Distribution Stocks Look Better in the Second Half... Reopening Benefits Begin in Earnest

[Asia Economy Reporter Kwon Jae-hee] With the clear changes in consumption patterns since the onset of COVID-19, traditional distribution channels such as department stores are expected to benefit significantly from the full-scale reopening in the second half of the year. During the COVID-19 pandemic, consumption patterns were dominated by 'revenge spending' focused on luxury and high-priced goods, as well as online channels. However, in the endemic phase of COVID-19, offline channels centered on fashion and food & beverage (F&B) are expected to show a distinct customer attraction effect.

Department stores, a representative traditional distribution channel, are currently in a phase where visit purposes, consumption targets, and channels are expanding after the COVID-19 pandemic. In the past, location and tenant brands were the main reasons for visiting department stores, but recently, consumers are willing to travel long distances and endure inconvenient transportation to attend exhibitions, pop-up stores, and gourmet experiences.

Additionally, the resumption of overseas travel has diversified luxury consumption channels, which is analyzed to be a positive factor for department stores. From the perspective of contract types in department stores, fashion and F&B are more profitable than luxury goods, and it is expected that the slowdown in sales growth of the luxury category will be offset by fashion and F&B. Luxury goods have lower commission rates for department stores, whereas better sales in fashion and F&B categories improve the department stores' gross profit.

Accordingly, Eugene Investment & Securities named Hyundai Department Store as the top preferred stock in the distribution sector. Eugene Investment & Securities gave Hyundai Department Store a 'Buy' rating with a target price of 100,000 KRW. Hyundai Department Store's total sales for this year are estimated at 3.91 trillion KRW, and operating profit at 349.4 billion KRW, representing increases of 9.5% and 32.2% respectively compared to the previous year.

Researcher Lee Haeni of Eugene Investment & Securities analyzed, "Hyundai Department Store's 'The Hyundai Seoul,' recently regarded as the hippest place, and the 'Pangyo Branch,' which is planned for a major brand renewal, will drive strong performance." She added, "Since Hyundai Department Store's sales proportion from the MZ generation reaches 53.5%, following luxury consumption in 2021, a year-end special demand is expected in 2022 from reopening-driven fashion and F&B."