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Department store industry
Initiating coverage
Daisuke Kameyama, CFA
Research Analyst
(+81) 3 5156-6983
daisuke.kameyama@db.com
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.
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.
Coverage Change
Companies featured
J. Front Retailing (3086.T),¥360 Sell
2008A 2009E 2010E
EPS (¥) 39 22 23
P/E (x) 23.9 16.4 15.4
EV/EBITDA (x) 10.9 5.4 5.5
Isetan Mitsukoshi (3099.T),¥733 Hold
2008A 2009E 2010E
EPS (¥) – 77 86
P/E (x) – 9.5 8.5
EV/EBITDA (x) – 9.3 7.6
Takashimaya (8233.T),¥646 Hold
2008A 2009E 2010E
EPS (¥) 57 44 52
P/E (x) 23.7 14.5 12.5
EV/EBITDA (x) 8.0 5.9 5.9
Global Markets Research Company
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.
Table of Contents
Sector stance and valuation ...........................................................3
Sector view ...............................................................................................................................3
Valuation....................................................................................................................................3
Risks ................................................................................................4
Upside risks...............................................................................................................................4
Downside risks..........................................................................................................................4
Industry overview ...........................................................................5
Characteristics of department store industry .............................................................................5
Comparison of major sector companies.......................................10
Sales mix of each company .....................................................................................................10
Store efficiency ........................................................................................................................11
Industry environment ...................................................................14
Long-term trends......................................................................................................................14
Current trends ..........................................................................................................................15
Earnings outlook...........................................................................19
Our FY08 earnings estimates...................................................................................................19
Medium-term earnings outlook................................................................................................19
Companies
J. Front Retailing ......................................................................................................................22
Isetan Mitsukoshi.....................................................................................................................35
Takashimaya............................................................................................................................50
Sector view and valuation
Sector view
We initiate coverage of the department store sector with an Underweight view. This mainly
reflects: (1) the strong possibility of a prolonged sales downturn, (2) the limited impact of
business integration, and (3) the decline in regional department stores driven by the
population decline and competition from other retail formats.
In some respects, we think consumers have over-reacted to the stock market’s sharp decline,
weaker business confidence, and changes in the employment environment. Unlike previous
economic downturns, the slump in department store sales seems to be driven largely by
consumer uncertainty about the future. We think the sales downturn is likely to last until the
economy recovers and people’s concerns for their livelihood are dispelled. Major department
store operators have already lowered their full-year FY08 earnings estimates and their outlook
is that a sharp YoY profit decline will be unavoidable.
Within the past year or so, J. Front Retailing and Isetan Mitsukoshi Holdings were formed,
and Takashimaya announced a capital and business alliance with H2O Retailing with the
assumption the two companies will merge within three years. As we cover in detail in our
chapter on the industry environment, because individual store profitability is an important part
of the department store business, we see limited scope for economies of scale. Therefore,
companies need to implement individual measures to improve profitability, such as
increasing store sales capacity and reducing costs by increasing efficiency.
After peaking in 1997, total department store sales have declined steadily over the past 10
years. The decline in sales at stores in regional areas has been particularly sharp, as a result
of the declining population and competition from other retail formats including shopping
centers. This trend looks set to continue. The majority of department store items are related
to consumer hobbies or individual preferences (this is covered in detail in the industry
environment chapter) and stores are generally found in large retail trading areas. As the
industry looks set to continue to contract, it is vital that companies strengthen the sales
capacity of flagship stores in major cities in order to produce good profit levels.
Valuation
Share prices are already below BPS excluding unrealized land gains, so this factor is unlikely
to provide much 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 the recent
weakness of department store sales, we think it is appropriate to value the sector at a
discount to the average TOPIX P/E. We calculate our TP for Isetan Mitsukoshi Holdings based
on EPS after reverse goodwill. Our TP and P/B ratios for each stock are: Isetan Mitsukoshi
Holdings: ¥620, 0.48x, Takashimaya ¥630, 0.71x, and J. Front Retailing ¥310, 0.53x.
Risks
Upside risks
A rapid economic recovery or a sharp rise in share prices and other asset values could have a
positive impact on department store sales and revenue.
Sales of apparel and other seasonal items could be boosted by favorable weather.
Sales of apparel and accessories could be boosted by the emergence of new fashion trends.
If an ongoing downturn in sales leads to more store closures and the postponement of store
expansion plans across the industry, the resulting decrease in supply could boost earnings.
Downside risks
If the economy deteriorates further, leading to a tougher employment environment, a
decrease in bonus payments, and lower asset prices, this could be a negative factor for
department store sales.
The current downturn in apparel sales at department stores could persist in the medium to
long term if it is due to a change in consumer purchasing behavior, rather than the economic
cycle.
Department store competition in major cities tends to come from retail complexes and standalone
luxury brand retail shops, while in regional areas it tends to come from shopping
centers. If the decline in land prices leads to greater supply, this could have a negative impact
on department store sales.
Rapid economic recovery,
increase in asset values
Weather
New fashion trends
Decrease in supply if sales
downturn continues
Continued economic
downturn
Structural change in apparel
spending
Competing retail facilities
add to supply
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