In the first six months of fiscal 2010, existing store sales on a consolidated basis declined 2.4% year on year. The interim period was a story of two quarters. In the first quarter, economic, weather and other external conditions weighed heavily on our performance. In the second quarter, meanwhile, we enjoyed the benefits of high-value-added product launches, strong sales of dessert and pasta lines, and a fillip from the July and August heat wave. As a result, sales declined less in the second quarter than the first quarter. Since last year, we have been forging ahead with structural improvements in raw materials procurement, distribution, and other areas. These improvements yielded a 0.6 percentage point improvement in the gross profit margin. Moreover, effective use of advertising and promotional expenses and other actions enabled us to come under budget in selling, general and administrative (SG&A) expenses. At the beginning of the current fiscal year, we projected lower earnings due to higher IT expenses than the previous fiscal year. In fact, consolidated operating profit at 30.1 billion yen was 2.2 billion yen higher than planned and higher than the first half of fiscal 2009, albeit slightly.

However, first-half consolidated net profit declined sharply. One reason was that last year we booked extraordinary income from the merger of subsidiaries. The other was that in the first half of fiscal 2010 we recorded one-time extraordinary losses. On a non-consolidated basis, we booked extraordinary losses due to the sale of training facility that was costly to maintain. Maintenance costs at the new facility are lower though, so we should be able to recoup those losses quickly. On a consolidated basis, we booked extraordinary losses in the form of impairment losses for old IT systems at Ninety-nine Plus Inc. Here too, however, we should recoup the losses quickly as the across-the-board roll-out of our new IT system (PRiSM) is expected to produce higher sales at Ninety-nine Plus Inc. by reducing opportunity losses. We took these charges ahead of schedule because of sufficient prospects for generating cash.

The main highlights of the first half of fiscal 2010 were as follows.

We began full-scale operations of PRiSM, which we finished introducing in fiscal 2009. This system has enabled us to clearly see and reduce lost opportunities (from running out of products customers want). Looking ahead, in addition to further promoting the Three Challenge Practices*, we plan to utilize PRiSM to thoroughly revamp operations at franchised stores and Head Office. I'm confident this will lead to higher sales and gross profit, thereby raising the earnings power of franchised stores and, in turn, Head Office's earnings.

In March this year, we joined the Ponta multi-partner shopping points program. Loyalty Marketing, Inc. issues the cards, operates and manages this program. Since joining this program, the number of Ponta cards issued has risen strongly, topping 25 million. Sales to Ponta card members accounted for approximately 28% of our total sales.

As an investment in a future growth field, we began introducing the LAWSON Kobe Hot Deli, a new system for preparing food in-store. By August 2010, we had opened 20 stores with this system.

On July 1, 2010, we made LAWSON ENTERMEDIA INC. and Ninety-nine Plus Inc. wholly owned subsidiaries. We are now working to capture greater synergies with these Group members to raise our earnings. These moves should also enable us to accelerate the pace at which we open LAWSON STORE100 stores.

In the second half of the fiscal year, we will push ahead with the abovementioned measures, while strengthening our original product offerings in fast foods and other categories. In this way, we will deliver merchandise assortments in tune with individual locations. Our goals are to improve the earnings of franchise stores as well as achieve our full-year earnings target.

Going forward, we ask for the continued understanding and support of LAWSON shareholders and other investors.

October 12, 2010

Takeshi Niinami
President & Chief Executive Officer

^*The Three Challenge Practices are points that franchised store owners, employees and store crews (part-time and casual workers) must pay particular attention to in running LAWSON stores. They are (1) ensuring merchandise assortments are matched to individual locations, (2) serving customers courteously, and (3) keeping stores and surrounding areas clean.

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