[Click eStock] "Lotte Shopping, Strong Performance Led by Department Stores"

[Asia Economy Reporter Kwon Jae-hee] Korea Investment & Securities maintained its 'Buy' rating and target price of 130,000 KRW for Lotte Shopping on the 4th.

Lotte Shopping's third-quarter earnings are expected to surpass market expectations. On a consolidated basis for the third quarter, Lotte Shopping's sales are projected to be 4.1787 trillion KRW, and operating profit is expected to increase by 4.3% and 413.2% year-on-year, respectively, to 148.5 billion KRW.

In the third quarter, domestic department stores are expected to show strong sales growth in fashion, consistent with the previous quarter. Accordingly, existing store sales growth is expected to be a solid 15-16%, with operating profit reaching 111.9 billion KRW. In the third quarter of last year, domestic department stores recorded a loss due to a one-time cost of 60 billion KRW from voluntary retirement. Lotte On, which recorded a loss of 49 billion KRW in the second quarter, is estimated to post a loss of 46 billion KRW in the third quarter. Domestic marts are expected to record an operating profit of 24.4 billion KRW due to solid existing store sales growth driven by consumer price inflation and the transfer effect of the e-commerce division.

The leverage effect is expected to continue in the second half, maintaining a favorable trend. Lotte Shopping has undergone structural improvements over the past four years; the number of supermarkets decreased from 557 at the end of 2018 to 391 as of the second quarter this year. Department stores have strengthened MD competitiveness through renewals. The proportion of luxury sales, which was in the low 10% range at the end of 2019, is estimated to have increased to the low to mid-20% range currently. Thanks to the structural improvements in the first half, store renewals, and a favorable operating environment, Lotte Shopping's sales are expected to increase more than selling and administrative expenses. The leverage effect is also expected to continue in the second half due to strong sales growth in department stores and the continued turnaround of cinemas.

Kim Myung-joo, a researcher at Korea Investment & Securities, said, "Although rising interest rates are negative for Lotte Shopping, which has high borrowings, strong core business performance and improved earnings from equity-method affiliates such as Uniqlo will partially offset the increase in interest expenses, so net losses are not expected this year or next." He added, "It is unfortunate that the e-commerce segment will record a large loss again in the third quarter, but since expectations for Lotte Shopping's e-commerce are very low, it will not act as an additional factor for stock price adjustment."