"Retail Sector Earnings Rise on Recovery in Consumer Sentiment and Increase in Foreign Visitors" [Click e-Stock]

Effect of Consumer Coupons: Convenience Stores Rise, Hypermarkets Fall
Attention on Shilla Duty Free's Exit from Airport, Homeplus's Future Also in Focus

Following the visa-free entry policy for Chinese group tourists, major retail stores are preparing events and products tailored to tourist demand. On the 30th of last month, a promotional banner featuring the character '복 (Fortune)' was displayed at the Shinsegae Duty Free Myeongdong branch in Jung-gu, Seoul. Photo by Yonhap News

Despite a recovery in consumer sentiment, major retail companies such as convenience stores and department stores are expected to report sluggish results for the third quarter of this year. While their core businesses are expected to rebound from the bottom, non-core businesses are likely to remain weak.

Rebound in Consumer Sentiment and Increase in Foreign Visitors

On October 15, Kiwoom Securities predicted that major retail companies would post disappointing results in the third quarter of this year, despite a rebound in consumer sentiment and a recovery in the department store and convenience store sectors, due to poor performance in non-core businesses.

For department stores, the same-store sales growth rate is expected to be around 4%. The fundamentals of major companies such as Shinsegae, Hyundai, and Lotte are improving, driven by recovering consumer sentiment, increased sales to foreign customers, and a rebound in the fashion category. Convenience store sales growth is also expected to rebound to around 4% compared to the first half of the year. This is attributed to balanced growth in sales of cigarettes and processed foods, supported by the use of consumer coupons in July and September.

However, discount stores are expected to see a significant decline in same-store sales. This is because they were excluded from the list of eligible outlets for consumer coupons, and the negative impact of the timing of Chuseok was greater for discount stores than for department stores. Duty-free stores, despite an increase in inbound tourists, continue to show weak sales at downtown locations. The burden of airport store rental fees is also increasing, leading to relatively poor profitability.

Solid Sales Expected to Continue in the Fourth Quarter

Foreign and domestic customers visiting Lotte World Mall in Jamsil, Seoul during the golden holiday period in October. Lotte Department Store

The consumer sentiment index remains around 110 points, the domestic stock market is strong, and the number of foreign tourists visiting Korea continues to rise. With the Chuseok holiday falling in October, there are positive expectations for fourth-quarter results.

Department stores are seen as having strengthened structural growth momentum. The benefits of recovering consumer sentiment continue, and sales to foreign customers have grown by about 30-40% year-on-year, increasing the contribution to overall same-store sales growth by 1-2 percentage points. For convenience stores, the impact of consumer coupons will disappear, so sales growth is expected to slow compared to the third quarter, but the positive effect of recovering consumer sentiment remains valid.

Meanwhile, in the airport duty-free sector, competition is expected to ease as Shilla Duty Free has decided to return its DF1 concession at Incheon International Airport Terminal 1. Shinsegae Duty Free, which has seen a significant increase in airport store operating losses due to excessive rental fees, may also be affected by this decision. If Shinsegae Duty Free returns part of its airport duty-free business rights, the timing, method, and rental fee levels set by Incheon International Airport Corporation for the re-bidding process could affect the performance outlook for new entrants seeking to enter the market.

Whether Homeplus will accelerate store closures is also a key point to watch. Homeplus had planned to close 15 stores by the end of the year, but it is reported that this has been postponed until a buyer is decided. If store closures expand at the end of the year, competing companies could benefit from this starting in the first quarter of next year.

Accordingly, Kiwoom Securities maintained its 'overweight' investment rating for the retail sector. Its top picks in the sector are Hyundai Department Store, Shinsegae, and Emart.

Park Sangjun, a researcher at Kiwoom Securities, stated, "Hyundai Department Store and Shinsegae will continue to see improvements in core business performance, supported by recovering consumer sentiment, increased sales to foreign customers, and easing competition in airport duty-free stores," adding, "Emart will experience a rebound in same-store sales growth from the fourth quarter of this year, and the momentum for performance improvement will grow as it benefits from the weakening business capabilities of Homeplus."