7&i: Despite Near-Term Fuel Margin Squeeze, Food-Service Expansion Remains The Growth Driver

Narrow-moat Seven & i’s guidance for a small profit growth—merely 1.3% for operating profit for fiscal 2023 ending February 2024—was less of a surprise, as we expected correction in fuel margins of the U.S. convenience store business might weigh on profits. Nevertheless, the guidance of profit loss for the underperforming Ito-Yokado superstore business is a disappointment, which may escalate the dissatisfaction of shareholders who have been demanding a spin off or divestiture of the unit. On the other hand, the announcement of strategic reorganization of the financial service business, in an attempt to expedite monetization of digital data, is welcomed. We reduce our profit estimates by 2%-3% after incorporating the recent fuel margin trend and revised currency assumptions in our projections, but raise our fair value estimate to JPY 6,300 from JPY 5,700 to reflect improved free cash flow and increased time value of money. As we have stressed, growing the C-stores into destination retailers through food-service expansion will be a key growth engine. We view shares as undervalued, implying 12% upside to our new fair value estimate.