Sanrio Company, Ltd. (Sanrio) identifies itself as an entertainment company with a diverse intellectual property (IP) portfolio of over 450 globally popular characters, including the most famous- Hello Kitty, which was introduced in 1974. The company has four revenue streams: product sales (at Sanrio shops, department stores, mass retailers, and e-commerce stores); licensing fees (characters used for merchandising, advertising, and promotion); theme park formats (Sanrio Puroland, Tama City, Tokyo and Harmonyland, Oita Prefecture); and new businesses (edutainment, digital businesses, etc.). Geographically, Japan contributed bulk of FY24 sales (69.0%), followed by Asia (15.1%), North America (12.4%) and rest 3.5% from Others (including Europe and Latam).

Investments and positive sectoral tailwinds in the post-pandemic period to boost growth  

Following the downtrend during the COVID-19 pandemic, the entertainment industry has bounced back to deliver a strong performance, aided by the fluid movement of people and an increase in inbound tourist demand. Sanrio, too, has experienced a significant recovery with turnaround of FY21’s operating loss of JPY3.2bn to an impressive operating profit of JPY26.9bn in FY24. In addition to the sectoral tailwinds, the company’s performance has also been supported by reforms in the management team, which witnessed key changes in strategic roles based on merit rather than seniority. As part of the new mid-term plan, management has prioritized investments in global content and aims to enhance and leverage relationships with platforms such as Alibaba Group. Furthermore, the team plans to expand the company’s IP portfolio by leveraging its diverse characters and creating new ones.

Guidance upgrade on the back of better-than-expected results

Sanrio delivered better-than-expected performance in 1HFY25 (Sep-24 ended), with sales increased 43% YoY to JPY62.8bn, beating management’s guidance by JPY5.8bn. The celebrations for Hello Kitty’s 50th anniversary helped performance of brick-and-mortar stores and driving strong domestic and foreign visitor attendance at theme parks. The license business surged ahead with growth from existing licensees and signing of new contracts. In addition, solid royalty sales drove performance in North America and China. Operating profit grew 77.3% YoY to reach JPY23.6bn, aided by the solid top-line performance, greater share of the higher-margin license business, and lower SG&A expenses. Operating margin surged 730 basis points (bps) YoY to 37.6%.

On the back of the solid 1H25 performance and expectation of strong sales in 3Q, management raised its FY25 guidance, with revenues now guided at JPY130.6bn (prior forecast JPY119.3bn), and an operating profit of JPY41bn (prior forecast JPY37.1bn).

Strong balance sheet supports management’s new mid-term plan

Strong underlying results have boosted free cash flows in the post pandemic phase (FY22-24), which have tripled to JPY18.6bn in FY24. This has strengthened the balance sheet significantly with cash and equivalents of JPY100bn at 1H25-end, providing considerable firepower to help achieve targets of the new mid-term plan for FY25-27.

The key objective of the new plan is to reduce volatility in business performance. Management intends to do this by bolstering its IP through investments in global content, collaboration with global creators, and strengthening global branding. The expanded IP will then be monetized at multiple layers through added touchpoints such as games, events/experiences, and edutainment. To build up the IP, management plans to utilise the strong balance sheet, cash generation, and additional debt to spend JPY80bn for organic (JPY30bn) and inorganic (JPY50bn) investments. Sanrio targets achieving annual revenues of JPY135bn and operating profit of JPY40bn or more ahead of the plan by FY27. Dividend payout is guided at 30%, with an option to pay higher in absence of investment opportunities. In line with this and buoyed by the robust 1HFY25 results, management raised its interim dividend and guidance for final dividend to JPY20 per share (JPY1.5 higher than previous guidance), implying a payout ratio of 30.3%.

Overall, the company presents strong fundamentals, driven by better-than-expected results, guidance upgrades, and management’s commitment to focus on growth through organic and inorganic investments. Sanrio’s valuation appears to be slightly on the higher side compared to its peers. The stock is currently trading at a P/E ratio of 37.5x (based on 2025 consensus estimated EPS of JPY131.8), as compared to its global peer average of 35.9x. Tracking its strong fundamentals, the stock has delivered substantial YTD returns of over 161% and a 1-month return of over 27%. Over the past couple of quarters, consensus FY25 and FY26 sales and earnings projections for 9 analysts have been revised upwards. Most analysts have a ‘Buy’ recommendation, with an average price target of JPY4,708, however, the recent surge in prices means the target has been crossed, providing no room for upside. Any correction in the near term should provide an opportunity to investors to revisit the stock. On the other hand, over reliance on the Hello Kitty character and Japanese market and inability to produce new successful IP could impact business growth over the long-term.