Nextage (3186) 2024 H1 Update

Sell-off after Q2 earnings appears unwarranted

Since my first post on Nextage, the company has had two quarterly earnings announcements, both of which were followed by drops in its share price. This post aims to analyze these results and share my perspective. In brief, despite the sluggish recovery in add-on sales (one of the risk factors I had highlighted), the same-store sales volume in Q2 appears to have surpassed last year's levels (the company does not disclose same-store sales volume per se). Nextage is likely on track to meet the management's EBIT guidance of ¥20 billion (TIKR consensus is ¥20.8 billion) for the fiscal year ending November 2024. The sell-off following its Q2 results was puzzling because the stock had already declined in January when investors considered the management's guidance for FYE Nov-24 overly optimistic. The risk to Nextage meeting full year guidance is the drop in gross profit per unit from vehicle sales if wholesale price starts softening.

Feb-24 Q1 Results (announced 4/1/24 after market close):

Nextage recorded an EBIT of ¥2.2 billion, up 25% year-over-year, despite lower customer foot traffic and add-on sales due to the discontinuation of sales incentives. This growth was partly because the previous year's Q1 was notably weak, with the management offloading high-priced inventories procured when the wholesale market was strong. However, the market reacted negatively to the ¥2.2 billion EBIT figure, as the target for the first six months was ¥8.0 billion. I, too, was disappointed, having expected around ¥3.5 billion. I overestimated the retail gross profit per unit (GPU). In the quarters running up to the discontinuation of the incentives for selling add-ons, implemented in around October 2023, retail GPU has been about Y460k. In Nov-23 Q4 it dropped to Y421k. With the company's guidance that GPU will gradually recover over the following quarters, I anticipated Feb-24 Q1 GPU of Y430-440k. But the company booked Y395k GPU as add-on revenue did not recover. Nevertheless, Nextage commented that it was on track to meet its full-year guidance of ¥20 billion.

May-24 Q2 results (announced 7/1/24 after market)

Nextage reported an EBIT of ¥5.5 billion, down 10.5% year-over-year, with six-month EBIT at ¥7.7 billion, slightly below the ¥8 billion guidance. The share price fell following the announcement, perhaps driven by weak retail GPU, which was ¥409k compared to ¥455k last year and ¥395k in Q1.

The slide below shows the GPU breakdown by: (1) vehicle sales excluding add-ons; (2) add-ons, excluding financial fees; and (3) financial fees which presumably include brokerage and loan origination fees. You can see that (2) and (3) declined quarter-over-quarter, offsetting the c. 40% increase in (1).

Nextage Gross Profit per Unit (GPU) Breakdown

The company attributed the weak add-on sales GPU to inexperienced salespeople (note that the industry has a high employee turnover) overlooking option sales. The company installed sales support software to assist the inexperienced ones. I believe reintroducing incentives, without imposing sales goals, would help more.

Despite the weak GPU, there were more positives than negatives in the results. It seems likely that Nextage will achieve at least ¥19 billion in full-year EBIT and probably meet the ¥20 billion guidance. Keep in mind that the January sell-off occurred because the ¥20 billion guidance seemed overly ambitious. Historically, Nextage has shown quarter-over-quarter EBIT increases thanks to rising store counts. With ¥5.5 billion EBIT in Q2, simple math suggests at least ¥11 billion in the second half, in addition to ¥7.7 billion in H1. Although add-on sales GPU has been disappointing, the same-store sales volume has likely turned positive in Q2 and is expected to improve.

Macroeconomic change is always a risk factor, but the Nextage-specific risk factor is the high retail GPU derived from vehicle sales as the chart above shows. I cannot verify the company numbers because it is standardized, and my calculations using the disclosure shows that it was only up 10% QoQ. Nextage explains the improvement to better inventory management and higher volume of inventory sourcing by purchasing from consumers.

Disclaimer:

The information provided here is for general informational purposes only and should not be considered as professional financial advice. The content is based on the author's understanding and interpretation of financial markets, economic trends, and various other factors.

Investing involves risks, and past performance is not indicative of future results. The author or provider of this information is not a licensed financial advisor and does not guarantee any specific outcome or profit. It is important to do your own research and consult with a qualified financial professional before making any investment decisions.

The information presented may not be suitable for all investors and is not tailored to individual investment objectives, financial situations, or risk tolerance. All investors should carefully consider their own financial situation and consult with their financial advisor before making any investment decisions.

The author and the platform providing this information are not responsible for any losses, damages, or liabilities that may arise from the use of the information provided. The reader assumes all risks associated with their investment decisions.

Investing in financial markets involves the risk of loss, and past performance is no guarantee of future results. The reader is solely responsible for evaluating the risks and merits associated with the use of any information provided and should seek advice from a qualified financial professional.