Top Management Message July 4, 2006

Today, LAWSON announced its operating results for the first quarter of fiscal 2006. First-quarter existing store sales dropped 4.4% year on year. In addition to intensifying competition among companies operating conventional convenience store (CVS) formats, this result reflected the discontinuation of Highway Card sales in September last year and unseasonable weather during April and May. Existing store markups, a key management indicator for LAWSON, declined by only 2.9%, supported by strongly performing counter products and other mainstay products. While this decline was less than the fall in existing store sales, it is by no means a satisfactory result. To increase the motivation of franchise owners, we actively conducted advertising and sales promotion campaigns targeting an increase in the number of customers. In addition, we made upfront investments in strategic formats NATURAL LAWSON and LAWSON STORE100 to support medium- and long-term growth. First-quarter consolidated recurring profit was ¥10.9 billion, 12.9% lower year on year. The size of the decrease, which partly reflected the previously mentioned advertising and sales promotion expenses and upfront investments, was inflated by several percentage points due to non-recurring factors that boosted earnings in the first quarter of the previous fiscal year. (For a full summary of results for the first quarter of fiscal 2006, please click here.)

Since fall of last year, growth in the operating results of all companies in the CVS industry in Japan has been lackluster, underscoring the need to increase the customer base by creating new markets. In 2001, we took a pioneering step in the industry with the launch of NATURAL LAWSON, a new format convenience store pitched mainly at women and offering a range of health-oriented products. Since the opening of the first store, we have introduced a variety of innovations and transferred some of the original brand products from this format to our regular LAWSON stores. Last year, we opened another new format, LAWSON STORE100, a convenience store offering perishable foods targeted mainly at housewives and senior citizens. Having won the support of customers, this format is now generating average daily sales on a par with regular LAWSON stores. As we move forward, we plan to use the products and know-how of these two strategic formats in our more than 8,300 regular LAWSON stores nationwide. In this way, we believe we can expand the customer base and thus strengthen our conventional format stores. Effectively, this approach will drive the evolution of regular LAWSON stores into hybrid stores. We have already begun trials in major urban areas whereby we introduce perishable foods and daily foods and value-for-money private brand Value Line merchandise assortments assembled at LAWSON STORE100 stores to regular LAWSON stores. The results have been immediate, with an improvement in both average daily sales and customer numbers due to an increase in the number of female customers. In areas where there is a growing number of elderly, we have also started experimenting with LAWSON stores that serve the needs of these customers; merchandise assortments and store layouts are planned with senior citizens in mind. I am convinced that by innovating in ways that respond to the needs of these customers we can make further progress toward our goal of creating stores that offer even higher levels of convenience for local people in their neighborhood.

In the first half of fiscal 2006, we plan to continue investing in sales promotions and making upfront investments in trials of new formats, aiming to motivate franchise owners and improve their earnings through an increase in customers. As we announced at the start of the current fiscal year, we expect these activities to result in a decrease in recurring profit in the fiscal 2006 interim period. However, we believe that our strategy of moving to increase customers ahead of other companies will translate into higher earnings in the second half of the year and future fiscal years. We ask for your understanding on this point, as we believe this will support the medium- to long-term development of LAWSON.

July 4, 2006

Takeshi Niinami
President and CEO

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