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Holmes Osborne, CFA
Holmes Osborne, CFA
Articles (247)  | Author's Website |

Sugi Is Thriving in a Growth Industry

The company continues to open new stores, the industry is growing and consolidation portends good things for the larger players

Sugi Holdings Co. Ltd. (TSE:7649) is a Japanese operator of drug stores. The company continues to open new stores, the industry is growing and consolidation portends good things for the larger players like Sugi.

The stock sells for 6,110 yen ($56.29), there are 61.81 million shares and the market cap is 377 billion yen ($3.5 billion). Earnings were 314.64 yen and the price-earnings ratio is 19.4. The dividend is 80 yen and the dividend yield is 1.3%.

Revenue grew from 415 billion yen in 2016 to 508 billion yen over the past 12 months. That’s good top-line growth and management hasn’t diluted shareholders by offering new shares to achieve that growth. Earnings grew from 14.6 billion yen to 19.4 billion yen over that time frame.

Like many Japanese corporations, Sugi is extremely solvent. There is 100 billion yen in cash and investments and 24 billion yen in receivables. There is no debt. Free cash flow jumps around a bit, but has been positive. It ranges from 3 billion yen in 2016 to 25 billion yen last year.

Sugi was founded in 1982 and has 1,048 stores. Think of Walgreen’s (NASDAQ:WBA) or CVS (NYSE:CVS). It also has eight in-home care nursing stations. In 2000, there were 106 stores, so growth has been fantastic. In 2006, Sugi entered the Tokyo market and jumped from 328 stores to 510. Revenues from Japanese drug stores have grown from 2.5 trillion yen in 2000 to 65 trillion yen in 2016. That’s growth!

The ratio of people 65 and older in 1990 in Japan was 12.1. In 2020, it will be 29.1. This should portend good things for the pharmaceutical industry as older folks spend more on health care.

A big difference between the U.S. and Japan in how we buy pharmaceuticals is that small, mom and pop stores have a large presence in Japan. In 2007, independent stores accounted for a whopping 92% of the industry. In 2015, it fell to 85.2%. In 2003, there were 671 companies. That number fell to 431 in 2016 and the trend continues to decrease. Again, this could portend good things for Sugi as it buys these operations out.

It’s tough to compete against the big boys. I had three clients who worked for Red Cross Pharmacies in Missouri. Red Cross sold out to CVS.

Sugi’s stores seem to be about what an American pharmacy is. Approximately 21% of revenues are health care, 21% pharmacy, 23% beauty, 14% food and 21% commodities. I base this comparison on my own time walking around American drugstores.

The company’s motto is: “With you always. All for your smiles.” I don’t think it translates to English very well.

I was surprised to see that Sugi has an operating margin of 5.3%. Walgreen’s is 3.52% and CVS’s is 4.8%. Like a grocery store, drug stores need volume. High turnover is how they make their money.

The stock was trading around 1,900 yen in 2010 and grew to 6,000 yen in 2015. Since then, it’s traded sideways. I compared the stock to a Japanese exchange-traded fund, Nikkei 225. Sugi outperformed the index during its growth years, but has since traded in line. I found out about Sugi by perusing the holdings of the Wasatch International Growth (Trades, Portfolio) Fund.

Sugi and Cocokara (TSE:3098) were discussing a merger, but Cocokara decided to tie-up with MatsumotoKiyoshi (TSE:3088) instead. It will be Japan’s largest drugstore with $10 billion in sales. An old Forbes article noted that Sugi’s principal shareholder, Hirokazu Sugiura, is one of the wealthiest people in Japan.

I like Sugi. The company is in growth mode and so is its industry. I don’t have an opinion on the Japanese stock market, but the stock seems reasonably priced and is growing revenue and earnings. The stock doesn’t have an American depositary receipt in the U.S., so you’re going to have to buy in Japan. That’s not a big deal for most brokerage firms.

Disclosure: We don’t own shares.

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About the author:

Holmes Osborne, CFA
Holmes Osborne is principal of Osborne Global Investors.

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