[Into the Stocks] Shinsegae, the Biggest Beneficiary of Revenge Spending, Signals a Revival

Operating Profit This Year Nears Pre-COVID-19 Levels
Growth Expected Across All Sectors from Duty-Free Shops to Online

On the morning of the 30th of last month, customers are waiting to enter in front of the Shinsegae Department Store Luxury Hall in Jung-gu. [Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] Shinsegae is expected to greatly benefit from the recovery of consumer sentiment suppressed by COVID-19. With solid performance across its consolidated subsidiaries, it is anticipated to restore its pre-COVID-19 performance levels by the end of this year.

"Back to Pre-COVID-19"... Smooth Recovery with 'Revenge Consumption'

According to financial information analysis firm FnGuide on the 4th, Shinsegae's market consensus for Q2 performance this year is sales of 1.356 trillion KRW and operating profit of 73.4 billion KRW. Sales increased by 33.68% year-on-year, and operating losses are expected to turn into profits. Following a strong Q1 performance with operating profit of 123.6 billion KRW, which was 1320.69% higher than the same period last year and 38.55% above consensus, solid results are expected to continue.

This trend is expected to persist through the end of the year. According to FnGuide, the consensus for this year estimates sales of 5.7053 trillion KRW and operating profit of 449.8 billion KRW. Compared to the year before last, sales are projected to increase by 19.63%, and operating profit by 408.30%. Next year, sales are expected to reach 6.5031 trillion KRW and operating profit 539.8 billion KRW, surpassing pre-COVID-19 levels.

The stock price is also generally trending upward. On the 31st of last month, it hit a 52-week high of 327,000 KRW during trading. Compared to the year-start closing price of 238,500 KRW, this represents an increase of about 37.1%. Although profit-taking has caused some stagnation this month, the price remains in the 300,000 KRW range.

Vaccine Distribution Expansion as a Trigger... 'Revenge Consumption' in Full Swing

With the expansion of COVID-19 vaccine distribution, consumer sentiment and economic recovery are expected to be positively influenced. Shinsegae is anticipated to be a primary beneficiary of the pent-up 'revenge consumption.' Park Jong-ryeol, a researcher at Hyundai Motor Securities, explained, "Following the recent Korea-US summit, vaccine supply is expected to accelerate faster than initially anticipated in Q2 and Q3. Since the easing of social distancing in February, the increase in mobility and other favorable changes in the consumption environment have been observed."

The recovery of department stores and duty-free shops, which were the most sluggish sectors last year, is driving overall performance improvement. The fashion and accessories sectors, which significantly impact department store profitability, are rapidly improving, leading to substantial profitability gains.

In particular, the expansion of luxury consumption trends is a positive factor. Lim Su-yeon, a researcher at Hi Investment & Securities, stated, "Shinsegae has pursued a premium strategy, resulting in a higher proportion of luxury brands compared to competitors, aligning well with the increasing luxury demand centered on the MZ generation (born between the 1980s and early 2000s). The recent double-digit growth in total sales based on department store management accounting standards compared not only to the previous year but also to 2019 supports this." Furthermore, as revenge consumption expands, increased spending is also seen in high-margin categories such as women's and men's fashion, children's products, and sports, which is expected to improve profitability through product mix enhancement.

In August, the Daejeon Shinsegae Expo branch of the Daejeon Science Complex is scheduled to open, with the effect of the new store expected to be fully realized from Q4. This location will feature not only a department store but also a hotel (Onoma), a science museum, an observatory, and an aquarium, attracting significant customer traffic. Additionally, the department store is expanding luxury brand entries such as Gucci and Boucheron, which is expected to secure a competitive advantage over local department stores. Shinsegae has set a sales target of 570 billion KRW for the first year of operation.

Improvement in Subsidiaries' Performance Including Duty-Free Shops Becomes Visible

Regarding Shinsegae Duty-Free, although overseas travel is unlikely to resume this year, the revenue structure centered on Chinese traders (daigou) is expected to continue. However, due to the base effect from the previous year, growth rates are expected to remain steady. Additionally, profit improvement is anticipated due to fixed cost reductions such as rent. Besides the rent reduction effect at airport stores due to operating rate application (90 billion KRW per quarter), further cost savings are expected from the July withdrawal of the Gangnam branch (5.7 billion KRW).

Shinsegae International is also expected to show favorable performance. Overseas fashion and imported cosmetics have shown high growth of 21% and 18% respectively compared to the same period last year, driven by compensatory sentiment due to the inability to travel abroad. Researcher Lim explained, "Additionally, as part of a business collaboration with Naver, Shinsegae International is scheduled to open a luxury boutique on Naver this month, which is expected to increase sales through channel expansion."