[Click eStock] "Emart, Positive Effect of Focusing on Loyal Customers"

Shinhan Investment Corp. maintained its 'Buy' rating and target price of 130,000 KRW for Emart on the 21st.

Emart's Q1 sales and operating profit are expected to record 7.21 trillion KRW and 72.3 billion KRW, respectively, falling short of consensus by 11%. Unlike Q4 last year, the consolidated subsidiaries performed well, but the core business was sluggish.

The existing store growth rate for discount stores is expected to be 0.7%, with operating profit decreasing by 7%. This is due to the base effect, fewer public holidays compared to the previous year, and the impact of renovations at some stores. However, the gross profit margin (GPM) continues to improve due to efforts to enhance the profit structure. SSG.COM's gross merchandise volume (GMV) is expected to decline by 6%, but operating losses are anticipated to shrink due to a profitability-focused strategy. Gmarket is also expected to see a slight GMV decline and reduced operating losses. SCK Company will continue to face cost burdens through Q1, but is projected to increase by 23% year-over-year.

This year, attention should be paid to the recovery trend in discount stores. On a standalone basis, GPM rose throughout 2022. The number of customers is recovering, and the company has benefited from eased competition. Despite GPM improvement, selling and administrative expenses such as labor costs and commission fees increased, causing standalone operating profit to remain sluggish. However, it turned to profit growth starting from Q3 last year. This year, with continued GPM improvement and efficient execution of selling and administrative expenses, the profit growth trend is expected to be maintained.

Additionally, the easing of large mart regulations observed since last year is positive. Typically, weekday sales are estimated at 30 billion KRW, weekend sales at 50 billion KRW, and sales around mandatory closure days are divided into 10 billion KRW. If the two mandatory weekend closure days are changed to weekdays, monthly sales would increase by 32 billion KRW, and annual sales by 384 billion KRW, improving existing store growth by about 3-4%. Considering GPM and slight variable costs, operating profit is estimated to improve by 90 billion KRW. This is expected to raise the 2023 standalone and consolidated operating profit estimates by 32% and 27%, respectively.

Researcher Sanghoon Cho of Shinhan Investment Corp. analyzed, “Since Q2 last year, a shift from a growth-first strategy to a profitability-focused strategy has been observed,” adding, “The launch of a paid membership focusing on loyal customers through a ‘selection and concentration’ strategy strengthens customer retention effects and enables the accumulation of high-quality customer data, which is also positive.”