With flat revenues and mounting losses, is Aeon scared to reform its legacy and low margin retail businesses?

Aeon employs over 155,000 staff across a plethora of businesses ranging from General Merchandise, Supermarket and Drug stores, plus financial services and shopping centre developments. 

Although global retailers have been challenged to expand internationally (think of Tesco’s advance and retreat in the US, or Carrefour’s global pull back), Aeon has developed businesses in Hong Kong, Malaysia and other markets. It is currently building a new shopping mall cum delivery centre in Cambodia.

Diversity can be a strength but it can also be a driver of complexity. Aeon’s revenues of JPY8.6 trillion (US$70b) are flat and in 2021 it produced an operating loss for the first time in several years.

Read Aeon’s shareholder reports, the pandemic and stay-at-home mandates are given as excuses.

One of Aeon’s strategies, is the ‘Acceleration and evolution of the Shift to Digital Markets’. Online shopping sales have grown by 23% however are still a fraction of the group’s mix.

The bigger issue is that revenues are growing in segments where margins are thinnest. Last year, for example, Aeon acquired Can Do a discount store chain. Discount stores are the fastest growing segment of Aeon’s portfolio.

GMS and Supermarkets are the heart of Aeon accounting for 78% of revenue. However GMS has a negative operating profit and supermarkets, whilst in the black, just 18% of consolidated profits.

Perhaps an untapped jewel in the crown is financial services? This segment accounts for 5% of group revenues yet over 50% of consolidated profits.

According to both the FT and WSJ no analysts following Aeon rate the stock as a ‘buy’. Most recommend underweighting it in their portfolio.

Amongst the company’s top 10 shareholders, 8 are Japanese financial institutions, however there are 2 foreign ones, Black Rock and Vanguard.

Are they seeing something others have missed?

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