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Jul 7, 2009
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Aeon Q1 profit sinks 62 pct on sluggish sales

By
Reuters
Published
Jul 7, 2009

TOKYO, July 7 (Reuters) - Japan's second-largest retailer, Aeon Co Ltd (8267.T), on Tuesday 6 July posted a 62 percent drop in quarterly profit as a slide in consumer spending hit its supermarkets and its U.S. women's clothing unit Talbots.

Aeon
Photo: www.aeon.info

Aeon, which operates the Jusco supermarket chain, and its rivals have been suffering sharp sales falls as customers have less money to spend and defect to cheap specialty stores like apparel chain Uniqlo.

"We are experiencing an unprecedented retail slump," Masaaki Toyoshima, Aeon executive vice president, said at its earnings briefing.

"We have made drastic cost cuts, but falls in gross margins have had a bigger impact," he said.

The company, which runs 600 supermarkets, 1,200 grocery stores and thousands of specialty stores, said operating profit fell to 8.7 billion yen ($91.5 million) during its March-May first quarter.

Same-store sales at its core supermarket operation fell 5.8 percent from the previous year despite aggressive markdowns and increased ranges of cheap store-brand items.

Sales falls were particularly sharp in clothing, a trend that is especially damaging to Aeon and other all-in-one stores since apparel items typically have bigger profit margins than others products.

"What Aeon needs is topline growth. There is a limit to the amount of profit that can be achieved by cost cutting," said Naoki Fujiwara, a fund manager at Shinkin Asset Management.

U.S. unit Talbots (TLB.N), which mainly caters to women over 35, posted a loss for the quarter. Talbots has also announced further job cuts and the sale of its J.Jill division.

Last week, larger rival Seven & I Holdings (3382.T) posted a bigger-than-expected 17.5 percent decline in its first-quarter operating profit, hurt by a dismal performance by its supermarket and department store divisions.

FURTHER MARKDOWNS

Aeon said it would further cut prices as it aims to achieve overall sales growth by increasing customer traffic and the number of items bought per shopper.

While the retailer said it has seen some success in pulling in more customers, steep markdowns made so far and in the future would mean stores have to sell a lot more to deliver net revenue growth.

Such moves are also likely to trigger further price competition with Seven & I and other rivals. "They are in a deflationary trend. They will lose customers if they don't markdown. But if they do, it will be difficult for them to increase sales," Shinkin's Fujiwara said.

For the full year through February, Aeon kept its operating profit forecast of 130-140 billion yen, up 4.5-12.6 percent from the previous year and above an average estimate of 128.7 billion yen in a poll of 13 analysts by Thomson Reuters.

Shares of Aeon ended down 1.9 percent at 878 yen after the results. The stock has fallen 32 percent in the past 12 months, underperforming an 18 percent decline in the Tokyo stock exchange's retail subindex .IRETL.T. ($1=95.34 Yen) (Additional reporting by Mayumi Negishi; Editing by Chris Gallagher and Joseph Radford)

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