Expected to Follow Japan, but Shares Plunge Despite Biggest Boom in 20 Years: Is This a Buying Opportunity for Department Store Stocks? [Weekend Money]

Luxury and Foreign Spending Drive Earnings
Stronger Won Poses Headwind

The domestic department store industry is experiencing its greatest boom in two decades, driven by luxury goods and foreign tourist spending. However, the share prices of related stocks have plunged by about 40% from their peaks. In the financial sector, while there are concerns that a stronger won could slow foreign consumer spending, some analysts point out that stock prices have fallen excessively compared to actual performance.

Despite Reports of Weak Domestic Demand… Biggest Department Store Boom in 20 Years

Recently, Seo Jeongyeon, a researcher at Shin Young Securities, stated, "In the second quarter, domestic department stores achieved the highest quarterly sales and operating profit since the COVID-19 pandemic, meeting market expectations. Despite this, the three major department store stocks have undergone significant corrections since mid-June and have shown little sign of recovery."

The department store boom began in earnest in October of last year. The same-store sales growth rate surpassed double digits at that time and has exceeded 20% so far this year. The same-store sales growth rate is an indicator showing how much sales have increased at existing stores, excluding newly opened stores, compared to the previous year. Such a growth rate is unprecedented in the past 20 years.

There has been a particularly sharp increase in sales of ultra-high-end jewelry and watches. Seo noted, "Over the past year, the main driver of department store sales growth has been luxury goods, especially ultra-high-end jewelry and watches. Not only domestic customers but also foreign visitors to Korea showed marked demand for these items. The recovery in demand for high-margin products such as fashion has enabled department stores to achieve both growth and profitability."

The influence of foreign tourists has also grown significantly. In the first half of this year, foreigners accounted for about 7-8% of total sales at domestic department stores. Foreign consumer spending alone contributed roughly two percentage points to the same-store sales growth rate. There are also rising expectations that department stores can now capture demand for luxury goods that tourists previously brought to duty-free shops.

Expected to Mimic Japan, But Why Are Stocks Falling?

The main problem is the stock price trend. Despite strong earnings growth, the forward 12-month price-to-earnings ratio (PER) for Korean department store stocks has dropped back to around 8 times.

Seo explained, "If the number of foreign tourists and their per capita spending determine department store sales, then long-term tourism competitiveness and short-term currency exchange rates are critical factors for the revaluation of Korean department store stocks. It is striking that major Japanese department store stocks are priced at PERs of 15–25, while the expected PERs for Korean department stores have dropped."

The key risk factor is the strong won. Just as Japanese department stores benefited from a weaker yen, domestic stores have profited from a weaker won. When the won is weaker, Korean products become cheaper for foreign tourists, making it easier for them to purchase luxury and fashion items. Conversely, if the won strengthens, the price advantage for shopping in Korea diminishes.

Record Earnings, Yet a Sharp Stock Decline: “Excessive Drop”

There are also concerns about excessive dependence on luxury goods and foreign consumption. Luxury sales are highly sensitive to economic trends, asset prices, and currency fluctuations. If the pace of foreign tourist arrivals slows or the won appreciates rapidly, it may become difficult to maintain the current sales growth rate.

Seo said, "This boom, driven by luxury goods and foreign consumption, is truly a 'rare and extraordinary phenomenon.' While we must be cautious about overconcentration in luxury goods and the sustainability of foreign spending, it is worth questioning whether the current level of stock price adjustment is appropriate."

In the longer term, the competitiveness of South Korea's tourism industry will be key. The proportion of visitors from the United States and Europe is rising, and the proximity to Chinese tourists—who are among the world's top spenders on shopping—is a positive factor. If demand for luxury goods from domestic high-income consumers remains solid and the number of foreign tourists continues to grow, department stores could overcome the limits of being a stagnating domestic sector.

Shin Young Securities has listed Shinsegae and Hyundai Department Store as its preferred stocks among department store shares. Shinsegae is positively evaluated for the ongoing boom in its department store business, the effects of major renovations, and improved profits in its duty-free sector. For Hyundai Department Store, while the sluggish performance of its subsidiary Zinus is a concern, the core competitiveness of its main department store business remains solid.

Seo added, "With a solid customer base of domestic consumers who consistently buy high-end goods, Korean department stores have demonstrated the potential to absorb demand from incoming foreign tourists over the medium to long term. Given that shares have declined by about 40% from their peak, this is an opportune moment to assess the fundamental strength of Korean department stores."

This content was produced with the assistance of AI translation services.