[Asia Economy Reporter Minji Lee] With one week remaining until the end of 'social distancing,' interest is growing in retail stocks, which are the prime beneficiaries of the reopening. The securities industry advises a selective approach, as the pace of earnings recovery varies among retail companies.
According to the Korea Exchange on the 11th, Hotel Shilla rose 6% since the beginning of the year as of the 8th. This significantly outperformed the KOSPI return (-10%) during the same period. Other companies such as Lotte Shopping (9%), Shinsegae (0.5%), BGF Retail (-1%), and GS Retail (-3%) also exceeded market returns. With the government officially announcing the termination of the stringent quarantine system implemented over the past two years starting from the 17th, expectations for the transition to an 'endemic' have heightened, resulting in a favorable trend despite external negative factors.
The securities industry expects that interest in the retail sector, including convenience stores, department stores, and duty-free shops, will increase further once daily life is restored. Among these, convenience stores are rapidly raising earnings expectations. BGF Retail's estimated sales for the first quarter are 1.6416 trillion won, about 30 billion won higher than the January estimate of 1.6183 trillion won. This reflects positively the rapid sales growth rate due to the easing of social distancing. In February, convenience store sales growth reached 7.4%, driven by increased sales across most product categories such as daily necessities, beverages, and ready-to-eat foods. In March, sales are estimated to increase by about 4-5% due to the sales of COVID-19 self-test kits.
The next most attractive sector for investment is department stores. This is because luxury consumption continues, and consumers are spending more on clothing. Department store growth in February recorded 9.3%, with overseas famous brands (33%), children’s and sportswear (12%), and men’s clothing (11%) showing significant increases. Younghoon Joo, a researcher at NH Investment & Securities, explained, "Clothing sales were sluggish due to gatherings and events, but this year they can sufficiently rebound. Although profit margins have not been very good despite the rise in luxury sales, clothing can improve profitability as it follows a specific purchase contract structure."
Regarding duty-free shops, a long-term rather than short-term approach is necessary. This is because the Chinese government strengthened quarantine measures citing the Olympics, significantly reducing the activities of daigou (personal shoppers) early this year. Moreover, as the payment of brokerage fees to daigou has increased, selling and administrative expenses (costs) are also presumed to have risen substantially. According to the duty-free industry, total domestic duty-free sales decreased by 6% in January and February, and assuming a similar trend in March, total first-quarter sales growth is predicted to have declined by 4% year-on-year.
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