David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Seven & i Holdings Co.'s posting of better-than-expected third-quarter results has left investors feeling all slushy.

Lovestruck shareholders drove stock in the 7-Eleven owner up as much as 9 percent in Tokyo Friday, the biggest intraday gain in almost four years. They must be suffering from brain freeze.

Certainly, there were things to like about the numbers. Net income in the November quarter rose 3 percent to 42.1 billion yen ($370 million), well above analysts' consensus of 35 billion yen. Ito-Yokado, the company's struggling superstore chain, put in a 4.9 billion yen improvement in year-on-year operating income, its third consecutive gain. That suggests that close to two years of declining profit at the unit may be in the past.

The 7-Eleven convenience stores that account for about four-fifths of operating income also showed signs of improvement, with margins on merchandise rising in the quarter despite falling sales. Still, forecasts for the full year ending in February were unchanged -- and meanwhile, a rot appears to be setting in.

Revenue in the convenience business, the world's biggest, was growing at more than 10 percent as recently as 2014. Sales turned negative over the past year, and in the November quarter shrank 9 percent:

Big Gulp
Revenue growth at Seven & i's core convenience chain is slipping deeper into negative territory
Source: Bloomberg

It would be nice to blame this on the vagaries of the market. After all, Japan's convenience-store sector is facing a difficult adjustment as the population ages and more women join the workforce. The big three players -- 7-Eleven, FamilyMart UNY Holdings Co., and Lawson Inc. -- have been busy adding healthier meals and in-store nursing consultants as a result, to vary their traditional stock of bento boxes and spare shirts for harried salarymen.

Look Behind You
FamilyMart's convenience store revenues have been steadily creeping up on Seven & i
Source: Bloomberg

Some are adjusting better than others, though. FamilyMart has been consistently more profitable than Seven & i, and sales from its branded stores open at least 12 months have led the market all year.

While both those measures are likely to face a short-term hit thanks to FamilyMart's merger last year with UNY Group Holdings Co. and its underperforming Circle K Sunkus convenience chain, there's every reason to think the change of management should be able to turn things around -- and the combined group now has the scale to make a more serious play for Seven & i's crown.

The Leader of the Pack
FamilyMart has been the best performer in terms of sales growth from stores open at least 12 months
Source: Company websites
Note: Circle K Sunkus is now owned by FamilyMart following 2016 merger.

As Gadfly's Nisha Gopalan pointed out last month, FamilyMart also has the lead on 7-Eleven in terms of store numbers in China, a key forum for Japanese retailers if they're to escape the weak demographics in their domestic market.

That should be enough to worry investors who bid up the price of Seven & i stock Friday. Company President Ryuichi Isaka largely owes his current role to his expertise in running 7-Eleven, a track record that  drove activist shareholder Dan Loeb's successful lobbying campaign to put him in the top job.

Since his elevation, though, the convenience-store engine he ran so well has been misfiring -- and with FamilyMart on the warpath, there are few signs yet of a decisive strategy to regain the advantage.

In many ways, Seven & i is now starting to resemble Australia's fallen supermarket giant Woolworths Ltd., whose shares have slumped by more than a third from an April 2014 peak. As with Woolworths, there's a well oiled core business whose sales are faltering in the face of more aggressive competition, combined with peripheral units that tend to suck up cash and spit out meager profits in return.

That's a nasty combination for a retailer. Seven & i retains formidable strengths, but it's got well publicized weaknesses also, particularly the concrete shoes represented by its unprofitable, capital-hogging Ito-Yokado supermarkets and Sogo & Seibu department stores.

Should 7-Eleven start to lose its buoyancy, the group will have to fight to avoid being dragged down.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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David Fickling in Sydney at

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