Sales dampened by brand termination effects

We believe that Shinsegae International’s 3Q23 earnings will miss consensus, citing the combination of slowed consumption, liquidation of inefficient businesses, and withdrawal of a luxury brand (Celine). In 4Q23, the firm is expected to focus on improving its profit/loss picture by adding new brands targeting the MZ generation and by reducing overall marketing costs.

Starting again from ground zero

Due to the termination of the Celine contract last year and the removal of DAIZ sales volume, Shinsegae International has continually struggled with sluggish earnings this year. But, the pace of profit improvement is being primed to pick up through both planned new brand launches (Courrèges, Vuori, Dolce & Gabbana Beauty) in 4Q23 and advertising/promotion cost reductions. In keeping, we expect 2024 to usher in earnings growth, escaping from the impact of brand departures that sapped performance in 2023. Noting that the firm’s shares are currently trading at a 2024F P/E of 7.4x, the bottom end of its historical valuation band, we maintain a Buy rating and a TP of W22,000.

3Q23E: Consumption slowdown and brand churn issues compound

We estimate 3Q23 consolidated sales of W316.5bn (-18% y-y) and OP of W9.5bn (-61% y-y), with both figures to disappoint market expectations.

Fashion (non-consolidated): We estimate 3Q23 sales of W131.3bn (-34% y-y) and OP of W5.4bn (-73% y-y), with sales growth (y-y) of -36% for import brands and -30% for domestic brands. Foreign brand top-line was likely dampened by the withdrawal of Celine and slow sales of golf wear. We attribute a likely drop in in-house brand sales to the removal of DAIZ (3Q22 sales of W16.5bn). We see Tomboy sales of W21bn (+3% y-y).

Cosmetics (non-consolidated): We size sales at W90.8bn (-6% y-y), with OP of W5.4bn (+19% y-y). Helped by ongoing solid demand, overseas brands should show further growth (+5% y-y). But, this positive was likely offset by fall in downtown DFS channel sales for in-house brand VIDIVICI (-48% y-y, -39% q-q) on an absence of Daigous (personal shoppers). Swiss Perfection sales should come in at W3.8bn (+157% y-y).

Lifestyle (JAJU): We estimate sales of W71.6bn (+3% y-y) and operating losses of W1bn (RR y-y). Profitability in September looks to be lagging expectations on a wider portion of discount sales in high-margin fashion categories.