Distribution Stocks See Diverging Fortunes on Earnings Results

Lotte Shopping Surges Over 8% on May 9, Hits New 52-Week High
BGF Retail Plunges Over 9%, GS Retail Also Weakens by Over 4%
Stock Prices Diverge on First-Quarter Earnings

The stock prices of distribution companies have diverged based on their first-quarter earnings this year. Lotte Shopping, which reported improved results, hit a new 52-week high during trading, while convenience store operators saw their stock prices slump due to earnings that fell short of expectations.

According to the Korea Exchange on May 12, Lotte Shopping reached 72,500 won during trading on May 9, setting a new 52-week high. The closing price was 72,100 won, up 8.42%.

The improvement in first-quarter earnings appears to have influenced the stock price. Lotte Shopping's operating profit for the first quarter was 148.2 billion won, an increase of 29% compared to the same period last year. This figure exceeded market expectations. According to financial information provider FnGuide, the consensus (average forecast by securities firms) for Lotte Shopping's first-quarter operating profit was 131.7 billion won.

In contrast, convenience store operators could not avoid a decline in their stock prices due to weak earnings. On this day, BGF Retail closed down 9.86% at 11,500 won. GS Retail also fell by 4.81%.

On May 8, BGF Retail announced that its first-quarter sales this year increased by 3.2% year-on-year to 2.02 trillion won, while operating profit decreased by 30.7% to 22.6 billion won. Shinhan Investment & Securities researcher Cho Sanghoon analyzed, "The results were 28% below consensus (average forecast by securities firms). Due to unfavorable weather conditions, a reduced number of business days, and the impact of sluggish domestic consumption, the same-store sales growth rate for the first quarter was -2.1%. In particular, the number of customers fell by 3.2%, which is disappointing."

Following the earnings shock, securities firms have successively lowered their target prices for BGF Retail. DB Financial Investment lowered its target from 130,000 won to 110,000 won and also downgraded its investment opinion from 'Buy' to 'Neutral.' IBK Investment & Securities cut its target from 160,000 won to 145,000 won; Samsung Securities and NH Investment & Securities each lowered theirs from 150,000 won to 140,000 won; Hanwha Investment & Securities reduced its target from 170,000 won to 140,000 won; and Shinhan Investment & Securities adjusted its target from 150,000 won to 135,000 won.

GS Retail announced in a regulatory filing on May 9 that its first-quarter operating profit was provisionally tallied at 38.6 billion won, down 22.3% from the same period last year.

The divergence in performance by business type amid overall sluggish domestic demand appears to be due to the impact of overseas operations. Strong overseas business supported Lotte Shopping's first-quarter improvement. Lotte Department Store reported sales of 806.3 billion won and operating profit of 130 billion won. Compared to the first quarter of last year, sales fell by 1.1%, but operating profit increased by 44%. Among these, the overseas division's sales increased by 6.2% to 31 billion won, and operating profit turned to a profit at 2.1 billion won. The mart division also posted strong results in the overseas segment by boosting sales in the Vietnamese market. Overseas division sales reached 468.9 billion won, up 9.5%, and operating profit was 21.4 billion won, up 20.6%.

There is analysis that the convenience store sector has entered a low-growth phase. Researcher Cho said, "Even convenience stores, which are the most defensive in a prolonged consumption slump, are being affected. In the case of BGF Retail, this year's store opening guidance is only 700, which is just 76% of the average for the past five years (about 900), indicating entry into a low-growth phase." He added, "To achieve high valuations as in the past, qualitative growth through a rebound in same-store sales, rather than quantitative growth through new store openings, is necessary. This can be achieved by strengthening product competitiveness and expanding company-operated stores."