Shares of 7-Eleven operator Seven & I Holdings (3382.JP) have gained 11% since the company overhauled its management structure a year ago.
Daiwa analyst Kazunori Tsuda has more on the changes that have taken place at the Japanese retailer since then:
It is just over a year since the switch from top-down management under a charismatic leader to consensus-based management led by President Ryuichi Isaka. New management drew up a medium-term business plan for FY17-19 in October 2016, which includes new directions such as narrowing down geographical operating areas and businesses, as well as applying stricter investment standards. The company also saw organizational changes and board reshuffling. In FY16, effects of structural reform were evident, such as general merchandise store operator Ito-Yokado returning to the black.
Tsuda expects Seven & I to deliver stronger medium- to long-term earnings growth underpinned by its flagship convenience store business and to improve returns on capital.
Seven-Eleven Japan (SEJ) will focus on measures to achieve growth at existing stores, including stronger franchisee support. It will apply a 1% special discount on franchise royalty fees from 1 September and also plans to enhance merchandise offerings, dramatically change store layouts, and improve productivity. US subsidiary 7-Eleven Inc. (SEI) will acquire 1,108 convenience stores with gas stations from Sunoco (SUN; NY) for $3,305.6mn. Although details are not decided yet, we think the acquisition price is more or less appropriate. The company's FY17 projections do not factor in the acquisition except for acquisition cost and store numbers.
We have slightly reduced our forecasts at the operating level and below, but our view remains basically unchanged. We have factored in a contribution from the acquisition at SEI from 2H FY17. Although the increasing investment in convenience store operations will probably be a temporary drag on operating profit, we think it will ensure medium/long-term growth.
Tsuda, who has an outperform rating on Seven & I, has lifted his target price on the stock from JPY5,350 a share to JPY5,500 a share, which implies 15% upside. Seven & I shares trade at 21 times forward earnings and pay a not-too-shabby 1.9% dividend yield.