The author is an analyst of Shinhan Investment Corp. She can be reached at email@example.com. -- Ed.
4Q19 consolidated OP down 51.8% YoY, but up 86.1% YoY excluding one-offs
Lotte Shopping suffered an earnings shock with 4Q19 consolidated operating profit down 51.8% YoY to KRW43.6bn, missing the KRW165.4bn consensus. It comes in line at KRW168bn when excluding KRW78.6bn acquisition tax for the stake in Lotte REIT and a KRW45.8bn increase in depreciation expense with changes in useful years. Same-store sales growth stood at -3.3%YoY for department stores and -6.5% YoY for discount stores, sluggish as expected. By division, department stores reported operating profit of KRW183.2bn (including overseas, vs. domestic KRW187.2bn). Domestic discount stores and supermarkets posted operating loss of KRW10bn and KRW43bn, respectively. The company’s net loss increased by about KRW600bn YoY to KRW1.02tr, reflecting goodwill impairment loss (Lotte Hi-Mart KRW99.7bn, supermarkets KRW40.6bn) and leased asset impairment loss (KRW935.3bn).
Drastic restructuring measures affecting almost one in three stores
During the earnings call, Lotte Shopping announced drastic restructuring measures including the shutdown or leasing of 200 stores, almost one-third of about 700 stores operated under Lotte Mart, Lotte Department Store, Lotte Super, and LOHB’s names over the next three years. The company did not provide any details regarding the timeline, target stores, and expected profit gains. The restructuring plan is positive considering the profit trends across business units. Domestic discount stores incurred a loss of KRW48.6bnin 2019, vs. a profit of KRW87.4bn in 2015. Supermarkets also recorded a loss of KRW104.2bn in 2019, vs. a profit of KRW11.6bn in 2015. While the pace of restructuring will be key going forward, we remain positive on the direction the company is going.
Retain BUY for a target price of KRW160,000
Lotte Shopping slashed its dividend from KRW5,200 to KRW3,800 per share. The dividend yield no longer supports the downside of shares. Profits will inevitably drop in the near term along with restructuring. We retain our BUY rating on Lotte Shopping for a target price of KRW160,000, expecting profit improvement after restructuring. We recommend focusing on directionality rather than near-term earnings.