[Stock-Analysis] NITORI : The IKEA of Japan on its way to World Domination
With the growth Nitori is achieving, it might soon be larger than its arch-nemesis, IKEA
Disclaimer: The information in this article represents my opinions. It should not be construed as individualized investment advice and is subject to change.
Nitori is Japan's largest furniture and interior retailer. The company is often referred to as the Japanese IKEA with its strategy of offering packaged furniture the customers assemble.
Nitori's products are known in Japan for their good quality and reasonable prices. In fact, they are often touted for using sturdier material and simpler installation than IKEA. Also, as Nitori is a public company, you can invest in its stock; something that you cannot do with IKEA.
In this article, I will analyze Nitori's business performance, financial details, and the stock price, and ask whether the current stock price is attractive.
Konichi-Value Score
Nitori's investment criterion are summarized in the table below. Each criterion is evaluated on a four-grade emoji scale:
🤩 = Perfect
😃 = Good
😐 = Acceptable
😢 = Bad
My six analysis criteria:
Nitori’s business: Profitability and long-term growth
Is Nitori cash-flow abundant?
Is Nitori financially sound?
Is Nitori’s stock undervalued?
Estimated margin of safety (MOS) FY 2023
Does Nitori provide good dividend?
Summary
Based on the above 6 points, I have examined whether Nitori is a stock you should sell, hold, or buy.
1. Nitori’s business: Profitability and long-term growth
My first, and perhaps most important criteria, is Nitori’s business profitable, and how are their long term growth prospects?
Nitori’s business profitability
The profit margin is a measure of competitiveness, and the higher the profit margin, the better.
Nitori's operating profit margin since 2004 is as follows:
Nitori's operating profit margin has consistently exceeded 10% since 2011 and is consistently going up!
In the case of Japanese retail stocks, an operating profit margin of 10% or higher is very good. What’s even more impressive is that Nitori’s competitors have far worse margins. in the same industry, most companies are in the single digits (for example, the retail group Aeon's operating margin is 2-3% and the furniture company Muji’s is at 5-7%).
On top of an earnings growth that has exceeded 10% over the past 7 years, the company has had an incredible increase in earnings over the past decade!
How is Nitori so profitable?
The reason why Nitori's profit margins are so high is that the company has an integrated business model, from manufacturing to distribution and retail, allowing it to cut various intermediate margins, making it highly cost-competitive.
In addition, it is the largest furniture and interiors company in Japan, so there are economies of scale at work. The high level of competitiveness due to these factors is reflected in the high operating income ratio.
However, due to Nitori’s reliance on China and southeast Asia for manufacturing, a weaker yen and supply chain issue will likely hurt the company’s profit margins in the foreseeable future.
Nitori’s long-term performance (revenue and operating income) from 2004 to today is as follows:
Both revenue and operating profits have continued to grow basically every year since 2004. What is particularly astonishing is that there was no decline in sales or profits even during the economic downturn after the Lehman shock.
There are two reasons to Nitori’s seemingly unstoppable growth, even during recessions:
Because the company is known to sell good furniture at low prices, demand increased during downturns due to a consumer shift from more expensive furniture.
Since Nitori import most of their product from oversees, the appreciation of the yen since 2013 has had a positive effect. However, due to the recent collapse in the yen, this merit is gone…
The first point might actually help Nitori’s sales grow further due to the probable recession. However, the collapse of the yen and supply chain issues (especially from Nitori’s largest furniture producer, China) will most likely eat into Nitori’s operating income.
There is also a concern about the slowdown in Nitori’s growth rate going forward.
Nitori has already opened stores in all 47 prefectures in Japan, and due to global supply chain issues and the depreciating yen the room for expansion is getting smaller.
When growth slows, the expected P/E ratio falls (and thus the stock price falls).
Hence, we will likely see a stagnant or slightly lower operating income in 2022 and if this correlates with a slowing growth, the stock price will likely fall too.
However, in the long term, Nitori has garnered a strong brand recognition abroad and with a potential to take on IKEA head-on in many markets.
2. Is Nitori cash-flow abundant?
The second criterion is the abundance of cash flow. Cash flow is a numerical value that expresses the inflow and outflow of cash. My view is that cash-flow is one of the best ways to see the actual state of a business, as it is much harder to manipulate the actual cash a company holds compared to its earnings and balance sheets.
Nitori's cash flow trends are as follows:
Operating cash flow, which is particularly important, has been positive every fiscal year, indicating that it is at average steadily increasing.
Nitori invests a large amount of fixed assets every year to open new stores, much of which is covered by operating cash flow (that is, Nitori does not have an expansion strategy that relies on loans and the like).
Cash and cash-equivalents have also increased sharply since 2016, suggesting that the company is in a strong financial position.
3. Is Nitori financially sound?
The third criterion is Nitori’s financial soundness:
Looking at the company’s balance sheet, you can see the breakdown of a company's assets and liabilities. Signs of a company's strengths and dangers that do not appear in data such as sales and profits appear on the balance sheet.
Sales and profits are important, but I think the cleanliness of the balance sheet is more important (as well as the cleanliness of cash flow).
The first thing to note is the high equity ratio (about 82%).
As a guideline for the equity ratio, it is usually about 30%, and it is said that it is excellent if it’s 40% or more.
In addition, Nitori has cash and deposits equivalent to those of debt, and is virtually a debt-free company. Nitori's finances are top-notch, and there is almost no risk regarding its business continuity.
On the other hand, Nitori has a relatively large investment in land and buildings, accounting for about half of the total assets. In general, if there is a lot of investment in fixed assets, capital efficiency indicators such as Return on Equity (ROE) and Return on Assets (ROA) tend to deteriorate.
However, Nitori's ROE is about 13.5% and ROA about 11.0%. Among the Japan retailers, it is a fairly high ROE & ROA.
4. Is Nitori’s stock undervalued?
The fourth criterion is the value of Nitori’s stock-price:
As the graph shows, Nitori’s stock has had a remarkable journey. If you bought it 10 years ago, you have made a 288% profit!
The stock price fell significantly due to the Covid-shock in March 2020, and then quickly returned to its pre-pandemic level shortly after. However, due to the recent turmoil in markets around the world, the stock is now down almost 16% year-to-date and 31% in one year.
Is now the time to buy the Nitori stock? To demine this, I am using the following three as indicators of the cheapness of stock prices.
P/E ratio (price-to-earnings ratio)
P/B ratio (price-to-net assets (book) ratio)
Theoretical stock prices using DCF
P/E ratio
Nitori’s P/E has dropped from 25.3 to 17.5 in less than 6 months, and it’s now substantially lower than its five-year average of 22.3.
It's P/E is on the higher side for value investors, but considering the clmpany’s growth, I think it’s justified.
P/B ratio
In 2018, Nitori's P/B ratio increased to over 5x at one point, but has declined since then has is now approximately 2.1x.
A P/B ratio of 1x is the company’s dissolution value (the value on the books remaining when the business is liquidated). If a company has a P/B of less than 1x, the stock price is said to be cheap, but for a company with good performance, brand and stable operations, it can justifiably trade many times higher than 1.
Nitori's P/B ratio at 2.1x is slightly high, but considering the company’s performance and brand, I think it is justified.
5. Estimated Margin of Safety (MOS) for FY 2023
Margin of Safety (MOS) is a principle of investing in which an investor only purchases securities when their market price is significantly below their intrinsic value. In other words, when the market price of a stock is below your estimation of its intrinsic value, the difference is the margin of safety.
The industry average P/E is 15, which makes Nitori on the higher side. However, the company’s growth has been impressive and I believe its present P/E is therefore justified. Let’s try to estimate Nitori’s P/E for FY 2023:
Due to a likely global recession, a substantial drop in the Japanese yen and supply chain issues, I think we will likely see a shrinking business for Nitori during FY2023. Therefore, I have created a bear-case scenario:
Zero revenue growth is reached due to the upcoming recession
Profit margins goes lower due to increased manufacturing and import cost
Profit margins decreases slightly due to increased labor, manufacturing and import costs
In this scenario, the A P/E of 17.5 is reach with today’s stock price, which is the same as today. Hence, I think Nitori’s P/E is more than justified.
So in other words, even in the most bearish case, the MOS for Nitori is 0%, but if we keep the revenue increase this year the same as last year, the P/E drops to 16, and we end up with a MOS of 8.5%
6. Nitori’s dividend yield
This is the evolution of Nitori’s dividend yield since 2014:
As you can see, the dividend yield has has been hovering around 0.8% over the past 9 years, and is not expected to grow for the foreseeable future. The dividend yield is around 2% on average in the home furnishing sector, so Nitori's dividend yield is definitely low.
7. Summary: Is it time to buy Nitori's stock?
Nitori is a leading company in the furniture and interior retail industry, and its good performance and financial performance are attractive.
The impact of Covid-19 on business results seems to be relatively small, and even though the company will suffer from a weaker yen, it has a strong financial position and great brand recognition to continue to take market share in the home furnishing industry.
On the other hand, Nitori's high name recognition and popularity are reflected in the stock price, and it can be hard to justify a P/E of 17.3 as a value investor.
Although Nitori’s P/E might be hard to justify for a value investor, I think that it is an excellent company that is worth investing in for the long term.
Good analysis, I've recently been researching Japanese companies and came upon your blog. One retailer I like is Seria (2782), they are the second largest 100 yen store. Over the past 10 years as the 100 yen stores saturated the market and their growth went to regular retail growth Seria invested in data analytics including POS data. Using this data they were able to grow faster taking market share while their competitors diversified overseas and outside of the 100 yen category. Their stores have less products per store but have higher sales and they are at a PE of about 14 at the moment. Below the retailer average above of 15 despite a history of long term growth and management forecasting about 10% growth into the future.
Thanks. Do they have an overseas expansion plan and also a following in Asia?