[This Week's Gwan.Jong] Emart Slimmed Down, Smiled Brightly

First Deficit Since Company Founding Last Year Leads to Credit Rating Downgrades
Absorption Merger with Everyday and Delisting of Shinsegae Construction Planned
Major Structural Reforms Including First Voluntary Retirement and Integrated Purchases
Q3 Operating Profit Up 43%, Highest Quarterly Performance in 3 Years
Profitability Recovery Visible Despite External Uncertainties

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Emart, which experienced its worst year last year by recording its first-ever loss since its founding, is gradually recovering this year. The effects of structural reform and organizational improvement are leading to profitability enhancement. The securities industry expects Emart’s recovery trend to continue next year and considers it a stock capable of responding to market uncertainties.

Emart, which recorded its first-ever loss last year, recovers profitability through organizational improvement

In the third quarter of this year, Emart posted consolidated sales of KRW 7.51 trillion, down 2.6% year-on-year, and operating profit of KRW 111.7 billion, up 43.3%. This is the largest quarterly performance in three years since the first quarter of 2021. Jinhyup Lee, a researcher at Hanwha Investment & Securities, analyzed, "Despite the deficit of Shinsegae Construction expanding to KRW 54 billion, an increase of KRW 1.1 billion compared to the previous expectation of a reduction in losses from about KRW 30 billion per quarter in the first half, Emart recorded market-expected level results due to factors such as improvement in gross profit margin (GPM), efficiency in selling and administrative expenses leading to increased profits in the separate corporation, improved profitability of Starbucks, and strong performance of the U.S. subsidiary."

Some of the previously underperforming subsidiaries are also showing signs of recovery. Despite one-time costs related to voluntary retirement, SSG.com reduced its operating loss to about half compared to the previous year, and SCK Company, which operates Starbucks, significantly improved its GPM through cost improvement efforts.

Despite sales decline due to sluggish consumption, profitability recovery was achieved through organizational improvement. Sunghyun Nam, a researcher at IBK Investment & Securities, said, "Emart’s third-quarter performance showed a positive trend compared to other retail companies," adding, "This is interpreted as a result of structural improvement efforts and is expected to continue next year."

Last year, Emart recorded an operating loss of KRW 46.9 billion, marking its first-ever deficit since its founding. The poor performance continued due to large losses from its subsidiary, Shinsegae Construction. Due to weakened competitiveness of large discount stores and deteriorating profitability in the construction sector, financial burdens increased, leading to successive credit rating downgrades. In March this year, three credit rating agencies consecutively lowered Emart’s credit rating.

To overcome the crisis, Emart implemented its first voluntary retirement in 31 years in March this year and carried out high-intensity structural reforms such as the merger absorption of Emart Everyday and the delisting of Shinsegae Construction. It also pursued cost reduction through integrated purchasing. Since early this year, Emart has been conducting integrated purchasing for Emart, Traders, and Emart Everyday to strengthen purchasing competitiveness and reduce logistics costs.

Hyunjung Seo, a researcher at Hana Securities, analyzed, "Despite sales decline, cost efficiency effects are becoming visible, confirming some effects of organizational improvement," adding, "The separate division is expected to improve profitability by about KRW 100 billion due to integrated purchasing effects, and the e-commerce division is slimming down its cost structure by reducing delivery costs."

Due to poor performance, the stock price also could not perform well. Last year, Emart’s stock price fell by 21.84%. This year, it also recorded a double-digit decline. From the beginning of this year to June 18, it dropped by 18.54%. Emart hit a 52-week high of KRW 88,000 in early February but then declined, falling below KRW 60,000 in June. On June 27, it dropped to KRW 54,800 intraday, marking a 52-week low, just over four months after the record high. Although it recovered above KRW 60,000 afterward, it has been fluctuating between the low 60,000s and high 50,000s, showing no clear stock price recovery yet.

However, as profitability recovery becomes visible, the stock price trend is expected to improve. Myungjoo Kim, a researcher at Korea Investment & Securities, said, "Although macroeconomic uncertainties are unfavorable for Emart, the stock price is expected to recover due to expectations of increased operating profit from organizational improvement and eased competition in the retail market," adding, "It is necessary to pay attention to Emart as a stock that can respond to market uncertainties." Orina, a researcher at LS Securities, also evaluated, "The organizational improvement within the industry is contributing to performance, and there is still room for profitability improvement through integrated sourcing and selling and administrative expense reduction efforts planned for next year, so the stock price outlook is positive."

Performance improvement expected to continue next year

Performance improvement is expected to continue next year. According to financial information provider FnGuide, Emart’s annual performance consensus (average securities firm forecast) for this year is sales of KRW 29.3551 trillion and operating profit of KRW 178.9 billion. Sales are expected to decrease by 0.4% year-on-year, but operating profit is expected to turn positive. The forecast for next year is sales of KRW 30.5623 trillion and operating profit of KRW 315.5 billion.

Researcher Jinhyup Lee said, "Despite high external uncertainty, Emart is judged to be the most certain choice for performance improvement in the retail sector next year," adding, "This is because the effects of integrated purchasing will appear from next year. GPM improvement is occurring due to eased competition in the retail market, and an additional approximately 1 percentage point GPM improvement will appear due to integrated purchasing." He added, "Cost improvement efforts such as Starbucks price increases, growth of SSG.com’s Retail Media Network (RMN) business and logistics cost efficiency, profitability improvement due to eased competition, and increased profit share from strong performance of the U.S. subsidiary will also contribute to Emart’s performance improvement next year." Although Shinsegae Construction still carries risks, it is analyzed that the capital raising conducted in the first half of the year lowers the possibility of liquidity risk transferring to the parent company Emart.

The expectation that sluggish consumption will improve next year is also positive. Sanghoon Cho, a researcher at Shinhan Investment Corp., said, "Signals of recovery are detected when forecasting the consumption market next year," adding, "With interest rate cuts and price stabilization, the overall macro environment will improve, and domestic consumption will show gradual recovery. Recovery of consumer sentiment index closely related to retail stock prices is also expected."

Although Emart’s performance recovery is becoming visible, some opinions suggest a cautious approach until full recovery is confirmed. Researcher Cho said, "For an upgrade in investment opinion, synergy from offline business integration must become visible, which is expected to begin in earnest next year. Until performance improvement through strengthening core competitiveness is clearly seen, a cautious approach is necessary."

Jaeseung Baek, a researcher at Samsung Securities, said, "This year, workforce restructuring in various business units such as Emart, Everyday, SSG.com, and Gmarket will act as a factor for profit increase due to labor cost reduction next year, and the effect of the discount store and supermarket business integration implemented in July this year is also expected to become visible in earnest from next year," but added, "However, the speed and strength of profitability improvement due to this need to be confirmed at least through the performance trend in the first half of next year." He also added, "It is necessary to continuously monitor how Shinsegae Construction, a factor increasing performance uncertainty, will achieve performance recovery after delisting."