"End of Social Distancing, Buying Clothes and Going Out" Department Stores Soar in Q2

Overall Recovery in Fashion and Cosmetics
Shinsegae and Hyundai Achieve Record Quarterly Sales
Lotte's Operating Profit Surges After Bottoming Out

Despite Concerns Over High Interest Rates and Inflation Dampening Consumer Sentiment
"High-Income Groups Will Continue Luxury Goods Consumption"
Strong Performance Expected in the Second Half

[Asia Economy Reporter Yuri Kim] The department store industry posted results in the second quarter of this year that exceeded market expectations. Since the lifting of social distancing measures in April, the increase in foot traffic, along with the recovery across categories such as fashion and cosmetics?which had been sluggish during the COVID-19 situation as well as luxury goods?has led to strong performance. Despite ongoing concerns about economic slowdown amid worsening consumer sentiment due to high interest rates and inflation in the second half of the year, the industry expects department stores to deliver solid results. The widening income gap leading to polarized consumption is anticipated to drive department store performance, with luxury goods consumption centered on the wealthy and high-income groups.

According to the distribution industry on the 12th, Lotte Department Store's operating profit in the second quarter reached 104.2 billion KRW, a 68.5% increase compared to the same period last year. Sales during the same period rose 14.9% to 828.5 billion KRW. Shinsegae Department Store recorded an operating profit of 121.1 billion KRW and sales of 623.5 billion KRW in the second quarter, marking increases of 80.6% and 25.5% year-on-year, respectively. Hyundai Department Store also saw its second-quarter operating profit rise 30.2% year-on-year to 85 billion KRW, with sales increasing 8.3% to 588.8 billion KRW. The strong performance of department stores has driven overall earnings growth, with Shinsegae setting new quarterly records for consolidated sales and operating profit in the second quarter. Hyundai Department Store also achieved its highest-ever quarterly consolidated sales. Lotte Shopping showed signs of performance improvement led by Lotte Department Store after completing its groundwork phase.

Lotte Department Store explained that the strong sales of fashion products following the full-scale reopening of the economy led to significant increases in both sales and operating profit. It was noted that both customer numbers and average spending per customer grew simultaneously after the lifting of social distancing. The same-store sales growth rate in the second quarter was 13.6%, reflecting a swift response to the endemic trend. In the second quarter, fashion products showed strong sales growth, including overseas fashion (17.9%) which includes luxury goods, as well as men's, sports, and children's fashion (16.8%), and women's fashion (14.9%).

Shinsegae Department Store achieved strong results not only due to offline growth following the lifting of social distancing but also thanks to the success of its recently intensified digital strategy. The renewal of fashion genres such as women's and young fashion at the Gyeonggi branch in preparation for reopening, along with the rapid stabilization of the new store (Daejeon Shinsegae Art & Science), contributed to offline sales growth centered on popular genres such as women's fashion (34.2%), men's fashion (34.7%), and outdoor wear (43.6%). The digital transformation strategy also showed results. Shinsegae Department Store's online sales in the second quarter grew 12.2% year-on-year. Shinsegae emphasized that "introducing NFTs (non-fungible tokens) using the industry's first proprietary character, strengthening mobile app content such as travel and self-development, and opening new specialty sections in the SSG.com Shinsegae Department Store Mall contributed to steady growth in the digital sector." The number of mobile app users for Shinsegae Department Store in the second quarter increased 137.0% year-on-year to 6.2 million.

Hyundai Department Store analyzed that sales in the fashion, cosmetics, and accessories sectors, which had been sluggish due to the COVID-19 situation, improved, indicating that virtually all product categories are normalizing and moving out of the pandemic's impact zone. Operating profit was also considered to have performed well due to the recovery of high-margin product categories and reduced fixed cost burdens from increased sales.

Industry insiders collectively agreed that concerns about consumption contraction due to economic slowdown in the second half of the year are excessive. In a situation where consumption polarization is deepening, department store sales are expected to remain solid, mainly driven by VIP customers with high average spending. Meanwhile, general customers, who have already adopted luxury consumption trends, are unlikely to lower their elevated expectations easily.

The industry expects Lotte Department Store's operating profit rebound to strengthen further in the second half of the year, influenced by base effects and other factors. Shinsegae recorded high sales growth rates in June and July, despite growing concerns about consumption slowdown, supported by demand for luxury goods and fashion. In the second half, Shinsegae plans to continue its strong performance both online and offline by renewing the young fashion specialty section at the Gangnam branch and strengthening specialty sections in the SSG.com Shinsegae Department Store Mall.