7 January 2009
Global Markets Research
Daisuke Kameyama, CFA
Research Analyst (+81) 3 5156-6983 email@example.com
Department store industry
J. Front Retailing (3086.T),¥360 2008A 2009E EPS (¥) 39 22 P/E (x) 23.9 16.4 EV/EBITDA (x) 10.9 5.4 Isetan Mitsukoshi (3099.T),¥733 2008A 2009E EPS (¥) – 77 P/E (x) – 9.5 EV/EBITDA (x) – 9.3 Takashimaya (8233.T),¥646 2008A 2009E EPS (¥) 57 44 P/E (x) 23.7 14.5 EV/EBITDA (x) 8.0 5.9 Sell 2010E 23 15.4 5.5 Hold 2010E 86 8.5 7.6 Hold 2010E 52 12.5 5.9
Initiate coverage of three major stocks with Underweight sector view We initiate coverage of the department store sector with an Underweight stance and coverage of the three major stocks as follows: Isetan Mitsukoshi Holdings and Takashimaya (Hold), J. Front Retailing (Sell). Our ratings reflect each stock's market position and scope for profitability improvement amid the recent weak sales trend and long-term structural changes. Prolonged and unprecedented sales downturn; sharp profit drop inevitable There has been a sharp decline in department store sales since October 2008, caused by not only falling asset values and bonus payments, but also increasing economic and employment uncertainty. Unlike previous economic downturns, there is a high degree of uncertainty among consumers, which is likely to prolong the sales downturn. The major department store operators have already revised downward FY08 earnings estimates and it seems a sharp YoY profit drop is inevitable. Limited merger benefits; need to strengthen flagship stores and improve stand-alone profitability Over the past year or so, there have been a number of mergers between Japan’s largest department stores, but we think the direct benefits will be limited. Amid competition from other retail formats, the department store industry is in decline. In order to survive, department store companies need to strengthen the sales capacity of their flagship stores in major cities and work on improving profitability without relying on mergers. Valuation Share prices are already below BPS, so this factor is unlikely to provide much underlying support. We calculate our target prices in this sector based on our FY08 estimates and a P/E discounted by 20% against the TOPIX average. Given weak department store sales and the sharp profit downturn, we think it is appropriate to value the sector at a discount to the average TOPIX P/E. Risks Upside risks include a rapid economic recovery, weather factors, the emergence of new fashion trends, and a reduction in supply. Downside risks include a further economic downturn, structural changes in apparel spending, and an increase in supply, including competing retail formats.
Deutsche Securities Inc. All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers of DBSI in the United States at no cost. Customers can access IR at http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.
7 January 2009
Retailing Department store industry
Table of Contents
Sector stance and valuation ...........................................................3 Sector view...