Seven & i struggles to win back investors after failed takeover

[TOKYO] Almost three months have passed since Alimentation Couche-Tard abandoned its 6.8 trillion yen (S$58 billion) bid to acquire Seven & i Holdings, yet the stock remains 24 per cent below the proposed price with few signs of reversing course.

The company is reshaping itself under a new chief executive by selling weaker assets, buying back two trillion yen worth of shares and betting on growth in Japan and the US, but faces rising competition and pressure to prove its convenience-store model can deliver consistent profits.

Seven & i sits at a crossroads as it seeks to reassure investors that it can thrive without a foreign takeover. Stephen Dacus, who took over five months ago, said in August that the retailer is at a “turning point” and vowed to add more than 2,000 new stores to fuel growth. At the same time, the business faces headwinds from inflation biting into consumer spending in Japan and the US and rising costs.

“The fundamental outlook remains challenging,” said Lorraine Tan, an analyst at Morningstar Asia. Management is moving in the right direction, but there are few near-term catalysts for share gains, she added.

Early evidence of whether Seven & i’s management is making progress may come on Thursday (Oct 9), when the company reports results for the second fiscal quarter to August. Analysts are projecting an average operating profit of 135 billion yen on three trillion yen in sales, with both increasing slightly from a year earlier.

For the full fiscal year to February, analysts predict revenue of 10.5 trillion yen, almost double the level seen five years ago before Seven & i acquired Speedway and other stores in the US. Even so, operating profit is projected to be mostly flat at 422 billion yen over the same period – mostly in line with the company’s own forecasts.

In Seven & i’s home market, the company has been lagging behind Lawson and FamilyMart, which posting faster same-store sales growth. Seven & i needs to maximise value for franchise owners in order to improve its fortunes in a market where it has led for decades, according to Takahiro Kazahaya, a retail analyst at UBS AG Tokyo.

An alliance between divested Seven Bank and Itochu, the owner of FamilyMart, dampened franchisee’s morale and undermines efforts to reinforce ties with owners, according to Kazahaya. The former Seven & i unit plans to raise 51.4 billion yen by selling treasury shares to Itochu. The proceeds are largely earmarked for installing Seven Bank’s ATMs at rival FamilyMarts, which could draw customer traffic away from 7-Elevens at a critical time.

“The key question is how to strengthen its Japan operation,” Kazahaya said. “The business can’t be sustained if owners’ enthusiasm wanes.”

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In the US, where the market for food sales at convenience stores is projected to grow to US$100 billion in 2030 from US$66 billion in 2024, Seven & i’s observed sales have declined every month this year, while broader food and drug retailers and the convenience store sector showed growth, according to data compiled by Bloomberg Intelligence. Estimated visits also shrank for an eighth straight month, while rival Couche-Tard posted gains in both measures.

“Proprietary products, expansion of the 7NOW digital platform and greater fuel margin in the US could be growth catalysts,” said Bloomberg Intelligence analyst Lea El-Hage, referring to the company’s quick delivery service. “Still, none of these can meaningfully expand without continuous customer traffic.”

There’s still room to cut costs in the US and bolster operating margins, according to Morningstar’s Tan.

Although Seven & i shares have mostly recovered from a 10 per cent drop in the days after Couche-Tard walked away in mid-July, the stock remains down around 20 per cent this year. In August, the Japanese retailer’s market value briefly dipped below that of rival Japanese retail group Aeon for the first time since the business adopted a holding structure in 2005.

Seven & i is planning to raise about 7.5 trillion yen through operations and an initial public offering of the US business, in addition to the sale of supermarkets and other retail outlets that was completed in September. Roughly 40 per cent of that will be returned to shareholders with the rest earmarked for investments and debt reduction.

Lasting investor confidence will hinge on as stronger customer traffic, product sales and higher digital engagement, trends that could take 12 to 24 months to materialise, according to El-Hage.

“Investors need to see leading indicators improve,” she said. BLOOMBERG