NIKON Corp. released it’s H1 FY2017 results at a time of great volatility in global markets just a day before the election of Donald Trump as US President. Stocks were down -6.56% on the first day of trading but it’s difficult to attribute blame in this instance.
Looking at the overall business of Nikon we see a company with falling Net Sales by -13.8% but improving Operating Income by +56%. This income represents 6.8% of Net Sales and that is a big improvement on the previous year where it was just 3.7%.
So Nikon despite a difficult year has been able to cut costs and produce better value for investors. However, these results miss the latest previous forecast on Net Sales by -4.5% but improve on Operating Income by +1.3%. This previous forecast was already for a 10% drop so Net Sales are a problem.
Nikon remain a solid profitable company that has a long history in technology and a following that is loyal and supportive. There are severe underlying issues that have yet to be fully addressed and hence the management have ditched their Medium Term Plan and set in motion a new 3 year recovery plan. Let’s take a look at the overall business structure to outline the issues.
The chart above outlines the main issue, that in the first half of FY2017, Imaging accounted for 52% of all sales and 40% of Operating Income, before expenses. Now if there was growth in the Imaging segment then that would be fine, but that is a shrinking market with intense competition. So future growth would need to be sought elsewhere.
The 3 year medium term plan outlined in May 2015 has after just 1 year been ‘binned’ as inadequate for the current business climate. In its place a new 3 year ‘restructuring plan’ has been adopted. Simply put, this new plan ‘cuts sales and increases profits’ by focusing on high end products, reducing overall R&D, sales and manufacturing operations and shrinking corporate scale to match reduced operations. The trouble may be, that nearly every other company is doing that too, bar one. It could get awfully cramped at the top, leaving the reasonably priced products to one company.
Whilst the overall business results give a good idea as to the companies appetite to carry dead wood, we as course are interested in this company as a provider of stand alone Digital Cameras and lenses.
Net Sales are well down from ¥263.6b in 2015 to ¥178.3b for the same period, a drop of -32.4%. Much of the problem this first half has been laid at the door of the Kumamoto Earthquakes in April 2016. The other major reason for the steep decline is the strengthening value of the ¥en and the shrinking market.The trend is visibly down and profits are hard to come by. Reversal of this is hard to envision in the current market climate.
The effects of the exchange rate on both the cameras and sensors market is also important. The exchange rate for the second half of FY2017 has been forecast at ¥105 per $ and ¥115 per €. Given todays rate it looks a little high. This could be a little volatile due to the US Presidential elections and other external factors.
Total unit sales for digital cameras have been 2.85M units in the first half of FY2017. This is down 44% from the 5.12M units sold in the same period the previous year. Sales by value of all imaging products including lenses and scopes are down from ¥263.6b in 2015 to ¥178.3b for the same period, a drop of -32.4%.
Inventories for the Imaging segment are improving but still considerably below the same period the previous year.
Full year forecast for the imaging segment are for camera unit sales to fall to 6.7M units, down from 10.27M units the previous year. The whole segment will reduce sales by value to ¥415b, down from ¥520.4b in FY2016.
Nikon as a company have a great brand in photography with much goodwill around the world, especially with older men. Currently it is too dependent on its Digital Camera products. This market sector has seen an major fall in revenue that are not going to return anytime soon.
Nikon are a cash rich company, but they will need to spend it wisely in order to diversify and maintain its current size.
From a camera point of view, Nikon have a problem with Sony. They are ‘hamstrung' by the technology relationship that appears to prevent them attacking new mirrorless markets. As has been muted, a merger may be the best option around.