Apparel Sales Sluggish in 1Q20
The author is an analyst of NH Investment & Securities. She can be reached at jy.lee@nhqv.com. -- Ed.
We believe that Shinsegae International’s 1Q20 earnings fell well wide of consensus due to sluggish apparel sales. Looking at the current 2Q20 landscape, conditions for the firm’s cosmetics division appear similar to those in 1Q20, but sales improvement at the fashion division is to be slow paced. Given brand and distribution network expansions, we view the firm’s shares as offering mid/long-term investment appeal.
Despite sharp earnings decline, mid/long-term investment points remain valid
Reflecting the likely impacts of the Covid-19 crisis on Shinsegae International’s earnings, we adjust 2020E and 2021F EPS by -14% and +1%, respectively. However, considering: 1) the one-off peculiar nature of the disruptions being caused by the Covid-19 crisis; 2) an intact strong preference for the firm’s brand in China; and 3) improving Korea-China relations, we have changed the EPS base year used in calculating our TP from 2020E to 2021F. Accordingly, we adhere to a TP of W280,000.
Looking at the 2Q20 landscape, business conditions for the cosmetics division appear similar to those in 1Q20. But, it needs to be taken into account that the company’s hit Skin Illumination brand is to encounter weak seasonality (spring and summer). Meanwhile, sales growth at the fashion division is to be slow paced. As: 1) consumer interest in fashion is weakening in line with the blooming of a non-face-to-face consumption culture; and 2) off-season effects are in play, operating losses at the apparel business continue. While operating conditions are to be difficult this year, we view the firm’s shares as offering mid/long-term investment appeal on: 1) its aggressive promotions for imported cosmetics brands; 2) the direct entry of in-house brand Yunjac at Chinese online malls; and 3) hit VIDIVICI brand items and distribution network expansion.
1Q20 preview: Apparel sales to arrive sluggish
We expect Shinsegae International to post consolidated 1Q20 sales of W288.6bn (-21% y-y) and OP of W12.7bn (-57% y-y), with both figures falling well wide of consensus.
The cosmetics division should book sales of W77.9bn (-25% y-y) and OP of W15.6bn (-35% y-y). The impact of Covid-19 was likely felt sharply at the company’s duty-free shops, but rising sales of imported cosmetics brands likely buoyed earnings. For the fashion division, we estimate sales of W131.9bn (-25% y-y) and an operating loss of W2.5bn (TTL y-y). Earnings doldrums at the domestic fashion division are attributable to the Covid-19 crisis. For the Lifestyle division, we estimate 1Q20 sales of W48.0bn (0% y-y) and OP of W0.5bn (-50% y-y)—the opening of 10 new stores represents a cost burden.