[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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Recently, the convenience store sector has shown a recovery in fundamentals within the domestic demand and distribution market, with increased attention centered on the leading stock, BGF Retail. The company is demonstrating earnings momentum that surpasses the base effect from last year's government stimulus consumption coupons, and its proactive shareholder return policy is being highlighted as a key driver for the revaluation of its corporate value. In the securities industry, target prices for BGF Retail are being raised as high as 210,000 won, boosting expectations for a long-term recovery in value.

According to the financial investment industry on October 7, BGF Retail is benefiting significantly from structural changes such as the rise in single and two-person households as well as the increasing number of foreign visitors to Korea. Since 2023, with the convenience store market reaching saturation, the company moved away from aggressive new store openings and shifted its focus to improving the quality of existing stores through increasing the proportion of medium and large outlets. This strategic shift is producing tangible results. Consequently, the number of stores nationwide continues to rise steadily, from 18,711 in 2024 to an expected 19,011 in 2025 and 19,291 in 2026. Ju Younghoon, a researcher at NH Investment & Securities, commented, "BGF Retail continues its net increase trend with a focus on high-quality stores, and considering the great difficulties faced by smaller operators, the company's market share continues to grow."

BGF Retail is also working to strengthen store competitiveness by simultaneously expanding its target customer segments and focusing on high-margin products. The company is broadening its consumer base to include women, foreigners, and senior customers to secure new drivers of sales growth, and it is enhancing both value-for-money and premium differentiated products as well as its grocery shopping platform operation.

In terms of merchandise mix (MD), a virtuous cycle has been established, with the proportion of high-margin categories steadily increasing. As of the second quarter of this year, the product mix consisted of 45.3% processed foods, 35.9% tobacco, 13.9% foods, and 4.9% non-food goods. The share of tobacco, which has a low margin, is falling, while the growth in high-margin general merchandise is leading the trend. Lee Haeni, a researcher at Eugene Investment & Securities, noted, "The tobacco share is declining while the proportion of foods and processed foods is rising, and strong performance from high-margin items like ice cream and beverages is improving the mix." Yoo Jeong-hyeon, a researcher at Daishin Securities, analyzed, "With the growth in foreign customer sales, the proportion of low-margin tobacco sales is decreasing, while sales of high-margin beverages and general merchandise are increasing, which is expected to drive profit improvement."

To support these strategies, BGF Retail is significantly expanding its lineup of specialty stores. Park Jong-bae, a researcher at Hana Securities, explained, "The company is expanding services for both foreign tourists and foreign residents, and plans to increase the number of beauty specialty stores and grocery specialty stores for female customers to 500 each within the year. They are also expanding the lineup of health supplements and low-sugar products for senior customers." Concerning overseas business, he added, "It is another factor in profit improvement; the company aims to increase its presence to 1,000 stores in five countries—up from the current 855 stores—by 2028."

In the third quarter of this year, a combination of high-quality new store openings, the expansion of medium and large branches, and improved growth rates at existing stores is expected to lead to strong results. Heungkuk Securities projects third-quarter consolidated sales will rise by 5.2% year-on-year to 2.59 trillion won, with operating profit climbing 10.6% to 108 billion won, continuing the robust operational performance seen in the previous quarter. The firm particularly expects improved gross profit margin (GPM) to 19.2%, driven by the enhanced product mix, and reduced SG&A cost ratio due to scale expansion, to result in operating income growth outpacing topline growth. Korea Investment & Securities also pointed out that the cost-saving effects from lower depreciation, seen in the first half, will continue into the third quarter, resulting in a 10.1% year-on-year increase in operating profit.

The growth trend is estimated to remain solid on a full-year basis. Heungkuk Securities forecasts BGF Retail’s annual consolidated sales for this year to reach 9.542 trillion won (up 5.3% year-on-year), while operating profit is likely to reach 307 billion won, up 20.8%. The company's financial structure is also strengthening, backed by solid cash flow generation. With efficient facility investments of around 250 billion won per year and increasing cash generation, net debt and the debt ratio have been rapidly decreasing, further reinforcing financial stability.

Securities experts believe that, despite the temporary stagnation in the company’s share price due to past concerns about market saturation and reduced consumption, the current valuation phase provides heightened attractiveness. The 12-month forward price-earnings ratio (PER) stands at 10.6, and the price-to-book ratio (PBR) is at 1.6. Even applying an enterprise value-to-operating profit multiple (EV/EBITDA) of 2.7 (a 28% discount compared to the five-year average) reveals that the stock remains undervalued. Kim Myeong-ju, a researcher at Korea Investment & Securities, commented, "The convenience store channel’s market share (M/S) within the retail industry declined over the past three years as department stores and online channels showed steady growth, while convenience stores, particularly among smaller players, experienced a decrease in number of outlets. However, recently, the pace of store reduction within the sector has slowed." He added, "Close to 1,000 stores were opened annually from 2020 to 2023, and as these new outlets enter their fifth year, a tangible depreciation-saving effect is emerging this year. The increase in BGF Retail’s earnings per share (EPS) is clear, and thanks to stable improvement in results, the share price is expected to continue its gradual recovery."

The company’s shareholder return policy is also cited as a powerful factor leading to the revaluation of corporate value. On April 30, BGF Retail announced its plan to enhance corporate value by expanding shareholder returns, aiming for a shareholder return ratio of 40%. Park Jong-ryeol, a researcher at Heungkuk Securities, stated, "With favorable earnings momentum and the continued expansion of shareholder returns, the revaluation of BGF Retail’s stock is sustainable."

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