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Overseas stores drive growth for Seven-Eleven parent

But slowing market in Japan has investors worried

Seven-Eleven Japan is known for rolling out new products fast, but its stock price has been stuck in a rut.   © Reuters

TOKYO -- Seven & i Holdings turned in another record first-quarter profit that beat analyst expectations, but the parent of Japan's biggest convenience store chain still faces the challenges of low-earning segments on its way to an elusive stock price rally.

The company said Thursday that group operating profit rose 3% to 86.3 billion yen ($780 million) for the three months ended May 31, marking a second straight all-time high for that quarter. The figure topped a consensus forecast of 85.4 billion yen. 

The record result was driven by the overseas convenience store business. U.S. subsidiary 7-Eleven Inc.'s operating profit grew 40% to around $127 million. 

But Seven-Eleven Japan, the flagship unit generating more than 60% of group operating profit, saw its earnings slide 6% to 55.7 billion yen. Last September's 1% cut in the training fee charged to franchisees reduced profit by 3.8 billion yen.

The convenience store chain became the first in Japan to surpass 20,000 locations this year, but faces an increasingly saturated market. 

Long-suffering supermarket division Ito-Yokado did manage to improve margins by attracting tenants and slashing sales and administrative costs. Its profit more than tripled to 2.4 billion yen.

While Seven & i's result looks likely to please investors in the short term, market watchers are less enthusiastic about the stock's longer-term prospects. "I'm not too worried about downside risk, but this isn't really a stock that makes me exicited to buy, either," said a fund manager at a Japanese asset management company.

Shares have been generally boxed in between 4,200 yen and 5,000 yen since March 2016. At 4,621 yen at Thursday's close, they are up just 3% from the end of February 2016. During this time, the broader Nikkei Stock Average surged 34% and the subindex for retailers soared 39%. The stock is down by a fifth compared with its all-time high, reached in August 2015.

The main obstacle holding the stock price back is the group's laggard segments. Ito-Yokado and department store operator Sogo & Seibu continue to suffer full-year losses, despite their improvement. Catalog shopping company Nissen Holdings apparently remains in the red as well. As a result, Seven & i's return on equity came to just 7.6% for last fiscal year, falling short of the 10% average for listed companies.

Peers such as furniture store operator Nitori Holdings and online apparel market Start Today are more attractive, with faster profit growth, said another fund manager. "As it turned out, investing in companies like these over the past two years was the right choice."

It is a tough time to be in retail, with rapid and profound changes in the business environment that Seven & i President Ryuichi Isaka described as "once in a century." Brick-and-mortar retailers must compete with and other online rivals, while fighting for shoppers with drugstores and supermarkets, which offer deep discounts on food.

Consumers have yet to fully open up their wallets either.

Japan's personal consumption contracted 0.1% in the first quarter of this year. Real wages have been posting year-on-year declines in recent months as well.

"No full-fledged improvement has been made in the consumption climate," said Akiyoshi Takumori, chief economist at Sumitomo Mitsui Asset Management.

Some in the stock market point to the bright side for Seven & i.

"There's room for growth in the overseas convenience store business," says an executive at a Japanese investment trust company.

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