[This Week's Hot Picks] "Rebounding and Revalued"... BGF Retail Balances Earnings and Shareholder Returns

Restructuring for Mid- and Large-sized Stores and High-Margin Products
Business Model Transformation Reactivates "Growth Engine"
Annual Operating Profit Projected at 300 Billion Won

Editor's Note
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Amid a recent recovery in fundamentals within the domestic demand and retail market, the convenience store sector is drawing attention, particularly with BGF Retail standing out as the industry bellwether. Strong earnings momentum, which has surpassed last year's baseline burden from the distribution of government-issued consumer coupons, and an aggressive shareholder return policy are emerging as factors driving a corporate value reassessment. Brokerage firms have responded by raising their target price for BGF Retail as high as 210,000 won, boosting optimism for a long-term value rebound.

According to the financial investment industry as of October 7, BGF Retail is benefiting significantly from macro trends such as the increase in single- and two-person households and a notable rise in inbound foreign visitors. Since 2023, with the convenience store market at saturation point, the company has shifted away from growth focused mainly on new store openings. Instead, it has concentrated on improving quality by increasing the share of mid- to large-sized outlets, yielding tangible results. Accordingly, the total number of BGF Retail stores nationwide is projected to steadily rise from 18,711 in 2024, to 19,011 in 2025, and 19,291 in 2026. Younghoon Joo, a researcher at NH Investment & Securities, commented, "The company continues to increase its store count with a focus on high-quality outlets. Given that smaller competitors are facing difficulties, BGF Retail’s market share continues to rise."

To further enhance store competitiveness, BGF Retail is simultaneously working to broaden its target customer base and improve its product mix toward higher-margin items. By expanding its consumer group to include women, foreigners, and seniors, the company is establishing new revenue drivers. At the same time, it is strengthening its differentiated product lineup across both value-for-money and premium segments, and reinforcing its grocery shopping platform strategy.

In terms of merchandise mix (MD), a virtuous cycle has taken shape, with the proportion of high-margin categories consistently growing. As of the second quarter of this year, the sales mix stood at: processed foods 45.3%, tobacco 35.9%, fresh foods 13.9%, and non-food items 4.9%. The share of low-margin tobacco is declining, while high-margin general merchandise is leading growth. Haeni Lee, a researcher at Eugene Investment & Securities, observed, "The tobacco share is falling, while the proportions for food and processed foods are rising. Strong sales of high-margin categories like ice cream and beverages have driven this improvement in the product mix." Junghyun Yoo, an analyst at Daishin Securities, added, "Thanks to growth in foreign-customer sales, the share of low-margin tobacco revenue is declining, while drinks and other high-margin general merchandise are increasing, leading to improved profitability."

To further support these strategies, BGF Retail is significantly expanding its lineup of specialized outlets. Jongbae Park, a researcher at Hana Securities, explained, "The company is expanding services for foreign tourists and residents, and it aims to increase its number of beauty-focused and grocery specialty stores targeting female customers to 500 each by the end of the year. It is also broadening its offerings of health supplements and low-sugar products for senior customers." Regarding its overseas business, he pointed out, "This represents another factor for profitability improvement," adding, "BGF Retail currently operates 855 stores abroad and targets expansion to 1,000 stores in five countries by 2028."

In the third quarter of this year, a combination of new high-quality store openings, expansion of mid- to large-sized outlets, and improved growth rates for existing stores is expected to drive strong results. Heungkuk Securities projects that on a consolidated basis, third-quarter revenue will rise 5.2% year-on-year to 2.59 trillion won, with operating profit reaching 108 billion won, up 10.6% over the same period last year. This healthy performance will likely follow last quarter’s solid trend. The brokerage specifically cites an improved gross profit margin (GPM) of 19.2% thanks to product mix enhancement and a reduced SG&A expense ratio from business expansion, which together are expected to drive operating profit growth that outpaces sales growth. Korea Investment & Securities also highlighted continued cost reductions in depreciation and amortization seen in the first half, leading to a projected 10.1% year-on-year increase in operating profit in the third quarter.

For the full year, robust growth is expected to continue. Heungkuk Securities forecasts BGF Retail’s 2024 consolidated annual revenue at 9.542 trillion won, up 5.3% year-on-year, with operating profit reaching 307 billion won, a 20.8% increase. The company’s improvement in financial health is also notable, underpinned by solid cash generation. Efficient capital expenditure of around 250 billion won per year is boosting cash generation, which in turn is rapidly reducing net debt and the debt-to-equity ratio, resulting in even greater financial stability.

Given earlier declines in store expansion and consumer demand concerns, the current share price level is being viewed by the securities industry as a period of maximized valuation attractiveness. The 12-month forward price-earnings ratio (PER) stands at 10.6x, and the price-to-book ratio (PBR) is at 1.6x. Even when applying a 2.7x EV/EBITDA — a level that represents a 28% discount to the five-year average — the shares are still considered undervalued. Myungjoo Kim, an analyst at Korea Investment & Securities, stated, "Over the past three years, the market share (M/S) of convenience store channels in the retail industry declined mainly because department stores and online channels enjoyed stable growth, while convenience stores saw a decrease in store numbers among smaller players. Recently, however, the rate of store closures has slowed." She added, "Nearly 1,000 stores opened each year between 2020 and 2023, and as these new outlets enter their fifth year, we are seeing the effects of reduced depreciation and amortization costs." Kim concluded, "BGF Retail’s earnings per share (EPS) growth is clear and, thanks to ongoing stable results, the share price is gradually recovering."

Its shareholder return policy is also seen as a key driver for a reassessment of corporate value. On April 30, BGF Retail announced a plan to enhance corporate value, which included an expansion of shareholder returns (targeting a 40% return ratio). Jongryeol Park, a researcher at Heungkuk Securities, commented, "With continuing strong earnings momentum and the expansion of shareholder returns, a share price re-rating will likely be sustainable going forward."

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