UPDATE 2-7-Eleven operator plans record Japan expansion, unfazed by tax hike

Thu Apr 3, 2014 7:39am EDT

* Expects 4th straight record op profit in 2014/15, up 4.8 pct

* To open record 1,600 new 7-Eleven stores in Japan in 2014/15

* Sees consumption recovering by June from April tax hike (Adds executive comments, details from results)

By Ritsuko Shimizu

TOKYO, April 3 (Reuters) - Japan's Seven & I Holdings Co , the world's biggest convenience store operator, unveiled plans for a record pace of expansion at home, unfazed by the government's first sales tax hike in 17 years.

The owner of the 7-Eleven chain is banking on a revolution in Japanese retailing, with shoppers increasingly inclined to pick up everyday necessities at convenience stores rather than making trips to supermarkets.

Seven & I will open 1,600 new 7-Eleven convenience stores in the year started on March 1, helping it usher in another year of record earnings. The company posted its third record annual operating profit in a row on Thursday.

Seven & I, the first of Japan's big retailers to report full-year results this month, said it is confident the country's sales tax hike will not leave a lasting mark on consumption. The main risk, it said, is slow government policy responses should the tax start to wreak havoc on demand in the world's number three economy.

The last increase in the consumption tax dragged Japan into a recession and depressed private demand for years. But economists are more sanguine about the latest hike, optimistic that Prime Minister Shinzo Abe's recipe of ultra-easy monetary policy, fiscal spending and promised reforms would finally re-awaken the Japanese economy.

The government said it is ready to unleash more fiscal and monetary stimulus as needed if the sales tax, implemented on April 1 to help rein in government debt, proves more damaging to growth than expected.

"So far in April, things are down almost as much as they were the last time the tax was raised, but I think they'll be back to normal around June," Seven & I President Noritoshi Murata told an earnings briefing on Thursday.

"The main risk that could bring a worsening consumption environment is if the government moves too slowly to support the economy," Murata said.

Seven & I forecast a 4.8 percent rise in operating profit to 356 billion yen ($3.43 billion) for 2014/15.

In the prior year, operating profit rose 14.9 percent, although that was mostly due to changes in accounting for depreciation. Without those, 2013/14 profit would have risen only 4.2 percent.

BIGGEST TEST

Japan has experienced a decade and a half of deflation, and the government's reflationary policies implemented a year ago face their biggest test as the country's sales tax rose to 8 percent from 5 percent this month.

Murata said the new financial year would see a "volatile consumer environment".

"It's up to retailers to sweep away deflation, developing products that provide more added-value," he said.

Seven & I said operating profit at its Japan 7-Eleven chain - which makes up about 60 percent of the total - would rise 2.9 percent this business year, compared with the prior year's 13.9 percent.

Its 7-Eleven stores in the United States, where a weak yen has boosted profitability, are forecast to show 14.6 percent profit growth this year after last year's 34.1 percent.

The company expected the sales tax hike to cut existing store sales of its Ito Yokado supermarkets, forecasting a 3.0 percent drop this financial year, although it aimed to boost operating profit through higher-margin own-brand goods and cost reductions.

The supermarkets cut prices by 5 to 30 percent on 775 food and household items from April 1 in response to the tax hike.

For the year ended on Feb. 28, Seven & I's operating profit rose to a record 339.66 billion yen, compared with the consensus forecast of 366.5 billion yen from 18 analysts surveyed by ThomsonReuters I/B/E/S.

Sales rose 12.8 percent to 5.63 trillion yen.

Shares of Seven & I ended 1.2 percent higher at 3,978 yen before the earnings release, compared with a 0.8 percent gain in Tokyo's benchmark Nikkei average.

The shares have fallen nearly 5 percent since the start of the year, holding up better than the Nikkei which is down 7.5 percent.

Fellow retailers Aeon Co Ltd and Fast Retailing Co Ltd are reporting their full-year earnings next week. ($1 = 103.7200 Japanese yen) (Writing by Edmund Klamann; Editing by Christopher Cushing and Ryan Woo)

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