The revision in guidance came on back of strong first half performance and changes in the equity method affiliate of NOLLEY’S into a consolidated subsidiary from 4QFY25. The company believes there won’t be any changes to the numbers forecasted in 2HFY25. Furthermore, company expects net profit to be JPY14.8b, up from JPY12.9bn. Investors reacted positive to the news, as the share price was up over 15% the next day and touched an all-time high of JPY3,365 on December 12.

Headquartered in Osaka, Japan, PAL Group is a Japanese company engaged in planning, manufacturing, wholesale, and retail of clothing products, including men's and women's clothing. Operating brands include IACUCCI, CIAOPANIC, SHENERY as well as the retail of daily miscellaneous goods. The company was formerly known as Pal Co., Ltd. and changed its name to PAL GROUP Holdings CO., LTD in 2016.The company mainly operates through two segments: Apparel Business (59.2% of 1HFY25 sales), and Miscellaneous Goods/ Accessories Business (40.8%). Founded in 1930 and listed on the Tokyo Stock Exchange, PAL Group employs over 3800 people and has become a key player in the Apparel retail industry in Japan.

Steady performance with improved balance sheet

PAL group has delivered consistent performance over the past five years, registering a revenue CAGR above 8% to reach JPY193bn in FY24, driven by the Miscellaneous goods segment, which grew at CAGR of 16% from FY19-24, adding JPY73bn in FY24 to the net sales. EBITDA registered a CAGR of 16% over the same period, reaching JPY20.9bn in FY24 and margins expanded over 300bps to reach 10.8%. Expansion in margins helped the company to generate positive FCF, consequently, reducing the total debt to JPY12.3bn as of FY24-end from JPY17.2bn as of FY19-end. Reduction in debt improved the debt-equity ratio to 19% from 41% over the same period. In addition, the company’s cash and short-term investments increased by JPY22bn to reach JPY67.2bn as of FY24.

The company’s local peers, Fast retailing and ZOZO, also demonstrated revenue growth over the last five years. Fast retailing’s revenue grew at comparatively lower CAGR of 6.2% to JPY3,104bn in FY24, compared to ZOZO’s revenue CAGR of 10.7% to reflect sales at JPY197bn. Additionally, Fast retailing EBITDA margins expanded by 907bps to 22.4%% in FY24, while ZOZO’s margins expanded by 911bps to 32.5% in FY24.

First half performance surpasses guidance

Recently in 1HFY25, PAL group reported a robust 7.6% YoY increase in sales to JPY101bn, surpassing its guidance of JPY99bn. The improvement in sales was primarily driven by double-digit growth in miscellaneous goods/accessories business segment to JPY41bn, along with strong pace of new 3COINS+plus store openings. Although few casual brands struggled in 1HFY25, the apparel business recorded the highest net sales ever, buoyed by growth in town brands (dress-up brands) together with PAL CLOSET’s contribution of E-commerce sales. Furthermore, operating profit jumped over 14.6% YoY to JPY11bn in 1HFY25, surpassing its guidance of JPY9bn due to strengthening the business’s lineup of high-value-added products, expanding stores into large-scale establishments, optimizing of worker shifts and implementing measures for containing SG&A expenses.

PAL group was able to open 29 new stores in 1HFY25 compared to FY24. In the apparel business segment, PAL group opened 28 stores and closed 14 stores, resulting in a net increase of 14 stores, including three LOCUST stores and two stores in Kastane, Discoat, and three other brands. In the miscellaneous goods/accessories business segment, company opened 15 stores in the 3COINS+plus brand and moved forward with the expansion of existing store floorspace. Overall, PAL group was able to spread its distribution chain by establishing 420 stores in Kanto region, 222 stores in Kansai region and 336 stores in other regions in Japan.

Medium to long-term vision

Starting from FY14, PAL group has embedded their medium to long-term vision into attainable business strategies driven by creation of new brands by In-house proposals, external collaboration and M&A, enhancement of infrastructure (IT, logistics, production), promoting overseas business and promoting online business with the expectation of improving sales. The company aims to reach revenue of JPY300bn by FY26, particularly achieving e-commerce net sales of JPY70bn in FY26 with total app membership of 14mn.

Lower valuation offers comfort to investors

The stock price has increased over 30% in the last year. Despite this increase, the valuation looks attractive. PAL group is currently trading at a P/E ratio of 17x (based on estimated FY25 EPS of JPY181), compared to a P/E of 41x for Fast retailing ,31x for ZOZO and global peers average of 29x. However, it is trading in-line with its 10-year historical average of 17x. Additionally, on EV/EBITDA basis, the company is trading at 12x (based on estimated FY25 EBITDA of JPY23bn), compared to a 20x for Fast retailing, 19x for ZOZO, and global peers average of 15x. However, PAL Group has lower margin profile as compared to its local peers and only two analysts cover the stock, indicating limited coverage. Both analysts have “Buy” rating with an average target price of JPY3,075. The run-up in stock prices over the past year means the target price has already been met with no upside potential. Any correction in the near term might make the stock an interesting proposition for investors to evaluate.

Overall, the company looks fundamentally strong from long term perspective, with positive outlook for revenue growth and comfortable valuation. Throughout the previous five years (FY19- FY24), PAL group has surpassed its guidance. Despite these positives, company faces major risks, including climate change risk, inventory risk, intensifying competition, evolving consumer trends, and reliance on its online platform, which is susceptible to technical issues, cyber-attacks, system failures.