[Into the Stock] GS Retail Preparing for a New Start

Merger with GS Home Shopping Scheduled for July
Synergy Expected After Merger

[Asia Economy Reporter Song Hwajeong] GS Retail, which is scheduled to make a fresh start through a merger in July, is showing a strong stock price for the first time in a while. Despite recent setbacks such as poor first-quarter earnings and boycott controversies, the rebound is interpreted as being driven by expectations of consumer recovery and merger synergies.

According to the Korea Exchange on the 11th, GS Retail's stock price rose for three consecutive days until the previous day. Due to this strong trend, the stock price, which was 35,800 KRW at the end of last month, rose to 37,300 KRW on the 10th. On the same day, it showed a slight upward trend, even surpassing 38,000 KRW during the trading session.

Although the stock price had been weak for several days due to poor first-quarter earnings and boycott movements related to misogyny controversies, it appears to have mostly recovered the losses due to expectations of consumer recovery.

Fresh Start in July through Merger with GS Homeshopping

In November last year, GS Retail decided to absorb and merge GS Homeshopping. The merger aims to grow an integrated online and offline commerce platform. GS Retail explained the background of the merger as follows: "In a rapidly changing business environment due to the evolution of digital technology and changes in consumption patterns, the merger of GS Retail, which owns the largest offline platform in Korea, and GS Homeshopping, which has secured digital sales channels, will integrate the capabilities of both companies to create synergy and ultimately enhance corporate and shareholder value." The expected benefits of the merger include ▲ synergy creation in areas such as customers and products of both companies ▲ efficient utilization of resources in integrating the currently held online and offline platforms ▲ growth into an integrated online and offline commerce platform company.

A shareholders' meeting to approve the merger contract is scheduled for the 28th of this month, and the exercise period for the stock purchase right is from the 18th of this month to the 17th of next month. The trading suspension period is from June 29 to July 15, and the merged company, GS Retail, will be listed on July 16.

As of last year, the combined transaction volume of both companies was 15.5 trillion KRW, consisting of convenience stores at 8.9 trillion KRW, homeshopping at 3.2 trillion KRW, supermarkets at 1.4 trillion KRW, digital commerce at 1.3 trillion KRW, and others at 700 billion KRW. GS Retail has set a transaction volume guidance of 25 trillion KRW for 2025, a 61.2% increase compared to 2020. By segment, this includes convenience stores at 11.4 trillion KRW, homeshopping at 4.9 trillion KRW, supermarkets at 1.6 trillion KRW, digital commerce at 5.8 trillion KRW, and others at 1.3 trillion KRW. An Ji-young, a researcher at IBK Investment & Securities, said, "To achieve the 25 trillion KRW transaction volume target for the merged GS Retail in 2025, a total investment of 1.02 trillion KRW is expected. In particular, the digital commerce growth rate guidance is 346.3% from 2020 to 2025, and to achieve this, data analysis on the integrated customer base of 15.1 million held by both companies and future integrated membership will require 270 billion KRW, with infrastructure and technology investments of 570 billion KRW to realize this." It is analyzed that 840 billion KRW, 82% of the total investment, will be practically concentrated on digital commerce.

Time Needed to Realize Merger Synergies

The merger is expected to provide sufficient momentum for GS Retail's corporate value increase. Researcher An said, "Although GS Retail and GS Homeshopping hold the number one position in their respective industries, the rise in corporate value has been limited due to delayed group synergy linkage. With the merger of online and offline businesses in the same industry, there is sufficient potential for corporate value growth within the next five years."

However, it is expected to take time for investors to feel the integration effects. Park Eun-kyung, a researcher at Samsung Securities, analyzed, "It will likely take more than a year for investors to experience the effects of the integration, as cost reduction effects such as improved cost ratios and operating expense cuts are expected to be offset by expanded digital marketing and integration costs." She explained that this is a positive event for GS Retail shareholders. Park said, "This merger is a positive event for GS Retail shareholders, not only from the necessity of digital transformation but also because of the attractiveness of GS Homeshopping, which consistently generates over 1 trillion KRW in annual sales and over 100 billion KRW in operating profit, and currently holds more than 600 billion KRW in cash."

To expand digital commerce after the merger, services to attract traffic are necessary. Lee Jin-hyup, a researcher at Yuanta Securities, said, "The key competitive advantage presented by both companies is the ability to utilize GS Retail's offline bases. While this can be an advantage compared to pure e-commerce operators, relatively early offline operators like Lotte and Shinsegae Group also have similar strengths." He added, "It is difficult to claim that this is a unique strength of the merged company, and the platforms held by the merged company are not yet widely recognized." He concluded, "Ultimately, it is necessary to provide services unique to the merged company that can secure traffic, and that service could be quick commerce."

Poor First-Quarter Earnings, Improvement Expected from Second Quarter

GS Retail recorded consolidated sales of 2.1001 trillion KRW and operating profit of 37.5 billion KRW in the first quarter of this year. Sales decreased by 8.3% and operating profit by 57.8% compared to the same period last year, showing poor performance. Park Jong-ryeol, a researcher at Hyundai Motor Securities, analyzed, "The sharp decline in operating profit was due to a one-time gain of 45 billion KRW from real estate development business in the first quarter of last year. Considering this, the actual operating profit decreased by 7% compared to the same period last year. The operating profit of convenience stores and supermarkets was somewhat sluggish, while losses in common and other segments expanded."

Performance momentum is expected to recover from the second quarter. Park said, "A turnaround in performance is possible centered on convenience stores and supermarkets, and losses in hotels and common and other segments will gradually shrink. The convenience store segment is expected to record results that compensate for last year's slump due to net store increases and a slight recovery in existing store growth rates."