[Click eStock] "GS Retail, Cost Increase Uncertainty... Investment Opinion and Target Price Down"

[Asia Economy Reporter Song Hwajeong] Yuanta Securities on the 5th downgraded its investment opinion on GS Retail from 'Buy' to 'Neutral' and lowered the target price from 50,000 KRW to 41,000 KRW, citing slow recovery in its core business and emerging uncertainties regarding cost increases.

GS Retail posted weak results in the second quarter. Sales in Q2 reached 2.2856 trillion KRW, up 3.4% year-on-year, but operating profit fell 27.7% to 42.8 billion KRW. Researcher Lee Jin-hyeop of Yuanta Securities analyzed, "The poor performance was due to sluggishness in the convenience store and supermarket divisions, expanded losses in other divisions, and one-time expenses."

The convenience store division recorded sales of 1.816 trillion KRW, up 3.0%, and operating profit of 66.2 billion KRW, down 5.6% in Q2. Despite a weak same-store sales growth rate (-1.5%) and a decline in the proportion of tobacco sales, the purchase rate did not improve, and cost increase factors (estimated around 20 billion KRW) led to poor performance. Among the cost increase factors, one-time expenses were around 3 to 4 billion KRW. The supermarket division also showed weakness with sales down 5.5% to 297.4 billion KRW and operating profit down 66.3% to 3.1 billion KRW. The other divisions saw losses widen by 15.2 billion KRW year-on-year due to expanded losses in the digital division (around 7 to 8 billion KRW) and merger-related one-time costs.

The Q2 results of GS Homeshopping, which merged last month, were also weak. Transaction volume in Q2 increased 3.8% to 1.1772 trillion KRW, but operating profit fell 23.6% to 31.7 billion KRW.

Concerns remain about uncertainties related to cost increases. Researcher Lee said, "Among the cost increase factors in the convenience store division, about 15 to 16 billion KRW are items difficult to classify as one-time expenses, making a downward revision of the convenience store division’s performance inevitable. Moreover, although the same-store sales growth rate of convenience stores is gradually recovering, the pace is slow, which is disappointing."

For GS Retail’s stock price to rebound, recovery in the convenience store sector is expected to be necessary. Lee said, "A conservative approach is needed for GS Retail for the time being. For a stock price rebound, recovery in the convenience store sector along with expansion of the e-commerce scale is required." He added, "Participation in the M&A of Yogiyo is a positive event that can increase the scale of the e-commerce business and bring forward the timing to confirm the results of e-commerce business expansion."