Expectations for Performance Improvement of Hyundai Department Store Duty Free and Zinus... Will a Favorable Wind Blow for Hyundai Department Store?

Hyundai Department Store, Earnings Expected Following China's COVID-19 Quarantine Easing Announcement
Zinus, Raw Material Prices and Shipping Costs Stabilizing... Improvement Potential Rising

Hyundai Department Store Duty Free Shop exterior (Photo by Hyundai Department Store Group).

Hyundai Department Store is raising expectations for improved performance and stock price growth due to anticipated improvements in the results of its affiliates, the duty-free shop and Zinus. The relaxation of China’s COVID-19 quarantine policies is expected to be a positive factor for the duty-free shop’s performance, while stabilization of raw material prices and ocean freight rates is seen as a boon for Zinus’s earnings improvement.

According to FnGuide on the 6th, Hyundai Department Store’s consolidated earnings consensus for the fourth quarter is estimated at an operating profit of 124.5 billion KRW and sales of 1.3438 trillion KRW, representing increases of 32.17% and 22.10%, respectively, compared to the same period last year. It is expected that the impact of the duty-free shop and Zinus, which had underperformed until now, will be reflected alongside the department store’s results.

The duty-free shop is analyzed to improve its performance as demand from China is activated following the recent announcement of the relaxation of China’s COVID-19 quarantine policies. The city of Shanghai officially announced on the 5th that it would abolish the requirement to submit a negative PCR test certificate when using public transportation such as buses. A Hyundai Department Store Duty-Free representative said, "Since entering the duty-free industry as a latecomer, we have continuously invested based on the parent company’s solid financial structure. Despite lockdown policies in China, sales centered on key product groups such as imported cosmetics increased by 22% on a consolidated basis in the third quarter of this year, and we expect performance to improve further with the recent reopening in China."

Zinus, which was incorporated into the Hyundai Department Store Group last May, is also seeing growing expectations for earnings improvement. This is because adverse factors such as rising raw material prices and ocean freight rates, which had negatively affected performance, are rapidly being resolved. According to industry sources, U.S. ocean freight rates this year have decreased by about 22% compared to last year but remain relatively high compared to pre-COVID-19 levels. However, with freight rates recently stabilizing rapidly, it is expected that the average unit price will be more than 60% lower next year than this year. Prices of chemical raw materials (PPG) and steel raw materials are also continuously declining. A Zinus representative forecasted, "By the time the company recognizes costs next year, production costs are expected to decrease by about 15-30% compared to this year."

Expectations that the slowdown in U.S. consumer spending will ease are also positive for Zinus, which targets the U.S. market as a major focus. According to major foreign media, U.S. Cyber Monday sales recorded $11.3 billion (approximately 15 trillion KRW), up 5.8% from last year. Despite concerns about consumer sentiment contraction due to inflation, this was the largest online sales day ever recorded. A Zinus representative said, "Despite concerns about weak U.S. consumer sentiment and inventory adjustments by major large retail channels in the U.S., order volumes have been trending upward since the fourth quarter. Based on strong business competitiveness, Zinus products account for more than 60% of the best-selling items on Amazon, and market share is also increasing."

Meanwhile, Hyundai Department Store’s stock price was trading around 60,300 KRW in the afternoon. This is close to the level before the announcement of the spin-off (closing price of 60,600 KRW on September 16). According to the financial investment industry, "After the announcement of the Hyundai Department Store spin-off, the stock price fell to 53,700 KRW but has since shown a recovery trend. Active communication regarding the purpose and operational direction of the spin-off and shareholder-friendly policies has been conducted with major domestic and foreign institutions, and the foreign ownership ratio (23.97% as of December 5) has steadily increased since the spin-off announcement."

Hyundai Department Store disclosed the securities registration statement containing the details of the spin-off on the 30th of last month. After obtaining approval at the extraordinary general meeting of shareholders scheduled for February next year, the spin-off will be finalized on March 1 of next year.