5.3%

5.9%
2.6%

9.8%
4.4%

11.9%
4.5%

16.8%
4.0%

¥1,220,819
67,479¥1,213,088
80,954¥1,184,204
101,353¥1,144,717
132,921¥1,073,422
149,458$11,072,940
634,507¥ 625,031
302,568
139,506
221,192¥1,288,297¥ 600,508
303,098
138,353
252,083¥1,294,042¥ 583,712
297,030
150,862
253,953¥1,285,557¥ 562,777362,979
90,569261,313¥1,277,638¥ 528,188
350,70289,248
254,742¥1,222,880$ 5,953,690
2,743,946
1,313,534
1,696,277$11,707,447

LAWSON, INC. ANNUAL REPORT 200727

Management’s Discussion and Analysis■ Industry Overview

Revitalization Law and Large-store Establishment Law) in
May 2006, signaling a move to curb the excessive openingof major retail properties in suburban areas.
Looking ahead, major GMS chains and specialty stores,
which have relied on large-scale outlets in the suburbs, areexpected to intensify competition for securing locations
near train stations and in central city areas. An example ofthis has already been seen with the acquisition of a readymade meal supplier by a major GMS chain. Under thesecircumstances, the value of the networks of small outlets
already established by CVS operators is expected to increase.
In the CVS sector, major chains continue to open storesin large numbers. This is increasing the saturation of conventional CVS formats targeting men in their 20s and 30s ascore customers. Among the major CVS chains, some chains
have seen daily sales at new stores slip year on year. Thissuggests that, if conventional stores continue to be openedin large numbers, the number of low-profit stores will also
increase. LAWSON’s view is that such a situation increases
the risk of a decline in the earnings of franchised store
owners as well as capital efficiency, leading to lower ROE.

In the Japanese retail industry, the 2000 abolition of theLarge-Scale Retail Store Law and enforcement of the LargeScale Retail Store Location Law, made it easier for companies to set up large-scale retail stores in suburban areas,
triggering a rush to construct large-scale shopping centers.
Meanwhile, with regard to small and medium-sized retailstores, a large number of convenience stores (CVS), specialty
stores and restaurant and ready-made meal outlets continue
to be opened, with the number of chain stores increasing,particularly in residential and suburban areas. On the other
hand, small and medium-sized retailers, which congregate
around train stations and central city areas, are finding it
increasingly difficult to generate profits. As a result, in regional cities in particular, increasing concerns have been
expressed about the emptying of central city areas as consumers flock to large-scale shopping centers and major
general merchandizing stores (GMS) in suburban areas.
Because of this, the Diet passed and enacted revisions to
the Three New Acts about Harmonization of City Planningand Commercial Policy (City Planning Law, Central City

Retail Industry Market Size and CVS Share

(Billions of Yen)

Years ended December 31

2006

2005

2004

2003

2002

Total retail industry annual sales . . . . . . . . . . . . . . . . .

¥135,257¥135,055¥133,712¥132,446¥132,280

CVS sector annual sales . . . . . . . . . . . . . . . . . . . . . . .

7,399

7,360

7,289

7,096

6,980

CVS share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.5%

5.4%

5.5%

5.4%

5.3%

2006

2005

2004

Source: “Survey of Commerce,” Ministry of Economy, Trade and Industry

Share of CVS Market Held by Top Five Chains (Sales)
February 28 and 29

LAWSON . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(Billions of Yen)

2007

¥

1,387

¥

1,362

¥

1,329
2,441

¥

1,288
2,343

2003

¥

1,294

Seven-Eleven Japan . . . . . . . . . . . . . . . . . . . . . . . . .

2,534

2,499

2,213

FamilyMart . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,069

1,032

998

954

932

Circle K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

497

505

503

480

485

Sunkus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

376

394

403

403

406

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,863

5,792

5,674

5,468

5,330

(Share) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

79.2%

78.7%

77.8%

77.0%

76.4%

Note: Total figures are for the years ended February 28 and 29.

28 LAWSON, INC. ANNUAL REPORT 2007

■ Management Measures in Fiscal 2006
LAWSON’s major goal in fiscal 2006 was to increase thenumber of customers through expansion of its customer
base. To this end, LAWSON implemented the following
management initiatives.
(1) We continued to emphasize the Three Challenge Practices*—promoting the enhancement of quality (Q),service (S), and cleanliness (C)—aiming to raise the levelof customer satisfaction.
(2) We made greater use of “store charts”** (analysis ofindividual store information) that have been introduced
nationwide with the aim of assembling merchandise
assortments and creating store displays matched toregional preferences of customers of individual stores.
(3) We targeted product development at new customers,
namely women and middle-aged and elderly customers,
making progress in developing “health-oriented products,” “products in appropriately sized small quantities,”and “perishable foods and daily delivered foods.”***(4) We strengthened sales promotion activities aimed at
expanding the customer base by running such events as
the LAWSON Fair and a campaign allowing customers
to exchange shopping points for Miffy-themed picture
plates. The ultimate goal of these actions was toincrease the number of customers.
(5) We also promoted initiatives centered on point cards,
which have won strong support from female customers.
In order to strengthen merchandise assortments ofindividual stores through customer relationship management, we worked to sign up more members to the
LAWSON PASS credit card, which is also used as a
shopping point card. Furthermore, for those customers
who dislike owning credit cards, in January 2007 we rolled
out the MY LAWSON POINT point card nationwide.
(6) To expand the customer base, we opened stores using
the format—“LAWSON,” “NATURAL LAWSON” or“LAWSON STORE100”—we thought best suited thelocation. And in order to expand the customer base still
further, on February 28, 2007 we entered into an
equity-based business alliance with Ninety-nine Plus
Inc., which saw us subscribe to a private placement ofshares to acquire approximately 20% of the company’s
total issued shares.
(7) As an initiative to strengthen existing stores, we developed LAWSON PLUS, stores that carry perishable foods
as a main product line to respond to specific local

demand. We have started converting existing LAWSON
stores into LAWSON PLUS stores.
* The Three Challenge Practices are points that franchised store
owners, employees, and store crew (part-time workers) must pay
particular attention to in running LAWSON stores. They are (1)ensuring merchandise assortments are matched to individual locations, (2) serving customers courteously, and (3) keeping stores andsurrounding areas clean.
** An important tool for franchised store owners to make decisions,store charts include analysis of marketing and management on an
individual store basis.
*** Includes tofu, natto (fermented soy beans) and other side dishes anddelicatessen items as well as cooked noodles and other food products with a relatively short sales period after manufacture. Basically,
these products are ordered and delivered every day.

■ Product Overview
Sales by Product Category(consolidated, total net sales)
During the fiscal year under review, strong growth in salesof processed and fast foods compensated for lower sales of
non-food products. In the processed foods category, net
sales increased 3.4% year on year to ¥705,155 million.
Cigarette sales rose 7.4% year on year on an all-store basis,
inflated by higher tax from July 2006; existing store salesrose 4.3% due to this tax hike. Other main contributors to
the higher sales in the processed foods category were new
products belonging to national brands, and rice snacks andbaked goods, as LAWSON offered a fuller lineup of products matched to regional preferences for seniors. In the fast
foods category, sales rose 4.1% to ¥324,993 million. Ricedishes struggled, as strong sushi sales failed to counter
sharply lower sales of boxed lunches and rice balls. However, overall category sales were bolstered by robust salesof delicatessen items due to the launch of health-conscious
products such as salads, and of Karaage-kun crispy
Japanese-style fried chicken and other counter products,
as we actively launched new products. In the daily
delivered foods category, sales rose 3.1% to ¥155,575
million, lifted by buoyant sales of desserts and bakery items
thanks to the success of new product launches and shopping point campaigns. The non-food products category,
however, saw sales drop 7.2% to ¥200,907 million despite
firm sales of energy drinks, health care products, books andcertain other products. This overall decline was primarily
attributable to the fact that Highway Card sales were recorded in the previous fiscal year until they were terminated in September 2005, a decrease in sanitary goods
following strong sales in fiscal 2005 of products for countering hay fever, and lackluster magazine sales.

LAWSON, INC. ANNUAL REPORT 2007

29

Net Sales by Product Segment (consolidated, total net sales)
Years ended February 28 and 29(Millions of Yen)

2007*

2006

2005

2004

2003

Fast foods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 324,993¥ 312,289¥ 297,369¥ 302,568¥ 303,098

150,917

148,134

139,506

138,353

Daily delivered foods . . . . . . . . . . . . . . . . . . . . . . . .

155,575

Processed foods** . . . . . . . . . . . . . . . . . . . . . . . . . .

705,155

682,006

665,687

625,031

600,508

Total food sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,185,724

1,145,212

1,111,190

1,067,105

1,041,959

Non-food products . . . . . . . . . . . . . . . . . . . . . . . . . .

200,907

216,519

217,887

221,192

252,083

Net sales of all stores . . . . . . . . . . . . . . . . . . . . . . . . ¥1,386,630¥1,361,731¥1,329,077¥1,288,297¥1,294,042* Figures in the above table are for the fiscal year ended February in each year.
** Processed foods includes cigarettes.

Breakdown of Net Sales by Product Segment (consolidated, total net sales)(%)

Years ended February 28 and 29

2007*

2006

2005

2004

2003

Fast foods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23.4%

22.9%

22.4%

23.5%

23.4%

Daily delivered foods . . . . . . . . . . . . . . . . . . . . . . .

11.2

11.1

11.1

10.8

10.7

Processed foods** . . . . . . . . . . . . . . . . . . . . . . . . .

50.9

50.1

50.1

48.5

46.4

Total food sales . . . . . . . . . . . . . . . . . . . . . . . . . . . .

85.5

84.1

83.6

82.8

80.5

Non-food products . . . . . . . . . . . . . . . . . . . . . . . . .

14.5

15.9

16.4

17.2

19.5

* Figures in the above table are for the fiscal year ended February in each year.
** Processed foods includes cigarettes.

Gross Profit Margin by Product Segment(parent company)
The overall gross profit margin improved by about 0.1 of apercentage point, roughly in line with our target. The lossof a half year’s sales of low-margin Highway Cards, whichwere terminated in mid-September 2005, elevated thegross profit margin by about 0.2 of a percentage point on afiscal year basis. On the other hand, higher sales of lowmargin cigarettes ahead of a tax hike had an approximate

0.1 of a percentage point negative impact on the grossprofit margin. In the non-food products category, there wasa marked improvement in the markup from the previous
fiscal year. This was due to a lower share of sales of low
markup products such as books and magazines in the sales
mix; increasing markups of daily necessities; and an increasing share in the non-food products category of commission
income from bill settlement services.

Gross Profit Margin by Product Segment (parent company)(%)

Years ended February 28 and 29

2007*

2006

2005

2004

2003

Fast foods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

36.5%

36.8%

36.4%

35.6%

35.7%

Daily delivered foods . . . . . . . . . . . . . . . . . . . . . . .

33.8

33.6

33.3

32.5

32.5

Processed foods** . . . . . . . . . . . . . . . . . . . . . . . . .

26.4

26.7

26.7

26.9

27.3

Non-food products*** . . . . . . . . . . . . . . . . . . . . . .

38.0

35.8

34.0

33.4

29.9

Gross profit margin . . . . . . . . . . . . . . . . . . . . . . . . .

31.3

31.2

30.8

30.7

30.3

* Figures in the above table are for the fiscal year ended February in each year.
** The processed foods category includes cigarettes.
*** Calculation of the gross profit margin for non-food products includes bill settlement and other commission income.

Bill Settlement Services (parent company)
Years ended February 28 and 29

2007*

2006

2005

2004

2003

Bill settlements (millions of yen) . . . . . . . . . . . . . . . . ¥1,204,004

1,165,255

1,035,936

919,205

817,656

130.6

118.9

108.4

100.0

No. of transactions (millions) . . . . . . . . . . . . . . . . . . .

140.9

No. of companies handled . . . . . . . . . . . . . . . . . . . .

396

349

309

283

245

Commission income (millions of yen) . . . . . . . . . . . .

8,141

7,507

6,768

6,368

5,990

*Figures in the above table are for the fiscal year ended February in each year.

30 LAWSON, INC. ANNUAL REPORT 2007

Merchandising Strategy
In the area of merchandising strategy, LAWSON madeprogress developing products aimed at middle-aged, senior
and women customers. The goal was to expand the customer
base by targeting these less-traditional customer segments.
In the case of the Gohantei series, a rice dish brandlaunched in 2004 based on the concepts of “surprise” and“innovation,” in April 2006 we began selling Yasai to
Isshoni, a new offering of small portions of vegetables andrice aimed at women and health-conscious customers. In
the same vein, the following May, we developed Kurogome
iri Onigiri (rice ball with black rice and black beans), the first
NATURAL LAWSON brand dish offered at LAWSON stores.
Subsequently, in September the same year, we leveraged
know-how from product development for NATURALLAWSON to augment the Gohantei series with the launchof Gokoku Hayashi to Guriru Yasai (stew with grilled vegetables and 5-grain rice).
In sushi, which is popular with middle-aged, senior andhealth-conscious customers, we actively developed a rangeof new products, including hand-rolled sushi, sushi in smallboxes and sushi rice balls.
We also continued to offer products for the healthconscious, with the launch of the Neba-neba Menu featuring cold noodles, salads and other offerings based on foodingredients with a neba-neba, or sticky, quality such as
okra, tororo potato, glutinous yam, natto and mekabu
seaweed. All these ingredients have high nutritional values.
In June 2006, we ran the LAWSON Fair, a major sales
promotion campaign that had as its central planks limitedtime products and on-the-spot prize draws for coupons
when customers purchased products. Similarly, on two
occasions—from July through August 2006 and then from
November 2006 through January 2007—we ran a shopping
point collection campaign allowing customers to exchange
their points for Miffy-themed picture plates. This campaign
tied in with the launch of the Happy Child-Raising Project*
and was designed to attract more customers to our stores
during the key summer and winter sales periods.
*The Happy Child-Raising Project was launched in July 2006 and was
inspired by the winning entry in an essay competition staged to mark
LAWSON’s 30th anniversary. Through this project, LAWSON has taken up
the challenge presented in the essay of helping families to raise children.

■ Store Development
During the past fiscal year, LAWSON worked to develop
stores that it expects to generate high income by rigorously
adhering to its proprietary store opening standards, centered on return on investment (ROI), when opening stores
mainly in large city areas in the Kanto, Kinki, and Chubu
regions. Furthermore, we worked to secure quality franchised store owners and focused on gathering information
on prime locations for new stores by fostering closer cooperation between store operation and development divisions
and by working with leading companies in candidate areas.

When opening stores, we focused on picking the rightformat for the needs of the area from our three main formats:“LAWSON,” “NATURAL LAWSON” and “LAWSONSTORE100.” In candidate locations where use of the conventional LAWSON format was highly likely to expose us tostiff competition from other major convenience store
chains, we opted to open “NATURAL LAWSON” and“LAWSON STORE100” stores to differentiate ourselvesfrom other chains and to match customer needs in the area.
The pursuit of store formats best suited to each location
was a key theme in the past fiscal year. In this vein,
LAWSON initiated trials of Senior-friendly LAWSON, aformat designed to cater to the needs of elderly customers
in regions with a growing number of senior citizens. These
stores feature special merchandise assortments, shopping
carts, relaxation spaces and other features geared to theneeds of the elderly. In urban areas, LAWSON also beganconverting existing stores to an enhanced format to expand
the customer base. This hybrid format features perishable
foods based on know-how garnered from the “LAWSONSTORE100” stores. Following these trials during fiscal
2006, LAWSON named this format “LAWSON PLUS,” positioning it as a format focused on sales spaces and productmixes, centered on products for seniors and women. To
ensure that customers recognized these new stores as
different to conventional LAWSON stores, we changed theoutside and inside appearance, including the color of signboards. Together with a stronger merchandise assortment
for middle-aged, senior and women customers, these
efforts were aimed at expanding the customer base.
Part of LAWSON’s strategy is to open stores in diverse
locations. In August 2006, we opened LAWSON + toks, a
new type of convenience store for train stations. This format
was developed in conjunction with Tokyu Corporation undera business alliance inked in the fiscal year ended February
28, 2006. By combining the functions of a train station store
with the unique features of the convenience store format,
we found new possibilities for convenience stores.
Along the same lines, LAWSON has opened stores in
special captive commercial spaces, namely hospitals. During the past fiscal year, LAWSON opened another 14 Hospital LAWSON stores, bringing the number of these storesto 33 at the end of the fiscal year. We intend to expand thisbusiness model as a format that we expect to grow in an
aging society in Japan.
We also made steady progress preparing to capitalize on
business opportunities likely to occur after post officeprivatization with respect to Postal LAWSON stores, basedon our alliance with Japan Post. As of February 28, 2007,
there were five of these stores inside post offices in Japan.
In a new initiative, in October 2006 we began trialing jointdelivery in Kochi Prefecture, thereby raising the possibilityof opening stores in areas where we had given up on due
to poor distribution efficiency.
LAWSON, INC. ANNUAL REPORT 200731

closures reached 502, including relocated stores. At February
28, 2007, LAWSON’s domestic network comprised 8,564
stores, including 100 NATURAL LAWSON and 80 LAWSONSTORE100 stores, a net increase of 198 from a year earlier.
The network of SHANGHAI HUALIAN LAWSON CO.,LTD., an affiliate in the People’s Republic of China
accounted for under the equity method, reached 291
stores, an increase of 8 stores, as of December 31, 2006.

We believe that one of LAWSON’s defining strengths lies
in a flexible and dynamic store development system thatmakes possible alliances with diverse partners. Moving
forward, based on mold-breaking concepts, we will rise to
the challenge of opening stores in diverse locations as we
pursue the potential of new business opportunities.
As a result of the aforementioned measures, domestic
store openings in fiscal 2006 numbered 700 while store

Number of Stores in the LAWSON Network
Years ended February 28 and 29

2007

2006

2005

2004

2003

Number of stores . . . . . . . . . . . . . . . . . . . . . . . . . . .

8,564

8,366

8,077

7,821

7,625

Openings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

700

717

711

625

502

Closings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

502

428

455

429

611

Net increase (decrease) . . . . . . . . . . . . . . . . . . . . . .

198

289

256

196

(109)

2007

2006

2005

2004

2003

B ......................................
Share (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,512
17.7

1,674
20.0

1,836
22.7

1,992
25.4

2,200
28.8

G ......................................
Share (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,209
25.8

2,272
27.2

2,335
28.9

2,415
30.9

2,446
32.1

C* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,372
51.0

4,012
48.0

3,560
44.1

3,065
39.2

2,645
34.7

Franchised stores . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8,093
94.5

7,958
95.1

7,731
95.7

7,472
95.5

7,291
95.6

Company-operated stores . . . . . . . . . . . . . . . . . . . .
Share (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

471
5.5

408
4.9

346
4.3

349
4.5

334
4.4

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8,564
100.0

8,366
100.0

8,077
100.0

7,821
100.0

7,625
100.0

Number of Stores by FC Contract Type
February 28 and 29* Includes NATURAL LAWSON franchised stores.

Outline of Store Contracts
Contract typeC

G

Contract term
Owner conditions

At least 20 years old, 2 full-time store workers

Land and buildings

Prepared by LAWSON

Prepared by franchisee

Borne by LAWSON

Borne by franchisee

Investment in store construction
and interior decoration expenses
Signage and business fixtures
Payment by franchisee
at time of contract*B

10 years from store opening day

Prepared by LAWSONFranchise fee¥1.5 million (Contract fee, training expenses,
and store opening preparation commission, each ¥500,000)

Investment¥1.5 million (Including payment for some merchandisepurchased on behalf of the store)

Guarantee deposit provided by
franchisee
Head Office income**

Not required

Average monthly sales
x 2 months

Not required

Gross profit x 50%

Gross profit x 45%

Gross profit x 34%

Burden of utility expenses
Minimum guarantee (annual)**(thousands of yen)*Franchisee
21,00022,20022,200

The above amount is paid by franchisee to Head Office at the time of the franchising contract. In addition, the franchisee needs to separately
prepare a total of ¥500,000, including float at time of store opening.
** Head Office income and minimum guarantee are in the case of stores operating on a 24-hour basis.

32 LAWSON, INC. ANNUAL REPORT 2007

■ Scope of Consolidation
The consolidated results for fiscal 2006 include the performances of nine members of the LAWSON Group—six consolidated subsidiaries and three affiliates accounted forunder the equity method—and the parent company. Thesesubsidiaries and affiliates are broadly involved in five categories of business: CVS operations, financial services, otherservices, overseas services and restaurant services. The business operations and fiscal results of companies included
within the scope of consolidation are presented below.

CVS Operations
The LAWSON Group is developing four CVS formats:
LAWSON, INC. is developing the “LAWSON” and“LAWSON PLUS” formats, while NATURAL LAWSON, Inc.
and VALUE LAWSON, Inc are developing the “NATURALLAWSON” and “LAWSON STORE100” formats, respectively.

NATURAL LAWSON, Inc. (Consolidated Subsidiary)
NATURAL LAWSON is a CVS format targeting mainly working women and particularly health-conscious customers,
based on the key words “beauty,” “health” and “convenience.” The first store was opened in July 2001. In April

2004, one business division within the Head Office wasspun off as NATURAL LAWSON, Inc., a wholly owned subsidiary of LAWSON. NATURAL LAWSON, Inc. undertakes
store management guidance for NATURAL LAWSON andproduct planning and development under contract for
LAWSON. In the fiscal year ended February 28, 2007, thecompany endeavored to achieve further differentiationfrom the conventional CVS business model by strengthening merchandising aimed at health-conscious and womencustomers. In addition, it promoted operations based on
the introduction of individual store information analysis. In a
new development, it began trialing the franchising of stores
and as a result there were five franchised stores at the endof the fiscal year under review. In the fiscal year ending
February 29, 2008, in addition to improving existing storesthrough enhanced product development and stronger
store management guidance, the company will continue tofranchise directly operated stores as it seeks to move backinto the black on a single fiscal year basis.
At present, LAWSON, INC. owns the “NATURALLAWSON” stores, leaving NATURAL LAWSON, Inc. to focus
on store management guidance and product development.

(Millions of Yen)

2007

2006

2005

Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . .

¥(874)¥(690)¥19––

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(891)

(723)

18

–

–

No. of stores . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

100

51

28

14

13

VALUE LAWSON, Inc (Consolidated Subsidiary)

LAWSON Inc. was founded in April 2005 as a wholly owned
subsidiary to establish the “LAWSON STORE100” businessformat, which weds the CVS and mini-supermarket formats,as well as to perform product planning and development
for these stores. The company opened its first store in May
2005. To differentiate the format from peer companies, thecompany is actively developing a private brand called
Value Line. As of February 28, 2007, there were approximately 320 stock keeping units (SKUs) of Value Line, anincrease of 180 over the past year.

This consolidated subsidiary operates “LAWSONSTORE100” perishable food convenience stores.
“LAWSON STORE100” stores target women and seniors
with a concept of “supporting time saving, simplicity, andconvenience in everyday life.” These stores provide a wide
range of products spanning processed foods and daily
necessities at a uniform price of ¥100 (excluding consumption tax). The main products comprise fresh fruit and vegetables, handy boxed lunches and side dishes. VALUE

2004

2003

(Millions of Yen)

2007

2006

2005

2004

Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . .

¥ (980)Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1,311)

No. of stores . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

80¥(623)

–

–

–

(709)

–

–

–

35

–

–

–

LAWSON, INC. ANNUAL REPORT 2007

2003

33

Financial Services

agreement has been reached with partner banks. It hasformed alliances with the major city bank groups and regional banks; partner banks currently number 21.
The company’s main source of revenue is ATM commissions from banks. Its main expenses are operating center
outsourcing fees, ATM line charges and ATM leasing charges.
As of February 28, 2007, the number of ATMs installedstood at 4,245 and the number of prefectures where ATMs
are installed was 27. LAWSON held a 58.0% stake in thiscompany as of February 28, 2007.

LAWSON ATM Networks, Inc.
(Consolidated Subsidiary)This consolidated subsidiary was established in May 2001
with investments by LAWSON, Mitsubishi Corporation andseveral banks to run ATM-operations for LAWSON stores.
The company began installing ATMs and started ATM
services at some LAWSON stores from October 2001. The
company’s ATM business installs jointly operated ATMs on
a leased basis in LAWSON stores in regions where(Millions of Yen)

2007

2006

2005

2004

2003

Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . .

¥11,907¥11,311¥10,003¥8,352¥6,718Operating income (loss) . . . . . . . . . . . . . . . . . . . . . .

866

654

144

(348)

(529)

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . .

509

675

266

(350)

(529)

Number of ATMs Installed
Number of ATMs Installed . . . . . . . . . . . . . . . . . . . .

LAWSON CS Card, INC. (Equity-method affiliate)This equity-method affiliate was established in February
2002 by Credit Saison Co., Ltd. (30% shareholding),
Mitsubishi Corporation (20% shareholding), and LAWSON(50% shareholding). It issues the LAWSON PASS credit card,
which is also used as a shopping point card by LAWSON
customers and provides services through Loppi multimedia
terminals and other channels. As of February 28, 2007,
LAWSON PASS, for which services began in August 2002,

2007

2006

2005

2004

2003

4,245

3,812

3,570

3,127

2,712

had a cardholder base exceeding 2.7 million members. The
company has been profitable since the fiscal year ended
February 28, 2006, in line with growth in the cardholder base.
Credit Saison undertakes card issuance and credit screening for LAWSON PASS on behalf of LAWSON CS Card.
The company’s main revenues come from commissions
from the use of shopping and cash advance services, while
the main expenses are outsourcing expenses related tooperation of the card.
(Millions of Yen)

Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . .

2007

2006

2005

2004

¥8,250¥7,157¥ 4,261¥ 2,551

2003

¥

858

Operating income (loss) . . . . . . . . . . . . . . . . . . . . . .

189

270

(1,230)(2,255)(3,935)

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . .

200

568

(1,218)(2,256)(3,936)

Other Services

LAWSON TICKET ranks second in sales in the ticket sales
industry behind PIA Corp. and is particularly strong in salesof tickets for J-POP (Japanese popular music generally popular among the relatively younger generation), sporting eventsand theater. In fiscal 2006, LAWSON TICKET posted record
earnings, with operating income growing 1.8% year on year.
LAWSON used the opportunity presented by the termination of the business alliance between LAWSON TICKET
and Rakuten to increase its equity interest in LAWSONTICKET. Between May and June 2007, LAWSON conducteda tender offer for the shares of LAWSON TICKET to acquire
Rakuten’s shares in the company with the view to strengthening the LAWSON Group’s entertainment business. As aresult of this tender offer, LAWSON raised its shareholdingin LAWSON TICKET from 50.8% to 75.1%.

LAWSON TICKET INC. (Consolidated Subsidiary)This consolidated subsidiary sells tickets to concerts, movies, sporting events and other attractions, primarily throughLoppi multimedia terminals at LAWSON stores. It was established as a ticket sales company in 1992 and became asubsidiary of LAWSON in 1997. In October 2004, LAWSONTICKET listed on the JASDAQ market (stock code: 2416).
In January 2004, LAWSON TICKET formed a businessalliance with Rakuten, Inc., accepting capital participationfrom the latter. However, with the agreement of both companies, the business alliance was terminated in March 2007
because Rakuten Group website “Rakuten Auction” hadincluded tickets to events as an auction item.

34 LAWSON, INC. ANNUAL REPORT 2007

(Millions of Yen)

2007

2006

2005

2004

2003

Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . .

¥6,533¥6,259¥6,288¥6,218¥5,425

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . .

836

821

719

644

788

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

507

487

412

387

387

i-Convenience, Inc. (Consolidated Subsidiary)

site for mobile phones, and in addition to online merchandise sales and provision of related services and information,
it manages the LAWSON website. During the fiscal year
ended February 28, 2007, Mitsubishi Corporation purchased
the shareholdings of Matsushita Electric Industrial and NTT
DoCoMo, bringing its stake in i-Convenience to 49%.

This consolidated subsidiary was established in October2000 with the aim of expanding business in the e-commerce
sector, based on joint investment by LAWSON (51%shareholding), Mitsubishi Corporation (18%), Matsushita
Electric Industrial Co., Ltd. (18%), and NTT DoCoMo, Inc.
(13%). It operates the official “LAWSON Mobile” Internet(Millions of Yen)

2007

2006

2005

2004

2003

Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . .

¥686

¥ 427

¥ 308

¥ 333

¥ 213

Operating income (loss) . . . . . . . . . . . . . . . . . . . . . .

46

(64)

(114)

(241)

(383)

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . .

43

(137)

(155)

(663)

(489)

BestPractice Inc. (Consolidated Subsidiary)

this program, an undercover researcher who is an
employee of BestPractice and has a thorough knowledge of
convenience store operations and merchandise assortments, objectively and quantitatively evaluates LAWSON
stores from a customer’s perspective. The results are fed
back to LAWSON’s Head Office and franchise owners.

This company was established in March 2004 as a wholly
owned subsidiary. BestPractice implements “Mystery Shopper”
on-site inspections of convenience stores to determine thestatus of operations and offers advice and proposals toimprove LAWSON stores at the operational level. Through(Millions of Yen)

2007

2006

2005

2004

2003

Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . .

¥885

¥892

¥628

–

–

Operating income (loss) . . . . . . . . . . . . . . . . . . . . . .

82

62

(2)

–

–

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . .

45

34

(2)

–

–

Overseas Business
SHANGHAI HUALIAN LAWSON CO., LTD.
(Equity-method Affiliate)This company has been developing a chain of LAWSON
stores in Shanghai, the People’s Republic of China, since
July 1996. In May 2004, LAWSON relinquished 21.0% of its

70.0% equity interest in the company to partner HualianGroup Corporation, leaving LAWSON with a stake of 49.0%(current), to foster expansion through operation by local
partners. At the end of December 2006, there were 291
stores in operation, of which 216 were franchised stores.
(Millions of Yen)

2006

2005

2004

2003

2002

Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . .

¥ 20

¥ (7)

¥ (13)¥ (81)¥(191)Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8

3

0

(71)

(190)

No. of stores . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

291

283

210

146

96

*SHANGHAI HUALIAN LAWSON CO., LTD. closes its accounts in December. It also changed from a consolidated subsidiary to an equity-method
affiliate in fiscal 2004.

LAWSON, INC. ANNUAL REPORT 200735

Restaurant BusinessnaturalBeat Co., Ltd. (Equity-method affiliate)This company was established in March 2004 by the Lotte
Group and other companies. It is developing a chain of
stores that provide so-called slow food based on a conceptalso of quickly serving customers. These include sandwiches, salads and other foods that are individually andcarefully handmade from ingredients with an emphasis on
natural taste and without using artificial additives where
possible. naturalBeat had a chain of 10 stores as of March
31, 2007. LAWSON has had business relations withnaturalBeat, such as selling its products in NATURALLAWSON stores. However, with the view to leveraging
each other’s corporate brands, customer bases and expertise more in the future, LAWSON formed an equity-based
business alliance with naturalBeat in February 2007.
LAWSON paid approximately ¥0.35 billion to acquire a
33.4% equity interest in naturalBeat.

■ Overview of Earnings Figures
Consolidated Total Net Sales
Aggregate net sales of LAWSON stores in fiscal 2006,
ended February 28, 2007, rose 1.8% to ¥1,386,630 million.
In the first half of fiscal 2006, the September 2005 termination of Highway Card sales pushed down sales growth byabout 1 percentage point. In addition, unseasonable
weather conditions with few fine days and a delayed end to
the rainy season, hurt sales. While a recovery was evident
from August 2006 as weather conditions finally improved toseasonal levels and due to the success of a Miffy-themed

shopping point campaign, this failed to compensate forsluggish customer numbers through July 2006. The recovery trend continued in the second half of the fiscal year,
backed by the success of a second Miffy campaign run inNovember and an on-the-spot prize campaign in February
2007*. However, we did not achieve the sales we expected,
as we were unable to overcome the effects of structural
factors in the CVS industry.
Please refer to page 30 for details of sales by productcategory.
*A campaign where lucky customers were given vouchers that they
could exchange for products free of charge. We ran the campaign
twice during fiscal 2006, in June 2006 and February 2007.

Existing Store Sales
Existing store sales in fiscal 2006 fell for the ninth consecutive year, marking a steady downward trend since fiscal
1998. While there was a recovery in consumer sentiment inJapan as a whole, the lack of a firm economic recovery inregions outside the main metropolitan areas of Tokyo,
Osaka and Nagoya, had a slight impact on a company like
LAWSON with a nationwide chain. Existing store sales
struggled for the following reasons. One was the ongoing
effect of competition with peer companies due to the
opening of large numbers of conventional convenience
stores. Another factor was that we are still in the process ofcreating new store formats and sales areas matched to local
customers based on store charts due to a slow response todemographic changes in terms of products and store formats. Furthermore, sales were depressed by about 0.5% on
an annual basis by the termination of Highway Card sales.
(%)

2007

2006

2005

2004

2003

Existing store sales (year on year) . . . . . . . . . . . . . . .

98.2

97.5

99.7

97.5

98.1

No. of customers and amount spent per customer(year on year)
No. of customers . . . . . . . . . . . . . . . . . . . . . . . . . .

98.2

99.1

100.1

99.0

98.2

Amount spent per customer . . . . . . . . . . . . . . . . .

100.0

98.3

99.7

100.2

99.9

Income and Expenses (Consolidated)
Total Operating Revenues
Total operating revenues comprise net sales from Companyoperated stores, franchise commission from franchised
stores, and other operating revenues.
Total operating revenues increased ¥14,995 million, or
5.6%, to ¥283,053 million. This result mainly reflected
higher franchise commission from franchised stores, arisingfrom a 198 net increase in the number of stores; higher sales
due to an increase in the number of Company-operated
NATURAL LAWSON and LAWSON STORE100 stores; and

36 LAWSON, INC. ANNUAL REPORT 2007

higher ATM fee income at consolidated subsidiary
LAWSON ATM Networks. Additionally, the rate of total
operating revenue growth was higher than total net sales
growth. This was because franchise commission from franchised stores has risen at a faster pace than growth in thenumber of stores, as the weighting of Company-operated
stores, except new formats, has declined every year andthe share of C-type stores (prepared by LAWSON), which
pay a high rate of franchise commissions, has become
approximately 90%.

Selling, General and Administrative Expenses(SG&A) Expenses

temporary employees associated with more store openings
by NATURAL LAWSON, Inc. and VALUE LAWSON, Inc.
However, taking into consideration the effect of a change inthe classification of expenses for temporary employees, theincrease was effectively only 4.7%. Advertising and promotion expenses increased ¥516 million, or 5.6%, as LAWSON
conducted aggressive sales initiatives, including the Miffythemed campaigns.

SG&A expenses rose ¥7,274 million, or 4.1%, to ¥183,168
million. This increase was mainly attributable to a ¥4,082
million, or 8.0%, rise in store rents associated with anincrease in the opening of mainly C-type franchised stores,
and a ¥2,438 million, or 6.9%, increase in personnel
expenses stemming from an increase in full-time andBreakdown of Main SG&A Expenses(Millions of Yen)

2007

2006

2005

2004

2003

Personnel expenses* . . . . . . . . . . . . . . . . . . . . . . . . .

¥ 37,888¥ 35,450¥ 34,114¥ 33,803¥ 36,885

Advertising and promotional expenses . . . . . . . . . .

9,693

9,177

9,704

11,18812,505Store rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

55,31851,236

46,78542,67940,035Equipment leasing charges . . . . . . . . . . . . . . . . . . . .

17,475

16,734

16,263

15,726

14,316

Depreciation expenses . . . . . . . . . . . . . . . . . . . . . . .

16,18515,85915,05918,49916,071

Amortization expenses . . . . . . . . . . . . . . . . . . . . . . .

5,163

5,034

4,574

4,287

2,936

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

41,44642,402

38,136

31,27433,590Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥183,169¥175,894¥164,635¥157,456¥156,338*Effective from the fiscal year ended February 28, 2007, expenses for temporary employees have been included in “Personnel expenses,”
whereas they were previously recorded under “Other.” Expenses for temporary employees included in “Personnel expenses” in fiscal 2006
were ¥1,375 million, while expenses for temporary employees included in “Other” in fiscal 2005 were ¥750 million.

Composition of SG&A Expenses
Personnel expenses . . . . . . . . . . . . . . . . . . . . . . . . .

(%)

2007

2006

2005

2004

2003

20.7%

20.2%

20.7%

21.5%

23.6%

Advertising and promotional expenses . . . . . . . . . .

5.3

5.2

5.9

7.1

8.0

Store rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

30.2

29.1

28.4

27.1

25.6

Equipment leasing charges . . . . . . . . . . . . . . . . . . . .

9.5

9.5

9.9

10.0

9.2

Depreciation expenses . . . . . . . . . . . . . . . . . . . . . . .

8.8

9.0

9.1

11.7

10.3

Amortization expenses . . . . . . . . . . . . . . . . . . . . . . .

2.8

2.9

2.8

2.7

1.9

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

22.6

24.1

23.2

19.9

21.4

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

100.0%

100.0%

100.0%

100.0%

100.0%

Operating Income
Operating income rose ¥646 million, or 1.5%, to ¥44,513
million. Existing store growth and franchise commission
from franchised stores, which accounts for the majority of
total operating revenues, were below target, meaning that
total operating revenues fell short of target. SG&A expenses
were held slightly below target due to curbs on IT-related
costs and sales promotion costs, but this wasn’t enough tomake up for the lower-than-planned sales. As a result, operating income was about ¥787 million under target.

reason for this decline was a ¥183 million decrease inequity in gains of associated companies, the result of ayear-on-year decline in earnings at equity-method affiliate
LAWSON CS Card, Inc. owing to higher issuance expenses
in line with cardholder growth of LAWSON PASS andhigher bad debt expenses associated with moves to eliminate “grey-zone” interest rates in Japan. Another reason
was a loss of ¥2,202 million on the changeover to a nextgeneration IT system.

Net Income
Income Before Income Taxes and Minority Interests
Income before income taxes and minority interests
declined ¥1,875 million, or 4.8%, to ¥36,848 million. One

Net income was ¥20,983 million, a decrease of ¥1,042
million, or 4.7%. Net income per share decreased 6.5% to¥201.50.

LAWSON, INC. ANNUAL REPORT 200737

■ Financial Position (Consolidated)
Current Assets
Total current assets increased ¥19,180 million, or 14.8%, to¥149,022 million. This mainly reflected a ¥15,106 million
increase in cash and cash equivalents due to the sale oftreasury stock to NTT DoCoMo in March 2006.

Property and Store Equipment, Investments
and Other Assets
Net property and store equipment rose ¥4,983 million, or
5.0%, year on year to ¥104,255 million, the result of a riseof ¥14,310 million in buildings, owing to an increase in the
opening of C-type stores prepared by LAWSON among
newly opened franchise stores.
Intangible fixed assets declined ¥1,382 million, or 8.0%,
to ¥15,890 million. Investments and other assets decreased¥1,012 million, or 0.7%, to ¥144,981 million. While there
was an increase in long-term loans receivable, mainly tohelp with construction, lease deposits declined ¥2,024
million and software declined ¥1,021 million due to thestart of amortization.

Current Liabilities
Total current liabilities increased ¥2,273 million, or 1.6%, to¥143,514 million. While income taxes payable declined,
there was a ¥4,140 million increase in money held as agent
such as in bill settlement services.

Long-term Liabilities
Total long-term liabilities increased ¥392 million, or 0.7%,
to ¥55,251 million. There was a ¥710 million increase inliability for employees’ retirement benefits. On the other
hand, guarantee deposits received from franchised stores
declined ¥2,015 million due to a decrease in the number offranchised stores operating under franchise agreements
requiring the payment of a guarantee deposit.

Total Equity
In accordance with enforcement of the Corporate Law inMay 2006, shareholders’ equity as presented in the past is
now shown as a component of equity, along with minority
interests and stock acquisition rights. Total equity, including
minority interests, amounted to ¥199,493 million at the endof February 2007. Retained earnings were ¥95,344 million,
reflecting net income of ¥20,983 million and cash dividends
paid of ¥9,822 million. The equity ratio increased 2.3 points
to 49.0%.

38 LAWSON, INC. ANNUAL REPORT 2007

■ Special Account Items on the
Balance Sheet
The following items are special features of LAWSON’s
financial statements.

Due From Franchised Stores
LAWSON makes bulk purchases of products ordered by all
franchised stores and calculates and pays amounts payablefor such to the vendors on the stores’ behalf. LAWSON
records the cost of the merchandise in the “Accounts
receivable—Due from franchised stores” account since suchcosts are recovered from franchised stores. “Due from franchised stores” represents mainly the obligations of franchised stores to Head Office for these amounts at thebalance sheet date. As of February 28, 2007, this asset
account was ¥11,710 million, ¥948 million higher than a year
ago. There was thus no substantial change in this account.

Accounts Receivable—Other
Other accounts receivable such as income due from vendors is included in “Other” in “Accounts receivable” on thebalance sheet. The constituent elements of this item stoodat ¥26,002 million at February 28, 2007, an increase of¥4,424 million.

Long-Term Loans Receivable
This account mainly represents money paid to landlords(owners of land and buildings for stores) to help with construction and investments and finance from Head Office tofranchised stores. As of February 28, 2007, this account was¥3,749 million higher than a year ago at ¥24,380 million,
due to an increase in money paid to landlords to help withconstruction for store openings.

Lease Deposits
This account represents leasehold deposits paid to landlords equivalent to several months’ rent under lease agreements at LAWSON. As of February 28, 2007, this accountwas ¥87,904 million, a decrease of ¥2,024 million.

Due to Franchised Stores
This account represents Head Office obligations to franchised stores. All franchised stores make remittances ofcash proceeds from daily sales to the Head Office. If franchised store remittances of cash proceeds from daily sales
to the Company exceed the balance of “Accounts receivable—Due from franchised stores,” the excess will beshown on the balance sheet as “Accounts payable—Due tofranchised stores.” As of February 28, 2007, this accountwas ¥2,757 million, down ¥660 million from a year ago.

Money Held as Agent■ Capital ExpenditureThis account mainly comprises money held on behalf ofthird-party companies for which LAWSON provides billsettlement services, including public utility charges. There
was an increase in money held as agent due to a rise in thenumber of transactions and the number of companies forwhich settlement services were provided. As a reflection ofthis, the balance of payments to third-party companies
increased, leading to a rise of ¥4,140 million to ¥48,755
million in this account at February 28, 2007.

In fiscal 2006, capital expenditure totaled ¥49,822 million, adecrease of ¥4,595 million. Investments in new stores declined ¥2,603 million to ¥23,444 million due to constraints
on store openings compared to the previous fiscal year andan increase in cash proceeds such as from the recovery of
key money accompanying the closure of stores that wereleased. Systems-related investments decreased ¥4,422
million to ¥4,662 million due to a decrease in IT investments for management accounting systems recorded in theprevious year. Leases increased ¥4,382 million to ¥14,211
million as LAWSON made greater use of lease contracts forsign boards and other improvements. A breakdown ofcapital expenditure is as follows:

Guarantee Deposits Received FromFranchised Stores
This represents guarantee deposits received by LAWSON
from store owners operating under FC-G-type contracts. As
of February 28, 2007, this account was ¥48,451 million,¥2,015 million less than a year ago due to a decline in thenumber of FC-G-type contract stores.

Capital Expenditure(Millions of Yen)

2007

2006

2005

2004

2003

New store investments . . . . . . . . . . . . . . . . . . . . . . .

¥23,444¥26,047¥21,695¥19,614¥14,663

Existing store investments . . . . . . . . . . . . . . . . . . . .

5,887

6,592

8,175

10,432

12,028Systems-related investments . . . . . . . . . . . . . . . . . .

4,662

9,084

2,765

2,191

9,133

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1,395)

1,615

4,186

377

1,149

Investments and advances . . . . . . . . . . . . . . . . . . . .

3,013

1,250

(1,000)

6,250

3,550

Leases* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14,211

9,829

11,052

9,439

35,305

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥49,822¥54,417¥46,873¥48,303¥75,828*The amount equivalent to the acquisition cost of leased property acquired during each fiscal year.

■ Cash Flows
Operating activities provided net cash of ¥47,596 million,¥664 million more than in the previous fiscal year. While
there was a decline in income before income taxes andminority interests from the previous fiscal year, this result
was attributable mainly to increases in other accounts payable and accounts payable, the add back of a loss on
replacement of computer system and a decrease in income
taxes paid.
Investing activities used net cash of ¥31,754 million,¥23,528 million less than in the previous fiscal year. In addition to a decrease in payments for the purchase of intangible fixed assets such as systems, the increase in cash fromthe redemption of marketable securities outweighed theincrease in cash for the purchase of marketable securities(maturity date of more than three months) for the purposeof short-term funds investment.
As a result of changes in cash flows from operating andinvesting activities, free cash flow—the difference between
the two figures—increased ¥24,192 million year on year to¥15,842 million.

Financing activities used net cash of ¥736 million, ¥7,058
million less than one year earlier. This reflected ¥9,021
million in proceeds from sales of treasury stock, although¥1,635 million more was used for the payment of cash
dividends.
As a result, cash and cash equivalents at the end of the
fiscal year totaled ¥75,547 million, ¥15,107 million higher
than a year earlier.

■ Capital Policy: Dividends andPurchase of Treasury Stock
LAWSON regards returning profits to shareholders as oneof its most important management policies and properly
acknowledges that the level of capital cost reflects the
profit expectations of investors toward the Company. To
select and develop businesses that achieve earnings above
the cost of capital, LAWSON uses capital efficiency, such as
ROE, as its most important management indicator. Accordingly, we pursue optimal capital efficiency by looking at theappropriate balance between the distribution of profits
through dividends and the purchase and cancellation oftreasury stock to maintain high profitability and secure our

LAWSON, INC. ANNUAL REPORT 2007

39

financial soundness, by securing the necessary level ofinternal reserves for investment aimed at achieving sustained corporate growth over the medium and long terms.
In the past, during the four-year period from fiscal 2001
to fiscal 2004, LAWSON cancelled approximately ¥43.0
billion of treasury stock. As regards cash dividends, in fiscal
2004, we increased the annual cash dividend per share by¥29 to ¥70, and in fiscal 2005 we raised it by ¥20 to ¥90. In
fiscal 2006, the dividend was increased by a further ¥10 to¥100 per share, as we actively returned profits to shareholders. In fiscal 2007, we plan to raise the dividend byanother ¥10 to ¥110 per share. We are aiming for a dividend payout ratio of around 40%, a level which takes into
account the global standard, as we continue to strive toreturn profits to shareholders.

■ Business Cooperation andAlliances

naturalBeat Co., Ltd.
LAWSON formed an equity-based business alliance withnaturalBeat Co., Ltd. in February 2007. Please refer to page
36 for an overview of this company. The details of the alliance are as follows.
(1) Develop products for NATURAL LAWSON stores utilizing naturalBeat’s expertise in making sandwiches,soups, gelato, muffins and other foods that emphasize
the natural taste of the ingredients.
(2) Provide more attractive freshly baked bread products
inside NATURAL LAWSON stores by using the products
and technical expertise of Wholesome Co., Ltd., anaturalBeat subsidiary that offers bakery items based on
the concept of providing healthy food.
(3) Expand sales of naturalBeat original products such as
Rooibos tea in NATURAL LAWSON stores.
(4) Develop collaborative stores that tap the strengths ofboth NATURAL LAWSON and naturalBeat.

The main business cooperation and alliances are as follows.

Ninety-nine Plus Inc.
Mitsubishi Corporation
LAWSON formed a comprehensive tie-up, including acapital alliance, with Mitsubishi Corporation in February
2000. Mitsubishi Corporation is LAWSON’s leading shareholder with an equity interest of 30.7%. The two firms havebuilt a cooperative relationship in the areas of personnel
resources, store development, new businesses, productdevelopment and other areas.

NTT DoCoMo, Inc.
In March 2006, LAWSON signed a business alliance agreement, including a capital alliance, with NTT DoCoMo, Inc.
The main elements of the alliance are as follows.

Capital Alliance
In March 2006, LAWSON sold treasury stock of 2,092,000
common stock, representing 2.0% of total issued shares, toNTT DoCoMo for about ¥9.0 billion.

Business Alliance(1) The introduction of settlement services based on iD™*
at all LAWSON stores*iD™ is a mobile phone-based credit card payment service enabling
shopping, etc., via NTT DoCoMo’s Osaifu-Keitai® wallet services.

(2) Information services utilizing ToruCa®* at all LAWSON
stores*ToruCa® is a system for capturing information such as coupons just byholding NTT DoCoMo’s Osaifu-Keitai® mobile phones over reader/
writers at stores.

(3) Going forward, the two companies will hold regularmeetings to continue discussions regarding future fields
of collaboration.
*ID™, ToruCa® and Osaifu-Keitai® are trademarks or registeredtrademarks of NTT DoCoMo.

40 LAWSON, INC. ANNUAL REPORT 2007

In February 2007, LAWSON announced an equity-based
alliance with Ninety-nine Plus Inc., which operates the“SHOP99” chain of convenience stores known for theirfresh foods. Ninety-nine Plus was established in October2000 and since then has grown rapidly as a pioneer inJapan of a new perishable foods store format that provides
everything from daily food items, including perishable
foods, to sundry goods at a single price—it created theconcept of an everyday low price of 99 yen (excluding tax).
As of March 31, 2007, the company had a network of 780
stores. SHOP99 stores have won strong acceptance fromhousewives and older shoppers for a strategy of strengthening the merchandise assortment of perishable and daily
delivered foods at stores in residential areas. This is highlighted by a higher weighting of housewives and seniors in
its customer mix than at conventional convenience stores.
Through this alliance with Ninety-nine Plus, LAWSON
believes that it can improve the quality of perishable anddaily delivered foods sold in suitably sized small portions,by complementing each other’s know-how and strengths,
including in the area of perishable foods. By doing so,
LAWSON believes that it can broaden its customer base ofhousewives and seniors and attract more customers. Basedon the agreement between the two companies, Ninety-nine
Plus allotted 31,500 shares of common stock to LAWSONin March 2007 through an increase in capital by way of a
private placement of shares. LAWSON held 20% of all
Ninety-nine Plus shares with voting rights following theincrease in capital via private placement.

Details of the alliance are as follows.
(1) Jointly develop and purchase productsa) Between LAWSON STORE100 and SHOP99b) Extend to LAWSON PLUS and other stores(2) Rationalize distribution
Leverage LAWSON’s distribution infrastructure andknow-how to rationalize distribution at Ninety-nine Plus.
(3) Full-scale franchising
Ninety-nine Plus will leverage LAWSON’s franchiserelated know-how and systems to begin franchisedevelopment trials at SHOP99 stores. Existing
LAWSON franchise owners will be given first option totake up franchise agreements.
(4) Strengthen perishable foods lineups
Utilize SHOP99’s knowledge of perishable and daily
delivered foods and jointly developed private brandproducts, including frozen foods, in LAWSON PLUS andLAWSON STORE100 stores.
(5) Cooperation in opening stores
To open stores that are expected to be highly profitable for both companies by avoiding unnecessary competition, the two companies will provide each otherwith advance information on store openings and at thesame time do their best to avoid opening stores in thevicinity of existing stores.
(6) Integration of LAWSON STORE100 and SHOP99
Consider the integration of stores in the future.
(7) Formation of a Business Alliance Promotion Committee
Establish a Business Alliance Promotion Committee
made up of the presidents of both companies, heads ofproduct departments and their subordinates.

■ Outlook
Although the Japanese economy appears to be recoveringmoderately, competition transcending the boundaries of
the retail industry is becoming increasingly fierce, and customer needs are becoming increasingly diverse.
With regard to the CVS sector, if LAWSON focuses only on
opening a large number of conventional format stores, which
predominantly provide merchandise assortments and services for the core target of young male customers, pursuing
only the need to save time and convenience, it will be forced
into a war of attrition with other homogenized CVS stores ina mature market. As a consequence it would risk a drop in
existing store sales undermining the motivation of existing
franchised store owners. The CVS business is underpinnedby the motivation of franchised store owners. But if the
future expectations of franchised store owners don’t
improve, it will be increasingly difficult for a company operating in the industry to achieve stable, sustained growth.
To achieve stable, sustained growth over the medium tolong term in such a changing operating environment, we
believe LAWSON needs to become a more advanced company by pursuing innovation in all kinds of areas, without
being bound by conventional ideas about the CVS sector.
Based on this rationale, we initiated the medium-term management plan LAWSON Challenge 2007 in fiscal 2005. We
have implemented management initiatives based on thisplan, which ends in fiscal 2007.
In qualitative terms, we have derived considerable benefits from developing new format stores such as NATURALLAWSON and LAWSON STORE100, which have attracted
customers beyond the reach of the conventional format,
and LAWSON PLUS, which leverages the know-how garnered from the two new formats. In quantitative terms,
however, as a result of excessive competition created bymajor rival chains opening conventional stores, we failed toachieve our medium-term management targets for growthin existing store sales for two fiscal years, fiscal 2005 andfiscal 2006. Moreover, start-up and sales promotion costs
for launching the new formats to break the conventional
convenience store mold were higher than expected. For
these and other reasons, we expect it to be difficult toachieve the LAWSON Challenge 2007 final-year management targets in fiscal 2007 of an average growth in EPS of
10% over the 3 years of the plan, and ROE of 15%.
Curbing costs for new projects, advertising, educationand training in a bid to achieve these targets could compromise our growth prospects and have a negative effecton our ability to sustain growth from fiscal 2008 onwards.
For these reasons, we decided to lower our targets forfiscal 2007—to average growth in EPS of 2.3% over the 3
years of the plan, and ROE of 11.1%—and make the necessary upfront investments aimed at sustained growth overthe medium and long term.
LAWSON, INC. ANNUAL REPORT 200741

Looking ahead, the LAWSON Group’s single biggest
theme is to vitalize existing stores. To this end, we will
implement the following initiatives.

Increase customers by expanding our customer baseWe will move into full gear in converting LAWSON stores
to the LAWSON PLUS format, which targets more senior
and women customers, based on merchandise assortments
and store displays matched to the needs of local customers. At conventional LAWSON stores, we will use “store
charts” to develop more attractive merchandise assortments better suited to the needs of each region. This willentail providing more perishable foods and daily delivered
foods. Moreover, in a bid to reduce lost sales opportunities, we will provide merchandise popular with customers
based on improved order precision from data collection
and analysis.
Regarding sales promotion, we will continue to develop
loyal customers by making effective use of LAWSON PASS
and MY LAWSON POINT. In tandem with this, we will promote shopping point programs, which are popular withwomen, as we look to expand our customer base.
We are determined to convert the expected increase incustomer numbers through these initiatives into higher
earnings. In turn, this should also lead to a rise in franchised
store owner satisfaction and motivation.

Improve asset efficiency by opening highquality new stores and curbing store closures
The Group aims to improve asset efficiency as a whole bydeveloping high-quality stores in accordance with proprietary store opening guidelines and reducing extraordinary
losses from store closures by reducing store closures.
In particular, through the aforementioned measures tostrengthen existing stores, we will enhance the motivationof franchised store owners, convert stores to the LAWSONPLUS format and actively propose initiatives designed torestore the sales capabilities of franchised owners. In thisway, we aim to reduce store closures.

Strengthen the management base throughpersonnel development, next-generation IT
systems and internal controls
In accordance with our management policy and action
guidelines, we are determined to nurture people who canthink for themselves and not rely on direction from the top.
In addition, we will enhance the regional headquarters
management system consisting of seven headquarters
nationwide, to promote detailed management suited toregional characteristics. Such management is necessary tofoster management by individual stores.

42 LAWSON, INC. ANNUAL REPORT 2007

LAWSON is making preparations for the scheduled fullscale introduction in fiscal 2008 of a next-generation IT
system. The backbone for this new system will be an opticalfiber network. The concept of the new system is to create a
total company information system, one encompassing
store-related systems such as POS, store computers andstore operational equipment as well as systems for productdevelopment, store development, financial accounting andintegration master code systems (which manage products,
business partners and other operational aspects). The new
system is expected to yield benefits in terms of reductions
in lost operational time, improved ordering precision andan enhanced management infrastructure.
Where internal control is concerned, based on our “Basic
Policy for Maintaining Internal Control Systems,” we will
enhance our system and ready ourselves for compliancewith the Financial Instruments and Exchange Law.
We believe that steady implementation of these andother management initiatives will enhance customer satisfaction, and ultimately lead to improved corporate earnings
from an expanded customer base as well as higher profits
for franchised owners and greater corporate value.
For fiscal 2007, we are forecasting consolidated operating income of ¥45.9 billion, up 3.1% year on year, and net
income of ¥22.2 billion, up 5.8% year on year.

■ Business Risk Factors
The eight main risks that may impact on LAWSON’s performance and financial position are described below. Sufficiently aware that these risks may occur, LAWSON
conducts risk management and is also building and reinforcing an internal control system so as to respond in thebest manner possible should a risk materialize. Nevertheless, these risks are only within the range of what can beforecast based on information currently available to theCompany, and we do not believe that they cover all potential risks relating to LAWSON’s business operations.

Risks relating to changes in the businessenvironment
Because LAWSON’s main business is the operation of convenience stores, changes in consumer expenditure produced by changes in the economic environment, businesscycle trends, or the social structure in Japan and overseas
countries where the Company operates, as well as changes
in competition with other companies in the CVS sector ordifferent retail sectors, may impact LAWSON’s earnings
and financial condition.

Risks relating to food safety and hygiene
management
In the CVS business, LAWSON’s main business, the Company sells food products to customers. From the manufacturing process to sales in stores, in cooperation with
suppliers, LAWSON strictly observes quality standards by
performing thorough management and also performs rigorous hygiene management within stores. However, loss ofcustomer trust in the event of a serious incident such as
food poisoning or contamination by foreign matter could
have an impact on the Company’s performance and financial position. Should such an incident occur, the Company
intends to make the utmost effort to minimize the effect on
customers by making a public announcement as quickly as
possible through the mass media and other channels.

Risks relating to handling of personal
information
In the process of business operations, LAWSON handles
personal information of customers, shareholders, suppliers,
franchise owners and other parties. The Company recognizes that the leakage of personal information or improper
access to personal information are serious risks. Consequently, we have devised the best possible information
security measures and formulated a policy to protect personal information. We have also ensured that personnel
within the Company are thoroughly aware of these matters.
However, should personal information be leaked or
divulged outside the Company under whatever circumstances, LAWSON’s performance or financial position may
be affected.

Legal and regulatory risks
LAWSON operates numerous stores in various regions
throughout Japan and overseas, and the majority of storesoperate 24 hours a day. Because of this, in operating its
business, the Company must comply with various laws andregulations regarding store development, operating hours,
hygiene management, product transactions, environmental
protection, and other matters in Japan and overseas, andmust obtain various permits and licenses. Therefore, should
events arise such as an unforeseen change in laws or regulations or a change in the enforcement methods of administrative authorities, new compliance costs could arise, which
could have an impact on LAWSON’s performance or financial position.

Risks relating to franchise operations
In the CVS business, LAWSON’s main business, the Company has adopted the franchise system. Based on franchise
agreements concluded with franchised stores, LAWSON
operates a chain of stores via store brand names that are
owned by LAWSON. Therefore, if the brand image of theoverall chain is affected by illegal or improper actions at afranchised store, there may be an impact on LAWSON’s
performance or financial position.
Furthermore, the franchise system is designed to encourage improved business performance for both franchised
stores and the Company, based on a relationship of mutual
trust. If this relationship of trust between LAWSON andfranchised stores is damaged for any reason, and, as aconsequence, many franchise agreements are cancelled,there may be an impact on LAWSON’s performance or
financial position.

Risks relating to unseasonable weather ordisasters
Substantial differences in climate and temperatures fromthe average year could have an impact on LAWSON’s performance. Moreover, LAWSON is a national chain withstores located throughout Japan’s 47 prefectures, as well as
in Shanghai, China. Therefore, an earthquake could physically damage LAWSON stores or other facilities, hamperingbusiness operations. In addition, there is a risk that performance will fluctuate due to natural disasters in regions
where snowfalls are heavy or typhoons often occur.

Risks involving damage to IT systems
There is a risk that operation of the Group’s IT systems might
be impeded by a computer virus, or affected by natural
disasters such as an earthquake, which could cause interference to the distribution network, creating delays in the delivery of products to stores. Such developments could impact
on LAWSON’s performance or financial position.

Risks involving soaring materials prices
LAWSON’s performance or financial position could bematerially affected by further increases in raw materials
prices due to unpredictable developments, such as rising
oil and other raw materials prices, bird flu, and unusual
weather.

LAWSON, INC. ANNUAL REPORT 200743

Consolidated Balance Sheets
LAWSON, INC. and Subsidiaries
February 28, 2007 and 2006

Millions of Yen

Thousands of
U.S. Dollars(Note 1)

2007

2006

2007

¥ 75,547
14,996¥ 60,441
19,652$ 637,850
126,613

11,71026,002
(115)
1,789
8,850
2,795
7,448

10,762
21,578
(81)
1,573
6,250
3,189
6,478

98,869219,537(971)
15,10574,721
23,59862,885

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

149,022

129,842

1,258,207

PROPERTY AND STORE EQUIPMENT (Notes 4 and 6):
Land (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, fixtures and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,709
144,418
58,9785,237
130,108
60,41039,7591,219,334
497,957

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

208,105(103,850)

195,755(96,483)

1,757,050(876,815)

Net property and store equipment . . . . . . . . . . . . . . . . . . . . . . . . . .

104,255

99,272880,235

INVESTMENTS AND OTHER ASSETS:
Investment securities (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in associated companies . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease deposits (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets (Note 14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets for land revaluation (Note 7) . . . . . . . . . . . . . . . . . .
Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,560
1,553
24,38087,904
11,551
468
14,786
6,797(4,018)

1,962
1,087
20,631
89,928
11,0463,331
15,807
6,663(4,462)

13,171
13,112205,843
742,182
97,526
3,951
124,840
57,387(33,924)

Total investments and other assets . . . . . . . . . . . . . . . . . . . . . . . . . .

144,981

145,993

1,224,088

TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 398,258¥375,107$3,362,530

ASSETS

CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketable securities (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable:
Due from franchised stores (Notes 3 and 10) . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term loan to associated company (Note 17) . . . . . . . . . . . . . . . . .
Deferred tax assets (Note 14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . .

See notes to consolidated financial statements.

44 LAWSON, INC. ANNUAL REPORT 2007

Millions of Yen

Thousands of
U.S. Dollars(Note 1)

2007

2006

2007

CURRENT LIABILITIES:
Accounts payable:
Trade (Notes 9 and 17) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due to franchised stores (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable (Note 14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money held as agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other current liabilities . . . . . . . . . . . . . . . . . . . .

¥ 65,000
2,757
16,611
4,755
48,755
5,636¥ 63,170
3,417
14,344
10,32444,6155,371$ 548,801
23,278140,248
40,147
411,643
47,585

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

143,514141,241

1,211,702

LIABILITIES AND EQUITYLONG-TERM LIABILITIES:
Liability for employees’ retirement benefits (Note 11) . . . . . . . . . . . . . .
Allowance for retirement benefits to executive officers
and corporate auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Guarantee deposits received from franchised stores . . . . . . . . . . . . . . .
Lease deposits from lessees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for impairment loss on leased property (Note 16) . . . . . . . . .
Other (Note 15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,527

2,817

29,779249
48,451
875
95
2,054

318
50,466
870
140
248

2,102
409,076
7,388
802
17,342

Total long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

55,251

54,859466,489

MINORITY INTERESTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,823

CONTINGENT LIABILITIES (Note 18)
EQUITY (Notes 12 and 20):
Common stock—authorized, 409,300,000 shares in2007 and 2006; issued, 104,600,000 shares in 2007 and 2006 . . . . . .
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock acquisition rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land revaluation difference (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized gain on available-for-sale securities . . . . . . . . . . . . . . . .
Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock—at cost, 186,918 shares in 2007
and 2,313,932 shares in 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

58,50742,25478
95,344
(682)
320
135

58,507
41,52088,356(4,855)696
105

493,980
356,754659
804,998(5,758)
2,702
1,140

(739)

(9,145)(6,239)Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

195,217
4,276

175,184

1,648,236
36,103

Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

199,493

175,184

1,684,339

TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥398,258¥375,107$3,362,530

LAWSON, INC. ANNUAL REPORT 200745

Consolidated Statements of Income
LAWSON, INC. and Subsidiaries
Years Ended February 28, 2007 and 2006

Millions of Yen

Thousands of
U.S. Dollars(Note 1)

2007

2006

2007

OPERATING REVENUES:Franchise commission from franchised stores . . . . . . . . . . . . . . . . . . . . .
Net sales from Company-operated stores . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥174,325
75,151
33,577¥170,785
66,027
31,246$1,471,842
634,507283,494

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

283,053

268,058

2,389,843

COST AND OPERATING EXPENSES:
Cost of sales for Company-operated stores . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses (Notes 11 and 16) . . . . . .

55,371
183,169

48,297
175,894

467,5031,546,513

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

238,540

224,191

2,014,016

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

44,51343,867

375,827

OTHER INCOME (EXPENSES):Interest income—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in gains of associated companies . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sales of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sales of property and store equipment . . . . . . . . . . . . . . . . . . .
Reversal of allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of property and store equipment . . . . . . . . . . . . . . . . .
Impairment of long-lived assets (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on replacement of computer system (Note 15) . . . . . . . . . . . . . . . .
Other—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

628
102
44
746
311
(4,638)(1,811)(2,202)
(845)

386
286
989
24
263
(3,014)(2,708)(1,370)

5,302
861
372
6,299
2,626
(39,159)(15,290)(18,592)(7,135)

Other expenses—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(7,665)(5,144)(64,716)

INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS . . . .

36,84838,723

311,111

INCOME TAXES (Note 14):
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12,3783,011

17,823(1,606)

104,50925,422

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15,38916,217

129,931MINORITY INTERESTS IN NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . .

(476)

(481)

(4,019)NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥ 20,983¥ 22,025$ 177,161

Yen

U.S. Dollars

2007

2006

2007

¥201.50201.40100.00¥215.50215.46
90.00

$1.70
1.70
0.84

PER SHARE OF COMMON STOCK (Notes 2.q and 19):
Net income—basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income—diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
See notes to consolidated financial statements.

46 LAWSON, INC. ANNUAL REPORT 2007

Consolidated Statements of Changes in Equity
LAWSON, INC. and Subsidiaries
Years Ended February 28, 2007 and 2006

Thousands of Shares/Millions of Yen

Common Stock

BALANCE, MARCH 1, 2005 . . . . . . . . . . . . . . . . . .

SharesAmountCapitalSurplus104,600¥58,507¥41,523

Stock
Acquisition
RightsLand
Retained Revaluation
Earnings Difference¥76,721¥(7,038)

Net
Unrealized
Gain onForeign
AvailableCurrency
for-sale Translation
Securities Adjustments

¥ 110

¥ 34

Treasury Stock
SharesAmountTotal(2,423)¥(9,575)

Minority
Interests

Total
Equity¥160,282¥160,282

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

22,02522,02522,025

Year end cash dividends, ¥35 per share . . . . . . .

(3,576)(3,576)(3,576)

Interim cash dividends, ¥45 per share . . . . . . . .

(4,598)(4,598)(4,598)

Reversal of land revaluation difference . . . . . . . .

(2,183)

586

586

71

71

2,183

Net increase in unrealized gain on
available-for-sale securities . . . . . . . . . . . . . . . .

586

Net increase in foreign currencytranslation adjustments . . . . . . . . . . . . . . . . . . .

71

Treasury stock—at cost:
Purchase of treasury stock . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . . . . . .
BALANCE, FEBRUARY 28, 2006 . . . . . . . . . . . . . . .

104,600

58,507(3)(33)

41,52088,356(4,855)

696

105

(1)

(2)

(2)

(2)

110

432

396

396

(2,314)(9,145)

175,184

175,184

Reclassified balance as of February 28, 2006
(Note 2.l.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥3,823

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

20,983

20,983

3,823
20,983

Year end cash dividends, ¥45 per share . . . . . . .

(4,603)(4,603)(4,603)

Interim cash dividends, ¥50 per share . . . . . . . .

(5,219)(5,219)(5,219)

Reversal of land revaluation difference . . . . . . . .

(4,173)(4,173)(4,173)

Treasury stock—at cost:
Purchase of treasury stock . . . . . . . . . . . . . . . .
Sale of treasury stock . . . . . . . . . . . . . . . . . . . .

753

Exercise of stock options . . . . . . . . . . . . . . . . .

(19)

Others—net . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BALANCE, FEBRUARY 28, 2007 . . . . . . . . . . . . . . . 104,600¥78¥58,507¥42,254¥78¥95,344

4,173

(376)

30

¥ (682)

¥ 320

¥135

(1)

(1)

(1)

(1)

2,093

8,268

9,021

9,021

35

139

(187)

¥ (739)

120

120

3,905

453

4,358

¥195,217¥4,276¥199,493

Thousands of U.S. Dollars (Note 1)

BALANCE, FEBRUARY 28, 2006 . . . . . . . . . . . . . . . . . . . . . . . . .

CommonStockCapitalSurplus$493,980$350,557

Stock
Acquisition
RightsLand
Retained Revaluation
Earnings Difference$745,998$(40,991)

Net
Unrealized
Gain onForeign
AvailableCurrency
for-sale Translation
Securities Adjustments$5,876$ 887

Treasury
Stock

Total

Minority
Interests$(77,212) $1,479,095

Reclassified balance as of February 28, 2006 (Note 2.l.) . . . .

$1,479,095$32,278

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

177,161

Total
Equity177,161

32,278177,161

Year end cash dividends, $0.38 per share . . . . . . . . . . . . . . .

(38,864)(38,864)(38,864)

Interim cash dividends, $0.42 per share . . . . . . . . . . . . . . . . .

(44,064)(44,064)(44,064)

Reversal of land revaluation difference . . . . . . . . . . . . . . . . . .

(35,233)(35,233)(35,233)

Treasury stock—at cost:
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . .
Sale of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6,357

Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . .

(160)

Others—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BALANCE, FEBRUARY 28, 2007 . . . . . . . . . . . . . . . . . . . . . . . . .

$356,754(8)(8)

76,164

76,164

1,174$659$493,980(8)
69,807$659$804,998

1,014

35,233(3,174)253

32,971$ (5,758)$2,702$1,140$ (6,239) $1,648,236

1,014
3,825

36,796$36,103 $1,684,339

See notes to consolidated financial statements.

LAWSON, INC. ANNUAL REPORT 200747

Consolidated Statements of Cash FlowsLAWSON, INC. and Subsidiaries
Years Ended February 28, 2007 and 2006

Millions of Yen

Thousands of
U.S. Dollars(Note 1)

2007

2006

2007

¥ 36,848¥ 38,723$ 311,111(17,947)
21,352
1,811
2,202
(410)
2,881
(102)
(44)
(746)
1,262

(19,217)
20,896
2,708
324
1,846
(286)
(989)
(24)
1,849

(151,528)
180,277
15,29018,592(3,462)
24,325(861)(372)(6,299)10,656(5,345)
(283)
(216)
3,438
4,140
125

(2,908)
(588)
(197)
376
4,345
52

(45,128)(2,389)(1,824)29,027
34,954
1,055

641(2,016)
5

1,022(1,056)57

5,412(17,021)42

Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10,748

8,210

90,746

Net cash provided by operating activities . . . . . . . . . . . . . . . . . .

47,596

46,933401,857

INVESTING ACTIVITIES:
Purchases of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from redemption of marketable securities . . . . . . . . . . . . . . . .
Proceeds from sales of investment securities . . . . . . . . . . . . . . . . . . . . .
Purchases of property and store equipment . . . . . . . . . . . . . . . . . . . . . .
Decrease in lease deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in short-term loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in long-term loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(57,193)
61,850185(28,760)
2,024(2,600)(3,749)(3,511)(44,709)
33,076
1,705(28,631)37(1,250)(3,821)(11,689)(482,886)
522,205
1,562(242,823)
17,089(21,952)(31,653)(29,644)

Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . .

(31,754)(55,282)(268,102)

FINANCING ACTIVITIES:Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of share upon exercise of stock option . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid to minority shareholders . . . . . . . . . . . . . . . . . . . . .

(9,822)
9,021
120
(1)
(54)

(8,188)(82,928)
76,165
1,013
(8)
(456)

Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . .

(736)(7,795)(6,214)NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . .

15,106(16,144)

127,541

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR . . . . . . . . . .

60,441

76,585510,309

CASH AND CASH EQUIVALENTS, END OF YEAR . . . . . . . . . . . . . . . . .

¥ 75,547¥ 60,441$ 637,850

OPERATING ACTIVITIES:
Income before income taxes and minority interests . . . . . . . . . . . . . . . .
Adjustments for:
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on replacement of computer system . . . . . . . . . . . . . . . . . . . . . .
Provision for allowance for doubtful accounts . . . . . . . . . . . . . . . . . . .
Loss on disposal of property and store equipment . . . . . . . . . . . . . . .
Equity in gains of associated companies . . . . . . . . . . . . . . . . . . . . . . .
Gain on sales of investment securities . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sales of property and store equipment . . . . . . . . . . . . . . . . .
Other—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in assets and liabilities:
Increase in accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in prepaid expenses and other current assets . . . . . . . . . .
Increase in inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in money held as agent . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in accrued expenses and other liabilities . . . . . . . . . . . . . .
Increase in allowance for retirement benefits to employees
and executive officers and corporate auditors . . . . . . . . . . . . . . . .
Decrease in guarantee deposits received from franchised stores . .
Increase in lease deposits from lessees . . . . . . . . . . . . . . . . . . . . . .

See notes to consolidated financial statements.

48 LAWSON, INC. ANNUAL REPORT 2007

395
(2)

Notes to Consolidated Financial Statements
LAWSON, INC. and Subsidiaries
Years Ended February 28, 2007 and 2006

1. Basis of Presenting Consolidated Financial Statements
The accompanying consolidated financial statements have been prepared in accordancewith the provisions set forth in the Japanese Securities and Exchange Law and its related
accounting regulations, and in conformity with accounting principles generally accepted inJapan, which are different in certain respects as to application and disclosure requirementsof International Financial Reporting Standards.
On December 27, 2005, the Accounting Standards Board of Japan (the “ASBJ”) published a new accounting standard for the statement of changes in equity, which is effective
for fiscal years ending on or after May 1, 2006. The consolidated statement of shareholders’equity, which was previously voluntarily prepared in line with the international accounting
practices, is now required under generally accepted accounting principles in Japan and has
been renamed “the consolidated statement of changes in equity” in the current fiscal year.
In preparing these consolidated financial statements, certain reclassifications and rearrangements have been made to the consolidated financial statements issued domestically inorder to present them in a form which is more familiar to readers outside Japan. In addition,certain reclassifications have been made in the 2006 financial statements to conform to the2007 presentation.
The consolidated financial statements are stated in Japanese yen, the currency of thecountry in which LAWSON, INC. (the “Company”) is incorporated and operates. The translations of Japanese yen amounts into U.S. dollar amounts are included solely for the convenience of readers outside Japan and have been made at the rate of ¥118.44 to $1, theapproximate rate of exchange at February 28, 2007. Such translations should not be
construed as representations that the Japanese yen amounts could be converted into U.S.
dollars at that or any other rate.
Mitsubishi Corporation (“Mitsubishi”) owned 32,399 thousand shares of common stock of theCompany (including indirect holdings) as of February 28, 2007 which represented 31.02% of thetotal voting rights of the Company. Accordingly, Mitsubishi is a principal shareholder.

2. Summary of Significant Accounting Policies
a. Consolidation—The consolidated financial statements include the accounts of theCompany and its subsidiaries (together the “Companies”).
Under the control or influence concept, those entities in which the Company, directly or
indirectly, is able to exercise control over operations are fully consolidated, and those entities over which the Companies have the ability to exercise significant influence are accounted for by the equity method.
The excess of the cost of the Company’s investments in consolidated subsidiaries andassociated companies over the fair value of the net assets at the dates of acquisition is
being amortized over a period of 5 years.
All significant intercompany balances and transactions have been eliminated in consolidation.
All material unrealized profit included in assets resulting from transactions within the
Companies is eliminated.
b. Franchise Agreement and Basis of Recognizing Franchise Commission—The Company
operates principally in a single industry commonly classified as the convenience store businesswith its own stores and franchised stores. The Company allows each independent franchisee
to operate relatively small-sized convenience stores using specific designs and the LAWSON
brand names, and provides related managerial or technical know-how under a franchise
agreement. Under the agreement, all franchised stores are provided with a variety of services
and advice on the operation of convenience stores from the Company as the franchisor. In
return, such franchised stores are required to pay continuing franchise commissions to theCompany based on certain percentages of the respective franchised store’s annual grossmargin. As the franchisor, the Company accounts for franchise commissions on an accrual
LAWSON, INC. ANNUAL REPORT 200749

basis by reference to the annual gross margin earned by each franchised store and the applicable commission percentage. According to the franchise agreement, a franchised store may
pay additional guarantee deposits equal to twice of the average monthly sales amounts of therespective store and pay a lower commission percentage.
The term of a franchise agreement is effective primarily for 10 years from the commencement date of a new store’s operation as a franchised store, and may be extended or
renewed upon expiration subject to renegotiation of contract terms between the Company
and the franchisee.
The franchise agreement usually provides that the franchised store shall make a cash
payment to the Company in the amount of ¥3 million upon commencement. Upon receipt
of such payment, ¥1.5 million is credited to income of the Company as “Operating
revenues—franchise commission from franchised stores” for services related to the openingof the LAWSON store. The remaining amount received by the Company is credited to “Dueto franchised stores” account and then applied to working capital for purchases of merchandise and supplies for the franchised store.
As part of the contractual obligations of the franchisor under the agreement, theCompany generally provides franchisees with furniture, fixtures and equipment designed for
the LAWSON stores. In some cases, franchisees may also be provided with the land or
buildings for the stores. However, the Company does not require the franchisees to makelease payments related to the stores. Instead, a higher percentage applicable to the grossmargin would be used as the basis for determining the franchise commissions. The portionof franchise commission attributable to property and store equipment leases is not separately accounted for by the Company.

c. Cash and Cash Equivalents—Cash and cash equivalents include cash on hand, demand
deposits and short-term investments, which mature or become due within three months ofthe date of acquisition and which are readily convertible into cash and are exposed to insignificant risk of changes in value.
d. Inventories—Inventories are stated at cost determined by the retail method as generally
applied in the retail industry.
e. Marketable and Investment Securities—Marketable and investment securities are classified and accounted for, depending on management’s intent, as follows: (1) held-to-maturity
debt securities, which are expected to be held to maturity with the positive intent and ability
to hold to maturity are reported at amortized cost and (2) available-for-sale securities, which
are not classified as the aforementioned securities, are stated at fair value based on market
quotation. Unrealized gains and losses net of applicable taxes are reported in a separate
component of equity. The cost of securities sold is determined based on themoving-average method.
Non-marketable available-for-sale securities are stated at cost determined by themoving-average method. For other than temporary declines in fair value, non-marketableavailable-for-sale securities are reduced to net realizable value by a charge to income.
f. Property and Store Equipment—Property and store equipment are stated at cost except forland (see Note 7). Depreciation is computed by the declining-balance method at rates based on
the estimated useful lives of the assets. The range of useful lives is principally from 10 to 34 years
for buildings and structures and from 5 to 8 years for furniture, fixtures and equipment.

50 LAWSON, INC. ANNUAL REPORT 2007

g. Long-lived Assets—The Companies review its long-lived assets for impairment whenever
events or changes in circumstance indicate the carrying amount of an asset or asset group,
mainly by each store, may not be recoverable. An impairment loss would be recognized if
the carrying amount of an asset or asset group exceeds the sum of the undiscounted future
cash flows expected to result from the continued use and eventual disposition of the asset
or asset group. The impairment loss would be measured as the amount by which the carrying amount of the asset exceeds its recoverable amount, which is the higher of the discounted cash flows from the continued use and eventual disposition of the assets or the net
selling price at disposition.
h. Software—Software used by the Companies is amortized using the straight-line method
based on the estimated useful life (mainly 5 years).
i. Employees’ Retirement Benefits—The Company and a certain domestic subsidiary havedefined benefit lump-sum severance indemnity plans which cover substantially all of theiremployees. The Company established a trust fund for its lump-sum severance indemnity plan.
The Companies account for the liability for retirement benefits based on the projected
benefit obligations and plan assets at the balance sheet date.
In addition to the lump-sum severance indemnity plan, the Company has a defined contribution plan for severance payments. The Company recognizes expenses in the period when
the contribution was called for.
j. Allowance for Retirement Benefits to Executive Officers and Corporate Auditors—
The provisions are calculated to state the liability at 100% of the amount that would be required
if all executive officers and corporate auditors resigned as of each balance sheet date.
k. Stock Options—On December 27, 2005, the ASBJ issued ASBJ Statement No. 8,“Accounting Standard for Stock Options” and related guidance. The new standard andguidance are applicable to stock options newly granted on and after May 1, 2006. This
standard requires companies to recognize compensation expense for employee stock
options based on the fair value at the date of grant and over the vesting period as consideration for receiving goods or services. The standard also requires companies to account for
stock options granted to non-employees based on the fair value of either the stock option
or the goods or services received. In the balance sheet, the stock option is presented as astock acquisition right as a separate component of equity until exercised. The standard
covers equity-settled, share-based payment transactions, but does not cover cash-settled,share-based payment transactions. In addition, the standard allows unlisted companies tomeasure options at their intrinsic value if they cannot reliably estimate fair value.
The Company applied the new accounting standard for stock options to those granted on
and after May 1, 2006. The effect of adoption of this accounting standard for the year
ended February 28, 2007 was to decrease income before income taxes and minority interests by ¥78 million ($659 thousand).
l. Presentation of Equity—On December 9, 2005, the ASBJ published a new accounting
standard for presentation of equity. Under this accounting standard, certain items whichwere previously presented as liabilities are now presented as components of equity. Suchitems include stock acquisition rights, minority interests, and any deferred gain or loss onderivatives accounted for under hedge accounting. This standard is effective for fiscal years
ending on or after May 1, 2006. The consolidated balance sheet as of February 28, 2007 ispresented in line with this new accounting standard.

LAWSON, INC. ANNUAL REPORT 200751

m. Leases—All leases are accounted for as operating leases. Under Japanese accounting
standards for leases, finance leases that deem to transfer ownership of the leased property
to the lessee are to be capitalized, while other finance leases are permitted to be accounted
for as operating lease transactions if certain “as if capitalized” information is disclosed in thenotes to the consolidated financial statements.
n. Income Taxes—The Companies provide for income taxes applicable to all items includedin the consolidated statements of income regardless of when such taxes are payable.
Deferred income taxes are recorded to reflect the impact of temporary differences between
assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. These deferred taxes are measured by applying currently enacted
tax laws to the temporary differences.
o. Appropriations of Retained Earnings—Appropriations of retained earnings at each year
end are reflected in the consolidated financial statements for the following year upon shareholders’ approval.
p. Foreign Currency Financial Statements—The balance sheet accounts of an associatedcompany denominated in foreign currencies are translated into Japanese yen at the current
exchange rate as of the balance sheet date except for equity, which is translated at thehistorical rate. Differences arising from such translation are shown as “Foreign currencytranslation adjustments” in a separate component of equity. Revenue and expense accountsof an affiliated company denominated in foreign currencies are translated into yen at thecurrent exchange rate.
q. Per Share Information—Basic net income per share is computed by dividing net income
available to common shareholders by the weighted-average number of common shares
outstanding for the period.
The number of shares used in computing net income per share was 104,134 thousand
shares for 2007 and 102,202 thousand shares for 2006.
Diluted net income per share for the years ended February 28, 2007 and 2006 is computed by using the weighted-average number of common shares outstanding adjusted toinclude the potentially dilutive effect of stock options that were outstanding during the year.
Cash dividends per share presented in the accompanying consolidated statements ofincome are dividends applicable to the respective years including dividends to be paid after
the end of year.
r. New Accounting Pronouncements
Lease accounting—On March 30, 2007, the ASBJ issued ASBJ Statement No. 13,“Accounting Standard for Lease Transactions,” which revised the existing accounting standard for lease transactions issued on June 17, 1993.
Under the existing accounting standard, finance leases that deem to transfer ownership ofthe leased property to the lessee are to be capitalized, however, other finance leases are
permitted to be accounted for as operating lease transactions if certain “as if capitalized”
information is disclosed in the note to the lessee’s financial statements.
The revised accounting standard requires that all finance lease transactions should becapitalized. The revised accounting standard for lease transactions is effective for fiscal years
beginning on or after April 1, 2008 with early adoption permitted for fiscal years beginningon or after April 1, 2007.

52 LAWSON, INC. ANNUAL REPORT 2007

3. Accounts Receivable—Due From Franchised Stores
Under the franchise agreement, the Company is responsible for providing architectural anddesigning services with respect to the franchised stores’ facilities, for training of the franchisees’ personnel, and for the centralized processing of invoices from suggested vendors ofmerchandise and subsequent payments of amounts payable to such vendors.
The EDP system of the Company generates a record of merchandise purchased by eachfranchised store and accumulates the amounts payable to respective vendors. Under the
franchise agreement, the Company, as a representative for all franchised stores, pays
amounts payable to the vendors on the stores’ behalf. When the merchandise is received byeach franchised store, the Company records the cost of the merchandise in the “Accounts
receivable—due from franchised stores” account since such costs shall be subsequently
recovered from respective franchised stores.
The “Accounts receivable—due from franchised stores” account represents net amounts
recoverable from the franchised stores.

4. Property and Store Equipment
Property and store equipment as of February 28, 2007 and 2006, consisted of the following:
Millions of Yen

Thousands of
U.S. Dollars

2007

2006

2007

2,202
130,492
50,701¥ 1,423
118,297
51,404$ 18,592
1,101,756
428,073

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . .

183,395
92,448171,124
84,8501,548,421
780,547

Used by franchised stores:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, fixture and equipment . . . . . . . . . .

¥Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

90,947

86,274

767,874

Used by Company-operated stores and other:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, fixture and equipment . . . . . . . . . .

2,507
13,926
8,277

3,814
11,811
9,006

21,167
117,578
69,884

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . .

24,71011,402

24,631
11,633

208,629
96,268Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13,30812,998112,361

Net property and store equipment—total . .

¥104,255¥ 99,272$ 880,235

5. Marketable and Investment Securities
Marketable and investment securities as of February 28, 2007 and 2006, consisted of the following:

Current—Bonds . . . . . . . . . . . . . . . . . . . . . . . .
Non-current—Marketableand other equity securities . . . . . . . . . . . . . . .
Non-current—Bonds . . . . . . . . . . . . . . . . . . . . .

Millions of Yen

Thousands of
U.S. Dollars

2007

2006

2007

¥14,996¥19,652$126,613

763
797

1,464
498

6,442
6,729

LAWSON, INC. ANNUAL REPORT 2007

53

The costs and aggregate fair values of marketable and investment securities at February
28, 2007 and 2006, were as follows:
Millions of Yen
February 28, 2007

Cost

Securities classified as:
Held-to-maturity . . . . . . . . . . . . . . . . . . . . .
Available-for-sale:
Equity securities . . . . . . . . . . . . . . . . . . . .
Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Unrealized
Gains¥13,997¥

Unrealized
Losses3

Fair Value¥14,000

77
1,799

540

¥1
3

616
1,796

16,0121

316,010

288
4,141

1,175
3

1,463
4,138

February 28, 2006

Securities classified as:
Held-to-maturity . . . . . . . . . . . . . . . . . . . . .
Available-for-sale:
Equity securities . . . . . . . . . . . . . . . . . . . .
Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Thousands of U.S. Dollars
February 28, 2007

Securities classified as:
Held-to-maturity . . . . . . . . . . . . . . . . . . . . .
Available-for-sale:
Equity securities . . . . . . . . . . . . . . . . . . . .
Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cost$118,178
650
15,189Unrealized
Gains

$

Unrealized
Losses25

Fair Value$118,203

4,559

$ 8
25

5,201
15,164

Available-for-sale securities whose fair value is not readily determinable as of February 28,
2007 and 2006, were as follows:
Carrying Amount

Available-for-sale—Equity securities . . . . . . . . . . .

Millions of Yen

Thousands of
U.S. Dollars

2007

2006

2007

¥147

¥1

$1,241

Proceeds from sales of available-for-sale securities for the years ended February 28, 2007
and 2006 were ¥185 million ($1,562 thousand) and ¥1,705 million, respectively. Gross realized gains on these sales, computed on the moving average cost basis, were ¥44 million($372 thousand) for the year ended February 28, 2007, and ¥989 million for the year ended
February 28, 2006.

54 LAWSON, INC. ANNUAL REPORT 2007

6. Long-Lived Assets
The Companies recognized an impairment loss mainly for each store as the smallest cash
generating unit, which declined in value due mainly to continuous operating losses. The
carrying amount of those assets was written down to the recoverable amount and an
impairment loss was recorded in other expenses in the consolidated statements of income.
The Companies recognized impairment loss on the following asset categories for theyears ended February 28, 2007 and 2006:
Millions of Yen
Category

Related Assets

2007

2006

StoresBuildings andTokyo . . . . . . . .
furniture, fixtures Osaka . . . . . . . .
and equipment
Other . . . . . . . .
Land . . . . . . . . . . . . . . . . . . . . . . . . .
Software, etc. . . . . . . . . . . . . . . . . . .

¥ 111
303
1,397

¥ 272
183
1,870
316
67

$

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥1,811¥2,708$15,290

Other

Location

Thousands of
U.S. Dollars
2007

937
2,558
11,795The above assets which incurred impairment losses for the years ended February 28, 2007
and 2006, consisted of the following:

Fixed assets and leased property:
Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased property . . . . . . . . . . . . . . . . . . . . . .
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Millions of Yen

Thousands of
U.S. Dollars

2007

2006

2007

¥1,475
58$12,454489

278¥1,676204316
512¥1,811¥2,708$15,290

2,347

The recoverable amount of those assets were measured based on net selling price orvalue in use. The net selling price of land was calculated based on appraised value by realestate appraiser or expected contract price. The value in use was calculated by discounting
estimated future cash flows to which the discount rate was applied. The discount rate was
6.9% and 6.0% for the years ended February 28, 2007 and 2006, respectively.

7. Land Revaluation
Under the “Law of Land Revaluation,” promulgated on March 31, 1998 and revised on
March 31, 1999 and 2001, the Company chose a one-time revaluation of its own-use land toa value based on real estate appraisal information as of February 28, 2002.
The resulting land revaluation difference represents unrealized depreciation of land and isstated, net of income taxes, as a component of equity. There was no effect on the consolidated statements of income. Continuous readjustment is not permitted unless the land
value subsequently declines significantly.
As at February 28, 2007, the carrying amount of the land after the above one-time revaluation exceeded the market value by ¥181 million ($1,528 thousand).

LAWSON, INC. ANNUAL REPORT 200755

8. Lease Deposits
Under certain circumstances, the Company leases land and/or buildings, as a lessee, for its
offices and Company-operated stores or for franchisees to operate as franchised stores. The
leases are based on long-term, cancelable lease agreements with owners. In connection
with such agreements, the lessor requires leasehold deposits equivalent to approximately
several months’ rent, which are non-interest bearing and refundable only when the leases
are terminated.
Lease deposits as of February 28, 2007 and 2006, consisted of the following:
Millions of Yen

Thousands of
U.S. Dollars

2007

2006

2007

Lease deposits for franchised stores . . . . . . . . .
Lease deposits for Company-operated storesand other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥72,870¥74,856$615,248

15,034

15,072

126,934

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥87,904¥89,928$742,182

9. Accounts Payable—Trade
The balances of “Accounts payable—trade” represent the amounts payable to vendors formerchandise purchased by Company-operated stores and franchised stores. The Company
centralizes all merchandise purchasing procedures both for Company-operated stores andfranchised stores and makes collective payments to vendors (see Note 3).
Accounts payable—trade as of February 28, 2007 and 2006, were summarized below:
Millions of Yen

Thousands of
U.S. Dollars

2007

2006

2007

Accounts payable—trade for franchised stores . .
Accounts payable—trade forCompany-operated stores . . . . . . . . . . . . . . .

¥60,817¥59,795$513,484

4,183

3,375

35,317

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥65,000¥63,170$548,801

10. Accounts Payable—Due to Franchised Stores
The cost of merchandise supplied to the franchised stores is recorded as “Accounts receivable—
due from franchised stores” as described in Note 3.
All franchised stores make remittances of cash proceeds from daily sales to the Company.
In certain instances, the remittance from a franchised store exceeds the balance of“Accounts receivable—due from franchised stores.” In the accompanying consolidatedbalance sheets, such excess balances are presented as “Accounts payable—due to franchised stores.”11. Employees’ Retirement Benefits
The Company and a certain domestic subsidiary have each of defined benefit lump-sum
severance indemnity plan.
Under the plans, employees terminating their employment are entitled to retirement
benefits determined based on the rate of pay, years of service and certain other factors at
the time of termination. Such retirement benefits are made in the form of a lump-sum severance payment from the Company or from a certain subsidiary. Employees are entitled tolarger payments if the termination is involuntary, by retirement at the mandatory retirement

56 LAWSON, INC. ANNUAL REPORT 2007

age, by death, or by voluntary retirement at certain specific ages prior to the mandatory
retirement age.
The funded status of these plans as of February 28, 2007 and 2006 was as follows:
Millions of Yen

Thousands of
U.S. Dollars

2007

2006

2007

Projected benefit obligation . . . . . . . . . . . . . . .
Fair value of plan assets . . . . . . . . . . . . . . . . . .
Unrecognized prior service cost . . . . . . . . . . . .
Unrecognized actuarial loss . . . . . . . . . . . . . . .

¥10,736(5,548)(1,230)(431)¥10,710(5,536)(1,406)(951)$ 90,645(46,842)(10,385)(3,639)Net liability . . . . . . . . . . . . . . . . . . . . . . . . .

¥ 3,527¥ 2,817$ 29,779

The components of net periodic benefit costs for the years ended February 28, 2007 and2006 were as follows:
Millions of Yen

Thousands of
U.S. Dollars

2007

2006

2007

Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service cost . . . . . . . . . . .
Recognized actuarial loss . . . . . . . . . . . . . . . . .
Contribution to defined contribution plan . . . .

¥1,105
213
176
128
246

¥ 812
197
176
119
248

$ 9,330
1,798
1,486
1,081
2,077

Net periodic benefit costs . . . . . . . . . . . . .

¥1,868¥1,552$15,772

Assumptions used for the years ended February 28, 2007 and 2006, were as follows:

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected rate of return on plan assets . . . . . . . . . . . . . . . . . .
Amortization period of prior service cost . . . . . . . . . . . . . . . .
Recognition period of actuarial gain/loss . . . . . . . . . . . . . . . .

2007

2006

2.0%
0%
10 years
10 years

2.0%
0%
10 years
10 years

12. Equity
On and after May 1, 2006, Japanese companies are subject to a new corporate law of Japan(the “Corporate Law”), which reformed and replaced the Commercial Code of Japan (the“Code”) with various revisions that are, for the most part, applicable to events or transactions which occur on or after May 1, 2006 and for the fiscal years ending on or after May 1,
2006. The significant changes in the Corporate Law that affect financial and accounting
matters are summarized below:

a. Dividends
Under the Corporate Law, companies can pay dividends at any time during the fiscal year in
addition to the year-end dividend upon resolution at the shareholders meeting. For
companies that meet certain criteria such as: (1) having the Board of Directors, (2) having
independent auditors, (3) having the Board of Corporate Auditors, and (4) the term of service of the directors is prescribed as one year rather than two years of normal term by its
articles of incorporation, the Board of Directors may declare dividends (except for dividends
in kind) at any time during the fiscal year if the company has prescribed so in its articles ofincorporation. The Company meets all the above criteria.

LAWSON, INC.

ANNUAL REPORT 2007

57

The Corporate Law permits companies to distribute dividends-in-kind (non-cash assets) toshareholders subject to a certain limitation and additional requirements.
Semiannual interim dividends may also be paid once a year upon resolution by the Board of
Directors if the articles of incorporation of the company so stipulate. The Corporate Law provides certain limitations on the amounts available for dividends or the purchase of treasury
stock. The limitation is defined as the amount available for distribution to the shareholders,
but the amount of net assets after dividends must be maintained at no less than ¥3 million.

b. Increases/Decreases and Transfer of Common Stock, Reserve and Surplus
The Corporate Law requires that an amount equal to 10% of dividends must be appropriated as a legal reserve (a component of retained earnings) or as additional paid-in capital (acomponent of capital surplus) depending on the equity account charged upon the paymentof such dividends until the total of aggregate amount of legal reserve and additional paid-in
capital equals 25% of the common stock. Under the Corporate Law, the total amount ofadditional paid-in capital and legal reserve may be reversed without limitation. The Corporate Law also provides that common stock, legal reserve, additional paid-in capital, othercapital surplus and retained earnings can be transferred among the accounts under certain
conditions upon resolution of the shareholders.
c. Treasury Stock and Treasury Stock Acquisition Rights
The Corporate Law also provides for companies to purchase treasury stock and dispose ofsuch treasury stock by resolution of the Board of Directors. The amount of treasury stock
purchased cannot exceed the amount available for distribution to the shareholders which isdetermined by specific formula. Under the Corporate Law, stock acquisition rights, whichwere previously presented as a liability, are now presented as a separate component ofequity. The Corporate Law also provides that companies can purchase both treasury stockacquisition rights and treasury stock. Such treasury stock acquisition rights are presented asa separate component of equity or deducted directly from stock acquisition rights.

13. Stock Option
The Company has a stock option plan as an incentive plan for directors, executive officers
and selected employees.
A summary of information for the Company’s stock option plans is as follows:
Stock Option

Persons Granted

Number of
Options Granted

Date of Grant

Exercise Price

Exercise Period

Stock subscription
rights18 directors and574 employees

1,773,000 shares

2000.6.12¥7,500($63.32)

From May 27, 2002
to May 25, 2007

1st Stock Option

8 directors,
14 executive officers and561 employees

313,000 shares

2002.6.25¥3,680($31.07)

From December 1, 2002
to May 31, 2007

2nd Stock Option

9 directors and
17 executive officers

92,000 shares2003.7.3¥3,517($29.69)

From July 3, 2005
to July 2, 2008

3rd Stock Option

9 directors and
20 executive officers

99,000 shares2004.6.10¥4,320($36.47)

From June 10, 2006
to June 9, 2009

4th Stock Option

9 directors and
24 executive officers

114,000 shares2005.10.12¥4,160($35.12)From October 12, 2007
to December 31, 2010

5th Stock Option

9 directors

22,400 shares2005.10.12¥1($0.01)

From October 13, 2005
to May 31, 2025

6th(a) Stock Option

9 directors

21,300 shares2006.10.26¥1($0.01)

From October 27, 2006
to May 26, 2026

6th(b) Stock Option

9 directors and
14 executive officers

83,000 shares2006.10.26¥4,053($34.22)

From October 28, 2008
to October 26, 2011

58 LAWSON, INC. ANNUAL REPORT 2007

The stock option activity is as follows:
Stock
Subscription
Rights

1st
Stock
Option

2nd
Stock
Option

3rd
Stock
Option4th
Stock
Option5th
Stock
Option6th (a)Stock
Option6th (b)Stock
Option(Shares)

For the Year Ended February 28, 2006
Non-vested:
February 28,
2005—outstanding . . .
Granted . . . . . . . . . . .
Canceled . . . . . . . . . .
Vested . . . . . . . . . . . .
February 28,
2006—outstanding . . .
Vested:February 28,
2005—outstanding . . . 1,089,000
Vested . . . . . . . . . . . .
Exercised . . . . . . . . . .
Canceled . . . . . . . . . .
(72,000)
February 28,
2006—outstanding . . . 1,017,000
Stock
Subscription
Rights192,900

92,000(65,500)(3,100)(43,800)

124,300

48,200

1st
Stock
Option

2nd
Stock
Option99,000114,000

99,000114,000

22,40022,400
3rd
Stock
Option4th
Stock
Option5th
Stock
Option6th (a)Stock
Option6th (b)Stock
Option(Shares)

For the Year Ended February 28, 2007
Non-vested:
February 28,
2006—outstanding . . .
Granted . . . . . . . . . . .
Canceled . . . . . . . . . .
Vested . . . . . . . . . . . .
February 28,
2007—outstanding . . .
Vested:February 28,
2006—outstanding . . . 1,017,000
Vested . . . . . . . . . . . .
Exercised . . . . . . . . . .
Canceled . . . . . . . . . . (169,000)
February 28,
2007—outstanding . . .
848,000
Exercise price . . . . . . . . . .
Average stock priceat exercise . . . . . . . . . . . .

¥7,500($63.32)

99,000114,000
21,300(99,000)(21,300)
114,000

124,300

83,00048,20083,00022,40099,000(28,200)(8,400)(4,600)87,70043,60099,000¥3,680($31.07)¥3,517($29.69)¥4,320($36.47)¥4,489($37.90)¥4,386($37.03)21,300(2,400)¥4,160($35.12)20,00021,300¥1($0.01)¥1($0.01)¥4,053($34.22)¥3,178($26.83)¥618($5.22)¥4,060($34.28)

Fair value priceat grant date . . . . . . . . . .

The assumptions used to measure fair value of 6th Stock Option were as follows:

Estimate method . . . . . . . . . . . . . . . . . . .
Volatility of stock price . . . . . . . . . . . . . .
Estimated remaining
outstanding period . . . . . . . . . . . . . . . .
Estimated dividend . . . . . . . . . . . . . . . . .
Interest rate with risk free . . . . . . . . . . . .

6th (a) Stock Option

6th (b) Stock Option

Black-Scholes option
pricing model
37.06%

Black-Scholes option
pricing model
25.80%

9.8 years¥95 per share
1.74%

3.5 years¥95 per share
0.98%

LAWSON, INC. ANNUAL REPORT 200759

14. Income Taxes
The Company and its domestic subsidiaries are subject to a number of different taxes basedon income, which in the aggregate, resulted in a normal effective statutory tax rate of
approximately 40.7% for the years ended February 28, 2007 and 2006.
The tax effects of significant temporary differences and tax loss carryforwards which
resulted in deferred tax assets and liabilities at February 28, 2007 and 2006, are as follows:
Millions of Yen

Thousands of
U.S. Dollars

2006

2007

2007

Deferred tax assets:
Accrued enterprise tax . . . . . . . . . . . . . . . . .
Accrued employees’ bonuses . . . . . . . . . . . .
Excess of depreciation . . . . . . . . . . . . . . . . . .
Excess of amortization of software . . . . . . . .
Employees’ retirement benefits . . . . . . . . . . .
Allowance for doubtful accounts . . . . . . . . . .
Tax loss carryforward . . . . . . . . . . . . . . . . . . .
Impairment loss . . . . . . . . . . . . . . . . . . . . . . .
Loss on replacement of computer system . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less valuation allowance . . . . . . . . . . . . . . . .

¥

498
1,100
3,445
648
3,673
1,671
1,758
1,129
896
1,575
(1,827)

¥

833
1,144
3,320
930
3,255
1,772
1,425
2,197

$

1,527
(1,690)

4,205
9,287
29,086
5,471
31,011
14,108
14,843
9,532
7,565
13,300(15,426)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14,566

14,713

122,982

Deferred tax liabilities—Unrealized gain on
available-for-sale securities . . . . . . . . . . . . . . .

220

478

1,858

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .

220

478

1,858

Net deferred tax assets . . . . . . . . . . . . . . . . . . .

¥14,346¥14,235$121,124

As of February 28, 2007, certain subsidiaries have tax loss carryforwards aggregating
approximately ¥4,247 million ($35,858 thousand) which are available to be offset against
taxable income of such subsidiaries in future years. These tax loss carryforwards, if not
utilized, will expire as follows:Year Ending February 28 or 29

Millions of Yen

Thousands of
U.S. Dollars

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥ 484
415
287
1,605
1,456

$ 4,086
3,504
2,424
13,551
12,293

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥4,247$35,858

60 LAWSON, INC. ANNUAL REPORT 2007

15. Replacement of Computer System
The Company decided to replace its computer system to the next generation, includingcore information systems, based on an optical fiber network in 2008 and 2009. The Company recognized loss on replacement system, as special depreciation of the related equipment and software and equivalent of those related to lease cancellation of existing system.
Millions ofYen

Thousands of
U.S. Dollars

2007

2007

Loss on replacement of computer system:
Lease property (cancellation) . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥1,624542
36$13,7124,576
304

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥2,202$18,592

The amount of the lease cancellation loss, equivalent to special depreciation, wasincluded in other under long-term liabilities.

16. Leases
The Companies lease certain store facilities, machinery, computer equipment, office spaceand other assets.
Total lease payments under finance leases for the years ended February 28, 2007 and2006, were ¥17,485 million ($147,627 thousand) and ¥16,900 million, respectively.
Pro forma information of leased property such as acquisition cost, accumulated depreciation, accumulated impairment loss, obligations under finance leases, depreciation expense,
interest expense and impairment loss for finance leases that do not transfer ownership ofthe leased property to the lessee on an “as if capitalized” basis for the years ended February
28, 2007 and 2006 was as follows:
Leased to franchised stores:
Millions of Yen

Thousands of
U.S. Dollars

2007

2006

2007

Furniture, Fixtures and Equipment:
Acquisition cost . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . .
Accumulated impairment loss . . . . . . . . . . . .

¥65,163
40,122
204¥68,378
38,352158$550,177
338,754
1,722

Net leased property . . . . . . . . . . . . . . . . . .

¥24,837¥29,868$209,701

Millions of Yen

Thousands of
U.S. Dollars

2007

2006

2007

Due within one year . . . . . . . . . . . . . . . . . . . . .
Due after one year . . . . . . . . . . . . . . . . . . . . . .

¥11,976
13,607¥11,972
18,898$101,114
114,886

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥25,583¥30,870$216,000

Obligations under finance leases:

Allowance for impairment loss on leased property of ¥79 million ($667 thousand) as ofFebruary 28, 2007 is included in obligations under finance leases.

LAWSON, INC. ANNUAL REPORT 2007

61

Used by Company-operated stores and other:
Millions of Yen
2007
Furniture,
Fixtures andEquipment

SoftwareTotal

Acquisition cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated impairment loss . . . . . . . . . . . . . . . . . . . . . .

¥18,848
11,310
30

¥734
342

¥19,582
11,65230

Net leased property . . . . . . . . . . . . . . . . . . . . . . . . . .

¥ 7,508¥392¥ 7,900

Millions of Yen
2006
Furniture,
Fixtures andEquipment

SoftwareTotal

Acquisition cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated impairment loss . . . . . . . . . . . . . . . . . . . . . .

¥17,073
10,311
17

¥734
196

¥17,807
10,50717

Net leased property . . . . . . . . . . . . . . . . . . . . . . . . . .

¥ 6,745¥538¥ 7,283

Thousands of U.S. Dollars
2007
Furniture,
Fixtures andEquipment

SoftwareAcquisition cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated impairment loss . . . . . . . . . . . . . . . . . . . . . .

$159,135
95,491
253$6,197 $165,332
2,887
98,378253

Net leased property . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 63,391$3,310 $ 66,701

Total

Obligation under finance leases:
Millions of Yen

Thousands of
U.S. Dollars

2007

2006

2007

Due within one year . . . . . . . . . . . . . . . . . . . . .
Due after one year . . . . . . . . . . . . . . . . . . . . . .

¥3,432
4,851¥3,3784,469$28,977
40,957

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥8,283¥7,847$69,934

Allowance for impairment loss on leased property of ¥17 million ($144 thousand) as ofFebruary 28, 2007 is included in obligations under finance leases.
The imputed interest expense portion which is computed using the interest method is
excluded from the above obligations under finance leases.
Depreciation expense, interest expense and other information under finance leases:

Depreciation expense . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . .
Reversal of allowance for impairment loss
on leased property . . . . . . . . . . . . . . . . . . . . .
Impairment loss . . . . . . . . . . . . . . . . . . . . . . . . .

62 LAWSON, INC. ANNUAL REPORT 2007

Millions of Yen

Thousands of
U.S. Dollars

2007

2006

2007

¥16,3421,004¥15,782
1,090$137,977
8,477

82
58

37
204

692
490

Depreciation expense and interest expense, which are not reflected in the accompanying
consolidated statements of income, are computed by the straight-line method and theinterest method, respectively.
The minimum rental commitments under noncancelable operating leases at February 28,
2007 were as follows:
Millions ofYen

Thousands of
U.S. Dollars

2007

2007

Due within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥ 549
861

$ 4,635
7,270

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥1,410$11,905

17. Related Party Transactions
Balances to LAWSON CS Card, Inc. (an associated company) as of February 28, 2007 wereas follows:
Millions ofYen

Thousands of
U.S. Dollars

2007

2007

Short-term loan receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 8,850
Guarantee for bank loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,350$74,72195,829Mitsubishi became a direct principal shareholder when they purchased all shares in the
Company, which had been held by their wholly owned subsidiary, in December 2004.
Since then, Mitsubishi has been treated as an affiliated company of the Company. Therefore, the Company discloses transactions with subsidiaries of Mitsubishi, including thosetransactions related to the franchised stores.
Balances and transactions with subsidiaries of the principal shareholder as of and for theyear ended February 28, 2007 were as follows:

RYOSHOKU LIMITED:
Accounts payable—trade . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

¥Millions ofYen

Thousands of
U.S. Dollars

2007

2007

6,466
88,968$54,593751,165

Food Service Network Co., Ltd.:
Accounts payable—trade . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

16,445
218,341

138,847
1,843,473

SAN-ESU INC.:
Accounts payable—trade . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,795
31,286

23,598264,151

18. Contingent Liabilities
As of February 28, 2007, the Company guaranteed an associated company’s bank loan in
the amount of ¥11,350 million ($95,829 thousand).

LAWSON, INC. ANNUAL REPORT 200763

19. Net Income per Share
Reconciliation of the differences between basic and diluted net income per share (“EPS”) for
the years ended February 28, 2007 and 2006 is as follows:Year Ended February 28, 2007

Millionsof YenThousandsof Shares

Net
IncomeWeightedaverage
SharesYen

U.S. Dollars

EPS

Basic EPS—Net income available
to common shareholders . . . . . . . . . . . . . . .
Effect of dilutive securities—Stock options . . .

¥20,983

104,13452¥201.50$1.70

Diluted EPS—Net income for computation . .

¥20,983

104,186¥201.40$1.70

Basic EPS—Net income available
to common shareholders . . . . . . . . . . . . . . .
Effect of dilutive securities—Stock options . . .

¥22,025

102,20220¥215.50

Diluted EPS—Net income for computation . .

¥22,025

102,222¥215.46

Year Ended February 28, 2006

20. Subsequent Eventsa. The following appropriation of retained earnings was approved at the general shareholders meeting held on May 25, 2007:
Millions of Yen

Cash dividends, ¥50 ($0.42) per share . . . . . . . . . . . . . . . . . . . .

¥5,221Thousands of
U.S. Dollars$44,081b. The Company resolved at the meeting of the Board of Directors on May 11, 2007 toacquire, through a public tender process, shares of Lawson Ticket Inc., a consolidated
subsidiary of the Company that is publicly listed on the Jasdaq Securities Exchange.
The Company executed a capital participation agreement with Rakuten, Inc. on
January 5, 2004, to accompany the business tie-up agreement that was executed
between Lawson Ticket Inc. and Rakuten, Inc. on the same day. Under the capital participation agreement, if certain circumstances occur such as the termination of the businesstie-up agreement or the capital participation agreement, the Company has the right topurchase part or all of the Rakuten-owned shares on condition that the notification of theintent to exercise the share purchase rights is made within two months from the day the
aforesaid circumstance occurs. On March 13, 2007, the Company canceled the businesstie-up agreement and the capital participation agreement upon cancellation of these
agreements, the Company exercised its right to purchase all of Rakuten-owned shares.
The Company made a tender offer with the primary objective of purchasing all shares
held by Rakuten, Inc., that is 9,800 shares (17.8% equity interest) of 55,000, the total
number of Lawson Ticket shares issued, as follows:(1) Period of tender offer
From May 14, 2007 to June 12, 2007 (22 working days)(2) Price of tender offer¥140,000 per share(3) Intended number of shares to purchase
9,800 shares(4) Total cost of tender offer (estimate)¥1,372,000,000

64 LAWSON, INC. ANNUAL REPORT 2007

Independent Auditors’ Report

To the Board of Directors of LAWSON, INC.:
We have audited the accompanying consolidated balance sheets of LAWSON, INC. (the“Company”) and subsidiaries as of February 28, 2007 and 2006, and the related consolidated statements of income, changes in equity, and cash flows for the years then ended,
all expressed in Japanese yen. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in Japan.
Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of LAWSON, INC. and subsidiaries asof February 28, 2007 and 2006, and the consolidated results of their operations and their
cash flows for the years then ended in conformity with accounting principles generally accepted in Japan.
Our audits also comprehended the translation of Japanese yen amounts into U.S. dollar
amounts and, in our opinion, such translation has been made in conformity with the basis
stated in Note 1. Such U.S. dollar amounts are presented solely for the convenience of readers outside Japan.

May 25, 2007

LAWSON, INC. ANNUAL REPORT 200765

Directors, Corporate Auditors and Executive Officers

PRESIDENT AND CEO

Takeshi Niinami

MEMBER OF THE BOARD
AND SENIOR EXECUTIVE
VICE PRESIDENT

Toru Moriyama

General Manager, Merchandizing & Logistics Division

MEMBER OF THE BOARD
AND EXECUTIVE VICEPRESIDENT

Yoshiyuki Yahagi

Chief Financial Officer (CFO); in charge of Corporate Planning
Office; in charge of Human Resources Office

MEMBER OF THE BOARD
AND SENIOR VICE PRESIDENT

Manabu Asano

Chief Compliance Officer (CCO); in charge of General
Affairs; in charge of Internal Audit

MEMBERS OF THE BOARD

Hiroshi Tasaka
Reiko Okutani
Takehiko Kakiuchi

Professor, Graduate School of Tama University
President, The R Co., Ltd.
General Manager, Living Essentials Group CEO Office,Mitsubishi Corporation

STANDING CORPORATE
AUDITORSCORPORATE AUDITORSEXECUTIVE VICE PRESIDENTS

Munehiko Nakano
Kenji Yamakawa
Tetsuo Ozawa
Hiroshi Kuwata

LawyerSusumu Hasegawa

Chief Information Officer (CIO); General Manager,

General Manager, Risk Management Dept., Mitsubishi Corporation

Information Systems Station

Ichiro Okuda
Takatoshi Kawamura

General Manager, Kinki LAWSON Branch
General Manager, Kanto LAWSON Branch,
Next-Generation Business Development Division

SENIOR VICE PRESIDENTS

Konoshin Deguchi
Shigeru Niikura
Katsuyuki Imada
Kiyoteru Suzuki
Yoshio Shinozaki
Shigeaki Kawahara

General Manager, Corporate Franchisee Development Division
General Manager, Operations Office
General Manager, Corporate Planning Office
General Manager, Services Development Division
General Manager, CSR Promotion Office
Executive Assistant to CEO
President and CEO, VALUE LAWSON, Inc

Kenji Morimoto

General Manager, Finance & Accounting Office
General Manager, Management Services Office

Takaki Mizuno
Norikazu Nishiguchi
Jyun Miyazaki
Masatoshi Okada
Hajime Nakai
Yoichi Yokomizo

General Manager, Chubu LAWSON Branch
General Manager, Store Development Planning Division
General Manager, PR, Corporate Communications Office
President, NATURAL LAWSON, Inc.
Deputy General Manager, Kinki LAWSON Branch
Executive Assistant to CIO(As of May 25, 2007)

66 LAWSON, INC. ANNUAL REPORT 2007

Consolidated Financial Highlights

Corporate Data

LAWSON, INC. and Subsidiaries
Years Ended February 28, 2007, 2006 and 2005

For the Year:Net sales of all stores
Total operating revenues
Operating income
Income before income taxes andminority interests
Net income
Per Share Data (yen and dollars):
Net income
Cash dividends

Percent
ChangeThousands of
U.S. Dollars*

2007

2006

2005

2007/2006

2007¥1,386,630
283,053
44,513¥1,361,731
268,058
43,867¥1,329,077
254,395
42,941

1.8%
5.6%
1.5%

$11,707,447
2,389,843
375,827

36,84820,98338,72322,02536,04020,435

–4.8%
–4.7%

311,111
177,161¥

At Year-end:
Total assets
Total equity

Millions of Yen

202
100

¥

¥ 398,258
199,493216
90¥¥ 375,107
175,184

198
70

–6.5%
11.1%

¥ 356,310
160,282

6.2%
13.9%

$

1.70
0.84

$ 3,362,530
1,684,339

ENGLISH COMPANY NAMEESTABLISHEDLAWSON, INC.

April 15, 1975

ADDRESSCAPITAL

Tokyo Headquarters:¥58,506,644,000

East Tower, Gate City Osaki
11-2, Osaki 1-chome, Shinagawa-ku,

AUTHORIZED SHARESTokyo 141-8643, Japan

409,300,000

NUMBER OF EMPLOYEESSHARES ISSUED

3,614 (Consolidated) (As of February 28, 2007)

104,600,000

BUSINESS ACTIVITIESSHAREHOLDERS

Development of LAWSON convenience

40,904store franchise chain

MAJOR SHAREHOLDERS
NET SALES OF ALL STORESFinancial Data:
Return on equity (ROE)
Payout ratio

11.3%
49.6%

13.1%
41.8%

13.0%
35.3%

Number of Percentage ofSharesTotal Shares
Held
Held

¥1,386.6 billion (Consolidated) (Fiscal 2006)

–1.8
7.8

15,00060

20,00010,00040

1. Mitsubishi Corporation
32,089,300
2. Japan Trustee Services Bank, Ltd.
(Trust Account)
7,769,000
3. Marubeni Foods Investment Co., Ltd.
5,939,500
4. The Master Trust Bank of Japan, Ltd.
(Trust Account)
5,910,300
5. Trust & Custody Services Bank, Ltd.
(Securities Investment Trust Company)
2,610,800
6. NTT DoCoMo, Inc.
2,092,000
7. MELLON BANK N.A. AS AGENTFOR ITS CLIENT MELLON OMNIBUS
US PENSION
1,401,868
8. The Nomura Trust & Banking Co., Ltd.
(Trust account)
1,194,900
9. STATE STREET BANK AND TRUSTCOMPANY 505103
1,126,896
10. The Sumitomo Trust & Banking Co., Ltd.
(Trust account B)
1,093,300

10,0005,000

20

STOCK EXCHANGE LISTINGSNUMBER OF STORESStore Network:
Total number of stores in Japan
Franchised storesCompany-owned stores

8,564 (Consolidated) (As of February 28, 2007)
8,564
8,093
471

8,366
7,958
408

8,077
7,731
346

2.4%
1.7%
15.4%

OPERATING AREA
All 47 prefectures in Japan; Shanghai, PRC*The U.S. dollar amounts represent translations of Japanese yen at the approximate exchange rate at February 28, 2007, of ¥118.44=$1.

(Joint Venture)
Operating income andOperating income ratio

Net income and ROE

Cash dividends per share
and Payout ratio(Millions of Yen)

(Millions of Yen)

(Yen)

50,00025,000100
49.6

40,00020,000

13.0

13.1
80

41.8

11.3
30,000

3.2

35.3

3.2

3.2

30.7
7.4
5.7
5.7
2.5
2.0

1.3
1.1
1.1
1.0

Tokyo Stock Exchange (1st Section)
0

2005

2006

2007

Operating income
Operating income ratio (%)

0

2005

Net income
ROE (%)

2006

2007

0

2005

2006

2007

Cash dividends per share
Payout ratio (%)*Operating income ratio=Operating
income/Net sales of all stores

Osaka Securities Exchange (1st Section)

STOCK TRANSFER AGENT
Mitsubishi UFJ Trust and Banking Corporation
4-5, Marunouchi, 1-chome, Chiyoda-ku, Tokyo 100-8212, Japan

Forward-looking Statements
This annual report contains forward-looking statements about the future plans, strategies, beliefs and performance of LAWSON and its subsidiaries. These forwardlooking statements are not historical facts. They are expectations, estimates, forecasts and projections based on information currently available to the company andare subject to a number of risks, uncertainties and assumptions, which, without limitation, include economic trends, competition in the Japanese convenience store
industry, personal consumption, market demand, the tax system and other legislation. As such, actual results may differ materially from those projected.

LAWSON, INC. ANNUAL REPORT 2007

(As of February 28, 2007)

LAWSON, INC.

ANNUAL REPORT 200767

Annual Report 2007

Evolving
Annual Report 2007
Year ended February 28, 2007

Corporate Planning Office,East Tower, Gate City Osaki
11-2, Osaki 1-chome, Shinagawa-ku,
Tokyo 141-8643, Japan
http://www.lawson.co.jp/
Published in August 2007.
©1997–2007 LAWSON, INC. All rights Reserved.

B-(2)-060001

This annual report was produced using “Kanbatsu
White,” which contains 70% Japan-made pulp,
including 10% clear-cut lumber.

Printed in Japan