Aeon Co. Ltd.

Overview Key strengths Key risks One of Japan's two largest retail groups, with expected annual EBITDA of ¥600 billion-¥700 billion Reported EBITDA margin (before adjusting for leases) for the retail unit likely remaining slightly lower than that of domestic and overseas major retailers Mitigated volatility in earnings of its core retail units thanks to diversified store formats Limited presence in online retail due to delays in developing business initiatives Adequately diversified earnings sources, with the nonretail businesses generating nearly 40% of consolidated EBITDA (excluding its financial services unit) Its key financial ratios likely remaining commensurate with the rating in the coming one to two years, thanks to disciplined financial management. Persistently high reliance on debt due to continued aggressive investments

...Aeon's profitability in the retail unit should improve steadily for the next one to two years. Total operating profit of the unit improved by 17% to Ñ85.5 billion in fiscal 2022 (ended Feb. 28, 2023), accounting for slightly over 40% of the consolidated figure. The gross profit margin in its core general merchandise stores (GMS) business has risen following structural reforms over the past two years. Such reforms have included reducing inventories and introducing artificial intelligence (AI) systems. Operating profit in the retail unit will likely continue growing. Aeon aims to push this growth by developing low-price, high-profit private brand (PB) products and increasing their sales throughout the group, in S&P Global Ratings' view. The diversified retail unit will continue to support earnings stability, in our view. The portfolio of businesses in this sector provides more flexibility to adapt to changes in consumer behavior and preferences. The company can improve groupwide profit by...

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