'Poor Performance' Emart, When Will the Turnaround Come?

[Asia Economy Reporter Song Hwajeong] Emart's announcement of weak performance in the fourth quarter of last year has drawn attention to when the turnaround will occur.

Earlier, Emart disclosed on the 14th that it recorded an operating loss of 10 billion KRW on a consolidated basis in the fourth quarter of last year, turning to a deficit compared to the same period last year. Sales increased by 14.4% to 4.8332 trillion KRW, and net profit rose by 5.4% to 68.4 billion KRW.

Seojeongyeon, a researcher at Shin Young Securities, explained, "The reason for the poor performance with operating loss in the fourth quarter was due to the continued sluggishness of offline discount stores and the reflection of approximately 50 billion KRW in various costs such as efficiency improvements. The decrease in operating profit caused by the negative same-store sales growth of offline discount stores is estimated to be about 16 billion KRW, and the remaining reduction is analyzed to be costs related to inventory disposal for efficiency improvement."

Lee Jiyoung, a researcher at NH Investment & Securities, analyzed, "Even excluding one-off costs of about 50 billion KRW, operating profit fell 20% short of consensus due to the deteriorating operating environment of offline discount stores. The same-store sales growth rate was -1.2% for discount stores and 1.5% for Traders; in the case of Traders, the large Hanam store’s sales decline lowered the same-store sales growth somewhat."

The turnaround is expected to be possible only in the second half of the year. Researcher Seo said, "Emart's corporate value will see a turnaround when the combined online and offline sales show meaningful growth and efficiency improvement work is completed, leading to a trend reversal with increased operating profit, rather than the recovery of same-store sales growth at offline stores. This point is expected to be possible from the second half of this year."

Nam Seonghyeon, a researcher at Hanwha Investment & Securities, said, "It is likely that operating performance improvement in the first half will not be easy. This is because margin erosion has expanded due to increased supply from the Neo logistics center, customer attraction has inevitably decreased due to store renewals, and cost increases due to ultra-low price strategies are unavoidable." He added, "The burden from credit rating downgrades must also be considered. NICE Credit Rating downgraded Emart’s credit rating from AA+ (negative) to AA (stable), and if performance does not improve this year, the possibility of further downgrades is high."

There are also opinions that expectations for market restructuring are excessive. Park Eunkyung, a researcher at Samsung Securities, said, "We estimate Emart’s 2020 sales and operating profit to grow by 6% and 42%, respectively, to 20.2 trillion KRW and 213.5 billion KRW. This reflects the effects of specialty store restructuring, expansion of discount store market share, SG&A efficiency, and online market share growth comprehensively. Still, sales are 1% and operating profit 25% lower than market consensus. I believe the market’s expectations for restructuring effects are excessive."