Graphic: Cup noodles and aspirin: Japan's drugstores stocks rally on cheap grocery push
10/07/2018 09:40
* High-margin drugs and cosmetics help drugstores'
profitability
* Drugstore sales, number of stores hit record high last FY
* Shares suffered over the past month after reaching record
highs
By Ayai Tomisawa
TOKYO, July 10 (Reuters) - Shares of Japanese drugstores,
traditionally conservative businesses that focused predominantly
on pharmaceuticals, hit record highs earlier this year as
customers increasingly looked to such outlets for their grocery
needs.
The sector's lofty valuations have led to some profit taking
over the past month, however, investors expect long-term growth
in drugstore stocks, helped by lower outlays than their larger
supermarket rivals and higher margins from pharmaceutical
offerings.
Sector data from the Japan Association of Chain Drug Stores
showed the industry posting constant growth over the past
decade, with a total drugstore sales hitting a record 6.85
trillion yen the last fiscal year, up 38 percent from 10 years
earlier.
Drugstore operators such as MatsumotoKiyoshi Holdings Co
3088.T , Tsuruha Holdings Inc 3391.T and Welcia Holdings Co
3141.T have succeeded in getting customers to buy discounted
food items such as milk, tofu and cup noodles. Food and other
items sold 1.78 trillion yen last fiscal year, accounting for
about 26 percent of total sales.
Yet drugstores' main goal is to get frugal customers to buy
high-margin over-the-counter drugs and cosmetics, which are
their cash cows.
"Drugstores do not expect to be profitable by selling fresh
produce. They hope customers to buy drugs and cosmetics, which
generate gross margins of about 30 percent," said Jun Kawahara,
an analyst at Daiwa Securities.
Analysts said that drugstores, which have been sprawling at
fast pace, are better positioned to open new outlets due to
their lower investment costs. While it costs about 1 billion yen
to open a new supermarket store, a company would spend about 300
million yen to open a small drugstore, Kawahara said.
While individual supermarkets need land for parking, mass
refrigeration and meat preparation, multiple drugstores can be
supplied by one warehouse.
In the last fiscal year, industry association data showed
that the total number of drugstores reached a record 19,534
nationwide, almost double the number of supermarkets.
In contrast, convenience stores' growth is threatened by
higher wage costs due to a national labour shortage.
Over the past year, shares of MatsumotoKiyoshi have jumped
50 percent, Tsuruha by 15 percent and Welcia by 45 percent,
while the benchmark Nikkei has gained 10 percent.
Matsumotokiyoshi trades at 22 times its projected earnings,
while Tsuruha at 25.81, Welcia at 34.90 and the Nikkei trades at
16.25.
After reaching record highs in May and June, drugstores'
share prices have pulled back over the past month, in part
triggered by a conservative annual profit outlook by Tsuruha
Holdings.
"Drugstores have benefited from eating another subsector's
market share. The challenge they face now would be how they can
stay competitive within the industry," said Keita Kubota, a
senior investment manager at Aberdeen Standard Investments.
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Number of stores https://reut.rs/2NBHQm5
Share performances of Japan's major drugstores https://reut.rs/2NEj7xJ
Sales performances of drugstores and supermarkets https://reut.rs/2NAukiE
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(Reporting by Ayai Tomisawa; Editing by Sam Holmes)
((ayai.tomisawa@thomsonreuters.com; 81-3-6441-1875; Reuters
Messaging: ayai.tomisawa.thomsonreuters.com@reuters.net))