Core Earnings Surged 45.8% Driven by Strong Same Store Sales Growth in Q1

• Core earnings, which represents earnings before interest, taxes and impact of the new IFRS rose 45.8 percent to PhP419.9 million.
• This was driven by the improvement in same store sales that went up 6.8 percent and by the increase in the number of operating stores.
• The new International Financial Reporting Standards (IFRS) on Leases took effect at the start of the year and weighed down on profitability by reducing net income and EPS.
• IFRS 16 requires lessees to recognize an asset on the right to use the leased property (the right-ofuse asset) and a liability, for the obligation to make lease payments. The right-of-use asset will be amortized over the lease term and an accretion of interest is imputed to the balance of the lease liability until the end of the lease. Unlike, the previous accounting policy, rental payments are recognized as expense evenly or on a straight-line basis over the life of the lease.
• The adoption of the new standard tends to front-load expenses at the earlier stage and will decline over the latter portion as accretion of interest is based on the declining balance of the lease liability.

The following are the financial highlights based from the Company’s unaudited financial reports:

Philippine Seven Corporation (PSE: SEVN), the local licensee of 7-Eleven Convenience Stores, increased its operating income and net income in the first quarter by 45.8% and 48.1%, respectively, before including the impact of the new IFRS. The improved financial performance can be attributed to the growth in sales and service revenues or commission.

Retail sales of all stores (or system-wide sales) totaled to PhP12.5 billion, up by 18.0% from PhP10.6 billion last year. This was driven by the 6.8% increase in same store sales and higher number of operating stores, which rose by 11.3% or by 264 to end the period with 2,593 7-Eleven stores all over the Philippines. New stores added reached 56 against 13 closures during the period.

PSC ended the first quarter with a nation-wide store count of 2,593 stores. There are 1,995 7-Eleven stores in Luzon (943 of which are in Metro Manila), 370 in Visayas and 228 in Mindanao. The franchised-stores accounted for 54% of the total, while the remaining 46% are corporate-owned.

Jose Victor Paterno, President and CEO, stated, “Service revenues more than doubled mainly due to growth in ewallets on the back of significant improvements in system infrastructure. Payments and services are an important source of traffic and revenue in other major convenience chains. This is an integral part of our CLIQQ digital ecosystem strategy, which also includes loyalty, e-wallet, and e-commerce.

While some components of the ecosystem such as e-commerce remain in investment mode, losses were reduced significantly in the past year due to growing ecosystem synergies. We continue to work on partnerships with third party wallets and e-commerce companies using the infrastructure built and tested with our own efforts, and expanding the ecosystem further.”

The Company adopted the new International Financial Reporting Standard (IFRS) on leases or IFRS 16. The impact of IFRS 16 to PSC is significant since most of its stores and distribution centers are under a long-term lease arrangement.

Under the new standard, lessees are required to recognize an asset for the right to use the leased property (the rightof-use asset) and a liability for the obligation to make lease payments (the lease liability). The right-of-use asset will be amortized over the term of the lease and an interest expense will be incurred for the accretion of the lease liability. The lease payments, previously recorded as rent expense, will be applied to the outstanding balance of the lease liability.

The new standard has an effect of front-loading the expense during the early stage of the lease because the accretion of interest is based on the full balance of outstanding lease liability and shall diminish over time as payments are made. The sum of the depreciation of right-of-use asset and interest expenses in the first quarter exceeded the cash basis lease payments by about PhP170.0 million (after-tax). As a result, the net income and the EPS declined by 41.1% to PhP112.2 million and PhP0.15 per share, respectively, after considering the effect of the new IFRS.