Lotte Shopping, Performance Improves but... Acquisition Battle Uncertainty Remains

[Asia Economy Reporter Song Hwajeong] Lotte Shopping is expected to show strong performance in the first quarter of this year, but its stock price is likely to remain on the sidelines for the time being due to uncertainties surrounding mergers and acquisitions (M&A).

According to Samsung Securities, Lotte Shopping's first-quarter sales this year are expected to decrease by 4% year-on-year to 3.93 trillion KRW, while operating profit is projected to increase by 201% to 157.2 billion KRW, significantly exceeding market expectations (consensus) based on operating profit. Eun-kyung Park, a researcher at Samsung Securities, explained, "This operating profit surpasses the consensus by more than 20%. Last year, strong performance in marts and supermarkets offset the department store's sluggishness, but this year, the opposite is true, with the department store's strong performance more than compensating for the weak results of marts and supermarkets."

The department store's first-quarter sales and operating profit are estimated at 730.2 billion KRW and 135.1 billion KRW, respectively, representing increases of 20.5% and 383% compared to the same period last year. Researcher Park said, "The same-store sales growth rate based on total sales had maintained a double-digit decline after the spread of COVID-19 but sharply rebounded after February, when the base effect and recovery in consumer sentiment overlapped, currently exceeding 50% as of March." Additionally, demand for luxury goods and home appliances has been strong since the second half of last year, and fashion demand has also rapidly rebounded since March.

For marts and supermarkets, first-quarter sales are expected to decline by 15.5% year-on-year to 1.77 trillion KRW, but operating profit is projected to increase by 64% to 26.5 billion KRW. Although sales will decrease in double digits due to store restructuring, a high base effect from the first quarter of last year, and changes in internal sales recognition methods, operating profit is expected to increase significantly due to cost reduction effects from store restructuring. The home appliance distribution sector is expected to continue its performance improvement trend due to strong demand that began in the second quarter of last year. First-quarter sales in the home appliance distribution sector are estimated to increase by 4% to 962.3 billion KRW, with operating profit rising 55% to 30.2 billion KRW.

Samsung Securities forecasts Lotte Shopping's annual sales to decrease by 0.5% year-on-year to 16.1 trillion KRW, while operating profit is expected to increase by 64% to 567.4 billion KRW. Researcher Park stated, "We have raised our operating profit forecast by 13% compared to previous estimates, reflecting cost reduction effects from store restructuring."

Despite these performance improvements, the stock price is expected to remain on the sidelines for the time being due to uncertainties related to the eBay Korea acquisition battle. Researcher Park explained, "With four companies entering the eBay Korea acquisition battle, there are concerns about overheated competition. Considering that the acquisition of eBay Korea, the third-largest e-commerce company, could significantly change the competitive landscape of the retail industry, it is highly likely that the market will maintain a wait-and-see stance until the announcement of the preferred bidder around late May to early June."