[Click eStock] Shinsegae 3Q Operating Profit Forecasted at 4.8 Billion Won... Department Store 'Sluggish' Despite Duty-Free Recovery

3Q Earnings Slump... Direct Hit from COVID-19 Resurgence
Duty-Free Shops' Recovery a Silver Lining... Deficit Reduction Expected in 4Q

[Asia Economy Reporter Minwoo Lee] Shinsegae's operating profit for the third quarter of this year is expected to be 4.8 billion KRW, which is about half of the same period last year. Although the duty-free store segment is showing signs of recovery, department store sales have significantly declined due to the resurgence of COVID-19.

On the 10th, Eugene Investment & Securities forecast that Shinsegae would record consolidated sales of 1.2033 trillion KRW and an operating profit of 4.8 billion KRW in the third quarter of this year. These figures represent decreases of 24.9% and 95.0%, respectively, compared to the same period last year. The sharp decline in department store sales since mid-last month due to the COVID-19 resurgence was a major factor. Researcher Younghoon Joo of Eugene Investment & Securities explained, "Luxury goods are still experiencing growth, but other sectors are sluggish. Among subsidiaries, Central City (affected by a drop in hotel occupancy rates and sales at the Gangnam branch) and Shinsegae International are also unlikely to recover anytime soon."

Considering that the existing store growth rate of department stores was in double digits (based on management standards) until early last month, the situation inevitably feels disappointing. Researcher Joo added, "Based on the first half of the year, if concerns about the resurgence ease, a rapid recovery is expected. However, since department store performance accounts for a large portion of overall results, short-term profits and losses will inevitably be impacted."

However, the duty-free store segment is showing signs of recovery. Last month, duty-free store sales are estimated to have decreased by about 35% compared to the previous year. This is a clear improvement compared to the period when the impact of COVID-19 was greatest, with sales declines exceeding 50%. Another positive factor is the change in the airport duty-free store rental fee structure from fixed to sales-linked (operating rates by product category), which had been cited as a cause of large-scale deficits. From the fourth quarter, a reduction in deficits at airport duty-free stores, which accounted for most of the operating losses, is expected.

Against this backdrop, Eugene Investment & Securities maintained a "Buy" investment rating and a target price of 300,000 KRW for Shinsegae. The closing price the previous day was 207,000 KRW. Researcher Joo assessed, "In recent years, the key variable moving the company's stock price has been the duty-free store segment rather than department stores. If the recovery of the duty-free store segment's performance proceeds as expected, the potential for stock price appreciation at the current level is even greater."