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Japanese retailers' earnings to offer clearer picture of tax hike's impact

TOKYO -- Retailers in Japan are set to start releasing their financial statements for the March-May period. Their results will be under closer scrutiny than usual, with industry watchers and investors looking to gauge the state of consumer spending in the wake of April's consumption tax hike. 

     Department stores are among the first to release their earnings. J.Front Retailing, the operator of the Matsuzakaya and Daimaru chains, will do so Thursday, followed by Takashimaya on Friday.     

     The results for the three months will reflect both the pre-tax-hike consumption rush and the post-hike drop in demand. Compared with the previous consumption tax increase in 1997, the swoon appears to have been milder this time. And the last-minute surge is believed to have created a significant buffer.

     Many analysts expect Takashimaya's group operating profit to rise by 20-30% on the year. J.Front Retailing, which closed the Matsuzakaya Ginza department store last June, appears poised to beat its own sales projections.

     Nationwide department store sales for May, released on June 18 by the Japan Department Stores Association, fell 4.2% from a year earlier on a same-store basis. The figure was down for the second straight month, but the decline was not nearly as steep as the 12% drop in April.

     Although sales of big-ticket items fell off significantly after the 5% sales tax was raised to 8%, prices of women's apparel are rising and sales of men's clothing -- generally the last to recover -- are looking strong. Department store sales may be on the verge of turning positive.

Beating forecasts

Takahiro Kazahaya, senior analyst at Deutsche Securities, said consumer sentiment remains strong despite the tax increase. Spending, he added, appears to be on a medium- to long-term recovery track.     

     In a survey of analysts by QUICK, respondents' consensus forecasts exceed most major retailers' estimates for the March-August period -- the first half of the fiscal year through February 2015. This is because the impact of the tax hike was softer than companies expected.

     Furniture chain Nitori Holdings expects its March-August group operating profit to fall 4% on the year to 30 billion yen ($291 million). The market, meanwhile, sees its group operating profit staying flat at 31 billion yen. Some experts are projecting a profit increase, since Nitori has been shifting from its low-price-first strategy and winning over customers with improved quality and designs.

     Convenience stores are less susceptible to changes in the consumption tax, compared with other retailers. And their recent strategy of luring customers away from supermarkets and even cafe chains appears to be paying off. 

     Seven & i Holdings, the nation's largest convenience store chain, is expected to post a 5% increase in its group operating profit for the March-May term, to slightly more than 77 billion yen. Although the acquisition of online retailer Nissen Holdings placed a burden on the company in the previous period, Seven & i looks set for a record March-May profit for the second consecutive year.

     Rival chain Lawson, which is scheduled to report its earnings July 4, is expected to log strong results as well.

     Still, retailers need to beware of consumers' polarized habits. Japanese shoppers are showing a willingness to spend on what they really want, yet at the time they are becoming increasingly budget-minded.

     Price wars are a risk. Clothing chain Shimamura and the major mall operator Aeon both struggled in the previous fiscal year due to such competition.

     The El Nino weather phenomenon is also expected to result in a cooler-than-usual summer, which could be a factor that keeps wallets in pockets. While overall spending looks likely to remain steady, retailers still need to strike the right quality-value balance to attract consumers. 

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