Shinsegae, Hyundai, Lotte: Three Kingdoms of Department Stores... Who Makes the Most Money? [Weekend Money]

Shinhan Securities: "Prefer Department Stores; Shinsegae Top Pick"

Shinhan Securities maintained its Overweight rating on the retail sector on October 18, saying third-quarter results are expected to fall short of market expectations, but that a recovery in year-end spending, particularly at department stores, is anticipated.

Regarding third-quarter results for the retail sector, Cho Sang-hoon, a research fellow at Shinhan Securities, said, "Consumer sentiment is positive, but most retail formats are underperforming expectations due to elevated expectations, an adjustment in asset prices since July, and rising interest rates." He added, "However, the weak results have already been reflected in share prices, easing valuation concerns." He continued, "Weak third-quarter results present a buying opportunity," and emphasized, "We expect a recovery in consumer spending at year-end."

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Shinhan Securities maintained its preference for department stores, which it expects to rebound during the year-end shopping season, and named Shinsegae its top pick in the sector. Cho said, "(At Shinsegae,) the effects of renovations at major large-scale stores will contribute to results," adding, "Its high luxury sales as a share of revenue compared with competitors will drive the strongest top-line growth, while more efficient investment spending will slow the increase in depreciation and amortization expenses, improving operating profit."

Shinhan Securities forecasts that third-quarter operating profit at the eight retail companies it covers will reach KRW 1.1221 trillion, up 78.6% from a year earlier. This is 4% below the higher market expectations following the release of first-half results. However, the firm said it does not believe consumers' spending capacity has disappeared. Cho said, "In the fourth quarter, when household income growth from performance bonuses and wage increases gains momentum and the year-end shopping season is concentrated, we expect a recovery in results led by department stores."

Cho noted that while the sector's overall earnings momentum is weakening in the third quarter, differences in performance across retail formats warrant attention. For department stores, transaction value growth is expected to decline from the previous quarter but remain at a high level. Shinsegae is forecast to maintain growth of 15%, Hyundai Department Store 9%, and Lotte Department Store 10%.

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Cho said, "Top-line growth is weak due to the high base effect from luxury goods and slower sales following events held by major home appliance companies in June and July. However, higher-margin fashion has instead begun to recover from its June low." He added, "The structural growth in inbound tourism, or travel to Korea by foreign visitors, is increasing the share of department store sales made to foreign customers, which is positive."

Convenience stores are expected to post same-store sales growth of 1-2%. Results were weak in July and August due to the high base effect from consumer coupons, but are expected to show a recovery from September. Discount stores are forecast to record same-store sales growth of 14-15%. The combined effects of last year's consumer coupon base, differences in the timing of holidays, and spillover benefits from Homeplus are expected to contribute.

Duty-free stores' average daily sales are forecast to fall 15% from the previous quarter, due to the off-season for daigou, or Chinese purchasing agents, in July and August, as well as the strengthening of the won. While narrowing losses at airport stores is positive, operating profit at Hotel Shilla, Shinsegae, and Hyundai is expected to decline from the previous quarter due to higher cost ratios resulting from the sharp appreciation of the won and increased discount rates at downtown stores.

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