Earnings Highly Sensitive to Macro-economic Conditions
The author is an analyst of NH Investment & Securities. She can be reached at jy.lee@nhqv.com. -- Ed.
As a department store, DFS, consumer goods, and hotel player, Shinsegae’s earnings are highly sensitive to macro-economic conditions. Accordingly, the directions of the domestic and global economies are to be the key determinant of movements in its share price going forward. We believe that the firm’s earnings fell significantly in 1Q20. In 2Q20, earnings at its DFS arm are to be dampened by China’s full ban on foreign traveler entry and Korea’s new self-isolation rules for entering travelers.
In industries with high sensitivity to macro-economic conditions
Reflecting a sharp domestic economic downturn due to the Covid-19 crisis, we downwardly adjust our 2020 and 2021 EPS projections by 27% and 18%, respectively, in turn lowering our TP by 25% from W400,000 to 300,000.
As a department store, DFS, consumer goods, and hotel player, Shinsegae’s earnings are highly sensitive to macro-economic conditions. Accordingly, the directions of the domestic and global economies are to be the key determinant of movements in its share price going forward. After hitting a trough point in mid-March, sales at the department store division should recover gradually going forward. However, earnings at Shingsegae’s duty-free shop (DFS) business are to be harmed by the fact that Chinese reseller activity will be difficult to carry out from April due to China’s full ban on foreign traveler entry and Korea’s self-isolation rules for entering travelers.
Department store and DFS divisions to book sluggish 1Q12 earnings
We expect Shinsegae to post consolidated 1Q20 sales of 1,125.6bn (-26% y-y) and OP of 26.5bn (-76% y-y), with both figures falling well wide of consensus.
The department store division should book sales of W329.4bn (-12% y-y) and OP of W24.9bn (-53% y-y). SSSG was likely dampened due to the Covid-19 outbreak. Moreover, sales of high-margin clothing and miscellaneous goods dropped significantly, and we believe that the portion of fixed costs (such as labor and depreciation) was high.
For the DFS division, we estimate sales of W422.0bn (-40% y-y) and operating losses of W21.1bn (TTL y-y), with weak sales at airport DFSs contributing to the sharp drop in sales. Looking at Shinsegae’s other businesses: 1) earnings at Central City are to show strong impact from both a decrease in incoming traveler numbers and a rocky business environment for hotel players; 2) sales at the Dongdaegu branch have been slammed by a Covid-19 clustering in the Daegu region; and 3) earnings at Shinsegae International have likely been harmed by a drop in clothing sales.