[Click eStock] "Emart, Focus on Regulatory Easing Despite Poor Earnings"

[Asia Economy Reporter Lee Jung-yoon] Shinhan Investment Corp. maintained a buy rating and a target price of 120,000 KRW for Emart on the 25th, noting that despite poor earnings, a shift from the previous growth-first strategy to a profitability-focused strategy is being observed.

In the fourth quarter of last year, Emart's sales increased by 9.6% year-on-year to 7.52 trillion KRW, while operating profit decreased by 21.5% to 60.7 billion KRW, expected to fall about 8% below consensus estimates. The poor performance was attributed to the carryback compensation costs from SCK Company incurred since the third quarter of last year.

The existing store growth rate of discount stores was 8%, considered a solid performance despite a high base. Despite increased promotion costs due to the SSG Day event, the gross profit margin (GPM) improved thanks to efforts to enhance the profit structure, leading to an expected 24.6% increase in standalone operating profit. Although SSG.COM's total sales volume (GMV) is expected to decline by 5%, the profitability-focused strategy is anticipated to reduce operating losses. Gmarket is also expected to see a slight GMV decline and a reduction in operating losses. SCK Company is projected to see a 47% decrease in operating profit, with carryback compensation costs estimated at about 20 billion KRW from the third quarter of last year and a high base.

However, since last year, signs of regulatory easing around large supermarkets have been detected. According to the Distribution Industry Development Act, large supermarkets are subject to mandatory closure twice a month and a ban on operations after midnight. Recently, some local governments have relaxed regulations by changing mandatory closure days to weekdays. Typically, weekday sales are estimated at 30 billion KRW, weekend sales at 50 billion KRW, with 10 billion KRW sales distributed around mandatory closure days. If the two mandatory weekend closure days are changed to weekdays, monthly sales could increase by 32 billion KRW, and annual sales by 384 billion KRW, potentially improving existing store growth rates by about 3 to 4 percentage points. Considering a GPM of 26% and slight variable costs, operating profit is estimated to improve by 90 billion KRW. This could raise this year's standalone and consolidated operating profit estimates by 39% and 25%, respectively.

Researcher Cho Sang-han of Shinhan Investment Corp. explained, "Over the past two years, investment costs have significantly increased due to continuous efforts to strengthen online channels, resulting in poor earnings. However, since the second quarter of last year, a shift from the previous growth-first strategy to a profitability-focused strategy has been observed."

He added, "The launch of a paid membership last year, focusing on loyal customers through a selection and concentration strategy, has strengthened customer lock-in and enabled the accumulation of high-quality customer data, which is also positive."